Strategic Management (Modified)

C H
1
A P T E R
INTRODUCTION TO STRATEGIC MANAGEMENT
CONTENTS
1. Introduction
1
1. Definitions of Strategic Management
2
1. Nature of Strategic Management
3
1. Dimensions of Strategic Management
4
1. Need for Strategic Management
5
1. Strategic Management Process
6
1.6.1 Strategy Levels
1.6.2 Typologies and Methods of Strategy
1. Vision
7
1.7.1 Defining Vision
1.7.2 Nature of Vision
1.7.3 Characteristics of Vision Statements
1. Mission
8
1.8.1 Defining Mission
1.8.2 Importance of Mission Statement
1.8.3 Characteristics of a Mission
Statement
1.8.4 Components of a Mission Statement
1.8.5 Formulation of Mission Statement
1.8.6 Evaluating Mission Statement
NMIMS Global Access – School for Continuing

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1.9 Business
1.10 Definition
1.11 Summary
1.12 Descriptive
1.13 Questions Answers
and Hints
Suggested Readings for Reference

Education
2 STRATEGIC MANAGEMENT
INTRODUCTORY CASELET
NOTES
RISE AND DOWNFALL OF KODAK

Eastman Kodak revolutionised the photography industry by recording images on a film
(as against the traditional glass plates) through a novel product called portable camera,
in early 1901. The camera was a major hit with millions of customers. The name – Kodak
– became the most respected brand of photographic films almost instantaneously.
Continuous innovations (especially the colour film – those yellow little boxes of film) and
the absence of competition took Eastman Kodak Company to dizzying heights over the
years. It became a giant corporation registering sales of over $20 billion by 1990 –
powered by contributions from a vast army of over 1 lakh employees. The ad
campaign: “You press the button; we do the rest” – made Kodak a household name all
over the globe. Meanwhile, Fuji Photo Film Company of Japan entered the fray with a
little green box of film that challenged Kodak’s dominance for over a century. Using
latest manufacturing technologies, Fuji cut the price down aggressively without, of
course, sacrificing quality. For the customers, both were equally good. But the big price
differential between product prices brought Kodak down and the company lost the title
of “official film of the 1984 Summer Olympics to Fuji. From then onwards, Fuji gained
market share steadily as customers came to realise that Fuji is a legitimate alternative to
Kodak and is not just a low price brand. The introduction of digital imaging technologies
at around the same time from the likes of Sony, Cannon, Motorola, Casio and Hewlett-
Packard changed the rules of the game, more or less, permanently. In the interim, a bad
acquisition (a pharma company) and some failed innovations (entering office copier
business, introducing a 35mm camera; a disposable camera – in a belated manner —
and some heavy investments in Kodak Advantix system running to over $200 million)
have had a telling effect on the brand image. When the mobile phone technology took
off and the home computer market exploded in a big way, it was all over for Kodak
(2008 reported revenues just $442 million). The lethargic response to tumultuous
NMI
changes in the industry environment, according to experts, brought the company down.
As Trout commented, ‘if you are known for one thing, the market will not give you
another thing’. Kodak is a film in the minds of the marketplace and not camera (Nikon
fits such a description). As it turned out, Kodak could not find a rewarding space in the
marketplace beyond the realm of conventional photography. When you fail to make
intelligent moves – proactively and in sync with market expectations and remain stuck
MS
with a well-entrenched position and fail miserably in exploiting emerging opportunities,
you get punished and pushed aside. Before hiding its head in the sand, Kodak did try a
trick or two to cover the lost ground by embracing the digital imaging technology.
However, it was too late for it to make any difference. Adding salt to its injuries, due to
fierce competition, the digital camera business got commoditised and the Kodak brand
did not offer any value for money. In 2006, the company had to close the business and
show the door to over 27,000 people. The most respected brand for over 100 years in
photographic films had been decimated beyond belief within a span of just 10 years!
Contd...

Education
NOTES
1.1 INTRODUCTION
The firm’s strategy process is how its managers envision a
possible future and guide the firm toward it. This ‘possible
future’ is a moving target. The firm and the environment
change in unpredictable ways. So, ‘guiding the firm’ does not
mean formulating a strategy for others to implement. The firm
must be structured and its processes shaped so that it follows
the right strategic path in an ever-changing world.
Strategic management is a dynamic process of aligning
strategies, performance and business results; it is all about
people, leadership, technology and processes. Effective
combination of these elements will help with strategic direction
and successful service delivery. It is a continuous activity of
setting and maintaining the strategic direction of the
organisation and its business, and making decisions on a day-
to-day basis to deal with changing circumstances and the
challenges of the business environment. As part of your
strategic thinking about advancing the business, you (and your
partners) will have set a course for a particular direction, but
subsequent policy drivers (such as new performance targets)
or business drivers (such as increased demand for services)
could take the organisation in a different direction. There could
be implications for accountability when you decide whether to
take corrective action to get back on course or to go with the
new direction. Similarly, there could be implications for
governance if relationships with partners change.
Strategic management is exciting and challenging. It makes
fundamental decisions about the future direction of a firm – its
purpose, its resources and how it interacts with the
environment in which it operates. Every aspect of the
organisation plays a role in strategy – its people, its finances,
its production methods, its customers and so on.
Strategic management can be described as the identification
of the purpose of the organisation and the plans and actions to
achieve that purpose. It is that set of managerial decisions
and actions that determine the long-term performance of a
business enterprise.

Education
INTRODUCTION TO STRATEGIC MANAGEMENT5
NOTES
It involves formulating and implementing strategies that will
help in aligning the organisation and its environment to
achieve organisational goals. Strategic management does not
replace the traditional management activities such as
planning, organising, leading or controlling. Rather, it
integrates them into a broader context taking into account the
external environment and internal capabilities and the
organisation’s overall purpose and direction. Thus, strategic
management involves those management processes in
organisations through which future impact of change is
determined and current decisions are taken to reach a desired
future. In short, strategic management is about envisioning the
future and realising it.
DEFINITIONS OF STRATEGIC
1.2
MANAGEMENT
To get an understanding of what goes on in strategic
management, it is useful to begin with definitions of strategic
management. In this chapter, we introduce the elements and
the process of strategic management and the importance,
benefits and limitations of strategic management.
The concepts in strategic management have been developed
by a number of authors like Alfred Chandler, Kenneth Andrews,
Igor Ansoff, William Glueck, Henry Mintzberg, Michael E. Porter,
Peter Drucker and a host of others. There are therefore several
definitions of strategic management. Some of the important
definitions are:
“Strategic management is concerned with the determination of
the basic long-term goals and the objectives of an enterprise
and the adoption of courses of action and allocation of
resources necessary for carrying out these goals”.
– Alfred Chandler, 1962
“Strategic management is a stream of decisions and actions
which lead to the development of an effective strategy or
strategies to help achieve corporate objectives”.
– Glueck and Jauch, 1984
“Strategic management is a process of formulating,
implementing and evaluating cross-functional decisions that
enable an organisation to achieve its objective”.
– Fed R David, 1997
“Strategic management is the set of decisions and actions
resulting in the formulation and implementation of plans
designed to achieve a company’s objectives.”
– Pearce and Robinson, 1988
“Strategic management includes understanding the strategic
position of an organisation, making strategic choices for the
future and turning strategy into action.”
– Johnson and Sholes, 2002
NOTES
“Strategic management consists of the analysis, decisions, and actions organisation undertakes in order to create and sustain competitive
– Dess, Lumpkin & Taylor, 2005
We observe from the above definitions that different authors
have defined strategic management in different ways. Note
that the definition of Chandler that we have quoted above is
from the early 1960s, the period when strategic management
was being recognised as a separate discipline. This definition
consists of three basic elements:
 Determination of long-term goals
 Adoption of courses of action
 Allocation of resources to achieve those goals
Though, this definition is simple, it does not consist of all the
elements and does not capture the essence of strategic
management.
The definitions of Fred R. David, Pearce and Robinson, Johnson
and Sholes and Dell, Lumpkin and Taylor are some of the
definitions of recent origin. Taken together, these definitions
capture three main elements that go to the heart of strategic
management. The three on-going processes are strategic
analysis, strategic formulation and strategic implementation.
These three components parallel the processes of analysis,
decisions and actions. That is, strategic management is
basically concerned with:
 Analysis of strategic goals (vision, mission and objectives)
along with the analysis of the external and internal
environment of the organisation.
 Decisions about two basic questions:
 What businesses should we compete in?
 How should we compete in those businesses to
implement strategies?
 Actions to implement strategies. This requires leaders to
allocate the necessary resources and to design the
organisation to bring the intended strategies to reality. This
also involves evaluation and control to ensure that
strategies are effectively implemented.
The real strategic challenge to managers is to decide on
strategies that provide competitive advantage that can be
sustained over time. This is the essence of strategic
management, and Dess, Lumpkin and Taylor have rightly
captured this element in their definition.
NOTES
Fill in the blanks:

Strategic management provides overall ......................... to the enterprise.
Strategic management is a question of interpreting, and continuously ........................., the possibilities presented by
......................... circumstances for advancing an organisation’s objectives.
The foundation of strategy is a definition of organisational
........................
1.3 NATURE OF STRATEGIC MANAGEMENT

Strategic management can be defined as the art and science
Select an FMCG company of your choice. Collect data on new brands introduced in different product categories in the last one year. Can yo
of formulating, implementing, and evaluating, cross-functional
decisions that enable an organisation to achieve its objectives.
Strategic management is different in nature from other aspects
of management. An individual manager is most often required
to deal with problems of operational nature. He generally
focuses on day-to-day problems such as the efficient
production of goods, the management of a sales force, the
monitoring of financial performance or the design of some new
system that will improve the level of customer service.
These are all very important tasks. But they are essentially
concerned with effectively managing resources already
deployed, within the context of an existing strategy. In other
words, operational control is what managers are involved in
most of their time. It is vital to the effective implementation of
strategy, but it is not the same as strategic management.
Strategic management involves elements geared toward a firm’s long-term survival and achievement of management goals.
The components of the content of a strategy making process
include a desirable future, resource allocation, management of
the firm- environment and a competitive business ethics.
NOTES
Fill in the blank:

4.An individual is most often required to deal with problems of
..........................
Consider the case of Nokia that was once a household name and a market leader in the feature phone segment in India in the last decade
DIMENSIONS OF STRATEGIC
1.4
MANAGEMENT
The characteristics of strategic management are as follows:
Some conflicts may result in defining the content of strategy such as differences in interaction patterns among associates, inadequacy of a
Top management involvement: Strategic management relates to
several areas of a firm’s operations. So, it requires top
management’s involvement. Generally, only the top
management has the perspective needed to understand the
broad implications of its decisions and the power to authorise
the necessary resource allocations.
Requirement of large amounts of resources: Strategic management
requires commitment of the firm to actions over an extended
period of time. So they require substantial resources, such as,
physical assets, money, manpower etc.
Example: Decisions to expand geographically would have
significant financial implications in terms of the need to build
and support a new customer base.
Affect the firm’s long-term prosperity: Once a firm has committed
itself to a particular strategy, its image and competitive
advantage are tied to that strategy; its prosperity is dependent
upon such a strategy for a long time.
Future-oriented: Strategic management encompasses forecasts,
what is anticipated by the managers. In such decisions,
emphasis is on the development of projections that will enable
the firm to select the most promising strategic options. In the
turbulent environment, a firm will succeed only if it takes a
proactive stance towards change.
NOTES
Multi-functional or multi-business consequences: Strategic
management has complex implications for most areas of the
firm. They impact various strategic business units especially in
areas relating to customer-mix, competitive focus,
organisational structure etc. All these areas will be affected by
allocations or reallocations of responsibilities and resources
that result from these decisions.
Non-self-generative decisions: While strategic management may
involve making decisions relatively infrequently, the
organisation must have the preparedness to make strategic
decisions at any point of time. That is why Ansoff calls them
“non-self-generative decisions.”
Fill in the blank:

5.Organisations set up appropriate monitoring and control systems, develop standards and targets to judge .....................
Cyrus Mistry is the new Chairman of the Tata Group. Identify three decisions of Cyrus Mistry which have long-term implications and are fu
1.5 NEED FOR STRATEGIC MANAGEMENT
No business firm can afford to travel in a haphazard manner. It
has to travel with the support of some route map. Strategic
management provides the route map for the firm. It makes it
possible for the firm to take decisions concerning the future
with a greater awareness of their implications. It provides
direction to the company; it indicates how growth could be
achieved.
The external environment influences the management
practices within any organisation. Strategy links the
organisation to this external world. Changes in these external
forces create both opportunities and threats to an
organisation’s position – but above all, they create uncertainty.
Strategic planning offers a systematic means of coping with
uncertainty and adapting to change. It enables managers to
consider how to grasp opportunities and avoid problems, to
establish and coordinate appropriate courses of action and to
set targets for achievement.
Thirdly, strategic management helps to formulate better
strategies through the use of a more systematic, logical and
rational approach. Through involvement in the process,
managers and employees become committed to supporting
the organisation. The process is learning, helping, educating
and supporting activity. An increasing
NOTES number of firms are using strategic management for the

following reasons:
 It helps the firm to be more proactive than reactive in
shaping its own future.
 It provides the roadmap for the firm. It helps the firm
utilise its resources in the best possible manner.
 It allows the firm to anticipate change and be prepared to
manage it.
 It helps the firm to respond to environmental changes in a
better way.
 It minimises the chances of mistakes and unpleasant surprises.
 It provides clear objectives and direction for employees.
Fill in the blank:

6.......................... and ......................... of strategy rarely proceed according to plan.
You had a definite plan in mind about new product launches for the new financial year. Three months after the plan was made, you find tha
1.6 STRATEGIC MANAGEMENT PROCESS

Developing an organisational strategy involves five main
elements – strategic analysis, environmental analysis, strategic
choice, strategy implementation and strategy evaluation and
control. Each of these contains further steps, corresponding to
a series of decisions and actions that form the basis of
strategic management process.
Strategic Analysis: The foundation of strategy is a definition of
organisational purpose. This defines the business of an
organisation and what type of organisation it wants to be.
Many organisations develop broad statements of purpose, in
the form of vision and mission statements. These form the
spring – boards for the development of more specific objectives
and the choice of strategies to achieve them.
Environmental Analysis: Assessing both the external and internal
environments is the next step in the strategy process. Managers
need to assess the opportunities and threats of the external
environment in the light of the organisation’s strengths and
weaknesses keeping in view the expectations of the
stakeholders. This analysis allows the organisation to set more
specific goals or objectives which might specify
NOTES
where people are expected to focus their efforts. With a more
specific set of objectives in hand, managers can then plan how
to achieve them.
Strategic Choice: The analysis stage provides the basis for
strategic choice. It allows managers to consider what the
organisation could do given the mission, environment and
capabilities – a choice which also reflects the values of
managers and other stakeholders. These choices are about the
overall scope and direction of the business. Since managers
usually face several strategic options, they often need to
analyse these in terms of their feasibility, suitability and
acceptability before finally deciding on their direction.
Strategy Implementation: Implementation depends on ensuring
that the organisation has a suitable structure, the right
resources and competences (skills, finance, technology etc.),
right leadership and culture. Strategy implementation depends
on operational factors being put into place.
Strategy Evaluation and Control: Organisations set up appropriate
monitoring and control systems, develop standards and targets
to judge performance.
Table 1.1 summarises the steps involved in each of the above
elements of strategic management.
TABLE 1.1: STEPS INVOLVED IN THE STRATEGIC

MANAGEMENT PROCESS
Elements Questions Description

in strategy
NMI
process
STRATEGY FORMULATION
Strategic Analysis
Defining What is our Organisational purpose is
MS
organisational purpose? generally articulated in vision
purpose and mission statements. The
first task is, therefore, to
identify vision and mission of
the organisation.
What kind of Environmental analysis
organisation involves the gathering and
do we want to analysis of intelligence on the
be? business environment. This
encompasses the external
environment (general and
competitive forces), the
internal environment
(resources, competences,
performance relative to
competitors), and stakeholder
expectations.
Contd...
NOTES
Strategic Choice
Objectives Where do Objectives provide a more
we want to detailed articulation of
be? purpose and a basis for
monitoring performance.
Options Are there Alternative strategic options
analysis alternativ may be identified; options
e routes? require to be appraised in
order that the best can be
selected.
Strategies How are we Strategies are the means or
going to courses of action to achieve the
get there? purpose of the organisation.
Strategy Implementation
Actions How do A specification of the
we operational activities and tasks
turn plans into required
reality? to enable strategies to
be implemented.
Strategy Evaluation and
Control
Monitoring How will we Monitoring performance and
and control know if we progress in meeting
are getting objectives, taking corrective
there? action as necessary and
reviewing strategy.
The above steps can also be depicted as a series of processes
IM
involved in strategic management.
It can also be shown through a general framework as given in
Figure 1.1.
N Agreement on and initiation of the strategic management process.
M
The organisation determines vision, mission, goals and objectives.
FEEDBACK
The organisation analyses both external and internal environment.
The organisation establishes long-term goals and objectives.
The organisation chooses from alternative courses of action.
The organisation implements the choices to achieve strategic fit.
The organisation monitors the implementation activity.

Figure 1.1: General Framework of Strategic Management Process
NOTES
The seven steps in the above model of strategy process fall
into three broad phases – formulation, implementation and
evaluation – though in practice the three phases interact
closely.
Good strategists know that formulation and implementation of
strategy rarely proceed according to plan, partly because the
constantly changing external environment brings new
opportunities or threats, and partly because there may also be
inadequate internal competence. Since these may lead the
management to change the plan, there will be frequent
interaction between the activities of formulating and
implementing strategy, and management may need to return
and reformulate the plan.
1.6.1 STRATEGY LEVELS

Many organisations develop strategies at four different levels:
corporate, business, functional and production level.
NMI
Figure 1.2: Structure of the Strategy Level
Corporate Level Strategy: It is the process of defining the overall
MS
character and purpose of the organisation, the business it will
enter and leave and how resources will be distributed among
those businesses. Strategy at this level is typically developed
by top management (The Board of Directors, CEO etc.). The
decisions are broad-based, carry greater risk and affect most
parts of the organisation (e.g. the type of business that the
organisation should enter, changes required in growth strategy,
acquisition and Diversification decisions etc.).
Business Level Strategy: It is the planning process concerned
primarily with how to manage the interests and operations of a
particular unit within the organisation, commonly known as a
Strategic Business Unit (SBU). A strategic business unit is a
distinct business with its own set of competitors that can be
managed reasonably independently of other businesses within
the organisation. Generally, the heads of the respective
business units develop business strategies, with the approval
of top management. Strategies at this level are aimed at
deciding the competitive advantage to build, determining
responses to changing market situations, allocating resources
NOTES within the business unit and coordinating functional-level

strategies developed by functional managers.
Functional Level Strategy: It is the process of determining policies
and procedures for (relatively narrow levels of activity)
different functions of an enterprise like marketing, finance,
personnel, IT, R&D, HR and Manufacturing etc. These are
developed by functional managers and are typically reviewed
by business unit heads.
Product Level Strategy: It is the process of determining the cost,
quality, quantity, raw material, supplies, categories, brands,
range etc. of the product the organisation manufacture.
Sometimes this level of strategy is undertaken in functional
level strategy itself in many organisations.
Coordinating strategies across the four levels is crucial in
maximising strategic impact.
1.6.2 TYPOLOGIES AND METHODS OF STRATEGY

The different typologies and methods of strategy are shown in
Table 1.2.
TABLE 1.2: TYPOLOGIES AND METHODS OF

STRATEGY
Strategy Typologies/ Methods

Dominance strategies Leader, Challenger, Follower, Nicher
Innovation strategies Pioneers, Close followers, Late
followers
Growth strategies Integration, Diversification,
Intensification
Co-operative strategies JV, licensing, strategic alliance,
technology tie-up
Miles & Snow Prospector, Analyser, Defender, Reactor
strategy of firms
typology
Now we will discuss all the typologies and methods of strategy
in the following paragraphs.
Dominance Strategies
Dominance strategies are a type of marketing strategy that
classifies firms based on their market share or dominance of an
industry.
Dominance is a measure of the strength of a brand, product,
service, or firm, relative to competitive offerings. There is often
a geographic element to the competitive landscape. In defining
market dominance, you must see to what extent a product,
brand, or firm controls a product category in a given
geographic area. Typically there are four types of dominance
strategies that a manager will consider. There are leader,
challenger, follower and nicher.
NOTES
Leader
The market leader is dominant in its industry. It has substantial
market share and often extensive distribution arrangements
with retailers. It typically is the industry leader in developing
innovative new business models and new products (although
not always). It tends to be on the cutting edge of new
technologies and new production processes. It sometimes has
some market power in determining either price or output. Of
the four dominance strategies, it has the most flexibility in
crafting strategy. There are few options not open to it. However
it is in a very visible position and can be the target of
competitive threats and government anti-combines actions.
Research in experience curve effects and the PIMs study
during the 1970s concluded that market leadership was the
most profitable strategy in most industries. It was claimed that
if you cannot get enough market share to be a major player,
you should get out of that business and concentrate your
resources where you can take advantage of experience curve
effects and economies of scale, and thereby gain dominant
market share. Today we recognise that other less dominant
strategies can also be effective.
The main options available to market leaders are:
 Expand the total market by finding:
 new users of the product
 new uses of the product
 more usage on each use occasion
 Protect your existing market share by:
 developing new product ideas
 improve customer service
 improve distribution effectiveness
 reduce costs
 Expand your market share:
 by targeting one or more competitor
 without being noticed by government regulators.
Challenger
A challenger is a firm in a strong, but not dominant position
that is following an aggressive strategy of trying to gain market
share. It typically targets the industry leader (for example,
Pepsi targets Coke), but it could also target smaller, more
vulnerable competitors. The fundamental principles involved
are:
 Assess the strength of the target competitor. Consider the
amount of support that the target might muster from
allies.
NOTES  Choose only one target at a time.

 Find a weakness in the target’s position. Attack at this
point. Consider how long it will take for the target to
realign their resources so as to reinforce this weak spot.
 Launch the attack on as narrow a front as possible.
Whereas a defender must defend all their borders, an
attacker has the advantage of being able to concentrate
their forces at one place.
 Launch the attack quickly, then consolidate.
Some of the options open to a market
challenger are:
 Price discounts or price cutting
 Line extensions
 Introduce new products
 Reduce product quality
 Increase product quality
 Improve service
 Change distribution
 Cost reductions
 Intensify promotional activity.
Follower
A market follower is a firm in a strong, but not dominant
position that is content to stay at that position. The rationale is
that by developing strategies that are parallel to those of the
market leader, they will gain much of the market from the
leader while being exposed to very little risk. This “play it safe”
strategy is how Burger King retains its position behind
McDonalds. The advantages of this strategy are:
 no expensive R&D failures
 no risk of bad business model
 “best practices” are already established
 able to capitalise on the promotional activities of the market leader
 no risk of government anti-combines actions
 minimal risk of competitive attacks
 don’t waste money in a head-on battle with the market leader.
Nicher
In this niche strategy, the firm concentrates on a select few
target markets. It is also called a focus strategy. It is hoped that
by focusing ones marketing efforts on one or two narrow
market segments and tailoring your marketing mix to these
specialised markets, you can better meet the needs of that
ta
rg
et
m
ar
ke
t.
Th
e
ni
ch
e
sh
ou
ld
be
lar
ge
NOTES
enough to be profitable, but small enough to be ignored by the
major industry players. Profit margins are emphasised rather
than revenue or market share. The firm typically looks to gain a
competitive advantage through effectiveness rather than
efficiency. It is most suitable for relatively small firms and has
much in common with guerrilla marketing warfare strategies.
The most successful nichers tend to have the following
characteristics:
 They tend to be in high value added industries and are
able to obtain high margins.
 They tend to be highly focused on a specific market segment.
 They tend to market high end products or services, and
are able to use a premium pricing strategy.
 They tend to keep their operating expenses down by
spending less on R&D, advertising and personal selling.
Innovation Strategies
Innovation strategies is all about who is on the cutting edge,
who churns out the new products and technologies before
anyone else. The company is a pioneer, close follower or late
follower.
 Pioneer: The firm or the organisation concentrates on
being the one with the newest, hottest products around.
The company promise that its customers will get the new
technology before anyone else does.
 Close follower: The company waits for other to pioneer in
different direction, and when they are on to something, the
company quickly adopts it, improve it and make it the
company’s own innovation.
 Late follower: The company adopts only the most stable of
technology, the company stress to its customers that the
products of the company will be stable, tried and tested,
with no bugs or last minute recalls.
Growth Strategies
When operating under growth strategies, the company focus
should be on how to make its business grow. The company use:
 Horizontal integration: The company tries to expand by
acquiring or starting new business in the same field as its
main business, this way the company control a bigger
market share, and sideline the competition.
 Vertical integration: The company tries to acquire or start
businesses that supply your current business or sell its
products. This way the company can have a stable
production and delivery structure.
NOTES  Diversification: The company tries to conquer new markets

with new products, expending in unexpected direction
where the company predict that there are great profits
there.
 Intensification: The company adds new features to your
existing products. The company releases new versions of
its products. Trying to consolidate then expand its market
position.
Co-operative Strategies
Cooperative strategies are becoming increasingly important for
large corporations because technology continues to drive
many important markets. The rapid advance of knowledge in
many fields and the growing technical sophistication of the
present day consumers are driving the companies to cooperate
with specialist firms. Strategic alliances represent one of the
more innovative methods of cooperation, and they are being
actively exploited.
Joint ventures: Joint ventures, alliances, and other corporate
partnering are fuelling the growth of the world’s most
unsuccessful companies. The demand to deliver more new
products, quicker, and at lower prices has never been greater.
Joint ventures and other collaborative business arrangements
are revolutionising how winning companies compete. They
permit companies to enter new markets and field new products
that they otherwise couldn’t do on their own. They are the
quickest way to grow a company, particularly in times of
change.
Licensing: A contractual agreement whereby one company (the
licensor) makes an asset available to another company (the
licensee) in exchange for royalties, license fees, or some other
form of compensation
 Patent
 Trade secret
 Brand name
 Product formulations
Advantages of Licensing
 Provides additional profitability with little initial investment
 Provides method of circumventing tariffs, quotas and other
export barriers
 Attractive ROI
 Low costs to implement
Disadvantages of Licensing
 Limited participation
 Returns may be lost
NOTES
 Lack of control
 Licensee may become competitor
 Licensee may exploit company resources
Special Licensing Arrangements
 Contract manufacturing:
 Company provides technical specifications to a sub-
contractor or local manufacturer.
 Allows company to specialise in product design while
contractors accept responsibility for manufacturing
facilities.
 Franchising: Contract between a parent company-franchisor
and a franchisee that allows the franchisee to operate a
business developed by the franchisor in return for a fee
and adherence to franchise-wide policies.
 Technology Tie-up: Technology tie-ups give the companies
double advantage of adopting – the new and advanced
technology resulting in improved and better productivity
and the next thing is that the company increases its size
and people.
BOX 1.1: BHEL AND ALSTOM IN TECHNOLOGY TIE-UP

Tuesday, 16 Jan., 2007
Bharat Heavy Electricals and Alstom of France, on 15th
NMI
January 2007, entered into a technology transfer agreement
for Alstom technology for supercritical power equipment of
rating 800 MW and higher.
The ministry of heavy industries has opined that BHEL and
Alstom would be major players in India’s effort to add
1,50,000 MW of power capacity over the next ten years.
MS
In a related development, the ministry also stated that India
offers huge opportunity for investment and collaboration in a
number of sectors including energy, automobiles, capital
goods, chemicals, services, urban development and
infrastructure. Besides, with the isolation of India in the
nuclear sector coming to an end, the collaboration areas in
nuclear energy also offer a big possibility.
Source: www.projectstoday.com/News/NewsDetails
Miles & Snow Strategy of Firms Typology

Since its publication in 1978, Miles and Snow’s Organisational
Strategy, Structure, and Process (Miles & Snow, 1978) has had
considerable influence on the fields of strategic management
and organisation theory (Hambrick, 1983). Up to 2003, over
1100 scholarly works have cited the book, paying attention
especially to the Miles and Snow strategy typology highlighted
in the book (Ketchen, 2003). Based on field studies in four
industries, Miles and Snow classify firms
NOTES within a given industry into four groups, i.e. defenders,

prospectors, analysers and reactors, depending on how a firm
responds to the three major problems facing the firm
(entrepreneurial, engineering and administrative problems).
 Defenders: Defenders have a limited range of products and
focus on efficiency and process improvement.
 Prospectors: Prospectors have a broad market/product
domain and tend to lead change in the industry.
 Analysers: Analysers fall between the above two groups and
are likely to follow a second-but-better strategy.
 Reactors: Reactors have no consistent strategy and they
merely respond passively to environment pressure.
Miles and Snow argued that companies develop their adaptive
strategies based on their perception of their environments.
Hence, as seen above, the different organisation types view
their environments in different ways, causing them to adopt
different strategies. These adaptive strategies allow some
organisations to be more adaptive or more sensitive to their
environments than others, and the different organisation types
represent a range of adaptive companies. Because of their
adaptive strategies, prospector organisations are the most
adaptive type of company. In contrast, reactor organisations
are the least adaptive type. The other two types fall in between
these extremes: analysers are the second most adaptive
organisations, followed by defenders.
Fill in the blanks:

Once a firm has committed itself to a particular strategy, its
......................... andare tied to it.
basic characteristics distinguish functional strategies
from corporate level and business level strategies.
Classify the following companies as pioneers, close followers and late followers and state reasons behind your choice:
Apple
Nokia
Samsung
Panasonic
NOTES
The strength of the business-level strategy is enhanced when functional level strategies support its basic thrust. Similarly, the corporate lev
1.7 VISION
The first task in the process of strategic management is to
formulate the organisation’s vision and mission statements.
These statements define the organisational purpose of a firm.
Together with objectives, they form a “hierarchy of goals” as
shown in Figure 1.3.
NMI
Figure 1.3: Hierarchy of Goals
A clear vision helps in developing a mission statement, which
in turn facilitates setting of objectives of the firm after
analysing external and internal environment. Though vision,
MS
mission and objectives together reflect the “strategic intent” of
the firm, they have their distinctive characteristics and play
important roles in strategic management.
Vision can be defined as “a mental image of a possible and
desirable future state of the organisation” (Bennis and Nanus).
It is “a vividly descriptive image of what a company wants to
become in future”. Vision represents top management’s
aspirations about the company’s direction and focus. Every
organisation needs to develop a vision of the future. A clearly
articulated vision moulds organisational identity, stimulates
managers in a positive way and prepares the company for the
future.
“The critical point is that a vision articulates a view of a
realistic, credible, attractive future for the organisation, a
condition that is better in some important ways than what now
exists.”
NOTES According to Collins and Porras, a well-conceived vision

consists of two major components:
 Core ideology
 Envisioned future
Core ideology is based on the enduring values of the
organisation (“what we stand for and why we exist”), which
remain unaffected by environmental changes. Envisioned
future consists of a long-term goal (what we aspire to become,
to achieve, to create) which demands significant change and
progress.
1.7.1 DEFINING VISION

Vision has been defined in several different ways. Richard
Lynch defines vision as “a challenging and imaginative picture
of the future role and objectives of an organisation,
significantly going beyond its current environment and
competitive position.” E1-Namaki defines it as “a mental
perception of the kind of environment that an organisation
aspires to create within a broad time horizon and the
underlying conditions for the actualization of this perception”.
Kotter defines it as “a description of something (an
organisation, corporate culture, a business, a technology, an
activity) in the future.”
A number of authors have given their definitions of
organisational vision as per their findings and experiences,
some of them are as follows:
Vision is “clear mental picture of a future goal created jointly
by a group for the benefit of other people, which is capable of
inspiring and motivating those whose support is necessary for
its achievement”.
— Johnson
Vision is “an ideal that represents or reflects the shared values
to which the organisation should aspire”.
— Kirkpatrick et. al.
Vision is “a picture or view of the future. Something not yet
real, but imagined. What the organisation could and should
look like. Part analytical and part emotional”.
— Thornberry
Vision is “the shared understanding of what the firm should be
and how it must change”.
— Shoemaker
Vision is “a picture of a destination aspired to, an end state to
be achieved via the change. It reflects the larger goal needed
to keep in mind while concentrating on concrete daily
activities”.
— Kanter et. al.
Vision is “an ambition about the future, articulated today, it is a
process of managing the present from a stretching view of the
future”.
— Stace and
Dunphy
NOTES
Most refer to a future or ideal to which organisational efforts
should be directed. The vision itself is presented as a picture or
image that serves as a guide or goal. Depending on the
definition, it is referred to as inspiring, motivating, emotional
and analytical. For Boal and Hooijberg, effective visions have
two components:
 A cognitive component (which focuses on outcomes and
how to achieve them)
 An affective component (which helps to motivate people
and gain their commitment to it).
1.7.2 NATURE OF VISION

A vision represents an animating dream about the future of the
firm. By its nature, it is hazy and vague. That is why Collins
describes it as a Big Hairy Audacious Goal (BHAG). Yet it is a
powerful motivator to action. It captures both the minds and
hearts of people. It articulates a view of a realistic, credible,
attractive future for the organisation, which is better than what
now exists. Developing and implementing a vision is one of the
leader’s central roles. He should not only have a “strong sense
of vision”, but also a “plan” to implement it.
Example:
 Henry Ford’s vision of a “car in every garage” had power. It
captured the imagination of others and aided internal
efforts to mobilise resources and make it a reality. A good
vision always needs to be a bit beyond a company’s reach,
but progress towards the vision is what unifies the efforts
of company personnel.
 One of the most famous examples of a vision is that of
Disneyland “To be the happiest place on earth”. Other
examples are:
 Hindustan Lever: Our vision is to meet the everyday
needs of people everywhere.
 Microsoft: Empower people through great software any
time, any place and on any device.
 Britannia Industries: Every third Indian must be a
Britannia consumer.
Although such vision statements cannot be accurately
measured, they do provide a fundamental statement of an
organisation’s values, aspirations and goals.
Some more examples of vision statements are given below:
 “A Coke within arm’s reaches of everyone on the planet”
(Coca Cola)
 “Encircle Caterpillar” (Komatsu)
 “Become the Premier Company in the World” (Motorola)
 “Put a man on the moon by the end of the decade” (John F.
Kennedy, April 1961)
NOTES  “Eliminate what annoys our bankers and customers”

(Texas Commerce Bank)
 “The one others copy” (Mobil).
1.7.3 CHARACTERISTICS OF VISION STATEMENTS

As may be seen from the above definitions, many of the
characteristics of vision given by these authors are common
such as being clear, desirable, challenging, feasible and easy to
communicate. Nutt and Back off have identified four generic
features of visions that are likely to enhance organisational
performance:
 Possibility means the vision should entail innovative
possibilities for dramatic organisational improvements.
 Desirability means the extent to which it draws upon shared
organisational norms and values about the way things
should be done.
 Actionability means the ability of people to see in the vision,
actions that they can take that are relevant to them.
 Articulation means that the vision has imagery that is
powerful enoughto communicate clearly a picture
ofwheretheorganisation is headed.
Fill in the blanks:

A ......................... can be defined as the overall goal of an organisation that all business activi
Formulation and implementation of strategy must occur side- by-side rather than ..................
When a strategy becomes internalised into a corporate culture, it can lead to .........................
Corporate vision is a short, succinct, and inspiring statement of what the organisation intend
Choose the vision statements of any five companies that you like. Prepare a presentation on how these vision statements inspire you and h
Vision, therefore, not only serves as a backdrop for the development of the purpose and strategy of a firm, but also motivates the firm’s em
NOTES
1.8 MISSION
“A mission statement is an enduring statement of purpose”. A
clear mission statement is essential for effectively establishing
objectives and formulating strategies.
A mission statement is the purpose or reason for the
organisation’s existence. A well-conceived mission statement
defines the fundamental, unique purpose that sets it apart
from other companies of its type and identifies the scope of its
operations in terms of products offered and markets served. It
also includes the firm’s philosophy about how it does business
and treats its employees. In short, the mission describes the
company’s product, market and technological areas of
emphasis in a way that reflects the values and priorities of the
strategic decision makers.
As Fred R. David observes, mission statement is also called a
creed statement, a statement of purpose, a statement of
philosophy etc. It reveals what an organisation wants to be and
whom it wants to serve. It describes an organisation’s purpose,
customers, products, markets, philosophy and basic
technology. In combination, these components of a mission
statement answer a key question about the enterprise: “What
is our business?”
1.8.1 DEFINING MISSION

Thompson defines mission as “The essential purpose of the
organisation, concerning particularly why it is in existence, the
nature of the business it is in, and the customers it seeks to
serve and satisfy”. Hunger and Wheelen simply call the
mission as the “purpose or reason for the organisation’s
existence”.
A mission can be defined as a sentence describing a
company’s function, markets and competitive advantages. It is
a short written statement of your business goals and
philosophies. It defines what an organisation is, why it exists
and its reason for being. At a minimum, a mission statement
should define who are the primary customers of the company,
identify the products and services it produces, and describe the
geographical location in which it operates.
Example:
 Ranbaxy Pharmaceuticals: “To become a research based
global company”.
 Reliance Industries: “To become a major player in the global
chemicals business and simultaneously grow in other
growth industries like infrastructure”.
 ONGC: “To stimulate, continue and accelerate efforts to
develop and maximize the contribution of the energy
sector to the economy of the country”.
NOTES  Cadbury India: “To attain leadership position in the

confectionary market and achieve a strong national
presence in the food drinks sector”.
 Hindustan Lever: “Our purpose is to meet everyday needs of
people everywhere– to anticipate the aspirations ofour
consumers and customers, and to respond creatively and
competitively with branded products and services which
raise the quality of life”.
 McDonald: “To offer the customer fast food prepared in the
same high quality worldwide, tasty and reasonably priced,
delivered in a consistent low key décor and friendly
manner”.
Most of the above mission statements set the direction of the
business organisation by identifying the key markets which
they plan to serve.
1.8.2 IMPORTANCE OF MISSION STATEMENT

The purpose of the mission statement is to communicate to all
the stakeholders inside and outside the organisation what the
company stands for and where it is headed. It is important to
develop a mission statement for the following reasons:
 It helps to ensure unanimity of purpose within the organisation.
 It provides a basis or standard for allocating organisational
resources.
 It establishes a general tone or organisational climate.
 It serves as a focal point for individuals to identify with the
organisation’s purpose and direction.
 It facilitates the translation of objectives into tasks
assigned to responsible people within the organisation.
 It specifies organisational purpose and then helps to
translate this purpose into objectives in such a way that
cost, time and performance parameters can be assessed
and controlled.
Developing a comprehensive mission statement is also
important because divergent views among managers can be
revealed and resolved through the process.
According to Pearce (1982), vision and mission statements
have the following value:
 They provide managers with a unity of direction that
transcends individual, parochial and transitory needs.
 They promote a sense of shared expectations among all
levels and generations of employees.
 They consolidate values over time and across individuals
and interest groups.
 They project a sense of worth and intent that can be
identified and assimilated by company outsiders.
NOTES
 Finally, they affirm the company’s commitment to
responsible action, in order to preserve and protect the
essential claims of insiders for sustained survival, growth
and profitability of the firm.
According to Fred R. David, a mission statement is more than a
statement of purpose. It is:
 a declaration of attitude and outlook;
 a declaration of customer orientation;
 a declaration of social policy and responsibility.
1.8.3 CHARACTERISTICS OF A MISSION STATEMENT

A good mission statement should be short, clear and easy to
understand. It should therefore possess the following
characteristics:
 Not lengthy: A mission statement should be brief.
 Clearly articulated: It should be easy to understand so
that the values, purposes, and goals of the organisation
are clear to everybody in the organisation and will be a
guide to them.
 Broad, but not too general: A mission statement should
achieve a fine balance between specificity and
generality.
 Inspiring: A mission statement should motivate readers to
action. Employees should find it worthwhile working for
such an organisation.
 Feeling and emotions: It should arouse positive feelings and
emotions of both employees and outsiders about the
organisation.
 Reflect the firm’s worth: A mission statement should generate
the impression that the firm is successful, has direction
and is worthy of support and investment.
 Relevant: A mission statement should be appropriate to the
organisation in terms of its history, culture and shared
values.
 Current: A mission statement may become obsolete after
some time. As Peter Drucker points out, “Very few mission
statements have anything like a life expectancy of thirty,
let alone, fifty years. To be good enough for ten years is
probably all one can normally expect”. Changes in
environmental factors and organisational factors may
necessitate modification of the mission statement.
 Unique: An organisation’s mission statement should
establish the individuality and uniqueness of the company.
 Enduring: A mission statement should continually
guide and inspire the pursuit of organisational goals. It
may not be fully achieved, but it should be challenging for
managers and employees of the organisation.
NOTES  Dynamic: A mission statement should be dynamic in

orientation allowing judgments about the most promising
growth directions and the less promising ones.
 Basis for guidance: Mission statement should provide useful
criteria for selecting a basis for generating and screening
strategic options.
 Customer orientation: A good mission statement
identifies the utility of a firm’s products or services to its
customers, and attracts customers to the firm.
 A declaration of social policy: A mission statement should
contain its philosophy about social responsibility including
its obligations to the stakeholders and the society at large.
 Values, beliefs and philosophy: The mission statement
should lay emphasis on the values the firm stands for;
company philosophy, known as “company creed”,
generally accompanies or appears within the mission
statement.
1.8.4 COMPONENTS OF A MISSION STATEMENT

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

There is no standard method for formulating mission
statements. Different firms follow different approaches. As
indicated in the
NOTES
strategic management model, a clear mission statement is
needed before alternative strategies can be formulated and
implemented. It is important to involve as many managers as
possible in the process of developing a mission statement,
because through involvement, people become committed to
the mission of the organisation.
Mission statements are generally formulated as follows:
 In many cases, the mission is inherited i.e. the founder
establishes the mission which may remain unchanged
down the years or may be modified as the conditions
change.
 In some cases, the mission statement is drawn up by the
CEO and board of directors or a committee of strategists
constituted for the purpose.
 Engaging consultants for drawing up the mission
statement is also common.
 Many companies hold brainstorming sessions of senior
executives to develop a mission statement. Soliciting
employee’s views is also common.
 According to Fred R. David, an ideal approach for
developing a mission statement would be to select several
articles about mission statements and ask all managers to
read these as background information. Then ask managers
to prepare a draft mission statement for the organisation.
A facilitator or a committee of top managers, merge these
statements into a single document and distribute this draft
mission statement to all managers. Then the mission
statement is finalised after taking inputs from all the
managers in a meeting. Thus, the process of developing a
mission statement represents a great opportunity for
strategists to obtain needed support from all managers in
the firm.
 Decision on how best to communicate the mission to all
managers, employees and external constituencies of an
organisation are needed when the document is in its final
form. Some organisations even develop a videotape to
explain the mission statement and how it was developed.
 The practice in Indian companies appears to be a
consultative- participative route. For example, at Mahindra
and Mahindra, workshops were conducted at two levels
within the organisation with corporate planning group
acting as facilitators. The State Bank of India went one
step ahead by inviting labour unions to partake in the
exercise. Satyam Computers went one more step ahead by
involving their joint venture companies and overseas
clients in the process.
Although many organisations have mission statements, their
value has sometimes been questioned. Kay (1996) asserts that
visions or missions are indicative of a ‘wish-driven strategy’
that fails to recognise the limits to what might be possible,
given finite organisational resources. He cites the case of
Groupe Bull, a French computer
NOTES company, which for many years sought to challenge the

supremacy of IBM, particularly in the large US market. After
several attempts, Bull finally conceded that its mission was
faulty. Kay’s analysis was that for 30 years Groupe Bull was:
Driven not by an assessment of what it was, but by a vision of
what it would like to be. Throughout, it lacked the distinctive
capabilities that would enable it to realise that vision. Bull
epitomises wish-driven strategy, based on aspiration, not
capability (Kay, 1996).
In a study of some organisations, Leach (1996) found that
mission statements and strategic vision had become
fashionable. While in some organisations, mission statements
had made a real impact in clarifying organisational values and
culture, others regarded them only as symbolic public relations
documents that had little effect as a management tool.
The dangers are not just that missions are unrealistic and fail
to recognise an organisation’s capabilities (as in the case of
Groupe Bull), but also that management fails to develop a
belief in the mission statement throughout the organisation.
People come to believe in and act upon the mission statement
only when they see others doing so, especially senior
management and other influential players. The ideas of the
mission statement need to be cascaded through the structure
to ensure a link between mission and day-to-day actions.
BOX 1.2: MISSION OF TWO GLOBAL COMPANIES

Mission Statement of IBM
At IBM, we strive to lead in the invention, development and
manufacture of the industry’s most advanced information
technologies, including computer systems, software, storage
systems and microelectronics.
We translate these advanced technologies into value for our
customers through our professional solutions, services and
consulting businesses worldwide.
Mission Statement of FedEx
“FedEx is committed to our People-Service-Profit Philosophy.
We will produce outstanding financial returns by providing
totally reliable, competitively superior, global, air-ground
transportation of high-priority goods and documents that
require rapid, time- certain delivery.”
Source: ibm.com and fedex.com
1.8.6 EVALUATING MISSION STATEMENT

For a mission statement to be effective, it should meet the
following ten conditions:
 The mission statement is clear and understandable to all
parties involved. The organisation can articulate and relate
to it.
 The mission statement is brief enough for most people to
remember.
NOTES
 The mission statement clearly specifies the purpose of the
organisation. This includes a clear statement about:
 what needs the organisation is attempting to fill (not
what products or services are offered)?
 who the organisation’s target populations are?
 how the organisation plans to go about its business;
that is, what its primary technologies are?
 The mission statement should have a primary focus on a
single strategic thrust.
 The mission statement should reflect the distinctive
competence of the organisation (e.g., what can it do best?
What is its unique advantage?)
 The mission statement should be broad enough to allow
flexibility in implementation, but not so broad as to permit
lack of focus.
 The mission statement should serve as a template and be
the same means by which the organisation can make
decisions.
 The mission statement must reflect the values, beliefs and
philosophy of operations of the organisation.
 The mission statement should reflect attainable goals.
 The mission statement should be worked so as to serve as
an energy source and rallying point for the organisation
(i.e., it should reflect commitment to the vision).
Fill in the blanks:

The mission statement should have a primary focus on a
..................... strategic thrust.
The mission statement should reflectgoals.
A mission can be defined as a sentence describing a company’s
................., ................. and .................
It is more important to communicate the mission statement to
................. than to .................
Select a company of your choice. Prepare a presentation on its mission statement assessing it in terms of focus, competence, values and st
1.9 BUSINESS DEFINITION
In its broadest sense, strategic management is about taking
“strategic decisions.” A number of definitions given by various
eminent authors
NOTES are already being given at the beginning of the chapter. In

practice, a thorough strategic management process has three
main components, shown in the Figure 1.4.
Figure 1.4: Components of Strategic Management
Strategic Analysis
This is all about the analysing the strength of businesses’
position and understanding the important external factors that
may influence that position. The process of strategic analysis
can be assisted by a number of tools, including:
 PESTAnalysis:Atechniqueforunderstandingthe“environment”
in which a business operates.
 Scenario Planning: A technique that builds various plausible
views of possible futures for a business.
 Five Forces Analysis: A technique for identifying the forces
which affect the level of competition in an industry.
 Market Segmentation: A technique which seeks to identify
similarities and differences between groups of
customers or users.
 Directional Policy Matrix: A technique which summarises the
competitive strength of businesses operations in specific
markets.
 Competitor Analysis: A wide range of techniques and analysis
that seeks to summarise a businesses’ overall competitive
position.
 Critical Success Factor Analysis: A technique to identify
those areas in which a business must outperform the
competition in order to succeed.
 SWOT Analysis: A useful summary technique for
summarising the key issues arising from an assessment of
a businesses “internal” position and “external”
environmental influences.
Strategic Choice
This process involves understanding the nature of stakeholder
expectations (the “ground rules”), identifying strategic options,
and then evaluating and selecting strategic options.
NOTES
Strategy Implementation
Often the hardest part, when a strategy has been analysed and
selected, the task is then to translate it into organisational
action.
Fill in the blank:

17.Strategy formulation includes defining the,
specifying achievable ....................., developing .....................
and setting policy guidelines.
Consider the three components of strategic management. Which of these three components is the toughest part? State reasons.
1.10 SUMMARY
 Strategic or institutional management is the conduct of
drafting, implementing and evaluating cross-functional
decisions that will enable an organisation to achieve its
long-term objectives. It is a level of managerial activity
under setting goals and over tactics.
 Strategic management is the process of specifying the
organisation’s mission, vision and objectives, developing
policies and plans, often in terms of projects and
programs, which are designed to achieve these
objectives, and then allocating resources to implement the
policies and plans, projects and programs.
 Strategic management provides overall direction to the
enterprise and is closely related to the field of
Organisation Studies.
 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 internalised into a corporate
culture, it can lead to group think. It can also cause an
organisation to define itself too narrowly.
 Even the most talented manager would no doubt agree
that “comprehensive analysis is impossible” for complex
problems.
 Formulation and implementation of strategy must thus
occur side-by-side rather than sequentially, because
strategies are built on assumptions which, in the absence
of perfect knowledge, will never be perfectly correct.
 The essence of being “strategic” thus lies in a capacity for
“intelligent trial-and error” rather than linear adherence to
finally honed and detailed strategic plans.
NOTES  Strategic management is a question of interpreting, and

continuously reinterpreting, the possibilities presented by
shifting circumstances for advancing an organisation’s
objectives.
 Strategic management is the set of managerial decisions
and action that determines the way for the long-range
performance of the company.
 It includes environmental scanning, strategy formulation,
strategy implementation, evaluation and control.
 Strategy formulation is the development of long range
plans for the effective management of environmental
opportunities and threats in light of corporate strengths
and weaknesses.
 Strategy formulation includes defining the corporate
mission, specifying achievable objectives, developing
strategies and setting policy guidelines.
 Corporate strategy is one, which decides what business
the organisation should be in, and how the overall group of
activities should be structured and managed.
Mission: A statement that declares what business a company is in and who its customers are
Plan: A set of intended actions, through which one expects to achieve a goal.
Strategic Choice: Choice of course of action given the environment, mission and capabilities.
Strategic Management: Stream of decisions and actions that lead to development of effectiv
Strategy: A plan of action designed to achieve a particular goal.
Vision: The overall goal of an organisation that all business activities and processes should co
1.11 DESCRIPTIVE QUESTIONS

1. What are the dimensions of strategic management? What
explains the need for strategic management?
2. Examine the significance of strategic management.
3. “Strategic management process is the way in which
strategists determine objectives and strategic decisions”.
Discuss.
4. Bring out the distinguishing features of strategic management.
5. Can the process of strategic management really be
depicted in a given model or it is a prompt and dynamic
process? Give reasons.
NOTES
6. Given the vision, as the new Director, what ideas would
you want to implement to achieve the vision?
7. Has there ever been a time in your life when your vision of
the future was so inspiring that you converted initial nay-
sayers into followers later on? If yes discuss. If no, analyse
a situation when it could have happened. Why do you
think you failed?
8. Discuss a time when you established a vision for your
team. What process was used? Were others involved in
setting the vision? How did the vision contribute to the
functioning of the unit?
9. How mission statement is evaluated? Explain.
10. What do you mean by business definition? Explain the
tools of strategic analysis process.
1.12 ANSWERS AND HINTS

ANSWERS FOR SELF-ASSESSMENT QUESTIONS
Topic Q.No. Answers

Definitions of 1. direction
Strategic
Management
2. reinterpreting, shifting
3. Purpose
MS
Nature of 4. Operational nature
Strategic
Management
IM
Dimensions of Strategic 5. implementation
Management
Need for Strategic 6. vision, mission
Management
Strategic 7. image,
Management competitive
Process advantage
8. Three
Vision 9. vision
10. sequentially
11. Groupthink
12. become, achieve
Mission 13. Single
14. attainable
15. function, markets,
competitive
advantages
16. employees, customers
Business Definition 17. corporate mission,
objectives,
strategies
NOTES HINTS FOR DESCRIPTIVE QUESTIONS

1. Refer to 1.4 & 1.5
The dimensions for Strategic Management comprises top
management involvement, requirement of large amounts
of resources, affecting the firm’s long-term prosperity,
future- oriented, multi-functional or multi-business
consequences and non-self generative decisions. The need
for strategic management arises as it provides the route
map for the firm and makes it possible for the firm to take
decisions concerning the future with a greater awareness
of their implications. It provides direction to the company;
it indicates how growth could be achieved.
2. Refer to 1.3
The significance of strategic management deals with the
art and science of formulating, implementing, and
evaluating, cross- functional decisions that enable an
organisation to achieve its objectives. Strategic
management is different in nature from other aspects of
management. An individual manager is most often
required to deal with problems of operational nature. He
generally focuses on day-to-day problems such as the
efficient production of goods, the management of a sales
force, the monitoring of financial performance or the
design of some new system that will improve the level of
customer service.
3. Refer to 1.6
Developing an organisational strategy involves five main
elements – strategic analysis, environmental analysis,
strategic choice, strategy implementation and strategy
evaluation and control. Each of these contains further
steps, corresponding to a series of decisions and actions
that form the basis of strategic management process.
4. Refer to 1.4 &1.5
The features of strategic management is concerned with
effectively managing resources already deployed, within
the context of an existing strategy. In other words,
operational control is what managers are involved in most
of their time. It is vital to the effective implementation of
strategy, but it is not the same as strategic management.
Strategic management involves elements geared toward a
firm’s long-term survival and achievement of
management goals. The components of the content of a
strategy making process include a desirable future,
resource allocation, management of the firm-environment
and a competitive business ethics. Other distinguishing
features include top management involvement,
requirement of large amounts of resources, affecting the
firm’s long-term prosperity, future- oriented, multi-
functional or multi-business consequences and non-self
generative decisions.
NOTES
5. Refer to 1.4 & 1.6
Yes, the process of strategic management really be
depicted in a given model and a prompt and dynamic
process. It involves the seven steps of strategy process
which fall into three broad phases – formulation,
implementation and evaluation – though in practice the
three phases interact closely. The reasons for a
dynamic process are – top management involvement,
requirement of large amounts of resources, affecting the
firm’s long-term prosperity, future-oriented, multi-
functional or multi- business consequences and non-self
generative decisions.
6. Refer to 1.7 & 1.7.3
Vision can be defined as “a mental image of a possible and
desirable future state of the organisation” (Bennis and
Nanus). It is “a vividly descriptive image of what a
company wants to become in future”. For achieving vision,
it should have possibility, desirability, actionability and
articulation.
7. Refer to 1.7.3
Yes. Vision statements deal with possibility, desirability,
actionability and articulation.
8. Refer to 1.7,1.7.1,1.7.2 & 1.7.3
Vision represents top management’s aspirations about the
company’s direction and focus. Every organisation needs
to develop a vision of the future. A clearly articulated
vision moulds organisational identity, stimulates managers
in a positive way and prepares the company for the future.
“The critical point is that a vision articulates a view of a
realistic, credible, attractive future for the organisation, a
condition that is better in some important ways than what
now exists.” The process of vision include core ideology
and envisioned future. Core ideology is based on the
enduring values of the organisation (“what we stand for
and why we exist”), which remain unaffected by
environmental changes. Envisioned future consists of a
long- term goal (what we aspire to become, to achieve, to
create) which demands significant change and progress.
9. Refer to 1.8.6
For a mission statement to be effective, it should meet the
ten conditions.
10. Refer to 1.9
A business definition is a clear statement of the business
the firm is engaged in or is planning to enter. The process
of strategic analysis can be assisted by a number of tools,
including PEST Analysis, Scenario Planning, Five Forces
Analysis, Market Segmentation, Directional Policy Matrix
and Competitor Analysis.
NOTES 1.13 SUGGESTED READINGS FOR REFERENCE

SUGGESTED READINGS
 Fred R. David, Strategic Management – Concepts and Cases,
Pearson Education Inc., 2005.
 Johnson Gerry and Sholes Kevan, Exploring Corporate
Strategy, 6th Edition, Pearson Education Ltd., 2002.
 Rao VSP and Hari Krishna V, Strategic Management – Text and
Cases, New Delhi, Excel Books, 2003.
 Richard Lynch, Corporate Strategy, Essex, Pearson Education
Ltd, 2006.
 Wheelen Thomas L, David Hunger J, Krish Rangarajan,
Concepts in Strategic Management and Business Policy, New
Delhi, Pearson Education, 2006.
E-REFERENCES
 http://www.publishyourarticles.net/knowledge-
hub/business- studies/6-major-dimensions-of-strategic-
decisions.html
 http://www.diff en.com/diff erence/Mission_Statement_
vs_ Vision_Statement
 http://yourbusiness.azcentral.com/strategic-
management- needed-15149.html
C H
2
A P T E R
MODELS OF STRATEGIC MANAGEMENT
CONTENTS
2. Introduction
1
2. Mintzberg
2
2.2.1 Mintzberg’s Five P’s for Strategy
2.2.2 Mintzberg Views on Strategic Planning
2. Ansoff
3
2.3.1 Strategy Decisions
2.3.2 Components of Strategy
2.3.3 Ansoff Matrix
2.3.4 Paralysis by Analysis
2.3.5 Turbulence
2.3.6 Ansoff ’s Work in Perspective
2. Porter
4
2.4.1 Porter’s Generic Strategies
2.4.2 A Combination of Generic Strategies – Stuck in
the
Middle
2.4.3 Generic Strategies and Industry Forces
2. Prahalad and Gary Hammel
5
2.5.1 Developing Core Competencies
2.5.2 Loss of Core Competencies
2.5.3 Core Products
2.5.4 Implications for Corporate Management
2.5.5 Competing for the Future
2. Summary
6
2. Descriptive Questions
7
2. Answers and Hints
8
2. Suggested Readings for Reference
9
NOTES
DELL’S GENERIC STRATEGIES
Over the years, DELL COMPUTERS is constantly changing,

adapting and finding innovative ways to master its
environment and push rivals to the wall. One thing, of
course, has not changed: its focus on speed and low cost. It
has retained its image of what it does best. A custom order
placed with Dell at 9 am on Monday can be on a delivery
truck by 9 pm on Tuesday. The company spent years
developing a core competence in low cost and speedy
delivery by squeezing time lags and inefficiencies out of the
manufacturing and assembly process and then extending
the same brutal standards to the supply chain. Just peep into
the Tapfer Manufacturing Centre at the Dell’s headquarters
and you will understand how Dell does things with
meticulous care, passion and love. The parts storage does
not occupy too much space (occupying the space of just an
average bedroom!). Dell can receive parts in fifteen minutes
that could take two days to reach IBM or Gateway. Boxes of
microchips and electronic components skitter by on double
decker conveyer belts. Assembly workers get the right part
— whether you talk of microprocessors or combination of
software being delivered at the right time with clock work
precision. The system takes care of everything so as to
reduce the number of worker touches per machine. Over
25,000 finished computers head off towards happy customer
every day. Dell does everything in a very transparent
NMI
manner providing complete information to employees,
suppliers and customers. Precise coordination aided by
sophisticated supply chain software means Dell can keep
just two hours’ worth of parts inventory and replenish only
when it needs throughout the day. The just-in-time system
works so efficiently that nearly 8.5 percent of orders are
MS
built, customised and shipped within eight hours. Speed has
enabled Dell to slash inventories and parts costs so low that
it can under-price rivals by 10 to 15 per cent. Competitors
having watched as more and more customers turned to Dell
are trying to imitate the company’s way of doing business.

Education
MODELS OF STRATEGIC MANAGEMENT 41
NOTES
After studying this chapter, you should be able to:

Evaluate the meaning, definition and significance of strategic management model
Explain the strategic planning model of Mintzberg Analyse the strategic decision model of Ansoff Know about the generic
Identify the core competency model of Prahalad and Hammel
2.1 INTRODUCTION
The term ‘strategy’ proliferates in discussions of business.
Scholars and consultants have provided myriad models and
frameworks for analysing strategic choice. Today there are a
variety of firms and organisations having different nature and
environment of work but every one has same objective that is
to raise the sale of the firm. For doing so it needs to tailor its
strategy of working in such a way that it can get its target or
objective in the specified time with minimum possible wastage
of resources. In this chapter, we will discuss a few such
strategic models designed by various eminent management
professionals in their long course of experience and expertise.
2.2 MINTZBERG
2.2.1 MINTZBERG’S FIVE P’S FOR STRATEGY
The word “strategy” has been used implicitly in different ways
even if it has traditionally been defined in only one. Explicit
recognition of multiple definitions can help people to
manoeuvre through this difficult field. Mintzberg provides five
definitions of strategy:
 Plan
 Ploy
 Pattern
 Position
 Perspective.
Plan
Strategy is a plan – some sort of consciously intended course
of action, a guideline (or set of guidelines) to deal with a
situation.
Strategies have two essential characteristics: they are made in advance of the actions to which they apply, and they are developed conscio
NOTES Ploy
As plan, a strategy can be a ploy too, really just a specific
manoeuvre intended to outwit an opponent or competitor.
Pattern
If strategies can be intended (whether as general plans or
specific ploys), they can also be realised. In other words,
defining strategy as plan is not sufficient; we also need a
definition that encompasses the resulting behaviour:
Strategy is a pattern – specifically, a pattern in a stream of
actions. Strategy is consistency in behaviour, whether or not
intended. The definitions of strategy as plan and pattern
can be quite independent of one another: plans may go
unrealised, while patterns may appear without
preconception.
Plans are intended strategy, whereas patterns are realised
strategy; from this we can distinguish deliberate strategies,
where intentions that existed previously were realised, and
emergent strategies where patterns developed in the absence
of intentions, or despite them.
Position
Strategy is a position – specifically a means of locating an
organisation in an “environment”. By this definition strategy
becomes the mediating force, or “match”, between
organisation and environment, that is, between the internal
and the external context.
Perspective
Strategy is a perspective – its content consisting not just of a
chosen position, but of an ingrained way of perceiving the
world. Strategy in this respect is to the organisation what
personality is to the individual. What is of key importance is
that strategy is a perspective shared by members of an
organisation, through their intentions and/or by their actions. In
effect, when we talk of strategy in this context, we are entering
the realm of the collective mind – individuals united by
common thinking and/or behaviour.
2.2.2 MINTZBERG VIEWS ON STRATEGIC PLANNING

Mintzberg says “Strategic planning is not strategic thinking.
Strategic planning often spoils strategic thinking, causing
managers to confuse real vision with the manipulation of
numbers. This confusion lies at the heart of the issue: the most
successful strategies are visions, not plans.”
Strategic planning, as it has been practiced, has really been
strategic programming, the articulation and elaboration of
strategies or visions that already exist. When companies
understand the difference between planning and strategic
thinking, they can get back to what the strategy-making
process should be: capturing what the manager learns from all
Education
so ces and then synthesising that learning into a vision of the
ur direction that the business should pursue.

Education
NOTES
Planners should make efforts around the strategy-making
process rather than inside it. They should supply the formal
analyses or hard data that is needed in strategic thinking,
broadening the consideration of issues rather than trying to
discover the one right answer. They should act as catalysts who
support strategy-making by encouraging managers to think
strategically.
Planning is about analysis, breaking down a goal or set of
intentions into steps, formalising those steps so that they can
be implemented almost automatically and articulating the
anticipated consequences or results of each step. Strategic
thinking, on the other hand, is about synthesis. It comprises –
intuition and creativity. The result of strategic thinking is an
integrated perspective of the enterprise, a not-too- precisely
articulated vision of direction. Such strategies often cannot be
developed on schedule and immaculately conceived. They
must be free to appear at any time and at any place in the
organisation, typically through messy processes of informal
learning that must necessarily be carried out by people at
various levels who are deeply involved with the specific issues
at hand. Formal planning has always been dependent on the
preservation and rearrangement of established categories. But
real strategic change requires not merely rearranging the
established categories, but inventing new ones. Strategy needs
to function beyond the boxes, to encourage the informal
learning that produces new perspectives and new
combinations.
There are two types of planner, the analytical thinker and the
creative thinker. Many organisations need both types and it is
top management’s job to ensure it has them in appropriate
proportions.
Fill in the blanks:

Strategy is a plan – some sort of consciously …………………….
course of action, a guideline to deal with a situation.
Strategy is a position – specifically a means of locating an
…………………….. in an “environment”.
According to Mintzberg strategicis
not strategic thinking.
Strategic planning often spoils strategic thinking, causing managers to confuse real vision with the manipulation of numbers. Yet, business
NOTES
The grand fallacy of strategic planning is the belief that due to the fact that analysis encompasses synthesis, strategic planning is strategy
2.3 ANSOFF
Until the publication of corporate strategy, companies had little
guidance on how to plan for, or make decisions about, the
future. Traditional methods of planning were based on an
extended budgeting system which used the annual budget,
projecting it a few years into the future. By its nature, this
system paid little or no attention to strategic issues.
With the advent of greater competition, higher interest in
acquisitions, mergers and diversification, and greater
turbulence in the business environment, however, strategic
issues could no longer be ignored. Ansoff felt that, in
developing strategy, it was essential to systematically
anticipate future environmental challenges to an organisation,
and draw up appropriate strategic plans for responding to
these challenges. In corporate strategy, Igor Ansoff explored
these issues, and built up a systematic approach to strategy
formulation and strategic decision- making through a
framework of theories, techniques and models.
2.3.1 STRATEGY DECISIONS

Ansoff identified four standard types of organisational
decisions as related to strategy, policy, programmes, and
standard operating procedures. The last three of these, he
argued, are designed to resolve recurring problems or issues
and, once formulated, do not require an original decision each
time. This means that the decision process can easily be
delegated. Strategy decisions are different, however, because
they always apply to new situations and so need to be made
anew every time.
Ansoff developed a new classification of decision-making,
partially based on Alfred Chandler’s work, Strategy and
Structure (Cambridge, Mass, MIT Press, 1962). This
distinguished decisions as either: strategic (focused on the
areas of products and markets); administrative (organisational
and resource allocating), or operating (budgeting and directly
managing). Ansoff ’s decision classification became known as
Strategy-Structure-Systems, or the 3S model.
2.3.2 COMPONENTS OF STRATEGY

Ansoff argued that within a company’s activities there should
be an element of core capability, an idea later adopted and
expanded by Hamel and Prahalad. To establish a link between
past and future
NOTES
corporate activities (the first time such an approach was
undertaken) Ansoff identified four key strategy components:
 Product-market scope: A clear idea of what business or
products a company was responsible for (predating the
exhortations of Peters and Waterman to “stick to the
knitting”).
 Growth vector: As explained in the section below on the
Ansoff matrix, this offers a way of exploring how growth
may be attempted.
 Competitive advantage: Those advantages an organisation
possesses that will enable it to compete effectively. A
concept later championed by Michael Porter.
 Synergy: Ansoff explained synergy as “2 + 2 = 5”, or how
the whole is greater than the mere sum of the parts, and it
requires an examination of how opportunities fit the core
capabilities of the organisation.
2.3.3 ANSOFF MATRIX

Variously known as the “product-mission matrix” or the “2 ×
2 growth vector component matrix”, the Ansoff Matrix remains
a popular tool for organisations that wish to understand the
risk component of various growth strategies, including
product versus market development and diversification.
The matrix was first published in a 1957 article called
‘Strategies for diversification’ and the example below
illustrates what such a matrix may look like the matrix shown
in Figure 2.1.
Figure 2.1: Ansoff’s Matrix Model
The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy.
NOTES Ansoff ’s product/market growth matrix suggests that a

business’ attempts to grow depend on whether it markets new
or existing products in new or existing markets.
The output from the Ansoff product/market matrix is a series of
suggested growth strategies that set the direction for the
business strategy. These are described below:
Market penetration: Market penetration is the name given to a
growth strategy where the business focuses on selling existing
products into existing markets. Market penetration seeks to
achieve four main objectives:
 Maintain or increase the market share of current products
– this can be achieved by a combination of competitive
pricing strategies, advertising, sales promotion and
perhaps more resources dedicated to personal selling.
 Secure dominance of growth markets.
 Restructure a mature market by driving out competitors;
this would require a much more aggressive promotional
campaign, supported by a pricing strategy designed to
make the market unattractive for competitors.
 Increase usage by existing customers – for example by
introducing loyalty schemes.
A market penetration marketing strategy is very much about
“business as usual”. The business is focusing on markets and
products it knows well. It is likely to have good information on
competitors and on customer needs. It is unlikely, therefore,
that this strategy will require much investment in new market
research.
Market development: Market development is the name given to a
growth strategy where the business seeks to sell its existing
products into new markets. There are many possible ways of
approaching this strategy, including:
 New geographical markets, for example, exporting the
product to a new country.
 New product dimensions or packaging, for example, New
distribution channels.
 Different pricing policies to attract different customers or
create new market segments.
Product development: Product development is the name given
to a growth strategy where a business aims to introduce
new products into existing markets. This strategy may
require the development of new competencies and requires
the business to develop modified products which can appeal
to existing markets.
Diversification: Diversification is the name given to the growth
strategy where a business markets new products in new
markets. This
NOTES
is an inherently more risk strategy because the business is
moving into markets in which it has little or no experience. For
a business to adopt a diversification strategy, therefore, it must
have a clear idea about what it expects to gain from the
strategy and an honest assessment of the risks.
Of the four strategies given in the matrix, market penetration
requires increasing existing product market share in existing
markets.
2.3.4 PARALYSIS BY ANALYSIS

It has sometimes been suggested that the application of the
ideas in corporate strategy can lead to an over heavy
emphasis on analysis. Ansoff himself recognised this
possibility, however, and coined the now famous phrase
“paralysis by analysis” to describe the type of procrastination
caused by excessive planning.
2.3.5 TURBULENCE
The issue of turbulence underlies all of Ansoff ’s work on
strategy. One of his key aims in establishing a better
framework for strategy formulation was to improve the existing
planning processes of the stable, postwar economy of the USA,
since he realised these would not be sufficient to cope with
pressures that rapid and discontinuous change would place on
them. By the 1980s change, and the pace of change, had
become a key issue for management in most organisations.
Ansoff recognised, however, that if some organisations were
faced with conditions of great turbulence, others still operated
in relatively stable conditions. Consequently, although strategy
formulation had to take environmental turbulence into account,
one strategy could certainly not be made to fit every industry.
These ideas are discussed in Implanting Strategic
Management, where five levels of environmental turbulence
are outlined as:
 Repetitive: Change is at a slow pace, and is predictable.
 Expanding: A stable marketplace, growing gradually.
 Changing: Incremental growth, with customer requirements
altering fairly quickly.
 Discontinuous: Characterised by some predictable change
and some more complex change.
 Surprising: Change which cannot be predicted and which
both develops, and develops from, new products or
services.
2.3.6 ANSOFF’S WORK IN PERSPECTIVE

Although Ansoff ’s work is frequently referred to by other
strategists, it has not become more generally recognised in
comparison with that of other theorists. The complexity of his
work, and its reliance on the disciplines of analysis and
planning, are perhaps among the reasons why Ansoff is not
popularly viewed as belonging within the
NOTES top echelons of management thinkers. Other theorists were

working on similar themes to Ansoff at similar times.
In the 1960s Ansoff ’s notion of competence (which was later
developed by Hamel and Prahalad) was not unique, and
although Ansoff seems to have been the originator of his 2 × 2
growth vector component matrix, a similar matrix had been
published earlier. During the 1980s and 1990s, it is likely that
much work by other theorists about strategy formation under
conditions of uncertainty or chaos owed something to Ansoff ’s
theory of turbulence, though it is difficult to evaluate the
extent of the debt.
A debate between Ansoff and Henry Mintzberg over their
differing views of strategy was reflected in print over many
years, particularly in the Harvard Business Review. Ansoff has
often been criticised by Mintzberg, who disliked the idea of
strategy being built from planning which is supported by
analytical techniques.
This criticism was based on the belief that Ansoff ’s reliance on
planning suffered from three fallacies: that events can be
predicted, that strategic thinking can be separated from
operationalmanagement, and that hard data, analysis and
techniques can produce novel strategies.
Fill in the blanks:

Ansoff identified four standard types of organisational decisions as related to strategy, policy,
and standard operating procedures.
Ansoff argued that within a company’s activities there should be an element of ……………………
Excessive analysis and planning may turn out to be counter productive for corporate strategy. Discuss.
2.4 PORTER
Market expansion requires the identification of new customers for existing products; product expansion requires developing new produc
2.4.1 PORTER’S GENERIC STRATEGIES
If the primary determinant of a firm’s profitability is the
attractiveness of the industry in which it operates, an
important secondary determinant is its position within that
industry. Even though an
NOTES
industry may have below-average profitability, a firm that is
optimally positioned can generate superior returns.
A firm positions itself by leveraging its strengths. Michael
Porter has argued that a firm’s strengths ultimately fall into one
of two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope,
three generic strategies result: cost leadership, differentiation
and focus. These strategies are applied at the business unit
level. They are called generic strategies because they are not
firm or industry dependent. The Table 2.1 illustrates Porter’s
generic strategies.
TABLE 2.1: PORTER’S GENERIC STRATEGIES

Advantage
Target Scope
Low Cost Product Uniqueness
Broad Cost Leadership Differentiation
(Industry strategy Strategy
Wide)
Narrow (Market Focus Strategy Focus
Segment) (low cost) Strategy
(differentiation
)
Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an
industry for a given level of quality. The firm sells its products
either at average industry prices to earn a profit higher than
that of rivals, or below the average industry prices to gain
market share. In the event of a price war, the firm can maintain
some profitability while the competition suffers losses. Even
without a price war, as the industry matures and prices decline,
the firms that can produce more cheaply will remain profitable
for a longer period of time. The cost leadership strategy usually
targets a broad market.
Some of the ways that firms acquire cost advantages are by
improving process efficiencies, gaining unique access to a
large source of lower cost materials, making optimal
outsourcing and vertical integration decisions, or avoiding
some costs altogether. If competing firms are unable to lower
their costs by a similar amount, the firm may be able to sustain
a competitive advantage based on cost leadership.
Firms that succeed in cost leadership often have the following
internal strengths:
 Access to the capital required to make a significant
investment in production assets; this investment
represents a barrier to entry that many firms may not
overcome.
 Skill in designing products for efficient manufacturing, for
example, having a small component count to shorten the
assembly process.
 High level of expertise in manufacturing process engineering.
 Efficient distribution channels.
NOTES Each generic strategy has its risks, including the low-cost
strategy. For example, other firms may be able to lower their
costs as well. As technology improves, the competition may be
able to leapfrog the production capabilities, thus eliminating
the competitive advantage. Additionally, several firms
following a focus strategy and targeting various narrow
markets may be able to achieve an even lower cost within their
segments and as a group gain significant market share.
Differentiation Strategy
A differentiation strategy calls for the development of a
product or service that offers unique attributes that are valued
by customers and that customers perceive to be better than or
different from the products of the competition. The value
added by the uniqueness of the product may allow the firm to
charge a premium price for it. The firm hopes that the higher
price will more than cover the extra costs incurred in offering
the unique product. Because of the product’s unique attributes,
if suppliers increase their prices the firm may be able to pass
along the costs to its customers who cannot find substitute
products easily.
Firms that succeed in a differentiation strategy often have the
following internal strengths:
 Access to leading scientific research.
 Highly skilled and creative product development team.
 Strong sales team with the ability to successfully
communicate the perceived strengths of the product.
 Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include
imitation by competitors and changes in customer tastes.
Additionally, various firms pursuing focus strategies may be
able to achieve even greater differentiation in their market
segments.
Focus Strategy
The focus strategy concentrates on a narrow segment and
within that segment attempts to achieve either a cost
advantage or differentiation. The premise is that the needs of
the group can be better serviced by focusing entirely on it. A
firm using a focus strategy often enjoys a high degree of
customer loyalty, and this entrenched loyalty discourages other
firms from competing directly.
Because of their narrow market focus, firms pursuing a focus
strategy have lower volumes and therefore less bargaining
power with their suppliers. However, firms pursuing a
differentiation-focused strategy may be able to pass higher
costs on to customers since close substitute products do not
exist.
Fir that succeed in a focus strategy are able to tailor a broad
m range of product development strengths to a relatively narrow
s market
NOTES
segment that they know very well. Some risks of focus
strategies include imitation and changes in the target
segments. Furthermore, it may be fairly easy for a broad-
market cost leader to adapt its product in order to compete
directly. Finally, other focusers may be able to carve out sub-
segments that they can serve even better.
2.4.2 A COMBINATION OF GENERIC STRATEGIES –

STUCK IN THE MIDDLE
These generic strategies are not necessarily compatible with
one another. If a firm attempts to achieve an advantage on all
fronts, in this attempt it may achieve no advantage at all. For
example, if a firm differentiates itself by supplying very high
quality products, it risks undermining that quality if it seeks to
become a cost leader. Even if the quality did not suffer, the firm
would risk projecting a confusing image. For this reason,
Michael Porter argued that to be successful over the long-term,
a firm must select only one of these three generic strategies.
Otherwise, with more than one single generic strategy the firm
will be “stuck in the middle” and will not achieve a competitive
advantage.
However, there exists a viewpoint that a single generic
strategy is not always best because within the same product
customers often seek multi-dimensional satisfactions such as a
combination of quality, style, convenience and price. There
have been cases in which high quality producers faithfully
followed a single strategy and then suffered greatly when
another firm entered the market with a lower-quality product
that better met the overall needs of the customers.
2.4.3 GENERIC STRATEGIES AND INDUSTRY FORCES

These generic strategies each have attributes that can serve to
defend against competitive forces. The Table 2.2 compares
some characteristics of the generic strategies in the context of
the Porter’s five forces.
TABLE 2.2: GENERIC STRATEGIES AND INDUSTRY

FORCES
Industry Generic Strategies

Force Cost Differentiation Focus
Leadership
Entry Ability to Customer Focusing develops
Barriers cut price loyalty can core
in discourage competencies that
retaliation potential can act as an
deters entrants. entry barrier.
potential
entrants.
Contd...
NOTES
Buyer PowerAbility to offer lower priceLarge buyers Large buyers

to powerful buyers. have less powerhave less power to
to negotiate because of few close
negotiate
alternatives.
because of few alternatives.
Supplier Power Better insulated Better able toSuppliers have

from powerful
pass on
suppliers.
supplierpower because of price increases to low volumes, but
a differentiation-
customers.focused firm is better able to pass on supplier price increases.
Specialised
Threat ofCan use Customer’s

Substitutes low price to become attached products & core
defend against substitutes. to differentiating competency protect
attributes, reducing threat of substitutes.
against substitutes.
Rivalry
Better able to compete
Brand loyalty
on price.
toRivals cannot meet keep customersdifferentiation-
from rivals. focused customer needs.
Fill in the blanks:
I
Market penetration is the name given to a ……………………..
N
where the business focuses on selling existing products into existing markets.
Market development is the name given to a growth strategy where the business seeks to sell its existing products into ………………………
Cost leadership strategy calls for being the ……………………..
in an industry for a given level of quality.
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a
………………………… or differentiation.
Rajiv Bajaj opines that strategy is specialisation. Analyse the brand led growth strategy behind the launch and marketing of Pulsar, KTM an
NOTES
Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By
2.5 PRAHALAD AND GARY HAMMEL

The core competencies are the source of competitive
advantage and enable the firm to introduce an array of new
products and services. According to Prahalad and Hammel,
core competencies lead to the development of core
products. Core products are not directly sold to end users;
rather, they are used to build a larger number of end-user
products. For example, motors are a core product that can
be used in wide array of end products. The business units of
the corporation each tap into the relatively few core
products to develop a larger number of end user products
based on the core product technology. This flow from core
competencies to end products is shown in Figure 2.2.
End Products
3 10 11
12 12
4 5 6 7 8 9
Business 1 Business 2 Business 3 Business 4
NMI Core Product 1
MS
Core Product 2
Competence 1 Competence 2 Competence 3 Competence 4
Figure 2.2: Core Competencies to End Products

The intersection of market opportunities with core
competencies forms the basis for launching new businesses.
By combining a set of core competencies in different ways and
matching them to market opportunities, a corporation can
launch a vast array of businesses.
Without core competencies, a large corporation is just a
collection of discrete businesses. Core competencies serve as
the glue that bonds the business units together into a coherent
portfolio.
NOTES 2.5.1 DEVELOPING CORE COMPETENCIES

According to Prahalad and Hammel, core competencies arise
from the integration of multiple technologies and the
coordination of diverse production skills. There are three tests
useful for identifying a core competence. A core competence
should:
 provide access to a wide variety of markets,
 contribute significantly to the end-product benefits,
 be difficult for competitors to imitate.
Core competencies tend to be rooted in the ability to integrate
and coordinate various groups in the organisation. While a
company may be able to hire a team of brilliant scientists in a
particular technology, in doing so it does not automatically gain
a core competence in that technology. It is the effective
coordination among all the groups involved in bringing a
product to market that results in a core competence.
It is not necessarily an expensive undertaking to develop core
competencies. The missing pieces of a core competency often
can be acquired at a low cost through alliances and licensing
agreements. In many cases an organisational design that
facilitates sharing of competencies can result in much more
effective utilisation of those competencies for little or no
additional cost.
To better understand how to develop core competencies, it is
worthwhile to understand what they do not entail. According to
Prahalad and Hammel, core competencies are not necessarily
about:
 Outspending rivals on R&D
 Sharing costs among business units
 Integrating vertically
While the building of core competencies may be facilitated by
some of these actions, by themselves they are insufficient.
2.5.2 LOSS OF CORE COMPETENCIES

Cost-cutting moves sometimes destroy the ability to build core
competencies. For example, decentralisation makes it more
difficult to build core competencies because autonomous
groups rely on outsourcing of critical tasks, and this
outsourcing prevents the firm from developing core
competencies in those tasks since it no longer consolidates the
know-how that is spread throughout the company.
Failure to recognise core competencies may lead to decisions
that result in their loss. For example, in the 1970’s many U.S.
manufacturers divested themselves of their television
manufacturing businesses, reasoning that the industry was
mature and that high quality, low cost models were available
from Far East manufacturers. In the process, they lost their core
competence in video, and this loss resulted in a handicap in
th
e
ne
w
er
di
git
al
tel
ev
isi
on
in
du
str
y.
NOTES
Similarly, Motorola divested itself of its semiconductor DRAM
business at 256Kb level, and then was unable to enter the 1Mb
market on its own. By recognising its core competencies and
understanding the time required to build them or regain them,
a company can make better divestment decisions.
In about 100 words discuss the flow from core competencies to end products.
2.5.3 CORE PRODUCTS

Core competencies manifest themselves in core products that
serve as a link between the competencies and end products.
Core products enable value creation in the end products.
Examples of firms and some of their core products include:
 3M – substrates, coatings, and adhesives
 Black & Decker – small electric motors
 Canon – laser printer sub-systems
 Matsushita – VCR sub-systems, compressors
 NEC – semi-conductors
 Honda – gasoline powered engines
The core products are used to launch a variety of end products.
For example, Honda uses its engines in automobiles,
motorcycles, lawn mowers, and portable generators.
Because firms may sell their core products to other firms that
use them as the basis for end user products, traditional
measures of brand market share are insufficient for evaluating
the success of core competencies. Prahalad and Hammel
suggest that core product share is the appropriate metric.
While a company may have a low brand share, it may have
high core product share and it is this share that is important
from a core competency standpoint. Once a firm has successful
core products, it can expand the number of uses in order to
gain a cost advantage via economies of scale and economies
of scope.
2.5.4 IMPLICATIONS FOR CORPORATE MANAGEMENT

Prahalad and Hammel suggest that a corporation should be
organised into a portfolio of core competencies rather than a
portfolio of independent business units. Business unit
managers tend to focus on getting immediate end-products to
market rapidly and usually do not feel responsible for
developing company-wide core competencies. Consequently,
without the incentive and direction from corporate
management to do otherwise, strategic business units are
inclined to under invest in the building of core competencies.
NOTES If a business unit does manage to develop its own core

competencies over time, due to its autonomy it may not share
them with other business units. As a solution to this problem,
Prahalad and Hammel suggest that corporate managers should
have the ability to allocate not only cash but also core
competencies among business units. Business units that lose
key employees for the sake of a corporate core competency
should be recognised for their contribution.
2.5.5 COMPETING FOR THE FUTURE

Hamel and Prahalad start their most popular work, Competing
for the Future, with some questions. “Does the senior
management have a clear and broadly shared understanding
of how the industry may be different ten years future?” “Is the
task of regenerating core strategies receiving as much top
management attention as the task of reengineering core
process?” They indicate, by those questions, how largely senior
managements of corporations devote their efforts to maintain
and improve only present business, such as restructuring and
reengineering. The book, then, shows the limits of those
actions for the future success.
Strategic
Intent
Strategic
Foresight Architecture FUTURE
NMI
Core
Competencies
Figure 2.3: Core Competencies for Future

Hammel and Prahalad accomplished their theories in this
MS
masterpiece. The pair says management executives should act
differently from others, so that they could make their new
future, which represents new industry, new value, and new
market; rather than maintaining or improving present market
or present product. It can be, they say, first of all, having a
good ‘Foresight,’ secondly, designing a ‘Strategic architecture’;
and finally creating ‘Strategic intent’ and rebuilding ‘Core
competencies’, which will pull a corporation to the future, is
shown diagrammatically in Figure 2.3.
Foresight
For competing for tomorrow, Hammel and Prahalad insist that
the first thing should be done is to develop foresight. Foresight
is prescience about the size and shape of tomorrow’s
opportunities, such as, new types of customer benefits or new
ways of delivering the benefits. They explain forgetting the
present market, the present product, or the present business
units, or the organisation. For instance,
NOTES
“Motorola dreams of a world in which telephone numbers will
be assigned to people, rather than places; where small hand-
held devices will allow people to stay in touch no matter where
they are; and where the new communicators can deliver video
images and data as well as voice signals.”
Strategic Architecture
To bring a corporation to real future from foresight, the two
theorists say it is the next action should be done to craft a
‘Strategic Architecture’ instead of strategic planning. Strategic
architecture should describes “which new benefits, or
‘functionalities’ (not present product) will be offered” for the
future, and “on what new competencies will needed to create
those benefit,” and “how the customer interface will need to
change to allow customers to access those benefits most
effectively”. They also indicate it is impossible to create a
detailed plan for a ten-or fifteen-year competitive, which is
traditionally considered in a strategic planning. They cite NEC,
a Japanese electronic company, as an example of a strategic
architecture. NEC, initially a supplier of telecommunications
equipment, dreamed being a leader in ‘C&C,’ computers and
communication in 1980s. The company identified three
streams of technological and market evolution.
 Computing would evolve from large mainframes to
distributed processing (now called “client-server”)
 Components would evolve from simple Integrated Circuits
(ICs) to ultra large-scale ICs
 Communications would evolve from mechanical cross-bar
switching to complex digital systems.
Strategic Intent and Core Competence

The two gurus describe how to achieve the future in
creating ‘strategic intent’ and rebuilding ‘core
competencies’, which had been developed in their works
before the book.
Strategic intent is something “ambitious and compelling” that
“provides the emotional and intellectual energy” for the future.
They explain “Strategic architecture is the brain; strategic
intent is the heart.” They insist the most actually providing
gateway to the future is “core competence.” Competencies are
integration of skills and technology, they defined.
Competencies of a corporation can be ‘core,’ which provide a
value to customer, are different from competitor, and are
extendable in new products or services. To get to the future,
core competencies should be founded, rebuilt, and developed.
Motorola found, rebuilt, and developed their competencies in
digital compression, flat screen displays, and battery
technology, and the company made their foresight to the real
future.
NOTES
Fill in the blank:

10.Real strategic change requires not merely ……………………….
the established categories, but inventing new ones.
Consider the case of Canon, which is into the production and sales of photocopier machines, cameras and the likes. What is the underlyin
2.6 SUMMARY
 There is no one perfect strategic management model for
any organisation. Each organisation ends up developing its
own nature and model of strategic planning, often by
selecting a model and modifying it as they go along in
developing their own planning process.
 The models discussed in this chapter provide a range of
alternatives from which organisations might select an
approach and begin to develop their own strategic
planning process.
 It should be noted that an organisation might choose to
integrate the models, e.g., using a scenario model to
creatively identify strategic issues and goals, and then an
issues-based model to carefully strategise to address the
issues and reach the goals.
 Michael Porter has argued that a firm’s strengths ultimately
fall into one of two headings: cost advantage and
differentiation. By applying these strengths in either a broad
or narrow scope, three generic strategies result: cost
leadership, differentiation and focus.
 Generic strategies are not necessarily compatible with one
another. If a firm attempts to achieve an advantage on all
fronts, in this attempt it may achieve no advantage at all.
 The core competencies are the source of competitive
advantage and enable the firm to introduce an array of
new products and services. According to Prahalad and
Hammel, core competencies lead to the development of
core products. Core products are not directly sold to end
users; rather, they are used to build a larger number of
end-user products.
 Core Competencies: Cluster of extraordinary abilities or related ‘excellences’ that a firm acquires from its founders, after consistent str
Contd...
NOTES
Planning: Basic management function involving formulation of one or more detailed plans to achieve optimum balance of needs or deman
Strategic Management: Systematic analysis of the factors associated with customers and competitors (the external environment) and the
Market Development: Market development is the name given to a growth strategy where the business seeks to sell its existing products
Strategic Intent: Strategic intent is something “ambitious and compelling” that “provides the emotional and intellectual energy” for the fu
Foresight: Foresight is prescience about the size and shape of tomorrow’s opportunities, such as, new types of customer benefits or new

1. What is the significance of five P’s in the strategic planning
model of Mintzberg?
2. Do you think the strategy decision model of Ansoff is
relevant in present day organisations? Give appropriate
reasons in support of your answer.
3. What is significance of generic strategy model of Porter?
4. What is future of the Prahalad and Hammel’s core
competencies model of strategic management?
5. Describe the Ansoff Growth matrix in detail.
6. Describe four key strategy components identified by Ansoff.
7. Why a combination of Generic strategies got stuck in the
middle? Give reasons.
8. How core competencies get developed? Give the
reasons for the loss of core competency.
9. How core competencies manifest themselves in core
products that serve as a link between the competencies
and end products? Explain. What are its implications for
Corporate Management?
10. Discuss the views of Mintzberg on Strategic Planning.
NOTES 2.8 ANSWERS AND HINTS

Topic Q. No. Answers

Mintzberg 1. intended
2. organization
3. Planning
Ansoff 4. programmes
5. Core capability
Porter 6. growth strategy
7. new markets
8. low cost producer
9. cost advantage
Prahalad and Gary 10. rearranging
Hammel
HINTS FOR DESCRIPTIVE QUESTIONS

1. Refer to 2.2.1
The word “strategy” has been used implicitly in different
ways even if it has traditionally been defined in only one.
Explicit recognition of multiple definitions can help people
to manoeuvre through this difficult field. Mintzberg
provides five definitions of strategy: Plan, Ploy, Pattern,
Position and Perspective.
2. Refer to 2.3.6
Although Ansoff ’s work is frequently referred to by other
strategists, it has not become more generally recognised
in comparison with that of other theorists. The complexity
of his work, and its reliance on the disciplines of analysis
and planning, are perhaps among the reasons why Ansoff
is not popularly viewed as belonging within the top
echelons of management thinkers. Other theorists were
working on similar themes to Ansoff at similar times.
3. Refer to 2.4.1
If the primary determinant of a firm’s profitability is the
attractiveness of the industry in which it operates, an
important secondary determinant is its position within that
industry. Even though an industry may have below-
average profitability, a firm that is optimally positioned can
generate superior returns. A firm positions itself by
leveraging its strengths. Michael Porter has argued that a
firm’s strengths ultimately fall into one of
NOTES
two headings: cost advantage and differentiation. By
applying these strengths in either a broad or narrow scope,
three generic strategies result: cost leadership,
differentiation and focus. These strategies are applied at
the business unit level. They are called generic strategies
because they are not firm or industry dependent.
4. Refer to 2.5
For competing for tomorrow, Hammel and Prahalad insist
that the first thing should be done is to develop foresight.
Foresight is prescience about the size and shape of
tomorrow’s opportunities, such as, new types of customer
benefits or new ways of delivering the benefits. They
explain forgetting the present market, the present product,
or the present business units, or the organisation.
5. Refer to 2.3.3
The Ansoff Growth matrix is a tool that helps businesses
decide their product and market growth strategy. Ansoff ’s
product/ market growth matrix suggests that a business’
attempts to grow depend on whether it markets new or
existing products in new or existing markets.
The output from the Ansoff product/market matrix is a
series of suggested growth strategies that set the direction
for the business strategy.
6. Refer to 2.3.2
Product market scope, Growth vector, Competitive
advantage and synergy are the four key strategy
components identified by Ansoff.
7. Refer to 2.4.2
These generic strategies are not necessarily compatible
with one another. If a firm attempts to achieve an
advantage on all fronts, in this attempt it may achieve no
advantage at all. For example, if a firm differentiates itself
by supplying very high quality products, it risks
undermining that quality if it seeks to become a cost
leader. Even if the quality did not suffer, the firm would risk
projecting a confusing image. For this reason, Michael
Porter argued that to be successful over the long-term, a
firm must select only one of these three generic strategies.
Otherwise, with more than one single generic strategy the
firm will be “stuck in the middle” and will not achieve a
competitive advantage.
8. Refer to 2.5.1 & 2.5.2
According to Prahalad and Hammel, core competencies
arise from the integration of multiple technologies and
the coordination of diverse production skills. The loss of
core competencies depend
NOTES upon : Cost-cutting moves which sometimes destroy the

ability to build core competencies; Failure to recognise core
competencies may lead to decisions that result in their
loss.
9. Refer to 2.5.3 & 2.5.4
Core competencies manifest themselves in core products
that serve as a link between the competencies and end
products. Core products enable value creation in the end
products. The core products are used to launch a variety of
end products. Because firms may sell their core products
to other firms that use them as the basis for end user
products, traditional measures of brand market share are
insufficient for evaluating the success of core
competencies. Prahalad and Hammel suggest that core
product share is the appropriate metric. The implications
of core competencies depends upon business unit
managers who tend to focus on getting immediate end-
products to market rapidly and usually do not feel
responsible for developing company-wide core
competencies. Consequently, without the incentive and
direction from corporate management to do otherwise,
strategic business units are inclined to under invest in the
building of core competencies.
10. Refer to 2.2.2
Mintzberg says “Strategic planning is not strategic
thinking. Strategic planning often spoils strategic thinking,
causing managers to confuse real vision with the
manipulation of numbers. This confusion lies at the heart
of the issue: the most successful strategies are visions, not
plans.”
2.9 SUGGESTED READINGS FOR REFERENCE

SUGGESTED READINGS
 Choo, Chun W., The Knowing Organisation, New York, Oxford
University Press, 1998.
 Hamel, G.H, Strategy as Revolution, Harvard Business, 1996.
 Hamel, G.H. and Prahalad, C.K., Competing for the Future,
Boston, MA: Harvard Business School Press, 1994.
 Hamel, G.H. and Prahalad, C.K., Strategic Intent, Harvard
Business Review, 1989.
 Hamel, G.H. and Prahalad, C.K., The Core Competencies of the
Corporation, Harvard Business Review, 1990.
 Stephen P. Robbins and Mary Coulter, Management, Prentice
Hall, 1996.
NOTES
E-REFERENCES
 http://www.ansoffmatrix.com/
 http://faculty.bcitbusiness.ca/kevinw/4800/Bobs_porter_n
otes. pdf
 http://www.quickmba.com/strategy/core-competencies/
C H
3
A P T E R
STRATEGIC MANAGEMENT IN GLOBAL ENVIRONMENT
CONTENTS
3. Introduction
1
3. Need for Globalisation
2
3. Different Types of International
3 Companies
3. Development of a Global Corporation
4
3. Complexity of Global Environment
5
3. Industry Analysis
6
3.6.1 Importance of Internal Analysis
3.6.2 SWOT Analysis

Education
3.7 Summary
3.8 Descriptive
3.10 and Hints

Education
NOTES
AN ARENA OF GLOBALIZED WORLD
The world is shrinking in all major respects. People, goods,

capital and information are moving around the globe like
never before with faster communication, transportation and
financial flow, the barriers between nations have
disappeared and the world is becoming a borderless
market. In the new millennium, global companies seem to
virtually dance all over the place. They are not constrained
by national borders. For instance, people drive Fords in
Germany, use Dell computers in India, eat McDonald’s
hamburgers in France, and snack on Mars candy bars in
England. They drink Coke and wear Levi Strauss jeans in
China and South Africa. The Japanese buy Kodak film and
use American Express credit cards. People around the world
fly on American Airlines in planes made by Boeing. Their
buildings are constructed with Caterpillar machinery, their
factories are powered by General Electric engines and they
buy Chevron oil. Coca Cola has over 80 percent of its sales
outside of its home market (Nestle has 50 percent, Procter
and Gamble 65 percent and Avon 60 percent). BMW builds
cars in South Carolina. McDonald’s sells hamburgers in
China. Wal-Mart, the global retailing giant employs over
500,000 employees across the globe. It serves 50 million
customers in international markets via 3,000 stores and
enjoys sales of over $70 billion in international markets.
These giant corporations source and coordinate resources
NMI
and activities in the most suitable areas, to offer
sophisticated, cost-effective products and services to
customers all over the globe. For example, the Boeing
Company’s commercial jet aircraft, the 777, uses 1,32,500
engineered parts that are produced around the world by 545
suppliers. Eight Japanese suppliers make parts of the
MS
fuselage, doors and wings; a supplier in Singapore makes
the doors for the nose landing gear; three suppliers in Italy
manufacture wing flaps and so on. More and more
companies are using the lowering of barriers to international
trade and investment that has taken place during the past
half century quite successfully.
True, boundaries between nations have collapsed with the
dismantling of restrictions on trade and investment
everywhere. Alongside the barriers of distance, time and
culture also seem to have disappeared. It is no longer
meaningful to talk about the Indian market, the
Chinesemarket, the USmarketorthe Japanesemarket– there
is only one market, and that is the global market where you
need a well-known brand with more or less standardised
features to entice global audience. The global acceptance of
Coca-Cola, Citi Group credit cards, blue jeans, Sony
PlayStation, McDonald’s hamburgers, Nike shoes, the Nokia
wireless phone and Microsoft’s Windows operating system
are examples of this trend. As a result of this, many
Education
industries have to live with intense competition – present as
well as potential – from any part of the world. Welcome to
the global village where no organisation is insulated from
the effects of foreign markets and competition.

