INDEX

1 INTRODUCTION TO STRATEGIC MANAGEMENT 1-1 to 1-24

STRATEGIC ANALYSIS : 2 – 1 to 2- 40
2 EXTERNAL ENVIRONMENT

STRATEGIC ANALYSIS : 3–1 to 3-29

3
INTERNAL ENVIRONMENT

4 STRATEGIC CHOICES 4-1 to 4-28

STRATEGY IMPLEMENTATION 5-1 to 5-60

5 & EVALUATION
 1
CHAPTER

INTRODUCTION TO
STRATEGIC MANAGEMENT

LEARNING OUTCOMES
After studying this chapter, you will be able to :

 Identify strategic decisions and behaviours within a firm. And

discuss the relevance thereof in the modern business world.

 Acknowledge and appreciate the limitations of strategic

management. And accept that all decisions need not be
strategic.

 Formulate Strategic Intent - Vision, Mission, Goals and Values.

Analyse how each of these plays an important role in the
development of an overall business strategy.

 Describe strategic levels in organizations (Corporate, Business,

Functional and Network of relation between three levels); and
discuss the role each plays in final decision making and real
execution of plans.
 Chapter Overview

1.1 INTRODUCTION

This chapter is an attempt to highlight the concepts and significance of

‘strategic management’. With increased competition, business management has
acquired a strategic dimension. All executives and professionals, including Chartered
Accountants, working towards growth of businesses, must possess sound knowledge of
concepts of strategic management.

1.2 MEANING AND NATURE OF STRATEGIC MANAGEMENT

To understand the concept of strategic management, we need to have a basic
understanding of the term management. The term ‘management’ is used in two senses,
such as :

(a) It is used with reference to a key group in an organisation in-charge of its affairs. In
relation to an organisation, management is the chief organ entrusted with the task of
making it a purposeful and productive entity, by undertaking the task of bringing
together and integrating the disorganised resources of manpower, money, material,
and technology, which are then combined into a functioning whole.

An organisation becomes a unified functioning system when management systematically

mobilises and utilises the diverse resources efficiently and effectively. The survival and
success of an organisation depends to a large extent on the competence and character
1-1
 of its management. Management has to also facilitate organisational change and
adaptation for effective interaction with the environment.

(b) The term ‘Management’ is also used with reference to a set of interrelated
functions and processes carried out by the management of an organisation (the key
group of individuals mentioned in point (a) to attain its objectives). These functions
include Planning, Organising, Directing, Staffing and Control. The functions or sub-
processes of management are wide-ranging but closely interrelated. They range all
the way from determination of the goals, design of the organisation, mobilisation and
acquisition of resources, allocation of tasks and resources among the personnel and
activity units and installation of control system to ensure that what is planned is
achieved.

Management is an influence process to make things happen, to gain command over

phenomena, to induce and direct events and people in a particular manner. Influence
is backed by power, competence, knowledge and resources. Managers formulate
organisational goals, values and strategies, to cope with, to adapt and to adjust
themselves with the behaviour and changes in the environment.

The strategic management process is the set of activities that firm managers
undertake to put their firms in the best possible position to compete successfully in the
marketplace. Strategic management is made up of several distinct activities: developing
the firm’s vision and mission; strategic analysis; developing objectives; creating,
choosing, and implementing strategies; and measuring and evaluating performance.

1.3 CONCEPT OF STRATEGY

 In the context of business, the application of the term ‘Strategy’ relates to the ways,
the business decides to respond to dynamic and often hostile external forces while
pursuing their vision, mission and ultimate objectives.
 The very incorporation of the idea of strategy into business organizations is intended
to unravel complexity and to reduce uncertainty caused by changes in the environment.
Strategy seeks to relate the goals of the organization to the means of achieving
them. Strategy is the game plan that the management of a business uses to take
market position, conduct its operations, attract and satisfy customers, compete
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 successfully, and achieve organizational objectives.

 To the extent, the term strategy is associated with unified design and action for
achieving major goals, gaining command over the situation with a long-range
perspective and securing a critically advantageous position, its implications for
corporate functioning are obvious.

 We may define the term ‘strategy’ as a long-range blueprint of an organization’s

desired image, direction and destination, i.e., what it wants to be, what it wants to do,
how it wants to do things, and where it wants to go. Following are also important
other definitions are to understand the term :

Igor H. Ansoff : The common thread among the organization’s activities and
product-markets that defines the essential nature of
business that the organization has or planned to be in future.

William F. Glueck : A unified, comprehensive and integrated plan designed to assure

that the basic objectives of the enterprise are achieved.

 Strategy is consciously considered and flexibly designed scheme of corporate intent

and action to mobilise resources, to direct human effort and behaviour, to handle
events and problems, to perceive and utilise opportunities, and to meet challenges and
threats for corporate survival and success.

 Strategy is meant to fill in the need of organizations for a sense of dynamic direction,
focus and cohesiveness. Objectives and goals are essential to give a direction to
business, but they do not fill in the need alone. Strategy provides an integrated
framework for the top management to search for, evaluate and exploit beneficial
opportunities, to perceive and meet potential threats and crisis, to make full use of
resources and strengths, and to offset corporate weaknesses.

 Important to note that strategy is no substitute for sound, alert and responsible
management. It must be recognised that strategy can never be perfect, flawless and
optimal. It is in the very nature of strategy that it is flexible and pragmatic to take
care of sudden emergencies, pressures, and avoid failures and frustrations. In a sound
strategy, allowances are made for possible miscalculations and unanticipated events.

1-3
 In large organisations, strategies are formulated at :

a) the corporate,
b) divisional, and
c) functional levels
 Corporate strategies are formulated by the top managers. Such strategies include the
determination of the plans for expansion and growth, vertical and horizontal integration,
diversification, takeovers and mergers, new investment and divestment areas, R & D
projects, and so on. These corporate wide strategies need to be operationalized by
divisional and functional strategies regarding product lines, production volumes, quality
ranges, prices, product promotion, market penetration, purchasing sources, personnel
development and like. This is discussed in detail in further separate topics.

 Strategy is partly proactive and partly reactive: A company’s strategy is typically a

blend of :

a) Proactive actions on the part of managers to improve the company’s market position
and financial performance.
b) Reactions to unanticipated developments and fresh market conditions in the dynamic
business environment.

 In other words, a company uses both proactive and reactive strategies to cope up the
uncertain business environment. Proactive strategy is planned strategy whereas reactive
strategy is adaptive reaction to changing circumstances.

Figure : A company’s actual strategy is partly planned & partly reactive

 As is evident from the figure, a company’s current strategy flows from both
previously initiated actions and business approaches that are working well enough to
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 merit continuation, as well as newly initiated managerial decisions and actions that
strengthen the company’s overall position and performance. Thus, strategy partly is
deliberate and proactive, standing as the product of management’s analysis and strategic
thinking about the company’s situation and its conclusions about how to position the
company in the marketplace and tackle the task of competing for buyer’s patronage.

 However, not every strategic move is the result of proactive planning and deliberate
management design. Things happen that cannot be fully anticipated or planned for. When
market and competitive conditions take an unexpected turn or some aspect of a
company’s strategy hits a stone wall, some kind of strategic reaction or adjustment is
required. Hence, partially, a company’s strategy is always developed as a reasoned
response to unforeseen developments in the business environment as well as the
situations within the firm.

 Crafting a strategy thus involves stitching together a proactive/intended strategy

based on prior successful experience and then adapting pieces of successful reactions
as circumstances surrounding the company’s situation change or better options
emerge - a reactive/adaptive strategy.

 Strategy helps unravel complexity and reduce uncertainty caused by changes in the
environment. It also means to identify existing problems and solving them by executing
revolutionary ideas. It would be pertinent to mention one such example in the recent
times, that is UPI, Unified Payments Interface. UPI has changed the entire digital
payments landscape in India and has now even gone global. A true example of Made in
India for the world. It was all because of a well-planned identification of existing
problem statement, formulating a strategy putting it to perfect execution.

 Now that we have understood about strategy as a concept, the chapters to follow would
focus more on how organisations plan and execute their strategies via Strategic
Management.
Is this a Strategy ?
A ketchup brand making a healthier ketchup with less sugar and preservatives to
attract more customers by letting parents feel safe about their kid’s consuming
ketchup. Can this be called a strategy ?

1-5
 Yes, it is a business strategy to fight competition and to adapt with changing
external environment (people becoming health conscious is external environment
factor)

1.4 STRATEGIC MANAGEMENT - IMPORTANCE AND LIMITATIONS

 The importance of Strategic Management essentially lies in enabling an organisation to

perform better than its competitors and its own past and present performance. That is,
delivering superior returns to the investors, superior value to the customers and
superior performance vis-à-vis expectations of the employees, suppliers, government
and society. The overall objectives of strategic management are two-fold :

a) To create competitive advantage (something unique and valued by the customer), so

that the company can outperform the competitors in all aspects of organisational
performance.

b) To guide the company successfully through all changes in the environment. That is to
react in the right manner.
 The organizational operations are highly influenced by the increasing rate of change in
the environment and the ripple effect created on the organization. Changes can be
external to the firm, or they may be introduced in the firm by the managers. It may
manifest in the blurring of industry and firm boundaries, driven by technology,
deregulation, or, through globalization. The tasks of crafting, implementing and
executing company strategies are the heart and soul of managing a business enterprise.

 To put the concept in a few words, the term ‘strategic management’ refers to the
managerial process of developing a strategic vision, setting objectives, crafting a strategy,
implementing and evaluating the strategy, and finally initiating corrective adjustments
were deemed appropriate. The process does not end, it keeps going on in a cyclic manner.

 Strategic management involves developing the company’s vision, environmental scanning

(both external and internal), strategy formulation, strategy implementation and
evaluation and control.
 Originally called, business policy, strategic management emphasizes the monitoring and
evaluation of external opportunities and threats in the light of a company’s strengths
and weaknesses and designing strategies for the survival and growth of the company.
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1.4.1 Importance of Strategic Management :

 Formulation of strategies and their implementation have become essential for all
organizations for their survival and growth in the present turbulent business
environment. ‘Survival of the fittest‘ as propagated by Charles Darwin is the only
principle of survival for all organizations, where ‘fittest’ are not the ‘largest’ or
‘strongest’ organizations but those who can change and adapt successfully to the
changes in business environment.

 Many business giants have followed the path of extinction failing to manage drastic
changes in the business environment. For example, Bajaj Scooters, LML Scooters,
Murphy Radio, BPL Television, Videocon, Nokia, kodak and so on. Thus, it becomes
imperative to study Business Strategy.

 Businesses follows the war principle of ‘win or lose’, and only in a small number of cases,
win-win situation arises. Hence, each organization has to build its competitive advantage
over the competitors in the business warfare in order to win. This can be done only by
following the process of strategic management - strategic analysis, formulation and
implementation, evaluation and control of strategies.

 The major benefits of strategic management are:

a) The strategic management gives a direction to the company to move ahead. It
helps define the goals and mission. It helps management to define realistic
objectives and goals which are in line with the vision of the company.

b) Strategic management helps organisations to be proactive instead of reactive in

shaping its future. Organisations are able to analyse and take actions instead
of being mere spectators. Thereby they are able to control their own destiny in a
better manner. It helps them in working within vagaries of environment and
shaping it, instead of getting carried away by its turbulence or uncertainties.

c) Strategic management provides frameworks for all major decisions of an

enterprise such as decisions on businesses, products, markets, manufacturing
facilities, investments and organisational structure. It provides better guidance to
entire organisation on the crucial point - what it is trying to achieve.

d) Strategic management seeks to prepare the organisation to face the future and
1-7
 act as pathfinder to various business opportunities. Organisations are able to
identify the available opportunities and identify ways and means to reach them.

e) Strategic management serves as a corporate defence mechanism against

mistakes and pitfalls. It helps organisations to avoid costly mistakes in product
market choices or investments.

f) Strategic management helps to enhance the longevity of the business. With the
state of competition and dynamic environment it may be challenging for
organisations to survive in the long run. It helps the organization to take a clear
stand in the related industry and makes sure that it is not just surviving on luck.
Actions over expectations is what strategic management ensures.

g) Strategic management helps the organisation to develop certain core

competencies and competitive advantages that would facilitate assist in its fight
for survival and growth.

 The importance of strategic management lies in delivering superior organizational

performance than that would otherwise obtain. In the competitive context it implies
performance superior to that of the competitors or more generally, above average
performance.
1-8
 It must however be realized that in search of meaning and purpose organisations may
undertake decisions and activities that may not measure up to being “strategic.” Belief
in diversity, inclusion & equity; improving availability, affordability and accessibility of
products and services to the opportunity deprived sections etc., greater workplace
democracy are some of the decisions and behaviours that are worthy on their own count.
They may not serve a strategic purpose in the strict sense of the term.
1.4.2 Limitations of Strategic Management :

The presence of strategic management cannot counter all hindrances and always
achieve success. There are limitations too, attached to strategic management. Let us
discuss them briefly :

a) Environment is highly complex and turbulent. It is difficult to understand the complex

environment and exactly pinpoint how it will shape-up in future. The organisational
estimate about its future shape may awfully go wrong and jeopardise all strategic plans.
The environment affects as the organisation has to deal with suppliers, customers,
governments and other external factors. Thus, relying on a business strategy blindly
could go absolutely wrong if the environment is turbulent. For example, Two-Wheeler
Electric Vehicles brands counted on strategic benefits they would have because of the
huge push from the government for electric mobility. However, customers are getting
reluctant to purchase EVs due to the safety concerns amid the frequent incidents of
battery’s catching fire. So, strategy cannot overcome a turbulent environment.

b) Strategic management is a time-consuming process. Organisations spend a lot of time in

preparing, communicating the strategies that may impede daily operations and negatively
impact the routine business. Planning and strategizing are important but putting them in
action is where the actual success lies. Similar to us students, planning and strategizing
what to study, from where and at what time of the day to study, consumes so much of
our actual study time that by the time we have to study, we are almost exhausted.
Similarly in business if way too much time is spent on planning and formulating, then it
might not be as fruitful.

c) Strategic management is a costly process. Strategic management adds a lot of

expenses to an organization. Expert strategic planners need to be engaged, efforts are
1-9
 made for analysis of external and internal environments devise strategies and
properly implement. These can be really costly for organisations with limited
resources particularly when small and medium organisation create strategies to
compete. Strategic Management requires experts, and these experts are costly
resources. Thus, the process as a whole required good amount of funds to be spent.

d) In a competitive scenario, where all organisations are trying to move strategically, it is

difficult to clearly estimate the competitive responses to a firm’s strategies. It is quite
difficult to gauge the strategic planning of competitors because most of these decisions
are taken within closed doors by the top management. For example, Apple changed the
market dynamics of the speaker industry by choosing to remove 3.5mm audio jack from
iPhones. Now, to be relevant in the market, all major speaker brands had to put
concentrated efforts to develop their own true wireless speakers (TWS) and compete
with new entrants.

Why do businesses opt for strategic management even with its limitation ?
Strategic Management is a time consuming and costly process, yet all organization’s want
to do indulge into it ? Why ?
Because even though it has its limitations, its importance outweighs its shortcomings.
A business cannot operate and succeed without proper strategic management.

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1.5 STRATEGICINTENT (VISION, MISSION, GOALS, OBJECTIVES AND VALUES)

 Strategic Management is defined as a dynamic process of formulation, implementation,

evaluation, and control of strategies to realise the organisation’s strategic intent.
Strategic intent refers to purposes of what the organisation strives for senior
managers must define “what they want to do” and “why they want to do”.
 “Why they want to do” represents strategic intent of the firm. Clarity in strategic
intent is extremely important for the future success and growth of the enterprise,
irrespective of its nature and size.

 Strategic intent can be understood as the philosophical base of strategic management.

It implies the purposes, which an organisation endeavours to achieve. It is a statement
that provides a perspective of the means, which will lead the organisation, reach its
vision in the long run. Strategic intent gives an idea of what the organisation desires to
attain in future. It answers the question what the organisation strives or stands for? It
indicates the long-term market position, which the organisation desires to create or
occupy and the opportunity for exploring new possibilities.

 Strategic intent provides the framework within which the firm would adopt a
predetermined direction and would operate to achieve strategic objectives. Strategic
intent could be in the form of vision and mission statements for the organisation at the
corporate level. It could be expressed as the business definition and business model at
the business level of the organisation.

 Strategic intent is generally stated in broad terms but when stated in precise terms it
is an expression of aims to be achieved operationally, i.e., goals and objectives.

1. Vision : Vision implies the blueprint of the company’s future position. It describes
where the organisation wants to land. It depicts the organisation’s aspirations and
provides a glimpse of what the organisation would like to become in future. Every
sub system of the organisation is required to follow its vision.

2. Mission : Mission delineates the firm’s business, its goals and ways to reach the
goals. It explains the reason for the existence of the firm in the society. It is
designed to help potential shareholders and investors understand the purpose of the
firm. A mission statement helps to identify, ‘what business the firm undertakes.’ It
1 - 11
 defines the present capabilities, activities, customer focus and role in society.

3. Goals and Objectives : These are the base of measurement. Goals are the end
results, that the organisation attempts to achieve. On the other hand, objectives
are time-based measurable targets, which help in the accomplishment of goals.
These are the end results which are to be attained with the help of an overall plan,
over the particular period. However, in practice, no distinction is made between
goals and objectives and both the terms are used interchangeably.

The vision, mission, business definition, and business model explain the philosophy of
the organisation but the goals and objectives represent the results to be achieved
in multiple areas of business.

4. Values/ Value System : Values are the deep-rooted principles which guide an
organisation’s decisions and actions. Collins and Porras succinctly define core values
as being inherent and sacrosanct; they can never be compromised, either for
convenience or short-term economic gain.

Component of Strategic Intent

1.5.1 Vision :

 Very early in the strategy making process, a company’s senior managers must
consider the issue of what directional path the company should take and what
changes in the company’s product-market-customer-technology focus would improve
its current market position and future prospects. Deciding to commit the company to
one path versus other pushes managers to draw some carefully reasoned conclusions
1 - 12
 about how to try to modify the company’s business makeup and the market position it
should stake out.

 Top management’s views about the company’s direction and the product- customer-
market-technology focus constitute the strategic vision for the company. Strategic
vision delineates management’s aspirations for the business, providing a panoramic view
of the “where we are to go” and a convincing rationale for why this makes good
business sense for the company. Strategic vision thus points out a particular
direction, charts a strategic path to be followed in future, and moulding organisational
identity. A clearly articulated strategic vision communicates management’s aspirations
to stakeholders and helps steer the energies of company personnel in a common
direction. For instance, Henry Ford’s vision of a car in every garage had power because
it captured the imagination of others, aided internal efforts to mobilize the Ford
Motor Company’s resources, and served as a reference point for gauging the merits of
the company’s strategic actions.

a) HDFC Bank Ltd., one of the largest banks in India has clearly defined its Vision of
being a world class Indian bank. This vision helps them keep in mind, “where we want
to go”, as the central thought of their strategic decision making.

b) LIC Ltd., the largest insurance company of India has defined its visions as - A
trans-nationally competitive financial conglomerate of significance to societies and
Pride of India.

c) Apple Inc.’s CEO Tim Cook defined the vision of the company as - “We believe that
we are on the face of the earth to make great products, and that’s not changing.”
Essentials of a strategic vision

 The entrepreneurial challenge in developing a strategic vision is to think creatively

about how to prepare a company for the future.
 Forming a strategic vision is an exercise in intelligent entrepreneurship.
 A well-articulated strategic vision creates enthusiasm among the members of the
organisation.

 The best-worded vision statement clearly illuminates the direction in which

organisation is headed.
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1.5.2 Mission :

 A mission is an answer to the basic question ‘what business are we in and what we do’.
It has been observed that many firms fail to conceptualise and articulate the
mission and business definition with the required clarity. Such firms are seen to
fumble in the identification of opportunities and fail in formulating strategies to
make use of opportunities. Firms working to manage their organisation strategically
cannot be lax in the matter of mission and business definition, as the two ideas are
absolutely central to strategic planning.
Why should an organisation have a mission ?

 To ensure unanimity of purpose within the organisation.

 To develop a basis, or standard, for allocating organisational resources.
 To provide a basis for motivating the use of the organisation’s resources.

 To establish a general tone or organisational climate, to suggest a business- like

operation.

 To serve as a focal point for those who can identify with the organisation’s purpose
and direction.
 To facilitate the translation of objective and goals into a work structure involving
the assignment of tasks to responsible elements within the organisation.

 To specify organisational purposes and the translation of these purposes into goals
in such a way that cost, time, and performance parameters can be assessed
and controlled.
 A company’s mission statement is typically focused on its present business scope
– “who we are and what we do”. Mission statements broadly describe an
organisations present capability, customer focus, activities, and business makeup.

a) HDCF Bank has two-fold mission : first, to be the preferred provider of banking
services for target retail and wholesale customer segments. The second is to
achieve healthy growth in profitability, consistent with the bank’s risk appetite.

b) LIC Ltd.’s Mission is : Ensure and enhance the quality of life of people
through financial security by providing products and services of aspired attributes
with competitive returns, and by rendering resources for economic development.
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 c) Apple’s mission has been defined as - “to bring the best user experience to its
customers through innovative hardware, software, and services.”

 Mission statement should reflect the philosophy of the organisations that is perceived
by the senior managers. A good mission statement should be precise, clear, feasible,
distinctive and motivating. Following points are useful while writing a mission of a
company :

a) One of the roles of a mission statement is to give the organisation its own
special identity, business emphasis and path for development – one that
typically sets it apart from other similarly positioned companies.
b) A company’s business is defined by what needs it is trying to satisfy, which
customer groups it is targeting and the technologies and competencies it uses
and the activities it performs.
c) Good mission statements are – unique to the organisation for which they are
developed.
What is our mission? And what business are we in ?

 At the time these two experts raised this issue, the business managers of the world
did not fully appreciate the importance of these questions; those were the days
when business management was still a relatively simple process even in industrially
advanced countries like the US. It was only in subsequent years that captains of
industry all over the world understood the significance of the seemingly simple
questions raised by Drucker and Levitt.

 The corporate mission is an expression of the growth ambition of the firm. It is, in
fact, the firm’s future visualised. It provides a dramatic picture of what the company
wants to become. It is the corporation’s dream crystallised. It is a colourful sketch
of how the firm wants its future to look, irrespective of the current position. In other
words, the mission is a grand design of the firm’s future.

 Mission amplifies what brings the firm to this business or why it is there, what
existence it seeks and what purpose it seeks to achieve as a business firm. In other
words, the mission serves as a justification for the firm’s very presence and
existence; it legitimises the firm’s presence.
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 According to Peter Drucker, every organisation must ask an important question
“What business are we in?” and get the correct and meaningful answer. The answer
should have marketing or external perspective and should not be restated to the
production or generic activities of business. The table given below will clarify and
highlight the importance of external perspective.
What business are we in ?

Company Production-oriented answer Marketing-oriented answer

Indian Oil We produce oil and gasoline We provide various types of safe
products. and cost-effective energy.

Indian Railways We run a railroad. We offer a transportation and

material-handling system.

Lakme In the factory, we make In the retail outlet, we sell hope.

cosmetics.

1.5.3 Goals and Objectives :

 Business organisation translates their vision and mission into goals and objectives. As
such the term objectives are synonymous with goals, however, some authors make an
attempt to distinguish the two. Goals are open-ended attributes that denote the future
states or outcomes. Objectives are close-ended attributes which are precise and
expressed in specific terms. Thus, the Objectives are more specific and translate the
goals to both long term and short-term perspective. However, this distinction is not
made by several theorists on the subject. Accordingly, we will also use the term
interchangeably.

Objectives are organisation’s performance targets – the results and outcomes it

wants to achieve. They function as yardsticks for tracking an organisation’s
performance and progress.

HDFC can have multiple short term and long term objectives which align with the
overall vision and mission of the Bank.

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 All organisations have objectives. The pursuit of objectives is an unending process such
that organisations sustain themselves. They provide meaning and sense of direction to
organisational endeavour. Organisational structure and activities are designed, and
resources are allocated around the objectives to facilitate their achievement. They also
act as benchmarks for guiding organisational activity and for evaluating how the
organisation is performing.

 Objectives with strategic focus relate to outcomes that strengthen an organisation’s

overall business position and competitive vitality. Objectives, to be meaningful to
serve the intended role, must possess the following characteristics :

a) Objectives should define the organisation’s relationship with its environment.

b) They should be facilitative towards achievement of mission and purpose.
c) They should provide the basis for strategic decision-making.
d) They should provide standards for performance appraisal.
e) They should be concrete and specific.

f) They should be related to a time frame.

g) They should be measurable and controllable.
h) They should be challenging.
i) Different objectives should correlate with each other.

j) Objectives should be set within the constraints of organisational resources and

external environment.

 A need for both short-term and long-term objectives: As a rule, a company’s set of
financial and strategic objectives ought to include both short-term and long-term
performance targets. Having quarterly or annual objectives focuses attention on
delivering immediate performance improvements. Targets to be achieved within
three to five years’ prompt considerations of what to do now to put the company in
position to perform better down the road. A company that has an objective of
doubling its sales within five years can’t wait until the third or fourth year to begin
growing its sales and customer base. By spelling out annual (or perhaps quarterly)
performance targets, management indicates the speed at which longer-range targets
are to be approached.
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 Long-term objectives : To achieve long-term prosperity, strategic planners commonly
establish long-term objectives in seven areas.
a) Profitability
b) Productivity
c) Competitive Position
d) Employee Development
e) Employee Relations
f) Technological Leadership
g) Public Responsibility

 Long-term objectives represent the results expected from pursuing certain strategies.
Strategies represent the actions to be taken to accomplish long-term objectives. The
time frame for objectives and strategies should be consistent, usually from two to five
years.

 Short-range objectives can be identical to long-range objectives if an organisation is

already performing at the targeted long-term level. For instance, if a company has an
ongoing objective of 15 percent profit growth every year and is currently achieving this
objective, then the company’s long-range and short-range objectives for increasing
profits coincide. The most important situation in which short-range objectives differ
from long-range objectives occurs when managers are trying to elevate organisational
performance and cannot reach the long-range target in just one year. Short-range
objectives then serve as steps toward achieving long term objective.
 Clearly established objectives offer many benefits. They provide direction, allow
synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts,
stimulate exertion, and aid in both the allocation of resources and the design of jobs.
1.5.4 VALUES :

 “Business, as I have seen it, places one great demand on you: it needs you to self- impose
a framework of ethics, values, fairness and objectivity on yourself at all times.” - Ratan
N Tata, 2006 (Source: TATA Group Website)

 A few common examples of values are – Integrity, Trust, Accountability, Humility,

Innovation, and Diversity. But why are values so important? A company’s value sets the
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 tone for how the people of think and behave, especially in situations of dilemma. It
creates a sense of shared purpose to build a strong foundation and focus on longevity of
the company’s success. Employees prefer to work with employers whose values resonate
with them - the ones they can relate to in their daily work and personal life.
Interestingly, majority of consumers say that they would prefer to buy products and

services from companies that have a purpose that reflects their own value and belief
system. Hence, values have both internal as well as external implications.

 For reference, a lot of values were put to actions during Covid 19 pandemic when leaders
of the organisations put people before everything else. It projected how deep the
foundation of the oragnisations’ were and how important it was for them to uphold their
core values.

 The above graphic represents the interconnection of Intent, Vision, Mission, Goals
and Values; Values remain the center/core of Vision, Mission, Goals and putting all
them to action. Vision is followed by Mission, followed by Goals and finally executing
via real actions.
Values of HDFC Bank
HDFC Bank is committed to maintaining the highest level of ethical standards,
professional integrity, corporate governance and regulatory compliance. HDFC
Bank’s business philosophy is based on five core values: Operational Excellence,
Customer Focus, Product Leadership, People and Sustainability. (Source: HDFC
website)

Can you now go and read about LIC and Apple’s values? Try on your own.
1 - 19
 Intent vs Values - Which is a broader concept ?
Sandeep, a human resource manager thinks that Intent is a bigger concept than
Values. Is he right?
Sandeep is not right, as Values and Intent are two different concepts. Intent is
the purpose of doing business while values are the principles that guide decision
making of business. They both go hand in hand, while the intent is sometimes
driven by values. So values more or so is wider than Intent.

1.6 STRATEGIC LEVELS IN ORGANISATIONS

 A typical large organization is a multi-divisional organisation that competes in several

different businesses. It has separate self-contained divisions to manage each of these
businesses. For example, Patanjali has healthcare, FMCG, Organic Foods, Medicinal Oils
and Herbs, and various different businesses. It has separate divisions which work within
themselves to sustain each of these businesses.
 Generally, there are three main levels of management :
a) Corporate level
b) Business level
c) Functional level

 General managers are found at the first two of these levels, but their strategic roles
differ depending on their sphere of responsibility.

Figure: Levels of strategic management

 An organization is divided into a number of segments that work together to bring a

particular product or service to the market. If a company provides several and/or
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 different kinds of products or services, it often duplicates these functions and creates
a series of self-contained divisions (each of which contain its own set of functions) to
manage each different product or service.

 The general managers of these divisions then become responsible for their particular
product line. The overriding concern of the divisional managers is healthy growth of
their divisions. They are responsible for deciding how to create a competitive advantage
and achieve higher profitability with the resources and capital they have at their
disposal. Such divisions are called Strategic Business Units (SBUs).

 The corporate level of management consists of the Chief Executive Officer (CEO),
other senior executives, the board of directors, and corporate staff. These individuals
participate in strategic decision making within the organization. The role of corporate-
level managers is to oversee the development of strategies for the whole organization.
This role includes defining the mission and goals of the organization, determining what
businesses it should be in, allocating resources among the different businesses,
formulating and implementing strategies that span individual businesses, and providing
leadership for the organization as a whole.

 For example, Ahmedabad headquartered Adani Group is an Indian multinational

conglomerate active in a wide range of businesses, including mining, operating ports and
airports, power generation and transmission and cement. The main strategic
responsibilities of its Group Chairman, Mr. Gautam Adani, are setting overall strategic
objectives, allocating resources among the different business areas, deciding whether
the firm should divest itself of any of its businesses, and determining whether it should
acquire any new ones. In other words, it is up to Mr. Adani and other senior executives
to develop strategies that span individual businesses and building and managing the
corporate portfolio of businesses to maximize corporate profitability. However, it is not
their specific responsibility to develop strategies for competing in the individual
business areas, such as financial services. The development of such strategies is the
responsibility of those in charge of different businesses called business level managers.

 In simple words, corporate level managers provide an organisation level view of strategy
and what they want to achieve, but it is on the business level managers to ensure that or

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 their particular business, the one they are responsible for.

 Besides overseeing resource allocation and managing the divestment and acquisition
processes, corporate-level managers provide a link between the people who oversee the
strategic development of a firm and those who own it (the shareholders). Corporate-
level managers, and particularly the CEO, can be viewed as the guardians of
shareholders’ welfare. It is their responsibility to ensure that the corporate and
business strategies of the company are consistent with maximizing shareholders’ wealth.

 If they are not, then ultimately the CEO is likely to be held accountable by the
shareholders.

 As we now know, a strategic business unit is a self-contained division (with its own
functions - For example, finance, purchasing, production, and marketing
departments) that provides a product or service for a particular market. The principal
general manager at the business level, or the business-level manager, is the head of
the division. The strategic role of these managers is to translate the general
statements of direction and intent that come from the corporate level into concrete
strategies for individual businesses. Thus, whereas corporate-level managers are
concerned with strategies that span individual businesses, business-level managers are
concerned with strategies that are specific to a particular business.

 Functional-level managers are responsible for the specific business functions or

operations (human resources, purchasing, product development, customer service, and
so on) that constitute a company or one of its divisions. Thus, a functional
manager’s sphere of responsibility is generally confined to one organizational
activity, whereas general managers oversee the operation of a whole company or
division. Although they are not responsible for the overall performance of the
organization, functional managers nevertheless have a major strategic role: to
develop functional strategies in their area that help fulfill the strategic objectives
set by business- and corporate-level general managers.

