NATIONAL OPEN UNIVERSITY OF NIGERIA

SCHOOL OF MANAGEMENT SCIENCES

COURSE CODE: MBA 881

COURSE TITLE: BUSINESS POLICY

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COURSE MATERIAL DEVELOPMENT

Course Code MBA 881

Code Title Business Policy (2 credits units)

Course Team: Mr. E. U. Abianga (Writer/Developer) NOUN

Dr. Mande Samaila (Content Editor) NOUN
Dr. C. I. Okeke (Programme Leader) NOUN
Dr. J.M. Obi (Coordinator) NOUN

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 COURSE GUIDE

1.0 INTRODUCTION

MBA 881 Business Policy is one semester, course of two units for 800 level students of Master‘s
degree in Business Administration programme of the School of Management Sciences. This
course consists of sixteen units. The material has been developed to suit students for their
learning process and prepare them as potential or active entrepreneurs. This course guide tells
you briefly what the course is about, what course materials you will be using and how you are to
use them. It provides some general guidelines for the amount of time you might be spending in
order to successfully completed each unit of the course.

2.0 COURSE AIMS

The aim of this course is to explain business and identify it as the basis for guiding the
management and organization of an enterprise

3.0 COURSE OBJECTIVES

By the end of this course, the student should be able to:

 Learn business policies

 Explain the functions and responsibilities of an enterprises general management
 Identify problems associated with the management of an enterprise
 Design and implementation of corporate strategies

4.0 WORKING THROUGH THE COURSE

This course, MBA 881 – Business Policy expects you to do a lot of reading in order to cover the
materials in the course material. It implies that you should devote much time to this course by
reading through this material and getting more information from numerous texts and journals in
research. The course material has been made easy to read and user-friendly.

To complete this course you are required to read the study units in each module, read also the
suggested full books and other materials that will help you achieve the objectives. Each unit
contains self-assessment exercises and at intervals in the course you are required to submit
assignment for assessment. There will be a final examination at the end of the course.

5.0 COURSE MATERIALS

The National Open University of Nigeria provides you with the following items:

 Course Guide
 Study Units

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In addition, at the end of every unit is a list of texts for your references and for further reading. It
is not compulsory for you to read all of them. They are only essential supplements to this course
material.

6.0 STUDY UNITS

The study units in this course are located under Modules as follows:

MODULE 1 BUSINESS POLICY

Unit 1 Business Policy – Definition and Discussion of Concepts

Unit 2 Evolution of Business Policy as a Discipline
Unit 3 Characteristics of Policy
Unit 4 Kinds/Types of Policies
Unit 5 Nature, Objectives and Purposes of Business Policy
Unit 6 Organizational Policies
Unit 7 Functions and Responsibilities of Business Policy in management

MODULE 2 CORPORATE STRATEGY AND MANAGEMENT

Unit 1 The Concept of Corporate Strategy

Unit 2 Strategy Decision Making
Unit 3 Process of Strategic Management
Unit 4 Overview of Strategic Management
Unit 5 Historical Development of Strategic Management

MODULE 3 STRATEGY FORMULATION IN MANAGEMENT

Unit 1 Hierarchy of Strategic Intent
Unit 2 Environmental Appraisal
Unit 3 Organizational Appraisal
Unit 4 Strategic Analysis and Choice

The modules and units are self explanatory as they summarize Business Policy for 800 level
students of Master‘s degree in Business Administration. You will need to work in groups with
other students in this course and program in order to discuss, compare notes and thoughts in
order to exchange and share ideas.

7.0 ASSESSMENTS

There are two aspects to the assessment of the course: first are the tutor-marked assignments
(TMA); and the end of course examination. Within each unit are self assessment exercises
which are aimed at helping you check your assimilation as you proceed. Try to attempt each of
the exercises before finding out the expected answer from lecture.

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8.0 TUTOR-MARKED ASSIGNMENT (TMA)

This is your continuous assessment and accounts for 30% of your total score. You are expected
to answer at least four TMA‘s, three of which must be answered and submitted before you sit for
the end of course examination. Your Facilitator will give you the TMA‘s and you must submit
to your Centre your responses.

9.0 FINAL EXAMINATION AND GRADING

With this examination written successfully, you have completed your course in Basic Research
and one believes you would apply your knowledge (new or up-graded) in your project. The ‗end
of course examinations‘ would earn you 70% which would be added to your TMA score (30%).
The time for this examination would be communicated to you.

Table 1: Course Marking Scheme

ASSESSMENT MARKS
Assignment (TMAs) 1 – 4 Four (4) assignments, best three (3)
marks of the four account at 10%
each = = 10 x 3 = 30%
End of course examination 70% of overall course marks
Total 100% of course marks

10.0 HOW TO GET THE MOST FROM THIS COURSE

In distance learning, the study units are specially developed and designed to replace the
conventional lectures. Hence, you can work through these materials at your own pace, and at a
time and place that suits you best. Visualize it as reading the lecture.

Each of the study units follows a common format. The first item is an introduction to the subject
matter of the unit, and how a particular unit is integrated with the other units and the course as a
whole. Next is a set of learning objectives. These objectives let you know what you should be
able to do by the time you have completed the unit. You should use these objectives to guide
your study. When you have finished the unit, you must go back and check whether you have
achieved the objectives. If you make a habit of doing this, you will significantly improve your
chances of passing the course.

The main body of the unit guides you through the required reading from other sources. This will
usually be either from your set books or from a Reading Section.

Activities are interspersed throughout the units, and answers are given at the end of the units.
Practice these self-assessment exercises to help you to achieve the objectives of the units and
prepare you for the assignments and the examinations. Keep tap with your facilitator for
assistance.

In summary:

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(1) Try to read this course guide.

(2) Organize a study schedule.

(3) Do everything you can to stick to the schedule.

(4) Assemble the study materials.

(5) Work through the unit. The content of the unit itself has been arranged to provide a sequence
for you to follow. As you work through this unit, you will be instructed to read sections from
your set books or other further readings.

(6) Review the objectives for each study unit confirms that you have achieved them. If you feel
unsure about any of the objectives, review the study material or consult.

(7) When you are sure of having achieved a unit‘s objectives, you can then start on the next unit.

(8) After completing the last unit, review the course and prepare yourself for the final
examination. Check that you have achieved the unit objectives and the course objectives.

To gain the maximum benefit from course tutorials, prepare a question list before attempting
them.

11.0 SUMMARY

This course MBA 881 is designed to give you some knowledge which would help you to
understand business policy of business organisation/enterprise. Endeavour to go through this
course successfully and you would be in a good position to pass your examination at the end of
the semester

We wish you success in this life-long and interesting course. GOOD LUCK.

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COURSE DESCRIPTION AS IN THE OPP/DPP

Type of business policies; business policy as a field of study; functions and responsibilities of
general management; the concept of corporate strategy; concept of strategy in relation to
business, corporations and management; linkages between organization and their environments;
introducing a formal strategic planning system in a business firm; concepts of policies, decision
making, business objectives, performance, criteria, structure and managerial behaviours; practice
in calculating simple financial and economic indices from business data and other accounting
information; learning opportunities and threats, strength s and weaknesses of business system

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COURSE MATERIAL DEVELOPMENT

Course Code MBA 881

Code Title Business Policy (2 credits units)

Course Team: Mr. E. U. Abianga (Writer/Developer) NOUN

Dr. Mande Samaila (Content Editor) NOUN
Dr. C. I. Okeke (Programme Leader) NOUN
Dr. J.M. Obi (Coordinator) NOUN

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MODULE 1 BUSINESS POLICY

Unit 1 Business Policy – Definition and Discussion of Concepts

Unit 2 Evolution of Business Policy as a Discipline
Unit 3 Characteristics of Policy
Unit 4 Kinds/Types of Policies
Unit 5 Nature, Objectives and Purposes of Business Policy
Unit 6 Organizational Policies
Unit 7 Functions and Responsibilities of Business Policy in management

MODULE 2 CORPORATE STRATEGY AND MANAGEMENT

Unit 1 The Concept of Corporate Strategy

Unit 2 Strategy Decision Making
Unit 3 Process of Strategic Management
Unit 4 Overview of Strategic Management
Unit 5 Historical Development of Strategic Management

MODULE 3 STRATEGY FORMULATION IN MANAGEMENT

Unit 1 Hierarchy of Strategic Intent
Unit 2 Environmental Appraisal
Unit 3 Organizational Appraisal
Unit 4 Strategic Analysis and Choice

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MODULE 1 BUSINESS POLICY

Unit 1 Business Policy – Definition and Concepts

Unit 2 Business Policy as a Discipline
Unit 3 Characteristics of Policy
Unit 4 Kinds/Types of Policies
Unit 5 Nature, Objectives and Purposes of Business Policy
Unit 6 Organizational Policies
Unit 7 Functions and Responsibilities of Business Policy in management

UNIT 1 BUSINESS POLICY – DEFINITION AND DISCUSSION OF CONCEPT

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Business Policy
3.2 Nature and Characteristics of Business Policy
3.3 Objectives of Business Policy
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

You are welcomed to this course MBA 881 and in the first unit of the first module of this course.

Every organisation has a purpose for which it was established – either for profit making or non-
profit making, and closely allied to the purpose of an organisation are the principles on which it
is to be conducted. These principles in business parlance are commonly called “Policy”. Policy,
according to Kalejaye (1998), denotes a future course of action of intent towards the activities of
an organisation. He opined that there is more to the meaning of policy than an expression of
intent. To him, there is usually the connotation that policies should express the beliefs of the
organisation, the things that are right to do and the courses of act ion which it ought to take in the
organisation. This explains why policies on the same subject can be so different from one
organisation to another. Every business requires guidelines which are to be embedded in policy.
Policy is a decision rule, not a decision (Ackoff 1993). Principles in business parlance are
commonly known as policy. Policy denotes a future course of action of intent towards the
activities of an organization.

In this unit, you will be introduced to the meaning of business policy in order to prepare you for
all the associated ideas about the concept in business management. We shall also highlight the
reasons why business policy is necessary. Finally, we shall explain business policy
implementation in an organisation.

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I believe you must have read the course guide and have a general understanding of this course
unit and how it fits into the course as a whole. You will see the objectives below specify what
you are expected to learn after reading this unit.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 Define business policy

 State the need for business policy
 Explain business policy implementation in organization

3.0 MAIN CONTENT

The introductory unit is intended to familiarize you with business policy. It starts with a
description of business policy. It starts with a description into the development process that
evolved before learners like you got the opportunity to study this course.

Next, we shall introduce you to the nature of business policy where its definition is also
provided. You should be convinced of the importance of the business policy course to be
motivated to learn it better. Hence, we have to be clear about the purpose and objectives of the
course that we are learning. The objectives of the course have been described in terms of
knowledge, skills and attitudes. It is essential to know what to expect from this course and in
which direction the learning objectives are likely to take the students.

3.1 Definition of Policy

What comes to your mind when the word policy is mentioned? As stated in the introduction
earlier, policy is defined as a decision rule not a decision. For example, of a policy- Hire only
professionally qualified accountants for senior accounting positions. When such a person is hired
it is a decision. A policy is considered the general guideline for decision making. Kalejaye, A.
(1998) defined policy as the objectives, the mode of thought and the body of principle underlying
the activities of an organization

According to Fagbemi (2006) a policy refers to what an organization or a person intends to do or

does. Business policy therefore is what business organization intends to do. It aims at assisting
the organization to deliver services to meet the needs and expectations of the goals of the
organization.

Policies are plans in that they are general statements or understandings that guide or channel
thinking in decision making. In actual business situation, not all policies are ―statements‖; they
are often merely implied from the action of managers. The president of a company
(organization), for example may strictly follow-perhaps for convenience rather than as policy-the
practice of promoting from within; the practice may be interpreted as policy and carefully
followed by subordinates. Weighrich & Koontz (2005)

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Business policy is a guide and roadmap to create awareness and direction to the management of
any organization. It publicizes the rights and obligations of different rung of the ladder-
horizontal and vertical- of the different capital be human resource engagement, finance
utilization etc. It ensures that organizations deliver better end product within a framework. It
encourages, promotes and improves performance attainment in an organization.

Policy provides the bedrock for vision and mission statement of the business organization along
the corporate objectives and goal. Policy enables the business to be assessed and given an image
by the way the carry out their responsibility along with their relationship with their
clients/customers. It is the ‗barometer‘ of playing by the rule and gives purpose to the strategy
thrust of the organization.

Self-Assessment Exercise 1.1

Define a policy.

3.2 Definition of Business

Wikipedia (2012) states that a business (also known as enterprise or firm) is an organization
engaged in the trade of goods, services, or both to consumers.[1] Businesses are predominant in
capitalist economies, where most of them are privately owned and administered to earn profit to
increase the wealth of their owners. Businesses may also be not-for-profit or state-owned. A
business owned by multiple individuals may be referred to as a company, although that term also
has a more precise meaning.

The etymology of "business" relates to the state of being busy either as an individual or society
as a whole, doing commercially viable and profitable work. The term "business" has at least
three usages, depending on the scope — the singular usage to mean a particular organization; the
generalized usage to refer to a particular market sector, "the music business" and compound
forms such as agribusiness; and the broadest meaning, which encompasses all activity by the
community of suppliers of goods and services. However, the exact definition of business, like
much else in the philosophy of business, is a matter of debate and complexity of meanings.

Although forms of business ownership vary by jurisdiction, there are several common forms:

 Sole proprietorship: A sole proprietorship is a business owned by one person for-profit. The
owner may operate the business alone or may employ others. The owner of the business has
unlimited liability for the debts incurred by the business.

 Partnership: A partnership is a business owned by two or more people. In most forms of

partnerships, each partner has unlimited liability for the debts incurred by the business. The
three typical classifications of for-profit partnerships are general partnerships, limited
partnerships, and limited liability partnerships.

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 Corporation: A corporation is a limited liability business that has a separate legal
personality from its members. Corporations can be either government-owned or privately-
owned, and corporations can organize either for-profit or not-for-profit. A privately-owned,
for-profit corporation is owned by shareholders who elect a board of directors to direct the
corporation and hire its managerial staff. A privately-owned, for-profit corporation can be
either privately held or publicly held.

 Cooperative: Often referred to as a "co-op", a cooperative is a limited liability business that

can organize for-profit or not-for-profit. A cooperative differs from a for-profit corporation in
that it has members, as opposed to shareholders, who share decision-making authority.
Cooperatives are typically classified as either consumer cooperatives or worker cooperatives.
Cooperatives are fundamental to the ideology of economic democracy.

Self Assessment Exercise 1.2

What is a business?

3.3 Definition of Business Policy

Business Policy defines the scope or spheres within which decisions can be taken by the
subordinates in an organization (Wikipedia, 2012). It permits the lower level management to deal
with the problems and issues without consulting top level management every time for decisions.
Business policies are the guidelines developed by an organization to govern its actions. They
define the limits within which decisions must be made. Business policy also deals with
acquisition of resources with which organizational goals can be achieved.

Business policy is the study of the roles and responsibilities of top level management, the
significant issues affecting organizational success and the decisions affecting organization in
long-run.

1. Specific- Policy should be specific and definite. If it is uncertain, then the implementation
will become difficult.

2. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There
should be no misunderstandings in following the policy.

3. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by

the subordinates.

4. Appropriate- Policy should be appropriate to the present organizational goal.

5. Simple- A policy should be simple and easily understood by all in the organization.

6. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive.

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7. Flexible- Policy should be flexible in operation/application. This does not imply that a policy
should be altered always, but it should be wide in scope so as to ensure that the line managers
use them in repetitive/routine scenarios.

8. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of
those who look into it for guidance.

Rama Rao (2010) gave some useful definitions of Business Policy as follows:

(1) A business policy is an implied overall guide setting up boundaries that supply the general
limit and direction in which managerial action will take place.

(2) A business policy is one, which focuses attention on the strategic allocation of scarce
resources. Conceptually speaking strategy is the direction of such resource allocation while
planning is the limit of allocation.

(3) A business policy represents the best thinking of the company management as to how the
objectives may be achieved in the prevailing economic and social conditions.

(4) A business policy is the study of the nature and process of choice about the future of
independent enterprises by those responsible for decisions and their implementation.

(5) The purpose of a business policy is to enable the management to relate properly the
organization‘s work to its environment. Business policies are guides to action or channels to
thinking.

3.3.1 Difference between Policy and Strategy

The term ―policy‖ should not be considered as synonymous to the term ―strategy‖. The
difference between policy and strategy can be summarized as follows:

1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature.

While strategy is concerned with those organizational decisions which have not been
dealt/faced before in same form.

2. Policy formulation is responsibility of top level management. While strategy formulation is

basically done by middle level management.

3. Policy deals with routine/daily activities essential for effective and efficient running of an
organization. While strategy deals with strategic decisions.

4. Policy is concerned with both thought and actions. While strategy is concerned mostly with
action.

A policy is what is, or what is not done. While a strategy is the methodology used to achieve a
target as prescribed by a policy.

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Self Assessment Exercise 1.3

1. Define, in your own words, the concept ‗Business Policy‘.

2. State the major differences between a policy and a strategy.

3.4 Objectives of Business Policy

The main objective of business policy is performance driven which ensures delivery of service or
product depending on purpose of which the business was set up-service or product oriented.

Business policy specific objectives ensure:

 Efficiency and effectives in performance of duties

 Equal provision of services and treatment of customers
 Better management and provision of better quality services
 The utilization and application of resources
 The formulation mission statement
 The establishment of vision of the organization

Policies are always aligned with the objectives of the enterprise if it is to be effective. All
policies follow parallel courses and directly related to objectives. If they cross or oppose
objectives, collective effect is lost and disorder would prevail. Misunderstanding and confusion
are often the cause of problems and poor results rather than faults in the stated policy (Kalejaye,
1998).

The major reasons for having policies are as follows:

3.4.1 Why Create Business Policies?

No matter what the size of the business, business policies can be simple to write and implement,
while adding structure to the great things you are already doing.

Specifically, business policies:

 drive strategic planning, and help set expectations and performance objectives.

 lead to more efficient internal operations.

 engage and align the values of stakeholders; and build mutual understanding of expectations
and challenges.

 ensure accountability and create transparency.

 promote ethical and responsible decision-making.

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 assess and mitigate risk.

 streamline new staff orientation; having established written policies that staff can refer to
create consistency, clarity, and provides an understanding of the goals and culture of the
company.

 result in time savings: proactively thinking about how specific situations and issues will be
handled eliminates having to discuss and debate how to handle issues every time they come
to the forefront.

 meet legal requirements; some laws require employers to adopt cert ain policies to guide the
actions of their staff and management. Example: Discrimination/Harassment Policy.

Self-assessment exercise 1.4

What are the objectives of Business Policy?

4.0 CONCLUSION

In conclusion, it is deduced that every organization including business requires a policy as a

decision rule to guides the activities and performance of the business to eventually achieve goals
and objective of the organization.

5.0 SUMMARY

In this unit, we have made an overview of the concept ‗business policy‘. The concepts policy,
business and business policy had also been respectively defined. We have also identified the
reasons for business policy. Finally, we listed and briefly explained the objectives of a business
policy.

In the next unit, we shall trace the evolution of business policy as a discipline.

6.0 TUTOR MARKED ASSIGNMENT

1) What are main objectives of Business Policy?

2) Why does a business create policy?

7.0 REFERENCES/FURTHER READING

Ackoff, R. L (1993). The Role of Business in a Democratic Society A Portable MBA Edited by
Collins, EGC & Devanna, M. A. Ibadan Spectrum Books Limited.

Fagbemi, A. O (2006). Customer Service Delivery in Public Sector Management Lagos, Concept
Publications Limited.

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http://www.managementstudyguide.com/index.html.

Kalejaye, A. (1998). Basic Management Practice Lagos: Mak-Jay Enterprise, ISBN: 978-027-
770-6, pp. 196 – 197.

Rama Rao, V. S. (2010). Business Policy. downloaded on November 3, 2010 from

http://www.citeman.com/11809-nature-of-business-policy.html#ixzz1naSwscRY

Weighrich, H & Koontz, H (2005) Management – A Global Perspective Eleventh Edition New
Delhi Tata McGraw-Hill Publishing Company Limited.

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UNIT 2 BUSINESS POLICY AS A DISCIPLINE

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Business Policy as a Discipline
3.2 The Genesis of Business Policy
3.3 Evolution based on Managerial Practices
3.4 Historical Perspectives of the Evolution of Business Policy
3.5 Pointers to the Future
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In the last unit, we gave an overview of the concept ‗business policy‘. We defined the concepts
policy, business and business policy. We also identified the reasons for business policy. Finally,
we listed and briefly explained.

In this unit, we shall trace the evolution of business policy as a discipline.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 trace the evolution of business policy based on managerial practices;

 discuss the historical perspective of the evolution of business policy;
 Predict the future business policy in regard to managerial practices.

3.0 MAIN CONTENT

3.1 Business Policy as a Discipline

Kazmi (2006) states that business policy is a mandatory course which is usually included in a
typical management studies curriculum which almost all management education programmes
offered by the universities and management institutes in Nigeria include business policy course
(by whatever nomenclature it may be addressed) normally in the latter part of a degree or
diploma programme.

3.2 The Genesis of Business Policy

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Tracing the history of business policy, Kazmi (2006) stated that its can be traced back to 1911,
when the Harvard Business School introduced an integrative course in management aimed
providing general management capability. This course was based on case studies which had
been in use at the School for instructional purposes since 1908 (Christensen, et. al., 1982 cited in
Kazmi, 2006). However, the real impetus for introducing business policy in the curr iculum of
business schools (as management institutes or departments are known in the United States) came
with the publication of two reports in 1959. The Gordon and Howell report, sponsored by the
Ford Foundation, had recommended a capstone course of business policy which would
―…….give students an opportunity to pull together what they have learned in the separate
business fields and utilize this knowledge in analysis of complex business problems‖ (Gordo and
Howell, 1959, quoted in Kazmi, 2006). The Pierson report, sponsored by the Carnegie
Foundation, and published simultaneously, had made a similar recommendation.

3.3 Evolution based on Managerial Practices

Glueck and Jauch (1984 cited in Kazmi, 2006) have viewed the development in business policy
as arising from the use of planning techniques by managers. Starting from day-to-day planning in
earlier times, managers, till recently, tried to anticipate the future through the preparation of
budgets and by using control systems like capital budgeting and management by objectives.
However, as these techniques were unable to emphasise the role of the future adequately, long-
range planning came into use. But, soon, long-range planning was replaced by strategic
planning, and later, by strategic planning – a term that is currently being used to describe ―the
process of strategic decision-making‖. Strategic management forms the theoretical framework
for business policy courses today.

3.4 Historical Perspective of the Evolution of Business Policy

Hofer et. al., (1984) have viewed the evolution of business policy in terms of four paradigm
shifts. For the sake of convenience, these shifts may be considered as four overlapping phases in
the development of the subject, business policy. It is interesting to note t hat the development of
business policy, as a field of study, has closely followed the demands of real-life business.
According to Hofer et. al. (1984) (referred to above), the first phase which can be traced to the
mid-1930s, rested on the paradigm of ad-hoc policy-making. The need for policy-making arose
due to the nature of the American business firms of that period. The first, which had originally
commenced operations in a single product line catering to a unique set of customers in a limited
geographical area, expanded in one or all of these three dimensions. Informal control and
coordination became partially irrelevant as expansion took place and the need to integrate
functional areas arose. This integration was brought about by framing policies to guide
managerial action. Policy-making became the prime responsibility of erstwhile entrepreneurs
who later assumed the role of senior management. Due to the increasing environmental changes
in the 1930s and 40s in the United States, planned policy formulation replaced ad-hoc policy-
making. Based on this second paradigm, the emphasis shifted to the integration of functional
areas in a rapidly changing environment.

Increasing complexity and accelerating changes in the environment made the planned policy
paradigm irrelevant since the needs of a business could no longer be served by policy-making

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and functional area integration only. By the 1960s, there was a demand for a critical look at the
basic concept of business and its relationship to the environment. The concept of strategy
satisfied this requirement and the third phase, based on a strategy paradigm, emerged in the early
sixties. The current thinking – which emerged in the eighties – is based on the fourth paradigm
of strategic management. The initial focus of strategic management was on the intersection of
two broad fields of enquiry: the strategic process of business firms and the responsibilities of
general management.

3.5 Pointers to the Future

The resolution of strategic issues that affect the future of a business firm has been a continual
endeavour in the subject of business policy. The endeavour is based on the development of
strategic thinking. As Whitefield says ―really useful training (in strategic management should
yield) …. a comprehension of a few general principles with a thorough grounding in the way
they apply to a variety of concrete details‖ (Whitefield, 1963, quoted in Kazmi, 2006). Most
likely, the students will forget the details and principles but ―remember (usually unconsciously)
new, non-obvious ways of thinking strategically‖ (Kazmi, 2006). The general principles
undergirding strategic thinking have been the focus of the efforts of researchers and
academicians in the field of business policy. What, then, are these general principles? As a first
step, the model of strategic management that has developed so far, and is under constant review,
incorporates these general principles.

The direction in which strategic management is moving can be anticipated from what Ansoff
calls an emerging comprehensive approach of ―management of discontinuous change, which
takes account of psychological, sociological, political, and systemic characteristics of complex
organizations‖ (Ansoff, 1984). With the emergence of futuristic organizations, which, in the
words of Toffler, are no longer responsible simply for making a profit or producing goods but for
simultaneously contributing to the solution of extremely complex ecological, moral, political,
racial, sexual, and social problems,‖ (Toffler, 1980) the demands on business policy are expected
to rise tremendously. The general managers of tomorrow may be called upon to shoulder a set of
entirely new responsibilities necessitating a drastic review of the emerging concepts and
techniques in business policy. Responding to the need for evolving new approaches to the
teaching of business policy, the AACSB no longer insists on the provision of just one course in
this area. Now there is an emerging trend to have several courses, such as, the theory of strategic
competitive strategy, industry dynamics, hyper-competition, and global strategy in the
curriculum (Kazmi, 2006).

While reviewing the development of strategy and theory, Rumelt, Schendel and Teece (1994)
posed four fundamental questions which, in their view, characterize the major concerns of
strategic management. These four fundamental questions are (Rumelt et. al., 1994):

1. How do firms behave? Or, do firms really behave like rational actors, and, if not, what
models of their behavior should be used by researchers and policy-makers?
2. Why are firms different? Or, what sustains the heterogeneity in resources and performance
among close competitors despite competition and imitative attempts?

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3. What is the function of or the value added by the headquarters unit in a diversified firm? Or,
what limits the scope of a firm?
4. What determines success or failure in international competition? Or, what are the origins of
success and what are their particular manifestations in international settings or global
competition?

In dealing with most of the issues raised by these fundamental questions, we would need to look
at what has been happening in Nigerian business scene.

4.0 CONCLUSION

We have gained familiarity with the course of business policy and strategic management by
learning about its history and its present status. We have also learnt what to aim for in this
course. The main points covered in this unit are as follows:

5.0 SUMMARY

In this unit, we have traced the evolution of business policy as a discipline; discussed the genesis
of business policy; traced the evolution of business policy based on managerial practices;
discussed the historical perspective of the evolution of business policy and predicted the future
business policy in regard to managerial practices.

In the next unit, we shall examine the nature, objective and purpose of business policy.

6.0 TUTOR-MARKED ASSIGNMENT

Questions

1. Business policy is a capstone, integrative course. Explain.

2. In what direction is strategic management likely to move in the future?
3. Around what questions does strategic management revolve?
4. Who constitutes the senior or top management in an organization?

7.0 REFERENCES/FURTHER READINGS

Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition, (New Delhi: Tata
McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6, pp. 1 – 23.

Christensen, C.R., et. al., Business Policy – Text and Cases, 5th edn, (Homewood: 3rd Richard D.
Irwin, 1982), quoted from preface.
Gordo, A. and J.E. Howell, Higher Education for Business, (New York: Columbia University
Press, 1959), pp. 206 – 07.

Glueck, W.F. and L.R. Jauch, Business Policy and Strategic Management, 4th edn, (New York:
Mc Graw-Hill, 1984), pp. 4-5.

21
Hofer, A, et. al., Strategic Management – A Casebook in Policy and Planning, 2nd edn,
(Minnesota: West Publishing, 1984), p. 8.

Thompson, A., Jr. and A.J. Strickland III, Strategic Management – Concepts and Cases, 3rd edn,
(Plano, Texas: Business Publication, 1984), quoted from preface.

Whitefield, A.N., The Aims of Education and Other Essays, (New York: American Library,
1963), p. 62.

Camerer, C., ―Redirecting Research in Business Policy and Strategy‖, Strategic Management
Journal, (6): 13.

Ansoff, H., Implanting Strategic Management, (Englewood Cliffs, New Jersey: Prentice-Hall,
1984), quoted from preface.

Toffler, A., The Third Wave, (New York: Bantam Books, 1980), p. 235.

Rumelt, R.P., D.E. Schendel and D.J. Teece, Fundamental Issues in Strategy: A Research
Agenda, (Boston, Mass: Harvard Business School Press, 1994), pp. 39 – 47.

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UNIT 3 NATURE, OBJECTIVE AND PURPOSE OF BUSINESS POLICY

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Business Policy
3.2 Importance of Business Policy
3.3 Purposes of Business Policy
3.4 Objectives of Business Policy
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In the last unit, we gave an overview of the concept ‗business policy‘. We defined the concepts
policy, business and business policy. We also identified the reasons for business policy. Finally,
we listed and briefly explained.

In this unit, we shall trace the evolution of business policy as a discipline.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

(i) state the nature of business policy;

(ii) highlight the importance of business policy;
(iii) enumerate the purposes of business policy
(iv) list the objectives of business policy.

3.0 MAIN CONTENT

3.1 The Nature of Business Policy

Before we proceed to understand the nature of business policy, let us witness these situations, as
reported in an issue of a reputed business magazine in India: (Business India, 1999, cited in
Kazmi, 2006).

 Exide reaps the benefits of its strategies, which include moder nization, expansion, and
acquisitions, to become the integrated leader in the battery sector.
 Costly expansions and poor demand have forced JK Corp to rework its strategies. It is now
banking its future on its core paper business. This will come through the divestment of its
cement division, Laxmi Cements, and the acquisition of the Central Pulp Mills.

23
 Tisco is using divestments and mergers to restructure its core businesses of steel, allied
industries, refractory, and engineering.
 Exim Bank (the Export and Import Bank of India), established in the early eighties with the
objective of extending support to Indian exporters and importers, still remains small given
the Indian economy‘s requirements. As it faces tough competition from the scheduled
commercial banks it needs a strategic vision to cope with the increasing competition in the
new millennium.

From the above reports, we can see that when a company either promotes a joint venture, divests
a part of its business, embarks upon an expansion programme, undertakes mergers and
acquisitions or takes other similar actions which have a long-term impact on its future operations
and status, those are a result of senior management decision-making. The senior management in
any organization is primarily responsible for guiding the future course of action and for
providing a sense of direction. Business policy attempts to inculcate the capability for senior
management in one toward these ends.

As defined by Christensen et. al. (1982 quoted in Kazmi, 2006), business policy is ―the study of
the function and responsibilities of senior management, the crucial problems that affect success
in the total enterprise, and the decisions that determine the direction of the organization and
shape its future. The problems of policy in business, like those of policy in public affairs, have
to do with the choice of purposes, the moulding of organizational identify and character, the
continuous definition of what needs to be done, and the mobilization of resources for the
attainment of goals in the face of competition or adverse circumstances‖ (Christensen, et. al.,
1982).

This comprehensive definition covers many aspects of business policy. Firstly, it is considered
as the study of the functions and responsibilities of the senior management related to those
organizational problems which affect the success of the total enterprise. Secondly, it deals with
the determination of the future course of action that an organization has to adopt. Thirdly, it
involves a choosing the purpose and defining what needs to be done in order to mould the
character and identity of an organization. Lastly, it is also concerned with the mobilization of
resources, which will help the organization to achieve its goals.

The senior management consists of those managers who are primarily responsible for long-term
decisions, and who carry designations, such as, Chief Executive Officer, President, General
Manager, or Executive Director. These are persons who are not concerned with the day-to-day
problems but are expected to devote their time and energy to thinking and deciding about the
future course of action. With its concern for the determination of the future course of action,
business policy lays down a long-term plan, which the organization then follows. While
determining the future course of action, the senior management has a mental picture of the type
of organization they want their company to become.

While deciding about a future course of action, the senior management are confronted with a
wide array of decisions and actions that could possibly be taken. The senior management
exercises a choice, on the basis of given circumstances, and which, in their opinion, would lead

24
the organization in a specific direction. By moving in a predetermined d irection, an organization
can attain its planned identity and character.

Organizational decisions are not made in isolation and managerial actions cannot be taken
without providing the resources necessary for them. While deciding about the future course of
action, the senior management concern themselves with the financial, material and human
resources that would be required for the implementation of the long-term plans.

3.2 The Importance of Business Policy

Kazmi (2006) opined that business policy is important as a course in the management curriculum
and as a component of executive development programmes for middle-level managers who are
preparing to move up to the senior management level. A study of business policy fulfills the
needs of management students as well as those of middle-level managers. To highlight the
importance of business policy, we shall consider four areas where this course proves to be
beneficial.

3.2.1 Learning the Course

Business policy seeks to integrate the knowledge and experience gained in various functional
areas of management. It enables the learner to understand and make sense of the complex
interaction that takes place between different functional areas.

Business policy deals with the constraints and complexities of real-life businesses. In contrast,
the functional area courses are based on a structured, specialized and well-developed body of
knowledge, resulting from a simplification of the complex overall tasks and responsibilities of
the management.

To develop a theoretical structure of its own, business policy cuts across the narrow functional
boundaries and draws upon a variety of sources – other courses in the management curriculum
and a wide variety of disciplines, like economics, sociology, psychology, political science, and
so on. In so doing, business policy offers a very broad perspective to its students.

Business policy makes the study and practice of management more meaningful as one can view
business decision-making in its proper perspective. For instance, in the context of business
policy, a short-term gain for a department or a sub-unit is willingly sacrificed in the interest of
the long-term benefit that may accrue to the organization as a whole.

3.2.2 Understanding the Business Environment

Regardless of the level of management a person belongs to, business policy helps to create an
understanding of how policies are formulated. This helps in creating an appreciation of the
complexities of the environment that the senior management faces in policy for mulation.

25
By gaining an understanding of the business environment, managers become more receptive to
the ideas and suggestions of the senior management. Such an attitude on the part of the
management makes the task of policy implementation simpler.

When they become capable of relating environmental changes to policy changes within an
organization managers feel themselves to be a part of a greater design. This helps to reduce
their feeling of isolation.

3.2.3 Understanding the Organisation

Business policy presents a basic framework for understanding strategic decision-making while a
person is at the middle level of management. Such a framework, combined with the experience
gained while working in a specialized functional area, enables a person to make preparations for
handling general management responsibilities. This benefits the organization in a variety of
ways.

Business policy, like most other areas of management, brings the benefit of years of distilled
experience in strategic decision-making to the organization and also to its managers. Case study
– which is the most common pedagogical tool in business policy – provides illustrations of real-
life business strategy formulation and implementation.

An understanding of business policy may also lead to an improvement in job performance. As a

middle-level manager, a person is enabled to understand the linkage between the different sub-
units of an organization and how a particular sub-unit fits into the overall picture. This has far-
reaching implications for managerial functions like coordination and communication, and also
for the avoidance of inter-departmental conflicts.

3.2.4 Personal Development

A study of business policy offers considerable scope for personal development. It is a fact of
organizational life that the different sub-units within an organization have a varying value and
importance at different times. It often happens that a company which has followed a production-
orientation as a matter of policy gradually shifts emphasis to marketing may be due to increasing
competition. In the changed situation, executives within the production departments have fewer
opportunities for career advancement as compared to their colleagues in marketing. In this case,
it is beneficial for an executive to understand the impact of policy shifts on the status of one’s
department and on the position one occupies. In extreme cases, many positions may become
redundant due to policy shifts and retrenchment is inevitable. Business India cautions
executives, especially those who work for multinationals. It says ―….. persons who have
devoted their lives working for one company suddenly find bewildering changes at head offices
in the UK and US‖, and adds that reorganization and changes at the top level can have a dramatic
impact on individuals. ―It is only too common for divisions of a company to be shut down
worldwide, or to be sold off to another company‖. 22 An understanding of business policy
enables executives to avail an opportunity or avoid a risk with regard to career planning and
development.

26
While making a career choice, a study of business policy provides an adequate grounding for
understanding the macro factors and their impact at the micro level. By gaining an
understanding of such an impact, an executive is better placed to identify the growth areas. For
instance, in the current business situation in India, a career in the computer industry, especially in
software, would offer better personal growth opportunities than, say, the steel industry.

Business policy offers a unique perspective to executives to understand the senior management’s
viewpoint. With such an understanding the chances that a proposal made by or an action taken
by an executive will be appreciated by senior managers is decidedly better.

An interesting by-product of the business policy course is the theoretical framework provided in
the form of the strategic management model. The applicability of this model is not limited to
businesses alone. It can be applied to organizations like, services, educational institutions,
family, government, public administration, and to many other areas. In fact, the model provides
powerful insights for dealing with policy-making at the macro level as well as at an individual
level through self-analysis.

The importance of business policy stems from the fact that it offers advantages to an executive
from multiple sources. Apart from the intangible benefits, an executive gains an understanding
of the business environment and the organization he or she works in. such an understanding can
help considerably in career planning and development.

Having studied the importance of business policy, we now move ahead to understand the
purpose it can serve for its learners.

3.3 The Purpose of Business Policy

‗Business policy‘ is a term associated with the integrated management course, which is generally
studied in the latter part of the degree or diploma, and is preceded by the study of functional area
courses in finance, marketing, operations and personnel (Kazmi, 2006). A business policy
course seeks to integrate the knowledge gained in various functional areas so as to develop a
generalist approach in management students. Such an approach is helpful in viewing
organizational problems in their totality. It can also create an awareness about the repercussions
that an action taken in one area of management can have on other areas individually, and on the
organization as a whole.

The viewpoint adopted in business policy is different from that adopted in the functional area
courses. For instance, a marketing problem is not viewed purely as a problem of ‗marketing‘ but
as an organizational problem. A course in business policy helps in understanding a business as a
system consisting of a number of sub-systems. Any action taken in one sub-system has an
impact on other sub-systems, and on the system as a whole. It is of vital importance for the top
management in any organization to adopt such a systems approach to decision-making. Business
policy helps a manager to become a generalist by avoiding the narrow perspective generally
adopted by the specialists, and to deal with business problems from the viewpoint of the senior
management.

27
The problem of declining sales volume is apparently a marketing problem. However, an analysis
of the problem will show that its roots may probably lie anywhere in the organization. Declining
sales volume may be due to a rising level of competition, inefficient distribution, faulty sales
promotion, inappropriate recruitment policies, misdirected training, inadequate sales promotion,
limited commission to sales personnel, falling quality standards, a decrease in the variety of
products offered, outdated design, underutilization of capacity, demotivating credit policies and
so on. a problem, which apparently seems to be a marketing problem, may be due to factors not
necessarily within the control of the marketing department. A solution to the problem would
necessitate transgressing the artificial boundaries between the functional areas, each of which is
looked after by a team of specialists. These specialists, due to their background, training and,
possibly, loyalty to their disciplines are unaware and ill-equipped to deal with all the problems in
entirety. They may come up with short-term solutions but these are only like first-aid to a victim
when a thorough diagnosis and treatment is required to mitigate the misery. A generalist, on the
other hand, is better qualified to deal with organizational problems and can come up wit h
solutions that will have a lasting effect. On the basis of the above discussion, we can say that the
purpose of business policy is three-fold:

1. to integrate the knowledge gained in various functional areas of management;

2. to adopt a generalist approach to problem-solving, and

3. to understand the complex interlinkages operating within an organization through the use of a
systems approach to decision-making and relating these to the changes taking place in the
external environment.

In order to make the study of business policy purposeful, specific objectives need to be defined,
which we shall do in the next section.

3.4 The Objectives of Business Policy

Objectives could be derived from the purpose of business policy.

3.4.1 Knowledge

1. The learners of business policy have to understand the various concepts involved. Many of
these concepts, like, strategy, policies, plans, and programmes are encountered in the
functional area courses too. It is imperative to understand these concepts specifically in the
context of business policy.

2. A knowledge of the external and internal environment and how it affects the functioning of
an organization is vital to an understanding of business policy. Through the tools of analysis
and diagnosis, a learner can understand the environment in which a firm operates.
3. Information about the environment helps in the determination of the mission, objectives, and
strategies of a firm. The learner appreciates the manner in which strategy is formulated.

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4. The implementation of strategy is a complex issue and is invariably the most difficult part of
strategic management. Through the knowledge gained from business policy, the learner will
be able to visualize how the implementation of strategic management can take place.

5. To learn that the problems in real-life business are unique and so are the solutions is an
enlightening experience for the learners. The knowledge component of such an experience
stresses the general approach to be adopted in problem-solving and decision-making. With a
generalized approach, it is possible to deal with a wide variety of situations. The
development of this approach is an important objective to be achieved in terms of
knowledge.

6. To survey the literature and learn about the research taking place in the field of business
policy is also an important knowledge objective.

3.4.2 Skills

1. The attainment of knowledge should lead to the development of skills so as to be able to

apply that which has been learnt. Such an application can take place by an analysis of case
studies and their interpretation, and by an analysis of the business events taking place around
us.

2. The study of business policy should enable a student to develop analytical ability and use it
to understand the situation in a given case or incident.

3. Further, the study of business policy should lead to the skill of identifying the factors relevant
in decision-making. The analysis of the strengths and weaknesses of an organization, the
threats and opportunities present in the environment, and the suggestion of appropriate
strategies and policies form the core content of general management decision-making.

4. The above objectives, in terms of skills, increase the mental ability of the learners and enable
them to link theory with practice. Such an ability is important in managerial decision-
making where a large number of factors have to be considered at once to suggest appropriate
action.

5. As a part of business policy study, case analysis leads to the development of oral as well as
written communication skills.

3.4.3 Attitude

1. The attainment of the knowledge and skill objectives should lead to the inculcation of an
appropriate attitude among the learners. The most important attitude developed through this
course is that of a generalist. The generalist attitude enables the learners to approach and
assess a situation from all possible angles.
2. By acting in a comprehensive manner, a generalist is able to function under conditions of
partial ignorance by using his or her judgement and intuition. Typically, case studies provide
only a glimpse of the overall situation and a case analyst frequently faces the frustrating

29
 situation of working with less than the required information. Experience has shown that
managers, specially in the area of long-range planning, have to work with incomplete
information. A specialist would tend to postpone or avoid a decision under such conditions
but a generalist would go ahead with whatever information was available. In this way, he or
she acts more like a practitioners rather than a perfectionist.

3. For a general manager information and suggestions are important to possess a liberal attitude
and be receptive to new ideas. Dogmatism with regard to techniques should be replaced with
a practical approach to decision-making for problem-solving. In this way, a general manager
can act like a professional manager.

4. It is important to have the attitude to ‗go beyond and think‘ when faced with a problematic
situation. Developing a creative and innovative attitude is the hallmark of a general manager
who refuses to be bound by precedents and stereotyped decisions.

3.4.4 An Alternative Viewpoint on the Objectives of Business Policy Course

Anisya S. Thomas of Florida International University says that the fundamental objectives of the
capstone business policy course have remained relatively stable over a long period of time.
There is broad agreement among textbook writers and instructors that these objectives
encompass content as well as process dimensions, that is, they deal with the core concepts and
theories and also seek to teach an analytical process that incorporates multiple perspectives.
More specifically, these objectives are as below:

1. Integration of functionally specific knowledge. Business policy acts as an integrative,

capstone course demonstrating the interdependence between separate functional areas, such
as marketing, finance, and so on.

2. Understanding the ‗big picture‘. Communicating the appreciation of the synergy created by
managing the interdependence among the funct ional areas is a critical objective of business
policy. A general management perspective aids in exposing the student to the tradeoffs
involved in achieving superior performance by balancing the internal competencies with the
external requirements.

3. Working in, managing, and leading a team. Working with and managing a diverse and
flexible team is a critical priority with the corporate recruiters. (Interestingly, a similar view
is expressed on the basis of surveys conducted by the Indian business magazines too.)
Business policy tries to build up the teamwork spirit by illustrating the finer aspects of group
dynamics and by bringing together students from different specialization areas.

4. Enhancement of comprehension and communication skills. Business policy lays great

emphasis on allowing students to be active participants in the learning process. In contrast to
the functional courses, there is a stress on using methodologies, such as case discussions, and
oral and written presentations and reports.