Education
STRATEGIC MANAGEMENT IN GLOBAL ENVIRONMENT 67
NOTES
After studying this chapter, you should be able to: Explain the need for Globalisation
Identify the different types of international companies Enumerate the development of a global corporation Analyse the c
Define industry analysis and SWOT analysis
3.1 INTRODUCTION
Globalisation means increasing economic interdependence
among countries due to increasing cross-border flows of goods
and services, capital, people and know-how. With faster
communications, transportation and financial flows, the
barriers between nations have disappeared and the world is
becoming a borderless market. Products developed in one
country – Hollywood movies, McDonald’s hamburgers, Nike
shoes and Arrow shirts – are finding enthusiastic markets all
over the world.
The term ‘Globalisation’ is generally used to cover three topic areas:
 Globalisation of economies, trade activities and regulatory
regimes: World economies are slowly coming together,
with barriers to trade being lowered.
 Globalisation of industries: Entire industries like the car
industry, the aerospace industries and the paper and pulp
industry are beginning to trade as one market rather than
as a series of regional markets.
 Globalisation of companies: Companies operate in many
countries and treat the whole world as one market and one
source of supply. A company buys raw materials, borrows
money, manufacturers and sells its products, recruits
employees etc., by treating the whole world as one
marketplace.
A number of forces are responsible for Globalisation. They are:
 Technological progress
 Opening up of national borders
 Strides in telecommunications
 Advancements in transportation
 Internet
 Opening up of economies such as India, China etc.
3.2 NEED FOR GLOBALISATION

Globalisation has become an important driver of a country’s
economic growth. Countries have contributed to this and benefited
from it.
NOTES
Globalisation presents the best opportunities for a firm’s growth and profitability.
Globalization also poses some risks.
Opportunities: The following are the opportunities available for
firms due to Globalisation:
 Economies of scale: Firms need a large customer base to
achieve economies of scale. Global markets offer exciting
opportunities to exploit the latest demand in world
markets, and expand their production volumes.
 Performance enhancement: Globalisation helps in improving
the performance of the firm. For example, Microsoft’s
decision to establish a corporate research laboratory in
Cambridge, England, helped it to build and sustain world-
class excellence in selected value-creating activities. This
strategic decision helped Microsoft gain access to
outstanding technical and professional talent, which in
turn helped in improved performance.
 Reduced costs: Firms all over the world are under pressure to
reduce costs by locating their production facilities in
countries where they can be produced more economically.
 Homogeneity of demand: Homogeneity of demand means that
irrespective of where customers are physically located,
they are likely to prefer the same kind of product or
service world-wide.
 Spreading of R&D costs: In some industries such as
pharmaceuticals and aircraft manufacturing, Research and
Development (R&D) costs are so high that unless there are
world-wide sales, the cost of development cannot be
covered.
 New customers: Globalisation helps in increasing the
customer base of the firm. Many multinationals view the
Indian and Chinese markets with their huge population
base as very attractive for expansion.
 Exploit local advantages: The most important reasons for
international expansion are low-cost labour and availability
of natural resources in various parts of the world.
Countries such as India, China, Taiwan and Israel are
becoming important engineering, manufacturing and
development centres for key skills in software and
computer design. Availability of cheap labour, cheap land
prices, low energy costs etc., in countries such as China,
India, Indonesia and other South-East Asian countries has
encouraged many Japanese, Korean and American
companies to build production units there.
 Government incentives: Government incentives in the form of
subsidies, tax concessions, exportincentives have
motivatedmany domestic firms to expand their operations
globally. Generous
Education
NOTES
loans, subsidies etc., given by the South Korean
government have encouraged many of their firms such as
Hyundai, Samsung, Daewoo, LG, etc., to invest huge sums
in new technology and build global-sized plants all over
the world.
Risks: Despite the above advantages, firms face many risks when
expanding globally. They are:
 Political and Economic Risks: Some countries are not stable
politically. Forces such as social unrest, military turmoil,
demonstrations and even violent conflicts and terrorist
attacks can pose serious threats. In some countries, the
legal system is not reliable.
 Currency Risks: Currency fluctuations can pose substantial
risk. A company with operations in several countries must
constantly monitor the exchange rate between its own
currency and that of the host country. Even a small change
in the exchange rate can result in a significant difference
in the cost of production or net profit when doing business
overseas.
 Management Risks: Managers face a number of risks in
foreign markets. These take a variety of forms; culture,
customs, language, income levels, customer preferences,
distribution systems, and so on.
Fill in the blanks:

Upstream activities are generally ....................
helps in increasing the customer base of the firm.
.................... of demand means that irrespective of where customers are physically located, they are likely to prefer the same kind of produ
DIFFERENT TYPES OF INTERNATIONAL

3.3
COMPANIES
Choose a specific industry of your choice. Prepare a presentation on how the industry has benefited from Globalisation.
In analysing international company activity, Barlett and
Ghoshal distinguished between three different types of
international expansion. These types represent how
Globalisation passes through three distinct stages, starting
from a domestic company.
Domestic company: A “domestic company” acquires essentially
all of its resources and sells all of its products or services within
a single country. The focus of its business is its domestic
operations.
NOTES International company: When the focus of a business is its

domestic operations, but a portion of its activities are outside
the home country, it is called an “International Company”. In
other words, an international company is one that is primarily
based in a single country but that acquires some meaningful
share of its resources or revenues from other countries.
Multinational company: When a company operates in many
countries, though it may still have a home base, it is called a
“multinational company”.
A multinational company has a worldwide market place from which it buys raw materials, bo
Global company: When the company treats the whole world as
one market and one source of supply, it is called a “global
company”. There is only limited response to local demand.
The focus of the business is one world market, with each of the
operating units contributing to that activity. Although a global
company is stateless, boundaryless, no business has truly
achieved this level of international expansion. However, Nestle
comes close. Nestle is based in Switzerland, has a German CEO
and gets more than 98% of its revenues and has more than
95% of its asset outside of Switzerland. The only aspect that
makes Nestle a Swiss company is that its headquarters are in
Switzerland and Swiss investors still own majority shares.
Fill in the blanks:

When the focus of a business is its domestic operations, but a portion of its activities are outside the home country, it is called an ……………
When the company treats the whole world as one market and one source of supply, it is called a …………………....
Write a report of about 200 words on a company of your choice stating the bracket of international companies it falls in. State the reasons
NOTES
DEVELOPMENT OF A GLOBAL
3.4
CORPORATION
The following are different ways in which a firm can compete in
global markets:
Exporting: This means selling the products in other countries
through an agent or a distributor. This choice offers avenues for
larger firms to begin their international expansion with a
minimum investment.
Merits:
 Less expensive
 No need to set up manufacturing facilities
abroad Demerits:
 Not suitable for bulky, perishable or fragile goods
 Import duties make the product expensive
 High transportation costs
 Cannot avail lower production costs in host country
Licensing: Licensing is an arrangement whereby a firm allows
another firm to use its trademark, technology, patent,
copyright or other rights in return for a fee or royalty. The firm
thus gains entry into another country at little risk, and the
licensee, in turn, gains product expertise, brand name etc.
Merits:
 Firm need not incur capital costs in setting up a unit
 Firm gets a stream of
revenues Demerits:
 Does not allow for economies of scale
 Technological know-how may be misused
 Licensee may become a competitor
 May damage image of the firm if licensee does not adhere
to quality standards.
Franchising: Franchising is a form of licensing in which the firm
provides the foreign franchisee with complete package
including equipment, product ingredients, trademark,
managerial advice and standard operating practices.
Franchisee agreements generally require payment of a fee
upfront and then a percentage of revenues.
Merits:
 Firm gets a stream of revenues
 No capital costs
 No active involvement of the firm in getting local clearances etc.
NOTES Demerits:
 Franchisee might not adhere to standards
 Lack of control over the franchisee
 Loss of firm’s image if franchisee does not adhere to standards.
Sales subsidiary: In this case, the firm retains production in its
home country, and sets up a sales subsidiary in a foreign
country, which performs marketing, sales and service of the
product.
Merits:
 Firm remains close to customers
 Less costly than setting up production facilities
 Firm can have economies of
scale Demerits:
 High transportation costs
 Firm has to bear import duties
 Firm misses opportunity of low production costs in host country
Wholly-owned subsidiary: In this case, the firm establishes a
wholly-owned subsidiary in the host country, which will look
after all production, sales and service activities needed to
operate in that country. There are several advantages of having
a wholly-owned subsidiary.
Merits:
 The firm has complete control over its operations in that country
 Profits remain as firm’s own
 Technology or trade secrets need not be shared with outsiders
 Firm gains more experience internationally
 Allows strategic coordination worldwide
 Especially useful for technologically intensive
firms Demerits:
 High cost of capital
 Risky if the firm is unfamiliar with host country
 Misses the expertise of the local partner
Joint ventures: In a joint venture, two firms contribute equity to
form a new venture, typically in the host country to develop
new products or build a manufacturing facility or set up a sales
and distribution network.
The commonly cited advantages are:
 Improvement of efficiency
 Access to knowledge
NOTES
 Dealing with political risk factors
 Collusions may restrict
competition Merits:
 Two partners bring complementary expertise to the new venture
 Both parties share capital and risks
 Helps to meet host country
regulations Demerits:
 Two partners may fail to get along
 The firm has to share profits with the partner
 Host country culture may pose problems
Strategic alliances: This is a collaborative partnership between
two or more firms to pursue a common goal. Each partner in
an alliance brings knowledge or resources to the partnership.
Such an alliance is generally formed to access a critical
capability not possessed in-house.
Offshoring: When the world globalises, a firm may outsource
some of its activities to firms abroad. US firms have been
outsourcing many activities for years. Functions that are most
often outsourced are those which a firm does not consider
integral to its main business and which can be done more
efficiently by an outside firm. The prime driver of outsourcing is
lower costs – coming primarily as a result of lower wages.
Choosing the pattern of expansion: As we observe from the
above discussion, there are merits and demerits to all the
paths of international expansion. The path to be taken depends
on such factors as experience and capabilities of the firm, the
cultural and business practices, differences between the home
country and host country or laws and regulations in the host
country etc.
Fill in the blanks:

.................... is a form of licensing in which the firm provides the foreign franchisee with complete package.
In the case of a, the firm remains close to customers.
When a firm establishes a .................... subsidiary in the host country, this subsidiary looks after all production, sales and service activities
Firms such as Infosys, TCS and Wipro have been growing rapidly because ofof software jobs.
Ais generally formed to access a critical capability
not possessed in-house.
NOTES
Consider the joint venture between Tesco and Trent Ltd for FDI in multi-brand retail in India. Prepare a presentation on how both compani
3.5 COMPLEXITY OF GLOBAL ENVIRONMENT

Complexity is today often considered the latest business
The technical and marketing skill of a company in international business is also an important factor in the choice. Ultimately, strategy will a
buzzword – it reflects a current common reality but not a
lasting one. When introducing the complexity concept to
executives in globally operating companies, complexity is
multiplied to its current heightened level.
Due to Globalisation, many types of boundaries have faded.
Trade liberalization allows for a substantially easier flow of
goods, capital, people, and knowledge around the globe. The
world has clearly moved beyond the key trade markets.
Sometimes abolishing boundaries create new homogeneity in a
larger area (e.g. the Euro currency), but mostly it doesn’t.
Various motives rank high on the list of possible drivers for
foreign expansion, such as learning, spreading risk, gaining
access to new customers, realising economies of scale and
scope, or optimising one’s value proposition with partners. But
the road to the promised land turns out to be more demanding
than expected, and complexity is the most common and
pervasive challenge that arises.
A core challenge of globalised companies, complexity cannot
be made simple, and it is not going away in the near future.
Managing complexity must therefore become a core
competency of top executives and management. As a first
step, it is crucial to understand what drives complexity. What
generates complexity? In our research, we’ve identified four
major sources that interact together to create today’s
environment. Each of these sources of complexity was created
by the erosion of boundaries, but their effects are different
from each other.
Diversity: Global organisations face a complex set of challenges
characterised by diversity both inside and outside the
organisation – across every aspect of the business itself and its
strategy drivers. Inside the organisation, executives must
manage and respond to more diversity in the
(internationalising) HR pool; more variety in the management
systems; more variation in the means and ends ranging from
simple financial goals to amore comprehensive view; and
different business models for different types of business units.
NOTES
Outside the organisation there is higher diversity:
heterogeneous customer needs; differing cultural values; a
plethora of stakeholders with different claims (investors,
customers, employees, regulators etc.); various political,
economic and legal environments; and finally, competitors’
differing strategies. Most firms today increasingly face each of
these types of diversity. Managing the differences is not trivial,
and reducing diversity often means being less responsive.
Interdependence: Companies must manage the effect of global
interdependence to an unprecedented degree: everything is
related to everything else, and the impact is felt more rapidly
and pervasively. Value webs have replaced traditional value
chains. Reputation, financial flows, value chain flows, top
management and corporate governance issues have reached
advanced levels of interdependence. The less clear-cut the
boundaries of a company become, the more it is exposed to
impacts on the value chain flow through mistakes, frictions,
reverse trends, or even shocks. Interdependence creates
opportunities for Globalisation, but taking advantage of these
opportunities raises difficult challenges.
Ambiguity: The business world today is characterised by too
much information with less and less clarity on how to interpret
and apply insights. A diversity of accounting standards renders
financial figures ambiguous. Studies, scenarios, survey results,
and reports become less reliable due to an ever-increasing
uncertainty. Many businesses find it more and more difficult to
discover what their clear value drivers are. Are they image,
price, related services, privileged relationships, speed,
knowledge, or something else? The cause-effect relationships
become blurred.
Flux: As if these three complexity drivers were not enough,
managers have to face yet another one, flux or change. Even if
you figure out temporary solutions regarding interdependence,
diversity and ambiguity for your specific company, industry,
and personal situation, the situation can change the next day.
Today’s solutions may be outdated tomorrow. Business
environments are increasingly being characterised as being
VUCA (volatile, uncertain, complex and ambiguous). While
there are strategies to mitigate risks associated with VUCA, it
is impossible to obliterate them.
Many people have tried to simplify complexity, and
contemporary
managementliteratureismisleadingwhentrumpetingthesuccessf
actor. Studies typically examine successful companies to see
what managers “did”, then conclude that all managers should
do the same thing. As unpredictability makes us uncomfortable,
delusions are created about performance as voluntary matter of
choice (companies can choose “to be great”); we like the
certainty promised by these solutions. But in an interdependent
world, much depends on contingencies, with no clear correction
between input and output. Accountability of managers has
therefore become an arbitrary element: yes, managers are
responsible, but results are influenced by factors beyond their
control. Navigating through this complexity requires a different
way of thinking, acting, and
NOTES organising than the typical “control” mentality. A long list of

advantages lures companies into globalising. Geographic
expansion abroad offers the vast potential benefits of a much
larger market arena, spread risks, scope/scale/location-based
cost advantages, and exposure to a variety of new product and
process ideas.
The practical consequence of complexity is that a managerial
dilemma often shapes the decision-making process when there
are two or more conflicting legitimate goals to meet demands.
Both cannot be simultaneously achieved with the given
resources. Companies in the financial service industry set up
competing distribution channels, but expect far-reaching
cooperation across the company (shared services and product
platforms) to reap economics of scale. In manufacturing, one
ongoing dilemma is between global standardization and
response to local market needs. Any required priority decision
nevertheless results in ongoing tension. As dilemmas cannot
be solved, they need to be managed-continuously.
Fill in the blanks:

from one subsidiary to another may not take place
“automatically”.
In a ...................., two firms contribute equity to form a new venture, typically in the host cou
Firms need not incurcosts in setting up a unit.
Global markets offer exciting opportunities to exploit the latest
.................... in world markets.
The most important reasons for international expansion are
.................... and availability ofin various parts of
the world.
A company with operations in several countries must constantly monitor thebetween its own
and that of the host country.
A diversity of accounting standards renders financial figures
...................
Vineet Nayar, the former CEO of HCL Technologies once remarked: “Abnormal is the new normal.” Interpret the meaning of this statement
3.6 INDUSTRY ANALYSIS

Internal analysis is also referred to as “internal appraisal”,
“organisational audit”, “internal corporate assessment” etc.
Over the years, research has shown that the overall strengths
and weaknesses
NOTES
of a firm’s resources and capabilities are more important for a
strategy than environmental factors. Even where the industry
was unattractive and generally unprofitable, firms that came
out with superior products enjoyed good profits.
Managers perform internal analysis to identify the strengths
and weaknesses of a firm’s resources and capabilities. The
basic purpose is to build on the strengths and overcome the
weaknesses in order to avail of the opportunities and
minimise the effects of threats. The ultimate aim is to gain and
sustain competitive advantage in the marketplace.
3.6.1 IMPORTANCE OF INTERNAL ANALYSIS

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

SWOT stands for strengths, weaknesses, opportunities and
threats. SWOT analysis is a widely used framework to
summarise a company’s situation or current position. Any
company undertaking strategic planning will have to carry out
SWOT analysis: establishing its current position in the light of
its strengths, weaknesses, opportunities and threats.
Environmental and industry analyses provide information
needed to identify opportunities and threats, while internal
analysis provides information needed to identify strengths and
weaknesses. These are the fundamental areas of focus in
SWOT analysis.
NOTES SWOT analysis stands at the core of strategic

management. It is important to note that strengths and
weaknesses are intrinsic (potential) value creating skills or
assets or the lack thereof, relative to competitive forces.
Opportunities and threats, however, are external factors that
are not created by the company, but emerge as a result of the
competitive dynamics caused by ‘gaps’ or ‘crunches’ in the
market.
We had briefly mentioned about the meaning of the terms
opportunities, threats, strengths and weaknesses. We revisit
the same for purposes of SWOT analysis.
Strengths: Strength is something a company possesses or is
good at doing. Examples include a skill, valuable assets,
alliances or cooperative ventures, experienced sales force,
easy access to raw materials, brand reputation etc.
Strengths are not a growing market, new products, etc.
Weaknesses: A weakness is something a company lacks or does
poorly. Examples include lack of skills or expertise, deficiencies
in assets, inferior capabilities in functional areas etc. Though
weaknesses are often seen as the logical ‘inverse’ of the
company’s threats, the company’s lack of strength in a
particular area or market is not necessarily a relative weakness
because competitors may also lack this particular strength.
Opportunities: An opportunity is a major favourable situation in a
firm’s environment. Examples include market growth,
favourable changes in competitive or regulatory framework,
technological developments or demographic changes, increase
in demand, opportunity to introduce products in new markets,
turning R&D into cash by licensing or selling patents etc. The
level of detail and perceived degree of realism determine the
extent of opportunity analysis.
Threats: A threat is a major unfavourable situation in a firm’s
environment. Examples include increase in competition; slow
market growth, increased power of buyers or suppliers,
changes in regulations etc. These forces pose serious threats
to a company because they may cause lower sales, higher cost
of operations, higher cost of capital, inability to make break-
even, shrinking margins or profitability etc. Your competitor’s
opportunity may well be a threat to you.
Advantages and Limitations

Advantages
 It is simple.
 It portrays the essence of strategy formulation: matching a
firm’s internal strengths and weaknesses with its external
opportunities and threats.
 Together with other techniques like Value Chain Analysis
and RBV, SWOT analysis improves the quality of internal
analysis.
NOTES
Limitations
 It gives a static perspective, and does not reveal the
dynamics of competitive environment.
 SWOT emphasises a single dimension of strategy (i.e.
strength or weakness) and ignores other factors needed
for competitive success.
 A firm’s strengths do not necessarily help the firm create
value or competitive advantage.
 SWOT’s focus on the external environment is too narrow.
 Hill and Westbrook criticise SWOT analysis by saying that it
is not a panacea. According to them, some of the
criticisms against SWOT analysis are:
 It generates lengthy lists.
 It uses no weights to reflect priorities.
 It uses ambiguous words and phrases.
 The same factor can be placed in two categories (e.g.
an opportunity may also be a threat).
 There is no obligation to verify opinions with data or analysis.
 It is only a simple level of analysis. There is no logical
link to strategy implementation.
 SWOT helps only as a starting point. By itself, SWOT
analysis rarely helps a firm develop competitive
advantage that it can sustain over time.
Fill in the blanks:

Strategic management is ultimately a “matching game” between ………………. and ………………..
……….. stands for strengths, weaknesses, opportunities and threats.
Do strengths and weaknesses of companies remain unchanged over a period? Discuss.
In spite of the criticism and its limitations, SWOT analysis is still a popular analytical tool used by most organisations. It is definitely a usefu
NOTES 3.7 SUMMARY

 Everything is diverse, and nothing is stable, everything is
in “fast flux”: interdependence is flowing in changing
directions. The future is no longer the prolongation of the
past – industry “breakpoints”, fundamentally altering the
value proposition in industries, occur more rapidly.
 The variety of options could overwhelm traditional
decision- making, as information often lacks clarity and is
ambiguous.
 Multiple interpretations of the same facts are possible,
depending on the perspective or cultural framework.
 Shared understanding cannot be assumed per se, whether
inside or outside the organisation.
 Interdependence, diversity and ambiguity – all in flux – are
the building blocks of managerial complexity.
 The mangers have to be adept today in managing the
complexities in global organisations.
 The internal environment of an organisation contains the
internal resources and possesses internal capabilities and
core competencies.
 SWOT Analysis is a strategic planning method used to
evaluate the Strengths, Weaknesses, Opportunities, and
Threats involved in a project or in a business venture.
 Culture is a powerful component of an organisation’s
success, laying the tracks for strategy to roll out on.
Domestic Company: It acquires essentially all of its resources and sells all of its products or s
Economies of Scale: The increase in efficiency of production as the number of goods being p
Global Company: When the company traits the whole world as one market and one source o
Globalisation: It means increasing economic interdependence among countries due to increa
International Company: When the focus of a business is its domestic operations, but a portio
Licensing: An arrangement whereby a firm allows another firm to use its trademark, technolo
Contd...
NOTES
Strategic Alliance: It is a collaborative partnership between two or more firms to pursue a common goal.
Transnational Strategy: It involves some global integration of manufacturing coupled with significant national responsiveness to local va

1. Do you believe that Globalisation has helped companies to
expand their horizon? Justify your answer.
2. Discuss, in detail, various types of international strategies.
Give the merits and demerits of each strategy.
3. Do you think that Globalisation improves performance of a
firm? Why/why not?
4. “Complexity is today often considered the latest business
lasting one”. Explain the complexity of Global
Environment.
5. Between licensing and franchising, what do you think is a
better way for a firm to compete in a global market and
why?
6. Explain the importance of Industry Analysis.
7. Explain the purposes of doing SWOT Analysis by companies.
8. Describe different types of international companies.
9. Explain diversity and interdependence as complexity of
global environment.
10. “The term ‘Globalisation’ is generally used to cover three
topic areas”. What are they? Describe the forces
responsible for Globalization.


Need for Globalisation 1. centralized
2. Globalisation
3. Homogeneity
Different Types of 4. International Company
International
Companies
5. Global company
Development of a Global 6. Franchising
Corporation
7. sales subsidiary
Contd...
NOTES
8. wholly-owned
9. offshoring
10. strategic alliance
Complexity of Global 11. Knowledge transfer
Environment
12. joint venture
13. Capital
14. Demand
15. low-cost labour, natural
resources
16. exchange rate
17. ambiguous
Industry Analysis 18. environmental
opportunities,
organisational strengths
19. SWOT

1. Refer to 3.2
Yes, Globalization has helped companies to expand their
horizon as it helps them to exploit opportunities and take
risks while expanding globally.
2. Refer to 3.4
The following are different ways in which a firm can
compete in global markets. They are in the form of
exporting, licensing, franchising, sales subsidiary, wholly-
owned subsidiary, Joint ventures, strategic alliances, off-
shoring, choosing the pattern of expansion.
3. Refer to 3.4
Yes, Globalisation helps improve the performance of a
firm as it helps the firm to export, obtain license for its
products, franchising its operations, expansion through
sales subsidiary, wholly-owned subsidiary, Joint ventures,
strategic alliances, off-shoring, choosing the pattern of
expansion.
4. Refer to 3.5
Complexity is today often considered the latest business
lasting one. When introducing the complexity concept to
executives in globally operating companies, complexity is
multiplied to its current heightened level. Due to
Globalisation, many types of boundaries have faded. Trade
liberalization allows for a substantially easier flow of
goods, capital, people, and knowledge around the globe.
The world has clearly moved beyond the key trade
markets. Globalising companies from developed and
NOTES
developing economies try to tap the benefits of
Globalisation to an unprecedented degree and therefore
face – as well as contribute to – the complexity of eroding
boundaries.
5. Refer to 3.4
Franchising is a better way for a firm to compete in a
global market as it is a form of licensing in which the firm
provides the foreign franchisee with complete package
including equipment, product ingredients, trademark,
managerial advice and standard operating practices.
Franchisee agreements generally require payment of a fee
upfront and then a percentage of revenues. Franchisers
offer exclusive rights to a geographical territory to
franchisees, whereas licensing companies usually offer no
such protection to licensees.
6. Refer to 3.6.1
The importance of systematic internal analysis helps the
firm to find where it stands in terms of its strengths and
weaknesses; to exploit the opportunities that are in line
with its capabilities; to correct important weaknesses; to
defend against threats and to asses capability gaps and
take steps to enhance its capabilities.
7. Refer to 3.6.2
SWOT stands for strengths, weaknesses,
opportunities and threats. SWOT analysis is a widely used
framework to summarise a company’s situation or current
position. Any company undertaking strategic planning will
have to carry out SWOT analysis: establishing its current
position in the light of its strengths, weaknesses,
opportunities and threats. Environmental and industry
analyses provide information needed to identify
opportunities and threats, while internal analysis provides
information needed to identify strengths and weaknesses.
These are the fundamental areas of focus in SWOT
analysis.
8. Refer to 3.3
Different types of international companies are: Domestic
company, International company, Multinational company
and Global company.
9. Refer to 3.5
Diversity: Global organisations face a complex set of
challenges
characterisedbydiversitybothinsideandoutsidetheorganisati
on– across every aspect of the business itself and its
strategy drivers. Inside the organisation, executives must
manage and respond to more diversity in the
(internationalising) HR pool; more variety in the
management systems; more variation in the means and
ends ranging from simple financial goals to amore
comprehensive view; and different business models for
different types of business units. Interdependence:
Companies must manage the effect of global
interdependence to an unprecedented
NOTES degree: everything is related to everything else, and the

impact is felt more rapidly and pervasively. Value webs
have replaced traditional value chains. Reputation,
financial flows, value chain flows, top management and
corporate governance issues have reached advanced
levels of interdependence.
10. Refer to 3.1
The term ‘Globalisation’ is generally used to cover three
topic areas. They are : Globalisation of economies, trade
activities and regulatory regimes; Globalisation of
industries and Globalisation of companies. A number of
forces are responsible for Globalisation. They are
technological progress, Opening up of national borders,
strides in telecommunications, advancements in
transportation, internet and opening up of economies such
as India, China etc.

SUGGESTED READINGS
 Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic
Management–Creating Competitive Advantage, McGraw–Hill,
Irwin, NY, 2003.
 Johnson Gerry and Sholes Kevan, Exploring Corporate
 Michael Porter, Competitive Advantage, Free Press, New York.
 Vipan Gupta, Kamala Gollakota and R. Srinivasan, Business
Policy and Strategic Management, Prentice-Hall of India, New
Delhi, 2005.
 VSP Rao and V. Hari Krishna, Strategic Management – Text and
Cases, Excel Books, New Delhi.
E-REFERENCES
 http://workforcevision.blogspot.in/2006/08/types- of-
global- companies.html
 http://www.marsdd.com/mars-library/industry-analysis-
and- competition-using-porters-five-forces/
 http://www.mindtools.com/pages/article/newTMC_05.htm
C H
4
A P T E R
COMPETITIVE ANALYSIS
CONTENTS
4.1 Introduction
4.2 Competitor Analysis Framework
4.2.1 Competitor’s Current Strategy
4.2.2 Competitor’s Objectives
4.2.3 Competitor’s Assumptions
4.2.4 Competitor’s Resources and Capabilities
4.2.5 Competitor Response Profile
4. Rivalry Analysis
3
4.3.1 Porter’s Intensity of Rivalry Determining
Factors
4.3.2 Porter’s Intensity of Rivalry Analysis
4.3.3 Porter’s Intensity of Rivalry Interpretation
4.4 Competitive Dynamics
4.4.1 Slow-cycle Markets
4.4.2 Fast-cycle Markets
4.4.3 Standard-cycle Markets
4.5 Competitive Rivalry
4.5.1 Strategic and Tactical Actions
4.5.2 Likelihood of Attack
4.5.3 Organisational Size
4.5.4 Likelihood of Response
4.6 Summary
4.7 Descriptive Questions
4.8 Answers and Hints
4.9 Suggested Readings for Reference
NOTES
GOOGLE UNSEATS MICROSOFT AS THE US BROWSER

POWERHOUSE
The curious case of the two biggest IT powerhouses taking on
each other is now a part of global corporate battle folklore.
Google and Microsoft are two companies with distinct
capabilities and core competencies. They have crossed
swords in the past and even now are leaving no stone
unturned to outsmart each other. Consider the battle for
supremacy in the segment of browsers in the USA.
A recent report published by Adobe confirms that Google has
unseated Microsoft as the leading web browser in the US
market for the first time. According to the Adobe Digital Index
(ADI), a measurement of browser usage based on tracking
visits to the average
U.S. website, Google’s desktop and mobile browsers –
Chrome (on both platforms, the aging Android browser on the
latter only), slipped past Microsoft’s Internet Explorer (IE).
Google retained its premier position on the desktop but had
little to show for its effort on smartphones. Google accounted
for 31.8% of all browser usage in the United States.
Meanwhile, Microsoft owned a 30.9% share.
Apple’s Safari was in third place with a combined desktop and
mobile share of 25%, while Mozilla’s Firefox, which lacks a
meaningful presence in mobile, was a distant fourth with just
8.7%. The rise of Google’s browsers, and to a lesser extent
Apple’s Safari, and the corresponding declines of both IE and
Firefox, can be attributed to mobile browsing, primarily that
conducted on smartphones. “Today, mobile [operating
systems are] more important, giving Google and Apple a leg
NMI
up with default status on Android and iOS,” said ADI analyst
Tyler White in a statement.
Adobe tallied visits, which in analytics parlance is
synonymous with a session on a website, a period during
which a user may view numerous pages before leaving, or
before a time limit of inactivity expires. Adobe thus actually
MS
measures a type of “usage share,” or how active users of
each browser are on the Web. Other analytic firms count
differently. California-based Net Applications uses visitors, an
expression of the number of unique individuals – actually their
browsers, as the tracking is done with cookies – to measure
“user share,” which is analogous to the number of copies of
each browser in use during a specific period.
Because Adobe drew its data only from consumer-facing sites
– some 10,000 of them – it was little surprise that the
Chrome/Android browsers outpaced IE. Microsoft’s browser
has a lock in businesses, where it’s often mandated as the
only allowed desktop browser, but it has a less-dedicated –
some would say less-coerced – base among consumers. On
mobile, IE accounted for just 1.8% of usage.
Google’s climb to the top spot in the U.S. followed its push
into that place globally by almost a year: Adobe’s data had
Google’s Chrome/ Android passing Microsoft’s IE in May 2013
worldwide. “Outside the U.S., Google’s browser share has
grown even more rapidly,” an Adobe spokesman said.
Education
Source:
http://www.computerworld.com/s/article/9248927/Google_unseats_Microsoft_as_
the_U.S._browser_powerhouse

Education
COMPETITIVE ANALYSIS 87
NOTES

Determine competitor analysis framework
Understand interpretation
the rivalryanalysiswithfactorsand
Explain the competitive dynamics – slow-cycle markets, fast cycle markets and standard-cycle markets
Understand the competitive rivalry
4.1 INTRODUCTION
In formulating business strategy, managers must consider the
strategies of the firm’s competitors. While in highly fragmented
commodity industries the moves of any single competitor may
be less important, in concentrated industries competitor
analysis becomes a vital part of strategic planning.
Competitor analysis has two primary activities, (1) obtaining
information about important competitors, and (2) using that
information to predict competitor behaviour. The goal of
competitor analysis is to understand:
 With which competitors to compete,
 Competitors’ strategies and planned actions,
 How competitors might react to a firm’s actions,
 How to influence competitor behaviour to the firm’s own advantage.
Casual knowledge about competitors usually is insufficient in
competitor analysis. Rather, competitors should be analysed
systematically, using organised competitor intelligence-
gathering to compile a wide array of information so that well
informed strategy decisions can be made.
4.2 COMPETITOR ANALYSIS FRAMEWORK

Even the simplest competitive analysis displays two critical
dimensions: the competitors and the criteria, or what we’ll call
the competitive framework. The purpose of the competitive
framework is to present the data in a way that makes it easy
to compare the various sites across the different criteria.
Michael Porter presented a framework for analysing
competitors. This framework is based on the following four key
aspects of a competitor:
 Competitor’s objectives
 Competitor’s assumptions
 Competitor’s strategy
 Competitor’s capabilities
NOTES Objectives and assumptions are what drive the competitor,

and strategy and capabilities are what the competitor is doing
or is capable of doing. These components can be depicted as
shown in the Figure 4.1.
Source: Adapted from Michael E. Porter, Competitive Strategy, 1980, p. 49.
Figure 4.1: Competitor Analysis Components
A competitor analysis should include the more important existing competitors as well as potential competitors such as those firms that mi
4.2.1 COMPETITOR’S CURRENT STRATEGY

The two main sources of information about a competitor’s
strategy are what the competitor says and what it does. What
a competitor is saying about its strategy is revealed in:
 Annual shareholder reports
 10K reports
 Interviews with analysts
 Statements by managers
 Press releases
However, this stated strategy often differs from what the
competitor actually is doing. What the competitor is doing is
evident in where its cash flow is directed, such as in the
following tangible actions:
 Hiring activity
 R&D projects
 Capital investments
 Promotional campaigns
 Strategic partnerships
 Mergers and acquisitions

Education
NOTES
4.2.2 COMPETITOR’S OBJECTIVES
Knowledge of a competitor’s objectives facilitates a better
prediction of the competitor’s reaction to different competitive
moves. For example, a competitor that is focused on reaching
short-term financial goals might not be willing to spend much
money responding to a competitive attack. Rather, such a
competitor might favour focusing on the products that hold
positions that better can be defended. On the other hand, a
company that has no short term profitability objectives might
be willing to participate in destructive price competition in
which neither firm earns a profit.
Goals may be associated with each hierarchical level of strategy – corporate, business unit and functional level.
Competitor objectives may be financial or other types. Some
examples include growth rate, market share, and technology
leadership.
The competitor’s organisational structure provides clues as to
which functions of the company are deemed to be the more
important. For example, those functions that report directly to
the chief executive officer are likely to be given priority over
those that report to a senior vice president.
Other aspects of the competitor that serve as indicators of its
objectives include risk tolerance, management incentives,
backgrounds of the executives, composition of the board of
directors, legal or contractual restrictions, and any additional
corporate-level goals that may influence the competing
business unit. Whether the competitor is meeting its objectives
provides an indication of how likely it is to change its strategy.
4.2.3 COMPETITOR’S ASSUMPTIONS

The assumptions that a competitor’s managers hold about
their firm and their industry help to define the moves that they
will consider. For example, if in the past the industry introduced
a new type of product that failed, the industry executives may
assume that there is no market for the product. Such
assumptions are not always accurate and if incorrect may
present opportunities. For example, new entrants may have the
opportunity to introduce a product similar to a previously
unsuccessful one without retaliation because incumbent firms
may not take their threat seriously. Honda was able to enter the
U.S. motorcycle market with a small motorbike because U.S.
manufacturers had assumed that there was no market for
small bikes based on their past experience.
A competitor’s assumptions may be based on a number of
factors, including any of the following:
 Beliefs about its competitive position
NOTES  Past experience with a product

 Regional factors
 Industry trends
 Rules of thumb
A thorough competitor analysis also would include assumptions
that a competitor makes about its own competitors, and
whether that assessment is accurate.
4.2.4 COMPETITOR’S RESOURCES AND CAPABILITIES

Knowledge of the competitor’s assumptions, objectives, and
current strategy is useful in understanding how the competitor
might want to respond to a competitive attack. However, its
resources and capabilities determine its ability to respond
effectively.
A competitor’s capabilities can be analysed according to its
strengths and weaknesses in various functional areas, as is
done in a SWOT analysis. The competitor’s strengths define its
capabilities. The analysis can be taken further to evaluate the
competitor’s ability to increase its capabilities in certain areas.
A financial analysis can be performed to reveal its sustainable
growth rate.
Finally, since the competitive environmentis dynamic, the
competitor’s ability to react swiftly to change should be
evaluated. Some firms have heavy momentum and may
continue for many years in the same direction before adapting.
Others are able to mobilise and adapt very quickly. Factors that
slow a company down include low cash reserves, large
investments in fixed assets, and an organisational structure
that hinders quick action.
4.2.5 COMPETITOR RESPONSE PROFILE

Information from an analysis of the competitor’s objectives,
assumptions, strategy, and capabilities can be compiled into a
response profile of possible moves that might be made by the
competitor. This profile includes both potential offensive and
defensive moves. The specific moves and their expected
strength can be estimated using information gleaned from the
analysis.
Consider the sports bike segment of the two-wheeler industry in India. Bajaj Pulsar waged wa
The result of the competitor analysis should be an improved ability to predict the competitor’s behaviour and even to influence that behav
NOTES
Fill in the blanks:

Casual knowledge about competitors usually isin
competitor analysis.
The purpose of the competitive framework is to present the data in a way that makes it easy tothe various sites
across the different criteria.
Knowledge of a competitor’s objectives facilitates a better prediction of the competitor’s reaction to different .................
moves.
The competitor’s organisational structure provides clues as to which functions of the company are deemed to be the more
.................
The assumptions that a competitor’s managers hold about their firm and their industry help tothe moves that
they will consider.
Knowledge of the competitor’s assumptions, objectives, and current strategy is useful in understanding how the competitor might want to
4.3 RIVALRY ANALYSIS

The intensity of rivalry among competitors in an industry refers
to the extent to which firms within an industry put pressure on
one another and limit each other’s profit potential. If rivalry is
fierce, competitors are trying to steal profit and market share
from one another. This reduces profit potential for all firms
within the industry. According to Porter’s five forces framework,
the intensity of rivalry among firms is one of the main forces
that shape the competitive structure of an industry.
Porter’s intensity of rivalry in an industry affects the
competitive environment and influences the ability of existing
firms to achieve profitability. High intensity of rivalry means
competitors are aggressively targeting each other’s markets
and aggressively pricing products. This represents potential
costs to all competitors within the industry.
4.3.1 PORTER’S INTENSITY OF RIVALRY DETERMINING

FACTORS
Several factors determine the intensity of competitive rivalry in
an industry. If the industry consists of numerous competitors,
Porter rivalry will be more intense. If the competitors are of
equal size or market share, the intensity of rivalry will increase.
If industry growth is slow, the intensity of rivalry will be high. If
the industry’s fixed costs are high, competitive rivalry will be
intense. If the industry’s products are undifferentiated or are
commodities, rivalry will be intense.
NOTES If brand loyalty is insignificant and consumer switching costs

are low, this will intensify industry rivalry. If competitors are
strategically diverse – they position themselves differently from
other competitors – industry rivalry will be intense. An industry
with excess production capacity will have greater rivalry
among competitors. And finally, high exit barriers – costs or
losses incurred as a result of ceasing operations – will cause
intensity of rivalry among industry firms to increase.
And of course, if the opposite is true for any of these factors,
the intensity of Porter rivalry among competitors will be low. For
example, a small number of firms in the industry, a clear
market leader, fast industry growth, low fixed costs, highly
differentiated products, prevalent brand loyalties, high
consumer switching costs, no excess production capacity, lack
of strategic diversity among competitors, and low exit barriers
all indicate that the Porter intensity of rivalry among existing
firms is low.
4.3.2 PORTER’S INTENSITY OF RIVALRY ANALYSIS

When analysing a given industry, all of the aforementioned
factors regarding the intensity of competitive rivalry Porter
placed among existing competitors may not apply. But some, if
not many, certainly will. And of the factors that do apply, some
may indicate high intensity of rivalry and some may indicate
low intensity of rivalry. The results will not always be
straightforward. Therefore it is necessary to consider the
nuances of the analysis and the particular circumstances of the
given firm and industry when using these data to evaluate the
competitive structure and profit potential of a market.
Intensity of rivalry is high if:
 Competitors are numerous
 Competitors have equal size
 Competitors have equal market share
 Industry growth is slow
 Fixed costs are high
 Products are undifferentiated
 Brand loyalty is insignificant
 Consumer switching costs are low
 Competitors are strategically diverse
 There is excess production capacity
 Exit barriers are high
Intensity of rivalry is low
if:
 Competitors are few
 Competitors have unequal size
 Competito unequal market share
rs have
NOTES
 Industry growth is fast
 Fixed costs are low
 Products are differentiated
 Brand loyalty is significant
 Consumer switching costs are high
 Competitors are not strategically diverse
 There is no excess production capacity
 Exit barriers are low
4.3.3 PORTER’S INTENSITY OF RIVALRY INTERPRETATION

When conducting Porter’s five forces industry analysis, low
intensity of rivalry makes an industry more attractive and
increases profit potential for the firms already competing
within that industry, while high intensity of rivalry makes an
industry less attractive and decreases profit potential for the
firms already competing within that industry. The intensity of
rivalry among existing firms is one of the factors to consider
when analysing the structural environment of an industry using
Porter’s five forces framework.
Fill in the blanks:

Porter’s intensity of rivalry in an industry affects the competitive ................. and influences the ability of existing firms to achieve profitabi
If the industry consists of numerous competitors, Porter rivalry will be more .................
4.4 COMPETITIVE DYNAMICS

Whereas competitive rivalry concerns the ongoing actions and
Consider the multi-brand retail industry in India. Conduct a rivalry analysis for the joint venture between Tresco and Trent.
responses between a firm and its competitors for an
advantageous
High intensity of competitive rivalry can make an industry more competitive and decrease profit potential for the existing firms. On the ot
NOTES market position, competitive dynamics concerns the ongoing

actions and responses taking place among all firms competing
within a market for advantageous positions.
To explain competitive rivalry, we described (a) factors that
determine the degree to which firms are competitors (market
commonality and resource similarity), (b) the drivers of
competitive behaviour for individual firms (awareness,
motivation and ability), and (c) factors affecting the likelihood a
competitor will act or attack (first mover incentives,
organisational size, and quality) and respond (type of
competitive action, reputation, and market dependence).
Building and sustaining competitive advantages are at the core
of competitive rivalry, in that advantages are the link to an
advantageous market position.
To explain competitive dynamics, we discuss the effects of
varying rates of competitive speed in different markets (called
slow-cycle, fast-cycle, and standard cycle markets) on the
behaviour (actions and responses) of all competitors within a
given market. Competitive behaviours as well as the reasons or
logic for taking them are similar within each market type, but
differ across market types. Thus competitive dynamics differs
in slow-cycle, fast-cycle, and standard- cycle markets. Thus
sustainability of the firm’s competitive advantages is an
important difference among the three market types.
As you know that the firms want to sustain their advantages
for as long as possible, although no advantage is permanently
sustainable.
4.4.1 SLOW-CYCLE MARKETS

Slow-cycle markets in which the firm’s competitive advantages
are shielded from imitation for what are commonly long
periods of time and where imitation is costly. Competitive
advantages are sustainable in slow-cycle markets.
Building on of a kind competitive advantage that is proprietary
leads to competitive success in a slow-cycle market. This type
of advantage is difficult for competitors to understand and
costly to imitate advantage results from unique historical
conditions, causal ambiguity, and or social complexity.
Copyrights, geography, patents, and ownership of information
resources are examples of what leads to one of kind
advantages. Once a proprietary advantage is developed, the
firm’s competitive behaviour in a slow-cycle market is oriented
to protecting, maintaining, and extending that advantage.
Thus, the competitive dynamics in slow-cycle markets involve
all firms concentrating on competitive actions and responses
that enable them to protect, maintain, and extend their
proprietary competitive advantage.
4.4.2 FAST-CYCLE MARKETS

Fast-cycle markets are markets in which the firm’s capabilities
that contribute to competitive advantages aren’t shielded from
im
ita
tio
n
NOTES
and where imitation is often rapid and inexpensive. Thus,
competitive advantages aren’t sustainable in fast-cycle
markets. Firms competing in fast-cycle markets recognise the
importance of speed; these companies appreciate that time is
as precious a business resource as money or head count –
and that the costs of hesitation and delay are just as steep as
going over budget or missing a financial forecast. Such high-
velocity environments place considerable pressures on top
managers to make strategic decisions quickly, but they must
be effective. The often substantial competition and technology-
based strategic focus make the strategic decisions complex,
increasing the need for a comprehensive approach integrated
with decision speed, two often-conflicting characteristics of the
strategic decision process.
Reverse engineering and the rate of technology diffusion in
fast- cycle markets facilitate rapid imitation. A competitor uses
reverse engineering to quickly gain the knowledge required to
imitate or improve the firm’s products, usually in only a few
months. Technology is diffused rapidly in fast-cycle markets,
making it available to competitors in a short period of time.
The technology often used by fast-cycle competitors isn’t
proprietary, nor is it protected by patents, as in slow-cycle
markets. Fast cycle markets are more volatile than slow cycle
markets and standard cycle markets. Indeed, the pace of
competition in fast-cycle markets is almost frenzied, as
companies rely on ideas and the innovations resulting from
them as the engines of their growth. Because prices fall quickly
in these markets, companies need to profit quickly from their
product innovations. Fast-cycle market characteristics make it
virtually impossible for companies in this type of market to
develop sustainable competitive advantages. Recognising this,
firms avoid “loyalty” to any of their products, preferring to
cannibalise their current product by launching a new product
before competitors learn how to do so through successful
imitation. This emphasis creates competitive dynamics that
differ substantially from those in slow-cycle markets. Instead of
concentrating on protecting, maintaining, and extending
competitive advantages, as is the case for firms in slow-cycle
markets, companies competing in fast-cycle markets focus on
learning how to rapidly and continuously develop new
competitive advantages that are superior to those they
replace. In fast cycle markets, firms don’t concentrate on trying
to protect a given competitive advantage because they
understand that the advantage won’t exist long enough to
extent it.
Competitive dynamics in this market type finds firms taking
actions and responses in the course of competitive rivalry that
are oriented to rapid and continuous product introductions and
the use of a stream of ever-changing competitive advantages.
The firm launches a product as a competitive action and then
exploits the advantage associated with it for as long as
possible. However, the firm also tries to move to another
temporary competitive action before competitors can respond
to the first one. Thus, competitive dynamics in fast cycle
markets, in which all firms seek to achieve new competitive
advantages before
NOTES competitors, learn how to effectively respond to current ones,

often result in rapid product upgrades as well as quick product
innovations.
As our discussion suggests, innovation has a dominant effect
on competitive dynamics in fast cycle markets. For individual
firms, this means that innovation is a key source of
competitive advantage. Through innovation, the firm can
cannibalise its own products before competitors successfully
imitate them.
4.4.3 STANDARD-CYCLE MARKETS

Standard-cycle markets are those in which the firm’s
competitive advantages are moderately shielded from
imitation and where imitation is moderately costly. Competitive
advantages are partially sustainable in standard-cycle markets,
but only when the firm is able to continuously upgrade the
quality of its competitive advantages. The competitive actions
and responses that form a standard-cycle market’s competitive
dynamics find firms seeking large market shares, trying to gain
customer loyalty through brand names, and carefully
controlling their operations to consistently provide the same
positive experience for customers.
NMI
MS Figure 4.2: Competitive Dynamics
Companies competing in standard-cycle markets serve many
customers. Because the capabilities on which their competitive
advantages are based are less specialised, imitation is faster
and less costly for standard-cycle firms than for those
competing is slow- cycle markets. However, imitation is less
quick and more expensive in these markets than in fast cycle
markets. Thus, the competitive dynamics in standard-cycle
markets rest midway between the characteristics of dynamics
in slow-cycle and fast-cycle markets. The quickness of imitation
is reduced and becomes more expensive for standard-cycle
competitors when a firm is able to develop economies of scale
by combining coordinated and integrated design and
manufacturing processes with a large sales volume.
NOTES
Because of large volumes, the size of mass markets, and the
need to develop scale economies, the competition for market
share is intense in standard-cycle markets. This form of
competition is readily evident in the battles between the Coca-
Cola and PepsiCo.
TABLE 4.1: COMPETITIVE DYNAMICS

Slow cycle Fast cycle Standard cycle
market market market
Competitive Shielded from Not shielded Moderately
advantage imitation for from imitation shielded
long periods imitation and
of
time where from
imitation is
moderately
costly.
Sustainability High Low Partial
Imitation Costly Quick & moderate
inexpensive
Strategy Concentrate Competitors Firms- Upgrade
on reverse quality
competitive
actions & engineer to continuously
S
responses quickly imitate Seek large
to protect, or improve market shares
I
maintain on firm’s Gain customer
& extend products Non- loyalty thro
proprietary proprietary brand names
advantage technology Carefully control
N
diffused operations
rapidly
Industry Pharma R&D Reverse HUL, P&G
patents engineering
Disney
characters firms- Indian
pharma, PC
makers
Fill in the blanks:

Competitive advantages are sustainable inmarkets.
Fast-cycle markets are markets in which the firm’s capabilities that contribute to competitive advantages aren’t shielded from
................. and where imitation is often rapid and inexpensive.
Prepare a presentation on the costs and benefits of imitation of technological competencies of rivals in the smart phone segment of the m
NOTES
The degree of sustainability is affected by how quickly competitive advantages can be imitated and how costly it is to do so.
4.5 COMPETITIVE RIVALRY

Competitive rivalry exists when companies jockey with one
another in the pursuit of an advantageous market position.
This means that, when one or more companies competing in
an industry feels pressure to act or perceives an opportunity to
improve their competitive position, competitive rivalry occurs
as various companies initiate a series of actions and responses.
Competitive rivalry exists because of competitive asymmetry,
which describes the fact that companies differ from one
another in terms of their resources, capabilities, and core
competencies, and the opportunities and threats in their
competitive environments and industries.
It also is important that companies recognise that competition
results in mutual interdependence among companies in the
industry as each company tries to establish a sustainable
competitive advantage. As companies strive to achieve
strategic competitiveness and earn above-average returns,
they must recognise that strategies are not implemented in
isolation from competitors’ actions and responses. The
strategic management process represents companies
taking a series of actions, fending off counter-actions or
responses and developing responses of their own.
This is important because the pattern of competitive rivalry
and competitive dynamics in the market(s) in which companies
compete affects strategic competitiveness and returns. Figure
4.3 below provides a model of competitive rivalry.
Figure 4.3: A Summary Model of Competitive Rivalry

We can make a number of observations from the model in Figure 4.3.
Competitive rivalry or competitive dynamics begin with an
assessment of competitors’ awareness and motivation to
attack and/or respond to competitive moves. Market
commonality and resource similarity
NOTES
are affected by a company’s awareness, and motivation affects
the likelihood of attack or response. The likelihood of attack
and response result in competitive outcomes, with outcomes
moderated by a company’s ability to take strategic actions or
responses. Feedback from competitive outcomes will affect
future competitive dynamics by affecting the nature of a
company’s awareness, motivation, and ability for
action/response. If companies overlap in a number of markets,
multipoint competition – a situation where companies compete
against each other simultaneously in a number of geographic
or product markets–generally results. Interestingly, a high level
of commonality reduces the likelihood of competitive
interaction. Since the major airlines are in so many common
markets, there generally is competitive peace. However, when
one company makes a competitive move, the others are
compelled to respond rapidly.
The intensity of competitive rivalry in an industry often is
based on the potential for response. As a result, attackers
generally are not motivated to target a rival that is likely to
retaliate. In other words, in most cases, dissimilar resources
may increase the likelihood of an attack while companies with
similar resources (overlap between their resource portfolios)
will be less likely to attack because resource similarity
increases the likelihood of retaliation.
As already defined, competitive rivalry is the ongoing set of
competitive actions and competitive responses occurring
between competing firms and an advantageous market
position. Because the ongoing competitive action response
sequence between a firm and a competitor affects the
performance of both firms, it is important for companies to
carefully study competitive rivalry to successfully use their
strategies. Understanding a competitor’s awareness,
motivation, and ability helps the firm to predict the likelihood
of an attack by that competitor and how likely it is that a
competitor will respond to the actions taken against it.
As described above, the predictions drawn from the study of
competitors in terms of awareness, motivation and ability are
grounded in market commonality and resource similarity.
These predictions are fairly general. The value of the final set
of predictions the firm develops about each of its competitor’s
competitive actions and competitive responses is enhanced by
studying the “Likelihood of Attack” factors (such as first mover
incentives and organisational size) and the “Likelihood of
Response” factors (such as the actor’s reputation).
4.5.1 STRATEGIC AND TACTICAL ACTIONS

Firms use both strategic and tactical actions when forming
their competitive actions and competitive responses in the
course of engaging in competitive rivalry. A competitive action
is a strategic or tactical action the firm takes to build or
defend its competitive advantages or improve its market
position. A competitive response is a strategic or tactical
action the firm takes to counter the effects
NOTES of a competitor’s competitive action. A strategic action or a

strategic response is a market based move that involves a
significant commitment of organisational resources and is
difficult to implement and reverse. A tactical action or a
tactical response is a market based move that is taken to fine
tune a strategy; it involves fewer resources and is relatively
easy to implement and reverse.
4.5.2 LIKELIHOOD OF ATTACK

In addition to market commonality, resources similarity, and the
drivers of awareness, motivation, and ability, other factors also
affect the likelihood a competitor will use strategic actions and
tactical actions to attack its competitors. Three of these factors
are first-mover incentives, organisational size and quality.
First-mover Incentives
A first mover is a firm that takes an initial competitive action to
build or to defend its competitive advantages or to improve its
market position. Superior Research and Development skills are
often the foundation of the first mover’s competitive success.
The first mover concept has been influenced by the work of
the famous economist Joseph Schumpeter, who argued that
firms achieve competitive advantage by taking innovative
actions. In general, first movers “allocate funds for product
innovation and development, aggressive advertising, and
advanced research and development.”
The benefits of being a successful first mover can be
substantial. Especially in fast-cycle markets where changes
occur rapidly and where it is virtually impossible to sustain a
competitive advantage for any period of time, “a first mover
may experience five to ten times the valuation and revenue of
a second mover.” This evidence suggests that although first-
mover benefits are never absolute they are often critical to
firm’s success in industries experiencing rapid technological
developments and relatively short product life cycles.
In addition to earning above average returns until its
competitors respond to its successful competitive action, the
first mover can gain
(a) the loyalty of customers who may become committed to
the goods or services of the firm that first made them available
and (b) market share that can be difficult for competitors to
take during future competitive rivalry.
First movers tend to be aggressive and willing to experiment
with innovation and take higher, yet reasonable, levels of risk.
To be a first mover, the firm must have readily available the
amount of resources required to significantly invest in Research
& Development as well as to rapidly and successfully produce
and market a stream of innovative products. Organisational
slack makes it possible for firms to have the ability (as
measured by available resources) to be first movers. Slack is
the buffer or cushion provided by actual or obtainable
resources that aren’t currently in use and are in excess of the
minimum resources needed to produce a given level of
or
ga
ni
sa
tio
na
l
ou
tp
ut.
Th
us
,
sl
ac
k
NOTES
is liquid resources that the firm can quickly allocate to support
the actions such as Research & Development investments and
aggressive marketing campaigns that lead to first mover
benefits. Slack allows a competitor to take aggressive
competitive actions to continuously introduce innovative
products. Furthermore, a first mover will try to rapidly gain
market share and customer loyalty in order to earn above
average returns until its competitors are able to effectively
respond to its first move.
Being a first mover also carries risk. For example, it is difficult
to accurately estimate the returns that will be earned from
introducing product innovations. Additionally, the first mover’s
cost to develop a product innovation can be substantial,
reducing the slack available to support further innovation. Also,
research has shown that in some cases, a first mover is less
likely to make the conversion to the product design that
eventually becomes the dominant in the industry. In such
cases, a first mover enjoys most of the benefits from its new
product in the period before adoption of a dominant design.
These risks mean that a firm should carefully study the results
a competitor achieves as a first mover. Continuous success by
the competitor suggests additional product innovations, while
lack of product acceptance over the course of the competitor’s
innovations may indicate less willingness in the future to
accept the risks of being a first mover.
Second Mover Incentives

A second mover is a firm that responds to the first mover’s
competitive action, typically through imitation. More cautious
than the first mover, the second mover studies customers’
reactions to product innovations. In the course of doing so, the
second mover also tries to find any mistakes the first mover
made so that it can avoid the problems resulting from them.
Often, successful imitation of the first mover’s innovations
allows the second mover “to avoid both the mistakes and the
huge spending of the pioneers (first movers).” Second movers
also have the time to develop processes and technologies that
are more efficient than those the first mover used. Greater
efficiencies could result in lower costs for the second mover.
Overall, the outcomes of the first mover’s competitive actions
may provide an effective blueprint for second and even late
movers as they determine the nature and timing of their
competitive responses.
Determining that a competitor thinks of itself as an effective
second mover allows the firm to predict that the competitor
willtendtorespond quickly to first movers’ successful,
innovation based market entries. If the firm itself is a first
mover, then it can expect a successful second mover
competitor to study its market entries and to respond to them
quickly. As a second mover, the competitor will try to respond
with a product that creates customer value exceeding the
value provided by the product that the firm introduced initially
as a first mover. The most successful second movers are able
to rapidly and meaningfully interpret market feedback to
respond quickly, yet productively, to the first mover’s
innovations.
NOTES Late Mover Incentives

A late mover is a firm that responds to a competitive action,
but only after considerable time has elapsed after the first
mover’s action and the second mover’s response. Typically, a
late response is better than no response at all, although any
success achieved from the late competitive response tends to
be slow in coming and considerably less than that achieved by
first and second movers. Thus, the firm competing against a
late mover can predict that the competitor will likely enter a
particular market only after both the first and second movers
have achieved success. Moreover, on a relative basis, the firm
can predict that the late mover’s competitive action will allow
it to earn even average returns only when enough time has
elapsed for it to understand how to create value that is more
attractive to customers than is the value offered by the first
and second mover’s products. Although exceptions do exist,
the firm can predict that the late mover’s competitive actions
will be relatively ineffective, certainly as compared with those
initiated by first movers and second movers.
TABLE 4.2: FACTORS AFFECTING LIKELIHOOD

OF ATTACK
First Allocate funds for product innovation, aggressive

mover advertising, R&D Can gain loyalty of customers
committed to the firm’s goods or services Difficult
for competitors to take market share
IMS
Secon Responds typically through imitation Studies
d customer reactions to innovation, avoids mistakes
mover & huge spends May develop more efficient
processes and technologies
Late Responds to competitive action after considerable
mover time has elapsed Slow to succeed, lesser share &
N
average returns than first & second movers
Small More likely to launch quicker competitive actions,
firms rely on speed and surprise to defend competitive
advantages or develop new ones
Larg Likely to initiate more competitive and strategic
e actions over a period
firms
4.5.3 ORGANISATIONAL SIZE

An organisation’s size affects the likelihood that it will take
competitive actions as well as the types of actions it will take
and their timing. In general, compared with large companies,
small firms are nimble and flexible competitors who rely on
speed and surprise to defend their competitive advantages or
develop new ones while engaged in competitive rivalry,
especially with large companies, to gain an advantageous
market position. Small firms’ flexibility and nimbleness allow
them to develop greater variety in their competitive actions
relative to larger firms. Nevertheless, because they tend to
have more slack resources, large firms are likely to initiate
more competitive
NOTES
and strategic actions during a given time. Thus, the
competitive actions a firm likely will encounter from
competitors larger than itself are different from the competitive
actions it will encounter from competitors who are smaller.
Relying on a limited variety of competitive actions (which is the
large firm’s tendency) can lead to reduced competitive success
across time, partly because competitors learn how to
effectively respond to a predictable set of competitive actions
taken by a firm. In contrast, remaining flexible and nimble
(which is the small firm’s tendency) in order to develop and
use a wide variety of competitive actions contributes to
success against rivals.
4.5.4 LIKELIHOOD OF RESPONSE

So far in this chapter we have examined how market
commonality, resource similarity, awareness of mutual
interdependence, motivation to act based on perceived gains
and losses, and the ability of a firm to take action can influence
competitive behaviour. We have also described how first mover
incentives, organisational size, and a firm’s emphasis on
quality can help a firm predict whether a competitor will pursue
a competitive action. These same factors should also be
evaluated to help a firm predict whether a competitor will
respond to an action it is considering. In addition, this section
describes other factors that a firm should consider when
predicting competitive responses from one or more
competitors.
The success of a firm’s competitive action is affected both
by the likelihood that a competitor will respond to it and by
the type (strategic or tactical) and effectiveness of that
response. As noted earlier, a competitive response is a
strategic or tactical action the firm takes to counter the effects
of a competitor’s competitive action. In general, a firm is likely
to respond to a competitor’s action if the action either
significantly strengthens the position of the competitor or
significantly weakens the competitive position of the firm. For
instance, the actions of a competitor may lead to better use of
its capabilities to create competitive advantages or an
improved market position. Alternatively, the actions of a
competitor could damage the firm’s own ability to use its
capabilities to create or maintain an advantage or could make
its market position less defensible.
Three factors can help a firm predict how a competitor is likely
to respond to competitive actions: the type of competitive
action, reputation and market dependence.
Type of Competitive Action

Competitive responses to strategic actions differ from
responses to tactical actions. These differences allow the firm
to predict a competitor’s likely response to a competitive
action that has been launched against it. Of course, a general
prediction is that strategic actions receive strategic responses
while tactical responses are taken to counter the effects of
tactical actions.
NOTES In general, strategic actions elicit fewer total competitive

responses. The reason in this case is that as with strategic
responses, such as market based moves, involve a significant
commitment of resources and are difficult to implement and
reverse. Moreover, the time needed for a strategic action to be
implemented and its effectiveness assessed delays the
competitor’s response to that action. In contrast to the time
often required to respond to a strategic action, a competitor
likely will respond quickly to a tactical action, such as when an
airline company almost immediately matches a competitor’s
tactical action of reducing prices in certain markets. Either
strategic actions or tactical actions that that target a large
number of a rival’s customers are likely to be targeted with
strong responses. In fact, if the effects of a competitor’s action
on the local firms are significant (e.g., loss of market share,
loss of major resources such as critical employees), a response
is likely to be swift and strong.
Actor’s Reputation
In the context of competitive rivalry, an actor is the firm
taking an action or response; reputation is “the positive or
negative attribute ascribed by one rival to another based on
past competitive behaviour.” A positive reputation may be a
source of competitive advantage and high returns,
especially for producers of consumer goods. To predict the
likelihood of a competitor’s response to a current or planned
action, the firm studies the responses that the competitor
has taken previously when attacked – past behaviour is
assumed to be a reasonable predictor of future behaviour.
Competitors are more likely to respond to either strategic or
tactical actions that are taken by a market leader. In particular,
successful actions will be quickly imitated.
Dependence on the Market

Market dependence denotes the extent to which a firm’s
revenues or profits are derived from a particular market. In
general, firms can predict that competitors with high market
dependence are likely to respond strongly to attacks
threatening their market position. Interestingly, the threatened
firm in these instances may not respond quickly, but rather
take more of a calculated approach so that its response is more
effective.
Consider an island where people are not accustomed to wearing shoes and thus, stay bare fo
What is blitzkrieg strategy? Write a 200-words report on a company that may have used this
NOTES
Fill in the blanks:

……………….. or ……………… begin with an assessment of competitors’ awareness and motivation to attack and/or respond to competitive
The value of the final set of predictions the firm develops about each of its competitor’s competitive actions and competitive responses is
factors and thefactors.
Competitive responses to strategic actions differ from responses to ………………..
Three factors can help a firm predict how a competitor is likely to respond to competitive actions: the type of,
…………… and ………………..
4.6 SUMMARY
 Competitor analysis is an important part of a firm’s
development of its strategy. Its importance lies in the
understanding of competitors, their strategy, and
resources and capabilities.
 Competitor analysis also allows a firm to assess its own
firm versus competitors and plan for what competitors’
actions may be as a reaction to actions the firm may take.
 A competitor analysis provides a firm with the knowledge
to leverage its strengths and address its weaknesses and
conversely, take advantage of weaknesses of competitors
and counter their strengths.
 Competitor analysis also gives a firm a better
understanding not only of the competitors but also their
overall sector and where the emerging opportunities may
be.
 Competitive rivalry exists because of competitive
asymmetry, which describes the fact that companies differ
from one another in terms of their resources, capabilities,
and core competencies, and the opportunities and threats
in their competitive environments and industries.
 Competitive Advantage: Condition which enables a company to operate in a more efficient or otherwise higher-quality manner than
NOTES
Competitor: Any person or entity which is a rival against another. In business, a company in the same industry or a similar industry which o
Intensity of Rivalry: The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pre
Competitive Dynamics: Competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within
Strategic Action: A strategic action or a strategic response is a market based move that involves a significant commitment of organisation
Tactical Action: A tactical action or a tactical response is a market based move that is taken to fine tune a strategy; it involves fewer resour

1. When competing against one another, firms jockey for a
market position that is advantageous, relative to
competitors. In this jockeying, what are the ethical
considerations associated with the way competitor
intelligence is gathered?
2. Second movers often respond to a first mover’s
competitive actions through imitation. Is there anything
unethical about a company imitating a competitor’s good
or service as a means of engaging in competition?
3. Discuss the implications of competitive advantage on slow-
cycle markets. Explain how the firms in fast-cycle markets
facilitate rapid imitation.
4. Explain the competitor analysis framework with a suitable
diagram.
5. How does Porter’s intensity of rivalry in an industry affects
the competitive environment and influences the ability of
existing firms to achieve profitability? Explain with factors
of intensive rivalry.
6. How do firms sustain competitive advantage in standard-
cycle markets? Explain.
7. Explain the difference between strategic and tactical
actions which the firms use it for forming their competitive
actions
NOTES
and competitive responses in the course of engaging in
the competitive rivalry.
8. Explain the factors affecting the likelihood of attack which
competitors use it for defending competition.
9. How does the assumptions help the competitor’s
managers for defining the competitive moves? Explain
with an example. State the competitor response profile.
10. “An organisation’s size affects the likelihood that it will take
competitive actions as well as the types of actions it will
take and their timing”. Discuss in context to large size and
small size firms.


Competitor 1. insufficient
Analysis
Framework
2. compare
3. competitive
4. important
5. define
6. competitive
Rivalry Analysis 7. Environment
8. Intense
Competitive Dynamics 9. slow-cycle
10. imitation
Competitive Rivalry 11. Competitive rivalry,
competitive dynamics
12. Likelihood of Attack,
Likelihood of
Response
13. tactical actions
14. competitive
action,
reputation,
market
dependence

1. Refer to 4.5
Competitive rivalry or competitive dynamics begin with an
assessment of competitors’ awareness and motivation to
attack and/or respond to competitive moves. Market
commonality and resource similarity are affected by a
company’s awareness, and motivation affects the
likelihood of attack or response. The likelihood of attack
and response result in competitive outcomes,
NOTES with outcomes moderated by a company’s ability to take

strategic actions or responses. Feedback from
competitive outcomes will affect future competitive
dynamics by affecting the nature of a company’s
awareness, motivation, and ability for action/ response.
2. Refer to 4.5.2
There is not anything unethical about a company
imitating a competitor’s good or service as a means of
engaging in competition. Often, successful imitation of the
first mover’s innovations allows the second mover “to
avoid both the mistakes and the huge spending of the
pioneers (first movers).” Second movers also have the
time to develop processes and technologies that are more
efficient than those the first mover used. Greater
efficiencies could result in lower costs for the second
mover. Overall, the outcomes of the first mover’s
competitive actions may provide an effective blueprint for
second and even late movers as they determine the
nature and timing of their competitive responses. As a
second mover, the competitor will try to respond with a
product that creates customer value exceeding the value
provided by the product that the firm introduced initially as
a first mover. The most successful second movers are able
to rapidly and meaningfully interpret market feedback to
respond quickly, yet productively, to the first mover’s
innovations.
3. Refer to 4.4.1 & 4.4.2
Building on of a kind competitive advantage that is
proprietary leads to competitive success in a slow-cycle
market. This type of advantage is difficult for competitors
to understand and costly to imitate advantage results from
unique historical conditions, causal ambiguity, and or
social complexity. Copyrights, geography, patents, and
ownership of information resources are examples of what
leads to one of kind advantages. Once a proprietary
advantage is developed, the firm’s competitive behaviour
in a slow-cycle market is oriented to protecting,
maintaining, and extending that advantage. Thus, the
competitive dynamics in slow-cycle markets involve all
firms concentrating on competitive actions and responses
that enable them to protect, maintain, and extend their
proprietary competitive advantage. Reverse engineering
and the rate of technology diffusion in fast-cycle markets
facilitate rapid imitation. A competitor uses reverse
engineering to quickly gain the knowledge required to
imitate or improve the firm’s products, usually in only a
few months. Indeed, the pace of competition in fast-cycle
markets is almost frenzied, as companies rely on ideas and
the innovations resulting from them as the engines of their
growth. Because prices fall quickly in these markets,
companies need to profit quickly from their product
innovations. Fast-cycle market characteristics make it
virtually impossible for companies in this type of market to
d elop sustainable competitive advantages. Recognising this,
e firms avoid “loyalty” to any of their products, preferring to
v
NOTES
cannibalise their current product by launching a new
product before competitors learn how to do so through
successful imitation. This emphasis creates competitive
dynamics that differ substantially from those in slow-cycle
markets.
4. Refer to 4.2
Even the simplest competitive analysis displays two critical
dimensions: the competitors and the criteria, or what we’ll
call the competitive framework. The purpose of the
competitive framework is to present the data in a way that
makes it easy to compare the various sites across the
different criteria. Michael Porter presented a framework for
analysing competitors. This framework is based on the
following four key aspects of a competitor: Competitor’s
objectives; Competitor’s assumptions; Competitor’s
strategy and Competitor’s capabilities.
5. Refer to 4.3,4.3.1 & 4.3.2
Several factors determine the intensity of competitive
rivalry in an industry. If the industry consists of numerous
competitors, Porter rivalry will be more intense. If the
competitors are of equal size or market share, the intensity
of rivalry will increase. If industry growth is slow, the
intensity of rivalry will be high. If the industry’s fixed costs
are high, competitive rivalry will be intense. If the
industry’s products are undifferentiated or are
commodities, rivalry will be intense.
6. Refer to 4.4.3
Standard-cycle markets are those in which the firm’s
competitive advantages are moderately shielded from
imitation and where imitation is moderately costly.
Competitive advantages are partially sustainable in
standard-cycle markets, but only when the firm is able to
continuously upgrade the quality of its competitive
advantages. The competitive actions and responses that
form a standard-cycle market’s competitive dynamics find
firms seeking large market shares, trying to gain customer
loyalty through brand names, and carefully controlling
their operations to consistently provide the same positive
experience for customers.
7. Refer to 4.5.1
A competitive response is a strategic or tactical action the
firm takes to counter the effects of a competitor’s
competitive action. A strategic action or a strategic
response is a market based move that involves a
significant commitment of organisational resources and is
difficult to implement and reverse. A tactical action or a
tactical response is a market based move that is taken to
fine tune a strategy; it involves fewer resources and is
relatively easy to implement and reverse.
8. Refer to 4.5.2
In addition to market commonality, resources similarity,
and the drivers of awareness, motivation, and ability, other
factors also
NOTES affect the likelihood a competitor will use strategic actions

and tactical actions to attack its competitors. Three of
these factors are first-mover incentives, organisational size
and quality.
9. Refer to 4.2.3 & 4.2.5
The assumptions that a competitor’s managers hold about
their firm and their industry help to define the moves that
they will consider. For example, if in the past the industry
introduced a new type of product that failed, the industry
executives may assume that there is no market for the
product. Such assumptions are not always accurate and if
incorrect may present opportunities. Information from an
analysis of the competitor’s objectives, assumptions,
strategy, and capabilities can be compiled into a response
profile of possible moves that might be made by the
competitor. This profile includes both potential offensive
and defensive moves.
10. Refer to 4.5.3
An organisation’s size affects the likelihood that it will take
competitive actions as well as the types of actions it will
take and their timing. In general, compared with large
companies, small firms are nimble and flexible competitors
who rely on speed and surprise to defend their
competitive advantages or develop new ones while
engaged in competitive rivalry, especially with large
companies, to gain an advantageous market position.
Small firms’ flexibility and nimbleness allow them to
develop greater variety in their competitive actions
relative to larger firms.

