In structures for strategy, we describe six major types of structures: entrepreneurial , functional, divisional, SBU, matrix, and network

structures. The section on transitional design and change deals with the process of development of organization structure and how changes have to be brought about so that the structure continues to satisfy the requirements of strategy. Six organizational systems of information, control, appraisal, motivation, development, and planning are described in the last section ending with an overview of these organizational systems. What is Structure? An organisation structure is the way in which the tasks and subtasks required to implement a strategy are arranged. The diagrammatical representation of structure could be an organisation chart but a chart shows only the 'skeleton'. The 'flesh and blood' that bring to life an organisation are the several mechanisms that support the structure. Structural Mechanisms To find out what the structural mechanisms are, it is useful to consider the case of a new organization which has decided to achieve a set of objectives through the implementation of certain strategies. In the next two paragraphs, we shall relate the 'story' of how structural mechanisms evolve. The implementation of strategies would require the performance of tasks. Some of these tasks are related to the formulation and implementation of programs and projects. We dealt with these tasks in the previous chapter which was on activating strategies. Having laid the foundations of an organization, the strategists now have to devote their attention to the tasks, that would have to be performed on a continuing basis for the implementation of strategies. It would be practically impossible to list all such tasks, so the strategists would attempt to enumerate the major tasks. These major tasks would have to be grouped on the basis of the commonality of the skills required to perform them. Having grouped the major tasks, each category of such tasks will have to be again segregated on the basis of the ability of an individual to perform a unit of tasks. This is the process by which organizational units, such as, departments, are created and hierarchies defined. The different mechanisms are summarized as follows: I. Defining the major tasks required to implement a strategy 2. Grouping tasks on the basis of common skill requirements 3. Subdivision of responsibility and delegation of authority to perform tasks 4. Coordination of divided responsibility. S. Design and administration of the information system 6. Design and administration of the control system 7. Design and administration of the appraisal system 8. Design and administration of the motivation system 9. Design and administration of the development system 10. Design and administration of the planning system The first four of these mechanisms will lead to the creation of the structure. The , iAAer six mechanisms are devised to hold and sustain the structure. Collectively, we I amid refer to the last six mechanisms as organisational systems.

Structural Implementation

Environment, Strategy and Structure Stages of Development Besides Chandler Salter, Thain, and Scott have contributed to the thinking that any organization, as it grows in size and diversity, moves from a simple to a complex organizational form. The life cycle of organizations could be divided into four stages that are not distinct and may overlap. Stage I organizations are small-scale enterprises usually managed by a single person who is the entrepreneur-owner-manager. These organizations are characterized by the simplicity of objectives, operations, and management. The form of the organization is also simple and could be termed as entrepreneurial. The strategies adopted are generally of the expansion type. Stage II organizations are bigger than Stage I organizations in terms of size and have a wider scope of operations. They are characterized by functional specialization or process orientation. The organizational form is simple functional (typically divided into the finance, marketing, operations, and personnel departments) or process-oriented (divided into process-based departments arranged in a
particular sequence according to the technology employed). The strategies adopted may range from stability to expansion.

Stage III organizations are large and widely scattered organizations generally having units or plants at different places. Each division is semi-autonomous and linked to the headquarters but functionally independent. The divisions may have a Simple functional form depending on their particular needs. The strategies adopted may be either stability or expansion. Stage IV organizations are the most complex. They are generally large Multiplan, multi product organizations that result from the adoption of related and unrelated diversification strategies. The organizational form is divisional. The corporate headquarters assume the responsibility of providing strategic direction and policy guidelines-through the formulation of corporate-level strategic$.: The divisions (which may be companies, profit centers or SBUs) formulate their business-level strategies and may adopt Stage I, II or III type of structures. The stages of development theories present a convenient way to understand the way the structure may evolve as the organization moves from one stage to the next. But, in practice, many variations may occur. It is not necessary that all organizations should pass through every stage of development. Nor does every organization exhibit the characteristics of exclusively one stage.

10.2 STRUCTURES FOR STRATEGIES There are several types of structures that are found in organizations. Here, some major types of 'pure' structures are described, with a special emphasis on their appropriateness for the different types of strategies. In practice, the actual organizational structure may be a combination of these 'pure' structures. . Entrepreneurial Structure The entrepreneurial structure is the most elementary form of structure and is appropriate for an organization that is owned and managed by one person. A small-scale industrial unit, a small proprietary concern, or a mini-service outlet may exhibit the characteristics of organizations which are based on an entrepreneurial structure. The owner-manager looks after all decisions, whether they are day-to-day operational matters or strategic in nature. The advantages that the entrepreneurial structure offers are: 1) Quick decision-making, as power is centralized 2) Timely response to environmental changes 3) Informal and simple organization systems The disadvantages of the entrepreneurial structure are 1) Excessive reliance on the owner-manager and so proves to be demanding for

The owner-manager 2) May divert the attention of owner-manager to day-to-day operational matters And ignore strategic decision 3) Increasingly inadequate for future requirements if volume of business expands Functional Structure As the volume of business expands, the entrepreneurial structure outlives its usefulness. The need arises for specialized skills and delegation of authority to managers who can look after different functional areas. The advantages that a functional structure offers are: . Efficient distribution of work through specialization . Delegation of day-to-day operational functions . Providing time for the top management to focus on strategic decisions. The disadvantages of a functional structure are: . Creates difficulty in coordination among different functional areas . Creates specialists, which results in narrow specialization, often at the cost of the overall benefit of the organization . Leads to functional, and line and staff conflicts Despite the disadvantages, the functional structure is quite common and exists in Its original or a modified form as the organization evolves from the initial to the Mature stages of development. Divisional Structure There comes a time in the life of organizations when growth and increasing complexity in terms of geographic expansion, market segmentation, and diversification make the functional structure inadequate. Some form of divisional structure is necessary to deal with such situations. A divisional structure is basically, work is divided on the basis of product lines, type of customers served, or geographic area covered, and then separate divisions or Groups are created and placed under the divisional-level management. Within divisions, the functional structure may still operate. The disadvantages of the divisional structure are: . Problems in the allocation of resources and corporate overhead costs! Particularly if the business and corporate objectives are ill-define; . Inconsistency arising from the sharing of authority between the corporate and Divisional levels . Policy inconsistencies between the different divisions. Strategic business unit (SBU) Has been defined by Sharplin as "any part of a business organization which is treated separately for strategic management purposes". When organizations face difficulty in managing divisional operations due to an increasing diversity, size, and number of divisions, it becomes difficult for the top management to exercise strategic control. Here, the concept of an SBU is helpful in creating an SBU-organizational structure. The advantages that the SBU-organizational structure offers are: . Establishes cords ;)apron between dWf)Oions having common strategic interests. Facilitates strategic management arid control of large, diverse organizations. Fixes accountability-M the level of distinct business units The disadvantages of the SBU-organizational structure are: . There are too many different SBUs to handle effectively in a large, diverse organisation

. Difficulty in assigning responsibility and defining autonomy for SBU heads . Addition of another layer of management between corporate and divisional management. Matrix Structure In large organizations, there is often a need to work on major products or projects, each of which is strategically significant. The result is the requirement of a matrix type of organisation structure. Essentially, such a type of structure is created by assigning functional specialists to work on a special project or a new product or service. For the duration of the project, the specialists from different areas form a. group or team and report to a team leac1er. Simultaneously, they may also work in their-respective parent departments. Once the project is completed, the team members revert to their parent departments. The advantages that the matrix structure offers are: . . Allows individual specialists to be assigned where their talent is the most needed , . Fosters creativity because of the pooling of diverse talents . Provides good exposure to specialists in general management The disadvantages of matrix structure are: . Dual accountability creates confusion and difficulty for individual team members . Requires a high level of vertical and horizontal combination . Shared authority may create communication problems Network Structure The increasing volatility of the environment, coupled with the emergence of knowledge-based industries, has led to the creation of a network structure. Also known as the 'spider's web structure' or the 'virtual organization', the network structure is "composed of a series of project groups or collaborations linked by constantly changing non-hierarchical cobweb-like networks".8 Exhibit 10.7 illustrates a network structure. This structure is highly decentralized and organized around customer groups or geographical regions. Rather than being located in one place, the business functions are scattered far and wide. The core organization is only a shell with a small headquarter acting as a 'broker' connected to the suppliers and the specialized functions performed by autonomous teams and workforce. The network structure is most suited to organizations that face a continually changing environment requiring quick response, high level of adaptability, and strong innovations skills. This structure makes extensive use of the outsourcing of support services required to produce and market products or services. There are few internal. resources and a network structure firm relies heavily on outsiders who are specialized in their respective areas. The advantages that the network structure offers are: . High level of flexibility to change structural arrangements in line with business requirements . Permits concentration on core competencies of the firm . Adaptability to cope with rapid environmental change The disadvantages of a network structure are: . Loss of control and lack of coordination as there are several partners . Risks of overspecialization as most tasks are performed by others . High costs as a duplication of resources could be there Other Types of Structures Besides the six major structures described above, there are several other types of structures that are used in organizations. We briefly describe five such structures below.

