Significance of Strategic

Planning for Business success

Lecture slide for Chapter 1

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 Objective
• To Understand the meaning of a business
organization and how environmental
forces compel it to plan its actions well in
advnace.

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What is a business organization?
• An assembly of people who all
volunteered to work together;
• Any difference from other types of
organization e.g. local neighborhood club?
– Contract of different members are different ?
– Driven by the goal of creating more wealth out
of limited wealth.

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How does an organization create
wealth?

Business Markets for

Markets for organizations outputs
inputs

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 Business organization as a
system
• It takes in goods and services from one market
and transform them into some other form and
delivers that to another group of people.
• System:
– It is called a system because it shows very similar
behavior like a machine such as a petrol engine of a
car that runs even when the driver is not in his/her sit
or the wrist watch on your hand which runs even
when you are not wearing it. It is called a system
because all its members are expected to behave in a
particular way.
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 Sources of a business
organization’s efficiency
• Pre-determined behavior of all its
members;
• Because it is located close to the
customer, it generates goods that are liked
by the customers;
• It is driven by a very well recognized and
visible goal of creating financial wealth.

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 What is Business Success ?
• Traditional measures: Surplus fund generated
per unit of asset of related investment in the firm.
• One can use many other measures for
evaluating the success of a firm e.g. Ratio of
total employment to asset, ratio of revenue to
asset etc.
• No matter what measure of success one uses,
an organization’s success would depend on
many forces operating in the environment from
where it procures and sells its goods and
services.
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 Efficiency and Governance
• In a business organization, there are two types of
members; the owners and the employees;
• The owners provide initial capital for forming the
organization and the employees provide service to run it;
• Employees are hired on a fixed contract and they are
paid their dues first;
• Once the employees’ due are paid the rest of the wealth
are distributed to the owners or the share holders.
• This is the rule of capitalist system
• The employees are in a better position when it does not
generate much wealth while share holders benefit more
when it does well.
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Efficiency and Governance rule

Members share
(First right)

Organizational
wealth

Owners share
(Residual)

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How the success of a business
organization could get affected?
• If it is unable to keep people working for it because of
poor internal governance policy;
• If it is unable to find goods in its inputs side;
• If it is unable to sell the goods produced by it;
• If Govt. and public concern for its actions places extra
burden on its operation.
• If others have found superior means to reach out the
customers.
• The most important factors that can affect the
success of an organization is through appearance of
discontinuity in any of the environmental forces.
• Why?
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Driving on a smooth road

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Driving on a rough road

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 What is a strategy ?
• Strategy is a set of intended actions e.g.
– Building a new plant or closing an existing one;
– Expanding one’s distribution network;
– Acquisition of new business or selling off an existing business;
– Launching of new products;
– Going into new markets;
– Expanding or contracting manpower in a selected division or
dept.
• Many of these decisions are taken with incomplete
information about the state of the world.
• But for some companies and industries these issues are
becoming very critical now. Why ?

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Forces in the Environment

Industrial
competition

Technological Business
forces Social forces
organization

Regulatory
forces

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 Regulatory forces
• A broad framework of rules usually made by the
Govt. of the day to ensure that business
transactions between different parties are fair
and free from opportunism, exploitation and
discrimination.
• These rules are applicable across organizations
within an industry or across all industries. These
may include industry policies for prioritizing
investment, environment protection policy, labor
regulations, trade policy between countries etc.
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Areas of concern Due to Change
in Regulatory Forces
• Economic liberalization;
• Protection of consumer rights;
• Environmental protection laws;
• Govt. tax policy in annual budget: Value added
tax, excise exemption, tariff policy;
• WTO regulation and patent law change;
• A change in labor regulations.
• Spot an important source of discontinuity in
a company you worked or you know.
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 Vignette 1.1
• Cost of bending the rule:
– In 2009 May, there was news that European
Commission penalized Intel Corporation to
the tune of $1.45 billion for their practice of
paying secret payment and rebate to Chip
users in Europe so that they do not use chips
from a competitor names Advanced Micro
device. This practice they were following for a
long period. The penalty was about 4% of
Intel’s world wide sales turnover.
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 Vignette 1.2
• Global Crisis
– Duplication of development models of the
West is likely to face a crisis of running out of
environmental resources not just at a country
level but at a global level. Global warming due
to progressive accumulation of greenhouse
gases in the atmosphere is staring on the face
of many industries. There is likely to be more
international restrictions and regulations on
how common resources of humanity could be
used and abused by different countries.
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 Vignette 1.3
• Business in a regulated space:
– Kyoto Protocol demand 5.2% reduction in emission of
greenhouse gases over there level in 1990 for
industrialized countries.
– Any industrial house that takes measure to reduce its
carbon dioxide emission by one tonne in a year will
get credit of one unit of carbon emission
reduction units (CER). This CER can be exchanged
with other companies who has no choice but to use
high global warming gas emission technology. There
was news that ITC in 2007 ITC got 140,000 carbon
credits through their forestry and use of other energy
saving technology in their existing plants.

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 Social Forces
• Society and its members interact with a
business as
– Customers for its goods and services;
– As suppliers of parts, components, and
services;
– As employees;
– As members of various Govt. agents.

