Chapter 1: Strategic Management, the Challenge of

the New Century

Chapter 1:
• Strategic management process
• Strategic management challenges
• Strategic vision and intent
• Strategic mission
• Landscape of business in the new century
• Global economic scenario
• Development of strategic competitiveness

Strategic Management and Process

Strategic management is the organization’s management of its overall long-term purpose. It must not be confused
with strategy, which is an organization’s whole approach for directing operations to achieve the organization’s long-
term purpose. An organization’s strategy must be used to guide and align the formation of sub-strategies in different
parts of the organization.

Purpose - is the main reason why the organization exist. It is usually the vision of the organization. The top
management is the one who is responsible for articulating what is the purpose of the organization and communicate
their purpose statements as vision, mission and values.

Situation analysis - is very important. The organization must evaluate the current external and internal situation. Their
evaluation is used to achieve strategic objectives.

Strategy - These are used to achieve the strategic objectives conditioned by the organization.

Implementation: These includes organizing, controlling and learning through the performance of the management.

However, the effectiveness of the organization's strategic management depends on the nature and commitment of
top management and its strategic leadership.

Consider the case of Twitter...

Reference:
Witcher, B. J., & Chau, V. S. (2010). Strategic management: Principles and practice. Cengage Learning EMEA.
Strategic Management and Challenges
WHY IS TWITTER STRUGGLING?

In contrast, why are Facebook and Google so successful? For that matter, why is any company successful? What
enables some firms to gain and then sustain their competitive advantage over time? Why do once-great firms fail?
How can managers influence firm performance? These are the big questions that define strategic management.

Strategic management is the integrative management field that combines analysis, formulation, and implementation
in the quest for competitive advantage. Mastery of strategic management enables you to view a firm in its entirety. It
also enables you to think like a general manager to help position your firm for superior performance.

The strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to
competitors. To achieve superior performance, companies compete for resources: New ventures compete for financial
and human capital. Existing companies compete for profitable growth. Charities compete for donations, and
universities compete for the best students and professors. Sports teams compete for championships, while celebrities
compete for media attention.

A good strategy consists of three elements:

1. A diagnosis of the competitive challenge. This element is accomplished through analysis of the firm’s external and
internal environments.

2. A guiding policy to address the competitive challenge. This element is accomplished through strategy formulation,
resulting in the firm’s corporate, business, and functional strategies.

3. A set of coherent actions to implement the firm’s guiding policy.

THE COMPETITIVE CHALLENGE. A good strategy needs to start with a clear and critical diagnosis of the competitive
challenge. The Case indicates that the biggest competitive challenge for Twitter is to grow its user base to become
more valuable for online advertisers. With some 300 million active users compared to Facebook’s roughly 1.5 billion
monthly users, Twitter is viewed by advertisers as a niche application. Companies direct the bulk of their digital ad
dollars to Facebook and Google rather than Twitter.

Moreover, Twitter suffers in comparison to Facebook for reasons other than sheer scale. Facebook allows advertisers
to target their online ads much more precisely based on a host of demographic data that the social network collects
and infers about each user, including birth year, university affiliation, network of friends, interests, and so on.

A GUIDING POLICY. Next, after the diagnosis of the competitive challenge, the strategist needs to formulate an
effective guiding policy in response. The formulated strategy needs to be consistent, often backed up with strategic
commitments such as sizable investments or changes to an organization’s incentive and reward system—big changes
that cannot be easily reversed. Without consistency in a firm’s guiding policy, a firm’s employees become confused
and cannot make effective day-to-day decisions that support the overall strategy. Without consistency in strategy,
moreover, other stakeholders, including investors, also become frustrated.

Here is where Twitter’s problems begin. While its leaders are well aware of the competitive challenge it faces and have
diagnosed this challenge correctly, they still lack a clear, guiding policy for facing this challenge. They could respond to
it by taking steps to accelerate user sign-ups and usage. For example, such steps could include making the sign-up
process and use of the services easier, explaining the sometimes-idiosyncratic conventions on Twitter to a broader
audience, and rooting out offensive content. However, rather than formulating a guiding policy to grow active core
users, Twitter has emphasized defining its user base more broadly. When serving as CEO, Costolo specifically declared
that the company should be seen as “three geometrically [con]centric circles” reflecting three types of users. The first
inner circle represents direct users of the social media service; the second, visitors to the Twitter site who do not log
in; and the third, people who view Twitter content on affiliate sites such as cable news networks, live sportscasts, and
other websites.

Twitter decided that it should henceforth pursue all three types of users. The goal of providing a new definition of
Twitter users is clear: To expand the perception of its reach so as to compare more favorably to Facebook. Changing
the definition of users, however, is not sufficient to address the competitive challenge of growing the base of core
users. Moreover, users in the second and third circle are harder to track, and more importantly, they are also much
less valuable to advertisers than core users.

COHERENT ACTIONS. Finally, a clear guiding policy needs to be implemented with a set of coherent actions.
Changing the goalpost of which users to go after not only confused management, but it also limited functional
guidance for employees in day-to-day operations. Consequences of an unclear mission followed: Frustration among
managers and engineers increased, leading to turnover of key personnel. Internal turmoil was further stoked by a
number of management demotions as well as promotions of close personal friends of the respective CEO. From its
inception, Twitter’s culture has been hampered by infighting and public intrigues among co-founders and other early
leaders.

In summary, a good strategy is more than a mere goal or a company slogan. Declaring that Twitter’s “ambition is to
have the largest audience in the world”8 is not a good strategy; it is no strategy at all. Rather it is a mere statement
of desire. In creating a good strategy, three steps are crucial. First, a good strategy defines the competitive
challenges facing an organization through a critical and honest assessment of the status quo. Second, a good
strategy provides an overarching approach on how to deal with the competitive challenges identified. The approach
needs to be communicated in policies that provide clear guidance for all employees involved. Last, a good strategy
requires effective implementation through a coherent set of actions.

Rothaermel, Frank T. Strategic management: concepts. Vol. 2. McGraw-Hill Education, 2016.

Strategic Vision and Intent

Vision Statements
Visions are drawn up in document form as a statement of intent. They are typically short and memorably ambitious
but not overblown. A vision will provide the basic rationale for change to ensure that the reasons and the broad
implications for action are obvious. Its inspirational qualities should excite and motivate enough to encourage people
to stretch possibilities and rethink their work. But it also needs to seem realistic – so senior managers need to walk a
narrow line between distant ambition and the possibility ties of getting there carefully. The development of a vision
needs to take into account an organization’s situation with regard to both the external and the participation of an
organization’s important stakeholders. A particular kind of vision statement is a simple ‘big idea’ – something very
different that will change an organization. This can be used as a memorable catchphrase to be easily communicated
as a slogan to spur people on to make exceptional efforts.

A word of warning is necessary: vision statements should be meaningful statements useful to guide activities in a
desired direction and should not be reduced to superficial slogans. It is also essential to understand that they have a
different role from that of mission statements.

Mission Statements
A mission statement explains why an organization exists. It explains the scope of what an organization does and
typically will have a rationale to explain how it adds stakeholder value. The style and the form of statements vary
considerably in practice since organizations use them in different ways. For example, a statement can be used for
public relations to influence important publics or for marketing to indicate a distinctiveness that stands out against
competitors. Care is necessary to ensure that an organization is able to live up to its claims. The statement may claim
excellence and quality, but if it fails to deliver these, the organization’s reputation will suffer. Platitudes like ‘we make
your life better’ can leave both customers and employees feeling cynical.
The importance of stakeholders to mission is important. Stakeholders are individuals and groups who benefit directly
by receiving value from what an organization does and provides. This includes, of course, shareholders and other
groups who invest in an organization. They may also include employees, suppliers, and facilitators, such as partners
and more broadly society and government. Peter Drucker, widely acknowledged as the father of modern management,
in an oft-quoted piece from his classic The Practice of Management (1955), puts the customer first:

If we want to know what a business is we have to start with its purpose. And its purpose must lie outside of the business
itself. In fact, it must lie in society since a business enterprise is an organ of society. There is only one valid definition
of business purpose: to create a customer.

Values Statements
A values statement documents the expected collective norms and standards of behavior for an organization’s
managers and workforce. It may also be expressed in terms of a set of principles setting out the way that managers
and other employees should do and conduct their work. Note that values are different from stakeholder value: values
are the standards by which people work, while value is an outcome produced by that work. Values statements should
be designed to sustain social capital by emphasizing trust, fairness, support, and honesty – those values upon which
most working relationships depend.

In strategic management, values statements have become more important with the rise in growth and power of global
organizations. An important reason is a greater requirement to integrate corporate-wide management philosophies
and business methodologies across global workforces that differ widely in terms of national cultures. Large
organizations have to harmonize cross-functional activity with functional ones, and this needs a general context in
which individuals can work consistently in relation to each other to develop and sustain organization-wide values.

An organization’s general context for working must be stable over a long period. Jim Collins (2001), in his important
book Good to Great, argues that the best companies sustain their position by preserving their core values and purpose,
while their strategy and operating practices continuously adapt to change. It does not matter what these core values
are so much that to be successful companies must have them – it is more important that senior managers are aware
of them, can build them explicitly into the organization, and preserve them over time. An organization’s core values
constitute its basic strategic understanding, and Collins emphasizes the importance of a culture of self-disciplined
people who adhere to a consistent system within which they have the freedom and responsibility to take action. This
discipline is felt as much intuitively as it is consciously. It should be communicated through a common organizational
culture which is shared by key managers and employees.

Reference

Witcher, B. J., & Chau, V. S. (2010). Strategic management: Principles and practice. Cengage Learning EMEA.

Development of Strategic Competitiveness

Competitive advantage is always relative, not absolute. To assess competitive advantage, we compare firm
performance to a benchmark—that is, either the performance of other firms in the same industry or an industry
average. A firm that achieves superior performance relative to other competitors in the same industry or the industry
average has a competitive advantage. Google has a competitive advantage over Facebook, Twitter, and Yahoo in digital
advertising. In smartphones, Apple has achieved a competitive advantage over Samsung, Microsoft, and BlackBerry. A
firm that is able to outperform its competitors or the industry average over a prolonged period of time has a
sustainable competitive advantage.

If a firm underperforms its rivals or the industry average, it has a competitive disadvantage. For example, a 15 percent
return on invested capital may sound like superior firm performance. In the consulting industry, though, where the
average return on invested capital is often above 20 percent, such a return puts a firm at a competitive disadvantage.
In contrast, if a firm’s return on invested capital is 2 percent in a declining industry, like newspaper publishing, where
the industry average has been negative (25 percent) for the past few years, then the firm has a competitive advantage.
Should two or more firms perform at the same level, they have competitive parity. In Chapter 5, we’ll discuss in greater
depth how to evaluate and assess competitive advantage and firm performance.

To gain a competitive advantage, a firm needs to provide either goods or services consumers value more highly than
those of its competitors, or goods or services similar to the competitors’ at a lower price.10 The rewards of superior
value creation and capture are profitability and market share. Sam Walton was driven by offering lower prices than his
competitors. Steve Jobs wanted to “put a ding in the universe”— making a difference by delivering products and
services people love. Mark Zuckerberg built Facebook to make the world more open and connected. Google
cofounders Larry Page and Sergey Brin are motivated to make the world’s information universally accessible. For
Walton, Jobs, Zuckerberg, Page, Brin, and numerous other entrepreneurs and businesspeople, creating shareholder
value and making money is the consequence of filling a need and providing a product, service, or experience consumers
wanted, at a price they could afford.

The important point here is that strategy is about creating superior value, while containing the cost to create it.
Managers achieve this combination of value and cost through strategic positioning. That is, they stake out a unique
position within an industry that allows the firm to provide value to customers, while controlling costs. The greater the
difference between value creation and cost, the greater the firm’s economic contribution and the more likely it will
gain competitive advantage.

Rothaermel, Frank T. Strategic management: concepts. Vol. 2. McGraw-Hill Education, 2016.

 Chapter 2: Business Environment for Competitive Strategy
Chapter 2:
• Business Environment
• Analysis of the external environment
• Segmentation of the general environment
• Analysis of the industrial environment
• Five forces that affects firm’s competitiveness
• Analysis of the industry competition

Business Environment
Business Environment
-Environment literally means the surroundings, external objects, influences or circumstances under which someone
or something exists. The environment of any organization is “the aggregate of all conditions, events and influences
that surround and affect it.” Davis, K, The Challenge of Business, (New York: McGraw Hill, 1975), p. 43.
-Environment refers to all external forces which have a bearing on the functioning of business.
-The environment includes factors outside the firm which can lead to opportunities or a threat to the firm. Although
there are many factors the most important of the sectors are socio-economic, technological, supplier, competitor, and
govt.
So, it is quite obvious that success in a business depends upon better understanding of the environment. A successful
organization doesn’t look at the environment on an ad hoc basis but develops a system to study the environment on
a continuous basis to try and protect the organization from every possible threat and to take the advantage of every
opportunity. Sometimes better and timely understanding of the environment can even turn a threat into an
opportunity.

Importance of business environment

1. Environment is Complex: The environment consists of a number of factors, events, conditions and influences arising
from different sources. All these interact with each other to create new sets of influences.
2. It is Dynamic: The environment by its very nature is a constantly changing one. The varied influences operating upon
it impart dynamism to it and cause it to continually change its shape and character.
3. Environment is multi -faceted: The same environmental trend can have different effects on different industries. For
instance, GATS is an opportunity for some companies but a threat for others.
4. It has a far-reaching impact: The environment has a far-reaching impact on organizations in that the growth and
profitability of an organization depends critically on the environment in which it exists.
5. Its impact on different firms within the same industry differs: A change in environment may have different bearings
on various firms operating in the same industry.
6. It may be an opportunity as well as a threat to expansion: Developments in the general environment often provide
opportunities for expansion in terms of both products and markets.
7. Changes in the environment can change the competitive scenario: General environmental changes may alter the
boundaries of an industry and change the nature of its competition.
8. Sometimes developments are difficult to predict with any degree of accuracy: Macroeconomic developments such
as interest rate fluctuations, the rate of inflation, and exchange rate variations are extremely difficult to predict on a
medium or a long-term basis. On the other hand, some trends such as demographic and income levels can be easy to
forecast.
 Analysis of the external environment
Analysis of the external environment
The external environment of the enterprise can itself be divided into two parts
1. The general environment - The general environment, viewed from an economic perspective, consists of a whole
series of different industrial environments.

2. The competitive (industrial) environment- The competitive environment is made up of the immediate competitors
of an enterprise. Industries overlap national boundaries
Enterprises must position themselves appropriately in the external environment in order to make an above-normal
rate of return, one which gives a guarantee of their continued existence.
Positioning involves location as to both industry and country and comprises identification of an appropriate industry
and an appropriate country in which to have business dealings. Such positioning only relates to the general location,
and not to a particular location. Reading the general environment only results in general positioning.
Some interpretations of strategy see positioning as the essential feature of strategy design. The work of Michael Porter
is closely associated with this point of view. Positioning involves a range of different strategic decisions – the choice of
product or service, market or even market segment, location of various facilities concerned with production and selling
and, not least, the choice of a specific technology. In this sense reading the external environment could be said to
determine the nature of the strategy. On these accounts the external environment is at the very least the starting
point for the articulation of any particular strategy.

Segmentation of the general environment

Segmentation of the general environment
The analysis/segmentation of the general environment is called PEST, but more accurately STEP, the four main
segments are identified:
-Social
-Technical
-Economic
-Political-.

Characteristics of general environment

It is extremely difficult to read.
1. Complexity - The complexity arises from the multiple interactions between different segments of the general
environment. It is common to see change as resulting from segments of the environment which are already an
immediate focus of interest. For example, a strategist may be tempted to read the environment simply as an economic
environment and other segments as irrelevant. This is a mistake. The nature of the interaction which produces the
flow of global events and trends is difficult to read clearly. It involves many different elements and complicated
interactions between different segments.
There are numerous ways in which the general environment influences the profitability of an enterprise, or the
profitability of future ventures likely to be undertaken by the enterprise. Many of these influences are indirect, not
immediately obvious to the observer. The pathway of causation may be very circuitous. The general environment is
amazingly complex, particularly, but not only, at the global level.
2. Uncertainty - There is significant ambiguity and uncertainty. The nature or strength of the pressures building
beneath the business landscape is far from obvious. The sources of these pressures can be anything from a change in
the birth rate to major technical breakthroughs. Sometimes the economy is overwhelmed by catastrophic events, such
as war or a general depression, which may have causes which are complex and not simply a reflection of economic
change. Understanding change is not simply a matter of observing the symptoms of that change and detecting patterns
in it. It is much more a matter of recognizing in a series of apparently unrelated events relevant chains of cause and
effect.
3. Rapid change - The general context is a dynamic one. It offers both threat and opportunity. Change is imposed
upon the enterprise by the instability of the environment in which the enterprise has to survive. The enterprise has no
choice but to change with its environment or cease to exist. The trick is to ride the wave of change, exploiting the
opportunities which arrive with the change and controlling the threats. It is essential that any enterprise anticipates
all the threats which loom on the horizon and rapidly change the relevant context:
• extreme political events such as revolution or war
• the appearance of a new product or technology, or rather a family of products or Processes
a fundamental market change, say a shift from inflation to deflation difficulties in factor markets
• a worsening shortage of labor
• a change in the level of government regulation
• the appearance of a new competitor or competitors, sometimes from abroad.