 Functional managers provide most of the information that makes it possible for
business- and corporate-level general managers to formulate realistic and
attainable strategies. Indeed, because they are closer to the customer than the

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 typical general manager is, functional managers themselves may generate important
ideas that subsequently may become major strategies for the company. Thus, it is
important for general managers to listen closely to the ideas of their functional
managers. An equally great responsibility for managers at the operational level is
strategy implementation: the execution of corporate and business-level plans.

Which is better - Top Down Approach or Bottom-Up Approach ?

Do you know the concepts of Top-Down and Bottom-Up approach of decision making ?
A top-down approach to decision making is when decisions are made solely by
leadership at the top i.e. corporate level of management, while the bottom-up
approach gives all teams across the levels a voice in decision making.

1.6.1 Network of Relationship Between the Three Levels

 The corporate level decides what the business wants to achieve, while the business
level draws ideas and plan to execute the same, which eventually flow down to
functional level to execute and achieve results. But there are multiple ways in which all
the 3 levels of management are interlinked, and interestingly it depends on the
organisation as a whole to decide what kind of network of relationship suits their
culture and aspirations.

 There are 3 major types of networks of relationship between the levels and also
amongst the same levels of a business;

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a) Functional and Divisional Relationship : It is an independent relationship,
where each function or a division is run independently headed by the
function/division head, who is a business level manager, reporting directly to the
business head, who is a corporate level manager. Functions maybe like Finance,
Human Resources, Marketing, etc. while Divisions may depend on the products like
for a toys manufacturer - kids toys, teenager toys, etc. could be divisions.

b) Horizontal Relationship : All positions, from top management to staff-level

employees, are in the same hierarchical position. It is a flat structure where
everyone is considered at same level. This leads to openness and transparency in
work culture and focused more on idea sharing and innovation. This type of
relationship between levels is more suitable for startups where the need to
share ideas with speed is more desirable.

c) Matrix Relationship : It features a grid-like structure of levels in an

organisation, with teams formed with people from various departments that are
built for temporary task-based projects. This relationship helps manage huge
conglomerates with ease where it is nearly impossible to track and manage
every single team independently. In Matrix relationship - there are more than
one business level managers for each functional level teams. It is complex for
smaller organisations, but extremely useful for large organisations.

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 2
CHAPTER

STRATEGIC ANALYSIS :
EXTERNAL ENVIRONMENT

LEARNING OUTCOMES
After studying this chapter, you will be able to :

 Examine the criticality of the business environment in strategic

analysis.

 Describe various elements of the domestic macro environment

of business.

 Utilise PESTLE Analysis as a tool for environmental analysis.

 Situate a business in an industry and conduct industry analysis.

 Analyse aspects related to competition in the industry with

reference to Porter’s five competitive forces.
 CHAPTER OVERVIEW

2.1 INTRODUCTION

 There are different kinds of business activities that take place in an organisational
setting, and a cursory look into their world reflects a wide variety of organisations
ranging from small local businesses to international or multinational corporations’ level.
Generally, organisations are distinguished based on their size, type of products,
markets, geographical coverage, legal status, and like because of vast organisational
diversity.

 Whatever their size or other distinguishing feature they do not operate in a vacuum.
They continuously act and react to what happens outside their periphery. The factors
that are outside the business operations are typically referred to as organisational /
business environment. In other words, and in the specific context of business,
environment may be defined as a set of all external factors that weigh in the minds of
the managers. Drawing an analogy with the term ‘atmosphere’ one could envision layers
of such influences. See Figure-

2-1
 The process of strategic formulation begins with a strategic analysis. Its objective is to
compile information about internal and external environments in order to assess
possibilities while formulating strategic objectives and contemplating strategic
activities. In this chapter various aspects of external environment are covered with the
perspective of strategic analysis. We will also attempt to understand how to identify,
and tackle strategies to adapt within complex and turbulent external environment.
2.2 STRAGIC ANALYSIS

 Strategy formulation is not a task in which managers can get by with intuition,
opinions, instincts, and creative thinking. Judgments about what strategies to pursue
need to flow directly from analysis of a firm’s external environment and its internal
resources and capabilities. Environmental scanning is a natural and continuous activity
for every business and some do it on an informal basis, while others have a formal
structure to collect meaningful information.

 It is just as important to learn about changes in tax regulations through television

news as it is through a well-established reading material from experts. The capacity
to collect important information in informal settings usually separates great
entrepreneurs and managers. Using just informal techniques, on the other hand,
exposes the organisation to missed opportunities and unanticipated hazards.

2-2
 A systematic approach to environmental assessment is essential for managing risk
and uncertainty.

 The majority of the rapidly expanding organisations use strategic planning

throughout various stages of their operations. The strategic analysis is a component of
business planning that has a methodical approach, makes the right resource
investments, and may assist business in achieving its objective. It forces to think
about the rivals and aids in the evaluation of business plans to stay ahead of the
competition. The two important situational considerations are :

(1) industry and competitive conditions, and

(2) an organisation’s own capabilities, resources, internal strengths, weaknesses, and

market position.

Figure: Strategic Analysis

 The analytical sequence is from strategic appraisal of the external and internal
situation to evaluation of alternatives of strategies, to the final choice of strategy.

 Accurate diagnosis of the business situation is necessary for managerial preparation

to decide on a sound long-term direction, setting appropriate objectives, and
crafting a winning strategy. Without perceptive understanding of the strategic
aspects of a company’s external and internal environments, the chances are greatly
increased that managers will finalize a strategic game plan that doesn’t fit the
situation well, that holds little prospect for building competitive advantage, and
that is unlikely to boost company performance.

 The strategic analysis is a continuous process which is not without limitations. There

2-3
 are two major limitations of strategic analysis that we need to be aware of. First, it
gives a lot of innovative options but doesn't tell which one to pick. The options can be
overlapping, confusing or difficult to implement. Second, it can be time- consuming at
times, hurting overall organisational functioning and also strain other efficient
innovations such as developing a new product or a service.

2.2.1 Issues to consider for Strategic Analysis

 Strategy evolves over a period of time : Each strategic decision must balance the
different factors that impact and constrain strategy. A key element of strategic
analysis is the probable outcomes of everyday decisions. A current strategy is the
result of several little choices taken over a protracted period of time. A management
radically changes strategy when they try to speed up the organisational growth.
Strategy is influenced by experience, but it has to be updated when the results become
clear. It therefore evolves with time.

 Balance of external and internal factors : In practise, strategic analysis necessitates

creating a reasonable balance between many and conflicting challenges, because a
perfect fit between them is unlikely. Management must consider opportunities,
influences, and constraints while taking a strategic decision. There are factors driving a
decision, such as entering a new market. Concurrently, there exist constraints that limit
the option, such as the presence of a large opponent. These limiting constraints will have
various implications on the kind, degree, volume, and significance of the impact. While
some of these aspects are under your control, there will be others way beyond the
existing capabilities.

 Risk : In strategic analysis, the principle of maintaining balance is important. However,

the complexity and intermingling of variables in the environment reduces the strategic
balance in the organisation. Competitive markets, liberalization, globalization, booms,
recessions, technological advancements, inter-country relationships all affect
businesses and pose risk at varying degrees. An important aspect of strategic analysis is
to identify potential imbalances or risks and assess their consequences. A broad
classification of the strategic risk that requires consideration in strategic analysis is
given below :

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 Time
Short Time Long Time
Errors in interpreting the Changes in the environment
Strategic Risks

External environment cause lead to obsolescence of

strategic failure strategy.
Organizational capacity is Inconsistencies with the
unable to cope up with strategy are developed on
Internal
strategic demands. account of changes in internal
capacities and preferences
Figure : Strategic Risk

 External risk is on account of inconsistencies between strategies and the forces in

the environment. Internal risk occurs on account of forces that are either within the
organization or are directly interacting with the organization on a routine basis.

 The below given broad list of analysis that a business undertakes to plan a strategy
covers both aspects of external analysis and internal analysis. An analysis helps
identify opportunities, threats, strengths and weaknesses.

Figure : Framework of Strategic Analysis

2-5
 It is evident that industries differ widely in their economic characteristics, competitive
situations, and future profit prospects. The economic character of industries varies
according to such factors as overall size and market growth rate, the pace of
technological change, the geographic boundaries of the market (which can extend from
local to worldwide), the number and size of buyers and sellers, whether sellers’ products
are virtually identical or highly differentiated, the extent to which costs are affected
by economies of scale, and the types of distribution channels used to access buyers,
marketing opportunities, disposable income of prospective buyers, government support,
etc. Competitive forces can be moderate in one industry and fierce, even cutthroat, in
another.

 In some industries competition focuses on who has the best price, while in others
competition is centered on quality and reliability (as in monitors for PCs and laptops) or
product features and performance (as in mobile phones) or quick service and
convenience. (as in online shopping and fast foods) or brand reputation (as in laundry
detergents and soft drinks).

 In other industries, the challenge is for companies to work cooperatively with suppliers,
customers, and maybe even select competitors to create the next round of product
innovations and open up whole new vistas of market opportunities.

 An industry’s economic traits and competitive conditions, and how they are expected to
change, determine whether its profit prospects are poor, average, or excellent.
Industry and competitive conditions differ so much that leading companies in
unattractive industries can find it hard to earn respectable profits, while even weak
companies in attractive industries can achieve good performance.
2.3 STRATEGY AND BUSINESS ENVIRONMENT

 To accomplish the goals and objectives of a business, business strategist creates

strategies and formulate policies considering both internal and external factors. A
framework for adjusting to the demands of an unpredictable environment and an
uncertain future is provided by strategic management.

2-6
 Figure: Strategy and Environment

 The business environment is highly dynamic and continuously evolving. Strategists

provide an interface between the organizational abilities and the opportunities and
challenges it must deal within the larger environment.
The term "business environment" refers to all external factors, influences, or situations
that in some way affect business decisions, plans, and operations. Organisational success
is determined by its business environment, and even more from its relationship with it.

 Strategic management is involved with choosing a long-term direction in relation to

these resources and opportunities. There is a close and continuous interaction
between a business and its environment. This interaction helps in strengthening the
business firm and using its resources more effectively. It helps the business in the
following ways :

i) Determine opportunities and threats : The interaction between the business and its
environment would explain opportunities and threats to the business. It helps to find
new needs and wants of the consumers, changes in laws, changes in social behaviours,
and tells what new products the competitors are bringing in the market to attract
consumers.

ii) Give direction for growth : The interaction with the environment enables the
business to identify the areas for growth and expansion of their activities. Once the
business is aware and understands the changes happening around, it can plan and
strategise to have successful business.

iii) Continuous Learning : The managers are motivated to continuously update their
knowledge, understanding and skills to meet the predicted changes in the realm of
business.

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 iv) Image Building : Environmental understanding helps the business organizations to
improve their image by showing their sensitivity to the environment in which they
operate. For example, in view of the shortage of power, many companies have set up
captive power plants with their factories to meet their own requirement of power as
well as extend surplus capacities in the vicinity. Understanding the needs of the
environment help to showcase that the business is aware and responsive to the
needs. It creates a positive image and helps it to prosper and win over the
competitors.

v) Meeting Competition : It helps the businesses to analyse the competitors’ strategies

and formulate their own strategies accordingly. The idea is to flourish and beat
competition for its products and services.

 Business strategies relate organisational resources to challenges and opportunities in

the larger environment. The changes happening in the external environment challenge
organisations to find novel and unique strategies to remain in business and succeed. As
the world is getting smaller and competition is increasing, organisations have an
increasing pressure to develop their businesses and strengthen their competitiveness.
Strategic analysis covering internal and external environment is highly relevant and
important for the strategists in organisations in order to achieve competitive
advantage, as well as ensure high performance for survival and growth.

To flourish, a business must be aware of, assess, and respond to the many opportunities
and threats present in its environment. In order to succeed, the business must not only
be aware of the numerous aspects of its surroundings but also be able to handle and
adapt to them. The business must continuously evaluate its environment and modify its
operations in order to thrive and expand.

 Strategic decisions are significant aspects of business management and are essential
for the success and continued existence. Two crucial aspects for the success
include are the function of top management and the method of formulating
strategic decisions. Improvement of strategic decisions is constant endeavour for
strategist. Due to the contemporary environment's changes and the challenges that
managers must overcome when making decisions, there is interest in enhancing

2-8
 strategic decision-making. The environment is far more dynamic and unpredictable
than it used to be.
2.3.1 Micro and Macro Environment :

 The environment in which an organization exists can be described in terms of the

opportunities and threats operating in the external environment apart from the
strengths and weaknesses existing in the internal environment. Business strategists
should always be adequately informed on developments occurring in their company, its
industry, and within micro and macro environment of business. For making any strategic
decision, they should be able to comprehend the facts available and challenge the
underlying assumptions.
 The external environment can be categorised in two major types as follows :
a) Micro environment
b) Macro environment

 Micro-environment is related to small area or immediate periphery of an organization. It

influences an organization regularly and directly. Micro environment consists of
suppliers, consumers, marketing intermediaries, competitors, etc. These are specific to
the said business or firm and affect its working on a direct and regular basis. Within
the micro or the immediate environment in which a firm operates we need to address
the following issues :

a) The employees of the firm, their characteristics and how they are organised.
b) The existing customer base on which the firm relies for business.
c) The ways in which the firm can raise its finance.
d) Who are the firm suppliers and how are the links between the two being
developed ?

e) The local community within which the firm operates.

f) The direct competition and their comparative performance.

 The factors in micro environment often relate an organization to the macro issues
influencing the way a firm reacts in the market place. The macro environment is the
portion of the outside world that significantly affects how an organisation operates but
is typically much beyond its direct control and influence.

2-9
2.3.2 Elements of Macro Environment

 Macro environment has broader dimensions as it consists of economic, socio-

cultural, technological, political and legal factors. The classification of the relevant
environment into components or sectors helps an organization to cope with its
complexity, comprehend the different influences operating, and relating the
environmental changes to its strategic management process.

“The environment includes factors outside the firm which can lead to opportunities for,
or threats to the firm. Although, there are many factors, the most important of the
factors are socio-economic, technological, supplier, competitors, and government.”
Gluek and Jauch

 The external environment of an organisation is made up of all the individuals,

teams, organisations, agencies, and factors that it routinely interacts with when
conducting business. In addition to carrying out transactions, it develops and puts into
action pertinent plans and policies to address environmental changes. It negotiates its
way into the future as well.
Demographic Environment :

 Demographics are the characteristics of a population that have been classified and
explained according to certain criteria, such age, gender, and income, in order to
understand the features of a specific group. Demographical analysis considers factors
such as race, age, income, education, possession of assets, house ownership, job position,
region, and the degree of education. Data about these qualities across homes and within
a demographic variable are of importance to both businesses and economists. Marketers
and other social scientists regularly divide up populations based on their demographic
makeup. India has relatively younger population as compared to many other countries.
Many multinationals are interested in India considering its population size.
Socio-Cultural Environment

 A general factor that influences almost all enterprises in a similar manner. It

represents a complex group of factors such as social traditions, values and beliefs, level
and standards of literacy, the ethical standards and state of society, the extent of
social stratification, conflict, cohesiveness and so forth. It differs from demographics
2 - 10
 in the sense that it is not the characteristics of the population, but it is the behaviour
and the belief system of that population.

 Socio-cultural environment consists of factors related to human relationships and the

impact of social attitudes and cultural values which has bearing on the operations of the
organization. The beliefs, values and norms of a society determine how individuals and
organizations should be interrelated.
Economic Environment :

 Economic conditions have a direct bearing over the business strategies. The economic
environment refers to the overall economic situation around the business and include
conditions at the regional, national and global levels. It encompasses conditions in the
markets for resources that have an effect on the supply of inputs and outputs of the
business, their costs, and the dependability, quality, and availability.

 Economic environment determines the strength and size of the market. The purchasing
power in an economy depends on current income, prices, savings, circulation of money,
debt and credit availability. Income distribution pattern determine the business
possibilities. The important point to consider is to find out the effect of economic
prospect, growth and inflation on the operations of the business.

Higher interest rates are detrimental for the businesses with high debt. In the real
estate market, they reduce the capability of the prospective buyers to avail loan and
pay instalments, thus lower the demand.
Political-Legal Environment :

 Political-legal environment takes into account elements like the general level of political
development, the degree to which business and economic issues have been politicised,
the degree of political morality, the state of law and order, political stability, the
political ideology and practises of the ruling party, the effectiveness and purposefulness
of governmental agencies, and the scope and type of governmental intervention in the
economy and industry. It is partly general to all similar enterprises and partly specific
to an individual enterprise.

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 Technological Environment :

 A highly important factor in the present times is technology. Technology has changed
the way people communicate and do things. Technology has also changed the ways of how
businesses operate now. Technology and business are linked and are interdependent on
one another. Businesses help society access the outcomes of technological research and
development, raising everyone's standard of living.

 As a result, business leverages technology. Businesses use new discoveries to adapt

themselves for the advancement of society.

 Technology has impacted on how businesses are conducted. With use of technology,
many organisations are able to reduce paperwork, schedule payments more efficiently,
are able to coordinate inventories efficiently and effectively. This helps to reduce costs
of companies, and shrink time and distance, thus, capturing a competitive advantage for
the company.
Changes in technology have an effect on how a business runs its operations. The
technological advancements might require a business to drastically alter its
operational, production and marketing strategies.
2.3.3 PESTLE– A tool to Analyse Macro Environment

 The term PESTLE is often used to describe a framework for analysis of macro
environmental factors. PESTEL analysis is frequently used to assess the business
environment in which a firm operates. Political, economic, social, and technological
(PEST) analysis was the name given to the framework in the past; however, later,
the framework has been expanded to include environmental and legal factors as well.
PESTLE analysis involves identifying the political, economic, socio-cultural,
technological, legal and environmental influences on an organization and providing a way
of scanning the environmental influences that have affected or are likely to affect an
organization or its policy. ‘PESTLE analysis is an increasingly used and recognized
analytical tool, and it is an acronym for:

P- political E- economic

S- socio-cultural T- technological L- legal

E- environmental
2 - 12
 The PESTLE analysis is simple to understand and quick to implement. The advantage of
this tool is that it encourages management into proactive and structured thinking in
its decision making.
The Key Factors :

 Political factors are how and to what extent the government intervenes in the economy
and the activities of business firms. Political factors may also influence goods and
services which the government wants to provide or be provided and those that the
government does not want to be provided. Furthermore, governments have great
influence on the health, education and infrastructure of a nation.

 Economic factors have major impacts on how businesses operate and take decisions. For
example, interest rates affect a firm's cost of capital and therefore to what extent a
business grows and expands. Exchange rates affect the costs of exporting goods and
the supply and price of imported goods in an economy. The money supply, inflation,
credit flow, per capita income, growth rates have a bearing on the business decisions.

 Social factors affect the demand for a company's products and how that company
operates.

 Technological factors can determine barriers to entry, minimum efficient production

level and influence outsourcing decisions. Furthermore, technological shifts can affect
costs, quality, and lead to innovation.

 Legal factors affect how a company operates, its costs, and the demand for its
products, ease of business.
 Environmental factors affect industries such as tourism, farming, and insurance.
Growing awareness to climate change is affecting how companies operate and the
products they offer--it is both creating new markets and diminishing or destroying
existing ones.
 On the basis of these, it should be possible to identify a number of key environmental
influences, which are in effect, the drivers of change. These are the factors that
require to be considered in making meaningful decisions. Take a look at the table given
below :

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 Political Economic

♦ Political stability ♦ Economy situation and trends

♦ Political principles and ideologies ♦ Market and trade cycles

♦ Current and future taxation policy ♦ Specific industry factors

♦ Regulatory bodies and processes ♦ Customer/end-user drivers

♦ Government policies ♦ Interest and exchange rates

♦ Government term and change ♦ Inflation and unemployment

♦ Thrust areas of political leaders ♦ Strength of consumer spending

Social Technological

♦ Lifestyle trends ♦ Replacement

♦ Demographics technology/solutions

♦ Consumer attitudes and opinions ♦ Maturity of technology

♦ Brand, company, technology Image ♦ Manufacturing maturity and capacity

♦ Consumer buying patterns ♦ Innovation potential

♦ Ethnic/religious factors ♦ Technology access, licensing, patents,

♦ Media views and perception property rights and copyrights

Legal Environmental

♦ Business and Corporate Laws ♦ Ecological/environmental issues

♦ Employment Law ♦ Environmental hazards

♦ Competition Law ♦ Environmental legislation

♦ Health & Safety Law ♦ Energy consumption

♦ International Treaty and Law ♦ Waste disposal

♦ Regional Legislation

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2.3.4 Internationalization of Business :

 Internationalization has emerged as the dominant commercial trend over the last couple
of decades. It enables a business to enter new markets in search of greater earnings
and less expensive resources. Additionally, expanding internationally enable a business
to achieve greater economies of scale and extend the lifespan of its products.

 The strategic-management process is essentially the same for global firms as it is for
domestic firms; nevertheless, international processes are much more complicated due to
additional variables and linkages. A business can approach internationalisation
systemically with the aid of international strategy planning. One method for an
organization to identify opportunities and threats in global markets is by scanning the
external environment. The development of effective strategies and the formulation of
global strategic objectives are made feasible by internationalisation.
Characteristics of a global business :

To be specific, a global business has three characteristics :

 It is a conglomerate of multiple units (located in different parts of the globe) but all
linked by common ownership.

 Multiple units draw on a common pool of resources, such as money, credit, information,
patents, trade names and control systems.

 The units respond to some common strategy. Besides, its managers and shareholders are
also based in different nations.
Developing internationally :

 International development is expensive and challenging. Moving on in a thorough and

structured manner is thus the ideal approach to adopt. The steps in international
strategic planning are as follows :

a) Evaluate global opportunities and threats and rate them with the internal
capabilities.
b) Describe the scope of the firm's global commercial operations.
c) Create the firm's global business objectives.
d) Develop distinct corporate strategies for the global business and whole organisation.

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 Why do businesses go global ?

Technological developments and evolving political views are two important factors
in the rapid rise of multinational organisations. Because of technological advances, the
process of internationalisation is now simpler than it was previously. Worldwide
communication makes it easier to define and implement global strategy by linking
corporate headquarters with their abroad operations. In addition, introduction of
improved transportation has increased the mobility of money, people, raw materials, and
finished items. There are several reasons why companies go global. These are explained
as follows :

 The first and foremost reason is the need to grow. It is basic need of every
organisation. Often finding opportunities in the other parts of the globe,
organisations extend their businesses and globalise their operations.

 There is rapid shrinking of time and distance across the globe, because of faster
communication, speedier transportation, growing financial flow of funds and rapid
technological changes.

 It is being realised that the domestic markets are no longer adequate. The
competition present domestically may not exist in some of the international markets.
 There can be varied other reasons such as need for reliable or cheaper source of raw-
materials, cheap labour, etc. Many foreign businesses shift and set up some of their
operations to take advantage of availability of vast pool of talent.

 Companies often set up overseas plants to reduce high transportation costs. It may be
cheaper to produce near the market to reduce the time and costs involved in
transportation.

 When exporting organisations find foreign markets to open up or grow big, they may
naturally look at overseas manufacturing plants and sales branches to generate higher
sales and better cash flow.

 The apparent and real collapse of international trade barriers redefines the roles of
state and industry. The trend is towards increased privatization of manufacturing and
services sectors, less government interference in business decisions and more
dependence on the value-added sector to gain marketplace competitiveness. The trade
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 tariffs and custom barriers are getting lowered, resulting in increased flow of business.

 Globalization has made companies in different countries to form strategic alliances to

ward off economic and technological threats and leverage their respective comparative
and competitive advantages.
2.3.5 International Environment

 The social, cultural, demographic, environmental, political, governmental, legal,

technological factors that an international organisation faces are nearly limitless,
and the number and complexity of these factors increase manifold as the number of
products produced and geographic areas served increase. An assessment of the
external environment is the first step toward internationalisation. Analysing
international environment is important since it allows organisation to discover
opportunities in the global market and evaluate feasibilities of capitalising on these
opportunities. Assessments of the international environment can be done at three
levels: multinational, regional, and country.
 Multinational environmental analysis involves identifying, anticipating, and monitoring
significant components of the global environment on a large scale. Understanding
global developments covering economic and other macro elements is important.

 Governments may have free or interventionist tendencies in economies that needs

to be carefully considered. These characteristics are evaluated based on their
present and expected future impact.

 Regional environmental analysis is a more in-depth evaluation of the critical factors

in a specific geographical area. The emphasis would be on discovering market
opportunities for a goods, services, or innovations in the chosen location.

 Country environmental analysis has to take a deeper look at the important

environmental factors. Study of economic, legal, political, and cultural dimensions is
required in order for planning to be successful. The analysis must be customised for
each of the countries to develop effective market entrance strategies.
 International environment has become an inherent part of strategic management for
businesses of all sizes with global interests. It essentially involves various global aspects
like political risks, cultural differences, exchange rate fluctuations, legal compliances

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 and taxation issues. Thus, it becomes more important for the people at the decision-
making levels to focus on factors comprising the international environment.
2.4 UNDERSTANDING PRODUCT AND INDUSTRY

Businesses sell products. A product can be either a good or a service. It might

be physical good or a service, an experience. Business products have certain
characteristics as follows :

 Products are either tangible or intangible. A tangible product can be handled, seen, and
physically felt, such as a car, book, pen, table, mobile handset and so on. Alternatively,
an intangible product is not a physical good, such as telecom services, banking, insurance,
or repair services.

 Product has a price. Businesses determine the cost of their products and charge a price
for them. The dynamics of supply and demand influence the market price of an item or
service. The market price is the price at which quantity provided equals quantity
desired. The price that may be paid is determined by the market, the quality, the
marketing, and the targeted group. In the present competitive world price is often given
by the market and businesses have to work on costs to maintain profitability.
On account of competition, businesses are not able to fix market price by adding
profit margin on the costs. Rather, they work on reducing the costs given the
prevailing market price.

 Products have certain features that deliver satisfaction. A product feature is a

component of a product that satisfies a consumer need. Features determine product
pricing, and businesses alter features during the development process to optimise the
user experience. Products should be able to provide value satisfaction to the customers
for whom they are meant. Features of the product will distinguish it in terms of its
function, design, quality and experience. A customer's cumulative experience with a
product from its purchase to the end of its useful life is an important component of a
product feature.

 Product is pivotal for business. The product is at the centre of business around which all
strategic activities revolve. The product enables production, quality, sales, marketing, logistics
and other business processes. Product is the driving force behind business activities.

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  A product has a useful life. Every product has a usable life after which it must be
replaced, as well as a life cycle after which it is to be reinvented or may cease to exist.
We have observed that fixed line telephone instruments have largely been replaced by
mobile phones.
2.4.1 Product Life Cycle :

 An important concept in strategic choice is that of product life cycle (PLC). It is a

useful concept for guiding strategic choice. Essentially, PLC is an S-shaped curve which
exhibits the relationship of sales with respect of time for a product that passes
through the four successive stages of introduction, growth, maturity and decline. If
businesses are substituted for product, the concept of PLC could work just as well.

 The first stage of PLC is the introduction stage with slow sales growth, in which
competition is almost negligible, prices are relatively high, and markets are limited. The
growth in sales is at a lower rate because of lack of awareness on the part of customers.

The second phase of PLC is growth stage with rapid market acceptance. In the growth
stage, the demand expands rapidly, prices fall, competition increases, and market
expands. The customer has knowledge about the product and shows interest in
purchasing it.

 The third phase of PLC is maturity stage where there is slowdown in growth rate. In this
stage, the competition gets tough, and market gets stablised. Profit comes down because
of stiff competition. At this stage, organisations have to work for maintaining stability.

 In the fourth stage of PLC is declines with sharp downward drift in sales. The sales and
profits fall down sharply due to some new product replaces the existing product. So, a
combination of strategies can be implemented to stay in the market either by
diversification or retrenchment.

Figure : Product Life Cycle

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 The main advantage of PLC approach is that it can be used to diagnose a portfolio of
products (or businesses) in order to establish the stage at which each of them
exists. Particular attention is to be paid on the businesses that are in the declining
stage. Depending on the diagnosis, appropriate strategic choice can be made. For
instance, expansion may be a feasible alternative for businesses in the introductory
and growth stages. Mature businesses may be used as sources of cash for investment
in other businesses which need resources. A combination of strategies like selective
harvesting, retrenchment, etc. may be adopted for declining businesses. In this
way, a balanced portfolio of businesses may be built up by exercising a strategic
choice based on the PLC concept.
2.4.2 Value Chain Analysis

 With each transaction, successful businesses produce value for their consumers in the
form of satisfaction and profits for themselves and their shareholders. Companies
that generate more value are more likely to profit than those that generate less
value. Understanding value chain of an organisation is critical for evaluating how
much value it generates.

 Value chain analysis is a method used by strategists to break down each process that
their business employs. This analysis could be used to improve the sequence of
operations, enhancing efficiency and creating a competitive advantage. Value chain
analysis can be used by businesses of all sizes, from sole proprietorships to
multinational organisations. Each organisation has a unique set of procedures to perform
its duties, and they may all benefit from value chain analysis to evaluate and optimise
their processes.
Value chain analysis is a method of examining each activity in value chain of a business in
order to identify areas for improvements. When you do a value chain analysis, you must
analyse how each stage in the process adds or subtracts value from the end product or
service.

 Value chain analysis has been widely used as a means of describing the activities
within and around an organization and relating them to an assessment of the
competitive strength of an organization (or its ability to provide value-for-money

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 products or services).

 Value chain analysis was originally introduced as an accounting analysis to shed light
on the ‘value added’ of separate steps in complex manufacturing processes, in order to
determine where cost improvements could be made and/or value creation improved.

 The two basic steps of identifying separate activities and assessing the value added
from each were linked to an analysis of an organization’s competitive advantage by
Michael Porter.

Figure: Value Chain (Michael Porter)

 One of the key aspects of value chain analysis is the recognition that organizations are
much more than a random collection of machines, material, money and people. These
resources are of no value unless deployed into activities and organised into systems and
routines which ensure that products or services are produced which are valued by the
final consumer/user. In other words, it is these competences to perform particular
activities and the ability to manage linkages between activities which are the source of
competitive advantage for organizations. Porter argued that an understanding of
strategic capability must start with an identification of these separate value activities.

 The primary activities of the organization are grouped into five main areas: inbound
logistics, operations, outbound logistics, marketing and sales, and service.

a) Inbound logistics are the activities concerned with receiving, storing and
distributing the inputs to the product/service. This includes materials handling,
stock control, transport etc. Like, transportation and warehousing.

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b) Operations transform these inputs into the final product or service: machining,
packaging, assembly, testing, etc. convert raw materials in finished goods.

c) Outbound logistics collect, store and distribute the product to customers. For
tangible products this would be warehousing, materials handling, transport, etc. In
the case of services, it may be more concerned with arrangements for bringing
customers to the service, if it is a fixed location (e.g. sports events).

d) Marketing and sales provide the means whereby consumers/users are made aware of
the product/service and are able to purchase it. This would include sales
administration, advertising, selling and so on. In public services, communication
networks which help users’ access a particular service are often important.
e) Service are all those activities, which enhance or maintain the value of a
product/service, such as installation, repair, training and spares.

Each of these groups of primary activities are linked to support activities. These
can be divided into four areas;

f) Procurement : This refers to the processes for acquiring the various resource inputs
to the primary activities (not to the resources themselves). As such, it occurs in
many parts of the organization.

g) Technology development : All value activities have a ‘technology’, even if it is simply

know-how. The key technologies may be concerned directly with the product
(e.g. R&D product design) or with processes (e.g. process development) or with a
particular resource (e.g. raw materials improvements).

h) Human resource management : This is a particularly important area which transcends

all primary activities. It is concerned with those activities involved in recruiting,
managing, training, developing and rewarding people within the organization.
i) Infrastructure : The systems of planning, finance, quality control, information
management, etc. are crucially important to an organization’s performance in its
primary activities. Infrastructure also consists of the structures and routines of
the organization which sustain its culture.