Product-based structures: The grouping of activities on the basis of the product product lines is followed by organizations where there is a need to delegate to a ,vision all functions related to that particular product or product line. Such a need rises when the strategy adopted requires exclusive attention to a product or a group III products. Expansion and diversification strategies may require a product-based culture as it facilities the addition or deletion of product divisions. Customer-based structure: In some organisations, divisions may be created on die basis of the customer groups served. The rationale for a customer-based structure is that the grouping of activities on the basis of customers would enable the organization to provide exclusive attention to separate and distinct customer groups. Thus, an organization may have individual sales divisions and institutional sales divisions to serve consumers and institutions, respectively. Geographic structure: Multiplant or multiunit organisations which have several factories and offices dispersed geographically are usually organised on the basis of geographic (or territorial) structure. This type of structure evolves in the process of expansion and diversification. When an organisation acquires another firm or wishes to set up additional factories at different sites, geographic structure is a natural choice; such a structure offers the advantages of decentralisation to a local level, the use of locally available resources and raw materials, and nearness to markets.. Intrapreneurial structure: As described in one of the previous sections in this ,chapter, the evolution of organisational structure often starts with the entrepreneurial nature. At the other extreme, a state is reached when organisations become too diverse, and complex. As a result, they usually become slow-moving, bureaucratic, and resistant to change. It is at this point that an intrapreneurial structure could have to be useful and appropriate. The intrapreneurial structure offers the advance of revitalizing organisations by creating opportunities for innovative and tallied individuals within organisations to act as intrapreneurs in order to apply .elusive attention to the development of new ideas, products, or services. ORGANISATIONAL DESIGN AND CHANGE It is an extremely difficult proposition to decide which type of structure would satisfy the requirements of a particular strategy. In general; strategists have to ask themselves: 'What is required to implement the strategic plan and how best can it be done?' This entails what we indicated in the first section of this chapter: organisation structure has to be based on those functions and activities that are critical from the viewpoint of strategy. We first take up the discussion of the design of an organisational structure and then move on to the issue of structural change. Organisational Design The needs of an organisation can be derived from its mission and objectives. These needs are the key activities which have to be performed to achieve objectives to realize the mission. Organisational design. therefore. starts with the identification of such key activities. The sequence of steps followed in organisational design are to be described as below. 1. Identification of key activities necessary to be performed for the achievement of objectives and the realisation of the mission through the formulated strategy 2. Grouping of activities that are similar in nature and which need a common set of skills to be performed. 3. Choice of structure that could accommodate the different groups of activities 4. Creation of departments. divisions. and so on to which the groups of activities could be assigned 5. Establishing an interrelationship between different departments for the purpose of coordination and communication These five steps lead to the development of an organisational design but the process of organisation

is not complete yet. There are various other issues to be tackled to lee that the organisation becomes an effective medium for the implementation of \1Iategy. For instance. it was mentioned in the previous sections that the basic units fir structuring are the departments. based on functional specializations. But this thinking is changing as organisations are attempting to create a more responsive culture in terms of processes based on cross-functional teams. Strategists have to !J1pple with a number of issues before the task of organisational design is over. The major issues are the span of management. basic departmentation. line and staff relaoonships, and the use of committees and group decision-making1o., The span of management refers to the ways in which activities can be grouped. The different structures. as described in the previous section. consist of various departments, each of which deals with a distinct group of activities. The activities could also be organised on the basis of the processes leading to the manufacture of a product or provision of a service. These structures form the core of basic departmentation. Line and staff relationship describe the way in which authority is dispersed within the organisation structure. Where a higher-level manager exercises direct supervision over a sub or in little, authority is delegated in a direct line or steps. Staff positions are advisory in nature. Within the staff departments, however, authority may again be delegated on the basis of line relationships. Organisation Change The first type of change is related to modifications in structural relationships and may entail the creation or disbandment of departments or managerial positions. The second type of change relates to the concomitant behavioral modifications that are essential to absorb the impact of organisational changes. Students of management are quite familiar with the concepts of formal and informal organisations. What we are referring to then in the first and second cases are the formal and Informal organisations respectively. While formal organizational changes are mainly administrative in nature and can be brought about by the means of organisational planning and implementation the informal organisation changes are more complex and evolve as a response to formal organisational changes. . During the mid-1970s ! Indal had a predominantly functional structure with a geographical component. It reorganised in 1976 to a modified functional structure that decentralised some of the functional areas according to the geographical component of the structure headed by business managers. The structure further evolved in 1990 to a divisional structure while retaining some of the functional and geographical components. ORGANISATIONAL SYSTEMS The organizational structure provides the mechanisms for the distribution of author. it and responsibility within the organization. we describe six types of organizational systems while laying special emphasis on the role that each of these systems plan in strategy implementation. The six organisational systems described are as below. 1. Information system 2. Control system 3. Appraisal system 4. Motivation system 5. Development system 6. Planning system

Information System

A structure subdivides the total responsibility while the information system serves to coordinate the divided responsibility. If a strategy is to be effectively implemented, organisational arrangements that provide the information to managers to perform their tasks and relate their work to others are necessary. The information system. therefore, serves two important purposes:it enables the managers to know what they need to grasp in order to perform their tasks and also to coordinate their activities with others. Control System The Conuol Cycle Corporate-level stability strategies require an efficiency orientation that leads to increased efficiency without any appreciable increase in the volume of activity. In such a situation, an information system that requires a certain level of rigidity for the efficient performance of clearly-defined responsibilities, based on access to a mainframe computer and transaction processing system, aimed at repetitive, programmed decision-making, would be more feasible. On the other hand, a growth strategy would require a decisional orientation that needs quick action and a creative response. In such a situation. an information system that adopts a flexible policy stance. uses microcomputers. and adopts a decisionsupport system would be more feasible. In between the two extreme dimensions lie several possible alternatives that could guide !Ie design and administration of information systems for different types of strategies. Strategists have to be aware of the implications of strategic changes on the decrements of the information system as this system provides the foundation for the sign and administration of the other organisational systems. The next such system being discussed is the control system. Control has traditionally been considered as a major management function. While am trolling. the manager essentially deals with "the measurement and correction of !Ie performance of activities of subordinates in order to make sure that enterprise objective and plan devised to attain them are being accomplished". IS In other words. control ensures that the implementation of strategy takes place according to predetermined plans. Basically. control operates in a cyclical manner as shown in Exhibit 10.11. It is Viewed as a fourstep process consisting of: (i) establishing standards. (ii) measurUlgactual performance, (Hi) evaluating actual performance against standards, and (IV) determining corrective action to bring performance in line with the predetermined plan. Standards are in the form of budgeted performance. Measurement of performance is done through an appraisal system discussed in the next subsection. TheactuaI performance is evaluated with reference to the standards, and positive or oegalive variation is observed. Corrective action follows so that the performance corresponds to the standards. This is the manner in which any control system works. In Practice, there are several issues that strategists have to consider so that the control system works effectively and satisfies the requirements of the strategy being implemented. The first issue is the need for a control system. The need for control arises from the fact that the result of subdivision of responsibility and the creation of structure tomes from the dispersal of the total strategic tasks among different organisational units. Since the activities of each of these units are to be coordinated, controls are necessary. Controls are, in fact, devices to enforce strategic behaviour so that the organisation, as an entity, moves towards the pretermined goals. All types of organisations-successful or failing-need controls. " Another important issue is the type of controls to be used. Controls may be classified as formal (or direct) and informal (or indirect or social) controls. Formal controls are prescribed in nature and are based on quantitative, objective data. For instance, financial controls are based on accounting data and are used to quantify performance in fiscal terms. Informal controls are emergent in nature and are based on qualitative, subjective data. For example, adherence to ethical standards can only

be ensured primarily through informal means. Appraisal System The achievement of organisational objectives has to be monitored if the implementation of strategy is to take place. The appraisal system performs this critical role of evaluating managerial performance in the light of organisational objectives. Managerial appraisal is an important element in the total control system that has been discussed in the preceding subsection. . Several issues regarding the appraisal system have to be considered by individual managers, groups, and divisions. Appraisal also provides inputs to the personnel functions, salary as, salary determination, rewards and incentives, payments, management development, placement, and promotion. From the viewpoint of strategy implementation, the major issues relate to the choice of factors used in managerial appraisal, relevance of the appraisal method to strategy, and the procedure of appraisal. There are several appraisal methods available like rating forms, ranking appraisal, behavioral method, and so on. Rather than the method alone, its relevance to the nature of strategy is more important. For instance, stability strategies typically stress 00 improving efficiency in current operations and would require appraisal methods The third major issue before strategists is the procedure of appraisal. Here, questions such as these have to be answered: who makes the appraisal? and when and how these results would be used? In an entrepreneurial structure, the owner-manager is responsible for appraisal but as the structure becomes more complex, the responsibility for appraisal has to be shared by other managers. While delegating the respong"bility for appraisal, it has to be seen that the appraiser is in close contact with the person whose performance is being evaluated. Regarding the timing of appraisal, the organisational policy may be to have a periodical appraisal which may be yearly or biannual. But when the performance of a project group has to be evaluated, it should be done at the end of the natural period of completion. Motivation System The function of the control system is to enforce desirable behaviour and the appraisal system serves to evaluate performance so that strategically desired behaviour may be reinforced and undesirable behaviour curbed. The motivation system plays a positive role in inducing strategically desired behaviour so that managers are encouraged to work towards the achievement of organisational objectives. Any organisation is a conglomeration of human beings. The individual objectives of organisational members may not be consistent with the objectives of the organisation. A system of motivation attempts to neutralise this dichotomy. Motivation is a complex behavioral phenomenon and it has been studied in. depth by specialists in several fields. But, as yet, there is no complete understanding of how motivation works. However, it is known that incentives play an important role in motivation. Incentives are the means by which individuals can be encouraged to perform better. Generally, the incentives are divided into two groups: the monetary and the non. monetary incentives. Monetary incentives-are provided in the form of money. Salary. bonus, profit-sharing plans, and so on, are common monetary incentives. Non-monetary incentives are in the form of rewards, recognition, designation, perquisites. and so on. Both the type of incentives are important and are used by all types of organisations. However, there are limitations within which these incentives can be used. For instance, salary and other monetary payments have a limited role. Witness what NR Narayana Murthy, CEO of Infosys, India's best known software company has to say: "My employees seek challenging opportunities, respect, dignity, and the opportunities to learn new things. . . Salary alone is a very dangerous way