Very often a threat is associated with an opportunity, the chance of moving into a new area of profit. This is not
uncommon. The difference between opportunity and threat is not very great. Failing to anticipate significant events is
not just a matter of missing a chance for enhanced profit, it is often a sure prescription for disaster.
On occasions the unanticipated changes are political, sometimes demographic, sometimes simply economic,
sometimes all of these rolled into one. The relevant parts of the general environment are broad indeed. These
interactions have little stability; they change their nature from moment to moment, so that the environment never
returns to what it was before. Each momentary context is unique. Each period of time has its own characteristic pace
of change, its own mix of stability and volatility. It is often unclear what will be the source of the next change and what
impact it will have on the business landscape. It is hard to make an accurate prediction if there is no understanding of
the causes of the instability.

Analysis of the industrial environment

Analysis of the industrial environment

An industry is thus a group of firms producing similar products or services.
Framework for Industry Analysis
Industry analysis covers two important components:
1. Industry environment
2. Competitive environment

Industry Analysis
1. Industry features - Industries differ significantly. So, analyzing a company’s industry begins with identifying the
industry’s dominant economic features and forming a picture of the industry landscape. An industry’s dominant
economic features include such factors as:
a) Overall size
b) Market growth rate
c) Geographic boundaries of the market
d) Number and sizes of competitors
e) Pace of technological change
f) Product innovations etc.
 2. Industry boundaries - All the firms in the industry are not similar to one another. Firms within the same industry
could differ across various parameters, such as:
a) Breadth of market
b) Product/service quality
c) Geographic distribution
d) Level of vertical integration
e) Profit motives

3. Industry environment - According to Michael Porter, industries can be categorized into:

-Emerging industries: Are those in the introductory and growth phases of their life cycle.
-Mature industries: Are those who reached the maturity stage of their life cycle.
-Declining industries: Are those in the transition stage from maturity to decline.
-Global industries: Are those with manufacturing bases and marketing operations in several countries.

Competition varies during each stage of industry life cycle.

4. Industry structure - Defining an industry’s boundaries is incomplete without an understanding of its structural
attributes. Structural attributes are the enduring characteristics that give an industry its distinctive character. Industry
structure consists of four elements:
a) Concentration
b) Economies of scale
c) Product differentiation
d) Barriers to entry

5. Industry performance - This requires an examination of data relating to: Notes

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

6. Industry practices - refer to what a majority of players in the industry do with respect to products, pricing,
promotion, distribution etc. This aspect involves issues relating to:
a) Product policy
b) Pricing policy
c) Promotion policy
d) Distribution policy
e) R&D policy
f) Competitive tactics.

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

8. Industry prospects for future - The future outlook of an industry can be anticipated based on such factors as:
a) Innovation in products and services
b) Trends in consumer preferences
c) Emerging changes in regulatory mechanisms
d) Product life cycle of the industry
e) Rate of growth etc.
 Five Forces

Five forces that affects firm’s competitiveness

1. Threat of new entrants

2. Intensity of rivalry among industry competitors
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products and services.

Each of these forces affects a firm’s ability to compete in a given market. Together, they determine the profit potential
for a particular industry. To understand industry competition and profitability, one must analyze the industry’s
underlying structure in terms of the five forces.
Porter argues that the stronger each of these forces are, the more limited is the ability of established companies to
raise prices and earn greater profits. With Porter’s framework, a strong competitive force can be regarded as a threat
because it depresses profits. A weak competitive force can be viewed as an opportunity because it allows a company
to earn greater profits. The strength of the five forces may change with time as industry conditions change.

1. The Threat of New Entrants: The first of Porter’s Five Forces model is the threat of new entrants. New entrants
bring new capacity and often substantial resources to an industry with a desire to gain market share. Established
companies already operating in an industry often attempt to discourage new entrants from entering the industry to
protect their share of the market and profits. Particularly when big new entrants are diversifying from other markets
into the industry, they can leverage existing capabilities and cash flows to shake up competition. Pepsi did this when
it entered the bottled water industry, Microsoft did when it began to offer internet browsers, and Apple did when it
entered the music distribution business.

The threat of new entrants, therefore, puts a cap on the profit potential of an industry. When the threat is high, existing
companies hold down their prices or boost investment to deter new competitors. And the threat of entry in an industry
depends on the height of entry barriers (i.e. factors that make it costly for new entrants to enter industry) that are
present and on the retaliation from the entrenched competitors. If entry barriers are low and newcomers expect little
retaliation, the threat of entry is high and industry profits will be moderate. It is the threat of entry, not whether entry
actually occurs, that holds down profitability.

2. Intensity of Rivalry among Competitors: The second of Porter’s Five-Forces model is the intensity of rivalry among
established companies within an industry. Rivalry means the competitive struggle between companies in an industry
to gain market share from each other. Firms use tactics like price discounting, advertising campaigns, new product
introductions and increased customer service or warranties. Intense rivalry lowers prices and raises costs. It squeezes
profits out of an industry. Thus, intense rivalry among established companies constitutes a strong threat to
profitability. Alternatively, if rivalry is less intense, companies may have the opportunity to raise prices or reduce
spending on advertising etc. which leads to higher level of industry profits.
3. Bargaining power of buyers: The third of Porter’s five competitive forces is the bargaining power of buyers.
Bargaining power of buyers refers to the ability of buyers to bargain down prices charged by firms in the industry or
driving up the costs of the firm by demanding better product quality and service. By forcing lower prices and raising
costs, powerful buyers can squeeze profits out of an industry. Thus, powerful buyers should be viewed as a threat.
Alternatively, if buyers are in a weak bargaining position, the firm can raise prices, cut costs on quality and services
and increase their profit levels. Buyers are powerful if they have more negotiation leverage than the firms in the
industry, using their clout primarily to pressure price reductions. According to Porter, buyers are most powerful under
the following conditions:

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

(b) The products are standard or undifferentiated: If the products purchased from the firm are standard or
undifferentiated, the buyers can easily find alternative sources of supplies. Then buyers can play one company
against the other, as in commodity grain markets.

(c) The buyer faces low switching costs: Switching costs lock the buyer to a particular firm. If switching costs
are low, buyers can easily switch from one firm’s product to another.

(d) The buyer earns low profits: If the buyer is under pressure to trim its purchasing costs, the buyer is price
sensitive and bargains more.

(e) The quality of buyer’s products: If the quality of buyer’s product is little affected by industry’s products,
buyers are more price sensitive. Most of the above sources of buyer power can be attributed to consumers as
a group as well as to industrial and commercial buyers. The buying power of retailers is determined by the
same factors, with one important addition. Retailers can gain significant bargaining power over manufacturers
when they can influence consumers. Purchasing decisions as they do in audio components, jewellery,
appliances, sporting goods etc., are examples.

4. Bargaining power of suppliers: The fourth of Porter’s Five Forces model is the bargaining power of suppliers.
Suppliers are companies that supply raw materials, components, equipment, machinery and associated products.
Powerful suppliers make more profits by charging higher prices, limiting quality or services or shifting the costs to
industry participants. Powerful suppliers squeeze profits out of an industry and thus, they are a threat. For example,
Microsoft has contributed to the erosion of profitability among PC makers by raising prices on operating systems. PC
makers, competing fiercely for customers, have limited freedom to raise their prices accordingly.
A supplier’s bargaining power will be high under the following conditions:

(a) Few suppliers: When the supplier group is dominated by few companies and is more concentrated than
the firms to whom it sells, an industry is called concentrated. The suppliers can then dictate prices, quality
and terms.

(b) Product is differentiated: When suppliers offer products that are unique or differentiated or built-up
switching costs, it cuts off the firm’s options to play one supplier against the other. For example,
pharmaceutical companies that offer patented drugs with distinctive medical benefits have more power over
hospitals, drug buyers etc.

(c) Dependence of supplier group on the firm: When suppliers sell to several firms and the firm does not
represent a significant fraction of its sales, suppliers are prone to exert power. In other words, the supplier
group does not depend heavily on the industry for revenues. Suppliers serving many industries will not hesitate
to extract maximum profits from each one. If a particular industry accounts for a large portion of a supplier
group’s volume or profit, however, suppliers will want to protect the industry through reasonable pricing.

(d) Importance of the product of the firm: When the product is an important input to the firm’s business or
when such inputs are important to the success of a firm’s manufacturing process or product quality, the
bargaining power of suppliers is high.
 (e) Threat of forward integration: When the supplier poses a credible threat of integrating forward, this
provides a check against the firm’s ability to improve the terms by which it purchases.

(f) Lack of substitutes: The power of even large, powerful suppliers can be checked if they compete with
substitutes. But, if they are not obliged to compete with substitutes as they are not readily available, the
suppliers can exert power.

5. Threat of substitute products: The fifth of Porter’s Five Forces model is the threat of substitute products. A
substitute performs the same or a similar function as an industry’s product. Video conferences are a substitute for
travel. Plastic is a substitute for aluminum.

E-mail is a substitute for a mail. All firms within an industry compete with industries producing substitute products.
For example, companies in the coffee industry compete indirectly with those in the tea and soft drink industries
because all these serve the same need of the customer for refreshment. The existence of close substitutes is a strong
competitive threat because this limits the price that companies in one industry can charge for their product. If the
price of coffee rises too much relative to that of tea or soft drink, coffee drinkers may switch to those substitutes.

The more attractive is the price/performance ratio of substitute products, the more likely they affect an industry’s
profits. In other words, when the threat of substitutes is high, industry profitability suffers. If an industry does not
ward off the substitutes through product performance, marketing, price or other means, it will suffer in terms of
profitability and growth potential in the following circumstances:

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

Thus, according to Porter, “substitutes limit the potential returns of an industry by placing a ceiling on the
prices firms in the industry can profitably charge”. For example, the price of tea puts a ceiling on the price of
coffee. To the extent that switching costs are low, substitutes may have a strong effect on the profitability of
an industry.
(a) It offers an attractive price and performance: The better the relative value of the substitute, the worse is
the profit potential of the industry. For example, long distance telephone service providers suffered with the
advent of Internet-based phone services.

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

The Five Forces model developed by Michael E. Porter has been the most commonly used analytical tool for examining
competitive environment. According to this model, the intensity of competition in an industry depends on five basic
forces. These five forces are:

Analysis of the industry competition

Analysis of the industry competition

Competitive analysis basically addresses two questions:

1. Which firms are our competitors?
2. What factors shape competition in industry?

The degree of competition in an industry is influenced by a number of forces. To establish a strategic agenda for
dealing with these forces and grow despite them, a firm must understand:
1. How these forces work in an industry?
2. How they affect the firm in its particular situation?
Each business operates among a group of firms that produce competing products or services known as an “industry”.
An industry is thus a group of firms producing similar products or services. By similar products we mean products that
customers perceive to be substitutes for one another.

Although there are usually some differences among competitors, each industry has its own set of “rules of combat”
governing such issues as product quality, pricing and distribution. This is especially true in industries that contain a
large number of firms offering standardized products and services. As such, it is important for strategic managers to
understand the structure of the industry in which their firms operate before deciding how to compete successfully.
Industry analysis is therefore a critical step in the strategic analysis of a firm.

In a perfect world, each firm would operate in one clearly defined industry. However, many firms compete in multiple
industries, and strategic managers in similar firms often differ in their conceptualization of the industry environment.
In addition, the advent of Internet has completely changed the way business is done. As a result, the process of industry
definition and analysis can be specially challenging when internet competition is considered.

The basic purpose of industry analysis is to assess the strengths and weaknesses of a firm relative to its competitors in
the industry. It tries to highlight the structural realities of particular industry and the extent of competition within that
industry. Through industry analysis, an organization can find whether the chosen field is attractive or not and assess
its own position within the industry.

Some of the techniques which are generally used for carrying out environmental analysis are:
1. PESTEL analysis
2. SWOT analysis

PESTEL- PESTEL Analysis is a checklist to analyze the political, economic, socio-cultural, technological, environmental
and legal aspects of the environment.

Political trends
Political considerations include developments not only in the conduct of local, regional, and foreign governments and
agencies but also in the thought and behavior of prominent organizations and individuals: in many ways, government
policies and regulatory decisions influence competition. Significant uncertainty hangs over financial markets, for
example, because of a potential trade war between the United States and China.

Economic trends
Economic trends include resource and price use, interest rates, disposal income, employment, inflation, and
productivity. Emerging economies in China, India, and several other Asian countries have led the world in economic
growth rates since the 2008 financial crisis. Though globalization has slowed down in the aftermath of the global
financial crisis, it shows every sign of continuing, though at a slower pace.

Social trends
Social factors include changes in economic, social, and lifestyle, gender roles and group identities, national cultures,
ethics, morals, and aspirations. The post-WWII baby boom in Western countries created a strong and distinct
community of customers who will spend more on health and leisure as they age.

Technological trends
The technology involves impacts on personnel, organizational practices, goods and services, and operations from
current and emerging technological changes. The proliferation of smartphones and applications for price scanning and
the expanded usage of the Internet changes the nature of shopping and the role of information more generally.

Environmental trends
Environmental factors include not only quality of life, sustainability, and resource recycling but also logistical and
infrastructure possibilities. Issues such as environmental wealth, global warming, and plastic packaging waste and
intensive farming escalate. Many companies would have to take these into account.
Legal trends
Legal considerations include legislation and administrative action, boundary requirements, standards, and labor
regulations. It can also include topics of globalization that deal with international trade and competition law. National
legal systems differ enormously, and their consequences are profound for individual industries. One of the most
significant trends is to tighten regulatory accounting standards after massive corporate failures – like Enron, Tyco
International, Peregrine Systems, and WorldCom – and the dot.com bubble burst.

The PESTEL process

The PESTEL process should be kept as simple as possible with the big picture always kept central. The use of the
approach should follow this set of principles:

1. Someone should be in charge of the process, including meetings and discussions.

2. Before starting, think through the process and be clear what the objectives of the PESTEL analysis are.
3. Keep it simple; do not get bogged down in detail so that the big picture gets lost.
4. Involve a balance of pessimists and optimists; include outsiders with different perspectives and beware of vested
interests and groupthink.
5. Agree on appropriate sources and check inside the organization first for information.
6. Use visual tools and discussion aids.
7. Identify the most critical factor issues for strategy.
8. Produce a discussion document for broader circulation.
9. Use feedback and follow-up checks on actions and keep all PESTEL participants informed on a follow-up to
encourage continual dialogue.
10. Decide which issues to monitor on an ongoing basis; link to existing in-house processes for monitoring and
reviewing change, especially for planning.

PESTEL is a valuable tool for testing and defining strategic goals, as managers are encouraged to look beyond their
company and sector and be less insular. However, beware of system vulnerabilities. Scanning data can be too easy and
slip into lazily ticking boxes over time. A strong PESTEL will go far enough to understand the root causes behind the
trends; things are not always as it seems. The research should not just emphasize the obvious; strategists should avoid
overloading information.
 Chapter 3: Internal Operational Environment of the Business
Chapter 3:
• Analysis of firm’s internal operation
• Creating customer’s value
• Challenge of internal analysis
• Managerial decision making
• Resources of the internal environment
• Firms internal capabilities
• Internal core competencies
• Criteria for sustainable advantage

Analysis of the firm’s internal operation

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

Importance of Internal Analysis Notes

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

This exercise is also the starting point for developing the competitive advantage required for the survival and growth
of the firm.
Internal analysis is also referred to as “internal appraisal”, “organizational audit”, “internal corporate assessment”
etc. Over the years, research has shown that the overall strengths and weaknesses of a firm’s resources and
capabilities are more important for a strategy than environmental factors. Even where the industry was unattractive
and generally unprofitable, firms that came out with superior products enjoyed good profits.
Managers perform internal analysis to identify the strengths and weaknesses of a firm’s resources and capabilities.
The basic purpose is to build on the strengths and overcome the weaknesses in order to avail of the opportunities and
minimize the effects of threats. The ultimate aim is to

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

Challenge of internal analysis

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

1. Identification:
(a) Identify company resource strengths and competitive capabilities
(b) Identify company resource weaknesses and competitive deficiencies
(c) Identify company’s opportunities
(d) Identify external threats
2. Conclusion:
(a) Draw conclusions about the company’s overall situation

3. Translation: Translate the conclusions into strategic actions by acting on them:

(a) Match the company’s strategy to its strengths and opportunities
(b) Correct important weaknesses
(c) Defend against external threats

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

Probably the biggest mistake that is commonly made in SWOT analysis is to provide a long list of points but little
logic, argument and evidence. A shortlist with each point well-argued is more likely to be convincing

Advantages and Limitations

Advantages
1. It is simple.
2. It portrays the essence of strategy formulation: matching a firm’s internal strengths and weaknesses with its
external opportunities and threats.
3. Together with other techniques like Value Chain Analysis and RBV, SWOT analysis improves the quality of internal
analysis.

Limitations
1. It gives a static perspective, and does not reveal the dynamics of competitive environment.
2. SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and ignores other factors needed for
competitive success.
3. A firm’s strengths do not necessarily help the firm create value or competitive advantage.
4. SWOT’s focus on the external environment is too narrow.

Nokia Caselet

Nokia’s Global Opportunities

Over the last 15 years, the Finnish company Nokia has built global leadership of the mobile telephone market. After
dramatic growth in recent years, Nokia has faced problems in making the best strategic choice for continued growth.
This case explores its strategic decision making and the risks that it now faces.

Background
In the late 1980s, the small Finnish company Nokia was involved in a wide range of businesses. For example, it made
televisions and other consumer electronics in which it claimed to be ‘third in Europe’. It also had a thriving business in
industrial cables and machinery and manufactured a wide range of other goods from forestry logging equipment to
tyres. It had been expanding fast since the 1960s and was beginning to struggle under the vast range of goods that it
sold. Sadly, group’s chief executive at that time, Kari Kairamo, was overwhelmed that he committed suicide. It is rare
that strategic pressures are so intense but the impact on managers of strategy evaluation and development is an
important factor in generating stress.
The Early 1990s
In 1991 and 1992, Nokia lost US$120 millions on its major business activities. The company had to find new strategies
to remedy this situation. It had already cut out some of its activities but was still left with a telephone manufacturing
operation, an unprofitable TV and video manufacturing business and a strong industrial cables business. Nokia began
the process by seeking a new group chief executive. Its choice was Jorma Ollila, who had previously run the small Nokia
mobile phone division, which was loss-making at the time. “My brief was to decide whether to sell it or keep it. After
four months, I proposed we keep it. We had good people, we had know-how and there was market growth
opportunity”, explained Ollila.