30
5. Ability to assess the applicability and relevance of strategic management research (theory to
practice). Theoretical advances in the field of business policy are taking place rapidly. It is
necessary for the students to evaluate the relative merit and applicability of theoretical
advances to deal with the rapid environmental and strategic changes that characterize the
business arena. So it is imperative that the students not just learn but also learn how to learn
(Kazmi, 2006).

Having looked at the above alternative view of the objectives of business policy course, you will
be in a position to gain further insight into the issue. The objective business policy, in terms of
knowledge, skills and attitude could be further extended to the areas of behavior and
performance.

After having attained a knowledge of the objectives in the classroom, or in an executive

development programme, the learner is expected to exhibit appropriate behavior and good
performance on the job. The structure of business policy, built through the accumulation of
experience as one moves up the managerial ladder. The richness and variety of experience
gained as one moves up the managerial ladder in business offers opportunities of testing,
validating, and replicating the mental images and models learnt in the business policy course.
Such an approach imparts an added impetus to the development of general management
capability which is the sine qua non for a manager who wishes to succeed in his or her job and
make a meaningful contribution to the organization he or she works for.

In the next unit, we shall take up an overview of strategic management that will familiarize you
with the several terms and concepts used in this course.

4.0 CONCLUSION

An attempt has been made to understand the nature of business policy through a definition and
its explanation. The nature of business policy deals with studying the functions and
responsibilities of the senior management
.
5.0 SUMMARY

In this unit, we have stated the nature of business policy; highlighted the importance of business
policy; enumerated the purposes of business policy and listed the objectives of business policy.

In the next unit, we shall examine the characteristics of business policy.

6.0 TUTOR-MARKED ASSIGNMENT

Questions:

1. What are the different aspects of the nature of business policy? Discuss each one of them
with the help of suitable examples.
2. How does a course in business policy serve the needs of (a) management students (b) middle-
level executives?

31
7.0 REFERENCES/FURTHER READINGS

Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition, (New Delhi: Tata
McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6, pp. 1 – 23.

AICTE, Norms and Standards for Management Education, (New Delhi: AICTE, 1990).

AICTE, Norms and Standards, (New Delhi: AICTE, 1995).

A.S. Thomas, ―The Business Policy Course: Multiple Methods for Multiple Goals‖. Journal of
Management Education, (22) 4: 486 – 87).

Steiner, G.A., J.B. Miner and E.R. Gray, Management Policy and Strategy – Text, Readings and
Cases, 2nd edn, (New York: Macmillan, 1982), pp. 206 – 07.

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UNIT 4 CHARACTERISTIC OF BUSINESS POLICY

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Characteristics of Policy
3.2 Sources of Policy
3.3 What makes a Good Policy
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the last unit, we made an overview of the concept ‗business policy‘. We defined the concepts
policy, business and business policy. We identified the reasons for business policy and listed the
objectives of a business policy.

In this unit, we shall continue with the discussion on overview of business policy. This
discussion will centre on the nature and characteristics of policy, reasons for formulating
policies, and formulation of policy. The policy thrust of an organisation solely depends on the
type of business offered – whether it is for production or services; the intensity of needs of
operation and quality of human resources to be employed. It provides guidance to achieving
objectives and goals of organizations.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 explain the characteristics of policy;

 list and discuss the sources of a policy;
 state the features that make a good policy.

3.0 MAIN CONTENT

Most organisations produce statements and explanations on what they are trying to achieve in
particular areas. Policies are subdivided and stated in terms of procedures i.e. series of related
steps or tasks expressed in a chronological order, and rules i. e. prescribed course of actions that
explicitly state what are to be done under a given sets of circumstances. Many organisations
provide parameters within which decisions must be made. Some of these will be written by
specialists in different operational areas, like employment matters which may focus on hiring and
firing, sales and marketing departments may provide guidelines of pricing and credit facilities;
purchasing department policies may prohibit gifts from suppliers. Some policies focus on

33
materials/stock and others on capital and equipments. Some describe objectives and others
means.

In general, policies may be classified in relation to personnel, capital, objectives, means and
specific organisational areas. This is an arbitrary but convenient way to classify policies. It
should be noted that these categories are not mutually exclusive but frequently overlap.

3.1 Characteristics of Policy

Sound policies usually contain a combination of the following characteristics:

(1) Destiny
(2) Top Management Approval and Commitment
(3) Intellectual Input
(4) Consistency and Long-term in Nature
(5) Acceptability
(6) Communicated to Staff
(7) Genuine Intention and Application
(8) Balanced Interpretation
(9) Alignment with Objective

 Destiny – A common characteristic of policy is that it denotes future action and intent. It
usually describes a goal or destiny which is there to be achieved. In addition, it implies a
conviction in a set of beliefs which is considered ―right‖ for the people in the organisation.
The manner a policy is expressed and the detailed procedures which stem from it all point in
the same direction and do not allow individual actions to follow a different direction. If the
actual procedures and wording do not imply belief in a course of action, then it is probably a
wrongly formulated policy.

 Top Management Approval and Commitment – In practice, making contributions and

recommendations on policy issues may be the function at the lower levels of management in
the organisation, but it is the hallmark of policy that it is approved and endorsed by the top
management. This may be Board of Directors and Managing Director or the responsibility
may be delegated to a top executive committee. Directors and top managers are primarily
responsible for policy making and setting long-term objectives. Once the series of policies
are approved at the top, there is every possibility that all segments of the organisation will
move to the same direction toward the set objectives.

 Intellectual Input – Policy requires a high level of intellectual and intelligent inputs because
policies are concerned about the future activities deemed to be just and right for the
organisation. Policies must be able to withstand pressures, opposition and challenges from all
parts of the organisation and its environment which may see and treat the policies differently.
Without a high degree of thorough analysis and deep thought of reasoning during formation,
a policy may be less effective and may even fail to provide the framework for enduring
decision making.

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 Consistency and Long-term in Nature – Usually, policy makers have thought through all
aspects of a particular policy culminating into consistent and enduring policy thereby making
frequent amendments difficult. Constant changes in the course of action and direction of an
organisation will surely bring about confusion, resenting and even generally derail all things
that sound policies are trying to achieve. Practically, almost all policies are long-term in
nature, although for practical purposes; long-term policies are sub-divided into short-term.

It is worthy of note that there could be circumstances in which refinement and revision might
be required; in essence, they are intended to create a continuum against which day-to-day
standards and decisions can be made.

 Acceptability – The degree of acceptance of organisation policy to everyone is marked by

the persistence and understanding of employees who want to know why the policy is made or
changed. Genuine reasons must be forthcoming and management needs to provide
supervisors with sufficient information to satisfy queries regarding a policy. There is danger
in withholding information which often leads to gossip and speculation in an organisation as
this can be disorganizing, cause increased friction between management and employees,
upset and strain relationships through general suspicion and mistrust.

 Communicated to Staff – As soon as policies are formulated and ratified, they should be
communicated to members of the organisation. Everybody must be aware about the missio n
and objectives of the organisation; hence, there should be no exception in communicating
policies to the members of the organisation. Appropriate channels must be used in channeling
policies throughout the organisation, so that nobody is left out. This, of course, will cement
relationship in the organisation and motivate the staff to reach higher heights.

 Genuine Intention and Application – It is not uncommon for management to declare policy
for prestige purposes, such as publicity and then fail to put the policy into practice.
Management‘s intention, in these circumstances, is to ignore and dump the declared policies.

In some cases, some managers apply policies in wrong and negative ways, hiding under one
excuse or the other for not carrying out some course of action. These types of policies are
rarely put into writing and where it is in written form; they are usually wrongly worded in
such vague manners that will distort to fit in with any course of genuine action at the line.
These types of policies must be avoided; every policy of the management must be treated
with all the seriousness it deserves and must be genuinely applied to the intended course of
action.

 Balanced Interpretation – While correctly interpreting policies, managers do rigidly

conform to principles and procedures without due regard for the human elements of the
organisation and emerging pressing issues. Something more than correctness is required in
human society and ever changing complex environment; all these factors, when weighed
carefully, might well provide a more balanced interpretation which would relegate to the
background the narrow correct ones. A little of flexibility to accommodate the emerging
factors and balanced interpretation of policies are the real art of managing and supervising
which cannot be attributable to abuse of policy.

35
 Alignment with Objective – All policies must follow parallel courses of action which are
directly related to objectives. If they cross or oppose objectives, collective effect is lost and
disorder would prevail. Misunderstanding and confusion are often the cause of problems and
poor results rather than faults in the stated policy. these identified dangers highlight the need
for careful checking of ambiguity in policy so as to avoid misunderstanding especially at the
lower level of management hierarchy.

Self Assessment Exercise 2.1

What are the characteristics of a policy? List some of them and explain them briefly.

3.2 Sources of Policy

Kalejaye (1998) examined the major sources of policies and classified them as originated,
appealed, implied and externally-imposed. These are explained as follows:

(1) Originated Source – The most acclaimed source of policies is the one from top management
which originates for the express purpose of guiding the company‘s operations. Originated
policies flow basically from the objectives of the enterprise, as they are defined by top
executive authority. These types of policies may be broad in scope, allowing key
subordinates to give them clearer definition or they might be promulgated so completely and
comprehensively as to leave little room for definition or interpretation.

(2) Appealed Source – In practice, in most cases, policies stem from appeal through the
hierarchical level of management authority. If occasion for decision arises for executives
who do not know whether they have sufficient authority or how such matters should be
handled, they appeal to their supervisors for the necessary support and action. As appeals are
taken upward and decisions are made on them, a kind of rules and procedures are established.
Precedent, therefore, develops and becomes guides for future managerial action and serves as
reference point.

(3) Implied Source – Useful policies are developed from the actions which employees see about
them and believe to constitute them. Employees will readily understand what real policy is if
they work for a company that operate policies that produce high quality goals, or sound
labour policy, for instance, though the real policy is implied.

(4) Externally-imposed Source – To a large extent, policies are externally-imposed by such

agencies as the government, trade unions, professional associations and others like trade
association. This might come in form of direct regulation or one of the many conditions of
accepting government aid or contract; it could also be to maintain industrial peace. Besides,
local and state governments, professional associations, social and charitable organisations do
influence the policies of organisations.

Self Assessment Exercise 2.2

36
Briefly explain the four major sources of policies that you know of.

3.3 What Makes a Good Policy

Wikipedia (2012) states that company policies are most effective as official written documents.
While policies often differ in form depending on company size, industry, and length of time in
business, policy documents generally contain certain standard components including:

 Purpose Statement, outlining why the organization is issuing the policy, and what the
desired effect or outcome of the policy is.

 Specifications, including statements indicating the specific regulations, requirements, and

organizational behavior that the policy is creating.

 Implementation section, indicating which parties is responsible for carrying out individual
policy statements and how policy adherence will be ensured.

 Effective Date, which indicates when the policy is considered in force (an executive
signature or endorsement can be useful to legitimize the policy).

 Applicability and Scope Statement, describing whom the policy affects and which actions
are impacted by the policy.

 Background, indicating any reasons, history, and intent that led to the creation of the policy,
which may be listed as motivating factors.

 Definitions, providing clear definitions for terms and concepts found in the policy document.

4.0 CONCLUSION

You will note from the discussion in this unit that policies are subdivided and stated in terms of
procedures. For instance, it contains series of related steps or tasks expressed in a chronological
order, and rules.

5.0 SUMMARY

In this unit, we describe the nature and characteristics of a policy and the sources of a policy. We
also listed the attributes of a good policy.

In the next unit, we shall discuss the third part of overview on business policy which would
extensively dwell on the types of policies, uses of policies for management effectiveness,
integration and relationship of policies to objectives, reasons for formulating policies and the role
of workers in policy formulation.

6.0 TUTOR-MARKED ASSIGNMENT

37
3. What makes a good policy? List them and briefly explain.

4. Sound policies usually contain some features or characteristics. List these features and briefly
explain them.

5. Briefly explain the nature of a policy.

7.0 REFERENCES/FURTHER READINGS

Kalejaye, A. (1998). Basic Management Practice Lagos: Mak-Jay Enterprise, ISBN: 978-027-
770-6, pp. 196 – 197.

Rama Rao V. S. (2010). Business Policy. downloaded on November 3, 2010 from

http://www.citeman.com/11809-nature-of-business-policy.html#ixzz1naSwscRY

38
UNIT 5 TYPES/KINDS OF POLICIES

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Formulation of Policy
3.2 Types of Policy
3.3 Reasons for Formulating Policies
3.4 The Uses of Polices for Management Effectiveness
3.5 Integration and Relationship of Policies to Objectives
3.6 Management Policy Areas
3.7 The Role of Workers in Policy Formulation
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In this unit, we describe the characteristics of a policy and the sources of a policy. We also listed
the attributes of a good policy.

In the next unit, we shall discuss the third and final part of the overview on business policy
which would extensively dwell on the types of policies, uses of policies for management
effectiveness, integration and relationship of policies to objectives, reasons for formulating
policies and the role of workers in policy formulation.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 describe how policies are formulated;

 list the types of Policy
 enumerate the reasons for formulating policies;
 highlight the uses of polices for management effectiveness;
 explain how policies are integrated in relation to objectives;
 itemize management policy areas;
 state the role of workers in policy formulation.

3.0 MAIN CONTENT

Business policy basically deals with decisions regarding the future of an ongoing enterprise.
Such policy decisions are taken at the top level after carefully evaluating the organizational
strengths and weaknesses in terms of product price, quality, leadership position, resources etc., in

39
relation to its environment. Once established the policy decisions shape the future of a company
channel the available resources along desired lines and direct the energies of people working at
various levels toward predetermined goals. In a way, business policy implies the choice of
purposes, the shaping of organizational identity and character the continuous definition of what
is to be achieved and the deployment of resources for achieving corporate goals.

Business policies generally have a long life. They are established after a careful evaluation of
various internal and external factors having an impact on the firm‘s market standing as and when
circumstances change in a major way the firm is naturally forced to shift gears, rethink and
reorient its policies. The World Oil crisis during the 70s has forced many manufacturers all over
the globe tom reverse the existing practices and pursue a policy of manufacturing fuel efficient
cars Therefore, policies should be changed in response to changing environmental and internal
system conditions.

3.1 Formulation of Policy

The studies or theories in which purposeful organisations formulate policies represent a scholarly
pursuit which has been carried on for years by management theorists. These scholars have
observed and analysed the decision making action of managers of business and other
organisations as they determined the direction and course of their respective organisations.

To influence policy thinking in an organisation is one of the important goals of an executive as

he develops his career. The greater an executive‘s influence on policy, the greater is his
contribution and the higher his status among fellow executives. This, in part, is what contributes
to the difference and respect generally accorded a company‘s chief executive. His thinking is all
centred on policy issues and as you will note all policies are crucial to the survival, health and
success of an enterprise.

Policy decisions rest fundamentally on human judgement and intuition. Some policies evolve
informally over a long period of time without conscious or selective formulation. They have their
origin in slowly developing customs, traditions and attitudes. Others are formulated quickly,
because the situation requires rapid implementation. Both types may originate at the top levels in
the organisation and work their way down; they may also arise in a given area and remain in that
area; or they may start at lower levels and permeate upward. In general, policies should be
formulated by those in organisation who have the responsibility for accomplishing the par ticular
objectives to which the policies relate.

3.2.1 Policies from Top to Bottom

Some policies cut across all functional areas of the organisation. Many are so interrelated with all
area of operations that their significance can best be understood by t he top level management.
Policies that originate from the top arise out of broad, basic needs perceived and defined by the
top managers. In large corporations today, for instance, the Chief Accountant is an important
contributor to advance planning and policy formulation. Complex taxes, new accounting
procedures, mergers, computerization, insurance, pensions, investment options and appraisal,

40
profit sharing, and depreciation of assets and other many cost implication corporate issues cause
the Chief Accountant to become involved in areas that are broad than strictly finance.

General policies or corporate policies affecting all areas of operation usually originate from the
top management. Descending levels in the organisation structure will be guided by these policies
when formulating more limited policies at their own levels.

3.2.2 Policies within Functional Areas of Departments

Those in charge of functional areas, and/or departments are generally involved in establishing
policies for those areas. Marketing executives formulate marketing policies, purchasing
executive formulate purchasing policies; personnel managers formulate personnel policies, etc.
These are operational policies proposed and formulated at functional areas and departmental
levels. Managers must be consistent and operate within corporate policy guidelines while
formulating policies at these levels. Policy established within functional areas may influence the
formulation of policy in other functional areas as well as the strategies developed to pursue those
policies.

3.2.3 Policies from Bottom to the Top

There are lots of advantages and wisdom in inviting supervisors and other operating personnel to
participate in developing and implementing policies. Whenever possible, non-management
employees should have a voice in policy matters that will directly affect them or their work. This
kind of ―Participative Management‖ engenders good human relations. It gives the managers a
chance to hear from the workers reactions to subject policies and to accommodate them, but also
to give the workers the opportunity to gratify deep seated needs for recognition and influence on
the group‘s functioning. Also, by participating in policy making, a worker develops a managerial
perspective and a tendency to consider the enterprise as a whole, thereby contributing to its
success.

One important thing to note in the above arrangement is that policies and suggestions which may
originate at or near the bottom of an organisation and which may be useful never get to the top
except through strong influential pressures. If the higher level management is receptive to ideas,
feelings and attitudes of those below, they will derive valuable policy inputs from them. The
openness of upward communication and the use of participative management method can do
much to generate upward policy formulation process.

In general, it is advisable that managers review all policies periodically, as some might have
outgrown their original purpose or usefulness. They should not be glorified and perpetuated
merely because they are policies, rather, they should be modified or replaced when
circumstances call for such a change. Once a policy has been adopted or modified, it should be
communicated to all affected by it. It is advisable to communicate policy statements at all levels
in writing and to maintain a policy file that is accessible to everyone. Persons expected to
conform to a policy have a right to know that such a policy exists, the purpose of that policy and
why it was formulated.

41
Since policy formulation is not a guess work, certain definite steps are stipulated to be followed
by decision makers when formulating new policies or modifying the existing ones. These are
(Kalejaye, 1998):

(i) Carefully study the organisation‘s objectives.

(ii) Identify the need for a policy in a given area.
(iii) Source for and collect all possible and relevant information for the policy formulation.
(iv) Consideration must be given to all alternatives especially as they relate to the policy.
(v) Analyse all possible available outcomes.
(vi) Select the best policy statement so far made taking into consideration its possible
outcome.
(vii) Review the policy statement with the employees and others who will be affected by its
application.
(viii) Ensure the policy is in line with the other existing policies of the organisation.
(ix) Draw out the final policy statement including the effective dates of such a policy.

Self Assessment Exercise 3.1

List the steps required for formulating a new policy or review an existing policy.

3.2 Types of Policies

The type of organization influences the type of policies muted out for compliance. The
regulations which guide decisions which guide decisions and actions vary considerably and cut
across the hierarchical structure of the organization depending on the nature and magnitude of
objective. There are many types of policies – marketing policies, financial policies, production
policies, personnel policies to name a few in every organization. Within each of these areas more
specific policies are developed. For example, personnel policies may cover recruitment training
promotion and retirement policies. Viewed from a systems angle, policies form a hierarchy of
guides to managerial thinking. At the top of level policy statements are broad. The management
is responsible for developing and approving major comprehensive company policies. Middle
managers usually establish less critical policies relating to the operation of their sub units.
Policies tend to be more specific at lower levels. The manager‘s job is to ensure the consonance
of these policies, each must contribute to the objectives of the firms and there should be no
conflict between sub system policies.

Although it is customary to think of policies as written statements it is not necessarily the case.
For example a firm may simply decline to consider handicapped employees in the selection of
new personnel. In effect, this becomes an effective policy even though the company has never
verbalized its position.

There are many types of policies. Examples include:

 hiring university-trained engineers;

 encouraging employees suggestions for improved cooperation;
 promoting from within, conforming strictly to a high standards of business ethics;

42
 setting competitive prices; and
 insisting on fixed, rather than cost-plus, pricing.

Hicks and Gullett (1985) expressed the opinion that every operating areas ranging from sales,
procurement, manufacturing, personnel (human resources) and finance need a hierarchy of
supporting policies to drive the business. This move enhances policies as guide to decision
define the boundaries within the organization and they direct decisions toward accomplishing
objectives thereof. In the progression from objectives to policies to procedures to rules, the limits
become increasingly narrow.

Steiner (1969) stated that the regulations which guide decisions and actions very considerably
and cut across the hierarchical structure of the organisation depend on the nature and magnitude
of mission to be accomplished. He therefore developed a pyramid to demonstrat e the relationship
among various types of business policies will be used as a model as discussed below:

Figure 3.1 Steiner‟s Pyramid of Business Policies

MAJOR POLICIES
Lines of business, code of conduct

SECONDARY POLICIES
Selecting of geographical area, major
customers, major customers

FUNCTIONAL POLICIES
Marketing, Production, Research, Finance

MINOR POLICIES
Merchandise display, Plant layout, maintenance,
absenteeism, etc.

PROCEDURE
Handing income orders, servicing customers‘ complaints,
shipping, smoking, etc.

RULES
Delivery of paychecks, loitering around, plant, security,
smoking, etc.

Source: Steiner, G. (1969 quoted in Kalejaye, A., 1998).

Top Management Planning, Macmillan, New York.

43
 Major policies
 Secondary (corporate) policies
 Functional policies
 Minor policies
 Procedure
 Rules

3.2.1 Major Policies

Major policies are formulated at the top of the organization and relate to the company‘s ma in
purpose. They provide guide line pertaining to such things as the line of business and ethical
conduct of organization.

3.2.2 Secondary or Corporate Policies

These policies are broad and general policies formulated at the upper levels of management o f
the organization. These policies apply to the entire organization and deal with business facets
such as the selection of major products and services and the selection of marketing areas. Much
of the information generated in the proper formulation of major policies can be used in
determining secondary policies, which are more specific than major policies.

3.2.3 Functional Policies

These deal with specific functional areas of the organization. They involve policies that
specifically related to marketing production, finance, and other functional areas. For instance, the
ABC Transport Company will accept customer exchanges or returns made within one month
after purchase is an example of functional policy related to marketing.

3.2.4 Minor Policies

They are subordinate to functional policies and define in details such matters as maintenance of
equipments, schedules, plant layout, absenteeism etc.

3.2.5 Procedure

This is a series of related steps or related steps or tasks expressed in chronological order to
achieve a specified purpose. Procedure defines in step-by-step fashions the method by which
policies are achieved. They outline precisely the manner in which an activity must be
accomplished. Procedure generally permits little flexibility and deviation.

3.2.6 Rules

This is a statement of what may, must or must not be done in a particular situation or when
playing a game. It explains in a lucid manner what an employee should do or is advised to do in
a particular situation. You can also describe rules as the habits, the normal state of things, or

44
what is true in most cases. Finally, a rule is a statement of what is possible according to a
particular system.

Rules permit the use of discretion in performing a particular task.

Self-Assessment Exercise 3.2

What is the main characteristic of functional policy?

3.3 Business policies

Business policies are sets of rules followed by a store or group of stores that define business
processes, industry practices, and the scope and characteristics of a store's o r group of stores'
offerings. They are the central source and reference template for all allowed and supported
practices within a store or group of stores.

In WebSphere Commerce, business policies are enforced with a combination of one or more
business policy commands that implement the rules of the business policy. Each business policy
command is a Java class. A business policy command can be shared by multiple business
policies. The behavior of the business policy command is determined by the parameters passed
to the command.

Parameters affecting the function of a business policy command can be introduced in three
places:

 the contract term and condition referencing the business policy

 the business policy definition
 the business policy command itself.

The business policy definition may specify a set of parameters that are automatically fed into
each invocation of any of commands associated with the policy. A business policy command
may specify additional parameters when it is invoked. Finally, a contract term and condition may
prove extra parameters for a business command unique to the term and condition.

Business policy commands for the same type of business policy must have the same interface.
The following categories of business policies are provided in WebSphere Commerce:

3.3.1 Catalog business policies

Catalog business policies define the scope and characte ristics of the catalog of products for sale
in a store including prices and the categorization of products in a store's catalog.

3.3.2 Payment business policies

Invoicing, payment, and refund business policies define how a store accepts payments, pays
refunds, and the format of a store's invoices.

45
3.3.3 Returns business policies

Returns business policies define if refunds are accepted, the time period they are accepted for,
and any re-stocking fees applied to returns.

3.3.4 Shipping business policies

Shipping business policies define the shipping providers a store can use and the charges
associated with each type.

3.3.5 Referral interface business policies

Referral interface business policies define the relationship between a proxy store and a remote
store. Many contract terms and conditions reference business policies. This provides a measure
of control over the nature of contracts a store enters into while still providing flexibility in
creating the contract terms and conditions.

There are several types of Business policies being followed in the Business Environment.

Business policies may be of the following types:

1. External Policies:

Policies framed to give effect to the decisions of the Government, judiciary, trade
associations and such other external forces are what are called external policies. For
example, under the Income-Tax Act, every employer is bound to deduct tax from the
salary payable to the employees every month. Similarly, the Government requires certain
number of jobs to be reserved for the backward sections of the society. To give effect to
such orders, policies may be formulated at the enterprise level.

2. Internal Policies:

Policies formulated to give effect to certain decisions taken by the owners of a business
establishment are what are called internal policies. For example, it may be the policy of a
certain private sector organization to appoint certain categories of workers purely on
contract basis. Similarly, a business organization may adopt a policy to produce only for
the foreign market.

3. Appealed Policies:

Such policies are formulated to give effect to the suggestions of the staff of an
organization. For example, the employees may make an appeal to the top management to
give employment to an eligible member of an employee‘s family after the latter‘s
retirement. If such a proposal is acceptable to the management, the same may be
announced as a policy.

46
4. Explicit Policies:

Those policies of an organization that are stated outwardly are called explicit policies.
Such policies form part of the organization manual. Most of the policies of an
organization are explicit in nature. The sales policy, credit policy, etc., may be cited as
examples.

5. Implicit Policies:

These policies are not stated outwardly. For Example, every organization follows certain
policy for the recruitment of employees. Such a policy is not usually stated explicitly.
Even the existing employees may not be aware of it.

3.4 Reasons for Formulating Policies

Many professionally managed businesses acknowledged that it is necessary to have policies in

all the major functional areas of management. The focus areas will thus include production
policy, purchasing policy, marketing policy, selling and promotional policy, etc. All these
policies are expected to give support to the overall objectives of the organisation as defined by
the top management and they complement each other. The major reasons for having policies are
as follows:

(1) It is impossible and wrong to rely on expediency or precedents to solve problems which
arise intervally or regularly. To that extent, decision-making is more consistent and
detailed when policy is defined and known.

(2) Policy provides continuity for the organisation. They are more permanent than the
individuals who are employed and later leave for greener pastures or are sacked; thereby
providing an enduring foundation for continuity.

(3) They help to facilitate expansion and integration of new businesses into the company so
that when growth occurs, there is already a firm foundation policy to apply in the new
situation.

(4) They provide a yardstick with which to measure progress in the organisation. For
example, policy on issue of stock items – stipulating that no condition on which stock
should be issued on verbal instruction. This may not be achievable instantly, but it sets a
standard against which progress can be measured as the policy is implemented.

(5) They stimulate action, because managers and supervisors have the knowledge and
confidence to make decisions and take actions knowing fully well that they are following
the laid down policies.

(6) Policies also save management time because the information is available and the
procedures for carrying them out are known. This, of course, assumes that the policies are
made freely available to those who require them.

47
(7) They promote fairness in treating employee matters; provided the policies take account of
the needs of the entire organisation and are interpreted consistently.

(8) Policies serve as bases for the defence of the various organisation actions and activities in
the event of challenges and litigation in the court of law.

Self Assessment Exercise 3.3

Itemize the reasons why policies are formulated.

3.4 Uses of Policies for Management Effectiveness

Policies are of great importance to every organisation as they are used to establish stable
institution, create identity, shape planning and boost the organisation‘s image and acceptability
by the public. Kalejaye (1998) itemised the various uses of policies as follows:

1. Policies are used in preventing deviation from planned course of action by providing definite
guide to follow. They provide the communication channels between organisational units thus
facilitating the delegation process.

2. Policies provide a conceptual framework within which other plans can be established to form
a balanced and coordinated structure of plans. Since they serve as guide to further action, the
existing policies relieve managers of the necessity to ask superiors for permission to do or
not to do certain things. As long as managers are conforming to the organisation‘s policies,
they can safely proceed and use their own initiatives.

3. Through policies, closer coordination and cooperation can be promoted among the
organisation elements. Closer coordination and easier delegation will permit a greater degree
of decentralization within the organisation.

4. Employees are more likely to take action and voluntarily assume greater responsibility when
they are aware of organisational policies. If the personnel are confident that their actions are
consistent with organisational policies, they are more likely to take actions than do nothing.

5. Definiteness and flexibility are both desirable to goals attainment, but calculating the trade-
off lies the problem. In certain cases, decisions are too trivial to require policy and at the
other extreme, decisions may be too important to rule; hence, in between these extremes,
there is need for policies to save time and increase the speed of decision making.

6. To the subordinates, policies will not only serve as means of exercising authorities, it also lay
down the guidelines that define and limit the exercise of the subordinates authorities and
responsibilities.

7. Policies under-guide the planning of a future course of actions. They show the way the future
plans and activities of an organisation are formulated and implemented.

48
8. Policies define and clarify the objectives and goals of an organisation. They give a further
definition on how the objectives of the organisation can be accomplished.

9. Policies are particularly necessary at lower levels where relationship between actions and
objectives are most of the time vaguely articulated. Policies are used to bridge the gap –
ensuring that staff actions are consistent with the broad policies and actions of others in the
organisation. If this were not done by policies, every action will have to be approved, putting
an impossible communications burden on coordinating supervisors.

10. Policies are used to mould and project the image of the organisation before the interest
groups such as shareholders, suppliers, customers, employees and the public in general. The
reputation that a company enjoys, whether favourable or otherwise, is frequently linked to
the way the outsider perceives the company through its policy structure. It is common to hear
people making statement such as ―the firm is known to be liberal in its credit policy or the
policy dictates positive attitude towards employees‖.

3.5 Integration and Relationship of Policies to Objectives

Policies are general statements specifying how objectives are to be accomplished; they stem
directly from organisation‘s objectives and can be no better than the objectives set.
Organisational objectives and policies are not mutually exclusive components of the
management process. Rather, the relationship between policy and objective is that they are
highly interdependent and inseparable. The two are interlocked and interrelated; and while
objective defines standard of what the organisation should accomplish, policy directs action
towards the attainment of the standard set by the objective.

It is not possible to attain objectives without knowing the policy guidelines that must be
followed. Similarly, strategies cannot be determined without first knowing the objectives to be
pursued and the policies to be followed. Rogers (1973) provided the basis for the above analogy
which demonstrates the interdependence among objectives, policies and strategies.

49
Figure 3.2 Relationships between Objectives, Policies and Strategies

Policy

Goal Goal

Objective Objective Objective Objective

 Strategy  Strategy  Strategy  Strategy

 Strategy  Strategy  Strategy  Strategy
 Strategy  Strategy  Strategy  Strategy

Source: Rogers, D.C.D. (1973). Corporate Strategy and Long Range Planning, Ann Arbor
Mich, The Landis Press, p. 18.

The above sketch indicates a situation where the boat is going up a river. The surrounding
terrains represent the organisational purpose, and the surroundings terrains that influence the
general flow and direction of the river. The primary objective is the harbour or stopping point of
some distance up the river to be reached by a certain time. Organisational objectives and other
subordinate goals and plans can be represented by other milestones between the boat‘s present
position and the harbour. Policies are the river bank that directs and guides the boat towards the
harbour.

Like the river bank, policies remain the effect, after the primary objectives had been reached.
They are independent of time and must be reviewed as to acceptability and consistency whenever
objectives are set. By all indications, it has been established that policies and objectives are
related and that one leads to another. Policies serve as guide that provide direction and vision to
managers in decision making. With articulated and purposive policies, managers can make
decisions with some assurance that the decisions are likely to make the organisation‘s corporate
objective realizable within the stipulated time.

Self Assessment Exercise 3.4

1. What is the relationship between objectives, policies and strategies?
2. State the uses of policies and explain them.

50
3.6 Management Policy Areas

Management policy areas are very extensive; some of the specified principal areas are as
discussed below:

Organisation: The organisation has to develop policies for itself. Such policies have to do with
defining the appropriate departments, jobs, ranks within the organisation and interrelationships in
line with the corporate objectives of the organisation.

Administration: Administrative policies of the organisation are formulated with a view to

ensuring that there is effective leadership, direction and supervision at all levels and divisions of
the organisation.

Unions: The policy statements are set out to maintain appropriate relationships with
management. Between the organisation and unions/labour movement, they also space out the
procedure for negotiating conditions of service and settling of industrial disputes.

Control: Policies on control are essential in organisation because they facilitate and pave way
for the attainment of organisational goals by maintaining appropriate standards of tasks, personal
and group performance.

Training and Development: This category of policies are formulated to guide the top
management in providing programmes designed to meet organisation needs, individual needs an
career requirements of managers and employees.

Incentive: This involves developing appropriate incentives to motivate employees and managers
alike in order to ensure efficient performance.

Public Relations: The policy here guides in providing adequate and appropriate attention to
public attitudes and reactions to policies and practices of the organisation.

Political Action: This policy expresses the position or attitude of the organisation on political
issues and events. Policy statement in this regard may restrain employees from talking to the
press on political issues or even discuss political matters within the organisation.

3.7 The Role of Workers in Policy Formulation

The concept of workers participation in management policy formulation has always been
controversial. The principal perspectives in which workers participation in management policy
may be seen as:

(i) Workers participation is viewed as a means of advancing the interest of workers;

(ii) Workers participation is a way of distributing power within the enterprise more equally
and in handling conflicts of interest by democratic procedure otherwise known as
industrial democracy.

51
(iii) By involving workers in policy formulation, this will bring about effective utilization of
the human resources of the enterprise.

(iv) Workers participation in management policy is in effect seen as the antidote towards
uncooperative attitudes and increase in industrial conflicts.

4.0 CONCLUSION

From the discussions in this unit, it can be deduced that every organization, whether business or
non-business, requires a policy as a decision rule to guide the activities and performance of the
business to eventually achieve goals and objective of the organization.

5.0 SUMMARY

In this unit, we have described how policies are formulated; listed the types of Policy;
enumerated the reasons for formulating policies; highlighted the uses of polices for management
effectiveness; explained how policies are integrated in relation to objectives; itemized
management policy areas; stated the role of workers in policy formulation.

In the next unit, you will be introduced to yet another topic known as organisational policies.

6.0 TUTOR MARKED ASSIGNMENT

(1) Sound and creative policies are essential for a company to survive the competitive business
terrain. Explain the necessary actors that will ensure that a policy is sound and creative.

(2) Discuss extensively the relationship between policy and objectives.

(3) Identify the various areas in which policies can be directed or addressed in an organisation.

7.0 REFERENCES/FURTHER READING

Gomez-Mejia, L. R., Balkin, D.B. & Cardy, R. L (2005) Management – People, Performance,
Change New York McGraw-Hill Companies

Hicks, H. G and Gullett, C. R (1985) Management Singapore McGraw-Hill, Inc

Kalejaye, A. (1998) Basic Management Practice Lagos Mak-Jay Enterprise

Steiner, G. (1969 quoted in Kalejaye, A., 1998). Top Management Planning, Macmillan, New
York.

Rogers, D.C.D. (1973). Corporate Strategy and Long Range Planning, Ann Arbor Mich, The
Landis Press, p. 18.

52
UNIT 6 ORGANIZATIONAL POLICIES

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Organizational Policy
3.2 Nature of Organizational Policy
3.3 The Purpose of Policies
3.4 Distinction between Objectives and Policy
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References and Further Reading

1.0 INTRODUCTION

In the last unit, we described how policies are formulated; listed the types of Policy; enumerated
the reasons for formulating policies; highlighted the uses of polices for management
effectiveness; explained how policies are integrated in relation to objectives; itemized
management policy areas; stated the role of workers in policy formulation.

In this unit, you will be introduced to yet another topic known as organisational policies.

2.0 OBJECTIVES

At the end of this unit, you should be to:

 explain the meaning of organization;

 discuss the purpose of organizational policies;
 differentiate between objectives and policies.

3.0 MAIN CONTENT

Abdullahi (2009) stated that corporate organizations operate within the ambit of the necessary
guides which are normally the organizational procedures and regulations for effectiveness and
efficiency. Basically, policies incorporate all the necessary operational procedures and
regulations of an organization. Therefore, all the operational activities of an organization are
circumscribed within the ambit of organizational policy. Hence, the issue of organizational
policy cannot be compromised. All organizations must operate with policy as it is normally
formulated for the good of healthy operations and interrelationships among the various
subsystems of the organization. In this unit of the study material, therefore, the discussion is on
organizational policy.

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 3.1 Meaning of Organisational Policy

According to Pearce II and Robinson Jr. (1998, cited in Abdullahi, 2009), policies are specific
guides for operating managers and their subordinates. Policies are powerful tools for strategy
implementation and control once they are clearly linked to operating strategies and long-term
objectives. In the opinion of Thompson Jr. and Strickland (1987, quoted in Abdullahi, 2009),
policies are directives designed to guide the thinking, decisions, and actions of managers and
their subordinates in implementing an organization‘s strategy. Policies provide guidelines for
establishing and controlling ongoing operations in a manner consistent with the firm‘s strategic
objectives.

Often referred to as standard operating procedures, policies serve to increase managerial

effectiveness by standardizing many routine decisions and controlling the discretion of managers
and subordinates in implementing operational strategies. Logically, policies should be derived
from functional strategies (and, in some instances, from corporate or business strategies) with the
key purpose of aiding in strategy execution.

In essence, a policy is a guideline for organisational action and the implementation of goals and
objectives. Policy is translated into rules, plans and procedures; it relates to all activities of the
organisation, and to all levels of the organisation. Clearly stated, policy can help reinforce the
main functions of the organisation, make for consistency and reduce dependence on the actions
of individual managers.

Policy clarifies roles and responsibilities of managers and other members of staff and provides
guidelines for managerial behaviour. Securing agreement to a new or revised policy can help
overcome reliance on outdated practices and aid the introduction of organisational change.

Policy provides guiding principles for areas of decision-making and delegation, for example,
specific decisions relating to personnel policy may be to:

 give priority to promotion from within the organisation;

 enforce retirement at government pensionable age;
 employ only graduate or professionally qualified accountants;
 permit line managers, in consultation with the personnel manager, to appoint staff up to a
given salary/wage level.

Some policy decisions are directly influenced by external factors, for example, government
legislation on equal opportunities.

3.2 Nature of Organizational Policy

Policies in their nature can vary in their level of strategic significance. Some, such as travel
reimbursement procedures, are really work rules that are not necessarily linked to the
implementation of a specific strategy. A policy, for instance, couched that requirement that every

54
location invest a certain percent of gross revenue in local advertising are virtually functional
strategies.
Policies can also be externally imposed or internally derived depending on the ownership
interest. Policies regarding equality of opportunity practices are often developed in compliance
with external (government) requirements. In the same vein, some organizational policies
regarding leasing or depreciation may be strongly influenced by current tax regulations.
Regardless of the origin, formality, and nature of the policy, the key point to bear in mind is the
valuable role policies can play in strategy implementation.

In utmost consideration, the carefully constructed policies enhance strategy implementation in

several ways. Obviously, it is imperative to examine exist ing policies and ensure the existence of
policies necessary to guide and control operating activities consistent with current business and
functional strategies. Ensuring communication of specific policies will help overcome resistance
to strategic change and foster greater organisational commitment for successful strategy
implementation.

On the basis of the organization‘s ideology of philosophy, the goals of the organisation are
translated into objectives and policy. Terminology and use of the two terms vary but objectives
are seen here as the ‗what‘, and policy as the ‗how‘, ‗where‘ and ‗when‘ – the means that follow
the objectives.

Self-Assessment Exercise 1

Explain the term ‗organizational policy‘.

3.3 The Purpose of Policies

According to Pearce II and Robinson Jr. (1998 cited in Abdullahi, 2009), policies are designed to
communicate specific guides to decisions. They are designed to control and reinforce the
implementation of functional strategies and the grand strategy, and they fulfill this role in several
ways such as discussed below:

1. Policies establish indirect control over independent action by making a clear statement about
how things are now to be done. By limiting discretion, policies in effecting control decisions
and the conduct of activities without direct intervention by top management.

2. Policies promote uniform handling of similar activities. This facilitates coordination of work
tasks and helps reduce friction arising from favoritism, discrimination, and disparate
handling of common functions.

3. Policies ensure quicker decisions by standardizing answers to previously answered questions

that would otherwise recur and be pushed up the management hierarchy again and again.

4. Policies help institutionalize basic aspects of organisation behaviour. This minimizes

conflicting practices and establishes consistent patterns of action in terms of how
organisational members attempt to make the strategy work.

55
5. Policies reduce uncertainty in repetitive and day-to-day decision making, there providing a
necessary foundation for coordinated, efficient efforts.

6. Policies can counteract resistance to or rejection of chosen strategies by organisation

members. When major strategic change is undertaken, unambiguous operating policies help
clarify what is expected and facilitate acceptance, particularly when operating managers
participate in policy development.

7. Policies offer a predetermined answer to routine problems, giving managers more time to
cope with non-routine matters; dealing with ordinary and extraordinary problems is greatly
expedited – the former by referring to established policy and the latter by drawing on a
portion of the manager‘s time.

8. Policies afford managers a mechanism for avoiding hasty and ill-conceived decisions in
changing operations. Prevailing policy can always be used as a reason for not yielding to
emotion-based, expedient, or temporarily valid arguments for altering procedures and
practices.

A policy can either in writing and documented or implied. In other words, policies may be
written and formal or unwritten and informal. The positive reasons for informal, unwritten
policies are usually associated with some strategic need for competitive secrecy.

Some unwritten policies, such as ―consultation with the employees‖, are widely kno wn (or
expected) by employees and implicitly sanctioned by management. On the contrary, unwritten,
informal policies may be contrary to the long-term success of a strategy. Still, managers and
employees often like the latitude ―granted‖ when policies are unwritten and informal.

There are inherent advantages in the use of formal written policies such as follows:

(i) Managers are required to think through the policy‘s meaning, content, and intended use.
(ii) The policy is explicit so misunderstandings are reduced.
(iii) Equitable and consistent treatment of problems is more likely.
(iv) Unalterable transmission of policies is ensured.
(v) Authorization or sanction of the policy is more clearly communicated, which can be
helpful in many cases.
(vi) A convenient and authoritative reference can be supplied to all concerned with the policy.
(vii) Indirect control and organisation-wide coordination, key purposes of policies, are
systematically enhanced.

Self-Assessment Exercise 2

What are the reasons for the formulation of organizational policies?

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3.4 Distinction between Objectives and Policy

While objectives set out more specifically the goals of the organisation; the aims to be achieved
and the desired end-results, policy is developed within the framework of objectives. It provides
the basis for decision-making and the course of action to follow in order to achieve objectives.
The relationship between the organisation, its objectives and management is espoused as one of
the managerial duties of an organization, which it is to ensure that t he human and material
organisation is consistent with the objective, resources and requirements of the concern. The
established objectives and policy therefore constitute an integral part of the process of
management and a necessary function in every organisation.

The objectives of an organisation are related to the input-conversion-output cycle. In order to

achieve its objectives and satisfy its goals, the organisation buys inputs from the environment,
through a series of activities transforms or converts these inputs into outputs and returns them to
the environment as inputs to the systems. The organisation operates within a dynamic setting and
success in achieving its goals will be influenced by a multiplicity of interactions with the
environment.

Regardless of the type of organization under consideration, there is need for lines of direction
through the establishment of objectives and determination of policy. Objectives and policy form
a basis for the process of management. The choice of objectives is an essential part of the
decision-making process including future courses of action. Objectives may be set out either in
general terms or in more specific terms. General objectives are determined by top management.
Specific objectives are formulated within the scope of general objectives and usually have more
defined areas of application and time limits.

Objectives may be just implicit but the formal, explicit definition of objectives will help
highlight the activities which the organisation needs to undertake as the comparative importance
of its various functions. An explicit statement of objectives may assist communications and
reduce misunderstandings, and provide more meaningful criteria for evaluating organisational
performance. However, objectives should not be stated in such a way that they detract from the
recognition of possible new opportunities, potential danger areas, the initiative of staff or the
need for innovation or change.

Objectives emphasise aims and are stated as expectations, but policies emphasise rules and are
stated in the form of directives. In terms distinction between objectives and policy, the figure
below is very relevant.

Figure 5.1: Comparison between Objectives and Policy

Functional Area Objective Policy

Marketing Complete market coverage The company will sell to every retail outlet that is
creditworthy, as decided by the Company Accountant.

Production Low units costs from long production runs

The company will not produce one-off jobs without the specific authority of the Board.

