Académique Documents
Professionnel Documents
Culture Documents
Objective
• To study the evolution of strategic management and understand the basics of
strategy and strategic management
--James M. Higgins
Strategic management is defined as the set of decisions and actions resulting in the
Notes formulation and implementation of strategies designed to achieve the objectives of the
organization
Strategic management can also be defined as a bundle of decisions and acts which
a manager undertakes and that decide the firm’s performance. The manager must
have a thorough knowledge and analysis of the general and competitive organizational
environment so as to take right decisions. They should conduct a SWOT Analysis
(Strengths, Weaknesses, Opportunities, and Threats), i.e., they should make best
possible utilization of strengths, minimize the organizational weaknesses, make
use of arising opportunities from the business environment and shouldn’t ignore the
threats. Strategic management is nothing but planning for both predictable as well as
unforeseen contingencies. It is applicable to both small as well as large organizations
as even the smallest organization face competition. By formulating & implementing
appropriate strategies, they can attain sustainable competitive advantage.
Strategic Management is a way in which strategists set the objectives and proceed
about attaining them. It deals with making and implementing decisions about future
direction of an organization. It helps us to identify the direction in which an organization
is moving.
The word “strategy” is derived from the Greek word “strategeos”; stratus (meaning
army) and “ago” (meaning leading/moving).
Strategy is an action that managers take to attain one or more of the organization’s
goals. Strategy can also be defined as “A general direction set for the company and its
various components to achieve a desired state in the future. Strategy results from the
detailed strategic planning process”.
A strategy is all about integrating organizational activities and utilizing and allocating
the scarce resources within the organizational environment so as to meet the current
objectives. While planning a strategy it is essential to consider that decisions are not
taken in a vaccum and that any action taken by a firm is likely to be met by a reaction
from those affected i.e. competitors, customers, employees or suppliers.
Henry Mintzberg, in his 1994 book, “The Rise and Fall of Strategic Planning “, points
out that people use “strategy” in several different ways, the most significant are--:
• Strategy is a plan, a “how,” a means of getting from here to there.
• Strategy is a pattern in actions over time; for example, a company that
regularly markets very expensive products is using a “high end” strategy.
• Strategy is position; that is, it reflects decisions to offer particular products or
services in particular markets.
• Strategy is perspective, that is, vision and direction.
Strategy needs to take into consideration the likely or actual behavior of others.
Strategy is the blueprint of decisions in an organization that shows its objectives
and goals, reduces the key policies, and plans for achieving these goals. It defines
the business the companies intend to carry on, the type of economic and human
organization they want to be, and the contribution they plan to make to its shareholders,
customers and society at large.
2. Strategy deals with long term developments rather than routine operations, i.e. it
deals with probability of innovations or new products, new methods of productions,
or new markets to be developed in future.
3. Strategy is created to take into account the probable behavior of customers and
competitors. Strategies dealing with employees will predict the employee behavior.
Over the years, the practice of strategy has evolved through five phases (each
phase generally involved the perceived failure of the previous phase):
4. Strategic Management
In the 1960s, George Steiner did much to focus business manager’s attention on
strategic planning, bringing the issue of long-range planning to the forefront. Managerial
Long-Range Planning, edited by Steiner focused upon the issue of corporate long-
range planning. He gathered information about how different companies were
using long-range plans in order to allocate resources and to plan for growth and
diversification.
A number of other linear approaches also developed in the same time period,
including “game theory”. Another development was “operations research”, an approach
that focused upon the manipulation of models containing multiple variables. Both have
made a contribution to the field of strategy.
While the theorists were arguing, one large US Company was quietly innovating.
General Electric Co. (GE) had begun to develop the concept of strategic business
units (SBUs) in the 1950s. The basic idea-now largely accepted as the normal and
obvious way of going about things-was that strategy should be set within the context of
individual businesses which had clearly defined products and markets. Each of these
businesses would be responsible for its own profits and development, under general
guidance from headquarters.
The evolution of strategy began in the early 1960s, when a flurry of authoritative
texts suddenly turned strategic planning from an issue of vague academic interest into
an important concern for practicing managers. Prior to this strategy wasn’t part of the
normal executive vocabulary.
Chandler talks about the development of the management of a large company from
Notes history; in particular from the mid nineteenth century to the end of the First World War
(what he calls ‘the formative years of modern capitalism’). During this period, the typical
entrepreneurial or family firm gave way to larger organizations containing multiple units.
A new form of management was needed because the owner-manager could not be
everywhere at once. In addition, a new breed of manager was needed to operate in this
environment – the salaried professional.
His influential book Strategy and Structure was published in 1962, appealing to
many large companies that were having difficulty in coping with their size. In recent
years it has come under heavy attack from critics, who maintain that strategy must be a
line responsibility, decided as close as possible
Wickham Skinner (1924-) who was based at Harvard since 1960, pointed out that
an excessive focus on marketing Planning frequently led companies to forget about
manufacturing needs until late in the day, when there was little room for manoeuvre.
Skinner argued for a clear manufacturing strategy to proceed in parallel with the
marketing strategy. In many ways he was ahead of his time, for the concept of
technology strategy or manufacturing strategy had only begun to take root in the 1980s
and many manufacturing companies still have no one in charge of this aspect of their
business.
One particularly influential idea from skinner was the ‘focused factory’. He
demonstrated that it was not normally possible for a production unit to focus on more
than one style of manufacturing. Even if the same machines were used to produce
basically similar products, if those products had very different customer demands
that required a different manner of working, the factory would not be successful. For
example, trying to produce equipment for the consumer market, where a certain error
rate in production was compensated for by higher volume sales at a lower price, was
incompatible with producing 100 per cent perfect product for the military. The most likely
outcome was a compromise that satisfies no one.
Paul Lawrence and Jay Lorsch, also from Harvard, put forth their contingency
theory of organizations. They argued that every organization is composed of multiple
paradoxes. On the one hand, each department or unit has its own objectives and
environment. It responds to those in its own way, both in terms of how it is structured,
the time horizons people assume, the formality or informality of how it goes about its
tasks and so on. All these factors contribute towards what they call ‘differentiation’. At
Igor Ansoff (1918-2002) through his unstintingly serious, analytical and complex,
Corporate Strategy, published in 1965, had a highly significant impact on the business
world. It propelled consideration of strategy into a new dimension. It was Ansoff who
introduced the term strategic management into the business vocabulary.
Ansoff’s sub-title was “An Analytical Approach to Business Policy for Growth
and Expansion. “ The end product of strategic decisions is deceptively simple; a
combination of products and markets is selected for the firm. This combination is
arrived at by addition of new product-markets, divestment from some old ones, and
expansion of the present position,” writes Ansoff. While the end product was simple,
the processes and decisions which led to the result produced a labyrinth followed only
by the most dedicated of managers. Analysis – and in particular ‘gap analysis’ (the gap
between where Organization are now and where Organization want to be) – was the
key to unlocking strategy.
The book also brought the concept of ‘synergy’ to a wide audience for the first time.
In Ansoff’s original creation it was simply summed up as the “2+2=5” effect. In his
later books, Ansoff refined his definition of synergy to any “effect which can produce a
combined return on the firm’s resources greater than the sum of its parts.”
While Corporate Strategy was a notable book for its time, it produced what Ansoff
himself labeled “paralysis by analysis”; repeatedly making strategic plans which
remained unimplemented.
Reinforced by his conviction that strategy was a valid, if incomplete concept, Ansoff
followed up Corporate Strategy with Strategic Management (1979) and Implanting
Strategic Management (1984). His other books include Business Strategy (1969),
Acquisition Behavior in the US Manufacturing Industry, 1948-1965 (1971), From
Strategic Planning to Strategic Management (1974), and The New Corporate Strategy
(1988).
The Problem with Strategic Planning (Analysis): The fuel for the modern growth
in interest in all things strategic has been analysis. While analysis has been the
watchword, data has been the password. Managers have assumed that anything
which could not be analyzed could not be managed. The belief in analysis is part of a
search for a logical commercial regime, a system of management which will, under any
circumstances, produce a successful result. Indeed, all the analysis in the world can
lead to decisions which are plainly wrong. IBM had all the data about its markets, yet
reached the wrong conclusions.
There are two basic problems with the reliance on analysis. First, it is all technique.
Notes The second problem is more fundamental. Analysis produces a self-increasing loop.
The belief is that more and more analysis will bring safer and safer decisions. The
traditional view is that strategy is concerned with making predictions based on analysis.
Predictions, and the analysis which forms them, lead to security. The bottom line is not
expansion, future growth or increased profitability-it is survival. The assumption is that
growth and increased profits will naturally follow. If, by using strategy, we can increase
our chances of predicting successful methods, then our successful methods will lead us
to survival and perhaps even improvement. So, strategy is to do with getting it right or,
as the more competitive would say, winning. Of course it is possible to win battles and
lose wars and so strategy has also grown up in the context of linking together a series
of actions with some longer-term goals or aims.
This was all very well in the 1960s and for much of the 1970s. Predictions and
strategies were formed with confidence and optimism (though they were not necessarily
implemented with such sureness). Security could be found. The business environment
appeared to be reassuringly stable. Objectives could be set and strategies developed to
meet them in the knowledge that the overriding objective would not change.
Under MBO, strategy formulation was seen as a conscious, rational process. MBO
ensured that the plan was carried out. The overall process was heavily logical and,
indeed, any other approach (such as an emotional one) was regarded as distinctly
inappropriate. The thought process was backed with hard data. There was a belief that
effective analysis produced a single, right answer; a clear plan was possible and, once
it was made explicit, would need to be followed through exactly and precisely.
In practice, the MBO approach demanded too much data. It became overly
complex and also relied too heavily on the past to predict the future. The entire system
was ineffective at handling, encouraging, or adapting to change. MBO simplified
management to a question of reaching A from B using as direct a route as possible.
Under MBO, the ends justified the means. The managerial equivalent of highways were
developed in order to reach objectives quickly with the minimum hindrance from outside
forces.
Henry Mintzberg’s book The Rise and Fall of Strategic Planning was first published
in 1994. “The confusion of means and ends characterizes our age,” Henry Mintzberg
observes and, today, the highways are likely to be gridlocked. When the highways are
blocked managers are left to negotiate minor country roads to reach their objectives.
And then comes the final confusion: the destination is likely to have changed during the
journey. Equally, while MBO sought to narrow objectives and ignore all other forces,
success (the objective) is now less easy to identify. Today’s measurements of success
can include everything from environmental performance to meeting equal opportunities
targets. Success has expanded beyond the bottomline.
Ansoff looked again at his entire theory. His logic was impressively simple – either
strategic planning was a bad idea, or it was part of a broader concept which was not
fully developed and needed to be enhanced in order to make strategic planning
effective. An early fundamental answer perceived by Ansoff was that strategic planning
is an incomplete instrument for managing change, not unlike an automobile with an
engine but no steering wheel to convert the engine’s energy into movement.
In 1972 Ansoff published the concept under the name of Strategic Management
through a pioneering paper titled The Concept of Strategic Management, which
was ultimately to earn him the title of the father of strategic management. The paper
asserted the importance of strategic planning as a major pillar of strategic management
but added a second pillar – the capability of a firm to convert written plans into market
reality. The third pillar- the skill in managing resistance to change – was to be added in
the 1980s.
Ansoff obtained sponsorship from IBM and General Electric for the first International
Conference on Strategic Management, which was held in Vanderbilt in 1973 and
resulted in his third book, From Strategic Planning to Strategic Management.
Between 1974 and 1979 Ansoff developed a theory which embraces not only
business firms but other environment-serving organizations. The resulting book titled
Strategic Management, was published in 1979.
Michael Porter of Harvard Business School is perhaps the best known of all the
strategy theorists. He has generally been more prolific than the rest. Porter has been
responsible for the writing of numerous books and articles that have been widely
accepted in the field. He has been especially involved in the creation or popularization
of a number of tools that have been widely used in the discipline.