SUGGESTED READINGS
 Duro, R.B., Winning the Marketing War, John Wiley and Sons,
1989.
 Hall, W.K., Survival Strategies in a Hostile Environment,
Harvard Business Review. Sept-Oct 1980, pp 75-85.
 Keegan, W.J., Global Marketing Management, 4th ed. Prentice
Hall International Edition, 1989.
 Porter, M.E., Competition in Global Industries, Boston: Harvard
Business School Press, 1986.
 Porter, M.E., Competitive Advantage, New York: The Free
Press, 1985.
E-REFERENCES
 http://www.netmba.com/strategy/competitor-analysis/
 http://strategiccfo.com/wikicfo/intensity- of-rivalry-
one- of- porters-five-forces/
 http://www.quickmba.com/strategy/porter.shtml
C H
5
A P T E R
INDUSTRY ANALYSIS
5.7
CONTENTS
5.
5. Introduction 8
1
5.
5. Formulation of Strategy 9
2
5. Five Competitive Forces that Shape Strategy
3
5.3.1 Differences in Industry Profitability
5.3.2 Threat of Entry
5.3.3 Expected Retaliation
5.3.4 Power of Suppliers
5.3.5 Power of Buyers
5.3.6 Rivalry among Existing Competitors
5. PESTLE Analysis
4
5.4.1 History of PESTLE
5.4.2 PESTLE Analysis Tool
5.4.3 On to SWOT Analysis
5.4.4 PEST-G or PEST-E
5. Competition and Value
5
5. Industry Structure
6
5.6.1 Fragmentation and Consolidation of
Industries
5.6.2 Consolidation
5. Technology Life Cycle
7
5.7.1 Four Phases of the Technology Life Cycle
5.7.2 Licensing Options
5.7.3 Licensing in the R&D Phase
5.7.4 Licensing in the Ascent Phase
5.7.5 Licensing in the Maturity Phase
Contd...
NOTES
5.10 Typical Steps in Industry Analysis
5.11 Summary
5.12
5.13 Descriptive
and Hints

Education
NOTES
PESTLE ANALYSIS OF RUSSIAN GAS INDUSTRY
The latest episode of US-Russia belligerence over the

annexation of Crimea can potentially trigger tectonic shifts
in the global natural gas industry. As allegations fly thick and
fast on Russian expansionism, an intense and interesting
sub-plot of rivalry promises to unfold.
Russia is the largest producer and exporter of natural gas in

the world. Gazprom the state run natural gas monopoly is
perhaps Vladimir Putin’s license to kill. Since the collapse of
the Soviet Union, Russia under the leadership of Putin has
identified energy as a sunrise sector. Russia is also likely to
possess the world’s largest volume of still-undiscovered
natural gas: a mean probable volume of 6.7 trillion cubic
meters. A growing economy implies that domestic demand
for natural gas is on the rise.
In the aftermath of Russia sending troops to safeguard the

interests of Russian speaking people and then following it up
with a referendum, deep cracks have appeared in bilateral
relations between USA-EU and Russia. Over the last three
months USA has retaliated to Russian aggression with
economic sanctions and freezing of business operations of
both Russian multi-national companies and individuals who
are close to Putin. Many Russian banks have been selectively
out casted from the banking system of the European Union.
NMI
Ukraine, the tug of war between EU and Russia is at a
receiving end. Germany the largest economy in Europe also
stands to face challenges. Germany has a robust industrial
base and German demand for natural gas is on the rise.
Sources claim that almost forty percent of the German
MS
demand for natural gas is supplied by Russia. Germany’s
domestic energy resources are by far too insignificant
relative to demand to be taken seriously. Ukraine, the cause
of disagreement between Russia and US used to enjoy the
benefits of highly subsidised Russian natural gas. Now that
the bonhomie between Ukraine and Russia has gone for a
toss, Gazprom the state run Russian company has decided
to levy a debt with retrospective effect for its earlier gas
supplies. The European Commission has requested Bulgaria,
the poorest EU member nation to suspend the construction
of a gas pipeline beneath the Black Sea that would have
enabled Russia to supply gas to southern Europe. However,
Bulgaria depends entirely on Russian gas supplies.
Gazprom, the Russian natural gas company is about to

witness some excitement in the near future courtesy the
interplay of competitive forces.
NOTES

Explain the meaning of economic features of strategic management
Describe the competitive forces shaping the strategy Define competition and value
5.1 INTRODUCTION
Industry analysis is a market strategy tool used by businesses
to determine if they want to enter a product or service market.
Company management must carefully analyze several aspects
of the industry to determine if they can make a profit selling
goods and services in the market. Analysing economic factors,
supply and demand, competitors, future conditions and
government regulations will help management decide whether
to enter an industry or invest money elsewhere.
Economic Factors: Economic factors of industry analysis include
raw materials, expected profit margins and the interference of
substitute goods. The cost of raw materials is an important
factor in industry analysis because over-priced goods will not
sell in an established market. Profit margins are closely linked
to materials costs because offering discounts or sales prices
will shrink company profits and lessen cash inflows for future
production activity.
Substitute goods allow consumers to purchase a cheaper good that performs relatively like the original item.
Supply and Demand: A supply and demand analysis helps
management understand if enough consumers are willing to
purchase more goods in an industry. If demand is high and
supply is low, a company may be willing to enter the market
and offer goods near the market price to gain a competitive
advantage in the industry. A trend of declining demand
indicates an industry that is oversold, and any new competitors
will likely lose money because consumers are not interested in
current goods or services.
Competitors: The number of competitors is an important factor
for proper industry analysis. If few competitors exist in a
market, they may be charging consumers higher prices
because of limited availability of products or services. As new
competitors enter the market, existing companies can lower
prices to maintain their current market share; newer
competitors may not be able to match these price cuts if
their products costs are too high. As industries contract,
inefficient producers are forced out.
Future Conditions: While no company managers can predict the
future of an industry, they can try to determine where the
industry is
Education
INDUSTRY ANALYSIS115
NOTES
in the business cycle. If the industry is in an emerging market
stage, companies can enter an industry and expect to earn a
profit from rising consumer demand. If the industry is in a
plateau stage, then only the most efficient producers with the
lowest costs can continue to earn profits. At the end of a
business cycle, demand is declining and producers leave the
industry for more profitable markets.
Government Regulations: Some industries have heavier
regulations or taxes than others, which must be considered by
companies looking to enter new markets. Taxes and other
government fees add to the cost of doing business, which eats
into profits earned by companies. Properly understanding the
amount of government regulation in an industry helps
management to determine if expected profit margins will earn
a high enough return to cover these costs.
In the terms of industry analysis and to make an industry grow
in the competitive world it is quite essential to be strategic in
its planning and future expectations. In the following
paragraphs we will focus on all the aspects of industry
analysis and strategic management in relation to that.
5.2 FORMULATION OF STRATEGY

The real meaning of strategy formulation is coping with
competition. Yet it is easy to view competition too narrowly and
too pessimistically. While one sometimes hears executives
complaining to the contrary, intense competition in an industry
is neither coincidence nor bad luck. In addition, in the fight for
market share, competition is not manifested only in the other
players. Rather, competition in an industry is rooted in its
underlying economics, and competitive forces exists that go
well beyond the established combatants in a particular
industry. Customers, suppliers, potential entrants, and
substitute products are all competitors that may be more or
less prominent or active depending on the industry.
Strategy formulation is the process of determining appropriate courses of action for achieving organizational objectives and thereby accom
The collective strength of the forces may be painfully apparent
to all the antagonists; but to cope with them, the strategist
must delve below the surface and analyse the sources of each.
Knowledge of these underlying sources of competitive pressure
provides the groundwork for a strategic agenda of action. They
highlight the critical strengths and weaknesses of the
company, animate the positioning of the company in its
industry, clarify the areas where strategic changes may yield
the greatest payoff, and highlight the places where industry
trends promise to hold the greatest significance as wither
opportunities or threats. Understanding these sources also
proves to be of help in considering areas for diversification.
NOTES
Fill in the blank:

1.The collective strength of the forces may be painfully apparent to all the ………………………….
Consider small business unit dealing in the manufacture and sales of furniture. Outline the competitors of the firm.
FIVE COMPETITIVE FORCES THAT
5.3
SHAPE STRATEGY
Whatever their collective strength, the corporate strategist’s goal is to find a position in the industry where his or her company can best de
In essence, the job of the strategist is to understand and cope
with competition. Often, however, managers define
competition too narrowly, as if it occurred only among today’s
direct competitors. Yet competition for profits goes beyond
established industry rivals to include four other competitive
forces as well: customers, suppliers, potential entrants and
substitute products. The extended rivalry that results from all
five forces defines an industry’s structure and shapes the
nature of competitive interaction within an industry.
As different from one another as industries might appear on
the surface, the underlying drivers of profitability are the same.
The global auto industry, for instance, appears to have nothing
in common with the worldwide market for art masterpieces or
the heavily regulated health-care delivery industry in Europe.
But to understand industry competition and profitability in each
of those three cases, one must analyze the industry’s
underlying structure in terms of the five forces.
If the forces are intense, as they are in such industries as
airlines, textiles, and hotels, almost no company earns
attractive returns on investment. If the forces are benign, as
they are in industries such as software, soft drinks, and
toiletries, many companies are profitable. Industry structure
drives competition and profitability, not whether an industry
produces a product or service, is emerging or mature, high
tech or low tech, regulated or unregulated. While a myriad of
factors can affect industry profitability in the short run –
including the weather and the business cycle – industry
structure, manifested in the competitive forces, sets industry
profitability in the medium and long run.
NOTES
5.3.1 DIFFERENCES IN INDUSTRY PROFITABILITY
Understanding the competitive forces, and their underlying
causes, reveals the roots of an industry’s current profitability
while providing a framework for anticipating and influencing
competition (and profitability) over time. A healthy industry
structure should be as much a competitive concern to
strategists as their company’s own position. Understanding
industry structure is also essential to effective strategic
positioning. As we will see, defending against the competitive
forces and shaping them in a company’s favour are crucial to
strategy.
NMI
Figure 5.1: Five Forces that Shape the Industry Competition
The configuration of the five forces differs by industry. In the
market for commercial aircraft, fierce rivalry between dominant
MS
producers Airbus and Boeing and the bargaining power of the
airlines that place huge orders for aircraft are strong, while the
threat of entry, the threat of substitutes, and the power of
suppliers are more benign. In the movie theatre industry, the
proliferation of substitute forms of entertainment and the
power of the movie producers and distributors who supply
movies, the critical input, are important.
The strongest competitive force or forces determine the
profitability of an industry and become the most important to
strategy formulation. The most salient force, however, is not
always obvious.
Example: Even though rivalry is often fierce in commodity
industries, it may not be the factor limiting profitability. Low
returns in the photographic film industry, for instance, are the
result of a superior substitute product – as Kodak and Fuji, the
world’s leading producers of photographic film, learned with
the advent of digital photography. In such a situation, coping
with the substitute product becomes the number one strategic
priority.
NOTES Industry structure grows out of a set of economic and technical

characteristics that determine the strength of each competitive
force. We will examine these drivers in the pages that follow,
taking the perspective of an incumbent, or a company already
present in the industry. The analysis can be readily extended to
understand the challenges facing a potential entrant.
5.3.2 THREAT OF ENTRY

New entrants to an industry bring new capacity and a desire to
gain market share that puts pressure on prices, costs, and the
rate of investment necessary to compete. Particularly when
new entrants are diversifying from other markets, they can
leverage existing capabilities and cash flows to shake up
competition, as Pepsi did when it entered the bottled water
industry, Microsoft did when it began to offer internet browsers,
and Apple did when it entered the music distribution business.
The threat of entry, therefore, puts a cap on the profit potential
of an industry. When the threat is high, incumbents must hold
down their prices or boost investment to deter new
competitors. In specialty coffee retailing, for example,
relatively low entry barriers mean that Starbucks must invest
aggressively in modernising stores and menus.
The threat of entry in an industry depends on the height of
entry barriers that are present and on the reaction entrants
can expect from incumbents. If entry barriers are low and
newcomers expect little retaliation from the entrenched
competitors, the threat of entry is high and industry
profitability is moderated. It is the threat of entry, not whether
entry actually occurs, that holds down profitability.
Barriers to Entry
Entry barriers are advantages that incumbents have relative to
new entrants. There are seven major sources:
Supply-side economies of scale: These economies arise when
firms that produce at larger volumes enjoy lower costs per
unit because they can spread fixed costs over more units,
employ more efficient technology, or command better terms
from suppliers. Supply-side scale economies deter entry by
forcing the aspiring entrant either to come into the industry
on a large scale, which requires dislodging entrenched
competitors, or to accept a cost disadvantage. Scale
economies can be found in virtually every activity in the
value chain; which ones are most important varies by industry.
In microprocessors, incumbents such as Intel are protected
by scale economies in research, chip fabrication, and
consumer marketing. For lawn care companies like Scotts
Miracle-Gro, the most important scale economies are found
in the supply chain and media advertising. In small-package
delivery, economies of scale arise in national logistical
systems and information technology.
Demand-side benefits of scale: These benefits, also known as
network effects, arise in industries where a buyer’s willingness
to
pa
y
fo
r
a
NOTES
company’s product increases with the number of other buyers
who also patronise the company. Buyers may trust larger
companies more for a crucial product: Recall the old adage
that no one ever got fired for buying from IBM (when it was the
dominant computer maker). Buyers may also value being in a
“network” with a larger number of fellow customers.
Example: Online auction participants are attracted to eBay
because it offers the most potential trading partners. Demand-
side benefits of scale discourage entry by limiting the
willingness of customers to buy from a newcomer and by
reducing the price the newcomer can command until it builds
up a large base of customers.
Customer switching costs: Switching costs are fixed costs that
buyers face when they change suppliers. Such costs may arise
because a buyer who switches vendors must, for example,
alter product specifications, retrain employees to use a new
product, or modify processes or information systems. The
larger the switching costs, the harder it will be for an entrant to
gain customers.
Example: Enterprise Resource Planning (ERP) software is an
example of a product with very high switching costs. Once a
company has installed SAP’s ERP system, the costs of moving
to a new vendor are astronomical because of embedded data,
the fact that internal processes have been adapted to SAP,
major retraining needs, and the mission-critical nature of the
applications.
Capital requirements: The need to invest large financial resources
in order to compete can deter new entrants. Capital may be
necessary not only for fixed facilities but also to extend
customer credit, build inventories, and fund start-up losses.
The barrier is particularly great if the capital is required for
unrecoverable and therefore harder-to- finance expenditures,
such as up-front advertising or research and development.
While major corporations have the financial resources to
invade almost any industry, the huge capital requirements in
certain fields limit the pool of likely entrants. Conversely, in
such fields as tax preparation services or short-haul trucking,
capital requirements are minimal and potential entrants
plentiful. It is important not to overstate the degree to which
capital requirements alone deter entry. If industry returns are
attractive and are expected to remain so, and if capital
markets are efficient, investors will provide entrants with the
funds they need.
Example: For aspiring air carriers, financing is available to
purchase expensive aircraft because of their high resale value,
one reason why there have been numerous new airlines in
almost every region.
Incumbency advantages independent of size: No matter what their
size, incumbents may have cost or quality advantages not
available to potential rivals. These advantages can stem from
such sources as proprietary technology, preferential access to
the best raw material sources, preemption of the most
favourable geographic locations, established brand identities,
or cumulative experience that has
NOTES allowed incumbents to learn how to produce more efficiently.

Entrants try to bypass such advantages.
Example: Upstart discounters such as Target and Wal-Mart, have
located stores in freestanding sites rather than regional
shopping centres where established department stores were
well entrenched.
Unequal access to distribution channels: The new entrant must,
of course, secure distribution of its product or service. A new
food item, for example, must displace others from the
supermarket shelf via price breaks, promotions, intense selling
efforts, or some other means. The more limited the wholesale
or retail channels are and the more that existing competitors
have tied them up, the tougher entry into an industry will be.
Sometimes access to distribution is so high a barrier that new
entrants must bypass distribution channels altogether or
create their own. Thus, upstart low-cost airlines have avoided
distribution through travel agents (who tend to favour
established higher-fare carriers) and have encouraged
passengers to book their own flights on the internet.
Restrictive government policy: Government policy can
hinder or aid new entry directly, as well as amplify (or nullify)
the other entry barriers. Government directly limits or even
forecloses entry into industries through, for instance, licensing
requirements and restrictions on foreign investment. Regulated
industries like liquor retailing, taxi services, and airlines are
visible examples. Government policy can heighten other entry
barriers through such means as expansive patenting rules that
protect proprietary technology from imitation or environmental
or safety regulations that raise scale economies facing
newcomers. Of course, government policies may also make
entry easier – directly through subsidies, for instance, or
indirectly by funding basic research and making it available to
all firms, new and old, reducing scale economies. Entry barriers
should be assessed relative to the capabilities of potential
entrants, which may be start-ups, foreign firms, or companies
in related industries. And, as some of our examples illustrate,
the strategist must be mindful of the creative ways
newcomers might find to circumvent apparent barriers.
5.3.3 EXPECTED RETALIATION

How potential entrants believe incumbents may react will also
influence their decision to enter or stay out of an industry. If
reaction is vigorous and protracted enough, the profit potential
of participating in the industry can fall below the cost of
capital. Incumbents often use public statements and responses
to one entrant to send a message to other prospective
entrants about their commitment to defending market share.
Newcomers are likely to fear expected retaliation if:
 Incumbents have previously responded vigorously to new
entrants.
NOTES
 Incumbents possess substantial resources to fight back,
including excess cash and unused borrowing power,
available productive capacity, or clout with distribution
channels and customers.
 Incumbents seem likely to cut prices because they are
committed to retaining market share at all costs or
because the industry has high fixed costs, which create a
strong motivation to drop prices to fill excess capacity.
 Industry growth is slow so newcomers can gain volume
only by taking it from incumbents.
An analysis of barriers to entry and expected retaliation is
obviously crucial for any company contemplating entry into a
new industry. The challenge is to find ways to surmount the
entry barriers without nullifying, through heavy investment,
the profitability of participating in the industry.
5.3.4 POWER OF SUPPLIERS

Powerful suppliers capture more of the value for themselves by
charging higher prices, limiting quality or services, or shifting
costs to industry participants. Powerful suppliers, including
suppliers of labour, can squeeze profitability out of an industry
that is unable to pass on cost increases in its own prices.
Example: Microsoft has contributed to the erosion of profitability
among personal computer makers by raising prices on
operating systems. PC makers, competing fiercely for
customers who can easily switch among them, have limited
freedom to raise their prices accordingly.
Companies depend on a wide range of different supplier groups
for inputs. A supplier group is powerful if:
 It is more concentrated than the industry it sells to.
Microsoft’s near monopoly in operating systems, coupled
with the fragmentation of PC assemblers, exemplifies this
situation.
 The supplier group does not depend heavily on the
industry for its revenues. Suppliers serving many
industries will not hesitate to extract maximum profits
from each one. If a particular industry accounts for a large
portion of a supplier group’s volume or profit, however,
suppliers will want to protect the industry through
reasonable pricing and assist in activities such as R&D and
lobbying.
 Industry participants face switching costs in changing suppliers.
Example: shifting suppliers is difficult if companies have
invested heavily in specialised ancillary equipment or in
learning how to operate a supplier’s equipment (as with
Bloomberg terminals used by financial professionals). Or
firms may have located their production lines adjacent to a
supplier’s manufacturing facilities (as in the case of some
beverage companies and container
NOTES manufacturers). When switching costs are high, industry

participants find it hard to play suppliers off against one
another. (Note that suppliers may have switching costs as
well. This limits their power.)
 Suppliers offer products that are differentiated.
Example: Pharmaceutical companies that offer patented
drugs with distinctive medical benefits have more power
over hospitals, health maintenance organisations, and
other drug buyers, for example, than drug companies
offering me-too or generic products.
 There is no substitute for what the supplier group provides.
Example: Pilots’ unions, exercise considerable supplier
power over airlines partly because there is no good
alternative to a well-trained pilot in the cockpit.
 The supplier group can credibly threaten to integrate
forward into the industry. In that case, if industry
participants make too much money relative to suppliers,
they will induce suppliers to enter the market.
5.3.5 POWER OF BUYERS

Powerful customers – the flip side of powerful suppliers – can
capture more value by forcing down prices, demanding better
quality or more service (thereby driving up costs), and
generally playing industry participants off against one another,
all at the expense of industry profitability. Buyers are powerful
if they have negotiating leverage relative to industry
participants, especially if they are price sensitive, using their
clout primarily to pressure price reductions.
As with suppliers, there may be distinct groups of customers
who differ in bargaining power. A customer group has
negotiating leverage if:
 There are few buyers, or each one purchases in volumes
that are large relative to the size of a single vendor. Large-
volume buyers are particularly powerful in industries with
high fixed costs, such as telecommunications equipment,
offshore drilling, and bulk chemicals. High fixed costs and
low marginal costs amplify the pressure on rivals to keep
capacity filled through discounting.
 The industry’s products are standardised or
undifferentiated. If buyers believe they can always find an
equivalent product, they tend to play one vendor against
another.
 Buyers face few switching costs in changing vendors.
 Buyers can credibly threaten to integrate backward and
produce the industry’s product themselves if vendors are
too profitable.
Producers of soft drinks and beer have long controlled the
power of packaging manufacturers by threatening to make,
and at times actually making, packaging materials themselves.
NOTES
A buyer group is price sensitive if:
 The product it purchases from the industry represents a
significant fraction of its cost structure or procurement
budget. Here buyers are likely to shop around and bargain
hard, as consumers do for home mortgages. Where the
product sold by an industry is a small fraction of buyers’
costs or expenditures, buyers are usually less price
sensitive.
 The buyer group earns low profits, is strapped for cash, or
is otherwise under pressure to trim its purchasing costs.
Highly profitable or cash-rich customers, in contrast, are
generally less price sensitive (that is, of course, if the item
does not represent a large fraction of their costs).
 The quality of buyers’ products or services is little affected
by the industry’s product. Where quality is very much
affected by the industry’s product, buyers are generally
less price sensitive. When purchasing or renting production
quality cameras, for instance, makers of major motion
pictures opt for highly reliable equipment with the latest
features. They pay limited attention to price.
 The industry’s product has little effect on the buyer’s other
costs. Here, buyers focus on price. Conversely, where an
industry’s product or service can pay for itself many times
over by improving performance or reducing labour,
material, or other costs, buyers are usually more
interested in quality than in price.
Examples: Include products and services like tax accounting or
well logging (which measures below-ground conditions of oil
wells) that can save or even make the buyer money. Similarly,
buyers tend not to be price sensitive in services such as
investment banking, where poor performance can be costly
and embarrassing.
Most sources of buyer power apply equally to consumers and
to business-to-business customers. Like industrial customers,
consumers tend to be more price sensitive if they are
purchasing products that are undifferentiated, expensive
relative to their incomes, and of a sort where product
performance has limited consequences. The major difference
with consumers is that their needs can be more intangible and
harder to quantify.
Intermediate customers, or customers who purchase the
product but are not the end user (such as assemblers or
distribution channels), can be analysed the same way as other
buyers, with one important addition. Intermediate customers
gain significant bargaining power when they can influence the
purchasing decisions of customers downstream. Consumer
electronics retailers, jewellery retailers, and agricultural
equipment distributors are examples of distribution channels
that exert a strong influence on end customers.
Producers often attempt to diminish channel clout through
exclusive arrangements with particular distributors or retailers
or by marketing
NOTES directly to end users. Component manufacturers seek to

develop power over assemblers by creating preferences for
their components with downstream customers. Such is the
case with bicycle parts and with sweeteners.
Example: DuPont has created enormous clout by advertising its
Stainmaster brand of carpet fibres not only to the carpet
manufacturers that actually buy them but also to downstream
consumers. Many consumers request Stainmaster carpet even
though DuPont is not a carpet manufacturer.
Threat of Substitutes
A substitute performs the same or a similar function as an
industry’s product by a different means. Videoconferencing is a
substitute for travel. Plastic is a substitute for aluminium. E-
mail is a substitute for express mail. Sometimes, the threat of
substitution is downstream or indirect, when a substitute
replaces a buyer industry’s product.
Example: Lawn-care products and services are threatened when
multifamily homes in urban areas substitute for single-family
homes in the suburbs. Software sold to agents is threatened
when airline and travel websites substitute for travel agents.
Substitutes are always present, but they are easy to overlook
because they may appear to be very different from the
industry’s product: To someone searching for a Father’s Day
gift, neckties and power tools may be substitutes. It is a
substitute to do without, to purchase a used product rather
than a new one, or to do it yourself (bring the service or
product in-house). When the threat of substitutes is high,
industry profitability suffers. Substitute products or services
limit an industry’s profit potential by placing a ceiling on prices.
If an industry does not distance itself from substitutes through
product performance, marketing, or other means, it will suffer
in terms of profitability – and often growth potential.
Substitutes not only limit profits in normal times, they also
reduce the bonanza an industry can reap in good times.
Example: In emerging economies, the surge in demand for
wired telephone lines has been capped as many consumers opt
to make a mobile telephone their first and only phone line.
The threat of a substitute is high if:
 It offers an attractive price-performance trade-off to the
industry’s product. The better the relative value of the
substitute, the tighter is the lid on an industry’s profit
potential.
Example: Conventional providers of long-distance
telephone service have suffered from the advent of
inexpensive internet- based phone services such as
Vonage and Skype. Similarly, video rental outlets are
struggling with the emergence of cable and satellite video-
on-demand services, online video rental services
NOTES
such as Netflix, and the rise of internet video sites like
Google’s YouTube.
 The buyer’s cost of switching to the substitute is low.
Switching from a proprietary, branded drug to a generic
drug usually involves minimal costs, for example, which is
why the shift to generics (and the fall in prices) is so
substantial and rapid.
Strategists should be particularly alert to changes in other
industries that may make them attractive substitutes when
they were not before. Improvements in plastic materials, for
example, allowed them to substitute for steel in many
automobile components. In this way, technological changes or
competitive discontinuities in seemingly unrelated businesses
can have major impacts on industry profitability. Of course the
substitution threat can also shift in favour of an industry, which
bodes well for its future profitability and growth potential.
5.3.6 RIVALRY AMONG EXISTING COMPETITORS

Rivalry among existing competitors takes many familiar forms,
including price discounting, new product introductions,
advertising campaigns, and service improvements. High rivalry
limits the profitability of an industry. The degree to which
rivalry drives down an industry’s profit potential depends, first,
on the intensity with which companies compete and, second,
on the basis on which they compete.
The intensity of rivalry is greatest if:
 Competitors are numerous or are roughly equal in size and
power. In such situations, rivals find it hard to avoid
poaching business. Without an industry leader, practices
desirable for the industry as a whole go unenforced.
 Industry growth is slow. Slow growth precipitates fights for
market share.
 Exit barriers are high. Exit barriers, the flip side of entry
barriers, arise because of such things as highly specialised
assets or management’s devotion to a particular business.
These barriers keep companies in the market even though
they may be earning low or negative returns. Excess
capacity remains in use, and the profitability of healthy
competitors suffers as the sick ones hang on.
 Rivals are highly committed to the business and have
aspirations for leadership, especially if they have goals
that go beyond economic performance in the particular
industry. High commitment to a business arises for a
variety of reasons.
Example: State-owned competitors may have goals that
include employment or prestige. Units of larger companies
may participate in an industry for image reasons or to offer
a full line. Clashes of personality and ego have sometimes
exaggerated
NOTES rivalry to the detriment of profitability in fields such as the

media and high technology.
 Firms cannot read each other’s signals well because of lack
of familiarity with one another, diverse approaches to
competing, or differing goals.
Rivalry is especially destructive to profitability if it gravitates
solely to price because price competition transfers profits
directly from an industry to its customers. Price cuts are
usually easy for competitors to see and match, making
successive rounds of retaliation likely. Sustained price
competition also trains customers to pay less attention to
product features and service. Price competition is most liable
to occur if:
 Products or services of rivals are nearly identical and there
are few switching costs for buyers. This encourages
competitors to cut prices to win new customers. Years of
airline price wars reflect these circumstances in that
industry.
 Fixed costs are high and marginal costs are low. This
creates intense pressure for competitors to cut prices
below their average costs, even close to their marginal
costs, to steal incremental customers while still making
some contribution to covering fixed costs. Many basic-
materials businesses, such as paper and aluminium, suffer
from this problem, especially if demand is not growing. So
do delivery companies with fixed networks of routes that
must be served regardless of volume.
 Capacity must be expanded in large increments to be
efficient. The need for large capacity expansions, as in the
polyvinyl chloride business, disrupts the industry’s supply-
demand balance and often leads to long and recurring
periods of overcapacity and price cutting.
 The product is perishable. Perishability creates a strong
temptation to cut prices and sell a product while it still has
value. More products and services are perishable than is
commonly thought. Just as tomatoes are perishable
because they rot, models of computers are perishable
because they soon become obsolete, and information may
be perishable if it diffuses rapidly or becomes outdated,
thereby losing its value. Services such as hotel
accommodations are perishable in the sense that unused
capacity can never be recovered.
Competition on dimensions other than price – on product
features, support services, delivery time, or brand image, for
instance – is less likely to erode profitability because it improves
customer value and can support higher prices. Also, rivalry
focused on such dimensions can improve value relative to
substitutes or raise the barriers facing new entrants. While non-
price rivalry sometimes escalates to levels that undermine
industry profitability, this is less likely to occur than it is with
price rivalry. As important as the dimensions of rivalry is
w ther rivals compete on the same dimensions. When all or many
he competitors
NOTES
aim to meet the same needs or compete on the same
attributes, the result is zero-sum competition. Here, one firm’s
gain is often another’s loss, driving down profitability. While price
competition runs a stronger risk than non-price competition of
becoming zero sum, this may not happen if companies take care
to segment their markets, targeting their low-price offerings to
different customers.
Rivalry can be positive sum, or actually increase the average
profitability of an industry, when each competitor aims to serve
the needs of different customer segments, with different mixes
of price, products, services, features, or brand identities. Such
competition can not only support higher average profitability
but also expand the industry, as the needs of more customer
groups are better met. The opportunity for positive-sum
competition will be greater in industries serving diverse
customer groups. With a clear understanding of the structural
underpinnings of rivalry, strategists can sometimes take steps
to shift the nature of competition in a more positive direction.
How to analyse Industry - (Michael Porter, HBR-Jan, 2008)
 Analyse average industry profitability over a period
 3-5 year period can distinguish temporary/cyclical changes
from structural changes
 Understand the underpinnings of competition and the root
causes of profitability in an industry analysis, not
important to declare an industry attractive or unattractive
 Analyse industry structure quantitatively, than qualitatively
with lists of factors
 Quantify the 5 forces – % age of buyer’s total cost
accounted for by industry’s product (to understand buyer
price sensitivity);
%age of industry sales required to fill a plant or operate
logistical network of efficient scale (to assess barriers to
entry); buyer’s switching cost (to determine inducement
an entrant or rival must offer customers)
 Define relevant industry – Products, exclusive/indirect
industry, scope, competition
 Identify and segment participants – buyers,
suppliers, competitors, substitutes and potential
entrants
 Assess drivers of each competitive force – determine which
are strong and weak – Why
 Determine overall industry structure and consistency –
profitability levels and reasons, controlling factors; are
more profitable players better positioned wrt the 5 forces
 Analyse future changes (+/–) in each force
 Aspects ofindustry structure, influenced by company,
competitors or new entrants
 Common Pitfalls
 Defining industry – too broadly or too narrowly
NOTES  Paying equal attention to all forces than focusing on the

most important ones
 Confusing effect (price sensitivity) with cause (buyer economics)
 Using static analysis that ignores industry trends
 Confusing cyclical or transient changes with true structural
changes
 Use framework for strategic choices than declare industry
– attractive/unattractive
Fill in the blanks:

The job of the strategist is to understand and cope with……………………….
A healthy industry structure should be as much a competitive concern toas their company’s own position.
New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate ofneces
The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction entrants can expect from …
If reaction is vigorous and protracted enough, the profit potential of participating in the industry can fall below the …………………….
Substitutes not only limit profits in normal times, they also reduce thean industry can reap in good times.
High rivalry limits theof an industry.
The strength of rivalry reflects not just theof
competition but also the basis of competition.
The competitive forces reveal theof
industry competition.
Consider the metals and mining industry in India. Outline the competitive forces that shall aff
The strength of rivalry reflects not just the intensity of competition but also the basis of competition. The dimensions on which competitio
NOTES
5.4 PESTLE ANALYSIS

Originally designed as a business environmental scan, the
PEST or PESTLE analysis is an analysis of the external macro
environment (big picture) in which a business operates. These
are often factors which are beyond the control or influence of a
business, however are important to be aware of when doing
product development, business or strategy planning.
5.4.1 HISTORY OF PESTLE

The term ‘PESTLE’ has been used regularly in the last 10+
years and its true history is difficult to establish. From our
research, the earliest know reference to tools and techniques
for ‘Scanning the Business Environment’ appears to be by
Francis J. Aguilar (1967) who discusses ‘ETPS’ – a mnemonic for
the four sectors of his taxonomy of the environment:
Economic, Technical, Political, and Social. Shortly after its
publication, Arnold Brown for the Institute of Life Insurance (in
the US) reorganised it as ‘STEP’ (Strategic Trend Evaluation
Process) as a way to organise the results of his environmental
scanning.
Thereafter, this ‘macro external environment analysis’, or
‘environmental scanning for change’, was modified yet again
to become a so-called STEPE analysis (the Social, Technical,
Economic, Political and Ecological taxonomies). In the 1980s,
several other authors including Fahey, Narayanan, Morrison,
Renfro, Boucher, Mecca and Porter included variations of the
taxonomy classifications in a variety of orders: PEST, PESTLE,
STEEPLE etc. Why the slightly negative connotations of PEST
have proven to be more popular than STEP is not known. There
is no implied order or priority in any of the formats.
Some purists claim that STEP or PEST still contain headings
which are appropriate for all situations, other claim that the
additional breakdown of some factors to help individuals and
teams undertaking an environmental scan.
Quite who and when added what elements to the mnemonic is
a mystery, but what we do know is that the actual order and
words contained are common to certain parts of the world and
streams of academic study. The term PESTLE is particularly
popular on HR and introductory marketing courses in the UK.
Others favour PEST, STEP or STEEPLE.
5.4.2 PESTLE ANALYSIS TOOL

PESTLE analysis is a useful tool for understanding the “big
picture” of the environment, in which you are operating, and
the opportunities and threats that lie within it. By
understanding the environment in which you operate (external
to your company or department), you can take advantage of
the opportunities and minimise the threats. Specifically the
PEST or PESTLE analysis is a useful tool for understanding risks
NOTES associated with market growth or decline, and as such the

position, potential and direction for a business or organisation.
The PESTLE analysis is often used as a generic ‘orientation’
tool, finding out where an organisation or product is in the
context of what is happening out side that will at some point
effect what is happening inside an organisation.
A PESTLE analysis is a business measurement tool, looking at
factors external to the organisation. It is often used within a
strategic SWOT analysis (Strengths, Weaknesses, Opportunities
and Threats analysis).
PESTLE is an acronym for Political, Economic, Social,
Technological, Legal and Environmental factors, which are used
to assess the market for a business or organisational unit
strategic plan.
TABLE 5.1: DESCRIPTION OF PESTLE ACRONYM
Political Economic Social

Regulatory/legislativ Economy, Tax, Demographics,
e, policy, Trade Market, Trade psychographics,
practices, Macro and cycles, interest consumer
external & exchange behaviour,
S
environment rates culture
Technological Legal Environmental
Technology, IPR, local & Ecology,
innovation, lifecycle international laws, environment,
competition energy, waste
The PESTLE analysis headings are a framework for reviewing a
situation, and can also be used to review a strategy or position,
NM
direction of a company, a marketing proposition, or idea. There
are many variants on this model including PEST analysis and
STEEPLE analysis.
Completing a PESTLE analysis can be a simple or complex
process. It all depends how thorough you need to be. It is a
good subject for workshop sessions, as undertaking this
activity with only one perspective (i.e. only one persons view)
can be time consuming and miss critical factors.
Use PESTLE analysis for business and strategic planning,
marketing planning, business and product development and
research reports.
The PESTLE template below includes sample questions or
prompts, whose answers are can be inserted into the relevant
section of the table. The questions are examples of discussion
points, and should be altered depending on the subject of the
analysis, and how you want to use it. Make up your own
PESTLE questions and prompts to suit the issue being analysed
and the situation (i.e. the people doing the work and the
expectations of them).
NOTES
It is important to clearly identify the subject of a PESTLE
analysis (that is a clear goal or output requirement), because
an analysis of this type is multi faceted in relation to a
particular business unit or proposition – if you dilute the
focus you will produce an unclear picture – so be clear about
the situation and perspective that you use PESTLE to analyze.
A market is defined by what is addressing it, be it a product,
company, organisation, brand, business unit, proposition, idea,
etc, so be clear about how you define the market being
analysed, particularly if you use PESTLE analysis in workshops,
team exercises or as a delegated task. The PESTLE subject
should be a clear definition of the market being addressed,
which might be from any of the following standpoints:
 A company looking at its market
 A product looking at its market
 A brand in relation to its market
 A local business unit or function in a business
 A strategic option, such as entering a new market or
launching a new product
 A potential acquisition
 A potential partnership
 An investment opportunity
Be sure to describe the subject for the PESTLE analysis clearly
so that people contributing to the analysis, and those seeing
the finished PESTLE analysis, properly understand the purpose
of the PESTLE assessment and implications.
5.4.3 ON TO SWOT ANALYSIS

To take the PESTLE analysis forward you can integrate the
results into your SWOT.
The outputs from the BIR/ SWOT will provide you with your
internal strengths and weaknesses.
Have a look at the HIGH impacts from the PESTLE. Some will be
positive in nature, others will be negative. List these on your
SWOT analysis under OPPORTUNITIES and THREATS.
The PESTLE model is a useful environmental scan as part
of a diagnostic process. The PESTLE analysis tool can be used
in association with the Business Improvement Review (BIR) – a
highly structured and holistic SWOT tool. The PESTLE models
can help to identify the context in which a business operates
and provide a context for change. A PESTLE analysis can
provide a valuable agenda upon which to use a Business
Improvement Review (BIR) to help identify the strengths and
weaknesses (SWOT) of an organisation, as apart of an
organisational change process.
NOTES 5.4.4 PEST-G OR PEST-E

There have been some changes to the way PEST is being used
in 2009, with the addition of G for Green or E for Environment.
Within the PESTLE version of course this is already catered for.
It has taken some time, but now those faithful to PEST rather
than PESTLE are starting to change and add a new variant.
Fill in the blanks:

Originally designed as a business environmental scan, the
…………. or ………….. analysis is an analysis of the external macro environment (big picture) in w
A PESTLE analysis is a business measurement tool, looking at factorsto the organisation.
PESTLE is an acronym for …………., ………….,,
………….., ………… andfactors.
Walmart wants to enter into the Indian multi-brand retail industry. Conduct PESTLE analysis for Walmart’s entry strategy in India.
5.5 COMPETITION AND VALUE

The competitive forces reveal the drivers of industry
competition. A company strategist who understands that
competition extends well beyond existing rivals will detect
wider competitive threats and be better equipped to address
them. At the same time, thinking comprehensively about an
industry’s structure can uncover opportunities: differences in
customers, suppliers, substitutes, potential entrants, and rivals
that can become the basis for distinct strategies yielding
superior performance. In a world of more open competition and
relentless change, it is more important than ever to think
structurally about competition.
Understanding the Industry Structure

Understanding industry structure is equally important for
investors as for managers. The five competitive forces reveal
whether an industry is truly attractive, and they help investors
anticipate positive or negative shifts in industry structure
before they are obvious. The five forces distinguish short-term
blips from structural changes and allow investors to take
advantage of undue pessimism or optimism. Those companies
whose strategies have industry-transforming potential become
far clearer. This deeper thinking about competition is a more
powerful way to achieve genuine investment success than
the
NOTES
financial projections and trend extrapolation that dominate
today’s investment analysis.
Common Pitfalls
If both executives and investors looked at competition this way,
capital markets would be a far more effective force for
company success and economic prosperity. Executives and
investors would both be focused on the same fundamentals
that drive sustained profitability. The conversation between
investors and executives would focus on the structural, not the
transient. Imagine the improvement in company performance –
and in the economy as a whole – if all the energy expended in
“pleasing the Street” were redirected toward the factors that
create true economic value.
Differences in Industry Profitability

The average return on invested capital varies markedly from
industry to industry. Between 1992 and 2006, for example,
average return on invested capital in U.S. industries ranged as
low as zero or even negative to more than 50%. At the high
end are industries like soft drinks and pre-packaged software,
which have been almost six times more profitable than the
airline industry over the period.
Do a company’s actions to “please the street” deprive it of genuine opportunities to create value? Discuss.
5.6 INDUSTRY STRUCTURE

Now after seeing the forces what force the companies to make
their strategy we will see that what is the structure of industry
and what are its determinants. A final dimension of industry
that is important to the performance of new firms is industry
structure. The structure of the industry refers to the nature of
barriers to entry and competitive dynamics in the industry. Four
characteristics of industry structure are particularly important
to the performance of new firms in the industry: capital
intensity, advertising intensity, concentration and average firm
size.
Capital intensity measures the importance of capital as
opposed to labour in the production process. Some industries,
such as aerospace, involve a great deal of capital and relatively
little labour. Other industries, such as textiles, involve relatively
little capital and a great deal of labour.
New firms perform better in labour intensive industries (ones
where work matters more than money) than in capital
intensive ones. Why? At the time that they are founded, new
firms lack cash flow from existing operations. Yet new firms
need to expend capital to establish the organisation and create
production and distribution
NOTES assets. Because new firms must expend capital before they
have cash flow from operations, they must obtain capital from
external capital markets. Capital obtained from financial
markets is more expensive than internally generated capital.
Investors demand a premium for bearing the risk that comes
from the gap of information between investors and
entrepreneurs. The magnitude of this premium is related to the
size of the capital requirement necessary to create the
business. The larger the capital requirement, the greater the
disadvantage faced by new firms in the industry.
New firms are disadvantaged relative to established firms in
more advertising intensive industries. Advertising is a
mechanism through which companies develop the reputations
that help them sell their products and services. To build a brand
name reputation through advertising, two conditions need to
be met. First, the advertising has to be repeated over time. The
capacities of human beings are such that they can only absorb
so much information at a time. Therefore, it takes time for new
firms to build their brand names, during which time they have
lesser reputations than existing firms. Second, economies of
scale exist in advertising. The cost of advertising is largely
fixed, regardless of the number of units of a product sold. As a
result, the cost per unit of advertising decreases with the
volume of sales. New firms tend to produce fewer units than
established firms because they begin operations at a small
scale, making their per unit advertising costs higher than those
of established firms. Of course, this advertising disadvantage is
more problematic the more important advertising is for an
industry, making new firms less competitive with established
firms in more advertising intensive industries than in less
advertising intensive ones.
New firms are disadvantaged relative to established firms in
more concentrated industries. Concentration is a measure of
the market share that is held by the largest companies in an
industry. For instance, in some industries, such as
pharmaceuticals, the largest companies account for almost all
of the market. In contrast, in more fragmented industries, like
dry cleaning, virtually no firm has even 1 percent of the total
market.
New firms perform relatively poorly in concentrated industries
because industry concentration provides large, established
firms with market power. In concentrated industries, such as
telecommunications firms offering local phone service,
established firms have the resources to keep new firms from
establishing a beachhead in the industry. As a result, they use
their monopoly or oligopoly profits to deter entry. Moreover,
entry can be deterred more easily in concentrated industries
than in fragmented industries for two reasons. First, in
fragmented industries, there are small, vulnerable firms that
can be challenged more successfully than the large, powerful
firms that are the only competitors in concentrated industries.
Second, in concentrated industries, established firms can
collude to keep other firms from entering. For instance, they
ca
n
co
lle
cti
ve
ly
cu
t
pri
ce
s
w
he
n
a
ne
w
NOTES
entrant comes into the industry until that entrant is driven out
of business and then raise prices again. Because collusion only
works if all of the colluders participate, it is much easier to pull
off when there are few players in an industry than when there
are many.
New firms perform better in industries in which the average
size of firms is small. New firms tend to begin small as a way to
minimise the risk of entrepreneurial miscalculation. That is, if
entrepreneurs begin small, they have a lower downside loss if
they are incorrect. In industries in which most firms are small,
starting a new firm at a small scale does not create much of a
disadvantage relative to the established firms in the industry. In
contrast, in industries where the average firm size is large,
starting small creates a number of disadvantages, such as the
inability to purchase in volume and higher average
manufacturing and distribution costs due to the absence of
economies of scale. As an example, think of the difference
between Web site developers and steel mills. Because the
average Web site developer is small, a new small Web site
developer is able to operate at almost the same scale, if not
the same scale, as the established players. However, the
average steel mill is quite large. So, if a new steel mill is
started small, it is initially at a great disadvantage relative to
the established firms with which it needs to compete.
5.6.1 FRAGMENTATION AND CONSOLIDATION

OF INDUSTRIES
Industries are fragmented for a wide variety of reasons, with
greatly differing implications for competing in them. Some
industries are fragmented for historical reasons — because of
the resources or abilities of the firms historically in them — and
there is no fundamental economic basis for fragmentation.
However, in many industries there are underlying economic
causes and the principal ones seem to be as follows:
 Low overall Entry Barriers: Nearly all fragmented industries
have low overall entry barriers. Otherwise they could
not be populated by so many small firms. However,
although a prerequisite to fragmentation, low entry
barriers are usually not sufficient to explain it.
Fragmentation is nearly always accompanied by one or
more of the other causes discussed below.
 Absence of Economies of Scale or Experience Curve: Most
fragmented industries are characterised by the absence of
significant scale economies or learning curves in any major
aspect of the business, whether it be manufacturing
processes characterised by few if any economies of scale
or experience cost declines, because the process is a
simple fabrication or assembly operation (fibreglass and
polyurethane molding), is a straightforward warehousing
operation (electronic component distribution), has an
inherently high labour content (security guards), has a
high personal service content or is intrinsically hard to
mechanise or routinise.
NOTES  High Transportation Cost: High transportation costs limit

the size of an efficient plant or production location despite
the presence of economies of scale. Transportation costs
balanced against economies of scale determine the radius
a plant can economically service. Transportation costs are
high in such industries as cement, fluid milk, and highly
caustic chemicals. They are effectively high in many
service industries because the service is “produced” at the
customer’s premises or the customer must come to where
the service is produced.
 High Inventory Costs or Erratic Sales Fluctuations: Although
there may be intrinsic economies of scale in the production
process, they may not be reaped if inventory carrying
costs are high and sales fluctuate. Here production has
to be built up and down, which works against the
construction of large-scale, capital-intensive facilities
and operating them continuously. Similarly, if sales are very
erratic and fluctuate over a wide range, then the firm with
large-scale facilities may not have advantages over the
smaller, more nimble firm, even if the large firm’s
production operations are more efficient in a fully loaded
state. Small-scale, less specialised facilities or distribution
systems are usually more flexible in absorbing output
shifts than large, more specialised ones, even though they
may have higher operating costs at a steady operating
rate.
 No Advantages of Size in Dealing with Buyers or Suppliers:
The structure of the buyer groups and supplier industries is
such that a firm gains no significant bargaining power in
dealing with these adjacent business from being large.
Buyers, for example, might be so large that even a large
firm in the industry would only be marginally better off in
bargaining with them than a smaller firm. Sometimes
powerful buyers or suppliers will be powerful enough to
actually keep companies in the industry small, through
intentionally spreading their business or encouraging entry.
 Diseconomies of Scalein Some Important Aspect: Diseconomies
of scale can stem from a variety of factors. Rapid product
changes or style changes demand quick response and
intense coordination among functions. Where frequent
introductions and style changes are essential to
competition, allowing only short lead times, a large firm
may be less efficient than a smaller one – which seems to
be true in women’s clothing and other industries in which
style plays a major role in competition.
If maintaining a low overhead is crucial to success, this factor
can favour the small firm under the iron hand of an owner-
manager, unencumbered by pension plans and other corporate
trappings and less subject to scrutiny by government
regulators than the large firm.
A high diverse product line requiring customisation to
individual users requires a great deal of user-manufacturer
int face on small volumes of product and can favour the small firm
er over the larger one.
NOTES
The business forms industry many be an example of one in
which such product diversity has led to fragmentation.
Although there are exceptions, if heavy creative content is
required, it is often difficult to maintain the productivity of
creative personnel in a very large company. One sees no
dominant firms in industries such as advertising and interior
design.
If close local control and supervision of operations is
essential to success the small firm may have an edge. In some
industries, particularly services like nightclubs and eating
places, an intense amount of close, personal supervision
seems to be required. Absentee management works less
effectively in such business, as a general rule, than an owner-
manager who maintains close control over relatively small
operation.
Smaller firms are often more efficient where personal service is
the key to the business. The quality of personal service and the
customer’s perception that individualised, responsive service is
being provided often seem to decline with the size of the firm
once a threshold is reached. This factor seems to lead to
fragmentation in such industries as beauty care and
consulting.
Where a local image and local contacts often are keys to the
business the large firm can be at a disadvantage. In some
industries like aluminium fabricating, building supply, and
many distribution business, a local presence is essential to
success. Intense business development, contact building, and
sales effort on a local level are necessary to compete. In such
industries a local or regional firm can often outperform a larger
firm provided it faces no significant cost disadvantages.
 Direct Market Needs: In some industries buyers’ tastes are
fragmented, with different buyers each desiring special
varieties of a product and willing (and able) to pay a
premium for it rather than accept a more standardised
version. Thus the demand for any particular product
variety is small, and adequate volume is not present to
support production, distribution, or marketing strategies
that would yield advantages to the large firm. Sometimes
fragmented buyers’ tastes stem from regional or local
differences in market needs, for example, in the fire engine
industry. Every local fire department wants its own
customised fire engine with many expensive bells, whistles
and other options. The nearly every fire engine sold is
unique. Production is job shop and almost purely assembly,
and there are literally dozens of fire engine manufacturers,
none of whom has a major market share.
 High Product Differentiation, Particularly if Based on Image:
If product differentiation is very high based on image, it
can place limits on a firm’s size and provide an umbrella
that allows inefficient firms to survive. Large size may be
inconsistent with an image of exclusivity or with the
buyer’s desire to have a brand
NOTES all his or her own. Closely related to this situation is one in
which key suppliers to the industry value exclusively or a
particular image in the channel for their products or
services. Performing artists, for example, may prefer
dealing with a small booking agency or record label that
carries the image they desire to cultivate.
 Exit Barriers: If there are exit barriers, marginal firms will
tend to stay in the industry and thereby hold back
consolidation. Aside from economic exit barriers,
managerial exit barriers appear to be common in
fragmented industries. There may be competitors with
goals that are not necessarily profit-oriented. Certain
businesses may have a romantic appeal or excitement that
attracts competitors who want to be in the industry
despite low or even nonexistent profitability. This factor
seems to be common in such industries as fishing and
talent agencies.
 Basic approach to overcome fragmentation: It recognises that
the root cause of the fragmentation cannot be altered.
Rather, the strategy is to neutralise the parts of the
business subject to fragmentation to allow advantages of
share in other aspects to come into play.
 Make Acquisitions for a Critical Mass: In some industries there
may ultimately be some advantages to holding a
significant share, but it is extremely difficult to build share
incrementally because of the causes of fragmentation. For
example, if local contacts are important in selling, it is
difficult to invade the territory of other firms in order to
expand. But if the firm can develop a threshold share, it
can begin to reap any significant advantages of scale. In
companies can be successful, provided the acquisitions
can be integrated and managed.
 Recognise Industry Trends Early: Sometimes industries
consolidate naturally as they mature, particularly if the
primary source of fragmentation was the newness of the
industry; or exogenous industry trends can lead to
consolidation by altering the causes of fragmentation.
Example: Computer service bureaus are facing increasing
competition from minicomputers and microcomputers. This
new technology means that even the small and
medium- sized firm can afford to have its own computer.
Thus, service bureaus increasingly have had to service the
large, multilocation company to continue their growth
and/or to offer sophisticated programming and other
services in addition to just computer time. This
development has increased the economies of scale in the
service bureau industry and is leading to consolidation.
In the service bureau example, the threat of substitute
products triggered consolidation by shifting buyers’ needs, and
thereby stimulating changes in service that were increasingly
subject to
NOTES
economies of scale. In other industries, changes in buyers’
tastes, changes in the structure of distribution channels, and
innumerable other industry trends may operate, directly or
indirectly, on the causes of fragmentation. Government or
regulatory changes can force consolidation by raising
standards in the product or manufacturing process beyond the
reach of small firms through the creation of economies of
scale. Recognising the ultimate effect of such trends, and
positioning the company to take advantage of them, can be an
important way of overcoming fragmentation.
5.6.2 CONSOLIDATION
Consolidation has long been used to achieve and sustain power
in the marketplace. Indeed, creating a monopoly position
through consolidation can be one of the most effective ways of
achieving economic returns through a business venture. This
long history does not imply, however, that consolidation
strategies have remained the same. Using historical
documentation and an analysis of current merger and
acquisition activity, we show how consolidation strategies have
evolved through the past century, and how they could be
improved using a more rigorous framework. As with the prior
waves, consolidation is ultimately encouraged by changes in
the external environment, and many factors align to drive the
current boom. However, the current wave of consolidation is
much broader, spanning industrial and service industries. In
addition, specialised financial players have joined the
traditional consolidators, resulting in even greater market
activity.
We certainly recognise that success for a consolidation play
relies significantly on implementation. Our 5 C’s may suggest
that an industry is ripe for a consolidation play only to have the
consolidator fail during implementation. Conversely, our
framework may suggest that successful consolidation is
unlikely but a superior consolidator could overcome the
negative issues.
The framework is meant to guide thinking about consolidations
and highlight the factors that will ultimately influence success.
As depicted in Figure 5.2, the 5 C’s are Capital access
restricted; Cultures and regions compatible; Customers and
competitors receptive; Change catalysts unlikely; and
Competitive advantage realizable for the consolidator. Each
element of the framework will be detailed further in following
sections, but we first present a quick note on the interaction
between the variables. The outer four variables address the
major industry issues and highlight potential pitfalls. They are
focused on the industry as a whole and should apply somewhat
uniformly across individual businesses.
They should be examined by asking: “Is this issue significant in
this industry?” If the answer is affirmative, then consolidation
may well be successful. However, the fifth and centre variable
is more business specific and should be examined by asking:
“Do these opportunities
NOTES exist and are they realizable?” Essentially, the ultimate success
in a consolidation play relies upon the proper implementation
of the fifth variable.
Underlying this analysis must be the broader question of:
“Why is this industry fragmented now and what has changed
to make consolidation possible?” According to Michael Porter in
Competitive Strategy, industries are usually fragmented for five
general reasons. These reasons will be addressed in turn as
they pertain to each of our 5 C’s but it is useful to summarise
them here. They are:
 Low entry barriers and/or high exit barriers
 Lack of power advantages with buyers and/or suppliers
Capital access restricted
Change catalysts unlikely Cultures and regions compatible

Competitive advantage to consolidator
Customers and competition receptive
NMI
Figure 5.2: Porter’s 5 C Model
 No economies of scale or scope
 Regional issues: high transport costs, high inventory costs,
or diverse markets
MS
 Regulatory issues
There is some obvious overlap with some of our 5 C’s. Porter’s
reasons are a useful starting point for understanding industry
fragmentation but fail to fully cover all potential issues of a
consolidation strategy. We highlight his work because it
provides a useful foundation upon which to more deeply
examine a consolidation play using the 5 C’s. In the following
sections, we will address each of the 5 C’s in turn and
incorporate the issues that Porter raises into our discussion.
Capital Access Enhanced

Fragmented industries are populated with businesses that are
almost by definition small, private companies. As such, these
businesses may face a more expensive cost of capital than
they could get from the public markets. Thus, growth and
capital reinvestment in these small businesses is limited or at
least costly, which explains the evolution of the fragmented
industry.
NOTES
To invest and grow, the businesses would either have enough
size to go public or find more favourable private capital. Either
way, obtaining a cheaper cost of capital may create an
advantage within the industry and allow for growth. This is the
attractiveness for consolidators of industries with restricted
capital access. A consolidated firm will not face such high
transaction and information costs in the capital markets
because of the economies of scale it will enjoy. However,
industries with few capital requirements and no need for
growth may not necessarily need cheaper capital.
Thus, to determine if this variable is both significant within the
industry and suggests that industry consolidation will be
successful, we need to ask several questions:
 Do industry players face a high cost of capital that would
be cheaper in a consolidated firm?
 Is capital a significant enough factor in the industry that
cheaper capital would it create a significant competitive
advantage?
 Will the capital markets support a consolidation play in this
industry?
If the answer is affirmative to all three, then this variable
suggests that industry consolidation will be successful. While
most industries will suggest an affirmative answer to the first
two questions, there may be few industries where cheaper
capital is somewhat irrelevant.
Example: The beauty salon industry has few capital
requirements and is certainly fragmented. Many, if not all,
salons are privately owned by small business owners. The
industry is near saturation in most markets and thus, there are
few opportunities for growth. The retail channels are evolving
into the shopping malls but for the most part, capital
requirements remain small. Thus, restricted capital access is
not a major concern.
There may also be an example of a fragmented industry that
enjoys cheap capital that could not gain even cheaper capital
for a consolidated firm.
The final question is perhaps the most basic but also most
important. Currently, the capital markets are strong and willing
to support consolidation plays. An economic downturn will sour
the market appetite for such plays and could spell disaster for
a consolidated firm.
Cultures and Regions Compatible

Fragmented industries develop for a variety of reasons. These
vary from market segments that require specialised businesses
and products to the historical evolution of the industry. Using
Porter’s work, low barriers to entry and lack of a power
advantage over buyers and/or suppliers may account for the
historical development of fragmentation of this industry. Porter
also highlights regional issues, such as high transportation
costs, as a reason for industry
NOTES fragmentation. Another potential reason for industry

fragmentation may simply be the personalities of the firm
owners, who want to run their own businesses.
The fundamental outcome of all of these factors is that the
cultures and regions of the individual businesses may be very
different. Cultural issues can be further subdivided into both
regional and industry differences. Regional cultures may seem
relatively straightforward but are often subtle and can be often
overlooked. Industry cultures include not only the personalities
of the operators in the industry but also the personalities and
norms of the various individuals and organisations that interact
with the industry. Finally, the industry may dictate a need for
distinct regional operations that may hinder a consolidator’s
ability to create competitive advantages.
Consolidators rarely mention this variable. Unfortunately, we
suspect it is also one of the primary reasons for consolidation
failure. Many times, these issues are downplayed or worse,
overlooked. They emerge during implementation and may
quickly sabotage other successes. An honest appraisal of the
feasibility of consolidation among business cultures and across
regions is essential. One must ask the following questions:
 Are there distinct cultures present within the industry and
the individual businesses?
 Is there no economic reason for distinct regional orientation?
 Are the cultures and regions realistically compatible across
businesses?
An affirmative answer to all three suggests that industry
consolidation will succeed. However, assessing compatibility is
extremely difficult, primarily because fully identifying and
analysing cultures is so difficult. The auto service and home
contracting industries have historically been attractive areas
for a consolidation play. However, the culture of the businesses
and the workers in such industries does not lend itself to
compatibility.
In the home contracting business, workers operate as
individual sub-contractors, generally responsible to themselves
only. Home contractors face a continual management challenge
to meet deadlines and budgets in the face of all these
individuals. A consolidation of such an industry would require a
break in the paradigm with which the workers have grown
comfortable.
Example: The Fortress Group in Washington, DC is attempting to
consolidate home building. (Mayer, 1997; Comer, 1997) Their
primary obstacle (the main focus of the criticism against them)
is that they will be unable to integrate the numerous
independent operators into a unified business team.
There are several other examples of industries where
consolidation has failed due to cultural and regional issues.
NOTES
Example: The Foster Management Group attempted an
unsuccessful consolidation in mental healthcare. Despite the
economic benefits of consolidation, the primary roadblock to
success was that the psychiatrists were unwilling to give up
their autonomy to a large organisation.
Finally, the dental industry might, at first, seem like a potential
consolidation play. However, many people probably enter
dentistry as an opportunity to become small business owners.
They are less attracted to the actual work of being a dentist. As
such, they are unlikely to be receptive to a consolidation play
that will strip away their ability to manage their own business.
Customers and Competitors Receptive

The historical evolution of fragmented industries has affected
the customers and competitors. As Porter would assert, it is
likely that there has been little, if any, power advantage over
buyers and suppliers. Both the customers of the industry and
the competitors within the industry are likely to be comfortable
in their expectations. A consolidator entering the industry is
likely to rock the boat and thus, the effect needs to be
examined closely. This variable contains several deeper issues
as well. With the customers, issues of branding and customer
perception and acceptance are relevant. With competitors,
issues of response tactics and willingness to be consolidated
arise. All issues fundamentally rest on the goal of successfully
ascertaining the overall market response to a consolidation
play. The following general questions should be addressed:
 Is this a relatively static industry with set expectations
among all participants?
 Will customers perceive a consolidator negatively?
 Are competitors likely to fight at every turn along multiple fronts?
An affirmative answer to all three suggests that a consolidator
will face stiff opposition and may not be able to successfully
consolidate the industry. In the funeral home industry, for
example, the answers to the first two are affirmative.
Customers are accustomed to family- owned funeral parlours
that are members of the community. A national funeral parlour
chain would certainly face negative customer perceptions. A
consolidator looking to exploit economies of scale by
performing embalming services at a central assembly-line style
facility would not be well received. These issues can be
resolved, but they must be recognised and addressed early.
Service Corporation International has been able to consolidate
funeral homes by preserving the compassionate front to the
customer despite leveraging economies of scale.
Another example of customer perceptions as potential barriers
to consolidation is the current backlash against Health
Maintenance Organisations. As a result of consolidations in
healthcare and
NOTES the fallout on customers, big, economically efficient firms are

perceived as cold and impersonal. These issues must be
overcome for consolidation to succeed. With competitors, the
consolidator will face two issues. First, will the competitive
response be strong? While this might seem unlikely in a
fragmented industry, there may be underlying relationships or
other factors that may be exploited against the consolidator.
Second, and possibly most important, will stiff competitive
resistance force a consolidator to pay high premiums for
acquisitions? This is certainly less preferred than consolidating
an industry where businesses are more eager to sell. Quite
simply, the higher the premium the consolidator is forced to
pay, the harder it will be to eventually succeed in the industry.
Change Catalysts Favourable

Change catalysts can be both a positive and a negative issue
for a consolidation play. In the positive light, change catalysts
can alter a fragmented industry to enable successful
consolidation. In the negative, change catalysts either prohibit
successful consolidation or worse, disrupt a new or established
consolidated industry. Regulatory issues and technological
changes are the two most important factors in this variable.
They are the primary change catalysts that can affect
industries. Fragmented industries may have evolved under a
particular regulatory or technological paradigm. When this
paradigm shifts, with a new regulatory environment or a new
technology, the industry may be immediately ripe for
consolidation. Thus, the major questions for this variable are:
 Have change catalysts affected this industry?
 Are these change catalysts likely to further affect this industry?
 Does a consolidated firm stand to be affected negatively
by new changes?
If the answer to all three questions is affirmative, then a
consolidation play will likely be unsuccessful. The key here is
that the industry should not be facing a tremendous amount of
uncertainty in the future. While a catalyst may have created
the opportunity for consolidation, the future industry should be
relatively stable and free of major regulatory or technological
factors.
A prime regulatory environment for consolidation may occur if
there is no natural monopoly already and/or if there is one
specific body that regulates the industry. In such a case, a
consolidator can be assured that the likelihood of major change
catalysts altering the industry is low. It is also useful to
examine and understand the interaction between regulation
and the fundamental economic forces that determine industry
structure and would affect consolidation.
Currently, some of the major consolidation plays have arisen
out of the change catalysts. The tower industry, for example,
was extremely fragmented in the past. With the utilities
deregulation and the
NOTES
explosion of cellular services, the tower industry has been
thrust into the limelight as a profitable consolidation play.
However, as quickly as these catalysts can create a
consolidation opportunity, they can spell doom for a
consolidated industry.
Competitive Advantage Realizable for the Consolidator

Identification and full investigation of the first four primary
variables is essential to this fifth variable. While the first four
highlight the areas of concern that are not necessarily
controllable by the consolidator, the fifth rests on the
consolidator’s ability to implement successfully. Indeed,
potential pitfalls raised among the first four issues may be
addressed and overcome given complete analysis and proper
implementation of the fifth variable.
The two primary competitive advantages for the consolidator are:
 The ability to exploit economies of scale and/or scope.
 The ability to leverage management talent.
These advantages are frequently cited in the popular literature
today. The major issues that consolidators face, such as
branding, tend to fall into one of these two buckets. Given that
the nature of these advantages is well documented in strategy
texts, we will not explain them in detail here. Suffice to say
that properly identifying and realising these advantages may
seem simpler in theory than in practice.
One particular example of successful execution is Wayne
Huizenga. He created economies of scale through centralised
purchasing and/ or management of assets. In the video rental
business, he gained scale with Blockbuster to negotiate
cheaper video purchase prices. In Waste Management’s trash
and recycling services, he gained scale to enable cheaper
management and maintenance of a trash hauler fleet.
Huizenga was able to leverage management by gobbling up
mom and pop video stores and immediately converting them
to the Blockbuster format with national management. Despite
current analyst concerns for the companies, Huizenga’s
consolidation plays were viewed as highly successful. Whether
through an actual set of guidelines or just strong intuition,
Huizenga has been able to identify potential industries where a
consolidation play will work. More importantly, he has been
able to implement their identified goals properly.
Success Requires Careful Implementation

Many agents have attempted consolidation over the past century of
U.S. business. Some have been extraordinary successes, but
some have failed. The new rise in attempted consolidation
points to an even greater need for a systematic approach to
developing consolidation strategies.
The 5 C’s framework should be used for identifying and
analysing fragmented industries where a consolidation play will
likely be
NOTES profitable. It is meant as a guide and tool to structure what is

currently intuition and loose guidelines in most minds. The 5
C’s framework is a systematic structure in which to answer the
following fundamental questions:
 Why is this industry fragmented?
 What are the opportunities and issues that must be addressed?
 Who are the industry stakeholders that a consolidation will affect?
 Where are the obstacles for a consolidation play?
 How can this consolidation best be implemented with
these issues in mind?
As stated previously, implementation will be the key to
eventual success regardless of the obstacles or opportunities
identified by the framework. Despite the level of industry
attractiveness, individual success is highly dependent on the
approach and persistence of the consolidator. Beyond
implementation, a final issue remains. How do you continue
to succeed and grow beyond initial industry consolidation? This
question is certainly beyond the scope of this framework but
bears mentioning nonetheless. Slow growth and few
opportunities may still characterise fragmented industries
where a consolidation play will work. Huizenga has been
criticised for bailing out on his ventures when growth of the
consolidated company was slowing.
Fill in the blanks:

………… measures the importance of capital as opposed to labour in the production process.
………….. demand a premium for bearing the risk that comes from the gap of information bet
The cost of …………….. is largely fixed, regardless of the number of units of a product sold.
has long been used to achieve and sustain power in
the marketplace.
Prepare a presentation on the steps taken by McDonalds to consolidate its position in the Indian QSR (quick service restaurant) industry.
NOTES
The consolidator enters and realises competitive advantages over other industry players and may even gain most if not all of the market. H
5.7 TECHNOLOGY LIFE CYCLE

The Technology Life Cycle (TLC) describes the commercial gain
of a product through the expense of research and
development phase, and the financial return during its “vital
life”. Some technologies, such as steel, paper or cement
manufacturing, have a long lifespan (with minor variations in
technology incorporated with time) whilst in other cases, such
as electronic or pharmaceutical products, the lifespan may be
quite short.
The Technology Life Cycle associated with a product or
technological service is different from Product Life Cycle (PLC)
dealt with in Product Life Cycle Management. The latter is
concerned with the life of a product in the market-place in
respect of timing of introduction, marketing measures and
business costs. The technology underlying the product (such as
that of a uniquely flavoured tea) may be quite marginal but the
process of creating and managing its life as a branded product
will be very different.
Figure 5.3: Technology Life Cycle Path

The technology life cycle is related to the time and cost of
developing the technology, the timeline of recovering cost and
modes of making
NOTES the technology yield a profit proportionate to the costs and

risks involved. The Technology Life Cycle may, further, be
protected during its cycle with patents and trademark seeking
to lengthen the cycle and to maximise the profit from it.
The development of a competitive product or process can have
a major impact on the lifespan of the technology, making it
shorter. Equally, the loss of patent rights through litigation, or
loss of its secret elements (if any) through leakages also work
to reduce its lifespan. Thus, it is apparent that the
‘management’ of the Technology Life Cycle is an important
aspect of technology development.
In the simplest formulation, innovation can be thought of as
being composed of research, development, demonstration, and
deployment.
5.7.1 FOUR PHASES OF THE TECHNOLOGY LIFE CYCLE

The Technology Life Cycle may be seen as composed of four phases:
 The research and development (R&D) phase (sometimes
called the “bleeding edge”) when incomes from inputs are
negative and where the prospects of failure are high.
 The ascent phase when out-of-pocket costs have been
recovered and the technology begins to gather strength by
going beyond some Point A on the Technology Life Cycle
(sometimes called the “leading edge”).
 The maturity phase when gain is high and stable, the
region, going into saturation, marked by M.
 The decline (or decay phase), after a Point D, of reducing
fortunes and utility of the technology.
5.7.2 LICENSING OPTIONS

In modern world’s business trends, with Technology Life Cycles
are shortening due to competition and rapid innovation, a
technology becomes technically licensable at all points of the
Technology Life Cycle, whereas earlier, it was licensed only
when it was past through its stage of maturity.
Large corporations develop technology for their own
advantage and not with the objective of licensing. The
tendency to license out technology only appears when there is
a threat to the life of the Technology Life Cycle (business gain)
as discussed later.
5.7.3 LICENSING IN THE R&D PHASE

There are always smaller firms (SMEs) who are improperly
situated to finance the development of innovative Research
and Development in the post-research and early technology
phases. By sharing incipient technology under certain
conditions, substantial risk financing can come from third
parties. This is a form of quasi-licensing which takes various
formats.
NOTES
Even the big corporate houses may not wish to bear all
costs of development in areas of crucial and high risk (such
as aircraft development) and may seek means of spreading
it to the stage that proof-of-concept is obtained.
In the case of small and medium firms, entities such as venture
capitalists can enter the scene and help to materialise
technologies. Venture capitalists accept both the costs and
uncertainties of Research & Development, and that of market
acceptance, in reward for high returns when the technology
proves itself. Apart from finance, they may provide networking,
management and marketing support. Venture capital connotes
financial as well as human capital.
Large firms may opt for Joint Research and Development or
work in a consortium for the early phase of development. Such
vehicles are called strategic alliances – strategic partnerships.
With both venture capital funding and strategic (research)
alliances, when business gains begin to neutralise
development costs (the Technology Life Cycle crosses the X-
axis), the ownership of the technology starts to undergo
change.
In the case of smaller firms, venture capitalists help clients
enter the stock market for obtaining substantially larger funds
for development, maturation of technology, product promotion
and to meet marketing costs.
Example: A major way is through Initial Public Offering (IPO)
which invites risk funding by the public for potential high gain.
At the same time, the IPOs enable venture capitalists to
attempt to recover expenditures already incurred by them
through part sale of the stock pre-allotted to them (subsequent
to the listing of the stock on the stock exchange). When the
IPO is fully subscribed, the assisted enterprise becomes a
corporation and can more easily obtain bank loans, etc if
required.
Strategic alliance partners, allied on research, pursue separate
paths of development with the incipient technology of common
origin but pool their accomplishments through instruments
such as ‘cross- licensing’. Generally, contractual provisions
among the members of the consortium allow a member to
exercise the option of independent pursuit after joint
consultation; in which case the opted owns all subsequent
development.
5.7.4 LICENSING IN THE ASCENT PHASE

The ascent stage of the technology usually refers to
some point above Point A in the Technology Life Cycle diagram
but actually it commences when the Research and
Development portion of the Technology Life Cycle curve inflects
(only that the cash-flow is negative and unremunerative to
Point A). The ascent is the strongest phase of the Technology
Life Cycle because it is here that the technology is superior
to alternatives and can command
NOTES premium profit or gain. The slope and duration of the ascent
depends on competing technologies entering the domain,
although they may not be as successful in that period. Strongly
patented technology extends the duration period.
The Technology Life Cycle begins to flatten out (the region
shown as M) when equivalent or challenging technologies
come into the competitive space and begin to eat away market
share.
Till this stage is reached, the technology-owning firm would
tend to exclusively enjoy its profitability, preferring not to
license it. If an overseas opportunity does present itself, the
firm would prefer to set up a controlled subsidiary rather than
license a third party.
5.7.5 LICENSING IN THE MATURITY PHASE

The maturity phase of the technology is a period of stable and
remunerative income but its competitive viability can persist
over the larger timeframe marked by its ‘vital life’. However,
there may be a tendency to license out the technology to a
third-parties during this stage to lower risk of decline in
profitability (or competitively) and to expand financial
opportunity.
The exerciseofthis optionis, generally, inferior to seeking
participatory exploitation; in other words, engagement in joint-
venture, typically in regions where the technology would be in
the ascent phase, as say, a developing country. In addition to
providing financial opportunity it allows the technology-owner
a degree of control over its use. Gain flows from the two
streams of investment-based and royalty incomes. Further, the
vital life of the technology is enhanced in such strategy.
5.7.6 LICENSING IN THE DECLINE PHASE

After reaching a point such as D in the Figure 5.3, the earnings
from the technology begin to decline rather rapidly. To prolong
the life cycle, owners of technology might try to license it out
at some point L when it can still be attractive to firms in other
markets. This, then, traces the lengthening path, LL’. Further,
since the decline is the result of competing rising technologies
in this space, licenses may be attracted to the general lower
cost of the older technology (than what prevailed during its
vital life).
Licenses obtained in this phase are ‘straight licenses’. They are
free of direct control from the owner of the technology (as
would otherwise apply, say, in the case of a joint-venture).
Further, there may be fewer restrictions placed on the licensee
in the employment of the technology.
The utility, viability, and thus the cost of straight-licenses
depends on the estimated ‘balance life’ of the technology. For
instance, should the key patent on the technology have
expired, or would expire in a short while, the residual viability
of the technology may be limited, although balance life may be
governed by other criteria viz. know-how which could have a
lo
ng
er
lif
e
if
pr
op
erl
y
pr
ot
ec
te
d.
NOTES
It is important to note that the license has no way of knowing
the stage at which the prime, and competing technologies, are
on their TLCs. It would, of course, be evident to competing
licensor firms, and to the originator, from the growth,
saturation or decline of the profitability of their operations.
The license may, however, be able to approximate the stage
by vigorously negotiating with the licensor and competitors to
determine costs and licensing terms. A lower cost, or easier
terms, may imply a declining technology.
In any case, access to technology in the decline phase is a
large risk that the licensee accepts. (In a joint-venture this risk
is substantially reduced by licensor sharing it). Sometimes,
financial guarantees from the licensor may work to reduce
such risk and can be negotiated.
There are instances when, even though the technology
declines to becoming a technique, it may still contain
important knowledge or experience which the licensee firm
cannot learn of without help from the originator. This is often
the form that technical service and technical assistance
contracts take (encountered often in developing country
contracts). Alternatively, consulting agencies may fill this role.
Fill in the blank:

18. ………………. describes the commercial gain of a product through the expense of research and development phase, and the financial retu
5.8 INDUSTRY ANALYSIS IN PRACTICE
Parle has launched the first coffee flavoured soft drink in India called Café Cuba. Would it be prudent on the part of Parle to license the und
 Good industry analysis looks rigorously at the structural
underpinnings of profitability. A first step is to understand
the appropriate time horizon. One of the essential tasks in
industry analysis is to distinguish temporary or cyclical
changes from structural changes. A good guideline for the
appropriate time horizon is the full business cycle for the
particular industry. For most industries, a three-to-five-
year horizon is appropriate, although in some industries
with long lead times, such as mining, the appropriate
horizon might be a decade or more. It is average
profitability over this period, not profitability in any
particular year that should be the focus of analysis.
NOTES  The point of industry analysis is not to declare the industry

attractive or unattractive but to understand the
underpinnings of competition and the root causes of
profitability. As much as possible, analysts should look at
industry structure quantitatively, rather than be satisfied
with lists of qualitative factors. Many elements of the five
forces can be quantified: the percentage of the buyer’s
total cost accounted for by the industry’s product (to
understand buyer price sensitivity); the percentage of
industry sales required to fill a plant or operate a logistical
network of efficient scale (to help assess barriers to entry);
the buyer’s switching cost (determining the inducement an
entrant or rival must offer customers).
 The strength of the competitive forces affects prices,
costs, and the investment required to compete; thus the
forces are directly tied to the income statements and
balance sheets of industry participants. Industry structure
defines the gap between revenues and costs.
Example: Intense rivalry drives down prices or elevates the
costs of marketing, R&D, or customer service, reducing
margins. How much? Strong suppliers drive up input costs.
How much? Buyer power lowers prices or elevates the
costs of meeting buyers’ demands, such as the
requirement to hold more inventory or provide financing.
How much? Low barriers to entry or close substitutes limit
the level of sustainable prices. How much? It is these
economic relationships that sharpen the strategist’s
understanding of industry competition.
 Finally, good industry analysis does not just list pluses and
minuses but sees an industry in overall, systemic terms.
Which forces are underpinning (or constraining) today’s
profitability? How might shifts in one competitive force
trigger reactions in others? Answering such questions is
often the source of true strategic insights.
Towards the end of the last decade activity in the Indian aviation industry grew greatly. Many
5.9 DEFINING THE RELEVANT INDUSTRY

Defining the industry in which competition actually takes place
is important for good industry analysis, not to mention for
developing strategy and setting business unit boundaries.
Many strategy
NOTES
errors emanate from mistaking the relevant industry, defining it
too broadly or too narrowly. Defining the industry too broadly
obscures differences among products, customers, or
geographic regions that are important to competition, strategic
positioning and profitability. Defining the industry too narrowly
overlooks commonalities and linkages across related products
or geographic markets that are crucial to competitive
advantage. Also, strategists must be sensitive to the possibility
that industry boundaries can shift. The boundaries of an
industry consist of two primary dimensions. First is the scope of
products or services. For example, is motor oil used in cars part
of the same industry as motor oil used in heavy trucks and
stationary engines, or are these different industries? The
second dimension is geographic scope. Most industries are
present in many parts of the world. However, is competition
contained within each state, or is it national? Does competition
take place within regions such as Europe or North America, or
is there a single global industry?
The five forces are the basic tool to resolve these questions. If
industry structure for two products is the same or very similar
(that is, if they have the same buyers, suppliers, barriers to
entry, and so forth), then the products are best treated as
being part of the same industry. If industry structure differs
markedly, however, the two products may be best
understood as separate industries. In lubricants, the oil used
in cars is similar or even identical to the oil used in trucks, but
the similarity largely ends there. Automotive motor oil is sold
to fragmented, generally unsophisticated customers through
numerous and often powerful channels, using extensive
advertising. Products are packaged in small containers and
logistical costs are high, necessitating local production. Truck
and power generation lubricants are sold to entirely different
buyers in entirely different ways using a separate supply chain.
Industry structure (buyer power, barriers to entry, and so forth)
is substantially different. Automotive oil is thus a distinct
industry from oil for truck and stationary engine uses. Industry
profitability will differ in these two cases, and a lubricant
company will need a separate strategy for competing in each
area.
Differences in the five competitive forces also reveal the
geographic scope of competition. If an industry has a similar
structure in every country (rivals, buyers, and so on), the
presumption is that competition is global, and the five forces
analysed from a global perspective will set average
profitability. A single global strategy is needed. If an industry
has quite different structures in different geographic regions,
however, each region may well be a distinct industry.
Otherwise, competition would have levelled the differences.
The five forces analysed for each region will set profitability
there.
The extent of differences in the five forces for related products
or across geographic areas is a matter of degree, making
industry definition often a matter of judgment. A rule of thumb
is that where the differences in any one force are large, and
where the differences involve more than one force, distinct
industries may well be present. Fortunately,
NOTES however, even if industry boundaries are drawn incorrectly,

careful five forces analysis should reveal important competitive
threats. A closely related product omitted from the industry
definition will show up as a substitute, for example, or
competitors overlooked as rivals will be recognised as potential
entrants. At the same time, the five forces analysis should
reveal major differences within overly broad industries that will
indicate the need to adjust industry boundaries or strategies.
Consider a diversified business conglomerate like ITC. How has ITC tweaked its business mode
5.10 TYPICAL STEPS IN INDUSTRY ANALYSIS

 Define the relevant industry:
 What products are in it? Which ones are part of
another distinct industry?
 What is the geographic scope of competition?
 Identify the participants and segment them into groups, if
appropriate. Who are:
 the buyers and buyer groups?
 the suppliers and supplier groups?
 the competitors?
 the substitutes?
 the potential entrants?
 Assess the underlying drivers of each competitive force to
determine which forces are strong and which are weak and
why.
 Determine overall industry structure, and test the analysis
for consistency:
 Why is the level of profitability what it is?
 Which are the controlling forces for profitability?
 Is the industry analysis consistent with actual long-run
profitability?
 Are more-profitable players better positioned in
relation to the five forces?
 Analyze recent and likely future changes in each force,
both positive and negative.
 Identify aspects of industry structure that might be
influenced by competitors, by new entrants, or by your
company.
NOTES
Common Pitfalls
In conducting the analysis avoid the following common mistakes:
 Defining the industry too broadly or too narrowly.
 Making lists instead of engaging in rigorous analysis.
 Paying equal attention to all of the forces rather than
digging deeply into the most important ones.
 Confusing effect (price sensitivity) with cause (buyer economics).
 Using static analysis that ignores industry trends.
 Confusing cyclical or transient changes with true structural
changes.
 Using the framework to declare an industry attractive or
unattractive rather than using it to guide strategic choices.
The mobile computing industry has seen some major changes with the advent of the Android operating system. Is it a cyclical or transient
5.11 SUMMARY
 A competently conducted industry and competitive
analysis generally tells a clear, easily understood story
about the company’s external environment. Managers
become better strategists when they know what questions
to pose and what tools to use.
 The real meaning of strategy formulation is coping with
competition. Yet it is easy to view competition too narrowly
and too pessimistically.
 Understanding the competitive forces, and their underlying
causes, reveals the roots of an industry’s current
profitability while providing a framework for anticipating
and influencing competition (and profitability) over time.
 The threat of entry in an industry depends on the height of
entry barriers that are present and on the reaction
entrants can expect from incumbents. If entry barriers are
low and newcomers expect little retaliation from the
entrenched competitors, the threat of entry is high and
industry profitability is moderated.
 Originally designed as a business environmental scan, the
PEST or PESTLE analysis is an analysis of the external
macro environment (big picture) in which a business
operates. These are often factors which are beyond the
control or influence of a business, however are
important to be aware of when doing product
development, business or strategy planning.
NOTES  The Technology Life Cycle (TLC) describes the commercial

gain of a product through the expense of research and
development phase, and the financial return during its
“vital life”.
Industry Analysis: Industry analysis is a market strategy tool used by businesses to determine
Strategy Formulation: Strategy formulation is the process of determining appropriate cou
Retaliation: The act of responding violently to an act of harm or perceived injustice.
Economies of Scale: The decrease in unit cost of a product or service resulting from large-sca
Technology Life Cycle: The Technology Life Cycle (TLC) describes the commercial gain of a pro

1. What is the strategist’s goal in fighting with the
competitive forces?
2. Which five forces shape the strategy of an organisation? Explain.
3. How the power of buyer’s influences the strategy of an
organisation?
4. How industry analysis is significant for strategy formulation?
5. What are the typical steps in industry analysis?
6. Discuss the reasons for fragmentation and consolidation of
industries.
7. What do you mean by Licensing Options? Explain the
several phases of Licensing.
8. What do you understand by Technology Life Cycle? Explain
its four phases in detail.
9. Explain the PEST Analysis tool.
10. How relevant industry can be defined?
NOTES


Formulation of Strategy 1. antagonists
Five Competitive 2. Competition
Forces that Shape
Strategy
3. Strategists
4. investment
5. incumbents
6. cost of capital
7. bonanza
8. profitability
9. intensity
10. drivers
PESTLE Analysis 11. PEST, PESTLE
12. external
13. Political, Economic,
Social, Technological,
Legal, Environment
Industry Structure 14. Capital intensity
15. Investors
16. advertising
17. Consolidation
Technology Lifecycle 18. Technology Lifecycle
(TLC)

1. Refer to 5.2
The corporate strategist’s goal is to find a position in the
industry where his or her company can best defend itself
against these forces or can influence them in its favour.
The collective strength of the forces may be painfully
apparent to all the antagonists; but to cope with them, the
strategist must delve below the surface and analyse the
sources of each. Knowledge of these underlying sources of
competitive pressure provides the groundwork for a
strategic agenda of action.
2. Refer to 5.3,5.3.2,5.3.3,5.3.4,5.3.5 & 5.3.6
The five forces which shape the strategy of an organization
are - Threat of New Entrants, Bargaining power of buyers,
Threat of
NOTES Substitute Products or Services, Bargaining power of

suppliers and Rivalry among existing competitors.
3. Refer to 5.3.5
Powerful customers – the flip side of powerful suppliers –
can capture more value by forcing down prices,
demanding better quality or more service (thereby driving
up costs), and generally playing industry participants off
against one another, all at the expense of industry
profitability. Buyers are powerful if they have negotiating
leverage relative to industry participants, especially if they
are price sensitive, using their clout primarily to pressure
price reductions.
4. Refer to 5.8
Good industry analysis looks rigorously at the structural
underpinnings of profitability. A first step is to understand
the appropriate time horizon. One of the essential tasks in
industry analysis is to distinguish temporary or cyclical
changes from structural changes. A good guideline for the
appropriate time horizon is the full business cycle for the
particular industry. For most industries, a three-to-five-
year horizon is appropriate, although in some industries
with long lead times, such as mining, the appropriate
horizon might be a decade or more. It is average
profitability over this period, not profitability in any
particular year that should be the focus of analysis.
5. Refer to 5.10
Typical Steps in Industry analysis are: define the relevant
industry; identify the participants and segment them into
groups, if appropriate; assess the underlying drivers of
each competitive force to determine which forces are
strong and which are weak and why; determine overall
industry structure, and test the analysis for consistency;
analyze recent and likely future changes in each force,
both positive and negative and lastly, identify aspects of
industry structure that might be influenced by
competitors, by new entrants, or by your company.
6. Refer to 5.6.1
Industries are fragmented and consolidated for a wide
variety of reasons. These are- Low overall entry barriers,
absence of economies of scale or experience curve, high
transportation cost, high inventory cost or erratic sales
fluctuations, no advantage of size in dealing with buyers or
suppliers, diseconomies of scale in some important
aspect, direct market needs, high product differentiation
particularly if based on image, exit barriers basic approach
to overcome fragmentation, make acquisitions for a critical
mass and recognition of early industry trends.
NOTES
7. Refer to 5.7.2,5.7.3,5.7.4,5.7.5 & 5.7.6
In modern world’s business trends, with Technology Life
Cycles are shortening due to competition and rapid
innovation, a technology becomes technically licensable at
all points of the Technology Life Cycle, whereas earlier, it
was licensed only when it was past through its stage of
maturity. Large corporations develop technology for their
own advantage and not with the objective of licensing. The
tendency to license out technology only appears when
there is a threat to the life of the Technology Life Cycle
(business gain). The several phases of Licensing are –
licensing in the R&D phase, licensing in the Ascent phase,
licensing in the Maturity phase and licensing in the decline
phase.
8. Refer to 5.7 & 5.7.1
The Technology Life Cycle (TLC) describes the commercial
gain of a product through the expense of research and
development phase, and the financial return during its
“vital life”. The four phases of Technological Life Cycle
(TLC) are- Technology in the R&D phase, Technology in the
Ascent phase, Technology in the maturity phase and
Technology in the decline phase.
9. Refer to 5.4.2
PESTLE analysis is a useful tool for understanding the “big
picture” of the environment, in which you are operating,
and the opportunities and threats that lie within it. By
understanding the environment in which you operate
(external to your company or department), you can take
advantage of the opportunities and minimise the threats.
Specifically the PEST or PESTLE analysis is a useful tool for
understanding risks associated with market growth or
decline, and as such the position, potential and direction
for a business or organisation.
10. Refer to 5.9
Defining the industry in which competition actually takes
place is important for good industry analysis, not to
mention for developing strategy and setting business unit
boundaries. Many strategy errors emanate from mistaking
the relevant industry, defining it too broadly or too
narrowly. Defining the industry too broadly obscures
differences among products, customers, or geographic
regions that are important to competition, strategic
positioning and profitability. Defining the industry too
narrowly overlooks commonalities and linkages across
related products or geographic markets that are crucial to

SUGGESTED READINGS
 Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic
Management–Creating Competitive Advantage, McGraw–Hill,
Irwin, 2003.
NOTES  Johnson Gerry and Sholes Kevan, Exploring Corporate

 Michael Porter, Competitive Advantage, Free Press.
 Vipan Gupta, Kamala Gollakota and R. Srinivasan, Business
Policy and Strategic Management, Prentice–Hall of India,
2005.
 VSP Rao and V. Hari Krishna, Strategic Management – Text and
Cases, Excel Books.
E-REFERENCES
 http://med.virginia.edu/asp/wp-
content/uploads/sites/46/2014/03/ Porter-5-Forces-that-
Shape-Strategy.pdf
 http://pestleanalysis.com/
 http://www.slideshare.net/MBAMithlesh/technology-
life - cycle-17957782
C H
6
A P T E R
STRATEGIC MANAGEMENT PROCESS
CONTENTS
6. Introduction
1
6. Purposes of Strategic Management Process
2
6. Steps Involved in the Strategic Management
3 Process
6. Strategic Management Process
4
6.4.1 Situation Analysis
6.4.2 Strategy Formulation
6.4.3 Strategy Implementation
6.4.4 Strategy Evaluation
6. Strategy Formulation
5
6.5.1 Corporate Level Strategy Formulation
6.5.2 Business Level Strategy Formulation
6.5.3 Functional Level Strategy Formulation
6. Constraints and Strategic Choice
6
6. Strategy Implementation
7
6.7.1 Organising
6.7.2 Staffing
6.7.3 Directing
6.7.4 Motivational Techniques
6.8 Strategic Control and
6.9 Assessment Summary
6.10 Descriptive
6.12 and Hints
NOTES
STRATEGIC PROCESSES AND IMPLEMENTATION OF BAJAJ

MOTORS
The advertisement campaign with the punch line of “hunto”
(meaning unbelievable in Japanese) is synonymous with the
audacity of Rajiv Bajaj to challenge the likes of Honda Motors
in the sports bike segment of the competitive two-wheeler
industry. Ask about the strategic management process and all
you need to do is, delve into the doctrines of a famous
homeopath Dr.James Tyler Kent!
Ever since Rajiv Bajaj has assumed office at Bajaj Motors, he
has carved out a strategic management process that relies
on the homeopathic principle of the three-legged stool. In
the two-wheeler industry, a company can get easily lost in
the milling crowds of existing two-wheeler models unless it
opts for specialisation. Specialisation demands focus and
sacrifice. Hence, the age-old scooter models of Bajaj got the
axe. Bajaj decided to focus on the sports bike segment and
launch new models in succession.
The challenge was to analyse the situation, prepare a list of
options, check out for constraints that limited strategic
choice and then decide on the strategic implementation.
Bajaj understood the simple logic that brands pass through
the stages of the brand lifecycle, get old and then fade out.
Good companies are premised on their ability to say “no.”
Hence, keeping in mind the changing scenario of the Indian
two-wheeler industry in India, scooters had to make way for
fast, stylish and powerful bikes.
Focus in terms of strategy also meant answering another
NMI
question: “one product for all markets or all products in one
market?” Bajaj decided to narrow down the band of
products in accordance with the world-wide market trend.
Hence, Africa got Boxer, US, Europe and Australia got the
KTM and south Asian markets got the Pulsar and Discover.
How did he decide on the brands that were launched? He
MS
framed his answer in terms of the three legged stool
principle. Every product had to satisfy three criteria in the
context of the concerned market. Hence, if a bike could not
yield an EBIDTA of 20%, it was shelved. EBIDTA is Earnings,
before Interest, Taxes, Depriciation and Amortization. EBIDTA
is an indicator of a company’s financial performance which is
calculated by deducting expenses (excluding tax, interest,
depreciation and amortization) from revenues.
Coming down to implementation, Bajaj decided to compete
in terms of the economics of manufacturing units. Other
companies that were technology-based players had a high
component of fixed costs and hence had a high operating
leverage. Baja took reverse gear. So he opted for just 60
acres of land and an investment of rupees one fifty crore for
the Pantnagar plant. He assessed the annual production
capacity at one million bikes and annual revenue at rupees
three thousand crore. The manufacturing units were
equipped with lean manufacturing to reduce organisational
flab and maintain cost discipline. Manufacturing of several

Education
non- core components was outsourced. The result was that
the company had the advantage of working with negative
working capital.