57
Finance To maintain adequate liquidity
Accountant will draw up a cash budget and inform the Board if working capital is likely to fall
below a specified limit.

Personnel Good labour relations Set up and maintenance schemes for Joint Consultation,
Job Evaluation, Wage Incentives.

Source: Daft, Richard (2009). Strategy Formulation and Implementation (Management 6th
Edition) p.26.

Objectives and policy together provide corporate guidelines for the operation and management of
the organisation. The activities of the organisation derive the significance from the contribution
they make to achieving objectives in the manner directed. The formulation of objectives and
policy, and the allocation of resources, provide the basis for strategic planning which is the first
stage in the planning and control processes of business organisations.

4.0 CONCLUSION

In this unit we have discussed that policies are directives designed to guide the thinking,
decisions and actions of managers in implementing an organization‘s strategy. You have
observed from the analysis that policies provide guidelines for establishing and controlling
ongoing operations in a manner consistent with the firm‘s strategic objectives.

58
We also discussed that policies are interrelated with objectives because the former is normally
designed to pursue and achieve the latter. Lastly, we have also discussed that there are
fundamental differences between policies and objectives particularly in business functional
areas.

5.0 SUMMARY

In this unit, the topics discussed include the following:

 meaning of organizational policy

 nature of organizational policy
 the purpose of policies, and
 distinctions between objectives and policy.

In the next study unit, you will be taken through the discussion on organizational policy.

6.0 TUTOR-MARKED ASSIGNMENT

Differentiate between policy and objective in business functional areas.

Answer to Self-Assessment Exercise

1. Policy refers to the specific guide for operating managers and their subordinates in
carrying out their routine responsibilities. Policy operates like the internal law of an
organization.

2. The reasons for the formulation of organizational policies are as follows:

i. Policies establish indirect control over independent action by making a clear statement
about how things are now to be done.
ii. Policies promote uniform handling of similar activities.
iii. Policies ensure quicker decisions by standardizing answers to previously answered
questions that would otherwise recur and be pushed up the management hierarchy again
and again.
iv. Policies help institutionalize basic aspects of organisation behaviour.
v. Policies reduce uncertainty in repetitive and day-to-day decision making, there
providing a necessary foundation for coordinated, efficient efforts.
vi. Policies can counteract resistance to or rejection of chosen strategies by organisation
members.
vii. Policies offer a predetermined answer to routine problems, giving managers more time
to cope with non-routine matters.
viii. Policies afford managers a mechanism for avoiding hasty and ill-conceived decisions in
changing operations.

59
7.0 REFERENCES/FURTHER READINGS

Abdullahi, S.A. (2009). Corporate Management Strategy, MBA 726 Study Material for
Management Students in the School of Management Sciences.

Glueck, W. F. (1980). Business Policy and Strategic Management, New York: McGraw-Hill.

Pearce and David (1987). Strategic Planning and Policy, New York: Reinhold Pearce II, J. A.
and Robinson Jr., R. B. (1998). Strategic Management: Strategy Formulation and
Implementation, Third Edition, Krishan Nagar, Delhi: All India Traveller Bookseller.

Hill, C. W. L. and Jones, G. R. (2004). Strategic Management; An Integrated Approach, Sixth

Edition, Indian Adaptation, New Delhi: Biztantra, An Imprint of Dreamtech Press.

Draft, R (2009)Strategy Formulation and Implementation Management 6th Edition.

60
UNIT 7 FUNCTIONS AND RESPONSIBILITIES OF BUSINESS POLICY IN
MANAGEMENT

TABLE OF CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Business Policy in Different Organisations
3.2 Functions of Business Policy in Management
3.3 Business Policy – Issues, Challenges and Solutions
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the last unit, we defined organizational policy; described the nature of organizational policy;
state the purpose of policies, and distinguished between objectives and policy.

In this unit, you will be taken through the discussion on organizational policy on functions and
responsibilities of business policy in management.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 Discuss business policy as they relate to different organisations;

 Enumerate the function of Business policy in management;
 State the responsibility of Business policy in management.

3.1 Business Policy in different Organizations

Top-level managers consider the numerous ways in which this goal could be accomplished. In
the progression from objectives to policies to procedures to rules, the limits become increasingly
narrow. Rules are specific statements what should and what should not be done.

Dividend policy is another area in which management can affect the financing structure of the
company and examine whether changing dividend policy could perhaps add value.

In Unit 1 it was stated that policies are general statements that guide decision making. Thus, a
business organization requires policy as an added out-standing plan of organization. There are
policies in different organizations depending if it is service or product oriented.

Policies in each of these operational areas will be formulated. For example, in personnel
numerous policies would be established to provide consistent guides to action. Areas might

61
include securing, selecting, training and compensating employees. Working conditions,
employee services and industrial relations also might be considered.

Business policies generally have a long life. They are established after a careful evaluation of
various internal and external factors having an impact on the firm‘s market standing. As and
when circumstances change in a major way the firm is naturally forced to shift gears, rethink and
reorient its policies. The World Oil crisis during the 70s has forced many manufacturers all over
the globe to reverse the existing practices and pursue a policy of manufacturing fuel efficient
cars. Therefore, policies should be changed in response to changing environmental and internal
system conditions.

In the example of Ethical policy, sometimes a credo is not specific enough for a large company
that faces complex ethical challenges in many different markets and cultures. In such situations,
more concrete guidelines (in form of statements) on ethical conduct are needed (Gomez-Mejia,
Balkin & Cardy, 2005).

There are many types of policies – marketing policies, financial policies, production policies,
personnel policies to name a few in every organization. Within each of these areas more specific
policies are developed. For example, personnel policies may cover recruitment training
promotion and retirement policies. Viewed from a systems angle, policies form a hierarchy of
guides to managerial thinking (Rama Rao, 2010). At the top of level policy statements are broad.
The management is responsible for developing and approving major comprehensive company
policies. Middle managers usually establish less critical policies relating to the operation of their
sub units. Policies tend to be more specific at lower levels. The manager‘s job is to ensure the
consonance of these policies, each must contribute to the objectives of the fir ms and there should
be no conflict between sub system policies.

Many professionally managed companies acknowledge the fact that it is necessary to have
policies in all the major functional areas of management Kalejaye (1998).

The focus areas will thus include:

 Production policy -
 Purchasing policy -
 Financial policy -
 Marketing policy -
 Credit policy -
 Selling and promotion policy - etc.

All these policies are expected to give support to overall objectives of the organization as defined
by the top management and they complement each other.

Although it is customary to think of policies as written statements it is not necessarily the case.
For example a firm may simply decline to consider handicapped employees in the selection of
new personnel. In effect, this becomes an effective policy even though the company has never
verbalized its position.

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Self-Assessment Exercise

Give examples of business policy.

3.1.1 Business Policy and Implementation in Organization

Business policies define areas within which decisions are made and ensure that decision will be
consistent with and contribute to an objective. For visionary management, policies help decide
issues before they become problems, make it unnecessary to analyze the same situation every
time it occurs and unify other plan thus permitting managers to delegate authority and still
maintain control over what their subordinate do (Weighrich & Koontz, 2005). The fabric of our
lives is held together by organizations. Managers and organization go toget her hand in hand,
hence establishing the need for managers in organization. They are there to make wise decisions
through dependable standing plans leading to the development of policies, procedures and rules.

3.2 Managerial Functions and Policy Implementation

The basic management functions are planning, organization, motivation and controlling.

Planning develops objectives for each level of organization and how to achieve those objectives.
Strategies, policies, procedures, methods and budgets are examples of plans that help to
accomplish objectives

Organizing is also necessary as it takes place when work is divided among departments and
among individuals.

Motivating is in working with people in order to create conditions that encourage employees to
do good job.

Controlling measures the results of activities, compares them against predetermined objectives
and takes corrective action if necessary.

These functions are made workable by established policy depending on the business thrust of the
organization

3.3 Business Policy – Issues, Challenges and Solutions

Business policy issues are basically that of decision making to achieve set goals and objectives.
The challenges gyrate around overcoming obstacles and giving solutions. The role of Business
policy in providing solution in a going concern matters so much in an organization.

The implementation policy depends on the type of organization and the service rendered. Policy
comes to form one of the structure of organization. It follows procedures, rules, programmes,
budgets etc. All these gear to give policy reliable focus. Every organization including business

63
requires a policy as a decision rule to guide the activities and performance of the business to
eventually achieve goals and objective of the organization.

Policy Implementation

• Set up a committee/working group. Setting up and engaging the correct people to devise (and
oversee) the policy is essential to the success of the planning and implementation.

• Consult stakeholders. Consult employees, board, and other stakeholders who will be affected
by the policy about policy inclusions, how the policy will be implemented, and assistance offered
etc. throughout the development and implementation stages. This can be done via
surveys/questionnaires, emails and team meetings.

• Devise draft policy (see recommended policy content above). Circulate. Revise.

• Have policies reviewed for legal accuracy. You may want to have policies reviewed to make
sure they are not requiring or prohibiting something that would violate the law.

• If a board of directors or advisory board exists, do a board vote.

• Set policy implementation date. Once the policy has been amended and agreed upon,
designate an implementation date, sign, and then promote.

• Monitor and review. The staff responsible for monitoring the policy must ensure adherence to
the policy. It is good practice to review the policy at two yearly intervals.

• Consider creating & distributing a Policy Manual. Keeping all of your policies in one place
makes them easy to refer to and review. Copies should be provided to all members of an
organization, along with applicable stakeholders.

Further Resources
B Resources - These free downloadable guides were created to help companies improve their
social and environmental performance.

4.0 CONCLUSION

We discussed business policy in different organisations. We noted that a business organization

requires policy as an added out-standing plan of organization. We also noted that there are
policies in different organizations depending if it is service or product oriented and that policies
in each of these operational areas will be formulated.

We discussed the various functions of management and how they relate to implementation of
business policy in an organisation. Finally, we discussed issues, challenges as solutions as they
affect business policy.

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5.0 SUMMARY

In this unit, we have

 discussed business policy as they relate to different organisations;

 Enumerated the function of Business policy in management;
 Discussed the responsibility of Business policy in management.

This brings us to the end of the first module of this course.

6.0 TUTOR MARKED ASSIGNMENT

1. In what way(s) does the function of management relate to implementation of business policy
in an organisation?

2. Policy comes to form one of the structures of organization. Discuss

7.0 REFERENCES/FURTHER READING

Rama Rao, V.S. (2010). Business Policy http://www.citeman.com/11809-nature-of-business-

policy.html#ixzz1naSwscRY

http://en.wikipedia.org/wiki/Policy

Gomez-Mejia, Balkin & Cardy (2005)

Kalejaye, A. (1998). Basic Management Practice Lagos: Mak-Jay Enterprise, ISBN: 978-027-
770-6, pp. 196 – 197.

65
MODULE 2 CORPORATE STRATEGY AND MANAGEMENT

Unit 1 Corporate Strategy

Unit 2 Strategic Decision Making
Unit 3 Process of Strategic Management
Unit 4 Overview of Strategic Management
Unit 5 Developments of Strategic Management

UNIT 1: CORPORATE STRATEGY

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Conceptualization of Strategy
3.1.1 Scope of Strategy
3.1.2 Process of Strategy Formulation
3.1.3 Influences on Strategic Choice
3.1.4 Criteria for Assessing Strategic Alternatives
3.1.5 Inherent Advantages of Corporate Strategic Formulation
3.2 The Need for Strategy
3.3 Forms of Organizational Strategy
3.3.1 Corporate Strategy
3.3.2 Business Strategy
3.3.3 Operational Strategy
3.3.4 Functional strategies
3.3.5 Grand strategies
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References and Further Reading

1.0 INTRODUCTION

You are welcome to the second module of this course.

Business policy, as we have seen in Unit 2, is the name given to an integrative course in
management (Kazimi, 2006). It is an emerging discipline and is a study of the functions and
responsibilities of the senior management. In this unit, our prime objective is to understand the
concept of strategy and the process of strategic management. We shall also see the roles that
different strategies play in strategic management.

We would start with a discussion on the concept of strat egy, which is undoubtedly the most
significant concept in business policy and strategic management. Then, we present a set of

66
definitions of strategy given by the authorities in the field and derive the main characteristics of
strategy.
The next section is about the levels at which strategy operates. Here, we shall tell you how
strategies can be formulated at different levels in an organisation. We explore the nature of
strategic decision-making by pointing out how it is similar to conventional decision-making and
yet how it differs in its coverage, reach and depth.

2.0 OBJECTIVES

At the end of this unit, you should be to:

 explain the meaning of and the need for strategy

 explain the scope of strategy
 list and discuss criteria and steps involved in formulation of strategy
 mention and discuss the influences on strategy choice
 mention and explain the inherent advantages of strategy formulation
 Identify and explain various forms of organizational strategy.

3.0 MAIN CONTENT

3.1 Corporate Strategy

The concept of strategy is central to understanding the process of strategic management. The
term ‗strategy‘ is derived from the Greek word strategos, which means generalship – the actual
direction of military force, as distinct from the policy governing its deployment. Therefore, the
word ‗strategy‘ literally means the art of the general. In business parlance, there is no definite
meaning assigned to strategy. It is often used loosely to mean a number of things.

The following sections shall present some representative definitions and different perspectives
on strategy. Here, you will get an overview of the complex terrain that the debate on strategy has
traversed in the course of its development as a concept. Kazmi (2006) gave the following
illustrations/examples of strategy in action:

 Rollatainers, after divesting a major stake in ITC, is contemplating an expansion strategy.

The combined turnover of Rollatainers and ITC‘s packaging division, which is Rs 500 crore
at present, is likely to touch Rs 1000 crore in the next five years.
 TTK Prestige is part of the diversified TTK Group. It is focusing on its core strength of
manufacturing and marketing of kitchenware. It has a US-based subsidiary Mantra Inc
which markets multicooking systems.
 Singer India, which has been associated with sewing machines, is entering the white goods
and colour television market as part of its diversification strategy.
 Birla Trans-Asia Carpets is a sick unit from the Yash Birla group. As it is faced with
excessive manpower and high interest costs, it is attempting a turnaround strategy by
retrenching three-fourth of its employees, importing synthetic carpets and tiles, and exporting
to the US carpet markets.

67
 Kotak Mahindra Finance Limited is a major non-banking finance company (NBFC) that has
experienced low profitability owing to the various problems faced by the NBFCs in India. It
is planning to adopt a divestment strategy in wholesale corporate lending and focusing on
new growth areas, such as wealth management, retail, insurance, and information services.

The above illustrations show how different companies reacted to their environment. In so doing,
they adopted a course of action which seemed to be appropriate to them. Such a course of action
may involve actions like expansion, diversification, focus, turnaround, stability or divestment.

When an old established company which has been profitable in the past starts facing new threats
in the environment – like the emergence of competitors – it has to rethink the course of action it
had been following. With such rethinking, new ways are devised to counter the threats.
Alternatively, some new opportunities may emerge in the environment which had not been there
in the past. In order to take advantage of these opportunities the company reassesses the
approaches it had been following and changes its courses of action. These courses of action are
what we may call strategies.

No doubt, strategy is one of the most significant concepts to emerge in the subject of
management studies in the recent past. Its applicability, relevance, potential and viability have
been put to severe tests. It has emerged as a critical input to organizational success and has come
in handy as a tool to deal with the uncertainties that organisations face. It has helped to reduce
ambiguity and provide a solid foundation as a theory to conduct business – a convenient way to
structure the many variables that operate in the organizational context, and to understand their
interrelationship. It has aided thinkers and practitioners to formulate their thoughts in an ordered
manner and to apply them in practice. There have been several such benefits, yet there are some
pitfalls too.

It would be prudent on our part to realize that one should not blindly adhere to the postulations of
strategy. This is likely to elicit a mature response so that the full potential of this powerful
concept can be realized. It is also intended to provide a balanced understanding of the concept of
strategy. Here are two points for our consideration to help temper our enthusiasm while
embracing the concept of strategy.

 The application of the concept of strategy to real-life situations may tend to oversimplify
things. Actual situations are complex and contain several variables that are not amenable to
structuring. The concept of strategy tends to distort reality and, as an abstraction of reality, it
is anything but a true reflection of the actual situation. Of course, this limitation is not
unique to strategy. It is present in any situation where modelling has to be resorted to in
order to provide a structured understanding of reality. Just as several mathematical
formulations start with a phrase that indicates that a certain number of variables are assumed
to be constant.

 The application of the concept of strategy commits an organisation to a predetermined course

of action. While this is essential to chart out the path ahead, it can often blind an
organisation to emergent situations as it goes along the path. Rigidity can lead t o an attitude
of finality with regard to those situations that are actually not known at the time of starting

68
 the journey. It might be better, thus, to move slowly, one step at a time, and keep in mind the
maxim: look before you leap. One might say that this may already be known to perspective
managers. Yet there is no harm in being cautious. ‗Discretion is certainly the better part of
valour‘.

Since strategy is the most important concept in the business policy course, next we shall study a
few definitions of strategy given by different authors and derive certain conclusions from them.

3.2 Defining and Explaining Strategy

Management is an art as well as science (Kazmi, 20060. Many of the concepts used in building
management theory have been derived from practice. Unlike the pure sciences which have their
foundation in experimental research, management studies draw upon the practical experiences of
managers in defining concepts. Business policy is rooted in the practice of management and has
passed through different phases before taking its shape in the present form of strategic
management. One of the earliest contributors to this young subject was Alfred D. Chandler.

3.2.1 Alfred D. Chandler (1962)

Chandler made a comprehensive analysis of interrelationships among environment, strategy, and

organizational structure. He analysed the history of organizational change in 70 manufacturing
firms in the United States. While doing so, Chandler defined strategy as: ―The determination of
the basic long-term goals and objectives of an enterprise and the adoption of the courses of
action and the allocation of resources necessary for carrying out these goals‖ (Chandler, 1962
cited in Kazmi, 2006). Note that Chandler refers to three aspects:

 Determination of basic long-term goals and objectives;

 Adoption of courses of action to achieve these objectives; and
 Allocation of resources necessary for adopting the courses of action.

3.2.2 Kenneth Andrews (1965)

Andrews belong to the group of professors at Harvard Business School who were responsible for
developing the subject of business policy and its dissemination through the case study method.
Andrew defines strategy as: ―The pattern of objectives, purposes, goals, and the major policies
and plans for achieving these goals stated in such a way so as to define what business the
company is in or is to be and the kind of company it is or is to be‖ (Andrews, 1965 cited in
Kazmi, 2006). This definition refers to the ‗business definition‘, which is a way of stating the
current and desired future position of a company, and the objectives, purposes, goals, major
policies and plans required to take the company from where it is to where it wants to be.

3.2.3 Igor Ansoff (1965)

Professor Ansoff is a well-known authority in the field of strategic management and has been a
prolific writer for the last three decades. In one of his earlier books, Corporate Strategy (1965),
he explained the concept of strategy as: ―The common thread among the organisation‘s activities

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and product-markets ….that defines the essential nature of business that the organisation was or
planned to be in future‖ (Ansoff, 1965).
Ansoff has stressed on the commonality of approach that exists in diverse organizational
activities including the products and markets that define the current and planned nature of
business.

3.2.4 William F. Glueck (1972)

Another well-known author in the area of strategic management was Glueck, who was a
Distinguished Professor of Management at the University of Georgia till his death in 1980. He
defined strategy precisely as: ―A unified, comprehensive and integrated plan designed to assure
that the basic objectives of the enterprise are achieved‖ (Glueck, 1972). The three adjectives
which Glueck has used to define a plan make the definition quite adequate. ‗Unified‘ means that
the plan joins all the parts of an enterprise together; ‗comprehensive‘ means it covers all the
major aspects of the enterprise, and ‗integrated‘ means that all parts of the plan are compatible
with each other.

3.2.5 Henry Mintzberg (1987)

Mintzberg of McGill University is a noted management thinker and prolific writer on strategy.
He advocates the idea that strategies are not always the outcome of rational planning. They can
emerge from what an organisation does without any formal plan. He defines strategy as: ―a
pattern in a stream of decisions and actions‖ (Mintzberg, 1987). Mintzberg distinguishes between
intended strategies and emergent strategies. Intended strategies refer to the plans that ma nagers
develop, while emergent strategies are the actions that actually take place over a period of time.
In this manner, an organisation may start with a deliberate design of strategy and end up with
another form of strategy that is actually realized.

3.2.6 Michael E. Porter (1996)

Michael Porter of the Harvard Business School has made invaluable contributions to the
development of the concept of strategy. His ideas on competitive advantage, the five-forces
model, generic strategies, and value chain are quite popular. He opines that the core of general
management is strategy, which he elaborates as: ―….developing and communicating the
company‘s unique position, making trade-offs, and forging fit among activities‖ (Porter, 1996).

Strategic position is based on customers‘ needs, customers‘ accessibility, or the variety of a

company‘s products and services. A company‘s unique position relates to choosing activities
that are different from those of the rivals, or to performing similar activities in differ ent ways.
However, a sustainable strategic position requires a trade-off when the activities that a firm
performs are incompatible. Creation of it fit among the different activities is done to ensure that
they relate to each other.

It must be noted that the different approaches referred to above to define strategy cover nearly a
quarter of a century. This is an indication of what a complex concept strategy is and how various
authors have attempted to define it. To put it in another way, there are as ma ny definitions as

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there are experts. The same authors may change the approach they had earlier adopted. Witness
what Ansoff said 19 years later in 1984 (his earlier definition is of 1965): ―Basically, a strategy is
a set of decision –making rules for the guidance of organizational behavior‖ (Porter, 1996).

We have tried to give you an assortment of definitions out of the many available. Rather than an
assortment, it may be more appropriate to call this section a bouquet of definitions and
explanations of strategy. Each flower (definition) is resplendent by itself yet contributes
synergistically to the overall beauty of the bouquet. The field of strategy is indeed fascinating,
prompting an author to give the title – ―What is Strategy and does it matter?‖ – to his thought-
provoking book (Porter, 1996). Drucker goes to the extent of terming the strategy of an
organisation as its ―theory of the business‖ (Porter, 1996).

By means of the deeper insight that the authors have developed through years of experie nce and
thinking, they have attempted to define the concept of strategy with greater clarity and precision.
This comment is valid for most of the concepts in strategic management since this discipline is in
the process of evolution and a uniform terminology is still evolving.

By combining the above definitions we do not attempt to define strategy in a novel way but we
shall try to analyse all the elements that we have come across. We note that strategy is:

- a plan or course of action or a set of decision rules forming a pattern or creating a common
thread;
- the pattern or common thread related to the organisation‘s activities which are derived from
its policies, objectives and goals;
- related to pursuing those activities which move an organisation from its current position to a
desired future state;
- concerned with the resources necessary for implementing a plan or following a course of
action; and
- connected to the strategic positioning of a firm, making trade-offs between its different
activities, and creating a fit among these activities.

We have looked at a few practical illustrations in the previous section which were aimed at
developing an understanding of strategy and at some representative definitions of strategy, in this
section. We now go ahead to learn about the various levels at which strategy operates.

3.3 Levels at which Strategy Operates

The definitions of strategy, varied in nature, depth and coverage, offer us a glimpse of the
complexity involved in understanding this daunting, yet interesting and challenging, concept. In
this section we shall learn about the different levels at which strategy can be formulated.

It is not uncommon to find many companies, or a group of companies, working in different

business lines with regard to either products/services, markets or technology. Here are a few
illustrations (Kazmi, 2006):

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 Hindustan Levers, the venerable multinational subsidiary, is in several businesses, such as
animal feeds, beverages, oils and dairy fat, soaps and detergents, and specialty chemicals.
 Sundaram Clayton and its associate companies – Harita Grammar, Sundaram Fasteners, TVS
Suzuki, TVS Electronics and TVS Whirlpool – operate in technology areas as diverse as
brake and signal systems for railways, two-wheelers, computer peripherals, and electrical
appliances.
 Balmer Lawrie, a public sector company, has a diversified portfolio of businesses in the
fields of cargo, chemicals, containerization, lubricants, packaging, project consultancy, tea
exports, and international business.
 The Flowmore group of companies manufactures pumps for irrigation, a range of
engineering products, turbines, castings, specialized conversion equipments, and has recently
started the manufacture of polyester films. It also offers engineering consultancy services for
power projects and environmental engineering.

For many companies, such as those illustrated above, a single strategy is not only inadequate but
also inappropriate. The need is for multiple strategies at different levels. In order to segregate
different units or segments, each performing a common set of activities, many companies are
organized on the basis of operating divisions or, simply, divisions. These divisions may also be
known as profit centres or strategic business units (SBUs). An SBU as defined by Sharplin
(Sharplin, 1985 quoted in Kazmi, 2006), is ―any part of a business organisation which is treated
separately for strategic management purpose‖ (Whittington, 1993).

Different Levels of Strategy

LEVELS STRUCTURE STRATEGY
CORPORATE CORPORATE-LEVEL
Corporate
Office

SBU BUSINESS-LEVEL
Corporate Corporate Corporate
Office Office Office

FUNCTIONAL FUNCTIONAL-
LEVEL
Finance Marketing Operations Personnel Information

Source: Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition,
(New Delhi: Tata McGraw-Hill Publishing Company Limited), ISBN: 0-07-
044470-6, pp. 1 – 23.

Generally, SBUs are involved in a single line of business. A complementary concept to the
SBU, valid for the external environment of a company, is a strategic business area (SBA). It is
defined as ―a distinctive segment of the environment in which the firms does (or may want to do)
business‖ (Drucker in Kazmi, 2006).

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A number of SBUs, relevant for different SBAs, form a cluster of units under a corporate
umbrella. Each one of the SBUs has its own functional departments, or a few major functional
departments, while common functions are grouped under the corporate level. These different
levels are illustrated in the figure stated above. Two types of levels are depicted in this figure.
One relates to the organizational levels and the other to the strategic levels. The organizational
levels are those of the corporate, SBU and functional levels. The strategic levels are those of the
corporate, SBU and functional level strategies.

Corporate level strategy is an overarching plan of action covering the various functions
performed by different SBUs. The plan deals with the objectives of the company, allocation of
resources and coordination of the SBUs for optimal performance.

SBU level (or business) strategy is a comprehensive plan providing objectives for SBUs,
allocation of resources among functional areas, and coordination between them for making an
optimal contribution to the achievement of corporate level objectives.

Functional strategy deals with a relatively restricted plan providing objectives for a specific
function, allocation of resources among different operations within that functional area, and
coordination between them for optimal contribution to the achievement of SBU and corporate-
level objectives.

Apart from the three levels at which strategic plans are made, occasionally companies plan at
some other levels too. Firms often set strategies at a level higher than the corporate level. These
are called the societal strategies. Based on a mission statement, a societal strategy is a
generalized view of how the corporation relates itself to society in terms of a particular need or a
set of needs that it strives to fulfill. Suppose a corporation decides to provide alternative sources
of energy for society at an optimum price and based on the latest available technology. On the
basis of its societal strategy, the corporation has a number of alternatives with regard to the
businesses it can take up. It can either be a manufacturer of nuclear power reactors, a maker of
equipments used for tapping solar energy, or a builder of windmills, among other alternatives.
The choice is wide and being in one of these diverse fields would still keep the corporation
within the limits set by its societal strategy. Corporate- and business-level strategies derive their
rationale from the societal strategy.

Some strategies are also required to be set at lower levels. One step down the functional level, a
company could set its operations-level strategies. Each functional area could have a number of
operational strategies. These would deal with a highly specific and narrowly defined area. For
instance, a functional strategy at the marketing level could be subdivided into sales, distribution,
pricing, product and advertising strategies. Activities in each of the operational areas of
marketing, whether sales or advertising, could be performed in such a way that they contribute to
the functional objectives of the marketing department. The functional strategy of marketing is
interlinked with those of the finance, production and personnel departments. All these functional
strategies operate under the SBU-level. Different SBU-level strategies are put into action under
the corporate-level strategy which, in turn, is derived from the societal-level strategy of a
corporation. Ideally, a perfect match is envisaged among all strategies at different levels so that

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a corporation, its constituent companies, their different SBUs, the functions in each SBU, and
various operational areas in every functional area are synchronized. Perceived in this manner, an
organisation moves ahead towards its objectives and mission like a well-oiled piece of
machinery. Such an ideal, though extremely difficult – if not impossible of attainment – is the
intent of strategic management.

A note of caution to readers here: when we refer to strategy in business policy texts, it is
generally meant to be a corporate-level strategy or a business- or SBU-level strategy. Societal
strategies are manifest in the form of vision and mission statements, while functional and
operational strategies take the shape of functional and operational implementation, respectively.

A reading of this section will give the impression that an organisation could have a number of
strategies at different levels and that would solve its strategic problems or lay down the
groundwork for its strategic success. Mark the words we have used – ‗the organisation moves
ahead…like a well-oiled machinery/. In reality, however, rarely does an organisation move
ahead so smoothly. We have viewed strategy from several perspectives. In some cases it is seen
as something which arises systematically due to conscious decision-making. Yet in other cases it
may seem to be the product of a messy and complicated series of maneuvers. The next section
provides an overview of the strategic decision-making process.

3.4 Forms of Organizational Strategy

The various forms of strategies according to Hill and Jones (2004), including the strategies as
identified and discussed below:

3.4.1 Corporate Strategy

These strategies are plans formulated to carry out values and performance objectives of a
company. These plans become more specific and detailed the lower the organisational level.
Corporate strategy is the art of using organisational resources to render the goals defined by the
organisation with minimum risk.

Corporate strategy also involves marshalling the available resources for definite missions and
planning alternative strategies in anticipation of changing contingencies and creating flexible
conditions in structure and employee attitudes favourable towards achieving the corporate goal.
The corporate strategy defined a company‘s general posture in the broad economy. The business
strategy outlined the competitive posture of its operations within the domestic movie exhibition
industry. But to increase the likelihood that these strategies will be successful, more specific
guidelines are needed for the business‘s operating components.

3.4.2 Business Strategy:

Business strategy refers to the aggregated strategies of a single business firm. In other words,
business strategy is a strategy designed to position the strategic business unit in a diversified
corporation. Each firm formulates a business strategy in order to achieve a sustainable
competitive advantage.

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3.4.3 Operational Strategy:

The concept of operational strategy was popularized and encouraged by Peter Drucker (1954) in
his theory of management by objectives. This is needed for the day-to-day operational activities
in the organisation. It must operate within the budget and cannot create a budget. Operational
level strategies are informed by business level strategies which, in turn, are informed by
corporate level strategies.

Other forms of strategy are the functional and grand strategies which are discussed in detail as
shown below.

3.4.4 Functional Strategy

A functional strategy is the short-term game plan for a key functional area within a company.
Such strategies clarify grand strategy by providing more specific details about how key
functional areas are to be managed in the near future. Thus, functional strategies clarify the
business strategy, giving specific, short-term guidance to operating managers.

Functional strategies must be developed in the key areas of marketing, finance, production,
operations, research and development, and personnel. They must be consistent with long-term
objectives and grand strategy. Functional strategies help in implementation of grand strategy by
organizing and activating specific subunits of the company (e.g., marketing, finance, production,
etc.) to pursue the business strategy in daily activities.

3.4.5 Grand Strategy

Grand strategies which are also known and called master business strategies are intended to
provide basic direction for strategic actions. Therefore, they are seen as the basis of coordinated
and sustained efforts directed toward achieving long-term business objectives. More often that
not, grand strategies indicate how long-range objectives will be achieved. Thus, a grand strategy
can be defined as a comprehensive general approach that guides major actions.

A principal grand strategy could serve as the basis for achieving major long-term objectives such
as single business concentration, market development, product development, innovation,
horizontal integration, vertical integration, joint venture, concentric diversification, conglomerate
diversification, retrenchment/turnaround, divestiture and liquidation. A company which is
involved with multiple industries, businesses, product lines, or customer groups uses several
grand strategies. Such grand strategies are discussed below with examples to indicate some of
their relative strengths and weaknesses.

4.0 CONCLUSION

Strategy is the determination of the basic long-term goals and objectives of an enterprise and the
adoption of relevant courses of action and the allocation of resources to pursue and achieve these
goals. Formulation of strategy goes through a process while some factors needed to be taken into

75
consideration in the course of formulating strategy. There are reasons and advantages which
necessitate the use of strategy, and strategy assumes various forms such as corporate strategy,
business strategy, operational strategy, functional strategy and grand strategy.

6.0 SUMMARY

In this unit, we have discussed the following topics: Corporate Strategy; Defining and explaining
strategy; Levels of Strategy in Organisations and Forms of Organizational Strategy.

In the next study unit, you will be taken through discussion on strategy decision-making.

6.0 TUTOR-MARKED ASSIGNMENT

1) Mention and discuss the various forms of organizational strategy.

2) Explain the meaning of and the need for styrategy

7.0 REFERENCES/FURTHER READINGS

Abdullahi, S.A. (2009). Corporate Management Strategy, MBA 726 Study Material for
Management Students in the School of Management Sciences.

Delaney, E. (2008). ―Warfare and Modern Strategy: Lessons for Nigerian Business‖, Zenith
Economic Quarterly, A publication of Zenith Bank Plc, Vol. 3 No. 4, October, 2008, pp. 40-52.

Dilworth, J. (1983). Production and Operations Management: Manufacturing and Non-

Manufacturing, 2nd ed., New York: Random House, Inc.

Gupta, C.B. (1995). Corporate Planning and Policy, New Delhi: Sultan Chand and Sons.

Hill, C. W. L. and Jones, G. R. (2004). Strategic Management; An Integrated Approach, Sixth

Edition, Indian Adaptation, New Delhi: Biztantra, An Imprint of Dreamtech Press.

Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition, (New Delhi: Tata
McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6, pp. 1 – 23.

Pearce and David (1987). Strategic Planning and Policy, New York: Reinhold Pearce II and
Robinson Jr. (1998). Strategic Management: Strategy Formulation and Implementation, Third
Edition, Krishan Nagar, Delhi: All India Traveller Bookseller.

Whittington, R. (1993). What is Strategy and does it matter? (New York: Routledge).

Drucker, P.F. ―The Theory of the Business‖, Harvard Business Review (70) 5: 95-104.

Sharplin (1985) Strategic Management (New York: McGraw-Hill) p. 6.

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UNIT 2: STRATEGIC DECISION MAKING

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Strategic Decision Making
3.2 Issues in Strategic Decision-making
3.3 Schools of Thought on Strategic Formation
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In the last unit, we discussed the following topics: Corporate Strategy and Defining and
explaining strategy; Levels of Strategy in Organisations and Forms of Organizational Strategy.

In this unit, you will be taken through discussion on strategy decision-making.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 Explain strategic decision making;

 Discuss issues in strategic decision-making; and
 Enumerate and discuss the various schools of thought on strategic formation.

3.0 MAIN CONTENT

3.1 Strategic Decision-Making

Decision-making is the most important function of any manager. Strategic decision-making is

the prominent task of the senior management. Both kinds of decision-making are essentially the
same. The difference lies in the levels at which they operate. While decision-making pertains to
all managerial functions, strategic decision-making largely relates to responsibilities of the senior
management.

3.1.1 Conventional Decision-making

Most people agree that decision-making is the process of selecting a course of action from
among many alternatives. The process works somewhat like this:

 objectives to be achieved are determined;

77
  alternative ways of achieving the objectives are identified;
 each alternative is evaluated in terms of its objective-achieving ability; and
 the best alternative is chosen.

The end result of the above process is a decision or a set of decisions to be implemented. Such a
process of decision-making is deceptively simple. In practice decision-making is a highly
complex phenomenon. The first set of problems encountered in decision-making is related to
objective-setting. Second, the identification of alternatives is a difficult task. How to test the
objective-achieving ability of each alternative is easier said than done, and, lastly, choosing the
best alternative is a formidable task too.

3.1.2 Strategic Decision-making

As indicated above, the problems encountered in decision-making are experienced by all
managers in the course of their day-to-day activities. On the other hand, strategic tasks are by
their very nature complex and varied. Decision-making in performing strategic tasks is,
therefore, an extremely difficult, complicated and, at times, intriguing and enigmatic process.
Kazmi (2006) provides an illustration of a company‘s managing director revealing his thoughts
with regard to the strategic decisions related to growth objectives and the intended strategy. This
illustration is indicative of the complexity of strategic decision-making.

Strategic Decision-making at Zodiac Clothing:

Zodiac, with its ‗classic business statement‘, is one of the strongest brands in shirts and ties in India. Anees
Noorani, the managing Director of Zodiac Clothing Company, answered an interviewer‘s queries on the
prospects for his company and the intended strategy.

Zodiac is aiming at a growth of 20 percent in the topline (premium) segment and 35 percent in the bottomline
segment of branded garments. The reason for the strategic decision to set these objectives is that the Indian
markets are now ready for branded garments. Foreign brands have made an entry into the market and retailing is
on the rise. The company is perceived to have the necessary infrastructure in terms of manufacturing,
distribution and logistics to take advantage of the emerging opportunities. From a dominant position in the
export market it is now focusing on the domestic market.

Another significant strategic decision has been the company‘s reverse backward integration. This means that
Zodiac no longer wants to produce fabric for its garments. It wishes to have the flexibility of outs ourcing for a
changing product mix dictated by fashion. Motivate by this logic, it has abandoned its plans for manufacturing
cloth for its garments. Rather, it would like to extend its product range to producing branded trousers.

Source: Adapted from ―We expect to grow at 20 percent‖, An interview, Business Standard (The Smart Investor),
September 13, 1999, p. 16 (quoted in Kazmi, 2006)

In the process of strategic management the basic thrust of strategic decision-making is to make a
choice regarding the courses of action to adopt. Thus, most aspects of strategy formulation rest
on strategic decision-making. The fundamental strategic decision relates to the choice of a
mission. In other words, the answers to questions – ‗what is our business? what will it be?, and
what should it be?‘ – are the basic concerns in strategic management. With regard to objective-
setting, the senior management is faced with alternatives regarding the different yardsticks to
measure performance. Finally, at the level of choosing a strategy, t he senior management
chooses from among a number strategic alternatives in order to adopt one specific course of
action which would make the company achieve its objectives and realize its mission.

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Apart from the fundamental decisional choice, as pointed above, there are numerous occasions
when the senior management has to make important strategic decisions. Environmental threats
and opportunities are abundant; that the senior management focuses its attention on only a few of
those. Likewise, there are many company strengths and weaknesses; the senior management
considers only a limited number at any given time. With regard to resource allocation, the
management faces a strategic choice from among a number of alternatives that it could allocate
resources to. Thus, strategic decision-making forms the core of strategic management.

3.2 Issues in Strategic Decision-making

As strategic decision-making is a complex process, it is difficult to perform. It is

incomprehensible; it cannot be analysed and explained easily. Decision-makers are unable to
describe the exact manner in which strategic decisions are made. Like the working of the human
mind, strategic decision-making is fathomless. And rightly so, for it is based on complex mental
processes which are not exposed to the view. While commenting on the nature of strategic
decision-making Henry Mintzberg says that ―the key managerial processes are enormously
complex and mysterious, drawing on the vaguest of information and using the least articulated of
mental processes. These processes seem to be more relational and holistic than ordered and
sequential, and more intuitive than intellectual ….‖.

For these reasons, no theoretical model, however painstakingly formulated, can adequately
represent the different dimensions of the process of strategic decision-making. Despite these
limitations, we can still attempt to understand strategic decision-making by considering some
important issues related to it. We shall deal with six such issues below:

1. Criteria for decision-making. The process of decision-making requires objective-setting.

These objectives serve as yardsticks to measure the efficiency and effectiveness of the
decision-making process. In this way, objectives serve as the criteria for decision-making.
There are three major viewpoints regarding setting criteria for decision-making:

(a) The first is the concept of maximization. It is based on the thinking of economists who
consider objectives as those attributes which are set at the highest point. The behavior of
the firm is oriented towards achieving these objectives and, in the process, maxismising
its returns.

(b) The second view is based on the concept of satisficing. This envisages setting objectives
in such a manner that the firm can achieve them realistically through a process of
optimization.
(c) The third viewpoint is that of the concept of incrementalism. According to this view, the
behavior of a firm is complex and the process of decision-making, which includes
objective-setting, is essentially a continually-evolving political consensus-building.
Through such an approach, the firm moves towards its objectives in small, logical and
incremental steps.

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2. Rationality in decision-making. In the context of strategic decision-making, rationality means
exercising a choice from among various alternative courses of action in such a way that it
may lead to the achievement of the objectives in the best possible manner. Those economists
who support the maximizing criterion consider a decision to be rational if it leads to profit
maximization. Behaviourists, who are proponents of the satisfying concept, believe that
rationality takes into account the constraints under which a decision-maker operates.
Incrementalists are of the opinion that the achievement of objectives depends on the
bargaining process between different interested coalition groups existing in an organisation,
and therefore a rational decision-making process should take all these interest into
consideration.

3. Creativity in decision-making. To be creative, a decision must be original and different. A

creative strategic decision-making process may considerably affect the search for alternatives
where novel and untried means may be looked for and adopted to achieve objectives in an
exceptional manner. Creativity as a trait is normally associated with individuals and is
sought to be developed through techniques such as brainstorming. You may recall that one
of the attitudinal objectives of a business policy course is to develop the ability to go beyond
and think, which, in other words, is using creativity in strategic decision-making.

4. Variability in decision-making. It is a common observation that given an identical set of

conditions two decision-makers may reach totally different conclusions. This often happens
during case discussions too. a case may be analysed differently by individuals in a group of
learners, and, depending on the differing perceptions of the problem and its solutions, they
may arrive at different conclusions. This happens due to variability in decision-making. It
also suggests that every situation is unique and there are no set formulas that can be applied
in strategic decision-making.

5. Person-related factors in decision-making. There are a host of person-related factors that

play a role in decision-making. Some of these are age, education, intelligence, personal
values, cognitive styles, risk-taking, and creativity. Attributes like age, knowledge,
intelligence, risk-taking ability, and creativity are generally supposed to play a positive role
in strategic decision-making. A cognitive style which enables a person to assimilate a lot of
information, interrelate complex variables, and develop an integrated view of the situation is
specially helpful in strategic decision-making. Values, as enduring prescriptive beliefs, are
culture-specific and important in matters of social responsibility and business ethics – issues
that are important to strategic management.

6. Individual versus group decision-making. Owing to person-related factors, there are

individual differences among decision-makers. These differences matter in strategic
decision-making. An organisation, as it possesses special characteristics, operates in a
unique environment. Decision-makers who understand an organisation‘s characteristics and
its environment are in a vantage position to undertake strategic decision-making. Individuals
such as chief executives or entrepreneurs play the most important role as strategic decision-
makers. But as organisations become bigger and more complex, and face an increasingly
turbulent environment, individuals come together in groups for the purpose of strategic

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 decision-making. We will be referring to many such groups when we deal with the role of
strategists in the last section of this unit.

Strategic decision-making leads to the formation of strategies. On the basis of an understanding

of the nature of strategic decision-making and the issues related to it, let us now move ahead to
study the different perspectives on strategy.

3.3 Schools of Thought on Strategy Formation

The subject of strategic management is in the midst of an evolutionary process. In the course of
its development, several strands of thinking are emerging which are gradually leading to a
convergence of views. This is a subtle indication of the maturing of this subject. We now have a
wealth of insight into the complexities of strategic behavior – the observable characteristics of
the manner in which an organisation performs decision-making and planning functions with
regard to the issues that are of strategic importance to its survival, growth and profitability.
Strategic decision-making is the core of managerial activity; strategic behavior is its
manifestation, while the outcome is the formation of strategy.

Here, in this section, we dwell upon the compendium of various perspectives to strategic
formation that have evolved over a period of time. Several persons, among whom are the doyens
in the field of strategy, have contributed to the formulation of these perspectives. These offer the
reader, a meaningful insight into the development of the concept of strategy. Indeed, Mintzberg
and his associates, from whose writings these perspectives have been adopted here, call them the
ten (10) schools of thought on strategy formation ( ).

The schools of thought can be classified under three groups as below:

The Prescriptive Schools
1. Design school where strategy formation is a process of conception
2. Planning school where strategy formation is a formal process
3. Positioning school where strategy formation is an analytical process.

The Descriptive Schools

4. Entrepreneurial school where strategy formation is a visionary process
5. Cognitive school where strategy formation is a mental process
6. Learning school where strategy formation is an emergent process
7. Power school where strategy formation is a negotiation process
8. Cultural school where strategy formation is a collective process
9. Environmental school where strategy formation is a reactive process

The Integrative School

10. Configuration school where strategy formation is a process of transformation.

Given below is a description and explanation of each school of thought.

1. The design school, which perceives strategy formation as a process of conception developed
mainly in the late 1950s and 60s. Under this school, strategy is seen as something unique

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 which is in the form of a planned perspective. The CEO as the main architect guides the
process of strategy formation. The process of strategy formation is simple and informal and
based on judgement and thinking. The major contributors to the design school are Selznick
(1957) and Andrews (1965).