of rewarding capability. . .,,20 It is to be noted that employees of knowledge industry companies like Infosys already get high salaries by Indian standards and, therefore, have more money than most others in the business. High salaries are augmented substantially by employee stock option plans (ESOPs) that increase the stake of employees in the shareholding of the company thereby enhancing the commitment to stay and contribute enthusiastically to achieving organisational objectives. Besides high salaries and Eseps, Infosys has a system of motivation where employees are encouraged to communicate both with each other and with the higher management. The CEO keeps in regular touch with the employees by sending mails every fortnight. There are live chats and a 360-degree appraisal. There is a concept called Chairman's list and an annual excellence award is given to recognise talent. The phenomenon of motivation is extremely complex and multifaceted. It offers enough scope for strategists, CEOs, and managers for improvisation. In nature it is related to another complex managerial phenomenon, that is, leadership, and is contingent upon the situations prevailing in any given organisation. Next we discuss organisational system 'of development. Development System Management development is considered to be a "process of gradual, systematic improvement in the knowledge, skills, attitudes, and performance of those individuals in an organisation who carry management responsibilities".21 Schematically, the process of development could be viewed. Managerial behaviour is the product of individual characteristics and organisa tional environment. The environment of an organisation is shaped by managerial behaviour and it is, therefore, the result of the processes that operate within the organisational systems. Management development is the outcome of the experience and learning that takes place due to the performance of managerial functions. It is logical to assume that development is a natural process and takes place irrespective of whether it is planned or not. Planned development takes place when new experience is provided in the form of education and training. The strategic aim of a development system is to see that the new experience is provided in the light of strategic tasks required for the implementation of strategy. Changes in strategy or the adoption of a new strategy results in a modified set of strategic tasks. The development system has to be activated in such a manner that it prepares the managers to perform this modified set of tasks. It can be seen that the development system performs a vital function in strategy implementation. Practically, the development system may consist of: . Recruitment of personnel, if not available within the organisation, to handle the emerging strategic tasks . Education and training of managers through internal and external training programmes to impart knowledge, skills, and attitudes to managers for the performance of strategic tasks . Career planning and development of managers to prepare them to perform future strategic tasks . Organisational development in the form of planned intervention to ensure a smooth transition from one strategic phase to the next and minimize resistance to change The four components of the development system, as indicated above, may be used individually or jointly to implement the strategy of the organisation. Finally, we briefly refer to the planning system that acts as the link between the formulation of strategy and the implementation of plans.

Planning system In this section we focus on the role of the planning system in implementation and the changes that might have to be undertaken in Ute light of a new or modified strategy. The role ,of the planning system, per se, does not include implementation as it is mainly related to the formulation of strategy. But forward linkages between the for. mutation of strategy and the implementation of plans do exist. For instance, the ex. tent of participation 9fmanagers in planning and the relative involvement of line and staff managers does affect the manner in which a strategy is implemented. The practices of planniI1&. differ from organisation to organisation. In some organisations, the formulation of strategy is a centralised activity and plans are provided in a packaged form for implementation. Under decentralised planning, on the other hand, the participation of managers is of a higher order. It is generally felt that when managers, who are ultimately responsible for the implementation of plans are actively-involved in the formulation of strategies, the probability of successful implementation is enhanced. This feeling is based on the assumption that participation affects commitment to successful implementation in a positive manner. The other view is that the tasks of formulation and implementation of strategy are distinct and, therefore, should be performed separately. From this viewpoint, the function of formulation is a staff function while the implementation of strategy is a line function. Both these views prevail and affects organisational policies related to the role of the planning system. Hence, one finds organisation where planning committees act in a centralised structure, either as task groups or staff possible because the behavioral aspects of implementation offer a range of flexible alternatives to strategists in terms of structure, systems, and processes. These variables could be manipulated to sub serve the interests of corporate culture. However, each situation in the organisation would call for an innovative solution and would test the capabilities of managers as strategists. 3. To change the corporate culture to suit strategic requirements. As said earlier, it is extremely difficult to change corporate culture. But in some cases it may be imperative. For instance, the postliberalization spate of takeovers and acquisitions in the Indian industry led to a situation where many erstwhile multinational subsidiaries were taken over by family business groups. This led to a processoften prolonged and painful-of cultural transition.29 But such a transition may be brought about by a careful understanding of existing culture, making strategic tasks explicit, assessing risks of cultural change, enhancing managerial capability to imbibe changes, and, most importantly, exhibiting a strong, assertive leadership. 4. To change the strategy to fit the corporate culture. Rather than changing culture to suit strategy, it is better and more economical to consider the cultural dimension while formulating strategy in the first place. Recall that in Section 8.4 we discussed the subjective factors affecting the selection of strategy. One of the important factors is commitment to past strategic actions which should take care that strategic changes are not drastic but incremental, allowing the cultural ripple effects to settle down to create a more conducive environment for strategy implementation. However, if an impregnable cultural barrier is faced after strategy implementation, it may be better to abandon the strategy or use a combination of the above three approaches. The next important issue of behavioral implementation relates to corporate politics and use of power. CORPORATE POLITICS AND USE OF POWER All corporate cultures include a political component and, therefore, all organisations are political in nature. Strategists should understand that organisations are a micro cosm of the society in which they exist. Organisational members bring with them their likes and dislikes, views and opinions, prejudices and inclinations when they enter organisations. Managerial behaviour cannot be purely rational and, therefore, an understanding is to be acquired of how politics works 'and the use of power is to be made. Understanding Politics and Power Power is defined as "the ability to influence others" and corporate politics is "the carrying out of activities not prescribed by policies for the purpose of influencing the distribution of advantages within the organisation".3O Politics is related to the use of power but it is not similar to it. Usually, we tend to

view politics and power negatively as means for domination, manipulation, and subjugation. But these can be viewed in a positive way also. In this sense, politics and power may be thought of as a means for the achievement of organisational objectives. Henry Mintzberg is of also of the view that corporate politics is neither inherently good nor bad.31 Though most of the time corporate politics leads to divisiveness that is not good for an organisation, yet there are times when it needs to be shaken up in order to bring about changes. These are occasions when the organisation is emerging from a phase of stability and entering into a period requiring some fundamental changes. Strategy implementation is basically about change management. Therefore, corporate politics has a definite role to play in strategy implementation. Recommending the need for creating political tension and apolitical harmony Mintzberg says that "The organization must pull apart before it can pull together again".32 It can be said that strategists need to know when to use politics and power to get things done and when to shun politics and encourage harmony. 'power within an organisation is derived from five types of sources: I. Reward power arises from the ability of managers to reward positive outcomes 2. Coercive power arises from the ability of managers to penalize negative outcomes 3. Legitimate power arises from the ability of managers to use position to influence behaviour 4. Referent power arises from the ability of managers to create a liking among subordinates due to charisma or personality 5. Expert power arises from the manager's competence, knowledge, and expertise that is acknowledged' by others Strategists use one or more of these power bases to influence the behaviour of organisational members. Politics is concerned with the use of power and relates to managing coalitions. consensus-building, and the creation of commitment to organisational purpose and mission. The nature of organisation itself creates the conditions for corporate politics to manifest itself. Through the creation of an organisation structure, not only are the hierarchy, positions, and relationships created, but structure leads ultimately to conflicts, coalitions, drives, and ambitions among the people who constitute an organisation. Most managers are aware that the higher they move, the pyramid of the organisational structure narrows down progressively; there are fewer top positions available as one moves higher. This causes jockeying for power resulting in political play. Since material rewards, promotions, prestige, and ego are involved, each organisation, more or less, is affected by corporate politics. For everyone manager that considers corporate politics and the use of power as bad, there could be another manager who feels that it is good. So, despite some well-meaning managers shunning it, politics remains a part of the organisation. Political considerations and use of power, therefore. are a part of behavioural implementation by strategists.