Education
STRATEGIC MANAGEMENT PROCESS 163
NOTES

Describe the purposes of strategic management process
Explain the steps involved in the strategic management process
Define strategy formulation and strategy implementation Identify the strategic control and assessment
6.1 INTRODUCTION
A strategy is developed within a firm. The final product will
necessarily be shaped by the background of that firm, the
processes it has in place for arriving at basic business
decisions and the interests and perspectives of its senior
managers. Typically, these factors come together in a formal
strategy process through which strategy is defined and
evaluated by the firm’s managers.
The term ‘Strategic Management Process’ refers to the steps
by which management converts a firm’s mission, objectives
and goals into a workable strategy. In a dynamic environment
each firm needs to tailor its strategic management process in
ways that best suit its own capabilities and situational
requirements. Viewed broadly, the strategic management
process has two parts: an information process and a decision
process. The information process involves collecting and
analysing information about the external and internal
environments. External factors are taken into account to find
major opportunities and threats that now or will confront the
organisation. To survive and grow, every organisation,
invariably, must find how the situational factors have affected
its past and current performance. This must be followed by an
internal analysis to determine the organisation’s strategic
direction. Strategists carry out internal analysis to have a ‘feel’
of where their organisation has been and where it now is,
particularly with regard to internal strengths and weaknesses.
Information about the organisation’s strengths and
weaknesses, when combined with information about external
opportunities and threats, offers a stronger foundation for
informed decisions about strategic direction. The decision
process covers four important steps: development of
alternatives, choice, implementation and assessment. Based
on the external and internal analysis, strategists first identify
possible strategic alternatives and pick up those that help the
organisation reach its mission and objectives. In the next step,
the planners decide how and when to translate strategic
choices into action, followed by an evaluation of the
effectiveness and efficiency of the strategic direction the
organisation has followed.
NOTES PURPOSES OF STRATEGIC MANAGEMENT

6.2
PROCESS
Strategicmanagement basically aims at formulating and
implementing effective strategies.
Effective strategies, of course, are those that help a superior ‘fit’ between the organisation an
Strategies necessarily change over time to suit environmental
changes but, to remain competitive, organisations develop
strategies that focus on core competence, develop synergy
and create value for customers.
 Core Competence: An organisation’s core competence is
something it does exceptionally well in comparison to its
competitors. It reflects a distinct competitive advantage
(like superior research and development, mastery of a
technology, distribution channel, manufacturing efficiency
or customer service) that provides the firm (a) access to
variety of products/ markets (b) contributes greatly to
customer benefits in the end products and (c) is an
exclusive and inimitable preserve of the firm that is long-
lasting and cannot be easily copied by competitors.
 Synergy: When organisational parts interact to produce a
joint effort that is greater than the sum of the parts acting
alone, synergy occurs. Some call this the 1 + 1 = 3 effect.
In strategic management, managers are urged to achieve
as much market, cost, technology and management
synergy as possible when arriving at strategic decisions
(such as mergers, acquisitions, new products, new
technology etc.). When one product or service strengthens
the sales of one or more other products or services,
market synergy occurs. Wal-Mart’s new Supercentres and
Super K marts that put a discount store and a grocery
store under one huge roof (Crossroads, Mumbai;
Spencer’s in Chennai) are a good example of market
synergy in action. Cost synergy can occur in almost every
dimension of organised effort. When two or more products
can be designed by the same engineers, produced in the
same facilities, distributed through the same channels, or
sold by the same sales persons, overall costs will be lower
than if each product received separate treatment. In
Europe, today, banks and insurance companies are linking
up in an effort to market a wide array of financial products
that each would have trouble selling on its own (Wall Street
Journal). Technology synergy involves transferring
technology from one application to another, thus opening
up new markets. In management synergy also a similar
kind of technology transfer is needed. Management
synergy would be achieved, for example, if a software
product

Education
NOTES
company with weak roots in training and education line
hires a new CEO with strong academic and training
credentials. Ideally the new CEO would transfer his
technical skills to good effect.
 Value Creation: Exploiting core competencies and
achieving synergy help organisations create value for
their customers.
Fill in the blanks:

An organisation’s ……………………………. is something it does exceptionally well in comparison to its competitors.
Exploiting core competencies and achieving synergy help organisations create value for their ……………………….
Strategic …………………………. is achieved when a firm successfully formulates and implements a value creating strategy.
STEPS INVOLVED IN THE STRATEGIC

6.3
MANAGEMENT PROCESS
Dynamic in nature, the strategic management process is the
Maruti Suzuki is undoubtedly one of the most successful joint ventures in the Indian automobile industry. Prepare a presentation outlining
full set of commitments, decisions and actions needed for a
firm to achieve strategic competitiveness and earn above
average returns. Strategic competitiveness is achieved when a
firm successfully formulates and implements a value creating
Value is the sum total of benefits received and costs paid by the customer in a given situation. Ideally, the purpose of a strategy should be
strategy. When a firm implements such a strategy that other
firms are unable to duplicate or find too costly to imitate, this
firm has a sustainable competitive advantage. By achieving
strategic competitiveness and successfully exploiting its
competitive advantage, the firm is able to achieve above
average returns which are returns in excess of what an investor
expects to earn from other investments with a similar amount
of risk. ‘Risk’ here refers to an investor’s uncertainty about the
economic gains or losses that will result from a particular
investment (Hitt et al.).
NOTES
Figure 6.1: Strategic Management Process

Relevant strategic inputs from analyses of the internal and
external environments are needed for effective strategy
formulation, implementation and evaluation. In turn, effective
strategic actions are essential to achieve desired outcomes in
the form of strategic competitiveness and above average
returns. The various steps involved in the strategic
management process may be stated thus:
Vision, Mission and Objectives: In the organisational context,
vision is a picture of the organisation: the core values for which
an organisation stands and a clear description of what the
organisation wishes to become in the years ahead. A mission
statement, on the other hand, specifies what an organisation is
and why it exists. The strategic management process begins
with an evaluation of the organisation’s current vision, mission,
objectives and strategy. The principal value of a mission
statement lies in its specification of a firm’s ultimate aims. It
offers a sense of shared expectations among all levels and
generations of employees. It consolidates values over time and
across individuals and interest groups. It projects a glorified
sense of worth and intent that can be identified and
assimilated by external groups too. It also exhibits a firm’s
commitment to responsible action in line with the firm’s
internal (survival, growth, profitability) as well as external
(ethics, corporate governance, social responsibility) objectives.
External Analysis: The firm’s external environment is challenging
and complex. Because of the impact the external environment
has on performance, the firm must develop requisite skills to
identify opportunities and threats existing in that environment.
The external environment has three important parts:
 General environment (elements in the broader society that
affect industries and their firms)
 Industry environment (factors that influence a firm, its
competitive actions and responses, and the industry’s
profit potential) and
NOTES
 Competitive environment (in which the firm examines each
major rival’s future objectives, current strategies,
assumptions and capabilities).
Internal Analysis: In order to exploit environmental opportunities
to its advantage, a firm must have internal resources and
capabilities. A systematic internal appraisal helps a firm find:
 Where it stands in terms of its strengths and weaknesses
 Pick up opportunities that are in tune with its resource base
 Take steps to bridge any resource gaps and
 Select appropriate areas that help consolidate its position
in the industry.
A major task of strategists, while carrying out internal analysis,
is to match the conditions of the external environment with
the firm’s internal strengths and weaknesses. If a firm can
perform an activity better thanitsrivals, itthen possesses a
distinctive (or core) competence that helps the firm to build its
own source of competitive advantage. In the final analysis, the
choice of which strategy to pursue should be based on using
and exploiting the firm’s competitive advantage.
After the external and internal analysis, the firm tries to
formulate explicit strategic plans at three levels; corporate,
business and functional. These are then put into action using
leadership, structural designs, information systems and human
resources to good advantage.
Fill in the blank:

4.The information process involves collecting and analysing
…………………. about the external and internal environments.
How do the vision and mission of a company affect the strategic management process? Discuss.
6.4 STRATEGIC MANAGEMENT PROCESS
The strategic management process is made up of four
elements: situation analysis, strategy formulation, strategy
implementation and strategy evaluation. These elements are
steps that are performed, in order, when developing a new
strategic management plan. Existing businesses that have
already developed a strategic management plan will revisit
these steps as the need arises, in order to make necessary
changes and improvements.
6.4.1 SITUATION ANALYSIS

Situation analysis is the first step in the strategic management process.
NOTES
The situation analysis provides the information necessary to create a company mission statement. It involves “scanning and evaluating the
This analysis can be performed using several techniques.
Observation and communication are two very effective
methods.
To begin this process, organisations should observe the internal
company environment. This includes employee interaction with
other employees, employee interaction with management,
manager interaction with other managers, and management
interaction with shareholders. In addition, discussions,
interviews, and surveys can be used to analyse the internal
environment.
Organisations also need to analyse the external environment.
This would include customers, suppliers, creditors, and
competitors. Several questions can be asked which may help
analyse the external environment. What is the relationship
between the company and its customers? What is the
relationship between the company and its suppliers? Does the
company have a good rapport with its creditors? Is the
company actively trying to increase the value of the business
for its shareholders? Who is the competition? What advantages
do competitors have over the company?
6.4.2 STRATEGY FORMULATION

Strategy formulation involves designing and developing the
company strategies. Determining company strengths aids in
the formulation of strategies. Strategy formulation is generally
broken down into three organisational levels: operational,
competitive and corporate.
Operational strategies are short-term and are associated with the
various operational departments of the company, such as
human resources, finance, marketing, and production. These
strategies are department specific. For example, human
resource strategies would be concerned with the act of hiring
and training employees with the goal of increasing human
capital.
Competitive strategies are those associated with methods of
competing in a certain business or industry. Knowledge of
competitors is required in order to formulate a competitive
strategy. The company must learn who its competitors are and
how they operate, as well as identify the strengths and
weaknesses of the competition. With this information, the
company can develop a strategy to gain a competitive
advantage over these competitors.
Corporate strategies are long-term and are associated with
“deciding the optimal mix of businesses and the overall
direction of the organisation”. Operating as a sole business or
operating as a business with several divisions are both part of
the corporate strategy.
NOTES
6.4.3 STRATEGY IMPLEMENTATION
Strategy implementation involves putting the strategy into
practice. This includes developing steps, methods, and
procedures to execute the strategy. It also includes
determining which strategies should be implemented first. The
strategies should be prioritised based on the seriousness of
underlying issues. The company should first focus on the worst
problems, then move onto the other problems once those have
been addressed.
“The approaches to implementing the various strategies
should be considered as the strategies are formulated.” The
company should consider how the strategies will be put into
effect at the same time that they are being created. For
example, while developing the human resources strategy
involving employee training, things that must be considered
include how the training will be delivered, when the training
will take place, and how the cost of training will be covered.
6.4.4 STRATEGY EVALUATION

Strategy evaluation involves “examining how the strategy
has been implemented as well as the outcomes of the
strategy.” This includes determining whether deadlines have
been met, whether the implementation steps and processes
are working correctly, and whether the expected results have
been achieved. If it is determined that deadlines are not being
met, processes are not working, or results are not in line with
the actual goal, then the strategy can and should be modified
or reformulated.
Both management and employees are involved in strategy
evaluation, because each is able to view the implemented
strategy from different perspectives. An employee may
recognise a problem in a specific implementation step that
management would not be able to identify.
Fill in the blanks:

The decision process covers four important steps: development of alternatives, choice,and assessment.
Strategic management aims atand implementing
effective strategies.
Thestrategicmanagementprocessbeginswithan
………………… of the organisation’s current vision, mission, objectives and strategy.
In ordertoexploitenvironmentalopportunitiestoits advantage, a firm must have internal ……………… and ………………….
The situation analysis provides the information necessary to create a company ……………….. .
Strategy formulation involves designing and …………………….
the company strategies.
NOTES
Which is the toughest part in the strategic management process? In which step do companies face challenges? Discuss.
6.5 STRATEGY FORMULATION
The strategy evaluation should include challenging metrics and timetables that are achievable. If it is impossible to achieve the metrics and
6.5.1 CORPORATE LEVEL STRATEGY FORMULATION
Corporate level strategy pertains to the organisation as a
whole and the combination of business units and product lines
that make up the corporate entity. It addresses the overall
strategy that an organisation will follow. The process generally
involves selecting a grand strategy and using portfolio strategy
approaches to determine the types of businesses in which the
organisation should be engaged.
Grand strategy is the general plan of major action by which a
firm intends to achieve its long-term goals. It provides basic
direction for the strategic actions of a firm. Grand strategies fall
into four general categories: growth/expansion, stability,
retrenchment and combination.
Growth/Expansion Strategy: Organisations generally seek growth
in sales, market share or some other measure as a primary
objective. When growth becomes a passion and organisations
try to seek sizeable growth (as against slow and steady
growth), it takes the shape of an expansion strategy. The firm
tries to redefine the business, enter new businesses that are
related or unrelated or look at its product portfolio more
intensely. The firm can have as many alternatives as it wants
by changing the mix of products, markets and functions. Thus,
the growth opportunities may come internally or externally.
Internal growth possibilities may be exploited through
intensification or diversification. External growth options
include mergers, takeovers and joint ventures.
Stability Strategy: A stability strategy involves maintaining the
status quo or growing in a methodical, but slow, manner. The
firm follows a safety-oriented, status-quo-type strategy without
effecting any major changes in its present operations. The
resources are put on existing operations to achieve moderate,
incremental growth. As such, the primary focus is on current
products, markets and functions, maintaining the same level of
effort as at present.
Retrenchment Strategy: It is a corporate level, defensive strategy
followed by a firm when its performance is disappointing or
when
NOTES
its survival is at stake. When a firm is confronted with a
precipitous drop in demand for its products and services, it is
forced to effect across-the-board cuts in personnel and
expenditures. Retrenchment strategy, as such, is adopted out
of necessity, not by deliberate choice.
Combination Strategies: Large, diversified organisations generally
use a mixture of stability, expansion or retrenchment strategies
either simultaneously (at the same time in various businesses)
or sequentially (at different times in the same business). For
example, growth could be achieved by an organisation through
acquisition of new businesses or divesting itself of unprofitable
ventures. Depending on situational demands, therefore, an
organisation can employ various strategies to survive, grow
and remain profitable.
6.5.2 BUSINESS LEVEL STRATEGY FORMULATION

Business level strategy deals with how a particular business
competes. The principal focus is on meeting competition,
protecting market share and earning profit at the business unit
level. The strategies of growth, stability and retrenchment,
discussed above, apply at the business level as well as the
corporate level, but they are accomplished through
competitive actions rather than by the acquisition or
divestment of other businesses.
6.5.3 FUNCTIONAL LEVEL STRATEGY FORMULATION

Functional strategies are formulated by specialists in each area
of a business such as marketing, production, finance, human
resources and research and development. Functional strategies
outline the action plans that must be put into practice to
execute business level strategy. Business level and functional
specialists must coordinate their activities to ensure that the
strategies pursued by them are consistent and lead to
achievement of overall goals.
 Research and Development Strategy: Businesses cannot grow
and survive without new products. It is the role of R&D
specialists to generate new product ideas, nurture them
carefully and develop them fully into commercially viable
propositions. Where innovation proves to be a costly
exercise, imitation could also be tried as a fruitful option.
Many Japanese electronics companies were quite successful
in copying American technology and by avoiding R&D costs,
improved their competitive strength significantly.
 Operations Strategy: This strategy outlines steps to keep
costs under check and improve operational efficiency. The
focus is on arriving at decisions regarding plant layout,
plant capacity, production processes, inventory
management etc.
 Financial Strategy: It deals with financial planning, evaluating
investment proposals, securing funds for various
investments and controlling financial resources. Thus
raising funds, acquiring assets, allocating funds to
operations, using funds efficiently etc are all part of this
strategy.
NOTES  Marketing Strategy: It deals with strategies relating to

product, pricing, distribution and promotion of a
company’s offerings. Important issues here cover what
type of products, at what prices, through which distribution
channel and by the use of which promotional tool and
sales force etc.
 Human Resource Strategy: HR strategy deals with hiring,
training, assessing, developing, rewarding, motivating and
retaining the number and types of employees required to
run the business effectively. Internal (union contracts,
productivity indices, labour turnover, absenteeism,
accidents etc.) and external factors (labour laws, sons of
the soil, reservation, equal employment opportunity,
employment of children and women etc.) need to be
carefully evaluated while formulating HR strategies.
Fill in the blanks:

are formulated by specialists in each area of a business
such as marketing, production, finance, human resources and research and development.
strategy outlines steps to keep costs under check
and improve operational efficiency.
strategy deals with product, pricing, distribution
and promotion of a company’s offerings. Important issues here cover what type of products,
Is it better to take a bottom up approach to the three levels of strategic decision-making or traditional top down approach? Discuss.
6.6 CONSTRAINTS AND STRATEGIC CHOICE

Viewed collectively, the R&D strategy should encourage
innovation; marketing should stress brand loyalty and reliable
distribution channels; production should maintain long
production runs, cost reduction and routinisation; finance
should focus on cash flows and positive returns and HR
department should develop strategies for retaining and
developing a stable workforce. Of course, organisations do
come across constraints while formulating functional level
strategies in several forms; how to finance the proposals, what
kind of risk to be taken, how to combine strong production
skills of the company with its own weak marketing skills, how
to keep suppliers and channel partners happy, how to
encounter competitive retaliation etc.
NOTES
In any case while selecting appropriate strategies at corporate,
business and functional level, the following criteria should be
kept in mind (David Aaker).
Strategy Selection Criteria
 They are responsive to the external environment.
 They offer a sustainable competitive advantage.
 They are consistent with other strategies in the organisation.
 They provide adequate flexibility for the business and the
organisation.
 They conform to the organisation’s mission and long-term
objectives.
 They are organisationally feasible.
“Good companies are based on saying no.” Discuss the significance of these words of Al Ries.
6.7 STRATEGY IMPLEMENTATION

Strategy implementation is the process of translation of
strategies and policies into action through the development of
programmes, budgets and procedures. It is typically conducted
by the middle and lower level management but is reviewed by
the top management. However, programmes and procedures
are simply more detailed plans for the eventual
implementation of strategy. Unless the corporation is
appropriately organised, programmes are adequately staffed
and activities are properly directed, these operational plans fail
to deliver the goods. To be effective, a strategy must be
implemented through the right organisation structure and
appropriate management practices. In addition, management
must also ensure that there is progress towards objectives
according to plan by instituting a rigorous process of control
over important activities.
6.7.1 ORGANISING
In a classic study of large American Corporations (Du Pont,
General Motors, Sears Roebuck, Standard Oil), Chandler
concluded that structure follows strategy (Strategy and
Structure, MIT Press 1962). Changes in corporate strategy have
invariably led to changes in corporate structure. Chandler
found that most corporations begin with a centralised
organisation structure. As they add new product lines and
create independent distribution networks, the centralised
structure is discarded by the organisations in favour of a
decentralised structure which permits the creation of semi-
autonomous product divisions. Burns and Stalker also found
that mechanistic structures (centralised decision making and
bureaucratic rules) seem to be
NOTES appropriate to organisations operating in stable environments.

However, organic structures, in contrast (decentralisation and
flexible procedures), seem to be appropriate to organisations
operating in a constantly changing environment. The research
conducted later on also supports Chandler’s proposal that an
appropriate organisation structure is necessary to meet
changes in corporate strategy. The firm should, therefore, work
to make its structure congruent with its strategy.
6.7.2 STAFFING
Effective strategy implementation calls for utilisation of human
resources fully. For implementinggrowth strategies, new people
should be recruited and given requisite training. Retrenchment
strategies call for a sound basis for firing people, i.e., seniority,
performance, absenteeism, etc. In order to translate the
strategy into action, the services of capable and committed
people are necessary. To this end, management should institute
proper performance appraisal systems which permit people to
compare their performance with others and find out where
they are. These systems also help the management to identify
‘star’ performers easily and reward them adequately.
Perspiration does not go far without a little bit of inspiration.
6.7.3 DIRECTING
People should be motivated to implement a new strategy in
desired ways. It is not sufficient merely to have people who can
do the job; it is also necessary to have people who want to do
the job the way you need it done. In addition to traditional
motivational techniques, managers should also make use of
modern techniques in order to inspire people to peak
performance.
6.7.4 MOTIVATIONAL TECHNIQUES

The traditional motivational techniques are based on a reward-
punishment psychology and involve the use of performance
appraisals and performance-based incentive programmes.
These approaches, including MBO (Management by Objectives,
termed by Peter Drucker which states that it is a process of
defining objectives within an organization so that management
and employees agree to the objectives and understand what
they need to do in the organization in order to attain them),
indicate that specific results are best achieved by clearly
outlining realistic goals and then suitably rewarding those
managers who achieve them. They are overly reliant on money
as the primary motivator, while overlooking other factors that
might be truly motivating to many managers. According to
Morse and Martin, motivating the organisation to implement
strategy requires:
Supportive Culture
The successful implementation of strategy must take into
account the history of an organisation and dominant values or
cu
ltu
re
w
hi
ch
NOTES
exists. The corporate culture is a system of shared beliefs and
values that the people within the corporation hold. Some of the
critical dimensions of culture are:
 Clarity of direction: How well the company’s goal and
plans for achieving them are known, understood and found
to be motivating throughout the organisation.
 Decision making structure and processes: Whether the culture
is decision-oriented or decision-avoidant and whether
decisions are made on the basis of sound information or
‘seat of the pants’ intuition.
 Management style: Whether too little or too much
participation in making decisions exists at each level of
the company.
 Integration of effort: Whether teamwork, sharing and smooth
meshing of activities – or the opposite – accurately
describes the culture.
 Performance orientation: Whether managers feel
accountable for end results and whether rewards are
related to performance or not.
 Compensation: Whether it is equitably fairly administered
and motivational, or not.
 Human resource development: How much this characterises
the culture.
 Organisational vitality: That drive to perform – that sense of
urgency and desire to be a winner – which some
organisations have and others do not.
 Risk taking: Whether it is encouraged or punished, and
 Competitive image: Whether company views itself as faster,
sharper and better than the competitor, or vice versa.
Every company should try to measure these dimensions of
culture and determine what kind of culture and what kind of
subcultures will best support the company’s strategy. Senior
executives should determine the desired culture taking the
short-term requirements of the company.
Short-term Motivational Environment

Whereas a company’s culture affects strategy implementation
over the long haul, the short-term motivational environment
affects strategy implementation today. The short-term
environment reflects the immediate mood of the company’s
employees and contributes to the way they face immediate
problems. Building such an environment involves actions very
similar to public relations activities
 Communication programmes
 Morale-building conferences
NOTES  Visibility of charismatic leaders

 Use of awards, language, symbols, gestures etc.
Performance Management
The traditional motivators (MBO, performance appraisal, etc.)
should be logically and firmly linked to what is called an
integrated performance management process. To this end
detailed budgets and programmes should be drawn.
Individuals should also know exactly what piece of the
organisation structure they are accountable for and what goals
and objectives they must attain this year to stay on plan.
Individual Motivators
In addition to the traditional motivating techniques, the
organisation should also provide for individual motivators for
achieving results competently. Over-reliance on bonuses and
incentives may not fully motivate individual managers in
today’s world. Top management should, therefore, fully
understand the individual differences and devise an
appropriate motivational strategy. Though it is difficult to
categorise individual motivators, some of the important ones
may be stated thus:
 Mastery: The act of mastering a new skill or gain control
over a challenging problem is most motivating to many
individuals.
 Approval: Lack of approval can hamper and constrict the
performance of talented and bright managers.
 Risk and Adventure: High visibility positions having risk
and adventure are mostly preferred by managers
possessing entrepreneurial talents.
 Security: In order to perform effectively and efficiently,
managers need to feel that there is little at risk with
respect to their careers.
 Power and Influence: Organisational positions that enable
managers to gain power and control over human as well as
non- human resources are highly motivating.
Fill in the blank:

14.Whereas a company’s …… affects strategy implementation over the long haul, the short-t
strategy implementation today.
The top management sets the tone for strategy implementation by means of motivation, visible leadership and work culture. Discuss.
NOTES
Performance management ensures that rewards and sanctions result from measures of good or poor performance. It links human resourc
6.8 STRATEGIC CONTROL AND ASSESSMENT

Strategic control, the last step of the strategic management
process, is monitoring and evaluating the strategy
management process as a whole in order to make sure that it
is operating properly. The focus is clearly on activities involved
in environmental analysis, organisational direction, strategy
formulation, strategy implementation – ensuring that all steps
of the strategy management process are appropriate,
compatible and functioning properly. There are three basic
steps to the strategic control process (Roush et al).
Measure Performance
Strategic audits are used to find what is actually happening in
the organisation. Both qualitative and quantitative tools are
employed for this purpose. According to S Tilles, the qualitative
measurement looks into five questions:
 Is the strategy internally consistent?
 Is it consistent with its environment?
 Is it appropriate given organisational resources?
 Is it too risky?
 Is the time horizon of the strategy appropriate?
Quantitative tools like return on investment (the relationship
between the amount of income generated and the amount of
assets required to operate the organisation); z score (an
analysis that numerically weighs and sums five measures –
working capital\total assets; retained earnings\total assets;
earning before interest and taxes\total assets; market value of
equity\book value of total liabilities and sales\ total assets – to
find whether the company in question is likely to go sick and
become bankrupt) and shareholders’ audit etc. are used to
measure organisational performance.
Compare Performance to Goals and Standards

Here management builds a case for concluding whether the
performance is according to the predetermined standards in
respect of certain key areas. At General Electric, the following
eight types of standards are set for comparing performance
at a later stage; profitability, market position, productivity,
product leadership,
NOTES personnel growth, employee attitude, social responsibility and

standards reflecting balance between short-range and long-
range goals.
Corrective Action
If the actual performance is not in line with predetermined
standards set for the purpose, corrective action is necessary. In
such a case, every attempt is made to modify the enterprise’s
strategies and their implementation so that the organisations’
ability to accomplish its goals will be improved.
The euphoria surrounding the strategic blueprint of Infosys 3.0 had fizzed out. N R Narayana
6.9 SUMMARY
 The strategic management process is a continuous
process. “As performance results or outcomes are realised
– at any level of the organisation – organisational
members assess the implications and adjust the strategies
as needed.”
 In addition, as the company grows and changes, so will the
various strategies. Existing strategies will change and new
strategies will be developed. This is all part of the
continuous process of improving the business in an effort
to succeed and reach company goals.
 Strategic management basically aims at formulating and
implementing effective strategies. Effective strategies, of
course, are those that help a superior ‘fit’ between the
organisation and its environment and the achievement of
strategic goals (Andrews).
 Dynamic in nature, the strategic management process is
the full set of commitments, decisions and actions needed
for a firm to achieve strategic competitiveness and earn
above average returns. Strategic competitiveness is
achieved when a firm successfully formulates and
implements a value creating strategy.
 The strategic management process is made up of four
elements: situation analysis, strategy formulation, strategy
implementation and strategy evaluation. These
elements are steps that are performed, in order, when
developing a new strategic management plan.
 A strategic business unit is a distinct business, with its own
business mission, product line, market share and
competitors that can be managed reasonably
independently of other businesses within the organisation.
NOTES
 Business Level Strategy: A competitive strategy that

focuses on meeting competition, protecting market
share and achieving profits at the business unit level.
 Corporate Level Strategy: The strategy formulated by the
top management for the overall company.
 Differentiation: A competitive strategy that seeks to
distinguish an organisation’s products or services from
competitors.
 Diversification: A strategy in which an organisation
operates in several businesses that are linked or not
linked with one another.
 Focus: It is a competitive strategy that emphasises
making an organisation more competitive by targeting a
specific regional market or buyer group.
 Functional Level Strategy: The strategy pursued by each
functional area of a business unit such as finance,
marketing, personnel, production etc.
 Grand Strategy: A general plan of major action by which a
firm intends to achieve its long-term goals.
 Strategic Business Unit: A strategic business unit is a
distinct business, with its own business mission, product
line, market share and competitors that can be
managed reasonably independently of other businesses
within the organisation.
 Strategic Competitiveness: It is achieved when a firm
successfully formulates and implements a value
creating strategy.
 Strategic Control: Monitoring and evaluating the strategic
management process as a whole, in order to make sure
that it is operating properly.
 Strategic Intent: It is the leveraging of a firm’s internal
resources, capabilities and core competencies to
accomplish the firm’s goals in a competitive
environment.
 Strategic Management Process: A management process
designed to achieve the firm’s missions and objectives.
 Strategy Formulation: The process of determining
appropriate courses of action for achieving
organisational objectives and thereby accomplishing
organisational purpose.
 Strategy Implementation: Putting formulated strategy
into action.
 Value Chain: The notion that an enterprise receives inputs
from suppliers of resources transforms them into
outputs and channels the outputs to buyers, adding
value at each point in the process.
 Value: Sum total of benefits received and costs paid by
the customer in a given situation.
NOTES 6.10 DESCRIPTIVE QUESTIONS

1. What aspect of strategy formulation, do you think, requires
the most time? Why?
2. Outline the major components of the strategic
management process. Explain why engaging in strategic
management is likely to be beneficial for an organisation.
3. Each firm needs to tailor its strategic management process
in ways that best suits its own specific context and
situation. Do you agree? Why? And why not?
4. Discuss in detail the process of strategy implementation.
5. Explain the procedure of Strategy Formulation.
6. What are the purposes of strategic management process?
Describe them in detail.
7. What kinds of constraints an organization aims to achieve
while formulating strategies? Discuss the strategy
selection criteria.
8. Explain motivational techniques as a basis of
strategy implementation.
9. “Strategy formulation is generally broken down into three
organisational levels”. Which are they? Explain in detail.
10. Explain three basic steps to the strategic control process.
How strategic assessment is being done by companies?


Purposes of Strategic 1. core competence
Management Process
2. customers
3. competitiveness
Steps Involved in the 4. Information
Strategic
Management
Process
Strategic 5. Implementation
Management
Process
6. Formulating
7. Evaluation
8. resources, capabilities
9. mission statement
Contd...
NOTES
10. Developing
Strategy Formulation 11. Functional strategies
12. Operations
13. Marketing
Strategy Implementation 14. culture, motivational

1. Refer to 6.4.1
Situation analysis is the first step in the strategic
management process. The situation analysis provides the
information necessary to create a company mission
statement. Situation analysis involves “scanning and
evaluating the organisational context, the external
environment, and the organisational environment.” This
analysis can be performed using several techniques.
Observation and communication are two very effective
methods.
2. Refer to 6.3
The various steps involved in the strategic management
process are: Vision, Mission and Objectives, External
Analysis and Internal Analysis. By achieving strategic
competitiveness and successfully exploiting its competitive
advantage, the firm is able to achieve above average
returns which are returns in excess of what an investor
expects to earn from other investments with a similar
amount of risk.
3. Refer to 6.4.4
Yes, firms needs to tailor its strategic management process
in ways that best suits its own specific context and
situation. By engaging themselves in strategic evaluation
which means “examining how the strategy has been
implemented as well as the outcomes of the strategy.” This
includes determining whether deadlines have been met,
whether the implementation steps and processes are
working correctly, and whether the expected results have
been achieved. If it is determined that deadlines are not
being met, processes are not working, or results are not in
line with the actual goal, then the strategy can and should
be modified or reformulated.
4. Refer to 6.7,6.7.1,6.7.2,6.7.3 & 6.7.4
The process of strategy implementation are – organizing,
staffing, directing and motivational techniques.
5. Refer to 6.5,6.5.1,6.5.2 & 6.5.3
Corporate Level Strategy Formulation, Business level
strategy formulation and functional level strategy
formulation.
NOTES 6. Refer to 6.2

Strategies necessarily change over time to suit
environmental changes but, to remain competitive,
organisations develop strategies that focus on core
competence, develop synergy and create value for
customers.
7. Refer to 6.6
Viewed collectively, the R&D strategy should encourage
innovation; marketing should stress brand loyalty and
reliable distribution channels; production should maintain
long production runs, cost reduction and routinisation;
finance should focus on cash flows and positive returns
and HR department should develop strategies for retaining
and developing a stable workforce. Of course,
organisations do come across constraints while
formulating functional level strategies in several forms;
how to finance the proposals, what kind of risk to be taken,
how to combine strong production skills of the company
with its own weak marketing skills, how to keep suppliers
and channel partners happy, how to encounter competitive
retaliation etc.
8. Refer to 6.7.4
Motivational techniques comprises of supportive culture,
short- term motivational environment, performance
management and individual motivators.
9. Refer to 6.4.2
Strategy formulation is generally broken down into three
organisational levels: operational, competitive and
corporate.
10. Refer to 6.8
There are three basic steps to the strategic control process
: measuring performance, compare performance to goals
and standards and corrective action. Strategic assessment
is being done by companies in building up a case for
concluding whether the performance is according to the
predetermined standards in respect of certain key areas. If
the actual performance is not in line with predetermined
standards set for the purpose, corrective action is
necessary. In such a case, every attempt is made to modify
the enterprise’s strategies and their implementation so
that the organisations’ ability to accomplish its goals will
be improved.

SUGGESTED READINGS
 Harrison, E. Frank (1999), The Managerial Decision-Making
Process (5th ed.), Boston: Houghton Mifflin.
NOTES
 McCall, Morgan W., Jr., & Kaplan, Robert K. (1990),
Whatever it takes: The Realities of Managerial Decision Making
(2nd ed.), Englewood Cliffs, NJ: Prentice-Hall.
 Porter, Michael E. (1980), Competitive Strategy: Techniques for
Analyzing Industries and Competitors, New York: Free Press.
 Porter, Michael E. (1985), Competitive Advantage: Creating
and Sustaining Superior Performance, New York: Free Press.
 Williams, Steve W. (2002), Making Better Business Decisions:
Understanding and Improving Critical Thinking and Problem
Solving Skills, Thousand Oaks, CA: Sage Publications.
E-REFERENCES
 http://www.strategicmanagementinsight.com/topics/strat
egic- planning-process.html
 http://onstrategyhq.com/resources/strategic-implementation/
 http://xisspm.fi les.wordpress.com/2010/11/ch-7-
strategy- evaluation-and-control.pdf
C H
7
A P T E R
FORMULATING CORPORATE LEVEL STRATEGY
CONTENTS
7. Introduction
1
7. Balanced Score Card: A Balanced
2 Approach
7. Grand Strategies: Strategic Alternatives
3
7. Growth/Expansion Strategy
4
7.4.1 When to Adopt a Growth Strategy?
7.4.2 Why to Pursue Growth Strategy?
7.4.3 Problems Created by Growth
7.4.4 How to Manage – Growth?
7. Diversification Strategy
5
7.5.1 Related Diversification
7.5.2 Unrelated Diversification
7.5.3 Costs of Diversification
7.5.4 When to Diversify?
7. Stability Strategy
6
7. Retrenchment Strategy
7
7. Turnaround Strategies
8
7.8.1 Conditions for Turnaround Strategies
7.8.2 Action Plans for Turnaround
7.9 Combination Strategies
7.10 Corporate Restructuring Strategy
7.10.1 Meaning and Need for Corporate Restructuring
7.10.2 Purpose of Corporate Restructuring
7.10.3 Characteristics of Corporate Restructuring
7.10.4 Category of Corporate Restructuring
7.10.5 Methods of Corporate Restructuring
7.11 Summary
Education

Education
NOTES
EXPANSION OF ITC LIMITED BUSINESSES

Over the years, ITC Limited, basically a tobacco company
set
up in 1910, has ballooned to gigantic proportions (with
26,000 employees in 60 locations across India with a
turnover of over
$7 billion) through excellent diversification moves into areas
such as hotels, information technology, packaging,
paperboards, speciality paper, agri-businesses, foods,
lifestyle and retailing, education and stationery and personal
care.
The objective of ITC’s entry into the hotels business was
rooted in the concept of creating value for the nation. ITC
chose the hotels business for its potential to earn high levels
of foreign exchange, create tourism infrastructure and
generate large scale direct and indirect employment. Since
then, ITC’s Hotels business has grown to occupy a position of
leadership, with over 100 owned and managed properties
spread across India.
In 1985, ITC set up Surya Tobacco Co. in Nepal as an Indo-
Nepal and British joint venture. Since inception, its shares
have been held by ITC, British American Tobacco and various
independent shareholders in Nepal. In August 2002, Surya
Tobacco became a subsidiary of ITC Limited and its name
was changed to Surya Nepal Private Limited (Surya Nepal).
In 1990, ITC acquired Tribeni Tissues Limited, a specialty
NMI
paper manufacturing company and a major supplier of tissue
paper to the cigarette industry. The merged entity was
named the Tribeni Tissues Division (TTD). TTD was merged
with the Bhadrachalam Paperboards Division to form the
Paperboards & Specialty Papers Division in November 2002.
ITC acquired the paperboard manufacturing facility of BILT
MS
Industrial Packaging Co. Ltd (BIPCO), near Coimbatore, Tamil
Nadu. Paperkraft entered new categories in the office
consumable segment with the launch of Textliners,
Permanent Ink Markers and White Board Markers in 2009.
In 1990, leveraging its agri-sourcing competency, ITC set
up the Agri-Business Division for export of agri-
commodities. The Division is today one of India’s largest
exporters. ITC’s unique and now widely acknowledged e-
Choupal initiative began in 2000 with soya farmers in
Madhya Pradesh. Now it extends to 10 states covering over
4 million farmers. ITC’s first rural mall, christened ‘Choupal
Saagar’ was inaugurated in August 2004 at Sehore. On the
rural retail front, 24 ‘Choupal Saagars’ are now operational
in the 3 states of Madhya Pradesh, Maharashtra and Uttar
Pradesh.
In 2000, ITC forayed into the Greeting, Gifting and Stationery
products business with the launch of Expressions range of
greeting cards. A line of premium range of notebooks under
brand ‘Paperkraft’ was launched in 2002. To augment its
Education
offering and to reach a wider student population, the popular
range of notebooks was launched under brand ‘Classmate’
in 2003.
Contd...

Education
FORMULATING CORPORATE LEVEL STRATEGY187
NOTES
ITC also entered the Lifestyle Retailing business with the

Wills Sport range of international quality relaxed wear for
men and women in 2000. The Wills Lifestyle chain of
exclusive stores later expanded its range to include Wills
Classic formal wear (2002) and Wills Clublife evening wear
(2003). ITC also initiated a foray into the popular segment
with its men’s wear brand, John Players in 2002. In 2006,
Wills Lifestyle became title partner of the country’s most
premier fashion event - Wills Lifestyle India Fashion Week -
that has gained recognition from buyers and retailers as the
single largest B-2-B platform for the Fashion Design industry.
To mark the occasion, ITC launched a special ‘Celebration
Series’, taking the event forward to consumers.
In 2000, ITC spun off its information technology business
into a wholly owned subsidiary, ITC Infotech India Limited, to
more aggressively pursue emerging opportunities in this
area. Today ITC Infotech is one of India’s fastest growing
global IT and IT-enabled services companies and has
established itself as a key player in offshore outsourcing,
providing outsourced IT solutions and services to leading
global customers across key focus verticals: Manufacturing,
BFSI (Banking, Financial Services & Insurance), CPG&R
(Consumer Packaged Goods & Retail), THT (Travel,
Hospitality and Transportation) and Media & Entertainment.
ITC’s foray into the foods segment began in August 2001
with the introduction of Kitchens of India’s ready-to-eat
Indian gourmet dishes. In 2002, ITC entered the
confectionery and staples segments with the launch of the
brands mint-o and Candyman confectionery and Aashirvaad
NMI
atta (wheat flour). 2003 witnessed the introduction of
Sunfeast as the Company entered the biscuits segment. ITC
entered the fast growing branded snacks category with
Bingo in 2007. In eight years, the Foods business has grown
to a significant size with over 200 differentiated products
under six distinctive brands, with an enviable distribution
MS
reach, a rapidly growing market share and a solid market
standing.
ITC’s foray into the marketing of Agarbattis (incense
sticks) in 2003, marked the manifestation of its partnership
with the cottage sector. ITC’s popular agarbattis brands
include Spriha and Mangaldeep across a range of
fragrances like Rose, Jasmine, Bouquet, Sandalwood,
Madhur, Sambrani and Nagchampa.
ITC introduced Essenza Di Wills, an exclusive range of fine
fragrances and bath & body care products for men and
women in July 2005. Inizio, the signature range under
Essenza Di Wills provides a comprehensive grooming regimen
with distinct lines for men (Inizio Homme) and women (Inizio
Femme). Continuing with its tradition of bringing world class
products to Indian consumers, the Company launched ‘Fiama
Di Wills’, a premium range of Shampoos, Shower Gels and
Soaps in September, October and December 2007,
respectively. The Company also launched the ‘Superia’ range
of Soaps and Shampoos in the mass-market segment at
select markets in October 2007 and Vivel De Wills & Vivel
range of soaps in February and Vivel range of shampoos in
June 2008.
NOTES

Explain the meaning of corporate strategy formulation Describe the balanced scorecard: a ba
Knowtheimportanceofgrandstrategies:strategic alternatives
Discuss the growth/expansion strategy Assess the diversification strategy
Understand the significance of stability strategy Explain the retrenchment strategy
Identify the combination strategy
7.1 INTRODUCTION
The results obtained through external and internal analysis
provide the inputs needed by a firm to develop its strategic
intent and strategic mission. Strategic intent shows how
resources, capabilities and core competencies will be
leveraged to achieve desired results in a competitive
environment. The mission is used to specify the product
markets and customers a firm intends to serve through various
strategies (at the corporate, business unit and functional
level). This chapter, basically, throws light on corporate
strategies that help firms to leverage their resources and skills
to extend their competitive advantage to new areas of activity.
Corporate strategy is basically concerned with the choice of
businesses, products and markets. It tries to answer certain
key questions:
 What businesses the firm should be in, in terms of the
range of products it supplies?
Answer 1: Punjab Tractors is a specialised company which
is involved almost exclusively in the manufacturing of
tractors.
Answer 2: Hindustan Lever Ltd. is highly diversified with
interests in soaps, tea, washing powders, detergents, tooth
pastes, shampoo, creams, salt, hair oils etc.
 What should be the optional geographic spread of
activities for a firm?
Answer: In the restaurant business, most firms serve small
local markets, whereas McDonald’s operates in more than
one hundred countries throughout the world.
 What range of vertically linked activities should the firm
encompass?

Education
Answer: Reliance Industries is a key player in each of the
products in the Petrochemical – Fibre intermediate chain
(synthetic textiles, PSF, PFY, PTA MEG).

Education
NOTES
 How the corporate office should manage its group of businesses?
Answer: Corporate strategy spells out the businesses in
which the firm will participate, the markets it will serve and
the customer needs it will satisfy.
Corporate-level strategy, thus, pertains to the organisation as a
whole and the combination of business units and product lines
that make up the corporate entity. It addresses the overall
strategy that an organisation will follow. The process generally
involves selecting a grand strategy and using portfolio strategy
approaches to determine the types of businesses in which the
organisation should be engaged.
BALANCED SCORE CARD: A

7.2
BALANCED APPROACH
R S Kaplan and D P Norton came out with a popular, balanced
score card approach in early 90s linking corporate goals with
strategic actions undertaken at the business unit,
departmental and individual level.
The Balanced score-card allows managers to evaluate a firm from different complementary perspectives.
The arguments run thus:
 A firm can offer superior returns to stockholders if it has a
competitive advantage in its product or service offerings
when compared to its rivals.
 In order to sustain a competitive advantage, a firm must
offer superior value to customers.
 This, in turn, requires development of operations with
necessary capabilities.
 In order to develop the needed operational capabilities, a
firm requires the services of employees having requisite
skills, creativity, diversity and motivations.
Thus, the performance as assessed in one perspective supports
performance in other areas – as given below:
 Financial Perspective: Does the firm offer returns in
excess of the total cost of capital, as suggested by the
Economic Value Added (EVA) model? EVA is the spread
between a firm’s return on invested capital minus its
weighted average cost of capital, multiplied by the amount
of capital invested. In other words, EVA is what is left over
after a firm has covered all its factors of production
(operating expenses, overheads, interest, taxes, plus fair
return to shareholders). “To succeed financially, how should
we appear to our shareholders?” is the question to be
answered here.
NOTES  Customer’s Perspective: Does the firm provide the customer

with superior value in terms of product differentiation, low
cost and quick response?
 Operations Perspective: How effectively and efficiently do the
core processes that produce customer value perform?
What are the most important sources of customer value
that need improvising to offer greater customer value?
 Organisational Perspective: Can the firm adapt to changes
in its environment? Is their workforce committed to shared
goals? Does the organisation learn from its past mistakes?
When confronted with a problem, does it work towards
identifying the root causes or does it start from the
beginning?
A properly constructed scorecard helps a firm strike a fine
balance between short-and long-term financial measures;
financial and non-financial measures; internal and external
performance perspectives. A firm’s long-term strategy should
take all the above perspectives into account while trying to
match a firm’s internal resources and capabilities with external
opportunities.
As mentioned previously, competitive advantage comes from a
firm’s ability to perform activities (using its unique, durable,
specialised, hard-to-imitate resources and skills etc. while
serving the needs of customers) more effectively than rivals.
Fill in the blanks:

Corporate strategy is basically concerned with the choice of
……………………., products and markets.
The score-card allows managers to evaluate a firm from different complementary …………………
Corporate success, depends on how well a firm is able to extend itsto new areas over a long
time.
Which is a better way to link corporate goals with strategic actions – shareholder value model or the balanced scorecard approach?
Corporate success, ultimately, depends on how well a firm is able to extend its competitive advantage to new areas over a long period of ti
NOTES
GRAND STRATEGIES: STRATEGIC

7.3
ALTERNATIVES
Grand strategy is the general plan of major action by which a
firm intends to achieve its long-term goals. It provides basic
direction for the strategic actions of a firm. Most firms begin
their operations as single-business units. Some firms continue
to thrive due to their specialised operations and exclusive focus
on a limited business arena. McDonald’s, for instance, has been
able to develop a steadily improved product line and keep its
costs low by focusing on the fast food business alone. Likewise,
Infosys Technologies had exploited the low cost advantage of
software services initially in India and after consolidating its
position is now seeking to extend its business by developing
competencies in new and emerging technologies. Wal-Mart, too,
has benefited primarily from the retailing industry. However,
operating primarily in one industry may make the firm
vulnerable to business cycles. Should the industry attractiveness
decline (Software, Telecom businesses in late 90s) through a
permanent decrease in consumer demand for the firm’s
products or competition intensifies from existing or new
competitors, the firm’s performance is likely to suffer. These
limitations can be overcome by operating in different fields
through diversification. “The firm could diversify into related (to
exploit its core strengths) or unrelated businesses (to tap profit
opportunities in other areas). Of course, unrelated
diversifications may results in uncertainties associated with
losing touch with the fundamentals of each business and the
difficulty of analysing the numerous disaggregate external
opportunities and threats inherent in unrelated industries”
(Wright et al.). Managers have to be extremely cautious in
choosing the various strategic alternatives aimed at improving
customer value.
Fill in the blank:

4.Grand strategy is the general plan of major action by which a firm intends to achieve itsgoals.
Diversification is essentially a risk mitigation strategy. Discuss.

7.4 GROWTH/EXPANSION STRATEGY
Grand strategies fall into four general categories: growth/expansion, stability, retrenchment and combination.
Organisations generally seek growth in sales, market share or
some other measure as a primary objective.
NOTES
When growth becomes a passion and organizations try to seek sizeable growth, (as against slow and steady growth) it takes the shape of a
The firm tries to redefine the business, enter new businesses,
that are related or unrelated or look at its product portfolio
more intensely. The firm can have as many alternatives as it
wants by changing the mix of products, markets and functions.
Thus, the growth opportunities may come internally or
externally. Internal growth possibilities may be exploited
through intensification or diversification. External growth
options include mergers, takeovers and joint ventures.
7.4.1 WHEN TO ADOPT A GROWTH STRATEGY?

There are certain inherent limits to corporate growth and a firm
intending to grow beyond a particular limit, should look into
the pros and cons carefully before embarking upon an
ambitious growth strategy. This compels us to examine the
issue as to when corporations should look for a growth
strategy:
 Growth must be manageable: It should enable the organisation
to stabilise its operations over a period of time and ensure
profitability. When an organisation achieves stability after
a time, it can pursue growth strategies in the same field or
in diversified fields depending on its strengths.
 Growth must take into account environmental demands: The
limitations imposed by various pieces of legislation (for
example FDI limits in print media, banking etc.) must be
carefully looked into before going ‘all out’. Growth, as a
matter of fact, should be in consonance with
environmental demands. An organisation can grow only to
the extent permitted by (all the above factors) the
environment. This, however, requires advance thinking and
careful planning.
 Growth should be the natural choice where the environment
presents several opportunities and special concessions
and incentives are readily available. For example, the
government offers special benefits to small scale
industries and industries set up in backward areas.
Whenever such opportunities exist in the environment,
organisations can pursue ‘growth strategies’ diligently.
7.4.2 WHY TO PURSUE GROWTH STRATEGY?

Growth strategies are extremely popular because most
managers tend to equate growth with success. Obviously, a
firm that fails to move ahead may fall behind in the
competitive race. The firm that operates in a dynamic
environment must grow in order to survive. Growth implies
greater sales and an opportunity to take advantage
NOTES
of the environmental opportunities. As the firm grows in size
and experience, it gets better at what it is doing and reduces
costs and improves productivity. A growing firm can cover up
mistakes and inefficiencies more easily than can a stable one.
There are more opportunities for advancement, promotion and
interesting jobs in a growing firm. Growth per se is exciting
and ego-enhancing for managers. A corporation tends to be
seen as a winner or on the move by the market place and by
potential investors. Growth strategies gain importance if a
firm’s industry is growing quickly and competitors are engaging
in price wars so as to slice out a larger share of the market. If
the firm is not able to find a profitable niche, (for example
Anchor vegetarian toothpaste, triple-refined Dandi Salt) it can
not flourish in a volatile environment. More specifically, the
compelling motives for pursuing growth strategies may be
furnished thus:
 To Ensure Survival: In the long run growth is necessary for
the very survival ofthe organisation, especially when the
environment is turbulent and highly competitive. If the
organisation does not grow, it may by pushed out of the
market by new entrants. Ambassador car, Ideal Jawa,
Diner’s Credit Card business, are the inglorious examples
in this regard, where the organisations failed to take stock
of competitive reactions and were eventually forced out of
business.
 To Obtain Scale Economies: Growth is tempting because of
innumerable benefits offered by large scale operations.
Fixed costs could be spread over a large volume of units
and the resultant savings could be recycled into the
product and offer the same at economical rates ensuring
continued organisational success. Great penetration into
the market is ensured thereby.
 To Stimulate Talent: Managers and entrepreneurs with a high
degree of achievement and recognition would prefer to
work in companies always on the move rather than
companies where there are limited opportunities to exploit
their talents fully. The stupendous rate of growth achieved
by Hero Honda, Infosys, Wipro in recent years bears ample
testimony to this fact.
 To Reach Commanding Heights: Growth ensures market
control. It means prestige and power. It means securing
investor confidence. Companies such as Nestle, Britannia,
ITC, HLL etc. have a high level of reputation in the
corporate world owing to this reason. They are held high
and rated as ‘winners’ in the corporate world owing to
their relentless efforts to grow in various profitable
directions. Growth, obviously, brings satisfaction to
employees, investors in particular and innumerable
benefits to society in the form of increased employment,
low-price-high- quality-goods, and so on. Growth allows the
organisation to reach commanding heights in the
economy; it can increase its market share, secure a high
degree of control over the market and influence market
behaviour in a significant way.
NOTES 7.4.3 PROBLEMS CREATED BY GROWTH

Growth, however, is not an unmixed blessing. In some firms, as
pointed out previously, growth beyond an optimum limit
creates many problems. According to P.F. Drucker, a business
that grows at an exponential rate, would soon gobble up the
world and all its resources. Growth at a high rate and for an
extended period makes a business exceedingly vulnerable. It
makes it all but impossible to manage it properly. Even from
the financial point of view, a growing company does not offer
sound investment opportunities. Sooner or later the firm runs
into tremendous losses, has to write off vast sums, and
become, in effect, unmanageable. It takes years then for such
a firm to recover and establish itself in the market.
7.4.4 HOW TO MANAGE – GROWTH?

It is true that a firm has to grow in order to survive in a
competitive environment. Without this strategy it would be
impossible for the firm to attract, motivate, and hold men of
talent and competence on a permanent basis. However, the
desire to grow must be supported by a rational growth policy,
having the following objectives:
 Minimum Growth: The firm, initially, must set its growth
targets both for the short-term and the long-term. It must
meet these targets, of course, without losing its standing
(in terms of sales, margins, market share) in the
marketplace. It should be able to grow in economic
performance and economic results. According to Drucker,
growth objectives have to be economic objectives rather
than volume objectives. This requires the company to
slough off its unprofitable lines and concentrate on
products that have growth potential.
 Optimum Growth: The company should be able to strike a
happy balance between risk and return on resources. It
should be able to combine activities, products and
business in a useful manner. Growth should be at least the
minimum growth. But it should not exceed the optimum
point. Growth, like any other business policy, requires
objectives, priorities and strategy necessary to exploit the
strengths of the business successfully. More importantly,
growth goals should be rational and grounded in the
objective reality of a business, of its markets, of its
technologies, rather than in financial fantasy.
 Internal Preparation: Growth requires internal preparation. As
pointed out by Drucker “When the opportunity for rapid
growth will come in the life of a company cannot be
predicted. But a company has to be ready. If a company is
not ready, opportunity moves on and knocks at somebody
else’s door”. Growth should be based on the strengths of a
company. It requires financial planning and, above all,
requires a human organisation capable of achieving
different and bigger things continuously. However, the
controlling factor in managing growth is management.
NOTES
“For a company to be able to grow, top management must
be willing and able to change itself, its role, its
relationship, and its behaviour”.
Fill in the blanks:

When an organisation achieves stability after a time, it can pursue growth strategies in the same field or in ………………….
depending on its strengths.
are extremely popular because most managers
tend to equate growth with success.
7.5 DIVERSIFICATION STRATEGY

Growth for the sake of growth is the ideology of the cancer cell. Discuss.
A single-product strategy is always a risky one. Because the
firm has staked its survival on a single product (or a small
basket of products like Colgate) the organisation has to work
very hard to ensure the success of that product. If the product
is not accepted by the market (like taking a big call on Indica
by TELCO) or is replaced by a new one (the challenge of Close-
Up from HLL to Colgate) the firm will suffer. Given the risk of a
single-product strategy, most large organisations today operate
in several different businesses, industries or markets.
Diversification describes the number of different businesses
that an organisation is engaged in and the extent to which
these businesses are related to one another. Diversification
involves entry into fields where both products and markets are
significantly different than those of a firm’s initial base. Related
diversification occurs when a firm expands into industries
similar to its initial business in terms of at least one major
function (when the firm enjoys distinctive competence such as
marketing, distribution, engineering etc). Unrelated
diversification involves expansion into fields that do not share
any financial or skill- based interrelationship with a firm’s initial
business.
Diversification is said to minimise risks associated with
confining the business to one or very few products. The
company can enter new lines of business to preempt potential
competitors or to gain superiority over competitors entering
the market at an early stage. It can introduce new products,
satisfying a variety of needs. This helps in consolidating its
position in the industry. The company can put its resources and
related capabilities to good effect. The existing businesses
might have saturated a bit and the only way to grow could be
through diversification, exploiting opportunities in the
environment. Diversification, of course, is not a sure bet.
Diversification may lead
NOTES to neglect of old business. The managers may fail to

understand the intricacies of new business as well – because
they have entered the field without full knowledge and
adequate preparation. To make matters worse, competitors
may retaliate with full force, adversely impacting even the
existing businesses. To be successful, diversification requires
careful planning and meticulous preparation. The company
must have deep pockets and strong staying power. Building
competitive advantages takes time and involves lot of money.
The company must have relevant core competency in the field
that it is trying to look at now. The chosen field must be
attractive and the company should have capable managers to
handle the associated risks in a competent way. The cost of
entry should also be reasonable. To be safe, the company
should screen and pretest the proposals carefully and proceed
in a cautious manner.
7.5.1 RELATED DIVERSIFICATION

Horizontal integration takes place when some firms expand by
acquiring other companies in the same line of business (adding
new products or services to the existing product or service line).
Such acquisitions eliminate competitors and provide the
acquiring organisation with access to new markets. Horizontal
integration could come, thus, through mergers and acquisitions.
The purchase of one firm by another firm of approximately the
same size is called a merger. It is called an acquisition when one
of the organisations involved is considerably larger than the
other. Most software companies use the mergers and
acquisitions route to acquire complementary businesses,
products or services linked by a common technology and
common customers.
Concentric diversification: It occurs when an organisation
diversifies into a related, but distinct business. With concentric
diversification, the new businesses can be related to existing
businesses through products, markets or technology. The new
product is a spin-off from the existing facilities, products and
processes. For example, Philip’s the electronics major, decided
to diversify into related businesses such as cellular phones,
telecommunication equipment, electronic components etc. to
exploit its core advantages in the form of related technology,
strong distribution network etc. IBM has used a concentric
diversification strategy right from 60s onwards. In early 60s
IBM concentrated on the mainframe computer business. Today
the company’s products include small computers, terminals,
communication’s equipment, etc.
Concentric diversifications may occur due to factors such as
common distribution channel, marketing skills, common brand
name, and common customers. Organisations such as Philip
Moris, Nabisco, Proctor & Gamble operate multiple businesses
related by a common distribution network (grocery stores) and
common marketing skills (advertising). Disney and Universal
rely on strong brand names and reputations to link their
diverse businesses which include movie studios and theme
pa Pharmaceutical firms such as Cipla, Ranbaxy sell numerous
rk products to a single set of customers: hospitals, doctors,
s. patients and drugstores.
NOTES
7.5.2 UNRELATED DIVERSIFICATION
Conglomerate diversification takes place when an organisation
diversifies into areas that are unrelated to its current business.
The decision to diversify into unrelated areas is generally
undertaken by firms in volatile industries that are subject to
rapid technological change. The obvious purpose is to reduce
risk. It is also assumed that by restructuring the portfolio of
businesses, the firm would be in a position to create value.
Similarity in products, technology or marketing knowledge
between the two firms is not an issue here, the acquiring firm
simply wants to make an attractive investment. Unrelated
diversification was a very popular strategy in the 1960s and
early 1970s. For example, the ITC’s diversification into edible
oils, hotels, financial services etc. is conglomerate
diversification (likewise NEPC group’s foray into agro foods,
textiles, paper, airlines, wind energy, tea plantations etc;
Ballarpur Industries’ unrelated diversification, into chemicals,
nylon fibre, leather etc. in addition to paper. Essar’s foray into
shipping, oil, sponge iron, marine construction, telecom, power,
etc.).
Economic Motives
It is worth noting the principal difference between
concentric and conglomerate diversification here. Concentric
diversification emphasises some commonality in markets,
products, or technology, whereas conglomerate diversification
is based on profit considerations only. The firm thinks that it is
able to spot an attractive investment opportunity faster than
the market and commits its resources accordingly. Of course, it
is always open to doubt whether the new business justifies its
acquisition cost. Thus, the selection of attractive acquisition
candidates is largely a matter of managerial judgement. The
basic source of value in a conglomerate is senior
management’s ability to time the market to buy and sell
businesses. Consistent success in such matters, however,
cannot be guaranteed. Throughout the 1990s, not surprisingly,
many conglomerates failed to deliver the goods. Unrelated
diversification moves have actually destroyed value instead of
creating it (dyssynergy, in which individual businesses may
actually be worth more on their own rather than when placed
under a larger corporate umbrella with other unrelated units).
Conglomerates have failed in most cases because of various
reasons: inadequate focus, failure to understand the business
fully, competitive disadvantage compared to organisations that
use related diversification.
7.5.3 COSTS OF DIVERSIFICATION

Evidently, diversification into related or unrelated areas is not a
sure bet. Problems could surface suddenly from multifarious –
known as well as unknown-factors. Let’s examine these more
closely (Pitts and Lei).
 Cost of Ignorance: Entering a new, unknown field is risky. The
firm does not know the extent of competition. It may fail to
read
NOTES the mind of the consumer properly. Technological

developments, environmental factors may compel the firm
to shift gears continuously. Mistakes might be committed
when the firm is navigating through uncharted waters.
 Cost of Neglect: A company trying to expand through
unrelated diversifications may have to divert its attention
from its core businesses – at least temporarily. First, it must
decide the areas where it wants to operate. Second, if
acquisition is the route; it must identify suitable targets for
purchase. Third, top managers must integrate the new
units with the existing businesses. All these steps would
dilute the attention of the firm towards its own, original
business. The costs of ignorance and neglect might prove
to be crippling, especially in a highly competitive rapidly
changing environment. Let’s consider the cases of Indian
companies which have gone out of business, because of
hasty, unrelated diversifications into too many different
areas.
7.5.4 WHEN TO DIVERSIFY?

Diversification will be fruitful only when the benefits generated
by diversification outweigh the related costs. To contain costs,
the firm should focus attention on familiar fields and by
diversifying internally rather than by acquisition. In any case,
as summarised by Pears and Robinson, diversification is the
most preferred route:
 When the firm intends extraordinary growth in assets,
revenues and profits.
 When the firm wants to counter vulnerability arising out of
a single-product concentration – by creating a large
portfolio of diverse businesses.
 When the environment presents an unusually large
number of exciting opportunities to be exploited by the
firm’s resource base.
 When there is great environmental uncertainty, firms
embark on a constant search for new businesses.
 When the firm finds diversification to be more profitable
than intensification.
 When the firm has surplus resources that could be
profitability deployed in new ventures.
 When the firm finds synergy in its existing businesses and
the new ones that it intends to set up.
When diversification is likely to produce fewer benefits than
costs, the firm should turn its attention to restructuring its
operations with a view to enhance shareholder value. The
various possibilities in this connection include:
 Selective Focus: Target carefully selected new segments
when the firm is able to expand its market share quickly
even though the industry in which it operates is on the
de
cli
ne
.
NOTES
 Spin-off: Spinning off businesses means selling those units
or parts of a business that no longer contribute to or fit the
firm’s core competence. Spinning off non-core or less
related businesses help produce renewed focus on
remaining core operations. It also helps shareholders
capture the full value of assets being used by
management.
Fill in the blanks:

Diversification is said to minimise risks associated with
…………………… the business to one or very few products.
Horizontal integration takes place when some firms expand by
…………………. other companies in the same line of business.
Conglomerate diversification takes place when an organisation
…………… into areas that are unrelated to its current business.
Diversification is fruitful only when the benefits generated by diversificationthe related costs.
7.6 STABILITY STRATEGY
Prepare a presentation on the diversification strategy of Tata Sons in light of their entry into the aviation industry recently.
A stability strategy involves maintaining the status quo or
growing in a methodical, but slow, manner. The firm follows a
safety-oriented, status-quo-type strategy without effecting any
major changes in its present operations. The resources are put
on existing operations to achieve moderate, incremental
growth. As such, the primary focus is on current products,
markets and functions, maintaining the same level of effort as
at present. Organisations might follow a stability strategy for a
variety of reasons:
 Why rock the boat?: If the company is doing reasonably well,
managers may not like to take the risks or hassles
associated with more aggressive growth.
 Why not stop for a while?: Stability allows the firm to stop
for a while, re-examine what it has already done and
proceed cautiously. An organisation that has stretched its
resources during a period of accelerated growth may want
to attain stability before it attempts further accelerated
growth.
 Why to swallow risk?: If managers believe that growth
prospects are low, they may follow a stability strategy with
a view to hold on to their current market share. Stability
strategy, is however, not a ‘do-nothing’ strategy. To
maintain current position, the organisation definitely needs
to carry out marginal improvements in performance in line
with changing trends.
NOTES  Where are the resources?: Introducing new products,

entering new markets, undertaking major
organisational changes
- all require huge investments. Where there is an internal
resource constraint, a stability strategy is preferred. If the
organisation’s strategic advantages lie in the current
business and market, it pursues the stability strategy to
exploit its competitive advantages fully.
Limitations
Stability strategies would work only when the firm is doing well
and the environment is not excessively volatile. However,
present day organisations have to grapple with change
continually. They have to operate in highly competitive and
turbulent environments. So strategies of functioning along
existing lines would work initially when the firm is able to carve
out a niche for itself but would fail to work as new firms
enter into the market or new developments in the business
environment occur. It is true that future means change and
adjustments to new situations and conditions. But it is better to
indulge in proactive planning through strategic planning
systems rather than living with low profits and low stockholder
dividends year after year. Failure to improve profits over the
long term means corporate death. The corporate graveyard is
filled with the corpses of companies that failed to respond to
changes in the environment.
So organisations must practice pro-active planning. They must
practise strategic planning in order to manage change
successfully. The manager who is able to anticipate and
prepare for possible changes in the business work has more
control than the manager who does not plan ahead, and is
content with the present set-up and status quo arrangements.
The consequences of taking a short-term perspective can be
severe. Only a few years ago the U.S. auto industry was the
marvel of the world. Textbooks cited it for its examples of good
management practice. But what has happened to the auto
industry during the 1970s? Blinded by its success, it made the
biggest mistake of all—it failed to adapt to the changing
requirements and wants of the market place. Japanese and
other foreign auto companies moved into fill the market void
(need for fuel-efficient cars). By the early 1980s General
Motors and Ford were losing hundreds of millions of dollars and
Chrysler was fighting off bankruptcy. One of the important
advantages of planning is that it helps a manager or
organisation to affect rather than accept the future. In a
competitive environment, resting on past laurels would prove
to be suicidal. No change strategies force managers to live
with wrong products and wrong markets. In volatile industries,
a stability strategy can mean short-run success, long-run
death. In order to progress in an orderly manner, every firm
must employ appropriate growth strategies that help in
improving present as well as future performance in the market
place.
NOTES
Fill in the blank:

11.Stability strategies works only when the firm is doing well and the environment is not excessively ……………………...
In the first decade of the new millennium, Infosys had the second largest cash reserves worth ` 22,000 crore. Yet it let go several acquisitio
7.7 RETRENCHMENT STRATEGY
Retrenchment strategy is a corporate level, defensive strategy
followed by a firm when its performance is disappointing or
when its survival is at stake for a variety of reasons. Economic
recessions, production inefficiencies, and innovative
breakthroughs by competitors are only three causes. Managers
choose retrenchment when they think that the firm is neither
competitive enough to succeed through a counter attack (on
market forces affecting its sales negatively) nor nimble enough
(effecting fast changes) to be a fast follower. However,
retrenchment does not mean death knell for every business
under attack. Many healthy companies have faced life –
threatening competitive situations in the past, successfully
addressed their weaknesses and restored themselves.
Retrenchment calls for aradical surgery to cut the‘extra fat’ –
say, laying off employees, dropping items from a production
line, eliminating low- margin customer groups, avoiding
elaborate promotional efforts etc. Apart from the above cost
reductions, retrenchment calls for drastic steps to improve
cash flows through sale of assets. Retrenchment strategy, as
such, is adopted out of necessity, not by deliberate choice. In
actual practice, retrenchment may take one of the following
forms:
 Outright sale to another company,
 Leveraged Buy-out (LBO), and
 Spin-off.
Reasons for Divestment

 Strong Focus: Spinning off unviable units may help a firm
focus on its core business more closely and regain the lost
ground quickly.
 Unlock Critical Funds: The firm can sell those assets
whose values have plateaued or declined as a result of
ignorance or neglect.
NOTES  Invest in Emerging Technologies: Firms can use the cash

generated through spin offs in emerging or future
technologies that better leverage or revitalise their core
competencies.
 A Maker of Policy: Sometimes the firm may spin off units in
fields where it has no dominance. If the firm wants to be in
the top slot, it must naturally get out of all those ventures
where it is only a marginal player (like what K.M. Birla did
in paper, sugar and steel – all peripheral businesses in
Birla’s kitty).
 From Red to Black: Assets bought at inflated prices might
drain out cash flows, especially if they are funded through
debt capital. Spinning off such assets would help a firm
liquidate debts, improve the cash flow position and
recharge its operations in areas where it has immense
strength.
 Unviable Projects: If the business becomes unviable due to
stiff competition or change in government policy it is
better to get out quickly.
Jack Welch the former CEO of GE used retrenchment to great effect to the extent that he was
A leveraged buy out occurs when a company’s shareholders are bought out (hence buyout) by the company’s management and other priv
7.8 TURNAROUND STRATEGIES

A turnaround is designed to reverse a negative trend and
bring the organisation back to normal health and profitability.
The basic purpose of a turnaround is to transform the
corporation into a leaner and more efficient firm. It usually
involves getting rid of unprofitable products, trimming the
workforce, pruning distribution outlets, and finding other useful
ways of making the organisation more efficient. If the
turnaround is successful, the organisation may then focus on
growth strategy.
7.8.1 CONDITIONS FOR TURNAROUND STRATEGIES

Firms often lose their grip over markets due to various internal
and external factors. If they have to survive and flourish in a
competitive environment, they have to identify the danger
signals quite early and
NOTES
undertake rectificational steps immediately. Such negative
trends are not difficult to trace.
 Continuous cash flow problems.
 Declining profits; lower profit margins.
 Dwindling market share.
 High employee turnover.
 Low morale of employees.
 Underutilisation of capacity.
 Raw material supply problems.
 Rising input prices.
 Strikes and lockouts.
 Increased competition, uncompetitive products or services.
 Recession.
 Mismanagement etc.
7.8.2 ACTION PLANS FOR TURNAROUND

The action plans for achieving a turnaround aim at yielding
immediate results focusing attention on certain key areas like
quality improvement, cost reduction, new product
development, rejuvenated marketing effort etc. Such short-
term action plans usually tackle the following issues:
 Change the leader.
 Change the prices – depending on the elasticity of demand.
 Focus attention on specific customer and specific products.
 Extend the product’s life through product improvements.
 Replace existing products with new ones.
 Focus on ‘power brands’ that are valued, visible and bring
in most of the revenues of the firm; in short, rationalising
the products line.
 Liquidating assets for generating cash.
 Better internal coordination.
 Emphasis on selling, advertising etc.
Fill in the blank:

12.A turnaround is designed to reverse a negative trend and bring the organisation back to normal health and …………………….
NOTES
In the aftermath of the global meltdown of 2008, Vikram Pandit the then CEO of Citibank Corporation was credited with the turnaround o
7.9 COMBINATION STRATEGIES

Large, diversified organisations generally use a mixture of
stability, expansion or retrenchment strategies either
simultaneously (at the same time in various businesses) or
sequentially (at different times in the same business). For
example, growth could be achieved by an organisation
through acquisition of new businesses or divesting itself of
unprofitable ventures. Depending on situational demands,
therefore, an organisation can employ various strategies to
survive, grow and remain profitable.
In recent times, three more strategies have gained popularity
namely, joint ventures, strategic alliances and consortia.
 Joint Ventures: When two or more firms pool resources to
accomplish a task that a firm could not accomplish, or that
can be done more effectively by joining, the result is a
joint venture. Like a merger or acquisition, a joint venture
is not a strategy but a way of implementing a strategy. It
helps a firm to undertake giant projects by spreading risks
more efficiently. Examples include, the joint ventures
between Thermax and Babcock and Wilcox; Maruti Udyog
and Suzuki; TELCO and Hitachi Construction Company etc;
in addition the Tata’s, the Birla’s, the Oberoi’s, the
Kirloskar’s and many software giants also have joint
ventures with global partners from outside the country. To
be successful, however, joint venture partners should be
willing to share technology in the real sense, resolve
cultural differences clearly and integrate operations at
various locations in a more compact manner. In any case,
“joint ventures often limit the discretion, control and profit
potential of partners, while demanding managerial
attention and other resources that might be directed
toward the firm’s mainstream activities”.
 Strategic Alliances: In a joint venture, the companies involved
take an equity stake in one another. In strategic alliances,
however, the partners contribute their skills and expertise
to a cooperatively conceived and executed project for a
specific period. Partners, during the said period, try to
peep into each other’s know-how and learn from one
another. Alliances could take the shape of a licensing
agreement too, where licensor would transfer his property
right over patents, trade marks, technical know-how etc.,
to a licensee for a specified time in return for a royalty,
Outsourcing is another useful approach to strategic
alliances that helps firms to gain a competitive
advantage
NOTES
(especially in technology intensive fields such as software,
telecommunications, electronics, bio-technology etc.)
 Consortia: Consortia are interlocking relationships between
businesses of an industry. It works more or less like a
Japanese Keiretsu involving upto 50 different firms that are
joined around a large trading company or bank and are
coordinated through interlocking directories and stock
exchanges (like Sumitomo, Mitsui, Mitsubishi, Sanwa).
Fill in the blanks:

are interlocking relationships between businesses of an
industry.
In a, the companies involved take an equity stake in
one another.
Combination strategies are unpredictable to competitors and hence better than focus strategies. Discuss.
CORPORATE RESTRUCTURING
7.10
STRATEGY
Corporate restructuring is one of the most complex and
fundamental phenomena that management confronts. Each
company has two opposite strategies from which to choose: to
diversify or to refocus on its core business. While diversifying
represents the expansion of corporate activities, refocus
characterises a concentration on its core business. From this
perspective, corporate restructuring is reduction in
diversification.
Corporate restructuring is an episodic exercise, not related to
investments in new plant and machinery which involve a
significant change in one or more of the following:
 Pattern of ownership and control
 Composition of liability
 Asset mix of the firm.
It is a comprehensive process by which a co. can consolidate
its business operations and strengthen its position for
achieving the desired objectives:
 Synergetic
 Competitive
 Successful
NOTES It involves significant re-orientation, re-organisation or

realignment of assets and liabilities of the organisation through
conscious management action to improve future cash flow
stream and to make more profitable and efficient.
7.10.1 MEANING AND NEED FOR

CORPORATE RESTRUCTURING
Corporate restructuring is the process of redesigning one or
more aspects of a company. The process of reorganising a
company may be implemented due to a number of different
factors, such as positioning the company to be more
competitive, survive a currently adverse economic climate, or
poise the corporation to move in an entirely new direction.
Here are some examples of why corporate restructuring may
take place and what it can mean for the company.
Restructuring a corporate entity is often a necessity when the
company has grown to the point that the original structure can
no longer efficiently manage the output and general interests
of the company. For example, a corporate restructuring may
call for spinning off some departments into subsidiaries as a
means of creating a more effective management model as well
as taking advantage of tax breaks that would allow the
corporation to divert more revenue to the production process.
In this scenario, the restructuring is seen as a positive sign of
growth of the company and is often welcome by those who
wish to see the corporation gain a larger market share.
Corporate restructuring may also take place as a result of the
acquisition of the company by new owners. The acquisition
may be in the form of a leveraged buyout, a hostile takeover,
or a merger of some type that keeps the company intact as a
subsidiary of the controlling corporation. When the
restructuring is due to a hostile takeover, corporate raiders
often implement a dismantling of the company, selling off
properties and other assets in order to make a profit from the
buyout. What remains after this restructuring may be a smaller
entity that can continue to function, albeit not at the level
possible before the takeover took place.
In general, the idea of corporate restructuring is to allow the
company to continue functioning in some manner. Even when
corporate raiders break up the company and leave behind a
shell of the original structure, there is still usually a hope, what
remains can function well enough for a new buyer to purchase
the diminished corporation and return it to profitability.
7.10.2 PURPOSE OF CORPORATE RESTRUCTURING

To enhance the shareholder value, the company should
continuously evaluate its:
 Portfolio of businesses.
 Capital mix, Ownership & Asset arrangements to find
opportunities to increase the shareholder’s value.
NOTES
 To focus on asset utilisation and profitable
investment opportunities.
 To reorganise or divest less profitable or loss making
businesses/ products.
 The company can also enhance value through capital
restructuring, it can innovate securities that help to reduce
cost of capital.
7.10.3 CHARACTERISTICS OF CORPORATE

RESTRUCTURING
Following are the basic characteristics of corporate restructuring:
 To improve the company’s Balance sheet, (by selling
unprofitable division from its core business).
 To accomplish staff reduction (by selling/closing of
unprofitable portion)
 Changes in corporate management
 Sale of underutilised assets, such as patents/brands.
 Outsourcing of operations such as payroll and technical
support to a more efficient third party.
 Relocating certain business units like Manufacturing unit to
a cost-effective location.
 Reorganisation of functions such as sales, marketing, and
distribution
 Renegotiation of labour contracts to reduce overhead
 Refinancing of corporate debt to reduce interest payments.
 A major public relations campaign to reposition the co.,
with consumers.
7.10.4 CATEGORY OF CORPORATE RESTRUCTURING

Corporate restructuring entails a range of activities including
financial restructuring and organisation restructuring.
Financial Restructuring
Financial restructuring is the reorganisation of the financial
assets and liabilities of a corporation in order to create the
most beneficial financial environment for the company. The
process of financial restructuring is often associated with
corporate restructuring, in that restructuring the general
function and composition of the company is likely to impact
the financial health of the corporation. When completed, this
reordering of corporate assets and liabilities can help the
company to remain competitive, even in a depressed economy.
Just about every business goes through a phase of financial
restructuring at one time or another. In some cases, the
process of
NOTES restructuring takes place as a means of allocating resources for

a new marketing campaign or the launch of a new product line.
When this happens, the restructure is often viewed as a sign
that the company is financially stable and has set goals for
future growth and expansion.
Need for Financial Restructuring

The process of financial restructuring may be undertaken as a
means of eliminating waste from the operations of the
company. For example, the restructuring effort may find that
two divisions or departments of the company perform related
functions and in some cases duplicate efforts. Rather than
continue to use financial resources to fund the operation of
both departments, their efforts are combined. This helps to
reduce costs without impairing the ability of the company to
still achieve the same ends in a timely manner.
In some cases, financial restructuring is a strategy that must
take place in order for the company to continue operations.
This is especially true when sales decline and the corporation
no longer generates a consistent net profit. A financial
restructuring may include a review of the costs associated with
each sector of the business and identify ways to cut costs and
increase the net profit. The restructuring may also call for the
reduction or suspension of production facilities that are
obsolete or currently produce goods that are not selling well
and are scheduled to be phased out.
Financial restructuring also take place in response to a drop in
sales, due to a sluggish economy or temporary concerns about
the economy in general. When this happens, the corporation
may need to reorder finances as a means of keeping the
company operational through this rough time. Costs may be
cut by combining divisions or departments, reassigning
responsibilities and eliminating personnel, or scaling back
production at various facilities owned by the company. With this
type of corporate restructuring, the focus is on survival in a
difficult market rather than on expanding the company to meet
growing consumer demand.
All businesses must pay attention to matters of finance in order
to remain operational and to also hopefully grow over time.
From this perspective, financial restructuring can be seen as a
tool that can ensure the corporation is making the most
efficient use of available resources and thus generating the
highest amount of net profit possible within the current set
economic environment.
Organisational Restructuring
In organisational restructuring, the focus is on
management and internal corporate governance structures.
Organisational restructuring has become a very common
practice amongst the firms in order to match the growing
competition of the market. This makes the firms to change the
organisational structure of the company for the betterment of
th
e
bu
si
ne
ss
.
NOTES
Need for Organisation Restructuring
 New skills and capabilities are needed to meet current or
expected operational requirements.
 Accountability for results are not clearly communicated
and measurable resulting in subjective and biased
performance appraisals.
 Parts of the organisation are significantly over or under staffed.
 Organisational communications are inconsistent,
fragmented, and inefficient.
 Technology and/or innovation are creating changes in
workflow and production processes.
 Significant staffing increases or decreases are contemplated.
 Personnel retention and turnover is a significant problem.
 Workforce productivity is stagnant or deteriorating.
 Morale is deteriorating.
Some of the most common features of organisational restructures are:
 Regrouping of business: This involves the firms regrouping
their existing business into fewer business units. The
management then handles theses lesser number of
compact and strategic business units in an easier and
better way that ensures the business to earn profit.
 Downsizing: Often companies may need to retrench the
surplus manpower of the business. For that purpose
offering Voluntary Retirement Schemes (VRS) is the most
useful tool taken by the firms for downsizing the business’s
workforce.
 Decentralisation: In order to enhance, the organisational
response to the developments in dynamic environment,
the firms go for decentralisation. This involves reducing
the layers of management in the business so that the
people at lower hierarchy are benefited.
 Outsourcing: Outsourcing is another measure of
organisational restructuring that reduces the manpower
and transfers the fixed costs of the company to variable
costs.
 Enterprise Resource Planning: Enterprise resource planning is
an integrated management information system that is
enterprise- wide and computer-base. This management
system enables the business management to understand
any situation in faster and better way. The advancement of
the information technology enhances the planning of a
business.
 Business Process Engineering: It involves redesigning the
business process so that the business maximises the
operation and value added content of the business while
minimising everything else.
NOTES  Total Quality Management: The businesses now have started

to realise that an outside certification for the quality of the
product helps to get a good will in the market. Quality
improvement is also necessary to improve the customer
service and reduce the cost of the business.
The perspective of organisational restructuring may be
different for the employees. When a company goes for the
organisational restructuring, it often leads to reducing the
manpower and hence meaning that people are losing their
jobs. This may decrease the morale of employee in a large
manner. Hence many firms provide strategies on career
transitioning and outplacement support to their existing
employees for an easy transition to their next job.
Sell-offs
NMI
MS Figure 7.1: Corporate Restructuring Activities
Leveraged Buyout, Hostile Takeover & Merger