Porter’s first book for practicing managers, Competitive Strategy; Techniques for
Analyzing Industries and Competitors, was first published in 1980. Drawing heavily
on industrial economics (a field of study that tries to explain industrial performance
through economics), he was trying ‘to take these basic notions and create a much
richer, more complex theory, much closer to the reality of competition’. The book defines
five competitive forces that determine industry profitability – Potential Entrants, Buyers
(Customers), Suppliers, Substitutes, and Competitors within the industry. Each of these
can exert power to drive margins down. The attractiveness of an industry depends on
how strong each of these influences is. Competitive Strategy brought together in a
rational and readily understandable manner both existing and new concepts to form a
coherent framework for analyzing the competitive environment.
The realization that he had not been focusing on choice of competitive positioning,
this work led Porter in turn to his interests in the concept of competitive advantage,
the theme of his next major book, Competitive Advantage: Creating and Sustaining
Superior Performance (1985). He sought a middle ground between the two polarized
approaches then accepted-on the one hand, that competitive advantage was achieved
by organizations adapting to their particular circumstances; and, on the other, that
competitive advantage was based on the simple principle that the more in-tune and
aware of a market a company is, the more competitive it can be (through lower prices
and increased market share). From analysis of a number of companies, he developed
“generic strategies”: Porter contends that there are three ways by which companies can
gain competitive advantage:
Porter insisted that though the “generic strategies” existed, it was up to each
organization to carefully select which were most appropriate to them and at which
particular time. The “generic strategies” are backed by five competitive forces which
are then applied to “five different kinds of industries” (Fragmented, Emerging, Mature,
Declining, and Global).
This has led to the myth of “sustainable competitive advantage”. In reality, any
competitive advantage is short-lived. If a company raises its quality standards and
increases profits as a result, its competitors will follow. If a company says that it
is reengineering, its competitors will claim to be reengineering more successfully.
Businesses are quick to copy, mimic, pretend and, even, steal. The logical and
distressing conclusion is that an organization has to be continuously developing
new forms of competitive advantage. It must move on all the time. If it stands still,
competitive advantage will evaporate before its very eyes and competitors will pass.
The dangers of developing continuously are that it generates, and relies on, a
climate of uncertainty. The company also runs the risk of fighting on too many fronts.
This is often manifested in a huge number of improvement programs in various parts
of the organization which give the impression of moving forward, but are often simply
cosmetic.
Porter would suggest that his “five forces model” and SWOT allow for nonlinear
analysis, but most would agree that the overlaying of a linear mental model (self-
confirming theory) on top of any nonlinear analysis would render any such argument
questionable.
From the early 1980s to the mid-1900s, approaches based on the equilibrium theory
repeatedly failed, and the level of dissatisfaction with this particular approach grew.
The new global competitive environment that emerged in the late 1980s demanded a
solution. TQM gained a great deal of popularity through the early 1990s, but it soon
fell far short of being a holistic solution. The generally accepted failure rate for TQM
initiatives during this period was over 80%. Failure to understand the critical role that
quality plays in corporate success can be disastrous, but TQM cannot replace strategy,
and it is wrong to believe that quality is all a company needs to be competitive. Quality
is simply the price of admission to play the game. Once in the game, it is strategy that
must drive organizational activities.
In the early 1990s, major consulting firms were overwhelmed with clients who
wanted to use process re-engineering as a solution – for everything from sagging profits
to product development cycles. Like TQM, process re-engineering failed to deliver,
with a failure rate of around 70%. As a result of these failures, many people began to
suggest that the real issue was change – and the usual preponderance of books soon
hit the market. However, once again, the general view was that the majority of change
initiatives added little value to the bottom line.
Discussions with a number of senior executives reveal that most people have given
up on the traditional strategic approach, which is based on mission statements and core
competencies. Interestingly, though, most of their companies still use that traditional
approach. It is important to understand that self-confirming theories of strategy remain
the most frequently used at this time, with well over 90% of all companies making use
of the approach, or of some hybrid that is based upon it. Why do people continue to use
the approach if they no longer trust it? There are a number of answers to that question.
First, most undergraduate and graduate schools still teach that approach, almost
exclusively. Second, the approach is easy to learn and understand. Third, it is
comforting, because it focuses upon what some have called “self-confirming theory” – it
confirms that what we have done in the past is good, since we are going to continue
to do in the future what we have done in the past (i.e. our future strategy will be based
upon our historic competencies).
As early as 1989, Rosabeth Moss Kanter was pointing out, in When Giants Learn
to Dance, the problems with another historic-linear approach, which she refers to as
“excellence”. People tend to love the idea of excellence. It makes for a great book title,
whether it involves “searching for excellence” or “building something to last”. Alongside
these books were the “7 Things That Companies do” titles, which again focused upon
excellence in practice.
From 1991 to 2001, rapid change and high levels of complexity have characterized
the global competitive environment. As the rate of environmental change accelerates,
and the level of complexity rises, the ‘rules of the game” change. Such changes mean
that the firm must change in harmony with the environment. If it does not, ultimately the
environment will eliminate it. For the company that does not change in harmony with the
environment, the result is deterioration and, perhaps, demise.
• As a complex system, every aspect off the firm (not just its strategies) must be
balanced with the future environment if the firm is to maximize performance.
Henry Mintzberg has famously coined the term “crafting strategy,” whereby strategy
is created as deliberately, delicately, and dangerously as a potter making a pot. To
Mintzberg strategy is more likely to “emerge,” through a kind of organizational osmosis,
than be produced by a group of strategists sitting round a table believeing they can
predict the future.
Mintzberg argues that intuition is “the soft underbelly of management” and that
strategy has set out to provide uniformity and formality when none can be created.
Another fatal flaw in the conventional view of strategy is that it tended to separate
the skills required to develop the strategy in the first place (analytical) from those
needed to achieve its objectives in reality (practical).
Mintzberg argues the case for what he labels ‘strategic programming’. His view is
that strategy has for too long been housed in ivory towers built from corporate data and
analysis. It has become distant from reality, when to have any viable commercial life
Notes strategy needs to become completely immersed in reality.
Mintzberg’s most recent work is probably his most controversial. “ Strategy is not
the consequence of planning but the opposite: its starting point,” he says countering the
carefully wrought arguments of strategists, from Igor Ansoff in the 1960s to the Boston
Consulting Group in the 1970s and Michael Porter in the 1980s. The Rise and Fall of
Strategic Planning is a masterly and painstaking deconstruction of central pillars of
management theory.
The divide between analysis and practice is patently artificial. Strategy does not stop
and start, it is a continuous process of redefinition and implementation. In his book, The
Mind of the Strategist, the Japanese strategic thinker Kenichi Ohmae says: “In strategic
thinking, one first seeks a clear understanding of the particular character of each
element of a situation and then makes the fullest possible use of human brain power to
restructure the elements in the most advantageous way. Phenomena and events in the
real world do not always fit a linear model. Hence the most reliable means of dissecting
a situation into its constituent parts and reassembling them in the desired pattern is
not a step-by-step methodology such as systems analysis. Rather, it is that ultimate
nonlinear thinking tool, the human brain. True strategic thinking thus contrasts sharply
with the conventional mechanical systems approach based on linear thinking. But it also
contrasts with the approach that stakes everything on intuition, reaching conclusions
without any real breakdown or analysis.”
When future could be expected to follow neat linear patterns, strategy had a clear
place in the order of things. Organizations are increasingly aware that, as they move
forward, they are not going to do so in a straight unswerving line. The important
ability now is to be able to hold on to a general direction rather than to slavishly
follow a predetermined path. Now, the neatness is being upset, new perspectives are
necessary. The new emphasis is on the process of strategy as well as the output.
Such flexibility demands a broader perspective of the organization’s activities and
direction. This requires a stronger awareness of the links between strategy, change,
team-working, and learning. Strategy is as essential today as it ever was. But, equally,
understanding its full richness and complexity remains a formidable task.
Kenichi Ohmae argues that an effective strategic plan takes account of three main
players – the company, the customer, and the competition – each exerting their own
influence. The strategy that ignores competitive reaction is flawed; so is the strategy
that does not take into account sufficiently how the customer will react; and so, of
course, is the strategic plan that does not explore fully the organization’s capacity to
implement it.
Kenichi Ohmae says that a good business strategy “is one, by which a company can
gain significant ground on its competitors at an acceptable cost to itself.” He believes
there are four principal ways of doing this:
1. Focus on the key factors for success (KFSs). Ohmae argues that certain
functional or operating areas within every business are more critical for
success in that particular business environment than others. If Organization
concentrate effort into these areas and their competitors do not, this is a source
3. Pursue aggressive initiatives. Frequently, the only way to win against a much
larger, entrenched competitor is to upset the competitive environment, by
undermining the value of its KFSs – changing the rules of the game by
introducing new KFSs.
“In each of these four methods, the principal concern is to avoid doing the same
thing, on the same battle-ground, as the competition,” Ohmae explains.
Kathryn Rudie Harrigan’s first book, Strategies for Declining Businesses focused
on declining businesses. Harrigan believes there is a life-cycle for businesses and they
need to revitalize themselves constantly to prevent decline. From declining businesses,
Harrigan moved on to the subject of vertical integration and the development of
strategies to deal with it. A central premise of the framework she developed was that,
as firms strived to increase their control over supply and distribution activities, they
also increased their ultimate strategic inflexibility (by increasing their exit barriers). In
search of more flexible approaches she carried out lengthy research into joint ventures.
Despite their boom, Harrigan’s research showed that between 1924 and 1985 the
average success rate for joint ventures was only 46 per cent and the average life span
a meager three and a half years. In her two books on joint ventures, Harrison argued
they will become a key element in competitive strategy. The reasons she gave for this
were: economic deregulation, technological change, increasing capital requirements in
connection with development of new products, increasing globalization of markets. She
predicted:
2. Teams of co-operating firms seeking each other out like favorite dancing
partners will soon replace many current industry structures where firms stand
alone.
3. To cope with these changes, managers must learn how to co-operate, as well
as compete, effectively.
Ameliorating the pain and avoiding premature death have been the motivating
Notes factors of Harrigan’s work. Harrigan’s argument is that endgame can be highly profitable
if companies adopt a coherent strategy sufficiently early. The strategic options are:
1. Divest now – the first company out usually gets the highest price; later leavers
may not get anything.
2. Last iceman –focusing on customer niches which will continue long-term and
will be prepared to pay a premium.
3. Selective shrinking – taking the profitable high ground and leaving the less
profitable low ground to the competitors.
4. Milking the business – the last option, but none the less a practical alternative
in many situations.
The complexity group falls into two categories. One might be called a “pure”
complexity-based group, the other a “hybrid”. In the case of the former, theorists
generally apply the concept of emergence to every situation. According to this group
predictive modeling is rendered useless by the chaotic nature of the environment. They
would suggest that any attempt to plan for the future is pointless.
The hybrid group also assumes that the Darwinian hypotheses may be used as a
metaphor for business systems. This particular group of thought is based upon the idea
that the firm may compete on the edge of chaos, that is in a state in which the system
is complex adaptive, but at the same time with a minimal level of predictability in the
system (Brown and Eisenhardt’s Competing on the Edge). This group of thinkers has
combined the emergent (complex-historic) approach with the extrapolation (simple-
future) approach
1.8.1 Emergence:
The emergence camp is divided into at least two or three distinctive groups.
Emergence-based theorists begin with the idea of complex systems and chaos theory.
Some suggest that the ability to deal with complexity on a futuristic basis is impossible.
Others suggest that it is possible to understand some aspects of futuristic systems. A
third group imposes naturalistic ecological presuppositions in its theory.
Ralph Stacey and Henry Mintzberg tend to hold to the view that it is simply not
possible to consider future complex environments. As a result they suggest that
the strategist must wait for events to occur, or emerge, then develop strategy. This
approach of “incrementalism” involves the “after the fact” development of strategy for
discontinuous events. Mintzberg suggests that, as discontinuous events occur, the firm
should dynamically craft strategy.Stacey generally agrees with Mintzberg, but in his
book ‘Managing the Unknowable’, he additionally suggests that it is possible to create
organizations that are designed to deal with ambiguity and complexity.