2. The planning school, which perceives strategy formation as a formal process developed
mainly in the 1960s. Under this school, strategy is seen as a plan divided into substrategies
and programmes. The lead role in strategy formation is played by the planners. The process
of strategy formation is formal and deliberate. The major contributor to the planning school
is Ansoff (1965).

3. The positioning school, which perceives strategy formation as an analytical process

developed mainly in the 1970s and 80s. Under this school, strategy is seen as a set of
planned generic positions chosen by a firm on the basis of an analysis of the competition and
the industry in which they operate. The lead role in strategy formation is played by the
analysts. The process of strategy formation is analytical, systematic and deliberate. The
major contributors to the positioning school are Schendel and Hatten (1970s), Porter (1980s).

4. The entrepreneurial school, which perceives strategy formation as a visionary process

developed mainly in the 1950s. Under this school, strategy is seen as the outcome of a
personal and unique perspective often aimed at the creation of a niche. The lead role in
strategy formation is played by the entrepreneur/leader. The process of strategy formation is
intuitive, visionary, and largely deliberate. The major contributors to the entrepreneurial
school are Schumpeter (1950s), Cole (1959) and several others, most of whom are
economists.

5. The cognitive school, which perceives strategy formation as a mental process, developed
mainly in the 1940s and 50s. Under this school strategy is seen as an individual concept that
is the outcome of a mental perspective. The lead role in strategy formation is played by the
thinker-philosopher. The process of strategy formation is mental and emergent. The major
contributors to the cognitive school are Simon (1947 and 1957), and March and Simon
(1958).

6. The learning school, which perceives strategy formation as an emergent process has had a
legacy from the 1950s through the 1990s. Under this school, strategy is seen as a pattern that
is unique. The lead role is played by the learner within the organisation whoever that might
be. The process of strategy formation is emergent, informal and messy. The major
contributors to the learning school are Lindblom (1959, 1960), Cyert and March (1963),
Weick (1969), Quinn (1980), Senge (1990), and Prahalad and Hamel (early 1990s).
7. The power school, which perceives strategy formation as a negotiation process, developed
mainly during the 1970s and 80s. Under this school, strategy is seen as a political and
cooperative process or pattern. The lead role in strategy formation is played by any person in
power (at the micro level) and the whole organization (at the macro level). The process of
strategy formation is messy, consisting of conflict, aggression and cooperation. At the micro
level the process of strategy formation is emergent while at the macro level it is deliberate.

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 The major contributors to the power school are Allison (1971), Pfeffer and Salancik (1978),
and Astley (1984).

8. The cultural school, which perceives strategy formation as a collective process developed
mainly in the 1960s. Under this school, strategy is seen as a unique and collective
perspective. The lead role in strategy formation is played by the collectivity displayed within
the organisation. The process of strategy formation is ideological, constrained, collective and
deliberate. The major contributors to the cultural school are Rhenman and Normann (late
1960s).

9. The environmental school, which perceives strategy formation as a reactive process,

developed mainly in the late 190s and 70s. Under this school, strategy is seen as something
generic occupying a specific position or niche in relation to the environment. The lead role
in strategy formation is played by the environment as an entity. The process of strategy
formation is passive and imposed, and hence, emergent. The major contributions to the
environmental school are Hannan and Freeman (1977) and contingency theorists like Pugh
et. al. (late 1970s).

10. The configuration school, which perceives strategy formation as a transformation process
developed during the 1960s and 70s. Under this school, strategy is viewed in relation to a
specific context and thus could be in a form that corresponds to any process visualized under
any of the other nine schools. The lead role may be played by any actor identified in the
other nine schools. The process of strategy formation is integrative, episodic and sequential.
In addition, the process could incorporate the elements pointed out under the other nine
schools of thought. The major contributors to the configuration school are Chandler (1962),
Mintzberg and Miller (late 1970s), and Miles and Snow (1978).

4.0 CONCLUSION

The unit discussed all about the levels at which strategy operates. Here, you were told how
strategies can be formulated at different levels in an organisation. We explored the nature of
strategic decision-making by pointing out how it is similar to conventional decision-making and
yet how it differs in its coverage, reach and depth. Ten schools of thought on strategy
formulation have been reviewed to provide you with a panoramic view of this interesting subject.
The schools are divided into three groups: the prescriptive school consists of the design planning,
and positioning schools. The descriptive school consists of the entrepreneurial, cognitive,
learning, power, cultural, and environment process schools. The integrative school includes the
configuration school where strategy formation is a process of transformation.

5.0 SUMMARY

In this unit, we have defined and explained strategic decision making; discussed issues in
strategic decision-making; and enumerated and discussed the various schools of thought on
strategic formation.

In the next unit, you will learn strategic management.

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6.0 TUTOR MARKED ASSIGNMENT

1. In your own words, define strategic decision-making.

2. List the various schools of thought on strategic formation that you know and explain any
four of them.

7.0 REFERENCES/FURTHER READING

Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition, New Delhi: Tata
McGraw-Hill Publishing Company Limited.

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UNIT 3 PROCESS OF STRATEGIC MANAGEMENT

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Process of Strategic Management
3.2 Definitions of Strategic Management
3.3 Phases in Strategic Management
3.4 Elements in Strategic Management Process
3.5 Models in Strategic Management Process
3.6 Strategists and their Roles in Strategic Management
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the last unit, we defined and explained strategic decision making; discussed issues in strategic
decision-making; and enumerated and discussed the various schools of thought on strategic
formation.

In this unit, you will learn strategic management, which is a newer and broader concept of
managing organizations strategically. It takes into account all the aspects of managerial
problems, the processes of solving them, and the many variables that operate in a problem-
solving environment.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 define Strategic Management and discuss the Process of Strategic Management;

 list and explain the Phases in Strategic Management;
 enumerate and discuss the Elements in Strategic Management Process;
 state and discuss the Models in Strategic Management Process, and
 Explain the term ―Strategists‖ and their Roles in Strategic Management.

3.0 MAIN CONTENT

3.1 The Process of Strategic Management

In Unit 2 of module 1, we had described the historical evolution of business policy as a course of
study and said that strategic management is the emerging discipline that forms the theoretical
framework for business policy. Strategic decision-making is carried out through the process of

85
strategic management. Like the other terms in business policy, strategic management has also
been defined and interpreted differently by various authors. There are also differences of
opinion regarding the phases of the strategic management process and the elements they contain.
In this section, we shall deal with four aspects: the way strategic management is defined, the
different phases in the process of strategic management, the elements that this process contains;
and lastly, the model of strategic management adopted.

3.2 Definitions of Strategic Management

Glueck (1984) defines strategic management as ―a stream of decisions and actions which leads to
the development of an effective strategy or strategies to help achieve corporate objectives‖. As
visualized by Glueck (cited in Kazmi, 2006), the end result of strategic management is a strategy
or a set of strategies for the organisation.

Hofer and others (1984) consider strategic management as ―the process which deals with the
fundamental organizational renewal and growth with the development of strategies, structures,
and systems necessary to achieve such renewal and growth, and with the organizational systems
needed to effectively manage the strategy formulation and implementation processes‖.

Firstly, these authors include two sub-processes within the overall strategic management process.
Through the formulation and implementation sub-processes strategies, structures, and systems
are developed to achieve the objectives of organizational renewal and growth. Secondly, the
strategic management process is also considered as the managing of the organizational systems
which are required for strategic management. For instance, the administrative arrangements
necessary for the formulation and implementation of strategies would also be included in the
process of strategic management.

Ansoff (1984) states that strategic management is ―a systematic approach to a major and
increasingly important responsibility of general management to position and relate the firm to its
environment in a way that will assure its continued success and make it secure from surprises‖.
In this definition the emphasis is on the environment-organisation relationship for the purpose of
achieving the objective of continued success and remaining protected from environmental
surprises through the adoption of a systematic approach to general management.

Sharplin (1985) defines strategic management as ―the formulation and implementation of plans
and carrying out of activities relating to the matters which are of vital, pervasive or continuing
importance to the total organisation‖. This is an all-encompassing view of strategic management
and considers all plans and activities which are important for an organisation.

Note that all the four definitions that we have quoted above are from the early 1980s – the period
when strategic management was being recognized as a separate discipline which deals with the
fundamental issues related to the existence, growth and profitability of organisations.

The last definition, that we quote next, is of a recent origin and emphasizes the elements in the
process of strategic management. It states that the main end is the satisfaction of stakeholders of
the organisation. The stakeholders are groups or individuals who can significantly affect or be

86
affected by an organisation‘s activities. Harrison and St. John (1998) define strategic
management as ―the process through which organisations analyze and learn from their internal
and external environments, establish strategic direction, create strategies that are intended to help
achieve established goals, and execute these strategies, all in an effort to satisfy key
organizational stakeholders‖.

We observe that different authors have defined strategic management differently. Yet there are
several common elements in the way it is defined and understood. Strategic management is
considered as either decision-making and planning or a set of activities related to the formulation
and implementation of strategies to achieve organizational objective. In strategic management
the emphasis is on those general management responsibilities which are essential to relate the
organisation to the environment in such a way that its objectives may be achieved.

Self-Assessment exercise 1
1. Provide a brief and clear explanation of the concept of strategy.
2. What are the benefits of the concept of strategy? What are its pitfalls?

3.3 Phases in Strategic Management

The definitions quoted above give us the idea that strategic management as a process consists of
different phases which are sequential in nature. Most authors agree that there are four essential
phases in the strategic management process, though they may differ with regard to its sequence,
emphasis, or nomenclature. These four phases could be encapsulated as follows:

1. Establishing the hierarchy of strategic intent;

2. Formulation of strategies;
3. Implementation of strategies; and
4. Performing strategic evaluation and control.

These four phases are considered as sequentially linked to each other and each successive phase
provides a feedback to the previous phases. the phases in strategic management are depicted in
the figure below:

Figure showing phases in the Strategic Management Process:

Establishment of Formulation of Implementation Formulation of

strategic intent strategies of strategies strategies

Strategic
control

However, in practice, the different phases of strategic management may not be clearly
differentiable from each other. In fact, we prefer to call them phases rather than stages or steps

87
(as some authors do) to signify that the different phases, at the interface, may e xist
simultaneously, and that the strategic activities gradually emerge in one phase to merge into the
following phase. The feedback arising from each of the successive phases is meant to revise,
reformulate or redefine the previous phases, if necessary. Such a representation yields a dynamic
model of strategic management which takes into account the emerging factors as the process
moves on.

3.4 Elements in Strategic Management Process

Each phase of the strategic management process consists of a number o f elements which are
discrete and identifiable activities performed in logical and sequential steps. As many as twenty
different elements could be identified in the models provided by various authors. From the
literature on business policy, we note that most or all of the following activities are considered as
part of the strategic management process.

(1) Establishing the hierarchy of strategic intent:

(a) creating and communicating a vision;
(b) designing a mission statement;
(c) defining the business;
(d) setting objectives;

(2) Formulation of strategies:

(e) performing environmental appraisal;
(f) doing organizational appraisal;
(g) considering corporate-level strategies;
(h) considering business-level strategies;
(i) undertaking strategic analysis;
(j) exercising strategic choice;
(k) formulating strategies;
(l) preparing a strategic plan;

(3) Implementation of strategies:

(m) activating strategies;
(n) designing structures and systems;
(o) managing behavioural implementation;
(p) managing functional implementation;
(q) operationalising strategies;

(4) Performing strategic evaluation and control:

(r) performing strategic evaluation;
(s) exercising strategic control; and
(t) reformulating strategies.

3.5 Models in Strategic Management Process

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 The process of strategic management is depicted through a model which consists of different
phases, each phase having a number of elements. As earlier stated, most authors agree on
dividing the strategic management process into four phases consisting of about 20 elements. The
models of strategic management that we have adopted in this course are provided in figures 1
and 2 below:

In the first figure, we provide a vertical representation of a comprehensive model of the strategic
management process. In second figure, we depict the process laterally and provide a working
model. Our purpose in additionally giving a working model, devoid of the complexity observed
in the comprehensive model, is to assist you in remembering and recalling it with ease. The
remainder of this discourse will deal with the various elements of the strategic management
process. Here, we present a bird‘s-eye view of the different elements of the process.

Figure 1 Comprehensive Model of Strategic Management Process

Establishing strategic intent

Vision, mission, business definition, and objectives

Formulation of strategies
Environmental Organisational
Appraisal Appraisal
SWOT Analysis
Corporate-level strategies
Business-level strategies
Strategic control

Strategic choice
Strategic plan

Strategy Implementation
- Project
- Procedure
- Resource allocation
- Structural
- Behavioural
- Functional and operational

Strategic Evaluation

Figure 2 Working Model of Strategic Management Process

Strategic SWOT Strategic Strategic Strategic Strategic

Intent Analysis Alternatives Analysis Implementa Evaluation
and Choice tion

Strategic Control

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Self-Assessment Exercise 2
State the similarities and differences in the roles of the following:

(a) Board of Director

(b) Chief Executives Officers
(c) Entrepreneurs.

1. The hierarchy of strategic intent lays the foundation for the strategic management of any
organisation. In this hierarchy, the vision, mission, business definition, and objectives are
established. The strategic intent makes clear what an organisation stands for. The element of
vision in the hierarchy of strategic intent serves the purpose of stating what an organisation
wishes to achieve in the long run. The mission relates an organisation to society. The
business definition explains the businesses of an organisation in terms of customer needs,
customer groups, and alternative technologies. The objectives of an organisation state what
is to be achieved in a given time period. These objectives then serve as yardsticks and
benchmarks for measuring organisational performance.

2. Environmental and organisational appraisal helps to find out the opportunities and threats
operating in the environment and the strengths and weaknesses of an organisation in order to
create a match between them. In such a manner, opportunities could be availed of and the
impact of threats neutralized in order to capitalize on the organisational strengths and
minimize the weaknesses.

3. Strategic alternatives and choices are required for evolving alternative strategies out of the
many possible options, and choosing the most appropriate strategy or strategies in the light of
environmental opportunities and threats and corporate strengths and weaknesses. Strategies
are chosen at the corporate-level and the business-level. The process used for choosing
strategies involves strategic analysis and choice. The end result of this set of elements is a
strategic plan which can be implemented.

4. For the implementation of a strategy, the strategic plan is put into action through six sub-
processes: project implementation, procedural implementation, resource allocation, structural
implementation, behavioural implementation, and functional and operational implementation.
Project implementation deals with setting up the organisation. Procedural implementation
deals with different aspects of the regulatory framework within which the organisations have
to operate. Resource allocation relates to the procurement and commitment of resources for
implementation. The structural aspects of implementation deal with the designing of
appropriate organisational structures and systems, and reorganizing to match the structure to
the needs of the strategy. The behavioural aspects consider the leadership styles for
implementing strategies and other issues like corporate culture, corporate politics and use of
power, personal values and business ethics, and social responsibility. The functional aspects
relate to the policies to be formulated in different functional areas. The operational
implementation deals with the productivity, processes, people, and pace of implementing the
strategies. The emphasis in the implementation phase of strategic management is on action.

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5. The last phase of strategic evaluation appraises the implementation of strategies and
measures organisational performance. The feedback from strategic evaluation is meant to
exercise strategic control over the strategic management process. Strategies may be
reformulated, if necessary.

3.6 Strategists and their Role in Strategic Management

Strategists are individuals or groups who are primarily involved in the formulation,
implementation, and evaluation of strategy. In a limited sense, all managers are strategists.
There are persons outside the organisation who are also involved in various aspects of strategic
management. They too are referred to as strategists. We can identify nine strategists who, as
individuals or in groups, are concerned with and play a role in strategic management. In this
section, we shall describe the roles of these strategists.

3.6.1 Role of Board of Directors

The ultimate legal authority of an organisation vests in the board of directors. The owners of the
organisation – shareholders, controlling agencies, the government, financial institutions, the
holding company or the parent company – elect and appoint the directs on the board. The board
is responsible to them for the governance of the organisation. As directors, the members of the
board are responsible for providing guidance and establishing the directives according to which
the managers of the organisation can operate. The board exercises authority according to the
memorandum of association and articles of association of that company. Legally, they have to
conform to the various provisions of the Companies and Allied Matters Act 1990. Apart from
the legal framework, the board has to act according to the policies, rules, procedures, and
conventions of the organisation.

In practice, however, there is a wide difference between the roles played by the board in various
types of organisations. These differences may arise due to the ownership patterns in public and
private sector companies. Even within these sectors there might be variations. Private sector
companies which are family-owned differ from multinationals. Further, professionally-managed
companies may differ from family-owned concerns.

By definition, the board is only required to direct. But many operational matters of vital
significance, like technology collaborations, new product development, senior management
appointments, and so on, may also be referred to the board. The directing functions of the board
have certain formal and informal components (Chandler, 1962). Formally, the board is involved
in reviewing and screening executive decisions in the light of their environmental, business, and
organisational implications. Informally, the board seeks to direct the organisation‘s activities so
that they are in concordance with the prevailing social, economic, and political milieu. Because
the board is considered a vital link between the environment and the organisation, it usually does
not concern itself with operational decision-making.

In strategic management, the role of the board is to guide the senior management in setting and
accomplishing objectives, reviewing and evaluating organisational performance, and appointing
senior executives. The function of the board is usually seen in terms of setting the strategic

91
direction, which involves establishing objectives and strategy, and subsequently monitoring and
reviewing achieving (Andrews, 1973). However, there is no clarity regarding the exact role that
the board should play in managing the affairs of an organisation. Much depends on the relative
strength, in terms of the power wielded by the board and the chief executive. Where there is a
high level of clarity regarding their respective roles, the relationship between the board and the
chief executive is cordial and the functioning of the board is smooth. Where such clarity is low,
problems do occur.

The role of the board of directors has come under intense scrutiny in recent times leading to the
emergence of the issue of corporate governance, a system by which corporate entities are
directed and controlled. This means the governance of a company by its board of directors. It
relates to the functioning of the board of a company and the conducting of the business internally
and externally.

Globally, there has been much concern about the biased and, sometimes outright unethical
practices adopted by publicly-held companies. In the UK, the Cadbury Committee (1992) and
the Hampel Committee (1995) have gone into various aspects, specially the financial matters,
related to the governance of the companies by its board. The reports prepared by these
committees have generated a lot of interest worldwide.

3.6.2 Role of Chief Executive Officer (CEO)

The CEO is the most important strategist who is responsible for all aspects of strategic
management, from, the formulation to the evaluation of strategy. The CEO is variously
designated as the managing director, executive director, president or general manager in business
organisations. As the chief strategist, the CEO plays a major role in strategic decision-making.
Due to the importance accorded to the CEO many authors and researchers have attempted to
define his/her roles, functions, and responsibilities. This is understandable since the CEO of an
organisation plays the most crucial role in determining whether an organisation is successful or
not. Peters and Waterman say that ―associated with almost every excellent company was a
strong leader (or two) who seemed to have had a lot to do with making the company excellent in
the first place‖ (Ansoff, 1965).

The role of CEO in strategic management is the most important among the roles played by
different strategists. He/she is the person who is chiefly responsible for the execution of those
functions which are of strategic importance to the organisation. In other words, a CEO performs
the strategic tasks – actions which are necessary to provide a direction to the organisation so that
it achieves its purpose. He/she plays a pivotal role in setting the mission of the organisation,
deciding the objectives and goals, formulating and implementing the strategy and, in general,
seeing to it that the organisation does not deviate from its predetermined path designed to move
it from the position it is in to where it wants to be. In short, a CEO is primarily responsible for
the strategic management of the organisation.

Defining roles theoretically owing to the primacy attached to the chief execut ives, many authors,
researchers and practitioners have attempted to study their roles. The different approaches that
have been adopted to study the roles of CEOs may be broadly classified into two categories: the
role-modelling approaches and the other approaches.

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 1. The role-modelling approaches attempt to describe the CEOs in terms of the different roles
that they play in organisations. For instance, a CEO may be considered as:

 chief architect of organisational purpose, strategist or planner,

 organisational leader, organizer or organisation builder
 chief administrator, implementor or coordinator; and
 communicator of organisational purpose, motivator, personal leader or mentor.

2. The other approaches, directly or indirectly, attempt to describe the role of CEOs in terms of
different parameters like:

 how time is spent;

 qualities and personalities;
 communication styles;
 demographic characteristic, such as, age, intelligence, education, functional
background, experience, and so on;
 managerial values;
 managerial styles; and
 environment.

3.6.3 Role of Entrepreneurs

According to Drucker, ―the entrepreneur always searches for change, responds to it and exploits
it as an opportunity‖ (Glueck, 1976). The entrepreneur has been usually considered as the
person who starts a new business, is a venture capitalist, has a high level of achievement -
motivation, and is naturally endowed with the qualities of enthusiasm, idealism, sense of
purpose, and independence of thought and action. However, not all of these qualities are present
in all entrepreneurs nor are these found uniformly. An entrepreneur may also demonstrate these
qualities in different measures at different stages of life. Contrary to the generally accepted view
of entrepreneurship, entrepreneurs are not to be found only in small businesses or new ventures.
They are also present in established and large businesses, in service institutions, and also in the
bureaucracy and government. By their very nature, entrepreneurs play a proactive role in
strategic management. As initiators, they provide a sense of direction to the organisation, and set
objectives and formulate strategies to achieve them. They are major implementers and
evaluators of strategies. The strategic management process adopted by entrepreneurs is
generally not based on a formal system, and usually they play all strategic roles simultaneously.
Strategic decision-making is quick and the entrepreneurs generate a sense of purpose among
their subordinates. The illustrations given below shall provide a glimpse of the entrepreneurs‘
role as strategists.

Profiles of three Successful CEOs

S/N Factors CEO A CEO B CEO C
1. The company Manages a well-established public Manages a private sector Manages a highly diversified multi-
sector monopoly using process company based on mass plant, multi-product, multinational
technology, faces problems of production technology; is company; has high research
stagnating production levels, market leader and operates in a potential; good marketing network;
technological obsolescence and competitive environment, emphasis on teamwork and

93
 low worker morale. worker productivity is high but maintaining good organisational
organisational loyalty is low. culture, seen as a slow-moving, risk-
averse company.
2. The Person:
(a) Personal traits In the group of 60 – 65 years; has In the age group of 50 -55 In the age group of 50 – 55 years;
a technical background; has risen years; has technical and has a scientific background; comes
from the ranks; possesses qualities managerial background; comes from middle class family, simple
of intelligence and selflessness; is from a business family; and modest, family man; possesses
principled and a man of possesses qualities of foresight, qualities of honesty and fairness;
convictions; has regular habits; determination, openness, travels frequently; keeps in touch
spends leisure time reading; honesty and fairness, has high with the environment; publicity-shy;
neglect family life. aspirations, is principled, has a deep sense of patriotism and a
impatient, drives himself and philosophical attitude towards life.
others too hard, unforgiving,
dedicated to family but finds
little time for it.

(b) Managerial Could be described as a motivator, Quick decision-maker; has Adopts a scientific-rational
qualities leader, communicator, visionary high business acumen; is an approach, professional; keeps in
and institution builder, is able to effective and dedicated leader; touch with market conditions;
create rapport with the does clear thinking and has an maintains good relations with peers
government; successful in eye for detail; is influential in and subordinates; believes in
managing interface between his government circles. delegation; has good rapport with
company and concerned government.
bureaucrats and politicians.

(c) Pre-dominant Motivational style; effectively Believes in centralized Professional style; believes in
management style manages change; believes in open decision-making; does strategic people and has faith in subordinates;
communication and environment; planning personally; closely maintains close touch with
adopts a systematic planned supervises operational areas. company; believes in continuity;
approach to strategic business adopts stability approach in strategy
thinking. formulation.
Source: Based on Azhar Kazmi, Monograph on Roles and Responsibilities of Chief Executives (Aligarh: Department of Business
Administration, Aligarh Muslim University, Aligarh, 1988).

 K. C. Raghunathan, managing director of SIP Resins Limited, and K C Sukumar, joint

managing director are brothers who moved from their traditional family businesses of
construction, transport, money lending, and so on to the manufacture of PVC resins. Quick
to react to a business opportunity (they got the idea while on a visit to an exhibition), they set
up a small-scale PVC resin compounding unit after winding up their family business.
Overcoming many hurdles in production and marketing, these two entrepreneurs finally
succeeded in creating a 25 percent share in a market dominated by a multinational, Hindustan
Ciba-Giegy Limited by 1986 – 87. When the turnover crossed Rs 6 crores, they decided to
go public in order to finance their future expansion plans.

 K. V. Kamath, CEO of ICICI, who had earlier worked as a leasing specialist with the Asian
Development Bank (ADB) was the head of a small team engaged in the formulation and
implementation of a long-range strategic plan at the ICICI. As a part of the new directions
provided by N. Vaghul, chairman and managing director of ICICI, Kamath played an active
role by taking a number of strategic initiatives and identifying new businesses in his position
as the Deputy General Manager for corporate planning and policy.

 In the traditional field of banking where there is little scope for innovation and
entrepreneurship, S. Kumarasundaram, as the chairman of the Bank of Madura Limited,, and

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 after his death in 1986, the new chairman, S.V. Shanmugavadivelu, provide an excellent
example of the role of entrepreneur as strategists. They were not entrepreneurs in the
generally accepted sense, asw these persons headed a bank which had been set up in 1943.
They were responsible for providing a sense of direction, setting long-term strategies,
improving systems and customer service, consolidation of position, organizational
restructuring, and demarcating decision-making authority at various levels.

 Kiran Mazumdar, a young entrepreneur, set up an export-oriented unit manufacturing a range

of enzymes. As an expert in brewing technology, Mazumdur entered the field of
biotechnology after experiencing problems in getting a job. Later, she set up another plant
for manufacturing two new enzymes created by her own research and development (R&D)
department. As managing director, Mazumdar was actively involved in all aspects of policy
formulation and implementation for her companies.

3.6.4 Role of Senior Management

The senior (or top) management consists of managers at the highest level of the managerial
hierarchy. Starting from the chief executive to the level of functional or profit-centre heads,
these managers are involved in various aspects of strategic management. Some of the members
of the senior management act as directors on the board usually on a rotational basis. All of them
serve on different top-level committees set up by the board to look after matters of strategic
importance and other policy issues such as: policy formulation, policy implementation, policy
evaluation, and new product development. On the whole, senior managers perform a variety of
roles by assisting the board and the chief executive in the formulation, implementation, and
evaluation of strategy. Occasionally, they come together in the form of different types of
committees, task forces, work groups, think tanks, management teams, and so forth, to play a
very important role in strategic management. One may observe how senior managers act as
strategists from the examples given below.

 Strategic planning at MRF Limited used senior management expertise by dividing them into
five groups dealing with products and markets, environment, technology, resources, and
manpower. Each group had a leader who helped to prepare position papers for presentation
to the board. The executive directors in the company were actively involved in SWOT
analysis through the help of managers and assistant managers.
 At Voltas, the implementation of strategies and plans was done through a corporate executive
committee headed by the president and consisting of senior vice-presidents and vice-
presidents from different functional areas.

 In family-owned concerns, the manner in which senior managers are involved in strategic
management varies. Where these managers are family members, they constitute an informal
family council, as in Lohia Machines of the Singhania group. The professional managers at
senior levels may be involved in the implementation of strategies as in the case of Arvind
Mills of the Lalbhai group. Others like the Mahindra group have provided a great deal of
autonomy to their senior executives in all aspects of strategic management.

 In the early 1970s, under the chairmanship of R.K. Talwar, the State Bank of India (SBI)
realized the importance of decentralized planning. The bank‘s central office at Bombay

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 exercised strategic control and generated broad policy guidelines. The general managers of
planning department at 13 local head offices had development managers in charge of
different market segments. Lower down in the hierarchy, at the regional office levels,
development officers were in charge of business planning for industry and agriculture.

3.6.5 Role of Corporate Planning Staff

David Hussey has enlisted the many and varied principal responsibilities of corporate planners
(Hessey, 1974). Essentially, the corporate-planning staff plays a supporting role in strategic
management. It assists the management in all aspects of strategy formulation, implementation
and evaluation. Besides this, they are responsible for the preparation and communication of
strategic plans, and for conducting special studies and research pertaining to strategic
management. It is important to note that the corporate planning department is not responsible for
strategic management and usually does not initiate the process on its own. By providing
administrative support, it fulfills its functions of assisting the introduction, working, and
maintenance of the strategic management system.

3.6.6 Role of Consultants

Many organisations which do not have a corporate planning department o wing to reasons like
small size, infrequent requirements, financial constraints, and so on, take the help of external
consultants in strategic management. These consultants may be individuals, academicians or
consultancy companies specializing in strategic management activities. According to the
Management Consultants Association of India, management consultancy is ―a professional
service performed by specially trained and experienced persons to advise and assist managers
and administrators to improve their performance and effectiveness and that of their organisation‖
(Drucker, 1985). Among the many functions that management consultants perform, corporate
strategy and planning is one of the important services rendered. The main advantages of hiring
consultants are: getting an unbiased and objective opinion from a knowledgeable outsider, cost -
effectiveness, and the availability of specialists‘ skills. According to a senior consultant of a
large consultancy firm, the trend is that ―family-owned companies and the public sector are
relying moiré heavily on consultancy services than the multinationals‖. There are many
consultancy organisations, large and small, that offer consultancy services in the area of strategic
management in India. Instances of companies seeking the help of consultants in various strategic
exercises such as diversification, restructuring, and so on, are legion.

Besides, the Indian consultancy firms, such as, A.F. Ferguson, S.B. Billimoria and several others,
now there are many foreign consultancy firms operating in India. Some of the better-known
consultancy firms and the services they offer are: McKinsey and Company, which specializes in
offering consultancy in the areas of fundamental change management and strategic visioning;
Anderson Consulting, which is in business restructuring, and infotech and systems; Boston
Consulting that helps in building competitive advantage; and KPMG Peat Marwick that is in
strategic financial management and feasibility studies for strategic implementatio n. It should be
noted that consultants do not perform strategic management; they only assist the organisations
and their managers in strategic management by working on specific, time-bound consultancy
assignments.

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3.6.7 Role of Middle-level Managers
The major functions of middle-level managers relate to operational matters and, therefore, they
rarely play an active role in strategic management. They may, at best, be involved as ‗sounding
boards‘ for departmental plans, as implementers of the decisions taken above, followers of policy
guidelines, and passive receivers of communication about functional strategic plans. As they are
basically involved in the implementation of functional strategies, the middle-level managers are
rarely employed for any other purpose in strategic management. This does not, however,
preclude the possibility of using their expertise. Many of the examples that we have provided in
the previous sub-sections show that managers and assistant managers can also contribute to the
generation of ideas, the development of strategic alternatives, the refinement of business,
functional and development plans, target-setting at departmental levels, and for various other
purposes. The importance of the middle management cadres lies in the fact that they form the
catchment areas for developing future strategists for the organisation.

3.6.8 Role of Executive Assistant

The emergence of executive assistants in the managerial hierarchy is a relatively recent
phenomenon. An executive assistant is a person who assists the chief executive in the
performance of his duties in various ways. These could be: to assist the chief executive in data
collection and analysis, suggesting alternatives where decisions are required, preparing briefs of
various proposals, projects and reports, helping in public relations and liaison functions,
coordinating activities with the internal staff and outsiders, and acting as a filter for the
information coming from different sources. Among these ―the most important and what one
manager labels the ‗bread and butter role‘ of EA (executive assistants) could be that of corporate
planners‖ (Business India, 1986). The reason being that the increasing complexity of business
and strategic decision-making has led to a situation where ―it is the function of the executive
assistant to monitor the changing context and evolve strategies in tandem with senior
management‖. But in companies where a corporate planning department exists, this function is
not assigned to the executive assistants. Since executive assistants assist the chief executive they
help to optimize their time utilization. In terms of skills and attitudes, the requirements for an
executive assistant include a generalist‘s orientation, a few years‘ line experience, exposure to
different functional areas, excellent written and oral communication ability, and a pleasing
personality. Generally the qualification required is an MBA or a CA. The position of an
executive assistant offers a unique advantage to young managers as nowhere else can he or she
gain a comprehensive view of the organisation, which can help in career planning and
development, and rapid advancement to the senior levels of management

Self-Assessment Exercise 3
1. List the elements in the strategic management process.
2. Identify the roles that CEOs play in strategic management.

4.0 CONCLUSION

This unit has provided an overview of strategic management. This is an important unit because
it attempts to make you understand the two supporting pillars of the course-the concept of
strategy and the process of strategic management.

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5.0 SUMMARY

In this unit, we discussed the Process of Strategic Management, defined Strategic Management,
listed and explained the Phases in Strategic Management, enumerated and discussed the
Elements in Strategic Management Process, state and discussed the Models in Strategic
Management Process and explained the term ―Strategists‖ and their Roles in Strategic
Management.

The next unit would trace the Overview of strategic management.

6.0 TUTOR MARKED ASSIGNMENT

1. Each phase of the strategic management process consists of a number of elements which
are discrete and identifiable activities performed in logical and sequential steps. Discuss
this statement with relevant diagram.

2. Using appropriate diagram explain the phases in strategic management.

7.0 REFERENCES/FURTHER READING

Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition, (New Delhi: Tata
McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6, pp. 1 – 23.

Chandler, A. (1962). Strategy and Structure – Chapters in the History of the American Enterprise
(Cambridge, MA: MIT Press), p. 13.

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UNIT 4 OVERVIEW OF STRATEGIC MANAGEMENT

Table of Contents

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Concepts/Approaches of Strategic Management
3.2 Strategic Formation (Classical School)
3.3 Strategic Evaluation and Choice
3.4 Strategic Implementation and Control
3.5 Testing the Strategic Alignment of the Organisation
3.6 The Strategic Hierarchy
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In the last unit, we discussed the process of strategic management, defined strategic
management, listed and explained the phases in strategic management, enumerated and discussed
the elements in strategic management process, state and discussed the models in strategic
management process and explained the term ―strategists‖ and their roles in strategic
management.

In this unit, we shall discuss the overview of strategic management.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 Define the Concepts/Approaches of Strategic Management;

 Discuss the Strategic Formation (Classical School);
 Explain what is meant by Strategic Evaluation and Choice;
 Define and explain the concepts Strategic Implementation and Control;
 Enumerate the reasons for Testing the Strategic Alignment of the Organisation;
 Define and discuss Strategic Hierarchy;

3.0 MAIN CONTENT

Strategic management is a field that deals with the major intended and emergent initiatives taken
by general managers on behalf of owners, involving utilization of resources, to enhance the
performance of firms in their external environments. [1] It entails specifying the organization's
mission, vision and objectives, developing policies and plans, often in terms of projects and

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programs, which are designed to achieve these objectives, and then allocating resources to
implement the policies and plans, projects and programs. A balanced scorecard is often used to
evaluate the overall performance of the business and its progress towards objectives. Recent
studies and leading management theorists have advocated that strategy needs to start with
stakeholders expectations and use a modified balanced scorecard which includes all stakeholders.
Strategic management is a level of managerial activity under setting goals and over tactics.
Strategic management provides overall direction to the enterprise and is closely related to the
field of Organization Studies. In the field of business administration it is useful to talk about
"strategic alignment" between the organization and its environment or "strategic consistency."
According to Arieu (2007), "there is strategic consistency when the actions of an organization
are consistent with the expectations of management, and these in turn are with the market and the
context." Strategic management includes not only the management team but can also include the
Board of Directors and other stakeholders of the organization. It depends on the organizational
structure.

―Strategic management is an ongoing process that evaluates and controls the business and the
industries in which the company is involved; assesses its competitors and sets goals and
strategies to meet all existing and potential competitors; and then reassesses each strategy
annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it
has succeeded or needs replacement by a new strategy to meet changed circumstances, new
technology, new competitors, a new economic environment., or a new social, financial, or
political environment.‖ (Lamb, 1984: ix) [2] Strategic Management can also be defined as "the
identification of the purpose of the organisation and the plans and actions to achieve the purpose.
It is that set of managerial decisions and actions that determine the long term p erformance of a
business enterprise. It involves formulating and implementing strategies that will help in aligning
the organisation and its environment to achieve organisational goals."

3.1 Concepts/Approaches of Strategic Management

Strategic management can depend upon the size of an organization, and the proclivity to change
of its business environment. These points are highlighted below:

 A global/transnational organization may employ a more structured strategic management

model, due to its size, scope of operations, and need to encompass stakeholder views and
requirements.

 An SME (Small and Medium Enterprise) may employ an entrepreneurial approach. This is
due to its comparatively smaller size and scope of operations, as well as possessing fewer
resources. An SME's CEO (or general top management) may simply outline a mission, and
pursue all activities under that mission.

 Whittington (2001) highlighted four approaches to strategic management, utilising different

factors that organisations may face. These are the Classical, Processual, Evolutionary and
Systemic approaches. Each paradigm is suited to specific environmental factors, of which
global firms have faced over the past 4/5 decades.

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 Mintzberg has stated there are prescriptive (what should be) and descriptive (what is)
schools, in the sense that the prescriptive schools are "one size fits all" approaches designed
to work as best practice methods, and the descriptive schools merely describe how corporate
strategy is devised in given contexts.

It can be said that there is no overriding strategic managerial method, and that a number of
differing variables must be taken into account, relative to how a corporate strategic plan is
outlined. It can also be said to be a subjective and highly contextual process.

3.2 Strategy Formation (Classical School)

The Classical School of strategic management is the most taught and deployed approach, of
which most textbooks on the subject convey. The essential points of the approach are "where are
we now?", "where do we want to be?" and "how do we get there?". It thus comprises an
environmental analysis, a choice of available options, and determining a path for action and
implementation. The initial task in strategic management is typically the compilation and
dissemination of a mission statement. This document outlines, in essence, the raison d'etre of an
organization. Additionally, it specifies the scope of activities an organization wishes to
undertake, coupled with the markets a firm wishes to serve.

Following the devising of a mission statement, a firm would then undertake an environmental
scanning within the purview of the statement. Strategic formation is a combination of three main
processes which are as follows:

 Performing a situation analysis, self-evaluation and competitor analysis: both internal and
external; both micro-environmental and macro-environmental.

 Concurrent with this assessment, objectives are set. These objectives should be parallel to a
time-line; some are in the short-term and others on the long-term. This involves crafting
vision statements (long term view of a possible future), mission statements (the role that the
organization gives itself in society), overall corporate objectives (both financial and
strategic), strategic business unit objectives (both financial and strategic), and tactical
objectives.

3.3 Strategy Evaluation and Choice

An environmental scan will highlight all pertinent aspects that affect an organization, whether
external or sector/industry-based. Such an occurrence will also uncover areas to capitalise on, in
addition to areas in which expansion may be unwise. These options, once identified, have to be
vetted and screened by an organization. In addition to ascertaining the suitability, feasibility and
acceptability of an option, the actual modes of progress have to be determined. These pertain to:
(a) The basis of competition
The basis of competition is the competitive advantage used or established by the strategy. This
advantage may derive from how an organization produces its products, how it acts within a
market relative to its competitors, or other aspects of the business. Specific approaches may
include:

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 Differentiation, in which a multitude of market segments are served on a mass scale. An
example will include the array of products produced by Unilever, or Procter and Gamble, as
both forge many of the world's noted consumer brands serving a variety of market segments.

 Cost-based, which often concerns economy pricing. An example would be dollar stores in the
United States.

 Market segmentation (or niche), in which products are tailored for the unique needs of a
niche market, as opposed to a mass market. An example is Aston Martin cars.

(b) Mode of action

Measuring the effectiveness of the organizational strategy, it's extremely important to conduct a
SWOT analysis to figure out the internal strengths and weaknesses, and external opportunities
and threats of the entity in business. This may require taking certain precautionary measures or
even changing the entire strategy.

In corporate strategy, Johnson, Scholes and Whittington present a model in which strategic
options are evaluated against three key success criteria: [3]

 Suitability; would it work?

 Feasibility; can it be made to work?
 Acceptability; will they work it?

(c) Suitability

Suitability deals with the overall rationale of the strategy. The key point to consider is whether
the strategy would address the key strategic issues underlined by the organisation's strategic
position.

 Does it make economic sense?

 Would the organization obtain economies of scale or economies of scope?
 Would it be suitable in terms of environment and capabilities?

Tools that can be used to evaluate suitability include:

 Ranking strategic options

 Decision trees
(d) Feasibility
Feasibility is concerned with whether the resources required to implement the strategy are
available, can be developed or obtained. Resources include funding, people, time, and
information. or cash flow in the market

Tools that can be used to evaluate feasibility include:

 cash flow analysis and forecasting
 break-even analysis

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 resource deployment analysis

(e) Acceptability
Acceptability is concerned with the expectations of the identified stakeholders (mainly
shareholders, employees and customers) with the expected performance outcomes, which can be
return, risk and stakeholder/stakeholders reactions.

 Return deals with the benefits expected by the stakeholders (financial and non-financial).
For example, shareholders would expect the increase of their wealth, employees would
expect improvement in their careers and customers would expect better value for money.

 Risk deals with the probability and consequences of failure of a strategy (financial and non-
financial).

 Stakeholder reactions deal with anticipating the likely reaction of stakeholders.

Shareholders could oppose the issuing of new shares, employees and unions could oppose
outsourcing for fear of losing their jobs, customers could have concerns over a merger with
regards to quality and support.

Tools that can be used to evaluate acceptability include:

 what-if analysis
 stakeholder mapping
(f) The direction of action

Strategic options may span a number of options, including:

 Growth-based (inspired by Igor Ansoff's matrix – market development, product
development, market penetration, diversification)
 Consolidation
 Divestment
 Harvesting
The exact option depends on the given resources of the firm, in addition to the nature of
products' performance in given industries. A generally well-performing organisation may seek to
harvest (i.e. let a product die a natural death in the market) a product, if via portfolio analysis it
was performing poorly comparative to others in the market.

Additionally, the exact means of implementing a strategy needs to be considered. These points
range from:
 Strategic alliances
 Capital Expenditures (CAPEX)
 Internal development (,i.e. utilising one's own strategic capability in a given course of action)
 M&A (Mergers and Acquisitions)
The chosen option in this context is dependent on the strategic capabilities of a firm. A company
may opt for an acquisition (actually buying and absorbing a smaller firm), if it meant speedy
entry into a market or lack of time in internal development. A strategic alliance (such as a
network, consortium or joint venture) can leverage on mutual skills between companies. Some

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countries, such as India and China, specifically state that FDI in their countries should be
executed via a strategic alliance arrangement.

3.4 Strategic Implementation and Control

Once a strategy has been identified, it must then be put into practice. The implementation of
strategy is of great importance. Conducting a corporate strategy is worthless as long as it is not
implemented correctly by each depart ment of the organization This may involve organising,
resourcing and utilising change management procedures:
(a) Organizing
Organizing relates to how an organizational design of a company can fit or align with a chosen
strategy. This concerns the nature of reporting relationships, spans of control, and any strategic
business units (SBUs) that require to be formed. Typically, an SBU will be created (which often
has some degree of autonomous decision-making) if it exists in a market with unique conditions,
or has/requires unique strategic capabilities (i.e. the skills needed for the running and
competition of the SBU are different).
(b) Resourcing
Resourcing is literally the resources required to put the strategy into practice, ranging from
human resources, to capital equipment, and to ICT-based implements.
(c) Change management
In the process of implementing strategic plans, an organization must be wary of forces that may
legitimately seek to obstruct such changes. It is important then that effectual change ma nagement
practices are instituted. These encompass:
 The appointment of a change agent, as an individual who would champion the changes and
seek to reassure and allay any fears arising.

 Ascertaining the causes of the resistance to organizational change (whether from employees,
perceived loss of job security, etc.)

 Via change agency, slowly limiting the negative effects that a change may uncover.

3.5 Testing the Strategic Alignment of the Organization

The optimal performance of organizations is highly dependent on the level of Strategic

Alignment. Until 2010 Change management was used to implement a strategy. In 2010 the
Rotterdam School of Management together with the Erasmus School of Economics conducted
research on the measurement possibilities of Strategic Alignment. This cooperation led to the
introduction of the S-ray Alignment Scan.

The S-ray Alignment Scan is a visual of the Corporate Strategy measured against the level of
understanding and implementation of the organizational departments. In 2011 Erasmus
University of Rotterdam introduced S-ray Diagnostics, which is a spin-off of this cooperation,
solely focused on measuring strategic alignment of organizations.