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2.5 INDUSTRY ENVIRONMENT ANALYSIS

 A combination of ideas and methodologies may be utilised to create a clear picture of

key industry traits, competition intensity, industry change drivers, rival firms'
market positions and tactics, competitive success, and profit forecasts. Industry
analysis enable strategic understanding about the entire state of any industry and
make decisions about whether the industry is a lucrative or not.
The goal of the industry environment analysis, which is typically an important step of
strategic analysis, is to estimate the amount of competitive pressures the business is
presently facing and is expected to face in the near future.

 The analysis entails seeing the firm in the context of a bigger framework. The purpose
of industrial analysis is to get insight into a wide range of elements within and outside
the business. Analysing these elements enhances knowledge of surrounding and serves as
the foundation for aligning strategy with changing industry circumstances and realities.
2.5.1 Porter’s Five Forces Model :

 Every business operates in the competitive environment. Competitive state of an

industry applies a strong influence on how firms develop their strategies. Porter's Five
Forces analysis is a simple but efficient way for determining the key sources of
competition in business or industry.

 It is a powerful and widely used tool to systematically diagnose the significant

competitive pressures in a market and assess the strength and importance of each.
Understanding the variables that affect industry helps to adapt strategy, boost
profitability, and stay ahead of the competition. Strategist may use a strong position to
organizational advantage or reinforce a weak one to avoid making mistakes in the future.

 Michael Porter believes that the basic unit of analysis for understanding is a group of
competitors producing goods or services that compete directly with each other. It is
the industry where competitive advantage is ultimately won or lost. It is through
competitive strategy that the organisation attempts to adopt an approach to compete in
the industry.
 The character, mix, and intricacies of competitive forces are never the same from one
industry to another. The model holds that the state of competition in an industry is a

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 composite of competitive pressures operating in five areas of the overall market :
a) Competitive pressures associated with the market manoeuvring and jockeying for
buyer patronage that goes on among rival sellers in the industry.

b) Competitive pressures associated with the threat of new entrants into the market.

c) Competitive pressures coming from the attempts of companies in other industries to

win buyers over to their own substitute products.

d) Competitive pressures stemming from supplier bargaining power and supplier-seller

collaboration.

e) Competitive pressures stemming from buyer bargaining power and seller- buyer
Collaboration.

 The strategists can use the five-forces model to determine what competition is like in
a given industry by undertaking the following steps :

Step 1 : Identify the specific competitive pressures associated with each of the five
forces.
Step 2 : Evaluate how strong the pressures comprising each of the five forces are
(fierce, strong, moderate to normal, or weak).
Step 3 : Determine whether the collective strength of the five competitive forces is
conducive to earning attractive profits.

Figure: Porter’s Five Force Model of Competition

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  Porter’s five forces model is one of the most effective and enduring conceptual
frameworks used to assess the nature of the competitive environment and to describe
an industry’s structure. The interrelationship among these five forces gives each
industry its own particular competitive environment. By applying Porter’s five forces
model of industry attractiveness to their own industries, the manager can gauge their
own firm’s strengths, weaknesses, and future opportunities.
I] The Threat of New Entrants :

 New entrants can reduce industry profitability because they add new production
capacity leading to an increase supply of the product even at a lower price and can
substantially erode existing firm’s market share position. New entrants are always a
powerful source of competition. The new capacity and product range they bring in
throw up new competitive pressure. And the bigger the new entrant, the more
severe the competitive effect. New entrants also place a limit on prices and affect
the profitability of existing players. A firm’s profitability tends to be higher when
other firms are blocked from entering the industry.

 To discourage new entrants, existing firms can try to raise barriers to entry.
Barriers to entry represent economic forces (or ‘hurdles’) that slow down or impede
entry by other firms. Common barriers to entry include, capital requirements,
economies of scale, product differentiation, switching costs, brand identity, access
to distribution channels and possibility of aggressive retaliation by existing players.
These are explained as follows :

i) Capital Requirements : When a large amount of capital is required to enter an

industry, firms lacking funds are effectively barred from the industry, thus
enhancing the profitability of existing firms in the industry.

ii) Economies of Scale : Many industries are characterized by economic activities

driven by economies of scale. Economies of scale refer to the decline in the
per-unit cost of production (or other activity) as volume grows. A large firm
that enjoys economies of scale can produce high volumes of goods at
successively lower costs. This tends to discourage new entrants.

iii) Product Differentiation : Product differentiation refers to the physical or

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 perceptual differences, or enhancements, that make a product special or
unique in the eyes of customers. Firms in the personal care products and
cosmetics industries actively engage in product differentiation to enhance
their products’ features. Differentiation works to reinforce entry barriers
because the cost of creating genuine product differences may be too high for
the new entrants.

iv) Switching Costs : To succeed in an industry, new entrant must be able to

persuade existing customers of other companies to switch to its products.
To make a switch, buyers may need to test a new firm’s product,
negotiate new purchase contracts, and train personnel to use the equipment,
or modify facilities for product use. Buyers often incur substantial financial
(and psychological) costs in switching between firms. When such switching
costs are high, buyers are often reluctant to change.

v) Brand Identity: The brand identity of products or services offered by

existing firms can serve as another entry barrier. Brand identity is
particularly important for infrequently purchased products that carry a high
unit cost to the buyer. New entrants often encounter significant
difficulties in building up the brand identity, because to do so they must
commit substantial resources over a long period.

vi) Access to Distribution Channels : The unavailability of distribution channels

for new entrants poses another significant entry barrier. Despite the
growing power of the internet, many firms may continue to rely on their
control of physical distribution channels to sustain a barrier to entry to rivals.
Often, existing firms have significant influence over the distribution channels
and can retard or impede their use by new firms.

vii) Possibility of Aggressive Retaliation : Sometimes the mere threat of

aggressive retaliation by incumbents can deter entry by other firms into an
existing industry. For example, introduction of products by a new firm may
lead incumbents firms to reduce their product prices and increase their
advertising budgets.

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II] Bargaining Power of Buyers :

 This is another force that influences the competitive condition of the industry.
This force will become heavier depending on the possibilities of the buyers
forming groups or cartels. Mostly, this is a phenomenon seen in industrial
products. Quite often, users of industrial products come together formally or
informally and exert pressure on the producer.

 The bargaining power of the buyers influences not only the prices that the
producer can charge but also influences in many cases, costs and investments of
the producer because powerful buyers usually bargain for better services which
involve costs and investment on the part of the producer.

 Buyers of an industry’s products or services can sometimes exert considerable

pressure on existing firms to secure lower prices or better services. This
leverage is particularly evident when:

i) Buyers have full knowledge of the sources of products and their substitutes.
ii) They spend a lot of money on the industry’s products i.e. they are big
buyers.
iii) The industry’s product is not perceived as critical to the buyer’s needs and
buyers are more concentrated than firms supplying the product. They can
easily switch to the substitutes available.
III] Bargaining Power of Suppliers

 Quite often suppliers, too, exercise considerable bargaining power over

companies. The more specialised the offering from the supplier, greater is his
clout. And, if the suppliers are also limited in number, they stand a still better
chance to exhibit their bargaining power. The bargaining power of suppliers
determines the cost of raw materials and other inputs of the industry and,
therefore, industry attractiveness and profitability.
 Suppliers can influence the profitability of an industry in a number of ways.
Suppliers can command bargaining power over a firm when :
i) Their products are crucial to the buyer and substitutes are not available.
ii) They can erect high switching costs.

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 iii) They are more concentrated than their buyers.
IV] The Nature of Rivalry in the Industry

 The rivalry among existing players is quite obvious. This is what is normally
understood as competition. For any player, the competitors influence strategic
decisions at different strategic levels. The impact is evident more at functional level
in the prices being charged, advertising, and pressures on costs, product and so on.

 The intensity of rivalry in an industry is a significant determinant of industry

attractiveness and profitability. The intensity of rivalry can influence the costs of
suppliers, distribution, and of attracting customers and thus directly affect the
profitability. The more intensive the rivalry, the less attractive is the industry.
Rivalry among competitors tends to be cutthroat and industry profitability low
under various conditions explained as follows :

i) Industry Leader : A strong industry leader can discourage price wars by

disciplining initiators of such activity. Because of its greater financial
resources, a leader can generally outlast smaller rivals in a price war. Knowing
this, smaller rivals often avoid initiating such a contest.

ii) Number of Competitors : Even when an industry leader exists, the leader’s
ability to exert pricing discipline diminishes with the increased number of
rivals in the industry as communicating expectations to players becomes more
difficult.

iii) Fixed Costs : When rivals operate with high fixed costs, they feel strong
motivation to utilize their capacity and therefore are inclined to cut prices
when they have excess capacity. Price cutting causes profitability to fall for all
firms in the industry as firms seek to produce more to cover costs that must
be paid regardless of industry demand. For this reason, profitability tends to
be lower in industries characterized by high fixed costs.

iv) Exit Barriers : Rivalry among competitors declines if some competitors leave
an industry. Profitability therefore tends to be higher in industries with few
exit barriers. Exit barriers come in many forms. Assets of a firm considering
exit may be highly specialized and therefore of little value to any other firm.
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 Such a firm can thus find no buyer for its assets. This discourages exit. When
barriers to exit are powerful, competitors desiring exit may refrain from
leaving. Their continued presence in an industry exerts downward pressure on
the profitability of all competitors.

v) Product Differentiation : Firms can sometimes insulate themselves from price

wars by differentiating their products from those of rivals. As a consequence,
profitability tends to be higher in industries that offer opportunity for
differentiation. Profitability tends to be lower in industries involving
undifferentiated commodities such as, memory chips, natural resources,
processed metals and railroads.

vi) Slow Growth : Industries whose growth is slowing down tend to face more
intense rivalry. As industry growth slows, rivals must often fight harder to
grow or even to keep their existing market share. The resulting intensive
rivalry tends to reduce profitability for all.
V] Threat of Substitutes :

 Substitute products are a latent source of competition in an industry. In many cases

they become a major constituent of competition. Substitute products offering a
price advantage and/or performance improvement to the consumer can drastically
alter the competitive character of an industry. And they can bring it about all of a
sudden. For example, coir suffered at the hands of synthetic fibre. Wherever
substantial investment in R&D is taking place, threats from substitute products can
be expected. Substitutes, too, usually limit the prices and profits in an industry.

 A final force that can influence industry profitability is the availability of

substitutes for an industry’s product. To predict profit pressure from this source,
firms must search for products that perform the same, or nearly the same, function
as their existing products. For example, Real estate, insurance, bonds and bank
deposits for example are clear substitutes for common stocks, because they
represent alternate ways to invest funds.

 The five forces together determine industry attractiveness/ profitability. This is so

because these forces influence the causes that underlie industry attractiveness/

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 profitability. For example, elements such as cost and investment needed for being a
player in the industry decide industry profitability, and all such elements are
governed by these forces. The collective strength of these five competitive forces
determines the scope to earn attractive profits. The strength of the forces may
vary from industry to industry.
2.5.2 Attractiveness of Industry :

 The industry analysis culminates into identification of various issues and draw
conclusions about the relative attractiveness or unattractiveness of the industry, both
near-term and long-term. Strategists assess the industry outlook carefully, deciding
whether industry and competitive conditions present an attractive business opportunity
for the organisation or whether its growth and profit prospects are gloomy. This is
important because companies invest capital, either the promoters or from the public and
should be inherent careful in choosing an industry. The important factors on which the
management may base such conclusions include :

i) The industry’s growth potential, is it futuristically viable?

ii) Whether competition currently permits adequate profitability and whether

competitive forces will become stronger or weaker?

iii) Whether industry profitability will be favourably or unfavourably affected by the

prevailing driving forces?

iv) The competitive position of an organisation in the industry and whether its position
is likely to grow stronger or weaker. (Being a well-entrenched leader or strongly
positioned contender in an otherwise lackluster industry can still produce good
profitability; however, having to fight an uphill battle against much stronger rivals
can make an otherwise attractive industry unattractive).

v) The potential to capitalize on the vulnerabilities of weaker rivals (perhaps

converting an unattractive industry situation into a potentially rewarding company
opportunity).
vi) Whether the company is able to defend against or counteract the factors that make
the industry unattractive?

vii) The degrees of risk and uncertainty in the industry’s future.

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 viii) The severity of problems confronting the industry as a whole.

ix) Whether continued participation in this industry adds importantly to the firm’s
ability to be successful in other industries in which it may have business interests?

 As a general proposition, if an industry’s overall profit prospects are above average, the
industry can be considered attractive; if its profit prospects are below average, it is
unattractive. However, it is a mistake to think of industries as being attractive or
unattractive to all firms in the industry and all potential entrants. Attractiveness is
relative, not absolute. Industry environments unattractive to weak competitors may
be attractive to strong competitors.
2.5.3 Experience Curve :

 Experience curve akin to a learning curve which explains the efficiency increase gained
by workers through repetitive productive work. Experience curve is based on the
commonly observed phenomenon that unit costs decline as a firm accumulates
experience in terms of a cumulative volume of production. It is based on the concept,
“we learn as we grow”.

 The implication is that larger firms in an industry would tend to have lower unit costs as
compared to those for smaller companies, thereby gaining a competitive cost advantage.
 Experience curve results from a variety of factors such as learning effects, economies
of scale, product redesign and technological improvements in production.
 Experience curve has following features :
i) As business organisation grow, they gain experience.
ii) Experience may provide an advantage over the competition. Experience is a key
barrier to entry.
iii) Large and successful organisation possess stronger “experience effect”.

A typical experience curve may be depicted as follows :

Figure: Experience curve

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 As a business grows, it understands the complexities and benefits from its experiences.

 The concept of experience curve is relevant for a number of areas in strategic

management. For instance, experience curve is considered a barrier for new firms
contemplating entry in an industry. It is also used to build market share and discourage
competition. In the contemporary Indian automobile industry, the experience curve
phenomenon seems to be working in Maruti Suzuki. The likely strategic choice for
competitors can be a market niche approach or segmentation based on demography or
geography.
2.5.2 Value Creation :

 The concept of value creation was introduced primarily for providing products and
services to the customers with more worth. Value is measured by a product’s features,
quality, availability, durability, performance and by its services for which customers are
willing to pay. Further, the concept took more space in the business and organizations
started discussing about the value creation for stakeholders.

Figure: Value Creation

 Thus, we can say that the value creation is an activity or performance by the firm to
create value that increases the worth of goods, services, business processes or even the
whole business system. Many businesses now focus on value creation both in the context
of creating better value for customers purchasing its products and services, as well as
for stakeholders in the business who want to see their investment in business
appreciate in value. Ultimately, this concept gives business a competitive advantage in
the industry and helps them earn above average profits/returns.

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 Competitive advantage leads to superior profitability. At the most basic level, how
profitable a company becomes depends on three factors :
(1) the value customers place on the company’s products;
(2) the price that a company charges for its products; and

(3) the costs of creating those products.

 The value customers place on a product reflects the utility they get from a product—
the happiness or satisfaction gained from consuming or owning the product. Utility
must be distinguished from price. Utility is something that customers get from a
product. It is a function of the attributes of the product, such as its performance,
design, quality, and point-of-sale and after-sale service.

 Companies are ultimately aiming to achieve sustainable competitive advantage, which

enables them to succeed in the long run. Michael Porter argues that a company
can generate competitive advantage in two different ways, either through
differentiation or cost advantage. According to Porter’s, differentiation means the
capability to provide customers superior and special value in the form of product’s
special features and quality or in the form of aftersales customer service. As a result
of differentiation, a company can demand higher price for its products or services. A
company will earn higher profits due to differentiation in case the expenses stay
comparable to the costs of competitors.

 The above-mentioned differentiation and cost advantage will affect a company’s

ability to achieve competitive advantage, but there are many different organizational
functions that will influence whether a company can achieve cost advantage or
differentiation advantage.

 Michael Porter used the concept of value chain to explore closer different functions of
the organisations and mutual interactions among those functions. Value chain analysis
provides an excellent tool to examine the origin of competitive advantage. It divides the
organisations into two different strategically important group of activities, namely,
primary activities and supporting activities, which can help to comprehend the potential
sources for differentiation and to understand an organisation’s costs behaviour.

 It is basically the value consumer wants to pay, over and above the price that the

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 business wants to charge from the consumer. This excess amount is called value creation,
wherein the consumers value the product or service more than it actually costs them.
2.6 MARKET AND CUSTOMER

 A market is a place for interested parties, buyers and sellers, where items and services
can be exchanged for a price. The market might be physical, such as a departmental
store where people engage in person. They may also be virtual, such as an online market
where buyers and sellers do not meet in person but tools of technology to strike a deal.
In addition to this broad definition, the term market can apply to a wide range of
contexts. For example, it might be used to describe the stock exchange, where
securities are traded. It may also refer to a group of individuals trying to buy a specific
commodity or service in a specific place, such as grain or vegetable market where
farmers come to sell their produce. It may also be used to define a business or industry,
such as the global oil market.
 While the market is a place, business strategist work on marketing to improve the
chances of success. The term "marketing" encompasses a wide range of operations,
including research, designing, pricing, promotion, transportation, and distribution. Often
market activities are categorised and explained in terms of four Ps of marketing –
product, place, pricing, and promotion. These four kinds of marketing activities help
marketers identify customer needs so they may meet their demands and deliver
satisfaction. Delivering the best customer experience and establishing, maintaining, and
growing relationships with customers are the main goals of marketing.

 The orientation of product marketing has evolved and acquired different dimensions
centred around product, production, sales and customers. Businesses that have product
orientation think that buyers will choose those products that have the best quality,
performance, design, or features. Next, there are production- oriented businesses that
believe that customers choose low price products. Sales- oriented businesses believe
that if they spend enough money on advertisement, sales and promotion, customers can
be persuaded to make a purchase.

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2.6.1 Customer :

 A customer is a person or business that buys products or services from another

organisation. Customers are important because they provide revenue and organisations
cannot exist without them. All businesses vie for customers, either by aggressively
marketing their products or by lowering their pricing to boost their customer bases.
The terms customer and consumer are practically synonymous and are frequently used
interchangeably. There is, however, a thin distinction. Individuals or businesses that
consume or utilise products and services are referred to as consumers. Customers are
the purchasers of products and services in the economy, and they might exist as
consumers or only as customers. In homes groceries are often bought by a parent and
consume by all the members of family.
2.6.2 Customer Analysis :

 Customer analysis is an essential marketing component of any strategic business plan. It

identifies target clients, determines their wants, and then defines how the product
meets those needs.

 Thus, it involves the examination and evaluation of consumer needs, desires, and wants.
Customer analysis includes the administration of customer surveys, the study of
consumer data, the evaluation of market positioning strategies, development of
customer profiles, and the selection of the best market segmentation techniques. Using
the facts generated by customer analysis, an effective profiling of customers may be
established. Customer profiles can reveal demographic information about customers.
2.6.3 Customer Behaviour

 Customer behaviour moves beyond the identification of customers to explain how they
purchase products. It examines elements like shopping frequency, product preferences,
and the perception of your marketing, sales, and service offerings. Understanding these
details allows businesses to communicate with customers in an effective manner.
Understanding the behaviours of customers enables businesses to establish effective
marketing and advertising campaigns, provide products and services that meet their
needs, and retain customers for repeat sales.

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 Consumer behaviour may be influenced by a number of things. These elements can be
categorised into the following three conceptual domains :

a) External Influences : External influences, like advertisement, peer recommendations

or social norms, have a direct impact on the psychological and internal processes
that influence various consumer decisions. The focus of external effects is on the
numerous elements that have an impact on customers as they choose which needs to
satisfy and which products to use to do so. These aspects are divided into two
groups – the company's marketing efforts and the numerous environmental elements.

b) Internal Influences : Internal processes are psychological factors internal to

customer and affect consumer decision making. Consumer behaviour is influenced by
a combination of internal and external influences, including motivation and attitudes.

Figure: Process of consumer behaviour

c) Decision Making : A rational consumer, as decision maker would seek information about
potential decisions and carefully integrate this with the existing knowledge about the
product. After weighing the advantages and disadvantages of each option, they would
make a decision. The stages of decision making process can be described as :
i) Problem recognition, i.e., identify an existing need or desire that is unfulfilled
ii) Search for desirable alternative and list them
iii) Seeking information on available alternatives and weighing their pros and cons.
iv) Make a final choice

 This behaviour of making decisions happens very frequently. However, it mostly applies
when the purchase is one that is significant to the customer, such as when the product
could have a significant influence on their health or self-image. The process is
extremely valid when purchasing a car, television or a refrigerator in contrast to
purchase of ice creams or soft drinks.

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 a) Post-decision Processes : After making a decision and purchasing a product, the final
phase in the decision-making process is evaluating the outcome. The consumer's
reaction may vary depending upon the satisfaction. While a happy customer may
make repeat purchase and recommend to others, customer with dissonance will
neither purchase the product again nor recommend it to others.
2.7 COMPETITIVE STRATEGY

 Competition is a fundamental attribute of economic systems and business, and it is

frequently connected with small and large organisations. Businesses compete with each
other for the same set of resources and customers. Within a industry, competition is
frequently encouraged with the wider goal of attaining and achieving higher quality
services or superior goods that the firm may manufacture or develop.

 The competitive strategy of a business is concerned with how to compete in the

business areas in which the organization operates. In other words, competitive strategy
defines how a firm expects to create and sustain a competitive advantage over
competitors. Having a competitive advantage over competitors means being more
profitable in the long run. The competitive strategy of a firm within a certain business
field is analysed using two criteria: the creation of competitive advantage and the
protection of competitive advantage.

 An important component of industry and competitive analysis involves delving into the
industry’s competitive process to discover what the main sources of competitive pressure
are and how strong each competitive force is.

 Porter’s five forces model is useful in understanding the competition. It is a powerful

tool for systematically diagnosing the main competitive pressures in a market and
assessing how strong and important each one is. Not only is it the widely used technique
of competition analysis, but it is also relatively easy to understand and apply.
2.7.1 COMPETITIVE LANDSCAPE

 Competitive landscape is a business analysis which identifies competitors, either direct

or indirect. Competitive landscape is about identifying and understanding the
competitors and at the same time, it permits the comprehension of their vision, mission,
core values, niche market, strengths and weaknesses. Understanding of competitive

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 landscape requires an application of “competitive intelligence”.

 An in-depth investigation and analysis of a firm’s competition allows it to assess the

competitor’s strengths and weaknesses in the marketplace and helps it to choose and
implement effective strategies that will improve its competitive advantage. Thus,
understanding the competitive landscape is important to build upon a competitive
advantage.
Steps to understand the Competitive Landscape :

i) Identify the competitor : The first step to understand the competitive landscape is
to identify the competitors in the firm’s industry and have actual data about their
respective market share.
This answers the question :

 Who are the competitors and how big are they ?

ii) Understand the competitors : Once the competitors have been identified, the
strategist can use market research report, internet, newspapers, social media,
industry reports, and various other sources to understand the products and services
offered by them in different markets.
This answers the question :
 What are their product and services ?

iii) Determine the strengths of the competitors : What are the strengths of the
competitors? What do they do well? Do they offer great products? Why are
consumers liking their product/service? Do they utilize marketing in a way that
comparatively reaches out to more consumers? Why do customers give them their
business ?

This answers the questions :

 What are their financial positions?

 What gives them cost and price advantage?

 What are they likely to do next?

 How strong is their distribution network?

 What are their human resource strengths?

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 iv) Determine the weaknesses of the competitors : Identify the areas where the
competitor is lacking or is weak. Weaknesses (and strengths) can be identified by
going through consumer reports and reviews appearing in various media. Financial
strength and weakness can always be learnt from annual reports.
This answers the question.

 Where are they lacking ?

v) Put all of the information together : At this stage, the strategist should put
together all information about competitors and draw inference about what they are
not offering and what the firm can do to fill in the gaps. The strategist can also
know the areas which need to be strengthen by the firm.
This answers the questions :
 What will the business do with this information?
 What improvements does the firm need to make?
 How can the firm exploit the weaknesses of competitors?
2.7.2 Key factors for competitive success

 An industry’s Key Success Factors (KSFs) are those things that most affect industry
members’ ability to prosper in the marketplace - the particular strategy elements,
product attributes, resources, competencies, competitive capabilities, and business
outcomes that spell the difference between profit and loss and, ultimately, between
competitive success or failure. KSFs by their very nature are so important that all firms
in the industry must pay close attention to them.
Key success factors are the prerequisites for industry success or, to put it another way,
KSFs are the factors that shape whether a company will be financially and competitively
successful.

 The answers to three questions help identify an industry’s key success factors :

a) On what basis do customers choose between the competing brands of sellers ?

b) What product attributes are crucial to sales ?

c) What resources and competitive capabilities does a seller need to have to be

competitively successful, better human capital, quality of product or quantity of
product, cost of service, etc. ?

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 d) What does it take for sellers to achieve a sustainable competitive advantage,
something that can be sustained for long term ?

 For example, in apparel manufacturing, the KSFs are appealing designs and colour
combinations (to create buyer interest) and low-cost manufacturing efficiency (to
permit attractive retail pricing and ample profit margins).

 Determining the industry’s key success factors, given prevailing and anticipated industry
and competitive conditions, is a top-priority analytical consideration. At the very least,
managers need to understand the industry situation well enough to know what is more
important to competitive success and what is less important. They need to know what
kind of resources are competitively valuable. Misdiagnosing the industry factors critical
to long-term competitive success greatly raises the risk of a misdirected strategy. In
contrast, an organisation with perceptive understanding of industry KSFs can gain
sustainable competitive advantage by training its strategy on industry KSFs and devoting
its energies to being distinctively better than rivals on one or more of these factors.

 Indeed, business organisations that stand out on a particular KSF enjoy a stronger
market position for their, efforts- being distinctively better than rivals on one or more
key success factors presents a golden opportunity for gaining competitive advantage.
Hence, using the industry’s KSFs as cornerstones for the company’s strategy and trying
to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful
competitive strategy approach.

 Key success factors vary from industry to industry and even from time to time within
the same industry as driving forces and competitive conditions change. Only rarely does
an industry have more than three or four key success factors at any one time. And even
among these three or four, one or two usually outrank the others in importance.
Managers, therefore, have to resist the temptation to include factors that have only
minor importance on their list of key success factors. The purpose of identifying KSFs
is to make judgments about what things are more important to competitive success and
what things are less important. To compile a list of every factor that matters even a
little bit defeats the purpose of concentrating management attention on the factors
truly critical to long-term competitive success.

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 3
CHAPTER

STRATEGIC ANALYSIS :
INTERNAL ENVIRONMENT

LEARNING OUTCOMES
After studying this chapter, you will be able to :

 Understand the importance of the internal environment in

strategic analysis.

 Explain the stakeholder view of the firm.

 Identify and explain the strategic drivers.

 Examine the role of firm-level resources and competencies in

shaping the strategic advantage of the firm.

 Integrate analyses of internal and external environments into

SWOT and formulation of business level strategies.
 Chapter Overview

3.1 INTRODUCTION

 Strategic Analysis is equally important when it comes to internal environment

assessment.

 Internal environment refers to the sum total of people – individuals and groups,
stakeholders, processes- input-throughput-output, physical infrastructure- space,
equipment and physical conditions of work, administrative apparatus- lines of authority
& power, responsibility, accountability and organizational culture intangible aspects of
working- relationships, philosophy, values, ethics- that shape an organization’s identity.
 In other words, the internal environment is specific to each organisation. It is based on
its structure and business model and includes all stakeholders like top management,
investors, employees, board of directors, investors, etc.

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 Internal environment also involves understanding of the ethics, principles, work
environment, employee friendliness, confidence of investors and other philosophical and
cultural aspects of business, which aim for the success of the organisation.

 Thus, it is even more important to understand the internal environment from a strategic
analysis perspective.
3.2 UNDERSTANDING KEY STAKEHOLDERS
Who are Stakeholders and how do we identify them?

 A firm may be viewed as a coalition of stakeholders- all those individuals and entities
that have a stake in its success and can impact it as well. They may be the employees,
shareholders, investors, suppliers, customers, regulators and so on. This view of the
firm is in contrast to the earlier view of the firm that was considered to be an
extension of the owners and shareholders alone.

 Thus, it may be reiterated that the stakeholders can be defined as any person/group of
individuals, internal or external, that has an interest in, or impact on the business or
corporate strategy of the organisation. They have the power to influence the strategy
or performance of that organisation.

 Generally, stakeholders include management, employees, shareholders, customers and

vendors. Additionally, other individuals and groups, such as governments, labour unions
and local groups, which are often considered as stakeholders depending on their impact
on the particular organisation. Each stakeholder or stakeholder group will be affected
by the business strategy that the organisation chooses and implements.

 It is important to first identify the key stakeholders. Each stakeholder exerts a

different level of influence and can have differing levels of interest in the organisation.
For example, an organisation involved in healthcare innovation needs to have a long-term
perspective about its return on investment (ROI) as there may be a long time between
investment into research timelines and a commercial outcome. While, shareholders,
whose main concern is quick profits, may be more hesitant to support the organisation
spending funds on something that they may not see the return in the near future.

 Since the expectations of key stakeholders can influence the organisation’s strategy, a
clash of objectives may have unfavourable consequences for the organisation.

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 Example of Key Stakeholders and their requirements for an OTT Platform

Stakeholders Requirements

Shareholders ♦ Innovation and continuous creative content

♦ Total shareholder return (RoI)
♦ Corporate social responsibility
♦ Top rankings of the organisation
♦ Highest market share

CEO and Board of Directors ♦ Prestige

♦ Market share
♦ Revenue and profit growth
♦ Market rankings

Major Vendors (Production Houses) ♦ Growth

♦ Stability of ordering
♦ Stable margins

Consumers (Viewers) ♦ New content - Innovation

♦ Better deals - Pricing Benefits
♦ Value for money
♦ Continuous supply

Employees ♦ Wages and benefits

♦ Stability of employment
♦ Pride of working for a reputed organisation

3.2.1 Mendelow’s Matrix

 The Mendelow Stakeholder matrix (also known as the Stakeholder Analysis matrix and
the Power-Interest matrix) is a simple framework to help manage key stakeholders.

 Managing a project is extremely complicated as it involves managing the competing

interests of various stakeholders. Who needs to know what and when, who needs to give
their feedback and who has the final approval can be confusing. However, managing
stakeholders is critical to the success of a project. This is where a stakeholder analysis
matrix i.e. Mendelow’s Matrix can help.

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 Mendelow suggests that one should analyse stakeholder groups based on Power (the
ability to influence organisation strategy or resources) and Interest (how interested
they are in the organisation succeeding). A thing to remember is that all stakeholders
may seem to have lots of power and organisation may hope they would have lots of
interest too. But in reality, some stakeholders will hold more Power than others, and
some stakeholders will have more Interest than others.

For example, a big shareholder is likely to have high power and high interest in the
organisation, whereas a big competitor would have high power to impact strategy, but
potentially less Interest in success of rival organisation.
Developing a Grid of Stakeholders

 Mendelow’s Matrix is based on Power and Interest. It suggests to identify which

stakeholders are incredibly important. Metrics to define the importance being High
Power and High Interest which management would need to manage closely, while
investing a lot of time and resources.

For example, the CEO is likely to have more Power to influence the work and also high
interest in it being successful. Keeping them informed almost daily should be a priority.

 However, those stakeholders with low power and low interest like research institutes
seeking an organisation data should be monitored rarely and minimum effort expended
on them in terms of time and money.

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 In the above figure, we see categorisation of stakeholders into four groups by
Mendelow’s;

 KEEP SATISFIED Stakeholders: High power, less interested people - Organisation

should put in enough work with these people to keep them satisfied with their intended
information on a regular basis. For example, banks, government, customers, etc.