Strategic Use of Politics and Power Politics and power affect the way a strategy is formulated and implemented. "A manager cannot effectively formulate and implement strategy without being perceptive about Company politics and being adept at political maneuvering". The different elements in the hierarchy of objectives: strategic intent, vision', mission, and objectives are affected by the formation of groups and coalitions which influence the direction that the organisation has to take. Political considerations affect which type of objectives take precedence over others I!lnd what strategy the firm has to choose. Recall that we included internal political considerations as a descriptive factor in strategic choice in Section 8.4. Generally there is even more politics in implementing strategy than in formulating it In implementation, politics and power affect a number of elements. The nature of strategy implementation requires consensus-building, managing coalitions, and creating commitments. It also requires conflict resolution and balancing of interests. To take a few examples: resource allocation is ultimately a rationalpolitical decision which results in the sharing of scarce resources among different organisational units, structure results in the distribution of authority and responsibility and decides how power will be

exercised, and corporate culture is itself the outcome of the use of politics and power. Experience has repeatedly shown that by having an understanding of the use of politics and power, strategists can perform the tasks of strategic management better. "Indeed. having astute political skills is a definite, and even a necessary, asset for a general manager (or strategist) to have in orchestrating the whole strategic process". A strategic use of politics and power becomes even more critical where strategy changes are to be made. In reality, "most strategic decisions and most strategic thrusts in large enterprises emerge as part of an evolving continuous political consensus building with no precise beginning or end".36 Therefore, it is imperative to make strategy changes with a judicious use of politics and power. The typical approaches to a strategic use of politics and power may involve one or more of these actions: . First of all, to accept the inevitability of politics being there in the organisation . To understand how an organizations power structure works, who wields real power and influence, and who are the individuals and groups whose opinions carry weight. and cannot be disregarded . To be sensitive and alert to political signals emanating from different parts of the organisation . To know when to tread softly and rely on coalition management and consensus-building, and when to push-through decisions and actions by a selective and judicious use of "Machiavellian" methods . To lead strategy and not to dictate it, being patient till a consensus emerges . To let most negative decisions emerge as a group consensus rather than as a directive from the top . To gather support for acceptable proposals and to let the unacceptable ideas die a natural death . To reward organisational commitment and penalize negative or indifferent attitudes . To practice principled politics and use openness and honesty to counter un principled politics In the Indian context, the presence of politics and use of power are, perhaps, more visible than in other cultures. This may be due to the pervasive enviousness exhibited in Indian organisations.37 Managers have not only to deal with-and be affected by-intracorporate politics, but also intercorporate politics between rival companies. At a higher level, Indian industry is plagued with politics between associations and federations of business, public versus private sector, small versus large sector, multinational versus local firms, and technocrats versus bureaucrats. In such a mi. lieu, strategists have to be aware of not only internal political considerations but also the politics and power play present in other organisations, particularly government departments and ministries, with whom they have to deal. Talking about corporate politics and use of power, we have been walking a tight. rope between moral and amoral uses of politics and power. It is easy for strategists to often forget the distinction between use of politics and power for the benefit of self, organisation, or the society. What blurs the distinction is a lack of personal values and a sense of business ethics. We discuss these issues in the next section.

PERSONAL VALUES AND BUSINESS ETHICS As we said above, only personal values and license of business ethics can help a strategist to distinguish between moral and amoral use of politics and power as a means to attain organisational goals. We attempt to answer these questions: what are personal values and business ethics? why and how are they important? and what is the relation of values and ethics to strategy? The Meaning of Values and Ethics Personal values refer to a conception of what an individual or groups regards as desirable.38 A value is a view of life and a judgement of what is desirable which is very much a part of a person's personality and

a group's morale.39 Thus, a benign attitude to labour welfare is a value which may prompt an industrialist to do much more for workers than the labour laws stipulate. Service-mindedness is a value, which when cherished in an organisation, manifests in better customer satisfaction. Personal values are imbibed from parents, teachers, and elders, and as an individual grows, values are adapted and refined in the light of new knowledge and experiences. Within organisations, values are imparted by the founder-entrepreneur or a dominant chief executive, and these remain in some form a long time after that person is not there. J R D Tata, the previous chainnan of the Tata group, when asked to define the House of Tata and what links the different Tata companies together said: "I would call it a group of individually-managed companies united by two factors. Firs~ a feeling that they are part of a larger group which carries the name and prestige of Tatas, and public recognition of honesty, reliability and trustworthiness. The other reason is more metaphysical. There is an innate loyalty, a sharing of certain beliefs. We all feel a certain pride that we are somewhat different from others".40 The seven values that J R D Tata refers to have been derived from the ideals of J N Tata, the founder of the Tata group.

Strategic Evaluation and Control

Operational control consists of setting standards, measuring performance, analyzing variances, and taking corrective action. This is a process that you are already familiar with. Several techniques are available to exercise strategic control and operational con 101. We describe the major techniques in the fourth section of this chapter. The last section attempts to highlight the role of different organisational systems in evaluation. 13.1 AN OVERVIEW OF STRATEGIC EVALUATION AND CONTROL This section aims at outlining the framework for the topic of strategic evaluation and control. The sections that follow will further elaborate and discuss the issues that are highlighted here. We start with a description of the nature of evaluation as applied in strategic evaluation and point out the various participants involved in the evaluation process. The section concludes with an explanation of the different kinds of barriers faced in strategic evaluation and how they could be avoided. From this definition, we can infer that the nature of the strategic evaluation am control process is to test the effectiveness of strategy. During the two preceding phases of the strategic management process, the strategists formulate the strategy to achieve a set of objectives and then implement the strategy. Now there has to be a . way of finding out whether the strategy being implemented will guide the organisation towards its intended objectives. Strategic evaluation and control, therefore. per. forms the crucial task of keeping the organisation on the right track. In the absence of such a mechanism, there would be no means for strategists to find out whether or not the strategy is producing the desired effect. In this manner, through the process of strategic evaluation and control, the strategists attempt to answer two sets of questions, such as, the ones below. 1. Are the premises made during strategy formulation proving to be correct? Is the strategy guiding the organisation towards its intended objectives? Are the organisation and its managers doing things which ought to be done? Is there a need to change and reformulate the strategy? 2. How is the organisation performing? Are the time schedules being adhered to? Are the resources being utilised properly? What needs to be done to ensure that resources are utilised properly and objectives met? The first set of questions relates to the more generalized and over-arching issues of evaluation and are dealt with by the use of strategic control. The second set of questions relates to issues that concern the performance of tasks and are considered under operational control. We will discuss shortly these two types of evaluation sys. terns. But first we need to be convinced of the importance of evaluation

NATURE OF STRATEGIC EVALUATION The purpose of strategic evaluation is to evaluate the effectiveness of strategy in : achieving organisational objectives. Thus, strategic evaluation and control could~ defined as the process of determining the effectiveness of a given strategy in achiev ing the organisational objectives and taking corrective action wherever required. IMPORTANCE OF STRATEGIC EVALUATION The process of strategic management requires that strategists lay down the objectives of the organisation and then formulate strategies to achieve them. The process of strategy implementation starts with the identification of the key managerial tasks which form the basis for the creation of organisational structure and the design of systems. These are the issues that were discussed in Section 9.2. Here, it should be reiterated that the segregation of key managerial tasks leads to a situation where individual managers are required to perform a small portion each of the overall tasks required to implement a strategy. The fact that a manager individually performs a set of functions, which are interrelated to the other tasks that managers elsewhere in the organisation are performing, makes it clear that the tasks have to be coordinated. The importance of strategic evaluation lies in its ability to coordinate the tasks performed by individual managers, and also groups, division or SBUs, through the control of performance. In the absence of coordinating and controlling mechanisms, individual managers may pursue goals which are inconsistent with the overall objectives of the ! department, division, SBU or the whole organisation. Besides the basic reason given above to show why strategic evaluation is important there could be several other factors. These are: the need for feedback, appraisal . and reward; check on the validity of strategic choice; congruence between decisions and intended strategy; successful culmination of the strategic management i process; and creating inputs for new strategic planning. ! Within an organisation, there is a need to receive feedback on current performance, so that appraisal can be done and good performance rewarded. This is essential for motivating employees. Strategic evaluation helps to keep a check on the validity of a strategic choice. An ongoing process of evaluation would, in fact, provide feedback on the continued relevance of the strategic choice made during the formulation phase. This is due to efficacy of strategic evaluation to determine the effectiveness of strategy. During the course of strategy implementation managers are required to take scores of decisions. Strategic evaluation can help to assess whether the decisions match the intended strategy requirements. This is due to the inherent nature of any administrative system which leaves some amount of discretion in the hands of managers. In the absence of such evaluation, managers would not know explicitly how to exercise such discretion. Strategic evaluation, through its process of control, feedback, rewards, and re view, helps in a successful culmination of the strategic management process. Lastly, the process of strategic evaluation provides a considerable amount of information and experience to strategists that can be useful in new strategic planning. In addition to the obvious reasons described above, there are certain other and not-so-obvious reasons why managers use strategic evaluation and control. These are: using control systems to overcome resistance to change, communicating the new strategic agenda, ensuring continuing attention to new strategic initiatives, formalising beliefs, setting boundaries on acceptable strategic behaviour, and motivating discussion and debate about strategic uncertainties.! Participants in Strategic Evaluation It is important to know who the participants are and what role they will play in strategic evaluation and control. This will answer the question: who evaluates the strategy and how do they do it? Going beyond the role of evaluators, we are also interested in knowing who the appraisers are and how they help in strategic evaluation. The various participants in strategic evaluation and control and their respective roles are described below.