Corporate restructuring may take place as a result of the
acquisition of the company by new owners. The acquisition
may be in the form of a leveraged buyout, a hostile takeover,
or a merger of some type that keeps the company intact as a
subsidiary of the controlling corporation.
Hostile Takeover
A hostile takeover is a type of corporate takeover which is
carried out against the wishes of the board of the target
company. This unique type of acquisition does not occur
nearly as frequently as friendly
NOTES
takeovers, in which the two companies work together because
the takeover is perceived as beneficial. Hostile takeovers can
be traumatic for the target company, and they can also be
risky for the other side, as the acquiring company may not be
able to obtain certain relevant information about the target
company.
Companies are bought and sold on a daily basis. There are two
types of sale agreements. In the first, a merger, two companies
come together, blending their assets, staff, facilities, and so
forth. After a merger, the original companies cease to exist,
and a new company arises instead. In a takeover, a company is
purchased by another company. The purchasing company owns
all of the target company’s assets including company patents,
trademarks, and so forth. The original company may be
entirely swallowed up, or may operate semi-independently
under the umbrella of the acquiring company.
Typically, a company which wishes to acquire another company
approaches the target company’s board with an offer. The
board members consider the offer, and then choose to accept
or reject it. The offer will be accepted if the board believes that
it will promote the long term welfare of the company, and it will
be rejected if the board dislike the terms or it feels that a
takeover would not be beneficial. When a company pursues
takeover after rejection by a board, it is a hostile takeover. If a
company bypasses the board entirely, it is also termed a
hostile takeover.
Publicly traded companies are at risk of hostile takeover
because opposing companies can purchase large amounts of
their stock to gain a controlling share. In this instance, the
company does not have to respect the feelings of the board
because it already essentially owns and controls the firm. A
hostile takeover may also involve tactics like trying to sweeten
the deal for individual board members to get them to agree.
An acquiring firm takes a risk by attempting a hostile takeover.
Because the target firm is not cooperating, the acquiring firm
may unwittingly take on debts or serious problems, since it
does not have access to all of the information about the
company. Many firms also have trouble getting financing for
hostile takeovers, since some banks are reluctant to lend in
these situations.
Merger
A merger occurs when two companies combine to form a single
company. A merger is very similar to an acquisition or takeover,
except that in the case of a merger existing stockholders of
both companies involved retain a shared interest in the new
corporation. By contrast, in an acquisition one company
purchases a bulk of a second company’s stock, creating an
uneven balance of ownership in the new combined company.
The entire merger process is usually kept secret from the
general public, and often from the majority of the employees at
the involved
NOTES companies. Since the majority of merger attempts do not

succeed, and most are kept secret, it is difficult to estimate
how many potential mergers occur in a given year. It is likely
that the number is very high, however, given the amount of
successful mergers and the desirability of mergers for many
companies.
A merger may be sought for a number of reasons, some of
which are beneficial to the shareholders, some of which are
not. One use of the merger, for example, is to combine a very
profitable company with a losing company in order to use the
losses as a tax write-off to offset the profits, while expanding
the corporation as a whole.
Increasing one’s market share is another major use of the
merger, particularly amongst large corporations. By merging
with major competitors, a company can come to dominate the
market they compete in, giving them a freer hand with regard
to pricing and buyer incentives. This form of merger may cause
problems when two dominating companies merge, as it may
trigger litigation regarding monopoly laws.
Another type of popular merger brings together two companies
that make different, but complementary, products. This may
also involve purchasing a company which controls an asset
your company utilises somewhere in its supply chain. Major
manufacturers buying out a warehousing chain in order to save
on warehousing costs, as well as making a profit directly from
the purchased business, is a good example of this. PayPal’s
merger with eBay is another good example, as it allowed eBay
to avoid fees they had been paying, while tying two
complementary products together.
A merger is usually handled by an investment banker, who aids
in transferring ownership of the company through the strategic
issuance and sale of stock. Some have alleged that this
relationship causes some problems, as it provides an incentive
for investment banks to push existing clients towards a merger
even in cases where it may not be beneficial for the
stockholders.
Mergers and acquisitions are means by which corporations
combine with each other. Mergers occur when two or more
corporations become one. To protect shareholders, state law
provides procedures for the merger. A vote of the board of
directors and then a vote of the shareholders of both
corporations is usually required. Following a merger, the two
corporations cease to exist as separate entities. In the classic
merger, the assets and liabilities of one corporation are
automatically transferred to the other. Shareholders of the
disappearing company become shareholders in the surviving
company or receive compensation for their shares.
Mergers may come as the result of a negotiation between two
corporations interested in combining, or when one or more
corporations “target” another for acquisition. Combinations
that occur with the approval and encouragement of the target
co pany’s management are called “friendly” mergers;
m combinations that occur
NOTES
despite opposition from the target company are called
“hostile” mergers or takeovers. In either case, these
consolidations can bring together corporations of roughly the
same size and market power, or corporations of vastly different
sizes and market power.
The term “acquisition” is typically used when one company
takes control of another. This can occur through a merger or a
number of other methods, such as purchasing the majority of a
company’s stock or all of its assets. In a purchase of assets,
the transaction is one that must be negotiated with the
management of the target company. Compared to a merger,
an acquisition is treated differently for tax purposes, and the
acquiring company does not necessarily assume the liabilities
of the target company.
A “tender offer” is a popular way to purchase a majority of
shares in another company. The acquiring company makes a
public offer to purchase shares from the target company’s
shareholders, thus by passing the target company’s
management. In order to induce the shareholders to sell, or
“tender,” their shares, the acquiring company typically offers a
purchase price higher than market value, often substantially
higher. Certain conditions are often placed on a tender offer,
such as requiring the number of shares tendered be sufficient
for the acquiring company to gain control of the target. If the
tender offer is successful and a sufficient percentage of shares
are acquired, control of the target company through the normal
methods of shareholder democracy can be taken and
thereafter the target company’s management replaced. The
acquiring company can also use their control of the target
company to bring about a merger of the two companies.
Often, a successful tender offer is followed by a “cash-out
merger.” The target company (now controlled by the acquiring
company) is merged into the acquiring company, and the
remaining shareholders of the target company have their
shares transformed into a right to receive a certain amount of
cash.
Another common merger variation is the “triangular” merger,
in which a subsidiary of the surviving company is created and
then merged with the target. This protects the surviving
company from the liabilities of the target by keeping them
within the subsidiary rather than the parent. A “reverse
triangular merger” has the acquiring company create a
subsidiary, which is then merged into the target company. This
form preserves the target company as an ongoing legal entity,
though its control has passed into the hands of the acquirer.
In general, mergers and other types of acquisitions are
performed in the hopes of realising an economic gain. For
such a transaction to be justified, the two firms involved must
be worth more together than they were apart. Some of the
potential advantages of mergers and acquisitions include
achieving economies of scale, combining complementary
resources, garnering tax advantages, and eliminating
inefficiencies. Other reasons for considering growth through
NOTES acquisitions include obtaining proprietary rights to products or

services, increasing market power by purchasing competitors,
shoring up weaknesses in key business areas, penetrating new
geographic regions, or providing managers with new
opportunities for career growth and advancement. Since
mergers and acquisitions are so complex, however, it can be
very difficult to evaluate the transaction, define the associated
costs and benefits, and handle the resulting tax and legal
issues.
When a small business owner chooses to merge with or sell out
to another company, it is sometimes called “harvesting” the
small business. In this situation, the transaction is intended to
release the value locked up in the small business for the
benefit of its owners and investors. The impetus for a small
business owner to pursue a sale or merger may involve estate
planning, a need to diversify his or her investments, an
inability to finance growth independently, or a simple need for
change. In addition, some small businesses find that the best
way to grow and compete against larger firms is to merge with
or acquire other small businesses.
In principle, the decision to merge with or acquire another firm
is a capital budgeting decision much like any other. But
mergers differ from ordinary investment decisions in at least
five ways. First, the value of a merger may depend on such
things as strategic fits that are difficult to measure. Second,
the accounting, tax, and legal aspects of a merger can be
complex. Third, mergers often involve issues of corporate
control and are a means of replacing existing management.
Fourth, mergers obviously affect the value of the firm, but they
also affect the relative value of the stocks and bonds. Finally,
mergers are often “unfriendly.”
Benefits of Mergers and Acquisitions

Merger refers to the process of combination of two companies,
whereby a new company is formed. An acquisition refers to the
process whereby a company simply purchases another
company. In this case there is no new company being formed.
Benefits of mergers and acquisitions are quite a handful.
Mergers and acquisitions generally succeed in generating cost
efficiency through the implementation of economies of scale. It
may also lead to tax gains and can even lead to a revenue
enhancement through market share gain. The principal
benefits from mergers and acquisitions can be listed as
increased value generation, increase in cost efficiency and
increase in market share.
Mergers and acquisitions often lead to an increased value
generation for the company. It is expected that the shareholder
value of a firm after mergers or acquisitions would be greater
than the sum of the shareholder values of the parent
companies. An increase in cost efficiency is affected through
the procedure of mergers and acquisitions. This is because
mergers and acquisitions lead to economies of scale. This in
tu
rn
pr
o
m
ot
es
co
st
e
ffi
ci
en
cy.
As
th
e
pa
re
nt
NOTES
firms amalgamate to form a bigger new firm the scale of
operations of the new firm increases. As output production
rises there are chances that the cost per unit of production will
come down.
Demerger
Demergers are situations in which divisions or subsidiaries of
parent companies are split off into their own independent
corporations. The process for a demerger can vary slightly,
depending on the reasons behind the implementation of the
split. Generally, the parent company maintains some degree of
financial interest in the newly formed corporation, although
that interest may not be enough to maintain control of the
functionality of the new corporate entity.
A demerger results in the transfer by a company of one or
more of its undertakings to another company. The company
whose undertaking is transferred is called the demerged
company and the company (or the companies) to which the
undertaking is transferred is referred to as the resulting
company.
A demerger may take the form of: A spin-off or a split-up.
7.10.5 METHODS OF CORPORATE RESTRUCTURING

 Joint ventures
 Sell off and spin off
 Divestitures
 Equity carve out
 Leveraged Buy Outs (LBO)
 Management buy outs
 Master limited partnerships
 Employee Stock Ownership Plans (ESOP)
Joint Venture
Joint ventures are new enterprises owned by two or more
participants. They are typically formed for special purposes for
a limited duration. It is a combination of subsets of assets
contributed by two (or more) business entities for a specific
business purpose and a limited duration. Each of the venture
partners continues to exist as a separate firm, and the joint
venture represents a new business enterprise. It is a contract
to work together for a period of time each participant expects
to gain from the activity but also must make a contribution.
Example: GM-Toyota JV: GM hoped to gain new experience in the
management techniques of the Japanese in building high-
quality, low-cost compact & subcompact cars. Whereas, Toyota
was seeking to learn from the management traditions that had
made GE the no. 1 auto producer in the world and in addition
to learn how to operate an auto company in the environment
under the conditions in the
NOTES US, dealing with contractors, suppliers, and workers. DCM

group and Daewoo motors entered in to JV to form DCM
Daewoo Ltd. to manufacture automobiles in India.
Reasons for Forming a Joint Venture

 Build on company’s strengths.
 Spreading costs and risks.
 Improving access to financial resources.
 Economies of scale and advantages of size.
 Access to new technologies and customers.
 Access to innovative managerial practices.
Rational for Joint Ventures

 To augment insufficient financial or technical ability to
enter a particular line or business.
 To share technology and generic management skills in
organisation, planning and control.
 To diversify risk.
 To obtain distribution channels or raw materials supply.
 To achieve economies of scale.
 To extend activities with smaller investment than if done
independently.
 To take advantage of favourable tax treatment or political
incentives (particularly in foreign ventures).
Tax Aspects of Joint Venture

If a corporation contributes a patent technology to a Joint
Venture, the tax consequences may be less than on royalties
earned though a licensing arrangements.
Example: One partner contributes the technology, while another
contributes depreciable facilities. The depreciation offsets the
revenues accruing to the technology. The J.V. may be taxed at a
lower rate than any of its partner & the partners pay a later
capital gain tax on the returns realised by the J.V. if and when it
is sold. If the J.V. is organised as a corporation, only its assets
are at risk. The partners are liable only to the extent of their
investment, this is particularly important in hazardous
industries where the risk of workers, production, or
environmental liabilities is high.
Spin-off
Spin-offs are a way to get rid of underperforming or non-core
business divisions that can drag down profits.
NOTES
Process of Spin-off
 The company decides to spin off a business division.
 The parent company files the necessary paperwork with
the Securities and Exchange Board of India (SEBI).
 The spin-off becomes a company of its own and must also
file paperwork with the SEBI.
 Shares in the new company are distributed to parent
company shareholders.
 The spin-off company goes public.
Notice that the spin-off shares are distributed to the parent
company shareholders. There are two reasons why this creates
value:
 Parent company shareholders rarely want anything to do
with the new spin-off. After all, it’s an underperforming
division that was cut off to improve the bottom line. As a
result, many new shareholders sell immediately after the
new company goes public.
 Large institutions are often forbidden to hold shares in
spin- offs due to the smaller market capitalisation,
increased risk, or poor financials of the new company.
Therefore, many large institutions automatically sell their
shares immediately after the new company goes public.
Simple supply and demand logic tells us that such large
number of shares on the market will naturally decrease the
price, even if it is not fundamentally justified. It is this
temporary mispricing that gives the enterprising investor an
opportunity for profit. There is no money transaction in spin-
off. The transaction is treated as stock dividend and tax free
exchange.
Split-off and Split-up

Split-off: It is a transaction in which some, but not all, parent
company shareholders receive shares in a subsidiary, in return
for relinquishing their parent company’s share. In other words
some parent company shareholders receive the subsidiary’s
shares in return for which they must give up their parent
company shares.
Features: A portion of existing shareholders receives stock in a
subsidiary in exchange for parent company stock.
Split-up: It is a transaction in which a company spins off all of its
subsidiaries to its shareholders & ceases to exist.
 The entire firm is broken up in a series of spin-offs.
 The parent no longer exists and
 Only the new offspring survive.
NOTES In a split-up, a company is split up into two or more

independent companies. As a sequel, the parent company
disappears as a corporate entity and in its place two or more
separate companies emerge.
Squeeze-out: The elimination of minority shareholders by
controlling shareholders.
Sell-off
Selling a part or all of the firm by any one of means: sale,
liquidation, spin-off & so on or General term for divestiture of
part/all of a firm by any one of a no. of means: sale, liquidation,
spin-off and so on.
Partial Sell-off
 A partial sell-off/slump sale, involves the sale of a business
unit or plant of one firm to another.
 It is the mirror image of a purchase of a business unit or plant.
 From the seller’s perspective, it is a form of contraction;
from the buyer’s point of view it is a form of expansion.
Example: When Coromandal Fertilizers Limited sold its cement
division to India Cement Limited, the size of Coromandal
Fertilizers contracted whereas the size of India Cements
Limited expanded.
Motives for Sell-off

 Raising capital.
 Curtailment of losses.
 Strategic realignment.
 Efficiency gain.
Strategic Rationale: Divesting a subsidiary can achieve a variety of
strategic objectives, such as:
 Unlocking hidden value: Establish a public market valuation
for undervalued assets and create a pure-play entity that
is transparent and easier to value.
 Non-diversification: Divest non-core businesses and sharpen
strategic focus when direct sale to a strategic or financial
buyer is either not compelling or not possible.
 Institutional sponsorship: Promote equity research
coverage and ownership by sophisticated institutional
investors, either of which tend to validate SpinCo as a
standalone business.
 Public currency: Create a public currency for acquisitions
and stock-based compensation programs.
 Motivating management: Improve performance by better
aligning management incentives with Spin Co’s
performance (using Spin Co’s, rather than Parent Company,
stock-based
NOTES
awards), creating direct accountability to public
shareholders, and increasing transparency into
management performance.
 Eliminating dissynergies: Reduce bureaucracy and give
Spin Company management complete autonomy.
 Anti-trust: Break up a business in response to anti-trust concerns.
 Corporate defense: Divest “crown jewel” assets to make a
hostile takeover of Parent Company less attractive.
Divestitures
Divesture is a transaction through which a firm sells a portion
of its assets or a division to another company. It involves selling
some of the assets or division for cash or securities to a third
party which is an outsider.
Divestiture is a form of contraction for the selling company
means of expansion for the purchasing company. It represents
the sale of a segment of a company (assets, a product line, a
subsidiary) to a third party for cash and or securities.
Mergers, assets purchase and takeovers lead to expansion
in some way or the other. They are based on the principle of
synergy which says 2 + 2 = 5!, divestiture on the other
hand is based on the principle of “anergy” which says 5 – 3
= 3!
Among the various methods of divestiture, the most important
ones are partial sell-off, demerger (spin-off & split off) and
equity carve out. Some scholars define divestiture rather
narrowly as partial sell off and some scholars define divestiture
more broadly to include partial sell offs, demergers and so on.
Motives for Divestitures

 Change of focus or corporate strategy
 Unit unprofitable can mistake
 Sale to pay off leveraged finance
 Antitrust
 Need cash
 Defend against takeover
 Good price.
Equity Carve Out

A transaction in which a parent firm offers some of a
subsidiaries common stock to the general public, to bring in a
cash infusion to the parent without loss of control. In other
words equity carve outs are those in which some of a
subsidiaries shares are offered for a sale to the general public,
bringing an infusion of cash to the parent firm
NOTES without loss of control. Equity carve out is also a means of

reducing their exposure to a riskier line of business and to
boost shareholders value.
Features of Equity Carve Out

 It is the sale of a minority or majority voting control in a
subsidiary by its parents to outsider investors. These are
also referred to as “split-off IPO’s”.
 A new legal entity is created.
 The equity holders in the new entity need not be the same
as the equity holders in the original seller.
 A new control group is immediately created.
Difference between Spin-off and Equity Carve Outs

 In a spin off, distribution is made pro rata to shareholders
of the parent company as a dividend, a form of non cash
payment to shareholders. In equity carve out; stock of
subsidiary is sold to the public for cash which is received
by parent company.
 In a spin off, parent firm no longer has control over
subsidiary assets. In equity carve out, parent sells only a
minority interest in subsidiary and retains control.
Leveraged Buyout
A buyout is a transaction in which a person, group of people, or
organisation buys a company or a controlling share in the stock
of a company. Buyouts great and small occur all over the
world on a daily basis. Buyouts can also be negotiated with
people or companies on the outside. For example, a large
candy company might buy out smaller candy companies with
the goal of cornering the market more effectively and
purchasing new brands which it can use to increase its
customer base. Likewise, a company which makes widgets
might decide to buy a company which makes thingamabobs in
order to expand its operations, using an establishing company
as a base rather than trying to start from scratch.
In a leveraged buyout, the company is purchased primarily
with borrowed funds. In fact, as much of 90% of the purchase
price can be borrowed. This can be a risky decision, as the
assets of the company are usually used as collateral, and if the
company fails to perform, it can go bankrupt because the
people involved in the buyout will not be able to service their
debt. Leveraged buyouts wax and wane in popularity
depending on economic trends.
The buyers in the buyout gain control of the company’s assets,
and also have the right to use trademarks, service marks, and
other registered copyrights of the company. They can use the
company’s name and reputation, and may opt to retain several
key employees who can make the transition as smooth as
possible. However, people in senior
NOTES
management may find that they are not able to keep their jobs
because the purchasing company does not want redundant
personnel, and it wants to get its personnel into key positions
to manage the company in accordance with their business
practices.
A leveraged buyout involves transfer of ownership
consummated mainly with debt. While some leveraged
buyouts involve a company in its entirety, most involve a
business unit of a company. Often the business unit is bought
out by its management and such a transaction is called
management buyout (MBO). After the buyout, the company (or
the business unit) invariably becomes a private company.
What does debt do?

A leveraged buyout entails considerable dependence on debt.
What does it imply?

Debt has a bracing effect on management, whereas equity
tends to have a soporific influence. Debt spurs
management to perform whereas equity lulls management to
relax and take things easy.
Risks and Rewards

The sponsors of a leveraged buyout are lured by the prospect
of wholly (or largely) owning a company or a division thereof,
with the help of substantial debt finance. They assume
considerable risks in the hope of reaping handsome rewards.
The success of the entire operation depends on their ability to
improve the performance of the unit, contain its business risks,
exercise cost controls, and liquidate disposable assets. If they
fail to do so, the high fixed financial costs can jeopardise the
venture.
Purpose of Debt Financing for Leveraged Buyout

 The use of debt increases the financial return to the
private equity sponsor.
 The tax shield of the acquisition debt, according to the
Modigliani- Miller theorem with taxes, increases the value
of the firm.
Features of Leveraged Buyout

 Low existing debt loads;
 A multi-year history of stable and recurring cash flows;
 Hard assets (property, plant and equipment, inventory,
receivables) that may be used as collateral for lower cost
secured debt;
 The potential for new management to make operational or
other improvements to the firm to boost cash flows;
 Market conditions and perceptions that depress the
valuation or stock price.
NOTES Example:
 Acquisition of Corus by Tata.
 Kohlberg Kravis Roberts, the New York private equity firm,
has agreed to pay about $900 million to acquire 85
percent of the Indian software maker Flextronics Software
Systems is the largest leveraged buyout in India.
Management Buyout
In this case, management of the company buys the company,
and they may be joined by employees in the venture. This
practice is sometimes questioned because management can
have unfair advantages in negotiations, and could potentially
manipulate the value of the company in order to bring down
the purchase price for themselves. On the other hand, for
employees and management, the possibility of being able to
buy out their employers in the future may serve as an
incentive to make the company strong. It occurs when a
company’s managers buy or acquire a large part of the
company. The goal of an MBO may be to strengthen the
managers’ interest in the success of the company.
Purpose of MBO
From management point of view may be:
 To save their jobs, either if the business has been
scheduled for closure or if an outside purchaser would
bring in its own management team.
 To maximise the financial benefits they receive from the
success they bring to the company by taking the profits for
themselves.
 To ward off aggressive buyers.
The goal of an MBO may be to strengthen the manager’s
interest in the success of the company. Key considerations in
MBO are fairness to shareholders price, the future business
plan, and legal and tax issues.
Benefits of MBO
 It provides an excellent opportunity for management of
undervalued co’s to realise the intrinsic value of the
company.
 Lower agency cost: cost associated with conflict of interest
between owners and managers.
 Source of tax savings: since interest payments are tax
deductible, pushing up gearing rations to fund a
management buyout can provide large tax covers.
Master Limited Partnership

Master Limited Partnership’s are a type of limited
partnership in which the shares are publicly traded. The
limited partnership
NOTES
interests are divided into units which are traded as shares of
common stock. Shares of ownership are referred to as units.
MLPs generally operate in the natural resource (petroleum and
natural gas extraction and transportation), financial services,
and real estate industries.
The advantage of a Master Limited Partnership is it combines
the tax benefits of a limited partnership (the partnership does
not pay taxes from the profit - the money is only taxed when
unit holders receive distributions) with the liquidity of a
publicly traded company.
There are two types of partners in this type of partnership:
 The limited partner is the person or group that provides
the capital to the MLP and receives periodic income
distributions from the Master Limited Partnership’s cash
flow.
 The general partner is the party responsible for managing
the Master Limited Partnership’s affairs and receives
compensation that is linked to the performance of the
venture.
Employees Stock Option Plan (ESOP)

An Employee Stock Option is a type of defined contribution
benefit plan that buys and holds stock. ESOP is a qualified,
defined contribution, employee benefit plan designed to invest
primarily in the stock of the sponsoring employer. Employee
Stock Options are “qualified” in the sense that the ESOP’s
sponsoring company, the selling shareholder and participants
receive various tax benefits.
With an ESOP, employees never buy or hold the stock directly.
Features
 Employee Stock Ownership Plan (ESOP) is an employee
benefit plan.
 The scheme provides employees the ownership of stocks
in the company.
 It is one of the profit sharing plans.
 Employers have the benefit to use the ESOP’s as a tool to
fetch loans from a financial institute.
 It also provides for tax benefits to the employers.
Benefits for the Company

Increased cash flow, tax savings, and increased productivity
from highly motivated workers. The benefit for the employees:
is the ability to share in the company’s success.
How it Works?
 Organisations strategically plan the ESOPs and
make arrangements for the purpose.
NOTES  They make annual contributions in a special trust set up

for ESOPs.
 An employee is eligible for the ESOP’s only after he/she
has completed 1000 hours within a year of service.
 After completing 10 years of service in an organisation or
reaching the age of 55, an employee should be given the
opportunity to diversify his/her share up to 25% of the
total value of ESOP’s.
Fill in the blanks:

is a form of contraction for the selling company means
of expansion for the purchasing company.
……… is a qualified, defined contribution, employee benefit plan designed to invest primarily
Hindustan Motors, the maker of the Ambassador car shut down recently. Write a 200-words report on prima facie corporate restructuring
7.11 SUMMARY
 Corporate-level strategy involves determining in what
business or businesses, the firm expects to compete.
 For companies with a single market or a few closely related
markets, the corporate-level strategy involves developing
an overall strategy.
 Most large corporations, however, have complicated
organisational structures with stand-alone, often
unrelated, business units or divisions, each with different
products, markets and competitors.
 The corporate-level strategy then involves making
decisions on whether to add divisions and product lines to
manage the business’s portfolio of businesses.
 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.
 Restructuring a corporate entity is often a necessity when
the company has grown to the point that the original
structure can no longer efficiently manage the output and
general interests of the company.
NOTES
 Combination Strategy: It is a mixture of stability, expansion

or retrenchment strategies applied simultaneously or
sequentially.
 Conglomerates: Firms that practice unrelated diversification.
 Corporate Strategy: It spells out the business in which the
firm will participate, the markets it will serve and the
customer needs it will satisfy.
 Grand Strategy: A general plan of major action by which a
firm intends to achieve its long-term goals.
 Horizontal Integration: It takes place when some firms
expand by a acquiring other companies in the same line
of business (adding new products or services to the
existing product or service line).
 Market Development: It consists of marketing present
products, often with only cosmetic changes, to
customers in related market areas by adding channels
of distribution or by changing the content of advertising
or promotion.
 Product Development: It involves the substantial
modification of existing products or the creation of new
but related products that can be marketed to current
customers through established channels.
 Related Diversification: It extends the firm’s distinctive
competence into new industries that are similar to the
firm’s original business (in terms of markets, products or
technology).
 Retrenchment Strategy: It is a defensive strategy
adopted as a reaction to operational problems such as
internal mismanagement, surprises caused by
competitors, changing market conditions etc.—involving
reduction of any existing product or service line to
improve its performance.
 Spin-off: It means selling those units or parts of a
business that no longer contribute to or fit the firm’s
core competence.
 Stability Strategy: It involves maintaining the status quo or
growing in a methodical but slow manner.
 Synergy: An economic effect in which the different parts
of the company contribute a unique source of
heightened value to the firm when managed as a single
unified entity.
 Turnover Strategy: A turnaround strategy is designed to
reverse a negative trend and bring the organisation
back to normal health and profitability.
 Unrelated Diversification: It occurs when a firm seeks to
enter new industries without relying on a distinctive
competence to link up business units.
 Vertical Integration: It exists when a firm is producing its
own inputs (backward integration) or owns its own
sources of distribution of outputs (forward integration).
NOTES 7.12 DESCRIPTIVE QUESTIONS

1. What is a Balanced Score Card Approach? How it supports
the performance in other areas?
2. Describe the different forms of diversification and give an
example of each.
3. Do you believe that in the current year 2014 large firms
will be more or less diversified than they were in several
previous years? Discuss.
4. Explain the costs of diversification and when firms should
diversify.
5. What do you mean by retrenchment and combination
strategies?
6. Write short notes on:
(a) Stability Strategy
(b) Backward Integration
(c) Forward Integration
7. Distinguish between concentric diversification and
conglomerate diversification as strategic alternatives.
8. Why do organizations need expansion strategy? When
they should adopt a growth strategy? Why it is necessary
to pursue growth? Explain problems created by growth
strategy? How firms manage it?
9. Explain the nature and objectives of a turnaround strategy.
What kind of steps should be undertaken to implement the
same?
10. What is Corporate Restructuring Strategy? Discuss the
methods of corporate restructuring.


Balanced Score Card: 1. businesses
A Balanced Approach
2. perspectives
3. competitive advantage
Grand Strategies: 4. long-term
Strategic Alternatives
Growth/Expansion 5. corporate level strategy
Strategy
Contd...
NOTES
6. Growth Strategies
Diversification Strategy 7. confining
8. Acquiring
9. diversifies
10. Outweigh
Stability Strategies 11. volatile
Turnaround Strategies 12. Profitability
Combination Strategies 13. Consortia
14. Joint Venture
Corporate Restructuring 15. Divestiture
Strategy
16. ESOP

1. Refer to 7.2 & 7.5
R S Kaplan and D P Norton came out with a popular,
balanced score card approach in early 90s linking
corporate goals with strategic actions undertaken at the
business unit, departmental and individual level. The
score-card allows managers to evaluate a firm from
different complementary perspectives. From the financial
Perspective: Does the firm offer returns in excess of the
total cost of capital, as suggested by the Economic Value
Added (EVA) model? EVA is the spread between a firm’s
return on invested capital minus its weighted average cost
of capital, multiplied by the amount of capital invested. In
other words, EVA is what is left over after a firm has
covered all its factors of production (operating expenses,
overheads, interest, taxes, plus fair return to
shareholders). “To succeed financially, how should we
appear to our shareholders?” is the question to be
answered here.
2. Refer to 7.5.1 & 7.5.2
Horizontal integration takes place when some firms expand
by acquiring other companies in the same line of business
(adding new products or services to the existing product or
service line). Concentric diversification occurs when an
organisation diversifies into a related, but distinct
business. Conglomerate diversification takes place when
an organisation diversifies into areas that are unrelated to
its current business.
3. Refer to 7.5.1 & 7.5.2
Most software companies use the mergers and acquisitions
route to acquire complementary businesses, products or
services linked
NOTES by a common technology and common customers. The

decision to diversify into unrelated areas is generally
undertaken by firms in volatile industries that are subject
to rapid technological change. The obvious purpose is to
reduce risk. It is also assumed that by restructuring the
portfolio of businesses, the firm would be in a position to
create value.
4. Refer to 7.5.3 & 7.5.4
Cost of Ignorance: Entering a new, unknown field is risky.
The firm does not know the extent of competition. It may
fail to read the mind of the consumer properly.
Technological developments, environmental factors may
compel the firm to shift gears continuously. Mistakes might
be committed when the firm is navigating through
uncharted waters. Cost of Neglect: A company trying to
expand through unrelated diversifications may have to
divert its attention from its core businesses – at least
temporarily.
5. Refer to 7.7 & 7.9
Retrenchment strategy is a corporate level, defensive
strategy followed by a firm when its performance is
disappointing or when its survival is at stake for a variety
of reasons. Economic recessions, production inefficiencies,
and innovative breakthroughs by competitors are only
three causes. Large, diversified organisations generally
use a mixture of stability, expansion or retrenchment
strategies either simultaneously (at the same time in
various businesses) or sequentially (at different times in
the same business). Joint Ventures, Strategic Alliance and
Consortia are used in combination strategies.
6. Refer to 7.6 & 7.10
A stability strategy involves maintaining the status quo or
growing in a methodical, but slow, manner. The firm
follows a safety-oriented, status-quo-type strategy without
effecting any major changes in its present operations.
Backward integration exists when a firm is producing its
own inputs and in case of forward integration, it owns its
own sources of distribution of outputs.
7. Refer to 7.5.1 & 7.5.2
Concentric diversification occurs when an organisation
diversifies into a related, but distinct business. With
concentric diversification, the new businesses can be
related to existing businesses through products, markets
or technology. The new product is a spin-off from the
existing facilities, products and processes. Conglomerate
diversification takes place when an organisation diversifies
into areas that are unrelated to its current business.
NOTES
8. Refer to 7.4,7.4.1,7.4.2,7.4.3 & 7.4.4
Organisations generally seek growth in sales, market
share or some other measure as a primary objective.
When growth becomes a passion and organisations try to
seek sizeable growth, (as against slow and steady growth)
it takes the shape of an expansion strategy. There are
certain inherent limits to corporate growth and a firm
intending to grow beyond a particular limit, should look
into the pros and cons carefully before embarking upon an
ambitious growth strategy. This compels us to examine the
issue as to when corporations should look for a growth
strategy. Growth implies greater sales and an opportunity
to take advantage of the environmental opportunities. As
the firm grows in size and experience, it gets better at
what it is doing and reduces costs and improves
productivity. A growing firm can cover up mistakes and
inefficiencies more easily than can a stable one. There are
more opportunities for advancement, promotion and
interesting jobs in a growing firm. Growth per se is exciting
and ego-enhancing for managers. A corporation tends to
be seen as a winner or on the move by the market place
and by potential investors.
9. Refer to 7.8, 7.8.1 & 7.8.2
A turnaround is designed to reverse a negative trend and
bring the organisation back to normal health and
profitability. The basic purpose of a turnaround is to
transform the corporation into a leaner and more efficient
firm. It usually involves getting rid of unprofitable
products, trimming the workforce, pruning distribution
outlets, and finding other useful ways of making the
organisation more efficient. If the turnaround is successful,
the organisation may then focus on growth strategy. The
action plans for achieving a turnaround aim at yielding
immediate results focusing attention on certain key areas
like quality improvement, cost reduction, new product
development, rejuvenated marketing effort etc.
10. Refer to 7.10, 7.10.1 & 7.10.5
Corporate restructuring is the process of redesigning one
or more aspects of a company. The process of reorganising
a company may be implemented due to a number of
different factors, such as positioning the company to be
more competitive, survive a currently adverse economic
climate, or poise the corporation to move in an entirely
new direction. Financial restructuring, Organizational
restructuring, Leveraged Buyout, Hostile Takeover, Mergers
and Demergers are the methods of corporate
restructuring.

SUGGESTED READINGS
 A B Ravi, “From Red to Black”, Business India, May 28-June
10, 2001.
 Abir Pal, “This House has Got to Rock”, Business Today, April
6, 2001.
 B Car Valho, “The Complete Man”, Business Today, Oct 6, 2000.
 B Chuganee, “Redefining the Core”, Business India, June
26- July 9, 2000.
 B Chuganee, “Stepping out of Dad’s Suit”, Business India,
July 23-August 5, 2001.
 BT-Stern Stewart Study, Business Today, Feb 17, 2002.
Where HLL, WIPRO, Infosys, Reliance, ITC were the biggest
weather creators as per their EVA rankings in 2001 and in
2002 as well, Business Today, 13-04-2003.
 C C Markides, “Diversification, Restructuring and Economic
Performance”, Strategic Management Journal, Vol 16, 1995.
 E K Sinha, “ITC Bhadrachalam Pages Profits”, Business
Today, Sep 6, 2000.
 G Saloner, et al., Strategic Management, Johnwiley & Sons,
New York, 2001.
 H Q, Neill, Turnaround and Recovery: What Strategy Do You Need?
Long Range Planning, 1986.
 J A Pearce and R B Robinson, Strategic Management, McGraw
Hill, NY, 2000.
E-REFERENCES
 http://www.opm.gov/policy- data-
oversight/performance- management/reference-
materials/historical/using-a-balanced- scorecard-
approach-to-measure-performance/
 http://www.slideshare.net/anandsubramaniam/turnarou
nd- strategies
 http://www.intermerger.eu/transaction-support-sercice/
C H
8
A P T E R
FORMULATING BUSINESS LEVEL STRATEGY
CONTENTS
8.1 Introduction
8.2 Porter’s Competitive Strategies
8.3 Competitive Advantage
8.3.1 Resources and Capabilities
8.3.2 Cost Advantage and Differentiation Advantage
8.3.3 Features of Competitive Advantages
8.4 Competitive Advantage Factors
8.5 How to Build or Acquire Competitive Advantage?
8.6 Acquiring Core Competence
8.7 Low Cost Strategies
8.8 Differentiation Strategies
8.9 Focus Strategies
8.10 Summary
NOTES
ACHIEVING COMPETITIVE ADVANTAGES BY DELL
The AICPA Information Technology Executive Committee

recently visited the Dell Server Production facility in Austin,
Texas to see first-hand how Dell has revolutionised the
concept of Mass Customisation. Dell has recently become
the number one maker of file servers in the US as well as
holding the number two position worldwide. The production
process from order to delivery is managed electronically,
which allows Dell to build servers very efficiently and their
customers to know where their server is during each step of
the process.
The production process begins with the customer ordering

the server and individual components (over 50% are ordered
via the Dell website or a customised page created for
business customers). This information is placed in a
production queue that breaks out every component that is
to be assembled into the server. The required inventory is
then allotted to the assembly area to make sure that it is
adequately queued. Dell partners with suppliers to provide
them with the production pipeline, so they can have
inventory readily available on the loading docks (that are
connected to the factory floor). This allows Dell to maintain
only two hours of actual inventory on the factory floor.
The detailed specifications and listing of components are

then printed on a ‘traveller’ form, which includes the
NMI
assigned customer service tag for the server. The actual
production begins with the chassis, motherboard and
memory assembled and moved to the ‘kit’ area where the
various internal components (such as drives, cards and
connectors) are added to the tray. These kits then move to
the assembly area where they are automatically routed to
MS
the next available assembler (the server facility we visited
had 80 such stations with individuals producing between 18
and 26 servers in two shifts each day). The traveller form
then lists each item in the order to be implemented and the
assembler scans the bar code to ‘check’ it off the completed
list, so no part can be left out. Remarkably, as the assembler
is building the current server, they are simultaneously
performing primary testing on up to four additional servers
they have built. Dell originally had two individuals
assembling each computer, but found they could increase
production 30-40% by having certified individuals
responsible for the entire build. Each assembler only builds
the servers they are certified on (which can be up to fifteen
different models).
During preliminary testing, if a problem is encountered that

cannot be corrected within five minutes; a technician is
called by switching a green light above their work area to
red. In turn, if the technician cannot resolve the issue at the
Education
assembly station within five minutes, it is brought to a
special section on the floor where
expert technicians diagnose the problem and direct a Contd...
solution. If

Education
FORMULATING BUSINESS LEVEL STRATEGY233
NOTES
they cannot fix the issue, a new production order is placed

and the inoperable unit is sent to a special laboratory for
detailed diagnostics.
The servers thenmove down the assembly line and are

automatically stacked into carts holding four units each,
which are transferred to the burn-in area and tested for six
to eighteen hours depending on specifications. If there is
specific customer software to be loaded, it is installed and
tested in a special part of the burn-in area. Once a server
has completed testing, it is placed mechanically in a
shipping container to minimise any risk of damage. At the
same time, the ‘collateral’ materials that are to be shipped
with the server are assembled by an automated ‘pick’
system, which turns a light on in front of each item that is to
be placed in the shipping container, again removed by a
scanning of the bar code on the item to ensure everything is
included. Then the box passes through a conveyor system,
reaches a centralised shipping area and is delivered to the
client. Though production occurs very quickly, each server is
customised on a mass scale making Dell one of the leaders
in the server market.
Source: www.itpna.com
NMI
MS
NOTES
After studying this chapter, you should be able to: Describe the Porter’s competitive strategie
Know how to build or acquire competitive advantage Define core competence and low cost s
Identify the differentiation strategies and focus strategies
8.1 INTRODUCTION
Business level strategy deals with how a particular business
competes. The principal focus is on meeting competition,
protecting market share and earning profit at the business unit
level by performing activities differently, offering superior value
to customers. A firm is able to deliver superior value to
customers when it is in a position to perform an activity that
is distinct or different from that of its competitors. This is
popularly defined as competitive advantage. Competitive
advantage implies a distinct and sustainable advantage over
competitors. It is a kind of clear superiority or distinctive
competence in some functions or area over the competitors.
The areas may include finance, marketing, production, human
resources, new product development, research etc. Firms
usually build competitive advantage by initiating certain
unique steps that help them gain an edge over their rivals in
attracting customers. These steps would include offering best
customer service, producing at the lowest cost or focusing
efforts on a specific segment or niche of the industry. A
useful approach to formulating business level strategies is
based on Michael Porter’s ‘competitive analysis’ and three
general alternative business strategies that are derived from it.
8.2 PORTER’S COMPETITIVE STRATEGIES

M E Porter studied a number of business organisations and
proposed that business-level strategies are the result of five
competitive forces in the company’s environment. According to
him, competitiveness within an industry is determined by the
following new entrants or new companies within the industry;
products that might act as a substitute for goods or services
that companies within the industry produce; the ability of
suppliers to control issues like cost of materials that companies
use to manufacture their products; the bargaining power that
buyers possess within the industry; and the general level of
rivalry or competition among firms within the industry.
According to Porter, buyers, product substitutes, suppliers and
potential new companies within the industry all contribute to
the level of rivalry among industry firms. Understanding the
forces that determine competitiveness within an industry

Education
should help managers develop strategies that will enable
individual companies within the industry

Education
NOTES
to be more competitive. Porter suggested three generic
strategies that managers might take up to make organisations
more competitive.
 Cost Leadership: Cost leadership is a strategy that
focuses on making an organisation more competitive by
producing its products more cheaply than competitors can.
The logic behind this strategy is that by producing
products more cheaply than competitors, organisations
can offer products to customers at lower prices than
the competitors and thereby hope to increase market
share. Nirma Chemicals was able to challenge the might of
Hindustan Lever by pursuing this strategy aggressively,
without, of course, sacrificing quality. For example Wal-
mart, a typical industry cost leader, enjoys a competitive
advantage due to a unique satellite-based distribution
system; it generally keeps store location costs to a
minimum by placing stores on low-cost land outside small
to medium-sized southern towns. Most software
companies in India enjoy the cost advantage in terms of
low labour and location costs when compared to their
Western counterparts. It is small wonder the call centre
business has shifted to India (especially to areas like
Noida, Gurgaon) in recent times. A low-cost strategy is not
without risks. To be effective, the company in question
should be the cost leader, not just one of several players.
Otherwise, two or more companies vying for cost
leadership can push prices to unremunerative levels. HLL
is facing ‘low-cost competition’ in oil business from desi
brands such as Gemini Gold Winner etc. due to this reason
only. These desi brands have exploited the ‘value for
money’ idea to their advantage playing on the price factor
constantly. The business, therefore, must have a cost
advantage that cannot be easily imitated, and it must stay
abreast of new technologies that can upset cost
calculations completely. Further, managers must still carry
out product or service innovations that are very important
to customers, lest competitors, using a differentiation
strategy, woo customers away using product or service
improvements to good effect.
 Differentiation Strategy: It involves attempting to develop
products and services that are viewed as unique in the
industry. Successful differentiation allows the business to
charge premium prices, leading to above average profits.
Differentiation can take many forms – for example, design
or brand image (Rolex Watches, Levi’s Jeans, Pepsi or Coca
Cola for brands); technology (Macintosh stereo
components, Honda’s vehicles, Hyster in lift trucks);
customer service (City Bank, HDFC), unique channels
(Tupperware), unique features (Mercedes-Benz, Cross
writing instruments) quality (Xerox in copiers, Rolls Royce).
Differentiation works best when the differentiating factor is
both important to customers and difficult for competitors
to imitate. If buyers are loyal to a company’s brand, a
differentiation strategy can reduce rivalry with
competitors. Of course when costs are
NOTES too high, customers may choose less costly alternatives,

even though they forego some desirable features. Also,
customer tastes and needs can change, so businesses
following a differentiation strategy must carefully evaluate
customer’s shifting preferences from time to time.
 Focus: It is a strategy that emphasises making an
organisation more competitive by targeting a specific
regional market, product line or buyer group. The
organisation can use either a differentiation or low cost
approach, but only for a narrow target market. The logic of
this approach is that an organisation that limits its
attention to one or a few market segments can serve
those segments better than organisations that seek to
influence the entire market. For example, products such as
Rolls-Royce automobiles, Titan jewellery watches, Cross
pens are designed to appeal to a narrow segment of the
market and serve the same well rather than trying to cover
the whole ground. The important risks are possibilities that
the costs for the focused firm will become too great
relative to those of the less focused one, differentiation too
will become less of an advantage as competitors serving
broader markets embellish their products, and competitors
will begin focusing on a group within the customer
population being served by the firm with the focus
strategy.
Porter found that many firms did not consciously pursue one of
these three strategies and were therefore, struck in the middle
of the pack with no strategic advantage. Without a strategic
advantage, the businesses earned below-average profits and
therefore, were not in a position to compete successfully.
Competitive Advantage in Motor Vehicle Industry

Porter argued that in the motor vehicle industry, Toyota became
the overall cost leader. The company is successful in a number
of segments with a full range of cars. Its mission is to remain a
low cost producer (like Maruti). In contrast, General Motors also
competes in most segments of the market but tries to
differentiate each of its products with better styling and
innovative features. Hyundai is successful around the world
with four small and medium size cars which it produces at low
cost and prices competitively. BMW and Mercedes offer
exclusive cars for the price-insensitive, quality-conscious
customer.
Porter argued that a company cannot achieve superior
profitability if it is ‘struck in the middle’ with no clear strategy
for competitive advantage. Thus, Chrysler came upon hard
times because in its Can business it neither stood out as lowest
in cost, highest in perceived value, or best in serving some
market segment.
Cost leadership or differentiation – which one of these two strategies is Wal-Mart synonymou
NOTES
Fill in the blank:

1.Buyers, product substitutes, suppliers and potential new companies within the industry all contribute to the level of
………………… among industry firms.
8.3 COMPETITIVE ADVANTAGE

When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive advantage
over its rivals. The goal of much of business strategy is to
achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:
 Cost advantage
 Differentiation advantage
A competitive advantage exists when the firm is able to deliver
the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value for its
customers and superior profits for itself.
Cost and differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader i
A resource-based view emphasises that a firm utilises its
resources and capabilities to create a competitive advantage
that ultimately results in superior value creation. The following
diagram combines the resource-based and positioning views to
illustrate the concept of competitive advantage:
Resources
Distinctive Cost advantage or Value

Competencies differentiation advantage Creation
Capabilities
Figure 8.1: A Model of Competitive Advantage

NOTES 8.3.1 RESOURCES AND CAPABILITIES

According to the resource-based view, in order to develop a
competitive advantage the firm must have resources and
capabilities that are superior to those of its competitors.
Without this superiority, the competitors simply could replicate
what the firm was doing and any advantage quickly would
disappear.
Resources are the firm-specific assets useful for creating a cost
or differentiation advantage and that few competitors can
acquire easily. The following are some examples of such
resources:
 Patents and trademarks
 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity
Capabilities refer to the firm’s ability to utilise its resources effectively.

An example of a capability is the ability to bring a product to
market faster than competitors. Such capabilities are
embeddedintheroutines of the organisation and are not easily
documented as procedures and thus are difficult for
competitors to replicate.
8.3.2 COST ADVANTAGE AND DIFFERENTIATION

ADVANTAGE
Competitive advantage is created by using resources and
capabilities to achieve either a lower cost structure or a
differentiated product. A firm positions itself in its industry
through its choice of low cost or differentiation. This decision
is a central component of the firm’s competitive strategy.
Another important decision is how broad or narrow a market
segment to target. Porter formed a matrix using cost
advantage, differentiation advantage, and a broad or narrow
focus to identify a set of generic strategies that the firm can
pursue to create and sustain a competitive advantage.
Value Creation
The firm creates value by performing a series of activities that
Porter identified as the value chain. In addition to the firm’s
own value- creating activities, the firm operates in a value
system of vertical activities including those of upstream
suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one
or more value creating activities in a way that creates more
overall value
NOTES
than do competitors. Superior value is created through lower costs
or superior benefits to the consumer (differentiation).
8.3.3 FEATURES OF COMPETITIVE ADVANTAGES

 Not Sustainable for Long: It is not always possible for
companies to sustain individual sources of competitive
advantage for long (rivals copy and do everything possible
to wipe out the edge through their own innovations). So,
the best way to maintain leadership is to continually seek
new forms of advantage through constant
experimentation, innovative efforts and investments in
the latest technology. According to Kotler, competitive
advantages are not sustainable, but leverage able. A
leverage able advantage is one that a company can use as
a spring board to new advantages, much as Microsoft has
leveraged its operating system to Microsoft Office and
then to networking applications. Therefore, a company
that hopes to endure must be in the business of
continuously inventing new advantages.
 Relevant Advantage: In order to implement the chosen
strategy, a firm must have the relevant competitive
advantage. To become a global player, for example, a
cement company can buy or take controlling stakes in
competing firms (as in the case of Gujarat Ambuja
Cements). However, unless the company has some
relevant competitive edge over its rivals (in terms of
pricing, transport costs, distribution network, location of
units in cement- deficit states etc) the acquisition strategy
may not pay off in the long run. In the rush to become a
major player, a firm, therefore, should not throw caution to
the wind and extend its arms over the market beyond a
point (remember India Cements case in the Cement
industry?).
 Backbone of Strategy: A successful strategy is always built
around the competitive advantage. Without such a distinct
advantage, it is not possible to achieve corporate
objectives successfully. It becomes difficult to outwit
competitors. The firm may not be in a position to price
its products in a flexible way. Where there is a distinct
edge, as in the case of Maruti Udyog Limited (for instance
in terms of sales, price advantage, cost advantage owing
to its massive scale of operations, monopoly status in the
lower income segment etc.), the firm could breathe easily
by playing on the price, cost, early bird status, monopoly
position, brand image and a host of other factors. Likewise
Bajaj Auto in scooters, Telco in the heavy vehicles segment
have acquired competitive advantages by building strong
entry barriers (scale of operations, lower costs, etc.).
Fill in the blank:

2.Competitive advantage factors include marketing, finance, research and development, personnel and ………………
NOTES
How Google has leveraged its competitive advantage in developing a better search engine as against its competitors? Discuss.
8.4 COMPETITIVE ADVANTAGE FACTORS
The firm’s resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality,
Marketing
 Market Standing and Market Share (say Bajaj Auto in
sports bikes, Hero Honda in motor cycles, Reliance
Industries in textiles and petrochemicals, Maruti in small
cars).
 Innovations in Marketing (Birla 3M, LG Electronics credit
card operations of Citi Bank).
 Customer Service (Washing machine segment where each
player tries to extend the warranty period by a few
months).
 New Product Development (Citi Bank, HDFC Bank,
Ranbaxy, Dr Reddy Labs).
 Price (Maruti Udyog in small cars, Exide Industries in
batteries, Moser Baer in data storage products, Archies in
Greeting card segment, etc.).
 Distribution Channel (Hindustan Lever, Bata India,
Britannia Industries, Asian Paints).
 Personnel Selling or Sales Force Effectiveness (Eureka
Forbes Limited which has achieved unique success in
vacuum cleaners and water purifiers through personnel
selling).
 Product in terms of quality, design, technological strength,
differentiation, brand image etc.
Finance
 Assets (asset rich companies like Reliance, TISCo, ONGC,
IPCL, GAIL, IOC, etc.).
 Cash Flows (Infosys, Punjab Tractors, Aurobindo Pharma).
 Profitability (HDFC Bank, Britannia, Ranbaxy, Hindustan
Inks and Resins etc. which have earned fat profits despite
the slowdown).
 Gearing and leverage (Engineers India, NMDC, Castrol,
HLL, Novartis).
NOTES
 Cost consciousness (ability to cut costs and adopt
strategies that help companies improve their input-output
ratio: Godrej Foods, Whirlpool, ITC Agrotech, ACC, Bharat
Forge, MRF etc.).
Research and Development

 Research capabilities (Cipla, Dr Reddy Labs, Ranbaxy, Sun
Pharma, Pfizer).
 Research personnel (Dr Reddy Labs, Ranbaxy).
 Number of patents generated (Dr Reddy Labs, Ranbaxy).
 Speed of research efforts, leading to new product launches etc.
Personnel
 Quality of personnel (in terms of latest knowledge, core
skills, critical experience as can be found in people
working in Wipro, Infosys, Satyam, Polaris, Cipla, Dr Reddy
Labs etc.).
 Satisfaction of personnel (low attrition rates that
characterise companies which have liberal stock option
plans and exciting security and welfare schemes such as
Infosys, Polaris, NIIT etc.).
 Labour costs (most software producers in India).
 Industrial relations (Sundaram Fasteners, Sundaram Clayton).
Production
 Scale of operations (Reliance, BHEL, ONGC, Ranbaxy).
 Capacity utilisation.
 Productivity (Foreign banks).
 Extent of automation (Maruti, Hero Honda).
 Locational benefits (ACC, Gujarat Ambuja).
Write a 200-words report on the competitive advantage factors behind the success of Domino’s in the QSR (quick service restaurant) segm
HOW TO BUILD OR ACQUIRE

8.5
COMPETITIVE ADVANTAGE?
Firms usually build competitive advantage using various
strategic routes such as:
 Innovation: Innovation is a new idea applied to initiating or
improving a product, process or service. Today’s successful
organisations must foster innovations and master the art
of change or they will become candidates for extinction.
Victory
NOTES will go to those organisations that maintain their flexibility,

continually improve their quality, and beat their
competition in the marketplace through a constant
stream of innovative products and services (S P Robbins).
 Integration: Integration could be horizontal (adding one or
more businesses that are similar usually by purchasing
such businesses) or vertical (called as backward
integration; here a business grows by becoming its own
supplier). Reliance Industries, Hindustan Lever Ltd., Nirma,
Videocon, India Cements, etc., have followed this route in
order to gain competitive advantage in their respective
areas of business.
 Alliances, Mergers, Acquisitions: During the past 20 months,
Indian software firms have made over 25 overseas
acquisitions and the trend promises to snowball in the
coming years.
 Research and Development: Research and development is
responsible for producing unique ideas and methods that
will lead to new and improved products and services.
Indian pharma giants like Ranbaxy, Dr Reddy Laboratories,
Aurobindo Pharma, Cipla are trying to gain significant cost
advantages through the research and development push.
 Entry Barriers: The entry barriers created by Bajaj Auto in
two- wheelers Maruti Udyog Limited in passenger cars,
Asian paints in decorative paints, TELCO in heavy vehicles
segment; Thermax in industrial boilers have helped them
remain at the top for a painfully long time in India. Entry
barriers include large size, low investment, substantial cost
advantage, formidable distribution network, powerful
brand etc.
 Benchmarking: It is a way of comparing your own products
and processes against the very best (rivals) in the world.
The basic purpose of benchmarking is to initiate or
improve upon the best practices of other companies.
Benchmarking is an important tool in building competitive
advantage. Quite often, benchmarking could be used by a
forward—thinking leader to improve internal practices and
processes and build a sustainable competitive advantage.
 Value Chain Approach: According to Michael Porter the value
chain approach also helps in identifying and building
competitive advantage. Every firm is a collection of
activities that are performed to design, produce, market,
and deliver and support its product. The value chain
identifies nine strategically relevant activities that create
value and cost in a specific business. The nine value-
adding activities consist of five primary activities and four
support activities.
 Strategic Business Unit (SBU) Structure: Firms can also
achieve competitive advantage by dividing their
operations into separate strategic business units.
NOTES
An SBU has three features:
 It is a single business or collection of related
businesses that can be planned separately from the
rest of the company.
 It has its own set of competitors.
 It has a manager who is responsible for strategic
planning and performance and who controls most of
the factors affecting profit.
The resources of a firm are allocated to various SBUs based on
their market attractiveness and profit potential. SBUs carry out
their own strategic business planning, remain close to their
environment and profitably exploit new opportunities that
come their way.
Building Durable Competitive Advantage: Core Competence

To be successful in the long run, every firm must possess some
long- lasting, unique competitive advantage that can’t be
easily imitated by competitors. The enduring competitive
superiority enables the firm to get ahead easily and emerge as
a ‘winner’ on most occasions – at least till others catch up and
bridge the gap in terms of cost leadership or product
differentiation. C K Prahlad and Gary Hamel argued that it is
not the product that is at the root of such a competitive
advantage. Behind the product, there is the core competence,
a fundamental, unique and far reaching strength of the firm.
Once the skills that offer competitive advantage are
developed, they should be exploited. For example, Honda has
exploited its skills at engine design and technology. Core
competencies must, however, be flexible and responsive to
changing customer needs. Canon has developed core
competencies in fibre optics, precision mechanics and
microelectronics and these are spread across a wide range of
products such as cameras, calculators, photocopiers and
printers. There is continuous product innovation, keeping pace
with market requirements and customer expectations.
Fill in the blanks:

…………………… is a way of comparing your own products and processes against the very best (rivals) in the world.
Valuechainapproachhelpsinidentifyingand building …………………
Corporate lawsuits against each other to protect respective product designs are essentially concentrated contests to defend core compete
NOTES
SBUs usually benefit from separate planning efforts, face competitors with lot of advance preparation and are managed effectively as profi
8.6 ACQUIRING CORE COMPETENCE

Firms can acquire core competence through heavy investments
in technology, research and development followed by new
product innovations. Hammel and Prahalad (“Corporate
Imagination and Expeditionary Market”, HBR, July-August 91)
argued that most profitable companies are those that create
and dominate new markets, looking for opportunities to further
explore key skills and competencies. New product innovations
such as chilled prepared meals (Marks and Spencer), the
compact disc (Philips) and the anti- lock breaking system for
cars (Bosch) took place in companies which have excellent in-
house R&D facilities. (In India, Ranbaxy, Dr Reddy Labs in
pharma; TCs and Infosys in Software; HLL, Nestle, Cadbury in
fast moving consumer goods have a good track record of
exploiting their key research and development skills for
achieving consistent growth. Employees play a key role in
acquiring such capabilities. Leaders have to provide a positive
work climate for employees to develop such crucial skills. The
US company 3M is renowned for its ability to empower
employees and produce innovative products (masking tape,
post-it notes etc.); laboratory staff are free to devote 15% of
their time on developing ideas. They are allowed to work as per
their own convenience. Technicians are encouraged to talk with
customers; internal networking is fostered.
Focus on One or Two Skills

To gain a fundamental, immutable strength in the long-run, a
firm should focus on one or two core skills, which it should
develop. Focus does not mean restricting the number of
businesses the firm can operate. It only means concentrating on
a particular group of customers, a specific geographic area, or a
certain part of the product or service line. The rationale is that
by specialising, the organisation can serve the market segment
more effectively than competitors who try to cover the entire
market. The focus strategy still relies on a low-cost or a
differentiation approach, or perhaps both, to establish a strong
position within the particular market segment or niche. The
differentiation within a focus strategy can occur by tailoring
products to the exclusive needs of the market segment. A cost
advantage may be simultaneously possible because a firm may
be able to offer better prices on custom orders even though
another firm may have the cost leadership in serving the
larger-volume requirements of the broader market. Building core
competencies is not easy. It requires a conscious, determined
long- range effort on the part of strategic leaders who seek to
strike a happy balance between objectives, resources, skills and
opportunities.
NOTES
Core Competence Model
Core competences are often presented as arising from unique
resources that give rise to distinct capabilities. An expanded
version of this model is given in Figure 8.2. This version
suggests that behind resources is something called attributes;
that, as well as unique resources, core competences are
influenced by unique weaknesses; and that combining
intersectoral core competences give rise to a unique potential
societal function.
RESOURCES
Inputs
ATTRIBUTES CORE
CAPABILITIES COMPETENCE FUNCTION
Logistics
Integration of resources Strategic capabilities Role
WEAKNESSES
Failings
Figure 8.2: Core Competence Strategic Model

The expanded model is the basis for understanding
intersectoral collaborations as initiatives that aim not just to
co-ordinate activities between different organisations with
complementary resources but also to offset weaknesses and
produce outcomes that are more than the sum of the parts.
From the societal function point of view, these collaborations
provide an important place for negotiating the social contract
and improving cohesion between disparate parts of society.
Against this backdrop, let’s now examine the three generic
strategies advocated by Porter to make organisations more
competitive in a detailed manner.
Fill in the blank:

5. Firms can acquire core competence through heavy investments in technology, research and development followed by new ……………
8.7 LOW COST STRATEGIES
Maruti Suzuki has launched a new automatic Gear shift car, Celerio this year. Is it the right strategy adopted by the company to acquire cor
Low cost leadership strategies are based on a firm’s ability to offer
a product or service at a lower cost than its rivals. When a firm is
able
NOTES to build a substantial cost advantage over other competitors, it

can pass on the benefits to customers and gain a large market
share. Low cost works because after a certain time all markets
mature and the number of players and their offerings stagger
to a very high level. Buyers in such a market are able to drive
down prices to rock bottom levels where only the low cost
producers survive. Low cost producers are also able to
withstand sluggish demand conditions, weather out business
cycles and get ahead of their rivals. Desi brands for example,
in FMCG sector are growing at a respectable level even when
other established players are finding it difficult to stay afloat
(example look at Anchor’s Growth rate of 50 per cent, Gold
winners 24%, Gemini’s 40%, Ghadi’s 20% growth rate against
HLL’s flat growth rate in many of its product categories during
2001-03).
Low cost strategies can be used effectively when (a) the
market for the product or service is price sensitive (b) the
product or service is standardised (c) the buyers are
powerful enough to extract a concession from the
manufacturer (d) the buyers are not brand-loyal and are willing
to switch from one seller to another based on price differences
and (e) where differentiation is not possible and even when
there is such a possibility – customers do not value it.
A low cost strategy builds competitive advantage through
economies of scale, experience curve effects and other factors
to capture a substantial share of the market.
 Economies of Scale: Large established firms produce, sell and
advertise in greater volume than smaller firms and late
entrants. The substantial volumes that they are able to
generate help them take advantage of economies of scale
within many primary and supporting value-adding
activities. More employees are required to carry out an
activity. This, in turn, helps them specialise and achieve
greater productivity. Fixed costs can be spread over a large
volume. The firm can gain from quantity discounts
available on components, inputs and other raw materials.
Also, large, volume players are in a better position to
vertically integrate and make their own inputs at a lower
cost. High levels of vertical integration enable firms to
control all of the inputs, supplies, and equipment required
to convert raw material into the final end product. At the
same time firms could also think of buying more than they
make. They can focus effort on these few activities, which
they are best equipped to carry on and get supplies from
others – thereby avoiding large fixed-cost capital
investments. They can also avoid investing in those
technologies or production processes that could become
obsolete in a short span of time. For example Dell
Computer does not invest in making chips or designing
software; it simply assembles and distributes personal
computers by buying key components from outside
suppliers. The savings obtained through tight inventory
and production cost control are passed on to buyers.
NOTES
 Experience Curve Effects: The principal source of experience
based cost reduction is learning by organisation members.
As employees repeat activities, they learn how to carry
them out more quickly and accurately. The net effect is
continuing improvement in both productivity and quality as
employees’, experience base expands. Again, as a firm’s
engineers become more familiar with the way a product
is manufactured, they can often redesign components that
cause problems in later assembly, reduce the number of
components needed to make the product and substitute
better materials (Pitts and Lei). These changes help in
reducing manufacturing costs and improving the product
quality over time. Increasing experience also helps
engineers to bring small but useful improvements in the
way the product is manufactured by changing the workflow
or altering the equipment design.
 Vertical Integration: Extending control over sources of supply
(upstream operations) is vertical integration. High levels of
vertical integration which can be achieved by fairly large
firms, help firms control all of the inputs, supplies and
equipment required to convert raw materials and
equipment into finished products. Firms pursue vertical
integration in cases where their products and technologies
tend to remain fairly stable over long periods. Vertical
integration could be an important cost driver in cases
when the firm manufactures components that directly feed
into its final products.
 Location of Activities: The actual location where a value-
added activity is carried out could be an important factor
in determining a firm’s cost advantage. Maruti, for
example, works with key suppliers to build their
component factories near its own assembly plant in
Gurgaon. This way it gets the parts it needs without the
costs of holding inventory.
Benefits and Risks of Low-cost Leadership Strategies

Numerous studies have proved that firms with a high market
share enjoy above-average returns over extended periods of
time. Customers are usually reluctant to switch their loyalty to
a competing brand unless that brand has something unique to
offer. Low-cost firms can bring about pricing discipline within
the industry also (as other firms are aware that they cannot
carry out a price war with the low cost leader). The price-
cutting power acts as a powerful entry barrier for firms
contemplating entry into industry. Low-cost firms are generally
in a better position to absorb increase in prices of inputs from
time to time and keep the prices of their products somewhat
steady.
The cost leadership strategy is not risk free.
 A cost leader has to lock up his resources in fixed assets and
equipment. After investing in such inflexible production
and distribution technologies, it becomes difficult for the
firm to embrace a more innovative technological process.
For example
NOTES when quartz and digital watches became popular during

the late 1970, Timex was so committed to its mechanical
watch and process technology that it could not adapt to
technological change.
 Cost reduction methods can be easily copied by rival firms
as cost advantages in standardised production processes
are somewhat slippery.
 “Firms obsessed with low costs may find themselves
ambushed by competitors talking a different strategy
designed to outflank a dominant industry player.”
 When other firms also enter the industry to reap the
benefits, competition increases to such a level, where they
do not hesitate to take the prices to unremunerative level.
Excess capacity build up coupled with depressing price
levels would force many players to draw the shutters down
in the end.
In actual practice many firms have succeeded in achieving
dramatic reductions in operating costs by focusing on those
activities in which the firm, has a cost advantage and
outsourcing others, and by extensively reengineering
manufacturing and administrative processes. Given multiple
drivers of relative cost, the cost leadership strategy requires
multiple initiatives at different organisational levels. Careful
examination of existing operations relative to rivals can
indicate cost reduction opportunities by lowering input cost,
accessing scale economies and better utilising capacity. At the
same time the firm must actively seek opportunities for
innovation and process design with a view to exploit new
sources of dynamic efficiency (Grant).
Fill in the blank:

6. Low cost leadership strategies are based on a firm’s ability to offer a product or service at a
A low pricing point offered by companies to customers self-destroys the industry and makes the customer price sensitive. Discuss.
8.8 DIFFERENTIATION STRATEGIES

The attraction of differentiation over low cost as a basis for
competitive advantage is its potential for sustainability. It is
susceptible to being overturned by changes in the external
environment, and it is more difficult to copy. Differentiation
strategies are based on offering buyers something unique or
different that makes the firm’s products or services distinct
from that of its rivals. According to Michael Porter
NOTES
“strategy is about selling yourself apart from the competition.
It’s not just a matter of being better at what you do – it’s a
matter of being different at what you do”.
Differentiation strategies can be pursued by firms when:
 The market is too large to be served by a few firms
offering standardised products/services.
 The customer needs and preferences are too diversified to
be met through standardised products/services.
 The firm is able to charge a premium for an advantage
that is valued by customers.
 The product is such that customer loyalty can be obtained
and sustained (e.g. Chicory blended coffee, Darjeeling
tea).
The potential for differentiation in any business is vast. It may
involve physical differentiation of the product, it may be
through complementary services, or it may even be intangible.
Differentiation extends beyond technology, design and
marketing to include all aspects of a firm’s interactions with its
customers. Thus, McDonald’s differentiation advantage within
the fast food business depends not just on the characteristics
of the food (physical) it serves or the associated services
(speed of service, cleanliness etc.), but also the values it
projects (intangible) such as happiness and interest in children.
In the end, differentiation is all, about a firm’s responsiveness
to customer requirements where every corporate activity is to
be examined through the customer’s eyes. Will this make it
easier for the customer? Faster? Better? Less Expensive?
Thus, products can be differentiated along any dimension that
is valued by some group of customers. Any competitive
advantage must be seen by customers as a customer
advantage (Kotler). For example, if a company delivers faster
than its competitors, this will not be a customer advantage, if
customers do not value speed. Companies, therefore, must
focus attention on building and sustaining customer
advantages through differentiation. Then, they will move closer
to the hearts of customers – who do not hesitate to buy the
product again and again. Firms using this strategy seek to
differentiate their products from rivals goods or services along
as many dimensions as possible. The less the similarity with
rivals’ products, the more buffered a firm is from competition
with its rivals.
Benefits and Risks of Differentiation Strategies

Differentiation builds competitive advantage by making
customers more loyal, less price sensitive and less willing to
consider other product alternatives. The firm pursuing a high
differentiation strategy along some key product’s attribute
(e.g. fuel efficiency of Hero Honda Motor Cycles) or buyer need
can earmark its own strategic group within the industry. In such
a scenario, destructive price wars can be avoided. The
perceived, superior quantity special appeal enables
NOTES the firm to hold its ground as far as the pricing strategy is
concerned. Product quality helps the firm build its own
reputation and demand that often gets translated into higher
market share as well. Risks associated with the differentiation
strategy include:
 A customer group’s decision that the differences between
the differentiated products and the cost leader’s good or
service (remember the Surf vs. Nirma battle?) is no longer
worth a premium price. As a product becomes more
mature, customers become smarter about what they want,
what genuine value is, and what they are willing to pay.
Price premiums become difficult to justify as customers
gain more knowledge about the product” (See opening
case).
 Unless differentiation is based on some unique proprietary
knowledge, skill, expertise or patent, a firm faces the
threat of being outmanoeuvred by rivals, who can stuff the
product or service offering with similar features at a lesser
lost.
 Excessive differentiation can seriously affect the
competitive advantage and profitability of firms as “rising
operating costs eat into price premiums that customers
are willing to pay”.
Fill in the blanks:

The attraction of differentiation over low cost as a basis for competitive advantage is its pote
Differentiation builds competitive advantage by making
…………………… more loyal, less price sensitive and less willing to consider other product altern
…............…. builds competitive advantage by making customers more loyal, less price sensitiv
Which ofthetwoismore prudential for atwo-wheelermanufacturing company that operates globally: one product in all markets or many p
The important assumption behind differentiation strategies is that customers are ready to pay a premium price for a product that is distinc
NOTES
8.9 FOCUS STRATEGIES

Focus strategies aim to sell goods or services to narrow or
specific target market, niche or segment. The essence of the
focus strategy is the exploitation of a narrow target’s
differences from the balance of the industry. Focus builds
competitive advantage through high specialisation and
concentration of resources in a given niche. If a niche or
segment has distinctive and lasting features, then a firm can
develop its own set of entry barriers in much the same way
that large established firms do in broader markets. Nowadays,
Internet is playing a great role in identifying market segments
marked with greater and greater specificity in terms of unique
customer needs. Firms can build focus in one of two ways.
Focused cost leadership and focused differentiation. Through
the cost leadership and the differentiated focus strategies firms
serve the needs of a narrow competitive segment (a buyer
group, products segment or geographic location). This strategy
works when firms have the core competencies required to offer
value to a narrow competitive segment that exceeds the value
available from firms serving customers on an industry-wide
basis.
A focused firm can serve the needs of a niche segment through
a low cost or differentiation strategy (a) by identifying gaps not
covered by existing players and (b) by developing superior
skills or achieving superior efficiency while serving such narrow
segments. A number of Indian companies have adopted the
focus strategies either on the basis of lower cost or
differentiation quite successfully in recent times:
 Ayur Herbal Brand: The Delhi based D S Narang has carefully
positioned the ‘Ayur’ brand herbal shampoo at the lower
end of the market by pricing it at less than half the price
charged by other players. The 10-year-old Ayur brand is
worth more than
` 100 crore now.
 Anchor Toothpaste: Atul Shah found the gap in the
predominantly vegetarian Gujarat and Rajasthan
markets (as far as toothpastes are concerned) and
positioned his ‘Anchor’ brand as a vegetarian product
(differentiation) and priced it
` 35 (200 gms packet) as against Colgate’s ` 62 (250 gm). Anchor is a
` 150 crore brand now and has grabbed nearly 10% market
share (behind Colgate and HLL) now.
 Ayurvedic Brand: ‘No Marks’: S C Sehgal found that there is
great demand for ayurvedic products in the global markets
(after making a trip to New York, London and Paris in early
90s). He launched the ‘No marks’ ayurvedic product and
began advertising through Aaj Tak Hindi channel,
highlighting the superiority of ayurvedic product(s). The
brand is raking in nearly ` 5 crores in sales every month.
 ‘T’ Series Cassettes: In early 1980s Gulshan Kumar
brought a revolution in the music cassettes industry by
launching the
NOTES ‘T’ series brand at the lower-end of the market. Priced at

less than half the price charged by the market leader HMV,
the brand proved to be a mega-hit with the masses (low
cost strategy).
As the above examples clearly show, smaller firms normally
avoid competing with larger firms by targeting small markets
of little or no interest to the larger firms (say the ` 1 sachet
market in shampoos ignored by other players). Of course, it is
not always easy to find such gaps in the broader market,
unless one is blessed with creativity, and ingenuity. Before
exploiting such gaps, one should pay attention to the following:
 Uniqueness: Is the segment, to be created and exploited,
unique in terms of certain key attributes such as age,
religion, region, lifestyle etc?
 Size: Is the segment big enough to offer profitable growth
for a reasonable length of time?
 Ignored by the Big: Is the segment to be pursued ignored
by large firms? Or does not impact their success in any
way?
 Resources: Is the firm well equipped (in terms of skills,
expertise, resources) to serve the niche market?
 Superiority: Is it possible for the firm to guard its territory
from rival firms on the strength of its superior service,
better customer relations? Has it got a clear edge over
others in building and sustaining customer loyalty for
some time?
The key to nichemanship is specialisation, superior,
differentiated service at a price liked by the customer (the
value for money proposition). In course of time, rival firms may
try every trick in the book to break the hold of the focused firm
in a ‘niche’ segment. As a result, niches can weaken. To survive
and flourish in a competitive market, the firm must continually
create new ones. For example after tasting success through
Dandi Salt (` 125 crores brand), Kunvar Ajay Industries, Suresh
Agarwal has gone one step further and entered the detergent
business through another winning brand – Friendly wash (` 40
crores brand). Next on the cards: Atta and Shampoo brands.
The firm should “stick to its niching”, but not necessarily to its
niche. That is why multiple niching is preferable to single
niching. By developing strength in two or more niches, the firm
increases its chances for survival.
Benefits and Risks of Focus Strategies

The biggest benefit of a focus strategy is that the firm is able
to find a market niche against a larger, broader-line competitor.
Through specialisation and high concentration of its resources
in a given area, the firm is able to serve the requirements of a
niche segment better than others, and insulate itself from the
attention of bigger players in the field. Over time, it is able to
improve other sources of value- adding activities that
co
nt
rib
ut
e
to
co
st
or
di
ffe
re
nti
ati
on
.
NOTES
The biggest risk associated with a focus strategy lies in that
the distinctive tastes and product characteristics may blur over
time. This, in turn, reduces the defensibility of the niche. When
the tastes and preferences of a particular segment are widely
known, competitors may initiate and bring out their own
product offerings to capture the market, (e.g. HLL bringing out
the ` 1 Shampoo sachet). The bigger players may use their
technological strength while redefining the preferences of the
niche in a better way.
To survive in a competitive market, firms will need to offer a
variety of value ‘bundles’ or solutions to customers. Exclusive
reliance on any single generic strategy (low cost or
differentiation) is quite risky because it does not endow the
firm with a sustained capability to innovate new sources of
value more quickly and more efficiently over time.
Current research evidence supports moderate diversification in
place of exclusive focus on a narrow segment. According to
Harper and Viguerie, “Companies must branch out into new
businesses to compensate for the declining prospect of
creating value in older ones”. To generate superior shareholder
returns firms must strike a happy balance between focus and
diversification.
Fill in the blanks:

means concentrating on a particular group
of customers, a specific geographic area, or a certain part of the product or service line.
The biggest benefit of a focus strategy is that the firm is able to find aagainst a larger, broader-line
competitor.
Throughand high concentration of its resources in a
given area, the firm is able to serve the requirements of a niche segment better than others.
Exclusive reliance on any single ……… strategy does not endow the firm with a sustained capability to innovate new sources of value more
8.10 SUMMARY
 According to Porter, buyers, product substitutes, suppliers
and potential new companies within the industry all
contribute to the level of rivalry among industry firms.
Understanding the
Focus strategy helps a company build walls around its niche, but may find itself restricted by the same walls. Discuss.
NOTES forces that determine competitiveness within an industry

should help managers develop strategies that will enable
individual companies within the industry to be more
competitive.
 Porter suggested three generic strategies that managers
might take up to make organisations more competitive.
These are – Cost leadership, differentiation strategy and
focus strategy.
 Business level strategy is an integrated and coordinated
set of commitments and actions the firm uses to gain a
competitive advantage by exploiting core competencies in
specific product markets.
 In selecting business level strategy, the firm determines:
(a) Who it will serve, (b) What needs those target
customers have that it will satisfy, (c) How those needs will
be satisfied.
 Customer relationships are strengthened by offering them
superior value: (a) Help customers to develop a new
competitive advantage, (b) Enhance the value of existing
competitive advantages.
 When a firm sustains profits that exceed the average for
its industry, the firm is said to possess a competitive
advantage over its rivals. The goal of much of business
strategy is to achieve a sustainable competitive
advantage.
Barriers to Entry: Obstacles to entering an industry. The major barriers include economies of
Benchmarking: The process of finding the best available product features, processes and serv
Competitive Advantage: A superior or distinctive competence in some function or area relati
Core Competence: It is a unique strength that gives a firm access to important market segme
Culture: A system of shared values and beliefs that produce norms of behaviour.
Differentiation Strategy: A competitive strategy based on providing buyers with something sp
NOTES
Focus Strategy: It is a strategy that emphasises making an organisation more competitive by targeting a specific regional market, product li
Innovation: It is a new idea applied to initiating or improving a process, product or service.
Leadership: The capacity to secure the cooperation of others in accomplishing a goal.
Lower Cost Leadership Strategy: A competitive strategy based on the firm’s ability to provide products or services at lower cost than its r
Niche Marketing: Focusing on sub segments or niches with distinctive traits that may seek a special combination of benefits.
Power: The ability, apart from functional authority or control over resources or rewards, to influence the behaviour of others.
Pragmatism: The ability to make things happen and achieve positive results.
Product Innovations: A firm’s activities that enhance the differentiation of its products or services.

1. What is the relationship between a firm’s customers and
its business-level strategy? Why is this relationship
important?
2. How is competitive advantage achieved through
successful implementation of the cost leadership strategy?
successful implementation of the differentiation strategy?
successful implementation of the focused cost leadership
strategy?
5. How competitive advantage is created by a firm? Explain
the factors associated with it.
6. Explain the model of competitive advantage as proposed
by M.E. Porter. Describe its features.
7. How core competency can be built by durable
competitive advantage?
8. White short notes on:
(a) Benchmarking
(b) Core Competence
9. Define ‘Competitive Advantage’. Explain how firms build or
acquire competitive advantage over time. Use examples in
support of your answer.
NOTES 10. What do you mean by differentiation strategy? Explain the

benefits and risks associated with it.


Porter’s 1. Rivalry
Competitive
Strategies
Competitive Advantage 2. Production
How to Build or Acquire 3. Benchmarking
Competitive Advantage?
4. Competitive Advantage
Acquiring Core 5. Product Innovations
Competence
Low Cost Strategies 6. Lower cost
Differentiation Strategies 7. Sustainability
8. Customers
9. Differentiation
Focus Strategies 10. Focus
11. Market Niche
12. Specialization
13. Generic

1. Refer to 8.1 & 8.2
Business level strategy deals with how a particular
business competes. The principal focus is on meeting
competition, protecting market share and earning profit at
the business unit level by performing activities differently,
offering superior value to customers. A firm is able to
deliver superior value to customers when it is in a position
to perform an activity that is distinct or different from that
of its competitors. This is popularly defined as competitive
advantage. Competitive advantage implies a distinct and
sustainable advantage over competitors. It is a kind of
clear superiority or distinctive competence in some
functions or area over the competitors. M E Porter studied
a number of business organisations and proposed that
business-level strategies are the result of five competitive
forces in the company’s environment. According to him,
competitiveness within an industry is determined by the
following new entrants or new companies within the
industry; products that might act as a substitute for
NOTES
goods or services that companies within the industry
produce; the ability of suppliers to control issues like cost
of materials that companies use to manufacture their
products; the bargaining power that buyers possess within
the industry; and the general level of rivalry or competition
among firms within the industry.
2. Refer to 8.3
Cost leadership is a strategy that focuses on making an
organisation more competitive by producing its products
more cheaply than competitors can. The logic behind this
strategy is that by producing products more cheaply
than competitors, organisations can offer products to
customers at lower prices than the competitors and
thereby hope to increase market share.
3. Refer to 8.3
Differentiation Strategy involves attempting to develop
products and services that are viewed as unique in the
industry. Successful differentiation allows the business to
charge premium prices, leading to above average profits.
4. Refer to 8.3
Focus is a strategy that emphasises making an
organisation more competitive by targeting a specific
regional market, product line or buyer group. The
organisation can use either a differentiation or low cost
approach, but only for a narrow target market. The logic
of this approach is that an organisation that limits its
attention to one or a few market segments can serve
those segments better than organisations that seek to
influence the entire market.
5. Refer to 8.3.2 & 8.4
Competitive advantage is created by using resources and
capabilities to achieve either a lower cost structure or a
differentiated product. A firm positions itself in its industry
through its choice of low cost or differentiation. This
decision is a central component of the firm’s competitive
strategy. Marketing, Finance, Research & Development,
Personnel and Production are some of the factors of
6. Refer to 8.3, 8.3.1 & 8.3.3
When a firm sustains profits that exceed the average for
its industry, the firm is said to possess a competitive
advantage over its rivals. The goal of much of business
strategy is to achieve a sustainable competitive
advantage. A competitive advantage exists when the firm
is able to deliver the same benefits as competitors but at a
lower cost (cost advantage), or deliver benefits that
exceed those of competing products (differentiation
advantage). Thus, a competitive advantage enables the
firm to create superior value for its customers and superior
profits for itself. According to the resource-based view, in
order to develop
NOTES a competitive advantage the firm must have resources and

capabilities that are superior to those of its competitors.
Features of Competitive Advantages are inability to sustain
for long, relevant advantage and backbone of strategy are
the features of competitive advantage.
7. Refer to 8.5
To be successful in the long run, every firm must possess
some long-lasting, unique competitive advantage that
can’t be easily imitated by competitors. The enduring
competitive superiority enables the firm to get ahead
easily and emerge as a ‘winner’ on most occasions – at
least till others catch up and bridge the gap in terms of
cost leadership or product differentiation.
8. Refer to 8.5 & 8.6
Benchmarking is the process of finding the best available
product features, processes and services and using them
as a standard (benchmark) for improving a company’s own
products, processes and services. Core Competence is a
unique strength that gives a firm access to important
market segments, offers significant benefits to customers
in the end products and is difficult to copy.
9. Refer to 8.3 & 8.5
A competitive advantage exists when the firm is able to
deliver the same benefits as competitors but at a lower
cost (cost advantage), or deliver benefits that exceed
those of competing products (differentiation advantage).
Firms usually build competitive advantage using various
strategic routes such as: innovation, integration,
alliances, mergers, acquisitions, research & development,
entry barriers, benchmarking, value chain approach and
strategic business unit (SBU) structure.
10. Refer to 8.8
The attraction of differentiation over low cost as a basis for
competitive advantage is its potential for sustainability. It is
susceptible to being overturned by changes in the external
environment, and it is more difficult to copy. Differentiation
strategies are based on offering buyers something unique
or different that makes the firm’s products or services
distinct from that of its rivals. Differentiation builds
competitive advantage by making customers more loyal,
less price sensitive and less willing to consider other
product alternatives. The firm pursuing a high
differentiation strategy along some key product’s attribute
(e.g. fuel efficiency of Hero Honda Motor Cycles) or buyer
need can earmark its own strategic group within the
industry.
NOTES

SUGGESTED READINGS
 E Mosakowski, “A Resource Based Perspective on the
Dynamic Strategy-Performance Relationship”, Journal of
Management, Vol. 19, 1993.
 G Saloner et al., Strategic Management, John Wiley & Sons,
New York, 2001.
 M H Hitt, R D Ireland and R E Hoskisson, Strategic
Management, South Western Publishing Company,
Cincinnati, Ohio, 2001.
 N W C Harper & S P Viguerie, Are you too Focused?, Business
World, 7-10-2002.
 P Kotler, Marketing Management, Pearson, Delhi, 2003.
E-REFERENCES
 http://www.quickmba.com/strategy/competitive-advantage/
 http://toolkit.smallbiz.nsw.gov.au/part/16/80/345
 http://smallbusiness.chron.com/pros- cons-
diff erentiation- strategy-21452.html
C H
9
A P T E R
ANALYSING RESOURCES AND CAPABILITIES
CONTENTS
9. Introduction
1
9. Factor Affecting the Internal Environment
2
9. Resources and Capabilities as Sources of Profit
3
9. Resources of the Firm
4
9.4.1 Tangible Resources
9.4.2 Intangible Resources
9.4.3 Human Resources
9. Organisational Capabilities
5
9.5.1 Classifying Capabilities
9.5.2 Architecture of Capability
9. Appraising Resources and Capabilities
6
9.6.1 Establishing Competitive Advantage
9.6.2 Sustaining Competitive Advantage
9.6.3 Appropriating the Returns to Competitive
Advantage
9. Placing Resource and Capability Analysis to Work
7
9. Developing Resources and Capabilities
8
9.8.1 Relationship between Resources and Capabilities
9.8.2 Replicating Capabilities
9.8.3 Developing New Capabilities
9.8.4 Approaches to Capability Development

Education
9.9 Summary
9.10 Descriptive
9.12 and Hints

Education
NOTES
COMPETITIVE STRATEGIES OF ZARA IS INEVITABLE
Zara – the Spanish clothing and accessories retailer founded

in 1975, is one of the hottest fashion chains of 21st century,
offering men’s clothing, women’s clothing, cosmetics,
complements and children’s clothing. Since its initial public
offering in 2001, Zara’s parent, Inditex tripled its sales and
profits and doubled the number of stores for its flagship
brands. Headquartered in Spain, Zara is known for its
innovations and its stores operate in choicest locations in
Europe, Asia and North America. Described by many as the
most devastating retailer in the world, the company has
rewritten a number of rules in the fashion retailing industry
so far through its novel strategies. Any Zara store typically
carries only a small batch of merchandise, compelling
shoppers to visit the stores frequently. For example, in
London, shoppers visit the average store four times a year,
but frequent Zara 17 times annually. Zara makes about
20,000 items a year which are being released in phases. The
small batch size helps the company catch the changes in
fashion quickly and introduce new models at amazing speed
– thanks to its grip over the supply chain. Every store places
orders twice a week and shipments reach most European
stores in about 24 hours’ time. Customers (as well as store
employees) thus, are pretty sure about when shipments will
arrive and visit the store frequently making enquiries. Zara
has so far resisted the industry- wide trend towards
NMI
transferring fast fashion production to low-cost countries. By
concentrating its production in-house and in Spain, Zara has
developed a super-responsive supply chain. It designs,
produces and delivers a new garment to its stores in a
mere 15 days, something very unusual in the fashion
industry, compared to 6 month industry average. The
MS
company also does not believe in offering its products on
discount and when it happens occasionally, it averages only
15%. Amazing to relate, Zara follows a zero advertising
policy and prefers to invest a percentage of revenues to
opening new stores – 1285 stores all over the world
currently with annual sales of over $10 billion instead. Zara
is able to push competitors to the wall so far due to its
ability to design, produce and deliver fashion garments
efficiently and effectively, leveraging on its unique resource
strengths and capabilities.