 KEY PLAYERS Stakeholders: High power, highly interested people - Organisation’s aim
should be to fully engage this group of stakeholders, making the greatest efforts to
satisfy them, take their advice, build actions and keep them informed with all
information on a regular basis. For example, Shareholders, CEO, Board of Directors, etc.

 LOW PRIORITY Stakeholders: Low power, less interested people - Organisation should
only monitor them with no actions to satisfy their expectations. Strategically, minimal
efforts should be spent on this group of stakeholders while keeping an eye to check if
their levels of interest or power change. For example, business magazines, media houses,
etc.

 KEEP INFORMED Stakeholders: Low power, highly interested people - Organisation

should adequately inform this group of people and communicate with them to ensure
that no major issues arise. This audiences can also help with real time feedbacks and
areas of improvement for an organisation. For example, employees, vendors, suppliers,
legal experts, etc.

Activity :

Identify and group the below stakeholders in the 4 groups as suggested by

Mendelow for an Ecommerce startup.

Ms. Suhasini (CEO), Mango Partners and TRIK Group (Investors), MSME Ministry,
Customers from NorthEast India, Sellers from Rajasthan, Jandhan Bank (Lender),
and Kumar S and Sharma T (Sr. Managers in the Co.)

Keep Satisfied Key Players

Low Priority Keep Informed

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3.3 STRATEGIC DRIVERS

 An important aspect of internal analysis is assessing the current performance of the

business. And in assessing current performance, the strategic drivers consider what
differentiates an organisation from its competitors.

 It involves analysis of the key markets in which the organisation operates, as well as its
key customers, the products and services it provides, the channels in which the
products or services are delivered, and the organisation’s competitive advantage. Some
of these components are interlinked, such as markets and products/services, and
channels and key customers in each channel.
 There can be varied ways to assess the current performance of a business and it is
highly subjective based on the managements metrics and ways of doing business. It can
either be profit driven, purpose driven or any other metrics that the management seems
to fit in. But in general, the key strategic drivers of an organisation include :

a) industry and markets

b) customers

c) products/services
d) channels
3.3.1 Industry and Markets

 In terms of the internal environment, it is very important for an organisation to

understand it’s relative position in the industry and in the market in which it operates.
There are many ways to do this but require analysis and understanding of the environment.
 Similar companies are grouped together into industries. Basically, industry grouping is
based on the primary product that a company makes or sells. For example, Maruti,
Mahindra, Tata Motors, TVS, Bajaj Auto, are all selling automotives as their primary
product and thus categorised into Automotive Industry. Similarly, Zara, H&M, Marks &
Spencer, Pantaloons, Westside, Uniqlo, are all selling apparels and accessories for the
youth, and thus categorised under apparels industry.
 A market is defined as the sum total of all the buyers and sellers in the area or region
under consideration. The value, cost and price of items traded are as per forces of
supply and demand in a market. The market may be a physical entity or may be virtual

3-6
 like e-commerce websites and applications. It may further be local or global, depending
on which all countries the business sells its products in.
Is market the same for all businesses ?
Market refers to all the buyers and sellers of a particular product/service and so
it would be incorrect to say that market is the same for all businesses. Each business
has its own set of customers i.e. market and more so, each product within a business
has its own market. For example, for a FMCG brand selling Shampoos, Dairy Products,
Flours, Washing Powder, etc. - each product line will have a separate market to cater
to and therefore build strategies specific to the market of concern.

3.3.1.1 Analysing Industry and Markets

 Industry and market analysis is extremely important to identify one’s position as

compared to the competitors, who can be of equal size and value, or bigger in size and
value or even smaller and newer. A tool used for this is called - Strategic Group Mapping.

 A strategic group consists of those rival firms which have similar competitive approaches
and positions in the market. Companies in the same strategic group can resemble one
another in any of the several ways: they may have comparable product-line breadth, sell in
the same price/quality range, emphasize the same distribution channels, use essentially
the same product attributes to appeal to similar types of buyers, depend on identical
technological approaches, or offer buyers similar services and technical assistance.
 An industry contains only one strategic group when all sellers pursue essentially identical
strategies and have comparable market positions. At the other extreme, there are as
many strategic groups as there are competitors when each rival pursues a distinctively
different competitive approach and occupies a substantially different competitive
position in the marketplace.

 The procedure for constructing a strategic group map and deciding which firms belong
in which strategic group is straightforward :

a) Identify the competitive characteristics that differentiate firms in the industry

typical variables are price/quality range (high, medium, low); geographic coverage
(local, regional, national, global); degree of vertical integration (none, partial, full);
product-line breadth (wide, narrow); use of distribution channels (one, some, all);
and degree of service offered (no-frills, limited, full)

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 b) Plot the firms on a two-variable map using pairs of these differentiating
characteristics.
c) Assign firms that fall in about the same strategy space to the same strategic group.
d) Draw circles around each strategic group making the circles proportional to the size
of the group’s respective share of total industry sales revenues.

Explanation of Diagram (Strategic Group Mapping)

 ABC, DEF, GHI, XYZ AND PQR are companies operating in the same industry. Let us
assume these all are companies selling Laptops.

 Now on the Y-Axis (vertical) is the reputation of the company and on the X-Axis
(horizontal) is the range of their products.
3.3.2 Customers :

 Understanding the different types of customers to whom the organisation’s

products/services are sold or provided, is not only important but also the first step in
deciding the product/service. Different customers may have different needs and
require different sales models or distribution channels.
 Consider the example of a headphones brand - the customers can be grouped under high
value buyers, medium value buyers and low value buyers based on the amount they are
willing to spend on a product, thus helping the business understand their key customers
and focus areas of improvement.

 As customers are often responsible for the generation of profits obtained by an

organisation, it is important to be able to collect and display data in order to show

3-8
 customer trends and profitability. Issues with customers can be identified, and target
areas for growth can be pursued based on the findings.

 Another interesting concept is the difference between Customer and Consumer - while a
customer is the one buys a product/service, the consumer is the one who finally
uses/consumes the bought product or service. For example - A parent buying stationery
products for their kids might be the customers, but consumers of stationery are the
kids who would actually use it. Thus, understanding both is important for the marketers.

 From a pricing perspective - the customer is of more importance and from value creation
and design/usability, consumer needs to be the kept at the center of decision making.
3.3.3 Product/Services

 Products and services are closely linked and interrelated with the markets that the
organisation wants to serve. In this component of the strategic drivers’ analysis,
business identifies the key products/ services that the organisation offers and how
those products/services are performing.

 It attempts to answer the general question: What business are we in and what should be
done to win over competition in each product/service we serve.

 Product stands for the combination of “goods-and-services” that the company offers to
the target market. Strategies are needed for managing existing product over time,
adding new ones and dropping failed products. Strategic decisions must also be made
regarding branding, packaging and other product features such as warranties. The
products can also be classified on the basis of industrial or consumer products,

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 essentials or luxury products, durables or perishables.

 There are products that have wide range of quality and workmanship and these also
change over time since products and markets are infinitely dynamic. An organization has
to capture such dynamics through a set of policies and strategies. Some products have
consistent customer demand over long period of time while others have short life spans.

 Products can also be differentiated on the basis of size, shape, colour, packaging, brand
names, after-sales service and so on. Organizations seek to hammer into customers’
minds that their products are different from others. It does not matter whether the
differentiation is real or imaginary. Quite often the differentiation is psychological
rather than physical. It is enough if customers are persuaded to believe that the
marketer’s product is different from others. For example, Shampoos with different
branding namely Head & Shoulders, Olay, Old Spice, Pantene are all produced by the
same company P&G.

 Organizations formalize product differentiation through designating ‘brand names’ to

their respective products. These are generally reinforced with legal sanction and
protection. Brands enable customers to identify the product and the organization
behind it. The products and even firms’ image is built around brands through advertising
and other promotional strategies. Customers tend to develop strong brand loyalty for a
particular product over a period of time.

 For a new product, pricing strategies for entering a market need to be designed and for
that matter at least three objectives must be kept in mind :
a) Have customer-centric approach while making a product.
b) Produce sufficient returns through a reasonable margin over cost.
c) Increasing market share.

 Products and services need heavy investment in reaching out to customers. Over the
years, a number of marketing strategies have been evolved, which are given to handle
marketing strategically and fight the competition in the market.

 Social Marketing : It refers to the design, implementation, and control of programs

seeking to increase the acceptability of a social ideas, cause, or practice among a target
group to bring in a social change. For instance, the publicity campaign for prohibition of
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 smoking in Delhi explained the place where one can and can’t smoke and also indicates
that smoking is injurious to health.

 Augmented Marketing : This type of marketing includes additional customer services

and benefits that a product can offer besides the core and actual product that is being
offered. It can be in the form of introduction of hi-tech services like movies on
demand, online computer repair services, secretarial services, etc. Such innovative
offerings provide a set of benefits that promise to elevate customer service to
unprecedented levels.

 Direct Marketing : Marketing through various advertising media that interact directly
with consumers, generally calling for the consumer to make a direct response. Direct
marketing includes catalogue selling, e-mail, telecomputing, electronic marketing,
shopping, and TV shopping.

 Relationship Marketing : The process of creating, maintaining, and enhancing strong,

value-laden relationships with customers and other stakeholders. For example, Airlines
offer special lounges at major airports for frequent flyers. Thus, providing special
benefits to select customers to strengthen bonds. It can go a long way in building
relationships.

 Services Marketing : It is applying the concepts, tools, and techniques, of marketing to

services. Services is any activity or benefit that one party can offer to another that is
essentially intangible. This marketing requires different marketing strategies since it
has peculiar characteristics of its own such as inseparability, variability etc.

 Person Marketing : People can also be marketed. Person marketing consists of activities
undertaken to create, maintain or change attitudes and behaviour towards particular
person. For example, politicians, sports stars, film stars, etc. i.e., market themselves to
get votes, or to promote their careers.

 Organization Marketing : It consists of activities undertaken to create, maintain, or

change attitudes and behaviour of target audiences towards an organization. Both profit
and non-profit organizations practice organization marketing.

 Place Marketing : Place marketing involves activities undertaken to create, maintain, or

change attitudes and behaviour towards particular places say, marketing of business
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 sites, tourism marketing.

 Enlightened Marketing : It is a marketing philosophy holding that a company’s marketing

should support the best long-run performance of the marketing system that is beyond
the prevailing mindset; its five principles include customer-oriented marketing, innovative
marketing, value marketing, sense-of-mission marketing, and societal marketing.

 Differential Marketing : It is a market-coverage strategy in which a firm decides to

target several market segments and designs separate offer for each. For example,
Hindustan Unilever Limited has Lifebuoy, Lux and Rexona in popular segment and Dove
and Pears in premium segment.

 Synchro-marketing : When the demand for a product is irregular due to season, some
parts of the day, or on hour basis, causing idle capacity or overworked capacities,
synchro-marketing can be used to find ways to alter the pattern of demand through
flexible pricing, promotion, and other incentives. For example, products such as movie
tickets can be sold at lower price over weekdays to generate demand.

 Concentrated Marketing : It is a market-coverage strategy in which a firm goes after a

large share of one or few sub-markets. It can also take the form of Niche marketing.

 Demarketing : It includes marketing strategies to reduce demand temporarily or

permanently. The aim is not to destroy demand, but only to reduce or shift it. This
happens when there is overfull demand. For example, buses are overloaded in the
morning and evening, roads are busy for most of times, zoological parks are over-
crowded on Saturdays, Sundays and holidays. Here demarketing can be applied to
regulate demand.
3.3.4 Channels :

 Channels are the distribution system by which an organisation distributes its product or
provides its service. To understand the concept of channels let us see some examples of
how the following companies distribute their products and services ;

a) Lakme - sells its products via retail stores, intermediary stores (like Nykaa,
Westside, Reliance Trends), as well as online mode like amazon, flipkart, nykaa online
and its own website.

b) Boat Headphones - only online via e-commerce platforms like flipkart and amazon
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 c) Coca Cola - retail shops across the nation, in each district, each town as well as
online mode via dunzo, blinkit, etc.

 All the above are the channels via which companies sell their products and services to
the customers. The wider and stronger the channel the better position a business has to
fight and win over competition. Also, having robust channels of business distribution
help keep new players away from entering the industry, thus acting as barriers to entry.
 There are typically three channels that should be considered: sales channel, product
channel and service channel.

 The sales channel - These are the intermediaries involved in selling the product
through each channel and ultimately to the end user. The key question is: Who needs to
sell to whom for your product to be sold to your end user? For example, many fashion
designers use agencies to sell their products to retail organisations, so that consumers
can access them.

 The product channel - The product channel focuses on the series of intermediaries
who physically handle the product on its path from its producer to the end user. This is
true of Australia Post, who delivers and distributes many online purchases between the
seller and purchaser when using eBay and other online stores.

 The service channel - The service channel refers to the entities that provide
necessary services to support the product, as it moves through the sales channel and
after purchase by the end user. The service channel is an important consideration for
products that are complex in terms of installation or customer assistance.

For example, a Bosch dishwasher may be sold in a Bosch showroom, and then once sold it
is installed by a Bosch contracted plumber.

 Channel analysis is important when the business strategy is to scale up and expand
beyond the current geographies and markets. When a business plans to grow to newer
markets, they need to develop or leverage existing channels to get to new customers.
Thus, analysis of channels that suit one’s products and customers is of utmost
importance.

For example - if a healthcare brand wants to reach out to elderly customers – they
need to be more focused on offline mode of business where agents reach out physically
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 to the elderly as most of their potential customers (i.e. the old aged) are not active on
smart phones.

 Another example being - if a new drink brand wants to acquire customers – they need
to place their products via every channel possible to get more attraction from
customers like placing their drinks in stores, and shops alike, offering competitive
campaigns to create awareness via online modes (social media) and so and so forth.
Thus, channels, the partners in growth, play a crucial role in internal strategic alignment.

Ever been to a hill station or a desert or a far-off location on vacation, and still had
access to bottled water and cold drinks ?
This is possible because of strong channels of distribution. Some of the most renowned
brands who have created competitive advantage in channels are Coca Cola, HUL,
Patanjali, Asian Paints, Ola, to name a few.

3.4 ROLE OF RESOURCES AND CAPABILITIES : BUILDING CORE COMPETENCY

 An organization may be viewed as an entity endowed with resources and capabilities.

These resources and capabilities may be so synergized as to impart distinct
competencies that the organization may leverage to its advantage. C.K. Prahalad and
Gary Hamel have advocated a concept of core competency, which is a widely used
concept in management theories. They defined core competency as the collective
learning in the organization, especially coordinating diverse production skills and
integrating multiple streams of technologies.

 An organization’s combination of technological and managerial know-how, wisdom and

experience are a complex set of capabilities and resources that can lead to a
competitive advantage compared to a competitor.

 Competency is defined as a combination of skills and techniques rather than individual

skill or separate technique. For core competencies, it is characteristic to have a
combination of skills and techniques, which makes the whole organization utilize these
several separate individual capabilities. Therefore, core competencies cannot be built on
one capability or single technological know-how, instead, it has to be the integration of
many resources. The optimal way to define core competence is to consider it as sum of
5- 15 areas of developed expertise.

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 According to C.K. Prahalad and Gary Hamel, major core competencies are identified in
three areas :
a) competitor differentiation,
b) customer value, and
c) application to other markets

 Competitor differentiation is one of the main three conditions. The company can
consider having a core competence if the competence is unique and it is difficult for
competitors to imitate. This can provide a company an edge compared to competitors.
It allows the company to provide better products or services to market with no fear
that competitors can copy it. The company has to keep on improving these skills in order
to sustain its competitive position. Competence does not necessarily have to exist within
one company in order to define as core competence. Although all companies operating in
the same market would have the equal skills and resources, if one company can perform
this significantly better; the company has obtained a core competence.

For example, it is quite difficult to imitate patented innovation, like Tesla has been
winning over competition in electric vehicles.

 The second condition to be met is customer value. When purchasing a product or

service it has to deliver a fundamental benefit for the end customer in order to be a
core competence. It will include all the skills needed to provide fundamental benefits.
The service or the product has to have real impact on the customer as the reason to
choose to purchase them. If customer has chosen the company without this impact, then
competence is not a core competence, and it will not affect the company’s market
position. The essence is that the consumer should value the differentiation offered.
Without it, the core competency does not make sense.

 The last condition refers to application of competencies to other markets. Core

competence must be applicable to the whole organization; it cannot be only one
particular skill or specified area of expertise. Therefore, although some special
capability would be essential or crucial for the success of business activity, it will not be
considered as core competence if it is not fundamental from the whole organization’s
point of view. Thus, a core competence is a unique set of skills and expertise, which will

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 be used throughout the organisation to open up potential markets to be exploited.

 If the three above-mentioned conditions are met, then the company can regard it
competence as core competency.

 Core competencies are often visible in the form of organizational functions.

For example, Marketing and Sales is a core competence of Hindustan Unilever Limited
(HUL) This means that HUL has used its resources to form marketing related
capabilities that in turn allow it to market its products in ways that are superior those
of competitors. Because of this core competence, HUL is capable of launching new
brands in the market successfully.

 A core competency for a firm is whatever it does best : For example: Wal-Mart focuses
on lowering its operating costs. The cost advantage that Wal-Mart has created for
itself has allowed the retailer to price goods lower than most competitors. The core
competency in this case is derived from the company’s ability to generate large sales
volume, allowing the company to remain profitable with low profit margin.

 Core competencies are the knowledge, skills, and facilities necessary to design and
produce core products. Core competencies are created by superior integration of
technological, physical and human resources. They represent distinctive skills as well as
intangible, invisible, intellectual assets and cultural capabilities. Cultural capabilities
refer to the ability to manage change, the ability to learn and team working.
Organizations should be viewed as a bundle of a few core competencies, each supported
by several individual skills. Core Competence-based diversification reduces risk and
investment and increases the opportunities for transferring learning and best practice
across business units.

 Core technological competencies are also corporate assets; and as assets, they facilitate
corporate access to a variety of markets and businesses. For competitive advantage, a
core technological competence should be difficult for the competitors to imitate.
3.4.1 Criteria for building a Core Competencies (CC) ?

Four specific criteria of sustainable competitive advantage that firms can use to
determine those capabilities that are core competencies. Capabilities that are valuable,
rare, costly to imitate, and non-substitutable are core competencies.
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i. Valuable : Valuable capabilities are the ones that allow the firm to exploit opportunities
or avert the threats in its external environment. A firm created value for customers by
effectively using capabilities to exploit opportunities. Finance companies build a valuable
competence in financial services. In addition, to make such competencies as financial
services highly successful require placing the right people in the right jobs. Human
capital is important in creating value for customers.

ii. Rare : Core competencies are very rare capabilities and very few of the competitors
possess this. Capabilities possessed by many rivals are unlikely to be sources of
competitive advantage for any one of them. Competitive advantage results only when
firms develop and exploit valuable capabilities that differ from those shared with
competitors.

iii. Costly to imitate : Costly to imitate means such

capabilities that competing firms are unable to develop
easily. For example, Intel has enjoyed a first-mover
advantage more than once because of its rare fast R&D
cycle time capability that brought SRAM and DRAM
integrated circuit technology and brought microprocessors to market well ahead of the
competitor. The product could be imitated in due course of time, but it was much more
difficult to imitate the R&D cycle time capability.

iv. Non-substitutable : Capabilities that do not have strategic

equivalents are called non-substitutable capabilities. This final
criterion for a capability to be a source of competitive
advantage is that there must be no strategically equivalent
valuable resources that are themselves either not rare or
imitable.
For example, For years, firms tried to imitate Tata’s low-cost strategy, but most have
been unable to duplicate Tata’s success. They did not realize that Tata has a unique
culture and attracts some of the top talent in the industry. The culture and excellent
human capital worked together in implementing Tata’s strategy and are the basis for its
competitive advantage.

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 Zero Customer Complaints!
Airtel has its marketing campaign that talks about - Zero Customer Complaints. This
is about creating a core competency of great customer service.

3.5 COMBINING EXTERNAL AND INTERNAL ANALYSIS (SWOT ANALYSIS)

 SWOT analysis is the analysis of a business’s strengths, weaknesses, opportunities and

threats. The primary objective of a SWOT analysis is to help organizations develop a
full awareness of all the factors (external as well as internal), involved in making a
business decision.
 SWOT analysis shall be implemented before all company actions, whether it is exploring
new initiatives, revamping internal policies, considering opportunities to grow or alter a
plan midway. One shall also us SWOT analysis to discover recommendations and
strategies, with a focus on leveraging strengths and opportunities to overcome
weaknesses and threats.
 Since its creation, SWOT has been the most widely used tools for business owners to
grow their companies. Sometimes it’s wise to perform SWOT analysis just to check on
the current landscape of your business to improve business operations as needed. The
analysis can show areas where an organization is performing well, as well as areas that
need improvement.

SWOT Analysis Example

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 Let us understand with an example of a law firm - what could its SWOT analysis
help understand about its business.
STRENGTH WEAKNESS
Multiple Partners with varied expertise Run by old methods No automation of
Long Term contractual service work and documentation
agreements 70 years of brand value Not very employee friendly culture
Services spread across 20 states of
India 400+ employee strength to deliver
work

OPPORTUNITY THREAT
Automation driven advancement. Online players entering market.
Startups can be supported with AI based solutions and applications.
experienced partners. Price point of online being very
Investment in technology can multiply competitive
returns. Speed of work becoming faster by the
day.

 The benefit of this analysis is that it identifies the complex issues for an organisation
and puts them into a simple framework. While on the other hand, one of the major
criticisms of this tool is that it does not generally provide for evaluation of strengths,
weaknesses, opportunities and threats in the competitive context.

 Therefore, an organsition while using this tool, SWOT analysis, should consider relative
competitors, and external factors affecting the organisation. Although a simple tool, it
is a useful starting point for analysis.

3.6 COMPETITIVE ADVANTAGE: USING MICHAEL PORTER’S GENERIC STRATEGIES

Why do some companies succeed while others fail ?

Why did Hindustan Motors do so well for several decades ?
How did Apple return from near obsolescence in the late 1990s and become the
world leader and a dominant technology company of today?
In the Indian airline industry, how has Indigo Airlines managed to keep increasing
its revenues and profits through both good times and bad, while rivals struggled?

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 For most, if not all, companies, achieving superior performance relative to rivals is the
ultimate challenge. If a company’s strategies result in superior performance, it is said to
have a competitive advantage.

 Strategic management involves development of competencies that managers can use to

achieve better performance and a competitive advantage for their organization.
Competitive advantage allows a firm to gain an edge over rivals when competing. ‘It is a
set of unique features of a company and its products that are perceived by the target
market as significant and superior to the competition.’

 In other words, an organization is said to have competitive advantage if its profitability

is higher than the average profitability for all companies in its industry.

“If you don’t have a competitive advantage, don’t compete” - Jack Welch

 The competitive advantage is the achieved advantage over rivals when a company’s
profitability is greater than the average profitability of firms in its industry. It is
achieved when the firm successfully formulates and implements the value creation
strategy and other firms are unable to duplicate it or find it too costly to imitate.
Further, it can be said that a firm is successful in achieving competitive advantage only
after other firm’s efforts to duplicate or imitate it fails.
3.6.1 Sustainability of Competitive Advantage :

The sustainability of competitive advantage and a firm’s ability to earn profits

from its competitive advantage depends upon four major characteristics of resources
and capabilities :

i. Durability : The period over which a competitive advantage is sustained depends in part
on the rate at which a firm’s resources and capabilities deteriorate. In industries where
the rate of product innovation is fast, product patents are quite likely to become
obsolete. Similarly, capabilities which are the result of the management expertise of
the CEO are also vulnerable to his or her retirement or departure. On the other hand,
many consumer brand names have a highly durable appeal.

ii. Transferability : Even if the resources and capabilities on which a competitive

advantage is based are durable, it is likely to be eroded by competition from rivals. The
ability of rivals to attack position of competitive advantage relies on their gaining

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 access to the necessary resources and capabilities. The easier it is to transfer
resources and capabilities between companies, the less sustainable will be the
competitive advantage which is based on them.

iii. Imitability : If resources and capabilities cannot be purchased by a would-be imitator,

then they must be built from scratch. How easily and quickly can the competitors build
the resources and capabilities on which a firm’s competitive advantage is based? This is
the true test of imitability. For example, In financial services, innovations lack legal
protection and are easily copied. Here again the complexity of many organizational
capabilities can provide a degree of competitive defense. Where capabilities require
networks of organizational routines, whose effectiveness depends on the corporate
culture, imitation is difficult.

iv. Appropriability : Appropriability refers to the ability of the firm’s owners to

appropriate the returns on its resource base. Even where resources and capabilities are
capable of offering sustainable advantage, there is an issue as to who receives the
returns on these resources. This means, that rewards are directed to from where the
funds were invested, rather than creating an advantage with no actual reward to people
to invested capital.
3.6.2 Michael Porter’s Generic Strategies

 According to Porter, strategies allow organizations to gain competitive advantage from

three different bases: cost leadership, differentiation, and focus. Porter called these
base generic strategies. These strategies have been termed generic, because they can
be pursued by any type or size of business firm and even by not-for-profit
organisations.

1) Cost leadership emphasizes on producing standardized products at a very low per-

unit cost for consumers who are price-sensitive.

2) Differentiation is a strategy aimed at producing products and services considered

unique industry-wide and directed at consumers who are relatively price-insensitive.

3) Focus means producing products and services that fulfil the needs of small groups
of consumers with very specific taste.

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  Porter’s strategies imply different organizational arrangements, control procedures, and
incentive systems. Larger firms with greater access to resources typically compete on a
cost leadership and/or differentiation basis, whereas smaller firms often compete on a
focus basis.

Figure : Michael Porter’s Generic Strategies

3.6.2.1 Cost Leadership Strategy

 It is a low-cost competitive strategy that aims at broad mass market. It requires

vigorous pursuit of cost reduction in the areas of procurement, production, storage and
distribution of product or service and also economies in overhead costs. Because of its
lower costs, the cost leader is able to charge a lower price for its products than most of
its competitors and still earn satisfactory profits. For example, McDonald’s fast-food
restaurants have successfully followed low-cost leadership strategy. Decathlon Group’s
mega sports stores have been following low-cost leadership strategy to gain
international recognition and also beat competition.

 A primary reason for pursuing forward, backward, and horizontal integration strategies
is to gain cost leadership benefits. Generally, cost leadership must be pursued in
conjunction with differentiation. A number of cost elements affect the relative
attractiveness of generic strategies, including economies or diseconomies of scale
achieved, learning and experience curve effects, the percentage of capacity utilization
achieved, and linkages with suppliers and distributors. Other cost elements to consider
while choosing among alternative generic strategies include the potential for sharing
costs and knowledge within the organization, R&D costs associated with new product

3 - 22
 development or modification of existing products, labour costs, tax rates, energy costs,
and shipping costs. This internal strategy of sharing resources to build a competitive
advantage is called synergy benefit. Striving to be a low-cost producer in an industry can
especially be effective,

a) when the market is composed of many price-sensitive buyers and

b) when there are few ways to achieve product differentiation.

 Further, when buyers do not care much about differences from brand to brand, or when
there are a large number of buyers with significant bargaining power. The basic idea is
to under price competitors and thereby gain market share driving some of the
competitors out of the market.

 A successful cost leadership strategy usually permeates the entire firm, as evidenced
by high efficiency, low overheads, limited perks, intolerance of waste, intensive
screening of budget requests, wide span of controls, rewards linked to cost containment,
and broad employee participation in cost control efforts.

 Some risks of pursuing cost leadership are;

a) that competitors may imitate the strategy, therefore driving overall industry
profits down;
b) that technological breakthroughs in the industry may make the strategy ineffective;
or that buyer interests may swing to other differentiating features besides price.
Achieving Cost Leadership Strategy :

To achieve cost leadership, following actions could be taken :

1. Prompt forecasting of demand of a product or service.
2. Optimum utilization of the resources to achieve cost advantages.
3. Achieving economies of scale; thus, lower per unit cost of product/service.
4. Standardisation of products for mass production to yield lower cost per unit. (Example
of McDonald’s)
5. Invest in cost saving technologies and using advance technology for smart efficient
working.
6. Resistance to differentiation till it becomes essential.

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 Advantages of Cost Leadership Strategy

A cost leadership strategy may help to remain profitable even with rivalry, new
entrants, suppliers’ power, substitute products, and buyers’ power.
1. Rivalry – Competitors are likely to avoid a price war, since the low-cost firm will continue
to earn profits even after competitors compete away their profits.
2. Buyers – Powerful buyers/customers would not be able to exploit the cost leader firm
and will continue to buy its product.
3. Suppliers – Cost leaders are able to absorb greater price increases from suppliers
before they need to raise prices for customers.
4. Entrants – Low-cost leaders create barriers to market entry through their continuous
focus on efficiency and cost reduction.
5. Substitutes – Low-cost leaders are more likely to lower the costs to induce existing
customers to stay with their products, invest in developing substitutes, and even
purchase patents.
Disadvantages of Cost Leadership Strategy :

1. Cost advantage may not last long as competitors may imitate cost reduction techniques.
2. Cost leadership can succeed only if the firm can achieve higher sales volume.
3. Cost leaders tend to keep their costs low by minimizing cost of advertising, market
research, and research and development, but this approach can prove to be expensive in
the long run.
4. Technological advancement areas a great threat to cost leaders.

3.6.2.2 : Differentiation Strategy

 This strategy is aimed at broad mass market and involves the creation of a product or
service that is perceived by the customers as unique. The uniqueness can be associated
with product design, brand image, features, technology, dealer network or customer
service. Because of differentiation, the business can charge a premium for its product.
For example, Domino’s Pizza has been offering home delivery within 30 minutes or the
order is free, is a unique selling point that differentiates if from its rivals.

 Differentiation does not guarantee competitive advantage, especially if standard

products sufficiently meet customer needs or if rapid imitation by competitors is

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 possible. Durable products protected by barriers to quick imitation by competitors’
areas better. Successful differentiation can mean greater product flexibility, greater
compatibility, lower costs, improved service, less maintenance, greater convenience, or
more features. Product development is an example of a strategy that offers the
advantages of differentiation.

 Differentiation strategy should be pursued only after a careful study of buyers’ needs
and preferences to determine the feasibility of incorporating one or more differentiating
features into a unique product that features the customers’ desired attributes.

 A successful differentiation strategy allows a firm to charge a higher price for its
product and to gain customer loyalty, because consumers may become strongly attached
to the differentiated features. Special features that differentiate one’s product can
include superior service, spare parts availability, engineering design, product
performance, useful life, gas mileage, or ease of use.

 A risk associated with pursuing a differentiation strategy is that the unique product
may not be valued high enough by customers to justify the higher price. When this
happens, a cost leadership strategy will easily defeat a differentiation strategy.

 Another risk of pursuing a differentiation strategy is that competitors may develop

ways to copy the differentiating features quickly. Firms must find durable sources of
uniqueness that cannot be imitated quickly or cheaply by rival firms.

For example, Amazon Prime offers deliver within two hours. This is quite difficult to
imitate by its rivals, and thus this differentiating factor helps it to lead the market.
Basis of Differentiation

There are several bases of differentiation, major being: Product, Pricing and Organization.

Product : Innovative products that meet customer needs can be an area where a
company has an advantage over competitors. However, the pursuit of a new product
offering can be costly – research and development, as well as production and marketing
costs can all add to the cost of production and distribution. The payoff, however, can be
great as customer’s flock to be among the first to have the new product. For example,
Apple iPhone, has invested huge amounts of money in R&D, and the customers’ value
that. They want to be among the first ones to try the new offerings from the company.
3- 25
 Pricing : It fluctuates based on its supply and demand and may also be influenced by the
customer’s ideal value for a product. Companies that differentiate based on product
price can either determine to offer the lowest price or can attempt to establish
superiority through higher prices. For example, Apple iPhone dominates the smart phone
segment by charging higher prices for its products.