In 1992, Nokia chose to develop two existing divisions that had related technologies: mobile telephone and
telecommunications equipment (switches and exchanges). Subsequently, it focused mainly on the mobile business but
did not pull completely out of the telecommunications equipment market.

There were four criteria to justify the strategic choice to focus on mobile telephones:
1. It was judged that the mobile telephone market had great worldwide growth potential and was growing fast.
2. Nokia already had profitable businesses in this area.
3. Deregulation and privatization of tele-communications markets around the world were providing specific
opportunities.
4. Rapid technological change – especially the new pan-European GSM mobile system – provided the opportunity to
alter fundamentally the balance between competitors.

Clearly, all the above judgements carried significant risk. In addition, the company’s strategic choice was limited by
constraints on its resources. The heavy losses of the group overall were a severe financial constraint. In addition, it
was not able to afford the same level of expenditure on research and development as its two major rivals, Motorola
(US) and Ericsson (Sweden). Moreover, although it had the in-house skills and experience of working with national
deregulated telecommunications operators through competing in world markets in the 1970s and 1980s, it would
need many more employees if it was to develop the market opportunities. However, by selling off its other interests
and concentrating on mobile telephones it was able to overcome some of the difficulties.

Looking back on that time, Ollila commented: “In order to be really successful you have to globalise your organisation
and focus your business portfolio. We have been able to grow and be global and maintain our agility and be fast at the
same time”. What Ollila did not say was that Finland is a small country, so to build any sizeable business, it is essential
to think beyond the country’s national boundaries.

1992-2000: Building Global Leadership

One of Ollila’s first tasks was to build a management team. He chose two new, young executives as part of his team:
Sari Baldauf as head of Nokia networks and Matti Alahuhta as head of Nokia mobile telephones. Alahuhta had recently
attended IMD Business School in Switzerland where he had written a dissertation on how to turn a medium-size
technology-based company into a world-class enterprise against larger rivals with greater resources. He clearly had in
mind how Nokia could compete with competitors like its Swedish rivals Ericsson, the Dutch company Philips, the
French company Alcatel and the American company Motorola, all of whom had considerably greater resources in
terms of finance and technical knowledge. Alahuhta identified three important factors to help Nokia: first, it was
important to find a new technology that would change the rules of the game and turn all existing competitors into
beginners; second, it was essential to move fast internationally and respond flexibly as international markets
developed; third, the company had to assess and deliver what customers really wanted from mobile telephones.

Alahuhta did not especially identify one technology development that proved highly valuable in the early 1990s. This
was the agreement within the European Union to adopt the GSM technical standard for mobile telephones. This
allowed company like Nokia to have access to a large market where the technology was standardised and major
economies of scale were therefore possible. Such a development was important because the GSM standard was
subsequently used worldwide, with around 500 millions of the world’s 700 millions mobiles using this standard by
2000. This was fortunate for companies like Nokia: “Good luck favours the prepared mind” was Alahuhta’s cryptic
comment some years later.
Benefits and Problems of Strategic Choice
In fact, Nokia was highly successful in its expansion.: moved rapidly to design phones that would appeal to global
customers by designing mobile phones that offered reliability and ease-of-use. This meant that it had to invest heavily
in software development and it formed an alliance with the British company, Symbian, subsequently taking a majority
share in order to ensure that developments remained on track. Nokia was also single-minded in its investment in
factories in order to deliver economies of scale, reduce costs and raise profit margins.

Nokia was particularly good at reading what customers wanted and then moving quickly into the market place with
new telephones: it realised that the mobile phone during this period was almost a fashion accessory and designed
phones to reflect this. It made the important judgement that the market during the 1990s was moving from being a
high-tech market into a mass-market, where cheaper, entry-level phones were required. This was in sharp contrast to
its Nordic competitor, Ericsson, who had remained with high-tech phones: “We had the wrong profile in our portfolio,”
was the later comment from Kurt Hellstrom, Ericsson’s chief executive. By 2000, Nokia had developed a range of
mobile telephones that were both attractive to look at and innovative in their use of the new
digital technology that had become available. The result was that by 2000 Nokia was world leader in mobile
telephone manufacture, with 35% global share.

2000-2005: Coping with New Challenges

Having concentrated its resources into mobile telephones, Nokia then had to cope with a major downturn in the world
market 2000-2002 which occurred for three main reasons. The first reason was that the market became saturated in
some parts of the world – for example, 80% of people in the EU had mobile telephones. Other markets were also
becoming saturated – only America lagged behind because of the profusion of mobile standards in that market. Even
in countries like China and India, around 30% of the population had mobiles and the take-up was much higher in Asian
countries like Singapore and Japan, though the latter country had developed its own technical standards outside the
GSM system.

The second reason for problems was that the technology bubble of the late 1990s came to an end in 2001. This left
the leading telecommunications companies over-burdened with debt and wanting to slash their costs. Sales in Nokia’s
telecommunications equipment division - related to mobile phones but more associated with the surrounding
infrastructure of telephone exchanges dropped 50% over three years. Nokia itself had to make some 7,500 workers
redundant in order to recover the situation.

In the mobile phone division of Nokia, there was a third additional problem for Nokia. The telephone service providers
like Vodafone and Orange were delaying the introduction of the next generation of mobile telephone technology for
reasons of technical feasibility and lack of funds through paying too much for the licenses. The ‘3G’ pure digital
technology would introduce a whole new market for telephone services that would need a totally new series of
product designs. In turn, this would require new manufacturing processes inside companies like Nokia. The result was
that all the mobile telephone manufacturers, including Nokia, were hit by falling profits in 2001-2002.

The early markets for the new 3G technology were in Japan and Korea, where the GSM Notes standard was not used.
In addition, some of the Asian electronics manufacturers like Samsung and Sony realised that the new technology gave
them another chance to enter the global mobile markets, particularly if they had missed out on the benefits of the
GSM standard. Sony combined with Ericsson to launch a new joint venture and Samsung invested heavily in new 3G
technology. The result was that Samsung had built a global market share of 14% by 2005 and Sony Ericsson had a share
of 6%. However, Motorola still kept its second position with 17% of the market. Competition was therefore increasing
for Nokia.

New Challenges and New Management

At this point, Nokia lost its way slightly. It failed to read customer demand correctly around the year 2003/2004. The
new ‘clam shell’ folding designs and mid-price photo imaging screens from its competitors proved popular in the
market place. Nokia did not move to match these but stuck with its existing ‘stick’ designs. There was some suggestion
that this may partly have been because Nokia’s economies of scale were more associated with its existing designs.
Certainly, Nokia had easily the highest profit margins in the industry and was reluctant to reduce these. Eventually,
Nokia decided that its dominant world market share was highly valuable and it would be preferable to reduce its prices,
take a loss of profit margin and also introduce new ‘clam shell’ designs. At the end of 2004, the company’s share had
begun to rise again and was back around 35%.
More generally around 2004, Nokia realised that it needed to review its position. It had taken a hit from its competitors
and it had failed to read the market changes fully. Importantly, it also faced new challenges that would come as 3G
digital technology became the accepted medium of telephony. Essentially, this would open up opportunities that were
unclear but potentially important – live transmission of television to mobile phones, new games to mobile phones,
instant web access, etc. All these were technically feasible but still remained to be exploited fully. New mobile phones
needed to be multimedia and also needed to consider the extent to which they would converge in terms of
performance with other consumer electronics like the highly successful Apple iPod.

There was also another new trend that Nokia needed to master. The world market for mobile telephone providers
was becoming more concentrated. Companies like Vodafone, Orange, Telekom and others were Nokia’s major
customers. The mobile telephone service customers were buying around 65-70% of all the world’s mobiles, which they
were then selling or offering free to customers. The Japanese electronics company Sharp had been able to move into
mobile telephones from nothing in the early 2000s by doing a deal to supply Vodafone with some of its models. This
was a serious matter for Nokia since such large customers required more than the standard models: customers like
Vodafone wanted customised phones that would deliver competitive advantages over their rivals and large orders
meant real bargaining power. Nokia has been hit hard by the strategies of Samsung, Motorola and Sony Ericsson. Nokia
has responded with a new product range but has lost some market share. Nokia needed to introduce a whole new
area of customer management for such large customers. “It’s a very different era in terms of management
requirements, in terms of skills, know-how, how you build your customer relationship,” explained Nokia’s Chief
Executive, Ollila.

The outcome of all the above was the introduction of new management at Nokia in December 2004. ‘From a
management point of view, it began in spring or summer 2003 when we in the management team started discussing
the need to look at the organisation afresh,’ said Ollila. In a period of change in the industry, Nokia needed to adapt
and restructure its management team. The result was that both Sari Baldauf and Matti Alahuhta left Nokia. Mr
Alahuhta went to a leading position at another Finnish company and Baldauf to do something ‘completely different’.
Hence, as Nokia faced up to the new challenges, it decided that a new organisation structure and a new management
team would be needed. Ollila commented: “You don’t make generational changes easily. . . It’s a big change. But
change allows you to reposition, to rethink.” Nokia’s profitability had stabilised in the short term but the company
needed to think carefully about new technologies, new trends and new strategic choices.

It was announced that Nokia’s widely admired Chief Executive, Jorma Ollila, would beleaving this position in May 2006
but would remain non-executive Chairman. The Nokia Management team that guided the company to world
leadership in mobile phones would largely have left the company.

Resources of the internal environment

A ‘resource’ can be an asset, skill, process or knowledge controlled by an organisation. From a strategic perspective,
an organisation’s resources include both those that are owned by the organisation and those that can be accessed by
the organisation to support its strategies. Some strategically important resources may be outside the organisation’s
ownership, such as its network of contacts or customers.

Typically, resources can be grouped into four categories:

1. Physical resources include plant and machinery, land and buildings, production capacity etc.
2. Financial resources include capital, cash, debtors, creditors etc.
3. Human resources include knowledge, skills and adaptability of human resources.
4. Intellectual capital is an intangible resource of an organisation. This includes the knowledge that has been captured
in patents, brands, business systems, customer databases and relationships with partners. In a knowledge-based
economy, intellectual capital is likely to be the major asset of many organisations.

Strategic Importance of Resources

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

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

2. Threshold Resources
A set of basic resources are needed by a firm for its existence and survival in the marketplace. These resources are
called ‘threshold resources’. But this threshold tends to increase with time. So, a firm needs to continuously improve
this threshold resource base just to stay in business.

3. Unique Resources
Unique resources are those resources that are critically required to achieve competitive advantage. They are better
than competitors’ resources and are difficult to imitate. The ability of an organisation to meet the critical success
factors in a particular market segment depends on
these unique resources.

To illustrate unique resources, Johnson and Sholes quote the example of some libraries having unique collection of
books, which contain knowledge not available elsewhere, and the example of retail stores located in prime locations,
which can charge higher
than average prices. Similarly, some organisations have patented products or services that are unique, which give
them advantage.

Firms internal capabilities

Resources are not very productive on their own. They need organisational capabilities. Organisational capabilities are
the skills that a firm employs to transform inputs into outputs.

They reflect the ability of the firm in combining assets, people and processes to bring about the desired results.
Prahalad and Hamel describe an organisational competence as a “bundle of skills and technologies”, which are
integrated in people skills and business processes.

Capabilities are, therefore a function of the firm’s resources, their application and organisation, internal systems and
processes, and firm specific skill sets. Capabilities are rarely unique, and can be acquired by other firms as well in that
industry. Some of these capabilities may become
“distinctive competencies”, when a firm performs them better than its rivals.

Internal core competencies

Superior performance does not merely come from resources alone because they can be imitated or traded. Superior
performance comes by the way in which the resources are deployed to create competences in the organisation’s
activities. For example, the knowledge of an individual will not improve an organisation’s performance unless he or
she is allowed to work on particular tasks which exploit that knowledge. Although an organisation will need to achieve
a threshold level of competence in all of the activities and processes, only some will become core competences.
Core competence refers to that set of distinctive competencies that provide a firm with a sustainable source of
competitive advantage. Core competencies emerge over time, and reflect
the firm’s ability to deploy different resources and capabilities in a variety of contexts to gain and sustain competitive
advantage.

Core competences are activities or processes that are critically required by an organisation to achieve competitive
advantage. They create and sustain the ability to meet the critical success factors of particular customer groups better
than their competitors in ways that are difficult to imitate. In order to achieve this advantage, core competences must
fulfill the following criteria.

It must be:
1. an activity or process that provides customer value in the product or service features.
2. an activity or process that is significantly better than competitors.
3. an activity or process that is difficult for competitors to imitate.

Criteria for sustainable advantage

An organisation uses different types of resources and exhibits a certain type of organisational capabilities to leverage
those resources to bring about a competitive advantage, as shown in Figure 6.3.

It is important to emphasize that resources by themselves do not yield a competitive advantage. Those resources need
to be integrated into value creating activities. Thus the central theme of RBV is that competitive advantage is created
and sustained through the bundling of several
resources in unique combinations. Thus,
1. Competence is something an organisation is good at doing.
2. Core competence is a proficiently performed internal activity.
3. Distinctive competence is an activity that a company performs better than its rivals.
4. Distinctive competencies become the basis for competitive advantage.

Barney, in his VRIO framework of analysis, suggests four questions to evaluate a firm’s key resources.

1. Value: Does it provide competitive advantage?

2. Rareness: Do other competitors possess it?
3. Imitability: Is it costly for others to imitate?
4. Organisation: Is the firm organised to exploit the resource?
If the answer to these questions is “yes” for a particular resource, that resource is considered a strength and a
distinctive competence.

Using Resources to Gain Competitive Advantage: Grant proposes a five-step resource based approach to strategy
analysis.
1. Identify and classify the firm’s resources in terms of strengths and weaknesses.
2. Combine the firm’s strengths into specific capabilities.
 3. Appraise the profit potential of these resources and capabilities.
4. Select the strategy that best exploits the firm’s resources and capabilities relative to external
opportunities.
5. Identify resource gaps and invest in overcoming weaknesses.

In week 3, I have learned that the detailed topics about the internal environment of the business and how important
this environment for the success of the venture. Every business must establish a strong, competitive and innovative
management team to properly analyze how the market works or what is the predicted future of the market in order
to have a strategic plan, know first the market then start planning. Thus, the success of every business greatly depends
on the resources of the organization because these resources will help the business to be equipped against the
competitors.
 Chapter 4: Strategy Formulation and Business Level
Strategic Action
Chapter 4:
• Strategy focus and development
• Identification of customer
• Customer relation management
• Types of business level strategy
• Universal Business level strategies
• Risk associated with cost leadership strategy
• Product differentiation strategy
• Segmented focus strategy

Strategy focus and development

Strategy focus and development

Each business should have its own business strategy. A business strategy is basically a
competitive strategy and is concerned more with how a business competes successfully in the
chosen market. The strategic decisions at business-level revolve around choice of products
and markets, meeting the needs of customers, protecting market share, gaining advantage
over competitors, exploiting or creating new opportunities and earning profit at the business
unit level. In short, a business strategy outlines the competitive posture of its operations in
the industry.

Business strategy is guided by the direction set by the corporate strategy. It takes the cue
from the priorities set by the corporate strategy. It translates the direction and intent
generated at the corporate level into objectives and strategies for individual business units.

A business-level strategy is a fundamental approach that a company takes to help a single

business to survive and grow its overall intent. The strategy typically aims at sustaining
competitive advantage within a given industry.

Identification of customer

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

Identification of Segment Gaps and their Competitive Positioning Implications

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

Identifying the Positioning within the Segment

From a strategy perspective, some gaps may be more attractive than others. For example,
they may have limited competition or poorly supported products. In addition, some gaps may
possess a clear advantage in terms of competitive positioning. Others may not.

The process of developing positioning runs as follows:

1. Perceptual mapping: In-depth qualitative research on actual and prospective customers on
the way they make their decisions in the market place, e.g. strong versus weak, cheap versus
expensive, modern versus traditional.

2. Positioning: Brands or products are then placed on the map using the research dimensions.

3. Options development: Take existing and new products and use their existing strengths and
weaknesses to devise possible new positions on the map.

4. Testing: First with simple statements with customers, then at a later stage in the
marketplace. It will be evident that this is essentially a process, involving experimentation
with actual and potential customers.

Customer relation management

The Value Chain

A value chain is an organizational framework to disaggregate and display the
strategically relevant activities of an organization to understand cost behavior and the existing
and potential sources of difference. A value chain's role is to identify those strategic activities
relevant to the organization's core areas to assess how they interact together to sustain a
chosen strategy. A company helps its competitive progress by more efficiently or better than
its rivals conducting such strategically essential activities.
Value is represented by the amount the customers are prepared to pay for the
products and services of an organization. Porter (1985) stresses the importance of value-
adding operations, rather than functions such as departments. Value is shown as a margin in
the value chain, which is gross revenue (the aggregated value created for customers) minus
costs – or the net margin that the producer receives as gross profit. The activities that
generate interest are generally seen as primary and support activities.