Education
ANALYSING RESOURCES AND CAPABILITIES263
NOTES

Appreciate the role of a firm’s resources and capabilities as a basis for formulating strategy
Identify and appraise the resources and capabilities of a firm
Evaluate the potential for a firm’s resources and capabilities to confer sustainable competitive advantage
Use the results of resource and capability analysis to formulate strategies that exploit internal strengths while defending
Identify the means through which a firm can develop its resources and capabilities
9.1 INTRODUCTION
Strategy is concerned with matching a firm’s resources and
capabilities to the opportunities that arise in the external
environment. So far, the emphasis of the book has been the
identification of profit opportunities in the external
environment of the firm. With this chapter, our emphasis shifts
from the interface between strategy and the external
environment towards the interface between strategy and the
internal environment of the firm – more specifically, with the
resources and capabilities of the firm. Increasing emphasis on
the role of resources and capabilities as the basis for strategy
is the result of two factors. First, as firms’ industry
environments have become more unstable, so internal
resources and capabilities rather than external market focus
has been viewed as a securer base for formulating strategy.
Second, it has become increasingly apparent that competitive
advantage rather than industry attractiveness is the primary
source of superior profitability.
FACTOR AFFECTING THE INTERNAL

9.2
ENVIRONMENT
Basing Strategy on Resources and Capabilities
During the 1990s, ideas concerning the role of resources and
capabilities as the principal basis for firm strategy and the
primary source of profitability coalesced into what has become
known as the resource-based view of the firm. To understand
why the resource- based view has had a major impact on
strategy thinking, let us go back to the starting point for
strategy formulation: typically some statement of the firm’s
identity and purpose (often expressed in a mission statement).
Conventionally, firms have answered the question “what is our
business?” in terms of the market they serve: “who are our
customers?” and “which of their needs are we seeking to
serve?” However, in a world where customer preferences
are volatile and
NOTES the identity of customers and the technologies for serving

them are changing, a market-focused strategy may not provide
the stability and constancy of direction needed to guide
strategy over the long term.
When the external environment is in a state of flux, the firm itself, in terms of its bundle of re
In general, the greater the rate of change in a firm’s external
environment, the more likely it is that internal resources and
capabilities will provide a secure foundation for long-term
strategy. In fast-moving, technology-based industries, new
companies are built around specific technological capabilities.
Motorola, the Texas-based supplier of wireless
telecommunications equipment, semiconductors, and direct
satellite communications, has undergone many
transformations, from being a leading provider of TVs and car
radios to its current focus on telecom equipment. Yet,
underlying these transformations has been a consistent focus
on wireless electronics.
NMI
MS
Figure 9.1: Analysing Resources and Capabilities: The Interface
between Strategy and the Firm
The difficulties experienced by established firms in adjusting to
technological change within their own markets are well
documented – in typesetting and in disk drive manufacturing,
successive technological waves have caused market leaders to
falter and allowed new entrants to prosper.
Fill in the blanks:

When the external environment is in a state of flux, the firm itself, in terms of its bundle of resources and capabilities, may be a much mor
In fast-moving, technology-based industries, new companies are built around specificcapabilities.

Education
NOTES
In a volatile industry marked by disruptive technologies, companies should focus on building competencies, not just products. Discuss with
RESOURCES AND CAPABILITIES AS

9.3
SOURCES OF PROFIT
Among the two major sources of superior profitability: industry
attractiveness and competitive advantage. Of these,
competitive advantage is the more important.
Internationalisation and deregulation have increased
competitive pressure within most sectors; as a result, few
industries (or segments) offer cosy refuges from vigorous
competition. The industry factors account for only a small
proportion of interfirm profit differentials.
Establishing competitive advantage through the development and deployment of resources and capabilities, rather than seeking shelter f
The distinction between industry attractiveness and
competitive advantage (based on superior resources) as
sources of a firm’s profitability corresponds to economists’
distinction between different types of profit (or rent). The
profits arising from market power are referred to as monopoly
rents; those arising from superior resources are Ricardian
rents, after the 19th-century British economist David Ricardo.
Ricardo showed that, even when the market for wheat was
competitive, fertile land would yield high returns. Ricardian
rent is the return earned by a scare resource over and above
the cost of bringing it into production.
In practice, distinguishing between profit arising from market
power and profit arising from resource superiority is less clear
in practice than in principle. A closer look at Porter’s five forces
framework suggests that industry attractiveness derives
ultimately from the ownership of resources. Barriers to entry,
for example, are the result of patents, brands, distribution
channels, learning, or some other resource possessed by
incumbent firms. Similarly, the lack of rivalry resulting from the
dominance of a single firm (monopoly) or a few firms
(oligopoly) is usually based on the concentrated ownership
of key resources such as technology, manufacturing facilities,
or distribution facilities.
The resource-based approach has profound implications for
companies’ strategy formulation. When the primary concern of
strategy was industry selection and positioning, companies
tended to adopt similar strategies. The resource-based view, by
contrast,
NOTES emphasises the uniqueness of each company and suggests

that the key to profitability is not through doing the same as
other firms, but rather through exploiting differences.
Fill in the blanks:

Distinguishing between profit arising from market power and profit arising from ………………….
The resource-based approach has profound implications for companies’ …………………..
Write a 200-words report on the attractiveness of the multi-brand retail industry in India. Justify the entry of Trent into the industry based
9.4 RESOURCES OF THE FIRM

It is important to distinguish between the resources and the
Establishing competitive advantage involves formulating and implementing a strategy that exploits the uniqueness of a firm’s portfolio of r
capabilities of the firm: resources are the productive assets
owned by the firm; capabilities are what the firm can do.
Individual resources do not confer competitive advantage, they
must work together to create organisational capability. It is
capability that is the essence of superior performance. Figure
9.2 shows the relationship among resources, capabilities, and
Drawing up an inventory of a firm’s resources can be
surprisingly difficult. No such document exists within the
accounting or management information systems of most
corporations. The corporate balance sheet provides a limited
view of a firm’s resources – it comprises mainly financial and
physical resources. To take a wider view of a firm’s resources it
is helpful to identify three principal types of resource: tangible,
intangible and human resources.
NOTES
Figure 9.2: Links among Resources, Capabilities and

Competitive Advantage
9.4.1 TANGIBLE RESOURCES

Tangible resources are the easiest to identify and evaluate:
financial resources and physical assets are identified and
valued in the firm’s financial statements. Yet, balance sheets
are renowned for their propensity to obscure strategically
relevant information, and to under- or overvalue assets.
Historic cost valuation can provide little indication of an asset’s
market value. Disney’s movie library had a balance sheet value
of $4.6 billion in 2005, based on production cost less
amortisation. Its land assets (including its 28,000 acres in
Florida) were valued at a paltry $1.1 billion.
However, the primary goal of resource analysis is not to value a
company’s assets, but to understand their potential for
creating competitive advantage. Information that British
Airways possesses tangible fixed assets with a book value of
£8.2 billion is of little use in assessing their strategic value. To
assess British Airways’ ability to compete effectively in the
world airline industry we need to know about the
composition of these assets, the location of land and buildings,
the types of plane and their age, and so on.
Once we have fuller information on a company’s tangible
resources we explore how we can create additional value from
them. This requires that we address two key questions:
 What opportunities exist for economising on their use? It
may be possible to use fewer resources to support the
same level of business, or to use the existing resources to
support a larger volume of business.
 What are the possibilities for employing existing assets
more profitably?
NOTES 9.4.2 INTANGIBLE RESOURCES

For most companies, intangible resources are more valuable
than tangible resources. Yet, in company financial statements,
intangible resources remain largely invisible – particularly in
the US where R&D is expensed. The exclusion or
undervaluation of intangible resources is a major reason for the
large and growing divergence between companies’ balance
sheet valuations (“book values”) and their stock market
valuations (see Table 9.1).
TABLE 9.1: MAJOR COMPANIES WITH THE HIGHEST

MARKET-TO-BOOK RATIOS, DECEMBER 2005
Valuation Valuation
Company Ratio Country Company Ratio Country
Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US
Colgate- 20.8 US Diageo 7.4 UK
Palmolive
GlaxoSmithKline 13.4 UK 3M 7.3 US
Anheuser-Busch 12.6 US Nokia 6.7 Finland
eBay 11.2 US Sanofi-Aventis 6.3 France
SAP 10.8 Germany AstraZeneca 5.9 UK
Yahoo! 10.7 US Johnson & 5.7 US
S
Johnson
Dell Computer 10.0 US Boeing 5.7 US
Sumitomo 8.8 Japan Eli Lily 5.6 US
Mitsui Financial
NI
Procter & 8.4 US Cisco 5.5 US
M
Gamble Systems
Qualcomm 8.3 US Roche 5.5 Switz.
Holding
Schlumberger 8.2 US L’Oreal 5.3 France
Unilever 8.1 Neth./UK Altria 5.2 US
PepsiCo 8.0 US Novartis 5.1 Switz
Note: The table includes companies with the highest market capitalisation as a
proportion of balance sheet net asset value among the top 200 companies of the world
with the largest market capitalisation at the end of 2005.
Among the most important of these undervalued or unvalued

intangible resources are brand names. Table 9.2 shows
companies owning brands valued at $15 billion or more. Brand
names and other trademarks are a form of reputational asset:
their value is in the confidence they instil in customers. This
value is reflected in the price premium that customers are
willing to pay for the branded product over that for an
unbranded or unknown brand. Brand value
NOTES
(or “brand equity”) can be estimated by taking the price
premium attributable to a brand, multiplying it by the brand’s
annual sales volume, then calculating the present value of this
revenue stream. The brand valuations in Table 9.2 involve
estimating the operating profits for each brand (after taxation
and a capital charge), estimating the proportion of net
operating income attributable to the brand, and then
capitalising these returns. The value of a company’s brands
can be increased by extending the product/market scope over
which the company markets those brands. Philip Morris is an
expert at internationalising its brand franchises.
TABLE 9.2: THE WORLD’S MOST

VALUABLE BRANDS, 2006
Rank Brand Brand value in Change Country

2006, $ billion from 2004 of origin
1 Coca-Cola 67.5 0% USA
2 Microsoft 59.9 −2% USA
3 IBM 53.4 −1% USA
4 GE 47.0 +7% USA
5 Intel 35.6 +6% USA
6 Nokia 26.5 +10% Finland
7 Disney 26.4 −2% USA
8 McDonald’s 26.0 +4% USA
9 Toyota 24.8 +10% Japan
I
10 Marlboro 21.2 −4% USA
11 Mercedes Benz 20.0 −6% Germany
12 Citi 20.0 0% USA
N
13 Hewlett-Packard 18.9 −10% USA
14 American Express 18.6 +5% USA
15 Gillette 17.5 +5% USA
M
16 BMW 17.1 +8% Germany
17 Cisco 16.6 +4% USA
18 Louis Vuitton 16.1 n.a. France
19 Honda 15.8 +6% Japan
20 Samsung 15.0 19% S. Korea
Note: Brand values are calculated as the net present value of future earnings
generated by the brand.
Harley-Davidson’s brand strength has not only permitted the

company to obtain a price premium of about 40% above that
of comparable motorcycles, but also to license its name to the
manufacturers of clothing, coffee mugs, cigarettes, and
restaurants. Reputation may be attached to a company as well
as to its brands. Companies depend on the support from
employees, customers, investors, and governments.
NOTES Harris Interactive shows Johnson & Johnson followed by Coca-

Cola, Google, UPS, and 3M to have the highest “reputation
quotients.”
Like reputation, technology is an intangible asset whose value
is not evident from most companies’ balance sheets.
Intellectual property – patents, copyrights, trade secrets, and
trademarks – comprise technological and artistic resources
where ownership is defined in law. Over the past 20 years,
companies have become more attentive to the value of their
intellectual property. Texas Instruments was one of the first
companies to begin managing its patent portfolio in order to
maximise its licensing revenues. For some companies, their
ownership of intellectual property is a key source of their
market value.
9.4.3 HUMAN RESOURCES

The human resources of the firm are the expertise and effort
offered by its employees. Human resources do not appear on
corporate balance sheets for the simple reason that people are
not owned: they offer their services under employment
contracts. Identifying and appraising the stock of human
resources within a firm is complex and difficult. Human
resources are appraised at the time of recruitment and
throughout the period of employment, e.g. through annual
performance reviews. Companies are continually seeking more
effective methods to assess the performance and potential of
their employees. Over the past decade, human resource
appraisal has become far more systematic and sophisticated.
Organisations are relying less on formal qualifications and
years of experience and more on attitude, motivation, learning
capacity, and potential for collaboration. Competency
modelling involves identifying the set of skills, content
knowledge, attitudes, and values associated with superior
performers within a particular job category, then assessing
each employee against that profile. The results of such
competency assessments can then be used to identify training
needs, make selections for hiring or promotion, and determine
compensation. A key outcome of systematic assessment has
been recognition of the importance of psychological and social
aptitudes in linking technical and professional abilities to
overall job performance. Recent interest in emotional
intelligence reflects growing recognition of the importance of
social and emotional skills and values.
This organisational context as it affects internal collaboration is
determined by a key intangibleresource: the culture
oftheorganisation. The term organisational culture is
notoriously ill defined. It relates to an organisation’s values,
traditions, and social norms.
Industry insiders have raised eyebrows in the acquisition of Patni Computers by Igate Solution
NOTES
Fill in the blanks:

Like reputation, technology is anasset whose
value is not evident from most companies’ balance sheets.
The human resources of the firm are the expertise and effort offered by its …………………..
9.5 ORGANISATIONAL CAPABILITIES
The ability of employees to harmonise their efforts and integrate their separate skills depends not only on their interpersonal skills but also
Resources are not productive on their own. A brain surgeon is
close to
uselesswithoutaradiologist,anaesthetist,nurses,surgicalinstrum
ents, imaging equipment, and a host of other resources. To
perform a task, a team of resources must work together. An
organisational capability is a “firm’s capacity to deploy
resources for a desired end result.” Just as an individual may
be capable of playing the violin, ice skating, and speaking
Mandarin, so an organisation may possess the capabilities
needed to manufacture widgets, distribute them throughout
Latin America, and hedge the resulting foreign exchange
exposure. We use the terms capability and competence
interchangeably.
Our primary interest is in those capabilities that can provide a
basis for competitive advantage. Selznick used distinctive
competence to describe those things that an organisation
does particularly well relative to its competitors. Prahalad and
Hamel coined the term core competences to distinguish those
capabilities fundamental to a firm’s strategy and performance.
Core competences, according to Hamel and Prahalad, are
those that:
 Make a disproportionate contribution to ultimate customer
value, or to the efficiency with which that value is
delivered, and
 Provide a basis for entering new markets.
Prahalad and Hamel criticise US companies for emphasising
product management over competence management. They
compare the strategic development of Sony and RCA in
consumer electronics. Both companies were failures in the
home video market. RCA introduced its videodisk system, Sony
its Betamax videotape system. For RCA, the failure of its first
product marked the end of its venture into home video
systems and heralded a progressive retreat from the consumer
electronics industry. RCA was acquired by GE, which then sold
off the combined consumer electronics division to Thomson of
France. Sony, on the other hand, acknowledged the failure of
Betamax, but continued to develop its capabilities in video
technology. This
NOTES continuous development and upgrading of its video capabilities

resulted in a string of successful video products from
camcorders and digital cameras to the PlayStation game
console.
9.5.1 CLASSIFYING CAPABILITIES

To identify a firm’s capabilities, we need to have some basis for
classifying and disaggregating its activities. Two approaches
are commonly used:
 A functional analysis identifies organisational capabilities in
relation to each of the principal functional areas of the
firm. Table
9.3 classifies the principal functions of the firm and
identifies organisational capabilities pertaining to each
function.
 A value chain analysis separates the activities of the firm
into a sequential chain. Michael Porter’s representation of
the value chain distinguishes between primary activities
(those involved with the transformation of inputs and
interface with the customer) and support activities (see
Figure 9.3). Porter’s generic value chain identifies a few
broadly defined activities that can be disaggregated to
provide a more detailed identification of the firm’s
activities (and the capabilities that correspond to each
activity). Thus, marketing might include market research,
test marketing, advertising, promotion, pricing, and dealer
relations.
TABLE 9.3: A FUNCTIONAL CLASSIFICATION

OF ORGANISATIONAL CAPABILITIES
Contd...
Functional area Capability Exemplars
Corporate Financial control Exxon Mobil,
Functions Strategic management PepsiCo
of multiple businesses General Electric,
Strategic innovation Procter & Gamble
Multi-divisional BP, Google
coordination Unilever, Shell
Acquisition management Cisco, Bank
International of America
management Shell, Citigroup
Manageme Comprehensive, Wal-Mart, Capital
nt integrated MIS One, Dell
Information network linked to Computer
managerial decision
making
Research & Research IBM, Merck
Development Innovative new product 3M, Apple
development Canon,
Fast-cycle new product Inditex (Zara)
development
NOTES
Briggs &
Operations Efficiency in volume Stratton, YKK
manufacturing Toyota, Harley-
Continuous Davidson
improvements in Four Season
operations Hotels
Flexibility and speed
or response
Product Design capability Nokia,

Design Apple
Brand
Marketing Computer
management
P&G, Altria
Promoting reputation
for quality Johnson & Johnson
Responsiveness to MTV, L’Oreal
market trends
Sales and Distribution
Effective sales promotion and execution
PepsiCo, Pfizer
Efficiency and speed of order processing
L.L. Bean, Dell Computer
Speed of Distribution Amazon.com
Quality and effectiveness of customerSingapore
service Airlines, Caterpillar
NMI
MS
Figure 9.3: Porter’s Value Chain
9.5.2 ARCHITECTURE OF CAPABILITY

Why is 3M so good at developing new products for a variety of
home, office, and medical needs? How is Wal-Mart able to
combine relentless cost focus and high levels of flexibility and
adaptability? Why is Toyota so superior to either Ford or GM in
developing new models of car and launching them globally?
We can guess, but the fact remains: we don’t really know how
organisational capabilities are created or why one company
performs a capability more effectively than another. To begin to
understand organisational capabilities, let us look at their
structure.
NOTES Capability as Routine

Organisational capability requires the expertise of various
individuals to be integrated with capital equipment,
technology, and other resources. But how does this integration
occur? Virtually all productive activities involve teams of
people undertaking closely coordinated actions – typically
without detailed direction. Richard Nelson and Sidney Winter
have used the term organisational routines to refer to
theseregular and predictable patterns of activity madeupofa
sequence of coordinated actions by individuals. Such routines
form the basis of most organisational capabilities. At the
manufacturing level, a series of routines governs the passage
of raw materials and components through the production
process to the factory gate. Sales, ordering, distribution, and
customer service activities are similarly organised through a
number of standardised, complementary routines. Even top
management functions comprise routines for monitoring
business unit performance, capital budgeting, and strategic
planning.
Like individual skills, organisational routines develop through
learning-by-doing. Just as individual skills become rusty when
not exercised, so it is difficult for organisations to retain
coordinated responses to contingencies that arise only rarely.
Hence, there may be a trade-off between efficiency and
flexibility. A limited repertoire of routines can be performed
highly efficiently with near-perfect coordination. The same
organisation may find it extremely difficult to respond to novel
situations.
Routinisation is an essential step in translating directions and
operating practices into capabilities. In every McDonald’s
hamburger restaurant, operating manuals provide precise
directions for the conduct of every activity undertaken, from
the placing of the pickle on the burger to the maintenance of
the milk-shake machine. In practice, the operating manuals are
seldom referred to in the course of day- to-day operations –
through continuous repetition, tasks become routinised.
Hierarchy of Capabilities
Whether we examine capabilities from a functional or value
chain approach, it is evident that broad functions or value
chain activities can be disaggregated into more specialist
capabilities performed by smaller teams of resources. What
we observe is a hierarchy of capabilities where more general,
broadly defined capabilities are formed from the integration of
more specialised capabilities. For example:
 A hospital’s capability in treating heart disease depends on
its integration of capabilities pertaining to a patient’s
diagnosis, physical medicine, cardiovascular surgery, pre-
and post- operative care, as well as capabilities relating to
various administrative and support functions.
NOTES
 Toyota’s manufacturing capability – its system of “lean
production” – integrates capabilities relating to the
manufacture of components and subassemblies, supply-
chain management, production scheduling, assembly,
quality control procedures, systems for managing
innovation and continuous improvement, and inventory
control.
Figure 9.4 offers a partial view of the hierarchy of capabilities
of a telecom equipment maker. At the highest level of
integration are those capabilities which integrate across
multiple functions. New product development draws upon a
broad range of functional capabilities – which is why it is so
difficult to manage. One solution to the problems of integrating
functional know-how into new product development is the
creation of cross-functional product development teams. The
use of such product development teams (led by a
“heavyweight” team leader) by Toyota, Nissan, and Honda has
been a key reason for these firms’ fast-cycle new product
development compared with US and European car companies.
NMI
MS
Figure 9.4: Hierarchical Nature of Capabilities:
A Manufacturer of PBXs
Fill in the blank:

7.………………….. is an essential step in translating directions and operating practices into capabilities.
NOTES
Great companies build competencies using the Great Repetitive Model. Cite an example of a company that has developed capability as a r
APPRAISING RESOURCES AND

9.6
CAPABILITIES
So far, we have established what resources and capabilities
are, how they can provide a long-term focus for a company’s
strategy, and how we can go about identifying them. However,
if the focus of this book is the pursuit of profit, we also need to
appraise the potential for resources and capabilities to earn
profits for the company. The profits that a firm obtains from its
resources and capabilities depend on three factors: their
abilities to establish a competitive advantage, to sustain that
competitive advantage, and to appropriate the returns to that
competitive advantage. Each of these depends on a number of
resource characteristics. Figure 9.5 shows the key
relationships.
NMI
MS
Figure 9.5: Appraising the Strategic Importance of Resources and
Capabilities
9.6.1 ESTABLISHING COMPETITIVE ADVANTAGE

For a resource or capability to establish a competitive
advantage, two conditions must be present:
Scarcity: If a resource or capability is widely available within the
industry, then it may be essential to compete, but it will not be a
NOTES
sufficient basis for competitive advantage. In oil and gas
exploration, new technologies such as directional drilling and
3-D seismic analysis are critical to reducing the costs of finding
new reserves. However, these technologies are widely
available from oilfield service and IT companies. As a result,
such technologies are “needed to play,” but they are not
sufficient to win.
Relevance: A resource or capability must be relevant to the key
success factors in the market. British coal mines produced
some wonderful brass bands. Unfortunately, musical
capabilities did little to assist the mines in meeting competition
from cheap imported coal and North Sea gas. As retail banking
shifts toward automated teller machines and online
transactions, so the retail branch networks of the banks have
become less relevant for customer service.
9.6.2 SUSTAINING COMPETITIVE ADVANTAGE

The profits earned from resources and capabilities depend not
just on their ability to establish competitive advantage, but
also on how long that advantage can be sustained. This
depends on whether resources and capabilities are durable and
whether rivals can imitate the competitive advantage they
offer. Resources and capabilities are imitable if they are
transferable or replicable.
Durability: Some resources are more durable than others and,
hence, are a more secure basis for competitive advantage. The
increasing pace of technological change is shortening the
useful life span of most resources including capital equipment
and proprietary technologies. Brands, on the other hand, can
show remarkable resilience to time. Heinz sauces, Kellogg’s’
cereals, Campbell’s soup, Hoover vacuum cleaners, and Coca-
Cola have been market leaders for over a century.
Transferability: The simplest means of acquiring the
resources and capabilities necessary for imitating another
firm’s strategy is to buy them. The ability to buy a resource or
capability depends on its transferability – the extent to which it
is mobile between companies. Someresources, such as finance,
rawmaterials, components, machines produced by equipment
suppliers, and employees with standardised skills (such as
short-order cooks and auditors), are transferable and can be
bought and sold with little difficulty. Some resources are not
easily transferred – either they are entirely firm specific, or
their value depreciates on transfer.
Sources of immobility include:
 Geographical immobility of natural resources, large items
of capital equipment, and some types of employees may
make it difficult for firms to acquire these resources
without relocating themselves.
 Imperfect information regarding the quality and
productivity of resources creates risks for buyers. Such
imperfections are especially important in relation to
human resources – hiring
NOTES decisions are typically based on very little knowledge of

how the new employee will perform. Sellers of resources
have better information about the characteristics of the
resources on offer than potential buyers – this creates a
“lemons problem” for firms seeking to acquire resources.
Jay Barney has shown that different valuations of
resources by firms can result in their either being
underpriced or overpriced, giving rise to differences in
profitability between firms.
 Complementarity between resources means that the
detachment of a resource from its “home team” causes it
to lose productivity and value. Thus, if brand reputation is
associated with the company that created it, a change in
ownership of the brand erodes its value. The transfer of
the Thinkpad brand of notebook computers from IBM to
Lenovo almost certainly eroded its value.
 Organisational capabilities, because they are based on
teams of resources, are less mobile than individual
resources. Even if the whole team can be transferred (in
investment banking it has been commonplace for whole
teams of analysts or M&A specialists to defect from one
bank to another), the dependence of the team on a wider
network of relationships and corporate culture may pose
difficulties for recreating the capability in the new
company.
Replicability: If a firm cannot buy a resource or capability, it
must build it. In financial services, most innovations in new
derivative products can be imitated easily by competitors. In
retailing too, competitive advantages that derive from store
layout, point-of-sale technology, charge cards, and extended
opening hours can also be copied easily by competitors.
Less easily replicable are capabilities based on complex
organisational routines. Some capabilities appear simple but
prove difficult to replicate. Just-in-time scheduling and quality
circles are relatively simple techniques used effectively by
Japanese companies. Although neither require advanced
manufacturing technologies or sophisticated information
systems, their dependence on high levels of collaboration
through communication and trust meant that many American
and European firms had difficulty implementing them. Even
where replication is possible, incumbent firms may benefit
from the fact that resources and capabilities that have been
accumulated over a long period can only be replicated at
disproportionate cost by would-be imitators. Dierickx and Cool
identify two major sources of incumbency advantage:
 Asset mass efficiencies occur where a strong initial
position in technology, distribution channels, or reputation
facilitates the subsequent accumulation of these
resources.
 Time compression diseconomies are the additional costs
incurred by imitators when attempting to accumulate
ra dly a resource or capability. Thus, “crash programs” of
pi R&D and
NOTES
“blitz” advertising campaigns tend to be less productive
than similar expenditures made over a longer period.
9.6.3 APPROPRIATING THE RETURNS TO

COMPETITIVE ADVANTAGE
Who gains the returns generated by superior capabilities? We
should normally expect that such returns accrue to the owner
of that capability. However, ownership is not always clear-cut:
capabilities depend heavily on the skills and efforts of
employees – who are not owned by the firm. For companies
dependent on human ingenuity and know-how, the mobility of
key employees represents a constant threat to their
competitive advantage. In investment banks and other human
capital-intensive firms, the struggle between employees and
shareholders to appropriate rents is reminiscent of the war for
surplus value between labour and capital that Marx analysed.
The prevalence of partnerships (rather than joint-stock
companies) in professional service industries (lawyers,
accountants, and management consultants) reflects the desire
to avoid conflict between owners and its human resources.
The less clearly defined are property rights in resources and
capabilities, the greater the importance of relative bargaining
power in determining the division of returns between the firm
and its individual members. In the case of team-based
organisational capabilities, this balance of power between the
firm and an individual employee depends crucially on the
relationship between individuals’ skills and organisational
routines. The more deeply embedded are individual skills and
knowledge within organisational routines, and the more they
depend on corporate systems and reputation, the weaker the
employee is relative to the firm.
Conversely, the closer an organisational capability is identified
with the expertise of individual employees, and the more
effective those employees are at deploying their bargaining
power, the better able employees are to appropriate rents. If
the individual employee’s contribution to productivity is clearly
identifiable, if the employee is mobile, and if the employee’s
skills offer similar productivity to other firms, the employee is
in a strong position to appropriate most of his or her
contribution to the firm’s value added. In recent years
investment banks and consulting companies have emphasised
the team-based nature of their capabilities. In downplaying the
role of individual expertise, they can improve their firm’s
potential for appropriating the returns to their capabilities.
If its rival imitates a company’s capability, should the company continue to treat it as a basis for competitive advantage? Discuss.
NOTES PLACING RESOURCE AND CAPABILITY

9.7
ANALYSIS TO WORK
We have covered the principal concepts and frameworks for
analysing resources and capabilities. How do we put this
analysis into practice? Let us discuss the simple, step-by-step
approach to how a company can appraise its resources and
capabilities and then use the appraisal to guide strategy
formulation.
Step 1 – Identify the Key Resources and Capabilities

To draw up a list of the firm’s resources and capabilities, we can
begin from outside or inside the firm. From an external focus,
we begin with key success factors. What factors determine why
some firms in an industry are more successful than others and
on what resources and capabilities are these success factors
based?
Suppose we are evaluating the resources and capabilities of
Volkswagen AG, the German-based automobile manufacturer.
We can start with key success factors in the world automobile
industry: low-cost production, attractively designed new
models embodying the latest technologies, and the financial
strength to weather the cyclicality and heavy investment
requirements of the industry. What capabilities and resources
do these key success factors imply? They would include
manufacturing capabilities, new product development
capability, effective supply chain management, global
distribution, brand strength, scale-efficient plants with up-to-
date capital equipment, a strong balance sheet, and so on. To
organise and categorise these various resources and
capabilities, it is helpful to switch to the inside of VW and look
at the company’s value chain, identifying the sequence of
activities from new product development to purchasing, to
supply chain management, to component manufacture,
assembly, and right the way through to dealership support and
after-sales service. We can then look at the resources that
underpin the capabilities at each stage of the value chain.
Step 2 – Appraising Resources and Capabilities

Resources and capabilities need to be appraised against two
key criteria. First is their importance: which resources and
capabilities are most important in conferring sustainable
competitive advantage? Second, where are our strengths and
weaknesses as compared with competitors?
 Assessing Importance: The temptation in assessing which
resources and capabilities are most important is to
concentrate on customer choice criteria. What we must
bear in mind, however, is that our ultimate objective is not
to attract customers, but to make superior profit through
establishing a sustainable competitive advantage. For this
purpose we need to look beyond customer choice to the
underlying strategic characteristics of resources and
ca
pa
bil
iti
es
.
To
do
thi
s
w
e
ne
ed
to
lo
ok
at
th
e
se
t
of
ap
pr
ai
sa
l
NOTES
criteria outlined in the previous section “Appraising
Resources and Capabilities.” In the case of VW, many
resources and capabilities are essential to compete in the
business, but several of them are not scarce (for example,
total quality management capability and technologically
advanced assembly plants have become widely diffused
within the industry), while others (such as IT capability and
design capability) are outsourced to external providers –
either way, they are “needed to play” but not “needed to
win.” On the other hand, resources such as brand strength
and a global distribution network, and capabilities such as
fast-cycle new product development and global logistics
capability, cannot be easily acquired or internally
developed – they are critical to establishing and sustaining
advantage.
 Assessing Relative Strengths: Objectively appraising the
comparative strengths and weaknesses of a company’s
resources and capabilities relative to competitors is
difficult. In assessing their own competencies,
organisations frequently fall victim to past glories, hopes
for the future, and their own wishful thinking. The
tendency toward hubris among companies – and their
senior managers – means that business success often
sows the seeds of its own destruction. Among the failed
industrial companies in America and Europe are
manywhose former success blinded them to their
stagnating capabilities and declining competitiveness:
examples include the cutlery producers of Sheffield,
England and the integrated steel giants of the United
States. To identify and appraise a company’s capabilities,
managers must look both inside and outside. Internal
discussion can be valuable in sharing insights and
evidence and building consensus regarding the
organisation’s resource and capability profile. The
evidence of history can be particularly revealing in
reviewing instances where the company has performed
well and those where it has performed poorly: do any
patterns appear? Finally, to move the analysis from the
subjective to the objective level, benchmarking is a
powerful tool for quantitative assessment of performance
relative to that of competitors. Benchmarking is “the
process of identifying, understanding, and adapting
outstanding practices from organisations anywhere in the
world to help your organisation improve its performance.”
Benchmarking offers a systematic framework and
methodology for identifying particular functions and
processes and then for comparing their performance with
other companies.
Ultimately, appraising resources and capabilities is not
about data, it’s about insight and understanding.
Every organisation has some activity where it excels or has
the potential to excel. For Federal Express, it is a system
that guarantees next-day delivery anywhere within the
United States. For BMW it is the ability to integrate world-
class engineering with design excellence and highly
effective marketing. For
NOTES McDonald’s, it is the ability to supply millions of

hamburgers from thousands of outlets throughout the
world, with remarkable uniformity of quality, customer
service, and hygiene. For General Electric, it is a system of
corporate management that reconciles coordination,
innovation, flexibility, and financial discipline in one of the
world’s largest and most diversified corporations. All these
companies are examples of highly successful enterprises.
One reason why they are successful is that they have
recognised what they can do well and have based their
strategies on their strengths. For poor-performing
companies, the problem is not necessarily an absence of
distinctive capabilities, but a failure to recognise what they
are and to deploy them effectively.
 Bringing Together Importance and Relative Strength: Putting
together the two criteria – importance and relative
strength – allows us to highlight a company’s key strengths
and key weaknesses. Consider, for example, Volkswagen
AG. Dividing this display into four quadrants allows us to
identify those resources and capabilities that we may
regard as key strengths and those that we may identify as
key weaknesses. For example, our assessment suggests
that plant and equipment, engineering capability, and
supply chain management are key strengths of VW, while
distribution (a relatively weak presence in the US and
Japan), new product development (no consistent record of
fast- cycle development of market-winning new models),
and financial management are key weaknesses.
Step 3 – Developing Strategy Implications

How do we exploit our key strengths most effectively? What
do we do about our key weaknesses in terms of both
upgrading them and reducing our vulnerability to them?
Finally, what about our “inconsequential” strengths? Are
these really superfluous, or are there ways in which we can
deploy them to greater effect?
 Exploiting Key Strengths: Having identified resources and
capabilities that are important and where our company is
strong relative to competitors, the key task is to formulate
our strategy to ensure that these resources are deployed
to the greatest effect. If engineering is a key strength of
VW, then it may wish to seek differentiation advantage
through technical sophistication and safety features. If VW
is effective in managing government relations and is well
positioned in the potential growth markets of China,
Eastern Europe, and Latin America, exploiting this strength
may require developing models that will appeal to these
markets. To the extent that different companies within an
industry have different capability profiles, this implies
differentiation of strategies within the industry. Thus,
Toyota’s outstanding manufacturing capabilities and fast-
cycle new product development, Hyundai’s low-cost
manufacturing capability that derives from its South
Ko
re
an
lo
ca
tio
n
an
d
Pe
ug
eo
t’s
de
si
gn
fla
ir
NOTES
suggest that each company should be pursuing a distinctively
different strategy.
 Managing Key Weaknesses: What does a company do
about its key weaknesses? It is tempting to think of how
companies can upgrade existing resources and capabilities
to correct such weaknesses. However, converting
weakness into strength is likely to be a long-term task for
most companies. In the short to medium term, a company
is likely to be stuck with the resources and capabilities that
it inherits from the previous period. The most decisive –
and often most successful – solution to weaknesses in key
functions is to outsource. Thus, in the automobile industry,
companies have become increasingly selective in the
activities they perform internally. Through clever strategy
formulation a firm may be able to negate the impact of its
key weaknesses.
 What about Superfluous Strengths?: What about thoseresources
and capabilities where a company has particular
strengths, but these don’t appear to be important sources
of sustainable competitive advantage? One response may
be to lower the level of investment from these resources
and capabilities. If a retail bank has a strong, but
increasingly underutilised, branch network, this may be an
opportunity to prune its real estate assets and invest in IT
approaches to customer services.
However, in the same way that companies can turn apparent
weaknesses into competitive strengths, so it is possible to
develop innovative strategies that turn apparently
inconsequential strengths into valuable resources and
capabilities.
Fill in the blank:

8.Organisational capability requires the expertise of various individuals to be integrated withequipment,
technology, and other resources.
DEVELOPING RESOURCES AND

9.8
CAPABILITIES
Conventional approaches to developing resources and
capabilities have emphasised gap analysis – identifying
discrepancies between the current position and the desired
future position, then adopting policies to fill those gaps. Such
approaches are of limited value. In the case of resources,
investing in areas of weakness – whether it is proprietary
technology or manufacturing facilities – can be very expensive
and, because of the complex complementarities between
different resources, such investments may deliver limited
returns. In the case of capabilities, because we know little
about their structure or operation, developing them is a
hazardous endeavour.
NOTES 9.8.1 RELATIONSHIP BETWEEN RESOURCES AND

CAPABILITIES
Possibly the most difficult problem in developing capabilities is
that we know little about the linkage between resources and
capabilities. In most sports, the relationship between the skills
of the individual players and team performance is weak. In
European football (soccer), teams built with modest
expenditures often outplay star-studded, big-budget teams. In
international competitions – the soccer world cup, Olympic
games, and ice hockey world cup – smell, resource-poor
countries often humiliate the preeminent national teams.
Among business firms, we observe the same phenomenon. The
firms that demonstrate the most outstanding capabilities are
not necessarily those with the greatest resource endowments:
 In automobiles, General Motors has four times the output
of Honda and four times the R&D expenditure, yet it is
Honda, not General Motors, that is world leader in power
train technology.
 In animated movies, the most successful productions in
recent years were by newcomers Pixar (Toy Story, The
Incredibles) and Aardman Animations (Wallace and Gromit)
rather than by industry giant, Walt Disney.
 In telecom equipment it was the upstart Aircel rather than
industry leaders Vodafone, Airtel, Idea Cellular and
Reliance that established leadership in the new world of
package switching.
According to Hamel and Prahalad, it is not the size of a firm’s
resource base that is the primary determinant of capability, but
the firm’s ability to leverage its resources. Resources can be
leveraged in the following ways:
 Concentrating resources through the processes of converging
resources on a few clearly defined and consistent goals;
focusing the efforts of each group, department, and
business unit on individual priorities in a sequential
fashion; and targeting those activities that have the
biggest impact on customers’ perceived value.
 Accumulating resources through mining experience in
order to achieve faster learning, and borrowing from other
firms – accessing their resources and capabilities through
alliances, outsourcing arrangements, and the like.
 Complementing resources involves increasing their
effectiveness through linking them with complementary
resources and capabilities. This may involve blending
product design capabilities with the marketing capabilities
needed to communicate these to the market, and
balancing to ensure that limited resources and capabilities
in one area do not hold back the effectiveness of resources
and capabilities in another.
NOTES
 Conserving resources involves utilising resources and
capabilities to the fullest by recycling them through
different products, markets, and product generations; and
co-opting resources through collaborative arrangements
with other companies.
9.8.2 REPLICATING CAPABILITIES

Growing capabilities requires that the firm replicates them
internally. Some of the world’s most successful corporations are
those that have been able to replicate their capabilities in
different product and geographical markets. Ray Kroc’s genius
was to take the original McDonald’s formula and replicate it
thousands of times over in building a global chain of
hamburger restaurants. Other leading service companies –
Nike, Reebok, Levis – have built global presence on the
principle that once a capability has been developed, its
replication in another location can be achieved at a low cost.
If routines develop learning-by-doing, and the knowledge that
underpins them is tacit, replication is far from easy. Replication
requires systematisation of the knowledge that underlies the
capability
– typically through the formulation of standard operating
procedures. Thus, McDonald’s has distilled its business system
into operating procedures and training manuals that govern
the operation and maintenance of every aspect of its
restaurants. This systematisation presumes that the firm can
more fully articulate the processes that underlie its
capabilities. In the case of semiconductor fabrication, these
processes are so complex and the know-how involved so
deeply embedded that the only way that Intel can replicate its
production capabilities is by replicating its lead plant in every
detail – a process called “Copy Exactly.”
9.8.3 DEVELOPING NEW CAPABILITIES

Creating certain resources – a brand or an overseas distribution
network – may be difficult, costly, and time consuming, but at
least the challenge can be comprehended and planned.
Creating organisational capability poses a much higher level of
difficulty. If capabilities are based on routines that develop
through practice and learning, what can the firm do to
establish such routines within a limited time period? We know
that capabilities involve teams of resources working together,
but, even with the tools of business process mapping, we
typically have sketchy understanding of how people, machines,
technology, and organisational culture fit together to achieve a
particular level of performance. In the same way that we can
only speculate about what makes Tiger Woods the greatest
golfer of our time, we are unable fully to diagnose how Dell
achieves its brilliance at logistics management or how
Electronic Arts has been able to develop video games that
continue to set new standards in complexity, sophistication,
and player involvement.
NOTES  Capability as a Result of Early Experiences: Organisational

capability is path dependent – a company’s capabilities
today are the result of its history. More importantly, this
history will constrain what capabilities the company can
perform in the future. To understand the origin of a
company’s capabilities, a useful starting point is to study
the circumstances that existed and events that occurred at
the time of the company’s founding and early
development. How did Wal-Mart develop its super efficient
system of warehousing and distribution? This system was
not the result of careful planning and design, but of initial
conditions: because of its rural locations, the company was
unable to get reliable distribution from its suppliers,
and so it established its own distribution system. How does
one explain Wal-Mart’s amazing commitment to cost
efficiency? Its management systems are undoubtedly
important, but ultimately it is Wal-Mart’s origins in small-
town Arkansas and the values and personality of its
founder, Sam Walton, that sustains its obsession with
efficiency and cost cutting.
 Organisational Capability: Rigid or Dynamic?: These long
periods over which capabilities develop have important
implications for firms’ capacity for change. The more
highly developed a firm’s organisational capabilities are,
the narrower its repertoire and the more difficult it is for
the firm to adapt them to new circumstances. Dorothy
Leonard argues that core capabilities are simultaneously
core rigidities – they inhibit firms’ ability to access and
develop new capabilities. Nevertheless, some companies
appear to have the capacity to continually upgrade,
extend, and reconfigure their organisational capabilities.
David Teece and his colleagues have referred to dynamic
capabilities as the “firm’s ability to integrate, build, and
reconfigure internal and external competences to address
rapidly changing environments.” There is little consensus
in the literature as to what dynamic capabilities are
Eisenhardt and Martin identify dynamic capabilities as
routines that enable a firm to reconfigure its resources –
these include R&D, new product development and
acquisition capabilities. Zollo and Winter define dynamic
capabilities as higher level processes through which the
firm modifies its operating routines.
What is agreed is that dynamic capabilities are far from
common. For most companies highly developed capabilities in
existing products and technologies create barriers to
developing capabilities in new products and new technologies.
When adapting to radical change within an industry, or in
exploiting entirely new business opportunities, are new firms at
an advantage or disadvantage to established firms?
It depends on whether the change or the innovation is
competence enhancing or competence destroying. In TV
manufacturing, the most successful new entrants were existing
producers of radios – the new
NOTES
technology was compatible with their capabilities. However, in
most new industries, the most successful firms tend to be
start-ups rather than established firms. In personal computers,
it was newcomers such as Dell, Acer and Compaq that
emerged as most successful during the 1990s. Among
established firms, relatively few (IBM, Hewlett- Packard, and
Toshiba) went on to significant success. Many others (e.g.,
Xerox, GE, Texas Instruments, AT&T, and Olivetti) exited. In
wireless telephony, too, it was start-ups – Vodafone, Idea
Cellular, Reliance – that were more successful than established
telephone companies.
9.8.4 APPROACHES TO CAPABILITY DEVELOPMENT

So, how do companies go about developing new capabilities?
Let us review few approaches commonly utilised.
 Acquiring Capabilities: Mergers and Acquisitions: If new
capabilitiescanonlybedevelopedoverlongperiods,thenacqui
ring a company that has already developed the desired
capability can short-circuit the tortuous process of
capability development. In technologically fast-moving
environments, established firms typicallyuse acquisitions
as ameansof acquiring specific technical capabilities –
Cisco Systems and Microsoft have each benefited
substantially from such acquisitions. Microsoft’s adaptation
to the internet and its entry into video games was
achieved through multiple acquisitions. Each year,
Microsoft hosts its VC Summit, where venture capitalists
from all over the world are invited to marker their
companies. However, using acquisitions as a means of
extending a company’s capability base involves major
risks. On its own, acquisition does not achieve the
intended goal. Once the acquisition has been made, the
acquiring company must find a way to integrate the
acquiree’s capabilities with its own. All too often, culture
clashes, personality of management systems can result in
the degradation or destruction of the very capabilities that
the acquiring company was seeking.
 Accessing Capabilities: Strategic Alliances: Given the high
cost of acquiring companies, alliances offer a more
targeted and cost effective means to access another
company’s capabilities. A strategic alliance is a
cooperative relationship between firms involving the
sharing of resources in pursuit of common goals. Long-
running technical collaboration between HP and Canon has
allowed both firms to enhance their printer technology.
Strategic alliances comprise a wide variety of collaborative
relationships, which include joint research, technology-
sharing arrangements, shared manufacturing, joint
marketing and/or distribution arrangements, and vertical
partnerships, to mention but a few. Alliances may involve
formal agreements or they may be entirely informal; they
may or may not involve ownership links. Alliances may
also be for the purpose of acquiring the partner’s
capabilities through organisational learning.
NOTES  Creating Capabilities: Creating organisational capability

requires, first, acquiring the necessary resources and,
second, integrating these resources. With regard to
resource acquisition, particular attention must be given to
organisational culture – values and behavioural norms are
critically important influences on motivation and
collaboration. In general, however, it is integration that
presents the greatest challenge. We know that capabilities
are based on routines – coordinated patterns of activity –
but we know little about how routines are established. The
assumption has been that they “emerge” as a result of
learning-by-doing. Recent research, however, has
emphasised on the role of management in developing
organisational capability through motivation and
deliberate learning. Organisational structure and
management systems are of particular importance:
 Capabilities need to be housed within dedicated
organisational units if organisational members are to
achieve high levels of coordination. Thus, product
development is facilitated when undertaken within
product development units rather that through a
sequence of “over-the-wall”
transfersfromonefunctionaldepartmenttoanother.Simil
arly, capabilities in quality management, change
management, corporate social responsibility customer
are all best developed when organisational units are
dedicated to such activities. Inevitably, aligning
organisational structure with the multiple capabilities
creates organisational complexity.
 Organisations need to take systematic approaches to
capability development – the need to create, develop,
and maintain organisational capabilities must be built
into the design of management systems. The
literature emphasises the roles of search,
experimentation, and problem solving in capability
development. Systematic approaches to capability
development – including the creation of organisational
routines for defensive and offensive manoeuvres – are
central to the management and coaching of sports
teams, but in most business organisations the heavy
emphasis on maintaining current operations means
that limited attention is devoted to explicit capability
development. The management of motivation and
incentives in one area that is relatively well
developed. The literature places heavy emphasis on
the role of strategic intent and performance
aspirations in driving capability development. This has
implications for both leadership and the design of
incentives.
Organisations often discover that the organisational structure,
management systems, and culture that support existing
capabilities may be unsuitable for new capabilities. To resolve
this problem, companies may find it easier to develop new
ca bilities in new organisational units that are geographically
pa separated from the main company.
NOTES
Given the complexity and uncertainty of programs to develop
new organisational capabilities, an indirect approach may be
preferable. If we cannot design new capabilities from scratch,
but if we know what types of capabilities are required for
different products, then by pushing the development of
particular products we can pull the development of the
capabilities that those products require. For such an approach
to be successful it must be systematic and incremental.
Ultimately, developing organisational capabilities is about
building the know-how of the company, which requires
integrating the knowledge of multiple organisational members.
One of the most powerful tools for managing such process is
knowledge management.
Fill in the blanks:

Possibly the most difficult problem in developing capabilities is that we know little about the linkage between ……………………
and capabilities.
Growing capabilities requires that the firm …………………..
them internally.
9.9 SUMMARY
Developing complex capabilities over a significant period of time requires a sequencing of products, where each stage of the sequence has
 Internal environment comprises many features of the firm,
but for the purposes of strategy analysis, the key issue is
what the firm can do. This means looking at the resources
of the firm and the way resources combine to create
organisational capabilities.
 Our interest is the potential for resources and
capabilities to establish sustainable competitive
advantage. Systematic appraisal of a company’s resources
and capabilities provides the basis for formulating (or
reformulating) strategy. How can the firm deploy its
strengths to maximum advantage? How can it minimise its
vulnerability to its weaknesses? How can it develop and
extend its capabilities to meet the challenges of the
future?
 Despite the progress that has been made in the last ten
years in our understanding of resources and capabilities,
there is much that remains unresolved.
 The management systems of most firms devote
meticulous attention to the physical and financial assets
that are valued on their balance sheets; much less
attention has been paid to the critical intangible and
human resources of the firm, and even less to the
identification and appraisal of organisational capability.
NOTES  Most senior managers are now aware of the importance of

their resources and capabilities, but the techniques of
identifying, assessing, and developing them are woefully
underdeveloped.
Competitive Advantage: Superiority gained by a firm when it can provide the same value a
Internal Environment: Conditions, entities, events, and factors within an organisation which
Mission Statement: Written declaration of a firm’s core purpose and focus which normally re
Organisational Capability: Ability and capacity of an organisation expressed in terms of its (1
Replication: Replication requires systematisation of the knowledge that underlies the capabil

1. In recent years Google has expanded from internet search
across a broad range of internet services, including email,
photo management, satellite maps, digital book libraries,
blogger services, and telephony. To what extent has
Google’s strategy focused on its resources and capabilities
rather specific customer needs? What are Google’s
principal resources and capabilities?
2. Microsoft’s main capabilities relate to the development
and marketing of complex computer software and its
greatest resource is its huge installed base of its Windows
operating system. Does Microsoft’s entry into video game
consoles indicate that its strategy is becoming divorced
from its principal resources and capabilities?
3. Many companies announce in their corporate
communications: “Our people are our most important
resource.” In terms of Intangible Resources, can
employees be considered to be of the utmost strategic
importance?
NOTES
4. Apply the approach outlined in the section “Putting
Resource and Capability Analysis to Work” to your own
business school. Begin by identifying the resources and
capabilities relevant to success in the market for business
education, appraise the resources and capabilities of your
school, then make strategy recommendations regarding
such matters as the programs to be offered and the
overall positioning and differentiation of the school and its
offerings.
5. Describe with examples the various types of resources in a firm.
6. How resources and capabilities can be stated as a source
of profit? Explain.
7. How strategy can be based on resource and capabilities?
Explain with a suitable diagram.
8. How organizational capabilities are classified? Discuss.
9. Describe the architecture of organizational capabilities.
10. What do you mean by replicating capabilities? Explain
approaches to capability development.


Factors Affecting the 1. stable
Internal Environment
2. Technological
Resources and 3. resource
Capabilities as Sources
of Profit
4. strategy formulation
Resources of the Firm 5. intangible
6. employees
Organisational 7. Routinisation
Capabilities
Placing Resource and 8. Capital
Capability Analysis to
Work
Developing Resources 9. Resources
and Capabilities
10. replicates

1. Refer to 9.7
To identify the key resources and capabilities, appraising
resources and capabilities and developing strategy
implications.
NOTES 2. Refer to 9.8.1

Possibly the most difficult problem in developing
capabilities is that we know little about the linkage
between resources and capabilities. According to Hamel
and Prahalad, it is not the size of a firm’s resource base
that is the primary determinant of capability, but the firm’s
ability to leverage its resources. Resources can be
leveraged in the following ways- Concentrating resources,
accumulating resources, complementing resources and
conserving resources.
3. Refer to 9.6.1 & 9.6.2
Yes, employees can be considered as a competitive
advantage. For a resource or capability to establish a
competitive advantage, two conditions must be present-
scarcity and relevance. The profits earned from resources
and capabilities depend not just on their ability to
establish competitive advantage, but also on how long
that advantage can be sustained. This depends on
whether resources and capabilities are durable and
whether rivals can imitate the competitive advantage they
offer.
4. Refer to 9.7
To identify the key resources and capabilities; appraising
resources and capabilities including assessing importance,
relative strength and bringing together importance and
relative strength; developing strategy implications;
developing strategy implications including exploiting key
strengths, managing key weaknesses and superfluous
strengths.
5. Refer to 9.4
Tangible Resources, Intangible resources and Human
resources are examples of various types of resources in a
firm.
6. Refer to 9.3
Among the two major sources of superior profitability:
industry attractiveness and competitive advantage. Of
these, competitive advantage is the more important.
Internationalisation and deregulation have increased
competitive pressure within most sectors; as a result, few
industries (or segments) offer cosy refuges from vigorous
competition. The industry factors account for only a small
proportion of interfirm profit differentials. The distinction
between industry attractiveness and competitive
advantage (based on superior resources) as sources of a
firm’s profitability corresponds to economists’ distinction
between different types of profit (or rent).
7. Refer to 9.2
Strategies can be based when the firms seeks to answer
the question “what is our business?” in terms of the
m rket they serve: “who are our customers?” and “which
a of their needs are we seeking to serve?”
NOTES
When the external environment is in a state of flux, the
firm itself, in terms of its bundle of resources and
capabilities, may be a much more stable basis on which to
define its identity. In general, the greater the rate of
change in a firm’s external environment, the more likely it
is that internal resources and capabilities will provide a
secure foundation for long-term strategy. In fast- moving,
technology-based industries, new companies are built
around specific technological capabilities.
8. Refer to 9.5.1
On the basis of functional analysis and value chain
organizational capabilities are classified.
9. Refer to 9.5.2
The architecture of organizational capabilities are
classified as: Capability as Routine and Hierarchy of
capabilities.
10. Refer to 9.8.2 & 9.8.4
Growing capabilities requires that the firm replicates them
internally. Some of the world’s most successful
corporations are those that have been able to replicate
their capabilities in different product and geographical
markets. Ray Kroc’s genius was to take the original
McDonald’s formula and replicate it thousands of times
over in building a global chain of hamburger restaurants.
Acquiring capabilities, accessing capabilities and creating
capabilities are some of the approaches to capability
development.

SUGGESTED READINGS
 C.E. Helfat and M. Lieberman, The Birth of Capabilities:
Market Entry and the Importance of Prehistory, Industrial and
Corporate Change 12 (2002): 725–60.
 C. Fombrun, The Value to be Found in Corporate Reputation,
Financial Times Mastering Management Series (December
4, 2000): 8–10.
 E. Lawler, “From Job-Based to Competency-based
Organisations,” Journal of Organisational Behaviour 15
(1994): 3–15; L. Spencer, D. McClelland, and S. Spencer,
Competency Assessment Methods: History and state of the
Art.
 G. Hamel and C. K. Prahalad argue (Harvard Business
Review, May–June 1992: 164–5) that The distinction between
competencies and capabilities is purely semantic.
 G. Hamel and C. K. Prahalad, letter, Harvard Business
Review (May–June 1992): 164–5.
NOTES E-REFERENCES
 h t tp : //s ma llb us in es s .ch ro n . c o m / i n te rn al-
e x t e rn a l- environmental-factors-affect-business-
69474.html
 http://en.wikibooks.org/wiki/Management_Strategy/Analyzi
ng_ Resources_and_Capabilities
 http://www.makeitbusiness.com/keep-sustain-
competitive- advantage/
C H
10 A P T E R
FORMULATING FUNCTIONAL LEVEL STRATEGY
CONTENTS
10.1 Introduction
10.2 Converting Strategy into Action
10.3 Role of Leaders in Functional Level Strategic Management
10.3.1 Looping Strategies with Tactical Tools
10.3.2 Gathering and Sharing Information
10.3.3 Goals
10.3.4 Communication
10.3.5 Accountability and Measuring Processes
10.3.6 Organisational Design
10.3.7 Strategy Alignment
10.3.8 Making it Work
10.4 Structural Design
10.4.1 Functional Structure
10.4.2 Product Divisional Structure
10.5 Information and Control System
10.5.1 Responsibility
10.5.2 Elements of Internal Control
10.5.3 Components of the Control Activity
10.6 Human Resources
10.7 Implementing Global Strategies
10.7.1 Implementing Strategic Plans
10.7.2 Cascading the Plan
10.7.3 Strategy Implementation Issues
10.7.4 Force Field Analysis
10.7.5 Role of Top Management
10.8 Summary
NOTES
EXP STRATEGIC IMPLEMENTATION OF PANASONIC

SYSTEMS
Does your bike fit you to a “t”? Would you like one that does?
If you are willing to pay 20 to 30 percent more than you
would pay for a mass-produced bike, you can get a
Panasonic bike manufactured to exactly match your size,
weight and colour preference. You can even get your bike
within three weeks of your order (only two weeks if you
visit Japan). This is accomplished by a process called the
Panasonic Individual Customer System (PICS), which skilfully
employs computers, robots and a small factory workforce to
make one-of-a-kind models at the National Bicycle Industrial
Company factory in Kokubu, Japan. The National Bicycle
Industrial Company (NBIC), a subsidiary of electronics giant
Matsushita, began making the bikes under the Panasonic
brand in 1987. With the introduction of its Personalised
Order System (POS) for the Japanese market (PICS was
developed for overseas sales), the firm gained international
attention as a classic example of mass customisation –
producing products to order in lot sizes of one. The factory
itself has 21 employees and a Computer-aided Design (CAD)
system, and is capable of producing any of 8 million
variations on 18 models of racing, road and mountain bikes
in 199 colour patterns for virtually any sized person. The PIC
system works in the following way. A customer visits a local
Panasonic bicycle store and is measured on a special frame.
NMI
The store- owner then faxes the specifications to the master
control room at the factory. There an operator punches the
specifications into a minicomputer, which automatically
creates a unique blueprint and produces a bar code (The
CAD blueprint takes about three minutes as opposed to
three hours required by company drafts people prior to
MS
computerisation). The barcode is then attached to metal
tubes and gears that ultimately become the customer’s
personal bike. At various stages in the process, line workers
access the customer’s requirement using the barcode label
and a scanner. This information, displayed on a CRT terminal
or computer terminal (CRT is defined as an electronic or
electromechanical hardware device applicable for entering
data into and displaying data from a computer or a
computing systems) at each station, is fed directly to the
computer-controlled machines that are part of a local area
computer network. At each step of production, a computer
reading the code knows that each part belongs to a specific
bike, and tells a robot where to weld or tells a painter which
pattern to follow. Despite the use of computers and robots,
the process is not highly automated. Gears are hand-wired,
assembly is manual, and the customer’s name is silk-
screened by hand with the touch of an artisan. The entire
manufacturing and assembly time required to complete a
single bike is 150 minutes, and the factory can make about
Education
60 a day. NBIC’s mass-production factory (which makes
Contd...

Education
FORMULATING FUNCTIONAL LEVEL STRATEGY297
NOTES
90 percent of its annual production) can make a standard

model in 90 minutes. One might ask why a customer must
wait two to three weeks given that it takes less than three
hours to make a custom model. According to the General
Manager (Sales), “We could have made the time shorter, but
we want people to feel excited about waiting for something
special.” To provide a more personal touch to mass
customisation, the factory is given the responsibility to
communicate directly with the customer. Immediately after
the factory receives the customer’s order, a personalised
computer- generated drawing of the bicycle is mailed with a
note thanking the customer for choosing the bike. This is
followed up with a second personal note, three months later,
inquiring about the customer’s satisfaction with the bicycle.
Finally, a “bicycle birthday card” is sent to commemorate the
first anniversary of the bicycle. NBIC is now contemplating
extending the Panasonic system to all of its bicycle
production, while Matsushita is considering applying the
concept to industrial machinery.
NMI
MS
NOTES

Explain the meaning, definition and significance of functional level strategy
Know how to transform strategies into actions
Describe the role of leaders in functional level strategic management
Appreciate the significance of a good structural design in functional level management
Analyse the significance of channelising and utilising the information and control system
Enumerate the human resource management in formulating functional level strategies
Evaluate the implementing global strategies and related issues
10.1 INTRODUCTION
The functional level of the organisation 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 Research and Development
involve the development and coordination of resources through
which business unit level strategies can be executed efficiently
and effectively. Functional units of an organisation are involved
in higher level strategies by providing 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. These all precautions will help to avoid
failures in strategies put forward by me in the company and
will lead to the success of the company.
10.2 CONVERTING STRATEGY INTO ACTION

Functional strategies deals with a relatively restricted plan
designed to achieve objectives in a specific functional area,
allocation of resources among different operations within that
functional area and coordination among different functional
areas for optimal contribution to the achievement of business
and corporate level objectives.
Functional strategies are concerned with “dealing the right things.”

Education
NOTES
The need for the functional strategy may arise out of a
benchmarking strategy of an organisation where it wants to
improve its functional structure efficient enough to compete
with the leader or best performers in the similar field. If an
organisation fails to implement a good functional strategy, then
it would not be able to compete with its rivals/competitors in
the long-run in terms of cost, quality and performance.
To plan and implement a functional strategy it is pertinent to
have a proper review of the functional structure of an
organisation. It is the functional structure which has to be
modernised, updated, renovated with acquisition of technology,
enhancement of core competence and other requisite factors
necessary to remain competitive in efficient production of
products and services, especially bringing credit and
performance to the organisation in time of its excellent quality,
better performance, competitive costs and good benefits.
The business world is facing a crisis in strategy. This is not
because the majority of managers cannot produce a good
strategy; most organisations develop their strategic plans well.
The crisis has occurred because many businesses fail to
execute their strategies effectively. Fortune magazine has
repeatedly claimed that 70% of strategic failures are due to
poor execution, not because of a lack of vision, and that only
10% of well formulated strategies are properly executed.
In 2006, the Balanced Scorecard Collaborative issued the
following statistics on its website:
 95% of a typical workforce does not understand its
organisation’s strategy
 90% of organisations do not execute their strategy effectively
 86% of executive teams spend less than one hour per
month discussing strategy
 70% of organisations do not link middle management
incentives to strategy
 60% of organisations do not link strategy to budgeting.
To achieve its objectives, an organisation must be able to turn
its vision, mission and core strategies into action. In many
organisations, there is a major disconnect between forming the
strategy and executing it. An ill-executed strategy not only
leads to shareholder and board frustration, but can also cause
high executive turnover. Strategy mapping is a recent
development aimed at improving strategy implementation and
execution.
Good functional strategy describes how an organisation plans
to use employee, technological and business processes to
meet customer expectations and shareholder demands. In
short, strategy maps allow organisations to describe and
communicate their strategies clearly.
NOTES Literature on strategic management has tended to concentrate

on what is functional strategy and why companies should adopt
it.
Specify an Overriding Objective

The first step is about linking the strategy map to the creation
or reaffirmation of the organisation’s mission, core values and
vision. It must distinguish between the organisation’s
overriding objective and its strategies. Business leaders often
confuse objective and strategy, and believe that satisfied
customers, excellent service or being a low- cost provider form
the overriding objective.
However, for profit making organisations, the overriding
objective must be the bottom line. Here are some examples of
an overriding objective:
 Increase the return on capital employed by 6% within three years
 Increase profit margin from 8% to 12% and net cash flow
from five crore rupees to eight crore rupees within five
years
 Increase the target share price by 20% by the next reporting date
 Increase total shareholder return relative to benchmark by
10% within two years.
Value Proposition
If an organisation wants to be a market leader, it must know
what its customers value. Once it has this information, the
organisation can re-focus its efforts to provide value drivers
better than its rivals. The organisation then chooses the value
proposition to help it win market share. It should refer to the
three value propositions for competing in the market:
 Operational excellence (also known as best total cost)
 Product leadership
 Customer intimacy (also referred to as customer solutions).
The purpose of the value proposition stage is to choose one
dominant value proposition and provide breakthrough customer
value in it.
Financial Strategies
Organisations need to determine their plans and strategies
around revenues and costs. Financial strategies fall into three
main areas:
 Revenue growth
 Productivity
 Asset utilisation.
Every organisation must pay attention to each financial
strategy area. However, the choice of value proposition in step
2 will decide which one will predominate in step 3.
NOTES
Customer Strategies
Once the financial strategy has been determined, the
organisation needs to make formal plans and strategies. The
organisation must determine and articulate its customer
strategies, which can be split into three main areas:
 Retaining and adding customers
 Increasing revenue per customer
 Reducing cost per customer
Execute through the Internal Perspective Strategies

The organisation must establish the actions that will realise its
plans and strategies to win market share. The organisation
must draft a plan to execute the ‘story’ that has been
developed so far.
Plan the Learning and Growth Strategies

Once the financial and customer strategies are established and
an execution plan devised, the organisation will almost
certainly find some gaps in the knowledge, skills and abilities it
needs. Companies develop appropriate learning and growth
strategies to fill the gaps. After it has produced a strategy map
at a basic corporate level following the six steps, organisations
can ‘cascade’ it into several lower level divisional or
geographic maps. Functional level strategy could play a big
part in budgetary decision making because each budgetary
measure can be seen in terms of its impact in achieving the
strategic goals of the organisation.
Fill in the blanks:

Functional strategies are concerned with dealing the …………
To plan and implement a functional strategy it is pertinent to have a proper review of theof an organisation.
Good functional strategy describes how an organisation plans to use employee, technological and business processes to meet customer …
The success of a corporate strategy is based on the execution of the functional strategy. Discuss.
Linking functional level strategy to budgeting can send an effective signal to employees as to where initiatives can be best deployed.
NOTES ROLE OF LEADERS IN FUNCTIONAL

10.3
LEVEL STRATEGIC MANAGEMENT
With the global economic downturn and tighter market
competition, business leaders must develop innovative
strategies that will keep their organisations profitable and in
some cases survive.
Today’s leaders must create and execute their strategies with a clear vision, precise communi
In order to successfully implement their strategies, CEOs and
high-level executives must gain the support of their
organisations.
When leaders and their executive teams take an active role in
implementing strategies, this is a commitment to ensure the
ideas or strategies become part of the organisation. Insightful
leaders realise that for strategies to be successfully integrated
into their organisations, they must align, measure, market and
package the strategy to their business, customers and
investment community as they would with any marketing
campaign.
It is vital that communication is consistent and that leaders are
involved in every aspect of the execution phases when putting
innovative plans into action. Goal setting is another important
element of the execution process. Several studies on why CEOs
fail indicate that a main reason is not because of their
strategies, but in their failure to successfully execute them.
Below are the steps leaders must take to effectively align and
develop an innovative marketing campaign that will allow them
to successfully execute what they want to achieve.
10.3.1 LOOPING STRATEGIES WITH TACTICAL TOOLS

Before executing a plan of action, leaders must know how they
can be most effective and creditable within their organisation,
how they personally function as leaders and how they can best
influence others to gain support and commit to their strategies.
Leaders must clearly define and communicate their roles in the
implementation process. For example, if a CEO’s strength lies
in dealing face to face with people, she will not spend time
speaking in the form of large groups. “Strategies must
communicate to the organisation where it is heading and what
tactical tools will get them to where they need to go.”
In addition, they must have an awareness of the strengths and
weaknesses of their executive and management teams. This
knowledge will help leaders to establish and appropriately
determine what role each member of the executive and
management team must play in the execution process. A
leader must also know the role every
NOTES
department must play, what will be expected, who will be
accountable and what is to be gained. Leaders must align their
own talents and skills with those of their executive and
management teams for the implementation process to be as
efficient as possible.
It is also essential to prepare for and examine all the
possibilities for success and failure and what skills, talents
and actions will be needed in any given situation. Leaders,
executives and managers must constantly monitor, evaluate
and perform progress checks to determine if their strategies
are on track and to deal with negative surprises before they
turn into critical set backs or derail the strategy. They must
make sure that they are using their talent in the most effective
and productive way possible. Strategies must communicate to
the organisation where it is heading and what tactical tools will
get them to where they need to go.
10.3.2 GATHERING AND SHARING INFORMATION

With the economy and markets changing at warp speed,
leaders must know how to generate a steady flow of reliable
information to help keep track of industry trends, changing
customer needs and product cycles. It is imperative that CEOs
and executives take a hands-on approach to develop sources
that will provide a steady flow of trustworthy information.
These sources of information can come from outside vendors,
customers, industry experts and sales people.
When leaders, along with their management teams, have a
steady flow of meaningful information, this will create insights
into any changes that might need to be made to their
strategies or execution plans. Also, by effectively managing
information, leaders will be in a stronger position to identify
potential problems or opportunities before the competition
does. They will also be in a better position to know how to
react and take advantage of the situation by creating the right
kind of strategies and execution plans.
10.3.3 GOALS
When leaders only establish one goal of increasing sales or
profits, they are setting themselves up for execution failure.
Goal setting needs to be done by using a step-by-step process
that creates clear, understandable and obtainable short- and
long-term objectives that will produce the best strategy
execution results. Leaders who use their management teams in
the goal setting process have a higher probability that the
goals are realistic and obtainable.
By setting short- and long-term execution goals for each
division, leaders will help create ownership between the
execution process and what needs to be accomplished. Also,
leaders who incorporate timetables into their goals will achieve
the best results. Each manager needs to conduct meetings
with their teams to obtain feedback and evaluate the progress
being made in reaching their customised goals.
NOTES Setting the right short- and long-term goals should not be
taken lightly if leaders want to succeed at executing their
strategies.
10.3.4 COMMUNICATION
The flow and type of information communicated will play a
significant role in how successful leaders will be in
implementing their ideas throughout their organisations. It is
imperative that the person delivering the messages is well
respected and trusted throughout the company. A mistake that
many leaders make is not keeping their people well informed
about issues surrounding what they want to be accomplished.
This is particularly true if the strategy is far reaching.
If workers are not kept informed, they will make up their own
messages and stories in an attempt to fill in the blanks. This can
cause the rumour mill to become the main source of
information, causing leaders to lose control over the facts. Once
leaders lose control over what messages are being
communicated, this will have a negative impact on their ability
to execute their strategies. “Leaders must align their own talents
and skills with those of their executive and management teams
for the implementation process to be as efficient as possible.”
When directing communicating to individual departments,
leaders must personalise their messages so that everyone
involved understands how strategies relate to them and what
role they play in accomplishing the desired results. It is
imperative to visualise the final goal. The first step is to
establish a message that will not only communicate what the
strategy is meant to accomplish, but will get others to come
together in support of the changes that will be taking place.
A good example of how important communication is in the
execution process is McDonalds’ strategy message: ‘Plan to
Win’. To complement this message, McDonald’s created five
easy-to-understand drivers that directly related to the main
message. These drivers clearly communicate what steps
McDonald’s needed to take for the ‘Plan to Win’ strategy to be
successful. Next, it set a growth strategy, creating a message
of ‘being better and not just bigger’.
The company communicated its strategy message through its
annual report, website, company newsletters, corporate
speeches and by its actions. Today, its customer satisfaction
scores are on the rise; in 2008, McDonald’s achieved its sixth
consecutive year of comparable same-store sales growth.
Remember, even if a company has the greatest ideas, best
products and brilliant concepts, without the right messages
and communication plan it will be hard to get the kind of
organisational buy-in needed to successfully execute the
strategy.
To get maximum performance from department heads and line
and project managers, leaders must put aside any personal
agendas—real or perceived—and monitor how key employees
ar erpreting and communicating the goals and objectives to those
e who report to them. It is important that everyone is on the
int same page in the way they are
NOTES
communicating what is expected from their subordinates. In
other words, the organisation must be moving in the same
direction and doing what is necessary to produce the desired
results.
10.3.5 ACCOUNTABILITY AND MEASURING PROCESSES

Leaders must put in place systems for how managers will be
evaluated and held accountable for their execution
performance. The systems should include a reward structure
and what management practices are required to obtain such
rewards. This information will help managers and their teams
understand what actions will need to be taken, what will
remain the same and what kind of changes will be required to
successfully implement the strategies.
A well-defined plan outlining how success will be measured can
provide clarification to both the organisation and managers on
what direction they need to be headed in. It is important that
the process by which managers will be measured is well
defined and easy to interrupt. Measurement systems can be a
tactical tool to create the right kind of actions, behaviours and
focus that will help implement the strategy. Successful
measurements that focus on what is important, what practices
are needed, the strategy itself and how an organisation’s
culture must work will have the best opportunity to succeed.
Without complete clarity, measurements can become
counterproductive and produce results that were not intended.
10.3.6 ORGANISATIONAL DESIGN

“To gain the necessary insights, leaders must conduct in-depth
research within their organisations to find out what has worked
in the past and why.” To gain the necessary insights, leaders
must conduct in- depth research within their organisations to
find out what has worked in the past and why. If an
organisation has a global presence, special care must be taken
to ensure the research identifies differences that might exist
from one culture to the next.
Leaders must recognise that making large-scale changes to an
organisation and its culture is not an easy task. This is why
leaders and their teams need to debate and examine what
changes are truly necessary and if they can be done. A number
of factors will influence an organisation’s ability to change and
accept new ideas. Such factors include maturity stage,
openness to change, the relationship between management
and workers, the overall design of the organisation, and its
leaders’ skills at implementing change.
10.3.7 STRATEGY ALIGNMENT

It is important that when leaders develop their strategy that it
is aligned to the culture of the company. An example is an
organisation that has a long history of producing high-end,
quality products but in a difficult economy needs to reduce
expenses. The culture of the company is based on pride in the
quality of their products. If the leader
NOTES has a strategy of reducing the cost of their product by 20% and
takes the focus off quality, this might be disruptive to the
organisation’s heritage and culture. It could result in the loss of
good employees. On the other hand, if a leader approaches the
same situation by challenging the organisation to produce the
highest quality product possible at the needed price, this might
produce the desired results without changing the deep history
and culture of the organisation.
10.3.8 MAKING IT WORK

Strategy execution is a complex process that cannot be taken
lightly. Every strategy is different and will require a unique
execution plan of action that will align the strategy to the
organisation’s culture, processes and structures. Leaders need
to know the depth of their management teams and align what
can be done with what needs to be done. Leaders who take a
hands-on approach exert a higher level of influence over the
execution process and can generate the kind of organisational
buy-in needed to make the strategy take hold.
Fill in the blanks:

If workers are not kept ……………………, they will make up their own messages and stories in an
Leaders must put in place systems for how managers will be evaluated and held accountable
Strategy execution is a complex process that cannot be taken
……………………
Empowerment of functional level employees enhances the success of functional strategy. Discuss.
10.4 STRUCTURAL DESIGN
It is the responsibility of leaders and their executive teams to set change priorities and to develop plans to help their organisations accept
Functional structure in the Functional level strategy formulation
is most often called structural design. In a functional structure,
teams or groups are created based on common functions in a
bottom-up manner. The result is a set of functional units such
as engineering, marketing,
NOTES
finance, human resource etc. that are controlled and
coordinated from the top level management. Functional
structure are the most common type of structural design and
have evolved from the concept of high specialisation, high
control framework of manufacturing organisations tuned
towards high efficiency. Functional management is more
technical oriented and less product or business oriented, while
they are skilled in taking decisions in their functional areas,
they are weak in the areas of product business plans, market
study and product release management. If the organisation
does have multiple product lines, then the functional hierarchy
at lowest level does get divided along product lines, thereby
creating deeper hierarchies.
Figure 10.1: Structural Design for Functional Level Strategy
10.4.1 FUNCTIONAL STRUCTURE

Functional structures are typically highly hierarchical; hence
they inherit the properties of hierarchical structure.
 Maximises Functional Performance: All the human knowledge,
skills and infrastructure required for a particular functional
activity are consolidated in a single sub-organisation, this
facilitates sharing of valuable expertise by superiors with
their subordinates. The functional units are managed by
leaders who have in-depth knowledge and experience;
they are able to control the unit very effectively. Hence it
harvests the potential of the unit without duplication of
scarce resources, maximising their utilisation.
 Cultivates Specialists: This type of structure promotes career
development of individuals aspiring to be technical
specialists of their field in large organisations. If the
organisation has properly crafted performance
management that promotes the visibility of individual
skills, functional structure makes it easier to coach other
and climb the hierarchical ladder.
Weaknesses of Functional Structure

 Restrictive Organisational View: Each functional unit has
expertise in its own field, but lacks broader awareness
about the organisations objectives or even the products.
The responsibility of successfully integrating the
organisation lies with few top
NOTES level executives, at the same time, the organisational

structure limits the capabilities of the functional managers
to occupy top management positions. Thus, even though
such organisations might be effective initially, being
controlled by few founding members, its long term
efficiency is doubtful.
 Slow Response: Functional units cannot respond to fast
changes in customer demands or the product since only
the top level management has broad knowledge and the
decision making authority. The management also performs
the role of coordinating tasks across functional units, thus
unless a complete plan of action is not formulated by the
managements, little progress can be made in individual
functional units.
 Poor Accountability: Due to weak link between product and
functional units, it is hard to correlate profits of individual
products to the budget and spending of individual units.
The units that offer support to other functional units, like
human resource or IT department, do not contribute
directly to the revenue, yet they are essential components
that helps in running the organisation smoothly.
Most Effective Conditions

 Small/medium size or few products: Functional units are
effective when the organisation has only few products or is
small in size; the drawback of limited view of the entire
organisation gets negligible. One way to test it is to try to
restructure the organisation from a hierarchical to
horizontal, if the resulting structure is not too different, it
implies that organisation is inherently lacking a horizontal
dimension.
 Stable external environment: Functional units are effective
when the organisation has routine technologies and there
is less probability of emergence of competitive technology
that is radically different.
10.4.2 PRODUCT DIVISIONAL STRUCTURE

In a divisional structure, the teams are organised in set of
divisions, where each division corresponds to the end product
or services provided by the organisation. Each division has its
own set of functional units like research, manufacturing,
marketing etc and is completely self-contained. A divisional
structure is less hierarchical than functional; it is formed by
decomposing the functional structure along the product lines.
Unlike functional management, the divisional management is
more skilled along product business and lesser in core
technical competencies.
Strengths of Divisional Structure

 Clear Accountability: Structuring along the product lines
provides clear correlation between the expense and
pr
ofi
t
of
NOTES
the individual divisions. The business objectives of the
division can be formulated more objectively and the
expectations can be better agreed.
 Departmental Coordination: An objective accountability
leads to better cohesion within the boundaries of the
department; it creates a win-win situation where teams
have mutual benefit in collaborating with each other.
 Broader Skills Development: Active collaborations between
different specialisations provide employees with
opportunities for learning new skills beyond their own area
of expertise. It is easier to comprehend the dynamics of a
product and therefore is best suited for nurturing general
managers in an organisation.
 Unstable Environment: Since each division is product based
and self-reliant, it can respond much quickly to changes in
the external environment.
NMI
MS
Figure 10.2: Divisional Structure
Weaknesses of Divisional Structure

 Resource Duplication: In order to make each division
independent, some of the resources which could have
been shared are rather duplicated. Specialists with
particular domain knowledge cannot be shared across
divisional boundaries.
 Inhibits Career Growth of Specialists: While divisional
structures are good for nurturing top level managers, they
are bad for technical specialists. Technical people feel
alienated from their peers in other divisions and have poor
exposure to the developments across the organisations.
NOTES  Divisional Affiliations: The employees feel more affiliated

towards their own department and would still lack the
sense of being part of a larger organisation, they might
know their own purpose but might not understand how
they might related to organisation’s objectives.
 Difficult Product Integration: When an organisation produces
multiple products which might be used together or are part
of a larger product, the integration task becomes
challenging since there is little coordination between the
divisions. The product management task across different
division requires regular sync- ups but the structure
inherently provides little motivation for the product
managers to seek this larger goal. Each divisional manager
is more concerned about delivering his product and would
view the integration as not part of his job or the problem.
Most Effective Conditions

 Very Large Corporations: The divisional structure is most
effective for large corporations that have indeed multiple
products that are poorly interrelated.
 Competitive Environment: The ability to respond rapidly to
the external changes makes divisional structure best
suited for highly competitive external environment.
10.5 INFORMATION AND CONTROL SYSTEM

Information and controls are to be an integral part of any
organisation’s functional level strategies. The information
system of the organisation should be up to date as it should
have complete knowledge about the market trends and its
close competitors. With a strong and efficient information
system an organisation and formulate its strategies or can
alter the strategies if any time its need arises. A bad
information system (internal or external) can be a great hurdle
in achieving success or the target of the organisation. Controls
consist of all the measures taken by the organisation for the
purposes of:
 Protecting its resources against waste, fraud, and inefficiency;
 Ensuring accuracy and reliability in accounting and
operating data;
 Securing compliance with the policies of the organisation; and
 Evaluating the level of performance in all organisational
units of the organisation.
Controls are simply good business practices.
10.5.1 RESPONSIBILITY
Everyone within the organisation has some role in controls. The
roles vary depending upon the level of responsibility and the
nature of involvement by the individual. The Board of
President and senior
NOTES
executives establish the presence of integrity, ethics,
competence and a positive control environment. The
department heads have oversight responsibility for controls
within their units. Managers and supervisory personnel are
responsible for executing control policies and procedures at the
detail level within their specific unit. Each individual within a
unit is to be cognizant of proper internal control procedures
associated with their specific job responsibilities.
The internal audit role is to examine the adequacy and
effectiveness of the company internal controls and make
recommendations where control improvements are needed.
Since internal auditing is to remain independent and objective,
the internal audit office does not have the primary responsibility
for establishing or maintaining internal controls.
10.5.2 ELEMENTS OF INTERNAL CONTROL

Internal control systems operate at different levels of
effectiveness. Determining whether a particular internal control
system is effective is a judgement resulting from an
assessment of whether the five components – Control
Environment, Risk Assessment, Control Activities, Information
and Communication and Monitoring – are present and
functioning. Effective controls provide reasonable assurance
regarding the accomplishment of established objectives.
Control Environment: The control environment, as established
by the organisation’s administration, sets the tone of the
organisation and influences the control consciousness of its
people. Managers of each department, area or activity
establish a local control environment. This is the foundation for
all other components of internal control, providing discipline
and structure. Control environment factors include:
 Integrity and ethical values;
 The commitment to competence;
 Leadership philosophy and operating style;
 The way management assigns authority and responsibility,
and organises and develops its people;
 Policies and procedures.
Risk Assessment: Every entity faces a variety of risks from
external and internal sources that must be assessed. A
precondition to risk assessment is establishment of objectives,
linked at different levels and internally consistent. Risk
assessment is the identification and analysis of relevant risks
to achievement of the objectives, forming a basis for
determining how the risks should be managed. Because
economics, regulatory and operating conditions will continue to
change, mechanisms are needed to identify and deal with the
special risks associated with change.
Objectives must be established before Managers can identify
and take necessary steps to manage risks. Operations
objectives relate to
NOTES effectiveness and efficiency of the operations, including

performance and financial goals and safeguarding resources
against loss. Financial reporting objectives pertain to the
preparation of reliable published financial statements,
including prevention of fraudulent financial reporting.
Compliance objectives pertain to laws and regulations which
establish minimum standards of behaviour.
The process of identifying and analysing risk is an ongoing
process and is a critical component of an effective internal
control system. Attention must be focused on risks at all levels
and necessary actions must be taken to manage. Risks can
pertain to internal and external factors. After risks have been
identified they must be evaluated.
Managing change requires a constant assessment of risk and
the impact on internal controls. Economic, industry and
regulatory environments change and entities’ activities evolve.
Mechanisms are needed to identify and react to changing
conditions.
Control Activities: Control activities are the policies and
procedures that help ensure management directives are
carried out. They help ensure that necessary actions are taken
to address risks to achievement of the entity’s objectives.
Control activities occur throughout the organisation, at all
levels, and in all functions. They include a range of activities as
diverse as approvals, authorisations, verifications,
reconciliations, reviews of operating performance, security of
assets and segregation of duties. Control activities usually
involve two elements: a policy establishing what should be
done and procedures to effect the policy. All policies must be
implemented thoughtfully, conscientiously and consistently.
Information and Communication: Pertinent information must be
identified, captured and communicated in a form and time
frame that enables people to carry out their responsibilities.
Effective communication must occur in a broad sense, flowing
down, across and up the organisation. All personnel must
receive a clear message from top management that control
responsibilities must be taken seriously. They must understand
their own role in the internal control system, as well as how
individual activities relate to the work of others. They must
have a means of communicating significant information
upstream.
Monitoring: Control systems need to be monitored – a process
that assesses the quality of the system’s performance over
time. Ongoing monitoring occurs in the ordinary course of
operations, and includes regular management and supervisory
activities, and other actions personnel take in performing their
duties that assess the quality of internal control system
performance.
The scope and frequency of separate evaluations depend
primarily on an assessment of risks and the effectiveness of
ongoing monitoring procedures. Internal control deficiencies
sh ld be reported upstream, with serious matters reported
ou immediately to top administration and governing boards.
NOTES
Control systems change over time. The way controls are
applied may evolve. Once effective procedures can become
less effective due to the arrival of new personnel, varying
effectiveness of training and supervision, time and resources
constraints, or additional pressures. Furthermore,
circumstances for which the internal control system was
originally designed also may change. Because of changing
conditions, management needs to determine whether the
internal control system continues to be relevant and able to
address new risks.
10.5.3 COMPONENTS OF THE CONTROL ACTIVITY