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 Sources of change for social
forces
• Educational composition of the customers;
• Demography of a country;
• Culture of the society.
• Political process of the society;

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 Consumer Income, Education and
awareness of customer rights
• High income and education raise demand
for fairness in market;
• High income and education also increases
volatility of demand;
• Demand for quality product increases with
increasing level of education and income.
• Consumer court and consumer right
movement are some of the outcomes of
these developments.
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 Some potential changes of the
social forces
• 1. Slowing down of population growth rates;
• Annual growth rates
• 1981 1991 2001
• 2.22% 2.14% 1.93%
• Life Expectancy at birth
• 1981 1991 2001
• Male
• 54.1 Y 59Years 62.3years
• Female
• 54.7 years 59.7Years 65.3 Years
• Question: Why population growth rate could be a source of
opportunity or threat.
• 2. Demographic characteristics and demand for goods and
services.
• 3. Demography and manpower supply.
• 4. Demography and population burden from retired population.
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 Population distribution by age
range
• Age Group (male) 1991 (%) 2001
• 0-9 25.7 23.3
• 10-19 21.85 23.3
• 20-29 16.4 16.8
• 30-39 13.1 13.9
• 40-49 9.7 10.2
• 50-59 6.5 6.5
• 60+ 6.67 6.93
• 60+ in Japan 25%, Germany 25%, UK 22%, US
17%

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 Culture and Human Behavior
• What is culture ?
– Inter-personal exchange that are not contract driven are guided by culture or
commonly accepted code of conduct. It can also be a characteristics of social
contracts.
Culture affects some of these areas
• Demand for services:
– Lack of prior experience of similar services can make it harder to create demand
for education, preventive healthcare, organized banking, insurance, cosmetic
products.
Manpower service
–permitted vs non-permitted
• Importance of informal contracts:
– Informal contract may be flexible to accommodate contingency or no flexibility.
• Value system: Eastern vs Western value:
– what drives people to work hard.
– Intrinsic vs extrinsic rewards

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 Political Process as a force of
instability
• A very unstable Government can be a force of
high instability in the economic environment
because of its effect on regulations.
• Do social forces has anything to do with this
instability?
• A heterogeneous society and limited economic
space may throw up lots of varieties of political
forces which may have the potential to create
high level of political instability.

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 Social forces and its effects
• Which kind of companies are more
vulnerable to such slow change in
social forces?
• Identify any important change in social
forces which may create serious problems
for the company you worked or planning
to take employment after graduation.

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 Industry Level Competition
• Economic liberalization and change in structure of industry
• Vanishing industrial boundary
• IT and Computer got merged; banking and insurance are getting merged; Railway and hotel
industry are coming closer.
• Merger and acquisition and change in nature of competitors
– After Jet Airways acquired Sahara its market share jumped to 55%
• Joint Venture and Strategic alliance
– In 2006 there was news that Corporation Bank, Indian Bank and Oriental Bank of Commerce were going to
share infrastructural resources in the area of IT, E-payment system, joint training and international ventures.
• Overcrowding by domestic based company:
– Pressure on factor market; raw materials manpower and other resources; Pressure on product market: lower
margin
• International competition: Entry of MNC
– International fund transfer, technology, quality, higher staying power in the face of low profitability, high
expenditure on product promotion.
– In 2005, Korean steel major Posco signed MOU with Orissa Govt. for building a steel plant there.
Immediately, there was news of capacity expansion move by tata Steel, SAIL, Essar, Ispat, Jindal and
Vijaynagar Steel. But the operating cost of Posco was far less than those of others. SAIL needs 10,000
operators for a million tonne plant, Tata uses 40000 for a 4 million tonne plant but Posco uses 14000 for a
30 million tonne plant.
• How can a discontinuity appear from a change in these areas ?

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 Technological Change
• Technology and fast diminishing product life cycles;
– Computers and many other technology intensive products are becoming obsolete at a
faster and faster rate.
• Product Standardization and Organizational size
– Size of Manufacturing organizations are becoming smaller and smaller.
• New Product with better appeal to customers;
– Entry of mobile phone sealed the fate of land-line phone business.
– Entry of flat screen technology in TV business is posing serious danger to the CRT
picture tube business.
• Widespread use of IT;
– By using IT, one can manage business with fewer employees. Example: banks branch
may not require that many employees to run.
• Change in manufacturing technology:
– integrated manufacturing is bringing down the size of company and raising the level of
minimum skill required from the operators;
• Innovation in business practice:
– Product innovation, service innovation and innovation in business process.
• Could you spot any recent discontinuous change in the technological
environment of your past employer?

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 Key learning
• A business organization is an assembly of many people.
Its success depend how well it can manage its relations
with the changing environment in which it has decided to
do its business. There are four types of forces in the
business environment of an organization viz.
technological opportunities and threats, other industries
and companies, social forces, and regulatory forces.
These environmental forces are not static but are
changing constantly. A strategic or future oriented plan
is required to position one’s company and business in
such a way that the stress from these changes are
minimal.

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 Questions - 1
• A few years back when Govt. tried to
introduce value added tax, it was
vehemently opposed by small business
houses but not big business organizations.
Why?

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 Question-2
• There was news that since 1990s, Indian
Revenue service was loosing its talent
pool of officers at a fast rate. What could
be the reasons for such exodus of IRS
officers?

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 Question-3
• In 2005, there was news that UK Govt. was
changing the pension rule that led to huge
protests by Govt. employees e.g. school
teachers, health workers, transport workers etc.
As per old rule one was eligible for pension if
retired at the age of 60 years. According to new
rule, one would be eligible for pension only if the
age of retirement plus years of service add up to
85 or more. What do you think, prompted the
Govt. to go for such policy?
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