Primary activities add value through the transformation of resources into products and
services through the following stages:
1. inbound logistics: activities bringing in inputs
2. operations: activities turning inputs into outputs
3. outbound logistics: activities getting finished products to customers
4. marketing and sales: activities enabling customers to buy and receive products
5. service: activities maintaining and enhancing the value

Conventionally, these are related to a company's line functions. However, a value chain is
concerned primarily with specific strategically essential characteristics and behaviors, and
how they communicate and can be implemented as a whole network – not in isolation from
the viewpoint of any functional portion of the enterprise. Support activities add value to the
primary activities by facilitating and assisting them. Help tasks are usually employee duties
and are the responsibility of a dedicated team, although generally, they are cross-functional
in orientation. The figure shows a condensed image of four functions, but more can be
obtained, such as quality control. The four shown have similar activities to them:

1. firm infrastructure: activities such as planning, legal affairs, and finance and accounting,
which support the general management of the primary activities
2. human resource management: activities that support the employment and development
of people
3. technology development: activities providing expertise and technology, including research
and development, which support the production and delivery process
4. procurement: activities to support buying

To help them organize and leverage resources that foster and maintain competitive
advantage, senior managers need to look for strategic linkages. An activity managed in one
area of an organization is likely to have spillover and trade-off effects for other areas; for
example, if it works to raise costs elsewhere, lower costs in one department may be
suboptimal. Coordination is needed to promote common ways of working following the
competitive strategy 's needs. A distinctive approach to the management of customer
relationships requires attention to every part of those activities that influence the customer
experience.

Extending the Value Chain into Supply Chain

The definition of the value chain can be expanded beyond the scope of an organization to
include all strategically linked operations in the distribution and supply chain. This may be
envisaged across relevant distributors and suppliers as a series of linked value chains. The
idea is that suppliers, especially first-tier suppliers, providing input crucial to value creation
for an industrial customer, should manage their activities in ways that are consistent with
their customers ' business strategy. Synergies are found between the core competencies of
an industrial customer and those of upstream suppliers, and between their downstream
distributors and customers. The higher an organization's ability to handle an internal and
external series of procedures, the more difficult it is for rivals to imitate their operation
relations. However, the degree to which independent suppliers can control a business
strategy and value chains in support of an industrial client is problematic. There is always a
fear of losing bargaining power for small and specialized suppliers when a large part of their
production is tailored to the needs of a significant customer.

Types of business level strategy

Types of business level strategy

Strategic management seeks to have a clear long-term strategic advantage that can support
stakeholders in an enterprise more sustainably than short-term productivity over time. An
external world is likely to be subject to unexpected changes as well as continuous change, and
it is essential to ensure that strategic goals are coherent and coherent and that the company
as a whole is clear on intent and can respond to change accordingly.

There are four broad forms of a strategic strategy that are focused on competitive advantage
and reach. Michael Porter (1980) refers to these as generic strategies. When a company
targets a whole market, a strategy is either a generic strategy for cost leadership or an
industry-wide generic strategy for differentiation. When a company targets a portion of an
industry, such as a consumer segment, the focus of a generic plan is either on cost or
difference. A strategy's detail will depend on the purpose of an organization and its industry;
however, for it to be competitively useful, it must conform to one of the four generic types.

1. Cost Leadership Generic Strategy

2. Differentiation Industry-Wide Generic Strategy
3. Cost Focus and Differentiation Focus Generic Strategy
4. Generic Strategies are Mutually Exclusive
 Universal business level strategies

Universal Business level strategies

Michael Porter made the bold claim that there are only that three fundamental strategies
any business can undertake. During the 1980s, they were regarded as being at the forefront
of strategic thinking. Arguably, they still have a contribution to make in the new century in
the development of strategic options.

Professor Porter argued that the three basic strategies open to any business are:

1. Cost leadership
2. Differentiation
3. Focus.

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

The generic business-level strategies discussed above are useful when we view an industry as
stable. However, in practice, business environment is dynamic and successful firms need to
adapt their strategies to the environmental conditions.

More (2001) notes that each generic strategy gives a company some kind of defense against
each of the five competitive forces.

1. Example: Cost leadership can raise barriers to cope with cost increases form suppliers.
Differentiation based on strong brand loyalty, can create an entry barrier and also insulate
the firm from rivalry. But there are risks in this.

2. Example: Consumer loyalty can falter if the price premium is perceived as too high, and
differentiation can be lost through imitation of a product by competitors.
 Risk associated with cost leadership strategy

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

ex. Cebu Pacific

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

Having a low-cost position also gives a company a defense against rivals. Its lower costs allow
it to continue to earn profits during times of heavy competition. Its high market share means
that it will have high bargaining power relative to its suppliers. Its low price also serves as a
barrier to entry because few new entrants will be able to match the leader’s cost advantage.
As a result, cost leaders are likely to earn above average profits on investment.

Companies that want to be successful by following a cost leadership strategy must maintain
constant efforts aimed at lowering their costs (relative to competitor’s costs) and creating
value for customers. Cost leadership requires:

1. Aggressive construction of efficient scale facilities

2. Vigorous pursuit of cost reductions from experience
3. Tight cost and overhead control
4. Avoidance of marginal customer accounts
5. Cost minimization in all activities in the firm’s value chain, such as R&D, services, sales
force, advertising etc.

Implementing and maintaining a cost leadership strategy means that a company must
consider its value chain of primary and secondary activities and effectively link those activities
with critical focus on efficiency and cost reduction. For example, McDonald’s Restaurants
achieved low costs through standardized products, centralized buying of supplies for a whole
country and so on.

How Low-cost Leadership Delivers Above-average Profits?

The profit advantage gained from low-cost leadership derives from the assertion that low-
cost leaders should be able to sell their products in the market place at around the average
price of the market–see line A-A in Figure below. If such products are not perceived as
comparable or their performance is not acceptable to buyers, a cost leader will be forced to
discount prices below competition in order to gain sales.

Risk associated with cost leadership strategy

(a) Cost leadership may not be sustained

(i) If competitors imitate

(ii) If technology changes
(iii) If other bases for cost leadership erode.

(b) Proximity in differentiation is lost.

(c) Cost focusers achieve even lower costs in segments.

Proximity in differentiation means that companies that choose cost leadership strategy must
offer relatively standardized products with features or characteristics that are acceptable to
customers. In other words, the company must offer a minimum level of differentiation–at the
lowest competitive price. If this minimum level of differentiation is lost, then the strategy of
cost leadership will fail.

Product differentiation strategy

Product differentiation strategy

Differentiation consists of offering a product or service that is perceived as unique or
distinctive by the customer. This allows firms to command a premium price or to retain buyer
loyalty because customers will pay more for what they regard as a better product. A
differentiation strategy can be more profitable than a cost leadership strategy because of the
premium price.

Products can be differentiated in a number of ways so that they stand apart from
standardized products:
1. Superior quality
2. Special or unique features
3. More responsive customer service
4. New technologies
5. Dealer network.

Example: Hero Honda, Nike athletic shoes, Sony, Asian Paints, Mercedes-Benz, BMW etc.

Nokia achieves differentiation through the individual design of its product, while Sony
achieves it by offering superior reliability, service and technology. Mercedes-Benz
differentiates by stressing a distinctive product service image, while Coca Cola differentiates
by building a widely recognized brand. This strategy is often supported by high spending on
advertising and promotion to sustain the brand identity.

McDonald’s is differentiated by its brand name and its ‘Big Mac’ and ‘Ronald McDonald’
products and imagery. In order to differentiate a product, Porter argued that it is necessary
for the producer to incur extra costs, for example, to advertise a brand and thus differentiate
it.

The form of differentiation varies from industry to industry. In construction industry,

equipment durability, spare parts availability and service will feature, while in cosmetics,
differentiation is based on sophistication and exclusivity. Differentiation is aimed at the broad
mass market. It is a viable strategy for earning above average profits because the resulting
brand loyalty lowers customers’ sensitivity to price. Buyer loyalty also serves as an entry
barrier because new entrants must develop their own distinctive competence to differentiate
their products in some way to achieve buyer loyalty.

It is essential for the success of this strategy that the premium price for the differentiated
product must exceed the cost of differentiation. For successfully carrying out the
differentiation strategy, the following are required:
1. Creative flair
2. Engineering skills
3. R&D capabilities
4. Innovative marketing capabilities
5. Motivation for innovation
6. Corporate reputation for quality or technological capabilities.
Differentiated product costs will be higher than those of competitors – see line Z-Z. The
producer of the differentiated product then derives an advantage from its pricing: with its
uniquely differentiated product it is able to charge a premium price, i.e. one that is higher
than its competitors – see line B-B in figure above.

This will deliver above average profits to the company following differentiation strategy.

However, there are two problems associated with differentiation strategies:

1. It is difficult to estimate whether the extra costs incurred in differentiation can be

recovered from the customer by charging a higher price.

2. The successful differentiation may attract competitors to copy the differentiated product
and enter the market segment.

Neither of the above problems is insurmountable but they do weaken the attractiveness of
this option.

Risks of differentiation:
(a) Differentiation may not be sustained
(i) If competitors imitate.
(ii) If features of differentiation become less important to buyers.
(b) Cost proximity is lost.
(c) Firms that follow focus strategy may achieve even greater differentiation in segments.
(d) Dilution of brand identification through product-line.

A company following a differentiation strategy must ensure that the higher price it charges
for its higher quality is not priced too far above the competition, otherwise customers will not
see the extra quality as worth the extra cost. In other words, if the price differential between
the standardized and differentiated product is too high, the risk is that the company provides
a greater level of uniqueness than the customers are willing to pay for.

Segmented focus strategy

Segmented focus strategy

A focus strategy occurs when a firm focuses on a specific niche in the market place and
develops its competitive advantage by offering products especially developed for that niche.
It targets a specific consumer group (e.g. teenagers, babies, old people etc.) or a specific
geographic market (urban areas, rural areas etc.).

Hence, the focus strategy selects a segment or group of segments in the industry and tailors
its strategy to serve them to the exclusion of others. By optimizing its strategy, for the targets,
the focuser seeks to achieve competitive advantage in its target segments, even though it
does not possess a competitive advantage overall.

As Porter observes, while the low cost and differentiation strategies are aimed at achieving
their objectives industry-wide, the entire focus strategy is built around serving a particular
target very well. Sometimes, according to Porter, neither a low-cost leadership strategy nor a
differentiation strategy is possible for an organization across the broad range of the market.

Example: The costs of achieving low-cost leadership may require substantial funds which are
not available. Equally, the costs of differentiation, while serving the mass market of
customers, may be too high. If the differentiation involves quality, it may not be credible to
offer high quality and cheap products under the same brand name. So a new brand name has
to be developed and supported. For these and related reasons, it may be better to adopt a
focus strategy.

The focus strategy has two variants:

1. Cost focus: A firm seeks to achieve low cost position in its target segment only.
2. Differentiation focus: A firm seeks to differentiate its products in its target segment only.

The essence of focus strategy is the exploitation of a narrow target’s differences from the
balance of the industry. Focus builds competitive advantage through high specialization and
concentration of resources in a given niche. A focus strategy can serve the needs of a niche
segment (a) by identifying gaps not covered by existing players, and (b) by developing superior
skills or efficiency while serving such narrow segments. By targeting a small, specialized group
of buyers it should be possible to earn higher than average profits, either by charging a
premium price for exceptional quality or by a cheap and cheerful low-priced product. In the
global car market, Rolls Royce and Ferrari are clearly niche players. They have only a minute
percentage of the market world-wide. Their niche is premium product and premium price.

The focus strategy rests on the premise that the firm is able to serve its narrow strategic target
more effectively and efficiently than competitors who are competing more broadly. As a
result, the firm achieves either differentiation from better meeting the needs of the particular
target, or lower costs in serving this target, or both. Even though the focus strategy does not
achieve low cost or differentiation industry-wide, it does so in its narrow market target.

The focus strategy requires for its success the same common factors, as are required for the
success of cost leadership and differentiation, except that they are directed at the particular
target market.

There are, however, some problems with the focus strategy:

1. By definition, the niche is small and may not be large enough to justify attention.
2. Cost focus may be difficult if economies of scale are important in an industry such as the
car industry.
3. The niche is clearly specialist in nature and may disappear over time.

None of these problems is insurmountable. Many small and medium-sized companies have
found that this is the most useful strategy to explore.

Risks of Focus: The competitive risks of focus strategy are similar to those previously noted
for cost leadership and differentiation strategies, with the following additions:

(a) Focus strategy is not sustained if competitors imitate it.

(b) The target segment may become structurally unattractive.
(i) if structure erodes.
(ii) if demand disappears.
(c) Competitors may successfully focus on an even smaller segment of the market, out
focusing the focuser, or focus only on the most profitable slice of the focuser’s chosen
segment.
(d) An industry-wide competitor may recognize the attractiveness of the segment served by
the focuser and mobilize its superior resources to better serve the segment’s need.
(e) Preferences and needs of the narrow segment may become more similar to the broad
market, reducing or eliminating the advantage of focusing.

Hybrid Strategy

What are Hybrid Strategies?

Hybrid strategies include a combination of generic strategies, for example, simultaneous
pursuing of both low-cost leadership and differentiation strategy. Research has found that
such hybrid strategies have contributed to competitive advantage in some situations. For
example, successful implementation of differentiation strategy may result in increased sales
volume and as sales volume increases costs drop due to economies of scale. Thus, successful
differentiators can also be the lowest cost producers in an industry.
Porter (1994) later offered some clarification: “A company cannot completely ignore quality
and differentiation in the presence of cost advantages, and vice-versa. Progress can be made
against both types of advantage simultaneously.” However, he notes that these are trade–
offs between the two and that companies should “maintain a clear commitment to superiority
in one of them”.
 Chapter 6: Dynamics of Corporate Expansion
Chapter 6:
• Dynamics of corporate expansion
• Crafting corporate strategy
• Corporate levels of diversification
• Levels and types of corporate diversification strategy
• Rationale of corporate diversification strategy

Dynamics of Corporate Expansion

Dynamics of Corporate Expansion

Corporate strategy is primarily about the choice of direction for the corporation as a whole.
The basic purpose of a corporate strategy is to add value to the individual businesses in it. A
corporate strategy involves decisions relating to the choice of businesses, allocation of
resources among different businesses, transferring skills and capabilities from one set of
businesses to others, and managing and nurturing a portfolio of businesses in such a way as
to obtain synergies among product lines and business units, so that the corporate whole is
greater than the sum of its individual business units. The essence of a corporate strategy vis-
a-vis a business-level strategy is summarized in figure below:

Managers at the corporate level act on behalf of shareholders and provide strategic guidance
to business units. In these circumstances, a key question that arises is to what extent and how
might the corporate level add value to what the businesses do; or at least how it might avoid
destroying value. Corporate strategy is thus concerned with two basic issues:
1. What businesses should a firm compete in?
2. How can these businesses be coordinated and managed so that they create “Synergy.”
Expansion Strategies
Growth strategies are the most widely pursued corporate strategies. Companies that do
business in expanding industries must grow to survive. A company can grow internally by
expanding its operations or it can grow externally through mergers, acquisitions, joint
ventures or strategic alliances.

Reasons for Pursuing Growth Strategies

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

Crafting Corporate Strategy

Crafting corporate strategy

The corporate-level strategy is the approach of a corporate center to manage a multi-
company group of organizations strategically. These are of sufficient size to operate in several
markets and more than one industry. A central headquarters is typically a corporate center.
A concern for any organization, but especially for one made up of several companies is how
to manage the whole strategically so that the various organizational parts work effectively
together to achieve the strategic purpose. Igor Ansoff (1965), one of the fathers of strategic
management, emphasized the importance of corporate synergy, which he called '2 + 2 = 5
effects,' in which an organization’s parts have a combined performance that is greater than
the sum of its parts.

Many multi-business organizations have independently existent businesses. Some

businesses, though, do better if they are grouped under single corporate management with
other businesses. The corporate center creates sufficient extra value in this instance to more
than offset the costs of the center.

The Product Expansion Grid

Ansoff suggests four key ways to expand the markets and goods of an enterprise, which he
demonstrates with his product- market expansion grid (sometimes called the growth vector
matrix). Four directions of expansion are possible: market penetration, market development,
product development, and diversification.
Market penetration means increasing the current company – using the same range of
products to maximize the share of established markets in an enterprise. Of the four options,
this is the least risky strategy. For example, an organization should be able to understand its
existing customers and exploit existing activities to encourage them to buy more. It can also
encourage prospective customers, who may currently buy from rivals.

Market development introduces the existing products and services from an organization into
new markets. To move into new areas, active research and marketing strategy is typically
needed to provide an initial entry and target segments. Existing and new markets are likely to
have significant potential differences, so caution and understanding are required.

Product development introduces new products and services to existing markets. Ideas for new
products usually come from knowing current customers ' expectations and behavior.
However, if innovation is piloted or established with existing customers, the possibility of new
product failure is minimized.

Diversification involves new products and services being introduced into new markets. This is
the more risky option. A company must take time to build new tools and consider consumer
dynamics and emerging goods. Inorganic growth provides an attractive shape for large
organizations way forward to gain the necessary expertise if investors support the move with
new finance to cover the costs of acquisitions.

Prospectors, Analyzers, Defenders, and Reactors

Raymond E. Miles and Charles C. Snow (1978) argue in their seminal book Organization
Strategy, Structure, and Process that strategy is shaped by how organizations decide to tackle
three fundamental issues. The first is entrepreneurial – how to choose a general and target
market; the second is engineering, how to choose the most suitable means to offer products
and services; and the third is an administrative issue – how to organize and manage the work.
How organizations address these issues identifies four distinct organizational types:
prospectors, analyzers, advocates, and reactors.
Prospectors
These diversify a revolutionary approach and encourage it. Organizational thinking, searching
for new strategic roles, is exploratory. Flexibility is what characterizes prospectors;
coordination and facilitation are essential. Planning is broad and sensitive to outside changes.
Prospectors will likely be first movers.