 Internal controls rely on the principle of checks and
balances in the workplace.
 Personnel need to be competent and trustworthy, with
clearly established lines of authority and responsibility
documented in written job descriptions and procedures
manuals. Organisational charts provide a visual
presentation of lines of authority and periodic updates of
job descriptions ensures that employees are aware of the
duties they are expected to perform.
 Authorisation procedures need to include a thorough
review of supporting information to verify the propriety
and validity of transactions. Approval authority is to be
commensurate with the nature and significance of the
transactions and in compliance with organisation’s policy.
 Segregation of duties reduce the likelihood of errors and
irregularities. An individual is not to have responsibility for
more than one of the three transaction components:
authorisation, custody, and record keeping. When the work
of one employee is checked by another, and when the
responsibility for custody for assets is separate from the
responsibility for maintaining the records relating to those
assets, there is appropriate segregation of duties. This helps
detect errors in a timely manner and deter improper
activities; and at the same time, it should be devised to
prompt operational efficiency and allow for effective
communications.
 Physical restrictions are the most important type of
protective measures for safeguarding company assets,
processes and data.
 Documentation and record retention is to provide
reasonable assurance that all information and transactions
of value are accurately recorded and retained. Records are
to be maintained and controlled in accordance with the
established retention period and properly disposed of in
accordance with established procedures.
 Monitoring operations is essential to verify that controls
are operating properly. Reconciliations, confirmations, and
exception reports can provide this type of information.
NOTES
Fill in the blanks:

Information and ………………… are an integral part of any organisation’s functional level strategies.
Internal control systems operate at different levels of ………….
Objectives must be established before Managers can identify and take necessary steps to ……………………
10.6 HUMAN RESOURCES
Enlightened democracy in the organisation on need to know basis strengthens the control system. Discuss.
Human resource management strategies, as with the other
functional areas, occur at the corporate, business, and
functional levels. Human resource activities are primarily
The effectiveness of the internal controls are enhanced through the reviews performed and recommendations made by internal auditing.
executed at the functional level because that is where the
workers are.
At the functional level, human resource management includes
translating corporate and business unit strategies into specific
N
functional activities. These include setting functional goals,
analysing strengths and weaknesses, determining distinctive
competencies and competitive advantages, and developing,
evaluating, and communicating functional plans within the
organisation. Major activities of human resources include
planning for future human resource needs, recruiting
personnel, placing people in new jobs, compensating them,
evaluating their performance, training them, developing them
into more efficient employees, and enhancing their work
environment.
The most effective strategy for any organisation, and
particularly large organisations and their business units, is to
develop commitment among employees to the organisation
and to the job. Many organisations consider human resources
to be their most important asset and competitive strategic
advantage.
In today’s global marketplace, to attract and retain competent
employees, human resource managers must consider a variety
of progressive working conditions and benefits, including
customised fringe benefits, child day care and flexible work
hours (four-day
NOTES
weeks). Also, high performance requires appropriate reward
systems to encourage and promote team-work.
In the past, during growth periods, companies were often able
to retain employees through temporary downturns, a
paternalistic strategy which created a loyal workforce that
worked hard with little turnover. Today’s strategies of
downsizing, restructuring, outsourcing, and so on have resulted
in a reduction of corporate loyalty.
Human resource systems provide support to top management
for implementing the organisational strategy by providing the
people, skills, and systems to facilitate and reinforce the
behaviour required. Matching the organisation’s human assets
with its strategy can require changing the individuals assigned
to a job or changing the behaviour of the individuals in their
positions. It is the task of human resource management to
provide the means to do either. This is done through systems
for planning, staffing, appraisal, compensation and rewards.
Human resource planning integrates functional plans and
activities into strategic plans in a manner consistent with the
organisation’s business plans. Human resource planning
includes resource planning and forecasting, career
management, work scheduling and job design.
The contributions of human resource management to strategic
planning include knowledge of the corporate culture in
assessing the feasibility of the strategy. Knowledge of the
organisation’s available skills as well as skills obtainable in
outside labour markets facilitates assessing the costs ofthe
alternatives. Human resource planning greatly enhances
environmental scanning by providing external information on
education trends, labour markets, laws, and regulations, as
well as internal information on productivity, absenteeism,
turnover, and other people’s problems. Assessing future needs
involves both quantitative forecasting and qualitative
forecasting.
Staffing consists of recruiting, selection, and placement of
persons with the appropriate competencies. Staffing involves
matching the position with the best functional background
depending on the strategic direction desired, and identifying
individuals that fit the job requirements. Among the factors to
be considered are the overall framework of the organisation’s
global philosophy, including ethnocentrism, polycentricism,
regiocentrism and geocentricism.
Because the optimum source of talent for the future of any
organisation is found in its present employees, the staffing
aspect of human resource management includes training and
development to develop new skills and behaviours that will be
needed in the future for strategic implementation. Such
activities range from managerial training in cultural values to
teaching employees new skills based on new technologies,
and include cultivating cultural sensitivity for international
assignments. In addition to training, employee development
must include individual career path planning aimed at aligning
employee aspirations and capabilities with the organisation’s
goals.
NOTES Appraisal and reward systems tell the organisation’s members

what is important, therefore providing reinforcement for the
proper behaviour. It is essential that the relevant behaviour is
well defined and accurately measured, and the criteria used to
appraise performance must reflect strategic goals and plans.
Executive compensation must be in sync with strategic
direction. Accordingly, a compensation plan should define
proper performance behaviour, measure results, and tie
compensation to performance. The focus of compensation
plans should be on organisational strategy; accordingly, multi-
year evaluations encourage a long term perspective.
Compensation arrangements are becoming more complex and
include not only pay, but other benefits as well. These benefits
can often attract and retain qualified individuals to fill key
positions. The appraisal and reward system also involves
performance management and control aspects, including:
employee outplacement assistance, personnel policy, and
program evaluation. Human resource management also
includes handling labour relations, collective bargaining
process, and labour-management cooperation.
Fill in the blank:

10.At the functional level, human resource management includes translating corporate and b
……………………
Decisions should be taken at the point where the company meets the customer. Discuss.
10.7 IMPLEMENTING GLOBAL STRATEGIES

The main role of a CEO’s is to communicate a vision and to
guide strategic planning. Clarity and consistent
communication, from mapping desired outcomes to designing
performance measures, seem to be essential to success.
Successful leaders have often engaged their teams by simply
telling the story of their shared vision, and publicly celebrating
large and small wins, such as the achievement of milestones.
To ensure that the vision is shared, teams need to know that
they can test the theory, voice opinions, challenge premises,
and suggest alternatives without fear of reprimand.
Implementing strategic plans may require leaders who lead
through inspiration and coaching rather than command and
control. Recognising and rewarding success, inspiring, and
modelling behaviours is more likely to result in true
commitment than use of authority, which can lead to passive
resistance and hidden rebellion.
NOTES
10.7.1 IMPLEMENTING STRATEGIC PLANS
Once strategies have been agreed on, the next step is
implementation; this is where most failures occur. It is not
uncommon for strategic plans to be drawn up annually, and to
have no impact on the organisation as a whole. A common
method of implementation is hoopla–a total communication
effort. This can involve slogans, posters, events, memos,
videos, Web sites, etc. A critical success factor is whether the
entire senior team appears to buy into the strategy, and
models appropriate behaviours. Success appears to be more
likely if the CEO, or a very visible leader, is also a champion of
the strategy.
Strategic measurement can help in implementing the strategic
plan. Appropriate measures show the strategy is important to
the leaders, provide motivation, and allow for follow-through
and sustained attention. By acting as operational definitions of
the plan, measures can increase the focus of the strategy,
aligning the workforce around specific issues. The results can
include faster changes (both in strategic implementation, and
in everyday work); greater accountability (since
responsibilities are clarified by strategic measurement, people
are naturally more accountable); and better communication of
responsibilities (because the measures show what each
group’s primary responsibility is), which may reduce
duplication of effort.
Creating a strategic map (or causal business model) helps
identify focal points; it shows the theory of the business in
easily understood terms, showing the cause and effect linkages
between key components. It can be a focal point for
communicating the vision and mission, and the plan for
achieving desired goals. If tested through statistical-linkage
analysis, the map also allows the organisation to leverage
resources on the primary drivers of success.
The senior team can create a strategic map (or theory of the
business) by identifying and mapping the critical few
ingredients that will drive overall performance. This can be
tested (sometimes immediately, with existing data) through a
variety of statistical techniques; regression analysis is
frequently used, because it is fairly robust and requires
relatively small data sets.
This map can lead to an instrument panel covering a few areas
that are of critical importance. The panel does not include all of
the areas an organisation measures, rather the few that the
top team can use to guide decisions, knowing that greater
detail is available if they need to drill down for more intense
examination. These critical few are typically within six strategic
performance areas: financial, customer/ market, operations,
environment (which includes key stakeholders), people, and
partners/suppliers. Each area may have three or four focal
points; for example, the people category may include
leadership, common values, and innovation.
Once the strategic map is defined, organisations must create
measures for each focal point. The first step is to create these
measures at an organisational level. Once these are defined,
each functional area should identify how they contribute to the
overall measures, and then
NOTES define measures of their own. Ideally, this process cascades

downward through the organisation until each individual is
linked with the strategy and understands the goals and
outcomes they are responsible for and how their individual
success will be measured and rewarded.
Good performance measures identify the critical focus points
for an organisation, and reward their successful achievement.
When used to guide an organisation, performance measures
can be a competitive advantage because they drive alignment
and common purpose across an organisation, focusing
everyone’s best efforts at the desired goal. But defining
measures can be tricky. Teams must continue to ask
themselves, “If we were to measure performance this way,
what behaviour would that motivate?” For example, if the
desired outcome is world-class customer service, measuring
the volume of calls handled by representatives could drive the
opposite behaviour.
10.7.2 CASCADING THE PLAN

In larger organisations, cascading the strategic plan and
associated measures can be essential to everyday
implementation. To a degree, hoopla, celebrations, events, and
so on can drive down the message, but in many organisations,
particularly those without extremely charismatic leaders, this is
not sufficient.
Cascading is often where the implementation breaks down. For
example, only sixteen percent of the respondents in a 1999
Metrus Group survey believed that associates at all levels of
their company could describe the strategy. In a 1998 national
survey of Quality Progress readers, cascading was often noted
as being a serious problem in implementing strategic
measurement systems.
Organisations have found it to be helpful to ask each functional
area to identify how they contribute to achieving the overall
strategic plan (“functional area” designating whatever natural
units exist in the organisation-functions, geographies,
business units, etc.). Armed with the strategic map, operational
definitions and the overall organisational strategic performance
measures, each functional area creates their own map of
success and defines their own specific performance measures.
They can follow the model outlined above starting with their
own SWOT analysis.
Example: In the 1990s, Sears cascaded its strategic plan to all
of its stores through local store strategy sessions involving all
employees. The plan was shown graphically by a strategy map,
and reinforced through actions such as the sale of financial
businesses such as Allstate. Online performance measures
helped store managers to gain feedback on their own
performance, and also let them share best practices with other
managers.
Functional area leaders may be more successful using a
cascade team to add input and take the message forward to
others in the area. Developing ambassadors or process
ch pions throughout the organisation to support and promote the
a plan and its implementation can also enhance the chances of
m success. These champions may be
NOTES
candidates for participation on the design or cascade teams,
and should be involved in the stakeholder review process.
10.7.3 STRATEGY IMPLEMENTATION ISSUES

Strategy implementation almost always involves the
introduction of change to an organisation. Managers may
spend months, even years, evaluating alternatives and
selecting a strategy. Frequently this strategy is then announced
to the organisation with the expectation that organisation
members will automatically see why the alternative is the best
one and will begin immediate implementation. When a
strategic change is poorly introduced, managers may actually
spend more time implementing changes resulting from the
new strategy than was spent in selecting it. Strategy
implementation involves both macro-organisational issues
(e.g., technology, reward systems, decision processes, and
structure), and micro-organisational issues (e.g., organisation
culture and resistance to change).
Macro-organisational Issues of Strategy Implementation

Macro-organisational issues are large-scale, system-wide
issues that affect many people within the organisation.
Galbraith and Kazanjian argue that there are several major
internal subsystems of the organisation that must be
coordinated to successfully implement a new organisation
strategy. These subsystems include technology, reward
systems, decision processes, and structure. As with any
system, the subsystems are interrelated, and changing one
may impact others.
Technology can be defined as the knowledge, tools, equipment,
and work methods used by an organisation in providing its
goods and services. The technology employed must fit the
selected strategy for it to be successfully implemented.
Companies planning to differentiate their product on the basis
of quality must take steps to assure that the technology is in
place to produce superior quality products or services. This
may entail tighter quality control or state-of-the-art equipment.
Firms pursuing a low-cost strategy may take steps to automate
as a means of reducing labour costs. Similarly, they might use
older equipment to minimise the immediate expenditure of
funds for new equipment.
Reward systems or incentive plans include bonuses and other
financial incentives, recognition, and other intangible rewards
such as feelings of accomplishment and challenge. Reward
systems can be effective tools for motivating individuals to
support strategy implementation efforts. Commonly used
reward systems include stock options, salary raises,
promotions, praise, recognition, increased job autonomy, and
awards based on successful strategy implementation. These
rewards can be made available only to managers or spread
among employees throughout the organisation. Profit sharing
and gain sharing are sometimes used at divisional or
departmental levels to more closely link the rewards to
performance.
NOTES Questions and problems will undoubtedly occur as part of

implementation. Decisions pertaining to resource allocations,
job responsibilities, and priorities are just some of the decisions
that cannot be completely planned until implementation
begins. Decision processes help the organisation make mid-
course adjustments to keep the implementation on target.
Organisational structure is the formal pattern of interactions
and coordination developed to link individuals to their jobs and
jobs to departments. It also involves the interactions between
individuals and departments within the organisation. Current
research supports the idea that strategies may be more
successful when supported with structure consistent with the
new strategic direction. For example, departmentalisations on
the basis of customers will likely help implement the
development and marketing of new products that appeal to a
specific customer segment and could be particularly useful in
implementing a strategy of differentiation or focus. A functional
organisational structure tends to have lower overhead and
allows for more efficient utilisation of specialists, and might be
more consistent with a low-cost strategy.
Micro-organisational Issues of Strategy Implementation

Micro-organisational issues pertain to the behaviour of
individuals within the organisation and how individual actors in
the larger organisation will view strategy implementation.
Implementation can be studied by looking at the impact
organisation culture and resistance to change has on employee
acceptance and motivation to implement the new strategy.
Peters and Waterman focused attention on the role of culture in
strategic management. Organisational culture is more than
emotional rhetoric; the culture of an organisation develops
over a period of time is influenced by the values, actions and,
beliefs of individuals at all levels of the organisation.
Persons involved in choosing a strategy often have access to
volumes of information and research reports about the need
for change in strategies. They also have timeto analyse and
evaluatethisinformation. What many managers fail to realise is
that the information that may make one strategic alternative
an obvious choice is not readily available to the individual
employees who will be involved in the day-to-day
implementation of the chosen strategy. These employees are
often comfortable with the old way of doing things and see no
need to change. The result is that management sees the
employee as resisting change.
Employees generally do not regard their response to change as
either positive or negative. An employee’s response to change
is simply behaviour that makes sense from the employee’s
perspective. Managers need to look beyond what they see as
resistance and attempt to understand the employee’s frame of
reference and why they may see the change as undesirable.
NOTES
10.7.4 FORCE FIELD ANALYSIS
One technique for evaluating forces operating in a change
situation is force field analysis. This technique uses a concept
from physics to examine the forces for and against change.
The length of each arrow as shown in Table 10.1 represents the
relative strength of each force for and against change. An
equilibrium point is reached when the sum of each set of forces
is equal. Movement requires that forces for the change exceed
forces resisting the change. Reducing resisting forces is usually
seen as preferable to increasing supporting forces, as the
former will likely reduce tension and the degree of conflict.
This model is useful for identifying and evaluating the relative
power of forces for and against change. It is a useful way of
visualising salient forces and may allow management to better
assess the probable direction and speed of movement in
implementing new strategies. Forces for change can come from
outside the organisation or from within. External forces for
change may result from socio-cultural factors, government
regulations, international developments, technological
changes, and entry or exit of competitors. Internal forces for
change come from within the organisation and may include
changes in market share, rising production costs, changing
financial conditions, new product development, and so on.
Similarly, forces resisting change may result from external or
internal sources. Common external pressures opposing change
are contractual commitments to other businesses (suppliers,
union), obligations to customers and investors, and
government regulations of the firm or industry. Internal forces
resisting change are usually abundant; limited organisational
resources (money, equipment, personnel) is usually one of the
first reasons offered as to why change cannot be implemented.
Labour agreements limit the ability of management to transfer
and, sometimes, terminate employees. Organisation culture
may also limit the ability of a firm to change strategy.
The total elimination of resistance to change is unlikely
because there will almost always remain some uncertainty
associated with a change. Techniques that have the potential
to reduce resistance to change when implementing new
strategies include participation, education, group pressure,
management support, negotiation, co-optation and coercion.
TABLE 10.1: FORCES OPERATING IN

STRATEGY CHANGE
Forces for Change Forces Resisting Change

External External
Socio cultural changes Prior commitments
Government regulations Obligations to consumers
Contd...
NOTES
Competitive pressures Government regulations
Internal Internal
Changes in market share Limited resources
Changing rates of return
Production economies Organisation culture
Participation is probably the most universally recommended
technique for reducing resistance to change. Allowing affected
employees to participate in both the planning and
implementation of change can contribute to greater
identification with the need for and understanding of the goals
of the new strategy. Participation in implementation also
helps to counteract the disruption in communication flows,
which often accompanies implementation of a change. But
participation has sometimes been overused. Participation does
not guarantee acceptance of the new strategy, and employees
do not always want to participate. Furthermore, participation is
often time consuming and can take too long when rapid
change is needed.
Another way to overcome resistance to implementing a new
strategy is to educate employees about the strategy both
before and during implementation. Education involves
supplying people with information required to understand the
need for change. Education can also be used to make the
organisation more receptive to the need for the change.
Furthermore, information provided during the implementation
of a change can be used to build support for a strategy that is
succeeding or to redirect efforts in implementing a strategy
that is not meeting expectations.
Group pressure is based on the assumption that individual
attitudes are the result of a social matrix of co-workers, friends,
family, and other reference groups. Thus, a group may be able
to persuade reluctant individuals to support a new strategy.
Group members also may serve as a support system aiding
others when problems are encountered during implementation.
However, the use of a group to introduce change requires that
the group be supportive of the change. A cohesive group that
is opposed to the change limits the ability of management to
persuade employees that a new strategy is desirable.
Management can take steps employees will view as being
supportive during the implementation of a change.
Management may extend the employees time to gradually
accept the idea of change, alter behaviour patterns, and learn
new skills. Support might also take the form of new training
programs, or simply providing an outlet for discussing
employee concerns.
Negotiation is useful if a few important resistors can be
identified, perhaps through force field analysis. It may be
possible to offer incentives to resistors to gain their support.
Ea retirement is frequently used to speed implementation when
rly resistance is coming from employees nearing retirement age.
NOTES
Co-optation is similar to negotiation in that a leader or key
resistor is given an important role in the implementation in
exchange for supporting a change. Manipulation involves the
selective use of information or events to influence others. Such
techniques may be relatively quick and inexpensive; however,
employees who feel they were tricked into not resisting, not
treated equitably, or misled may be highly resistant to
subsequent change efforts. Distrust of management is often
the result of previous manipulation.
Coercion is often used to overcome resistance. It may be
explicit (resistance may be met with termination) or implicit
(resistance may influence a promotion decision). Coercion may
also result in the removal of resistors through either transfer or
termination. Coercion often leads to resentment and increased
conflict. However, when quick implementation of a change is
needed or when a change will be unpopular regardless of how
it is implemented, some managers feel coercion may be as
good as most alternatives and faster than many others.
10.7.5 ROLE OF TOP MANAGEMENT

Top management is essential to the effective implementation of
strategic change. Top management provides a role model for
other managers to use in assessing the salient environmental
variables, their relationship to the organisation, and the
appropriateness of the organisation’s response to these
variables. Top management also shapes the perceived
relationships among organisation components.
Top management is largely responsible for the determination of
organisation structure (e.g., information flow, decision-making
processes, and job assignments). Management must also
recognise the existing organisation culture and learn to work
within or change its parameters. Top management is also
responsible for the design and control of the organisation’s
reward and incentive systems.
Finally, top management is involved in the design of information
systems for the organisation. In this role, managers influence
the environmental variables most likely to receive attention in
the organisation. They must also make certain that information
concerning these key variables is available to affected
managers. Top-level managers must also provide accurate and
timely feedback concerning the organisation’s performance and
the performance of individual business units within the
organisation. Organisation members need information to
maintain a realistic view of their performance, the performance
of the organisation, and the organisation’s relationship to the
environment.
The top management is responsible for clearing any “mist on the screen”. Discuss.
NOTES 10.8 SUMMARY

 Functional-level strategies are concerned with coordinating
the functional areas of the organisation (marketing,
finance, human resources, production, research and
development, etc.) so that each functional area upholds
and contributes to individual business-level strategies and
the overall corporate-level strategy.
 Functional strategies are primarily concerned with:
(a) Efficiently utilising specialists within the functional area.
(b) Integrating activities within the functional area (e.g.,
coordinating advertising, promotion, and marketing
research in marketing; or purchasing, inventory control,
and shipping in production/operations). (c) Assuring that
functional strategies mesh with business-level strategies
and the overall corporate- level strategy.
 Functional strategies are frequently concerned with
appropriate timing. For example, advertising for a new
product could be expected to begin sixty days prior to
shipment of the first product. Production could then start
thirty days before shipping begins. Raw materials, for
instance, may require that orders are placed at least two
weeks before production is to start. Thus, functional
strategies have a shorter time orientation than either
business- level or corporate-level strategies.
 Accountability is also easiest to establish with functional
strategies because results of actions occur sooner and are
more easily attributed to the function than is possible at
other levels of strategy. Lower-level managers are most
directly involved with the implementation of functional
strategies.
 Strategies for an organisation may be categorised by the
level of the organisation addressed by the strategy.
 Corporate-level strategies involve top management and
address issues of concern to the entire organisation.
 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
managers and are intended to help the organisation
achieve its corporate strategies.
 Functional strategies address problems commonly faced by
lower-level managers and deal with strategies for the
major organisational functions (e.g., marketing, finance,
production) considered relevant for achieving the business
strategies and supporting the corporate-level strategy.
 Market definition is thus the domain of corporate-level
strategy, market navigation the domain of business-level
strategy, and support of business and corporate-level
strategy by individual, but integrated, functional level
strategies.
NOTES
Ethnocentrism: Belief in the superiority of one’s own ethnic group.

Geocentricism: Relating to, measured from, or with respect to the centre of the earth.
Newsletter: A printed report giving news or information of interest to a special group.
Polycentrism: Having many centres, especially of authority or control.
Strategy: The art or skill of using stratagems in endeavours such as politics and business.

1. Explain the importance of formulating functional level strategy.
2. What is the role of leaders in formulating functional level
strategy?
3. What is significance of a good structural design?
4. What is significance of information and control system in
functional level strategy formulation?
5. How human resources are crucial in formulating the
functional level strategy?
6. What precautions should be taken while implementing the
global strategies?
7. How cascading the strategic plan gets implemented?
8. How strategic plans are implemented?
9. Explain the elements of internal control.
10. What is the role of top management in implementing
global strategies?

Converting Strategy 1. right things

into Action
2. functional structure
3. expectations, demands
Contd...
NOTES
Role of Leaders in 4. informed
Functional Level
Strategic Management
5. execution performance
6. Lightly
Information and 7. controls

Control System
8. effectiveness
9. manage risks
Human Resources 10. functional activities

1. Refer to 10.4.1
Maximises Functional Performance: All the human
knowledge, skills & infrastructure required for a particular
functional activity are consolidated in a single sub-
organisation, this facilitates sharing of valuable expertise
by superiors with their subordinates. The functional units
are managed by leaders who have in-depth knowledge and
experience; they are able to control the unit very
effectively. Hence it harvests the potential of the unit
without duplication of scarce resources, maximising their
utilisation. Cultivates Specialists: This type of structure
promotes career development of individuals aspiring to be
technical specialists of their field in large organisations. If
the organisation has properly crafted performance
management that promotes the visibility of individual
skills, functional structure makes it easier to coach other
and climb the hierarchical ladder.
2. Refer to 10.3, 10.3.1,10.3.2,10.3.3,10.3.4,10.3.5,10.3.6,10.3.7 & 10.3.8
Role of Leaders in functional level of strategic
management involves looping strategies with tactical
tools, gathering and sharing information, goals,
communication, accountability and measuring processes,
organizational design, strategy alignment and making it
work.
3. Refer to 10.4
Functional structure in the Functional level strategy
formulation is most often called as structural design. In a
functional structure, teams or groups are created based on
common functions in a bottom-up manner. The result is a
set of functional units such as engineering, marketing,
finance, human resource etc. that are controlled and
coordinated from the top level management.
NOTES
4. Refer to 10.5
Information and controls are to be an integral part of any
organisation’s functional level strategies. The information
system of the organisation should be up to date as it
should have complete knowledge about the market trends
and its close competitors. With a strong and efficient
information system an organisation and formulate its
strategies or can alter the strategies if any time its need
arises.
5. Refer to 10.6
Human resource activities are primarily executed at the
functional level because that is where the workers are.
At the functional level, human resource management
includes translating corporate and business unit strategies
into specific functional activities. These include setting
functional goals, analysing strengths and weaknesses,
determining distinctive competencies and competitive
advantages, and developing, evaluating, and
communicating functional plans within the organisation.
Major activities of human resources include planning for
future human resource needs, recruiting personnel, placing
people in new jobs, compensating them, evaluating their
performance, training them, developing them into more
efficient employees, and enhancing their work
environment.The most effective strategy for any
organisation, and particularly large organisations and their
business units, is to develop commitment among
employees to the organisation and to the job. Many
organisations consider human resources to be their most
important asset and competitive strategic advantage.
6. Refer to 10.7.3 & 10.7.4
In macro-organizational issues of strategy implementation
, firms which pursue a low-cost strategy may take steps to
automate as a means of reducing labour costs. Similarly,
they might use older equipment to minimise the
immediate expenditure of funds for new equipment.
Reward systems or incentive plans include bonuses and
other financial incentives, recognition, and other intangible
rewards such as feelings of accomplishment and
challenge. Reward systems can be effective tools for
motivating individuals to support strategy implementation
efforts. In micro-organizational issues of implementation of
strategies, implementation can be studied by looking at
the impact organisation culture and resistance to
change has on employee acceptance and motivation to
implement the new strategy. Managers need to look
beyond what they see as resistance and attempt to
understand the employee’s frame of reference and why
they may see the change as undesirable. Techniques that
have the potential to reduce resistance to change when
implementing new strategies include participation,
NOTES education, group pressure, management support,

negotiation, co-optation and coercion.
7. Refer to 10.7.2
Organisations have found it to be helpful to ask each
functional area to identify how they contribute to achieving
the overall strategic plan (“functional area” designating
whatever natural units exist in the organisation-functions,
geographies, business units, etc.). Armed with the
strategic map, operational definitions and the overall
organisational strategic performance measures, each
functional area creates their own map of success and
defines their own specific performance measures. They
can follow the model outlined above starting with their
own SWOT analysis. Functional area leaders may be more
successful using a cascade team to add input and take the
message forward to others in the area. Developing
ambassadors or process champions throughout the
organisation to support and promote the plan and its
implementation can also enhance the chances of success.
These champions may be candidates for participation on
the design or cascade teams, and should be involved in
the stakeholder review process.
8. Refer to 10.7.1
Strategic plans get implemented with a total
communication effort, strategic measurement by creating
a strategic map (or casual business model) which helps to
identify focal points and by creating measures for each
focal point.
9. Refer to 10.5.2
Internal control systems operate at different levels of
effectiveness. Determining whether a particular internal
control system is effective is a judgement resulting from
an assessment of whether the five components – Control
Environment, Risk Assessment, Control Activities,
Information and Communication and Monitoring – are
present and functioning. Effective controls provide
reasonable assurance regarding the accomplishment of
established objectives.
10. Refer to 10.7.5
Top management is essential to the effective
implementation of strategic change. Top management
provides a role model for other managers to use in
assessing the salient environmental variables, their
relationship to the organisation, and the appropriateness
of the organisation’s response to these variables. Top
management also shapes the perceived relationships
among organisation components.
Top management is largely responsible for the
determination of organisation structure (e.g., information
flow, decision-making processes, and job assignments).
NOTES
SUGGESTED READINGS FOR

10.11
REFERENCE
SUGGESTED READINGS
 D F Harvey, Business Policy and Strategic Management, Charles
E Merill, Columbus, 1982.
 F R David, Strategic Management, Prentice Hall, N J 1997.
 G A Steiner, J B Miner and E R Gay, Management Policy and
Strategy, Macmillan, New York, 1982.
 R McGlasham and T Singleton, Strategic Management, Merrill
Publishing Co., Ohio 1987.
 S P Robbins, Organisation Theory, Prentice Hall, N J, 1999.
E-REFERENCES
 http ://smal lbu sine ss.ch ron .com/fu ncti on al -
structure - organization-strength-weakness-60111.html
 http://smallbusiness.chron.com/advantages-
disadvantages- divisional-organizational-structure-
611.html
 http:// smal l bu si n e ss. ch ron. com/ four- types -
strategi c- control-14720.html
C H
11 A P T E R
CORPORATE GOALS AND STRATEGIC GAP
CONTENTS
11.1 Introduction
11.2 Corporate Goals
11.3 Strategic Gap
11.3.1 Management-Induced Gaps
11.3.2 Process-Induced Gaps
11.3.3 Technology System-Induced Gaps
11.4 Porter’s Generic Strategies
11.5 Summary

Education
NOTES
APPLE, ALIENWARE AND GATEWAY COMPUTER:

SUBTLE DIFFERENCES BETWEEN CORPORATE GOALS
AND CORPORATE STRATEGIES
In the following section, we look at three corporations of the

computing device industry to observe subtle difference in
corporate goals and corporate strategies of the three
companies.
Apple: Apple has pursued a Differentiation strategy. They

manufacture almost all the components themselves even if
there is a cheaper alternative, which could be out-sourced.
This includes the operating system called Mac OSX instead
of Windows, which the other manufacturers use. They invest
a lot of money in design, brand image (For example, placing
retail stores on premium high streets) trying to differentiate
themselves from the competition by creating a “Mac”
experience or way of life. This allows them to charge high
premiums for their product, meaning that even though they
sell less volume, they are still extremely profitable. Apple is
also great at innovating and adapting to its market, for
example, it used to manufacture its own processors but
eventually the cost became greater than the value placed
on it by the customers, so it switched to Intel manufactured
chips.
Alienware is a comparatively small company that sells

performance gaming computers. It has successfully focused
NMI
its strategy at a very small segment of the market with very
high premiums. Alienware sells some laptops upwards of
$5000; in contrast Dell laptops can be bought for $400,
more than 10x cheaper. Alienware outsources top of the
range components from chip manufacturers (in the same
way, Dell do their outsourcing) and assembles them in their
MS
own distinctly designed cases. In fact, Dell’s and Alienware’s
strategy are similar in many respects, no retail stores,
customised production, online orders. The difference
between them is that Alienware has decided to focus on
the gaming niche, which is considerably smaller than Dell’s
scope.
Gateway Computer Corporation was one of the first modern

home computer manufacturers, founded in 1985. However,
in the recent years it has failed to form a competitive
advantage and would be classified by Porter as “Stuck in the
Middle”. While the computer market was still in the early
stages, there was room for Gateway to succeed, however as
the market has matured Gateway have been unable to
sustain their advantage. Therefore, it has been pushed out
of the market by stronger competition and has performed
badly in the recent years. In fact, in October 2007, Gateway
declared bankruptcy and was bought by a rival computer
manufacturer (Acer).
Education
CORPORATE GOALS AND STRATEGIC GAP 333
NOTES

Identify the meaning and definition of corporate goals
Explain the meaning of strategic gap and how it hinders the achievement of corporate goal
Enumerate the significance of Porter’s generic strategies and its utilisation in achieving the corporate goal
11.1 INTRODUCTION
Strategic planning is a great start. But on paper it is just an
idea; it needs to be put into action. The projects created
because of the strategic planning phase need to be managed
closely. Implementation planning assists individuals and
organisations with creating plans, putting them into action, and
getting results. In order to activate strategies and projects
effectively, it is important to employ an implementation plan
that maintains goals and achieves desired end results.
11.2 CORPORATE GOALS

Companies require strategies to guide how to achieve
objectives and how to pursue the company’s mission. Strategy-
making is all about how – how to reach performance targets,
how to outcompete rivals, how to achieve sustainable
competitive advantage, how to strengthen the enterprise’s
long-term business position, how to make management’s
strategic vision for the company a reality. A strategy is needed
for the company as a whole, for each business the company is
in, and for each functional piece of each business — Research
and Development, purchasing, sales and marketing, finance,
human resources and so on.
A corporate goal is an observable and measurable end result having one or more objectives to be achieved within a more or less fixed time
The strategy making spotlight however needs to be kept
trained on the important facets of management’s game plan
for running the enterprise – those actions that determine what
market position the company is trying to stake out and that
underpin whether the company will succeed. Strategy is
inherently action oriented; it concerns what to do, when to do
it and who should be involved. Unless there is action, unless
something happens, unless somebody does something,
strategy thinking and planning simply go to waste and, in the
end, amount to nothing.
NOTES For most of the organisations, profitability is the main goal.

Maximising shareholder value, risk, and other goals include
high productivity, good organisational leadership, high morale,
good organisational reputation, high organisational efficiency,
profit maximisation, organisational stability, value to local
community, and service to public.
Fill in the blanks:

Companies require ………………… to guide how to achieve objectives and how to pursue the co
Strategy is inherently ………………… oriented; it concerns what to do, when to do it and who sh
For most of the organisations,is the main goal.
Goals of the company are the starting point of the journey in strategic management. Discuss.
11.3 STRATEGIC GAP
Strategies are plans, big plans, and important plans. They show the general direction in which the organisation would achieve its goals. Str
Long-term goals and detailed, short-term budgets, with nothing
to link the two together. Does this organisation sound familiar?
Whatever the answer, most business professionals understand
that achieving a long-term goal requires a series of logical,
achievable, sequential steps. Organisations cannot rely on
chance or luck. Yet the steps that lead from where a business is
today to where it wants to be – its objectives – often are
missing. If an organisation is not getting its goals, it simply
means that it has strategic gap and there might be some loop
holes in framing or execution of the strategic plans. Following
paragraphs will discuss about different types of strategic gaps.
Strategic Gap depends upon forecasting technique in which the difference between the desired performance levels and the extrapolate

Education
NOTES
11.3.1 MANAGEMENT-INDUCED GAPS
Management can cause a gap between strategy and execution
through both action and inaction. Four main ways management
causes this gap include failure to secure support for the plan,
failure to communicate the strategy, failure to adhere to the
plan, and failure to adapt to significant changes.
Failure to Secure Plan Support

The senior management team must develop a strategic plan
with objectives, goals, strategies, and tactics that everyone
supports. If people do not accept and support the plan, they
are unlikely to put in the right amount of effort to make it
succeed. Their allocation of resources may be
counterproductive to implementing strategic initiatives, while
their management time is diverted into seeking out factors
that will justify their position. This misplaced time and effort
will lead to a gap, which could prevent the execution of the
plan.
To achieve buy-in, management must create a corporate
culture and a set of values that support the vision and guide
employees’ decisions and behaviour. Employees must have the
opportunity to provide feedback regarding their ability to
implement strategy. Not listening to their views, not addressing
– and resolving – conflicts and major differences of opinion, and
not building learning culture – one that tracks and learns from
its own successes, failures, and mistakes – will result in
strategies that are unrealistic and cannot be implemented. This
situation leads to the strategy gap.
Failure to Communicate the Strategy

Operational managers and their employees are typically the
people within an organisation who implement strategy. They
need to know how the strategy affects them. Yet according to
research by Kaplan and Norton, creators of the Balanced
Scorecard, “less than 5 per cent of the typical workforce
understands their organisation’s strategy.” Without a clear idea
of what the strategy, vision, and direction of the organisation
are, they are unlikely to act in ways that will result in effective
implementation of the corporate plan.
Communication of strategy is vital in all management
processes. When budgeting, employees need to see the
tactical plans and related targets that affect them so they can
modify their behaviour accordingly. During the year, they need
to assess how well they are carrying out those tactics and the
progress they are making toward strategic goals. When
forecasting, employees need to know when their activities are
unlikely to achieve their KPIs and, hence, their strategic goals
so they can act early to bring the tactical plan back on target.
Technology clearly has a role to play in facilitating this
communication. Failure to effectively communicate strategy
and how well or poorly it is being implemented will result in the
strategy gap.
NOTES Failure to Adhere to the Plan

As the year progresses, many organisations make decisions
reactively rather than strategically. Often the cause is the
reporting of results based on a purely financial view of the
organisation, such as on the chart of accounts by cost centre,
rather than by a strategic and tactical view. As a result,
operational managers focus on financial variances that do not
relate to the specific strategic initiatives outlined in the plan. To
put things back on track, the accounts become the target of
any decision rather than the agreed-on action plans, which
may have long been forgotten.
Test this for yourself. In your current reporting pack, how many
of the reports tie actual and forecast results back to the
strategies outlined in the strategic plan? The reports may
monitor the goals, but how many of them actually monitor KPIs
by tactic? Without this link, organisations are likely to act and
react in ways that are divorced from the strategic plan, which
results in the strategy gap.
Failure to Adapt to Significant Changes

The reality of today’s business environment is that it
continually changes. Strategic plans are built on a set of
assumptions, such as market growth, production capability,
and competitor actions. If these assumptions change, it is
unlikely that the plan will still hold true. Following the attacks of
September 11, 2001, for example, most organisations found
themselves in an economy that was substantially different
from the one that existed when they planned earlier in the
year. Continuing to follow a plan when the basic assumptions
on which it was founded have changed makes no sense. Unless
plans are modified to reflect changes to these assumptions,
the result will be the strategy gap.
Some of the biggest corporate scandals have occurred in companies that are over obsessed w
11.3.2 PROCESS-INDUCED GAPS

The traditional processes an organisation uses to implement
and monitor strategy are the second set of strategy gap
causes. Once a strategic plan has been researched and
created, what happens next? How is the plan translated into
action? How are the organisation’s assets allocated to the
various strategic initiatives? How is progress monitored and the
success or failure of tactics measured? For most organisations,
the key tool used to implement strategy is the annual budget,
while the processes of actual reporting and forecasting are
used to monitor achievement. But the way in which these
processes are approached can lead to the strategy gap.
NOTES
Lack of Strategic Focus
The objective of any process will determine what gets
measured, by whom, and how far in the future. It may seem
obvious that the budget should support the implementation of
strategy. After all, the purpose of this tool is to control how
resources are allocated, which in turn affects what an
organisation accomplishes. It also may seem obvious that one
of the roles of reporting would be to monitor strategic progress.
Unfortunately, there is very little evidence to support that
these processes actually achieve this. Instead of being focused
on long-term business health, traditional planning and
budgeting are internally driven and focused on current-year
profits.
In a survey conducted by Comshare, Incorporated, participants
said that there is typically a gap between the strategic plan
and the budget created to support it. The budget tends to be
financially focused with emphasis on the chart of accounts by
cost centre, while the strategic plan tends to be behaviourally
focused on strategies and tactics. The result is that budget
holders, operational managers, and senior executives are often
unaware of how strategic initiatives affect the operating plan
or whether resources have even been allocated. Without this
linkage, the budget becomes a pure numbers exercise,
allowing the strategy gap to emerge. As a result, the budgeting
and planning processes actually become barriers to strategy
deployment.
The same is also true when it comes to reporting actual results
and forecasting future performance. For many organisations,
reporting of actuals takes the form of a simple income and
expense statement by department, based on the chart of
accounts. The reason reporting takes this form is mainly
because the general ledger holds income and expense items,
and these systems are used to generate the reports. However,
strategic plans, which are typically action based and measure
activity, do not fit easily within the rigid account and cost
centre structure of a general ledger, and so the focus is lost. As
a result, there is no direction or logical connection in the
budgeting and reporting processes for budget holders to adapt
their behaviour to achieving strategic goals.
Calendar Based
For most organisations, budgeting is an annual process that
follows the strategic plan, and it is a process that just takes too
long. Hackett Best Practices reports that a typical organisation
takes over four months to complete a budget cycle.
Organisations with an annual budget must try to predict events
that are 16 months away, which is unrealistic and leads to
the strategy gap. According to Hackett, in today’s fast-paced
business environment, planning should be treated as a
continuous exercise in operational decision making, resource
allocation, and performance management.
Yet nearly half of organisations treat planning and budgeting as
a strictly fiscal and annual exercise that leaves them
unprepared to
NOTES deal with sudden change. Similarly, Hackett found that 74 per
cent of organisations wait until the end of the month to issue
reports. Doing so delays the opportunity to deal with important
emerging trends, which could be vital to the effective
implementation of strategy. Interestingly, most organisations
have the data; it is their processes and tools that let them
down. What is required is a planning, budgeting, and reporting
process that is triggered by change, not by the date on a
calendar.
Financially Focused
An organisation’s financial results are the outcome of its
strategy implementation or lack of strategy implementation.
Although some financial measures, such as investments and
expenses, will be used in implementing a tactical plan, many
of the measures will be nonfinancial. Indeed, the long-term
viability of an organisation may well rest on the success of
nonfinancial measures such as product reliability, customer
satisfaction, organisational learning, and the efficiency of the
internal processes. The adoption of methodologies like the
Balanced Scorecard can ensure that organisations achieve the
correct balance of measures that will be needed to achieve
corporate objectives. The general ledger by itself will not be
able to supply all the data required. As already mentioned, the
chart of accounts is a transactional view of an organisation.
The reliance on this view cannot support the planning and
monitoring of strategy and will lead to the strategy gap.
Internally Focused
Consider an organisation that sets and achieves a revenue
budget that reflects a growth of 10 per cent year on year. Is
this achievement a good result? Is it a good result if the
general ledger confirms that the goal was achieved while
staying within the cost budget? What if the goal was built on
the assumption that the market was due to grow at 5 per cent,
when, if fact, it grew at 15 per cent? In this case, market share
was lost rather than gained.
In most organisations today, reports compare the performance
of the organisation with the budget, not with competitors and
the market.
Strategy is nearly always based on a combined internal and
external view that includes market and competitor
assumptions.
To ensure that strategy is being implemented, actual reporting
needs to compare performance by strategic initiative and to
check that any external assumptions made while planning still
hold true. Without this strategic external view, decisions will be
based on a view of performance that is too narrowly focused,
and the strategy gap will develop.
Lack of Realistic Forecasting

Al gh business conditions can change rapidly, many surprises that
th affect organisational performance can be predicted using
ou available
NOTES
data and technologies. By predicting future performance from
plans based on the current and perceived business
environment, contingencies drawn up in advance can be
selected or corrections to the existing plan can be made to
avoid or exploit the impact of any variances. The ability to
recognise and exploit changing business conditions is the
driving force behind rolling forecasts—which also deliver the
benefit of reducing or eliminating the annual budget process.
According to Hackett Best Practices research, however, only 23
per cent of organisations make use of this proven best
practice.
When forecasting, many organisations once again focus solely
on financial results, such as how much revenue will be
generated and what the associated costs will be. As with
planning, effective forecasting requires modifying and
developing plans to achieve strategic goals. In some
circumstances, such as when assumptions have changed,
strategic goals may have to be reset. Forecasting involves two
steps:
 Predicting the likely future performance based on current
knowledge.
 Evaluating or selecting alternative plans to change the
predicted outcome.
To predict future performance, the natural life cycle of an
organisation’s products and services should be taken into
account. This consideration must take place bottom up; that is,
each product and service must be analysed individually.
Once a forecast has been generated, it can be used as the
basis for “what if” analysis, the process of evaluating
alternative scenarios. The aim is to evaluate what changes are
required to the tactical plan to achieve the strategic goals. As
with budgeting, this evaluation needs to be done by strategic
initiative. The result will be the predicted income statement.
Other Factors
Two other factors that can contribute to the strategy gap are
more attributable to organisational behaviour than to the
processes themselves; nevertheless, they need to be taken
into account when designing a solution. The first factor is a
lack of accountability and commitment to the budgeting
process. Budgeting is often a game in which budget holders
inflate costs and suppress revenues because they expect
senior management to demand reduced costs and increased
revenues during a second budget pass. In addition, when a
budget is handed down to budget holders without giving them
a chance for input, budget holders feel free to miss their
targets. After all, it was not their budget. This game playing
produces unrealistic budgets, an absence of accountability, and
a lack of commitment to the final plan. The result will be the
strategy gap.
The second factor is wrongly focused incentive plans. Budget
holders and management often are paid on their ability to
meet or
NOTES beat the budget. This fact will affect their decisions when it
comes to planning and reporting their performance and does
little to help with the implementation of strategy. In some
cases, it will actively work against the implementation of
strategy. Hackett found that when management motivation was
linked to strategy rather than to the annual plan, budgeting
cycles were reduced and managers were less afraid of taking
risks.
How does forecasting help a company de-risk its business model? Discuss.
Organisations that reduce the forecasting process to a simple extrapolation into the future will reap unrealistic and misleading predictions
11.3.3 TECHNOLOGY SYSTEM-INDUCED GAPS

The third area that causes the strategy gap involves the
traditional systems used to support the planning, budgeting,
forecasting, and reporting processes. Issues include
fragmented systems and misplaced dependence on Enterprise
Resource Planning (ERP).
Fragmented Systems
In most organisations, planning, budgeting, forecasting, and
reporting are treated as separate, disconnected processes and
supported by different technology solutions. In fact, these
processes are all part of the much larger process of strategy
implementation. The following analogy illustrates why this
separation does not make sense. The journey that a business
takes over time is like traveling down a road. The road curves
and changes direction, and its exact route often are hidden
from view. In the same way, business direction continually
varies because of changing customer requirements,
competitors’ actions, or other occurrences in the business
environment.
On this journey, the business objective rests on the horizon.
This objective, based on current circumstances and
assumptions, is the planned destination for the organisation. It
serves as a beacon, guiding the organisation’s actions and
decisions. The journey is divided into a number of shorter
segments, each of which the organisation will arrive at over
time, allowing the organisation to gauge its progress. To reach
the point on the horizon, the traveller outlines a route. This
plan identifies the main roads to be travelled and the major
cities the traveller will pass through en route to the final
destination. In the same way, strategic plans outline the route
an organisation will travel to reach its objective. The journey
may take months or years to
NOTES
complete. The key roads are analogous to the strategic plan’s
tactics that must be performed to achieve the objective. Cities
are analogous to key performance indicators that will tell the
organisation if the tactics have been completed and if it is on
target for success.
Continuing, the traveller may plan in greater detail the portions
of the journey to be attempted in the near future. The plan
may include the names of townships, descriptions of
landmarks, and locations of road junctions. These are vital
indicators. Without them, the traveller may go in the wrong
direction without realising it until much later. The budget is like
that detailed plan outlining the organisation’s immediate route.
It is very much linked to the strategic plan but contains far
more detail. With the budget, the business assigns money,
people, and assets to the initiatives that will keep the
organisation on course to reach its objective. Monitoring
progress relative to the detailed plan is a vital activity because
it shows the organisation whether it is on target. Past
performance is of interest, but it actually does little to help the
business navigate the road ahead. On the journey,
organisations will come up against unexpected diversions, such
as construction (activities that are not yet implemented),
accidents (activities that are having an adverse impact on
performance), and heavy traffic (intense competition for the
same customers). These diversions will cause delays and can
even lead to dead ends unless the organisation can avoid
them. Similarly, organisations may come across new roads
(new business opportunities) that were not on the map when
the journey started. They may discover that taking advantage
of these roads can enable them to reach their destination
sooner than anticipated.
Finally, like directional signs and mile markers, the forecast
tells an organisation whether it is heading in the intended
direction and where it will end up unless it takes immediate
action. The enterprise must monitor position and make
adjustments constantly. Occasionally it may need to make a
major detour – sometimes even heading in what seems to be
the wrong direction – to achieve its final objective. By taking
note of the signs – the projected forecasts – and using
judgment based on experience, business leaders can make
intelligent adjustments to the plan. These adjustments will not
be just a once-a- year activity. They may become necessary at
any time to keep on track toward the intended destination.
Strategic planning, budgeting, forecasting, and monitoring
actual are all part of the same process—moving an
organisation toward its objective. Together, they are essential
components in the implementation and execution of strategy.
When performed in isolation, however, they provide little value.
Quite often, managers are asked to budget using systems that
do not allow them to see the strategic plan or latest forecast. It
is like asking someone to drive down the road with only partial
sight, no map, and no idea of the final destination. To drive
performance, the company needs to see the whole travel plan:
objective, strategic plan, forecast, actuals and budget. These
elements are all part of the same process.
NOTES This journey, or performance management process, is

continuous. Markets and competitors do not remain motionless
to accommodate an organisation’s annual planning process.
Traveling down this road smoothly and staying on course, like
driving a car, requires regular, small adjustments.
Unfortunately, the traditional systems that support planning,
budgeting, forecasting, and reporting are inflexible. Each
component is isolated from the others. In addition, often each
piece of the process is supported by a different technology
than the others, causing integration problems. For example,
the strategic plan may be presented as a text document; the
budget may be prepared in a spread sheet; actual results may
be reported in the general ledger; and analyses may be
performed using an Online Analytical Processing (OLAP) tool.
These systems are completely disjointed, manually intensive,
and error-prone. As a result, they help create the strategy gap.
In addition, these systems tend to suffer from other problems
that also create gaps:
 Difficult to change: Most existing management systems do
not allow changes to be made easily. Altering structures,
accounts, and basic assumptions so that management can
quickly see the impact of change is complex and time
consuming. Sadly, most systems are nothing short of
glorified adding machines – and they do not even do this
very well.
 Reporting problems: Systems tend to report from one
perspective – usually accounts down the page, and time
and version across the page, with each page representing
a cost centre. Viewing data by product, turnover,
geography, or any other business perspective – such as
strategy and tactic – is extremely difficult. In addition,
many systems require a great deal of effort to disseminate
actuals, the latest forecast, and strategy information
throughout the organisation. These difficulties prevent the
detailed analysis of budgets, forecasts, and actual results
in context and can result in the approval of unrealistic
plans.
 File management issue: Many organisations still rely on spread
sheets for preparing budgets and reporting results. While
spread sheets are great personal productivity tools, they
are a nightmare when used as a corporate planning and
reporting system. In addition to flexibility and reporting
problems already discussed, spread sheets and many
other file-based systems also incur version control and
other problems because multiple files have to be
maintained, relinked, and then redistributed. Apart from
the time and error-prone nature of this task, you can never
be sure that users are now using the right version.
Misplaced Dependence on Enterprise Resource Planning

A second system-induced gap can be caused by the reliance
some organisations have placed on their Enterprise Resource
Pl
an
ni
ng
(E
RP
)
NOTES
systems to implement strategy. At first glance, such reliance
seems logical. Before ERP, the processes that made up the
supply chain – order entry, inventory management, billing,
accounts receivable, and others – were separate functions
supported by multiple stand-alone systems, often running on
multiple technologies. Each part of the process could be owned
by a different department or operating unit.
The problems these systems generated are similar to those
encountered with today’s planning, budgeting and reporting
systems:
 Expensive in terms of both time (maintenance) and money
(hardware and software, personnel). Software had to be
maintained on individual desktops. Information Technology
(IT) staff had to learn multiple technologies. If the system
had been created in-house by a person who then left the
company, the organisation had a big problem.
 Data integrity and version control issues. Changes in one
system were not automatically reflected in other systems,
data often had to be rekeyed, and data were shared by
transferring files. Many departments multiplied by many
files equalled trouble. Organisations could never be certain
that the information they were basing decisions on was
accurate and up to date.
 Organisations could not easily see what was happening
across the enterprise, making it difficult to implement
corporate strategy, measure its success, and make
informed decisions. Enterprise resource planning was
hailed as the solution because it integrated the supply
chain processes and supporting systems. The ERP systems
increased the efficiency and speed of these operations.
Because ERP systems appear to hold most of the actual data in
a centralised database, organisations today are looking to these
systems to solve their planning, budgeting, and reporting
problems. Many organisations are also trying to leverage
their huge investments in ERP implementations to get a
return. Given that, many ERP vendors are now offering
“integrated” planning, budgeting, and reporting applications on
top of ERP, this initially seems an attractive solution. The
problem, however, is that ERP is the wrong vehicle for
implementing strategic plans just as a farm tractor is the wrong
vehicle for taking a family on vacation. Gartner, the Stamford,
Connecticut- based research firm, reports that “[a]lthough ERP
systems have largely addressed the needs of transactional
users, they have not been able to address the needs of
strategic and operational users.” The main reasons given are
the complexity of these systems for users and their closed
architectures, which make it difficult to integrate non-ERP data.
All enterprise resource planning systems are focused on
transactions, not on strategy. This very issue is the reason why
today’s traditional planning, budgeting, forecasting, and
reporting systems fail.
Implementing a strategic plan requires the dissemination of
goals, objectives, strategies, and tactics. Planners must be able
to evaluate
NOTES the impact of economic drivers, forecast trends, and predict

the impact of competitors. Senior management needs the
ability to analyse alternative operating structures, investments,
and divestments. Implementing strategy is about management
effectiveness. The two are different and require different tools
and processes.
Fill in the blanks:

Management can cause a gap between strategy and execution through both action and …………………
Operational managers and their employees are the people within an organisation whostrategy.
Communication of strategy is vital in all management
…………………
Failure to effectively communicate strategy and how well or poorly it is being implemented will result in the …………………
Budgeting is an annual process that follows the,
and it is a process that just takes too long.
An organisation’sresults are the outcome of its
strategy implementation or lack of strategy implementation.
The traditional systems that support planning, budgeting, forecasting, and reporting are …………………
Centralisation of information systems and databases enhance the ease of budgeting, reporting and planning. Discuss.
Enterprise resource planning was not designed to deliver these capabilities. It is focused on operational efficiency.
11.4 PORTER’S GENERIC STRATEGIES

This has been discussed in chapter 2 in detail.
Choosing the Right Generic Strategy

Your choice of which generic strategy to pursue underpins
every other strategic decision you make, so it’s worth spending
time to get it right. But you do need to make a decision: Porter
specifically warns against trying to “hedge your bets” by
following more than one strategy. One of the most important
reasons why this is wise advice is that the things you need to
do to make each type of strategy work appeal to different
types of people. Cost Leadership requires a very detailed
NOTES
internal focus on processes. Differentiation, on the other hand,
demands an outward-facing, highly creative approach. So,
when you come to choose which of the three generic strategies
is for you, it’s vital that you take your organisation’s
competencies and strengths into account. Use the following
steps to help you choose.
Step 1: For each generic strategy, carry out a SWOT analysis of
your strengths and weaknesses, and the opportunities and
threats you would face, if you adopted that strategy. Having
done this, it may be clear that your organisation is unlikely to
be able to make a success of some of the generic strategies.
Step 2: Use Five Forces Analysis to understand the nature of the
industry you are in.
Step 3: Compare the SWOT analyses of the viable strategic
options with the results of your Five Forces analysis. For each
strategic option, ask yourself how you could use that strategy
to:
 Reduce or manage supplier power.
 Reduce or manage buyer/customer power.
 Come out on top of the competitive rivalry.
 Reduce or eliminate the threat of substitution.
 Reduce or eliminate the threat of new entry.
Select the generic strategy that gives you the strongest set of options.
Porter’s Generic Strategies offer a great starting point for
strategic decision making. Once you’ve made your basic
choice, though, there are still many strategic options available.
Bowman’s Strategy Clock helps you think at the next level of
details, in that it splits Porter’s options into eight sub-
strategies.
Key Points
According to Porter’s Generic Strategies model, there are three
basic strategic options available to organisations for gaining
competitive advantage. These are: Cost Leadership,
Differentiation and Focus. Organisations that achieve Cost
Leadership can benefit either by gaining market share through
lowering prices (whilst maintaining profitability,) or by
maintaining average prices and therefore increasing profits. All
of this is achieved by reducing costs to a level below those of
the organisation’s competitors. Companies that pursue a
Differentiation strategy win market share by offering unique
features that are valued by their customers. Focus strategies
involve achieving Cost Leadership or Differentiation within
niche markets in ways that are not available to more broadly-
focused players.
Differentiation offers a stronger base for sustainability than cost leadership. Discuss.
NOTES
Fill in the blanks:

Cost Leadership requires a very ………….. internal focus on processes.
Differentiation, on the other hand, demands an outward- facing, highlyapproach.
Porter’s Generic Strategies offer a great starting point for
……………. decision making.
11.5 SUMMARY
 Goals describe a future end-state – desired outcome that is
supportive of the mission and vision.
 Shapes the way ahead in actionable terms.
 Best applied where there are clear choices about the future.
 Puts strategic focus into the organisation – specific
ownership of the goal should be assigned to someone
within the organisation.
 May not work well where things are changing fast –
goals tend to be long-term for environments that have
limited choices about the future.
 Cascade from the top of the Strategic Plan – Mission,
Vision, Guiding Principles.
 Broad participation in the development of goals:
Consensus from above – buy-in at the execution level.
Should drive higher levels of performance and close a
critical performance gap.
 The world’s best Strategic Plan will fail if it is not
adequately resourced through the budgeting process.
 Strategic Plans cannot succeed without people, time,
money, and other key resources. Aligning resources
validates that initiatives and action plans comprising the
strategic plan support the strategic objectives.
Strategic Gap: Forecasting technique in which the difference between the desired performance levels and the extrapolated results of the c
Corporate Goal: A corporate goal is an observable and measurable end result having one or more objectives to be achieved within a more
NOTES
Management-Induced Gaps: Management can cause a gap between strategy and execution through both action and inaction. Four main w
Process-Induced Gaps: The traditional processes an organization uses to implement and monitor are the process- induced gaps. It involves
Technology-Induced Gaps: The strategy gap which involves the traditional systems that are used to support the planning, budgeting, fore
Focus Strategies: Focus strategies involve achieving Cost Leadership or Differentiation within niche markets in ways that are not available t

1. What are corporate goals?
2. How do strategic gaps hinder the achievement of
corporate goals?
3. How many types of strategic gaps are there in the organisation?
4. How the Porter’s generic strategies are significant in
overcoming the strategic gap?
5. Differentiate between Cost Leadership and Differentiation.
6. Explain Management-Induced Gaps leading to Strategic Gap.
7. Explain Process-Induced Gaps leading to Strategic Gap.
8. Explain Technology System-Induced Gaps leading to
Strategic Gap.
9. How to choose the right Generic Strategies?
10. What are the three basic strategic options available to
organisations for gaining competitive advantage? Describe
them briefly.
NOTES 11.7 ANSWERS AND HINTS


Corporate Goals 1. strategies
2. action
3. profitability
Strategic Gap 4. inaction
5. implement
6. processes
7. strategic gap
8. strategic plan
9. financial
10. inflexible
Porter’s Generic 11. detailed
Strategies
12. creative
13. strategic

1. Refer to 11.2
A corporate goal is an observable and measurable end
result having one or more objectives to be achieved within
a more or less fixed timeframe. Companies require
strategies to guide how to achieve objectives and how to
pursue the company’s mission. Strategy-making is all
about how– how to reach performance targets, how to
outcompete rivals, how to achieve sustainable competitive
advantage, how to strengthen the enterprise’s long- term
business position, how to make management’s strategic
vision for the company a reality.
2. Refer to 11.3,11.3.1,11.3.2 & 11.3.3
Strategic gaps hinder the achievement of corporate goals
through management induced gaps, process-induced gaps
and technology system-induced gaps.
3. Refer to 11.3.1,11.3.2 & 11.3.3
Three strategic gaps – management induced gaps,
process- induced gaps and technology system-induced
gaps.
4. Refer to 11.4
Porter’s generic strategies are significant in overcoming
the strategic gap by using SWOT Analysis and Use of Five
Forces Model and their comparison of the results obtained
helps to select the best generic option.
NOTES
5. Refer to 11.4
Organisations that achieve Cost Leadership can benefit
either by gaining market share through lowering prices
(whilst maintaining profitability) or by maintaining average
prices and therefore increasing profits. All of this is
achieved by reducing costs to a level below those of the
organisation’s competitors. Companies that pursue a
Differentiation strategy win market share by offering
unique features that are valued by their customers.
6. Refer to 11.3.1
Management can cause a gap between strategy and
execution through both action and inaction. Four main
ways management causes this gap include failure to
secure support for the plan, failure to communicate the
strategy, failure to adhere to the plan, and failure to adapt
to significant changes.
7. Refer to 11.3.2
The traditional processes an organisation uses to
implement and monitor strategy are the second set of
strategy gap causes. Once a strategic plan has been
researched and created, what happens next? How is the
plan translated into action? How are the organisation’s
assets allocated to the various strategic initiatives? How is
progress monitored and the success or failure of tactics
measured? For most organisations, the key tool used to
implement strategy is the annual budget, while the
processes of actual reporting and forecasting are used to
monitor achievement. But the way in which these
processes are approached can lead to the strategy gap.
8. Refer to 11.3.3
The third area that causes the strategy gap involves the
traditional systems used to support the planning,
budgeting, forecasting, and reporting processes. Issues
include fragmented systems and misplaced dependence
on Enterprise Resource Planning (ERP).
9. Refer to 11.4
By performing SWOT analysis, Use Five Forces Analysis to
understand the nature of the industry you are in. Compare
the SWOT analyses of the viable strategic options with the
results of your Five Forces analysis. Select the generic
strategy that gives you the strongest set of options.
10. Refer to 11.4
Cost Leadership, Differentiation and Focus strategies are
the three basic strategic options available to organisations
for gaining competitive advantage.

SUGGESTED READINGS
 Baker Associates, Strategic Sustainability Assessment of the
Nottingham-Derby Green Belt in the East Midlands Region, Final
Report, Nottingham, EMRLGA, 1999.
 Elson, M.J., Mendham, N and S. Walker, Countryside Benefits
from Developers Contributions, A Report to the Countryside
Agency, School of Planning, Oxford Brookes University,
1999.
 Hampshire County Council, Strategic and Local Gaps,
Winchester, HCC, 1998.
 Monitoring Statement on Strategic Gaps in West Sussex,
Chichester, WSCC.
 VSP Rao, V Hari Krishna, Strategic Management: Text and
Cases, Excel Books, India, 2003.
E-REFERENCES
 http://yourbusiness.azcentral.com/examples-
corporate- goals-14839.html
 http://cdn.ttgtmedia.com/searchSAP/downloads/Mastering_
SAP. pdf
 http://www.mindtools.com/pages/article/newSTR_82.htm
C H
12 A P T E R
MANAGING INTERNAL ORGANISATION FOR STRATEGY
IMPLEMENTATION
CONTENTS
12.1 Introduction
12.2 Issues in Strategy Implementation
12.2.1 Implementing Strategy
12.2.2 Resource Allocation
12.3 Strategy-Structure Relationship
12.3.1 Functional Structure
12.3.2 Features of Functional Structure
12.3.3 Advantages of Functional Structure
12.3.4 Limitations of Functional Structure
12.4 Divisionalisation: Product and Geographic Forms
12.4.1 Product Departmentation
12.4.2 Geographic Divisionalisation
12.5 Strategic Business Units (SBUs)
12.6 Project Organisation
12.6.1 Nature of Project Management
12.6.2 Advantages
12.6.3 Problems
12.7 Matrix Organisation Structure
12.7.1 Key Matrix Roles
12.7.2 Strengths
12.7.3 Weaknesses
12.8 New Design Options
12.8.1 Team Structure
12.8.2 Virtual Organisation
12.8.3 Globalization
12.9 Factors Influencing Organisation Structure
12.9.1 Size and Structure
Contd...
NOTES
12.9.2 Technology and Structure
12.9.3 Environment and
12.9.4
12.10 Structure People and
12.11 Structure
12.12 Structure and Strategy
12.13
12.14 Implementation Summary
Descriptive
Questions Answers
and Hints

Education
MANAGING INTERNAL ORGANISATION FOR STRATEGY
NOTES
PHENOMENAN OF NIKE’S GEOGRAPHIC

DIVISIONALIZATION
Nike, the largest and most profitable sports shoe

manufacturer in the world have developed a complex
network structure to produce its shoes. Nike’s product
design and research function — the fulcrum around which all
other activities revolve — is located in Beaverton, Oregon.
Nike’s designers come out with novel, fascinating shoe
designs in sport shoes from here. Almost all other functions
involved in producing and marketing its sports shoes are
outsourced to companies around the world. Nike has
established a profitable relationship with suppliers,
distributors and customers over the years relying on
outsourcing partners, with a view to remain focused on what
it knows best. It designs the shoe but contracts
manufacturing, marketing and other functional activities to
other organisations. Coordination is achieved by
standardisation of the product range.
When the designers finish their work, they relay all the
blueprints for the new products electronically to Nike’s
network of suppliers and manufacturers in Southeast Asia.
For example, instructions for the design of a new sole may
be sent to a supplier in Taiwan, and instructions for the
leather uppers to a supplier in Malaysia. These suppliers
then produce the new shoe parts, which are then sent for
final assembly to a manufacturer in China with whom Nike
NMI
has established an alliance. From China, these shoes are
shipped to distributors throughout the globe, and are
marketed in each country by an organisation with which Nike
formed some kind of alliance such as a long-term contract.
Southeast Asia is the preferred location because of low
MS
wages prevailing over there. Skilled hands are cheaply
available and Nike is able to save a lot of money through
outsourcing contracts. Indonesian workers were stitching
together shoes in hot, noisy factories for only 80 cents a day
or about $ 18 per month. Workers in Vietnam and China
fared better since they were earning $ 160 a day. Nike’s
billionaire CEO, Phil Knight had to face a lot of criticism for
paying such miserable salaries to workers in underdeveloped
nations. This of course, compelled the company to review its
labour practices all over the world later on, revising wages
by about 30 per cent.
If any network partners are not able to meet Nike’s quality

standards, they are replaced with new partners easily. This
way Nike is able to remain small and flexible. Nike has rules
and procedures specifying the required quality of input
materials, the nature of the manufacturing process, and the
required quality of the finished product. Nike constantly
monitors production and sales information from its network
by means of a sophisticated global computer system.
NOTES
After studying this chapter, you should be able to: Explain the issues in strategy implementati
Discuss the meaning and significance of divisionalisation Explain the strategic business units
Discuss project organisation and its meaning
Explain the matrix organisation structure and its significance Discuss the new design options
Identify the factors influencing organisation structure Explain the structure and strategy impl
12.1 INTRODUCTION
Strategy implementation is a crucial issue because any
strategy is as good as the effort behind it to move it forward.
Successful strategy implementation requires support,
discipline, motivation and hard work from all managers and
employees. More importantly, it requires a suitable
organisation structure to translate ideas into concrete action
plans. In spite of having all these supporting elements,
strategy implementation, on most occasions proves to be a
tricky job. Creating a ‘fit’ between a firm’s goals and its other
activities proves to be a tough exercise. Multifarious reasons
could be cited in support of this statement. Strategy is
dependent on many variables—internal as well as external—
and to compound the problem further there are countless,
interrelated change factors that could upset managerial
calculations overnight. Because change factors interrelate,
changing only one or two things seldom brings any significant
overall organisational change. There are certainly no magic
bullets to assist managers in bringing about organisational
change either automatically or slowly. Given the complexities
inherent in organisational change and strategy
implementation, it is easy to find why efforts at both so often
fail.
The Mckinsey Company, a well-known management
consultancy firm in the United States, towards the end of
1970s was asked to find a solution to this knotty issue. The
researchers Peters and Waterman found after examining
America’s best run companies that the problem in strategy lay
in its implementation and structure was only one lever in the
hands of management. The other levers were systems, staff,
style, skills and superordinate goals. A strategy is usually

Education
successful when the other S’s in the 7-S framework fit into or
support the strategy.
 Strategy: A set of decisions and actions aimed at
gaining a sustainable competitive advantage.

Education
MANAGING INTERNAL ORGANISATION FOR STRATEGY IMPLEMENTATION355
NOTES
 Structure: The organisation chart and associated
information that shows who reports to whom and how
tasks are both divided and integrated.
 Systems: The flow of activities involved in the daily
operation of a business, including its core processes and
its support systems.
 Style: How managers collectively spend their time and
attention and how they use symbolic behaviour. How
management acts is more important than what
management says.
 Staff: How companies develop employees and shape basic values.
 SharedValues: Commonly held beliefs, mindsets and
assumptions that shape how an organisation behaves–its
corporate culture.
 Skills: An organisation’s dominant capabilities and competencies.
NMI
MS
Figure 12.1: 7-S Framework
The 7-S framework highlights the importance of some interrelated and interconnected factors within the organisation and their role in suc
The successful implementation of a strategy depends on the
right alignment of all the seven-Ss. “When the seven-Ss are in
good alignment, an organisation is poised and energised to
excuse strategy to the best of its ability”. Of course, there is no
starting point or implied order of preference in the shape of the
diagram. It is also not very obvious which of the seven factors
would be the driving force in changing an organisation at a
point of time.
NOTES
Fill in the blanks:

Successfulstrategyimplementationrequiressupport, discipline, motivation and hard work from all managers and
……………………
The successful implementation of a strategy depends on the rightof all the seven-Ss.
12.2 ISSUES IN STRATEGY IMPLEMENTATION
The principal job of strategists then is to achieve a good fit among the Seven Ss by making necessary alterations from time to time.
The successful implementation of strategy requires an
effective organisation. People working within a firm should
know how their actions interrelate with the actions of others to
support and execute the firm’s strategy. Without a structural
framework, the roles of management and employees can’t be
drawn-up clearly—leading to confusion, duplication of efforts
and chaos at various levels.
Apart from a sound organisation structure, the services of
talented and capable leaders are also required to translate
corporate vision into a concrete reality. The principal task of
leaders then would be to see that the various elements of an
organisation fit together and make logical sense. In the race to
get ahead, of course, they should not sacrifice ethical and
social values.
Functional plans and policies need to be formulated carefully
and implemented with active support from employees at
various levels. These should help employees find solutions to
several operational issues that need to be resolved on a day-
to-day basis.
The political factors than come in the way of effective
implementation of strategies should also be understood
properly. Every attempt should be made to remove the irritants
first before minor problems turn into major emergencies later.
12.2.1 IMPLEMENTING STRATEGY

There is no guarantee that a well-designed strategy is likely to
be approved and implemented automatically. The strategic
leader must, therefore, defend the strategy from every angle,
communicate how the strategy when implemented would
benefit the whole organisation and secure the wholehearted
support of employees working at various levels. To keep things
on track, he can list out priorities, programme implementation
process, budgets, etc. on paper so that nothing is left to
chance.
NOTES
While giving a concrete shape to the strategy, he should also
take note of regulatory mechanisms that govern business
activity and see that everything is in order. Some of the
important things to be kept in mind are listed below:
 Formation of a company: This must be in line with provisions
of the Companies Act, 1956, covering issues such as
formation of a company, its registration, obtaining suitable
licenses before commencing operations, raising funds from
various sources in accordance with the provisions of SEBI
Act, 1992.
 Operations of a company: The company must compete in a
fair way and earn the profits through legally blessed routes
only observing the (a) provisions of competition law; (b)
Import/export restrictions, (c) FERA regulations (FEMA
Regulations, 2000);
(d) Patent, trademark, copyright (Indian Patents Act, 1995,
the Trade and Merchandise Marks Act, 1958, the
Copyrights Act, 1957 etc.) stipulations; (e) Labour Laws
(regarding employment of women, children, payment of
wages, providing welfare amenities, keeping healthy
industrial relations etc.); (f) Environmental protection (the
Environment Protection Act 1986), (g) Pollution control
requirements; (h) Consumer protection measures etc.
 Winding up operations: Even when the company decides
to get out of a venture/business, the rules of the game
need to be followed scrupulously (whether in offering
golden handshake to employees or asking all the
employees to quit in one go).
After the institutionalisation of strategy in the above manner,
action plans could be formulated. These are basically
functional level strategies undertaken at the departmental
level and usually deal with operational aspects of a strategy.
The action plans, however, must try to translate the overall
strategic plan in letter and spirit without any deviations. Issues
like who will do what, what kind of support is required at
various stages, what kind of privatise have to be fixed while
implementing active plans, how does a particular active plan
contribute to the broad objectives of the strategy etc. must
also be carefully looked into. Once the action plans are ready,
the strategist must resolve issues relating to allocation of
scarce resources over the entire organisation.
12.2.2 RESOURCE ALLOCATION

While implementing strategies, the scarce resources of a firm
(financial, physical, human, technological) need to be allocated
carefully, according to a plan. In this regard, one can follow a
top-down or a bottom-up approach. In a top-down, approach
resources are allocated through a process of segregation down
to the operating levels. The Board of Directors, Managing
Directors and other members of top management typically
decide the requirements of each subunit and distribute
resources accordingly. In the bottom- up approach, resources
are distributed after a process of aggregation
NOTES from the operating level. A mix of these two may also find
favour in fairly large, multi-plant organisations.
Means of Resource Allocation

There are several ways of allocating resources in a systematic
way, namely:
 Strategic budget: Keeping the assumptions made before the
formulation of a budget, divisional heads (SBUs) and
functional managers focus their efforts on allocating funds,
through an interactive exercise—taking the opinions of all
those who matter most. The external influences and their
likely impact and the internal capabilities of a firm are also
kept mind in this joint budgeting effort (hence, the name
strategic budget).
 Capital budget: The primary purpose of a capital budget is to
maximise the long-term profitability of a firm while
deploying resources. Various techniques like internal rate
of return, payback period, and net present value are used
to find where a rupee invested would earn maximum
returns.
 Performance budget: Here the basic purpose is to focus
attention on the work to be carried out, services to be
rendered rather than things to be spent for or acquired. It
concentrates attention on physical aspects of
achievement. Here, there is not only a work plan but also a
work plan in terms of work done. It takes a systems view of
activities trying to associate the inputs of the expenditure
with the output of accomplishment in terms of services,
benefits etc.
 Zero-based budget: The key element of ZBB is future-
objective orientation of past objectives. Instead of taking
the last year’s budgets and adjusting them for finding out
the future level of activity and preparation of budget there
from, ZBB forces managers to review the current, on-going
objectives and operations. ZBB is, therefore, a type of
budgets that requires managers to re-justify the past
objectives, projects, and budget and to set priorities for
the future. The essential idea budget that differentiates
ZBB from traditional budgeting is that it requires managers
to justify their budget request in detail from scratch,
without any reference to the level of previous
appropriations. It tantamount to recalculation of all
organisational activities to see which should be eliminated,
funded at a reduced level, funded at the current level or
increased finances must be provided.
ZBB process runs into the following cardinal sequence of steps:
 Decision package: Each discrete department activity
and programme is broken down into a decision
package. Decision package summarises the scope of
work, requirements, anticipated benefits, time
schedule, and expected consequences if the element
i
s
n
o
t
p
e
r
f
o
r
m
e
d
,
e
t
c
.
NOTES
Thus, decision package provides a running
commentary of all the activities in a particular project.
 Ranking: Each decision package is ranked against
packages for other proposed projects or activities, and
the projects that are running (operating) currently.
Decision packages are ranked according to their
benefits to the total organisation during the budget
period.
 Resource allocation: The above ranking leads to
‘organisation-wide’ list of prioritised and priced out
decision packages built from zero-base or ground up.
Resources are then allocated to the packages
according to the preferential rank in the organisation.
When properly executed, the zero-base budgeting
provides an opportunity for the managers to carefully
examine, evaluate and prioritise each organisational
activity and see whether modification, continuance or
termination is feasible.
Problems in Resource Allocation

Resource allocation, in actual practice, is not an easy job.
Strategists should prioritise tasks that require maximum
attention initially taking political relations, overall objections,
external influences etc., into account. Each department may
fight for garnering a maximum share of the scarce resources
that are available-leading to destructive conflict and bitter
personality clashes. External influences such as government
regulations, shareholder preferences for higher dividends,
credit restrictions imposed by financial institutions also affect
the process of resource allocation considerably. To avoid trouble
at a later stage, strategists need to prioritise everything and
decide budgetary allocations in the initial stages. Many ‘budget
battles’ could be avoided if targets, resource sharing,
prioritisation and midway revisions etc., are decided in an
atmosphere of close cooperation and participation, especially
at departmental and divisional levels. Allocating resources to
specific divisions and departments alone does not mean
successful strategy implementation. There are other
troublesome issues to be looked into more closely. After
resolving the knotty issues concerning resource allocation, the
strategists should look for a suitable organisation structure for
implementing strategies.
Fill in the blanks:

The successful implementation of strategy requires an effective
…………………
While implementing strategies, the scarce resources of a firm need to becarefully, according to a plan.
The primary purpose of a capital budget is to ……………………
the long term profitability of a firm while deploying resources.
NOTES
What are the differences between a zero-based budget and performance-based budget? Discuss.
12.3 STRATEGY-STRUCTURE RELATIONSHIP

A suitable organisation structure is essential to implement
strategies and achieve stated goals. According to Classical
Organisation Theorists (Fayol, Taylor, Webber), the manager
generally determines the work activities to get the job done,
writes job descriptions, puts people into groups and assigns
them to superiors. He then fixes goals and deadlines and
establishes standards of performance. Operations are then
controlled through a reporting system. The whole structure
takes the shape of a pyramid. Thus, the term ‘organisation
structure’ describes the framework of an organisation in which
individual effort is coordinated. It is nothing but a chart of
relationships.
To be effective, the basic structure is governed by a set of rules
and regulations, reward-punishment systems, information
networks, control procedures etc. The structural components
are generally designed, keeping the requirements of
organisational members in mind, (where they are encouraged
to take up the assigned jobs, meet the expectations of
superiors, earn the rewards and keep the organisation going).
Structure, thus, is a means to an end and not an end in itself.
It is there to facilitate the smooth translation of organisational
plans, strategies and policies into concrete action. Without a
proper fit between strategy and structure, there will be chaos
and confusion in the organisation. Various parts do not move in
harmony. Delays, duplications and waste motions may occur
with frustrating regularity. It may ultimately lead to improper
use of facilities and failure to achieve goals. Research evidence
also suggests that structure follows strategy.
Generally speaking, organisations perform more effectively
when they implement strategy with the most appropriate
structure, while evaluating whether an organisation is properly
structured and stuffed to meet the requirements of the
strategy, the following questions need a careful analysis:
Checklist for determining appropriateness of organisational structure:
 Is the structure compatible with the corporate profile and
the corporate strategy?
 At the corporate level, is the structure compatible with the
outputs of the firm’s business units?
 Are there too few or too many hierarchical levels at either
the corporate or business unit level of analysis?
 Does the structure promote coordination among its parts?
NOTES
 Does the structure allow for appropriate centralisation or
decentralisation of authority?
 Does the structure permit the appropriate grouping of activities?
It is, more or less, agreed now that changes in strategy lead to
changes in organisational structure. Structure should be
designed to facilitate the strategic pursuit of a firm and,
therefore, follows strategy. Without a strategy or reasons for
being (mission), structure is not important (David).
Institutionalising a strategy definitely requires a strategy-
structure fit. Functional structure is useful when the firm begins
operations at a single site. The emphasis here is on increasing
volumes. As business expands, the firm begins to perform the
same function in different locations. Such geographical
dispersal of activity calls for inter-unit coordination. Vertical
integration is the next growth strategy. Firms operate within the
same industry but carry out additional functions. In the final
phase, according to Alfred Chandler, firms indulge in product
diversification – resulting in a large, multi- divisional structure.
Current research indicates that the greater the diversity among
the businesses in multi business firms, the greater is the
necessary degree of decentralisation and self-containment.
Four important guidelines can be advanced in this regard:
(Pearce and Robinson).
 A single product firm or single dominant business firm
(where one business accounts for 70-95% of sales) should
employ a functional structure.
 A firm in several lines of business that are somehow
related should employ a multi-divisional structure.
 A firm in several unrelated lines of business should be
organised into Strategic Business Units (SBUs).
 Early achievement of a strategy-structure fit can be a
While trying to relate the structure to strategy, managers have
a wide choice based on how authority relationships are
prescribed, how departments are created etc. The design
choices basically revolve around the following types: the
functional structure, the divisional structure, the profit and
matrix forms, the emerging structures like teams, virtual teams
and boundary-less organisations etc.
12.3.1 FUNCTIONAL STRUCTURE

In the functional structure, activities are grouped together by
common function. Each functional unit has a dissimilar set of
duties and responsibilities. In a university, functional structure
would mean a set of departments like marketing,
management, business economics, finance, etc. Thus, similar
and related occupational specialities are grouped together.
Functional structure tries to incorporate the positive aspects of
specialisation.
NOTES
The functional structure is a natural evolution of the simple structure as the organization grows and direct control becomes difficult or ineffi
12.3.2 FEATURES OF FUNCTIONAL STRUCTURE

Functional structures are characterised by specialisation of
function, sub-goal emphasis, line staff division, functional
relationship and centralisation and decentralisation:
NMI
Figure 12.2: Features of Functional Structure
12.3.3 ADVANTAGES OF FUNCTIONAL STRUCTURE

 Clarity: Functional design has the great advantage of clarity.
Everybody has a ‘home’. Everybody understands his own
MS
task. As a result, functional structures bring order and
clarity to organisational activities.
 Economies of scale within function: It provides economy of scale
within functions. It reduces duplication and waste. For
example, the total floor space shared by several products
in functional organisation leading to economy of
operations.
 Specialisation: Each departmental manager is concerned
with only one kind of work and can concentrate all his
energies upon it with minimum diversion. Specialisation
being built into the organisation brings about competitive
advantage for the firm. By putting its limited resources
into one specialised activity, ‘even the small company can
compete with the giant corporation on quantity, delivery
and price’.
 Coordination: Coordination within functions is easy.
Centralised decision-making ensures unity of performance.
NOTES
 In-depth skill development: The functional structure also
promotes skill development of employees. Employees are
exposed to a range of functional activities within their
departments allowing them to embody their outstanding
skills in every activity of the company.
 Suitability: The functional type of organisation is best for
small to medium sized organisation producing one or a few
products where the dominant competitive issue and goals
of the organisation emphasise functional specialisation,
efficiency and quality. In fact, Fayol’s model for functional
structure was a coal- mining company where there was
only one product, demanding simple, mechanical
operations. The operations were more or less
standardised.
12.3.4 LIMITATIONS OF FUNCTIONAL STRUCTURE

The weaknesses of the functional structure, unfortunately, are
legendary as the following list indicates:
 Effort focus: Every functional manager considers his
function the most important one and develops a narrow
dimension of the organisation. He becomes so enamoured
with his own specialty that he forgets the organisation’s
overall goals. In his anxiety to achieve departmental goals,
he may try to subordinate the welfare of the other
functions. ‘The lust for aggrandisement on the part of each
function is the price paid for the laudable desire of each
manager to do a good job.’ Again, functional specialisation
may lead to extremely narrow, dull and boring jobs in the
organisation with routine technologies. Functional structure
also contributes to a short-term perspective on the part of
specialists.
 Poor decision-making: No one except the man at the top
sees the entire picture of business. Consequently,
decisions are easily misunderstood and poorly executed.
Questions like ‘who is right?’, ‘who has scored better?’
force organisational participants into a tug-of-war.
 Sub-unit conflicts: As the functional organisation balloons to
a reasonable size, boundaries are erected between
departments. The structure turns out to be a ‘Berlin Wall
Building’. Coordination among departments becomes a
tough exercise. No one functional group is completely
responsible for performance. As a result, tendencies like
buck-passing, sidetracking of issues, etc., develop.
Overlapping authority and divided responsibility adds to
the confusion and chaos prevailing. Accountability suffers.
If functional structure is employed, important projects may
suffer for lack of focused coordinated attention.
 Managerial vacuum: Emphasis on functional skill makes a
man unfit for top management post requiring a broad
perspective on the organisation’s activities. Functional
structure does not prepare people for tomorrow, for it has
no position in which a
NOTES functional head can learn and prepare to handle

complexities inherent in the chief executive’s position. In
course of time, a chronic shortage of top management
generalists may be felt.
The weaknesses of the functional structure are legendary.
As the functional organisation grows in size, it ‘rapidly
becomes an organisation of misunderstandings, feuds, empires
and Berlin Wall Building.’ It soon requires elaborate, expensive
clumsy management crutches, coordinators, committees,
meetings, troubleshooters, special dispatchers which waste
everybody’s time without, as a rule, solving much! The
problem of coordination between functions becomes more
difficult. The administrative distance between top management
and functional department grows. Divisionalisation or product
organisation structure helps in relieving this position.
Fill in the blanks:

A suitable organisation structure is essential to …………………
strategies and achieve stated goals.
Changes in strategy lead to changes in organisational …………
Functional structure is useful when the firm begins operations at a ………………………
Functional structure tries to incorporate the ………………….
aspects of specialisation.
What are the pitfalls of a functional structure? Discuss.
DIVISIONALISATION: PRODUCT AND