Scientific evidence generally refutes these particular views (along with others held
by Darwin), but Darwin’s hypothesis has none the less been adapted metaphorically to
complexity theory as it is applied in business. Those who subscribe to the theory say
that the evolution (from lower complexity to higher complexity) that occurs “naturally”
in nature must apply equally to businesses. Complexity management theorists go on
to suggest that one of the goals of every manager should be to allow the business to
emulate nature by “self-organizing”.
This theme is clearly revealed in Peter Senge’s 1999 book The Dance of Change. In
one article in the book, entitled “The leadership of profound change-toward an ecology
Notes of leadership”, Senge suggests that leaders need to understand more about nature and
to manage with that in mind. The CEO, according to Senge, is not the solution to driving
meaningful change in the organization.
Ralph Stacey His book Managing the Unknowable (1992) was really ahead of the
curve among the work of the proponents of complex adaptive systems. Stacey’s work
differs from that of many of the others in that particular school, since he suggests that
companies need to prepare proactively for complexity.
The positive aspect of the theory is that it turns managers toward thinking
about complex systems. There is no doubt that linear thinking (equilibrium-based
management theory) can damage a company, but the absence of scientific support
for “adaptive systems” (in either nature or in business) may also be problematic when
trying to build corporate strategy.
A number of people are now using the idea of complex dynamic systems as a way to
think about the competitive environment. Moving from the Darwinian presupposition of
C. K. Prahalad and Gary Hamel in their book ‘Competing for the Future’ first
published in 1994. Their work has gone through a number of cycles, or changes.
Early on, it seemed to focus on self-confirming theories. However, they were quick
to comprehend the apparent failure of that model, and began to move more toward
a complexity-based model. In their later works they have focused on anticipating the
complex nature of the future environment. At the same time they are not proponents
of strategy based on complex adaptive systems (the Darwinian hypotheses). A very
positive aspect of their work is their emphasis on proactive strategies for dealing with
future uncertainty.
The phrase “core competencies” has now entered the language of management. In
layman’s terms, core competencies are what a company excels at. Gary Hamel and
C K Prahalad define core competencies as “the skills that enable a firm to develop a
fundamental customer benefit.” They argue that strategic planning is neither radical
enough nor sufficiently long-term in perspective. Instead its aim remains incremental
improvement. In contrast, they advocate crafting strategic architecture. The
phraseology is unwieldy, but means basically that organizations should concentrate on
rewriting the rules of their industry and creating a new competitive industry.
At the heart D’Aveni’s ideas is his conclusion that companies need to be focused
Notes upon disrupting the market. He suggests that there are three critical factors that enable
a firm to deliver sustainable disruption in the market:
1. A vision for disruption.
2. Capabilities for disruption (the organization).
3. Product/market tactics used to deliver disruptions.
There are a number of similarities between the work of Ansoff and that of D’Aveni.
Both suggest that the environment involves some level of complexity and rate of
change. Both propose a contingency theory approach – that is, the organization must
be designed to respond to the present and future environment. Both believe that
the environment of the 1990s began a new period of highly turbulent, unpredictable,
changing environments.
Observing the global environment, and accepting the fact that there are two
environmental issues that strategists must address – complexity and rate of change –
it is clear that an organization must be continually changing in nonlinear terms both in
speed and in complexity. Rosabeth Moss Kanter’s useful idea of “contingency theory”
(presented in When Giants Learn to Dance) rightly suggests that the organization must
be able to respond contingently to future changes in the environment. Her approach
is similar to W. R. Ashby’s “requisite variety theorem” explained in his Introduction to
Cybernetics.
The modified Ansoff Model is also a hybrid. On one hand, a complex dynamic
systems approach is taken. On the other, an emergence approach is viewed as part of
the firm’s ability to respond to discontinuous events. Then, the firm is assessed using a
complex model to determine its ability aggressively to create the future strategy the firm
needs and the responsiveness capabilities of the firm to address discontinuous events
as they emerge.
Rosabeth Moss Kanter Also from Harvard Business School, the fact that Kanter
rejects the self-confirming approach to the development of strategy in favor of
contingency design is an important underpinning of her work. She believes that the
strategist must begin with an understanding of the future environment, then contingently
design the firm around that understanding. In her book When Giants Learn to Dance
(1990), she offers seven ideas that describe managers who will be successful in the
new corporate environment:
1. They operate without the power of the might of the hierarchy behind them
(leadership vs. positional power).
2. They can compete (internally) without undercutting competition).
3. They must have the highest ethical standards.
4. They possess humility.
5. They must have a process focus.
6. They must be multifaceted and ambidextrous (work across business units/
flexible).
The first approach might be called or AIS, which involves the creation of a computer-
based model in which key variables can be manipulated. The researcher might identify
10 independent variables that appear to drive certain outcomes (dependent variables).
In some cases it is possible to base the behaviors of the variables on statistically based
relationships. That adds power to the model. Regardless, the AIS process allows
the researcher to manipulate variables in order to develop some level of predictive
confidence in the future. In some ways, AIS can be similar to war gaming.
Scenarios: The concept of scenario planning was pioneered by oil giant Shell.
Creating one single strategic plan to be followed with military precision simply didn’t
work in practice. As circumstances changed, the strategic plan also needed changing
and executives were either constantly going back to the drawing board or trying to
push through a plan that was no longer appropriate. The longer the planning horizon,
the worse the problem became. Shell’s answer was to make not one but a number
of sets of assumptions about the future environment. At its simplest, these would be
optimistic, pessimistic, and straightline. Any one of these scenarios could happen,
but managers now drew up plans that followed the most likely series of events, while
building in frequent evaluation points where one of the alternative scenarios could take
over. In effect, what they were doing was thinking through the implications of necessary
deviations of a plan sufficiently far ahead to be able to implement them at minimum cost
and effort.
(information that indicates that the future environment will shift, and that the “rules of the
Notes game” will change) is more often rejected by senior managers than accepted. Managing
such resistance (which can be measured using the modified Ansoff model) is quite
important from a profit standpoint.
War gaming: War gaming is a good way of preparing for complex futures. War
gaming is somewhat similar to using scenarios. There are a number of ways of doing
it, but it generally involves the gathering of competitor information prior to beginning
the exercise. The information might cover the predisposition or probable behavior of
different competitors. Some might use a “five forces” analysis and a SWOT analysis (of
each competitor). A modified Ansoff strategic profile of each competitor can be a most
valuable tool.
War gaming involves the organization dividing its managers into teams, which take
on the role of competitors. The competitors simulate a battle. The game is played in
terms of successive “strategies” created by each team. The exercise facilitator creates
ways for the competitors to play out their strategy, based upon the research about the
competitor that they were given. In some cases, the senior executives of the client
firm will take on the role of strategists for their own firm, while their management team
will play the roles of their competitors. This can be an extremely revealing exercise,
especially when the third or fourth passes or battles are completed.
In many ways the value of war gaming, as with scenarios, is that of organizational
learning. War gaming can help internal managers to change their mental models of
the competitive environment as well as their perceptions of competitors’ most probable
behaviors. One word of caution: there is nothing more boring than a poorly conceived
war game, and the services of external facilitators are recommended; make sure that
the facilitators selected are at the cutting edge in their field. Those that revert to simple
(non complexity-based) approaches, such as SWOT alone, should be avoided
Notes
Summary
• Strategic management is defined as the set of decisions and actions resulting in the
formulation and implementation of strategies designed to achieve the objectives of
the organization
• Strategic management is a wide concept and encompasses all functions and thus it
seeks to integrate the knowledge and experience gained in various functional areas
of management.
• It enables one to understand and make sense of the complex interaction that takes
place between different functional areas.
• There are many constraints and complexities, which the Strategic management
deals with. In order to develop a theoretical structure of its own, Strategic
management cuts across the narrow functional boundaries. This in turn helps to
create an understanding of how policies are formulated and also creating a solution
of the complexities of the environment that the senior management faces in policy
formulation.
2. The competencies or skills that a firm employs to transform inputs into outputs are:
a) Tangible resources.
Notes
b) Intangible resources.
c) Organizational capabilities.
d) Reputational resources.
3. Which one of the following is not an aspect of profit or contribution arising from a
change in strategy?
a) Growth aspect
c) Price aspect
d) Effectiveness aspect
b) It is a continuous process
5. “A desired future state that the organization attempts to realize”. Identify the term
relevant to the given statement.
a) Goal
b) Strategy
c) Policy
d) Procedure
b) A discipline which integrates or combines all the courses related to the rest of
the business functions.
d) A philosophical doctrine.
7. Which management function includes breaking tasks into jobs, combining jobs to
form departments and delegating authority?
a) Motivating
d) Planning
a) Fewer complexes
b) More complex
c) Less static
d) More profitable
9. Which of the following period strategic management was considered to be cure for
all problems?
2. How Strategic management has evolved into a vital tool for management?
Explain its development
3. Define strategy and what is the difference between a strategy and a plan?
3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons
6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed.,
Notes PHI.
Case Study
From good to great: world-class innovation in consumer electronics
Challenge
A leading consumer electronics company had enjoyed impressive growth over the
last decade by excelling as a “fast follower.” But the company recognized that future
success would require becoming the leading innovator in the industry.
We worked with the client to diagnose its needs. Historically, innovation had been
led by technology teams in the business units (BU); marketing and sales groups
were brought in later to help execute. As a result, cross-BU collaboration was stifled,
innovation processes were inconsistent and often sub-standard and the process yielded
only incremental improvements rather than breakthrough innovations.
Discovery
Working closely with top management, we analyzed the company’s innovation
“fingerprint”—that is, its performance relative to its peers on critical dimensions such
as process, organization, and culture. Based on the company’s aspiration to lead the
industry, we analyzed current strengths and weaknesses and developed a blueprint
with five intersecting pieces:
• Setting an aspiration and strategy
• Discovering actionable market insight
• Embedding new innovation processes
• Mobilizing the organization
• Extending open innovation networks
Critically, this central team also played a role as an internal “incubator,” and quickly
helped some of the businesses rise above their daily operations, creating five cross-
functional teams to support the goal of innovating as part of daily work. We also helped
design performance indicators so that the company would know when the new system
was working and when mid-course corrections were needed.
Impact
The company now has a pipeline that includes ten breakthrough products in
development. Several have the potential to reach $1 billion in sales soon after launch,
an aspiration that has become a commitment to investors. The company has rolled
out its new innovation process to all its labs worldwide. And its new incubator team,
charged with collecting and generating insights, is now leading a strategic process to
manage its investments in innovation.
Objectives
• To understand the process of strategy management and patterns of strategy
development
• To assess the competitors and set goals and strategies to meet all existing and
potential competitors
“Strategic management is an ongoing process that assesses the business and the
industries in which the company is involved; assesses its competitors and sets goals
and strategies to meet all existing and potential competitors; and then reassesses each
strategy annually or quarterly [i.e. regularly] to determine how it has been implemented”
- Lamb 1984
These components are steps that are carried, in chronological order, when creating
a new strategic management plan. Present businesses that have already created a
strategic management plan will revert to these steps as per the situation’s requirement,
so as to make essential changes.
Also, discussions, interviews, and surveys can be used to assess the internal
environment. Analysis of internal environment helps in identifying strengths and
weaknesses of an organization.
As business becomes more competitive, and there are rapid changes in the external
environment, information from external environment adds crucial elements to the
effectiveness of long-term plans. As environment is dynamic, it becomes essential to
identify competitors’ moves and actions. Organizations have also to update the core
competencies and internal environment as per external environment. Environmental
factors are infinite, hence, organization should be agile and vigile to accept and adjust
to the environmental changes. For instance - Monitoring might indicate that an original
forecast of the prices of the raw materials that are involved in the product are no more
credible, which could imply the requirement for more focused scanning, forecasting and
analysis to create a more trustworthy prediction about the input costs.