Defenders
They address a narrow audience and focus mainly on the engineering issue of how to
manufacture value-adding goods and services. Continuous review and improvement are
essential, and organizations are committed to a core mission. Controls are centralized and are
responsive to internal conditions. Defenders are more functionally oriented, with the
supremacy of finance and development.

Analyzers
These use market development, review, and planning, and implement projects of strategic
nature. Their features are a combination of prospector and defender approaches aimed at
avoiding excessive risks and doing well in delivering new products and services. Analyzers are
represented by more prominent firms, covering a variety of markets and industries.

Reactors
These use market penetration, which tends to use expediency and crisis management over
the short term. The strategy is to avoid overcrowding. Their response to change is typically
incoherent and inappropriate since there is a mismatch in the three fundamental issues. Often,
reactors have little control over their environment outside.

Miles and Snow argue that the strategy, structure, and processes of an organization should
be consistent, though they suggest that a single organization can use different strategies for
different projects. They argue that no single type of strategy is best; instead, what determines
an organization's ultimate success is the fact of establishing and sustaining a systematic
strategy that takes into consideration the environment, technology, and structure of the
organization. Pick a strategy in other words and stick to it.

Corporate Levels of Diversification

Corporate Levels of Diversification

Diversification Strategies - Diversification is the process of adding new businesses to the
existing businesses of the company. In other words, diversification adds new products or
markets to the existing ones. A diversified company is one that has two or more distinct
businesses. The diversification strategy is concerned with achieving a greater market from a
greater range of products in order to maximize profits. From the risk point of view, companies
attempt to spread their risk by diversifying into several products or industries.

Diversification can be achieved through a variety of ways:

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

Mergers and Acquisitions

A merger is an agreement between two organizations under common ownership to combine
and integrate their operations. A merger of equals is rare because one of the companies is
typically more powerful, and in post-merger negotiations and reorganization, the
management is likely to be preferred. An acquisition occurs when one organization purchases
a controlling interest in another to create a larger entity or, more rarely, restructure the
acquisition with a view to later reselling at a profit. Surveys conducted by McKinsey and
Company management consultancy suggest that the most common rationale for M&A is the
acquisition of new products, intellectual property, and capabilities. Other reasons include a
need to incubate new businesses, enter new geographies, and acquire increased scale.

The direction of integration: vertical and horizontal

Expansion of activities in the industry within an organization takes two directions: vertical and
horizontal. Vertical integration is the expansion of the activities of an organization up or down
a distribution chain. Horizontal integration is the expansion of the activities of an organization
sideways in an industry, achieved through the acquisition of rivals within the same part of the
supply chain.

Backward vertical integration enables a company to control some of the tools used as
inputs in its goods and services. Further vertical integration up the distribution chain provides
greater control over the fulfillment centers and retailers. An alternate approach to regulating
the members of a company in a supply chain, however, is to manipulate their negotiating
power by buying power. This is often a preferred strategy if an organization wishes to spread
its risk across multiple providers.

Horizontal integration happens when rivals are taken over and combined with the
internal operations that provide identical or complementary goods and services. With time
industries tend to get more concentrated as the activity of horizontal integration narrows
down the equal number.

M&A is a fast way to increase operational scale and market power. It can also take an
acquiring organization into new markets and industries, and M&A is traditionally associated
with new and expanding branches and markets. M&A activity results are often problematic,
however. Success requires a clear consolidation strategy before completing an acquisition.
The integration process needs to be quick and definitive for achieving cohesion once the
financial transaction is over. It requires a clear understanding of an acquired organization on
the part of the acquiring organization's senior management. The most successful mergers
have been between organizations with an already established history of partnerships, such as
joint ventures or alliances.

Philippe Haspeslagh and David Jemison (1991) propose that the degree of strategic
interdependence between the acquired and acquiring entities depends on the anticipated
value it generates. It is focused on the importance of exchanging resources at the
organizational level – a transfer of functional expertise to enhance efficiency and experience
through transferring people or sharing information or a transfer of managers. Extra value can
be achieved by combining the benefits created by leveraging resources (such as borrowing
capacity, added buying power, and increased market power).

Haspeslagh and Jemison suggest four approaches: absorption, when the acquisition should
be fully integrated into the acquisition organization; preservation, when full autonomy should
be granted to the acquired organization; symbiosis, when integration should be gradual and
existing organizational boundaries should be permeable but maintained; and retention when
there is no intention to do so.

A significant element of M&A is a cultural fit, where an acquisition's corporate culture will be
compatible with that of the acquiring organization. Evaluation of strategic compatibility is
relatively straightforward, as organizations can evaluate whether two organizations are
compatible in terms of geography, goods, consumers, or technologies. Cultural fit is
complicated because companies have unique ways of doing business, and sometimes very
different. In particular, they have specific strategic capabilities that are difficult to define and
understand for various organizations. An acquired organization’s culture, say, a sales culture,
can fight the culture of the acquiring organization, say, an engineering company.

Thus, the first concern in diversifying is what new industries to get into and whether to enter
by starting a new business unit or by acquiring a company already in the industry or by
forming a joint venture or strategic alliance with another company. A company can diversify
narrowly into a few industries or broadly into many industries. The ultimate objective of
diversification is to build shareholder value i.e., increasing value of the firm’s stock.

Reasons for Diversification: The important reasons for a company diversifying their business
are:
1. Saturation or decline of the current business: If the company is faced with diminishing
market opportunities and stagnating sales in its principal business, it may become necessary
to enter new businesses to achieve growth.
2. Better opportunities: Even when the current business provides scope for further growth,
there may be better opportunities in new lines of business. A firm in a “sunset industry” may
be tempted to enter a “sunrise industry.”
3. Sharing of resources and strengths: Diversification enables companies to leverage existing
competencies and capabilities by expanding into businesses where these resources become
valuable competitive assets. By sharing production facilities, technological capabilities,
managerial expertise, distribution channels, sales force, financial resources etc., synergy can
be obtained.
4. New avenues for reducing costs: Diversifying into closely related businesses opens new
avenues for reducing costs.
5. Technologies and products: By expanding into industries, the company can obtain new
technologies and products, which can complement its present businesses.
6. Use of brand name: Through diversification, the company can transfer its powerful and
well-known brand name to the products of other businesses.
7. Risk minimization: The big risk of a single-business firm is having all its eggs in one industry
basket. If the market is eroded by the appearance of new technologies, new products or fast–
changing consumer preferences, then a company’s prospects can quickly diminish.

Levels and Types of Corporate Diversification Strategy

Levels and Types of Corporate Diversification Strategy

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

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

diversification. It involves acquisition of businesses that are related to the acquiring firm in
terms of technology, markets or products. The selected new business has compatibility with
the firm’s current business. The ideal concentric diversification occurs when the combined
profits increase the strengths and opportunities and decrease the weaknesses and threats.
Thus, the acquiring firm searches for new businesses whose products, markets, distribution
channels and technologies are similar to its own, and whose acquisition results in “Synergy’’.
This is possible with related diversification because companies strive to enter product markets
that share resources and capabilities with their existing business units.

Diversification must create value for shareholders. But this is not always the case. Acquiring
firms typically pay premiums when they acquire a target firm. Besides, the risks and
uncertainties are high. Why do firms still go in for diversification? The answer, in one word, is
“Synergy”. In related diversification, synergy comes from businesses sharing tangible and
intangible resources. Additionally, firms can enhance their ‘market power’ through pooled
negotiating power. There are other advantages of concentric diversification.

Advantages
(a) Increases the firm’s stock value.
(b) Increases the growth rate of the firm.
(c) Better use of funds than ploughing them back into internal growth.
(d) Improves the stability of earnings and sales.
(e) Balances the product line when the life cycle of the current products has peaked.
(f) Helps to acquire a needed resource quickly (e.g. technology or innovative management
etc.)
(g) Achieves tax savings.
(h) Increases efficiency and profitability through synergy.
(i) Reduces risk.

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

diversification. The new business will have no relationship to the company’s technology,
products or markets. For example, ITC which is basically a cigarette manufacturer, has
diversified into hotels, edible oils, financial services etc. Similarly, Reliance Industries, which
is basically a textile manufacturer, has diversified into petro chemicals, telecommunications,
retailing etc. Unlike concentric diversification, conglomerate diversification does not result in
much of synergy. The main objective is profit motive. But it has important advantages.

Advantages
(a) Business risk is scattered over diverse industries.
(b) Financial resources are invested in industries that offer the best profit prospects.
(c) Buying distressed businesses at a low price can enhance shareholder wealth.
(d) Company profitability can be more stable in economic upswings and downswings.

Disadvantages
(a) It is difficult to manage different businesses effectively.
(b) The new business may not provide any competitive advantage if it has no strategic fits

The differences between concentric and conglomerate diversification are summarized below:

Rationale of Corporate Diversification Strategy

Rationale of Corporate Diversification Strategy

Example: Digital cameras have diminished markets for film and film processing; CD and DVD
technology has replaced cassette tapes and floppy disks and mobile phones are dominating
landline phones. Thus, there are substantial risks to single-business companies, and
diversification into other businesses minimizes this risk. But diversification itself can become
risky.

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

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

Caselet

Diversification brings Success for ITC

For ITC Ltd., 2007-08 continued to be year of quiet growth. Just more launches in its relatively
new segment of non-cigarettes fast-moving consumer goods, and solid growth. As in the past
few years, ITC's non-cigarettes businesses continued to grow at a scorching pace, accounting
for a bigger share of overall revenues. "The non-cigarette portfolio grew by 37.6% during
2006-07 and accounted during that year for 52.3% of the company's net turnover," an ITC
spokesman said. In fact, over the first three quarters of 2007-08, ITC's non-cigarette FMCG
businesses have grown by 48% on the same period last year, "Indicating that its plans for
increasing market share and standing are succeeding".

The branded packaged foods business continued to expand rapidly, with the focus on snacks
range Bingo. The biscuit category continued its growth momentum with the 'Sunfeast' range
of biscuits launching 'Coconut' and 'Nice' variants and the addition of 'Sunfeast BenneVita
Flaxseed' biscuits. Aashirvaad atta and kitchen ingredients retained their top slots at the
national level, with the spices category adding an organic range. In the confectionery
category, which grew by 38% in the third quarter, ITC cited AC Nielsen data to claim market
leader status in throat lozenges. Instant mixes and pasta powered the sales of its ready-to-
eat foods under the Kitchens of India and Aashirvaad brands.

In Lifestyle apparel, ITC launched Miss Players' fashion wear for young women to complement
its range for men.

Overall, the biscuit category grew by 58% during the last quarter, ready-to-eat foods under
the Kitchens of India and Aashirvaad brands by 63%, and the lifestyle business by 26%. For
the industry, the most significant initiative to watch was ITC's foray into premium personal
care products with its Fiama Di Wills range of shampoos, conditioners, shower gels, and soaps.
In the popular segment, ITC has launched a range of soaps and shampoos under the brand
name Superia.

Ravi Naware, chief executive of ITC's foods business, was quoted recently as saying that the
business will make a positive contribution to ITC's bottomline in the next two to three years.
In hotels, ITC's Fortune Park brand was making the news during the year, with a rapid rollout
of first class business hotels.

In the agri-business segment, the e-choupal network is trying out a pilot in retailing fresh fruits
and vegetables. The e-choupals have already specialised in feeding ITC high quality wheat and
potato, among other commodities, grown by farmers with help from the e-choupal.
 Chapter 7: Globalization and International Strategy
Chapter 7:
-Opportunities in the global market
-Benefits of global strategies
-Strategic approaches to international strategies
-Business level strategy in the global market
-Level of corporate strategy in international operations
-Mode of entry in international operations
-Risk international environment

Opportunities in the Global Market

The effects of globalization, especially for manufacturing industries, on the competitive
advantage of nations with developed economies, have been profound. Emerging economies
have a significant cost advantage for large foreign multinationals, and many have moved parts
of their production to low-wage Asian nations. Although the supply-side advantages are
substantial on the demand side, market sizes and development in emerging economies also
give growth space that would be unlikely in domestic markets.
Internationalization - When the focus of a business is its domestic operations, but a portion
of its activities are outside the home country, it is called an "International Company". In other
words, an international company is one that is primarily based in a single country but that
acquires some meaningful share of its resources or revenues from other countries. For
example, a small company engaged in exporting some of its products beyond its home
country, is called "international" in its operations.
Internationalization involves creating an international division and exporting the products
through that division. The firm really focuses on the domestic market, and exports what is
demanded abroad. All control is retained at home office regarding product and marketing
strategies. As a firm becomes more successful abroad, it might set up manufacturing and
marketing facilities in the foreign country, and allow a certain degree of customization.
Country units are allowed to make some minor adaptations to products to suit local needs.
But they have far less independence and autonomy compared to multi-domestic companies.
All sources of core competencies are centralized.
The majority of large US multinationals pursued the international strategy in the decades
following World War II. These companies centralized R&D and product development but
established manufacturing facilities as well as marketing divisions abroad. Companies such as
Mc Donald's and Kellogg's are examples of firms that followed such a strategy in the
beginning. Although these companies do make some local adaptations, they are of a very
limited nature. With increasing pressure to reduce costs due to global competition, especially
from low-cost countries, the use of this strategy has become limited.
The disadvantages of this strategy are:
1. By concentrating most of its activities in one location, it fails to take advantage of the
benefit of an optimally distributed value chain.
2. It is susceptible to higher levels of currency risks, because the company is too closely
associated with a single country and increase in the value of currency may suddenly make the
product unattractive abroad.

Benefits of Global Strategies

Global strategy- The global strategy involves using a standardized range of products and
services for all international markets within an organization. It offers economies of scale from
centralized manufacturing, distribution, and marketing. It fits circumstances where the
lifestyles and desires of customers overlap, as is often the case with multinational brands.
A brand is a name or label that incorporates a visual design and image and distinguishes the
products and services of an organization from rivals. Through communication media and ads,
various positive qualities are associated with the brand to generate interest beyond the
inherent functional value of the product or service purchased. When branding is successful,
it provides the manufacturer with competitive price discounts and builds high consumer
loyalty.
Brands are critical for global strategy because they represent a single offer and a guarantee
of benefits anywhere transactions are made. Global brands reach throughout the world,
although many of them were initially domestic in design but the wake of global changes.
Media that they could move into a new dimension. International businesses should be
targeting cities in emerging markets where there are more affluent consumers, and
competition intensity is typically higher than in a country at large.
BASIC BENEFITS OF GLOBAL STRATEGIES
1. Increase Market size- Firms can expand the size of their potential market—sometimes
dramatically—by using an international strategy to establish stronger positions in markets
outside their domestic market. As noted, access to additional consumers is a key reason
Carrefour sees international markets such as China as a major source of growth.
2. Economies of Scale and Learning - By expanding the number of markets in which they
compete, firms may be able to enjoy economies of scale, particularly in manufacturing
operations. More broadly, firms able to make continual process improvements enhance their
ability to reduce costs while, hopefully, increasing the value their products create for
customers. For example, rivals Airbus SAS and Boeing have multiple manufacturing facilities
and outsource some activities to firms located throughout the world, partly for the purpose
of developing economies of scale as a source of being able to create value for customers.
3. Locating Advantage - Locating facilities outside their domestic market can sometimes help
firms reduce costs. This benefit of an international strategy accrues to the firm when its
facilities in international locations provide easier access to lower cost labor, energy, and other
natural resources. Other location advantages include access to critical supplies and to
customers.
Once positioned in an attractive location, firms must manage their facilities effectively to gain
the full benefit of a location advantage.
 Strategic Approaches to International Strategies
International Strategies - Firms choose to use one or both basic types of international
strategy: business-level international strategy and corporate-level international strategy.
At the business-level, firms select from among the generic strategies of cost leadership,
differentiation, focused cost leadership, focused differentiation, and integrated cost
leadership/ differentiation. At the corporate level, multidomestic, global, and transnational
international strategies (the transnational is a combination of the multidomestic and global
strategies) are considered. To contribute to the firm’s efforts to achieve strategic
competitiveness in the form of improved performance and enhanced innovation, each
international strategy the firm uses must be based on one or more core competencies.
1. International Business-Level Strategy
Firms considering the use of any international strategy first develop domestic-market
strategies (at the business level and at the corporate level if the firm has diversified at the
product level). This is important because the firm may be able to use some of the capabilities
and core competencies it has developed in its domestic market as the foundation for
competitive success in international markets. However, research results indicate that the
value created by relying on capabilities and core competencies developed in domestic
markets as a source of success in international markets diminishes as a firm’s geographic
diversity increases.

2. International Corporate-Level Strategy

A firm’s international business-level strategy is also based, at least partially, on its
international corporate-level strategy. Some international corporate-level strategies give
individual country units the authority to develop their own business-level strategies, while
others dictate the business-level strategies in order to standardize the firm’s products and
sharing of resources across countries.
International corporate-level strategy focuses on the scope of a firm’s operations through
geographic diversification. International corporate-level strategy is required when the firm
operates in multiple industries that are located in multiple countries or regions (e.g.,
Southeast Asia or the European Union) and in which it sells multiple products. The
headquarters unit guides the strategy, although as noted, business- or country-level
managers can have substantial strategic input depending on the type of international
corporate-level strategy the firm uses. The three international corporate-level strategies are
shown in Figure 8.4; the international corporate-level strategies vary in terms of two
dimensions—the need for global integration and the need for local responsiveness.

Business Level Strategy in The Global Market

Global organizations have four types of strategy, depending on the strength of the pressure
to keep the cost of economic integration low and the strength of the need to respond to local
and national conditions: multi-domestic, global, international, and transnational (Bartlett C.
and Beamish P., 2018).
 Level of Corporate Strategy in International Operations
International strategy
The international strategy uses a central direction for facilitating common ways of working
across the subsidiaries of an organization. The emphasis is on the core of a corporation when
global organizations are united around a common organizational culture and mutual values,
principles of management, and business methodologies. This represents the belief that
proper diversification relies on the company's core products rather than their end products
and sequence vices.
International strategy is thus focused on the center-managed enterprise-wide goals. Those
organizations are likely to develop new practices and disseminate them to subsidiaries
centrally; policies and incentives are consistently maintained from country to country. While
different experiments are a prerequisite for senior management, the objective is to build a
common corporate culture across all companies.