Theoretically, every organisation is ultimately responsible to its Shareholders lenders and the public in the case of private companies, and the government in the public sector companies. The role of shareholders, in practice, however, is limited. This is specially true of the general public where the individual holding is too small lObe of any effective value in strategic evaluation. Lenders such as financial institutions and banks which have an equity stake are typically concerned about the security The Board of Directors enacts the formal role of reviewing and screening excel tive decisions in the light of their environmental, business and organisational implications? In this way, the Board is required to perform the functions of strategic evaluation in more generalized terms. But there is a lot of variation among India companies in the way in which the Board may perform its control functions. In companies, the Board may have the real authority to oversee strategic evaluation while in other companies its authority may be usurped by others like the chief executive or a higher de facto authority, such as the family council, in the case off a milt owned companies, the headquarters in the case of MNC subsidiaries, or Ii controlling ministry in the case of public sector companies. This lead to the question that who should evaluate the chief executive. Normally, the evaluation of a person should be done by an individual or a group to whom he reports. cases where the chief executive is accountable to no one in particular (this is possible in the case of an entrepreneurial organisation), it is difficult to allocate this responsibility apart from relying on self-evaluation. But in the other cases, the owners pattern can determine who should evaluate the chief executive. Thus, the fanuh council in family-owned companies and majority shareholders in other cases council evaluate a chief executive's performance.3 The SBU or profit-centre heads may be involved in performance evaluation. their levels and may facilitate evaluation by corporate-level executives. Financial controllers. company secretaries, and external and internal auditor form the group of persons who are primarily responsible for operational control , based on financial analysis, budgeting, and reporting. Audit and executive committees, set up by ..he Board or the chief executive, be charged with the responsibility of continuous screening of performance. ThecOf' i po rate planning staff or department may also be involved in strategic evaluation. Middle-level managers may participate in strategic evaluation and control as providers of information and feedback, and as the recipients of directions from above take corrective actions and returns on their shareholding rather than in the long-term assessment of strategic success. The government, through its different agencies, does playa significant in the strategic evaluation and control of public sector companies. In the next section, we will present an exhibit to show how performance evaluation is done in pi lie enterprises In the-manner described above, there are several participants in the process Ii .strategic evaluation and control. But owing to its inherent nature, the evaluation process may face certain obstacles in its functioning. We next see some major barriers! R the evaluation process Barriers in evaluation Earlier, in Section 10.4, we had described the control system as a component Ii ; strategy implementation. There, the discussion had centered on the performance individual managers. In the present context" the emphasis is on the evaluation of organisational units. In practice, however, ,e two types of evaluation cannot be strictly differentiated. While evaluating organisational units one cannot avoid relying on the performance evaluation of individuals. This creates certain barriers in strategic evaluation and control. We could point out five major types of barriers in evaluation: the limits of control, difficulties in measurement, resistance to evaluat ion, tendency to rely on short-term assessment, and relying on efficiency versus effectiveness. Units of controls: By its very nature, any control mechanism presents the dimroa of too much versus too little control. It is never an easy task for strategists to decide the limits of control. Too much control may impair the ability of managers, adversely affect initiative and creativity, and create unnecessary impediments to efficient performance. On the other hand, too less control may make the strategic evaluation process ineffective and redundant. Difficulties in measurement: The process of evaluation is draught with the danger difficulties in measurement. These mainly relate to the reliability and validity of the measurement techniques used for evaluation, lack of quantifiable objectives or performance standards, and the inability of the information system to provide timely md valid information. The control system may be distorted and may not evaluate uniformly or may measure attributes which are not intended to be evaluated.

Resistance to evaluation: The evaluation process involves controlling the behaviour of individuals and, like any other similar organisational mechanism, is likely to be resisted by managers. Short-term ism: Managers often tend to rely on short-term implications of activeness and try to measure the immediate results. Often, the long-term impact of performance on strategy and the extended effect of strategy on performance is ignored. This is so as immediate assessment seems to be the easy way out and taking the long implications into account may be seen as too tedious. Relying on efficiency versus effectiveness.' It is instructive to remember that efficiency is 'doing the things rightly' while effectiveness is 'doing the right things'. There is often a genuine confusion among managers as to what constitutes effective performance. Measuring the wrong parameters may lead to a situation where the "right type of performance does not get rewarded. In fact, sometimes performance does not really contribute to the achievement of objectives may be rewarded if assessed on the basis of efficiency alone. How can these barriers be avoided? In this context, it is .apt to quote Andrews iIiIen he says: "the true function of measurement (or evaluation) is to increase perceptions of the problems limiting achievement".4 This is indeed a profound statement In Andrew's opinion, it is the attitude towards evaluation that is more important man the process of evaluation itself. For instance, bureaucratic control often ends up ~mg control just for the sake of control and not for the real purpose of finding out It is obstructing effective performance. The real worth of evaluation lies in its ability to throw up the problems that are constraining achievement and then doing something about them so that performance can be made effective. Next, we shall see ~~ evaluation can be made effective. Requirements for Effective Evaluation The basic issue in all evaluation should be that control should be dictated by strategies. There needs to be a vertical fit between the strategy requirements, and the evaluation and control exercised over performance. The guidelines below are suggested under to make controls effectiveness . Control should involve only the minimum amount of information as too mil! information tends to clutter up the control system and creates confusion. . Control should monitor only managerial activities and results even if the evaluation is difficult to perform. . Controls should be timely so that corrective action can be taken quickly. . Long-term and short-term controls should be used so that a balanced to evaluation can be adopted. . Controls should aim at pinpointing exceptions as nitpicking does not result effective evaluation. The 80:20 principle, where 20 per cent of the activities result in 80 per cent of achievement, needs to be emphasised. Getting hour; down with the activities that do not really count for achievement make its evaluation ineffective. . Rewards for meeting or exceeding standards should be emphasised so iii. managers are motivated to perform. Unnecessary emphasis on penalties to pressurise the managers to rely on efficiency rather than effectiveness. i The next two sections describe the evaluation systems that could be used effective measurement of strategic and operational performance. STRATEGIC CONTROL The process of strategic management makes it clear that a strategy is formulaled the basis of several assumptions. These relate to the environmental and organisational factors, which are dynamic and eventful. There is a considerable gap between the time when a strategy is formulated and the time when it is implemented.1i process of implementation is itself time-consuming. During this intervening pe~ there is a possibility that the assumptions made while formulating a strategy will remain valid or, at least, are no longer so relevant. Strategic controls take into~. count the changing assumptions that determine a strategy, continually evaluable strategy as it is being implemented, and take the necessary steps to adjust the strategie to the new requirements. In this manner, strategic controls are early warning systems and differ from post-action controls which evaluate only after the implementation has been completed. You could think of strategic

. control as analogous to the continuous evaluation system used in your business school and distinguish it from the. of-the term examination system used in traditional universities. The four basic types of strategic controls are: 1. Premise control . 2. Implementation control 3. Strategic surveillance 4. Special alert control The following subsections address each of these four strategic control Premise Control As mentioned above, every strategy is based on certain assumptions about environ mental and organisational factors. Some of these factors are highly significant and any change in them can affect the strategy to a large extent. Premise control is necessary to identify the key assumptions, and keep track of any change in them so as to assess their impact on strategy and its implementation. For instance, a company may base its strategy on important assumptions related to environmental factors (e.g. government policies), industrial factors (e.g. nature of competition), and organisational factors (e.g. breakthrough in R&D). Premise control serves the purpose of continu ally testing the assumptions to find out whether they are still valid or not. This ena, lies the strategists to take corrective action at the right time rather than continuing with a strategy which is based on erroneous assumptions. The responsibility for exercise control can be assigned to the corporate planning, staff who can identify key assumptions and keep a regular check on their validity. implementation Control The implementation of a strategy results in a series of plans, programs, and Objects (for instance, see section 9.3). Resource allocation is done to implement these.lmplementation control is aimed at evaluating whether the plans, programmes, and projects are actually guiding the organisation towards its predetermined objectives or not. If, at any time, it is felt that the commitment of resources to a plan, programme or project would not benefit the organisation as envisaged, they have to re revised. In this manner, implementation control may lead to strategic rethinking. Implementation control may be put into practice through the identification and Millitoring of strategic thrusts such as an assessment of the marketing success of a Dew product after pre-testing, or checking the feasibility of a diversification programme after making initial attempts at seeking technological collaboration. In the first case. the company may evaluate whether the new product launch will really be Mlvantageous or it should be abandoned in favour of another programme. In the ICCOnd case, implementation control can help to determine whether a diversification will actually succeed or not. Another method of implementation control is milestone review, through which aitical points in strategy implementation are identified in terms of events, substan tial resource allocation, or significant end-time. This is similar to the identification ilbeiton a smaller scale-of events and activities in PERT/CPM networks. After the identification of milestones, a comprehensive review of implementation is made to assess its continued relevance to the achievement of objectives. Strategic Surveillance The premise and implementation types of strategic controls are specific in nature. strategic surveillance, on the other hand, is aimed at a more generalized and overarching control "designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of a firm's strategy". Strategic. surveillance can be done through a broad-based, general monitoring on the basis~ selected information sources to uncover events that are likely to affect the strategy~ an organisation. Aaker has suggested a "formal yet simple strategic information seal ning system (that) can enhance the effectiveness of the scanning effort and presel1 much of the information now lost within the organisation". Organisationallearni~1 and knowledge management systems can capture much of the information that I otherwise lost in an organisation. This information can be used for strategic surveillance