• National environment
Strategic managers must not only recognize the present state of the environment
and their industry but also be able to predict its future positions.
Strategy formulation refers to the process of choosing the most appropriate course
of action for the realization of organizational goals and objectives and thereby achieving
the organizational vision. The process of strategy formulation basically involves six
main steps. Though these steps do not follow a rigid chronological order, however they
are very rational and can be easily followed in this order.
While fixing the organizational objectives, it is essential that the factors which
influence the selection of objectives must be analyzed before the selection of
objectives. Once the objectives and the factors influencing strategic decisions have
been determined, it is easy to take strategic decisions.
After identifying its strengths and weaknesses, an organization must keep a track of
competitors’ moves and actions so as to discover probable opportunities & threats to its
market or supply sources.
3. Setting Quantitative Targets - In this step, an organization must practically fix the
quantitative target values for some of the organizational objectives. The idea behind
this is to compare with long term customers, so as to evaluate the contribution that
might be made by various product zones or operating departments.
4. Aiming in context with the divisional plans - In this step, the contributions
made by each department or division or product category within the organization is
identified and accordingly strategic planning is done for each sub-unit. This requires
a careful analysis of macroeconomic trends.
Excellently formulated strategies will fail if they are not properly implemented. Also, it
is essential to note that strategy implementation is not possible unless there is stability
between strategy and each organizational dimension such as organizational structure,
reward structure, resource-allocation process, etc.
The significance of strategy evaluation lies in its capacity to co-ordinate the task
performed by managers, groups, departments etc, through control of performance.
Strategic Evaluation is significant because of various factors such as - developing
inputs for new strategic planning, the urge for feedback, appraisal and reward,
development of the strategic management process, judging the validity of strategic
choice etc.
Just to differentiate, by this, we do not mean the financial benefits alone (which
would be discussed below) but also the assessment of profitability that has to do with
evaluating whether the business is strategically aligned to its goals and priorities.
The key point to be noted here is that strategic management allows a firm to orient
itself to its market and consumers and ensure that it is actualizing the right strategy.
Closing Thoughts
In recent years, virtually all firms have realized the importance of strategic
management. However, the key difference between those who succeed and those who
fail is that the way in which strategic management is done and strategic planning is
carried out makes the difference between success and failure. Of course, there are
still firms that do not engage in strategic planning or where the planners do not receive
the support from management. These firms ought to realize the benefits of strategic
management and ensure their longer-term viability and success in the marketplace.
But in the world where strategies must be implemented, the three elements are
interdependent. Means are as likely to determine ends as ends are to determine
means. The objectives that an organization might wish to pursue are limited by the
range of feasible approaches to implementation. (There will usually be only a small
number of approaches that will not only be technically and administratively possible, but
also satisfactory to the full range of organizational stakeholders.) In turn, the range of
feasible implementation approaches is determined by the availability of resources.
“How can individuals, organizations and societies cope as well as possible with ...
issues too complex to be fully understood, given the fact that actions initiated on the
basis of inadequate understanding may lead to significant regret?”
Woodhouse and Collins claim that the essence of being “strategic” lies in a capacity
for “intelligent trial-and error” rather than strict adherence to finely-honed strategic
plans. Strategy should be seen as laying out the general path rather than precise steps.
In many respects such gradual change makes a lot of sense, and arguably
managers should seek to manage strategy so that it is achieved. No Organization
could function efficiently if it were to undergo frequent major revisions of strategy; and,
in any case, it is unlikely that the environment will change so rapidly that this would
be necessary. Incremental change might therefore be seen as an adaptive process
in a continually changing environment; indeed, this is the view held by some writers
on the management of strategy and by many managers themselves. There are,
however, dangers here. Environmental change may not always be gradually enough
for incremental change to keep pace: if such incremental strategic change lags behind
environmental change, the Organization may get out of line with its environment, and in
time may need more fundamental strategic change to occur. Mintzberg’s work seems
to suggest that this is so: transformational change tends to occur at times of crisis in
Organizations, typically when performance has declined significantly.
Notes
Strategies may also come about in opportunistic ways (route 5 in Exhibit2.3). For
example, as changes occur in the environment, or new skills are recognized, these
may be taken advantage of in an opportunistic manner. Indeed, a firm may be set up
in the first place because an entrepreneur sees an opportunity in the market; and the
likelihood is that, if the initial strategic approach of that firm is successful, that strategy
will persist for some time. On the other hand, a long-established firm may enter a
new market sector because of an opportunistic acquisition, for example. This is not to
suggest that such opportunistic developments are always wise, but they do occur, and
can lead to changes in the realized strategy of an Organization.
1. Issue awareness: the recognition that ‘something is amiss’, that a state of affairs
exists which needs remedying, or that an opportunity exists for development.
4. The selection of a solution: the means by which a decision about what is to be done
is reached.
The resolution (or definition) of what constitutes the nature of the issue may prove
difficult. Overall, formal analysis appears to play much less of a role than is suggested
in some management texts. Through debate and discussion, there will probably be an
attempt to reach an Organizational view or consensus on the problem to be tackled.
The emerging view will therefore take shape in terms of both individual and collective
experience, and different views will be resolved through social and political processes.
It may also be that these processes of issue formulation could trigger a different
problem, so the process tends to be interactive.
As has been seen, the process of developing solutions may overlap with the
processes of selecting solutions. They are somewhat arbitrary categorizations for the
purpose of description and might be regarded as part of the same process, in which a
limited number of potential solutions gradually get reduced until one or more emerges.
This may occur through ‘screening’, in which managers eliminate that which they
consider not to be feasible. However, the pre-dominant criterion for assessing feasibility
is not formal analysis but managerial judgment followed by political bargaining. Formal
analysis is the least observed of these three approaches, and needs again to be seen
in the context of social and political processes.
It should also be remembered that the process might well be taking place below the
most senior levels of management, so it may be necessary to refer possible solutions
to some higher level, and seeking this authorization is another way of selecting
between possibilities. Typically, though not always, authorization is sought for a
complete solution after screening has taken place. Thus raises the question of whether
it is sensible to view this referral as a sort of checking of an incrementally generated
strategic solution against some overall strategy.
The conservative influence of the paradigm (i.e., the frame of reference managers
have built up over time consisting of their beliefs and assumptions about the nature
of their business) and ‘the way we do things around here’ are likely to have important
implications for the development of strategy in Organizations.
Faced with pressures for change, managers will be likely to deal with the situation in
ways which protect the paradigm from challenge. This raises difficulties when managing
strategic change, for it may be that the action required is outside the scope of the
paradigm, and that members of the Organization would therefore be required to change
substantially their core beliefs or routines. Desirable as this may be, the evidence is
that it does not occur easily. Managers are much more likely to attempt to deal with
the situation by searching for what they can understand and cope with in terms of the
existing paradigm, and this seems to be especially so in Organizations in which there
is a particularly high degree of homogeneity in the beliefs and assumptions which
comprise it. Managers will, then, typically attempt to minimise the extent to which they
are faced with ambiguity and uncertainty by looking for that which is familiar.
Exhibit2.5 illustrates how this might occur. Faced with a stimulus for action, in
this case declining performance, managers first seek for means of improving the
implementation of existing strategy: this could be through the tightening of controls.
In effect, they will tighten up their accepted way of operating. It this is not effective,
a change of strategy may occur, but still a change which is in line with the existing
paradigm. For example, managers may seek to extend the market for their business,
but may assume that it will be similar to their existing market, and therefore set about
managing the new venture in much the same way as they have been used to. There
has been no change to the paradigm and there is not likely to be until this attempt to
reconstruct strategy in the image of the existing paradigm also fails. What is occurring
is the predominant application of the familiar and the attempt to avoid or reduce
uncertainty or ambiguity.
This pattern of drift is made more difficult to detect and reverse because although
changes are being made in strategy - albeit within the parameters of the paradigm -
such changes is the application of the familiar and may achieve some short-term
improvement in performance, thus tending to legitimize the action taken. However,
in time either the drift becomes apparent or environmental change increases, or
performance is affected. Strategy development is, then, likely to go into a state of flux,
with no clear direction, further damaging performance. Eventually more transformational
change is required, if the demise of the Organization is to be avoided.
The paradigm is, then, an inevitable feature of Organizational life which can be
thought of either as encapsulating the distinctive competences of the Organization or,
more dangerously, as a conservative influence likely to prevent change and result in a
momentum of strategy which can lead to strategic drift.
2.11 Summary
This Unit has dealt with the processes of strategic management as they are to
be found in Organizations: it is therefore descriptive not prescriptive. There is no
suggestion here that, because such processes exist, this is how strategy should
be managed. However, it is important to understand the reality of strategy making
in Organizations not least because those who seek to influence the strategy of
Organizations must do so within that reality. There is little point in formulating strategies
which may be analytically elegant without having an understanding of the processes
which are actually at work. Moreover, it is the intention that the subject should be
approached in such a way that it builds upon this understanding of reality and, wherever
possible, relates an essentially analytical approach to the real world of managers.
In this concluding section, some of the lessons of this Unit are summarized and
related to what follows in the rest of the book.
Over time the Organization may become out of line with a changing environment
(strategic drift), eventually reaching a point of crisis. At this time, more fundamental or
transformational change may occur.
The way in which managers assess the need for strategic change is through an
essentially qualitative assessment of signals which accumulate from inside and outside
the Organization.
The definition of strategic problems and choice of strategies by managers rely not
so much on dispassionate analysis of data as on (a) perceptions of what powerful
individuals in the Organization see as the problem, and (b) the manager’s reconciliation
of the circumstances of the situation with past experience and the received wisdom
encapsulated in the core assumptions and beliefs of the Organization, termed here the
paradigm.
The cultural web of an Organization - its political structures, routines, rituals and
symbols - is likely to exert a preserving and legitimizing influence on the core beliefs
and assumptions that comprise the paradigm, hence making strategic change more
difficult to achieve.
a) Social factors
b) Political factors
c) Legal factors
d) Organizational culture
b) Global impacts
6. The general conditions for competition that influence business firms, which provide
similar products and services is known:
a) Remote environment
b) International environment
c) External environment
d) Industry environment
7. All of these are pitfalls an organization should avoid in strategic planning EXCEPT:
11. ______ provides focus and direction for formulating strategy to achieve specific
organizational objectives.
a) Strategy by objectives
b) Management by strategy
c) Management by objectives
2. What are the financial and non-financial benefits of strategic management? Explain
with the help of examples
3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons
4. Regular reading of all latest Business Journals : HBR, Strategist, Busienss World,
Business India, Business Today.
6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed., PHI.
Branson’s business strategy places him at the forefront as the company’s most
effective marketing tool. He has become the world’s greatest underdog commented
a London analyst. He is great actor. In addition his strategy also involves making the
most of publicity. If you have got an airline, Branson asserted, you’ve got to keep it in
the public eye somehow. This he accomplishes through a variety of methods including
headline grabbing adventures such as crossing the Atlantic Ocean by speedboat and
balloon.
passengers at airports and asks them how they enjoyed their flights. Any time that he
Notes goes out to meet passengers he is always scribbling things he commented.
With the airline in an industry plagued by intense competition and price survival
remains a constant goal. Branson is therefore cautious. There are a lot of big airlines
in America that have gone belly-up. As airlines get bigger they sometimes get more
vulnerable. Branson is determined not to let happen to his airline.
In recent years, Branson appears to have mellowed with regard to his ambitions.
Before he wanted to build the biggest entertainment empire in the world.
Now, the man who has everything, doesn’t need more. There is also an element of
social crusading in him that needs to be assuaged. Branson has now found at least a
degree of contentment, He is now complacent that he has enough money to have three
meals a day, to feed his children, clothe them, take holidays and build up and continue
to run his companies. He has no more ambitions to build the biggest company in the
world.