Transnational strategies
A mixture of multi-domestic and global strategies makes use of transnational strategy to
exploit markets in different countries. Local markets are accessible globally, but they have
specific cultural requirements that require a personalized approach to the region — allies. In
this, the more significant organization's interests must be balanced with the local
management needs and its need to make local strategic decisions.
One form of transnational strategy is based on flexible production, using common production
platforms that facilitate the extensive use of the same type of modular components. The Car
industry belongs to the best examples. General Motors (GM) and Ford both sought to develop
a world automobile during the 1980s and 1990s. They aimed at gaining economies of scale by
selling the same car everywhere, instead of separately developing vehicles for each region.
Ultimately, finding that roads are different worldwide and require different things from cars,
they abandoned this idea in favor of platforms (or architectures) designed to produce a
collective group of basic models; the models are varied at local assembly points and marketed
in ways that suit local, national conditions. Car companies centralize their R&D while
dispersing manufacturing to units and suppliers that are relatively low-cost assembly.
Micro multinational - A micro-multinational is a small to midsize manufacturer or service
provider that maintains a hub in a domestic economy, while its international customers are
spread across the world. A micro multinational is typically located in a niche sector of an
industry where novel technologies used that are esoteric yet vital to a more significant
industry. Competitors are usually few. Before the advent of the Internet, organizations had to
be significant to gain a global reach, but this is no longer true.
From a startup, entrepreneurs can access international markets at a little initial cost. While
many of these have experienced chequered histories, some of the most successful have
become very big indeed and are household names, for example, Amazon and eBay.
 Mode of Entry in International Operations

Mode of entry in International Operation

1. Exporting- For many firms, exporting is the initial mode of entry used. Exporting is an
entry mode through which the firm sends products it produces in its domestic market to
international markets. Exporting is a popular entry mode choice for small businesses to
initiate an international strategy
2. Licensing - is an entry mode in which an agreement is formed that allows a foreign
company to purchase the right to manufacture and sell a firm’s products within a host
country’s market or a set of host countries’ markets. The licensor is normally paid a royalty
on each unit produced and sold. The licensee takes the risks and makes the monetary
investments in facilities for manufacturing, marketing, and distributing products. As a result,
licensing is possibly the least costly form of international diversification. As with exporting,
licensing is an attractive entry mode option for smaller firms, and potentially for newer firms
as well.
3. Strategic Alliance - Increasingly popular as an entry mode among firms using international
strategies, a strategic alliance finds a firm collaborating with another company in a different
setting in order to enter one or more international markets. Firms share the risks and the
resources required to enter international markets when using strategic alliances. Moreover,
because partners bring their unique resources together for the purpose of working
collaboratively, strategic alliances can facilitate developing new capabilities and possibly core
competencies that may contribute to the firm’s strategic competitiveness. Indeed, developing
and learning how to use new capabilities and/or competencies (particularly those related to
technology) is often a key purpose for which firms use strategic alliances as an entry mode.
Firms should be aware that establishing trust between partners is critical for developing and
managing technology-based capabilities while using strategic alliances.
4. Acquisitions - When a firm acquires another company to enter an international market, it
has completed a cross-border acquisition. Specifically, a cross-border acquisition is an entry
mode through which a firm from one country acquires a stake in or purchases all of a firm
located in another country.
5. New Wholly Owned Subsidiary - A greenfield venture is an entry mode through which a
firm invests directly in another country or market by establishing a new wholly owned
subsidiary. The process of creating a greenfield venture is often complex and potentially
costly, but this entry mode affords maximum control to the firm and has the greatest amount
of potential to contribute to the firm’s strategic competitiveness as it implements
international strategies. This potential is especially true for firms with strong intangible
capabilities that might be leveraged through a greenfield venture. Moreover, having
additional control over its operations in a foreign market is especially advantageous when the
firm has proprietary technology.
6. Dynamics of Mode of Entry - Several factors affect the firm’s choice about how to enter
international markets. Market entry is often achieved initially through exporting, which
requires no foreign manufacturing expertise and investment only in distribution. Licensing
can facilitate the product improvements necessary to enter foreign markets, as in the
Komatsu example. Strategic alliances are a popular entry mode because they allow a firm to
connect with an experienced partner already in the market. Partly because of this,
geographically diversifying firms often use alliances in uncertain situations, such as an
emerging economy where there is significant risk (e.g., Venezuela). However, if intellectual
property rights in the emerging economy are not well protected, the number of firms in the
industry is growing fast, and the need for global integration is high, other entry modes such
as a joint venture or a wholly owned subsidiary are preferred. In the final analysis though, all
three modes—export, licensing, and strategic alliance—can be effective means of initially
entering new markets and for developing a presence in those markets.

Strategies for local companies in emerging markets

Niraj Dawar and Tony Frost (1999) put forward a strategic framework for local companies to
assess their competitiveness in an emerging market based on the strength of globalization
pressures and the degree to which the assets of a company are internationally transferrable.
Dodger strategy - A local company could follow a dodger strategy if its resources tailored to
local conditions and if it is receiving intense international competitive pressure. It involves
working with a multinational, possibly by providing local services or entering into a joint
venture. Local businesses are likely to have a low-cost advantage in the early stages of
increased competition. However, once this diminishes, it may be preferable to sell out to
foreign businesses.
Defender- If pressure from international businesses is low, a defender strategy is more
appropriate. A local company can target market segments where multinational competition
is weak. A local company may have developed low-cost mass-market brands positioned
around regional beliefs about traditional ingredients that multinationals ignore.
Contender - Local businesses may adopt a contender strategy by enhancing their resources
and skills to match relatively limited and specialized markets in other regions or countries
where foreign organizations compete vigorously. Generally speaking, more giant
multinational corporations leave smaller markets to themselves.
Extender - An extender strategy to move domestic goods and services to specific markets
provides incentives for expansion into other regions and countries with low levels of
competition.
 Risk International Environment

1. Political risks “denote the probability of disruption of the operations of multinational

enterprises by political forces or events whether they occur in host countries, home country,
or result from changes in the international environment

2. Economic risks include fundamental weaknesses in a country or region’s economy with

the potential to cause adverse effects on firms’ efforts to successfully implement their
international strategies. As illustrated in the example of Russian institutional instability and
property rights, political risks and economic risks are interdependent. If firms cannot protect
their intellectual property, they are highly unlikely to use a means of entering a foreign market
that involves significant and direct investments. Therefore, countries need to create, sustain,
and enforce strong intellectual property rights in order to attract foreign direct investment

National Cultures
There is evidence that companies operating in different countries can create a one-company
culture by moving business strategies and management principles between countries. It is
important for organizations that take a competitive advantage from a resource-based
perspective. However, the national management culture is likely to influence the style of
management, and this influences organizational culture. Pioneering research on and
managing national cultures by Geert Hofstede (1980) suggested that there are no universal
management styles. He identified five dimensions of national culture that influence how
organizations are managed:
1. Power distance: the degree of inequality a national culture considers reasonable is most
significant for Latino, Asian, African, and Arab communities and low for northern Europeans.
2. Individualism versus collectivism: the extent to which it is appropriate for people to look
after themselves and cared for – developed countries have the greatest individualism.
3. Masculinity versus femininity: the acceptable balance between dominance, assertiveness,
and acquisition compared to regard for people, feelings, and quality of life – Nordic countries
have the lowest difference. In contrast, masculinity is very high in Japan.
4. Uncertainty avoidance: the degree of preference for structured versus unstructured
situations – it is high for Latin American countries, southern Europe, and Eastern Europe,
German-speaking countries, and Japan; it is low in Anglo-American and Nordic countries and
China.
5. Long-term versus short-term orientation: persistence to reach a future rather than live in
the present, follow tradition, and other social obligations – long-term orientations are found
in China and Japan but are low in Anglo-American, Islamic, African, and Latin American
countries.
Such cultural diversity is linked to differences between countries like social and economic
institutions. This will likely have a strong influence on how large organizations, especially
multinationals, organize and manage cross-border strategic management. Much was done
about a crisis of capitalism at the time of the 2008 global financial crisis, in particular about
which are the most appropriate modes or varieties of capitalism for global strategy.

Varieties of Capitalism
Economists Peter Hall and David Soskice (2001) make an important observation that the
nature of an economy's capitalism depends on the strategic interactions and
complementarities between institutions and organizations. These provide the dominant
mode of resource coordination that businesses will use to manage strategically. They describe
two opposing modes: a liberal market economy in which competitive market structures
emphasized; and a structured market economy in which collective institutional relations
function to eliminate long-term uncertainty.
One priority for executives is to maintain a dividend level and a high share price that will
protect the company from a hostile takeover. Government policies intended to promote open
competition. The participation of stakeholders such as employer associations, trade unions,
and professional networks is essential for cross-sharing support and ideas in a coordinated
market economy. In these economies, the regulatory systems work to facilitate the free
movement of information and collaboration between industry.
The US, UK, Australia, Canada, New Zealand, and Ireland are recognized as liberal market
economies while the countries of central and northern Europe and Japan identified as
coordinated market economies. Hall and Soskice point out how a free market ethos
characterizes the United States and the United Kingdom, while the German economy
characterized by close cooperation between companies, banks, owners, and employees.
Likewise, Japan's economy depends on a coordinated relationship between technical
societies, banking and industrial organizations, and government agencies.
China's economic growth has made many analysts see state capitalism as a threat to free
market economies. It reported that China offers aggressive financial support to its businesses
to invest overseas and sign deals in sectors such as energy and raw materials to build new
multinationals while securing strategic commodity supplies. Global multinationals are also
forced to pass the knowledge of essential technologies in exchange for access to the Chinese
market.

Strategic Alliances and Partnerships

Strategic alliances and partnerships are formal and informal associations and inter-agency
collaborations. A structured partnership requires a legally binding agreement between two
organizations to collaborate for a common goal that may include a large project and shared
resources. It may involve the establishment of another independent organization, such as a
joint venture; this involves the establishment of a legally separate company in which the
partners take agreed equity interests. Agreements made to establish a common purpose,
standards, and contractual arrangements covering issues such as licensing, franchising,
distribution rights, and manufacturing contracts. Informal partnerships with clients with large
accounts, leading distributors, preferred manufacturers, major institutional shareholders,
and other stakeholders can enter into.
The reasons for the partnerships and alliances are varied and numerous. In return for market
access, it is often a matter of sharing knowledge about new technologies. Alliances also help
organizations find out about management approaches from another company or unfamiliar
markets. They can help cut capital costs and spread risk, and they are often a more suitable
form of market entry for regulators. They are not with- problems though. A Chinese study of
joint ventures found that the main difficulties foreign organizations have encountered with
their Chinese partners were cultural differences and communication issues (Tian, 2016).
 Chapter 8: Structural Dynamics and Control Strategies
Chapter 8:
-Structural alignment of organization
-Importance of organizational control
-Interdependence of structure and strategy
-Patterns of relationship between strategy and structure

Structural Alignment of Organization

Organizational structure specifies the firm’s formal reporting relationships, procedures,
controls, and authority and decision-making processes. A firm’s structure determines and
specifies the decisions that are to be made and the work that is to be completed by everyone
within an organization as a result of those decisions. Organizational routines serve as
processes that are used to complete the work required by individual strategies.

There are seven basic types of organizational structures:

1. Simple structure
2. Functional structure
3. Divisional structure
4. SBU structure
5. Matrix structure
6. Network structure
7. Virtual structure

Simple Structure: In this structure, the owner-manager controls all activities and makes all
the decisions. This structure may be appropriate for small and young organizations.
Coordination of tasks is done through direct supervision. There is little specialization of tasks,
few rules and regulations and communication are informal.

Functional Structure: Functional structures are grouped based on major functions performed.
Each function is led by a functional specialist. Functional structures are formed in
organizations in which there is a single or closely related products or services.
Divisional Structure: Divisional structures are used by diversified organizations. In a divisional
structure, divisions are created as self-contained units with separate functional departments
for each division. A division may be organized around geographic area, products, customers
etc. The head office determines corporate strategy, allocates resources among divisions and
appoints and rewards the heads of these divisions. Each division is responsible for product,
market and financial objectives for the division as well as their division’s contribution to
overall corporate performance.

Matrix Structure: The matrix structure is, in effect, a combination of functional and divisional
structures. In this structure, there are functional managers and product or project managers.
Employees report to one functional manager and to one or more project managers. For
example, a product group wants to develop a new product. For this project it obtains
personnel from functional departments like Finance, Production, Marketing, HR, Engineering
etc. These personnel work under the product manager for the duration of the project. Thus,
they are responsible for two managers – the product manager and the manager of their
functional area.
While functional heads have vertical control over the functional managers, the product or
project heads have horizontal control over them. Thus, matrix structure provides a dual
reporting. The dual lines of authority make the matrix structure unique. The matrix structure
has been used successfully by companies such as IBM, Unilever, Ford Motor Company etc.

Network Structure: A network organization outsources or subcontracts many of its major

functions to separate companies and coordinates their activities from a small headquarters.
Rather than being housed under one roof, activities like design, manufacturing, marketing,
distribution etc. are outsourced to separate organizations that are connected electronically
to the central office.

Virtual Organization: This is an extension of the network structure. In this approach,

independent organizations form temporary alliances to exploit specific opportunities, then
disband when their objectives are met. The term virtual means “being in effect but not
actually so”. The virtual organizations consist of a network of independent companies –
suppliers, customers or even competitors – linked together to share skills, costs, markets and
rewards. The members of a virtual organization pool and share the knowledge and expertise
of each other.

Creating Agile Virtual Organization: New ways to manage change and to compete in a rapidly
changing business world are emerging under the concept of the agile enterprise. Agile
organizations can be almost any size or type, but what distinguishes them from their
lumbering traditional business counterparts is the ability to read and to react quickly.

They can also be virtual, meaning they can reconfigure themselves quickly and temporarily in
response to a challenge, which gives them agility, but then dissolve or transmute themselves
into something else.

Virtual organizations have been existing throughout history, from the whaling companies of
the 19th century through the film studios of the 20th. The virtual organizations have few full-
time employees or usually temporarily hire outside specialists to complete a specific project,
such as a new software application. These people do not become a part of the organization,
but join together as a separate entity for a specific purpose. Sometimes companies use a
virtual approach to harness the talents and energies of the best people for a particular job,
rather than trying to develop those capabilities in-house.

Now that serious management tools are beginning to appear, the agile virtual enterprise is
no longer just a theoretical possibility. When an organization uses a virtual approach, the
virtual group typically has full authority to make decisions and take actions within certain
predetermined boundaries and goals. Most virtual organizations use electronic media for
sharing of information and data. Some organizations have redesigned offices to provide
temporary space for virtual workers to meet or work on-site.

Multidivisional Structure
As explained earlier, Chandler’s research shows that the firm’s continuing success leads to
product or market diversification or both. The firm’s level of diversification is a function of
decisions about the number and type of businesses in which it will compete as well as how it
will manage those businesses. Geared to managing individual organizational functions,
increasing diversification eventually creates information processing, coordination, and
control problems that the functional structure cannot handle.

Thus, using a diversification strategy requires the firm to change from the functional
structure to the multidivisional structure to form an appropriate strategy/structure match.
1. The cooperative form is an M-form structure in which horizontal integration is used to bring
about interdivisional cooperation. Divisions in a firm using the related constrained
diversification strategy commonly are formed around products, markets, or both. The
cooperative structure uses different characteristics of structure (centralization,
standardization, and formalization) as integrating mechanisms to facilitate interdivisional
cooperation.

ex. Procter & Gamble (P&G) uses a related constrained strategy. The firm matches the
cooperative form of the multidimensional structure to this strategy in order to effectively
implement it.
2. The strategic business unit (SBU) form is an M-form consisting of three levels: corporate
headquarters, strategic business units (SBUs), and SBU divisions.

A disadvantage associated with the related linked diversification strategy is that, even when
efforts to implement it are being properly supported by the use of the SBU form of the
multidivisional structure, firms using this strategy and structure combination find it
challenging to effectively communicate the value of their operations to shareholders and to
other investors. Furthermore, if coordination between SBUs is required, problems can surface
because the SBU structure, similar to the competitive form discussed next, does not readily
foster cooperation across SBUs. Accordingly, those responsible for implementing the related
linked strategy must focus on successfully creating and using the types of integrating
mechanisms we discussed earlier.

For many years, Sony Corporation used the related constrained strategy and the cooperative
form of the multidivisional structure to implement it. Today though, and in response to
declining firm performance, Sony appears to be using the related linked strategy and the SBU
form of the multidivisional structure to implement what is a new strategy for the firm. As we
discuss in the Strategic Focus, changes to the firm’s strategy and organizational structure have
occurred recently in order to increase Sony’s efficiency (essentially, doing things right) and
effectiveness (essentially, doing the right things).

3. The competitive form is an M-form structure characterized by complete independence

among the firm’s divisions that compete for corporate resources. Unlike the divisions included
in the cooperative structure, divisions that are part of the competitive structure do not share
common corporate strengths. Accordingly, integrating mechanisms are not part of the
competitive form of the multidivisional structure.
The three major forms of the multidivisional structure should each be paired with a particular
corporate-level strategy. Table 11.1 shows these structures’ characteristics. Differences exist
in the degree of centralization, the focus of the performance evaluation, the horizontal
structures (integrating mechanisms), and the incentive compensation schemes. The most
centralized and most costly structural form is the cooperative structure. The least centralized,
with the lowest bureaucratic costs, is the competitive structure. The SBU structure requires
partial centralization and involves some of the mechanisms necessary to implement the
relatedness between divisions. Also, the divisional incentive compensation awards are
allocated according to both SBUs and corporate performance.