 Organisation : Organisational differentiation is yet another form of differentiation.

Maximizing the power of a brand or using the specific advantages that an organization
possesses can be instrumental to a company’s success. Location advantage, name
recognition and customer loyalty can all provide additional ways for a company
differentiate itself from the competition. For example, Apple has been building
customer loyalty since years and has a fanbase of consumers that are called “Apple
Fanboys/Fangirls”.

Achieving Differentiation Strategy

To achieve differentiation, following strategies could be adopted by an

organisation :
1. Offer utility to the customers and match products with their tastes and preferences.
2. Elevate/Improve performance of the product.
3. Offer the high-quality product/service for buyer satisfaction.
4. Rapid product innovation to keep up with dynamic environment.
5. Taking steps for enhancing brand image and brand value.

6. Fixing product prices based on the unique features of product and buying capacity of
the customer.
Advantages of Differentiation Strategy

A differentiation strategy may help an organisation to remain profitable even with

rivalry, new entrants, suppliers’ power, substitute products, and buyers’ power.

1. Rivalry - Brand loyalty acts as a safeguard against competitors. It means that customers
will be less sensitive to price increases, as long as the firm can satisfy the needs of its
customers.
2. Buyers – They do not negotiate for price as they get special features and they have
fewer options in the market.

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3. Suppliers – Because differentiators charge a premium price, they can afford to absorb
higher costs of supplies as the customers are willing to pay extra too.

4. Entrants – Innovative features are an expensive offer. So, new entrants generally avoid
these features because it is tough for them to provide the same product with special
features at a comparable price.

5. Substitutes – Substitute products can’t replace differentiated products which have

high brand value and enjoy customer loyalty.
Disadvantages of Differentiation Strategy

1. In the long term, uniqueness is difficult to sustain.

2. Charging too high a price for differentiated features may cause the customer to
switch-off to another alternative. As we see a shift of iPhone users to other android
flagship smart phones.
3. Differentiation fails to work if its basis is something that is not valued by the
customers. Home delivery of packed snacks in 30 minutes would not even be a
differentiator as the consumer wouldn’t value such an offer.
3.6.2.3 Focus Strategies

 A successful focus strategy depends on an industry segment that is of sufficient size,

has good growth potential, and is not crucial to the success of other major competitors.
Strategies such as market penetration (new product for existing customers) and market
development (new product for new customers) offer substantial focusing advantages.

 Midsize and large firms can effectively pursue focus-based strategies only in
conjunction with differentiation or cost leadership based strategies. All firms in
essence follow a differentiated strategy. Because only one firm can differentiate itself
with the lowest cost, the remaining firms in the industry must find other ways to
differentiate their products.

 Focus strategies are most effective when consumers have distinctive preferences or
requirements, and when the rival firms are not attempting to specialize in the same
target segment. Risks of pursuing a focus strategy include the possibility of numerous
competitors recognizing the successful focus strategy and imitating it, or that
consumer preferences may drift towards the product attributes desired by the market

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 as a whole. An organization using a focus strategy may concentrate on a particular group
of customers, geographic markets, or on particular product-line segments in order to
serve a well-defined but narrow market better than competitors who serve a broader
market. For example, Ferrari sports cars.

 Focused cost leadership : A focused cost leadership strategy requires competing based
on price to target a narrow market. A firm that follows this strategy does not
necessarily charge the lowest prices in the industry. Instead, it charges low prices
relative to other firms that compete within the target market. Firms that compete
based on price and target a narrow market follow a focused cost leadership strategy.

 Focused differentiation : A focused differentiation strategy requires offering unique

features that fulfil the demands of a narrow market. Similar to focused lowcost
strategy, narrow markets are defined in different ways in different settings. Some
firms using a focused differentiation strategy concentrate their efforts on a particular
sales channel, such as selling over the internet only. Others target particular
demographic groups. Firms that compete based on uniqueness and target a narrow
market are following a focused differentiations strategy. For example, Rolls-Royce sells
limited number of high-end, custom-built cars.
Achieving Focused Strategy

To achieve focused cost leadership/differentiation, following strategies could be

adopted by an organization :

1. Selecting specific niches which are not covered by cost leaders and differentiators.
2. Creating superior skills for catering such niche markets.
3. Generating high efficiencies for serving such niche markets.
4. Developing innovative ways in managing the value chain.
Advantages of Focused Strategy :

1. Premium prices can be charged by the organisations for their focused product/services.
2. Due to the tremendous expertise in the goods and services that the organisations
following focus strategy offer, rivals and new entrants may find it difficult to compete.
Disadvantages of Focused Strategy

1. The firms lacking in distinctive competencies may not be able to pursue focus strategy.

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2. Due to the limited demand of product/services, costs are high, which can cause problems.
3. In the long run, the niche could disappear or be taken over by larger competitors by
acquiring the same distinctive competencies.
3.6.2.4 Best-Cost Provider Strategy

 The new model of best cost provider strategy is a further development of above three
generic strategies. It is directed towards giving customers more value for the money by
emphasizing on both, low cost and upscale differences. The objective is to keep costs
and prices lower than those of other sellers of “comparable products".

Figure: The Five Generic Competitive Strategies

Best-cost provider strategy involves providing customers more value for the money
by emphasizing on lower cost and better-quality differences. It can be done through :

(a) offering products at lower price than what is being offered by rivals for products with
comparable quality and features Or

(b) charging similar price as by the rivals for products with much higher quality and better
features.
For example, android flagship phones from OnePlus, Xiaomi, Oppo, Vivo, etc, are all
rooting for giving better quality at lowest prices to the customers. They are following
the best-cost provider strategy to penetrate market.
Activity for Michael Porter’s Generic Strategies

Use the blank space against each business idea to identify which generic strategy
is being used;
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 4
CHAPTER

STRATEGIC CHOICES

LEARNING OUTCOMES
After studying this chapter, you will be able to :

 Describe and discriminate between strategic choices such as

strategic intensification, strategic diversification and strategic
exits.

 Formulate strategic options.

 Explain the reasons for- relative costs & risks and benefits of
the adoption of various types of corporate strategies.

 Describe the circumstances necessitating pursuit of

combination strategies and strategic alliances.
 Chapter Overview

4.1 INTRODUCTION

Strategies are formulated at different levels of an organization. Strategy

formulation involves well thought of decision making and cover actions dealing with the
objective of the firm, shareholders and allocation of resources and coordination of
strategies of various business units for optimal performance. Top management of the
organization makes strategic decisions, which pan down for delegation at middle
management level and finally the functional level managers execute the same with their
teams.

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4.2 STRATEGIC CHOICES

 Businesses follow different types of strategies to enter the market, to stay relevant
and grow in the market. A large number of strategies with different nomenclatures have
been employed by different businesses and also suggested by different authors on
strategy. For instance, William F Glueck and Lawrence R Jauch discussed four generic
strategies including stability, growth, retrenchment and combination.

 These strategies have also been called Grand Strategies/Directional Strategies by many
other authors. Michael E. Porter suggested competitive strategies including Cost
Leadership, Differentiation, Focus Cost Leadership and Focus Differentiation which
could be used by the corporates for their different business units. Besides these, we
come across functional strategies in the literature on Strategic Management and
Business Policy. Functional Strategies are meant for strategic management of distinct
functions such as Marketing, Financial, Human Resource, Logistics, Production etc.

 We can classify the different types of strategies on the basis of levels of the
organisation, stages of business life cycle and competition as given in the Table –1.
Table: 1- Different types of strategies on the basis of their classification

Basis of Classification Types

Level of the Corporate Level

organisation Business Level

Functional Level

Stages of Business Life Entry/Introduction Stage - Market Penetration Strategy

Cycle Growth Stage - Growth/Expansion Strategy

Maturity Stage - Stability Strategy

Decline Stage - Retrenchment/ Turnaround Strategy

Competition oriented Competitive Strategies - Cost Leadership, Differentiation,

Focus

Collaboration Strategies - Joint Venture, Merger &

Acquisition, Strategic Alliance

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 Above are the various types of strategies available for an organisation to adopt. The
organisation adopts either of these depending upon their needs and requirements. For
instance, a start-up or a new enterprise might follow either a competitive strategy i.e.,
entering the market where a number of rivals are already operating, or a collaborative
strategy, i.e., enter into a joint venture with an established company.

 However, majority of startups are launched on a small scale and their main strategy is
to penetrate the market and to reach the breakeven stage at the earliest and later
pursue growth strategy. While a going concern can continue with the competitive
strategy or resort to collaborative strategy to ensure business growth.

 Business conglomerates having multiple product folios formulate strategies at different

levels, viz., corporate, business unit and functional. Corporate level strategies are meant
to provide ‘direction’ to the company. Business level strategies are formulated for each
product/process division known as strategic business unit.

 While for implementation of the corporate and business strategies, functional

strategies are formulated in business areas like production/operations, marketing,
finance, human resources etc. In fact, big corporates follow an elaborate system of
strategy formulation, implementation and control at different levels in the company to
survive and grow in the turbulent business environment. In this chapter, we shall discuss
the corporate level strategies.
 The corporate strategies a firm can adopt may be classified into four broad categories:
1. Stability strategy
2. Expansion strategy
3. Retrenchment strategy
4. Combination strategy

Figure:-Types of Corporate Strategies

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 Before proceeding further, let us discuss the basic features of all the types of
corporate strategies to get the bird’s eye view. The basic features of the corporate
strategies are as follows :
Table:2- Basic Features of Corporate Strategies

Strategy Basic Feature

Stability The firm stays with its current businesses and product markets; maintains
the existing level of effort; and is satisfied with incremental growth.
Expansion Here, the firm seeks significant growth-maybe within the current
businesses; maybe by entering new business that are related to existing
businesses; or by entering new businesses that are unrelated to existing
businesses.
Retrenchment The firm retrenches some of the activities in some business (es), or) or
drops the business as such through sell-out or liquidation.
Combination The firm combines the above strategic alternatives in some permutation
/combination so as to suit the specific requirements of the firm.

4.2.1 Stability Strategy

 One of the important goals of a business enterprise is stability strategy is to stabilise-

it may be opted to safeguard its existing interests and strengths, to pursue well
established and tested objectives, to continue in the chosen business path, to maintain
operational efficiency on a sustained basis, to consolidate the commanding position
already reached, and to optimise returns on the resources committed in the business.

 A stability strategy is pursued by a firm when :

1) It continues to serve in the same or similar markets and deals in same or similar
products and services.

2) This strategy is typical for those firms whose product have reached the maturity
stage of product life cycle or those who have a sufficient market share but need to
retain that. They have to remain updated and have to pace with the dynamic and
volatile business world to preserve their market share. Hence, stability strategy
should not be confused with ‘do nothing’ strategy. Small organizations may also
follow stability strategy to consolidate their market position and prepare for the
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 launch of growth strategies. For deeper understanding of these strategies, let us
delve into their characteristics :
Characteristics of Stability Strategy :

 A firm opting for stability strategy stays with the same business, same product-market
posture and functions, maintaining same level of effort as at present.
 The endeavour is to enhance functional efficiencies in an incremental way, through
better deployment and utilization of resources. The assessment of the firm is that the
desired income and profits would be forthcoming through such incremental
improvements in functional efficiencies.
 Stability strategy does not involve a redefinition of the business of the corporation.
 It is a safe strategy that maintains status quo.
 It does not warrant much of fresh investments.
 The risk involved in this strategy is less.
 While opting for this strategy, the organization can concentrate on its resources and
existing businesses/products and markets, thus leading to building of core
competencies.
 The firms with modest growth objective choose this strategy.
Major Reasons for Stability Strategy :

 A product has reached the maturity stage of the product life cycle.
 The staff feels comfortable with the status quo as it involves less changes and less risks.
 It is opted when the environment in which an organisation is operating is relatively stable.
 Where it is not advisable to expand as it may be perceived as threatening.
 After rapid expansion, a firm might want to stabilize and consolidate itself.

Why don’t Startups aim for stability?

A startup is an entrepreneurial venture in the early stages of ideation and

development, generally created for solving real-life problems through technology.
For it, the most important factors are speed and agility, because of it being in a
nascent stage of operations. Stability on the other hand is more meaningful
strategy when the size of operations is expanded to full capacity and business is
at a mature stage. Thereby, we rarely see startups aiming for stability.

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4.2.2 Growth/Expansion Strategy

Growth/Expansion strategy is implemented by redefining the business by enlarging

the scope of business and substantially increasing investment in the business. It is a
strategy that can be equated with dynamism, vigour, promise and success. It is often
characterised by significant reformulation of goals and directions, major initiatives and
moves involving investments, exploration and onslaught into new products, new
technology and new markets, innovative decisions and action programmes and so on. This
strategy may take the enterprise along relatively unknown and risky paths, full of
promises and pitfalls.
Characteristics of Growth/Expansion Strategy :

 Expansion strategy involves a redefinition of the business of the corporation.

 Expansion strategy is the opposite of stability strategy. While in stability strategy,

rewards are limited, in expansion strategy they are very high. In the matter of risks,
too, the two are the opposites of each other.

 Expansion strategy leads to business growth. A firm with a mammoth growth ambition
can meet its objective only through the expansion strategy.
 The process of renewal of the firm through fresh investments and new businesses
/products/markets is facilitated only by expansion strategy.
 Expansion strategy is a highly versatile strategy; it offers several permutations and
combinations for growth. A firm opting for the expansion strategy can generate many
alternatives within the strategy by altering its propositions regarding products, markets
and functions and pick the one that suits it most.
 Expansion strategy holds within its fold two major strategy routes: Intensification
Diversification. Both of them are growth strategies; the difference lies in the way in
which the firm actually pursues the growth.
Major Reasons for Growth/Expansion Strategy :

 It may become imperative when environment demands increase in pace of activity.

 Strategists may feel more satisfied with the prospects of growth from expansion; chief
executives may take pride in presiding over organizations perceived to be growth-oriented.

 Expansion may lead to greater control over the market vis-a-vis competitors.
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  Advantages from the experience curve and scale of operations may accrue.

 Expansion also includes intensifying, diversifying, acquiring and merging businesses.

Therefore, growth strategies can take the following forms:
Types of Growth/ Expansion Strategy

The growth strategies can be classified into two main types :

A. Internal growth strategies :

Internal growth strategies can be further divided into :

I] Expansion or growth through Intensification : Expansion or growth through

intensification means that the organisation tries to grow internally by intensifying
its operations either by market penetration or market development or by product
development. It tries to cash on its internal capabilities and internal resources. The
firm can intensify by adopting any of the following strategies :

a) Market Penetration: Highly common expansion strategy is market penetration

/concentration on the current business. The firm directs its resources to the
profitable growth of its existing product in the existing market.

b) Market Development : It consists of marketing present products, to customers

in related market areas by adding different channels of distribution or by
changing the content of advertising or the promotional media.

c) Product Development : Product development involves substantial modification

of existing products or creation of new but related items that can be
marketed to current customers through establish channels.

Igor. H. Ansoff gave a framework as shown in figure below which describes the
intensification options available to a firm.
Table 3 : Product-Market Expansion Grid

Market Penetration Product Development

♦ Increase market share. ♦ Add product features, product refinement.
♦ Increase product usage. ♦ Develop a new-generation product.
♦ Increase the frequency used. ♦ Develop new product for the same market.
♦ Increase the quantity used.
♦ Find new application for current users.
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Market Development Diversification involving new products

♦ Expand geographically Target new and new markets

segments. ♦ Related / Unrelated.

II] Expansion or Growth through Diversification :

 When a firm tries to grow and expand by diversifying into various products or
fields, it is called growth by diversification. This is also an internal growth strategy.
Innovative and creative firms always look for opportunities and challenges to grow,
to venture into new areas of activity and to break new frontiers with the zeal of
entrepreneurship using their internal resources. They feel that diversification
offers greater prospects of growth and profitability than intensification.

 Diversification is defined as an entry into new products or product lines, new

services or new markets, involving substantially different skills, technology and
knowledge. When an established firm introduces a new product, which has little or
no affinity with its present product line and which is meant for a new class of
customers different from the firm’s existing customer groups, the process is known
as conglomerate diversification. Both the technology of the product and the market
are different from the firm’s present experience.

 For some firms, diversification is a means of utilising their existing facilities and
capabilities in a more effective and efficient manner. They may have excess
capacity or capability in manufacturing facilities, investible funds, marketing
channels, competitive standing, market prestige, managerial and other manpower,
research and development, raw material sources and so forth. Another reason for
diversification lies in its synergistic advantage. It may be possible to improve the
sales and profits of existing products by adding suitably related or new products,
because of linkages in technology and/or in markets.

 Based on the nature and extent of their relationship to existing businesses,

diversification can be classified into two broad categories :

(i) Concentric diversification : diversification into related business to benefit

from synergistic gains
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 (ii) Conglomerate diversification : diversification into unrelated business to
explore more opportunities beyond existing areas of expertise

(iii) Expansion through Innovation

Diversification endeavours can be related or unrelated to existing businesses of

the firm.

(i) Concentric Diversification : Concentric diversification takes place when the products
are related. In this diversification, the new business that is it diversifies into is linked
to the existing businesses through process, technology or marketing. The new product is
a spin-off from the existing facilities and products/processes. This means that in
concentric diversification too, there are benefits of synergy with the current
operations. The new product is only connected in a loop-like manner at one or more
points in the firm’s existing process/technology/product chain. For example, a company
producing clothes ventures into the manufacturing of shoes.

Concentric diversification is generally understood in two directions, vertical and

horizontal integration;

(a) Vertically Integrated Diversification : In vertically integrated diversification,

firms opt to engage in businesses that are related to the existing business of the
firm. The firm remains vertically within the same process sequence moves forward
or backward in the chain and enters specific product/process steps with the
intention of making them into new businesses for the firm. The characteristic
feature of vertically integrated diversification is that the firm remains in the
vertically linked product-process chain. A firm can either opt for forward or
backward integration or horizontal integration.

Forward and Backward Integration : Forward and backward integration forms part
of vertically integrated diversification. In vertically integrated diversification,
firms opt to engage in businesses that are vertically related to the existing business
of the firm. The firm remains vertically within the same process. While diversifying,
firms opt to engage in businesses that are linked forward or backward in the chain.

Backward integration is concerned with creation of effective supply by entering

business of input providers. Strategy employed to expand profits and gain greater
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 control over production/supply of a product whereby a company will purchase or
build a business that will increase its own supply capability or lessen its cost of
production. For example, A large supermarket chain considers to purchase a number
of farms that would provide it a significant amount of fresh produce.
On the other hand, forward integration is moving forward in the value chain and
entering business lines that use existing products. Forward integration will also take
place where organizations enter into businesses of distribution channels.
For example, A coffee bean manufacture may choose to merge with a coffee cafe.

(b) Horizontal Integrated Diversification : A firm gets horizontally diversified by

integrating through acquisition of one or more similar businesses operating at the
same stage of the production-marketing chain. They can also integrate with the
firms producing complementary products or by-products or by taking over
competitors’ products. The following figure explains the horizontal diversification,
wherein, textile mill 1 acquires textile mill 2 and 3 as well.

Figure: Diversification

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(ii) Conglomerate Diversification : In conglomerate diversification, no linkages related to
product, market or technology exist; the new businesses/products are disjointed from
the existing businesses/products in every way; it is a totally unrelated diversification.
In process/technology/function, there is no connection between the new products and
the existing ones. Conglomerate diversification has no common thread at all with the
firm’s present position. For example, A cement manufacturer diversifies into the
manufacture of steel and rubber products.

Is it really worth expanding so much to diversify a business into unrelated

products?
Despite of its complexity, conglomerate diversification (diversification into unrelated
business) financially makes a lot of sense. It creates access a new pool of customers,
thereby expanding its customer base. It allows access to markets and cross-selling new
products, leading to increased revenues. Further, it eases the management of losses in
a business; profits in one business can be used to keep the loss making business afloat
within the same organisation.

(iii) Innovation : Innovation drives upgradation of existing product lines or processes,

leading to increased market share, revenues, profitability and most important, customer
satisfaction. Some may argue that innovation leads to unnecessary expenses that do not
give as much returns, but on the contrary, for a business to grow long term, innovation
offers the following ;

 Helps to solve complex problems : A business strives to find opportunities in

existing problems of the society, and it does so though planned innovation in areas
of expertise. This guided innovation help solve complex problems by developing
customer centric sustainable solutions. For example, the pressing problem of
environmental damage is being tackled heads on by shifting to renewable sources of
energy like solar, wind, sea waves, etc. It might be costly in introductory stages but
in the long run it will only have economical and environmental sustainability.

 Increases Productivity : Innovation leads to simplification and in most cases

automation of existing tasks. Productivity is defined as a measure of final output
from a task or a process, and companies are willing to spend millions on increasing
their productivity, Innovation, by automating repetitive tasks, and simplifying the

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 long chain of processes, adds to productivity of teams and thereby the organisation
as a whole.

For example, MS Excel, every finance professional uses this software to simplify
and automate their manual tasks. Such digital innovation which leads to improved
productivity, creates opportunities to further develop processes and products
within and outside the organisatoin. Thus, innovation creates a ripple effect that has
a far and wide impact across industries.

 Gives Competitive Advantage : Being ahead of competition is a need, and

businesses spend majority of their strategic time building solutions to achieve this
advantage. An interesting concept about innovation is -the faster a business
innovates, the farther it goes from its competitor’s reach. Innovative products need
less marketing as they aim to provide added satisfaction to consumers, thus,
creating a competitive advantage. Innovation not only helps retain the existing
customers but helps acquire new ones with ease.
B] External Growth Strategies
When the organization instead of growing internally thinks of diversifying by
making alliances with external organisations, it is called external growth diversification.
It can be classified in two ways :

I] Expansion through Mergers and Acquisitions

 Acquisition or merger with an existing concern is an instant means of achieving the

expansion. It is an attractive and tempting proposition in the sense that it
circumvents the time, risks and skills involved in screening internal growth
opportunities, seizing them and building up the necessary resource base required to
materialise growth. Organizations consider merger and acquisition proposals in a
systematic manner, so that the marriage will be mutually beneficial, a happy and
lasting affair.
 Apart from the urge to grow, acquisitions and mergers are resorted to for purposes
of achieving a measure of synergy between the parent and the acquired enterprises.
Synergy may result from such bases as physical facilities, technical and managerial
skills, distribution channels, general administration, research and development and
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 so on. Only positive synergistic effects are relevant in this connection which
denotes that the positive effects of the merged resources are greater than the
effects of the individual resources before merger or acquisition.

 Merger and acquisition in simple words are defined as a process of combining two or
more organizations together. There is a thin line of difference between the two
terms but the impact of combination is completely different in both the cases.
Some organizations prefer to grow through mergers. Merger is a process when two
or more companies come together to expand their business operations. In such a
case the deal gets finalized on friendly terms and both the organizations share
profits in the newly created entity. In a merger two organizations combine to
increase their strength and financial gains along with breaking of the trade barriers.

When one organization takes over the other organization and controls all its
business operations, it is known as acquisition. In acquisition, one financially strong
organization overpowers the weaker one. Acquisitions often happen during recession
in economy or during declining profit margins. In this process, the stronger one
overpowers the weaker one. The combined operations then run under the name of
the powerful entity. A deal in case of an acquisition is often done in an unfriendly
manner, it is more or less a forced association where the powerful organization
acquires the operations of the company that is in a weaker position and is forced to
sell its entity.
Types of Mergers :

The following are the types of mergers and are quite similar to the types of
diversification.

(a) Horizontal Merger Horizontal merger is a combination of firms engaged in the same
industry. It is a merger with a direct competitor. The principal objective behind this
type of merger is to achieve economies of scale in the production process by
shedding duplication of installations and functions, widening the line of products,
decrease in working capital and fixed assets investment, getting rid of competition
and so on. For example, formation of Brook Bond Lipton India Ltd. through the
merger of Lipton India and Brook Bond.
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(b) Vertical Merger It is a merger of two organizations that are operating in the same
industry but at different stages of production or distribution system. This often
leads to increased synergies with the merging firms. If an organization takes over
its supplier/producers of raw material, then it leads to backward integration. On the
other hand, forward integration happens when an organization decides to take over
its buyer organizations or distribution channels. Vertical merger results in many
operating and financial economies. Vertical mergers help to create an advantageous
position by restricting the supply of inputs to other players, or by providing the
inputs at a higher cost. For example, backward integration and forward integration.

(c) Co-generic Merger In Co-generic merger two or more merging organizations are
associated in some way or the other related to the production processes, business
markets, or basic required technologies. Such merger includes the extension of the
product line or acquiring components that are required in the daily operations. It
offers great opportunities to businesses to diversify around a common set of
resources and strategic requirements. For example, an organization in the white
goods category such as refrigerators can diversify by merging with another
organization having business in kitchen appliances.

(d) Conglomerate Merger Conglomerate mergers are the combination of organizations

that are unrelated to each other. There are no linkages with respect to customer
groups, customer functions and technologies being used. There are no important
common factors between the organizations in production, marketing, research and
development and technology. In practice, however, there is some degree of overlap
in one or more of these factors.

II] Expansion through Strategic Alliance : A strategic alliance is a relationship between

two or more businesses that enables each to achieve certain strategic objectives
which neither would be able to achieve on its own. The strategic partners maintain
their status as independent and separate entities, share the benefits and control
over the partnership, and continue to make contributions to the alliance until it is
terminated. Strategic alliances are often formed in the global marketplace between
businesses that are based in different regions of the world.
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Advantages of Strategic Alliance :

Strategic alliance usually is only formed if they provide an advantage to all the
parties in the alliance. These advantages can be broadly categorised as follows :

1. Organizational : Strategic alliance helps to learn necessary skills and obtain certain
capabilities from strategic partners. Strategic partners may also help to enhance
productive capacity, provide a distribution system, or extend supply chain. Strategic
partners may provide a good or service that complements thereby creating a
synergy. Having a strategic partner who is well-known and respected also helps add
legitimacy and creditability to a new venture.

2. Economic : There can be reduction in costs and risks by distributing them across
the members of the alliance. Greater economies of scale can be obtained in an
alliance, as production volume can increase, causing the cost per unit to decline.
Finally, partners can take advantage of co-specialization, creating additional value,
such as when a leading computer manufacturer bundles its desktop with a leading
monitor manufacturer’s monitor.

3. Strategic : Rivals can join together to cooperate instead of competing with each
other. Vertical integration can be created where partners are part of supply chain.
Strategic alliances may also be useful to create a competitive advantage by the
pooling of resources and skills. This may also help with future business opportunities
and the development of new products and technologies. Strategic alliances may also
be used to get access to new technologies or to pursue joint research and
development.
4. Political : Sometimes strategic alliances are formed with a local foreign business to
gain entry into a foreign market either because of local prejudices or legal barriers
to entry. Forming strategic alliances with politically influential partners may also
help improve your own influence and position.
Disadvantages of Strategic Alliance

Strategic alliances do come with some disadvantages and risks. The major
disadvantage is sharing. Strategic alliances require sharing of resources and profits,
and also sharing knowledge and skills that otherwise organisations may not like to share.
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 Sharing knowledge and skills can be problematic if they involve trade secrets.
Agreements can be executed to protect trade secrets, but they are only as good as the
willingness of parties to abide by the agreements or the courts willingness to enforce
them. Strategic alliances may also create potential competition when an ally becomes an
opponent in future when it decides to separate out.
4.3 STRATEGIC EXITS

Strategic Exits are followed when an organization substantially reduces the scope of
its activity. This is done through an attempt to find out the problem areas and diagnose
the causes of the problems. Next, steps are taken to solve the problems. These steps
result in different kinds of retrenchment strategies. If the organization chooses to focus
on ways and means to reverse the process of decline, it adopts at turnaround strategy. If
it cuts off the loss-making units, divisions, or SBUs, curtails its product line, or reduces
the functions performed, it adopts a divestment (or divestiture) strategy. If none of
these actions work, then it may choose to abandon the activities totally, resulting in a
liquidation strategy. We deal with each of these strategies below.
I] Turnaround Strategy :

 Retrenchment may be done either internally or externally. For internal

retrenchment to take place, emphasis is laid on improving internal efficiency, known
as turnaround strategy.

 There are certain conditions or indicators which point out that a turnaround is
needed if the company has to survive. These danger signals are :
1) Persistent negative cash flow from business(es)
2) Uncompetitive products or services
3) Declining market share

4) Deterioration in physical facilities

5) Over-staffing, high turnover of employees, and low morale
6) Mismanagement
Action Plan for Turnaround :

For turnaround strategies to be successful, it is imperative to focus on the short

and long-term financing needs as well as on strategic issues. A workable action plan for
4 - 16
 turnaround would involve the following stages :

 Stage One – Assessment of current problems : The first step is to assess the current
problems and get to the root causes and the extent of damage the problem has caused.
Once the problems are identified, the resources should be focused toward those areas
essential to efficiently work on correcting and repairing any immediate issues.

 Stage Two –Analyze the situation and develop a strategic plan : Before you make any
major changes; determine the chances of the business’s survival. Identify appropriate
strategies and develop a preliminary action plan.

For this one should look for the viable core businesses, adequate bridge financing and
available organizational resources. Analyze the strengths and weaknesses in the areas of
competitive position. Once major problems and opportunities are identified, develop a
strategic plan with specific goals and detailed functional actions.
 Stage Three –Implementing an emergency action plan : If the organization is in a critical
stage, an appropriate action plan must be developed to stop the bleeding and enable the
organization to survive. The plan typically includes human resource, financial, marketing
and operations actions to restructure debts, improve working capital, reduce costs,

improve budgeting practices, prune product lines and accelerate high potential products.

A positive operating cash flow must be established as quickly as possible and enough
funds to implement the turnaround strategies must be raised.

 Stage Four –Restructuring the business : The financial state of the organization’s core
business is particularly important. If the core business is irreparably damaged, then the
outlook for the entire organization may be bleak. Prepare cash forecasts, analyze assets
and debts, review profits and analyze other key financial functions to position the
organization for rapid improvement.
During the turnaround, the “product mix” may be changed, requiring the organization to
do some repositioning. Core products neglected over time may require immediate
attention to remain competitive. Some facilities might be closed; the organization may
even withdraw from certain markets to make organization leaner or target its products
toward a different niche.

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 Morale building is another important ingredient in the organization’s competitive
effectiveness. Reward and compensation systems that encourage dedication and
creativity amongst employees to think about profits and return on investments.

 Stage Five –Returning to normal : In the final stage of turnaround strategy process,
the organization should begin to show signs of profitability, return on investments and
enhancing economic value-added. Emphasis is placed on a number of strategic efforts
such as carefully adding new products and improving customer service, creating alliances
with other organizations, increasing the market share, etc.

The important elements of turnaround strategy are as follows :

 Changes in the top management

 Initial credibility-building actions

 Neutralising external pressures
 Identifying quick payoff activities
 Quick cost reductions
 Revenue generation
 Asset liquidation for generating cash
 Better internal coordination

II] Divestment Strategy

 Divestment strategy involves the sale or liquidation of a portion of business, or a major

division, profit centre or SBU. Divestment is usually a part of rehabilitation or
restructuring plan and is adopted when a turnaround has been attempted but has proved
to be unsuccessful. The option of a turnaround may even be ignored if it is obvious that
divestment is the only answer.
 A divestment strategy may be adopted due to various reasons :
a) A business that had been acquired proves to be a mismatch and cannot be
integrated within the company.
b) Persistent negative cash flows from a particular business create financial problems
for the whole company, creating the need for divestment of that business.
c) Severity of competition and the inability of a firm to cope with it may cause it to
divest.

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d) It is not possible for the business to do Technological upgradation that is required
for the business to survive, a preferable option would be to divest.
e) A better alternative may be available for investment, causing a firm to divest a part
of its unprofitable business.
Characteristics of Divestment Strategy :

 This strategy involves divestment of some of the activities in a given business of

the firm or sell-out of some of the businesses as such.