Special Alert Control The last of the strategic control systems is the special alert control, which is based II' a trigger mechanism for rapid response and immediate reassessment of strategy the light of sudden and unexpected events. Special alert control can be exercised through the formulation of contingency strategies (see Section 8.5) and assigning the responsibility of handling unforeseen events to crisis management teams. Example of such events can be the sudden fall of a government at the central or state level instant change in a competitor's posture, an unfortunate industrial disaster, or a naltural catastrophe. Crises are critical situations that occur unexpectedly and threaten the course of strategy. Organisations that hope for the best and prepare for the worst are in a Validate position to handle any crisis. Crisis management follows certain steps, such.. signal detection, preparation/prevention, containment/damage limitation, and recall. every leading to organisational earning. 9 The first step of signal detection can be per. formed by the special alert control systems. From the description of the four strategic controls it might seem that strategic evaluation is a complex process and requires the use of sophisticated and system all; techniques. While this may be true for large and complex organisations facing, turbulent environment, it is not of great concern for smaller and simpler firms. what face a relatively stable environment. Many of the tasks required for strategic control may be performed informally in a simple way. For instance, in an entrepreneuni organisation, the ownermanager may perform strategic control through a genera. awareness of environmental and industryrelated factors and initiate changes whenever required. This may be done through a regular scanning of business newspaper!. magazines, and trade journals; through attendance at seminars and conferences; m: general observations. In short, whatever sources are used for environmental appraising may also be useful for strategic control. MNCs, on the other hand, would have w plan for elaborate systems in order to perform strategic control. The basic theme of strategic control is to continually assess the changing environment to uncover events that may significantly affect the course of an organizations strategy. As compared to strategic control, operational control has a different purpose. The next section deals with operational control. OPERATIONAL CONTROL Exhibit 13.1 indicates the difference between strategic and operational control. It can be seen that operational control is aimed at the allocation and use of organisational resources through an evaluation of the performance of organisational units, such as, divisions, SBUs, and so on, to assess their contribution to the achievement of organisational objectives. Operational control is concerned with action or performance, and this is probably the reason why it is used so extensively in organisations. In this section we shall see how the process of evaluation is applied to exercise operational control. Process of Evaluation Section 10.4 (and specifically Exhibit 10.11: The control cycle) dealt with the control process as used in the context of strategy implementation. Here, we take up the issue of evaluation process in greater detail. The process of evaluation basically deals with four steps: 1. Setting standards of performance 2. Measurement of performance 3. Analyzing variances 4. Taking corrective action These four elements of the evaluation process, and the way they relate to each other, are depicted in Exhibit 13.2. The strategy, plans, and objectives result in a set of performance standards which form the basis for evaluation through the measurement of performance. The comparison of actual and standard performance leads to the analysis of variances. Feedback from this analysis results in either a check~ performance, revaluation of standards, or the reformulation of strategy, plans objectives. Due to the inherent nature of operational control, corrective action is aillllJ: mainly at performance and adjustment of standards rather than the reformulation strategy. The reformulation task is usually performed on the basis of strategic Control,

specially implementation control. Setting of standards Strategists encounter the following three questions while dealing with standard setting: what standards to set? how to set these standards? and, in what terms that express these standards? A three-pronged basic approach to standard-setting coul1 be used to settle these issues, .as given below: I. The key managerial tasks, derived from the strategic requirements, can k analysed for finding out the key areas of performance. Standards can then set in each of these key result areas. 2. The special requirements for the performance of the key tasks can help D determine the type of standards to set. 3. Performance indicators that best express the special requirements couldlhe8 be decided upon to be used for evaluation. Applying this approach in the case of a company which has adopted a mart~ development strategy, it can be said that one of the key managerial tasks is to expand market presence and enhance market visibility. A special requirement is to raise lie overall market share, and the two indicators, for instance, which could satisfy lie requirements could be: increase in sales revenue and efficiency of sales forcast Exhibit 13.3 provides some illustrative performance indicators in five functional areas across the three corporate-level strategies of stability, expansion, and retrenchment. The areas of operational effectiveness that we identified in section 12.6 could also lie used as the areas in which standards are set. For this to take place, one has to be clear as to how productivity, processes, people, and pace contribute to the strategy being implemented. In order to capture the reality-of action, performance indicators have to be set on the basis of quantitative (or objective) as well as qualitative (or subjective) criteria. Operational control can be effectively exercised through a combination of quantitative and qualitative criteria. Quantitative criteria: On the basis of quantitative criteria performance evaluation' can be done in two ways: an organisation can assess how it has performed as COI if pared to its past achievements, and it can also compare its performance with it, industry average or that of major competitors. There are several criteria, mainly financial in nature, that can be used. Companies can evaluate their performance on annual basis for the previous 10 years, or so, on the basis of criteria like net profit. stock price, dividend takes, earnings per share, return on capital, return on equipment, market share, growth in sales, days lost ~r employee as a result of strikes, production costs and efficiency, distribution costs and efficiency, and employee turnover, absenteeism and satisfaction indexes.1O Companies can also evaluate performally on the basis of the industry averages provided in industry reports published in leading business newspapers and magazines. Exhibit 13.4 provides the model that a leading business magazine in India uses to rank the top 100 companies. Parameters for Ranking the Top 100 Companies in India Business Today ranks companies in India to determine the list of the Super 100 every year. The parameters the magazine uses to rank companies offer an insight into the criteria that the companies themselves could use to benchmark their Performance against peers in the country. The financial figures the magazine uses are as under. 1. Net sales exclusive of excise duty after deducting returns, discounts, all allowances 2. Profit after tax is the profit after taking into account all the expenses 3. Net fixed assets is the amount of fixed assets as plant and machinery, less in depreciation and the capital work-in-progress 4. Market capitalization is the product of shares outstanding at the end of Year 3 and the adjusted share price on a date fixed for the purpose (e.g. Business India used November as the cut-off date in the year 2000) 5. Debt to equity ratio is the long-term debt divided by the company's net worth!)' the stockholders' equity 6. Return on capital is the profit after tax plus interest divided by the total capita employed 7. Interest coverage is the profit before tax plus interest dividend by the interest. Gross

profit is the profit earned after taking into account items, such as, raw material costs; but before interest, depreciation, and taxes 9. Gross profit margin is the gross profit divided by sales 10. Return on equity is the profit after tax, adjusted for preference dividend, divided by the net worth or the shareholder's equity as at the end of the year 11. One-year and five-year percentage changes in share price Using these figures, the magazine assesses the performance of companies 01\ six parameters out of which four are absolute )lumbers: net sales; earnings before interest, depreciation, tax and amortization; net fixed assets; and market capitalization. The other two parameters are of return on capital employed and sales-to-lllf fixed assets. Weight age on a scale of 1 to 5 is allotted to each of these parameters.The basis of their importance and the final scores are sorted in an ascending order. The lower a company scores, the higher it moves up the ladder. Source: Based on notes to "Super 100: A ranking of India's best performing companies", Business India, Nov 27-Dec 10,2000, pp 125-126. The method indicated in Exhibit 13.4 could welI be used by companies to evaluate performance on quantitative criteria, on an individual basis as welI as on the industry level. Qualitative criteria: The quantitative criteria, with all their characteristic objectivity and sophistication, cannot be Insufficient for an overalI assessment of performance. There has to be a special set of qualitative criteria for a subjective assessment of the factors like capabilities, core competencies, risk-bearing capacity, strategic clarity, flexibility, and workability. Qualitative criteria playa major role in strategic control for evaluating strategy before implementation but these can be used in operational control too. Glueck and Jauch have suggested three sets of qualitative criteria: consistency, appropriateness and workability will Consistency tests strategy with respect to objectives, environmental assumptions, and internal condition~. Appropriateness assesses the strategy from the viewpoint of resources capabilities, risk conference, and time horizon. Lastly, workability checks strategy with regard to its feasibility and stimulation. ~, Having set the standards of performance strategists proceed to measure perform-" IIICe as the next step towards evaluation.