Importance of Organizational Control

Organizational controls are an important aspect of structure. Organizational controls guide
the use of strategy, indicate how to compare actual results with expected results, and suggest
corrective actions to take when the difference is unacceptable. It is difficult for a firm to
successfully exploit its competitive advantages without effective organizational controls.
Properly designed organizational controls provide clear insights regarding behaviors that
enhance firm performance. Firms use both strategic controls and financial controls to support
implementation of their strategies.

Strategic controls are largely subjective criteria intended to verify that the firm is using
appropriate strategies for the conditions in the external environment and the company’s
competitive advantages. Thus, strategic controls are concerned with examining the fit
between what the firm might do (as suggested by opportunities in its external environment)
and what it can do (as indicated by its internal organization in the form of its resources,
capabilities, and core competencies). Effective strategic controls help the firm understand
what it takes to be successful, especially where significant strategic change is needed.
Strategic controls demand rich communications between managers responsible for using
them to judge the firm’s performance and those with primary responsibility for implementing
the firm’s strategies (such as middle- and first-level managers). These frequent exchanges
between managers are both formal and informal
in nature.

Financial controls are largely objective criteria used to measure the firm’s performance
against previously established quantitative standards. When using financial controls, firms
evaluate their current performance against previous outcomes as well as against competitors’
performance and industry averages. Accounting-based measures, such as return on
investment (ROI) and return on assets (ROA), as well as market-based measures, such as
economic value added, are examples of financial controls. Partly because strategic controls
are difficult to use with extensive diversification, financial controls are emphasized to
evaluate the performance of the firm using the unrelated diversification strategy. The
unrelated diversification strategy’s focus on financial outcomes requires using standardized
financial controls to compare performances between business units and those responsible for
leading them

Relation between Strategy and Structure

Strategy and structure have a reciprocal relationship, and if aligned properly, performance
improves. This relationship highlights the interconnectedness between strategy formulation
and strategy implementation.

Strategic management posits that the strategy and the organization structure of the firm must
match. In a classic study of large U.S. corporations such as DuPont, General Motors, Sears,
and Standard Oil, Alfred Chandler concluded that structure follows strategy. This means that
changes in corporate strategy lead to changes in organizational structure. He also concluded
that organizations follow a pattern of development from one kind of structural arrangement
to another as they expand. According to Chandler, these structural changes occur because
the old structure was not suitable. Chandler therefore proposed the following as the
sequence of what occurs:

1. New strategy is created

2. New administrative problems emerge
3. Economic performance declines
4. New appropriate structure is invented
5. Profit returns to its previous level

Chandler found that in their early years, corporations such as DuPont and General Motors
had a centralized functional structure, which was suitable for a limited range of products. As
they added new product lines and created their own distribution networks, the old structure
became too complex. Therefore, they shifted to a decentralized structure with several
autonomous divisions.

Interdependence of Structure and Strategy

Strategy and Structure are Interlinked

According to modern strategists, strategy and structure are interlinked. It may not be
optimal for an organization to develop its structure after it has developed its strategy. The
relationship is more complex in two respects:

1. Strategy and the structure associated with it may need to develop at the same time in an
experimental way: As the strategy develops, so does the structure. The organization learns to
adapt to its changing environment and to its changing resources, especially if such change is
radical.
2. If the strategy process is emergent, then learning and experimentation involved may need
a more open and less formal organization structure.

Managing the Complexity of Strategic Change

Quinn suggests that strategic change may need to proceed incrementally, i.e. in small stages.
He called the process “logical incrementalism”. The clear implication is that it may not be
possible to define the final organization structure, which may also need to evolve as the
strategy moves forward incrementally. He recognizes the importance of informal organization
structures in achieving agreement to strategy shifts. If the argument is correct, it will be
evident that any idea of a single, final organization structure – after deciding on a defined
strategy – is dubious.

Criticism of the Strategy – First, Structure- Afterwards Process

1. Structures may be too rigid, hierarchical and bureaucratic to cope with the newer social
values and rapidly changing environment.

2. The type of structure is just as important as the business area in developing the
organization’s strategy. It is the structure that will restrict, guide and form the strategy.

3. Value chain configurations that favor cost cutting or, alternatively, new market
opportunities may also alter the organization required.
4. The complexity of strategic change needs to be managed, implying that more complex
organizational considerations will be involved. Simple configurations such as a move from a
functional to a divisional structure are only a starting point in the process.

5. The role of top and middle management in the formulation of strategy may also need to be
reassessed: Chandler’s view that strategy is decided by the top leadership alone has been
challenged. Particularly for new, innovative strategies, middle management and the
organization’s culture and structure may be important. The work of the leader in empowering
middle management may require a new approach – the organic style of leadership.

Patterns of Relationship between Strategy and Structure

Evolutionary Patterns of Strategy and Organizational Structure

Research suggests that most firms experience a certain pattern of relationships between
strategy and structure. Chandler found that firms tend to grow in somewhat predictable
patterns: “first by volume, then by geography, then integration (vertical, horizontal), and
finally through product/business diversification”. Chandler interpreted his findings as an
indication that firms’ growth patterns determine their structural form.

As shown in Figure above, sales growth creates coordination and control problems the
existing organizational structure cannot efficiently handle. Organizational growth creates the
opportunity for the firm to change its strategy to try to become even more successful.
However, the existing structure’s formal reporting relationships, procedures, controls, and
authority and decision-making processes lack the sophistication required to support using the
new strategy, meaning that a new organizational structure is needed.

Firms choose from among three major types of organizational structures—simple, functional,
and multidivisional—to implement strategies. Across time, successful firms move from the
simple, to the functional, to the multidivisional structure to support changes in their growth
strategies.

The Concept of ‘Strategic Fit’

Although it may not be possible to define which comes first, there is a need to ensure that
strategy and structure are consistent with each other. For example, Pepsi Co reorganized its
North American business to ensure that its strengths in the growing non-carbonated drinks
market could be exploited across its full range of drinks. For an organization to be
economically effective, there needs to be a matching process between the organization’s
strategy and its structure. This is the concept of strategic fit.

In essence, organizations need to adopt an internally consistent set of practices in order to

undertake the proposed strategy effectively. It should be said that such practices will involve
more than the organization’s structure. They will also cover such areas as reward systems,
information systems and processes, culture, leadership styles, etc.

There is strong empirical evidence, both from Chandler and Senge, that there does need to
be a degree of strategic fit between the strategy and the organization structure.

Although the environment is changing all the time, organizations may only change slowly and
not keep pace with external change, which can often be much faster – for example, the
introduction of digital technology. It follows that it is unlikely that there will be a perfect fit
between the organization’s strategy and its structure. There is some evidence that a minimal
degree of fit is needed for an organization to survive. It has also been suggested that, if the
fit is ensured early during the strategic development process, then higher economic
performance may result. However, as the environment changes, the strategic fit will also need
to change.

Improving Effectiveness of Traditional Organizational Structures

In the changed times and situations, traditional organizational structure is crumbling under
the weight of ever-increasing regulations that drive greater accountability and transparency.
Smart companies are on the forefront of building new and improved structures that support
and enhance this new compliance environment, and best practices are emerging. The best
structure for an organization is determined by many aspects of its situation – the technology,
size, environment and strategy. Frequently, structures evolve as the organization moves from
one stage of growth to the next. The external and internal environments affect structural
design in different ways.
Example: 1. An organization which faces a stable environment may use functional structure.

2. A volatile environment demands a rapid-response capability, flexibility and quick decision-

making. Such demands can be better met by the creation of a divisional or a matrix type of
structure.
 Chapter 9: Strategic Leadership for Effective organization
Chapter 9:
- Foundation of effective leadership
- Characteristics of effective strategic leaders
- Managerial Leadership as organizational resources
- Dynamics of top-level Decision making
- Ten cardinal characteristics and value of good work teams
- Power behind the throne

Foundation of Effective Leadership

Strategic leadership how top management and other executive levels guide the company to
work for the accomplishment of the purpose of the organization.

Since the primary direction of strategic management is a top-down activity, it is essential to

have the nature of the approach of top management to lead and influence the rest of the
organization.

Leadership styles are the distinctive manners in which leaders act to influence the strategic
management of their organizations.

Leadership and management may have different characteristics; it is essential to understand

their differences if they work together to promote effective strategic management;

The primary responsibility for the project strategy and ensuring it works is at the top of the
company. The executive and other senior managers are expected to direct the company to
achieve its objective. Effective strategic leadership is the foundation for using the Strategic
Management process successfully.

Leadership is the capacity of a person or group of individuals to influence others to attain the
organization's intent and goals. Strategic leadership is the style, and general approach
embodied and used by senior management to articulate purpose, goals, and strategy to
influence implementation and strategic control. Its nature varies at different stages of the
development of an organization, particularly with scale when senior levels become more
distant from the daily management. Leadership styles differ depending on the senior
manager's personalities and group dynamics. Whatever the shape and design, however,
strategic leadership will foster synergy and harmony around the organization.

A leader's common notion is that of an individual being pursued by others. There may be
many reasons to follow, but it is usually the leaders who exercise power to influence events.
In the sense of strategic management, a leader is one who has the potential to move the
company to a shared goal by manipulating others. Through this sense, of course, the most
influential individuals inside a company are the executives and other senior managers; they
make the most critical strategic decisions. Although decisions can emerge and be worked out
involving a lot of people, ultimately it is only the top managers who make the decisions (or
choose not to make them) for an organization as a whole.

There will be people with leadership qualities and abilities at every level of the organization:
those who lead units, sections, teams, and specialists in essential areas of knowledge and
skills. Many of these would be critical for motivating and inspiring others, located in various
areas of an organization, to create strategic change. People's management ability is central,
especially in developing core competencies.

Peter Senge (2006) argued in a book about the learning organization for some kind of
organizational leadership that improves strategic skills and decision-making. A leader is
someone who can play three roles: a creator of organizational structures to encourage the
kind of people who say 'we have done it ourselves;' an instructor who teaches people how to
improve themselves in a way that is a priority for the organization; and a steward who uses
strategic intent to add a deep sense to the ambitions of a person. There is also an extra skill
to use systems analysis to see and understand the essential interdependencies of the
company that affect action and ties.

Observers usually say that a successful leader should seamlessly transfer skills between
various types of leadership, depending on the situation they face at any time. To some degree,
this depends on emotional intelligence: an ability to identify and appreciate one's own
emotions and other's emotions. High emotional intelligence includes the ability to articulate
openly about feelings, control and use good effect emotions, and empathize with others. That
may expect a lot, but it is essential to consider these qualities, at least.

Executive leadership is by its very definition remote in the sense that there would be daily
interaction with top executives only for a small part of the workers of a large company. In this
case, leadership appearance is essential. Writing regarding princes in the early sixteenth
century, Niccolo Machiavelli (1532) observed that men usually judge by their eyes rather than
by their ears. While all are in a position to watch, few are in a place to come in direct contact
with senior executives. All see what you seem to be; few experiences what you are. How
leaders do is significant as an indication of reputation and legitimacy, as reflected in the
symbols and artifacts associated with them.

Characteristics of Effective Strategic Leaders

Four Competencies of Leadership

Warren Bennis and Burt Nanus (1985) identified four management competencies for ethical
leadership – attention, meaning, trust, and self.

The Management of Attention

This is an ability to attract and draw people to them, to sustain and encourage them with their
attentiveness. This is usually associated with charismatic leadership; At the same time, a
leader might be ordinary. It is the strength of an underlying dream that inspires and provides
a sense of certainty about what will happen next, and that it will happen.

The Management of Meaning

It is a way of recognizing underlying patterns to express separate components as a cohesive
and understandable whole. In a chaotic environment, followers need to see the path forward
for coordinated energy and attention to be able to react. Being educated is not enough; the
use of language and visual slogans that express clarity is essential. Explanations should be
kept clear, understandable, and abstract.

The Management of Trust

A leader needs to be trusted to keep a constant theme; in other words, while an organization
has to change goals periodically as events unfold, a leader must be true to its underlying
principles. These may not be articulated as such, but they should hold and be conveyed in
similar phrases and slogans, repeated over a sense of who the leader is and what they stand
for. When loyalty is to be sustained over time, others must feel a constancy of intent or feel
betrayed.

The Management of Self

A leader should know his or her skills and not stress about making decisions or agonizing about
improvement and outcomes. He or she must focus on mistakes for long enough to learn from
them and step quickly forward again. This gives others confidence; it is not the leaders' trust
that counts but the assurance of their influence and acts.

Managerial Leadership as Organizational Resources

Leadership Styles
James McGregor Burns (1978), a political scientist, distinguishes transformative and
transactional leadership in his book Leadership. Trans-formational leadership is empowering
to take advantage of the follower's motivations and higher needs, thereby engaging the
'follower's full person.' He implies that the relationships between most leaders and followers
are transactional when leaders approach followers to swap one item for another; in most of
the relationships between leaders and followers, bargaining is vital. Such theories have
informed Strategy Systems.

Transformational leadership combines individual self-interest with an organization's broader

mission to promote a shared sense of purpose. It generates excitement when it is successful
and raises enthusiasm for the challenges of bringing change. On the other hand, transactional
leadership is more mission-centric, and certain specific management frameworks used to
explain goals and commitments and provide positive performance feedback.

A heightened type of transformational leadership is characterized by a charismatic, dominant

personality, which is a useful attribute to push past barriers to things. Still, the kind of
dramatic success that charismatic leadership produces can lead to hubris and a leadership
style that wants to micromanage. This is abrasive when subordinates believe a chief executive
can be a diligent listener and a partner in collegial leadership styles. A contrasting leadership
style is a low key, mostly self-effacing and quiet.

According to Jim Collins, big businesses have leaders who do not force change or seek to
inspire people directly; instead, they have leaders who work with the organization's core
values. Leaders are working to develop a balanced corporate culture that can produce long-
term success. It is not commanded and orders, but it demands that everyone stick to a precise
method of practice. It is about allowing people the ability to participate in rational thinking
and then pursue it with artful action. Collins believes that the challenges of participation,
commitment, motivation, and progress are melting away as they take care of themselves in a
straightforward, organized way.

Dynamics of Top-level Decision Making

Leadership and Management

There is often a distinction between leadership and strategy on the one hand and
management and control on the other. This is a view that encourages senior executives to
think they are doing strategy while others are doing management. Initially, this separation
began with the classical notion that the execution of the plan would obey formulation. There
is a growing belief that leadership is distinct from management.
Abraham Zaleznik (1977) was one of the first to argue in the Harvard Business Review that
leadership and management are different roles: a leader is a shaper and mover of change,
while a manager is based on procedures, coordination and working within the current
organization. The distinction is not readily known in certain national cultures; in Japan, there
are no equivalent leaders expected to manage the separation.

Warren Bennis (1993) described the differences between management practices and
leadership. While leading is about influencing people to go in a specific direction, managing is
about taking responsibility for actions.

The two hands, unfortunately, don't speak to each other much. Strategic management needs
leadership to understand how the company handles mission, especially in those core business
areas or processes critical for competitive advantage. Domain awareness is essential in this;
it's knowledge and understanding of how an enterprise operates. This is a daunting
environment for members brought in from outside an organization. It is particularly so for
strategic management, where the competitive advantage is built on vital tools unique to the
business.

Power Behind the Throne

Strategic Change
Organizational culture starts with the leadership given by the founder of an organization. The
core principles set in the early days and an organization's development and growth ultimately
imprints a distinctive character that is likely to continue even after the initial founders and
managers have left. When an entity expands, it recruits new members motivated by the
original ideals and spreads them. The culture of an organization, as its diversity becomes more
similar, becomes more distinct. If events call for radical change, group-thinking is a
disadvantage, though.

If the need arises, perhaps because of a disaster, a new leader and team may find it
challenging to execute a change programmed. John Kotter (1996), Harvard Leadership
Professor, devised an eight-stage sequence to guide the strategic and cultural transition. He
argues that they are all important and that any failure to implement them is why change
programs fail:

1. Establish a sense of urgency: this makes others aware of the need for change and works to
action them quickly while motivation is strong.

2. Create a guiding coalition: put together a group with enough power to drive the change
and work as a team.

3. Develop a change vision: change direction to develop strategies for achieving the vision.

4. Communicate a vision for others to buy into as many as possible need to understand and
accept the vision with its associated strategies – a vision should be communicated by a factor
of 10, 100, even 1,000.

5. Empower action across the organization: remove obstacles to change; change systems and
structures that seriously undermine the vision; encourage risk-taking and non-traditional
ideas, activities, and actions.

6. Generate short-term wins: plan for achievements that can easily be made visible and follow
through with these to recognize and reward those employees who were involved.

7. Never let up: continuously sustain and reinforce the increasing credibility of the change,
recruit, promote champions, develop these and other employees who can implement the
vision, and reinvigorate the change process with new projects, themes, and change agents.

8. Incorporate changes into the culture: the new ways of doing things must be seen to
compare favorably with traditional ways, articulate the connections between the new
behaviors and organizational success, develop the means to ensure leadership development
and succession.