3.5.1 Whittington's Perspectives

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Apart from the Classical approach, Whittington outlined three other schools with reference to
strategic management thinking.
(a) Processual

The Classical school was the prominent paradigm in the 1960s. However, with the advent of
stagflation in the 1970s, rising trade union actions in some countries, wide-scale regional
conflicts, rising oil prices, etc. it became apparent that firms needed to balance numerous
stakeholder standpoints. A rational planning model could not be exercised, if internal (and
sometimes external) powers needed to be heeded, consulted and even accommodated to
Processual strategic management thus emphasises politics, in terms of resolving/managing
internal conflicts and reaching compromises in strategic decision-making. Internal politics may
be required for the following purposes. Some SBUs/functional areas may require more resources,
or be competing for the same items from top management. An SBU/functional area could be
headed by a powerful manager, who by virtue of his or her influence can impede general
strategic actions.

In these cases, satisfying differing viewpoints is key, in an effort to resolve conflict and provide a
common path for the organisation.

(b) Evolutionary
In the 1980s, business environments became more dynamic. It thus became key to "sink or
swim", and adapt to the needs,challenges and rigours of one's business landscape. In this sense,
evolutionary strategic management is essentially Darwinist, and follows a classical Darwinian
path. Organisations must develop or nurture traits that will help them survive and prosper within
their given markets. If they do not, they will perish. A major facet of evolutionary strategic
management is a population ecology model, in which firms in an industry are seen akin to a
population of animals.

Evolutionary strategy stems from an inability to track properly complex environments. If an

industry has continuously changing factors, rational planning (as per the Classical school) is
futile. An organisation holds no choice but to "adapt or die".

(c) Systemic
In recent years, there has been greater emphasis on consumer rights and the general social
responsibility of companies. Consumers are now expecting firms to act responsibly in their
business operations, and to take heed of numerous needs in this process. It can be said,
consequent from this eventuality, that firms operate in a connected fashion with their
communities and societies, and necessarily impact and "give and take" from such bodies.
Systemic strategy views the organisation as an open system, in that it takes inputs from society
and imparts outputs into it. It thus is an integral and interconnected facet of the wider society,
and not an entity distinct from it. A rational planning model is not seen as optimal, as it detracts
from attuning to the needs of the community and the wider society a firm engages in.

(d) Drivers

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The end goal of Classical planning is a deliberate need for profit maximisation. Deliberate in this
instance means that it is consciously designed by top management as such. Conversely,
evolutionary strategy is emergent, and not consciously planned or executed.
Processual strategy is typically seen as deliberate and pluralistic, as a firm in the model cannot
always seek to maximise profits. Systemic strategy is emergent and p luralistic, due to the
continuous determining of social needs.

3.5.2 General Approaches

In general terms, there are two main approaches, which are opposite but complement each other
in some ways, to strategic management:
 The Industrial Organizational Approach
o based on economic theory — deals with issues like competitive rivalry, resource
allocation, economies of scale;
o assumptions — rationality, self discipline behaviour, profit maximization.
 The Sociological Approach
o deals primarily with human interactions
o assumptions – bounded rationality, satisficing behaviour, profit sub-optimality. An
example of a company that currently operates this way is Google. The stakeholder
focused approach is an example of this modern approach to strategy.

Strategic management techniques can be viewed as bottom-up, top-down, or collaborative

processes. In the bottom-up approach, employees submit proposals to their managers who, in
turn, funnel the best ideas further up the organization. This is often accomplished by a capital
budgeting process. Proposals are assessed using financial criteria such as return on investment or
cost-benefit analysis. Cost underestimation and benefit overestimation are major sources of error.
The proposals that are approved form the substance of a new strategy, all of which is done
without a grand strategic design or a strategic architect. The top-down approach is the most
common by far. In it, the CEO, possibly with the assistance of a strategic planning team, decides
on the overall direction the company should take. Some organizations are starting to experiment
with collaborative strategic planning techniques that recognize the emergent nature of strategic
decisions.

Strategic decisions should focus on Outcome, Time remaining, and current Value/priority. The
outcome comprises both the desired ending goal and the plan designed to reach that goal.
Managing strategically requires paying attention to the time remaining to reach a particular level
or goal and adjusting the pace and options accordingly. Value/priority relates to the shifting,
relative concept of value-add. Strategic decisions should be based on the understanding that the
value-add of whatever you are managing is a constantly changing reference point. An objective
that begins with a high level of value-add may change due to influence of internal and external
factors. Strategic management by definition, is managing with a heads-up approach to outcome,
time and relative value, and actively making course corrections as needed.

Simulation strategies are also used by managers in an industry. The purpose of simulation
gaming is to prepare managers make well rounded decisions. There are two main focuses of the
different simulation games, generalized games and functional games. Generalized games are
those that are designed to provide participants with new forms of how to adapt to an unfamiliar

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environment and make business decisions when in doubt. On the other hand, functional ga mes
are designed to make participants more aware of being able to deal with situations that bring
about one or more problems that are encountered in a corporate function within an industry. [4]

3.6 The Strategy Hierarchy

In most (large) corporations there are several levels of management. Corporate strategy is the
highest of these levels in the sense that it is the broadest – applying to all parts of the firm –
while also incorporating the longest time horizon. It gives direction to corporate values,
corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy
there are typically business-level competitive strategies and functional unit strategies.

Corporate strategy refers to the overarching strategy of the diversified firm. Such a corporate
strategy answers the questions of "which businesses should we be in?" and "how does being in
these businesses create synergy and/or add to the competitive advantage of the corporation as a
whole?" Business strategy refers to the aggregated strategies of single business firm or a
strategic business unit (SBU) in a diversified corporation. According to Michael Porter, a firm
must formulate a business strategy that incorporates either cost leadership, differentiation, or
focus to achieve a sustainable competitive advantage and long-term success. These three rules
are also known as Porter's three generic Strategies; this concept can be applied to any size or
form of business. Porter considered this concept as tradeoff strategy and argued that a person or
company must only choose ONE strategy or risk having no strategy at all. Alt ernatively,
according to W. Chan Kim and Renée Mauborgne, an organization can achieve high growth and
profits by creating a Blue Ocean Strategy that breaks the previous value-cost trade off by
simultaneously pursuing both differentiation and low cost.

Functional strategies include marketing strategies, new product development strategies, human
resource strategies, financial strategies, legal strategies, supply-chain strategies, and information
technology management strategies. The emphasis is on short and medium term plans and is
limited to the domain of each department‘s functional responsibility. Each functional department
attempts to do its part in meeting overall corporate objectives, and hence to some extent their
strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to organize
activities so they have reengineered according to processes or SBUs. A strategic business unit
is a semi-autonomous unit that is usually responsible for its own budgeting, new product
decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by
corporate headquarters. A technology strategy, for example, although it is focused on technology
as a means of achieving an organization's overall objective(s), may include dimensions that are
beyond the scope of a single business unit, engineering organization or IT department.

An additional level of strategy called operational strategy was encouraged by Peter Drucker in
his theory of management by objectives (MBO). It is very narrow in focus and deals with day-to-
day operational activities such as scheduling criteria. It must operate within a budget but is not at
liberty to adjust or create that budget. Operational level strategies are informed by business level
strategies which, in turn, are informed by corporate level strategies.

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Since the turn of the millennium, some firms have reverted to a simpler strategic structure dr iven
by advances in information technology. It is felt that knowledge management systems should be
used to share information and create common goals. Strategic divisions are thought to hamper
this process. This notion of strategy has been captured under the rubric of dynamic strategy,
popularized by Carpenter and Sanders's textbook [1].

This work builds on that of Brown and Eisenhart as well as Christensen and portrays firm
strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the
seamless integration of strategy formulation and implementation. Such change and
implementation are usually built into the strategy through the staging and pacing facets.

4.0 CONCLUSION

Strategic management was seen, in this unit, as a level of managerial activity under setting goals
and over tactics. It also provides overall direction to the enterprise and is closely related to the
field of Organization Studies.

5.0 SUMMARY

In this unit, we have defined the Concepts/Approaches of Strategic Management; discussed the
Strategic Formation (Classical School); Explained what is meant by Strategic Evaluation and
Choice; Defined and explained the concepts Strategic Implementation and Control; Enumerated
the reasons for Testing the Strategic Alignment of the Organisation and Defined and discussed
Strategic Hierarchy.

In the next unit, we shall discuss the historical developments of strategic management.

6.0 TUTOR-MARKED ASSIGNMENT

1. What do you understand by strategic implementation and control? Briefly discuss this.

2. List the options involved in strategic evaluation and choice.

3. What is strategic formation? List and explain the three main processes of strategic
formation.

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7.0 REFERENCES/FURTHER READINGS

Nag, R.; Hambrick, D. C.; Chen, M.-J, What is strategic management, really? Inductive
derivation of a consensus definition of the field. Strategic Management Journal. Volume 28,
Issue 9, pages 935–955, September 2007.

Lamb, Robert, Boyden Competitive strategic management, Englewood Cliffs, NJ: Prentice-Hall,
1984

Johnson, G, Scholes, K, Whittington, R Exploring Corporate Strategy, 8th Edition, FT Prentice

Hall, Essex, 2008, ISBN 978-0-273-71192-6

Deacon, Amos R. L. Simulation and Gaming a Symposium. New York, 1961. Print.

Chandler, Alfred Strategy and Structure: Chapters in the history of industrial enterprise,
Doubleday, New York, 1962.

Selznick, Philip Leadership in Administration: A Sociological Interpretation, Row, Peterson,

Evanston Il. 1957.

Ansoff, Igor Corporate Strategy McGraw Hill, New York, 1965.

Drucker, Peter The Practice of Management, Harper and Row, New York, 1954.

Chaffee, E. ―Three models of strategy‖, Academy of Management Review, vol 10, no. 1, 1985.

Buzzell, R. and Gale, B. The PIMS Principles: Linking Strategy to Performance, Free Press,
New York, 1987.

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UNIT 5 HISTORICAL DEVELOPMENT OF STRATEGIC MANAGEMENT

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Birth of Strategic Management
3.2 Growth and Portfolio Theory
3.3 The Marketing Revolution
3.4 The Japanese Challenge
3.5 Competitive Advantage
3.6 The Military Theorists
3.7 Strategic Change
3.8 Information and Technology-driven Strategic
3.9 Knowledge Adaptive Strategy
3.10 Strategic Decision-making Strategy
3.11 Psychology of Strategic Management
3.12 Limitations to Strategic Management
3.13 The Linearity Trap
3.14 Putting Creativity and Innovation into Strategy
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In the last unit, we have defined the Concepts/Approaches of Strategic Management; discussed
the Strategic Formation (Classical School); explained what is meant by Strategic Evaluation and
Choice; defined and explained the concepts Strategic Implementation and Control; enumerated
the reasons for Testing the Strategic Alignment of the Organisation; defined and discussed
Strategic Hierarchy.

In this unit, we shall discuss the historical developments of strategic management.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 Trace the Birth of Strategic Management;

 Discuss the Growth and Portfolio Theory;
 Discuss the Marketing Revolution and the Japanese Challenge;
 Define Competitive Advantage;
 Explain the Military Theorists in relation to strategic management;
 Define and discuss Strategic Change;

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 Explain Information and Technology-driven Strategy and Knowledge Adaptive Strategy in
relation to strategic management;
 Discuss Strategic Decision-making Strategy;
 Discuss Psychology of Strategic Management;
 Enumerate and discuss the Limitations to Strategic Management;
 Define and explain the Linearity Trap‘
 Discuss what is meant by Putting Creativity and Innovation into Strategy.

3.1 Birth of Strategic Management

The Strategic management discipline is originated in the 1950s and 60s. Although there were
numerous early contributors to the literature, the most influential pioneers were Alfred D.
Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker. The discipline draws from earlier
thinking and texts on 'strategy' dating back thousands of years.

Alfred Chandler recognized the importance of coordinating the various aspects of management
under one all-encompassing strategy. Prior to this time the various functions of management
were separate with little overall coordination or strategy. Interactions between functions or
between departments were typically handled by a boundary position, that is, there were one or
two managers that relayed information back and forth between two departments. Chandler also
stressed the importance of taking a long term perspective when looking to the future. In his 1962
ground breaking work Strategy and Structure, Chandler showed that a long-term coordinated
strategy was necessary to give a company structure, direction, and focus. He says it concisely,
―structure follows strategy.‖[5]

In 1957, Philip Selznick introduced the idea of matching the organization's internal factors with
external environmental circumstances.[6] This core idea was developed into what we now call
SWOT analysis by Learned, Andrews, and others at the Harvard Business School General
Management Group. Strengths and weaknesses of the firm are assessed in light of the
opportunities and threats from the business environment.

Igor Ansoff built on Chandler's work by adding a range of strategic concepts and inventing a
whole new vocabulary. He developed a strategy grid that compared market penetration
strategies, product development strategies, market development strategies and horizontal and
vertical integration and diversification strategies. He felt that management could use these
strategies to systematically prepare for future opportunities and challenges. In his 1965 classic
Corporate Strategy, he developed the gap analysis still used today in which we must understand
the gap between where we are currently and where we would like to be, then develop what he
called ―gap reducing actions‖.[7]

Peter Drucker was a prolific strategy theorist, author of dozens of management books, with a
career spanning five decades. His contributions to strategic management were many but two are
most important. Firstly, he stressed the importance of objectives. An organization without clear
objectives is like a ship without a rudder. He was developing a theory of management based on
objectives which evolved into his theory of management by objectives (MBO). According to
Drucker, the procedure of setting objectives and monitoring your progress towards them should

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permeate the entire organization, top to bottom. His other seminal contribution was in predicting
the importance of what today we would call intellectual capital. He predicted the rise of what he
called the ―knowledge worker‖ and explained the consequences of this for management. He said
that knowledge work is non-hierarchical. Work would be carried out in teams with the person
most knowledgeable in the task at hand being the temporary leader.

In 1985, Ellen-Earle Chaffee summarized what she thought were the main elements of strategic
management theory thus:
 Strategic management involves adapting the organization to its business environment.
 Strategic management is fluid and complex. Change creates novel combinations of
circumstances requiring unstructured non-repetitive responses.
 Strategic management affects the entire organization by providing direction.
 Strategic management involves both strategy formation (she called it content) and also
strategy implementation (she called it process).
 Strategic management is partially planned and partially unplanned.
 Strategic management is done at several levels: overall corporate strategy, and individual
business strategies.
 Strategic management involves both conceptual and analytical thought processes.

3.2 Growth and Portfolio Theory

In the 1970s much of strategic management dealt with size, growth, and portfolio theory. The
PIMS study was a long term study, started in the 1960s and lasted for 19 years, that attempted to
understand the Profit Impact of Marketing Strategies (PIMS), particularly the effect of market
share. Started at General Electric, moved to Harvard in the early 1970s, and then moved to the
Strategic Planning Institute in the late 1970s, it now contains decades of information on the
relationship between profitability and strategy. Their initial conclusion was unambiguous: The
greater a company's market share, the greater will be their rate of profit. The high market share
provides volume and economies of scale. It also provides experience and learning curve
advantages. One of the most valuable concepts in the strategic management of multi-divisional
companies is portfolio theory..

3.3 The Marketing Revolution

The 1970s also saw the rise of the marketing oriented firm. From the beginnings of capitalis m it
was assumed that the key requirement of business success was a product of high technical
quality. If you produced a product that worked well and was durable, it was assumed you would
have no difficulty selling them at a profit. This was called the production orientation and it was
generally true that good products could be so ld without effort, encapsulated in the saying "Build
a better mousetrap and the world will beat a path to your door." This was largely due to the
growing numbers of affluent and middle class people that capitalism had created. producing
products then trying to sell them to the customer, businesses should start with the custo mer, find
out what they wanted, and then produce it for them. The customer became the driving force
behind all strategic business decisions.

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3.4 Competitive Advantage

The Japanese challenge shook the confidence of the western business elite, but detailed
comparisons of the two management styles and examinations of successful businesses convinced
westerners that they could overcome the challenge. The 1980s and early 1990s saw a plethora of
theories explaining exactly how this could be done. They cannot all be detailed here, but some of
the more important strategic advances of the decade are explained below.

Gary Hamel and C. K. Prahalad declared that strategy needs to be more active and interactive;
less ―arm-chair planning‖ was needed. They introduced terms like strategic intent and strategic
architecture. Their most well known advance was the idea of core competency. They showed
how important it was to know the one or two key things that your company does better than the
competition. Active strategic management required active information gathering and active
problem solving.

Probably the most influential strategist of the decade was Michael Porter. He introduced many
new concepts including; 5 forces analysis, generic strategies, the value chain, strategic groups,
and clusters. In 5 forces analysis he identifies the forces that shape a firm's strategic
environment. It is like a SWOT analysis with structure and purpose. It shows how a firm can use
these forces to obtain a sustainable competitive advantage. Porter modifies Chandler's dictum
about structure following strategy by introducing a second level of structure: Organizational
structure follows strategy, which in turn follows industry structure. Porter's generic strategies
detail the interaction between cost minimization strategies, product differentiation strategies,
and market focus strategies. Although he did not introduce these terms, he showed the
importance of choosing one of them rather than trying to position your company between them.
He also challenged managers to see their industry in terms of a value chain. A firm will be
successful only to the extent that it contributes to the industry's value chain. This forced
management to look at its operations from the customer's point of view. Every operation should
be examined in terms of what value it adds in the eyes of the final customer.

In 1993, John Kay took the idea of the value chain to a financial level claiming ― Adding value is
the central purpose of business activity‖, where adding value is defined as the difference between
the market value of outputs and the cost of inputs including capital, all divided by the firm's net
output. Borrowing from Gary Hamel and Michael Porter, Kay claims that the role of strategic
management is to identify your core competencies, and then assemble a collection of assets that
will increase value added and provide a competitive advantage.
The seven areas of best practice were:
 Simultaneous continuous improvement in cost, quality, service, and product innovation
 Breaking down organizational barriers between departments
 Eliminating layers of management creating flatter organizational hierarchies.
 Closer relationships with customers and suppliers
 Intelligent use of new technology
 Global focus
 Improving human resource skills

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The search for ―best practices‖ is also called benchmarking. This involves determining where
you need to improve, finding an organization that is exceptional in this area, then studying the
company and applying its best practices in your firm.

Process management uses some of the techniques from product quality management and some of
the techniques from customer service management. It looks at an activity as a sequentia l process.
The objective is to find inefficiencies and make the process more effective. Although the
procedures have a long history, dating back to Taylorism, the scope of their applicability has
been greatly widened, leaving no aspect of the firm free from potential process improvements.
Because of the broad applicability of process management techniques, they can be used as a
basis for competitive advantage.

James Gilmore and Joseph Pine found competitive advantage in mass customization. Flexible
manufacturing techniques allowed businesses to individualize products for each customer
without losing economies of scale. This effectively turned the product into a service. They also
realized that if a service is mass customized by creating a ―performance‖ for each individual
client, that service would be transformed into an ―experience‖. Their book, The Experience
Economy, along with the work of Bernd Schmitt convinced many to see service provision as a
form of theatre. This school of thought is sometimes referred to as customer experience
management (CEM).

Like Peters and Waterman a decade earlier, James Collins and Jerry Porras spent years
conducting empirical research on what makes great companies. Six years of research uncovered
a key underlying principle behind the 19 successful companies that they studied: They all
encourage and preserve a core ideology that nurtures the company. Even though strategy and
tactics change daily, the companies, nevertheless, were able to maintain a core set of values.
These core values encourage employees to build an organization that lasts. In Built To Last
(1994) they claim that short term profit goals, cost cutting, and restructuring will not stimulate
dedicated employees to build a great company that will endure. In 2000 Collins coined the term
―built to flip‖ to describe the prevailing business attitudes in Silicon Valley. It describes a
business culture where technological change inhibits a long term focus. He also popularized the
concept of the BHAG (Big Hairy Audacious Goal).

Arie de Geus (1997) undertook a similar study and obtained similar results. He identified four
key traits of companies that had prospered for 50 years or more. They are:

 Sensitivity to the business environment — the ability to learn and adjust

 Cohesion and identity — the ability to build a community with personality, vision, and
purpose
 Tolerance and decentralization — the ability to build relationships
 Conservative financing

A company with these key characteristics he called a living company because it is able to
perpetuate itself. If a company emphasizes knowledge rather than finance, and sees itself as an
ongoing community of human beings, it has the potential to become great and endure for

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decades. Such an organization is an organic entity capable of learning (he called it a ―learning
organization‖) and capable of creating its own processes, goals, and persona.

There are numerous ways by which a firm can try to create a competitive advantage – some will
work but many will not. To help firms avoid a hit and miss approach to the creation of
competitive advantage, Will Mulcaster suggests that firms engage in a dialogue that centres
around the question "Will the proposed competitive advantage create Perceived Differential
Value?" The dialogue should raise a series of other pertinent questions, including:
 "Will the proposed competitive advantage create something that is different from the
competition?"
 "Will the difference add value in the eyes of potential customers?" – This question will entail
a discussion of the combined effects of price, product features and consumer perceptions.
 "Will the product add value for the firm?" – Answering this question will require an
examination of cost effectiveness and the pricing strategy.

3.5 The Military Theorists

In the 1980s some business strategists realized that there was a vast knowledge base stretching
back thousands of years that they had barely examined. They turned to military strategy for
guidance. Military strategy books such as The Art of War by Sun Tzu, On War by von
Clausewitz, and The Red Book by Mao Zedong became instant business classics. From Sun Tzu,
they learned the tactical side of military strategy and specific tactical prescriptions. From Von
Clausewitz, they learned the dynamic and unpredictable nature of military strategy. From Mao
Zedong, they learned the principles of guerrilla warfare. Philip Kotler was a well-known
proponent of marketing warfare strategy.

There were generally thought to be four types of business warfare theories. They are:

 Offensive marketing warfare strategies

 Defensive marketing warfare strategies
 Flanking marketing warfare strategies
 Guerrilla marketing warfare strategies

The marketing warfare literature also examined leadership and motivation, intelligence
gathering, types of marketing weapons, logistics, and communications.

By the turn of the century marketing warfare strategies had gone out of favour. It was felt that
they were limiting. There were many situations in which non-confrontational approaches were
more appropriate. In 1989, Dudley Lynch and Paul L. Kordis published Strategy of the Dolphin:
Scoring a Win in a Chaotic World. "The Strategy of the Dolphin‖ was developed to give
guidance as to when to use aggressive strategies and when to use passive strategies. A variety of
aggressiveness strategies were developed.

In 1993, J. Moore used a similar metaphor. [42] Instead of using military terms, he created an
ecological theory of predators and prey (see ecological model of competition), a sort of

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Darwinian management strategy in which market interactions mimic long term ecological
stability.

3.6 Strategic Change

In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity to describe the way
change forces disruptions into the continuity of our lives.[43] In an age of continuity attempts to
predict the future by extrapolating from the past can be somewhat accurate. But according to
Drucker, we are now in an age of discontinuity and extrapolating from the past is hopelessly
ineffective. We cannot assume that trends that exist today will continue into the future. He
identifies four sources of discontinuity: new technologies, globalization, cultural pluralism, and
knowledge capital.

In 1970, Alvin Toffler in Future Shock described a trend towards accelerating rates of change. [44]
He illustrated how social and technological norms had shorter life-spans with each generation,
and he questioned society's ability to cope with the resulting turmoil and anxiety. In past
generations periods of change were always punctuated with times of stability. This allowed
society to assimilate the change and deal with it before the next change arrived. But these periods
of stability are getting shorter and by the late 20th century had all but disappeared. In 1980 in
The Third Wave, Toffler characterized this shift to relentless change as the defining feature of the
third phase of civilization (the first two phases being the agricultural and industrial waves).[45] He
claimed that the dawn of this new phase will cause great anxiety for those that grew up in the
previous phases, and will cause much conflict and opportunity in the business world. Hundreds
of authors, particularly since the early 1990s, have attempted to explain what this means for
business strategy.

In 2000, Gary Hamel discussed strategic decay, the notion that the value of all strategies, no
matter how brilliant, decays over time. [46]

In 1978, Dereck Abell (Abell, D. 1978) described strategic windows and stressed the
importance of the timing (both entrance and exit) of any given strategy. This has led some
strategic planners to build planned obsolescence into their strategies.[47]

In 1989, Charles Handy identified two types of change. [48] Strategic drift is a gradual change
that occurs so subtly that it is not noticed until it is too late. By contrast, transformational
change is sudden and radical. It is typically caused by discontinuities (or exogenous shocks) in
the business environment. The point where a new trend is initiated is called a strategic inflection
point by Andy Grove. Inflection points can be subtle or radical.

In 2000, Malcolm Gladwell discussed the importance of the tipping point, that point where a
trend or fad acquires critical mass and takes off. [49]

In 1983, Noel Tichy wrote that because we are all beings of habit we tend to repeat what we are
comfortable with.[50] He wrote that this is a trap that constrains our creativity, prevents us from
exploring new ideas, and hampers our dealing with the full complexity of new issues. He
developed a systematic method of dealing with change that involved looking at any new issue

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from three angles: technical and production, political and resource allocation, and corporate
culture.

In 1990, Richard Pascale (Pascale, R. 1990) wrote that relentless change requires that businesses
continuously reinvent themselves.[51] His famous maxim is ―Nothing fails like success‖ by which
he means that what was a strength yesterday becomes the root of weakness today, We tend to
depend on what worked yesterday and refuse to let go of what worked so well for us in the past.
Prevailing strategies become self-confirming. To avoid this trap, businesses must stimulate a
spirit of inquiry and healthy debate. They must encourage a creative process of self renewal
based on constructive conflict.

Peters and Austin (1985) stressed the importance of nurturing champions and heroes. They said
we have a tendency to dismiss new ideas, so to overcome this, we should support those few
people in the organization that have the courage to put their career and reputation on the line for
an unproven idea.

In 1996, Adrian Slywotzky showed how changes in the business environment are reflected in
value migrations between industries, between companies, and within companies. [52] He claimed
that recognizing the patterns behind these value migrations is necessary if we wish to understand
the world of chaotic change. In ―Profit Patterns‖ (1999) he described businesses as being in a
state of strategic anticipation as they try to spot emerging patterns. Slywotsky and his team
identified 30 patterns that have transformed industry after industry. [53]

In 1997, Clayton Christensen (1997) took the position that great companies can fail precisely
because they do everything right since the capabilities of the organization also defines its
disabilities.[54] Christensen's thesis is that outstanding companies lose their market leadership
when confronted with disruptive technology. He called the approach to discovering the
emerging markets for disruptive technologies agnostic marketing, i.e., marketing under the
implicit assumption that no one – not the company, not the customers – can know how or in what
quantities a disruptive product can or will be used before they have experience using it.

A number of strategists use scenario planning techniques to deal with change. The way Peter
Schwartz put it in 1991 is that strategic outcomes cannot be known in advance so the sources of
competitive advantage cannot be predetermined.[55] The fast changing business environment is
too uncertain for us to find sustainable value in formulas of excellence or competitive advantage.
Instead, scenario planning is a technique in which multiple outcomes can be developed, their
implications assessed, and their likeliness of occurrence evaluated. According to Pierre Wack,
scenario planning is about insight, complexity, and subtlety, not about formal analysis and
numbers.[56]

In 1988, Henry Mintzberg looked at the changing world around him and decided it was time to
reexamine how strategic management was done. [57][58] He examined the strategic process and
concluded it was much more fluid and unpredictable than people had thought. Because of this, he
could not point to one process that could be called strategic planning. Instead Mintzberg
concludes that there are five types of strategies:

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 Strategy as plan – a direction, guide, course of action – intention rather than actual
 Strategy as ploy – a maneuver intended to outwit a competitor
 Strategy as pattern – a consistent pattern of past behaviour – realized rather than intended
 Strategy as position – locating of brands, products, or companies within the conceptual
framework of consumers or other stakeholders – strategy determined primarily by factors
outside the firm
 Strategy as perspective – strategy determined primarily by a master strategist

In 1998, Mintzberg developed these five types of management strategy into 10 ―schools of
thought‖. These 10 schools are grouped into three categories. The first group is prescriptive or
normative. It consists of the informal design and conception school, the formal planning school,
and the analytical positioning school. The second group, consisting of six schools, is more
concerned with how strategic management is actually done, rather than prescribing optimal plans
or positions. The six schools are the entrepreneurial, visionary, or great leader school, the
cognitive or mental process school, the learning, adaptive, or emergent process school, the power
or negotiation school, the corporate culture or collective process school, and the business
environment or reactive school. The third and final group consists of one school, the
configuration or transformation school, an hybrid of the other schools organized into stages,
organizational life cycles, or ―episodes‖. [59]

In 1999, Constantinos Markides also wanted to reexamine the nature of strategic planning
itself.[60] He describes strategy formation and implementation as an on-going, never-ending,
integrated process requiring continuous reassessment and reformation. Strategic management is
planned and emergent, dynamic, and interactive. J. Moncrieff (1999) also stresses strategy
dynamics.[61] He recognized that strategy is partially deliberate and partially unplanned. The
unplanned element comes from two sources: emergent strategies (result from the emergence of
opportunities and threats in the environment) and Strategies in action (ad hoc actions by many
people from all parts of the organization).

Some business planners are starting to use a complexity theory approach to strategy. Complexity
can be thought of as chaos with a dash of order. Chaos theory deals with turbulent systems that
rapidly become disordered. Complexity is not quite so unpredictable. It involves multiple agents
interacting in such a way that a glimpse of structure may appear.

3.7 Information- and Technology-driven Strategy

Peter Drucker had theorized the rise of the ―knowledge worker‖ back in the 1950s. He described
how fewer workers would be doing physical labor, and more would be applying their minds. In
1984, John Naisbitt theorized that the future would be driven largely by information: companies
that managed information well could obtain an advantage, however the profitability of what he
calls the ―information float‖ (information that the company had and others desired) would all but
disappear as inexpensive computers made information more accessible.

Daniel Bell (1985) examined the sociological consequences of information techno logy, while
Gloria Schuck and Shoshana Zuboff looked at psychological factors. [62] Zuboff, in her five year
study of eight pioneering corporations made the important distinction between ―automating

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technologies‖ and ―infomating technologies‖. She studied the effect that both had on individual
workers, managers, and organizational structures. She largely confirmed Peter Drucker's
predictions three decades earlier, about the importance of flexible decentralized structure, work
teams, knowledge sharing, and the central role of the knowledge worker. Zuboff also detected a
new basis for managerial authority, based not on position or hierarchy, but on knowledge (also
predicted by Drucker) which she called ―participative management‖. [63]

In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, borrowed de Geus'
notion of the learning organization, expanded it, and popularized it. The underlying theory is
that a company's ability to gather, analyze, and use information is a necessary requirement for
business success in the information age. (See organizational learning.) To do this, Senge claimed
that an organization would need to be structured such that:[64]

 People can continuously expand their capacity to learn and be productive,

 New patterns of thinking are nurtured,
 Collective aspirations are encouraged, and
 People are encouraged to see the ―whole picture‖ together.

Senge identified five disciplines of a learning organization. They are:

 Personal responsibility, self reliance, and mastery – We accept that we are the masters of our
own destiny. We make decisions and live with the consequences of them. When a problem
needs to be fixed, or an opportunity exploited, we take the initiative to learn the required
skills to get it done.

 Mental models – We need to explore our personal mental models to understand the subtle
effect they have on our behaviour.

 Shared vision – The vision of where we want to be in the future is discussed and
communicated to all. It provides guidance and energy for the journey ahead.

 Team learning – We learn together in teams. This involves a shift from ―a spirit of advocacy
to a spirit of enquiry‖.

 Systems thinking – We look at the whole rather than the parts. This is what Senge calls the
―Fifth discipline‖. It is the glue that integrates the other four into a coherent strategy. For an
alternative approach to the ―learning organization‖, see Garratt, B. (1987).

Since 1990 many theorists have written on the strategic importance of information, including
J.B. Quinn,[65] J. Carlos Jarillo,[66] D.L. Barton,[67] Manuel Castells,[68] J.P. Lieleskin, [69] Thomas
Stewart,[70] K.E. Sveiby,[71] Gilbert J. Probst,[72] and Shapiro and Varian[73] to name just a few.

Thomas A. Stewart, for example, uses the term intellectual capital to describe the investment an
organization makes in knowledge. It is composed of human capital (the knowledge inside the
heads of employees), customer capital (the knowledge inside the heads of customers that decide
to buy from you), and structural capital (the knowledge that resides in the company itself).

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Manuel Castells describes a network society characterized by: globalization, organizations
structured as a network, instability of employment, and a social divide between those with access
to information technology and those without.

Geoffrey Moore (1991) and R. Frank and P. Cook[74] also detected a shift in the nature of
competition. In industries with high technology content, technical standards become established
and this gives the dominant firm a near monopoly. The same is true of networked industries in
which interoperability requires compatibility between users. An example is word processor
documents. Once a product has gained market dominance, other products, even far superior
products, cannot compete. Moore showed how firms could attain this enviable position by using
E.M. Rogers five stage adoption process and focusing on one group of customers at a time, using
each group as a base for marketing to the next group. The most difficult step is making the
transition between visionaries and pragmatists (See Crossing the Chasm). If successful a firm can
create a bandwagon effect in which the momentum builds and its product becomes a de facto
standard.

Evans and Wurster describe how industries with a high information component are being
transformed.[75] They cite Encarta's demolition of the Encyclopædia Britannica (whose sales
have plummeted 80% since their peak of $650 million in 1990). Encarta‘s reign was speculated
to be short-lived, eclipsed by collaborative encyclopedias like Wikipedia that can operate at very
low marginal costs. Encarta's service was subsequently turned into an on-line service and
dropped at the end of 2009. Evans also mentions the music industry which is desperately looking
for a new business model. The upstart information savvy firms, unburdened by cumbersome
physical assets, are changing the competitive landscape, redefining market segments, and dis-
intermediating some channels. One manifestation of this is personalized marketing. Information
technology allows marketers to treat each individual as its own market, a market of one.
Traditional ideas of market segments will no longer be relevant if personalized marketing is
successful.

The technology sector has provided some strategies directly. For example, from the software
development industry agile software development provides a model for shared development
processes.

Access to information systems have allowed senior managers to take a much more
comprehensive view of strategic management than ever before. The most notable of the
comprehensive systems is the balanced scorecard approach developed in the early 1990s by Drs.
Robert S. Kaplan (Harvard Business School) and David Norton (Kaplan, R. and Norton, D.
1992). It measures several factors financial, marketing, production, organizational development,
and new product development to achieve a 'balanced' perspective.

3.8 Knowledge Adaptive Strategy

Most current approaches to business "strategy" focus on the mechanics of management —e.g.,
Drucker's operational "strategies" – and as such are not true business strategy. In a post-industrial

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world these operationally focused business strategies hinge on conventional sources of advantage
have essentially been eliminated:
 Scale used to be very important. But now, with access to capital and a global marketplace,
scale is achievable by multiple organizations simultaneously. In many cases, it can literally
be rented.

 Process improvement or ―best practices‖ were once a favored source of advantage, but they
were at best temporary, as they could be copied and adapted by competitors.

 Owning the customer had always been thought of as an important form of competitive
advantage. Now, however, customer loyalty is far less important and difficult to maintain as
new brands and products emerge all the time.

In such a world, differentiation, as elucidated by Michael Porter, Botten and McManus is the
only way to maintain economic or market superiority (i.e., comparative advantage) over
competitors. A company must OWN the thing that differentiates it from competitors. Without IP
ownership and protection, any product, process or scale advantage can be compromised or
entirely lost. Competitors can copy them without fear of economic or legal consequences,
thereby eliminating the advantage.

This principle is based on the idea of evolution: differentiation, selection, amplification and
repetition. It is a form of strategy to deal with complex adaptive systems which individuals,
businesses, the economy are all based on. The principle is based on the survival of the "fittest".
The fittest strategy employed after trail and error and combination is then employed to run the
company in its current market. Failed strategic plans are either discarded or used for another
aspect of a business. The trade off between risk and return is taken into account when deciding
which strategy to take. Cynefin model and the adaptive cycles of businesses are both good ways
to develop KAS, reference Panarchy and Cynefin. Analyze the fitness landscapes for a product,
idea, or service to better develop a more adaptive strategy.

(For an explanation and elucidation of the "post-industrial" worldview, see George Ritzer and
Daniel Bell.)

3.9 Strategic Decision-making Processes

Will Mulcaster[76] argues that while much research and creative thought has been devoted to
generating alternative strategies, too little work has been done on what influences the quality of
strategic decision making and the effectiveness with which strategies are implemented. For
instance, in retrospect it can be seen that the financial crisis of 2008–9 could have been avoided
if the banks had paid more attention to the risks associated with their investments, but how
should banks change the way they make decisions to improve the quality of their decisions in the
future? Mulcaster's Managing Forces framework addresses this issue by identifying 11 forces
that should be incorporated into the processes of decision making and strategic implementation.
The 11 forces are: Time; Opposing forces; Politics; Perception; Holistic effects; Adding value;
Incentives; Learning capabilities; Opportunity cost; Risk; Style—which can be remembered by
using the mnemonic 'TOPPHAILORS'.

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3.10 The Psychology of Strategic Management

Several psychologists have conducted studies to determine the psychological patterns involved in
strategic management. Typically senior managers have been asked how they go about making
strategic decisions. A 1938 treatise by Chester Barnard, that was based on his own experience as
a business executive, sees the process as informal, intuitive, non-routinized, and involving
primarily oral, 2-way communications. Bernard says ―The process is the sensing of the
organization as a whole and the total situation relevant to it. It transcends the capacity of merely
intellectual methods, and the techniques of discriminating the factors of the situation. The terms
pertinent to it are ―feeling‖, ―judgement‖, ―sense‖, ―proportion‖, ―balance‖, ―appropriateness‖. It
is a matter of art rather than science.‖[77]

In 1973, Henry Mintzberg found that senior managers typically deal with unpredictable
situations so they strategize in ad hoc, flexible, dynamic, and implicit ways. . He says, ―The job
breeds adaptive information-manipulators who prefer the live concrete situat ion. The manager
works in an environment of stimulous-response, and he develops in his work a clear preference
for live action.‖[78]

In 1982, John Kotter studied the daily activities of 15 executives and concluded that they spent
most of their time developing and working a network of relationships that provided general
insights and specific details for strategic decisions. They tended to use ―mental road maps‖ rather
than systematic planning techniques. [79]

Daniel Isenberg's 1984 study of senior managers found that their decisions were highly intuitive.
Executives often sensed what they were going to do before they could explain why. [80] He
claimed in 1986 that one of the reasons for this is the complexity of strategic decisions and the
resultant information uncertainty.[81]

Shoshana Zuboff (1988) claims that information technology is widening the divide between
senior managers (who typically make strategic decisions) and operational level managers (who
typically make routine decisions). She claims that prior to the widespread use of computer
systems, managers, even at the most senior level, engaged in both strategic decisions and routine
administration, but as computers facilitated (She called it ―deskilled‖) routine processes, these
activities were moved further down the hierarchy, leaving senior management free for strategic
decision making.

In 1977, Abraham Zaleznik identified a difference between leaders and managers. He describes
leadershipleaders as visionaries who inspire. They care about substance. Whereas managers are
claimed to care about process, plans, and form. [82] He also claimed in 1989 that the rise of the
manager was the main factor that caused the decline of American business in the 1970s and
80s.The main difference between leader and manager is that, leader has followers and manager
has subordinates. In capitalistic society leaders make decisions and manager usually follow or
execute.[83] Lack of leadership is most damaging at the level of strategic management where it
can paralyze an entire organization. [84]

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In 1997, Elliott Jacques book Requisite organization was published based on his 'Stratified
Systems Theory'. From over 20 years of research Jacques concluded that the strategic leader
works in an increasingly complex, ambiguous, volatile and uncertain environment. Dr Maretha
Prinsloo developed the Cognitive Process Profile (CPP) psychometric from the work of Elliott
Jacques. The CPP is a computer based psychometric which profiles a person's capacity for
strategic thinking. It is used worldwide in selecting and developing people into strategic roles.

According to Corner, Kinichi, and Keats, [85] strategic decision making in organizations occurs at
two levels: individual and aggregate. They have developed a model of parallel strategic decision
making. The model identifies two parallel processes that both involve getting attention, encoding
information, storage and retrieval of information, strategic choice, strategic outcome, and
feedback. The individual and organizational processes are not independent however. They
interact at each stage of the process. For instance, competition-oriented objectives are based on
the knowledge of the financial status of competing firms, such as their market share. [86]

3.11 Limitations of Strategic Management

Although a sense of direction is important, it can also stifle creativity, especially if it is rigidly
enforced. In an uncertain and ambiguous world, fluidity can be more important than a finely
tuned strategic compass. When a strategy becomes internalized into a corporate culture, it can
lead to group think. It can also cause an organization to define itself too narrowly. An example of
this is marketing myopia.

Many theories of strategic management tend to undergo only brief periods of popularity. A
summary of these theories thus inevitably exhibits survivorship bias (itself an area of research in
strategic management). Many theories tend either to be too narrow in focus to build a complete
corporate strategy on, or too general and abstract to be applicable to specific situations. Populism
or faddishness can have an impact on a particular theory's life cycle and may see application in
inappropriate circumstances. See business philosophies and popular management theories for a
more critical view of management theories.

In 2000, Gary Hamel coined the term strategic convergence to explain the limited scope of the
strategies being used by rivals in greatly differing circumstances. He lamented that strategies
converge more than they should, because the more successful ones are imitated by firms that do
not understand that the strategic process involves designing a custom strategy for the specifics of
each situation.[46]

Ram Charan, aligning with a popular marketing tagline, believes that strategic planning must not
dominate action. "Just do it!" while not quite what he meant, is a phrase that nevertheless comes
to mind when combatting analysis paralysis.

3.12 The Linearity Trap

It is tempting to think that the elements of strategic management – (i) reaching consensus on
corporate objectives; (ii) developing a plan for achieving the objectives; and (iii) marshalling and
allocating the resources required to implement the plan – can be approached sequentially. It

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would be convenient, in other words, if one could deal first with the noble question of ends, and
then address the mundane question of means.

But in the world where strategies must be implemented, the three elements are interdependent.
Means are as likely to determine ends as ends are to determine means.[87] The objectives that an
organization might wish to pursue are limited by the range of feasible approaches to
implementation. (There will usually be only a small number of approaches that will not only be
technically and administratively possible, but also satisfactory to the full range of organizational
stakeholders.) In turn, the range of feasible implementation approaches is determined by the
availability of resources.

And so, although participants in a typical ―strategy session‖ may be asked to do ―blue sky‖
thinking where they pretend that the usual constraints – resources, acceptability to stakeholders,
administrative feasibility – have been lifted, the fact is that it rarely makes sense to divorce
oneself from the environment in which a strategy will have to be implemented. It‘s probably
impossible to think in any meaningful way about strategy in an unconstrained environment. Our
brains can‘t process ―boundless possibilities‖, and the very idea of strategy only has meaning in
the context of challenges or obstacles to be overcome. It‘s at least as plausible to argue that acute
awareness of constraints is the very thing that stimulates creativity by forcing us to constantly
reassess both means and ends in light of circumstances.

The key question, then, is, "How can individuals, organizations and societies cope as well as
possible with ... issues too complex to be fully understood, given the fact that actions initiated on
the basis of inadequate understanding may lead to significant regret?"[88]

The answer is that the process of developing organizational strategy must be iterative. Such an
approach has been called the Strategic Incrementalisation Perspective. [89] It involves toggling
back and forth between questions about objectives, implementation planning and resources. An
initial idea about corporate objectives may have to be altered if there is no feasible
implementation plan that will meet with a sufficient level of acceptance among the full range of
stakeholders, or because the necessary resources are not available, or both.

Even the most talented manager would no doubt agree that "comprehensive analysis is
impossible" for complex problems. [90] Formulation and implementation of strategy must thus
occur side-by-side rather than sequentially, because strategies are built on assumptions that, in
the absence of perfect knowledge, are never perfectly correct. Strategic management is
necessarily a "...repetitive learning cycle [rather than] a linear progression towards a clearly
defined final destination."[91] While assumptions can and should be tested in advance, the
ultimate test is implementation. You will inevitably need to adjust corporate objectives and/or
your approach to pursuing outcomes and/or assumptions about required resources. Thus a
strategy will get remade during implementation because "humans rarely can proceed
satisfactorily except by learning from experience; and modest probes, serially modified on the
basis of feedback, usually are the best method for such learning."[92]

It serves little purpose (other than to provide a false aura of certainty sometimes demanded by
corporate strategists and planners) to pretend to anticipate every possible consequence of a

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corporate decision, every possible constraining or enabling factor, and every possible point of
view. At the end of the day, what matters for the purposes of strategic management is having a
clear view – based on the best available evidence and on defensible assumptions – of what it
seems possible to accomplish within the constraints of a given set of circumstances. [citation needed]
As the situation changes, some opportunities for pursuing objectives will disappear and others
arise. Some implementation approaches will become impossible, while others, previously
impossible or unimagined, will become viable.