 Divestment is to be viewed as an integral part of corporate strategy without any

stigma attached.

Major Reasons for Retrenchment/Turnaround Strategy :

 The management no longer wishes to remain in business either partly or wholly due
to continuous losses and unviability.
 The management feels that business could be made viable by divesting some of the
activities or liquidation of unprofitable activities.
 A business that had been acquired proves to be a mismatch and cannot be
integrated within the company.

 Persistent negative cash flows from a particular business create financial problems
for the whole company, creating the need for divestment of that business.

 Severity of competition and the inability of a firm to cope with it may cause it to
divest.

 Technological upgradation is required if the business is to survive but where it is not

possible for the firm to invest in it, a preferable option would be to divest.

 A better alternative may be available for investment, causing a firm to divest a part
of its unprofitable businesses.

Is Turnaround strategy only relevant to loss making businesses ?

Interestingly, turnaround strategy is relevant when a company is experiencing a
period of poor performance. Poor performance does not always mean losses, it may
also mean lower than expected growth, no future clarity, or even lesser than target
profits.

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4.4 STRATEGIC OPTIONS

 Strategic options need to be carved out from existing products and innovations that are
happening in the industry. There are a set of models that help strategists in taking
strategic decisions with regard to individual products or businesses in a firm’s portfolio.
Primarily used for competitive analysis and corporate strategic planning in multi-product
and multi business firms. They may also be used in less diversified firms, if these
consist of a main business and other minor complementary interests. The main advantage
in adopting a portfolio approach in a multi-product, multi-business firm is that resources
could be channelised at the corporate level to those businesses that possess the
greatest potential.

 For instance, a diversified company may decide to divert resources from its cash rich
businesses to more prospective ones that hold promise of a faster growth so that the
company achieves its corporate level objectives efficiently.

 In order to design the business portfolio, the management must analyse its current
business portfolio and decide which business should receive more, less, or no investment.
Depending upon analyses management may develop growth strategies for adding new
products or businesses to the firm’s portfolio.
4.4.1 Ansoff’s Product Market Growth Matrix :

 The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a useful tool
that helps businesses decide their product and market growth strategy. With the use
of this matrix a business can get a fair idea about how its growth depends upon it
markets in new or existing products in both new and existing markets.

 Companies should always be looking to the future. One useful device for identifying
growth opportunities for the future is the product/market expansion grid. The
product/market growth matrix is a portfolio-planning tool for identifying growth
opportunities for the company.

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 Figure: Ansoff’s Product Market Growth Matrix

 Market Penetration : Market penetration refers to a growth strategy where the

business focuses on selling existing products into existing markets. It is achieved by
making more sales to present customers without changing products in any major way.
Penetration might require greater spending on advertising or personal selling.
Overcoming competition in a mature market requires an aggressive promotional
campaign, supported by a pricing strategy designed to make the market unattractive for
competitors. Penetration is also done by effort on increasing usage by existing
customers. For example, Gucci, a luxury clothing brand, selling its luxury clothing in
European markets with new designs, is market penetration.

 Market Development : Market development refers to a growth strategy where the

business seeks to sell its existing products into new markets. It is a strategy for
company growth by identifying and developing new markets for current company
products. This strategy may be achieved through new geographical markets, new product
dimensions or packaging, new distribution channels or different pricing policies to attract
different customers or create new market segments. For example, Gucci, a luxury
clothing brand, selling its luxury clothing in Chinese markets, is market development.

 Product Development : Product development refers to a growth strategy where business

aims to introduce new products into existing markets. It is a strategy for company
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 growth by offering modified or new products to current markets. This strategy may
require the development of new competencies and requires the business to develop
modified products which can appeal to existing markets. For example, Gucci, a luxury
clothing brand, selling casual clothing in European markets, is product development.

 Diversification : Diversification refers to a growth strategy where a business markets

new products in new markets. It is a strategy by starting up or acquiring businesses
outside the company’s current products and markets. This strategy is risky because it
does not rely on either the company’s successful product or its position in established
markets. Typically, the business is moving into markets in which it has little or no
experience. For example, Gucci, a luxury clothing brand, selling casual clothing in Chinese
markets, is diversification.

 As market conditions change overtime, a company may shift product-market growth

strategies. For example, when its present market is fully saturated a company may have
no choice other than to pursue new market.
4.4.2 ADL Matrix :

 The ADL matrix (derived its name from Arthur D. Little) is a portfolio analysis
technique that is based on product life cycle. The approach forms a two dimensional
matrix based on stage of industry maturity and the firms competitive position,
environmental assessment and business strength assessment. Stage of industry maturity
is an environmental measure that represents a position in industry’s life cycle.

 Competitive position is a measure of business strengths that helps in categorization of

products or SBU’s into one of five competitive positions :

a) dominant,
b) strong,
c) favourable,
d) tenable and

e) weak

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 It is four by five matrix as follows:

Figure: Arthur D. Little Strategic Condition Matrix

The competitive position of a firm is based on an assessment of the following criteria :

 Dominant : This is a comparatively rare position and in many cases is attributable either
to a monopoly or a strong and protected technological leadership.
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 Strong : By virtue of this position, the firm has a considerable degree of freedom over
its choice of strategies and is often able to act without its market position being unduly
threatened by its competitions.

 Favourable : This position, which generally comes about when the industry is fragmented
and no one competitor stand out clearly, results in the market leaders a reasonable
degree of freedom.

 Tenable : Although the firms within this category are able to perform satisfactorily and
can justify staying in the industry, they are generally vulnerable in the face of
increased competition from stronger and more proactive companies in the market.

 Weak : The performance of firms in this category is generally unsatisfactory although

the opportunities for improvement do exist.
4.4.3 Boston Consulting Group (BCG) Growth-Share Matrix :

 The BCG growth-share matrix is the simplest way to portray a corporation’s portfolio of
investments. Growth share matrix also known for its cow and dog metaphors is popularly
used for resource allocation in a diversified company. Using the BCG approach, a
company classifies its different businesses on a two dimensional growth-share matrix.
In the matrix :
a) The vertical axis represents market growth rate and provides a measure of market
attractiveness.
b) The horizontal axis represents relative market share and serves as a measure of
company strength in the market.
 Using the matrix, organisations can identify four different types of products or SBU as
follows :

a) Stars are products or SBUs that are growing rapidly. They also need heavy
investment to maintain their position and finance their rapid growth potential. They
represent best opportunities for expansion.

b) Cash Cows are low-growth, high market share businesses or products. They generate
cash and have low costs. They are established, successful, and need less investment
to maintain their market share. In long run when the growth rate slows down, stars
become cash cows.
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 Figure: BCG Growth-Share Matrix

c) Question Marks, sometimes called problem children or wildcats, are low market
share business in high-growth markets. They require a lot of cash to hold their
share. They need heavy investments with low potential to generate cash. Question
marks if left unattended are capable of becoming cash traps. Since growth rate is
high, increasing it should be relatively easier. It is for business organisations to turn
them stars and then to cash cows when the growth rate reduces.

d) Dogs are low-growth, low-share businesses and products. They may generate enough
cash to maintain themselves, but do not have much future. Sometimes they may
need cash to survive. Dogs should be minimised by means of divestment or
liquidation.
BCG Matrix: Post Identification Strategies :

After a firm, has classified its products or SBUs, it must determine what role each will
play in the future. The four strategies that can be pursued are :
1. Build : Here the objective is to increase market share, even by forgoing short term
earnings in favour of building a strong future with large market share.
2. Hold : Here the objective is to preserve market share.
3. Harvest : Here the objective is to increase short-term cash flow regardless of long-
term effect.
4. Divest : Here the objective is to sell or liquidate the business because resources can
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 be better used elsewhere.
Is BCG Matrix really helpful ?

The growth-share matrix has done much to help strategic planning; however, there
are some problems and limitations with the technique. BCG matrix can be difficult, time-
consuming, and costly to implement. Management may find it difficult to define SBUs
and measure market share and growth. It also focuses on classifying current businesses
but provide little advice for future planning. They can lead the company to placing too
much emphasis on market-share growth or growth through entry into attractive new
markets. This can cause unwise expansion into hot, new, risky ventures or divesting
established units too quickly.

Identify if the following is a Star or a Cash Cow ?

SO Pharma Ltd. developed a new age medicine which cures cough in 3 hours with an
investment of INR 80 crores in R&D. They named it “COUFIX”. Coufix needs a lot of
marketing spend to create awareness amongst the public and also needs funds to get
licenses from the regulators. Interestingly, Coufix has gained 60% market share within
6 months of launch and been profitable since day 1. Is Coufix, a cash cow or a star for
SO Pharma Ltd.?

It is a Star.

Stars are products or SBUs that are growing rapidly. They also need heavy investment
to maintain their position and finance their rapid growth potential.

They represent best opportunities for expansion.

Just one parameter of market share cannot define the status of an SBU, it should be
categorised basis the inherent characteristics, and hence Coufix has more
representation as a Star.

4.4.4 General Electric Matrix [“Stop-Light” Strategy Model]

This model has been used by General Electric Company (developed by GE with the
assistance of the consulting firm McKinsey and Company). This model is also known as
Business Planning Matrix, GE Nine-Cell Matrix and GE Model. The strategic planning
approach in this model has been inspired from traffic control lights. The lights that are
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 used at crossings to manage traffic are : green for go, amber or yellow for caution, and
red for stop. This model uses two factors while taking strategic decisions: Business
Strength and Market Attractiveness.

Understanding the GE Matrixv:

 The vertical axis indicates market attractiveness, and the horizontal axis shows the
business strength in the industry. The market attractiveness is measured by a number
of factors like :
a) Size of the market.
b) Market growth rate.
c) Industry profitability.

d) Competitive intensity.

e) Availability of Technology.
f) Pricing trends.
g) Overall risk of returns in the industry.
h) Opportunity for differentiation of products and services.
i) Demand variability.
j) Segmentation.

k) Distribution structure (e.g. direct marketing, retail, wholesale) etc.

 Business strength is measured by considering the typical drivers like :
a) Market share.
b) Market share growth rate.
c) Profit margin.
d) Distribution efficiency.
e) Brand image.
f) Ability to compete on price and quality.
g) Customer loyalty.
h) Production capacity.
i) Technological capability.
j) Relative cost position.
k) Management calibre, etc.
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 If a product falls in the green section, the business is at advantageous position. To reap
the benefits, the strategic decision can be to expand, to invest and grow. If a product is
in the amber or yellow zone, it needs caution and managerial discretion is called for
making the strategic choices. If a product is in the red zone, it will eventually lead to
losses that would make things difficult for organisations. In such cases, the appropriate
strategy should be retrenchment, divestment or liquidation.

 This model is similar to the BCG growth-share matrix. However, there are differences.
Firstly, market attractiveness replaces market growth as the dimension of industry
attractiveness and includes a broader range of factors other than just the market
growth rate. Secondly, competitive strength replaces market share as the dimension by
which the competitive position of each SBU is assessed.

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 5
CHAPTER

STRATEGY IMPLEMENTATION
AND EVALUATION

LEARNING OUTCOMES
After studying this chapter, you will be able to :

 Describe the process of Strategy Management: From

Formulation to Implementation

 Evaluate the salience of strategy implementation.

 Explain Strategic Change through Digital Transformation

 Differentiate between Organisation Structure (hard) and

Culture (soft)

 Signify the meaning and importance of Strategic Leadership

 Discuss the role of Strategic Control

 Identify and Classify Strategic Performance Measures

 Chapter Overview

5.1. INTRODUCTION

Strategy implementation and evaluation are critical phases of the process of

strategic management in an organization. Implementation involves putting the plans and
initiatives developed as part of the strategy into action, while evaluation refers to the
process of measuring and assessing the effectiveness of these actions. In this chapter,
we will explore various implementation and evaluation methods that organizations can
use to assess the success of their strategy implementation and identify areas for
improvement. This chapter will provide a comprehensive overview of the implementation
and evaluation process and equip readers with the knowledge and skills needed to
effectively execute and assess their organization's strategies. To begin with an
overview of the process of strategic management is provided in the next section.
5.2 STRATEGIC MANAGEMENT PROCESS
 The process of developing an organisation’s strategy is quite methodical. The organisation
first develops a clear vision, mission, values and goals. They then must then discuss and
analyse a number of themes to determine which options are most promising. All these

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 aspects come together in a strategic plan that details the organisation’s vision, mission,
values, goals, strategic themes, a high-level implementation plan and key performance
measures. The key performance measures are included in the strategic plan and are
used to link the themes back to the organisation’s goals and to measure the success of
the strategy after it is implemented.

 The strategic management process is dynamic and continuous. A change in any one of the
major components in the model can necessitate a change in any or all of the other
components. For instance, a shift in the economy could represent a major opportunity
and require a change in long-term objectives and strategies; a failure to accomplish
annual objectives could require a change in policy; or a major competitor’s change in
strategy could require a change in the firm’s mission.

 Therefore, strategy formulation, implementation, and evaluation activities should be

performed on a continual basis, not just at the end of the year or semi-annually. The
strategic management process never really ends.

Figure: Strategic Management Model (Fred R David)

 The strategic management process can best be studied and applied using a model. Every
model represents some kind of process. The model illustrated in the Figure: Strategic
Management Model (Fred R David) is a widely accepted, comprehensive. This model like
any other model of management does not guarantee sure-shot success, but it does
represent a clear and practical approach for formulating, implementing, and evaluating

5-2
 strategies. Relationships among major components of the strategic management process
are shown in the model.

 In practice, strategists do not go through the process in lockstep fashion. Generally,

there is give-and-take among hierarchical levels of an organisation. The process
essentially is iterative and involves a lot of back-and-forth considerations across
different stages in the strategic management process. Many organisations conduct
formal meetings semi-annually to discuss and update the firm’s vision/mission,
opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and
performance. Creativity from participants is encouraged in meeting. Good communication
and feedback are needed throughout the strategic management process.
5.2.1 Stages in Strategic Management :

 Crafting and executing strategy are the heart and soul of managing a business
enterprise. But exactly what is involved in developing a strategy and executing it
proficiently? And who besides top management has strategy – formulation – executing
responsibility?

 Strategic management involves the following stages :

1) Developing a strategic vision and formulation of statement of mission, goals and

objectives.

2) Environmental and organisational analysis.

3) Formulation of strategy.
4) Implementation of strategy.
5) Strategic evaluation and control
Stage 1: Strategic Vision, Mission and Objectives :

 First a company must determine what directional path the company should take and
what changes in the company’s product – market – customer – technology – focus
would improve its current market position and its future prospect. Deciding to
commit the company to one path versus other pushes managers to draw some
carefully reasoned conclusions about how to try to modify the company’s business
makeup and the market position it should carve out. Top management’s views and
conclusions about the company’s direction and the product-customer-market-

5- 3
 technology focus constitute a strategic vision for the company. A strategic vision
delineates management’s aspirations for the organisation and highlights a particular
direction, or strategic path for it to follow in preparing for the future and molds its
identity. A clearly articulated strategic vision communicates management’s
aspirations to stakeholders and helps steer the energies of company personnel in a
common direction.
 Mission and Strategic Intent : Managers need to be clear about what they see as
the role of their organisation, and this is often expressed in terms of a statement
of mission. This is important because both external stakeholders and other
managers in the organisation need to be clear about what the organisation is seeking
to achieve and, in broad terms, how it expects to do so. At this level, strategy is not
concerned with the details of SBU competitive strategy or the directions and
methods the businesses might take to achieve competitive advantage Rather, the
concern here is overall strategic direction.

 Corporate goals and objectives flow from the mission and growth ambition of the
corporation. Basically, they represent the quantum of growth the firm seeks to
achieve in the given time frame. They also endow the firm with characteristics that
ensure the projected growth. Through the objective setting process, the firm is
tackling the environment and deciding the focus it should have in the environment.

 The objective provides the basis for major decisions of the firm and also help the
organisational performance to be realized at each level. The managerial purpose of
setting objectives is to convert the strategic vision into specific performance targets
– basically the results and outcomes the management wants to achieve - and then use
these objectives as yardsticks for tracking the company’s progress and performance.

 Ideally, managers ought to use the objective-setting exercise as a tool for

truly stretching an organisation to reach its full potential. Challenging company
personnel to go all out and deliver big gains in performance pushes an enterprise
to be more inventive, to exhibit some urgency in improving both its financial
performance and its business position, and to be more intentional and focused in
its actions.

5-4
  Objectives are needed at all organisational levels. Objective setting should not stop
with top management’s establishing of companywide performance targets. Company
objectives need to be broken down into performance targets for each separate
business, product line, functional department, and individual work unit. Company
performance can’t reach full potential unless each area of the organisation does its
part and contributes directly to the desired companywide outcomes and results.
This means setting performance targets for each organisation unit that support-
rather than conflict with or negate-the achievement of companywide strategic and
financial objectives.
Stage 2: Environmental and Organisational Analysis

 This stage is the diagnostic phase of strategic analysis. It entails two types of
analysis :
1. Environmental scanning
2. Organisational analysis

 The external environment of a firm consists of economic, social, technological,

market and other forces which affect its functioning. The firm’s external
environment is dynamic and uncertain. So, the management must systematically be
analysed various elements of environment to determine opportunities and threats for
the firm in future.

 Organisational analysis involved a review of financial resources, technological

resources, productive capacity, marketing and distribution effectiveness, research
and development, human resource skills and so on. This would reveal organisational
strengths and weaknesses which could be matched with the threats and opportunities
in the external environment. This would provide us a framework for SWOT analysis
(Strength, Weakness, Opportunity and Threat) which could be in the form of a table
highlighting various strengths and weaknesses of the firm and opportunities and
threats which the environment we create for the firm.

Stage 3: Formulating Strategy

 The first step in strategy formulation is developing strategic alternatives in the light
of organisation strengths and weaknesses, and opportunities and threats in the

5- 5
 environment. The second step is the deep analysis of various strategic alternatives for
the purpose of choosing the most appropriate alternative which will serve as the
strategy of the firm.
 A company may be confronted with several alternatives such as :
i. Should the company continue in the same business carrying on the same volume
of activities ?
ii. If it should continue in the same business, should it grow by expanding the
existing units or by establishing new units or by acquiring other units in the
industry ?
iii. If it should diversify, should it diversify into related areas or unrelated areas ?
iv. Should it get out of an existing business fully or partially ?

 The above strategic alternatives may be designated as stability strategy, growth

/expansion strategy and retrenchment strategy. A company may also follow a
combination of these alternatives called combination strategy.
Stage 4: Implementation of Strategy:

 Implementation and execution are an operations-oriented activity aimed at shaping

the performance of core business activities in a strategy-supportive manner. It is the
most demanding and time-consuming part of the strategy- management process. To
convert strategic plans into actions and results, a manager must be able to direct
organisational change, motivate people, build and strengthen company competencies and
competitive capabilities, create a strategy- supportive work climate, and meet or beat
performance targets.

 In most situations, strategy-execution process includes the following principal aspects :

1) Developing budgets that steer ample resources into those activities critical to
strategic success.
2) Staffing the organisation with the needed skills and expertise, consciously
building and strengthening strategy-supportive competencies and competitive
capabilities and organising the work effort.

3) Ensuring that policies and operating procedures facilitate rather than impede
effective execution.

5-6
 4) Using the best-known practices to perform core business activities and pushing
for continuous improvement.

5) Installing information and operating systems that enable company personnel to

better carry out their strategic roles day in and day out.
6) Motivating people to pursue the target objectives energetically.

7) Creating a company culture and work climate conducive to successful strategy

implementation and execution.

8) Exerting the internal leadership needed to drive implementation forward and keep
improving strategy execution. When the organisation encounters stumbling blocks or
weaknesses, management has to see that they are addressed and rectified quickly.

 Good strategy execution involves creating strong “fits” between strategy and
organisational capabilities, between strategy and the reward structure, between
strategy and internal operating systems, and between strategy and the organisation’s
work climate and culture.
Stage 5 : Strategic Evaluation and Control :

 The final stage of strategic management process – evaluating the company’s progress,
assessing the impact of new external developments, and making corrective adjustments
– is the trigger point for deciding whether to continue or change the company’s vision,
objectives, strategy, and/or strategy-execution methods. So long as the company’s
direction and strategy seem well matched to industry and competitive conditions and
performance targets are being met, company executives may decide to stay the course.
Simply fine-tuning the strategic plan and continuing with ongoing efforts to improve
strategy execution are sufficient.

 But whenever a company encounters disruptive changes in its external environment,

questions need to be raised about the appropriateness of its direction and strategy. If
a company experiences a downturn in its market position or shortfalls in performance,
then company managers are obligated to ferret out whether the causes relate to poor
strategy, poor execution, or both and then to take timely corrective action. A company’s
direction, objectives, and strategy have to be revisited anytime external or internal
conditions warrant. It is to be expected that a company will modify its strategic vision,

5- 7
 direction, objectives, and strategy over time.

 Proficient strategy execution is always the product of much organisational learning. It

is achieved unevenly – coming quickly in some areas and proving nettlesome and
problematic in others. Periodically assessing what aspects of strategy execution are
working well and what needs improving is normal and desirable. Successful strategy
execution entails vigilantly searching for ways or continuously improve and then
making corrective adjustments whenever and wherever it is useful to do so.
5.2.2 Strategy Formulation
Corporate Strategy :

 Planning entails choosing what has to be done in the future (today, next week, next
month, next year, over the next couple of years, etc.) and creating action plans. An
essential element of effective management is adequate planning. Choosing a path of
action to achieve defined goals is a part of planning.

 The game plan that really directs the company towards success is called “corporate
strategy”. Planning may be operational or strategic. Senior management develops
strategic plans for the entire organisation after evaluating the organization's
strengths and weaknesses in light of potential possibilities and dangers in the
outside world. They involve
gathering and allocating
resources in order to achieve
organisational goals. But
operational plans on the
other hand are made at the
middle and lower-level
management. They provide
specifics on how the
resources are to be used
effectively to achieve the
goals.

5-8
 Strategic Planning :

 The game plan that really directs the company towards success is called “corporate
strategy”. The success of the company depends on how well this game plan works.
Because of this, the core of the process of strategic planning is the formation of
corporate strategy. The formation of corporate strategy is the result of a process
known as strategic planning.
 Strategic planning is the process of determining the objectives of the firm,
resources required to attain these objectives and formulation of policies to govern
the acquisition, use and disposition of resources.
 Strategic planning involves a fact of interactive and overlapping decisions leading to
the development of an effective strategy for the firm.
 Strategic planning determines where an organisation is going over the next year or
more and the ways for going there.
 The process is organisation-wide or focused on a major function such as a division or
other major function.
Strategic uncertainty and how to deal with it ?

Strategic uncertainty refers to the unpredictability and unpredictability of

future events and circumstances that can impact an organization's strategy and goals.
It can be driven by factors such as changes in the market, technology, competition,
regulation, and other external factors. Dealing with strategic uncertainty can be
challenging and organizations need to have the flexibility, resilience, and agility to
quickly respond to changes in the environment and minimize its impact. To be
manageable, they need to be grouped into logical clusters or themes. It is then
useful to assess the importance of each cluster in order to set priorities with respect
to Information gathering and analysis.

 Flexibility : Organizations can build flexibility into their strategies to quickly adapt to
changes in the environment.
 Diversification : Diversifying the organization's product portfolio, markets, and
customer base can reduce the impact of strategic uncertainty.
 Monitoring and Scenario Planning : Organizations can regularly monitor key indicators
5- 9
 of change and conduct scenario planning to understand how different future scenarios
might impact their strategies.

 Building Resilience : Organizations can invest in building internal resilience, such as

strengthening their operational processes, increasing their financial flexibility, and
improving their risk management capabilities.
 Collaboration and Partnerships : Collaborating with other organizations, suppliers,
customers, and partners can help organizations pool resources, share risk, and gain
access to new markets and technologies.

 Impact of uncertainty : Each element of strategic uncertainty involves potential trends

or events that could have an impact on present, proposed, and even potential
businesses., a trend toward natural foods may present opportunities for juices for a
firm producing aerated drinks on the basis of a strategic uncertainty. The impact of a
strategic uncertainty will depend on the importance of the impacted SBU to a firm.
Some SBUs are more important than others. The importance of established SBUs may
be indicated by their associated sales, profits, or costs. However, such measures might
need to be supplemented for potential growth as present sales, profits, or costs may not
reflect the true value.
5.2.3 Strategy Implementation

Strategy implementation concerns the managerial exercise of putting a

freshly chosen strategy into action. It deals with the managerial exercise of
supervising the ongoing pursuit of strategy, making it work, improving the competence
with which it is executed and showing measurable progress in achieving the targeted
results. Strategic implementation is concerned with translating a strategic decision
into action, which presupposes that the decision itself (i.e., the strategic choice)
was made with some thought being given to feasibility and acceptability. The allocation
of resources to new courses of action will need to be undertaken, and there may be a
need for adapting the organization’s structure to handle new activities as well as
training personnel and devising appropriate systems.

5 - 10
 Relationship with strategy formulation

Many managers fail to distinguish between strategy formulation and strategy

implementation. Yet, it is crucial to realize the difference between the two because
they both require very different skills. Also, a company will be successful only when the
strategy formulation is sound and implementation is excellent. There is no such thing as
successful strategic design. This sounds obvious, but in practice the distinction is not
always made. Often people, blame the strategy model for the failure of a company
while the main flaw might lie in failed implementation. Thus, organizational success is a
function of good strategy and proper implementation. The matrix in the figure below
represents various combinations of strategy formulation and implementation:

Figure: Strategy formulation and implementation matrix

 The above-mentioned figure depicts the distinction between sound/flawed strategy

formulation and excellent/ weak strategy implementation.

 Square A is the situation where a company apparently has formulated a very competitive
strategy but is showing difficulties in implementing it successfully. This can be due to
various factors, such as the lack of experience (e.g. for startups), the lack of resources,
missing leadership and so on. In such a situation the company will aim at moving from
square A to square B, given they realize their implementation difficulties. Square B is
the ideal situation where a company has succeeded in designing a sound and competitive
strategy and has been successful in implementing it.

 Square D is the situation where the strategy formulation is flawed, but the company is
showing excellent implementation skills. When a company finds itself in square D the
first thing, they have to do is to redesign their strategy before readjusting their
implementation/execution skills.

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 Square C is denotes for companies that haven’t succeeded in coming up with a sound
strategy formulation and in addition are bad at implementing their flawed strategic
model. Their path to success also goes through business model redesign and
implementation/execution readjustment.

 Taken together all the elements of business strategy, it is to be seen as a chosen set of
actions by means of which a market position relative to the competing enterprises is
sought and maintained. This gives us the notion of competitive position.
 It needs to be emphasized that ‘strategy’ is not synonymous with ‘long-term plan’ but
rather consists of an enterprise’s attempts to reach some preferred future state by
adapting its competitive position as circumstances change. While a series of strategic
moves may be planned, competitors’ actions will mean that the actual moves will have to
be modified to take account of those actions.

 In contrast to this view of strategy there is another approach to management practice,

which has been followed in many organizations. In organizations that lack strategic
direction there has been a tendency to look inwards in times of stress, and for
management to devote their attention to cost cutting and to shedding unprofitable
divisions. In other words, the focus has been on efficiency (i.e., the relationship
between inputs and outputs, usually with a short time horizon) rather than on
effectiveness (which is concerned with the attainment of organisational goals - including
that of desired competitive position). While efficiency is essentially introspective,
effectiveness highlights the links between the organization and its environment. The
responsibility for efficiency lies with operational managers, with top management having
the primary responsibility for the strategic orientation of the organization.

Figure: Principal combinations of efficiency and effectiveness

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 An organization that finds itself in cell 1 is well placed and thrives, since it is achieving
what it aspires to achieve with an efficient output/input ratio. In contrast, an
organization in cell 2 or 4 is doomed, unless it can establish some strategic direction.
The particular point to note is that cell 2 is a worse place to be than is cell 3 since, in
the latter, the strategic direction is present to ensure effectiveness even if rather too
much input is being used to generate outputs. To be effective is to survive whereas to
be efficient is not in itself either necessary or sufficient for survival.

 In crude terms, to be effective is to do the right thing, while to be efficient is to do

the thing right. An emphasis on efficiency rather than on effectiveness is clearly wrong.
But who determines effectiveness? Any organization can be portrayed as a coalition of
diverse interest groups each of which participates in the coalition in order to secure
some advantage.

 This advantage (or inducement) may be in the form of dividends to shareholders, wages
to employees, continued business to suppliers of goods and services, satisfaction on the
part of consumers, legal compliance from the viewpoint of government, responsible
behaviour towards society and the environment from the perspective of pressure
groups, and so on.

 Even the most technically perfect strategic plan will serve little purpose if it is not
implemented effectively. Many organizations tend to spend an inordinate amount of
time, money, and effort on developing the strategic plan, treating the means and
circumstances under which it will be implemented as afterthoughts. Change comes
through implementation and evaluation, not through the plan. A technically imperfect
plan that is implemented well will achieve more than the perfect plan that never gets
off the paper on which it is typed.

 Successful strategy formulation does not guarantee successful strategy implementation.

It is always more difficult to do something (strategy implementation) than to say you
are going to do it (strategy formulation).
5.2.4 Difference between Strategy Formulation and Implementation

 Although inextricably linked, strategy implementation is fundamentally different from

strategy formulation. Summarized are the key distinctions between strategy

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 formulation and strategy implementation:
Strategy Formulation Vs. Strategy Implementation

Strategy Formulation Strategy Implementation

Strategy Formulation includes planning Strategy Implementation involves all those

and decision-making involved in means related to executing the strategic
developing organization’s strategic plans.
goals and plans.

In short, Strategy Formulation is In short, Strategy Implementation is

placing the Forces before the action. managing forces during the action.

An Entrepreneurial Activity based on An Administrative Task based on strategic

strategic decision-making. and operational decisions.

Emphasizes on effectiveness. Emphasizes on efficiency.

Primarily an intellectual and rational Primarily an operational process.

process.

Requires co-ordination among few Requires co-ordination among many

individuals at the top level. individuals at the middle and lower levels.

Requires a great deal of initiative, Requires specific motivational and

logical skills, conceptual intuitive and leadership traits.
analytical skills.

Strategic Formulation precedes Strategy Implementation follows Strategy

Strategy Implementation. Formulation.

 Strategy formulation concepts and tools do not differ greatly for small, large, for-
profit, or non-profit organizations. However, strategy implementation varies
substantially among different types and sizes of organizations. Implementation of
strategies requires such actions as altering sales territories, adding new departments,
closing facilities, hiring new employees, changing an organization’s pricing strategy,
developing financial budgets, developing new employee benefits, establishing cost-
control procedures, changing advertising strategies, building new facilities, training new
employees, transferring managers among divisions, and building a better management
information system. These types of activities obviously differ greatly among
manufacturing, service, and governmental organizations.

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 It is to be noted that the division of strategic management into different phases is only
for the purpose of orderly study. In real life, the formulation and implementation
processes are intertwined. Two types of linkages exist between these two phases of
strategic management. The forward linkages deal with the impact of strategy
formulation on strategy implementation while the backward linkages are concerned with
the impact in the opposite direction.
5.2.5 Linkages and Issues in Strategy Implementation

Linkages
Noteworthy is the fact that while strategy formulation is primarily an
entrepreneurial activity, based on strategic decision-making, the implementation of
strategy is mainly an administrative task based on strategic as well as operational
decision-making.

 Forward Linkages : The different elements in strategy formulation starting with

objective setting through environmental and organizational appraisal, strategic
alternatives and choice to the strategic plan determine the course that an
organization adopts for itself. With the formulation of new strategies, or
reformulation of existing strategies, many changes have to be affected within the
organization. For instance, the organizational structure has to undergo a change in
the light of the requirements of the modified or new strategy. The style of
leadership has to be adapted to the needs of the modified or new strategies. In
this way, the formulation of strategies has forward linkages with their
implementation.