Branson remain conservative in his lifestyle. He attributes this to his respect for
employees. As a businessman he thinks it’s very important to set an example for his
staff in the way you behave. You don’t drive flashy cars and you choose a wife who isn’t
into diamond rings and expensive, glitzy clothes .This he implied leads to a staff with
similar values.
In line with this, as Virgin has grown, Branson has broken operations down into
smaller companies of between 50 and 100 people. He believes that each company
should occupy separate offices and that employees should be able to take ownership
of their company. A culture that emphasizes individual responsibility in this way enables
drastic changes to take place quickly and easily.
The systems within the company are also very supportive of empowerment.
For example, through the strong communication system, budgeting is explained to
employees, with daily graphs that display performance by area in comparison to area
budgets. The hiring system also relies on the empowerment of employees. At one point
four junior employees were made responsible for hiring their own replacements when
they were promoted.
Virgin offices are extremely informal. With 15-foot ceilings, working fire places and
lavish gardens the building is more like a home than a place of business. Antiques are
scattered around, along with plush sofas, intimate family pictures, various plaques and
models of Virgin airplanes. And employees dress casually in line with the surroundings.
The elements of Virgin’s strategy thus clinch the company’s success. Under
Branson’s creative leader ship exciting twists promise to lie ahead.
Structure
3.1 External environment
3.2 Macro Environment Analysis
3.2.1 The PESTLE Factors
3.3 Micro Environment Analysis
3.3.1 Elements of Micro Environment
3.4 Industry Analysis, Using 5 Forces Model
3.5 Internal Environment
3.6 Internal Analysis using VRIO Framework: A Resource Based View of the Firm
3.7 Value Chain Analysis
3.8 Profiling Environmental Factors
3.9 Environmental Threat and Opportunity Profile (ETOP)
3.10 Organizational Capability Profile (OCP)
3.11 SWOT Analysis
Objectives
• To provide an insight into different types of environment , an organizations works in
Introduction
Each business organization operates in its unique environment. Environment
influence businesses and also get influenced by it. No business can function without
interacting and influencing forces that are outside its periphery
The environment can affect your start-up in dramatic ways. You can have the
best business idea with a great technology but it might still fail miserably if factors
like changes in the policies of the host government, new regulations or an economic
crisis in the host country come along. Therefore, it is imperative that you keep a close
Notes watch over environmental factors that affect your start-up and prepare adequately to
face the emerging challenges. Environmental scanning involves External and Internal
environmental Analysis.
It is not the strongest of the species that survive, nor the most intelligent, but
the one most responsive to change
Charles Darwin
The Macro environment includes Political and Legal forces, Macroeconomic forces,
Socio-Cultural forces, Technological forces, Ecological and at times International forces.
The Macro or General environment impacts the firm through its influence on the Micro
(also referred as Task /Industry environment)
When managers analyze the External environment they typically look for
Opportunities and Threats. Opportunities arise from circumstances or developments
in the external environment that, if exploited through strategies, enable managers
to better attain the goals of their Organization. Threats arise from circumstances or
• Economic factor- represent the wider economy so may include economic growth
rates, levels of employment and unemployment, costs of raw materials such as
energy, petrol and steel, interest rates and monetary policies, exchange rates and
Notes inflation rates. These may also vary from one country to another.
• Technological factor refer to the rate of new inventions and development, changes
in information and mobile technology, changes in internet and e-commerce or
even mobile commerce, and government spending on research. There is often a
tendency to focus Technological developments on digital and internet-related areas,
but it should also include materials development and new methods of manufacture,
distribution and logistics.
• Ecological factor impacts can include issues such as limited natural resources,
waste disposal and recycling procedures.
Micro environment factors are factors close to a business that have a direct impact
on its business operations and success. Before deciding corporate strategy businesses
should carry out a full analysis of their micro environment. At this point we discuss
common micro environment factors.
This is also known as the task environment and affects business and marketing
at the daily operating level. While the changes in the macro environment affect
business in the long run, the effect of micro environmental changes is noticed almost
immediately. Organizations have to closely analyse and monitor all the elements of
microenvironment in order to adapt to rapid change and stay competitive.
When carrying out a Macro environment analyses you will be seeking to answer the
questions “What will affect the growth of our Industry as a whole?” and “What is the
likely impact of all of the things that affect the growth of your industry?”
Hence, organizations must closely analyze and monitor all the elements of the
micro-environment on a regular basis. The elements of micro- environment are as
follows:
1. Consumers/Customers:
2. Organization:
However, they differ in beliefs, education, attitudes, and capabilities. When the
management and employees work towards different goals, everyone suffers.
3. Market:
Market refers to the system of contact between an organization and its customers.
The firm should study the trends and development and the key success factors of the
market, which are as follows:
a) The existing and the potential demand in market
b) Market growth rate
c) Cost structure
d) Price sensitivity
e) Technological structure
f) Distribution system, etc
4. Suppliers:
The suppliers refer to the providers of inputs, like raw materials, equipment and
services, to an organization. Large companies have to deal with hundreds of suppliers
to maintain their production.
Suppliers with their own bargaining power affect working and cost structure of the
industry. Hence it is important for an organization to carry out a study of the following:
5. Intermediaries:
Intermediaries include agents and brokers who facilitate the contact between
buyers and sellers for a commission. They may exert a considerable influence on
the business organizations as, in many cases, the consumers are not aware of the
manufacturers and their products. Hence, manufacturers use intermediaries to reach
out to consumers.
Porter’s Five Competitive Forces model is used by businesses when thinking about
business strategy and the impact of Information technology. This model can help a
business decide whether to, enter an industry or expand your business in the industry
you are already working on.
The more powerful these forces in an industry, the lower its profit potential.
The strength of each force differs by industry and changes over time. Porter’s Five
Competitive Forces model is used for industry analysis in several ways, to guide your
strategic decisions. Benefit from industry analysis by:
Industry Rivalry/Competitors
Rivalries naturally develop between companies competing in the same market.
Competitors use means such as advertising, introducing new products, more attractive
customer service and warranties, and price competition to enhance their standing and
market share in a specific industry. To Porter, the intensity of this rivalry is the result
of factors like equally balanced companies, slow growth within an industry, high
fixed costs, lack of product differentiation, overcapacity and price-cutting, diverse
competitors, high-stakes investment, and the high risk of industry exit. There are also
market entry barriers.
• Capital requirements for entry; the investment of large capital, after all,
presents a significant risk.
Notes
• Switching costs or the cost the buyer has to absorb to switch from one supplier
to another.
• Access to distribution channels. New entrants have to establish their
distribution in a market with established distribution channels to secure a
space for their product.
• Cost disadvantages independent of scale, whereby established companies
already have product technology, access to raw materials, favorable sites,
advantages in the form of government subsidies, and experience.
New entrants can also expect a barrier in the form of government policy through
federal and state regulations and licensing. New firms can expect retaliation from
existing companies and also face changing barriers related to technology, strategic
planning within the industry, and manpower and expertise problems. The entry deterring
price or the existence of a prevailing price structure presents an additional challenge to
a firm entering an established industry.
When managers analyze the internal environment of their own firm, they often do
so by identifying its strengths and weaknesses. This inward focus complements the
identification of opportunities and threats in the external environment.
The VRIO framework, in a wider scope, is part of a much larger strategic scheme
of a firm. The basic strategic process that any firm goes through begins with a vision
statement, and continues on through objectives, internal & external analysis, strategic
choices (both business-level and corporate-level), and strategic implementation. The
firm will hope that this process results in a competitive advantage in the marketplace
they operate in. VRIO falls into the internal analysis step of these procedures, but is
used as a framework in evaluating just about all resources and capabilities of a firm,
regardless of what phase of the strategic model it falls under. VRIO is an acronym
for the four question framework you ask about a resource or capability to determine
its competitive potential: the question of Value, the question of Rarity, the question of
Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit
the resource or capability).
• The Question of Value: “Is the firm able to exploit an opportunity or neutralize
an external threat with the resource/capability?”
• The Question of Rarity: “Is control of the resource/capability in the hands of a
relative few?”
• The Question of Imitability: “Is it difficult to imitate, and will there be significant
cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/
capability?”
• The Question of Organization: “Is the firm organized, ready, and able to exploit
the resource/capability?”
Valuable? Rare? Costly to Exploited by the Competitive implication
imitate? organization?
No Competitive disadvantage
Yes No Competitive parity
Yes Yes No Temporary competitive
advantage
Yes Yes Yes No Unexploited competitive
advantage
Yes Yes Yes Yes Sustained competitive advantage
Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its
goal is to recognize, which activities are the most valuable (i.e. are the source of cost
or differentiation advantage) to the firm and which ones could be improved to provide
competitive advantage. In other words, by looking into internal activities, the analysis
reveals where a firm’s competitive advantages or disadvantages are.
Value chain analysis is a powerful tool for managers to identify the key activities
within the firm which form the value chain for that organization, and have the potential
of a sustainable competitive advantage for a company. Therein, competitive advantage
of an organization lies in its ability to perform crucial activities along the value chain
better than its competitors.
Firstly, the value chain links the value of the organizations’ activities with its main
functional parts. Then the assessment of the contribution of each part in the overall added
value of the business is made. In order to conduct the value chain analysis, the company
is split into primary and support activities. Primary activities are those that are related with
production, while support activities are those that provide the background necessary for
the effectiveness and efficiency of the firm, such as human resource management. The
primary and secondary activities of the firm are discussed in detail below.
• Inbound logistics: These are the activities concerned with receiving the
materials from suppliers, storing these externally sourced materials, and
handling them within the firm.
• Operations: These are the activities related to the production of products and
services. This area can be split into more departments in certain companies.
For example, the operations in case of a hotel would include reception, room
service etc.
• Outbound Logistics: These are all the activities concerned with distributing
the final product and/or service to the customers. For example, in case of a
hotel this activity would entail the ways of bringing customers to the hotel.
• Marketing and Sales: This functional area essentially analyses the needs and
wants of customers and is responsible for creating awareness among the target
audience of the company about the firm’s products and services. Companies
make use of marketing communications tools like advertising, sales promotions
etc. to attract customers to their products.
Support activities
The support activities of a company include the following:
• Procurement: This function is responsible for purchasing the materials that are
necessary for the company’s operations. An efficient procurement department
should be able to obtain the highest quality goods at the lowest prices.
There are many strategy considering parameters which can be classified under
two broad categories viz., internal factors and external factors to the organization. In
order to access the importance and effect of change in such factor on the operation
and strategy of the business various model, such as Strategic Advantage Profile
(SAP), Environmental Threat and Opportunity Profile(ETOP), Organizational Capability
Profile(OCP) are developed by experts.
After the preparation of OCP, the organization is in a position to assess its relative
strength and weaknesses vis-a-vis its competitors. If there is any gap in area, suitable
action may be taken to overcome that.OCP shows the company’s capacity. OCP tells
about company’s potential and capability. OCP tells what company can do.
1. The organization should identify the factors which are relevant for determining
success in the industry concerned. These factors are known as KSF.
3. After identifying advantage, the next step is to measure their sustainability because
any advantage may turn into disadvantage due to change in environmental factors.
Factors Advantage/Disadvantage Sustainability
High Medium Low High Medium Low
±3 ±2 ±1 (3) (2) (1)
1. Product related
a. Appearance
b. Style
c. Functionality
d. Range
e. Cost structure
2. Market related
Notes a. Pricing
b. Distribution channel
c. Customer service
d. Customer relationship
e. Customer satisfaction
f. Brand loyalty
g. Market share
• What are the strengths and weaknesses of each competitor? (Think Competitive
Advantage)
• What does it take to be successful in this market? (List the strengths all companies
need to compete successfully in this market.)
• What are our company resources – assets, intellectual property, and people?
Competitor analysis
The following area analysis is used to look at all internal factors affecting a company:
The External Analysis examines opportunities and threats that exist in the
environment. Both opportunities and threats exist independently of the firm. The way
to differentiate between a strength or weakness from an opportunity or threat is to
ask: Would this issue exist if the company did not exist? If the answer is yes, it should
be considered external to the firm. Opportunities refer to favorable conditions in the
environment that could produce rewards for the organization if acted upon properly.