The essence of being ―strategic‖ thus lies in a capacity for "intelligent trial-and error"[93] rather
than linear adherence to finally honed and detailed strategic plans. Strategic management will
add little value—indeed, it may well do harm—if organizational strategies are designed to be
used as a detailed blueprints for managers. Strategy should be seen, rather, as laying out the
general path—but not the precise steps—an organization will follow to create value.[94] Strategic
management is a question of interpreting, and continuously reinterpreting, the possibilities
presented by shifting circumstances for advancing an organization's objectives. Doing so
requires strategists to think simultaneously about desired objectives, the best approach for
achieving them, and the resources implied by the chosen approach. It requires a frame of mind
that admits of no boundary between means and ends.

It may not be so limiting as suggested in "The linearity trap" above. Strategic thinking/
identification takes place within the gambit of organizational capacity and Industry dynamics.
The two common approaches to strategic analysis are value analysis and SWOT analysis. Yes
Strategic analysis takes place within the constraints of existing/potential organizational resources
but its would not be appropriate to call it a trap. For e.g., SWOT tool involves analysis of the
organization's internal environment (Strengths & weaknesses) and its external environment
(opportunities & threats). The organization's strategy is built using its strengths to exploit
opportunities, while managing the risks arising from internal weakness and external threats. It
further involves contrasting its strengths & weaknesses to determine if the organization has
enough strengths to offset its weaknesses. Applying the same logic, at the external level, contrast
is made between the externally existing opportunities and threats to determine if the organization
is capitalizing enough on opportunities to offset emerging threats.

3.13 Putting Creativity and Innovation into Strategy

Given that companies of all sizes are competing on the global stage, and the pace of change and
level of complexity have skyrocketed in the last decade, creative strategy development is needed
more than ever. In 2010, IBM released a study summarizing three conclusions of 1500 CEOs
around the world: 1) complexity is escalating, 2) enterprises are not equipped to cope with this
complexity, and 3) creativity is now the single most important leadership competency. IBM said
that it is needed in all aspects of leadership, including strategic thinking and planning. [95]

James Bandrowski declared in 1990 that strategy development should no longer be just an
analytical exercise, but should be highly creative with an aim to conceiving and executing an
innovative strategy that creates competitive distinction and elates customers. [96] He introduced a
sine wave approach that amplifies the strategic thinking of all participants in the development
and execution of strategy. It can be used at the corporate level, for every function in the

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organization, as well as in mergers, acquisitions, divestitures, and turnarounds. He states, the
bigger the amplitude (measure of the height and depth of a sine wave) of one‘s thinking and
feeling, the greater the chance of value-added breakthrough thinking and achieving stretch goals.
In 2009, he declared that a small amplitude both positively and negatively in one‘s thinking is
the metaphorical ―box‖ in thinking outside the box.

Similarly, Mckeown argued that "over-reliance on any particular approach to strategy is

dangerous" such that multiple methods can be used to combine the "creative human side" with
the "more analytic side of strategy" in order to create strategy, or an "approach to shaping the
future", that is "difficult to copy" [97]. He recommends introducing both approaches to leaders,
organisations and teams and discussing how best to alter the balance in the future.

4.0 CONCLUSION

We learnt from the discussion in this unit that strategic management discipline originated in the
1950s and 60s with numerous early contributors to the literature such as Alfred D. Chandler,
Philip Selznick, Igor Ansoff, and Peter Drucker. The discipline draws from earlier thinking and
texts on 'strategy' dating back thousands of years.

5 SUMMARY

In this unit, we have, traced the Birth of Strategic Management; discussed the Growth and
Portfolio Theory; the Marketing Revolution and the Japanese Challenge; defined Competitive
Advantage; explained the Military Theorists in relation to strategic management; Strategic
Change; Information and Technology-driven Strategy and Knowledge Adaptive Strategy in
relation to strategic management; Strategic Decision-making Strategy; Psychology of Strategic
Management; Limitations to Strategic Management; Linearity Trap‘ and discussed what is meant
by Putting Creativity and Innovation into Strategy.

In the next unit, we shall examine hierarchy of strategic intent.

6.0 TUTOR-MARKED ASSIGNMENT

1. What is psychology of strategic management? How would you compare this with
strategic decision making?

2. Explain what is meant by information and technology-driven strategy and compare this
with knowledge adaptive strategy in relation to strategic management.

7.0 REFERENCES/FURTHER READINGS

Nag, R.; Hambrick, D. C.; Chen, M.-J (2007) What is strategic management? Inductive
derivation of a consensus definition of the field Strategic- Management Journal Volume 28, Issue
9, pages 935–955, September.

Lamb, Robert, Boyden Competitive strategic management, Englewood Cliffs, NJ: Prentice-Hall,

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Johnson, G, Scholes, K, Whittington, R (1984) Exploring Corporate Strategy, 8th Edition, FT
Prentice Hall, Essex, 2008, ISBN 978-0-273-71192-6

Chandler, Alfred (1957) Strategy and Structure: Chapters in the history of industrial enterprise,
Doubleday, New York, 1962.

Selznick, Philip (1957) Leadership in Administration: A Sociological Interpretation, Row,

Peterson, Evanston Il..

Drucker, Peter (1969) The Age of Discontinuity, London, Heinemann,

Mintzberg, Henry (1988) ―Crafting Strategy‖, Harvard Business Review, July/August. Mintzberg,

Henry and Quinn, J.B. (1988) The Strategy Process, Prentice-Hall, Harlow. Mintzberg, H.

Ahlstrand, B. and Lampel, J. (1998) Strategy Safari : A Guided Tour Through the
Wilds of Strategic Management, The Free Press, New York,.

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MODULE 3 STRATEGY FORMULATION

Unit 1 Hierarchy of Strategic Intent

Unit 2 Environmental Appraisal
Unit 3 Organizational Appraisal
Unit 4 Strategic Analysis and Choice

UNIT 1: HIERARCHY OF STRATEGIC INTENT

Table of Contents

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Strategic Intent
3.2 Vision
3.3 Mission Statement
3.4 Business Definition
3.5 Product/Service Concept
3.6 Goals and Objectives
3.7 Critical Success Factors
3.8 Key Performance Indicators (KPIs)
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1 INTRODUCTION

In the last unit, we discussed the historical development of Strategic Management including
Strategic Change; Information and Technology-driven Strategy; Knowledge Adaptive Strategy;
Strategic Decision-making Strategy; Psychology of Strategic Management; Limitations to
Strategic Management; Linearity Trap‘ and Putting Creativity and Innovation into Strategy.

In this unit, we shall introduce you to the first phase of the strategic management process, that is,
the hierarchy of intent.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 explain the concepts of strategic intent, stretch, leverage and fit;

 describe evaluate the concept of vision and mission in business
 describe the role, process and characteristics of objectives
 distinguish between well-formulated and badly-formulated objectives;
.

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3.0 MAIN CONTENT

Strategic intent is a high-level statement of the means by which your organization will achieve
its vision. It is a statement of design for creating a desirable future (stated in present terms).
Putting it simple, a strategic intent is your company's vision of what it wants to achieve in the
long term. In complex science terms, strategic intent is decomposition of exploration rules into
the next level of detail, the linkages to the exploration rules and the transition rules that define
how it will migrate from its current design and ecosystem to a future business design and
ecosystem. At the same time, strategic intent is more than simply unfettered ambition. (Many
companies possess an ambitious strategic intent yet fall short of their goals). The concept also
encompasses an active management process that includes: focusing the organisation‘s attention
on the essence of winning, motivating people by communicating the value of the target; leaving
room for individual and team contributions; sustaining enthusiasm by providing new operational
definitions as circumstances change; and using intent consistently to guide resource allocations.

3.1 Definition of Strategic Intent

By strategic intent, we refer to the purposes the organisation strives for. These may be expressed
in terms of a hierarchy of strategic intent. Broadly stated, these could be in the form of a vision
and mission statement for the organisation as a corporate whole. At the business level of a firm
these could be expressed as the business definition. When stated in precise terms, as an
expression of the aims to be achieved operationally, these may be the goals and objectives.
3.1.1 Understanding Strategic Intent
Hamel and Prahalad coined the term ‗strategic intent‘ which they believe is an obsession with an
organisation – an obsession with having ambitious that may even be out of proportion to their
resources and capabilities. This obsession is to win at all levels of the organisation while
sustaining that obsession in the quest for global leadership. They explain the term ‗strategic
intent‘ like this: ―On the one hand, strategic intent envisions a desired leadership position and
establishes the criterion the organisation will use to chart its progress…. At the same time,
strategic intent is more than simply unfettered ambition…. The concept also encompasses an
active management process that includes: focusing the organisation‘s attention on the essence of
winning, motivating people by communicating the value of the target, leaving room for
individual and team contributions, sustaining enthusiasm by providing new operational
definitions as circumstances change and using intent consistently to guide resource allocations‖ .
They quoted several examples of global firms, almost all of American and Japanese origin, to
support their view. In fact, the concept of strategic intent – as evident from their path-breaking
article, published in 1989 in the Harvard Business Review – seems to have been proposed by
them to explain the lead taken by Japanese firms over their American and European counterparts.
Yet, strategic intent has wider implications and carries a lot of meaning for the strategic
management of firms. There is merit in their view as business groups and companies, which
have aspired for global leadership can be found in the Indian context too (Azhar, 2002).

3.1.2 Concepts of Stretch, Leverage and Fit

Subsequent to the idea of strategic intent, Hamel and Prahalad had added the dual concepts of
‗stretch‘ and ‗leverage‘. Stretch is ―a misfit between resources and aspirations‖ (Hamel and

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Prahalad, 1989). Leverage refers to concentrating, accumulating, complementing, conserving,
and recovering resources in such a manner that a meagre resource base can be stretched to meet
the aspirations that an organisation dares to have. The idea of stretch is diametrically opposite to
the idea of ‗fit‘ that means positioning the firm by matching its organisational resources to its
environment. The strategic fit is central to the strategy school of positioning where techniques
such as SWOT analysis are used to assess organisational capabilities and environmental
opportunities. Strategy then becomes a compromise between what the environment has got to
offer in terms of opportunities and the counteroffer that the organisation makes in the form of is
capabilities. The ideas of stretch and leverage belong appropriately to the learning school of
strategy where the capabilities are not seen as constraints to achieving, and the environment is
perceive not as something which is considered as given but as something which can be created
and moulded. You would appreciate that the idea of strategic intent could work in both cases
though it might be perceptively different in terms of the levels at which aspirations are set.
Under fit, the strategic intent would seem to be more realistic; under stretch and leverage it could
be idealistic. Yet, in both cases, it is essentially a desired aim to be achieved.

We can therefore define strategic intent as the hierarchy of intentions ranging from a broad
vision through mission and business definition down to specific objectives and goals. Vision is
at the top level of the hierarchy of strategic intent and that is what we try to understand in the
next section.

3.2 Vision

Aspirations, expressed as strategic intent, should lead to an end; otherwise they would just be
castles in the air. That end is the vision of an organisation or an individual. It is what the firm or
a person would ultimately like to become. For instance, some of you, say in 10 years, or may be
even earlier, would like to become general managers managing an SBU in a large, diversified
multinational corporation. Or some others among you would like to believe that you will be an
entrepreneur in 10 – 15 years owning your own company dealing with IT services and
employing cutting-edge technology to serve a global clientele. A firm thinks like that too.

3.2.1 Understanding Vision

A vision is more dreamt of than it is articulated. This is the reason why it is difficult to say what
vision an organisation has. Sometimes it is not even evident to the entrepreneur who usually
thinks of the vision. By its nature, it could be as hazy and vague as a dream that one experienced
the previous night and is not able to recall perfectly in broad daylight. Yet it is a powerful
motivator to action. And it is from the actions that a vision could often be derived (Azhar,
2002). Henry Ford wished to democratize the automobile when he visualized that an affordable
vehicle could be available for the masses. Walt Disney probably wanted to make people happy.

3.2.2 Defining Vision

Vision has been defined in several different ways. Kottre (1990) defines it as a ―description of
something (an organisation, corporate culture, a business, a technology, an activity) in the
future‖. El-Namaki (1992) considers it as a ―mental perception of the kind of environment an
individual, or an organisation, aspires to create within a broad time horizon and the underlying
conditions for the acutalisation of this perception‖. Miller and Dess (1966) view it simply as the

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―category of intentions that are broad, all-inclusive, and forward thinking‖. The common strand
of thought evident in these definitions and several others available in strategic management
literature relates to ‗vision‘ being future aspirations that lead to an inspiration to be the best in
one‘s field of activity.

3.2.3 Benefits of Having a Vision

Parikh and Neubauer (1993) point out the several benefits accruing to an organisation having a
vision. Here is what they say:
 Good visions are inspiring and exhilarating;
 Visions represent a discontinuity, a step function and a jump ahead so that the company
knows what it is to be;
 Good visions help in the creation of a common identity and a shared sense of purpose;
 Good visions are competitive, original and unique. They make sense in the marketplace as
they are practical;
 Good visions foster risk-taking and experimentation;
 Good visions foster long-term thinking;
 Good visions represent integrity, they are truly genuine and can be used for the benefit of
people.

3.2.4 The Process of Envisioning

The process of envisioning is a difficult one as we see from what Collins and Porras (1996) have
to say about it. According to them, a well-conceived vision consists of two major components:
core ideology and envisioned future. The core ideology defines the enduring character of an
organisation that remains unchangeable as it passes through the vicissitudes of vectors, such as,
technology, competition, or management fads. The core ideology rests on the core values (the
essential and enduring tenets of an organisation) and core purposes (an organisation‘s reason for
being). The envisioned future too consists of two components: a 10 – 30 years audacious goal,
and a vivid description of what it will be like to achieve that goal. The process of envisioning is
indeed fascinating.
Figure showing the Process of envisioning
Well-conceived vision

Core ideology Envisioned future

Core values Long-term audacious goal

Core purpose Vivid description of achievement

Source: Based on ideas in J. Parikh and F. Neubauer, ‗Corporate Visioning‘ International

Review of Strategic Management. Vol. 4, Ed; D.E. Hussey, West Sussex,
England, John Wiley & Sons, 1993, pp. 109 – 111.

From vision, we now move on to the second level of strategic intent that is the mission.

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Self Assessment Exercise 1

1. What is meant by ‗strategic intent‘?

2. Give brief explanations of each of these concepts: (a) stretch, (b) leverage, and (c) fit.

3.3 Mission

While the essence of vision is a forward-looking view of what an organisation wishes to become,
mission is what an organisation is and why it exists. Several years ago, Peter F. Drucker raised
important philosophical questions, though simply worded, are in reality the most fundamental
questions that any organisation can put to itself. The answers are based on the analysis of the
underlying needs of the society that any organisation serves to fulfill. The satisfaction of that
need is, then, the business of the organisation.

3.3.1 Understanding Mission

Organisations relate their existence to satisfying a particular need of the society. They do this in
terms of their mission. Mission is a statement which defines the role that an organisation plays
in a society. It refers to the particular needs of that society, for instance, its information needs.
A book publisher and a magazine editor are both engaged in satisfying the information needs of
society but they do it through different means. A book publisher may aim at producing excellent
reading material while a magazine editor may strive to present news analysis in a balanced and
unbiased manner. Both have different objectives but an identical mission.

3.3.2 Defining Mission

A mission was earlier considered as the scope of the business activities a firm pursues. The
definition of mission has gradually expanded to represent a concept that embodies the purpose
behind the existence of an organisation. Thompson (1997) defines mission as the ―essential
purpose of the organisation, concerning particularly why it is in existence, the nature of the
businesses it is in, and the customers it seeks to serve and satisfy‖. Hunger and Wheelen (1999)
say that mission is the ―purpose or reason for the organisation‘s existence‖. This an indication
that there is not much difference of opinion about he definition of mission. Yet, one finds
instances of organisations confusing mission with vision or objectives. In strategic management
literature, mission occupies a definite place as a part of strategic intent.

3.3.3 How are Mission Statements Formulated?

Most organisations derive their mission statements from a particular set to tasks they are called
upon to perform in the light of their individual, national or global priorities. Several
organisations, set up owe their existence to their prime movers. Mission statements, whether
derived from set priorities or not, could be formulated either formally or informally. Usually,
entrepreneurs lay down the corporate philosophy which an organisation follows in its strategic
and operational activities. Such a philosophy may not be consciously and formally stated but
may gradually evolve due to the entrepreneur‘s actions. Generally, an entrepreneur has a
perception of the type of organisation that he wants his company to be. Mission statements
could be formulated on the basis of the vision that an entrepreneur decides on in the initial stages
of an organisation‘s growth.

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Major strategists could also contribute to the development of a mission statement. They do this
informally by lending a hand in the creation of a particular corporate identity or formally through
discussions and the writing down of a mission statement. Chief executives play a major role in
formulating a mission statement both formally and informally. They may set up executive
committees to formally discuss and decide on a mission statement or enunciate a corporate
philosophy to be followed for strategic management. Consultants may also be called upon to
make an in-depth analysis of the organisation to suggest an appropriate mission statement.

A mission statement, once formulated, should serve an organisation for many years. But a
mission may become unclear as the organisation grows and adds new products, markets and
technologies to its activities. Then the mission has to be reconsidered and reexamined to either
change or discard it, and evolve a fresh statement of organisational mission.

3.3.4 Characteristics of a Mission Statement

Organisations legitimize themselves by performing some functions which are valued by society.
A mission statement defines the basic reason for the existence of that organisation. Such a
statement reflects the corporate philosophy, identity, character, and image of an organisation. It
may be defined explicitly or could be deduced from the management‘s actions, decisions, or the
chief executive‘s press statements. When explicitly defined it provides enlightenment to the
insiders and outsiders on what the organisation stands for. In order to be effective, a mission
statement should possess the following seven characteristics:

1. It should be feasible. A mission should always aim high but it should not be an impossible
statement. It should be realistic and achievable – its followers must find it to be credible.
But feasibility depends on the resources available to work towards a mission.

2. It should be precise. A mission statement should not be so narrow as to restrict the

organisation‘s activities nor should it be too broad to make itself meaningless. For instance,
‗Manufacturing bicycles‘ is a narrow mission statement since it severely limits the
organisation‘s activities, while ‗mobility business‘ is too broad a term as it does not define
the reasonable contour within which the organisation could operate.

3. It should be clear. A mission should be clear enough to lead to action. It should not be a
high-sounding set of platitudes meant for publicity purposes. Many organisations do adopt
such statements but probably they do so for emphasizing their ident ity and character. To be
useful, a mission statement should be a clear enough to lead to action.

4. It should be motivating. A mission statement should be motivating for members of the

organisation and of society, and they should feel it worthwhile working for such an
organisation or being its customers. A bank which lays great emphasis on customer service
is likely to motivate its employees to serve its customers well and to attract clients.
Customer service, therefore, is an important purpose for a banking institution.

5. It should be distinctive. A mission statement which is indiscriminate is likely to have little

impact. If all textile manufacturers defined their mission in a similar fashion, there would

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 not be much of a difference among them. But if one defines it as providing textiles that
would provide ‗value for money, for years‘ it will create an important distinction in the
public mind.

6. It should indicate major components of strategy. A mission statement, along with the
organisational purpose should indicate the major components of the strategy to be adopted.
The mission statement should indicate a combination of stability, growth and diversification
strategies in the future.

7. It should indicate how objectives are to be accomplished. Besides indicating the broad
strategies to be adopted, a mission statement should also provide clues regarding the manner
in which the objectives are to be accomplished. The mission statement should deal with the
objectives to be achieved within a given time period.

In day-to-day decision-making, managers are not concerned about survival and, therefore, do not
actively think about their organisation‘s mission for society. Thus, a mission statement becomes
an ideology that can be used occasionally for legitimization. But, for strategic decision-making it
is important to consider the mission in each phase of the strategic management process. A
helpful approach to defining as well as refining a mission statement is to define the business
itself.

Self Assessment Exercise 2

1. What are the possible pitfalls of not having a vision for an organisation?
2. Define ‗mission‘ in your own words.
3. Mention the characteristics of a good mission statement.

3.4 Business Definition

Understanding business is vital to defining it and answering the question ‗What is our business?‘
It could also be a pointer to the answers to the questions: ‗What will it be?‘ and ‗What should it
be?‘ Mission statements can use the ideas generated through the process of understanding and
defining business.

3.4.1 Defining Business

A watch manufacturing company may call itself the ‗timekeepers to the nation‘. The following
illustrative diagram can be helpful in understanding business. in this diagram, we have
attempted to relate societal needs to the business of timekeeping.

Each successive step provides alternative ways through which the timekeeping needs of ht
society could be satisfied. Consider the following illustrative examples:

 Wristwatches could be of different types, for example, ladies‘, men‘s, children‘s, and sports
watches. Ladies‘ wristwatches could be either utility or ornamental watches.
 Other types of watches could be timepieces, wall clocks, and pocket watches.
 Other products could be an hourglass or a sundial.

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 Specialty watches could be video-timers, calculator watches, and car clocks.
 Consumer non-durables could be time-punching machines and stop watches.
 Services could be telephone or teletext time services.
 Other organisations which roughly meet the timekeeping needs could be, for instance, a
church bell chiming at appointed hours, or a call to the faithful from mosques.

All the above options or their combinations, lead to the satisfaction of the timekeeping needs of a
society. Four other variables are useful in understanding the business of timekeeping. These
are:

1. The functions which watches can perform, such as, providing the time, day, date, and
direction.
2. Customer needs satisfied by actions like finding time, recording time, using watches as
fashionable accessories, and presenting them as gift items.

3. End usages, like, direct use by customers, and indirect use, as subassemblies in the form of
watch and clock movements, by industry.

4. The technology used, based on mechanical, quartz digital or quartz analog manufacturing.

All the above options and variables are, however, relevant to the current ‗state of the art‘. The
timekeeping business could change radically if a breakthrough occurs any time in the future. For
instance, if it could somehow be possible to embed sensors in the human brain that would enable
a person to just know and feel the time rather than finding time by looking at a watch,
timekeeping could become just another neurological function. The implications of such a
breakthrough for society and business are exciting. Naming just two of these, we could say that
visually-challenged persons could benefit a lot by such a technological advancement, and the
business of timekeeping would never be the same: all timekeeping equipment that we use today
could face the risk of becoming redundant. The business of timekeeping is, therefore, certainly
not making more, better, sophisticated and a variety of watches but providing the means –
whatever they might be – to simply know the time.

Graphical Picture

Society

Other
Business organisations
organisations

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 Products Services

Consumer Industrial
goods goods

Consumer Consumer
durables non-durables

Non-specialty Specialty
goods goods

Chronometers Other
products

Wristwatches Other types

of watches

Drawing an example from the above graphical picture, it can be said that a particular company
providing only ladies wristwatches of utility and ornamental types using the quartz analogue
technology could define its business in one way. Another company, a government supplier, may
choose to make mechanical wall clocks. Both the companies are in the timekeeping business but
they cater to different customer groups, provide different customer functions, and use alternative
technologies.

3.4.2 Dimensions of Business Definition

In a path-breaking analysis, Derek Abell suggests defining business along the three dimensions
of customer groups, customer functions, and alternative technologies. Customer gro ups relate to
‗who‘ is being satisfied, customer needs describe ‗what‘s being satisfied, and alternative
technologies means ‗how‘ the need is being satisfied (). The figure below presents a
diagrammatic view of these three dimensions.

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Figure: Abell‟s Three Dimensions for Defining a Business

Customer Function
(Utility/Ornamental)
Alternative Technologies
(Mechanical/Quartz technology)

Customer Groups
(Children, men or women)

Customer groups are created according to the identity of the customers. Customer functions are
based on what the products or services provide to the customers. Alternative technologies
describe the manner in which a particular functional can be performed for a customer.

Applying Abell‘s three-dimensional model to the illustration of timekeeping business, we could

identify the three dimensions as follows:

1. Customers groups are individual customers and industrial users.

2. Customer functions are of finding time, recording time, using watches as a fashionable
accessory, and as a gift item.
3. Alternative technologies are of the mechanical, quartz digital, and quartz analogue types.

Such a clarification helps in defining a business explicitly. A clear business definition is helpful
for strategic management in many ways. For instance, a business definition can indicate the
choice of objectives, help in exercising a choice among different strategic alternatives, facilitate
functional policy implementation, and suggest appropriate organisational structure. A watch
manufacturer who makes ladies watches of the utility type could extend its business definition
along the customer dimension and make ornamental watches also. It could also diversify further
by moving into the manufacture of wall clocks. Having decided to manufacture ornamental
watches may require a production-to-order system of manufacturing. Technological choice will
vary from making mechanical hand-wound watches to making battery-operated quartz digital
watches, which are two entirely different processes. We could, of course, go on pointing out
various other implications of defining a business along these three dimensions. In sum, we can
observe that the model provides powerful insights into understanding and defining business.

3.4.3 Levels at which Business could be Defined

Like strategy, business could either be defined at the corporate-or SBU-levels. A single-business
firm is active in just one area so its business definition is simple. A large conglomerate operating
in several businesses would have a separate business definition for each of its businesses.

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Rather, as Hill and Jones (1998) suggest, a diversified company‘s business is to manage a
collection of businesses. The important question here is how a corporate business adds value to
the constituent businesses of that company.

At the corporate level, the business definition will concern itself with the wider meaning of
customer groups, customer functions, and alternative technologies. A highly diversified
company organised on a divisional basis could benefit by having a business definition covering
all the three definitions. Each division could again have more accurate business definition at the
SBU-level. For example, Voltas Limited broadly performs the customer functions of trading and
manufacturing a large variety of items from agro-industrial pumps to textile machinery, catering
to two broad customer groups of individual and institutional customers, and using diverse
technologies for manufacturing switchgears and transformers as well as pesticides. In fact such
is the diversity in its operations, that observers attribute many problems that occur at Voltas to a
hazy and ill-defined business definition.

When a company takes up activities outside the domain of its business definitions, it generally
faces the accompanying risk of adding new businesses, divisions or products unrelated to its
present activities and at variance with its corporate identity. This crisis of identity is a serious
problem which results either in inefficiency or ineffectiveness. On the other hand, if the various
acquisition, growth and diversification plans of a company are linked through a business
definition, it results in a considerable amount of synergy (more commonly known as ‗the two -
plus-two-is-equal-to-five effect‘). An example of such a company is ITC Limited, which
believes in the ‗professional management of planned growth‘ through a ‗pursuit of excellence‘
by operating in the areas of agro-industry, packaging and printing, pulp and paper – seemingly
diverse but intrinsically related to its main activity of cigarette manufacturing. Incidentally, ITC
defines its SBU-level mission for its cigarette division as ‗making a quality product that will
offer the smoker satisfaction at a price he can afford‘.

Self Assessment Exercise 3

1. Explain the three dimensions of a business definition.

3.4.4 Business Model

The Internet boom and bust of the 1990s revitalized the term ‗business model‘. Though not
expressing a novel thought, it has become quite a popular term now and used frequently to
express a number of ideas, among them ‗creation and marketing of value‘ being the major theme.
The success of Wal-Mart as a retailer, Google as a search engine, Dell Computers as an Internet -
based marketer or Amazon.com as a virtual book seller is attributed to their respective business
models.

Colloquially, business models are often expressed in the form of a question: how does the
organisation make money? E-newspapers are able to offer free Internet editions on account of
the online advertisement revenues they earn from the advertisers. A kirana dukan (provision
store) owner buys commodities and products at a price and then, applying a mark-up, sells them
at retail prices thus earning revenue and profit. Budget airlines share certain features such as e-

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ticketing, no-frills service and uniformity in the types of planes used. Each of these
organisations is using a particular business model.

Formally, a business model could be defined as ‗a representation of a firm‘s underlying core

logic and strategic choices for creating and capturing value within a value network ( ).

Business models have an intimate relationship with the strategy of an organisation. Strategies
result in choices; a business model can be used to help analyse and communicate these strategic
choices. Companies in the same industry, competing with each other, can rely on different
models as a matter of strategic choice. Tata Consultancy Services adopts a traditional fixed-
price, fixed-time business model, where payments by clients are based on time related
milestones. Infosys and Wipro have a time and material business model where clients pay on an
ongoing basis, depending on the amount of work done rather than the time elapsed ( ).

From the abstraction that strategies actually are, business models are down-to-earth prescriptions
to implement the strategies. Strategies are not expected to answer the question: how to make
money? Business model can enable us to do precisely that.

The vision, mission, business definition, product/service concept and business model serve to
determine the basic philosophy that is adopted by an organisation in the long-run. To realize its
vision and mission and achieve its strategic intent, any organisation will have to set goals and
objectives to be pursued in the medium and short run.
3.5 The Product/Service Concept

Like the business definition, an explicit product/service concept could have far-reaching
implications for strategic management. A product/service concept is the manner in which a
company perceives its product or service. Such a perception is based on how the product or
service provides functions that satisfy customer needs.
A product/service concept, when defined carefully and innovatively, can prove to be of
significant worth to strategists in different phases of strategic management. An explicit business
definition and product/service concept are powerful tools for strategic management.

The vision, mission, business definition, and product/service concept serve to determine the
basic philosophy that is adopted by an organisation in the long-run. To realise its mission and to
achieve its intent, any organisation will have to set goals and objectives to be pursued in the short
run. The section deals with objectives and goals.

Self Assessment Exercise 4

1. Relate the product/service concept to the strategic intent of an organisation.

3.6 Goals and Objectives

Goals denote what an organisation hopes to accomplish in a future period of time. They
represent a future state or an outcome of the effort put in now. A broad category of financial and
non-financial issues are addressed by the goals that a firm sets for itself.

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Objectives are the ends that state specifically how the goals shall be achieved. They are co ncrete
and specific in contrast to goals which are generalised. In this manner, objectives make the goals
operational. While goals may be qualitative, objectives tend to be mainly quantitative in
specification. In this way they are measurable and comparable.In strategic management
literature, there has been confusion with regard to the usage of these terms: goals and objectives.
The meaning assigned to these terms is sometimes in contrast to what we have adopted here.
Also, often they are used interchangeably. Goals connote the broader sense of the term
objectives. However, we would prefer to use only the term objective to denote both. After all, it
must be remembered that objectives are the manifestations of goals, whether quantified and
specifically stated or not. Besides, it is more convenient to use one term rather than both every
time one refers to a future state or the outcome of an effort.

Any organisation shall always have a potential set of goals. It has to exercise a choice from
among these goals. This choice must be further elaborated and expressed in terms of operational
and measurable objectives.

3.6.1 Roles of Objectives

Objectives play an important role in strategic management. We could identify the various facets
of such a role as shown below:
 Objectives define the organisation’s relationship with its environment. By stating its
objectives, an organisation commits itself to what it has to achieve for its employees,
customers and society at large.
 Objectives help an organisation to pursue its vision and mission. By defining the long-term
position that an organisation wishes to attain and the short-term targets to be achieved,
objectives help an organisation in pursuing its vision and mission.

 Objectives provide the basis for strategic decision-making. By directing the attention of
strategists to those areas where strategic decisions need to be taken, objectives lead to
desirable standards of behaviour and, in this manner, help to coordinate strategic decision-
making.

 Objectives provide the standard for performance appraisal. By stating the targets to be
achieved in a given time period and the measures to be adopted to achieve them, objectives
lay down the standards against which organisational as well as well individual performance
could be judged. In the absence of objectives, an organisation would have no clear and
definite basis for evaluating its performance.

Managers who set objectives for themselves and their organisations are most likely to achieve
them than those who do not specify their performance targets.

3.6.2 Characteristics of Objectives

Objectives, as measures of organisational behaviour and performance, should possess certain
desirable characteristics in order to be effective. Given below are seven such characteristics.

1. Objectives should be understandable. Because objectives play an important role in strategic

management and are put to use in a variety of ways, they should be understandable to those

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 who have to achieve them. A chief executive who says that ‗something ought to be done to
set things right‘ is not likely to be understood by his managers. Subsequently, no action will
be taken, or even a wrong action might be taken.
2. Objectives should be concrete and specific. To say that our company plans to achieve a 12
percent increase its sales‘ is certainly better than stating that our company seeks to increase
its sales‘. The first statement implies a concrete and specific objective and is more likely to
lead and motivate the managers.
3. Objectives should be related to a timeframe. If the first statement given above restated as
our company plans to increase its sales by 12 percent by the end of two years‘, it enhances
the specificity of the objective. If objectives are related to a timeframe, then managers know
the duration within which they have to be achieved.
4. Objectives should be measurable and controllable. Many organisations perceive themselves
as companies which are attractive to work for. If measures like the number and quality of
job applications received, average emoluments offered, or staff turnover per year could be
devised, it would be possible to measure and control the achievement of this objective with
respect to comparable companies in a particular industry, and in general.
5. Objectives should be challenging. Objectives that are too high or too low are both
demotivating and, therefore, should be set at challenging but not unrealistic levels. To set
high sales targets in a declining market does not lead to success. Conversely a low sales
target in a burgeoning market is easily achievable and, therefore, leads to a suboptimal
performance.
6. Different objectives should correlate with each other. Organisations set many objectives in
different areas. If objectives are set in one area disregarding the other areas such an action is
likely to lead to problems. A classic dilemma in organisations, and a source of
interdepartmental conflicts, is setting sales and production objectives. Marketing
departments typically insist on a wider variety of products to cater to a variety of market
segments while production departments generally prefer to have greater product uniformity
in order to have economies of scale. Obviously, tradeoffs are required to be made so that
different objectives correlate with each other, are mutually supportive, and result in
synergistic advantages. This is especially true for organisations which are organised on a
profit-centre basis.
7. Objectives should be set within constraints. There are many constraints – internal as well as
external – which have to be considered in objective-setting. For example, resource
availability is an internal constraint which affects objective-setting. Different objectives
compete for scarce resources and tradeoffs are necessary for optimum resource utilisation.
Organisations face many external constraints like legal requirements, consumer activism and
environmental protection. All these limit the organisation‘s ability to set and achieve
objectives.

We will further examine a few issues relevant to object ives, in order to understand this complex
process.

3.6.3 Issues in Objective-Setting

There are many issues which have a bearing on different aspects of objective-setting. Here we
shall deal with six such issues (Azhar, 2002).

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1. Specificity. Objectives may be stated at different levels of specificity. At one extreme, they
might be very broadly stated as goals while at the other they might be specifically stated as
targets. Many organisations state corporate as well as general, specific, functional, and
operational objectives. Note that specificity is related to the organisational levels for which a
set of objectives has been stated. The issue of specificity is resolved through stating
objectives at different levels, and prefixing terms
2. Multiplicity. Since objectives deal with a number of performance areas, a variety of them
have to be formulated to cover all aspects of the functioning of an organisation. No
organisation operates on the basis of single or a few objectives. The issue of multiplicity
deals with different types of objectives with respect to organisational levels (e.g. higher or
lower levels), importance (e.g. primary or secondary), ends (e.g. survival or growth),
functions (e.g. marketing or finance), and nature (e.g. organisational or personal). Too few
or too many objectives are both unrealistic. Organisations need to set adequate and
appropriate objectives so as to cover all the major performance areas.
3. Periodicity. Objectives are formulated for different time periods. It is possible to set long-
term, medium-term and short-term objectives. Generally, organisations determine objectives
for the long-and short-term. Whenever this is done, objectives for different time periods
have to be integrated with each other. Long-term objectives are, by nature, less certain, and
are therefore stated in general terms. Short-term objectives, on the other hand, are relatively
more certain, specific, and comprehensive. One long-term objective may result in several
short-term objectives; many short-term objectives converge to form a long-term objective.
For example, a long-term objective may be continual profitability. Short-term objectives
which support continual profitability may be the return on investment, profit margin, return
on net worth, and so on, computed on an annual basis.
4. Verifiability. Each objective has to be tested on the basis of its verifiability. In other words,
it should be possible for a manager to state the basis on which to decide whether an objective
has been met or not. Only verifiable objectives can be meaningfully used in strategic
management. Related to verifiability is the question of quantification. A definite way to
measure any objective is to quantify it. But it may be neither possible nor desirable to
quantify each and every objective. In such cases, qualitative objectives have to be set. These
objectives could also be verified but not to the degree of accuracy possible for quantitative
objectives. For example, a qualitative objective may be stated as – to create a congenial
working environment within the factory. In order to make such an objective verifiable; the
value judgement of informed experts – both insiders and outsiders – could be used. A few
quantitative measures could also be devised which can serve as indicators of a congenial
working environment. Some of these could be staff turnover, absenteeism, accident rates,
productivity figures, and so forth. In general, it can be said that the issue of verifiability
could be resolved through a judicious use of a combination of quantitative and qualitative
objectives.
5. Reality. It is a common observation that organisations tend to have to sets of objectives –
official and operative. Official objectives are those which organisations profess to attain
while operative objectives are those which they seek to attain in reality. Probably no one
would be in a better position to appreciate the difference between these two objectives than a
harried client of a public sector bank who, on being maltreated by an arro gant bank
employee, looks up to find a poster of a smiling and beautiful girl with folded hands looking

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 down at him. The poster carries the caption: Customer service with a smile!‘ Many
organisations state one of their official objectives as the development of human resource.
But whether it is also an operative objective depends on the amount of resources allocated to
human resource development.
6. Quality. Objectives may be both good and bad. The quality of an objective can be judged on
the basis of its capability to provide a specific direction and a tangible basis for evaluating
performance. An example of a bad objective is: ‗To be the market leader in our industry‘. It
is insufficient with respect to its measurability. To restate the same objective as: ‗To increase
market share to a minimum of 40 percent of the total with respect to Product A over the
period of the next two years and to maintain it thereafter‘ turns it into a good objective since
it is specific, relates to performance, is measurable, and provides a definite direction.

Recapitulating what we have said in this and the previous subsection, it can be stated that
objectives have a number of characteristics and a variety of issues are involved in setting those.
The determination of objectives is, therefore, a complex task. Further, two important questions
need to be asked: what objectives are to be chosen for achievement and how are they to be
determined. We attempt to answer the first question in the following subsection and the second
in the next.

3.6.4 What Objectives are Set?

To put it straight, objectives have to be set in all those performance areas which are of strategic
importance to an organisation. In general, according to Drucker, objectives need to be set in the
eight vital areas of market standing, innovation, productivity, physical and financial resources,
profitability, manager performance and development, worker performance and attitude, and
public responsibility. A prescriptive approach, such as the one suggested by Drucker, is based
on those strategic factors which are supposedly vital for all types of organisations. But in
practice organisations differ widely with regard to the objectives that they choose to set.

Research studies, based on a survey of a large number of companies, too lead to a set of
objectives that the companies determine for themselves. But even here, the list of objectives is
more of a least common denominator rather than a true reflection of the objectives that the
companies actually set for themselves. to illustrate this point, we shall consider one such study
in the Indian context. B.R. Singh, who has studied 28 large companies, each having a turnover
of more than Rs 50 crore at the time of the study, reports that the objectives were set in areas
like;
 profit (return on investment, return on shareholder‘s capital, net profits as a percentage of
sales);
 marketing (increase in sales volume, market development for existing products, new product
development, reduction in marketing cost, improving customer service);
 growth (output, sales turnover, investment);
 employees (industrial relations, welfare and development);
 social responsibility (community service, rural development, auxiliary industry development,
family welfare).

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Consider the following examples of objective-setting by different types of organisations. We are
not including the usual financial parameters used to judge performance to provide you with an
idea of how the context could dictate the criteria for objective-setting.

 Two wheeler companies can use measures of performance such as the number of vehicles
manufactured per annum, market share in percent, level of indigenization achieved in
percent, average cost per vehicle and fuel efficiency achieved in kilometers per litre.
 Advertising agencies set objectives in terms of billings achieve din naira per year.

 For steel manufacturing companies, a basic measure is the quantity of saleable steel, both in
terms of installed capacity and actual production leading to capacity utilization in percent.
Another operational measure is energy consumed per tonne of saleable steel.

 Insurance companies may set objectives in terms of the number of policies executed, sum
assured, and expense-income ratio. Social objectives could be measured in terms o f the
percentage of insurable population covered and an investment mix consisting of government
securities, social schemes, and corporate securities.

 Railways are basically concerned with objectives in the area of passenger traffic and freight
handling. Passenger traffic is indicated by the volume of traffic handled in terms of the
number of passengers and the number of seats and berths available. Freight traffic is in terms
of the volume of traffic handled, expressed in weight and utilization percent of wagons and
locomotives.

 Hotels may set objectives in terms of the number of rooms‘ available, occupancy rate, and
cost per room. Subjective measures are maintaining the quality of hotel properties and the
quality of customer service provided.

The question that now remains to be addressed is how are the objectives to be formulated. The
next subsection takes up this issue.

3.6.5 How are Objectives Formulated?

From the foregoing discussion, it is clear that organisations need to set objectives at differe nt
levels, of various types and for different time periods, and that such objectives should possess
certain desirable characteristics and should resolve certain issues before being used. The
question that we now face is: how are objectives formulated? For an answer, we shall consider
the factors that have to be taken into account for the formulation of objectives.

Glueck identifies four factors that should be considered for objective-setting. These factors are:
the forces in the environment, realities of an enterprise’s resources and internal power
relationships, the value system of top executives, and awareness by management of the past
objectives of the firm. Here is a description of each of these factors.
1. The forces in the environment. These take into account all the interests – sometimes
coinciding but often conflicting – of the different stakeholders in an organisation. Each
group of stakeholders, whether they are company employees, customers, or the government,
put forward a set of claims or have expectations that have to be considered in setting

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 objectives. It is important to note that the interests of various stakeholders may change from
time to time, necessitating a corresponding shift in the importance attached to different
objectives.
2. Realities of enterprise’s resources and internal power relationships. This means that
objective are dependent on the resource capability of a company as well as the relative
decisional power that different groups of strategists wield with respect to each other in
sharing those resources. Resources, both material and human, place restrictions on the
objective-achieving capability of the organisation and these have to be considered in order to
set realistic objectives. Internal power relationships have an impact on objectives in different
ways. A dominant group of strategists such as the board of directors, or an individual
strategist, such as, a chief executive, may wield considerable power to set objectives in
consonance with their respective views. Again, since power configurations within a firm are
continually changing, the relative importance attached to different objectives may also vary
over a period of time.
3. The value system of the top executives. This has an impact on the corporate philosophy that
organisations adopt with regard to strategic management in general and objectives in
particular. Values, as an enduring set of beliefs, shape perceptions about what is good or
bad, desirable or undesirable. This applies to the choice of objectives too. for example,
entrepreneurial values may result in prominence being given to profit objectives while a
philanthropic attitude and values of social responsibility may lead to the setting of socially-
oriented objectives.
4. Awareness by management. Awareness of the past objectives and development of a firm
leads to a choice of objectives that had been emphasized in the past due to different reasons.
For instance, a dominant chief executive lays down a set of objectives and the organisation
continues to follow it, or deviates marginally from it in the future. This happens because
organisations do not depart radically from the paths that they had been following in the
recent past. Whatever changes occur in their choice of objectives take place incrementally in
an adaptive manner.

Keeping in view the four factors described above, we observe that objective-setting is a complex
task which is based on consensus-building and has no precise beginning or end. Vision and
mission provide a ‗common thread‘ to bind together the different aspects of the objective-setting
process by providing a specific direction along which an organisation can move.

3.6.6 Balanced Scorecard Approach to Objectives-setting

The performance management system called balanced scorecard, developed by Robert S. Kaplan
and David Norton of Harvard Business School, seeks to do away with the undue emphasis on
short-term financial objectives and seeks to improve organizational performance by focusing
attention on measuring and managing a wide range of non-financial, operational objectives.
Later, the system application was enlarged to include its usage as a comprehensive strategic
planning technique. In doing so, the balance scorecard approach advocates a top-down approach
to performance management, starting with strategic intent being expressed through the
organisation, down to operationally relevant targets.

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 Figure shows the Balance Scorecard Model.

How do we look to shareholders?

Financial Perspective

Objectives Targets
How do customers What must
see us? we excel at?

Customer Perspective Internal Process Perspective

Vision & Strategy
Objectives Targets Objectives Targets

Learning/Innovation
Perspective
Objectives Targets
How can we sustain our ability to change and improve?

Source: Based on R.S. Kaplan and D.P. Norton, The Strategy-focused orientation: How
Balanced Scorecard Companies Thrive in the New Business Environment,
Boston, Harvard Business School Publishing, 2000 and R.S. Kaplan and D.P.
Norton, The Balanced Scorecard: Translating Strategies into Action, Boston,
Harvard Business School Press, 1996.