Measurement of Performance The evaluation process operates at the performance level as action takes place. Ex hibit 13.2 shows how this happens (actual performance is depicted within a dotted boundary as it is not a part of the evaluation process). Standards of performance act IS the benchmark against which the actual performance is to be compared. It is important, however, to understand how the measurement of performance can take place. The information system is the key element in any measurement exercise. Operationally, measuring is done through the accounting, reporting, and communication sys1eInS. A variety of evaluation techniques (indicated in the next section) are used for measurement. Apart from the methods of measuring performance, the other impor tant aspects of measurement relate to the difficulties, timing, and periodicity in measuring. Difficulties in measurement: If standards are appropriately set, and if means are available for measuring performance, evaluation is a fairly easy task. But there are several activities for which it is difficult to set standards and measure performance. For instance, it is relatively easier to measure the contribution of workers as compared to that of managers. Likewise, it is not so difficult to measure "individual effort _ as it is to assess departmental performance. The solution lies in developing verifiable objectives, stated in quantitative and qualitative terms, against which performance :an be measured. Timing of measurement: Timing relates to the point of time at which evaluation has to take place. In general, it could be said that a delay in measurement can deft1 ~he purpose of evaluation itself. On the other hand, measuring before time can~ serve the purpose either. It is better to measure at critical points in a task schedule Generally, the critical points would be at the end of a definable activity or the conclusion of a task. For instance, in a project implementation schedule, there could several critical points at which measurement would take place. Periodicity in measurement: A related issue to timing is periodicity, which with the issue of "how often to measure". Normally, financial statements like but ets, balance sheets, and profit and loss accounts are prepared every year so the perdicity is on an annual basis. But there might be several functions, like production: marketing, where measurement will have to be done in shorter duration, possibly, a monthly or a weekly basis. Before we close this section, we shall look at several examples of private sectors.. companies in India to show the different approaches to performance evaluation. which they adopted. In the next section, we will provide an exhibit which illustrate how performance evaluation takes place in public sector companies. By these occupies, and the exhibit, you will get an idea of how companies strive to measure performance. There are many family-owned and other types of private sector companies which have separate management boards or executive committees to review the performance of departments or profit centers. A difficulty arises when there is no clear" authority for performance evaluation. Usually, the real authority for evaluation) rest with external groups. Thus, family businesses have their family councils, mul~ national subsidiaries have review committees constituted by parent company officials, while professionally-managed companies may evolve varying mechanism the evaluation purpose. . The DCM group formed a Board M.anagement Committee (BMC) for exercising effective executive control. The BMC planned to have weekly meetings conduct specification reviews. It was to be attended by outside directors aJIJ family representatives, besides the executive director who had the particular unit or functional responsibilities. The reallocation of work by the BMC It suited in the upgrading of professional managers to the top management level The focus of BMC's activities was on evolving a profitable operational strategy. . At TISCO, the evaluation of project performance gets top priority. The review and monitoring of projects related to all capital expenditures is done by die Board of Directors itself. The Board meets regularly, usually on the last Thursday of every month, where projects are approved or rejected. When

approved. the projects are subjected to strict time and cost schedules, and any devial100 or overrun has to get the Board's approval. Over and above, annual boaro presentations on .the status of ongoing schemes are obligatory. . As a part of management restructuring, the Murugappa group of companies formed the Murugappa Corporate Board (MCB) with family members and external members. The induction of external members was done so that accountability could be infused into the process of performance' evaluation. The family members act as functional-group heads looking after the functions of strategic planning, marketing, technology, human resource, and finance. The Chairman of the group was to act as the external interface. The family members were also designated as mentors to group companies. Through this elaborate arrangement, the Murugappa group hoped to have a more stringent evaluation process in place. The question of accountability has been of interest to the Indian CEOs. The private sector has tried to address this issue through a greater professionalisation of management. The advantage foreseen is a more objective assessment of performance and better control. Next, we take up the step that involves analysis of variances that it from the measurement of performance. The measurement of actual performance and its comparison with standard or budgetal performance leads to an analysis of variances. Broadly, the following three studios may arise: \. The actual performance matches the budgeted performance 2, The actual performance deviates positively over the budgeted performance 3. The actual performance deviates negatively from the budgeted performance The first situation is ideal but not realistic. In practice, the actual performance 'rely matches the budgeted performance. Here, the strategists would have to specify range of tolerance limits between which the results may be accepted satisfactorily. 10. actual performance which deviates from the budgeted performance within the accomplished tolerance limits can be acceptable and the variance is considered as not significant. , The second situation is welcome as it is an indication of superior performance. Ii exceeding the target continually should be considered as unusual and a check 1QIs to be made to .test the validity of standards and the efficacy of the measurement ,)\tem. Exhibit 13.2 takes care of this situation by getting a feedback from the various analysis as to standards. The third type of situation is alarming as it indicates a shortfall in achievement. It strategists need to pinpoint the areas where performance is below standard and up to the causes of deviation. Corrective action is taken on the basis of the analysis that causes of deviation. Evaluation by the top management can be facilitated if the analysis of variance is J!SeDted in the form of a simple device that could be termed as the variance chart. lEsame principle is applied in making control charts for statistical quality con Exhibit 13.5 shows a specimen variance chart that illustrates the nature of de aJOS and the areas in which they occur. . After noting the deviations, it is now time to find the causes of deviations. The owing questions can be helpful in determining the causes: 12 I Is the cause of deviations internal or external? I Is the cause random or was it expected? I Is the deviation temporary or permanent? Are the strategies (and plans and objectives) still valid? . Does the organisation have the capacity to respond to the change needed? Analysis of variances leads to a plan for correcti ve action which we shaII did next. Taking corrective Action Exhibit 13.2 suggests three courses for corrective action: checking ofperfol7l/lJTlll. checking of standards, and reformulating strategies, plans, and objectives. Initiating corrective action is not an insignificant part of the evaluation process:! involves a variety of

managerial functions which are performed during strategy implementation. For instance, checking of performance requires going into the deUII of organisational structure and systems as well as, behavioural implementation Performance can be affected adversely due to a number of factors such as distortial in resource allocation, inappropriateness of structure and systems, and wrong Ieadership and motivational styles. If the evaluation process shows that performance consistently lower than expected, the strategists would have to undertake an in the analysis and diagnosis of the factors that might be responsible for bad performance Taking corrective action for checking performance is, therefore, a significant party the dayto-day activities of managers. Checking of standards is less frequent than a performance check but it has tail done as soon as it is felt that there is nothing significantly wrong with performance. A standards check may result in a lowering of standards if it is concluded that organisational capabilities do not match the performance requirements. elevation of standards if the conditions have improved to allow better performance to take place. For instance, better equipment, improved systems, and upgraded skills presure to make existing standards partly irrelevant. Productivity frontiers too keep . IIOving farther and competitive pressures compel companies to continually strive to : disprove their operational effectiveness. in such a situation, standards check would become necessary. A more radical and infrequent corrective action is to reformulate strategies, plans, objectives. Strategic, rather than operational, control will lead to the conclusion whether strategies need reformulation, plans need to be remodelled, or objectives need to be redefined. Reformulation of strategy will take us back to the process of \1rategic management where a fresh strategic choice has to be made A remodelling of plans will entail a new resource allocation pattern and subsequent changes in strategy implementation. Redefinition of objectives, however, takes us back full-circle to the start of the strategic management process. Before we conclude the chapter, we must look at two explanatory sections on the techniques of strategic evaluation and control, and the role of an organisational system in evaluation. TECHNIQUES OF STRATEGIC EVALUATION AND CONTROL It is necessary for strategists to have an idea about the techniques of strategic evalu ation and control in order to make a choice from among the many available and to use those. Several of the techniques of evaluation are traditional and have been in usage for long, while there are some other techniques which are of recent origin. This section briefly describes the techniques for strategic control and operational control. First we take up the techniques for evaluation in strategic control and then for opera tional control. Techniques for Strategic Control As we said earlier in this chapter, the essence of strategic control is to continually assess the changing environment to uncover events that may significantly affect the course of an organisation's strategy. Techniques for strategic control could be classified into two groups on the basis of the type of environment faced by the organisa0005. The organisations that operate in a relatively stable environment may use strategic momentum control, while those which face a relatively turbulent environment may find strategic leap control more appropriate. strategic momentum control These types of evaluation techniques are aimed at wing that the assumptions on whose basis strategies were formulated are still \1Iid, and finding out what needs to be done in order to allow the organisation to maintain its existing strategic momentum. There are three techniques which could be used to achieve these aims: responsibility control centres, underlying success facIOrs, and generic strategies. I. Responsibility control centres form the core of management control systems and are of four types: revenue, expense, profit, and investment centres. Each of these centres is designed on the basis of the

measurement of inputs and outputs. IS The study and application of responsibility centres is done under discipline of management control systems. 2. The underlying success factors enable organisations to focus on the CSFs(a Section 3.5 for an explanation) in order to examine the factors that contribute the success of strategies. By managing on the basis of the CSFs, the strategists can continually evaluate the strategies to assess whether or not these helping the organisation to achieve its objectives. 3. The generic strategies approach to strategic control is based on the assumption that the strategies adopted by a firm similar to another firm are comparatively. Based on such a comparison, a f1flD can study why and how other firms implementing strategies and assess whether or not its own strategy is follo~1 a similar path. In this context, the concept of strategic group is also relevant strategic group is a group of f1flDs that adopts similar strategies with s' resources. Firms within a strategic group often within the same industry,. sometimes in other industries too, tend to adopt similar strategies. Strategic leap control Where the environment is relatively unstable, organization are required to make strategic leaps in order to make significant changes. Strategic leap control can assist such organisations by helping to define the new strategic. requirements and to cope with emerging environmental realities. 16 There are four teniques ,of evaluation used to exercise strategic leap control: strategic is_management, strategic field analysis, systems modelling, and scenarios. 1. Strategic issue management is aimed at identifying one or more strategic. sues and assessing their impact on the organisation. A strategic issue is 1 forthcoming development, either inside or outside of the organisation, which likely to have an important impact on the ability of the enterprise to meets objectives".17/By managing on the basis of strategic issues, the strategistsCi avoid being overtaken by surprising environmental changes and design gency plans to shift strategies whenever required. 2. Strategic field analysis is a way of examining the nature and extent of symbol that exist or are lacking between the components of an organisation. IS What ever synergies exist the strategists can assess the ability of the firm to !all advantage of those. Alternatively, the strategists can evaluate the firms ability to generate synergies where they do not exist. 3. Systems modelling is based on computer-based models that simultaneous features of the organisation and its environment. Through systems rm. ling, organisations may exercise preaction control by assessing the importance of the environment on organisation because of the adoption of a particular strategy. 4. Scenarios are perceptions about the likely environment a firm would facing the future. In Section 4.3 (on environmental scanning), scenario-writing.. discussed as a technique for analysing environment. Its use could be extent to evaluation by enabling organisations to focus strategies on the basis of coming developments in the environment. Several of the above techniques for strategic control-with the possible ex. of responsibility centres -are of a relatively recent origin. The development of the techniques is an evidence of the expanding body of knowledge in business policy strategic management. As the use and application of strategic management gains approval, it is quite likely that organisations would start using such techniques. Operational control, however, uses more familiar techniques which have traditionally been used by strategists. In the next part of this section, we look at techniques for operational control. Evaluation Techniques for Operational Control As we said in the beginning of Section 13.3, operational control is aimed at the allo cation and use of organisational resources. Evaluation techniques for operational control, therefore, are based on organisational appraisal rather than environmental monitoring, as is the case with strategic control. But before you read further, it would be helpful if you could review Section 5.4 where we described in detail the techniques used for organisational appraisal. These techniques are used for operational' control as well. To help you remember,let us reiterate the classification of evaluation techniques in the three parts:

internal analysis, comparative analysis, and comprehensive analysis. Internal analysis Internal analysis, which consists of value-chain analysis, quantitative (financial and nonfinancial) analysis, and qualitative analysis, deals with the identification of the strengths and weaknesses of a firm in absolute terms. I. Value chain analysis focuses on a set of inter-related activities performed in a sequence for producing and marketing a product or service. The utility of value-chain analysis for the purpose of operational evaluation lies in its ability to segregate the total tasks of a firm into identifiable activities which can then be evaluated for effectiveness. 2. Quantitative analysis takes up the financial parameters and the non-financial quantitative parameters, such as, physical units or time, in order to assess performance. The obvious benefit of using quantitative factors (either financial or physical parameters) is the ease of evaluation and the verifiability of the assessment done. These are probably the most-used methods for evaluation for operational control. Among the scores of financial techniques described in all standard texts in the area of finance are traditional techniques, such as, ratio analysis, or newer techniques, such as, economic value-added (EV A) and its variations, and activity-based costing (ABC). These are proved methods so far as their efficacy for evaluating operational effectiveness is concerned. Apart from the financial quantitative techniques, there are several non-financial quantitative techniques available for the evaluation for operational control, such as: computation of absenteeism, market ranking, rate of advertising recall, total cycle time of production, service call rate, or number of patents registered per period. Many more techniques can be evolved by firms to suit their specific requirement. 3. Qualitative analysis supplements the quantitative analysis by including those -aspects which it is not feasible to measure on the basis of figures and numbers. The methods that could be used for qualitative analysis are based on intuition, judgment, and informed opinion. Techniques like surveys and experimentation can be used for the evaluation of performance for exercising operational control. Comparative analysis This consists of historical analysis, industry norms benchmarking. It compares the performance of a firm with its own past performance or with other firms. 1. Historical analysis is a frequently used method for comparing the performance of a firm over a given period of time. This method has the added benefit enabling a firm to note how the performance has taken place over a period time and to analyze the trend or pattern. Such an analysis can offer the firm better perception of its performance as compared to an absolute assessment 2. Industry norms is a comparative method for analysing performance that ill, the advantage of making a firm competitive in comparison to its peers in same industry. Being a comparative assessment, evaluation on the basis of industry norms enables a firm to bring its performance at least up to the level other firms and then attempt to surpass it. 3. Benchmarking is a comparative method where a firm finds the best practices an area and then attempts to bring its own performance in that area in line with the best practice. Best practices are the benchmarks that should be adopted~ a firm as the standards to exercise operational control. Through this method. performance can be evaluated continually till it reaches the best practice level In order to excel, a firm shall have to exceed the benchmarks. In this m3Dll/l, benchmarking offers firms a tangible method to evaluate performance. Comprehensive analysis This includes balanced scorecard and key factor rating. This analysis adopts a total approach rather than focusing on one area of activity,1I a function or department. 1. Balanced scorecard method is based on the identification of four key performance measures of customer perspective, internal business perspective, innovation and learning perspective, and the financial perspective. This method in balanced approach to performance measurement as a range of parameters It taken into account for evaluation.

2. Key factor rating is a method that takes into account the key factors in some areas and then sets out to evaluate performance on the basis of these. These quite a comprehensive method as it takes a wholistic view of the performance areas in an organisation. Besides the several techniques referred to above, we could mention four of the techniques that are used by some companies to assess performance. These are !he network techniques parta system, management by objectives, and the memorandum of understanding. 1. The parta system is an indigenous system adopted usually by MarwarifmnsII keep track of daily cash generation. "Parta is the pre-determined budget of the net cash inflows from operations before tax and dividend".19 The pal1ll1 decided in advance between the family group and company head, and actual performance is compared to this budgeted parta on a daily basis. thus making parta an effective operation.11 control device. 2. Network techniques such as programme evaluation and review technique (PERT), critical path method (CPM), and their variants, are used extensive~ for the operational controls of scheduling and resource allocation in project. When network techniques are modified for use as a cost accounting system, they become highly effective operational controls for project costs and performance.2O 3. Management by Objectives (MBO) is a system, proposed by Drucker, which is based on a regular evaluation of performance against objectives which are decided upon mutually by the superior and the subordinate. By the process of consultation, objective-setting leads to the establishment of a control ,system that operates on the basis of commitment and self-control. Thus, the scope of MBO to be used as an operational control is quite extensive. 4. Me"Jorandum o/understanding Just like MBO is a commitment to objectives between individuals, a memorandum of understanding (MoD) is "an agreement between a public enterprise and the Government, represented by the administrative ministry in which both parties clearly specify their commitments and responsibilities".21 Having done that, the enterprises are evacuated on the basis of the MoD. Though an MoD is usually thought of as a technique used solely in the context of public enterprises, its use can be extended to any situation where an external agency is required to evaluate a firm's performance. Thus, an multinational company can set an MoD with its subsidiary and a family business group council can use an MoD to evaluate its constituent companies. With the greater professionalisation of private firms, especially in the family business sector, the use of MoDs can be helpful. But since in India the usage of MoD is traditionally largely confined to the evaluation of performance in a public enterprise, we will take this opportunity to provide an exhibit which describes the context in which MoDs are used: Exhibit 13.6 describes how operational control is done in public enterprises in India. Operational Control of Public Enterprises in India The Government of India is the owner of public enterprises (PEs) in India and exercises control over them through different means. Basically, the PEs are accountable to the Parliament/State legislatures, through audit and annual reports. Administrative or controlling ministries, committees on Public Undertakings, Bureau of Public Enterprises, and the Controller and Auditor General of India are the main agencies concerned with the performance evaluation of PEs. The overall assessment of the performance evaluation system of PEs by several experts and committees over a period of time shows that several problems have to be resolved for an effective system to emerge. The memorandum of understanding (MoU) and the concept of holding companies are often suggested as a means for creating a better, freer, and more effective evaluation system.The basic elements of the performance evaluation system in PEs are as under: 1. Standards are set in terms of operational efficiency (short-term) and dynamic efficiency (which results in the long-term) requirements 2. The measurement of performance is based on a combination of quantitative and qualitative criteria, though in the latter case, subjectivity is sought to be limited by the use of rating scales and composite scoring 3. The techniques used for performance evaluation are financial (ratio analysis, funds flow, common size analysis, inter-firm comparisons and audits) and economic (input-output analysis, and time and

cost overruns in project implementation) 4. An analysis of the deviation of actual performance from the standard is done by various agencies named above and the reports are sent to the ministries and nodal agencies along with recommendations 5. Corrective action is initiated by the nodal agencies: Bureau of Public Enterprises for central undertakings and PE cells/state bureaus for state-level PEs. There are several PEs which have signed an MoU with the government since 1986, when this system was first adopted. But the results of using MoUs as an evaluation system have been mixed. Several PE managers are critical of the system and feel that devolution of authority from the government to PEs does not match the accountability expected. All the techniques discussed in this section have their respective merits and de. merits. Strategists have to exercise a judicious choice from among the techniques which can be used for strategic evaluation and control, on, the basis of the requirements of the strategy that they are implementing. It is also clear that both strategic and operational controls have to be used in tandem to have an effective evaluation system. ROLE OF ORGANISATIONAL SYSTEMS IN EVALUATION The process of strategic evaluation and control does not operate in isolation; it works on the basis of the different organisational systems that are used to implement strategies. In Section, 10.4, we described six organisational systems: information, control, appraisal, motivation, development, and planning. There, the thrust of discussion was on understanding the role that these systems play in strategy implementation are how they have to be adapted to suit the requirements of changing strategies. Here, we shall briefly review the role of organisational systems in evaluation. Information System Evaluation is done by comparing actual performance with standards. The measurement of performance is done on the basis of reports generated through the information system. In fact the purpose of information management system is to enable managers to keep track of performance through control reports. Several of the techniques described in the previous section, whether for strategic surveillance or financial analysis, are based on the use of an information system to provide relevant are.

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