That is, opportunities are situations that exist but must be acted on if the firm is to
benefit from them. Threats refer to conditions or barriers that may prevent the firms
from reaching its objectives.
The following area analysis is used to look at all external factors affecting a
company:
• Market analysis: Overall size, projected growth, profitability, entry barriers, cost
Notes structure, distribution system, trends, key success factors
The SWOT Matrix helps visualize the analysis. Also, when executing this analysis
it is important to understand how these elements work together. When an organization
matched internal strengths to external opportunities, it creates core competencies in
meeting the needs of its customers. In addition, an organization should act to convert
internal weaknesses into strengths and external threats into opportunities.
Iternal External
Strengths Opportunities
Weaknesses Threats
Exhibit 3.6 – SWOT Analysis
Identify
• Can these competitors be grouped into strategic groups on the basis of assets,
competencies, or strategies?
• Who are potential competitive entrants? What are their barriers to entry?
Evaluate
• Tangible resources are the easiest to identify and evaluate: financial resources
and physical assets are identifies and valued in the firm’s financial statements.
Human resources or human capital are the productive services human beings offer
the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.
Capabilities
Resources are not productive on their own. The most productive tasks require
that resources collaborate closely together within teams. The term organizational
capabilities are used to refer to a firm’s capacity for undertaking a particular productive
activity. Our interest is not in capabilities per se, but in capabilities relative to other
firms. To identify the firm’s capabilities we will use the functional classification approach.
A functional classification identifies organizational capabilities in relation to each of the
principal functional areas.
Notes
Summary
• Two types of Business environment exists
a. External or Macro level Environment
b. Internal or Micro level Environment
• Porters Five forces Model
a. Potential Entrants
b. Buyer’s
c. Substitutes
d. Suppliers
e. Competition
Porter’s Five Competitive Forces model is used by businesses when thinking about
business strategy and the impact of Information technology. This model can help a
business decide whether to, enter an industry or expand your business in the industry
you are already working on
VRIO is an acronym for the four question framework you ask about a resource or
capability to determine its competitive potential: the question of Value, the question
of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of
Organization (ability to exploit the resource or capability).
ETOP is summarized depiction of the environmental actors and their impact on the
organization. SAP describes the organization’s competitive position in the market place.
A comparison of SAP and OCP shows that, OCP indicates what the organizations do
base on its capability. SWOT is an acronym used to describe the particular Strengths,
Weaknesses, Opportunities, and Threats that are strategic factors for a specific
company. A SWOT analysis should not only result in the identification of a corporation’s
core competencies, but also in the identification of opportunities.
a) Consumer
b) Suppliers
c) Society
d) Competitors
d) None
a) Society
b) Technology
c) Competitors
d) Competitors
a) Intellectual, Operational
b) Operational, Intellectual
c) Intelligent, Interim
Notes
d) Interim, Intellectual
a) Threat
b) Weakness
c) Loophole
d) Deviation
a) Avoid;Neutralize,Correct
b) Exploit,Neutralize,Correct
c) Avoid,Capitalize,Neutralize
d) Exploit,Avoid,Ignore
7. Expand KSF--
ii. Various environmental constituents exist in isolation and do not interact with
each other
Competitive Rivalry
As described above three dominant players operate in this oligopolistic global
industry. The industry is capital intensive and there is a requirement for high investment
in advanced technology and research and development. No single manufacturer
dominates the industry, so balance fuels the rivalry. Competition in the primary market
for aero-engines is intensified by the link to the secondary market for engine part sales
and services. Access to the secondary market is dependent on achieving the original
sale of new engines. In recent years the intensity of competition has increased as
each manufacturer has tried to improve its volumes and market share. Rivalry has also
intensified because gas turbine engines are now essentially a mature product and the
potential for technological differential advantage has been reduced.
Power of Buyers
The numbers of potential buyers of new aircraft are low. Buyers of aircraft engines
are therefore essentially price makers, with the market price for new engines being
largely set by the buyer. The power of buyers has further increased in recent years
as many airlines have become ‘global carriers’. The decision to purchase a particular
aircraft or engine combination is a long-term one. This means that failure to secure an
order may prevent an engine manufacturer trading with a particular airline for more
than a decade. The selection of one engine type can lead to a domino effect, with
other competing buyers following the same selection. Airlines are increasingly seeking
lifetime cost of ownership guarantees, and reduced repair costs.
Power of Supplier
The suppliers to the aero-engine manufacturer have limited power. There are many
hundreds of different suppliers to the aero-engine industry. They supply all nature of
components, from nuts and bolts to state-of-the-art electronic control systems costing
Notes hundreds of thousands of pounds. The power of many of the smaller companies,
which represent most of the supplier base, has been reduced. This is due to engine
manufacturers adopting dual sourcing strategies, using a range of alternative sources
of supply. The most powerful suppliers are those involved in the supply of high
specification electronic control equipment.
Threats of Entry
Although not unknown, entry to the aero-engine industry is extremely difficult. The
highly specialized advanced nature of aero-engine design combined with the costs of
research and development as well as the confidence of customers represent significant
barriers to entry. New engines also need extensive testing before gaining airworthiness
approval from the authorities. The market is also sensitive to the reputation of the
engine manufacturer, where names such as Rolls-Royce represent a range of proven
high-technology products.
Threats of Substitutes
There is no substitute for an aero engine and the threat of substitutes for air
transport itself is minor. However, it is thought that the development of video
conferencing capability will reduce some business travel and the growth of high speed
train travel (e.g. Eurostar) will affect some travel decisions. However, both of these
developments are taking place at a time when the demand for air travel is increasing.
This analysis shows that the commercial aero-engine business is highly competitive,
with the buyer possessing and exerting a very powerful influence upon organizations.
The high barriers to entry and the low threat of substitutes indicate that existing
competitors will continue to share the business between them. However, a slowdown
in industry growth and the increasing maturity of products will intensify the degree of
rivalry between the engine manufacturers.
Conclusion
In response to changes within its business environment, Rolls-Royce has developed
its orientation from that of engineering to become more business- and service-focused.
The organization has had to become much more proactive, dealing with new ideas to
create more services and customer focus. In the past, change was rare and slow, the
company tended to follow the market trend. The structure of the organization has been
realigned to meet the needs of the new way of operating. Organizational structures
define important relationships within the business and create a mechanism for meeting
business objectives. At the same time, it has been important to create a new business
culture within Rolls-Royce. A culture exists within the minds and hearts of the people of
an organization and contributes to the way they make decisions and develop business
strategies. As an organization changes from a product-focused organization towards
becoming a service-orientated culture, this requires more involvement of its people, with
greater empowerment and rapid decision-taking. The corporate identity is the sum of
the culture and its expression in behaviour and physical terms. Rolls-Royce has defined
the identity that it needs to encourage, building on its past reputation and achievements
for continuing success. As these changes take place, the organization is also realigning
its financial reporting framework and corporate governance. This will change how the
whole business shapes its purposes and priorities.
Structure
4.1 Strategy Formulation Process
4.2 The Industry and Market Place
4.3 The Competition
4.4 Strength & Weaknesses
4.5 Developing a Strategic Vision, a Mission , and set of Core Values
4.5.1 Developing a Strategic Vision
4.5.2 Communicating the Strategic Vision
4.5.3 Expressing the Essence of the Vision in a Slogan
4.5.4 The Payoffs of a Clear Vision Statement
4.5.5 Crafting a Mission Statement
4.5.6 Linking the Vision and Mission with Company Values
4.6 Setting Objectives
4.6.1 Kinds of Objectives to Set
4.6.2 The Merits of Setting Stretch Objectives
4.6.3 Why Both Short – Term and Long Term Objectives are Needed
4.6.4 The Need for Objectives at All the Organizational Levels
4.7 Crafting a Strategy
Objectives
• To get an overlook on Strategy formulation phases
• To make readers learn about crafting vision-mission-objectives statement of an
organization
• To make readers aware ,essence of vision-mission-objectives to an
organization
”Strategic Management is not a tool box of tricks or a bundle of techniques, It is
analytical thinking and commitment of resources to action “.
Peter Drucker
Introduction
Strategy is consciously considered and flexibly designed scheme of corporate intent
and action to achieve effectiveness to mobilize resources to direct behavior to handle
events and problems to perceive and utilize opportunities and to meet challenges
and threats to corporate survival and success. The concept of strategy into business
organizations is indended to streamline the complexities and reduce uncertainty of the
environment.
“The distinction between a strategic vision and a mission statement is fairly clear-
cut: A strategic vision portrays a company’s aspirations for its future (“where we are
going”), whereas a company’s mission describes its purpose and its present business
(“who we are, what we do, and why we are here”)”.
“In most companies, crafting strategy is a collaborative team effort that includes
Notes managers in various positions and at various organizational levels. Crafting strategy is
rarely something only high-level executives do”.
A company that has not taken the time to develop a strategic plan will not be able to
provide its employees with direction or focus. Rather than being proactive in the face
of business conditions, an organization that does not have a set strategy will find that
it is being reactive; the organization will be addressing unanticipated pressures as they
arise; and the organization will be at a competitive disadvantage.
Let’s review some of the ways in which companies can define themselves.
End Benefit
Organizations must remember that people are buying benefits not features. For
example, if an airline only defined itself as being in the business of flying people from
one place to another, then it would view its competition as being only other airlines.
However, if it views itself as being in the transportation business, then it will recognize
that its competition includes not only other airlines, but also trains, buses, car rental
companies, and other ways of getting people from one place to another place. An
airline must highlight the benefits of using its method of transportation as a means of
persuading customers to purchase its service.
Furthermore, an organization can explain how its product works or how it is built.
Inevitably, customers will ask the question, “What’s in it for me?” Companies must be
able to answer this question in order to meet the needs of their customers. They must
For example, Nike has successfully identified itself not only with professional
athletes, but with those who want to be part of the athlete world. Nike’s marketing
message has made everyone who wishes to participate in sports feel as if they can
achieve their athletic goals. While most people who purchase Nike products are not
professional athletes, the people who buy Nike’s products are able to identify with
Nike’s culture and feel like they are part of an exclusive group.
Technology
Computer companies, medical research companies, and other companies that
identify themselves with the tech world will find that they must be able to quickly adapt
to changes in the marketplace. New products, services, and inventions are frequently
introduced, making this a very difficult and challenging business environment in which
to operate. For example, Genentech, Inc. conducts genetic engineering and medical
research for the pharmaceutical industry. This company uncovers and discovers new
advances every day, making it challenging to develop a specific strategy plan for its
products and services. However, by defining the company as being in the biotech
industry, it can develop a strategy for its overall corporate goals.
A business organisation has to define its competitive strategy to guide and focus its
Notes future decisions, and to gain sustainable competitive advantage over its rivals to make
the organisation successful in long run. Organizational results are the consequences of
the decisions made by its leaders. The framework that guides and focuses competitive
positioning decisions is called competitive strategy. The purpose of competitive strategy
is to gain sustainable competitive advantage over the rivals.
Three factors must be considered when determining the overall competitive strategy:
The Industry and Marketplace, The Company’s Position relative to the Competition, and
the Company’s Internal Strengths and Weaknesses.
A sampling of vision statements currently in use shows a range from strong and
clear to overly general and generic. A surprising number of the vision statements found
on company Web sites and in annual reports are vague and unrevealing, saying very
little about the company’s future direction. Some could apply to almost any company
in any industry. Many read like a public relations statement— high-sounding words
that someone came up with because it is fashionable for companies to have an official
vision statement.
But the real purpose of a vision statement is to serve as a management tool for
giving the organization a sense of direction. Like any tool, it can be used properly or
improperly, either clearly conveying a company’s future strategic path or not.
For a strategic vision to function as a valuable managerial tool, it must convey what
management wants the business to look like and provide managers with a reference
point in making strategic decisions and preparing the company for the future. It must
say something definitive about how the company’s leaders intend to position the
company beyond where it is today.