The balance scorecard model requires an evaluation of organizational performance from four
different perspectives.
Financial Perspective. This perspective considers the financial measures arising from the
strategic intent of the organisation. Examples of such measures are revenues, earnings, return on
capital and cash flow.
Customer Perspective. This perspective measures the ability of the organisation to provide
quality goods and services, effective delivery and overall customer satisfaction. Examples of
such measures are market share, customer satisfaction measures and customer loyalty.
Internal Businesses Perspective. Internal business processes are the mechanisms through which
performance expectations are achieved. The internal business perspective provides data
regarding the internal business results against measures that lead to financial success and
satisfied customers. To meet the organizational objectives and customers expectations,
organisations must identify the key business processes at which they must excel. Examples of
such measures are productivity indices, quality measures and efficiency.

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 Learning and Growth Perspective. This perspective focuses on the ability of the organisation to
manage its businesses and adapt to change. In order to face the challenges of changes in the
environment and customer expectations, organisations take on new responsibilities that require
its employees to develop new skills and capabilities. Examples of such measures are morale,
knowledge, employee turnover, usage of best practices, share of revenue from new products and
employee suggestions.
Kaplan and Norton used the technique of strategy maps that provide a visual representation of
the organisation‘s strategy. In such maps, the four perspectives were connected to each other in
a ‗cause and effect‘ fashion, thus making clear the relationship of all the strategic objectives to
the strategic intent of the organisation. A typical strategic map is shown in the figure below.

Figure showing a typical strategy map

Long term shareholder value

Financial Improved Improved Improved Improved

perspective cost structure cost structure cost structure cost structure

Customer Customer Value Proposition

perspective Price Quality Availability Selection Functionality Service Partnership Brand

Internal Operational Customer Innovation Regulatory

perspective Management Management Processes and Social
Processes Processes Processes

Learning / Human capital

Innovation Information capital
perspective Organizational capital
Culture Leadership Alignment Teamwork
Source: Based on R.S. Kaplan and D.P. Norton. The Strategy-focused orientation: How Balanced
Scorecard Companies Thrive in the New Business Environment, Boston, Harvard Business School
Publishing, 2000 and R.S. Kaplan and D.P. Norton, The Balanced Scorecard: Translating
Strategies into Action, Boston, Harvard Business School Press, 1996.

The purpose here is to note that objective-setting can use the balanced scorecard approach. The
four perspectives above can help an organisation to set objectives. The utility of the balanced
scorecard approach lies in the prioritisation of key strategic objectives that can be allocated to

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each of these four perspectives and the identification of associated measures that can be used to
evaluate organizational progress in meeting the objectives.

In practice, the balanced scorecard approach works something like this:

1. The development of the scorecard begins with the establishment of the organisation‘s
strategic intent, including the vision and mission.

2. Next, the design of the balanced scorecard is determined by identifying the specific measures
related to the four perspectives.

3. The following step involves mapping the strategy through the identification of organizational
activities that are derived from the strategies. For example, achieving financial growth may
be expressed in terms of sales growth and revenue growth.

4. In the final stage, metrics that can be used to accurately measure the performance of the
organisation in the specific areas are established. In the example above, metrics for revenue
growth may be expressed in terms of sales to new customers, sales of new services or
products or entry into new markets.

3.7 Critical Success Factors

Many of us occasionally ask ourselves questions like: What do we need to do in order to be

successful in our studies? our career? our profession? our marriage? Similarly, managers too are
concerned about identifying those critical factors which will lead to success for their
organisations. Critical success factors (CSFs), sometimes referred to as strategic factors or key
factors for success, are those which are crucial for organisational success. When strategists
consciously look for such factors and take them into consideration for strategic management,
they are likely to be more successful, while putting in relatively lesser effort.

Some of the important points that can be used in objective-setting as well as for exercising a
strategic choice relative to critical success factors are:

1. A set of CSFs results from asking the question: what do we need to do in order to be
successful in a particular context?

2. CSFs are based on practical logic, heuristic, or a rule of thumb rather than an elaborate
procedure or an esoteric theoretical model.

3. CSFs are the result of long years of managerial experience, which leads to the development
of intuition, judgement and a hunch that can be used in strategic decision-making.

4. An analysis of what relevant CSFs operate in a particular context could be based on the
manager‘s statements, expert opinions and organisational success stories.

5. CSFs could also be generated internally through creative techniques such as brainstorming.

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6. The use of CSFs in objective-setting and strategic choice distinguishes the successful
organisations from the unsuccessful ones.

7. CSFs are used to pinpoint the key result areas, determining objectives in those areas, and
devising measures of performance for judging the objective-achieving capability of any
organisation.

Having seen what CSFs are and how they can be used for strategic decision-making, we now
reiterate our position on the hierarchy of strategic intent. This is the subject matter of the last
subsection in this unit.

The binding together of the different levels of the hierarchy of strategic intent is facilitated by
techniques such as the balanced scorecard that we would discuss next.

CSFs need key performance indicators in order to be measured.

3.8 Key Performance Indicators (KPIs)

Performance indicators are well understood as being metrics or measures in terms of which
performance is measured, evaluated or compared. Key performance indicators (KPIs) are the
metrics or measures in terms of which the critical success factors are evaluated. What makes the
KPIs ‗key‘ is their relationship to the CSFs and ultimately, to the vision of the organisation. An
organisation might have the vision ‗to be the most profitable company in our industry‘. For
making this vision operational, it needs to determine KPIs such as pre-tax profit or shareholder
equity that measure profitability. In the case of this organisation, the percent of profit
contributed to community causes will not be a relevant KPI. For an organisation, that states its
vision ‗to be a responsible corporate citizen‘ the KPI of percent of profit contributed to
community causes is appropriate.

Identification of which KPIs to use is important. A shoe manufacturing company that considers
high manufacturing quality or cost efficiency as its critical success factors, has to think of
metrics in terms of which it will measure these parameters. High manufacturing quality will
have to be expressed in terms of an indicator such as recall rate after delivery, product reject rate,
on-time delivery or number of complaints. The company has to determine which combination of
metrics it would use to determine whether it is successful. KPIs thus help to quantify the critical
success factors.

Selecting the right measures is vital for effectiveness. Even more importantly, the metrics must
be built into a performance measurement system that allows individuals and groups to
understand how their behaviours and activities are fulfilling the overall corporate goals. If a KPI
is going to be of any value, there must be a way to accurately define and measure it. ‗To
Generate More Repeat Customers‘ may apparently seem to be impressive as an objective, but it
could be inappropriate as a KPI without some way to distinguish between new and repeat
customers. ‗To Be The Most Popular Company‘ may not work if there is no way to measure the
company‘s popularity or compare it to its competitors. If a company wishes to be ‗an employer

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of choice‘ then a relevant KPI might be ‗the number of voluntary resignations divided by the
total number of employees at the beginning of the measurement period‘. To make this KPI
practical, the human resource management information system should be able to provide
information required to measure on the basis of this metrics, otherwise the KPI itself becomes
redundant.

3.8.1 Benefits of KPIs

KPIs have gained importance as well as popularity in the corporate world as they have several
benefits. The major benefit in using KPIs is to help an organisation define and measure progress
toward its objectives. KPIs give everyone in the organisation a clear picture of what is important
and what they need to do to accomplish objectives. They are a helpful tool for organisations to
motivate their employees towards achievement of its objectives. KPIs are applied in business
intelligence to gauge business trends. Developments in the areas of business intelligence and
business performance management are enabling the development of sophisticated information
technology based tools such as dashboards that show organizational performance at a glance, in
the form of visual charts and videos. KPIs can also be used for benchmarking the performance
of an organisation over time and to compare its performance with rivals in the same industry.

Having seen what CSFs and KPIs are and how they can be used for strategic decision-making,
we now reiterate our position on the hierarchy of strategic intent. An explicit structuring of the
hierarchy of a strategic intent has important implications for strategic management. First, it
serves as a charter of aims the organisation plans to achieve. Second, it is helpful in laying down
the aims of different subsystems within an organisation. Third, it is a powerful means of
communicating the organizational intent down the line. And, lastly, it ensures the creation of a
result-oriented organizational system set to attain the mission and realise the vision of the
organisation.

With the hierarchy of strategic intent, the organisation knows the answer to the question: What is
to be achieved? The next important question is: What are the means to be adopted in order to
realise the intent? The next part of this course will answer this question.

Summary – business models are often expressed in the form of a question: how does the
organisation make money? Strategic result in choices; a business model can be used to help
analyse and communicate these strategic choices. Business models are down-to-earth
prescriptions to implement the strategies.

Self Assessment Exercise 5

1. Propose the factors that should be taken into account while setting objectives.
2. Why are critical success factors ‗critical‘?
3. Point out the similarity, if any, between the critical factors (CSF) approach and the
management by exception technique.
4. To what different uses can CSFs be put in strategic management?

Self Assessment Exercise 6

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1. Formulate a mission statement for your business, school or for the organisation you work for.
2. Only verifiable objectives can be used meaningfully in strategic management. Why?
3. Name some important constraints under which objectives are set.
4. What is key performance indicator (KPI)? Explain briefly.

Self Assessment Exercise 7

1. State any two objectives, which, in your opinion are of bad quality. Now alter them in such a
way that their quality improves.
2. In what terms can a power corporation set its objectives? a business school? a graduate
aspiring for admission to an MBA programme?
3. Why can parameters such as shareholder value, economic value-added or market value-added
be better for objective setting?

4.0 CONCLUSION

Organisational performance is judged on the basis of key result areas which depend on an
analysis of critical success factors for any organisation. The various components of strategic
intent, as we know, are set at different levels. When placed at different levels and linked to each
other, strategic intent takes the shape of a hierarchy.

5 SUMMARY

In this unit, we have defined the concept strategic intent; differentiated between vision, mission
statement and business definition; explained product/service concept; distinguished between
goals and objectives; discussed critical success factors. And explained the concept key
performance indicators (KPIs).

6.0 TUTOR-MARKED ASSIGNMENT

1. Give a lucid description of these concepts:

(a) Strategic intent
(b) Stretch
(c) Leverage
(d) Fit

Discuss the manner in which these concepts aid our understanding of strategic management.

2. Consider any organisation of your choice. Attempt to define its business along the
dimensions of customer groups, customers‘ functions, and alternative technologies. What
insight does such a definition offer to you for the strategic management of your chosen
organisation?
3. Consider any industry of your choice and point out the critical success factors (CSFs) for an
organisation in that industry. Attempt to formulate objectives and devise measures of
performance on the basis of the CSFs you have identified.

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7.0 REFERENCES/FURTHER READINGS

Hamel, G. and C.K. Prahalad (1989). ―Strategic Intent‖, Harvard Business Review (65) 3: 63-76.

Kotter, J.A. (1990). Force for Change: How Leadership Differs from Management (London: Free
Press).

Miller, A. and G.G. Dess (1996). ―Strategic Management‖, 2 nd edition, (New York: McGraw-
Hill), p. 6.

Gary Hamel and C.K. Prahalad (1989). Strategic Intent. To revitalize corporate performance, we
need a whole new model of strategy, May – June Copyright © 2003 EBSCO Publishing.

Parikh, J. and F. Neubauer (1993). ―Corporate Visioning‖, International Review of Strategic

Management (ed.), Vol. 4, D.E. Hussey (West Sussex, England: John Wiley & Sons), pp. 109 –
11.

Drucker, P.F. (1974). Management – Tasks, Responsibilities, Practices (New York: Harper and
Row), pp. 77 – 79.

Thompson, J.L. (1997). Strategic Management: Awareness and Change, 3 rd edition (London:
International Thompson Business Press), p. 6.

Hunger, J.D. and T.L. Wheelen (1999). Strategic Management (Reading, MA: Addison Wesley
Longman), p. 10.

Business Today (1998). ―World Class Management Benchmarks for the Millennium‖ (Feb. 22 –
Mar 6), pp. 62 – 81.

Business India (1987). ―INDAL‘s growth strategy‖, (August 3 – 16), p. 21.

Business World (1987). ―The hi-tech gift of Sam Pitroda‖ (Sept 14 – 27), pp. 30 – 41.

Abell, D.F. (1980). Defining the Business: The Starting Point of Strategic Planning (Englewood
Cliffs, NJ: Prentice-Hall).

Hill, C.W.L. and G.R. Jones (1998). Strategic Management ‗Theory: An Integrated Approach
(Boston, M A: Houghton Mifflin) p. 39.

Business India (1985). ―What‘s up at Voltas?‖ (Oct 7 – 20), pp. 62 – 69.

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UNIT 2 ENVIRONMENTAL APPRAISAL AND SWOT ANALYSIS

Table of Contents

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Concept of Environment
3.2 External and Internal Environment
3.3 SWOT Analysis
3.4 General and Relevant Environment
3.5 Environmental Sectors
3.6 Environmental Scanning
3.7 Appraising the Environment
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In this unit, we shall examine environmental appraisal and this study will take us through to the
concept of environment, classification of environment, SWOT analysis, environmental sectors
and scanning as well as appraisal of the environment.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 define the concept environment as it relates to business organisation;

 distinguish between external and internal environment;
 discuss SWOT analysis;
 differentiate between general and relevant environment;
 define and explain the concept environment sectors;
 Discuss environmental scanning and appraisal of the environment.

3.0 MAIN CONTENT

The environment in which an organization exists could be broadly divided into two parts: the
external and the internal environment. In this unit, we shall deal with the appraisal of the
external environment. We shall start with attaining an understanding of the concept of
environment. This will be done through: a description of four important characteristics of the
environment, dividing the environment into its external and internal parts, observing how
systematic approach like SWOT analysis can help in environmental appraisal, and classifying the
external environment into two parts – the general and the relevant environment.

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We will now discuss how the external environment – especially that part which is more relevant
to an organization – can be divided into different components. For the purpose of understanding
and analysis, we have discussed eight components of the external environment: the market,
technological, supplier, economic, regulatory, political, socio-cultural, and international
environment. In the third section of this unit, we dealt with environmental scanning – the process
through which strategists monitor the external environment and collect information for strategy
formulation, and the methods and techniques for environmental scanning. Lastly, we describe
the manner in which environmental appraisal takes place. We have pointed out the various
factors that affect environmental scanning, how environmental issues can be identified, and the
way in which environmental appraisal can be structured.

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‖ ( ). Since the
environment influences an organization in multitudinous ways, it is of crucial importance to
understand it. The concept of environment can be understood by looking at some of its
characteristics.

3.1.1 Characteristics of Environment

Business environment (or simply environment) exhibits many characteristics. Some of the
important, and obvious, characteristics are briefly described here.

1. Environment is complex. The environment consists of a number of factors, events,

conditions, and influences arising from different sources. All these do not exist in
isolation but interact with each other to create entirely new sets of influences. It is
difficult to comprehend at once what factors constitute a given environment. All in all,
environment is a complex phenomenon relatively easier to understand in parts but
difficult to grasp in its totality.

2. Environment is dynamic. The environment is constantly changing in nature. Due to the

many and varied influences operating; there is dynamism in the environment, causing it
to change its shape and character continuously.

3. Environment is multi-faceted. What shape and character an environment will assume

depends on the perception of the observer. A particular change in the environment, or a
new development, may be viewed differently by different observers. This is seen
frequently when the same development is welcomed as an opportunity by one company
while another company perceives it as a threat.

4. Environment has a far-reaching impact. The environment has a far-reaching impact on

organizations. The growth and profitability of an organization depends critically on the
environment in which it exists. Any environmental change has an impact on the
organization in several different ways.

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Since the environment is complex, dynamic, multi-faceted, and has a far-reaching impact,
dividing it into external and internal components enables us to understand it better. But before
we do that it is important to understand that strategic management is becoming increasingly
conscious of the nature that affects organisations and environment. The traditional approach to
strategic management has led to an emphasis on control, order, and predictability. But these are
antithetical to the concept of organisations and environment as we now realize. The organisation
and the environment are, in reality, more unpredictable, uncertain, and non-linear. The exhibit
below presents an overview of the chaos theory and its application to strategic management.
Exhibit Chaos Theory in Strategic Management

Chaos theory, as proposed by Edward Lorenz and Mitchel Feigenbaum, postulates that at the root of all complex
systems – whether they are organisations or the environment – lies a set of rules that provide a dynamic order to
the surface complexity. These systems cannot be considered as linear systems where a simple cause-and-effect
model can explain the behaviour of these systems. Rather, these systems are non -linear and dynamic in nature.
Any change that takes place in the non-linear systems is chaotic. Chaos theory uses mathematical models,
known as chaotic models, to interpret the process of non-linear and dynamic systems. The phenomenon of
chaos is observed in a wide variety of processes – biological, sociological, economic, and meteorological. The
applications of chaos theory in management may range from predicting market behaviour, financial forecasting,
and anticipating competitive strategies. Organisations and environments, as these are also dynamic, ever-
changing systems, display some of the characteristics of the living ecosystems making it possible to ap0ply the
tenets of chaos theory to them.

While suggesting the use of chaos theory to strategic management, D. Levy gives the following reasons:

 Long-term planning is difficult;

 Industries do not reach a stable equilibrium;
 Dramatic changes can occur unexpectedly;
 Short-term forecasts and predictions of patterns can be made;
 Guidelines are needed to cope with complexity and uncertainty.

The lesson that students of strategic management need to learn is that, in a dynamic environment, it is suicidal
for organisations to remain static. They have to forego keeping an internal orientation and attempt to change
dynamically as the environment changes.

Source: D. Levy, ―Chaos theory and strategy: Theory, application and managerial implications‖, Strategic
Management Journal, Vol. 13, 1992, pp. 111-125; D.N. Chorafas: Chaos Theory in the Financial
Markets, Irwin, Chicago, 1994, and R.T. Pascale, M. Millemann and L. Gioja, Surfing the Edge of
Chaos: The Laws of Nature and the New Laws of Business, Crown Business, 2000.

Let us go ahead to grapple with the complexity of the environment by dividing it into external
and internal environments.

3.2 External and Internal Environment

The external environment includes all the factors outside the organisation which provide
opportunities or pose threats to the organisation. The internal environment refers to all the
factors within an organisation which impart strengths or cause weaknesses of a strategic nature.

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The environment in which an organisation exists can, therefore, be described in terms of the
opportunities and threats operating in the external environment apart from the strengths and
weaknesses existing in the internal environment. The four environmental influences could be
described as follows:
1. An opportunity is a favourable condition in the organisation‘s environment which enables it
to consolidate and strengthen its position. An example of an opportunity is a growing
demand for the products or services that a company provides.
2. A threat is an unfavourable condition in the organisation‘s environment which creates a
risk for, or causing damage to the organisation. An example of a threat is the emergence of
strong new competitors who are likely to offer stiff competition to the existing companies
in an industry.
3. Strength is an inherent capacity which an organisation can use to gain strategic advantage.
An example of a strength is superior research and development skills which can be used for
new product development so that the company can gain a strategic advantage.
4. A weakness is an inherent limitation or constraint which creates strategic disadvantages.
An example of a weakness is overdependence on a single product line, which is potentially
risky for a company in times of crisis.
An understanding of the external environment, in terms of opportunities and threats, and the
internal environment, in terms of strengths and weaknesses, is crucial for the existence, growth,
and profitability of any organisation. A systematic approach to understanding the environment is
the SWOT analysis.

3.3 SWOT Analysis

SWOT analysis, evolved during the 1960s at Stanford Research Institute, is a very popular
strategic planning technique having applications in many areas including management.
Organisations perform a SWOT analysis to understand their internal and external environments.
Business firms undertake SWOT analysis to understand their external and internal environments.
SWOT, which is the acronym for strengths, weaknesses, opportunities and threats, is also known
as WOTS-UP or TOWS analysis. Through such an analysis, the strengths and weaknesses
existing within an organisation can be matched with the opportunities and threats operating in the
environment so that an effective strategic can be formulated. An effective organizational
strategy, therefore, is one that capitalizes on the opportunities through the use of strengths and
neutralizes the threats by minimizing the impact on weaknesses, to achieve predetermined
objectives.A simple application of the SWOT analysis technique involves these steps:
1. Setting the objectives of the organisation or its unit;
2. Identifying its strengths, weaknesses, opportunities and threats;
3. Asking four questions:
(a) How do we maximize our strengths?
(b) How do we minimize our weaknesses?
(c) How do we capitalize on the opportunities in our external environment?
(d) How do we protect ourselves from threats in our external environment?
4. Recommending strategies that will optimize the answers from the four questions.

The SWOT analysis is usually done with the help of a template in the form of a four-cell matrix,
each cell of the matrix representing the strengths, weaknesses, opportunities and threats. The

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analysis for preparing the SWOT matrix could be done by a group of managers in a workshop
session. The session could use the brainstorming technique for generating ideas about the
SWOT factors. A typical SWOT analysis matrix for a hypothetical organisation is shown in the
figure below.
Figure showing a typical SWOT matrix
STRENGTHS WEAKNESSES
- Favourable location - Uncertain cash flow
- Excellent distribution network - Weak management information
- ISO 9000 quality certification system
- Established R & D Centre - Absence of strong USP for major
- Good management reputation product lines
- Low worker commitment

OPPORTUNITIES THREATS
- Favourable industry trends - Unfavourable political environment
- Low technology options available - Weak management information
- Possibility of niche target market system
- Availability of reliable business - Uncertain competitors‘ intentions
partners - Lack of sustainable financial
backing
SWOT analysis has several benefits, among the major being:
 Simple to use;
 Flexible and can be adapted to varying situations;
 Leads to clarification of issues;
 Development of goal-oriented alternatives;
 Useful as a starting point for strategic analysis.
The following could be the pitfalls of using the SWOT analysis indiscriminately:
 Simplicity of use may turn to be simplistic by trivializing the reality that may be more
complex than represented in the SWOT matrices.
 May result in just compiling lists rather than think about what is really important for
achieving objectives.
 Usually reflects an evaluator‘s position and viewpoint that can be misinterpreted to justify a
previously decided course of action, rather than be used as a means to open new possibilities.
 Chances exist where strengths may be confused with opportunities or weaknesses with
threats.
 May encourage organisations to take a lazy course of action of looking for strengths that
match opportunities rather than developing new strengths that could match the emerging
opportunities.
The process of strategy formulation starts with, and critically depends on the appraisal of the
external and internal environment of an organisation. In this unit, we will attempt to understand
the external environment and, in the next unit, we will take up the internal environment for
discussion.

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3.4 General and Relevant Environment

As we said earlier, the external environment consists of all those factors which provide
opportunities or post threats to an organisation. In a wider sense, the external environment
encompasses a variety of factors, like: international, national and local economy; social changes;
demographic variables; political systems; technology; attitude towards business; energy sources;
raw materials and other resources; and many other macro-level factors. We could designate such
a wider perception of the environment as the general environment. All organisations, in some
way or the other, are concerned about the general environment. But the immediate concerns of
any organisation are confined to just a part of the general environment which is of high strategic
relevance to the organisation. This part of the environment could be termed as the immediately
relevant environment, or simply, the relevant environment. The conception of the business
environment of an organisation is presented in the diagram below.
Diagram showing the business environment of an organisation

GENERAL ENVIRONMENT

ORGANISATION
RELEVANT
ENVIRONMENT

A conscious identification of the relevant environment enables an organisation to focus its

attention on those factors which are intimately related to its mission, purpose, objectives, and
strategies. Depending on its perception of the relevant environment, an organisation takes into
account those influences in its surrounding which have an immediate impact on its strategic
management process. Having identified its relevant environment, an organisation can
systematically appraise it and incorporate the results of such an appraisal in strategic planning.
In order to cope with the complexity of the environment, it is feasible to divide it into different
components or sectors.

3.4.1 Classification of Environmental Sectors

Aguilar evolved a categorisation scheme for grouping different kinds of information related to
the environment into sectors such as customers, competitors, suppliers, technology; social,
political, economic conditions, etc. Keegan suggests that the sector categorisation should be
such that these sectors must be exhaustive, i.e., each item of information should find a place in
one of the sectors; the sectors must be mutually exclusive so that any given item of information
must belong to one of the category; and the classification must be functional and relate to actual
scanning practices. There are several sectors into which the external/general environment could
be divided into. But, in a given context, there are certain sectors that merit greater attention than
the others.

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3.5 Environmental Sectors

The classification of the general environment into sectors helps an organisation to cope with its
complexity, to comprehend the difference influences operating in the environment, and to relate
the environmental changes to its strategic management process. Different bases for classification
have been adopted by different authors but the basis itself is not as important as the fact that all
the relevant factors in the environment have to be considered. Depending on a variety of factors,
such as, the size of the organisation, the level and scope of activities, the geographical spread of
markets, the nature of the product, the type of technology used, and managerial philosophy, an
organisation may divide its environment into sectors capable of being analysed conveniently.
In this unit we are using an eight-category classification of the environment. These eight sectors
of the environment are: market, technological, supplier, economic, regulatory, political, socio -
cultural, and international sectors of environment. We will now take up each of these sectors for
discussion.

3.5.1 Market Environment

The market environment consists of the factors related to the groups and other organisations that
compete with and have an impact on an organisation‘s markets and business. Some of the
important factors and influences operating in the market environment are as follows:

1. Customer or client factors, such as, the needs, preferences, perceptions, attitudes, values,
bargaining power, buying behaviour and satisfaction of customers.
2. Product factors, such as the demand, image, features, utility, function, design, lifecycle,
price, promotion, distribution, differentiation, and the availability of substitutes of
products or services.
3. Marketing intermediary factors, such as, levels and quality of customer service,
middlemen, distribution channels, logistics, costs, delivery systems, and financial
intermediaries.
4. Competitor-related factors, such as, the different types of competitors, entry and exit of
major competitors, nature of competition, and the relative strategic position of major
competitors.

The market environment depends largely on the type of the industrial structure. In monopolies
and oligopolies, the concern for the market environment is lesser than what it is in the face of
pure competition. In a controlled economy, like that of India, public utilities like electricity
boards and most public sector companies such as petrol and cooking gas companies operated in a
protected environment.

Here are several examples to show how the market environment affects, and is taken into
consideration by the companies.

 Growing international trade, massive investment in infrastructure, increasing levels of

disposable income and strong manufacturing and retail sectors have combined to produced a
dynamic market environment. Customers and their needs have been featuring more
prominently in the business strategies in several industries. Other marketing-related actions

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 include investments in retail networks, increasing opportunities for customer interactions,
improving customer service, customer-focused advertising, demonstrating a more visible
presence and improving the overall customer experience.

 There is a distinct trend of growing preference for natural products around the world and this
trend is also prevalent in Nigeria. Eco-friendly products whether in agriculture, clothing,
cosmetics or healthcare are seen as better substitutes for synthetic products.
 Nigerians are paying increasingly greater attention to personal grooming. Changing
lifestyles, increasing disposable incomes, availability of local and internal brands, and
influence of satellite television and better awareness of global brands are some of the major
factors that have led to an increasing demand for cosmetics. The cosmetics and personal care
industry has been growing a t a high rate during the last few years. With the demand for
cosmetics on the rise and opening of the market to foreign companies, there is increasing
competition offering greater product choice and availability to the fashion-conscious
Nigerian women and men in urban as well as rural areas.

 Sales promotion, advertising, and market research, all of which had not occupied an
important position in the marketing policies of companies have now assumed a greater
significance. Distribution has been strengthened so that customers are not put to
inconvenience. After-sales services, especially for consumer durables, have become a
significant component of the marketing strategies of many co mpanies.

The market environment is one of the most dynamic sectors of the environment. Nigerian
marketers are facing a daunting challenge in coming to terms with the dynamism and the ever -
changing nature of the Nigerian markets.

3.5.2 Technological Environment

The technological environment consists of those factors that are related to the knowledge applied
and the materials and machines used in the production of goods and services which have an
impact on the business of an organisation. Some of the important factors and influences
operating in the technological environment are as follows:

1. Sources of technology, like company sources, external sources, and foreign sources; cost of
technology acquisition; collaboration in and transfer of technology.
2. Technology development, stages of development, change and rate of change of technology,
and research and development.
3. Impact of technology on human beings, the man-machine system, and the environmental
effects of technology.
4. Communication and infrastructural technology in environment.

Strategists can ill afford to ignore the technological environment, as technology, besides
customer groups and customer functions, defines the business of their organisations. According
to Boris Petrov, there are three strategic implications of technological change: it can change
relative competitive cost position within a business, it can create new markets and new business
segments, and it can collapse or merge previously independent businesses by reducing or
eliminating their segment cost barriers.

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3.5.3 Supplier Environment

The supplier environment consists of factors related to the cost, reliability, and availability of the
factors of production or service that have an impact on the business of an organisation. Some of
the important factors and influences operating in the supplier environment are as follows:

1. Cost, availability and continuity of supply of raw materials, subassemblies, parts and
components.
2. Cost and availability of finance for implementing plans and projects.
3. Cost, reliability and availability of energy used in production.
4. Cost, availability and dependability of human resources.
5. Cost, availability and existence of sources and means for the supply of plants and machinery,
spare parts and after-sales service.
6. Infrastructural support and ease of availability of the different factors of production, the
bargaining power of suppliers, and the existence of substitutes.

The supplier environment occupies a dominant position in strategy formulation because of the
fact that Nigeria is a developing country with problems of scarcity of capital. Unlike some of the
western nations and Japan, the reliability of supply is very low causing companies to devote a lot
of attention and energy to maintain the continuity of supply. Almost all annual company reports
lament the shortage of power and cite the high costs of petroleum products as the reason for low
profitability.

3.5.4 Economic Environment

The economic environment consists of macro-level factors related to the means of production
and distribution of wealth which have an impact on the business of an organisation. Some of the
important factors and influences operating in the economic environment are:

1. The economic stage at which a country exists at a given point of time.

2. The economic structure adopted, such as, a capitalistic, socialistic or mixed economy.
3. Economic policies, such as, industrial, monetary and fiscal policies.
4. Economic planning, such as, five-year plans, annual budgets, and so on.
5. Economic indices like national income, distribution of income, rate and growth of gross
national product (GNP), per capita income, disposable personal income, rate of savings and
investments, value of exports and imports, the balance of payments, etc. and so on.
6. Infrastructural factors, such as, financial institutions, banks, modes of transportation,
communication facilities, and so on.

Strategists are acutely aware of the importance and impact of the economic environment on their
organisations. Almost all annual company reports presented by the chairman devote attention to
the general economic environment prevailing in the country and an assessment of its impact on
their companies.

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3.5.5 Regulatory Environment
The regulatory environment consists of factors related to planning, promotion, and regulation of
economic activities by the government that have an impact on the business of an organisation.
Some of the important factors and influences operating in the regulatory environment are as
follows:

 The constitutional framework, directive principles, fundamental rights, and division of

legislative powers between central and state governments;
 Policies related to licensing, monopolies, foreign investment, and financing of industries;
 Policies related to distribution and pricing, and their control;
 Policies related to imports and exports;
 Other policies related to the public sector, small-scale industries, sick industries,
development of backward areas, control of environmental pollution, and consumer
protection.

3.5.6 Political Environment

The political environment consists of factors related to the management of public affairs and
their impact on the business of an organisation. Some of the important factors and influences
operating in the political environment:

1. The political system and its features, like the nature of the political system, ideological
forces, political parties and centres of power;
2. The political structure, its goals and stability;
3. Political processes, like the operation of the party system, elections, funding of elections, and
legislation with respect to economic and industrial promotion, and regulation;
4. Political philosophy, government‘s role in business, and its policies and interventions in
economic and business development.

3.5.7 Socio-cultural Environment

The socio-cultural environment consists of factors related to human relationships within a

society; the development, forms and functions of such a relationship; and the learnt and shared
behaviour of groups of human beings which have a bearing on the business of an organisation.
Some of the important factors and influences operating in the social environment are:
1. Demographic characteristics, such as, population, its density and distribution, changes in
population and age composition, inter-state migration and rural-urban mobility, and income
distribution;
2. Socio-cultural concerns such as environmental pollution, corruption, use of mass media, the
role of business in society, and consumerism;
3. Socio-cultural attitudes and values, such as, expectation of society from business, social
customs, beliefs, rituals and practices, changing lifestyle patterns, and materialism;
4. Family structure and changes in it, attitude towards and within the family, and family values;
5. The role and position of men, women, children, adolescents, and the aged in family and
society;
6. Educational levels, awareness and consciousness of rights, the work ethic of the members of
society, and the attitude towards minority and disadvantaged groups.

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The socio-cultural environment primarily affects the strategic management process within the
organisation in the areas of mission and objective-setting, and decisions related to products and
markets. Strategists do not seem to be fully aware of the impact of the socio -cultural
environment on business or they are so preoccupied with other environment influences that they
do not give a high priority to socio-cultural factors. One reason for such a lack of interest could
be the nature of socio-cultural influences. Socio-cultural changes take place very slowly and do
not seem to have an immediate and direct impact on short-term strategic decisions.

3.5.8 International Environment

The international (or global) environment consists of all those factors that operate at the
transnational, cross-cultural, and across-the-border level which have an impact on the business of
an organisation. Some of the important factors and influences operating in the international
environment are as below:

1. Globalisation, its process, content, and direction;

2. Global economic forces, organisations, blocs, and forums;
3. Global trade and commerce, its process and trends;
4. Global financial system, sources of financing, and accounting standards;
5. Geopolitical situation, equations, alliances, and strategic interests of nations;
6. Global demographic patterns and shifts;
7. Global human resource – institutions, availability, nature and quality of skills and expertise,
mobility of labour and other skilled personnel;
8. Global information systems, communication networks, and media;
9. Global technological and quality systems and standards;
10. Global markets and competitiveness;
11. Global legal system, adjudication and arbitration mechanisms;
12. Globalisation of management and allied disciplines, and the diffusion of management
techniques in industry.

The international environment constitutes a special class o f the environmental sector. While the
preceding seven sectors are largely limited and exclusive in nature, the international environment
encompasses all the sectors, albeit in the global context. What we mean to say is that while for
instance, the political environment within a country could consist of certain factors related to
national politics; the international environment would also have a geopolitical component
including the political factors and influences at the global level.

This section of the unit has been devoted to a discussion of eight different sectors constituting the
environment of an organisation. By no means is it claimed that our coverage of environmental
sectors is all-encompassing. There are other sectors too which are worthy of consideration. For
instance, the natural, physical or geographical environment, to which a passing reference has
been made while discussing regulatory environment, is also of great concern to companies.
Environmental protection is of paramount importance in a world where the issues of sustainable
development have assumed great significance. The corporate sector is now required to adhere to
a plethora of regulations for environmental protection and control of pollution. This is especially
relevant for polluting industries, like, processing plants and refineries.

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It should be noted that any classification of the environment into sectors is artificial and is meant
solely to gain an understanding of the different environmental factors. In reality, the dividing
line between the different sectors of the environment is hazy and there is a high level of
interaction between variables belonging to various environmental sectors. For example, market
demand, which is a part of the market environment, does not exist in isolation but is dependent
on other factors, such as, the general state of the economy, buyer motivation or technical quality
of the products.

Apart from the inter-sectoral interaction, there are complex inter-linkages existing among the
factors in the same sector of the environment. To consider an example of such an inter-linkage,
the technological environment has a number of factors and influences. Among these,
collaboration in and transfer of technology affect the development of technology in a particular
company and also in the industry as a whole. When the technological level is raised, it has
repercussions on human beings and the man-machine system. There are also implications for the
environmental effects of technology.

The intersectoral and intrasectoral nature of the environmental factors have to be considered
while understanding the different environmental sectors. Strategists have to constantly monitor
the environment and its different sectors for opportunities and threats that have, o r are likely to
have, an impact on their organisations. Such a monitoring is done through environmental
scanning.

3.6 Environmental Scanning

In the two preceding sections, we have seen how organisation exists consists of a bewildering
variety of factors. These factors (may also be termed as influences) are events, trends, issues,
and expectations of different interested groups. These factors are explained below.

 Events are important and specific occurrences taking place in different environmental
sectors;
 Trends are the general tendencies or the courses of action along which events take place;
 Issues are the current concerns that arise in response to events and trends;
 Expectations are the demands made by interested groups in the light of their concern for
issues.

Environmental influences are a complex amalgam of the events, trends, issues and expectations
that continually shape the business environment of an organisation. By monitoring the
environment through environmental scanning, an organisation can consider the impact of the
different events, trends, issues and expectations on its strategic management process. Since the
environment facing any organisation is complex and canning it is absolutely essential, strategists
have to deal cautiously with the process of environmental scanning. It has to be done in a
manner that unnecessary time and effort is not expended, while important factors are not ignored.
For this to take place, it is important to devise an approach, or a combination of different
approaches, to environmental scanning.

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3.6.1 Approaches to Environmental Scanning

Kubr has suggested three approaches which could be adopted for sorting out information for
environmental scanning. We could call these approaches as systematic, ad-hoc and processed-
form approaches.

1. Systematic Approach. Under this approach, information for environmental scanning is

collected systematically. Information related to markets and customers, changes in
legislation and regulations that have a direct impact on an organisation‘s activities,
government policy statements pertaining to the organisation‘s business and industry, etc.
could be collected continuously to monitor changes and take the relevant factors into
account. Continuously updating such information is necessary not only for strategic
management but also for operational activities.

2. Ad-hoc Approach. For adopting this approach, the organisation uses information in a
processed form, available from different sources both inside and outside the organisation.
When an organisation uses information supplied by government agencies or private
institutions, it uses secondary sources of data and the information is available in a processed
form. Since environmental scanning is absolutely necessary for strategy formulation,
organisations uses different practical combinations or approaches to monitor their relevant
environments. These approaches may range from an informal assessment of the
environmental factors to a highly systematic and formal procedure. Informal assessment
may be adopted as a reactive measure to a crisis and ad-hoc studies may be undertaken
occasionally. A highly systematic and formal procedure may be used as a proactive measure
in anticipation of changes in environmental factors and structured data collection and
processing system may be used continuously.

3. Processed-form Approach. Between the two extremes of the informal and formal approaches,
different stances adopted by organisations might exist, depending on varying degrees of
concern for the environment. Such stances are situational. For example, when an issue-
related decision has to be taken, a periodic monitoring of the environment may be done.
Systematic and ad-hoc approaches can be used for the relevant environment of the
organisation while the processed-form approach could be used to appraise both the relevant
as well as the general environment. Whatever approach is adopted for environmental
scanning, data collection is necessary for deriving information about environmental factors.

3.6.2 Sources of Information for Environmental Scanning

The various sources of information tapped for collecting data for environmental scanning could
be classified in different ways. There could be formal and informal sources. Then there could
be written as well as verbal sources. In terms of origin, data sources could be external and
internal.

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Given below are some of the important types of sources of information.

1. Documentary or secondary sources of information like different types of publications. These

could be newspapers, magazines, journals, books, trade and industry association newsletters,
government publications, annual reports of competitor companies, commercial databases,
etc.
2. Mass media such as radio, television and Internet.
3. Internal sources like company files and documents, internal reports and memoranda,
management information system, databases, company employees, sales staff, etc.
4. External agencies like customers, marketing intermediaries, suppliers, trade associations,
government agencies, etc.
5. Formal studies done by employees, market research agencies, consultants and educational
institutions
6. Spying and surveillance through ex-employees of competitors, industrial espionage agencies,
or by planting ‗moles‘ in rival companies. The ethicality of these sources is doubtful but
nevertheless, these are used and so need a mention.

Strategists use different information sources depending on their needs for environmental
scanning. Government publications – though a rich and comprehensive source of information –
usually are available after a considerable time lag. Private sources, though relevant and timely,
are quite expensive to tap. Therefore, whenever a particular information source is used, it should
be checked for its reliability, timeframe, methods of data collection and analysis used, form of
presentation, etc.

3.6.3 Methods and Techniques Used for Environmental Scanning

The range of methods and techniques available for environmental scanning is wide. There are
formal and systematic techniques as well as intuitive methods available. Strategists may choose
from among these methods and techniques, those which suit their needs in terms of the quantity,
quality, availability, timeliness, relevance and cost of environmental information.

Various authors have mentioned the methods and techniques used for environmental scanning.
LeBell and Krasner outline nine groups of techniques: single-variable extrapolation, theoretical
limit environments, dynamic modes, mapping, multivariable interaction analysis, unstructured
expert opinion, structured expert opinion, structured inexpert opinion and unstructured inexpert
speculation.

Fahey, King and Narayanan have included ten techniques in their survey of environmental
scanning and forecasting in strategic planning. These are: scenario-writing, simulation,
morphological analysis, project-program-budget system (PPBS), game theory, cross-impact
analysis, field anomaly-relation, multi-echelon coordination and other forecasting techniques.
Of particular interest is the emerging set of techniques based on the complexity theory that is a
group of mathematical techniques designed to deal with the dynamic nature of real-world
problems. Among the techniques are the applications of the mathematical concepts of fractals,
fuzzy logic, genetic algorithms, swarm stimulation, Monte Carlo method and the more popular of
them, the chaos theory.

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Owing to the increasing complexity of the external environment, inevitably there have been
attempts to utilise the emerging information technologies in assisting strategic planners in
environmental scanning. Techniques based on artificial intelligence, neural networks, data
mining and a knowledge-based system have been proposed. An example is that of a software
agent-based system for continuous environmental surveillance. Another is Futurus, a business
solutions-software by Satyam Computer Services, for designing and simulating future scenarios.

While many of the environmental techniques are based on statistical methods and increasingly,
the use of sophisticated software in computer-assisted environmental scanning and forecasting,
some of them, like scenario-writing, may not use statistical information but employ informed
judgement and intuition to predict what the future is most likely to be, expressed in the form of a
descriptive statement or report.

Process based techniques for environmental scanning have been proposed from time to time. For
instance, a four-step technique called QUEST (quick environmental scanning technique),
proposed by B. Nanus uses scenario writing by a team of strategists. Day and Schoemaker have
proposed a seven-step process for developing peripheral vision that vigilant organisations should
develop, based on the assumption that opportunities and threats often begin as weak signals from
the periphery of the external environment hence Strategists have to be aware of the pitfalls of the
environmental scanning process so as to use it judiciously.

3.6.4 Pitfalls in Environmental Scanning

Just like any other strategic planning technique, environmental scanning has its soft underbelly.
We could enumerate at least five pitfalls faced while using environmental scanning.

 Sometimes, strategic planners may focus excessively on the influences in the relevant
environment that they miss out on the trends and issues in the general environment that really
matter.
 There is a danger of ‗paralysis by analysis‘, meaning that environmental scanning can create
such an overload of information that it may prevent timely action. Environmental scanning
should not become a number-crunching routine.
 The purpose of environmental scanning is to uncover influences that matter for the future of
the organisational strategic decision-making. This purpose should not be lost and
environmental scanning should not be used for purposes other than this. For instance,
scanning results cannot be used for political manoeuvering by strategists to favour their own
viewpoint, functional interests or departmental aims.
 The environmental scanning function should not be integrated too closely with the
operational and functional activities of the organisation. This means that it should not
become a line function, thus aligning it too closely with the interests of those activities.
 Similarly, environmental scanning should not be too far from the realities of the organisation,
making it an impersonal, staff function.

After environmental scanning process is complete, the strategists are faced with the question of
how to structure the mass of information available to them. The problem boils down to sifting

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the information in such a manner that a clear picture emerge of what opportunities and threats
operating in different sectors of the environment facing the organisation.

3.7 Appraising the Environment

In order to draw a clear picture of what opportunities and threats are faced by the organisation at
a given time, it is necessary to appraise the environment. This is done by being aware of the
factors that affect environmental appraisal, identifying the environmental factors and structuring
the results of this environmental appraisal.

3.7.1 Factors affecting Environmental Appraisal

Given the same environmental conditions, no two strategists or two organisations would appraise
the environment in a similar fashion. This is due to the many factors that affect the process of
environmental appraisal. We could identify these factors by classifying them into three
categories: the strategist-related, organisation-related and environment-related factors.

1. Strategist-related factors. There are many factors related to the strategist, which affect the
process of environmental appraisal. Since strategists play a central role in the formulation of
strategies, their characteristics such as age, education, experience, motivation level, cognitive
styles, ability to withstand time pressures and strain of responsibility have an impact on the
extent to which they are able to appraise their organisation‘s environment and how well they
are able to do it. Apart from these factors that are related to the strategists as individuals,
group characteristics could be the interpersonal relations between the different strategists
involved in appraisal, team spirit and the power equations operating between them.
Information consciousness is yet another variable denoting the attitude of top managers
towards environmental scanning and the communication patterns established among
managers with the organisation.

2. Organisation-related factors. Like those of strategists, many characteristics of the

organisation also have an impact on the environmental appraisal process. These
characteristics are the nature of business the organisation is in, its age, size and complexity,
the nature of its markets and the product or services that it provides. Another variable
identified is of information climate, which as assessed through the information infrastructure
implemented, i.e. the processes, technologies and people used in informat ion acquisition and
handling.

3. Environment-related factors. The nature of environment facing an organisation determines

how its appraisal could be done. The nature of the environment depends on its complexity,
volatility or turbulence, hostility and diversity. Information processing perspectives suggest
that scanning activity will increase in response to increasing environmental uncertainty.
Social cognition perspectives suggest that scanning decreases at high and low levels of
uncertainty since useful information is either unattainable or is already known.