Kotter 's sequence for change is logical, but perhaps perseverance is the most critical change
(and luck) leadership philosophy. However, it should be remembered that most organizations
are everyday affairs and that the people in them (including clients) are human beings.
Organizations and people are rarely prepared for strategic management. So, being tough-
skinned as well as open-minded is essential to leaders. They have to run and manage their
organizations regardless of the circumstances, and necessarily, it's not a strategy, but how the
procedure is handled that matters.
To be effective in strategic management, leaders must be able to see and appreciate the
organization's larger picture in terms of mission – the external and internal climate. Various
and sometimes contradictory knowledge sources must be weighed against a wide range of
possibilities and tests. Goals should be both confident and yet realistic. Over time, the
strategies or tactics used to achieve strategic objectives should be reliable and transparent
about competitive advantage. The organizational structure and strategic planning should be
conducive and contribute to successful daily management implementation of the strategy.
Leaders must understand their organizations and adopt a suitable style fit for the long-term
purpose.
 Chapter 10: Entrepreneurial Formation and Evaluation
Chapter 10:
• Strategic entrepreneurship formation
• Innovation for entrepreneurial formation
• Strategic entrepreneurial process
• Environmental scanning
• Analysis of the business condition

Strategic Entrepreneurship Formation

Entrepreneurship describes the process by which change agents (entrepreneurs) undertake
economic risk to innovate—to create new products, processes, and sometimes new
organizations. Entrepreneurs innovate by commercializing ideas and inventions. They seek
out or create new business opportunities and then assemble the resources necessary to
exploit them. If successful, entrepreneurship not only drives the competitive process, but it
also creates value for the individual entrepreneurs and society at large.
Social entrepreneurship describes the pursuit of social goals while creating profitable
businesses. Social entrepreneurs evaluate the performance of their ventures not only by
financial metrics but also by ecological and social contribution (profits, planet, and people).

Innovation for Entrepreneurial Formation

The Innovation Process
Broadly viewed, innovation describes the discovery, development, and transformation of new
knowledge in a four-step process captured in the four I’s: Idea, Invention, Innovation, and
Imitation.

The innovation process begins with an idea. The idea is often presented in terms of abstract
concepts or as findings derived from basic research. Basic research is conducted to discover
new knowledge and is often published in academic journals. This may be done to enhance the
fundamental understanding of nature, without any commercial application or benefit in mind.
In the long run, however, basic research is often transformed into applied research with
commercial applications. For example, wireless communication technology today is built
upon the fundamental science breakthroughs Albert Einstein accomplished over 100 years
ago in his research on the nature of light.
In a next step, invention describes the transformation of an idea into a new product or
process, or the modification and recombination of existing ones. The practical application of
basic knowledge in a particular area frequently results in new technology. If an invention is
useful, novel, and non-obvious as assessed by the U.S. Patent and Trademark Office, it can be
patented.
A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit
from commercializing a technology for a specified time period in exchange for public
disclosure of the underlying idea. For instance, many pharmaceutical drugs are patent
protected. Strategically, however, patents are a double-edged sword. On the one hand,
patents provide a temporary monopoly as they bestow exclusive rights on the patent owner
to use a novel technology for a specific time period. Thus, patents may form the basis for a
competitive advantage. Because patents require full disclosure of the underlying technology
and know-how so that others can use it freely once the patent protection has expired,
however, many firms find it strategically beneficial not to patent their technology.
Instead they use trade secrets, defined as valuable proprietary information that is not in the
public domain and where the firm makes every effort to maintain its secrecy. The most famous
example of a trade secret is the Coca-Cola recipe, which has been protected for over a
century. The same goes for Ferrero’s Nutella, whose secret recipe is said to be known by even
fewer than the handful of people who have access to the Coca-Cola recipe.
Innovation need not be high-tech in order to be a potent competitive weapon, as P&G’s
history of innovative new product launches such as the Swiffer line of cleaning products
shows. P&G uses the razor-razorblade business model, where the consumer purchases the
handle at a low price, but must pay a premium for replacement refills and pads over time. As
shown in Exhibit 7.3, an innovation needs to be novel, useful, and successfully implemented
in order to help firms gain and sustain a competitive advantage. The innovation process ends
with imitation. If an innovation is successful in the marketplace, competitors will attempt to
imitate it.

Innovations
Types of Innovation
One insightful way to categorize innovations is to measure their degree of newness in terms
of technology and markets. We also want to understand the market for an innovation—e.g.,
whether an innovation is introduced into a new or an existing market— because an invention
turns into an innovation only when it is successfully commercialized. Measuring an innovation
along these dimensions gives us the markets-and-technology framework depicted in Exhibit
7.10. Along the horizontal axis, we ask whether the innovation builds on existing technologies
or creates a new one. On the vertical axis, we ask whether the innovation is targeted toward
existing or new markets. Four types of innovations emerge: incremental, radical,
architectural, and disruptive innovations. As indicated by the color coding in Exhibit 7.10,
each diagonal forms a pair: incremental versus radical innovation and architectural versus
disruptive innovation.

An incremental innovation squarely builds on an established knowledge base and steadily

improves an existing product or service offering. It targets existing markets using existing
technology. On the other hand, radical innovation draws on novel methods or materials, is
derived either from an entirely different knowledge base or from recombination of existing
knowledge bases with a new stream of knowledge. It targets new markets by using new
technologies. Well-known examples of radical innovations include the introduction of the
mass-produced automobile (the Ford Model T), the X-ray, the airplane, and more recently
biotechnology breakthroughs such as genetic engineering and the decoding of the human
genome.

Firms can also innovate by leveraging existing technologies into new markets. Doing so
generally requires them to reconfigure the components of a technology, meaning they alter
the overall architecture of the product. An architectural innovation, therefore, is a new
product in which known components, based on existing technologies, are reconfigured in a
novel way to create new markets.

As a radical innovator commercializing the xerography invention, Xerox was long the most
dominant copier company worldwide. It produced high-volume, high-quality, and high-priced
copying machines that it leased to its customers through a service agreement. Although these
machines were ideal for the high end of the market such as Fortune 100 companies, Xerox
ignored small and medium-sized businesses. By applying an architectural innovation, the
Japanese entry Canon was able to redesign the copier so that it didn’t need professional
service—reliability was built directly into the machine, and the user could replace parts such
as the cartridge. This allowed Canon to apply the razor– razorblade business model, charging
relatively low prices for its copiers but adding a steep markup to its cartridges. Xerox had not
envisioned the possibility that the components of the copying machine could be put together
in an altogether different way that was more user-friendly. More importantly, Canon
addressed a need in a specific consumer segment—small and medium-sized businesses and
individual departments or offices in large companies—that Xerox neglected.

Finally, a disruptive innovation leverages new technologies to attack existing markets. It

invades an existing market from the bottom up, as shown in Exhibit 7.11.67 The dashed blue
lines represent different market segments, from Segment 1 at the low end to Segment 4 at
the high end. Low-end market segments are generally associated with low profit margins,
while high-end market segments often have high profit margins. As first demonstrated by
Clayton Christensen, the dynamic process of disruptive innovation begins when a firm,
frequently a startup, introduces a new product or process based on a new technology to meet
existing customer needs. To be a disruptive force, however, this new technology has to have
additional characteristics:

1. It begins as a low-cost solution to an existing problem.

2. Initially, its performance is inferior to the existing technology, but its rate of technological
improvement over time is faster than the rate of performance increases required by different
market segments. In Exhibit 7.11, the solid curved upward line captures the new technology’s
trajectory, or rate of improvement over time.
The following examples illustrate disruptive innovations:
■ Japanese carmakers successfully followed a strategy of disruptive innovation by first
introducing small fuel-efficient cars and then leveraging their low-cost and high-quality
advantages into high-end luxury segments, captured by brands such as Lexus, Infiniti, and
Acura. More recently, the South Korean carmakers Kia and Hyundai have followed a similar
strategy.

■ Digital photography improved enough over time to provide higher-definition pictures. As a

result, it has been able to replace film photography, even in most professional applications.

■ Laptop computers disrupted desktop computers; now tablets and larger-screen

smartphones are disrupting laptops.

■ Educational organizations such as Coursera and Udacity are disrupting traditional

universities by offering massive open online courses (MOOCs), using the web to provide large-
scale, interactive online courses with open access. One factor favoring the success of
disruptive innovation is that it relies on a stealth attack: It invades the market from the
bottom up, by first capturing the low end. Many times, incumbent firms fail to defend (and
sometimes are even happy to cede) the low end of the market, because it is frequently a low-
margin business. Google, for example, is using its mobile operating system, Android, as a
beachhead to challenge Microsoft’s dominance in the personal computer industry, where 90
percent of machines run Windows. Google’s Android, in contrast, is optimized to run on
mobile devices, the fastest-growing segment in computing. To appeal to users who spend
most of their time on the web accessing e-mail and other online applications, for instance, it
is designed to start up in a few seconds. Moreover, Google provides Android free of charge.

Open innovation is a framework for R&D that proposes permeable firm boundaries to allow
a firm to benefit not only from internal ideas and inventions, but also from ideas and
innovation from external sources. External sources of knowledge can be customers, suppliers,
universities, start-up companies, and even competitors. The sharing goes both ways: Some
external R&D is insourced (and further developed in-house) while the firm may spin out
internal R&D that does not fit its strategy to allow others to commercialize it. Even the largest
companies, such as AT&T, IBM, and GE, are shifting their innovation strategy toward a model
that blends internal with external knowledge sourcing via licensing agreements, strategic
alliances, joint ventures, and acquisitions.

In the open innovation model, in contrast, a company attempts to commercialize both its own
ideas and research from other firms. It also finds external alternatives such as spin-out
ventures or strategic alliances to commercialize its internally developed R&D. The boundary
of the firm has become porous (as represented by the dashed lines in the Panel B in Exhibit
7.12), allowing the firm to spin out some R&D projects while insourcing other promising
projects. Companies using an open innovation approach realize that great ideas can come
from both inside and outside the company. Significant value can be had by commercializing
external R&D and letting others commercialize internal R&D that does not fit with the firm’s
strategy. The focus is on building a more effective business model to commercialize both
internal and external R&D, rather than focusing on being first to market.

One key assumption underlying the open innovation model is that combining the best of
internal and external R&D will more likely lead to a competitive advantage. This requires that
the company must continuously upgrade its internal R&D capabilities to enhance its
absorptive capacity—its ability to understand external technology developments, evaluate
them, and integrate them into current products or create new ones. Exhibit 7.13 compares
and contrasts open innovation and closed innovation principles.

An example of open innovation is Procter & Gamble’s Connect+Develop, or C+D (a play on

research and development, or R&D). Because of the maturing of its products and markets,
P&G decided it was time to look outside for new ideas. P&G is an $85 billion company whose
investors expect it to grow at least 4–6 percent a year, which implies generating between $3
billion and $5 billion in incremental revenue annually. P&G was no longer able to generate
this amount of growth through closed innovation. By 2000, P&G’s closed innovation machine
had stalled, and the company lost half its market value. It needed to change its innovation
strategy to drive organic growth.

P&G’s Connect+Develop is a web-based interface that connects the company’s internal-

innovation capability with the distributed knowledge in the global community. From that
external community, researchers, entrepreneurs, and consumers can submit ideas that might
solve some of P&G’s toughest innovation challenges. The C+D model is based on the
realization that innovation was increasingly coming from small entrepreneurial ventures and
even from individuals. Universities also became much more proactive in commercializing their
inventions. The Internet now enables access to widely distributed knowledge from around
the globe.
Strategic Entrepreneurial Process

Environmental Scanning

Analysis of the Business Condition

 Chapter 11: Corporate Social Responsibility
Chapter 11:
▪ Corporate social responsibility (CSR)
▪ Development of CSR in the Philippines
▪ CSR approaches and program
▪ Example of typical program of CSR in the Philippines
▪ Principles of CSR
▪ Types of CSR
▪ Advantages and disadvantages of CSR

Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) is a self-regulating business model that helps a company
be socially accountable—to itself, its stakeholders, and the public. By practicing corporate
social responsibility, also called corporate citizenship, companies can be conscious of the kind
of impact they are having on all aspects of society, including economic, social, and
environmental.

Understanding Corporate Social Responsibility (CSR)

Corporate social responsibility is a broad concept that can take many forms depending on the
company and industry. Through CSR programs, philanthropy, and volunteer efforts,
businesses can benefit society while boosting their brands.

As important as CSR is for the community, it is equally valuable for a company. CSR activities
can help forge a stronger bond between employees and corporations; boost morale; and help
both employees and employers feel more connected with the world around them.

Development of CSR in the Philippines

Early roots of CSR

Philanthropy has been a tradition in the Philippines, where individual giving and volunteerism
are acknowledged to be “hidden forces” in the social and economic life of Filipinos. Its practice
is particularly prevalent within and across families and kinship groups, and in church-related
organizations or social welfare agencies which undertake such activities as Sunday collections,
social events, fund drives “for-a-cause” like “Piso para sa pasig”, the solicitation of donations,
special fund campaigns (Christmas fund drives) and disaster relief operations. According to
M.A. Velasco of the Center for the Study of Philanthropy, the notion of philanthropy and
concern for humanity form part of the Asian psyche. In the Philippines, mutual aid is
manifested in rural traditional communities. For example, the spirit of “bayanihan” (a
Philippine tradition which entails ‘brotherhood’) is exemplified in the lending of mutual
assistance. It is rooted in a deep sense of mutual respect.

The bayanihan tradition was cited by Philacor, the Philippines’ leading manufacturer of
refrigerators, washing machines and the like, for its decision to practice corporate citizenship.
The company reported a threefold growth in actual returns to shareholders within a year after
implementing CSR activities. The Philacor example supports the hypothesis that economic
and ethical motives and benefits are not fundamentally opposed to each other but may
actually be reconciled.

CSR Approaches and Program

Volunteerism
Volunteerism is CSR at its simplest. Implementing CSR need not necessarily involve large
donations or contributions as the success of CSR activities is measured in terms of the gains
achieved by the participants. Volunteerism, defined as extending personal services without
either compulsion or monetary compensation, is perceived as a tool for development such
that in recognition its importance, the Philippine government created the Philippine National
Service Committee in 1964 through Executive Order No. 134. Then in 1980, the said
committee evolved into the Philippine National Volunteer Service and Coordinating Agency.
The Philippines also celebrates every fifth of December as the International Volunteer Day for
Economic and Social Development One example is Meralco’s training program, described in
Case Study 1.

Case Study 1: Volunteerism in Meralco

Meralco is the Philippines’ largest distributor of electricity, serving over four million
customers in 23 cities and 88 municipalities, including the economy’s prime business districts
and top corporations. It established its corporate foundation called the Meralco Foundation,
Inc. through which it aims to uplift the social and economic status of the Filipino through
education and training, with emphasis on values internalization, the development and
application of appropriate technologies, and the formation of sustainable enterprises. With
this mission, MFI gives technical skills training in Meralco Foundation Institute at Ortigas to
an estimated 650 scholars, while in family farm schools in Jalajala (Rizal), Balete (Batangas),
and Bais City (Negros Oriental) the scholars number 275. Meralco is also committed to uplift
the community. It is involved in many different CSR programs such as the upgrading of
secondary schools, the provision of assistance to technicians’ education, and different
scholarships. One simple example of a low-input, high-output CSR activity is its computer
literacy program.

In 2001, Meralco launched a project that donates free computers to public schools and
provides free training for public school teachers on basic computer literacy within Meralco’s
franchise areas. The “Teacher Volunteers” are from among the regular staff pool of Meralco.
They are generally young to middle-aged professionals who sacrifice their day off from work
to train the public-school teachers on basic computer programs such as, Windows, Excel, and
the use of the Internet. These courses enable the teachers to use the donated computers.
Trainings are held on Saturdays (the non-working day of the volunteers) at the Meralco
compound, where the teachers are allowed to use all facilities of the building and are
provided with transportation, allowance, food and handouts. Since its launch in 2001, the
project has helped 392 public school teachers from eight public schools. The program has also
benefited the Meralco staff volunteers who felt a sense of fulfillment and learned the value
of CSR upon joining the program.

Types of CSR

Categories of CSR
Although corporate social responsibility is a very broad concept that is understood and
implemented differently by each firm, the underlying idea of CSR is to operate in an
economically, socially, and environmentally sustainable manner. Generally, corporate social
responsibility initiatives are categorized as follows:
1. Environmental responsibility- Environmental responsibility initiatives aim at reducing
pollution and greenhouse gas emissions, and the sustainable use of natural resources.

2. Human rights responsibility- Human rights responsibility initiatives involve providing fair
labor practices (e.g., equal pay for equal work) and fair-trade practices, and disavowing child
labor.

3. Philanthropic responsibility- Philanthropic responsibility can include things such as

funding educational programs, supporting health initiatives, donating to causes, and
supporting community beautification projects.

4. Economic responsibility- Economic responsibility initiatives involve improving the firm’s

business operation while participating in sustainable practices – for example, using a new
manufacturing process to minimize wastage.

Advantages and Disadvantages of CSR

Business Benefits of CSR

In a way, corporate social responsibility can be seen as a public relations effort. However, it
goes beyond that, as corporate social responsibility can also boost a firm’s competitiveness.
The business benefits of corporate social responsibility include the following:

1. Stronger brand image, recognition, and reputation - CSR adds value to firms by
establishing and maintaining a good corporate reputation and/or brand equity.

2. Increased customer loyalty and sales - Customers of a firm that practices CSR feel that they
are helping the firm support good causes.

3. Operational cost savings - Investing in operational efficiencies results in operational cost

savings as well as reduced environmental impact.

4. Retaining key and talented employees - Employees often stay longer and are more
committed to their firm knowing that they are working for a business that practices CSR.

5. Easier access to funding - Many investors are more willing to support a business that
practices CSR.

6. Reduced regulatory burden - Strong relationships with regulatory bodies can help to
reduce a firm’s regulatory burden.

SUMMARY
• A company practices corporate social responsibility (CSR) when it seeks to improve its
environmental and societal impact.
• Even for those unconcerned with environmental or social issues, there is ample
evidence that a commitment to CSR can have a positive effect on a company’s
finances.