Hence, reiterating the basis for the new direction, addressing employee concerns
head-on, calming fears, lifting spirits, and providing updates and progress reports
as events unfold all become part of the task in mobilizing support for the vision and
winning commitment to needed actions.
Winning the support of organization members for the vision nearly always means
putting “where we are going and why” in writing, distributing the statement organization
wide, and having executives personally explain the vision and its rationale to as many
people as feasible. A strategic vision can usually be stated adequately in one to two
paragraphs, and managers should be able to explain it to the company personnel and
outsiders in 5 to 10 minutes.
Ideally, executives should present their vision for the company in a manner that
reaches out and grabs people. An engaging and convincing strategic vision has
enormous motivational value—for the same reason that a stonemason is more inspired
by building a great cathedral for the ages than simply laying stones to create floors and
walls.
• Levi Strauss & Company: “We will clothe the world by marketing the most
Notes appealing and widely worn casual clothing in the world.”
• Nike: “To bring innovation and inspiration to every athlete in the world.”
• Scotland Yard: “To make London the safest major city in the world.”
(1) It crystallizes senior executives’ own views about the firm’s long-term direction;
(3) It is a tool for winning the support of organization members for internal changes
that will help make the vision a reality;
The mission of Trader Joe’s is to give our customers the best food and beverage
values that they can find anywhere and to provide them with the information required
for informed buying decisions. We provide these with a dedication to the highest quality
of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual
pride, and company spirit.
Note that Trader Joe’s mission statement does a good job of conveying “who we
are, what we do, and why we are here,” but it says nothing about the company’s long-
term direction.
Not many company mission statements fully reveal all these facets of the
business or employ language specific enough to give the company an identity that is
distinguishably different from those of other companies in much the same business or
industry. A few companies have worded their mission statements so obscurely as to
mask what they are all about. Occasionally, companies couch their mission in terms of
making a profit. This is misguided.
Most companies have identified four to eight core values. At FedEx, the six core
values concern people (valuing employees and promoting diversity), service (putting
customers at the heart of all it does), innovation (inventing services and technologies to
improve what it does), integrity (managing with honesty, efficiency, and reliability), and
loyalty (earning the respect of the FedEx people, customers, and investors every day, in
everything it does).
Do companies practice what they preach when it comes to their professed values?
Sometimes no, sometimes yes—it runs the gamut. At one extreme are companies with
window-dressing values; the values are given lip service by top executives but have
little discernible impact on either how company personnel behave or how the company
operates. Such companies have value statements because they are in vogue and
make the company look good. At the other extreme are companies whose executives
are committed to infusing the company with the desired character, traits, and behavioral
norms so that they are ingrained in the company’s corporate culture—the core values
thus become an integral part of the company’s DNA and what makes it tick. At such
value-driven companies, executives “walk the talk” and company personnel are held
accountable for displaying the stated values.
At companies where the stated values are real rather than cosmetic, managers
connect values to the pursuit of the strategic vision and mission in one of two ways.
In companies with long-standing values that are deeply entrenched in the corporate
culture, senior managers are careful to craft a vision, mission, and strategy that match
established values; they also reiterate how the value-based behavioral norms contribute
to the company’s business success. If the company changes to a different vision or
strategy, executives take care to explain how and why the core values continue to be
relevant. In new companies or companies having unspecified values, top management
has to consider what values, behaviors, and business conduct should characterize
the company and then draft a value statement that is circulated among managers and
employees for discussion and possible modification.
A final value statement that incorporates the desired behaviors and traits and that
connects to the vision and mission is then officially adopted. Some companies combine
their vision, mission, and values into a single statement or document, circulate it to
all organization members, and in many instances post the vision, mission, and value
statement on the company’s Web site.
As Mitchell Leibovitz, former CEO of the auto parts and service retailer Pep Boys,
once said, “If you want to have ho-hum results, have ho-hum objectives.”
The ideal situation is a team effort in which each organizational unit strives to
produce results in its area of responsibility that contribute to the achievement of the
company’s performance targets and strategic vision. Such consistency signals that
organizational units know their strategic role and are on board in helping the company
move down the chosen strategic path and produce the desired results.
Masterful strategies come from doing things differently from competitors where
it counts—out-innovating them, being more efficient, being more imaginative,
adapting faster—rather than running with the herd. Good strategy making is therefore
inseparable from good business entrepreneurship. One cannot exist without the other.
Strategy Making Involves Managers at All Organizational Levels
Managers with day-to-day familiarity of, and authority over, a specific operating unit
thus have a big edge over headquarters executives in making wise strategic choices for
their operating unit.
Take, for example, a company like General Electric, a $183 billion global corporation
with 325,000 employees, operations in some 100 countries, and businesses that
include jet engines, lighting, power generation, electric transmission and distribution
equipment, housewares and appliances, medical equipment, media and entertainment,
locomotives, security devices, water purification, and financial services.
The level of strategy also has a bearing on who participates in crafting strategy. In
diversified companies, where multiple businesses have to be managed, the strategy-
making task involves distinct levels of strategy which are taken up later.
Summary
Notes Developing a strategic vision and mission, setting objectives, and crafting a
strategy are basic direction-setting tasks. They map out where a company is headed,
its purpose, the targeted strategic and financial outcomes, the basic business model,
and the competitive moves and internal action approaches to be used in achieving
the desired business results. Together, they constitute a Strategic Plan for coping with
industry conditions, outcompeting rivals, meeting objectives, and making progress
toward the strategic vision.
In companies that do regular strategy reviews and develop explicit strategic plans,
the strategic plan usually ends up as a written document that is circulated to most
managers and perhaps selected employees. Near term performance targets are
the part of the strategic plan most often spelled out explicitly and communicated to
managers and employees.
a) Internal analysis
b) Set objectives
d) External analysis
a) Environment
b) Values
c) Ethics
d) Social Responsibility
a) Objectives
b) Vision
c) Mission
d) All
a) Goals
b) Vision
c) Mission
d) Objectives
a) Supervise, Amend
b) Guide, Focus
c) Plan, Control
d) Implement, Sustain
a) Internal
b) Perpetual
c) External
d) Short Termed
b) Focus
c) Direction
d) Future Plans
3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons
6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed.,
PHI.
Case in point
Virgin Trains: Vision to Success
Virgin Train is known for running high quality, fast and reliable state-of-the-art
trains, capable of speeds of up to 125 miles per hour. Virgin Trains operates the West
Coast rail franchise with trains running along various routes including from Glasgow,
Manchester and Birmingham to London. The average journey time from Manchester
to London today is just over two hours. Virgin Trains currently operates 333 trains
and carries more than 62,000 passengers a day. Until 1993, railways in Britain had
been part of the public sector. They were run by an organization appointed by the
government called British Rail. The culture was one where managers passed down
instructions and directions to employees who carried them out without questioning
them. Since 1997, Virgin Trains has been running the West Coast and other lines as an
independent private sector business.
New Vision
In 2003, the Chief Executive of the company, Tony Collins, set out his vision for
the company, which has transformed its operations. Virgin Trains’ vision involves the
empowerment of staff to take responsibility and ownership of their performance. This
vision is what makes Virgin Trains different. This case study looks at how this vision
is transforming the culture and performance of Virgin Trains. A vision enables an
organization to move forward with clarity. It links the business’ specific objectives and
targets with the core values that govern how the business will operate in order to meet
those targets. It therefore goes further than a mission statement.
A mission statement sets out the purpose of an organization. For example, for Virgin
Trains, this is to run a high quality, efficient and cost-effective rail service. A vision goes
further. It paints a picture in clear language of where the organization is going, linked to
the behaviours it expects of everyone in the organization.
Virgin Trains’ vision is: “To become the most safe, consistent, reliable and profitable
of the train operating franchises in a climate that respects different views and people
need not be afraid to be open and honest”.
1. It sets out the values of the company, e.g. safety and reliability.
3. It sets out the relationship between the organization and its people respecting
different views and encouraging openness and honesty.
4. This vision reflects Virgin Trains’ forward-thinking style. This may stand the
company in good stead in any future franchise bids
Structure
5.1 The components of Strategy
5.1.2 The Three Levels of Organizational Strategy
5.2 Corporate Level Strategy
5.3 Business Unit Level Strategy
5.4 Functional Level Strategy
5.5 Difference &Relationship between Corporate & Business Level Strategies
5.6 Classification of Corporate Strategy
5.7 Corporate directional Strategy
5.7.1 Growth Strategies
5.7.2 Stability Strategies
5.7.3 Retrenchment Strategies
5.8.1 Grand Strategy Selection Matrix (GSSM)
5.8.2 Corporate Portfolio Analysis
5.8.3 The Boston Consulting Group(BCG) Matrix
5.8.4 GE/McKinsey Matrix
5.8.5 Hofer’s Model or ADL Matrix- Arthur D. Little Matrix
5.9 The Competitive Position
5.9.1 The Life Cycle Stages
5.9.2 The Use of ADL Matrix
5.9.3 Defining the Line of Business in the ADL Matrix
5.9.4 Assessing the Industry Life Cycle Stage in the ADL matrix
5.9.5 Limitation
5.10 Corporate Parenting Strategy
5.11 The Parenting Advantage
5.11.1 Understanding the Parenting Grid
5.12 Classification of Business Level Strategies
5.13 Analysis of Business Level Strategies: Porter’s Generic Business Strategies
5.13.1 Cost Leadership Strategies
5.13.2 Differentiation Strategies
5.13.3 Focus
5.14 Functional Level Strategies
Objectives
• To understand different components of strategy.
• To provide students insight into the levels of strategy.
• To make students understand Ansoff’s Growth Strategy Matrix, Grand Strategy
Selection Matrix (GSSM), Corporate Portfolio Analysis , The Boston Consulting
Group (BCG) Matrix, GE/McKinsey Matrix, Hofer’s Model and ADL Matrix and
implications of the strategies.
Amity Directorate of Distance & Online Education
Business Policy & Strategic Management 93
Introduction
“There are many types of strategies in the business world, business-level strategies Notes
and corporate-level strategies, functional-level strategies. All types of strategy are
important to businesses, but they are very different. Managers should understand the
differences between these levels of strategy and the relationship between them”.
• Corporate Level
At the corporate level, Organizations are responsible for creating value through their
businesses. Organization do so by managing their portfolio of businesses, ensuring
that their businesses are successful over the long term, developing business units,
and sometimes ensuring that each business is compatible with others in their portfolio.
Corporate strategy answers the questions, “which businesses should we be in?” and
“how does being in these businesses create synergy and/or add to the competitive
advantage of the corporation as a whole?”
Business strategy is the corporate strategy of single firm or a strategic business unit
(SBU) in a diversified corporation. Products and services are developed by business
units. The role of the corporation is to manage its business units, products and services
so that each is competitive and so that each contributes to corporate purposes.
• Scope. The scope of an organization refers to the breadth of its strategic domain
– the number and types of industries, product lines, and market segments it
competes in or plans to enter. Decisions about an organization’s strategic scope
should reflect management’s view of the firm’s purpose or mission. This common
thread among its various activities and product-markets defines the essential nature
of what its business is and what it should be.
and product-market within its domain. How can it position itself to develop and
Notes sustain a differential advantage over current and potential competitors? To answer
such questions, managers must examine the market opportunities in each business
and product-market and the company’s distinctive competencies or strengths
relative to its competitors.
Strategies at all three levels contain the five components mentioned earlier, but
because each strategy serves a different purpose within the organization, each
emphasises a different set of strategy
• Reach– defining the issues that are corporate responsibilities. These might
include identifying the overall vision, mission, and goals of the corporation, the
type of business their corporation should be involved, and the way in which
businesses will be integrated and managed.
Corporate strategy refers to all strategic decisions that affect the firm as a whole.
Often, corporate-level strategies will have an effect on several business units.