In sum, how well environmental appraisal is done depends on the strategists, their organisations
and their environment in which their organisations exist. Before strategists can structure the
environmental appraisal, it is necessary to identify the environmental factors.

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3.7.2 Identifying the Environmental Factors

Environmental scanning results in a mass of information related to different sectors of the

environment. Without a technique to deal with this information, a strategist would be at a loss to
comprehend and analyse the environmental influences. These influences, as we have seen, are
the events, trends, issues and expectations of different interested groups. A feasible approach to
identifying the important environmental factors is to test each factor with regard to its impact on
the business of the organisation and the probability of such an impact. The figure below
provides a matrix which can help a strategist to identify the high priority environmental factors
(termed as issues by Boulton).

Figure identifying high priority environmental issues

Probability of impact High Medium Low
High Critical High priority Low priority
Medium High priority High priority Low priority
Low To be watched Low priority Low priority
Source: Adapted from William R. Boulton, Business Policy: The Art of Strategic Management, New York,
Macmillan Publishing Co., 1984, p. 120.

Environmental scanning leads to the identification of many issues that affect the organisation.
These issues could be judged on the basis of the intensit y of their impact on the business of the
organisation and the relative probability of such an impact. In such a manner, environmental
issues (and all the factors) could be distributed among the nine cells of the matrix. The issues
which are most likely to have a high level of impact on the organisations are the critical issues
and need immediate attention of the strategists. High priority issues are those which have a
medium to a high probability of impact, while those currently having a high level of impact but a
low probability of occurrence need to be kept under watch. All other issues could be considered
as being of low priority but still requiring continuous monitoring as conditions may change later.
In this way, strategists could narrow the range of environmental issues they have to focus their
attention upon. These issues help in structuring of the environmental appraisal, when divided
into opportunities and threats and allocated to different sectors of the environment.

3.7.3 Structuring Environmental Appraisal

The identification of environmental issues is helpful in structuring the environmental appraisal so
that the strategists have a good idea of where the environmental opportunities and threats lie.
Structuring the environmental appraisal is a difficult process as environmental issues do not lend
themselves to a straightforward classification into neat categories. An issue may arise
simultaneously from more than one sector of the environment. Strategists have to use their
experience and judgement to place the different environmental issues where they mainly belong,
so that clarity emerges. There are many techniques available to structure the environmental
appraisal. One such technique, suggested by Glueck, is that of preparing an environmental threat
and opportunity profile (ETOP) for an organisation.

The preparation of an ETOP involves dividing the environment into different sectors and then
analysing the impact of each sector on the organisation. A comprehensive ETOP requires
subdividing each environmental sector into sub factors and then the impact of each sub factor on

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the organisation is described in the form of a statement. A summary ETOP may only show the
major factors for the sake of simplicity.The table below shows an example of a n ETOP prepared
for an established company which is in the bicycle industry. The main business of the company
is in sports cycle manufacturing for the domestic and exports market. This example relates to a
hypothetical company but the illustration is realistic and based on the current Indian business
environment.

Table Environment threat and opportunity profile (ETOP) for a bicycle company
Environmental Nature of
Sectors impact Impact of each sector
Economic ↑ Growing affluence among urban consumers; rising
disposable incomes and living standards.
Market → Organised sector a virtual oligopoly with four major
manufacturers, buyers critical and better informed;
Overall industry growth rate not encouraging; Growth
rate for niche segments like sports, trekking, racing and
fancy city cycles is high; largely unsaturated demand in
niche segments; slender margins; traditional distribution
systems.
International ↓ Global imports growing but India‘s share shrinking;
India second globally as manufacturer; consumer and
exporter after China; major importers are the US and EU
but India exports mainly to Africa; threat of cheap
Chinese imports.
Political → Bicycle principal mode of transport for low and lower-
middle income; industry too small for any major political
attention.
Regulatory → Parts and components reserved for small-scale industry,
bicycle industry a thrust area for exports; regulatory
restrictions heavy; duty drawback rates lowered.
Social ↑ Environment- and health-friendly transport option; wide
usage like commuting to work or school and as
recreation and physical fitness equipment; easier
negotiating traffic congestions; customer preference for
sports cycles which are easy to ride and durable.
Supplier → Mostly ancillaries and associated companies in small-
scale sector supply parts and components; rising steel
prices; increasing use of aluminium; industrial
concentration in Punjab and Tamilnadu.
Technological ↑ Technological up-gradation of industry in progress;
import of machinery simple; product innovations
ongoing such as battery-operated and lightweight
foldable cycles.
Source: Adapted from William R. Boulton, Business Policy: The Art of Strategic Management, New York,
Macmillan Publishing Co., 1984, p. 120.

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Up arrows indicate favourable impact; down arrows indicate unfavourable impact, while
horizontal arrows indicate a neutral impact. As observed from the above table, sports cycle
manufacturing is an attractive proposition due to the many opportunities operating in the
environment. Prospects in the economic, social and technological sectors are bright. Market
environment can throw up opportunities in the niche segment that the company operates in. The
company can capitalise on the burgeoning demand by taking advantage of the various
government policies and concessions that still exist despite the low attention value of the
industry. It can also take advantage of the high exports potential that already exists and has not
been adequately capitalized upon. Since the company is an established manufacturer of bicycles,
it has a favourable supplier environment with traditional ties binding it to its vendors. But
contrast the implications of this ETOP for a new manufacturer, who is planning to enter this
industry. Though the economic, social and technological environment sectors would still be
favourable, much would depend on the extent to which the company is able to ensure the supply
of raw materials and components, have access to the latest technology have the facilities to use it.

The preparation of an ETOP provides a clear picture to the strategists about which sectors and
the different factors in each sector have a favourable impact on the organisation. By the means of
an ETOP, the organisation knows where it stands with respect to its environment. Obviously,
such an understanding can be of great help to an organisation in formulating appropriate
strategies to take advantage of the opportunities and counter the threats in its environment.
Before the formulation of strategies can be undertaken, strategists have to access whether the
organisation has the required strengths or whether it has weaknesses which can affect its
capability of taking advantage of the opportunities. This assessment is done through an analysis
of the strengths and weaknesses of the organisation and forms a part of the SWOT analysis. The
strengths and weaknesses can be analysed through an organisational appraisal, which is the
subject matter of the next unit.

4.0 CONCLUSION

The subject matter of the unit is environmental appraisal, which is the process of identifying
opportunities and threats facing an organisation, for the purpose of strategy formulation. SWOT
analysis is a systematic approach to find the strengths, weaknesses, opportunities and threats
pertaining to an organisation and its environment. Organisations are concerned about their
external environment in general, but more attention is paid to the relevant environment, which
has an immediate and a direct impact on their activities. The structuring of environmental
appraisal is done by the preparation of the environmental threats and opportunities profile
(ETOP) that involves dividing the environment into different sectors and then analysing the
impact of each sector on the organisation.

5.0 SUMMARY

In this unit, we have defined the concept environment as it relates to business organisation;
distinguished between external and internal environment; discussed SWOT analysis;
differentiated between general and relevant environment; defined and explained the concept
environment sectors; discussed environmental scanning, listed the methods and techniques for

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environmental scanning and drew and analysed the structuring of environmental appraisal and its
impact on each sector of the organisation.

In the next unit, our focus will be on appraisal of the internal organisation or simply put,
organisational appraisal.

6.0 TUTOR-MARKED ASSIGNMENT

1. Discuss some of the important characteristics of environment and demonstrate how a

strategist can understand it better by dividing it into external and internal components and
general and relevant environment.

2. A small scale industrialist recently attended a seminar on strategic management. She is quite
enthusiastic but does not understand exactly how to use the SWOT analysis for her company.
Act as a consultant and advise her on how to use the SWOT analysis.

3. What different types of factors affect the process of environmental appraisal? Select any
organisation of your choice. Identify the high priority environmental factors in its relevant
environment. Use this information to prepare a summary of ETOP for the organisation.

7.0 REFERENCES/FURTHER READINGS

Azhar, Kazmi (2010) Business Policy and Strategic Management, Free downloads from the
internet. Downloaded in January, 2012.

K. Davis (1975). The Challenge of Business, New York, NY, McGraw-Hill, p. 43.

Aguilar, F.J. (1967). Scanning the business environment, New York, NY: Macmillan Company.

Keegan, W.J. (1967). Scanning the international business environment: A study of the
information acquisition process, Unpublished Ph.D. Dissertation, Harvard Business School.

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UNIT 3 ORGANISATIONAL APPRAISAL

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Dynamics of Internal Environment
3.2 Organisational Capability Factors
3.3 Consideration in Organisational Appraisal
3.4 Methods and Techniques used for Organisational Appraisal
3.5 Structuring Organisational Appraisal
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the last unit, we defined the concept environment as it relates to business organisation;
distinguished between external and internal environment; discussed SWOT analysis;
differentiated between general and relevant environment; defined and explained the concept
environment sectors; discussed environmental scanning, listed the methods and techniques for
environmental scanning and drew and analysed the structuring of environmental appraisal and its
impact on each sector of the organisation. In this next unit, we shall discuss appraisal of the
internal organisation or in another way, organisational appraisal.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 Explain the manner in which strategic and competitive advantage is developed.

 Describe six factors of organisational capability.
 Explain the process of conducting organisational appraisal.
 Discuss the major methods and techniques used for organisational appraisal.
 Prepare strategic advantages profile (SAP) for an organisation.

3.0 MAIN CONTENT

Like individuals, all organisations have strengths and weaknesses that lead to their having
capabilities. These capabilities stand the organisations in good stead when they compete for
resources, customers and market share. In strategic management, we give a lot of importance to
an organisation‘s capabilities as these are central to their achieving strategic advantage for
gaining long-term success.
The appraisal of the external environment of a firm helps it to think of what it might choose to
do. The appraisal of the internal environment, on the other hand, enables a firm to decide about

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what it can do. We attempt to understand the internal environment of an organisation in terms of
the organisational resources and behaviour, strengths and weaknesses, synergistic effects and the
competencies that create strategic advantage.

3.1 Dynamics of Internal Environment

An organisation uses different types of resources and exhibits a certain type of behaviour. The
interplay of these different resources along with the prevalent behaviour produces synergy or
dysergy within an organisation, which leads to the development of strengths or weaknesses over
a period of time. Some of these strengths make an organisation especially competent in a
particular area of its activity causing it to develop competencies. Organisational capability rests
on an organisation‘s capacity and the ability to use its competencies to excel in a particular field,
thereby giving it strategic advantage. The resources, behaviour, strengths and weaknesses,
synergistic effects and competencies of an organisation determine the nature of its internal
environment. The diagram below shows the framework that we adopt for an explanation of the
process of development of strategic advantage by an organisation. It is expected that students
should be aware of these terms in general. However, we explain each of these terms here to
place them in the specific context of strategic management and business policy.

Diagram below shows the framework for the development of strategic advantage by an
organisation

Strategic
Advantage

Strategic
Advantage

Competencies

Synergistic
Effects

Strengths and
Weaknesses

Organisational Organisational
Resources + Behaviour
Source: C.K. Prahalad and Gary Hamel, ―The Core Competence of the Corporation‖, Harvard Business
Review, Vol. 68, No. 3, May-June, 1990, pp. 79-91.

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3.1.1 Organisational Resources
The dynamics of the internal environment of an organisation can be best understood in the
context of the resource-based view of firms or the resource-based theory of strategy. According
to Barney (1991), who is credited with developing this view of strategy as a theory, a firm is a
bundle of resources – tangible and intangible – that include all assets, capabilities, organisational
processes, information, knowledge, etc. These resources could be classified as physical, human
and organisational resources. The physical resources are the technology, plant and equipment,
geographic location, access to raw materials, etc. The human resources are the training,
experience, judgement, intelligence, relationships, etc. present in an organisation. The
organisational resources are the formal systems and structures as well as info rmal relations
among groups. Elsewhere, Barney says that resources of an organisation can ult imately lead to
strategic advantage for it if they possess four characteristics, i.e., if these resources are valuable,
rare, costly to imitate and non-substitutable. The resource-based theory of strategic management
holds that firms possess resources of which those that are valuable and rare enable them to
achieve strategic advantage. Other resources that cannot be imitated or substituted lead to
superior long-term performance and a sustainable strategic advantage. Empirical studies over
the years have generally supported the resource-based theory.

We observe here that the resource-based theory is concerned with the efficiency of resource
utilization. It clearly focuses on the internal environment of the firm and postulates that the
strategic advantage would flow from the efficiency with which the resources would be utilised.
When firms possess superior resources, they enable them to produce more efficiently and better
satisfy customer needs, delivering better value for a given cost and yielding a superior strategic
advantage to them. Very few organisations, like individuals, are born with a silver spoon in the
mouth; most organisations have to acquire resources the hard way. The cost and availability of
resources are the most important factors on which the success of an organisation depends. If an
organisation is favourably placed with respect to the cost and availability of a particular type of
resource, it possesses an enduring strength which may be used as a strategic weapon by it against
its competitors. Conversely, the high cost and scarce availability of a resource are a handicap
which causes a persistent strategic weakness in an organisation. It is worthy of note that mere
possession of resources does not make an organisation capable. Much depends on their usage
within the organisation. The usage, in turn, is based on the organisational behaviour that we
study next.

3.1.2 Organisational Behaviour

Organisational behaviour is the manifestation of the various forces and influences operating in
the internal environment of an organisation that create the ability for, or place constraints on, the
usage of resources. Organisational behaviour is unique in the sense that it leads to the
development of a special identity and character of an organisation. Some of the important forces
and influences that affect organisational behaviour are: the quality of leadership, management
philosophy, shared values and culture, quality of work environment and organisational climate,
organisational politics, use of power, etc.

The perspective reader would note that what we are proposing here is marrying of the hard side
of an organisation, i.e., its resource configuration, with the soft side of the behaviour. The

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resources and the behaviour are thus the yin and yang of organisations. What they collectively
produce are the strengths and weaknesses.

3.1.3 Strengths and Weaknesses

Organisational resources and behaviour do not exist in isolation. They combine in a complex
fashion to create strengths and weaknesses wit hin the internal environment of an organisation.
Strengths is an inherent capability which an organisation can use to gain strategic advantage. A
weakness, on the other hand, is an inherent limitation or constraint which creates a strategic
disadvantage for an organisation. Financial strength, for example, is a result of the availability of
sources of finances, low cost of capital, efficient use of funds, etc. Another example is of a
weakness in the operation area which results due to inappropriate plant location and layout,
obsolete plants and machinery, uneconomical operations, etc. In the following sections, we will
take up a comprehensive discussion of possible strengths and weaknesses in different functional
areas within an organisation. Strengths and weaknesses do not exist in isolation but combine
within a functional area, and also across different functional areas, to create synergistic effects.

3.1.4 Synergistic Effects

It is the inherent nature of organisations that strengths and weaknesses, like resources and
behaviour, do not exist individually, but combine in a variety of ways. For instance, two strong
points in a particular functional area add up to something more than double the strength.
Likewise, two weaknesses acting in tandem result in more than double the damage. In effect,
what we have is a situation where attributes do not add mathematically, but combine to produce
an enhanced or a reduced impact. Such a phenomenon is known as the synergistic effect.
Synergy is an idea that the whole is greater or lesser than the sum of its parts. It is also expressed
as ‗the two plus two is equal to five or three effect‘.

Within an organisation, synergistic effects occur in a number of ways. For example, within a
functional area, say of marketing, the synergistic effect may occur when the product, pricing,
distribution and promotion aspects support each other, resulting in a high level of marketing
synergy. At a higher level, the marketing and production areas may support each other leading
to operating synergy. On the other hand, a marketing inefficiency reduces production efficiency,
the overall impact being negative, in which case dysergy (or negative synergy) occurs. In this
manner, synergistic effects are an important determinant of the quality and type of the internal
environment existing within an organisation and may lead to the development of competencies.

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3.1.5 Competencies

On the basis of its resources and behaviour, an organisation develops certain strengths and
weaknesses which when combined lead to synergistic effects. Such effects manifest themselves
in terms of organisational competencies. Competencies are special qualities possessed by an
organisation that make them withstand the pressures of competition in the marketplace. In other
words, the net results of the strategic advantages and disadvantages that exist for an organisation
determines its ability to compete with its rivals. Other terms frequently used as being
synonymous to competencies are unique resources, core capabilities, invisible assets, embedded
knowledge, etc.

When an organisation develops its competencies over a period of time and hones them into a fine
art of competing with its rivals, it tends to use these competencies exceedingly well. The
capability to use the competencies exceedingly well turns them into core competencies. When a
specific ability is possessed by a particular organisation exclusively or relatively in large
measure, it is called a distinctive competence. Many organisations achieve strategic success by
building distinctive competencies around the critical success factors. Recall that critical success
factors are those which are crucial for organisational success (for a detailed discussion refer to
Unit 4, Module 2). A few examples of distinctive competencies are given below.

 Superior product quality on a particular attribute, say, a two-wheeler, which is more fuel
efficient than its competitor products.
 Creation of a marketing niche by supplying highly specialised products to a particular market
segment.
 Differential advantage based on superior research and development skills of an organisation,
not possessed by its competitors.
 Access to a low-cost financial source, like equity shareholders, not available to its
competitors.
A distinctive competence is ‗any advantage a company has over its competitors because it can do
something which they cannot or it can do something better than they can‘. It is not necessary, of
course, for all organisations to possess a distinctive competence. Neither do all organisations,
which possess certain distinctive competencies, use them for strategic purposes. Nevertheless,
the concept of distinctive competence is useful for the purpose of strategy formulation. The
importance of distinctive competence to strategy formulation rests with ‗the unique capability it
gives an organisation in capitalising upon a particular opportunity; the competitive edge it may
give a firm in the market place; and the potential for building a distinctive competence and
making it the cornerstone of strategy‘.

You may think that a hairline distinction is being made between the three terms: competencies,
core competencies and distinctive competencies. The difference, as you must have noted, lies in
the degree of uniqueness associated with the net synergistic effects occurring within an
organisation. You could think of them as being synonymous so long as you are able to make a
distinction among them when necessary. Among the three, it is the term ‗core competence‘ that
has gained greater currency and popularity. The term ‗core competence‘ has been popularised
by Prahalad and Hamel as an idea around which strategies could be formulated by an
organisation.

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3.1.6 Understanding the idea of „Core Competence‟
C.K. Prahalad and Gary Hamel are mainly credited for the dynamic capabilities approach that
consider strategic management as a collective learning process aimed at developing and then
exploiting distinctive competencies by an organisation that are difficulty to replicate by their
rivals. Through a series of publications such as ‗The Core Competence of the Corporation‘
(1990) and ‗Strategy as Stretch and Leverage‘ (1993) in the Harvard Business Review, and a
book ‗Competing for the Future‘ (1994), they have sought to propagate the idea of dynamic
capabilities. This idea rests on the thinking that strategy depends on learning, and learning
depends on the capabilities of an organisation.

According to Prahalad and Hamel, the competitive (or strategic, as we call it here) advantage can
be traced to the core competencies of an organisation. They take the analog of a tree in
describing core competence. ‗The diversified corporation is a large tree. The trunk and major
limbs are core products, the smaller branches are business units; the leaves, flowers, and fruit are
end products. The root system that provides nourishment, sustenance, and stability is the core
competence‘.To identify a core competence, Prahalad and Hamel prescribe three tests:

 It should be able to provide potential access to a wide variety of markets;

 It should make a significant contribution to the perceived customer benefits of the end
products; and
 It should be difficult for the competitors to imitate.

From the several examples of corporations that Prahalad and Hamel use to exemplify their
concept of core competence, we quote here a few. Canon‘s core competence lies in optics,
imaging and microprocessor controls. Sony‘s in miniaturisation, Philip‘s in optical-media, 3M‘s
in stick tape and Honda‘s in engines and power trains. The core competencies of these
corporations have enabled them to operate in diverse markets offering different products. For
instance, Canon has entered, and even dominated, diverse markets such as copiers, laser printers,
cameras and image scanners.

The idea of core competence, presented above, seems to be a brilliant way to focus upon the
latent strength of an organisation. Yet there are pitfalls of which an organisation has to be aware
of. Core competencies can be developed but so also, lost. They cannot be taken for granted. The
ability of a core competence to provide strategic advantage can diminish over time as they do not
exist perpetually. A dilemma associated with all core competencies is that they have the
potential of turning into core rigidities. External environment is responsible for this sad turn of
events. New competitors may figure out a way to serve customers better or new technologies
may emerge, causing the existing company to lose its strategic advantage. Over-reliance on core
competencies to the extent of becoming prisoners of one‘s own excellence may result in strategic
myopia.

Core competence acting as a double-edged sword is demonstrated by the concept of strategic

commitment enunciated by Pankaj Ghemawat. This term refers to an organisation‘s
commitment to a particular way of doing business, i.e., developing a particular set of resources
and capabilities. Ghemawat‘s contention is that once a company has made a strategic

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commitment, it finds it difficult to respond to new competition if doing so requires a break with
its commitment.

The idea of a single core competence as the bedrock for strategy formulation has not gone
unchallenged. Critics feel that a core competence, narrowly defined, may restrict an
organisation‘s freedom to act when fresh opportunities in the business environment lure it
towards a new direction. In a situation where organised retail is just taking off, the country still
remains under-insured, agriculture has not yet been exploited as an organised industry and the
infrastructure sector needs overhauling, it would be imprudent for organisations to stick to a
single core competence and deprive itself of taking advantage of the opportunities. There might
be several different core competencies required. In one case, it may be the ability to raise and
manage capital, in another, it might be the ability to manage the regulatory environment or
simply, the ability to roll out operation quickly.

Core or distinctive competencies serve a useful purpose if they are used to develop a sustained
strategic advantage through building up of organisational capability, which is the subject of the
next subsection.

3.2 Organisational Capability

Organisational capability is the inherent capacity or potential of an organisation to use its

strengths and overcome its weaknesses in order to exploit the opportunities and face the threats
in its external environment. It is also viewed as a skill for coordinating resources and putting
them to productive use. Without capability, resources – even though valuable and unique – may
be worthless. Since organisational capability is the capacity or potential of an organisation, it
means that it is a measurable attribute. As an attribute, it is the sum total of resources and
behaviour, strengths and weaknesses, synergistic effects occurring in and the competencies of
any organisation.

Several thinkers in the field of strategy favour the line that capabilities are the outcomes of an
organisation‘s knowledge base, i.e., the skill and knowledge of its employees. There is a
growing body of opinion that considers organisations as reservoirs of knowledge, in which case
they are all learning organisations. In fact, the concept of organisational learning has spawned a
whole school of strategy thought. Students are advised to refer to the subsection below which
provides some basic understanding of the learning organisation. It is to be noted that while the
concept of a learning organisation is applicable to strategic management in a wider sense at
several places, here we are referring to it in the specific context of a capability that is seen as an
outcome of organisational learning.

Strategies are primarily interested in organisational capability because of two reasons. First, they
wish to know what capacity exists within the organisation to exploit opportunities or face threats
in its environment. Secondly, they are interested in knowing what potential should be developed
within the organisation so that opportunities could be exploited and threats could be faced in
future.

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3.2.1 Understanding Organisational Learning
Crossan, Lane and White (1997) define organisational learning as ‗the process of change in
individual and shared thought and action, which is effected by and embedded in the institutions
of the organisation‘. Four basic processes of organisational learning are: intuiting (subconscious
process of learning that occurs at the individual level); interpreting (sharing learning at the group
level); integrating (collective understanding at the group level and taking it to the level of
organisation); and institutionalizing (incorporating learning across the organisation by
embedding it in systems, structures, routines and practices).

Nonaka and Takeuchi (1995) place value on knowledge creation within organisations through
focusing on insight, intuition and hunch that are gained through experience. Chris Argyris (1977)
earlier and later Garratt (1987), differentiated single-loop learning that questions the existing
framework in which decisions take place. Organisations that engage in double-loop learning are
able to discover new things and act in novel ways that enable them to adapt to changes and
sustain and improve their capability and competitiveness.

Peter Senge (1990) popularised the concept of a learning organisation which could be explained
as an organisation skilled at creating, acquiring and transferring knowledge, and at modifying its
behaviour to reflect new knowledge and insights. From the classic term of Pet er Drucker: the
knowledge worker down to the emerging discipli9ne of knowledge management – which is
considered as gathering and managing intellectual capital that can be leveraged for generating
internal responsiveness of organisation – the focus is clearly on the capability of an organisation
for developing and sustaining strategic advantage.

Organisational capability is measured and compared through the process of organisational

appraisal which is the subject matter of this unit. A feasible approach to appraising the
organisation is to start with the factors and influences operating within the organisation. These
could be called the organisational capability factors.

3.2.2 Strategic and Competitive Advantage

Strategic advantages are the outcomes of organisational capabilities. They are the results of
organisational activities leading to rewards in terms of financial parameters, such as profit or
shareholder value and/or non-financial parameters, such as market share or reputation. In
contrast, strategic disadvantages are penalties in the form of financial loss or damage to market
share. Clearly, such advantages or disadvantages are the outcomes of the presence or absence of
organisational capabilities. Strategic advantages are measurable in absolute terms using the
parameters in which they are expressed. So, profitability could be used to measure strategic
advantage: the higher the profitability, the better is the strategic advantage. They are comparable
in terms of the historical performance of an organisation over a period of time or its current
performance with respect to its competitors in the industry.

Competitive advantage is a special case of strategic advantage where there is one or more
identified rivals against whom the rewards or penalties could be measured. So, outperforming
rivals in profitability or market standing could be a competitive advantage for an organisation.
Competitive advantage is relative rather than absolute and it is to be measured and compared
with respect to other rivals in an industry.

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With rising competitiveness in industry, mainly owing to the liberalisation and reform process,
the usage of the term ‗competitive advantage‘ has become more pronounced. The term
‗competitive advantage‘ is more popular since it has been used as an important concept by the
proponents of the positioning school of thought in strategy. For instance, Michael Porter uses
competitive advantage as one of the important concepts in his seminal contributions to the area
of competitive strategy. Here, we take the position as described above. Strategic advantage is a
broader concept while competitive advantage is one of its subset. The obvious purpose of
gaining strategic advantage is to empower organisations to realise their strategic intent.

3.2.3 Organisational Capability Factors

Capabilities are most often developed in specific functional areas such as marketing or
operations or in a part of a functional area such as distribution or research and development. It is
also feasible to measure and compare capabilities in functional areas. Thus, a company could be
considered as inherently strong in marketing owi9ng to a competence in distribution skills. Or a
company could be competitive in operations owing to superior research and development
infrastructure.

Organisational capability factors (or, simply, capability factors) are the strategic strengths and
weaknesses existing in different functional areas within an organisation, which are of crucial
importance to strategy formulation and implementation. Other terms synonymous to
organisational capability factors are: strategic factors, strategic advantage factors, corporate
competence factors, etc.

Different types of capability factors exist within the internal environment of an organisation. For
the purpose of explanation, authors divided them into different functional areas. In this course,
we follow an approach of dividing the organisation into six largely accepted and commonly
understood functional areas. These are: finance, marketing, operations, personnel, information
and general management areas.

You will note that we are designating information and general management as functional areas
within the organisation though these are not per se considered as such. These are rather
overarching functions, concerned with the interaction and coordination of activities, covering the
other four functional areas. But here we consider them as functional areas to draw attention to
the fact that these two areas too merit consideration and possess embedded capabilities that have
the potential to provide strategic advantage to organisations. It should be remembered, however,
that a segregation of an organisation into four functional areas is arbitrary and organisations need
to choose a basis for classification that would be the most relevant to their structure, functions
and activities. You would need to keep a particular scheme of segregation of the organisation
into functional areas when you do a case analysis. For instance, a service organisation like a
corporate hospital may have, besides different specialties, functions such as a laboratory,
radiology unit, therapy, purchase and stores, personnel, housekeeping and accounting. The
organisation of such a type would have functional areas based on its typical activities.

We now describe capability factors in the six functional areas of finance, marketing, operations,
personnel, information and general management. For each capability factor, we first define that

181
factor, point out some of the important elements that support capability in an area, give a few
illustrations of typical strengths to help enhance your understanding.

(a) Financial Capability

Financial capability factors relate to the availability, usages and management of funds and all
allied aspects that have a bearing on an organisation‘s capacity and ability to implement it
strategies. Some of the important factors which influence the financial capability of any
organisation are as follows:
1. Factors related to sources of funds. Capital structure, procurement of capital, controllership,
financing pattern, working capital availability, borrowings, capital and credit availability,
reserves and surplus and relationship with lenders, banks and financial institutions.
2. Factors related to usage of funds. Capital investment, fixed asset acquisition, current assets,
loans and advances, dividend distribution and relationship with shareholders.
3. Factors related to management of funds. Financial, accounting and budgeting systems;
management control system, state of financial health, cash, inflation, credit, return and risk
management; cost reduction and control and tax planning and advantages.
Based on the above factors, a number of strengths and weaknesses can be found that affect the
financial capability of an organisation. The below provides a few illustrations of strengths that
support financial capability. The absence or unavailability of these factors leads to the
occurrence of weaknesses. For instance, access to financial resources is a strength, while
inaccessibility to them is a weakness. Typical strengths that support financial capability
 Access to financial resources;
 Amicable relationship with financial institutions;
 High level of credit-worthiness;
 Efficient capital budgeting system;
 Low cost of capital as compared to competitors;
 High level of shareholder‘s confidence;
 Effective management control system;
 Tax benefits due to various government policies.
(b) Marketing Capability
Marketing capability factors relate to the pricing, promotion and distribution of products or
services, and all the allied aspects that have a bearing on an organisation‘s capacity and ability to
implement its strategies.
(c) Personnel Capability
Some of the important factors which influence the personnel capability of an organisation are as
follows:

1. Factors related to the personnel system. Systems for manpower planning, selection,
development, compensation, communication and appraisal, position of the personnel
department within the organisation, procedures and standards, etc.
2. Factors related to organisational and employee characteristics. Corporate image, quality of
managers, staff and workers perception about and image of the organisation as an employer,
availability of developmental opportunities for employees, working conditions, etc.
3. Factors related to industrial relations. Union-management relationship, collective
bargaining, safety, welfare and security, employee satisfaction and morale, etc.

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Some of the typical strengths supporting the development of personnel capability are provided
below:

 Genuine concern for human resources management and development;

 Efficient and effective personnel systems;
 The organisation perceived as a fair and model employer;
 Excellent training opportunities and facilities;
 Congenial working environment;
 Highly satisfied and motivated workforce;
 High level of organisational loyalty;
 Low level of absenteeism;
 Safe and salutary working conditions.

4.0 CONCLUSION

We read from this unit that all organisations have strengths and weaknesses that lead to their
having capabilities. These capabilities stand the organisations in good stead when they compete
for resources, customers and market share. The resources, behaviour, strengths and weaknesses,
synergistic effects and competencies of an organisation determine the nature of its internal
environment. The dynamic of internal environment of an organisation can best be understood in
the context of the resource-based view of firms or the resource-based theory of strategy.
Organisational behaviour is the manifestation of the various forces and influences operating in
the internal environment of an organisation that create the ability for, or place constraints on, the
usage of resources. Organisational resources and behaviour do not exist in iso lation but combine
in a complex fashion to create strengths and weaknesses within the internal environment of an
organisation. It is the inherent nature of organisations that strengths and weaknesses like
resources and behaviour do not exist individually but combine in a variety of ways.

.0 SUMMARY

In this unit, we explained the manner in which strategic and competitive advantage is developed;
described and exemplify six factors of organisational capability; explained the process of
conducting organisational appraisal; described the major methods and techniques used for
organisational appraisal and prepared strategic advantages profile (SAP) for an organisation.

In the next unit, you will learn about hierarchical levels of management.

6.0 TUTOR MARKED ASSIGNMENT

1. With the aid of a diagram, explain what is meant by the dynamics of internal
environment.

2. Write short notes on the following:

(a) Organisational resources;
(b) Organisational behaviour;
(c) Strengths and weaknesses;

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 (d) Synergistic effects;
(e) Competencies;
(f) Core competencies.

3. What do you understand by the term organisational capability? Explain briefly showing
its relationship with organisational learning, strategic and competitive advantage,
organisational capability factors.

7.0 REFERENCES/FURTHER READING

C.K. Prahalad and Gary Hamel, ―The Core Competence of the Corporation‖, Harvard Business
Review, Vol. 68, No. 3, May-June, 1990, pp. 79-91.

C. Argyris, ―Double Loop Learning in Organisations‖, in Harvard Business Review, Sept-Oct,

1977, pp. 115-125

B. Garratt, The Learning Organisation, Fontana, 1987.

P.M. Senge, The Fifth Discipline: The Art and Practice of the Learning Organisation, New York:
Doubleday, Currency, 1990.

I. Nonaka and H. Takeuchi, The Knowledge-creating Company: How Japanese Companies

Create the Dynamics of Innovation, New York, Oxford University Press, 1995.

M. Crossan, H. Lane and R. White, ―Organisational Learning: Toward Theory‖, Working Paper,
London, Ontario: Richard Ivey School of Business, University of Western
Ontario, 1997.

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Unit 4 HIERARCHICAL LEVELS OF STRATEGY

TABLE OF CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Corporate Level Strategy
3.2 Function of Corporate Level Strategy
3.3 Strategy Levels
3.4 Corporate Level Strategy and other Levels of Planning
3.5 Decisions in Corporate Level Strategy
3.6 Corporate Level Strategic Questions
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the last unit, we explained the manner in which strategic and competitive advantage is
developed; described and exemplify six factors of organisational capability; explained the
process of conducting organisational appraisal; described the major methods and techniques used
for organisational appraisal and prepared strategic advantages profile (SAP) for an organisation.

In the next unit, you will learn about hierarchical levels of management.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

 define and explain corporate level strategy;

 list the functions of corporate level strategy;
 Discuss strategy levels;
 describe the relationship between corporate level strategy and other levels of planning;
 Explain decisions in corporate level strategy and corporate level strategic questions.

3.0 MAIN CONTENT

Strategy can be formulated on three different levels: corporate level, business unit level and
functional or departmental level.

While strategy may be about competing and surviving as a firm, one can argue that products, not
corporations compete, and products are developed by business units. The role of the corporation
then is to manage its business units and products so that each is competitive and so that each
contributes to corporate purposes.

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Consider Textron, Inc., a successful conglomerate corporation that pursues profits through a
range of businesses in unrelated industries. Textron has four core business segments:

 Aircraft - 32% of revenues

 Automotive - 25% of revenues
 Industrial - 39% of revenues
 Finance - 4% of revenues.

While the corporation must manage its portfolio of businesses to grow and survive, the success
of a diversified firm depends upon its ability to manage each of its product lines. While there is
no single competitor to Textron, we can talk about the competitors and strategy of each of its
business units. In the finance business segment, for example, the chief rivals are major banks
providing commercial financing. Many managers consider the business level to be the proper
focus for strategic planning.

3.1 Corporate Level Strategy

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

Corporate level strategy is concerned with:

 Reach - defining the issues that are corporate responsibilities; these might include identifying
the overall goals of the corporation, the types of businesses in which the corporation should
be involved, and the way in which businesses will be integrated and managed.
 Competitive Contact - defining where in the corporation competition is to be localized. Take
the case of insurance: In the mid-1990's, Aetna as a corporation was clearly identified with
its commercial and property casualty insurance products. The conglomerate Textron was not.
For Textron, competition in the insurance markets took place specifically at the business unit
level, through its subsidiary, Paul Revere. (Textron divested itself of The Paul Revere
Corporation in 1997.)
 Managing Activities and Business Interrelationships - Corporate strategy seeks to develop
synergies by sharing and coordinating staff and other resources across business units,
investing financial resources across business units, and using business units to complement
other corporate business activities. Igor Ansoff introduced the concept of synergy to
corporate strategy.
 Management Practices - Corporations decide how business units are to be governed: through
direct corporate intervention (centralization) or through more or less autonomous government
(decentralization) that relies on persuasion and rewards.

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

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3.1.1 Business Unit Level Strategy
A strategic business unit may be a division, product line, or other profit cent er that can be
planned independently from the other business units of the firm.
At the business unit level, the strategic issues are less about the coordination of operating units
and more about developing and sustaining a competitive advantage for the goo ds and services
that are produced. At the business level, the strategy formulation phase deals with:
 positioning the business against rivals
 anticipating changes in demand and technologies and adjusting the strategy to
accommodate them
 influencing the nature of competition through strategic actions such as vertical integration
and through political actions such as lobbying.

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

3.1.2 Functional Level Strategy

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

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

3.2 Function of Corporate Level Strategy

Corporate level strategy covers the strategic scope of the organization as a whole. For most
organizations the corporate strategic plan is the only strategic plan required. Often strategy at the
corporate level is simply referred to as corporate strategy, or in unified companies t he corporate
business strategy. The process that produces it is called corporate strategic planning, or
sometimes simply corporate planning. In a few situations however, it may be justified to speak of
corporate level strategy to distinguish it from other kinds of planning.

3.3 Strategy Levels

In the first case the organisation may be multidivisional in nature to the extent that in principle or
even in law, separate parts of the enterprise could operate as viable entities in their own right.

These ‗group structures‘ may undertake strategic planning as group exercise where under the
corporate level strategy, each separate subsidiary or division has its own strategic planning
process and strategic plan. In these cases however, one of the most significant inputs to each

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divisions‘ strategic planning is the output of the corporate strategic planning. These outputs from
corporate level strategy; usually in the form of performance targets for the divisions cannot be
ignored by the subsidiary unit. The corporate business strategy may also set down a small
number of other factors that the divisions, or strategic business units as they may sometimes be
called. These might include guidance on market definition, including geographic scope. For
example the subsidiaries of a multinational bank may be defined by the country they operate in.
In this case the corporate business strategy would set profit targets for each country bank. The
corporate strategy would yield to the country banks as to the strategies they pursue in generating
these profits. The country level banks would have their own business unit level strategies.

In the second case corporate level strategy is used to distinguish it from the many other plans and
planning processes that get the term ‗strategic‘ in their names. The word strategy has acquired a
kind of aura that seems to make many people want to use it, regardless of how actually strategic
the matter at hand is in relation to the overall performance of an organisation. So we can end up
with strategic plans for every level, part and functional process in the organization.

Here we emphasize the use of strategic plan as far as possible according to this definition.
Strategic planning is a systematic, formally documented process for deciding the handful of key
decisions that an organisation, viewed as a corporate whole, must get right in order to thrive over
the next few years.

However, because of this wide spread usage in a variety of contexts we also use the description
‗corporate level strategy‘ or ‗corporate strategy‘, and refer sometimes to ‗corporate strategic
planning‘ to make it clear we are not talking about all these other partial or ‗non corporate‘
forms.

Because the successful implementation of corporate level strategy relies on cooperation and
alignment across the organization as a whole, it is useful to distinguish the various levels of
strategy.

3.4 Corporate level strategy and other levels of planning

Let us illustrate the place of strategic planning in the overall set of plans involved with corporate
strategic planning, according to this sequence –

Note when we say business unit, it may also, among other designations, be known as strategic
business unit strategy or divisional strategy. And functional strategy may also apply to cross
divisional or cross functional processes, or major projects. Confusing isn‘t it!

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3.5 Decisions in corporate level strategy

Remember that at the beginning we said that corporate-level strategies address the entire
strategic scope of the enterprise. This is the "big picture" view of the organization and may
include deciding in which product or service markets to compete and the geographic boundaries
of the organizations‘ operations.

For multi-divisional organizations or enterprises, how capital, staffing, and other resources are
allocated is usually established at the corporate level. Additionally, because market defin ition is
usually the domain of corporate-level strategy, the responsibility for diversification, or the
addition of new products or services to the existing offerings, also mostly comes within the
responsibility of corporate-level strategy. Also, whether to compete head on with other
companies or to selectively establish cooperative partnering arrangements, or ‗strategic alliances‘
is a decision for corporate-level strategy, while requiring ongoing input from business unit or
divisional level managers.

3.6 Corporate level strategic questions

So crucial questions addressed by corporate-level strategy, among other possibilities may

include:

1. What should be the scope of operations; i.e.; what businesses should the firm be in? And
where should it be in business?
2. How should the organization allocate its resources its various existing lines of business or
business units?
3. What level of diversity should exist in the business as it moves into the future? Are there
other activities the enterprise should be in or are there current activities that should be
targeted for stopped or sold off to others?
4. What should be the nature of this diversity or how diversified should the organization be?
Should it diversify in similar product or service markets, or into completely differ ent areas;
becoming a more conglomerate entity.
5. How should the firm be organized? What will be the boundaries of the enterprise? How will
these boundaries impact relationships among parts of the business, with suppliers, customers
and other interest groups? How will the organizational functions such as product
development, production, distribution finance, marketing, sales customer service, etc. fit
together? Are the responsibilities for each business unit clearly identified and is
accountability established? Which will be carried out in-house, and which will be contracted
out?
6. Should the firm enter into cooperative, mutually-beneficial relationships or alliances with
others? If so, on what basis? If not, what impact might this have on future organizational
performance?

As these questions show, corporate strategies address the long-term direction for the organization
as a whole. Corporate strategies deal with plans for the entire organization and change as the
capabilities of the organization develop and as the environment of the organization changes.

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Top management has primary decision making responsibility in developing corporate strategies
and these managers are directly responsible to providers of capital to the organization, whether
shareholders, donors, members, and so on depending on the type of organization . The role of the
governing board of is to ensure that top managers actually act to address these owner or primary
beneficiary interests.

3.6.1 Business-Level Strategies

Business-level strategies are similar to corporate-strategies in that they focus on overall
performance. As distinct from corporate-level strategy, however, they focus on just one instead
of a range of businesses. The corporate level strategy of a multi division operation is like a
strategy for managing an investment portfolio.

Business units are usually individual enterprise-like entities oriented toward a particular industry,
product or service type, and or market. Business-level strategies are thus primarily concerned
with:

1. Managing unit activities so they conform to organizational corporate level strategies,

sometimes including cooperation with other business units to achieve ‗strategic synergy‘.

2. Developing distinctive capabilities, resources and competitive advantage in each unit.

3. Identifying product or service-market opportunities and developing strategies for succeeding

in each.

4. Monitoring the business industry environment so that strategies conform to the needs of the
markets at the current stage of development.
In a single-product company, corporate-level and business-level strategies are the same.
Business-level strategies look at the business unit strengths, weaknesses, opportunities and
threats; much like corporate-level strategies, except the emphasis in business-level strategies is
on the specific product or service, not on the corporate level investment portfolio. Business-level
strategies thus contribute to corporate-level strategies. Corporate-level strategies attempt to
deliver benefits to the primary beneficiaries, such as increasing the wealth of shareholders
through profitability of the overall corporate portfolio, and business-level strategies are
concerned wit:
1. matching their operations with the overall objectives of corporate-level strategy while
simultaneously
2. navigating the environment in which they are active in such a way that they are among the
better performers in their industry.

3.6.2 Functional-Level Strategies

Functional-level strategies are concerned with managing the functional areas of the organizatio n,
such as product or service development and design, marketing and sales, finance, human
resources, production, research and development, etc., so that each function upholds contributes

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to individual business unit strategies and the overall corporate-level strategy. Functional
strategies are primarily concerned with:
 Efficiently deploying specialists within the functional area.
 Integrating activities within the functional area
 Making sure that functional strategies link effectively and efficiently with business strategies
and the overall corporate-level strategy.

4.0 CONCLUSION

Strategies for an organization may be classified by the level of the organization responsible for
the strategy. Corporate-level strategies concern top management and address strategic issues of
facing the organization as a corporate whole. Business-level strategies deal with major business
units or divisions of the corporate portfolio. Business-level strategies are generally developed by
upper and middle-level business unit managers, in negotiation on key targets with the top
corporate managers, and are intended to help the organization achieve its corporate level
strategy. Functional or business process strategies address issues usually faced by lower-level
managers and deal with strategies for the major organizational functions such as marketing,
finance, production, and research, which are considered important to achieving the business
strategies and enabling the corporate-level strategy.

5.0 SUMMARY

In this unit, we defined and explained corporate level strategy; listed the functions of corporate
level strategy; discussed strategy levels; described the relationship between corporate level
strategy and other levels of planning and explained decisions in corporate level strategy and
corporate level strategic questions.

With this, we have come to the conclusion of the course. Please read through your material
again and assimilate it. We wish you all the best in your examination.

6.0 TUTOR MARKED ASSIGNMENT

1. What are strategy levels? Briefly discuss them.

2. What is the relationship between corporate level strategy and other levels of planning ?

7.0 REFERENCES/FURTHER READINGS

Mintzberg, Henry, Lampel, J., Ahlstrand, B., Strategy Safari: A Guided Tour through the Wilds
of Strategic Management

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