 Backward Linkages : Just as implementation is determined by the formulation of

strategies, the formulation process is also affected by factors related with
implementation. While dealing with strategic choice, remember that past strategic
actions also determine the choice of strategy. Organizations tend to adopt those
strategies which can be implemented with the help of the present structure of
resources combined with some additional efforts. Such incremental changes, over a
period of time, take the organization from where it is to where it wishes to be.

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 Issues in Strategy Implementation :

 This section focuses on the various issues involved in the implementation of strategies.
The different issues involved in strategy implementation cover practically everything
that is included in the discipline of management studies. A strategist, therefore, has to
bring a wide range of knowledge, skills, attitudes, and abilities. The implementation
tasks put to test the strategists’ abilities to allocate resources, design organisational
structure, formulate functional policies, and to provide strategic leadership.

a) The strategic plan devised by the organization proposes the manner in which the
strategies could be put into action. Strategies, by themselves, do not lead to action.
They are, in a sense, a statement of intent. Implementation tasks are meant to realise
the intent. Strategies, therefore, have to be activated through implementation.

b) Strategies should lead to formulation of different kinds of programmes. A

programme is a broad term, which includes goals, policies, procedures, rules, and
steps to be taken in putting a plan into action. Programmes are usually supported by
funds allocated for plan implementation.

c) Programmes lead to the formulation of projects. A project is a highly specific

programme for which the time schedule and costs are predetermined. It requires
allocation of funds based on capital budgeting by organizations. Thus, research and
development programme may consist of several projects, each of which is intended
to achieve a specific and limited objective, requires separate allocation of funds,
and is to be completed within a set time schedule.

 Implementation of strategies is not limited to formulation of plans, programmes, and

projects. Projects would also require resources. After resources have been provided, it
would be essential to see that a proper organizational structure is designed, systems
are installed, functional policies are devised, and various behavioural inputs are provided
so that plans may work.

 Given below in sequential manner the issues in strategy implementation which are to be
considered :
a) Project implementation
b) Procedural implementation

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 c) Resource allocation
d) Structural implementation

e) Functional implementation

f) Behavioural implementation

 It should be noted that the sequence does not mean that each of the above
activities are necessarily performed one after another. Many activities can be
performed simultaneously, certain other activities may be repeated over time; and
there are activities, which are performed only once. Thus, there can be overlapping and
changes in the order in which these activities are performed.

 In all but the smallest organizations, the transition from strategy formulation to
strategy implementation requires a shift in responsibility from strategists to
divisional and functional managers. Implementation problems can arise because of this
shift in responsibility, especially if strategic decisions come as a surprise to middle
and lower-level managers. Managers and employees are motivated more by perceived
self-interests than by organizational interests, unless the two coincide. Therefore, it
is essential that divisional and functional managers be involved as much as possible
in the strategy-formulation process. similarly, strategists should also be involved as
much as possible in strategy-implementation activities.

 Management issues central to strategy implementation include establishing annual

objectives, devising policies, allocating resources, altering an existing organizational
structure, restructuring and reengineering, revising reward and incentive plans,
minimizing resistance to change, developing a strategy-supportive culture, adapting
production/operations processes, developing an effective human resource system and,
if necessary, downsizing. Management changes are necessarily more extensive when
strategies to be implemented move a firm in a new direction.

 Managers and employees throughout an organization should participate early and

directly in strategy-implementation activities. Their role in strategy implementation
should build upon prior involvement in strategy-formulation activities. Strategists’
genuine personal commitment to implementation is a necessary and powerful
motivational force for managers and employees. Too often, strategists are too busy to

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 actively support strategy-implementation efforts, and their lack of interest can be
detrimental to organizational success. The rationale for objectives and strategies
should be understood clearly throughout the organization. Major competitors’
accomplishments, products, plans, actions, and performance should be apparent to all
organizational members. Major external opportunities and threats should be clear,
and managers and employees’ questions should be answered satisfactorily. Top-down
flow of communication is essential for developing bottom-up support.

 Firms need to develop a competitor focus on all hierarchical levels by gathering and
widely distributing competitive intelligence; every employee should be able to
benchmark her or his efforts against best-in-class competitors so that the challenge
becomes personal. This is a challenge for strategists of the firm. Firms should
provide training for both managers and employees to ensure that they have and
maintain the skills necessary to be world-class performers.
5.3 STRATEGIC CHANGE THROUGH DIGITAL TRANSFORMATION
Organizations are being pushed harder than ever to shift digitally in order to stay

competitive. Digital transformation, however, may be a difficult and complicated

process. To guarantee that projects for digital transformation are effective, change
management is crucial. We will now examine change management's function in the digital
transformation.
5.3.1 Strategic Change :

The changes in the environmental forces often require businesses to make

modifications in their existing strategies and bring out new strategies. Strategic
change is a complex process that involves a corporate strategy focused on new
markets, products, services and new ways of doing business.
 Steps to initiate strategic change : For initiating strategic change, three steps can be
identified as under:

(i) Recognize the need for change : The first step is to diagnose which facets of the
present corporate culture are strategy supportive and which are not. This basically
means going for environmental scanning involving appraisal of both internal and
external capabilities may be through SWOT analysis and then determining where

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 the lacuna lies and scope for change exists.

ii) Create a shared vision to manage change : Objectives of both individuals and
organization should coincide. There should be no conflict between them. This is
possible only if the management and the organization members follow a shared
vision. Senior managers need to constantly and consistently communicate the vision
to all the organizational members. They have to convince all those concerned that
the change in business culture is not superficial or cosmetic. The actions taken have
to be credible, highly visible and unmistakably indicative of management’s
seriousness to new strategic initiatives and associated changes.

iii) Institutionalise the change : This is basically an action stage which requires
implementation of changed strategy. Creating and sustaining a different attitude
towards change is essential to ensure that the firm does not slip back into old ways
of thinking or doing things. Capacity for self-renewal should be a fundamental anchor
of the new culture of the firm. Besides, change process must be regularly monitored
and reviewed to analyse the after-effects of change. Any discrepancy or deviation
should be brought to the notice of persons concerned so that the necessary
corrective actions are taken. It takes time for the changed culture to prevail.

 Kurt Lewin’s Model of Change : To make the change lasting, Kurt Lewin proposed three
phases of the change process for moving the organization from the present to the
future. These stages are unfreezing, changing and refreezing.

a) Unfreezing the situation: The process of unfreezing simply makes the individuals
aware of the necessity for change and prepares them for such a change. Lewin
proposes that the changes should not come as a surprise to the members of the
organization. Sudden and unannounced change would be socially destructive and morale
lowering. The management must pave the way for the change by first “unfreezing the
situation”, so that members would be willing and ready to accept the change.

Unfreezing is the process of breaking down the old attitudes and behaviours,
customs and traditions so that they start with a clean slate. This can be achieved by
making announcements, holding meetings and promoting the new ideas throughout
the organization.

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 (b) Changing to the new situation : Once the unfreezing process has been completed and
the members of the organization recognise the need for change and have been fully
prepared to accept such change, their behaviour patterns need to be redefined. H.C.
Kellman has proposed three methods for reassigning new patterns of behaviour.
These are compliance, identification and internalization.

i) Compliance : It is achieved by strictly enforcing the reward and punishment

strategy for good or bad behaviour. Fear of punishment, actual punishment
or actual reward seems to change behaviour for the better.
ii) Identification : Identification occurs when members are psychologically
impressed upon to identify themselves with some given role models whose
behaviour they would like to adopt and try to become like them.
iii) Internalization : Internalization involves some internal changing of the
individual’s thought processes in order to adjust to the changes introduced.
They have given freedom to learn and adopt new behaviour in order to
succeed in the new set of circumstances.
c) Refreezing : Refreezing occurs when the new behaviour becomes a normal way of
life. The new behaviour must replace the former behaviour completely for
successful and permanent change to take place. In order for the new behaviour to
become permanent, it must be continuously reinforced so that this new acquired
behaviour does not diminish or extinguish.

Change process is not a one-time application but a continuous process due to

dynamism and ever changing environment. The process of unfreezing, changing and
refreezing is a cyclical one and remains continuously in action.

5.3.2 How does digital transformation work?

 The use of digital technologies to develop fresh, improved, or entirely new company
procedures, goods, or services is known as "digital transformation." It's a fundamental
adjustment that can be challenging to identify and even more challenging to implement.

 Change management enters into the picture here. Organizations can plan, prepare for, and
carry out changes to their operations, including digital transformations, with the aid of
the discipline of change management. When implemented correctly, change management

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 may assist firms in overcoming the obstacles posed by the digital transition and reaping
the full rewards of their investment.

 But how does change management appear when applied to digital transformation?
Change management in the digital transition consists of four essential elements :
1. Defining the goals and objectives of the transformation
2. Assessing the current state of the organization and identifying gaps
3. Creating a roadmap for change that outlines the steps needed to reach the
desired state
4. Implementing and managing the change at every level of the organization

 To navigate a digital transformation successfully, each of these elements is

necessary. But what matters most is how they collaborate to support organisations in
achieving their goals.
How does change management work ?

 Change management is a process or set of tools and best practices used to manage
changes in an organization. It assists in making changes in a safe and regulated
manner, reducing the possibility of detrimental effects on the company. Any sort of
organisation, including enterprises, organisations, governmental bodies, and even
families, can utilise change management to manage changes.

 Change management models and methods come in a wide variety, but they all have key
things in common. These include creating a clear vision for the change, involving
stakeholders in the process, coming up with a plan for putting the change into action,
and keeping an eye on the results. Although change management is frequently viewed
as a difficult and complicated process, it is vital for ensuring that digital
transformation projects are successful.
The role of change management in digital transformation

 Digital transformation is a process of organizational change that enables an organization

to use technology to create new value for customers, employees, and other stakeholders.
A good change management strategy is necessary for a successful digital transformation.
 Change management is the process of planning, implementing, and monitoring changes
in an organization. It provides organizations in achieving their objectives while reducing

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 risks and disruptions. For any organisation undergoing a digital transition, change
management is crucial.

 A properly implemented change management strategy can help an organization to :

1) Specify the parameters and goals of the digital transformation

2) Determine which procedures and tools need to be modified.

3) Make a plan for implementing the improvements.
4) Involve staff members and parties involved in the transformation process.
5) Track progress and make required course corrections

 A crucial component of any digital transition is change management. Why it gains

more importance in the current times is because organizations can improve their
chances of success by approaching change in a proactive and organized manner.
5.3.3 Change Management Strategies for Digital Transformation :

One of the most important area of focus for guaranteeing a successful

transformation is change management. Businesses nowadays increasingly find themselves
responsible for managing more than simply their staff, clients, and products.
Additionally, they are handling the introduction of new technology, the unexpected
emergence of new market opportunities, and changes in customer preferences regarding
the brands they choose, interact with, and hold to. In essence, modern firms must be
able to manage change. They must modify their management techniques in order to
achieve this. The five best practices for managing change in small and medium-sized
businesses are :

1. Begin at the top : A focused, invested, united leadership that is on the same page about
the company's future is reflected in change that begins at the top. The culture that will
motivate the rest of the organisation to accept change can only be generated and
promoted in this way.

2. Ensure that the change is both necessary and desired : The fact that decision-makers
are unaware of how to properly handle a digital transformation and the effects it will
have on their firm is one of the main causes of this. If a corporation doesn’t have a
sound strategy in place, introducing too much too fast can frequently become a major
issue down the road.

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3. Reduce disruption : Employee perceptions of what is required or desirable change can
differ by department, rank, or performance history. It's crucial to lessen how changes
affect staff. The introduction of new tactics or technologies intended to improve
management and corporate operations causes employee concern about change. It is
possible to reduce workplace disruption by :

a. Getting the word out early and preparing for some interruption.
b. Giving staff members the knowledge and tools, they need to adjust to change.
c. Creating an environment that encourages transformation or change.
d. Empowering change agents to provide context and clarity for changes, such as
project managers or team leaders.
e. Ensuring that IT department is informed of changes in technology or
infrastructure and is prepared to support them.

4. Encourage communication : Create channels so that workers may contact you with
queries or complaints. Encourage departmental collaboration to propagate ideas and
innovations as new procedures take root. Communication promotes efficiency and has
the power to influence culture, just like your vision. The people who will be affected the
most by these changes are reassured that they are not in danger through effective
communication, which keeps everyone on the same page.

5. Recognize that change is the norm, not the exception : Change readiness may be defined
as “the ability to continuously initiate and respond to change in ways that create
advantage, minimize risk, and sustain performance.” In order to keep up with the
customers, businesses must also adapt their operations. They must prepare for change
in advance and expect them. It may run into difficulties because change is not a project
but rather an ongoing process.
5.3.4 How to Manage Change During Digital Transformation ?

Any organisation may find the work of digital transformation challenging and
overwhelming. To ensure that a digital transition is effective, change management is
essential. Here are some pointers for navigating change during the digital
transformation :

1. Specify the digital transformation’s aims and objectives : What is the intended outcome ?

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 What are the precise objectives that must be accomplished ? It will be easier to make
sure that everyone is on the same page and pursuing the same aims if everyone has a
clear grasp of the goals.

2. Always, always, always communicate : It might be challenging for people to accept

change and adjust to it. Ensure that you routinely and honestly discuss the objectives of
the digital transformation and how they will affect stakeholders, including employees,
clients, and other parties.
3. Be ready for resistance : Even when a change is for the better, it can be challenging for
people to embrace it. Have a strategy in place for dealing with any resistance that may
arise.

4. Implement changes gradually : Changes should ideally be implemented gradually rather

than all at once. In order to avoid overwhelming individuals with too much change at
once, this will give people time to become used to the new way of doing things.

5. Offer assistance and training : Workers will need guidance in the new procedures,
software applications, etc.

In conclusion, effective completion of the massive project known as digital

transformation depends on meticulous planning and change management. Digital
transformation efforts are more likely to fail without change management.
Organizations can successfully integrate a new digital system by planning for and
managing the changes that must take place. Any project involving digital transformation
must include it.
5.4 ORGRANISATIONAL FRAMEWORK

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational

design.” The goal of the model is to depict how effectiveness can be achieved in an
organization through the interactions of hard and soft elements. The McKinsey 7s
Model focuses on how the "Soft Ss" and "Hard Ss" elements are interrelated,
suggesting that modifying one aspect might have a ripple effect on the other elements
in order to maintain an effective balance.

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Hard elements are :

 Strategy : What steps does the company intend to take to address current and
futures challenges?

 Structure : How is work divided, how do different departments work and

collaborate?
 Systems : Which formal and informal processes is the company’s structure based on?
Soft elements are :

 Shared Values : What is the idea the organization subscribes to? Is this idea
communicated credibly to others ?
 Staff : This elements refers to employees development and relevant processes,
performances and feedback programs etc.
 Skill : What is the company’s base of skills and competencies?

 Style : This depicts the leadership style and how it influences the strategic
decisions of the organization.

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 The Hard elements are directly controlled by the management. The following
elements are the hard elements in an organization.

a) Strategy : the direction of the organization, a blueprint to build on a core

competency and achieve competitive advantage to drive margins and lead the
industry

b) Structure : depending on the availability of resources and the degree of

centralisation or decentralization that the management desires, it choses from the
available alternatives of organizational structures.

c) Systems : the development of daily tasks, operations and teams to execute the goals
and objectives in the most efficient and effective manner.

 The Soft elements are difficult to define as they are more governed by the culture.
But these soft elements are equally important in determining an organization’s
success as well as growth in the industry. The following are the soft elements in this
model ;

a) Shared Values : The core values which get reflected within the organizational
culture or influence the code of ethics of the management.
b) Style : This depicts the leadership style and how it influences the strategic
decisions of the organisation. It also revolves around people motivation and
organizational delivery of goals.
c) Staff : The talent pool of the organisation.

d) Skills : The core competencies or the key skills of the employees play a vital role
in defining the organizational success.
But like any other strategic model, this model has its limitations as well ;
 It ignores the importance of the external environment and depicts only the most crucial
elements within the organization.
 The model does not clearly explain the concept of organizational effectivness or
performance.
 The model is considered to be more static and less flexible for deicion making.
 It is generally criticized for missing out the reals gaps in conceptualization and
execution of strategy.

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5.4.1 Organization Structure :

The ideal organizational structure is a place where ideas filter up as well as down,
where the merit of ideas carries more weight than their source, and where
participation and shared objectives are valued more than executive order.
– Edson Spencer

 Changes in corporate strategy often require changes in the way an organization is

structured for two major reasons. First, structure largely dictates how operational
objectives and policies will be established to achieve the strategic objectives.
For example, objectives and policies established under a geographic organizational
structure are couched in geographic terms. Objectives and policies are stated largely in
terms of products in an organization whose structure is based on product groups. The
structural format for developing objectives and policies can significantly impact all
other strategy-implementation activities.

 The second major reason why changes in strategy often require changes in structure is
that structure dictates how resources will be allocated to achieve strategic objectives.
If an organization’s structure is based on customer groups, then resources will be
allocated in that manner. Similarly, if an organization’s structure is set up along
functional business lines, then resources are allocated by functional areas.

 According to Chandler, changes in strategy lead to changes in organizational structure.

Structure should be designed or redesigned to facilitate the strategic pursuit of a firm
and, therefore, structure should follow strategy. Chandler found a particular structure
sequence to be often repeated as organizations grow and change strategy over time.
There is no one optimal organizational design or structure for a given strategy. What is
appropriate for one organization may not be appropriate for a similar firm, although
successful firms in a given industry do tend to organize themselves in a similar way.
For example, consumer goods companies tend to emulate the divisional structure-by-
product form of organization. Small firms tend to be functionally structured
(centralized). Medium-size firms tend to be divisionally structured (decentralized).
Large firms tend to use an SBU (strategic business unit) or matrix structure. As
organizations grow, their structures generally change from simple to complex as a result
of linking together of several basic strategies.

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 Figure: Chandler’s Strategy-Structure Relationship

 Every firm is influenced by numerous external and internal forces. But no firm can
change its structure in response to each of these forces, because to do so would lead to
chaos. However, when a firm changes its strategy, the existing organizational structure
may become ineffective. Symptoms of an ineffective organizational structure include
too many levels of management, too many meetings attended by too many people, too
much attention being directed toward solving interdepartmental conflicts, too large a
span of control, and too many unachieved objectives. Changes in organisational structure
can facilitate strategy- implementation efforts, but changes in structure should not be
expected to make a bad strategy good, to make bad managers good, or to make bad
products sell.

 Structure can also influence strategy. If a proposed strategy required massive structural
changes, it would not be an attractive choice. In this way, structure can shape the choice
of strategy. But a more important concern is determining what types of structural
changes are needed to implement new strategies and how these changes can best be
accomplished. We will examine this issue by focusing on the following basic types of
organizational structure: functional, divisional by geographic area, divisional by product,
divisional by customer, divisional process, strategic business unit (SBU), and matrix.

 In order to implement and manage strategies that have been formulated, all companies
need some form of organizational structure. And, as companies formulate new
strategies, increase in size, or change their level of diversification, new organizational

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 structures may be required.
Types of Organization Structure

 Organizational structure is the company’s formal configuration of its intended roles,

procedures, governance mechanisms, authority, and decision-making processes.
Organizational structure, influenced by factors such as an organization’s age and size,
acts as a framework which reflects managers’ determination of what a company does
and how tasks are completed, given the chosen strategy. The most important issue is
that the company’s structure must be congruent with or fit with the company’s strategy.
A] Simple Structure :

 Simple organizational structure is most appropriate for companies that follow a

single-business strategy and offer a line of products in a single geographic market.
The simple structure also is appropriate for companies implementing focused cost
leadership or focused differentiation strategies. A simple structure is an
organizational form in which the owner-manager makes all major decisions directly
and monitors all activities, while the company’s staff merely serves as an executor.

 Little specialization of tasks, few rules, little formalization, unsophisticated

information systems and direct involvement of owner-manager in all phases of day-
to-day operations characterise the simple structure. In the simple structure,
communication is frequent and direct, and new products tend to be introduced to
the market quickly, which can result in a competitive advantage. Because of these
characteristics, few of the coordination problems that are common in larger
organizations exist.

 A simple organizational structure may result in competitive advantages for some

small companies relative to their larger counterparts. These potential competitive
advantages include a broad-based openness to innovation, greater structural
flexibility, and an ability to respond more rapidly to environmental changes.
However, if they are successful, small companies grow larger. As a result of this
growth, the company outgrows the simple structure. Generally, there are significant
increases in the amount of competitively relevant information that requires
processing. More extensive and complicated information-processing requirements

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 place significant pressures on owner-managers (often due to a lack of organizational
skills or experience or simply due to lack of time).

 Thus, it is incumbent on the company’s managers to recognise the inadequacies or

inefficiencies of the simple structure and change it to one that is more consistent
with company’s strategy.
 To coordinate more complex organizational functions, companies should abandon the
simple structure in favour of the functional structure. The functional structure is
used by larger companies and by companies with low levels of diversification.
B] Functional Structure :

 A widely used structure in business organisations is functional type because of its

simplicity and low cost. A functional structure groups tasks and activities by
business function, such as production/operations, marketing, finance/accounting,
research and development, and management information systems. Besides being
simple and inexpensive, a functional structure also promotes specialization of labour,
encourages efficiency, minimizes the need for an elaborate control system, and
allows rapid decision making.

Figure: Functional Structure

 The functional structure consists of a chief executive officer or a managing

director and supported by corporate staff with functional line managers in dominant
functions such as production, financial accounting, marketing, R&D, engineering, and
human resources. The functional structure enables the company to overcome the
growth-related constraints of the simple structure, enabling or facilitating
communication and coordination.

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  However, compared to the simple structure, there also are some potential problems.
Differences in functional specialization and orientation may impede communications
and coordination. Thus, the chief executive officer must integrate functional
decision-making and coordinate actions of the overall business across functions.
Functional specialists often may develop a myopic (or narrow) perspective, losing
sight of the company’s strategic vision and mission. When this happens, this problem
can be overcome by implementing the multidivisional structure.

C] Divisional Structure :

 As a firm, grows year after year it faces difficulty in managing different products
and services in different markets. Some form of divisional structure generally
becomes necessary to motivate employees, control operations, and compete
successfully in diverse locations. The divisional structure can be organized in one of
the four ways: by geographic area, by product or service, by customer, or by
process. With a divisional structure, functional activities are performed both
centrally and in each division separately.

Figure : Divisional Structure

 A divisional structure has some clear advantages. First and the foremost,
accountability is clear. That is, divisional managers can be held responsible for sales
and profit levels. Because a divisional structure is based on extensive delegation of
authority, managers and employees can easily see the results of their good or bad
performances. As a result, employee morale is generally higher in a divisional
structure than it is in centralized structure.

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 Other advantages of the divisional design are that it creates career development
opportunities for managers, allows local control of local situations, leads to a
competitive climate within an organization, and allows new businesses and products in

be added easily.
 The divisional design is not without some limitations. Perhaps the most important
limitation is that a divisional structure is costly, for a number of reasons. First, each
division requires functional specialists who must be paid. Second, there exists some
duplication of staff services, facilities, and personnel; for instance, functional
specialists are also needed centrally (at headquarters) to coordinate divisional
activities. Third, managers must be well qualified because the divisional design
forces delegation of authority better-qualified individuals requires higher salaries.
A divisional structure can also be costly because it requires an elaborate,
headquarters-driven control system. Finally, certain regions, products, or customers
may sometimes receive special treatment, and It may be difficult to maintain
consistent, companywide practices. Nonetheless, for most large organizations and
many small firms, the advantages of a divisional structure more than offset the
potential limitations.

 A divisional structure by geographic area is appropriate for organizations whose

strategies are formulated to fit the particular needs and characteristics of
customers in different geographic areas. This type of structure can be most
appropriate for organizations that have similar branch facilities located in widely
dispersed areas. A divisional structure by geographic area allows local participation
in decision making and improved coordination within a region.

 The divisional structure by product (or services) is most effective for implementing
strategies when specific products or services need special emphasis. Also, this type
of structure is widely used when an organization offers only a few products or
services, when an organization’s products or services differ substantially. The
divisional structure allows strict control over and attention to product lines, but it
may also require a more skilled management force and reduced top management
control.

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 For example, General Motors, DuPont, and Procter & Gamble use a divisional
structure by product to implement strategies.

 When a few major customers are of paramount importance and many different
services are provided to these customers, then a divisional structure by customer
can be the most effective way to implement strategies. This structure allows an
organization to cater effectively to the requirements of clearly defined customer
groups. For example, book-publishing companies often organize their activities
around customer groups such as colleges, secondary schools, and private commercial
schools. Some airline companies have two major customer divisions: passengers and
freight or cargo services. Bulks are often organised in divisions such as personal
banking corporate banking, etc.

 A divisional structure by process is similar to a functional structure, because

activities are organized according to the way work is actually performed. However,
a key difference between these two designs is that functional departments are
not accountable for profits or revenues, whereas divisional process
departments are evaluated on these criteria.

D Multi Divisional Structure :

 Multidivisional (M-form) structure is composed of operating divisions where each

division represents a separate business to which the top corporate officer
delegates responsibility for day-to-day operations and business unit strategy to
division managers. By such delegation, the corporate office is responsible for
formulating and implementing overall corporate strategy and manages divisions
through strategic and financial controls.

 Multidivisional or M-form structure was developed in the 1920s, in response to

coordination- and control-related problems in large firms. Functional departments
often had difficulty dealing with distinct product lines and markets, especially in
coordinating conflicting priorities among the products. Costs were not allocated to
individual products, so it was not possible to assess an individual product’s profit
contribution. Loss of control meant that optimal allocation of firm resources
between products was difficult (if not impossible).

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 Top managers became over- involved in solving short-run problems (such as
coordination, communications, conflict resolution) and neglected long-term strategic
issues.

 Multidivisional structure calls for :

a) Creating separate divisions, each representing a distinct business
b) Each division would house its functional hierarchy;
c) Division managers would be given responsibility for managing day-to-day
operations ;
d) A small corporate office that would determine the long-term strategic
direction of the firm and exercise overall financial control over the semi-
autonomous divisions.

 This would enable the firm to more accurately monitor the performance of individual
businesses, simplifying control problems, facilitate comparisons between divisions,
improving the allocation of resources and stimulate managers of poorly performing
divisions to seek ways to improve performance.

 When the firm is less diversified, strategic controls are used to manage divisions.
Strategic control refers to the operational understanding by corporate officers of
the strategies being implemented within the firm’s separate business units.

 An increase in diversification strains corporate officers’ abilities to understand the

operations of all of its business units and divisions are then managed by financial
controls, which enable corporate officers to manage the cash flow of the divisions
through budgets and an emphasis on profits from distinct businesses.
 However, because financial controls are focused on financial outcomes, they require
that each division’s performance be largely independent of the performance of
other divisions. So, the Strategic Business Units come into picture.
E] Strategic Business Unit (SBU) Structure :

 This concept is relevant to multi-product, multi-business enterprises. It is impractical

for an enterprise with a multitude of businesses to provide separate strategic
planning treatment to each one of its products/businesses; it has to necessarily group
the products / businesses into a manageable number of strategically related business

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 units and then take them up for strategic planning. The question is: what is the
best way of grouping the products/businesses of such large enterprises ?

 An SBU is a grouping of related businesses, which is amenable to composite planning

treatment. As per this concept, a multi-business enterprise groups its multitude of
businesses into a few distinct business units in a scientific way. The purpose is to
provide effective strategic planning treatment to each one of its products /
businesses.

 The three most important characteristics of a SBU are :

i) It is a single business or a collection of related businesses which offer scope for

independent planning and which might feasibly standalone from the rest of the
organization.
ii) It has its own set of competitors.
iii) It has a manager who has responsibility for strategic planning and profit
performance, and who has control of profit-influencing factors.
 Historically, large, multi-business firms were handling business planning on a territorial
basis since their structure was territorial. And in many cases, such a structure
was the outcome of a manufacturing or distribution logistics. Often, the territorial
structure did not suit the purpose of strategic planning.
 When strategic planning was carried out treating territories as the units for planning,
it gave rise to two kinds of difficulties :
(i) since a number of territorial units handled the same product, the same product was
getting varied strategic planning treatments; and
(ii) since a given territorial planning unit carried different and unrelated products,
products with dissimilar characteristics were getting identical strategic planning
treatment.

 The concept of strategic business units (SBU) breaks away from this practice. It
recognises that just because a firm is structured into a number of territorial units,
say six units, it is not necessarily in six different businesses. It may be engaged in
only three distinct businesses. It is also possible that it is engaged in more than six
businesses.

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 The endeavour should be to group the businesses into an appropriate number of
strategic business units before the firm takes up the strategy formulation task. The
SBU structure is composed of operating units where each unit represents a
separate business to which the top corporate officer delegates responsibility for
day-to-day operations and business unit strategy to its managers. By such delegation,
the corporate office is responsible for formulating and implementing overall
corporate strategy and manages SBUs through strategic and financial controls.

 Hence, the SBU structure groups similar products into strategic business units and
delegates authority and responsibility for each unit to a senior executive who reports
directly to the chief executive officer. This change in structure can facilitate
strategy implementation by improving coordination between similar divisions and
channelling accountability to distinct business units.

Figure : SBU Structure

 A strategic business unit (SBU) structure consists of at least three levels, with a
corporate headquarters at the top, SBU groups at the second level, and divisions
grouped by relatedness within each SBU at the third level.
 This enables the company to more accurately monitor the performance of individual
businesses, simplifying control problems. It also facilitates comparisons between
divisions, improving the allocation of resources and can be used to stimulate managers of
poorly performing divisions to seek ways to improve performance.

 This means that, within each SBU, divisions are related to each other, as also that SBU
groups are unrelated to each other. Within each SBU, divisions producing similar
products and/or using similar technologies can be organised to achieve synergy.

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 Individual SBUs are treated as profit centres and controlled by corporate headquarters
that can concentrate on strategic planning rather than operational control so that
individual divisions can react more quickly to environmental changes.

For example, Sony has been restructuring to match the SBU structure with its ten
internal companies as organised into four strategic business units. Because it has
been pushing the company to make better use of software products and content
(e.g., Sony’s music, films and games) in its televisions and audio gear to increase

 Sony’s profitability. By its strategy, Sony is one of the few companies that have the
opportunity to integrate software and content across a broad range of consumer
electronics products.

 The principle underlying the grouping is that all related products-related from the
standpoint of “function”-should fall under one SBU. In other words, the SBU concept
helps a multi-business corporation in scientifically grouping its businesses into a few
distinct business units. Such a grouping would in its turn, help the corporation
carry out its strategic management endeavour better. The concept provides the
right direction to strategic planning by removing the vagueness and confusion often
experienced in such multi-business enterprises in the matter of grouping of the
businesses.

 The attributes of an SBU and the benefits a firm may derive by using the SBU
Structure are as follows :
a) A scientific method of grouping the businesses of a multi-business corporation
which helps the firm in strategic planning.
b) An improvement over the territorial grouping of businesses and strategic planning
based on territorial units.
c) An SBU is a grouping of related businesses that can be taken up for strategic
planning distinct from the rest of the businesses. Products/businesses within an
SBU receive same strategic planning treatment and priorities.
d) The task consists of analysing and segregating the assortment of
businesses/portfolios and regrouping them into a few, well defined, distinct,
scientifically demarcated business units. Products/businesses that are related from

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 the standpoint of “function” are assembled together as a distinct SBU.

e) Unrelated products/businesses in any group are separated. If they could be

assigned to any other SBU applying the criterion of functional relation, they are
assigned; accordingly, otherwise they are made into separate SBUs.

f) Grouping the businesses on SBU lines helps the firm in strategic planning by
removing the vagueness and confusion generally seen in grouping businesses; it also
facilitates the right setting for correct strategic planning and facilitates
correct relative priorities and resources to the various businesses.

g) Each SBU is a separate business from the strategic planning standpoint. In the basic
factors, viz., mission, objectives, competition and strategy-one SBU will be distinct
from another.
h) Each SBU will have its own distinct set of competitors and its own distinct
strategy.

i) Each SBU will have a CEO. He will be responsible for strategic planning for the
SBU and its profit performance; he will also have control over most of the factors
affecting the profit of the SBU.