12.4
GEOGRAPHIC FORMS
Divisionalisation is the process of dividing the large functional
pyramids into smaller, flexible administrative units. It is
essentially designed to foster independent and self-contained
units. It creates a set of essentially autonomous ‘little
companies’ in terms of product or geography. It is particularly
adaptable to the large and complex modern organisation.
12.4.1 PRODUCT DEPARTMENTATION

Product or commodity departmentation is particularly
adaptable to tremendously large, complex and multiproduct
organisations. Product departmentation calls for division of
organisation work on product basis. The large functional units
in the organisation are divided into smaller units, each
grouped in terms of product manufactured and sold. Product
departmentation increases emphasis on product development,
it helps in orderly and even development
NOTES
of products. Those products, which need to be carefully nursed
and skilfully developed, will receive prompt and improved
attention. Other products whose life is over may be
discontinued. In response to changing conditions, products can
be developed, added or dropped.
Figure 12.3: Working of Product Departmentation
Features of Product Departmentation
NMI
Product departmentation is characterised by the following:
 Product departmentation focuses on results and
performance than on means. The product structure is
organised, basically, according to organisational outputs.
 Product structures involve dismemberment of the
MS
monolithic functional organisation into autonomous units.
Within each of these units lies another organisational
form and it’s almost always of the functional type.
 The divisional head is responsible for performance and
holds complete strategic and operating decision-making
authority.
 The organisation is split into product divisions, each of
which is responsible for its own profit or loss.
 In addition to providing for a central headquarters,
divisionalisation helps in promoting decentralisation in a
fruitful way. It facilitates a wide span of control at the top
leading to a flat organisation structure. It frees the top
management for the top management tasks.
 It is usually adopted by a multiproduct enterprise whose
basic aim is to expand and diversify its products having
distinct manufacturing and marketing features.
NOTES Merits
The resources of one complete administrative unit are
deployed on the product. All the activities for a single project
or purpose are brought under one manager. It is easy to fix
accountability. Procedures and systems can be standardised,
leading to better integration across different specialities. The
different units like marketing, sales, engineering, finance and
personnel are dedicated to the interests of one or a few related
products. All this increases emphasis on product development,
market exploitation, etc. Further, autonomous units enable a
manager to acquire a broad range of experience, the individual
responsibility and independence forces him to face challenges
and run an entire company with its frustrations and
satisfactions. Thus, divisionalised form serves as an excellent
vehicle for training and development of general managers.
Managers know what they are doing and can direct themselves
toward the performance of the whole, instead of becoming
prisoners of their own work, effort and skill. Divisionalised
form, further, allows for a wide span of control. It focuses the
vision and efforts of managers directly on business
performance and results. The divisions have the
responsiveness, the accountability and the benefits of
specialisation and are able to process information as if they
were organisations unto themselves. Non-Profitable lines are
not allowed to be carried on the backs of the profitable ones.
Whenever necessary the autonomous units can be lopped off
with minimal effect on the entire organisation.
Limitations
Divisionalisation tends to create additional departments and
divisions leading to duplication of effort. The overhead costs of
the product division multiply. There is little incentive to
promote cooperation among divisions. Conflicts are created as
divisions and headquarters argue about where to locate
support services. Often, it is difficult to draw a clear
distinction between different units and settle the priorities. A
tremendous amount of managerial time and energy is wasted
on adjudicating disputes between them with reference to
scarce inputs, etc. The smallest adjustment between
departments becomes a trial of strength or a matter of
prestige and honour. The rivalry and territorial protectionism by
the individual divisions can make coordination by headquarters
extremely difficult. Further, the autonomy of divisional manager
is exercised within limits and this breed’s resentment as
divisional heads feel that authority is inadequate to meet the
challenges. Divisionalisation makes high human demands on
self-discipline, on mutual toleration, on subordinating one’s self
interest. High-quality managers possessing these exceptional
qualities are rarely available.
12.4.2 GEOGRAPHIC DIVISIONALISATION

Geographic divisionalisation sets up separate regional units,
each self-sufficient in manufacturing, marketing, etc., to cater
to
th
e
ne
ed
s
NOTES
of local markets. As organisations grow, they divide their
activities among branches, regional offices or other facilities
from the main centre of their operations. To develop an
appropriate sales campaign, to exploit the latent advantages
available in a region or a good customer service programme,
organisations draw a territorial fence around their operations.
Sometimes, the nature of the product also demands
geographical fencing, for example, dairy products, candies,
drinks, etc. In such cases, territorial allotment leads to
intensive exploitation of markets. These days geographic
departmentation is also adopted to avoid the congestion of
large urban centres, as well as the problems of recruiting and
utilising labour.
Fill in the blanks:

Product departmentation calls for division of organisation work onbasis.
Geographic .......................... sets up separate regional units, each self-sufficient in manufacturing, marketing, etc., to cater to the needs of
12.5 STRATEGIC BUSINESS UNITS (SBUs)

The SBU structure is an extension of the divisional structure. In
Cite some important features of the organisational structure of Al Qaeda that posed a challenge to military forces fighting it in the war ag
its most extreme form, the SBU operates as a separate
autonomous organisation and may periodically send profits to
the corporate parent. Each unit will have a clearly defined
strategy, based on its capabilities and overall organisational
needs.
Figure 12.4: SBU Structure
Advantages
 Improves coordination between divisions with similar
strategic concerns and product/market environments.
NOTES  Tightens the strategic management and control of large,

diverse business enterprises.
 Facilitates distinct and in-depth business planning at the
corporate and business levels.
 Channels accountability to distinct business units.
Disadvantages
 Places another layer of management between the
divisions and the corporate management.
 Unhealthy completion for corporate resources.
 The role of the group vice president can be difficult to define.
 Defining the degree of autonomy for the group vice
presidents and division managers can be difficult.
The SBU’s autonomy will decrease if profits are lower than the parent expects. The parent ma
In what way is an SBU structure different from one that is based on core competencies?
12.6 PROJECT ORGANISATION

The project structure is an effective way of focusing all of the
necessary talent and organisation resources for a given period
on a specific project goal. The best talent is pooled to achieve
a specific and complex undertaking within time, cost and /or
quality parameters. It permits large doses of information and
activity to be managed without overloading the hierarchical
structure. The organisation can continue to focus on its routine
activities without interruption. It allows the main organisation
to proceed normally while providing concentrated attention to
a new project.
The project structure is quite similar to product organisation.
Project structures usually have limited life whereas product
structures are created to deal with profitable products having a
long life. The project structure can also be distinguished from
the matrix organisation (the terms are interchangeably
employed these days). The project employees’ in the matrix
structure are only lent to the project managers for a specific
purpose, rather than being purely responsible only to the
project manager for some period of time.
NOTES
Figure 12.5: Project Organisation and Its Structure
12.6.1 NATURE OF PROJECT MANAGEMENT

Project manager: Project management calls for the appointment
of a project manager who is responsible for the completion of
the project. The project manager makes sure that the project
does not get lost in the shuffle of organisational activities. He
specifies what is to be done, when it is to be completed, and
how much of the resources are required. In turn, the functional
managers decide who in their units will perform the task and
how it will be done. The project manager is a unifying agent
and a focal point for the project activities.
Team members: The project involves members from various
functional departments or from outside. Team members report
directly to the project manager. Membership is temporary. The
size of the group may change with the different phases of the
work. As soon as the project is completed, team members go
to another project.
Project authority: A project possesses a vertical as well as a
horizontal dimension. It cuts across the normal organisation
structure. A project manager is expected to work with various
functional managers by seeking their support through
persuasive bargaining. He must convince them that they
should help the project by lending its manager the support
needed to finish the undertaking within the time. In reality, the
project managers face an ‘authority gap’. They do not have
authority to promote or reward their personnel. They lack
complete authority over the team and possess what is known
as ‘project authority’. Further, in a project structure, the role
perceptions are unclear and lack specificity. The relationship of
project manager with functional heads is quite ambiguous. His
authority is more fluid than in a stable organisation composed
of line and staff relationships only. The project manager is
expected to accomplish goals by working not only with the
functional groups of the company but also with outside
organisations. ‘The total project organisation has no discrete
boundaries; it is a complex structure that facilitates the
coordination and integration of many project activities.’
NOTES 12.6.2 ADVANTAGES

 Project management allows maximum use of specialised
knowledge, which is available to all projects on an equal
basis. Knowledge and experience can be transferred from
one project to another.
 Project people have a functional home when they are no
longer required on a given project. In between, they are
provided with stimulating opportunities to participate in
the decision process.
 The project structure reduces environmental complexity. It
facilitates rapid collection and processing of new
information.
 Project structures are one way of promoting and
maintaining organisational flexibility. Through projects,
specialisation required to achieve a goal is brought
together for as long as necessary, but no longer.
12.6.3 PROBLEMS
 Project structure creates feelings of insecurity and
uncertainty among members. Their relationship with
functional members is unclear. Dual loyalty creates anxiety
and tension.
 The project structure is an ad hoc arrangement, having a
limited life. Once the project is completed, the project
team is disbanded. In other words, the project manager
and project staff work themselves out of a job. Some
people feel lost without a permanent department with
which they can identify. Security for such people is
threatened when it appears that the organisation’s only
commitment to them is a temporary project. They fear
that completion of the project will mean the end of their
job. This can encourage project slowdowns.
 The project management violates the principle of unity of
command. Role prescriptions are unclear. The relationship
between functional managers and the project manager is
not defined properly leading to ambiguity and conflict.
 The project structure creates insecurity and fear
ofunemployment as the project nears completion.
Members may even create work to avoid dangers of being
laid off.
 Contacts with the mainstream of organisational life are
severed. Members may be bypassed when opportunities
arise in their fields leading to career advancement.
 Projectmanager has to perform atightropewalk: he must
build the team straightaway, obtain cooperation from other
departments, battle to meet the schedule, grapple with
cost figures and decide things quickly. Decisions to
sacrifice time for cost, cost for quality or quality for time
are common in most projects and the project manager
m
us
t
be
ab
le
to
m
ak
e
th
e
m
wi
th
ou
t
pa
ni
ck
in
g.
NOTES
 The project organisation creates an authority gap for project
managers where responsibility outweighs authority. Most
projects are not self-sufficient. They need support from
various quarters. Top management can easily jeopardise
the projects’ success by lack of awareness. Functional
cooperation may be difficult to obtain. All such factors
seriously hamper the project performance.
Can a project structure enhance the efficiency of PPP (public private partnership on infrastructure projects?
12.7 MATRIX ORGANISATION STRUCTURE
Fill in the blanks:

Project management allows maximum use of specialised knowledge which is available to all projects on an ……………….
basis.
Themakes sure that the project does not get lost in the
shuffle of organisational activities.
usually have limited life whereas product structures
are created to deal with profitable products having a long life.
Ais expected to work with various functional managers
by seeking their support through persuasive bargaining.
Theis an effective way of focusing all of the necessary
talent and organisation resources for a given period on a specific project goal.
In the matrix structure, project managers are assigned to a
variety of projects — rather than a single one — whose
activities cut across traditional departments. Matrix structure
is simply an extension of the project management concept.
The matrix breaks the unity of command concept. The
classical principle ‘one man one boss’ is violated. The normal
vertical hierarchy is ‘overplayed’ by a form of lateral influence.
The matrix legitimates lateral chains of influence.
At any given time, a number of project managers direct the
activities of a number of projects, while the functional heads
allocate their resources to meet the requirements of these
various projects. Project managers have authority over
project employees relative to the projects’ goals. Decisions
such as promotion, salary increases, employee performance
appraisal typically remain a part of the functional manager’s
responsibility.
NOTES 12.7.1 KEY MATRIX ROLES

 Top leadership: The top leader holds the balance of
power. He must be willing to delegate decisions. He must
emphasise direct contact and group problem solving at
lower levels so as to promote effective communication
throughout the organisation. He must also see that the
power balance is maintained properly.
 Matrix bosses: Matrix bosses have authority over project
employees relative to projects’ goals. They share
subordinates in common with other bosses. They do not
have full control over subordinates. The functional head’s
responsibilities pertain to functional rules and standards.
The project manager acts as an integrator. He is required
to achieve the specific project by balancing time, cost and
performance. Matrix bosses must also be willing to face
one another on disagreements. Managing highly
competent professional employees demands a great deal
of time, patience, and skill from project heads.
 Two-boss managers/matrix subordinates: Matrix subordinates
are often confronted with an agonising choice. He must
confront senior managers on conflicting demands and
reach joint decisions with them. Just like a child adjusting
to conflicting demands from two parents, he is expected to
move along with both managers smoothly. In such dual
assignments, as indicated by Friedlander there is
commonly a lack of jurisdictional clarity. The dual reporting
relationship and assignments can cause role ambiguity,
concerns for career development and weakening of ties
with professional reference groups for employees.
12.7.2 STRENGTHS
Many people have sung the praises of matrix organisation
forms, from time to time. In fact, matrix form attempts to
achieve the benefits of both the functional organisation and
the product organisation:
 Efficiency: A matrix form permits efficient utilisation of
resources, especially manpower. Resources can be freely
allocated across different products. It facilitates the
efficient allocation of specialists. Specialised knowledge is
available to all products/projects on an equal basis.
Further, knowledge and experience can be transferred from
one project to another. Each project can share the
specialised resource with other units, rather than
duplicating it to provide independent coverage for each. ‘If
a project demands half an astrophysicist, it does not need
to support a whole one half occupied.’ It allows the pooling
and sharing to specialised resources across products in a
natural, routine way.
 Flexibility: Matrix forms encourage constant interaction
among project unit and functional department members.
The direct and frequent contact between different
sp ialities in the matrix can make for better communication
ec and more flexibility. Information
NOTES
permeates the organisation and reaches those people
who need to take account of it. Quick decisions can be
taken and the organisation can encounter the changing
and uncertain environment in a better way.
 Technical excellence: Matrix structures ensure the
maintenance of high technical standards. They facilitate
high quality and innovative solutions to technical
problems. Frequent interactions among project unit and
functional department members encourage cross
fertilisation of ideas. Each specialist is forced to listen,
understand and respond to the views of the other.
 Balance: Matrix structure is a way of balancing customer’s
need for project completion and cost control with the
organisation’s need for economic cooperation and
development of technical capability for the future. ‘A better
balance between time, cost and performance can be
obtained through the built in checks and balances and the
continuous negotiations carried on between the project
and functional organisations.’ Further, matrix reduces
bureau-pathologies. The dual lines of authority reduce
tendencies of departmental managers to become so busy
protecting their little worlds that goals become displaced.
 Freeing top management: Matrix structure permits decision-
making at lower levels. Since many decisions are made at
lower levels, the top management has more time to
interact with the environment. The top management need
not bury itself in endless daily routine; it can concentrate
more on long range planning. Matrix structure facilitates a
rapid managerial response to changing market and
technical requirements.
 Motivation: Traditional organisation structures are
based on the assumption that position level equals
contribution and contribution equals rewards. In other
words, the higher the individual in the organisation, the
more authority he has, the greater the knowledge he
possesses; the more he contributes, and the more he
should be rewarded. In many organisations, this holds
good even today. A 60-year-old full-time professor receives
a fat salary of ` 50,000 per month for teaching
Organisation Theory to post-graduate students while a 25-
year-old lecturer receives only ` 15,000 p.m. for teaching
another section of the same course in the university. The
reward structure will be more frustrating in case we
assume that the young scholar had just published two
brilliant research papers while the older one had produced
nothing in years. Fortunately, in matrix structures more
emphasis is placed on the authority of knowledge than the
position of an individual in the organisational hierarchy.
Membership of the team is based on special knowledge for
given aspects of the work. As a result, lower level people
can have a greater say in important decisions. The
opportunity to participate in important decisions fosters
higher levels of motivation and commitment.
NOTES  Development: A matrix structure helps employees to develop

and grow. It enlarges their experience and broadens their
outlook. It exposes them to a wider arena full of
challenges. The process of job rotation helps them to learn
something of other specialities; auditors will learn about
marketing, engineers develop knowledge of financial
matters and accountants learn about quality control. A
matrix structure gives persons of high potential an
excellent means of demonstrating their capabilities and
make a name for themselves (employees can acquire
either functional or general management skills depending
on their interests). It provides a stimulating atmosphere
more in line with the democratic norms preferred by
scientific and professional employees.
12.7.3 WEAKNESSES
A matrix structure is far from being a cure-all for the
embarrassments, expenses and delays that plague even the
best-managed organisations. They are seen as ‘hurried
improvisations’ rather than as ‘thought- through
transformations’. In fact, matrix organisations carry two
diametrically opposed sets of costs and benefits.
 Power struggles: Matrix fosters power struggles between
product and functional managers. Unfortunately, both
functional and product managers share the same set of
resources leading to unhealthy competition. Each manager
tries to safeguard his undisputed control over a given
sphere of operations by building protective walls. For
example, functional managers form coalitions to
undermine the power of project specialists. Matrix
intensifies defensive behaviour and hostile attitudes
between managers. It is a sure recipe for personal conflict.
 Stress: Matrix organisations can be stressful places to work
in. As pointed out by R.L. Kahn, et al., stress at work arises
from three factors: role conflict, role ambiguity and role
overload. The use of matrix means use of dual command.
Managers often end up jockeying for power and influence.
“The individuals are subjected to conflicting and confusing
expectations from others. The subordinate becomes a
political football of the ‘two superpowers’ in the
organisation.” Members of project teams possess only de
facto decision-making power. As a result, important
decisions are vetoed by superiors in preference to
decisions based on individual power and influence. In such
ambiguous situations, accountability becomes unclear.
Role overload arises because of too many demands
placed on an individual. An employee is expected to
shoulder normal operating responsibilities as usual and
also find time to participate in endless meetings and
tedious discussions. Additional demands arise from these
discussions leading to an increase in overall workload.
Confusion exists over who reports to whom. The comfort of
bureaucracy’s predictability is replaced by growing
in
se
cu
rit
y
an
d
str
es
s.
NOTES
 Costs: The matrix organisation incurs great administrative
costs than a conventional hierarchy. In an attempt to cover
themselves against blame, managers try to put everything
in writing. The dual chain of command turns the matrix
structure into another form of anarchy. It increases the
management costs to double. The decision-making
process is slowed down. Members have to spend far
more time at meetings and discussions than doing work.
More information has to be processed through written
reports.
 Balance: It is rather difficult to strike a stable balance
between project and functional authority. ‘The two kinds of
influence are negatively correlated. The more successful
lateral collaboration is achieved at agivenlevel, thegreater
are the stresses upthroughthe vertical hierarchy, with
more senior managers resentful of being bypassed. And
conversely, the better the vertical relationships in the line
hierarchy, the more likely the lateral activities are to suffer
from boundary disputes and communication blocks.’
Fill in the blanks:

In the, project managers are assigned to a variety of
projects — rather than a single one.
Thebreaks the unity of command concept.
Matrix forms encourage constant interaction among project unit and ……..…….
Discuss the demerits of a matrix structure.

12.8 NEW DESIGN OPTIONS
In the matrix structure, the authority of the project manager is generally greater than that given under the more traditional project manag
To compete effectively, managers have been experimenting
with various design options, especially after the 80s. Let’s
briefly explain these options in the ensuring sections.
12.8.1 TEAM STRUCTURE

The term ‘team structure’ refers to the use of teams as a
central device to coordinate work activities. The bureaucratic
structure is
NOTES not suitable for most of today’s dynamic organisations.

Employees with diverse skills and experience are required to
work together (as teams) to successfully complete complex
projects. As such traditional work areas have given way to
more of a team effort, building and capitalising on the various
skills and backgrounds that each member brings to the team.
Team members have a commitment, purpose, establish specific
goals and have the leadership and structure to provide focus
and direction. They are held responsible – individually and
jointly – for results. They rely on each other and develop
healthy interpersonal relations based on trust. They exchange
information, resources, feelings and thoughts freely and openly.
The point is that teams do go beyond traditional formal work
groups by having a collective synergistic (the whole is greater
than the sum of its parts) effect. The basis of these work
teams, then, is driven by the tasks at hand. Involving
employees gives them an opportunity to focus on the job
goals. The freedom that they enjoy empowers them to develop
the means to achieve the desired ends.
12.8.2 VIRTUAL ORGANISATION

The virtual organisation is a small core organisation that
outsources major business functions. Dell Computer, for
instance, owns no plants and merely assembles computers
from outsourced parts. The core functions generally reflect the
strengths of the virtual organisation- it can be designing,
marketing, distribution, etc. The core group consists of a small
group of executives overseeing activities that are undertaken
in-house and coordinating relationships with outside
organisations that carry out work on behalf of the virtual
organisation. Most of the time of executives is spent in
developing and coordinating links with outside suppliers
through computer networks. The major advantages of the
virtual structure are its flexibility. For instance, it allows
someone with an innovative idea and little money – like Dell
Computer – to successfully compete with giant outfits such as
IBM.
12.8.3 GLOBALIZATION
It is an organisation that seeks to eliminate the chain of
command, have limitless spans of control, and replace
departments with empowered teams. Let’s explain these
briefly. In a boundaryless organisation, the vertical lines of
hierarchy are eliminated. The pyramidal shape is decimated
and a flat organisation structure takes its place. Functional
departments are replaced by cross-functional teams. A cross-
functional team consists of employees from the same
hierarchical level but from different work areas, who come
together to accomplish a task. The attempt is to turn every
employee into a kind of a generalist by putting him in various
teams to improve his skills, experience and ability to get along
with others. To this end, the organisation rotates people into
and out of different functional areas. Lateral transfers are also
ro
uti
ne
ly
ca
rri
ed
ou
t.
NOTES
Fill in the blanks:

…………… seeks to eliminate the chain of command, have limitless spans of control, and replace departments with empowered teams.
Theis a small core organisation that outsources major
business functions.
FACTORS INFLUENCING ORGANISATION

12.9
STRUCTURE
There is no particular type of organisation structure that is best
suited for all enterprises. Even two firms, competing in the
same industry with a similar set of products, technologies, and
markets, may find that a structure that works for one firm may
need some modification in another. The issue depends on
several contingency factors such as size, technology,
environment, people etc.
12.9.1 SIZE AND STRUCTURE

There is considerable evidence that an organisation’s size is a
significant influence on structure. For example, consider this
scenario: As an organisation adds more employees, there is
more specialisation and horizontal differentiation. To facilitate
coordination, more managers are needed. This increases
vertical differentiation. The increase in complexity makes it
more difficult for top management to directly oversee what is
going on throughout the organisation. Direct surveillance
therefore is, supplemented by formalised rules and regulations.
Finally, with top management further removed from the
operating level, it makes it increasingly difficult for senior
executives to makes rapid and informative decisions. Decision-
making is likely to become more decentralised. The result is
that, as the organisation expands in size by adding more
employees, it becomes a decentralised bureaucracy.
12.9.2 TECHNOLOGY AND STRUCTURE

Technology is another important variable in the design of
organisation structure. To achieve satisfactory performance,
managers must design an organisation with the proper mix of
technology, structure and human behaviour. Technology, in
simple terms, is the organisation’s transformation process. It is
the combination of skills, equipment and relevant technical
knowledge needed to bring about desired transformation in
materials, information and people. Technology looks at how the
inputs are transferred to outputs. Broadly speaking, it is the
application of knowledge to perform work.
NOTES Contingency theories of technology have advanced the

following propositions:
 The type of technology in the organisation influences the
type of organisation structure that should be used. If the
type of structure fits the type of technology, the
organisation will be more successful.
 Different departments and divisions of the organisation
use different technologies. Therefore, the structure of
these sub- units should vary, depending upon the type of
technology they employ. Not all sub-units have to be
structured similarly.
 Different types of coordination and control systems are
appropriate for different types of technology.
In short, organisational technology moderates the relationship
between organisation design and organisational effectiveness.
The fit between the type of organisation structure and the type
of technology influences how effective the organisation can be.
12.9.3 ENVIRONMENT AND STRUCTURE

The term ‘environment’ refers to those factors external to the
organisation that influence the effectiveness of the firm’s day-
to-day operations and its long-term growth. Factors such as
economic conditions, changes in market conditions, advances
in technology, legal and political conditions all come within the
purview of environment.
Contingency theories of environment have advanced three
propositions, all quite similar to those of contingency theories
of technology. These propositions are:
 The type of environment of the organisation influences the
type of organisation structure, which should be used. If the
type of structure fits the type of environment, the
organisation will be more successful.
 Different departments and divisions of the organisation
have to respond to different environments. Therefore, the
structures of these sub-units should vary, depending upon
the types of environments they face. Not all sub-units have
to be structured similarly.
 Organisations should vary the strategies they use to adapt
to their environments, depending upon how hostile their
environment is.
12.9.4 PEOPLE AND STRUCTURE

A major influence on organisation structure is the “stock” of
personnel employed at the enterprise. The attitudes,
aspirations, experiences and roles of organisation members are
also related to the structure of the organisation. It is, therefore,
necessary to consider the forces affecting a subordinate’s
behaviour and performance. The desire for independence,
for assuming responsibility for facing challenging
NOTES
jobs, achieving something worthwhile will greatly influence the
organisation structure. Organisations try to accommodate the
psychological needs of employees adequately, the structure
selected should provide meaningful opportunities for
members to learn and develop continuously. Several
organisations have already experimented with such
innovations like MBO, job enlargement, job enrichment,
managerial grid etc., in an attempt to provide a more
rewarding environment for their employees.
Choosing the right structure, in any case, is very important
because switching from one structure to another is a costly
and time-consuming exercise. It is as difficult as moving and
relocating the Red Fort in Delhi. Senior management, therefore,
needs to identify a structure that best fits and accommodates
the firm’s strategy.
Fill in the blank:

22.As an organisation adds more employees, there is more specialisation anddifferentiation.
STRUCTURE AND STRATEGY

12.10
IMPLEMENTATION
Strategies remain useless ‘academic exercises’ unless they are
effectively implemented. This requires proper communication
of plans, strategies and policies to various functional/divisional
units; enlisting the support of people involved in the process;
proper guidance and support of top management; an
appropriate structure and climate suitable to carry out the
assigned tasks; allocation of resources over competing
alternatives with a view to maximise return and establishment
of appropriate control points to see that what has been
planned is achieved effectively and efficiently. Strategy
implementation, thus, includes the various management
activities that are necessary to put the strategy in motion,
institute strategic controls that monitor progress, and
ultimately achieve organisational goals.
Of course, no single structure is appropriate for implementing
all strategies. Each firm, therefore, has to choose a suitable
structure that best fits and accommodates its own strategy.
Structural choices have to the made carefully because
switching from one structure to another is a time-consuming
and costly exercise.
Strategic Implementation: Expert’s Views

 Steiner and Miner: “The implementation of policies and
strategies is concerned with the design and management
of systems to achieve the best integration of people,
structures, processes and resources in reaching
organisational purposes.”
NOTES  Glueck: “Strategic implementation is the assignment or

reassignment of corporate and SBU leaders to match the
strategy. The leaders will communicate the strategy to the
employees. Implementation also involves the development
of functional policies about the organisation structure and
climate to support the strategy and help achieve
organisational objectives”.
 Harvey: “Implementation involves actually executing the
strategic game plan. This includes setting policies,
designing the organisation structure, and developing a
corporate culture to enable the attainment of
organisational objectives.”
Successful implementation demands cooperation from all
functional and divisional managers in an organisation. To this
end, they must exchange notes freely, share resources in a
spirit of give and take, take all people along with them, monitor
progress continuously, put everything on track and achieve
results in a smooth way. All this calls for exceptional
communication and motivational skills that help leaders to
unite various powerful coalitions in an organisation effectively.
Fill in the blanks:

According to Glueckis the assignment or reassignment
of corporate and SBU leaders to match the strategy.
Successful implementation demands ……………… from all functional and divisional managers in
12.11 SUMMARY
 This chapter focuses attention on the ingredients of
effective strategy implementation, i.e. building the right
kind of organisation that can support a chosen strategy.
 Successful strategy implementation requires support,
discipline, motivation and hard work from all managers
and employees. It demands a suitable organisation
structure to translate ideas into concrete action plans.
 This chapter basically focuses on the management of
internal organisation for strategy implementation
successfully.
 Divisionalisation is the process of dividing the large
functional pyramids into smaller, flexible administrative
units. It is essentially designed to foster independent and
self-contained units. It creates a set of essentially
autonomous ‘little companies’ in terms of product or
geography. It is particularly adaptable to the large and
complex modern organisation.
 Strategies remain useless ‘academic exercises’ unless they
are effectively implemented. This requires proper
communication
NOTES
of plans, strategies and policies to various
functional/divisional units; enlisting the support of people
involved in the process; proper guidance and support of
top management; an appropriate structure and climate
suitable to carry out the assigned tasks; allocation of
resources over competing alternatives with a view to
maximise return and establishment of appropriate control
points to see that what has been planned is achieved
effectively and efficiently.
Organisation Structure: The framework in which the organisation defines how tasks are divided, resources are deployed and departments
Organising: The deployment of organisational resources to achieve strategic goals.
Decentralisation: The location of decision authority near lower organisational levels.
Departmentation: The process of grouping jobs according to some logical arrangement.
Functional Departmentation: The grouping of positions into departments based on similar skills, expertise and resource use.
Product Departmentation: Grouping activities around products or product groups.
Tall Structure: A structure that has many hierarchical levels and narrow spans of control.
Flat Structure: A structure that has a broad span of control and relatively few hierarchical levels.
Matrix Structure: A structure that superimposes a horizontal set of divisional reporting relationships onto a hierarchical functional structu

1. What do you mean by strategy implementation? What are
the important issues involved in it?
2. “Resource allocation is one of the important processes
in an organisation”. Explain. What are the bases for
resource allocation?
3. How are strategies implemented?
4. How does strategy affect structure?
5. Explain the problems in resource allocation.
NOTES 6. Outline the advantages and disadvantages of the following

structural forms:
(a) Functional Structure
(b) Product Structure
(c) Project Structure
(d) Matrix Structure
7. What new design options managers have been
experimenting with in order to compete effectively with
other organizations? Explain in detail.
8. Would you recommend a divisional structure by geographic
area, product, customer or process for a medium sized
bank in your local area? Why?
9. Why do large companies follow the divisional structure of
organisations? Do you think this structural form is superior
to that of a functional form?
10. Explain the factors influencing Organization Structure.


Introduction 1. Employees
2. alignment
Issues in Strategy 3. organization
Implementation
4. allocated
5. maximize
Strategy- 6. implement
Structure
Relationship
7. structure
8. single site
9. positive
Divisionalization: 10. product
Product and Geographic
Forms
11. Divisionalization
Project Organisation 12. equal
13. Project manager
14. Project structures
15. project manager
16. project structure
Contd...
NOTES
Matrix Organisation 17. matrix structure

Structure
18. matrix structure
19. functional
department
members
New Design Options 20. Boundaryless
organization
21. virtual organisation
Factors Influencing 22. Horizontal
Organisation Structure
Structure and 23. Strategic Implementation
Strategy
Implementation
24. cooperation

1. Refer to 12.1 & 12.2
Strategy implementation is a crucial issue because any
strategy is as good as the effort behind it to move it
forward. Successful strategy implementation requires
support, discipline, motivation and hard work from all
managers and employees. More importantly, it requires a
suitable organisation structure to translate ideas into
concrete action plans. The successful implementation of
strategy requires an effective organisation. People working
within a firm should know how their actions interrelate with
the actions of others to support and execute the firm’s
strategy. Functional plans and policies need to be
formulated carefully and implemented with active support
from employees at various levels. These should help
employees find solutions to several operational issues that
need to be resolved on a day-to-day basis. The political
factors than come in the way of effective implementation
of strategies should also be understood properly. Every
attempt should be made to remove the irritants first
before minor problems turn into major emergencies later.
Implementing Strategy and Resource allocation are
important issues involved in it.
2. Refer to 12.2.2
Strategic budget, Capital budget, Performance budget and
Zero- based budget are the bases for resource allocation.
3. Refer to 12.2.1
There is no guarantee that a well-designed strategy is
likely to be approved and implemented automatically.
The strategic leader must, therefore, defend the strategy
from every angle, communicate how the strategy when
implemented would benefit the whole organisation and
secure the wholehearted support of employees working at
various levels. To keep things on track, he can list out
priorities, programme implementation
NOTES process, budgets, etc. on paper so that nothing is left to

chance. Formation of a company, operations of a company
and winding up of operations are the ways of strategy
implementation.
4. Refer to 12.3
Strategy affects the structure when there is not a proper fit
between strategy and structure due to which there will be
chaos and confusion in the organisation. Various parts do
not move in harmony. Delays, duplications and waste
motions may occur with frustrating regularity. It may
ultimately lead to improper use of facilities and failure to
achieve goals.
5. Refer to 12.2.2
Resource allocation, in actual practice, is not an easy job.
Strategists should prioritise tasks that require maximum
attention initially taking political relations, overall
objections, external influences etc., into account. Each
department may fight for garnering a maximum share of
the scarce resources that are available-leading to
destructive conflict and bitter personality clashes. External
influences such as government regulations, shareholder
preferences for higher dividends, credit restrictions
imposed by financial institutions also affect the process of
resource allocation considerably.
6. (a) Refer to 12.3.3 & 12.3.4
Clarity, Economies of Scale within function, specialization,
coordination, in-depth skill development, suitability are
advantages of functional structure. Effort focus, poor-
decision making, sub-unit conflicts, managerial vacuum
are disadvantages of functional structure.
(b) Refer to 12.4.1
The resources of one complete administrative unit are
deployed on the product. All the activities for a single
project or purpose are brought under one manager. It is
easy to fix accountability. Procedures and systems can be
standardised, leading to better integration across different
specialities. The different units like marketing, sales,
engineering, finance and personnel are dedicated to the
interests of one or a few related products. All this
increases emphasis on product development, market
exploitation, etc. are advantages of product structure.
Divisionalisation tends to create additional departments
and divisions leading to duplication of effort. The overhead
costs of the product division multiply. There is little
incentive to promote cooperation among divisions.
Conflicts are created as divisions and headquarters argue
about where to locate support services. These are
disadvantages of product structure.
NOTES
(c) Refer to 12.6.2 & 12.6.3
Project people have a functional home when they are no
longer required on a given project. In between, they are
provided with stimulating opportunities to participate in
the decision process. The project structure reduces
environmental complexity. It facilitates rapid collection and
processing of new information. These are advantages of
project structure. Project structure creates feelings of
insecurity and uncertainty among members. Their
relationship with functional members is unclear. Dual
loyalty creates anxiety and tension. The project
management violates the principle of unity of command.
Role prescriptions are unclear. The relationship between
functional managers and the project manager is not
defined properly leading to ambiguity and conflict. These
are disadvantages of project structure.
(d) Refer to 12.7.2 & 12.7.3
Efficiency, Flexibility, Technical excellence, balance
between customers need for project completion and cost
control, freeing top management by delegating decision-
making at lower levels, motivation, development are
advantages of matrix structure. Power struggles, stress,
greater administrative costs and imbalance between
project and functional authority are disadvantages of
matrix structure.
7. Refer to 12.8, 12.8.2 & 12.8.3
The term ‘team structure’ refers to the use of teams as a
central device to coordinate work activities. Virtual
organization and Globalization are two design options
which managers have been experimenting with in order to
compete effectively.
8. Refer to 12.4.1 & 12.4.2
Product departmentation increases emphasis on product
development, it helps in orderly and even development of
products. Those products, which need to be carefully
nursed and skilfully developed, will receive prompt and
improved attention. Other products whose life is over may
be discontinued. As organisations grow, they divide their
activities among branches, regional offices or other
facilities from the main centre of their operations. To
develop an appropriate sales campaign, to exploit the
latent advantages available in a region or a good customer
service programme, organisations draw a territorial fence
around their operations. Sometimes, the nature of the
product also demands geographical fencing, for example,
dairy products, candies, drinks, etc.
9. Refer to 12.4, 12.4.1 & 12.4.2
Divisionalisation is the process of dividing the large
functional pyramids into smaller, flexible administrative
units. It is essentially designed to foster independent and
NOTES self-contained units. It creates a set of essentially

autonomous ‘little companies’ intermsof product
orgeography. It is particularly adaptable to the large and
complex modern organisation.
10. Refer to 12.9,12.9.1,12.9.2,12.9.3 & 12.9.4
Size and Structure, Technology and Structure, Environment
and Structure, People and Structure are the factors
influencing organization structures.
SUGGESTED READINGS FOR

12.14
REFERENCE
SUGGESTED READINGS
 G A Steiner, J B Miner and E R Gay, Management Policy and
Strategy, Macmillan, New York, 1982.
 D F Harvey, Business Policy and Strategic Management, Charles
E Merill, Columbus, 1982.
 W F Glueck, and L.R. Jauch, Business Policy and Strategic
Management, McGraw Hill, New York, 1984; T J Peters and R
H Waterman, In Search of Excellence, Harper & Row, New
York, 1982.
 J R Galbraith, Matrix Organisation Design, Business Horizons,
Feb 1971.
 S P Robbins, Organisation Theory, Prentice Hall, N J, 1999.
E-REFERENCES
 http://www.wiley.com/college/man/schermerhorn387
55X/ student/ch08/chreview_s_08d.html
 h ttp :// education-portal. com/ ac ad e my/
l e ss o n / ma t ri x- organizational-structure-advantages-
disadvantages-examples. html
 http://www.slideshare.net/jhullu/new-design-options
C H
13 A P T E R
CASE STUDIES
CONTENTS
Case Study 1: Chapter 1 Strategic Thinking: The McDonald’s Way
Case Study 2: Chapter 2 Prof. Dhar: Strategy for Commercial Success of
his
Invention Case Study 3: Chapter 3
DuPont
Case Study 4: Chapter 4 Maruti Suzuki India Ltd
Case Study 5: Chapter 5 Lakshmi Machine Works
Ltd
Case Study 6: Chapter 6 Bharat Petroleum Corporation Ltd
Case Study 7: Chapter 7 Starbucks Coffee Company Expanding into
India Case Study 8: Chapter 8 Symantec’s Strategy
Case Study 9: Chapter 9 Human Resources
Case Study 10: Chapter 10 Organisation
Design Case Study 11: Chapter 11 Aftermath of
a Tragedy
Case Study 12: Chapter 12 Differential Toxicity of Particle Constituents
CASE STUDY 1: CHAPTER 1

NOTES
STRATEGIC THINKING: THE MCDONALD’S WAY

McDonald’s opened the second fast food restaurant near
Kremlim (in Russia) in 1993. It used to serve burgers and
fries to almost 50,000 people daily in its restaurant on
Pushkin square. Despite that volume, the company earned
little profit because the prices were pretty low. A Beeg Mac in
Moscow, for example, is the cheapest in the world costing
slightly more than $1 (compared to almost $2 in USA) or
around 1,100 rubles. Food and drink at the Russian outlets
are sold for rubles daily.
To best employ the billions ofrubles that poured in daily,
McDonald’s branched out into real estate. The dollar rents
from office space in the Kremlin tower – badly needed by
foreign outfits working in Russia – would let McDonald’s earn
an overall profit, even if selling burgers does not give the
chain much. The tower is owned jointly by McDonald’s and
the Moscow City Council. Big corporate giants like Coca-
Cola, Toyota and American Express have already moved into
the $15 million McDonald’s tower.
The tower is, in a way, the answer to critics who predicted
that McDonald’s could not operate in Russia at Western
standards. It took nearly 14 years for the company to get
approval from Russian authorities. A third outlet opened in
August 93. Now, over 98 percent of ingredients come from
Russian sources. The meat, potatoes and other ingredients
come from local firms and are processed at Mc Complex
NMI
near Moscow. Quality checks are quite high (40 quality
control checks made on every piece of meat) – keeping in
tune with its overall global standards. To keep costs low, it
buys pickles and minced onions from local people. It sells
milk and bread in Moscow grocery shops and exports goods
purchased through roubles for resale in the West. Overall, it
MS
offers little more than burgers, fries, drinks and dessert.
Despite all these cost-cutting measures, a simple lunch at
McDonald’s costs around 1,000 roubles and that is a big
bite for Russians whose monthly salaries average 25,000
roubles.
McDonald’s experiment in Russia never got off the ground
due to several reasons:
 Politics is uncertain, the economy is weak, inflation is
severe, bribery is universal and Russian service is
rotten. It took nearly 12 years for the company to
convince Moscow officials about its ability to get along
with the cultural practices of Russia and set up shop
over there. The company immediately built what is
known as McComplex to supply high quality food
products throughout Russia.
 In early 90s, the Soviet Union got dissolved, an
unsuccessful coup was attempted against Gorbachev
Education
and impeachment proceedings were brought against
Russian President Yeltsin.
Contd...

Education
CASE STUDIES 389
NOTES
All the while, McDonald’s kept serving hamburgers, without paying bribes. McDonald’s staying power in Russia is a testimony to long-term
On January 31, 1990, a ribbon-cutting ceremony kicked off the grand opening of the first restaurant, located in Moscow’s Pushkin Square.
NMI
MS

NOTES
PROF. DHAR: STRATEGY FOR COMMERCIAL SUCCESS

OF HIS INVENTION
Prof. Dhar, a physicist teaching at the Delhi University, told us
he has finally developed a low-cost alternative to the
traditional vision- correcting glasses. The dynamic new
product also does away with the need for a vision test, a visit
to the optician or an expensive prescription. According to Prof.
Dhar, the lenses for these glasses are made from pairs of
transparent membranes. Basically, they will be made of
Mylar, an inexpensive plastic made by DuPont. The spectacle
frame will contain a colourless silicone fluid, in two circular
“focus adjusters.” The power of the lenses can be adjusted
by twirling the adjusters which injects the silicone fluid
through a tiny hole in the frame. A thinner lens that reduces
magnification can correct farsightedness and a thicker lens
that increases magnification can correct near-sightedness.
The consumer can focus each eye himself and then seal off
the adjusters by sealing the hole. The glasses will now be
ready for use!
Prof. Dhar has spent 13 years working on his invention and
wants to position the product as a low cost alternative to the
more expensive traditional glasses that require optician
visits and prescriptions. Third world countries should be a
major market for these glasses. Here the need for basic
vision correction is pressing (among middle-aged and older
people) but there are few eye-care facilities. Also, a large
NMI
section of the population cannot afford the more expensive
traditional glasses. Lack of correct vision can take years off a
person’s working life especially in skilled professions like
tailoring, handlooms, carpet weaving and carpentry etc.
The adjustable glasses are superior to traditional ones as
MS
they are personalised by the buyer himself by using the
adjusters. Thus, they can be sold as a regular consumer
product. They are also cheaper, costing 100 per piece. One
of the limitations of these new glasses, though, is that they
cannot correct astigmatism, which is caused by an irregular
curvature of the eye lens. Market trials in Africa have been
encouraging. Prof. Dhar has put together a management
team that is currently working on making this project a
1. How does Prof. Dhar want to help the Indian

customers with their invention?
2. What kind of strategy can be adopted by Prof. Dhar to
get commercial success of his invention in domestic
as well as global market?
commercial success.

Education
NOTES
DUPONT
DuPont’s nylon provides a classic story of new-use

expansion. Every time nylon became a mature product,
DuPont found a new use. Nylon was first used in parachutes,
then as a fibre for women’s stockings; later, as a major
material in women’s blouses and men’s shirts; still later it
entered automobile tyres, seat upholstery and carpeting.
The recent discovery that the use of aspirin may lower the
incidence of heart attacks is expected to boost sales in the
analgesic market tremendously (Another discovery that
drinking tea boosts the body’s defences against infection
and tea actually contains a substance that might be turned
into a drug to protect against disease is likely to boost sales
of tea throughout the globe).
1. How did new expansion policies help DuPont to gain

success in their business?
2. What kind of expansion strategy was adopted by
DuPont to get commercial success of their diversified
business?
NMI
MS

NOTES
MARUTI SUZUKI INDIA LTD

Core competencies of an organisation can be simply defined
as a set of qualities, which are unique to a particular
organisation that cannot be easily imitated by its
competitors. Core competencies are factors which give
competitive advantage to the organisation in its chosen
market. Core competencies may be of various types -
technical expertise, relationship with customers, employees’
dedication, manufacturing process, etc. An analysis of the
Maruti Suzuki India Ltd. shows three core competencies:
Strong Customer Base and Brand Image, Well Developed
Sales and Service Network throughout India and Very Strong
Knowledge of Indian Market. A detailed study of these core
competencies shows how each of these core values can
improve the company’s competitive advantage.
Strong Customer Base and Brand Image
The MSIL has a market share of about 55% in the Indian
passenger car segment and is the largest manufacturer of
small cars in India. The company have been voted as first by
Indian customers for level of customer service and customer
satisfaction. The company manufactures affordable small
cars which serve the needs of an average Indian customer
faithfully and hence have a strong brand image as the
common man’s car in India, which an average Indian
customer identifies with. Such a strong brand image and
huge customer base can sustain the position of the company
NMI
as the market leader in the Indian small car segment.
Well Developed Sales and Service Network throughout India
The Maruti Suzuki India has a strong dealership network
comprising more than 450 cities across India and a huge
service network of more 2,750 franchises of service outlets
MS
spreading about 1,300 cities throughout India. Such a widely
distributed sales and service network can help the company
to relate with its customers across India, also facilitates
bargaining power with suppliers and increases profitability.
Very Strong Knowledge of Indian Market
The Maruti Suzuki India has a strong knowledge of the Indian
market which has helped them to grow their sales and
market share in India.
1. How core competencies of MSIL are explained in

above case?
2. What kind of strategy can be adopted by MSIL to get
commercial success of car business in domestic as
well as global market?
NOTES
LAKSHMI MACHINE WORKS LTD
The Coimbatore based, Lakshmi Machine Works Ltd. (LMW),
established in 1962, is one of the three companies in the
world making the entire range of spinning and weaving
machinery and the largest textile machine manufacturer in
India. In 1996, it had a turnover of about ` 600 crore in the `
1,500 crore-textile machinery market in India. LMW had a
fairly steady and fast growth. Its sales increased from ` 322
crore in 91-92 to ` 600 crore in 95-96 and the net profits
increased from about ` 44 crore to ` 52 crore during the
same period. On an average, more than 90 per cent of the
profits were ploughed back so that its reserves soared from
about ` 52 crore in 1991-92 to ` 176 crore in 1995-96. The
assets of the company, historically valued at ` 450 crore, was
estimated to be around ` 1,000 crore in current prices in
1996. LMW, which had a nearly zero debt position in 1994-
95, had a debt of ` 56 crore in 1995-96, necessitated by its
expansion and modernisation plans involving a total outlay
of ` 250 crore. LMW’s capacity was expanded by 40 per cent
and a new foundry was established to meet its requirements
of casting. It also invested ` 60 crore in a big iron
manufacturing unit to supply iron and steel for the company
and promoted units to ensure steady supply of components
at reasonable prices. LMW had also diversified into unrelated
businesses such as agro-business like oil palm-cultivation
and floriculture (investment: ` 11 crore) and granite
(investment: over ` 8 crore)
NMI
LMW have had no dearth of orders and its order books used
to be full for the next two or three years. Even in 1996-97
when there was recession it had orders worth more than `
2,000 crore. As the company took 10 per cent of the value of
the order as interest free advance it did not have to seek
MS
other sources for its working capital. Because of the heavy
order position, it took 18 to 24 months to deliver a machine
after order was placed with it. The management planned to
bring the delivery time to about 12 months.
The liberalisation has thrown up a number of threats and
challenges for LMW. The competitive environment has been
fast changing. The liberalisation of foreign investment
facilitated the entry of several foreign firms via the joint
venture route or the increase in their stake in the existing
ventures. Rieter Machine Works of Switzerland, who was
LMW’s technology supplier and who held 13% equity in LMW,
set up a 100 per cent subsidiary in India in 1995. Technology
agreements between Rieter and LMW for some of the
machines had already expired but not renewed and the
remaining ones were not expected to stretch further beyond
the expiry of the agreements. In the new business
environment, foreign firms would not be willing to part with
their latest technology without a controlling or significant
stake in the business.
Contd...
NOTES
LMW has set up a full-fledged R&D centre with the aim of
developing its own technology and has increased the
allocations for R&D. The machines of the foreign firms,
priced high, cater to the upper segment of the market. There
are textile firms which use both LMW machinery and that of
the foreign firms. The machines of the foreign firms are
generally used for production for the quality conscious
foreign markets. Although the size of the quality segment is
small now, the intensification of competition in the
international market for textile items following the phase out
of MFA as per the Urgency Round Agreement and the
expansion of the premium quality market segment in India
are expected to expand the demand for high quality
machines.
One of the important threats faced by the LMW has been the
import of second hand machinery, available at 50 to 60 per
cent of the price of new ones, the customs duty on such
machines having cut from 25 to 10 per cent. Although the
prices of new machines imported are 20 to 30 per cent
higher than the domestic ones, the delivery time in respect
of them is only 2 to 3 months, compared to 18 to 24 months
in the case of LMW.
In 1998-99, the textile industry being under recession, the
LMW faced some serious problems. Most of the spinning
mills opted to postpone their delivery schedules, although
they had placed orders by advance payments. Only some
mills confirmed their willingness to take delivery (and even
some of them have been reported to have gone back on
NMI
their promise). Yet, LMW had orders worth
` 1,250 crore in hand, which would take at least 18 months
to complete the execution on its enhanced capacity. Since
most of the textile machinery is tailor-made for each
customer, late changes in delivery schedules cause serious
problems. LMW’s inventory of finished goods in June 98 was
MS
reported to be at around ` 90 crore compared to average
monthly inventory of ` 20 crore in 1996-97, whereas there
was not a single machine in stock until the previous year
end. In 1997-98, net profit amounted to nearly ` 25 crore
(about 10 per cent increase over the previous year) on a
turnover of about ` 514 crore. The LMW script (face value `
100), which ruled at about ` 12,000 in April 1996 crashed to
nearly ` 5,000 in the next year and tumbled further about `
1,500 in 1998 but improved to over ` 2,000 in same year.
1. Make a SWOT analysis of LMW.

2. Suggest measures to overcome the problems faced in
the recessionary situation.
3. Analyze the above case study in your own words and
prepare a detailed note on it.

Education
NOTES
BHARAT PETROLEUM CORPORATION LTD
Burmah Oil Refineries Ltd. was incorporated in 1952 as a
joint venture between Burmah Oil Company, UK and Shell
Petroleum Company by an agreement with the Indian
Government to set up a refinery at Mahul in Mumbai, which
went on stream in 1957. In 1976 the Indian Government
nationalised the petroleum industry and acquired 100%
equity in Burmah Oil Refineries and named it Bharat
Refineries Ltd. The name was later changed to Bharat
Petroleum Corporation Ltd. (BPCL) in 1977.
BPCL was an integrated refining and marketing company. It
markets a diverse range of products from petrochemicals,
solvents, specialty lubricants, aviation fuel and LPG. The
Mahul refinery had a capacity of 6 million tons per annum
and it operated at 127% of the capacity in the year ending
March 2000. It also had an installed capacity of 98000 MT of
benzene, 17600 MT of Toluene, 90000 MT of lubricants and
10950 MT of sulphur. It was the first Indian industrial unit to
obtain ISO 9002 and ISO 14001 certification and the only
Indian Refinery (and one of the 34 refineries worldwide) to
achieve a Level 7 on the International Safety Rating System
(ISRS).
BPCL’s retail network was the third largest in the country
with around 4,500 retail outlets (petrol pumps/gas stations),
around 950 dealerships for kerosene and light diesel oil, and
1200 LPG distributors. It had 22 LPG bottling plants, 3 lube
NMI
blending and filling plants, 6 port installations, 13 aviation
service stations, 67 company operated depots and 23
dispatch units. It completed a 250 km long cross-country
pipeline between Mumbai and Manmad in March 1998. It
had a market share of around 22% in petroleum products
and 20% in LPG. In 2000, the total sales grossed over 36,000
MS
crore of rupees and 18.86 million tons of petroleum
products. Industrial customers contributed to 27% of sales,
LPG 7%, aviation fuel 3% and lubricants 0.5% of the total
sales. The refinery and the marketing infrastructure are
considered the best in the industry and most efficient.
Designing the New Structure
There was a clear consensus among the change
management team, top management team and the
consultants that the functional structure would not be able
to sustain initiatives taken to create the customer centric
organisation. The obvious solution was to create customer
centric Strategic Business Units (SBUs). The change
management team with assistance of the consultants
considered various options. The redesign process took about
a month. The CMD was personally involved in this. To
prevent any interference from day to day activities he
officially took leave and presented himself as a resource
person. The change team discussed the various choices in
structure with all the stakeholders. There were
Contd...
NOTES
apprehensions among senior managers regarding the new
structure and no consensus emerged on the new structure.
Politicking and power plays were observed, with each
function trying to retain the existing status in terms of
power and control. Finally the CMD personally called for a
meeting of the functional heads and other senior managers.
Asking the group to discuss, negotiate and come with a
concrete solution acceptable to everyone, he locked the
room and waited outside. Finally a design was approved that
was acceptable to all. The final structure was not the
optimum structure as envisioned by the change team but
one acceptable to all the members of the top management
team.
Implementation
The new structure was rolled out in phased manner to
ensure effective implementation. The new structure was first
implemented in the LPG SBU. Based on the experience, the
new design was implemented across the organisation with
necessary modifications. Further, in each of the proposed
SBUs specific regions were identified and the new structure
was implemented to verify the smooth functioning before
full implementation.
Organisational Structure
The older structure was functionally organised. There were
mainly four functions (refineries, marketing, finance and
personnel) each headed by an executive director reporting
to the CMD. Other support departments like corporate
NMI
affairs, legal, audit, vigilance, coordination and company
secretary were directly under the CMD. The Director refinery
was in charge of refinery, corporate planning, JV refineries
and special projects. Other than corporate finance and
marketing finance EDP was also under the Director finance.
In marketing, there were different departments for retail,
MS
industry, LPG, lubricants and aviation segments. Corporate
communication was also under Director marketing. The
whole of India was divided into four regions and further into
22 divisions. Each region was headed by a Regional Manager
who was in charge of all activities within the region and
reported to the Director marketing. Each region had a
manager in charge of each of regional personnel, regional
engineering, regional industrial customers, regional retail,
and regional finance. Regional LPG was under regional
industrial customers. The division was the responsibility of
the Divisional Manager reporting to the Regional Manager.
He had a manager each for sales, operations and
engineering. Each of these was responsible for sales, depots
and engineering respectively for all the customer segments.
Across the marketing function, except for the corporate
departments (LPG, industrial customer, etc.) specifically
looking after a customer segment, every individual and role
is focused on multiple customer segments. For example any
Education
s ategy addressing the industrial customers originates from
t the Corporate Department (Industrial Customer), goes via
r the
Contd...

Education
CASE STUDIES 397
NOTES
Director Marketing, Regional Manager, Divisional Manager to

the Sales Officer. All of them are responsible for multiple
customer segments like retail, LPG, industrial, etc. and deal
with different classes of customers. Hence, there was very
low customer awareness in terms of the unique needs of the
different customer segments, with no single individual at the
operational level having clarity on any single customer
segment. Moreover, the marketing strategy was formulated
by people who were far from the customer with very low
understanding of the customer they were targeting. The
implementers were responsible for diverse customers with a
low understanding of the logic of these strategies meant for
each customer segment. Thus, the old structure had created
a bottleneck between the strategy formulators and
implementers in terms of the regional structure, and
between the field staff and the corporate offices and refinery.
Activities of a business process are spread out across
different functions and levels of hierarchy, engaging many
individuals. There was a long chain of non-value adding
linkages between any two activities targeting a
business/customer. For example, when an industrial
customer gives a special order of lubes to the sales officer,
the corporate lubes purchases the base oil, plant blends it,
S&D packs it and the sales officer sells it. The Sales Officer
would communicate the order to the Divisional Manager,
who passes it on to the Regional Manager. Then the order
would be routed to the Corporate Lubes for processing.
NMI
Everyone involved in the activities of this process belong to
different functions and hierarchy levels. This long chain of
communication had led to a lack of customer orientation,
low awareness of customer needs and expectations and
slow response.
New SBU Structure
MS
The new structure was focused on the business processes
and the customer. The new structure at the top
management level is the same. Five SBUs – Retail, Lubes,
Industry/Commercial, LPG and Aviation are customer-centred
SBUs and come under the director (marketing). The sixth
SBU, Refinery along with two new departments IT & Supply
Chain and R&D are under the director (refineries). Each
SBU would have its own HR, IS, finance, logistics, sales,
engineering, etc. The number of layers in the organisation
was reduced to four from six or seven. The major change is
the introduction of the territories covering a smaller
geographical area and focusing on specific customer
segments. In retail SBU the new structure had 66 territories
reporting to the four regional offices, whereas in the earlier
structure there were only 22 divisions which catered to all
segments. In other SBUs the regional office was removed
and territories were designed to directly report to the SBU
heads. Each territory team leader was responsible for sales
in the territory only for a specific product. The territory
structure was designed to enable the field staff to focus on
specific customer segments. Authority was also delegated
Contd...
NOTES
down the hierarchy and decision making pushed to the
lowest possible levels. Decisions earlier taken at the regional
level were taken now at the territory level. Further authority
was delegated to the role and not the hierarchy level.
Administrative offices have been moved to supply locations
that consist of 125 terminals for main fuels and 35 LPG
bottling ones. In LPG SBU head office there are only nine
personnel and across the territories even managers at senior
positions have been forced to get business. The new design
incorporated recalibration of roles and responsibilities and
redeployment of more than two thousand people (around
one fifth of total employee strength) across the organisation.
It created new roles at the front effectively using redundant
manpower to increase customer interface and interaction.
Since the corporate and support functions are now located
within the SBUs the new design included lateral linkage
mechanisms. Governance Councils, Process Councils, and
Task forces (to address specific organisational issues) were
the mechanisms for integrating the different parts of the
organisation.
Some salient features of new structure were:
 Highly empowered work force
 Decentralised decision making
 De-linking of authority from hierarchical levels
 Orientation towards internal and external customers
NMI
 Regular market research and customer surveys
 Conscious brand building efforts
Addressing the participants of a Top Management Program at
IIM Ahmedabad Mr Sundararajan stated “One can be
MS
prepared to face the tiger but we will never know how one
will behave unless one faces the tiger. I feel we are prepared
for full deregulation but we will know how much only when it
becomes a reality.”
1. Prepare a detailed note on the SBU structure for BPCL.

2. Suggest measures to prepare and formulate the SBU
structure for BPCL.

Education
NOTES
STARBUCKS COFFEE COMPANY EXPANDING INTO INDIA

Current Situation
Starbucks is a provider of high-end coffee products and more
importantly, a relaxed experience. Starbucks as it is known
today was purchased in 1987 and has seen tremendous
amounts of growth over the years. The company is known
globally and does business internationally, although it’s
headquartered in the United States. Starbucks has
historically had a differentiation strategy, with prices
comparably high and uniquely high-quality products, service
and environment for the consumer. This differentiation
strategy is used with a horizontal growth strategy
internationally. Starbucks currently has a market expansion
strategy focused around Asia, and has recently seen both
problems and great sales figures arise from this market in
China and Japan. The objective of this strategic campaign is
to capitalise on the highly dense Asian market, with its high
population and growing wealth. In 2002, Starbucks
announced that it intended on breaking into the Indian
market, however has failed to do so four years later. The
problem facing Starbucks right now is whether or not to
expand into India and if the company were to expand, how it
would go about doing so. If Starbucks does decide to expand
into India with a promising strategy, there is still the problem
of finding a suitable partner currently in India to form a
partnership with. Environmental scanning involves the
NMI
external factor analysis and the external opportunities and
threats that face Starbucks. These will later be addressed
in terms of how they can be taken advantage of or avoided.
The opportunities that Starbucks may take advantage of
are the Indian interest in Western brands, the geographic
popularity of coffee, the characteristics of the Indian
MS
population, and the market for the product. Threats to
Starbucks include the obesity and obesity-related disease
rate in India, the beverage habits in India, barriers to entry,
the conflict seen within global policies, and established
competition. The internal factor analysis shows the internal
strengths and weaknesses that Starbucks has and will either
use to an advantage or try to minimise. Starbucks’ strengths
include its strong company mission, vision and values, the
company’s brand awareness, the experience Starbucks has
in expanding into global markets, high buying power and
high quality products. Weaknesses of Starbucks include the
lack of a presence in India, which is a highly populated
country, Starbucks’ premium priced products, small product
breadth and the company’s corporate structure. These
external and internal factors are then combined in the
strategic factor analysis show the most influential factors of
a company’s environment. The internal factors chosen by a
weighted score include the experience in expanding into
global markets, the strong company mission, vision and
values, the small product breadth and the premium priced
products.
Contd...
NOTES
The external factors chosen based on a weighted score
include the Indian population, the geographic popularity of
coffee, established competition and beverage habits in
India. These factors are also given a time range in regard to
when they affect the company, such as Starbucks’
experience in expanding into global markets will help them
in the long run rather than immediately in the short run.
These important factors of the environment are then used in
a TOWS Matrix to show different business strategies that can
be used based on these factors. One SO strategy that can be
used is to examine past successful global expansions in
Starbucks’ history and imitate the methods used there and
the lessons learned in these countries. An example of a ST
strategy is to acquire the best Indian ingredients for local
Indian tea for use in Indian Starbucks. One WO strategy
within the TOWS Matrix is to increase product breadth by
adding more varieties of coffee, beverages, snacks, etc. This
is more likely to appeal to a broader range of the population
and will make it easier for Starbucks to penetrate into the
Indian market. A WT strategy that Starbucks may wish to
use is to set a price penetration strategy when first
expanding into India. It has been stated that Starbucks will
adjust its prices for India, but these prices should be lower
than the competitors’ in order to gain immediate customers.
Recommendation
It is recommended that Starbucks expand into India
immediately, as to avoid letting its current competition
NMI
expand. Starbucks cannot carry over its same business
operations as it had in other countries however, and must
instead adapt and change as it did in Japan.
Recommendations for the expansion of Starbucks into India
include: Contact Pantaloons Retail in regards to forming a
MS
partnership in India. This possible partner has over 100
stores in Indian cities, where the target market of Starbucks
lives. The partner also owns Big Bazaar, Food Bazaar, and
Pantaloons, which have comparably high sales and would be
good start-off locations for Starbucks outlets. The group has
revenues of $10.73 billion, as of 2005. Advertise heavily in
urban areas. This is where Starbucks’ target market lives, so
this should be where the Starbucks’ brand is recognised the
most. Use the challenges faced when expanding into China
and Japan as examples to adapt quickly to the customer
need. Certain needs can be met to satisfy the new customer
base while still maintaining the same vision, mission and
values. Adjust Starbucks positioning to reflect its
differentiation strategy. The local competition already has a
dominating amount of market share and provides the
service in India that Starbucks is known for in the U.S., only
better than Starbucks does. Instead of being known as the
place to get gourmet coffee in India, position Starbucks to
be the place to relax in style with a coffee. Continuously
analyse the competition’s expansion methods.
Education
Contd...

Education
CASE STUDIES 401
NOTES
Starbucks has vast experience expanding and can capitalise

on any mistakes made by the competition. Consider
expanding product breadth in the future to include a larger
variety of tea-based products, primarily iced teas, and
preferably using Indian-grown ingredients. This larger
product line should also include spices that may mix well
with tea, coffee or other Starbucks products. It is believed
that if Starbucks uses this strategy with these guidelines,
then it will be able to effectively expand into India.
Strategy Implementation Plan
Starbucks must contact Pantaloons Retail to form a
partnership with this company. In doing so, Starbucks will
have its foot in the door in India. Pantaloons Retail also
operates several chains of retail stores, which Starbucks could
set up small outlets inside of, or in cooperation with. It is also
likely that the experience this partner has with the food
industry (Food Bazaar) in India will be beneficial to the initial
Starbucks development team. It can only be assumed
through the company’s current fiscal situation and its
projected sales that Pantaloons Retail has high brand name
recognition and a good reputation in its field, which is
essential in a partnership with Starbucks. Starbucks will be
implementing a market expansion strategy, focused around
horizontal growth through differentiation.
Action Plan
CEO, Howard Schultz, must contact CEO of Pantaloons Retail
NMI
about forming a partnership in India. This is the first step in
forming a partnership with the firm, so this action must be
taken immediately. In three months, plans for the installation
of Starbucks outlets in Pantaloons Retail owned centres must
be underway. If partnership is agreed upon, nine months is
the cut-off date in which one Starbucks outlet is to begin
MS
construction within a Pantaloons Retail store. As a
precaution, Howard Schultz should remain in contact with
another possible partner, the K Raheja Group. Operations
managers should inquire with third party manufactures in
India about the local supply of raw materials, and focusing
on acquiring locally grown ingredients for spices and teas.
This action must start immediately, at least six months prior
to the first opening of a Starbucks branch in Mumbai, India.
The CEO will be directly responsible for overseeing the
timeliness and effectiveness of this action. This is expected
to lower variable costs due to non-international shipping,
with a contingency plan of shipping raw materials from
Starbucks’ prior roasting facility in Kent. An international
advertising team will be sent to Mumbai, India, two months
prior to the installation of the new Starbucks branch to
ensure proper advertisements are in place for the incoming
store. This team will stay abroad for one year until a
localised advertising team can be trained in India. The CMO
will be responsible for overseeing the timeliness and
effectiveness
Contd...
NOTES
of this team. This action is in an attempt to increase sales,
but requires a high rate of fixed costs in terms of advertising
expenses and salaries. The contingency plan for this action
is to hire a local advertising consultant firm located in India.
This may drastically modify the general message of the
marketing mix of Starbucks in India, and may be more
expensive, but may be more effective in reaching the target
audience due to cultural familiarity.
Evaluation and Control
Starbucks encountered several problems when expanding
into China and Japan, which need to be avoided when
expanding into India.
Japan: Starbucks locations too close in proximity, Lacked
enough food options for Japanese culture, No-smoking policy
conflicts with Japanese societal habits, High rent, High cost
of labour Starbucks didn’t have a roasting facility in Japan.
China: Many opposed a Western coffee chain in China -
traditionally a tea country and dominance of instant coffee
intense competition. These concerns will be assessed and
adjusted if needed, every quarter, using the balanced
scorecard approach as follows:
 Financial: How are Starbucks sales figures progressing
compared to the projected sales for the year in India?
Are any locations of Starbucks gaining/losing
profitability? Is this due to close proximity to another
Starbucks? Is Starbucks in India keeping up with the
NMI
growing market trends towards coffee in India? If not,
compare to competition and instant coffee
manufacturers. How does the contribution margin of
Starbucks in India compare to other international
markets? Is there a higher fixed cost/variable cost rate
MS
that needs to be allocated for and if need be, used to
readjust pricing?
 Customer: Conduct in-store surveys bi-annually to get
customer feedback and suggestions. This will give
insight into any problems like lack of variety in food or
problems with Starbucks policy like the no-smoking
policy. Conduct geographical surveys to see if any region
is less likely to have Starbucks consumers in it. This
may be due to cultural opinions towards Western
business expansion.
 Internal Business Perspective: Examine weak points within
the new Starbucks outlets in India on an individual
basis. Are there any outlets that do not reflect the
differentiation strategy used by Starbucks? How can this
be adjusted?
 Innovation and Learning: Are sales and brand awareness
increasing at a rate in India that would warrant further
expansion? Are there opportunities that are not being
t en advantage of? After these evaluations are
a assessed, control
k
Contd...
CASE STUDIES 403
NOTES
can be implemented on an organisational level. After every financial quarter, these factors must be recognised and adjusted to maximise S
Prepare a SWOT Analysis and TOWS Analysis for Starbucks for Indi
Suggest measures and strategy for Starbucks for successful expans
NMI
MS

NOTES
THE CASE OF GLAMOUR POSITIONING
Lyrix was an acquisition that made MAS limited proud, no
doubt. And its Managing Director, Shrishti Tandon, 44, was
rather enjoying the business of marketing a 60-year-old
brand with such awesome credentials. As a pioneer of
sunglasses designed to block ultraviolet and other harsh
rays, the brand had proven its eyecare expertise before it
was adopted as a standard accessory by film stars, at first
as a shield against glare (their natural defences having
weakened by hours of arclight exposure), and then as part of
their offscreen persona. Slowly but surely, Lyrix became so
well associated with glamour and fame that it became a
fashion statement. And so it continued.
Of late, however, it was floundering a bit. And Tandon was
worried. Market growth was not the issue: it was doing
double digits. The trouble was that it was no longer the only
big name around. In just about a year, fresh competition had
lowered Lyrix’s marketshare from 55 to 50 per cent. The
brand was doing particularly badly with female buyers. Its
classic design, for example, was seen as rather too
masculine, too functional and too under-stylised. The hot
new shades from the Italian fashion houses, on the other
hand, were all the rage on college campuses.
Uday Agarwal, 34, Marketing Manager, MAS, thought it was
time to rethink the brand’s strategy, starting with the
product portfolio. “Fashionable metro consumers are asking
for and willing to pay for the latest international styles,” said
NMI
Agarwal, “Their media exposure to global glamour has risen
exponentially, and everyone wants to be ‘with it’.”
“But we have some of the latest styles,” objected Tandon,
“and they’re being endorsed by some of the coolest
celebrities.”
MS
Agarwal wasn’t impressed. “Our last few promotions, even
with cricket celebs, weren’t runaway successes though,” he
countered, aware that Tandon had seen the sales charts. “I
think we have to question our earlier assumption that rising
fashion consciousness will work in our favour.”
“Don’t go just by the upper-crust,” said Tandon, “this is a
vast country, and we still have half the market.”
“Half, and falling,” said Agarwal, gloomily. “Besides, with
multiple ownership rising, the upper-end matters a lot.”
Tandon paused for a moment’s thought. The days that the
brand advertised itself as a UV ray filter were long past, and
for most of the 1990s, the thrust had been to raise volumes
by expanding distribution (to B and even C class towns),
containing prices within the Rs 1,000-2,000 band, and
appealing to the fashion aspirant. The brand, thus, had
been portrayed as an accessory for the cool,
Contd...
NOTES
confident individual who was not afraid to be him or her self.

The emphasis was on the classic model. Over-styling, it was
reckoned, would’ve put this consumer off. In the past two
years, Lyrix had used an edgy TV campaign to give itself a
more yuppie image. But the product range remained the
same, with a few additions here and there. So it was natural,
Tandon was willing to concede, that Lyrix was seen by
youngsters as a serious brand for the 35-plus.
“I feel that youngsters want sleek and snazzy designs that
stand out,” said Agarwal, “the kind that make a statement
not just by virtue of being sunshades, but by giving a
distinct look to the face.”
Tandon nodded unconsciously. Was the market changing
faster than she’d noticed? It was true that the entire
shopping environment had got spruced up, of late, with
glitzy malls opening up. Merchandising standards had risen
sharply. Indian film stars had turned trendy even by
international reckoning. And the typical youngster did not
want to be typical any more. Blending in was out, standing
out was in.
And the droolworthy sunshades displayed at the spiffy new
superstores, Tandon realised, were not Lyrix pairs, but a
clutch of other imported brands. Yet, volume growth was
important to her, and here, a major part of the battle was
tackling the unorganised sector-the Lyrix counterfeits that
damaged people’s eyes but continued to attract people with
their throwaway prices.
NMI
“Uday,” said the managing director, “I appreciate your
worries about the top-end, but there’s a bigger picture to
work on. Staving off the fakes is our leadership
responsibility. And for that, I think we need to re-emphasise
the eye-care attributes of the brand.”
MS
Agarwal was alarmed. “Abandon the glamour positioning?”
he asked, his eyebrows raised high.
“I didn’t say that,” replied Tandon, aware that the lifestyle
motive was still stronger than the ray-protection motive.
“And don’t give me that Jim Carrey look from ‘The Truman
Show’-you know that the brand has a lot of science behind
the starry sex appeal.”
“Yeah, sure,” admitted Agarwal, “we must do whatever is
strategically necessary.”
“Good,” said Tandon. “Now why don’t you work out the
potential sales boost we can get from attacking the fakes?
Income levels have risen at lower socio-economic levels as
well, and we may get bigger volumes here, than by
worrying about Pavretti, Milano and other highfalutin labels.
Besides, we must never alienate the lifelong Lyrix loyalist-
who has expectations of the brand on various rational and
emotional levels.”
Agarwal felt his gut churn. Would this spell the end of his
new marketing proposal, he wondered.
Contd...
NOTES
Tandon continued. “We need to address both the hip and the health
market ,” she said, “that’s what Lyrix’s brand heritage is all about- you know that.”
Agarwal sighed. And then spoke. “Oh, I’d thought we could turn our product lines a little more lyri
Tandon said nothing.
NMI
MS
NOTES
HUMAN RESOURCES
The president has called a meeting to get your feedback on
Jack, a department manager. Jack is what some people call
“from the old school” of management. He is gruff, bossy, and
often shows an “it’s my way or the highway” attitude. Jack is
about five years from retirement.
Jack has a high turnover rate in his department. There have
been several complaints on company surveys about him
from his department and from outside his department.
People have commented on the fact that Jack is “rude”
during meetings and doesn’t let others contribute. There are
times when he has belittled people in meetings and in the
hallway. He also talks about his staff “critically” or
“negatively” to other managers.
But Jack also is a brilliantly talented person who adds a vast
amount of needed knowledge and experience to the
company. He is extremely dedicated to the company and lets
people know this by his arrival each day at 6:30 a.m. and his
departure at 6:00 p.m. He has been with the company for 32
years and he reports directly to the president.
Jack has gone to the HR department and complained that
the people his supervisors hire are not a good fit for the
company. The new employees don’t listen and they have a
poor work ethic. Jack feels that HR should do a better job
screening people.
1.
NMI
What suggestions do you have for the president on
how to coach Jack and develop a personal
improvement plan?
MS
2. What areas would you suggest be first on
Jack’simprovement plan?

NOTES
ORGANISATION DESIGN
Matt owns 10 mobile phone shops located across Northern
Ireland. Although each outlet trades under the same name,
Chatz, they are all very different. This is because Matt has
always allowed the manager within each shop to have
complete control over their respective outlet. Therefore,
each of the stores has its own unique character in terms of
store layout, presentation and location. They stock different
brands of mobile phone and accessories and buy from
different suppliers. Each of the stores is promoted locally.
Whilst this approach has served the business well in the
past, Matt is planning to appoint a Purchasing Manager to
take responsibility for stock purchases for all outlets.
Increasing levels of competition from national supermarkets
and changes in consumer tastes have convinced Matt to
centralise the decision-making process within Chatz. It is
anticipated that many of the current responsibilities
undertaken by store managers will be transferred to Head
Office within the next 3 months. In considering the
appointment of a Purchasing Manager, Matt is conscious of
the need to widen the ‘span of control’ that this individual
would have, to include supervisory duties related to
successful management of stocks and the warehouse
operations. Matt owns 10 mobile phone shops located across
Northern Ireland. Although each outlet trades under the
same name, Chatz, they are all very different. This is
because Matt has always allowed the manager within each
NMI
shop to have complete control over their respective outlet.
Therefore, each of the stores has its own unique character in
terms of store layout, presentation and location. They stock
different brands of mobile phone and accessories and buy
from different suppliers. Each of the stores is promoted
locally.
1.
2. MS
Explain what is meant by ‘organizational design’.
Explain two ways in which Matt could design the
organization structure of Chatz.
NOTES
AFTERMATH OF A TRAGEDY
Shortly after midnight, on December 3, 1984, outside Bhopal,
India,
a cloud of deadly methyl isocyanate gas leaked from a
pesticide plant, owned by the Indian subsidiary of Union
Carbide. The choking gas covered the town, quickly killing
hundreds – including many children, who were less resistant
to the gas than adults – and forcing Bhopal’s 6,70,000
inhabitants to flee in panic. By the end of the week, more
than 2,000 people had died from inhaling the gas, and
150,000 more had to be hospitalised for respiratory and eye
damage, making Bhopal’s ‘night of death’ the worst
industrial disaster in history. Images of stunned families
burying or burning their relatives and blaming Union Carbide
for their agony were broadcast worldwide.
There were immediate repercussions for Union Carbide and
for the chemical industry as well. The Indian government
accused the plant management of failing to take adequate
safety precautions and indicated that it held the parent
company ultimately responsible. Lawsuits brought by
American lawyers on behalf of the victims asked for billions
of dollars in compensatory and punitive damages and
threatened to send the company into bankruptcy. Union
Carbide’s stock price plummeted; it halted production of
methyl isocyanate at its West Virginia plant that produced
the chemical in the United States.
NMI
Officials in the United States and India called for increased
regulation and inspection of chemical processing plants.
Many US localities considered passing “right-to-know” laws
that would require chemical companies to provide detailed
information about hazardous materials to the employees
who make them and to residents living near the plants.
MS
Several companies countered with voluntary right-to-know
programmes to head off public sentiment for government
regulation. In the wake of protests against Union Carbide in
other parts of the world, some multinational corporations
claimed that the Bhopal disaster had chilled the
international climate for US business.
Union Carbide, which had earned an above-average record
on industrial safety over the decade preceding the disaster,
appeared paralysed by the magnitude of Bhopal’s suffering.
Corporate Chairman, Warren Anderson, rushed to India to
inspect the site and was briefly arrested by Indian
authorities. Union Carbide’s one lakh employees observed a
moment of silence for the dead and injured; many donated
money for disaster relief. Top management spent sleepless
nights grappling with the company’s crushing problems and
its uncertain future. Morale at the company was low;
production at many plants temporarily dropped. However,
while expressing profound sympathy for the Bhopal victims
and promising to make a fair restitution, Union Carbide
maintained its essential innocence. “There’s no criminal
responsibility here,”
Contd...
NOTES
said Anderson. Shortly after midnight, on December 3, 1984,
outside Bhopal, India, a cloud of deadly methyl isocyanate
gas leaked from a pesticide plant, owned by the Indian
subsidiary of Union Carbide. The choking gas covered the
town, quickly killing hundreds – including many children,
who were less resistant to the gas than adults – and forcing
Bhopal’s 6,70,000 inhabitants to flee in panic. By the end of
the week, more than 2,000 people had died from inhaling
the gas, and 150,000 more had to be hospitalised for
respiratory and eye damage, making Bhopal’s ‘night of
death’ the worst industrial disaster in history. Images of
stunned families burying or burning their relatives and
blaming Union Carbide for their agony were broadcast
worldwide.
There were immediate repercussions for Union Carbide and
for the chemical industry as well. The Indian government
accused the plant management of failing to take adequate
safety precautions and indicated that it held the parent
company ultimately responsible. Lawsuits brought by
American lawyers on behalf of the victims asked for billions
of dollars in compensatory and punitive damages and
threatened to send the company into bankruptcy. Union
Carbide’s stock price plummeted; it halted production of
methyl isocyanate at its West Virginia plant that produced
the chemical in the United States.
1. What are the key issues in this case?
NMI
2. What do you think the long-term effects of the
disaster will be on the company?
MS

Education
NOTES
DIFFERENTIAL TOXICITY OF PARTICLE

CONSTITUENTS
For regulatory analyses and other risk assessments
addressing PM, it is important to know whether different
particle constituents have different levels of toxicity, as
control strategies may target some particle constituents
but not others. This question has been looked at
extensively by the EPA and others, with the conclusion that
the literature was not yet sufficient to develop constituent-
specific concentration-response functions. As discussed in
our recent publication, the literature could be insufficient
because of a lack of relevant studies, or because the
studies had methodological limitations or substantial
variability in approaches that makes it challenging to
synthesize the literature.
Our analysis was conducted in two stages. In the first
stage, we formally examined and synthesized the
published epidemiological literature to determine if it
provided the information necessary for a risk assessment
application. Specifically, we searched for studies that
provided estimates for four major particle constituents of
regulatory interest (sulfate, nitrate, elemental carbon,
organic carbon), as derived from multi-constituent models.
Concentrations of particle constituents may be correlated
with one another and multiple constituents influence
health outcomes, so models that only include individual
NMI
constituents could provide biased concentration-response
functions. We also considered it important to calculate the
probability that one constituent was more toxic than
another, rather than simply giving central estimates or
confidence intervals that do not allow for comparisons
between constituents. Risk assessments require
MS
uncertainty characterization, but assumptions that
estimates were uncorrelated with one another could be
unfounded.
In the second stage, we conducted a new epidemiological
investigation, with the primary objective depending in
part on the results of the first stage of our analysis. If the
literature synthesis provided robust and interpretable
concentration- response functions for all constituents, then
the epidemiological investigation would examine the
difference between estimates from aliteraturemeta-
analysis and alargemulti-city investigation. This would
help address questions about the importance of
methodological choices in the literature or the possibility of
publication bias. If the literature synthesis found significant
methodological concerns with the published literature,
then we would design and implement a new
epidemiological investigation with the objective of yielding
all of the requisite information for a multi-constituent risk
assessment application. In our literature synthesis, we first
reviewed the abstracts of 1,338 articles that addressed PM
and health, identifying 65 epidemiological studies
evaluating at least one of the four particle constituents of
interest.
Contd...
NOTES
Focusing on a subset of 42 published studies that provided
adequate information to generate concentration-response
functions for at least one constituent, we determined that
the evidence base did not meet the criteria described above.
Specifically, only eight of the 42 studies provided
quantitative effect estimates for all four constituents, and
most studies reported effect estimates for single-
constituent models or implemented multiconstituent models
but did not report quantitative findings for all constituents.
No study provided information necessary to quantify the
probability that a given constituent was more toxic than
another constituent or to determine correlations among
effect estimates. To be clear, this did not imply that these
were fundamentally flawed epidemiological studies, but
rather that they were not designed to give inputs to specific
types of risk assessment applications. Stated another way,
most of these epidemiological studies were trying to
determine which particle constituents were most strongly
associated with health outcomes of interest, not what the
concentration-response functions for all constituents might
be. Our new epidemiological study was therefore intended to
provide all of the information that would be needed for risk
assessment but was not available from a synthesis of the
published literature. Specifically, we applied identical
methods to hospital admissions data from 119 counties in
the US, yielding county-level estimates that could be readily
aggregated at the regional or national level. We incorporated
NMI
all four constituents into multi-constituent models. We
explicitly reported central estimates and confidence
intervals for all four constituents, along with the
correlations between each pair of beta coefficients, which
would allow for uncertainties to be appropriately
incorporated into multi-constituent risk assessments. We
MS
used the joint posterior distribution of the health effects of
the four constituents, coupled with the posterior
distribution of their covariance matrix, to estimate the
probability that each constituent was more toxic than each
other constituent. This provides quantitative insight
regarding whether the evidence was sufficient to infer
differential toxicity values or whether identical values could
be utilized. We were also able to use these outputs to
determine probability distributions of ratios of toxicity
values, given that risk assessment studies have
incorporated such ratios into previous differential toxicity
analyses without consideration of the likely degree of
uncertainty.
The specific findings from our new epidemiological
investigation are reported elsewhere, but in general, our
analytical approach provided information that would allow
for risk assessments incorporating differential toxicity to be
conducted, which would have been Challenging from the
published literature. For example, we found high
probabilities (> 0.99) that elemental carbon had greater
Education
t icity per unit concentrations than other particle constituents
o for Cardiovascular hospital admissions, with weaker
x Contd...

Education
CASE STUDIES 413
NOTES
evidence of differential toxicity for respiratory hospital admissions. We also found that multiple beta coefficients were significantly correlat
NMI
MS

Strategic Management (Modified)

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C H

INTRODUCTION TO STRATEGIC MANAGEMENT

NMIMS Global Access – School for Continuing

NMIMS Global Access – School for Continuing

RISE AND DOWNFALL OF KODAK

NMIMS Global Access – School for Continuing

NMIMS Global Access – School for Continuing

Fill in the blanks:

1.3 NATURE OF STRATEGIC MANAGEMENT

Fill in the blank:

Fill in the blank:

NOTES number of firms are using strategic management for the

Fill in the blank:

1.6 STRATEGIC MANAGEMENT PROCESS

TABLE 1.1: STEPS INVOLVED IN THE STRATEGIC

Elements Questions Description

N Agreement on and initiation of the strategic management process.

The organisation establishes long-term goals and objectives.

The organisation chooses from alternative courses of action.

The organisation implements the choices to achieve strategic fit.

The organisation monitors the implementation activity.

1.6.1 STRATEGY LEVELS

NOTES within the business unit and coordinating functional-level

1.6.2 TYPOLOGIES AND METHODS OF STRATEGY

TABLE 1.2: TYPOLOGIES AND METHODS OF

Strategy Typologies/ Methods

NOTES  Choose only one target at a time.

NOTES  Diversification: The company tries to conquer new markets

BOX 1.1: BHEL AND ALSTOM IN TECHNOLOGY TIE-UP

Miles & Snow Strategy of Firms Typology

NOTES within a given industry into four groups, i.e. defenders,

Fill in the blanks:

NOTES According to Collins and Porras, a well-conceived vision

1.7.1 DEFINING VISION

1.7.2 NATURE OF VISION

NOTES  “Eliminate what annoys our bankers and customers”

1.7.3 CHARACTERISTICS OF VISION STATEMENTS

Fill in the blanks:

1.8.1 DEFINING MISSION

NOTES  Cadbury India: “To attain leadership position in the

1.8.2 IMPORTANCE OF MISSION STATEMENT

1.8.3 CHARACTERISTICS OF A MISSION STATEMENT

NOTES  Dynamic: A mission statement should be dynamic in

1.8.4 COMPONENTS OF A MISSION STATEMENT

1.8.5 FORMULATION OF MISSION STATEMENT

NOTES company, which for many years sought to challenge the

BOX 1.2: MISSION OF TWO GLOBAL COMPANIES

1.8.6 EVALUATING MISSION STATEMENT

Fill in the blanks:

NOTES are already being given at the beginning of the chapter. In

Figure 1.4: Components of Strategic Management

Fill in the blank:

NOTES  Strategic management is a question of interpreting, and

1.11 DESCRIPTIVE QUESTIONS

1.12 ANSWERS AND HINTS

Topic Q.No. Answers

NOTES HINTS FOR DESCRIPTIVE QUESTIONS

NOTES 1.13 SUGGESTED READINGS FOR REFERENCE

MODELS OF STRATEGIC MANAGEMENT