 The questions posed at the corporate level are, first, whether the corporate body
wishes to have a related set of SBUs or not; and if so, on what basis. This issue of
relatedness in turn has direct implications on decisions about diversification
relatedness might exist in different ways :
i) SBUs might build on similar technologies, or all provide similar sorts of
products or services.
ii) SBUs might be serving similar or different markets. Even if technology or
products differ, it may be that the customers are similar. For example, the
technologies underpinning frozen food, washing powders and margarine production
may be very different; but all are sold through retail operations, and Unilever
operates in all these product fields.

iii) Or it may be that other competences on which the competitive advantage of

different SBUs are built have similarities. Unilever would argue that the marketing
skills associated with the three product markets are similar example.

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 The identification of SBUs is a convenient starting point for planning. Once the
company’s strategic business units have been identified, the responsibilities for
strategic planning can be more clearly assigned.

F] Matrix Structure :

 Most organizations find that organising around either functions (in the functional
structure) or around products and geography (in the divisional structure) provides
an appropriate organizational structure. The matrix structure, in contrast, may be
very appropriate when organizations conclude that neither functional nor divisional
forms, even when combined with horizontal linking mechanisms like strategic
business units, are right for the implementation of their strategies. In matrix
structure, functional and product forms are combined simultaneously at the same
level of the organization. Employees have two superiors, a product or project
manager and a functional manager.

 The “home” department - that is, engineering, manufacturing, or marketing - is

usually functional and is reasonably permanent. People from these functional units
are often assigned temporarily to one or more product units or projects. The
product units or projects are usually temporary and act like divisions in that they
are differentiated on a product-market basis.

 A matrix structure is the most complex of all designs because it depends upon both
vertical and horizontal flows of authority and communication (hence the term
matrix). In contrast, functional and divisional structures depend primarily on
vertical flows of authority and communication. A matrix structure can result in
higher overhead because it has more management positions. Other characteristics
of a matrix structure that contribute to overall complexity include dual lines of
budget authority (a violation of the unity command principle), dual sources of reward
and punishment, shared authority, dual reporting channels, and a need for an
extensive and effective communication system.

 Despite its complexity, the matrix structure is widely used in many industries,
including construction, healthcare, research and defence. Some advantages of a
matrix structure are that project objectives are clear, there are many channels of

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 communication workers can see the visible results of their work, and shutting down a
project is accomplished relatively easily.

 In order for a matrix structure to be effective, organizations need planning,

training, clear mutual understanding of roles and responsibilities, excellent internal
communication, and mutual trust and confidence. The matrix structure is used more
frequently by businesses because they are pursuing strategies add new products,
customer groups, and technology to their range of activities. Out of these changes
are coming product managers, functional managers, and geographic managers, all of
whom have important strategic responsibilities. When several variables such as
product, customer, technology, geography, functional area, have roughly equal
strategic priorities, a matrix organization can be an effective structural form.

 Matrix structure was developed to combine the stability of the functional

structure with the flexibility of the product form. It is very useful when the
external environment (especially its technological and market aspects) is very
complex and changeable. It does, however, produce conflicts revolving around
duties, authority, and resource allocation. To the extent that the goals to be
achieved are vague and the technology used is poorly understood, a continuous
battle for power between product and functional mangers is likely.

Figure : Matrix Structure

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 The matrix structure is often found in an organization or within an SBU when
the following three conditions exists :

1) Ideas need to be cross-fertilised across projects or products,

2) Resources are scarce and

3) Abilities to process information and to make decisions need to be improved.

Changing organizational design

Old Organizational Design New Organizational Design

 One large corporation  Mini-business units and cooperative

relationships

 Vertical communication  Horizontal communication

 Centralised top-down making  Decentralised participative decision

decision making

 Vertical integration  Outsourcing & virtual organizations

 Work/quality teams  Autonomous work teams

 Functional work teams  Cross-functional work teams

 Minimal training  Extensive training

 Specialised job design on individual  Value-chain team-focused job design

focused

For development of matrix structure Davis and Lawrence, have proposed three
distinct phases:

1. Cross-functional task forces : Temporary cross-functional task forces are initially

used when a new product line is being introduced. A project manager is in charge as the
key horizontal link.

2. Product/brand management : If the cross-functional task forces become more

permanent, the project manager becomes a product or brand manager and a second
phase begins. In this arrangement, function is still the primary organizational
structure, but product or brand managers act as the integrators of semi permanent
products or brands.

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3. Mature matrix : The third and final phase of matrix development involves a true
dual-authority structure. Both the functional and product structures are permanent.
All employees are connected to both a vertical functional superior and a horizontal
product manager. Functional and product managers have equal authority and must
work well together to resolve disagreements over resources and priorities.

However, the matrix structure is not very popular because of difficulties in

implementation and trouble in managing.
G] Network Structure

A radical organizational design, the network structure is an example of what could

be termed a “non-structure” by its virtual elimination of in-house business functions.
Many activities are outsourced. A corporation organized in this manner is often called a
virtual organization because it is composed of a series of project groups or
collaborations linked by constantly changing non-hierarchical, cobweb- like networks.

The network structure becomes most useful when the environment of a firm is
unstable and is expected to remain so. Under such conditions, there is usually a strong
need for innovation and quick response. Instead of having salaried employees, it may
contract with people for a specific project or length of time. Long-term contracts with
suppliers and distributors replace services that the company could provide for itself
through vertical integration.

Electronic markets and sophisticated information systems reduce the transaction

costs of the marketplace, thus justifying a “buy” over a “make” decision. Rather than
being located in a single building or area, an organization’s business functions are
scattered at different geographical locations. The organization is, in effect, only a shell,
with a small headquarters acting as a “broker”, electronically connected to some
completely owned divisions, partially owned subsidiaries, and other independent
organisation. In its ultimate form, the network organization is a series of independent
firms or business units linked together by a common system that designs, produces, and
markets a product or service.

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 Figure: Network Structure

Companies like Airtel use the network structure in their operations function by
subcontracting manufacturing to other companies in low-cost.

The network organization structure provides an organization with increased

flexibility and adaptability to cope with rapid technological change and shifting patterns
of international trade and competition. It allows a company to concentrate on its
distinctive competencies, while gathering efficiencies from other firms who are
concentrating their efforts in their areas of expertise. The network does, however,
have disadvantages. The availability of numerous potential partners can be a source of
trouble. Contracting out functions to separate suppliers/distributors may keep the firm
from discovering any synergies by combining activities. If a particular firm over
specialises on only a few functions, it runs the risk of choosing the wrong functions and
thus becoming non-competitive.

The new structural arrangements that are evolving typically are in response to
social and technological advances. While they may enable the effective management of
dispersed organizations, there are some serious implications, The learning organization
that is a part of new organizational forms requires that each worker become a self-
motivated, continuous learner.

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 Employees may lack the level of confidence necessary to participate actively
in organization-sponsored learning experiences. The flatter organizational
structures that accompany contemporary structures can seem intrusive as a result
of their demand for more intense and personal interactions with internal and
external stakeholders. Combined, the conditions above may create stress for many
employees.

H] Hourglass Structure :

In the recent year’s information technology and communications have significantly

altered the functioning of organizations. The role played by middle management is
diminishing as the tasks performed by them are increasingly being replaced by the
technological tools. Hourglass organization structure consists of three layers with
constricted middle layer. The structure has a short and narrow middle-management
level. Information technology links the top and bottom levels in the organization
taking away many tasks that are performed by the middle level managers. A
shrunken middle layer coordinates diverse lower-level activities. Contrary to
traditional middle level managers who are often specialist, the managers in the
hourglass structure are generalists and perform wide variety of tasks. They would be
handling cross-functional issues emanating such as those from marketing, finance or
production.

Figure : Hourglass Organisation Structure

Hourglass structure has obvious benefit of reduced costs. It also helps in

enhancing responsiveness by simplifying decision making. Decision making authority is
shifted close to the source of information so that it is faster. However, with the
reduced size of middle management the promotion opportunities for the lower levels
diminish significantly.

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 Continuity at same level may bring monotony and lack of interest and it becomes
difficult to keep the motivation levels high. Organisations try to overcome these
problems by assigning challenging tasks, transferring laterally and having a system of
proper rewards for performance.
5.4.2 Organization Culture

Every organisation has a unique organizational culture. It has its own philosophy
and principles, its own history, values, and rituals, its own ways of approaching
problems and making decisions, its own work climate. It has its own embedded
patterns of how to do things. Its own ingrained beliefs and thought patterns, and
practices that define its corporate culture.
Corporate culture refers to a company’s values, beliefs, business principles, traditions,
ways of operating, and internal work environment.

Where Does Corporate Culture Come From ?

A company’s culture is manifested in the values and business principles that

management preaches and practices, in its ethical standards and official policies, in its
stakeholder relationships (especially its dealings with employees, unions, stockholders,
vendors, and the communities in which it operates), in the traditions the organization
maintains, in its supervisory practices, in employees’ attitudes and behaviour, in the
legends people repeat about happenings in the organization, in the peer pressures that
exist, in the organization’s politics that permeate the work environment. All these
sociological forces, some of which operate quite subtly, combine to define an
organization’s culture, beliefs and practices that become embedded in a company’s
culture can originate anywhere: from one influential individual, work group, department,
or division, from the bottom of the organizational hierarchy or the top

Frequently, a significant part of a company’s culture emerges from the stories that
get told over and over again to illustrate to newcomers the importance of certain values
and beliefs and ways of operating.
Culture: ally or obstacle to strategy execution ?

An organization’s culture is either an important contributor or an obstacle to

successful strategy execution. The beliefs, vision, objectives, and business approaches
5- 45
and practices underpinning a company’s strategy may or may not be compatible with its
culture. When they are compatible, the culture becomes a valuable ally in strategy
implementation and execution. When the culture is in conflict with some aspect of the
company’s direction, performance targets or strategy, the culture becomes a stumbling
block that impedes successful strategy implementation and execution.
Role of culture in strategy execution

Strong culture promotes good strategy execution when there’s fit and impedes
execution when there’s negligible fit. A culture grounded in values, practices, and
behavioural norms that match what is needed for good strategy execution helps
energize people throughout the company to do their jobs in a strategy-supportive
manner, adding significantly to the power and effectiveness of strategy execution.
For example, a culture where frugality and thrift are values strongly shared by
organizational members is very conducive to successful execution of a low-cost
leadership strategy. A culture where creativity, embracing change, and challenging the
status quo are pervasive themes is very conducive to successful execution of a
product innovation and technological leadership strategy. A culture built around such
business principles as listening to customers, encouraging employees to take pride in
their work, and giving employees a high degree of decision-making authority is very
conducive to successful execution of a strategy of delivering superior customer
value.

A work environment where the culture matches the conditions for good
strategy execution provides a system of informal rules and peer pressure regarding
how to conduct business internally and how to go about doing one’s job. Strategy-
supportive cultures shape the mood, temperament, and motivation the workforce,
positively affecting organizational energy, work habits and operating practices, the
degree to which organizational units cooperate, and how customers are treated.

A strong strategy-supportive culture nurtures and motivates people to do their

jobs in ways conducive to effective strategy execution; it provides structure,
standards, and a value system in which to operate; and it promotes strong employee
identification with the company’s vision, performance targets, and strategy.

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 All this makes employees feel genuinely better about their jobs and work
environment and the merits of what the company is trying to accomplish. Employees are
stimulated to take on the challenge of realizing the company’s vision, do their jobs
competently and with enthusiasm, and collaborate with others as needed to bring the
strategy to fruition.

Perils of Strategy-Culture Conflict : When a company’s culture is out of sync with what
is needed for strategic success, the culture has to be changed as rapidly as can be
managed – this, of course, presumes that it is one or more aspects of the culture that
are out of whack rather than the strategy. While correcting a strategy- culture conflict
can occasionally mean revamping strategy to produce cultural fit, more usually it means
revamping the mismatched cultural features to produce strategy fit. The more
entrenched the mismatched aspects of the culture, the greater the difficulty of
implementing new or different strategies until better strategy-culture alignment
emerges. A sizable and prolonged strategy-culture conflict weakens and may even
defeat managerial efforts to make the strategy work.

Creating a strong fit between strategy and culture: It is the strategy maker’s
responsibility to select a strategy compatible with the “sacred” or unchangeable parts
of prevailing corporate culture. It is the strategy implementer’s task, once strategy is
chosen, to change whatever facets of the corporate culture hinder effective execution.

Changing a problem culture : Changing a company’s culture to align it with strategy is

among the toughest management tasks--easier to talk about than do.

Changing a problem culture is very difficult because of the heavy anchor of

deeply held values and habits-people cling emotionally to the old and familiar. It
takes concerted management action over a period of time to replace an unhealthy
culture with a healthy culture or to root out certain unwanted cultural obstacles and
instil ones that are more strategy-supportive.
The first step is to diagnose which facets of the present culture are strategy
supportive and which are not. Then, managers have to talk openly and forthrightly to all
concerned about those aspects of the culture that have to be changed. The talk has to
be followed swiftly by visible, aggressive actions to modify the culture- actions that

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everyone will understand are intended to establish a new culture more in tune with the
strategy. The menu of culture-changing actions includes revising policies and procedures
in ways that will help drive cultural change, altering incentive compensation (to reward
the desired cultural behaviour), visibly praising and recognizing people who display the
new cultural traits, recruiting and hiring new managers and employees who have the
desired cultural values and can serve as role models for the desired cultural behaviour,
replacing key executives who are strongly associated with the old culture, and taking
every opportunity to communicate to employees the basis for cultural change and its
benefits to all concerned.

Implanting the needed culture-building values and behaviour depends on a sincere,

sustained commitment by the chief executive coupled with extraordinary persistence in
reinforcing the culture at every opportunity through both words and deed. Neither
charisma nor personal magnetism is essential. However, personally talking to many
departmental groups about the reasons for change is essential; organizational changes
are seldom accomplished successfully from an office. Moreover, creating and sustaining
a strategy-supportive culture is a job for the whole management team. Major cultural
change requires many initiatives from many people. Senior managers, department heads,
and middle managers have to reiterate values and translate the organization’s philosophy
into everyday practice. In addition, for the culture-building effort to be successful,
strategy implementers must enlist the support of first line supervisors and employee
opinion leaders, convincing them of the merits of practicing and enforcing cultural norms
at the lowest levels in the organization. Until a big majority of employees join the new
culture and share an emotional commitment to its basic values and behavioural norms,
there’s considerably more work to be done in both instilling the culture and tightening
the culture strategy fit.

The task of making culture supportive of strategy is not a short-term exercise. It

takes time for a new culture to emerge and prevail; it’s unrealistic to expect an
overnight transformation. The bigger the organization and the greater the cultural shift
needed to produce a culture-strategy fit, the longer it takes.

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 In large companies, changing the corporate culture in significant ways can take two
to five years. In fact, it is usually tougher to reshape a deeply ingrained culture that is
not strategy-supportive than it is to instill a strategy-supportive culture from scratch in
a brand-new organization.

In conclusion, an excessive focus on the hard management, at best will result in a

linear improvement in performance. On the other hand, performance can be improved
exponentially by concentrating on the soft side of the management. The optimal
management approach probably would be somewhere between these extremes.
Accordingly, every organisation has to maintain a fine balance between a range of
"hard" and "soft” management as even though a structure is appropriate for the time
it is established, by the time it is implemented, reality has already changed,
especially in today's world.

5.5 STRATEGIC LEADERSHIP

A leader is best when people barely know he exists, when his work is done, his aim
fulfilled, they will say: we did it ourselves. - Lao Tzu

Strategic leadership sets the firms direction by developing and communicating

vision of future, formulate strategies in the light of internal and external environment,
brings about changes required to implement strategies and inspire the staff to
contribute to strategy execution. A manager as a strategic leader has to play many
leadership roles to play: visionary, chief entrepreneur and strategist, chief
administrator, culture builder, resource acquirer and allocator, capabilities builder,
process integrator, crisis manager, spokesperson, negotiator, motivator, arbitrator,
policy maker, policy enforcer, and head cheerleader. Sometimes it is useful to be
authoritarian; sometimes it is better to be a perceptive listener and a compromising
decision maker; sometimes a strongly participative, and sometimes being a coach and
adviser is the proper role.

A strategic leader is a change agent to initiates strategic changes in the

organisations and ensure that the changes successfully implemented. For the most part,
major change efforts have to be top-down and vision-driven.

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 Leading change has to start with diagnosing the situation and then deciding which
of several ways to handle it. Managers have five leadership roles to play in pushing for
good strategy execution :

1. Staying on top of what is happening, closely monitoring progress, solving out issues,
and learning what obstacles lie in the path of good execution.

2. Promoting a culture of esprit de corps that mobilizes and energizes organizational

members to execute strategy in a competent fashion and perform at a high level.

3. Keeping the organization responsive to changing conditions, alert for new

opportunities, bubbling with innovative ideas, and ahead of rivals in developing
competitively valuable competencies and capabilities.

4. Exercising ethical leadership and insisting that the company conduct its affairs like
a model corporate citizen.
5. Pushing corrective actions to improve strategy execution and overall strategic
performance.

For example, N. R. Narayan Murthy, is known as a celebrated business leader

because of the values he had institutionalised over his tenure as CEO of Infosys.
One of the great legacies he left with Infosys is a strong management development
program that builds management talent and strategic leader with ethical values.

Dhirubhai Ambani, pioneer of Reliance Group, was an icon in himself because of his
ability to conceptualise and create sweeping strategies, to reach corporate goals, and
proficiency in implementing his strategic vision. Dhirubhai Ambani had the ability to
provide clear direction for the company and had strong interpersonal skills that inspired
the employees to contribute their best for the accomplishment of strategic vision.
These qualities made him an excellent strategic leader in the corporate world.

Leadership role in implementation : The strategic leaders must be able to use the
strategic management process effectively by guiding the company in ways that result in
the formation of strategic intent and strategic mission, facilitating the development and
implementation of appropriate strategic plans and providing guidance to the employees
for achieving strategic goals.

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 Figure: Strategy Design and Implementation: Interrelationship of Elements

 Strategic leadership entails the ability to anticipate, envision, maintain flexibility, and
empower others to create strategic change as necessitated by external environment. In
other words, strategic leadership represents a complex form of leadership in companies.
A manager with strategic leadership skills exhibits the ability to guide the company
through the new competitive landscape by influencing the behaviour, thoughts, and
feelings of co-workers, managing through others and successfully processing or making
sense of complex, ambiguous information by successfully dealing with change and
uncertainty.

Figure: Effective Strategic Leadership

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 In the today’s competitive landscape, strategic leaders are challenged to adapt their
frames of reference so that they can deal with rapid, complex changes. A managerial
frame of reference is the set of assumptions, premises, and accepted wisdom that
bounds a manager’s understanding of the company, the industry in which it competes,
and the core competencies that it exploits in the pursuit of strategic competitiveness
(and above-average returns). In other words, a manager’s frame of reference is the
foundation on which a manager’s mindset is built.

 The importance of a manager’s frame of reference can be seen if we perceive those

competitive battles are not between companies or products but between mindsets or
managerial frames. This implies that effective strategic leaders must be able to deal
with the diverse and cognitively complex competitive situations that are characteristic
of today’s competitive landscape.
a) A Strategic leader has several responsibilities, including the following:
b) Making strategic decisions.
c) Formulating policies and action plans to implement strategic decision.
d) Ensuring effective communication in the organisation.
e) Managing human capital (perhaps the most critical of the strategic leader’s skills).

f) Managing change in the organisation.

g) Creating and sustaining strong corporate culture.

h) Sustaining high performance over time.

 Thus, the strategic leadership skills of a company’s managers represent resources that
affect company performance. And these resources must be developed for the company’s
future benefit.

 Strategic leadership sets the firm’s direction by developing and communicating a vision
of future and inspire organization members to move in that direction. Unlike strategic
leadership, managerial leadership is generally concerned with the short- term, day-to-
day activities.

 Two basic approaches to leadership can be transformational leadership style and

transactional leadership style.

a) Transformational leadership style uses charisma and enthusiasm to inspire people to

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 exert them for the good of the organization. Transformational leadership style may
be appropriate in turbulent environments, in industries at the very start or end of
their life-cycles, in poorly performing organizations when there is a need to inspire a
company to embrace major changes. Transformational leaders offer excitement,
vision, intellectual stimulation and personal satisfaction. They inspire involvement in
a mission, giving followers a ‘dream’ or ‘vision’ of a higher calling so as to elicit more
dramatic changes in organizational performance. Such a leadership motivates
followers to do more than originally affected to do by stretching their abilities and
increasing their self-confidence, and also promote innovation throughout the
organization.

b) Transactional leadership style focuses more on designing systems and controlling

the organization’s activities and are more likely to be associated with improving the
current situation. Transactional leaders try to build on the existing culture and
enhance current practices. Transactional leadership style uses the authority of its
office to exchange rewards, such as pay and status.

 They prefer a more formalized approach to motivation, setting clear goals with
explicit rewards or penalties for achievement or non-achievement.
 Transactional leadership style may be appropriate in static environment, in mature
industries, and in organizations that are performing well. The style is better suited
in persuading people to work efficiently and run operations smoothly.

5.6 STRATEGIC CONTROL

 Controlling is one of the important functions of management and is often regarded as

the core of the management process. It is a function intended to ensure and make
possible the performance of planned activities and to achieve the pre- determined goals
and results. Control is intended to regulate and check, i.e., to structure and condition
the behaviour of events and people, to place restraints and curbs on undesirable
tendencies, to make people conform to certain norms and standards, to measure
progress to keep the system on track. It is also to ensure that what is planned is
translated into results, to keep a watch on proper use of resources, on safeguarding of
assets and so on.

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 The controlling function involves monitoring the activity and measuring results
against pre-established standards, analysing and correcting deviations as necessary and
maintaining/adapting the system. It is intended to enable the organisation to
continuously learn from its experience and to improve its capability to cope with the
demands of organisational growth and development.

 The process of control has the following elements:

a) Objectives of the business system which could be operationalized into measurable
and controllable standards.
b) A mechanism for monitoring and measuring the performance of the system.

c) A mechanism (i) for comparing the actual results with reference to the standards
(ii) for detecting deviations from standards and (iii) for learning new insights on
standards themselves.

d) A mechanism for feeding back corrective and adaptive information and instructions
to the system, for effecting the desired changes to set right the system to keep it
on course.

 Primarily there are three types of organizational control, viz., operational control,
management control and strategic control.

Operational Control : The thrust of operational control is on individual tasks or

transactions as against total or more aggregative management functions. For example,
procuring specific items for inventory is a matter of operational control, in contrast to
inventory management as a whole. One of the tests that can be applied to identify
operational control areas is that there should be a clear-cut and somewhat measurable
relationship between inputs and outputs which could be predetermined or estimated
with least uncertainty.

 Many of the control systems in organisations are operational and mechanistic in nature.
A set of standards, plans and instructions are formulated. The control activity consists
of regulating the processes within certain ‘tolerances’, irrespective of the effects of
external conditions on the formulated standards, plans and instructions. Some of the
examples of operational controls can be stock control (maintaining stocks between set
limits), production control (manufacturing to set programmes), quality control (keeping

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 product quality between agreed limits), cost control (maintaining expenditure as per
standards), budgetary control (keeping performance to budget).

Management Control : When compared with operational control, management control is

more inclusive and more aggregative, in the sense of embracing the integrated activities
of a complete department, division or even entire organisation, instead or mere narrowly
circumscribed activities of sub-units.

 The basic purpose of management control is the achievement of enterprise goals – short
range and long range – in a most effective and efficient manner. The term management
control is defined by Robert Anthony as ‘the process by which managers assure the
resources are obtained and used effectively and efficiently in the accomplishment of
the organisation’s objectives. Controls are necessary to influence the behaviour of
events and ensure that they conform to plans.

Strategic Control : According to Schendel and Hofer “Strategic control focuses on the
dual questions of whether: (1) the strategy is being implemented as planned; and (2) the
results produced by the strategy are those intended.”

 There is often a time gap between the stages of strategy formulation and its
implementation. A strategy might be affected on account of changes in internal and
external environments of organisation. There is a need for warning systems to track a
strategy as it is being implemented. Strategic control is the process of evaluating
strategy as it is formulated and implemented. It is directed towards identifying
problems and changes in premises and making necessary adjustments.
Types of Strategic Control :

There are four types of strategic controls, which are as follows :

 Premise control : A strategy is formed on the basis of certain assumptions or premises
about the complex and turbulent organizational environment. Over a period of time
these premises may not remain valid. Premise control is a tool for systematic and
continuous monitoring of the environment to verify the validity and accuracy of the
premises on which the strategy has been built. It primarily involves monitoring two
types of factors :
(i) Environmental factors such as economic (inflation, liquidity, interest rates),

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 technology, social and legal-regulatory.

(ii) Industry factors such as competitors, suppliers, substitutes.

It is neither feasible nor desirable to control all types of premises in the same
manner. Different premises may require different amount of control. Thus,
managers are required to select those premises that are likely to change and
would severely impact the functioning of the organization and its strategy.

 Strategic surveillance : Contrary to the premise control, the strategic surveillance

is unfocussed. It involves general monitoring of various sources of information to
uncover unanticipated information having a bearing on the organizational strategy. It
involves casual environmental browsing. Reading financial and other newspapers,
business magazines, attending meetings, conferences, discussions and so on can help
in strategic surveillance.

Strategic surveillance may be loose form of strategic control but is capable of

uncovering information relevant to the strategy.

 Special alert control : At times, unexpected events may force organizations to

reconsider their strategy. Sudden changes in government, natural calamities, terrorist
attacks, unexpected merger/acquisition by competitors, industrial disasters and other
such events may trigger an immediate and intense review of strategy. To cope up with
such eventualities, the organisations form crisis management teams to handle the
situation.

 Implementation control : Managers implement strategy by converting major plans into

concrete, sequential actions that form incremental steps. Implementation control is
directed towards assessing the need for changes in the overall strategy in light of
unfolding events and results associated with incremental steps and actions.

Strategic implementation control is not a replacement to operational control. Unlike

operational control, it continuously monitors the basic direction of the strategy. The
two basic forms of implementation control are:

i. Monitoring strategic thrusts : Monitoring strategic thrusts helps managers to

determine whether the overall strategy is progressing as desired or whether there
is need for readjustments.

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 ii. Milestone Reviews : All key activities necessary to implement strategy are
segregated in terms of time, events or major resource allocation. It normally
involves a complete reassessment of the strategy. It also assesses the need to
continue or refocus the direction of an organization.

 Source : John A Pearce II, Richard B Robinson, Jr. and Amita Mital “Strategic
Management- Formulation, Implementation and Control”.

These four strategic controls steer the organisation and its different sub-systems
to the right track. They help the organisation to negotiate through the turbulent
and complex environment.
5.7 STRATEGIC PERFORMANCE MEASURES
 A company's performance depends heavily on execution of strategy. Companies that

continuously outperform their competitors are those who execute well. Executives in a
variety of businesses should explore about utilizing strategic performance measurement
(SPM). SPM is a method that increases line executives' understanding of an
organization's strategic goals and offers a continuous system for tracking progress
towards these objectives using clear-cut performance measurements. SPM helps to
eliminate silos by establishing a common language among all divisions of the organisation
so they may communicate openly and productively.

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 Strategic performance measures are key indicators that organizations use to track
the effectiveness of their strategies and make informed decisions about resource
allocation. The measures provide a snapshot of the organization's performance,
enabling leaders to assess whether their strategies are aligned with their goals and
objectives and to make necessary adjustments to improve their performance.

 Key performance measures and indicators must be created, selected, combined into
reports and acted upon so that strategy implementation can have tangible outcomes.
Firstly, there needs to be a clear cause and effect relationship between the
indicators and strategic outcomes. Secondly, KPIs need to be carefully chosen
because they will influence the behaviour of people within the organisation. However,
managers should be aware of paralysis by over analysis.
Managing the political aspects of implementing a strategy :

 People involved in the planning process for the implementation of a strategy may be
affected by two sets of forces. The "rational" forces of openness, communication, and
self-analysis can exist on the one hand. On the other hand, there could be political
forces concerned with preserving empires and fostering internal rivalry that urge
knowledge retention, selective communication, and caution. When these two techniques
conflict, the politically acceptable aspects may end up in the explicit strategy while the
sensitive elements may form an unspoken plan that contains the implicit strategy.
Types of Strategic Performance Measures :

There are various types of strategic performance measures, including :

 Financial Measures : Financial measures, such as revenue growth, return on investment

(ROI), and profit margins, provide an understanding of the organization's financial
performance and its ability to generate profit.

 Customer Satisfaction Measures : Customer measures, such as customer satisfaction,

customer retention, and customer loyalty, provide insight into the organization's ability
to meet customer needs and provide high-quality products and services.

 Market Measures : Market measures, such as market share, customer acquisition, and
customer referrals, provide information about the organization's competitiveness in the
marketplace and its ability to attract and retain customers.

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 Employee Measures : Employee measures, such as employee satisfaction, turnover
rate, and employee engagement, provide insight into the organization's ability to
attract and retain talented employees and create a positive work environment.

 Innovation Measures : Innovation measures, such as research and development (R&D)

spending, patent applications, and new product launches, provide insight into the
organization's ability to innovate and create new products and services that meet
customer needs.

 Environmental Measures : Environmental measures, such as energy consumption, waste

reduction, and carbon emissions, provide insight into the organization's impact on the
environment and its efforts to operate in a sustainable manner.

Toward More Holistic Measures of Strategic Performance :

Development of management thought and practice has persistently pushed the

frontier of strategic performance beyond financial metrics. Thus, the Triple
Bottom Line framework (TBL) emphasises People and Planetary Concerns besides
profitability or Economic Prosperity alone. The Quadruple Bottomline adds the 4th
P to add a spiritual dimension named ‘Purpose.’

The Importance of Strategic Performance Measures

Strategic performance measures are essential for organizations for several

reasons :

 Goal Alignment : Strategic performance measures help organizations align their

strategies with their goals and objectives, ensuring that they are on track to achieve
their desired outcomes.
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 Resource Allocation : Strategic performance measures provide organizations with the
information they need to make informed decisions about resource allocation, enabling
them to prioritize their efforts and allocate resources to the areas that will have the
greatest impact on their performance.

 Continuous Improvement : Strategic performance measures provide organizations

with a framework for continuous improvement, enabling them to track their progress
and make adjustments to improve their performance over time.

 External Accountability : Strategic performance measures help organizations

demonstrate accountability to stakeholders, including shareholders, customers, and
regulatory bodies, by providing a clear and transparent picture of their
performance.
Choosing the Right Strategic Performance Measures

 Organizations should choose strategic performance measures that are aligned with their
goals and objectives and that provide relevant and actionable information. In selecting
the right measures, organizations should consider the following factors :
a) Relevance : The measure should be relevant to the organization's goals and
objectives and provide information that is actionable and meaningful.
b) Data Availability : The measure should be based on data that is readily available and
can be collected and analyzed in a timely manner.
c) Data Quality : The measure should be based on high-quality data that is accurate
and reliable.
d) Data Timeliness : The measure should be based on data that is current and up-to-
date, enabling organizations to make informed decisions in a timely manner.

 These measures provide a way for organizations to assess the success of their
strategies, identify areas for improvement, and make informed decisions about how to
allocate resources and adjust their strategies to achieve their desired outcomes.
Effective strategic performance measures should be relevant, meaningful, and easy to
understand and should be regularly reviewed and updated to ensure their continued
alignment with the organization's goals and objectives.

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