Corporate strategic issues include the financial structure of the firm, mergers and
acquisitions, and the allocation of resources to individual business units. Corporate
strategic decisions are normally made by the board of directors.
Business-level and Corporate strategies are very different, but they are still closely
related. Corporate strategies will often affect business-level strategies. For example,
if a corporate strategic decision is made to acquire a competing firm, business-level
strategies would need to adjust to this, for instance making changes to the marketing
Notes strategy to incorporate the products of the acquired firm.
1. What should be the scope of operations; i.e.; what businesses should the firm
be in?
2. How should the firm allocate its resources among existing businesses?
3. What level of diversification should the firm pursue; i.e., which businesses
represent the company’s future? Are there additional businesses the firm
should enter or are there businesses that should be targeted for termination or
divestment?
5. How should the firm be structured? Where should the boundaries of the firm
be drawn and how will these boundaries affect relationships across businesses,
with suppliers, customers and other constituents? Do the organizational
components such as research and development, finance, marketing, customer
service, etc. fit together? Are the responsibilities or each business unit clearly
identified and is accountability established?
Corporate strategy deals with three key issues facing the corporation as a whole.
2. Portfolio Analysis – The industries or markets in which the firm competes through
its products and business units. In portfolio analysis, top management views its
product lines and business units as a series of portfolio investment and constantly
keeps analyzing for a profitable return.
Two of the most popular strategies are the BCG Growth Share matrix and GE
business screen
3. Parenting strategy – The manner in which the management coordinates activities and transfers
resources and cultivate capabilities among product lines and business units.
Notes
• Vertical Integration Strategy: The firm attempts to expand the scope of its current
operations by undertaking business activities formerly performed by one of its
suppliers (backward integration) or by undertaking business activities performed by
a business in its channel of distribution (forward integration).
Ansoff’s Growth Strategy Matrix: First presented in the Harvard Business Review
in 1957, H.I. Ansoff’s growth strategy matrix remains a popular tool for analyzing
growth.
The matrix presents four main strategic choices, ranging from an incremental
strategy in which current products are sold to existing customers to a revolutionary
strategy in which new products are sold to new customers.
4. Diversification. This quadrant entails the greatest risk; here, the company markets
new products to new customers. There are two types of diversification: related
and unrelated. In related diversification, the company enters a related market or
industry. In unrelated diversification, the company enters a market or industry in
which it has no relevant experience.
These quadrants represent varying degrees of risk. Assuming that the more a
business knows about its market, the more likely to succeed; the market penetration
strategy entails the least risk, while the diversification strategy entails the most. (In fact,
consultants often refer to the diversification cell as the ‘suicide cell.’)
• Divestment strategy: when a firm elects to sell one or more of the businesses in its
corporate portfolio. Typically, a poorly performing unit is sold to another company
and the money is reinvested in another business within the portfolio that has greater
potential.
• Bankruptcy: involves legal protection against creditors or others allowing the firm to
restructure its debt obligations or other payments, typically in a way that temporarily
increases cash flow. Such restructuring allows the firm time to attempt a turnaround
strategy. For example, since the airline hijackings and the subsequent tragic
events of September 11, 2001, many of the airlines based in the U.S. have filed
for bankruptcy to avoid liquidation as a result of stymied demand for air travel and
rising fuel prices. At least one airline has asked the courts to allow it to permanently
suspend payments to its employee pension plan to free up positive cash flow.
The above four elements form a four quadrant matrix wherein every organization
can be placed in a way the identification and selection of appropriate strategy becomes
an easy task. With the result, the matrix can be adapted to choose the best strategy
based on the current growth and competitive state of the company. A huge company
with many divisions can also plot its divisions in this four quadrants Grand Strategy
Matrix by formulating the best strategy for each division.
Quadrant 1: This quadrant is meant for companies that are in strong competitive
position and flourishing with market growth. The companies have an excellent
strategic position and should focus on current markets and product and its
development strategy. With resources they can also expand in backward, forward,
or horizontal integration. A single product company here should diversify to avert
risks with the slender product line. Companies in this quadrant can afford to exploit
external opportunities and enhance their financial muscle.
Quadrant II: Companies in this quadrant of the GSSM have weak competitive position
in a fast growing market. Companies here are in growing market but they are
competing ineffectively. An intensive and effective strategy must be adopted.
Companies can adapt to horizontal integration. If they cannot have a suitable
strategy, then divestiture of some divisions can be considered. As a last resort,
liquidation can be considered and another business can be acquired.
Quadrant III: Here companies are in a slow growth industry with weak competition.
Drastic changes are required. The management must change its philosophy and
new approaches to governance are the need. Overall revamping at a cost may
be warranted. Strategic asset reduction, retrenchment may be the best option.
Diversifying by shifting the resources may be another option. Final option could be
divestiture or liquidation.
Quadrant IV: The companies are in strong competitive position, but in a slow
growth industry. Companies must look for promising growth areas and to exploit
opportunities in the growing markets as they have the strength. These companies
have limited requirement of funds for internal growth and enjoy high cash flow
due to a strong competitive position. They can look for related or unrelated
diversification with cash flow and funds; they can also look for joint ventures.
The BCG matrix classifies business-unit performance on the basis of the unit’s
relative market share and the rate of market growth as shown below-
Products and their respective strategies fall into one of four quadrants.
1. Question marks are cash users in the organization. Early in their life, they contribute
no revenues and require expenditures for market research, test marketing, and
advertising to build consumer awareness. The typical starting point for a new
business is as a question mark. If the product is new, it has no market share, but
the predicted growth rate is good. What typically happens in an organization is
that management is faced with a number of these types of products but with too
2. Stars have high market share in high-growth markets. Stars generate large cash
flows for the business, but also require large infusions of money to sustain their
growth. Stars are often the targets of large expenditures for advertising and
research and development to improve the product and to enable it to establish a
dominant position in the industry. If the correct decision is made and the product
selected achieves a high market share, it becomes a BCG matrix star.
3. Cash cows are business units that have high market share in a low-growth market.
These are often products in the maturity stage of the product life cycle. They are
usually well-established products with wide consumer acceptance, so sales
revenues are usually high. The strategy for such products is to invest little money
into maintaining the product and divert the large profits generated into products with
more long-term earnings potential, i.e., question marks and stars.
4. Dogs are businesses with low market share in low-growth markets. These are
often cash cows that have lost their market share or question marks the company
has elected not to develop. The recommended strategy for these businesses is to
dispose of them for whatever revenue they will generate and reinvest the money in
more attractive businesses (question marks or stars).
Despite its simplicity, the BCG matrix suffers from limited variables on which to base
resource allocation decisions among the business making up the corporate portfolio.
Notice that the only two variables composing the matrix are relative market share and
the rate of market growth. Now consider how many other factors contribute to business
success or failure. Management talent, employee commitment, industry forces such
as buyer and supplier power and the introduction of strategically-equivalent substitute
products or services, changes in consumer preferences, and a host of others determine
ultimate business viability. The BCG matrix is best used, then, as a beginning point,
but certainly not as the final determination for resource allocation decisions as it was
originally intended.
Consider, for instance, Apple Computer. With a market share for its Macintosh-
based computers below ten percent in a market notoriously saturated with a number of
low-cost competitors and growth rates well-below that of other technology pursuits such
as biotechnology and medical device products, the BCG matrix would suggest Apple
divest its computer business and focus instead on the rapidly growing iPod business
(its music download business). Clearly, though, there are both technological and market
synergies between Apple’s Macintosh computers and its fast-growing iPod business.
Divesting the computer business would likely be tantamount to destroying the iPod
business.
1) It utilizes more comprehensive axes (the BCG matrix uses market growth rate
Notes as a proxy for Market attractiveness and relative market share as a proxy for the
strength of the business unit);
Both axes are divided into three segments, yielding nine cells. The nine cells are
grouped into three zones:
The Green Zone consists of the three cells in the upper left corner. If the SBU falls in
this zone, it’s in a favorable position with relatively attractive growth opportunities. This
position indicates a “green light” to invest and grow this SBU.
The Yellow Zone consists of the three diagonal cells from the lower left to the
upper right. A position in the yellow zone is viewed as having medium attractiveness.
Management must therefore exercise caution when making additional investments
in this SBU. The suggested strategy is to protect or allocate resources on a selective
basis rather than growing or reducing share.
The Red Zone consists of the three cells in the lower right corner. A harvest
strategy should be used in the two cells just below the three-cell diagonal. These SBUs
shouldn’t receive substantial new resources. The SBUs in the lower right cell shouldn’t
receive any resources and should probably be divested or eliminated from a firm’s
portfolio.
Also, he was unsatisfied with the G.E. method, developed by the McKinsey &
Company consultancy company and by the General Electric company, which did not
stated clearly the position of strategic business units which have recently penetrated the
market and which presented a high development potential in the future. Consequently,
he proposed a new assessment matrix of business portfolio of the company, organized
into 15 quadrants. The specialty literature mentions in under the name of “Hofer Matrix”
or “Product/Market Evolution Matrix” and is quite similar to the Arthur D. Little matrix
The ADL matrix from Arthur D. Little is a portfolio management method that is based
on product life cycle thinking. It uses the dimensions of environmental assessment
and business strength assessment. The environment assessment is an identification
of the industry’s life cycle and the business strength assessment is a categorization of
the corporation’s SBU’s into one of five competitive positions, these five competitive
positions by four life cycle stages.
• Common rivals
• Prices
• Customers
• Quality/Style
• Substitutability
• Divestment or liquidation
The assessment of the life cycle stage of each business is made on the basis of:
• Business market share
• Investment
• Profitability and cash flow
Notes
• Strong: this strategy does not consider much of the moves made by other rivals,
example of companies that have a lot of freedom since position in an industry is
comparatively powerful e.g. Apple’s iPod products. A strong company can follow a
strategy without too much consideration of moves by rival companies.
• Favorable: There may be more leaders among the strong rivals as industry
is fragmented. Companies with a favorable position tend to have competitive
strengths in segments of a fragmented market place. No single global player
controls all segments. Here product strengths and geographical advantages come
into play. In this the Industry is fragmented and there is no clear leader among
stronger rivals.
• Tenable: The business has not defined the product. Here companies may face
erosion by stronger competitors that have a favorable, strong or competitive
position. It is difficult for them to compete since they do not have a sustainable
competitive advantage. This imply that the company has a niche, either
geographical or defined by the product.
• Weak: The business may be too small to provide the profit; companies in this
undesirable space are in an unenviable position. Of course there are opportunities
to change and improve, and therefore to take an organization to a more favorable,
strong or even dominant position and in this business is too small to be profitable or
survive over the long term
• Aging: Demand decreases, the companies need to use strategy to add something
new to attract the customers or abandoning the market.
The ADL Matrix is often associated with strategic planning at business unit level.
However it works equally well when applied to product lines, or at the level of an
individual product.
According to ADL, there are six generic categories of strategy that could be
employed by individual SBU’s:
• Market strategies.
• Product strategies.
• Technology strategies.
• Retrenchment strategies.
• Operations strategies.
• Common rivals
• Prices
• Customers
• Quality/Style
• Substitutability
• Divestment or liquidation
Notes
5.9.4 Assessing the Industry Life Cycle Stage in the ADL Matrix
The assessment of the Industry Life Cycle stage of each company is made on the
basis of:
• Investment, and
5.9.5 Limitations
Some known limitations of the ADL Matrix are:
For most corporate enterprises, the corporate strategy is simply the sum of business
strategies, with some broad objectives and statement of business mission. Therefore,
senior managers who are responsible for defining the overall corporate strategy, often
recognize that something in their strategies is wrong. They may conceptually change
strategy through offering some financial guidelines, and determine which businesses
are “core”. This affirms creating advantage through parenting (Parenting Advantage),
which, as a principle, should guide decisions about the nature of the businesses in the
portfolio and about its structure
• Which businesses should we own rather than our competition and why?
• Is there a good fit between the skills of the parent and the needs of the
business?
• The last question is the most important, if you do not have skills or resources
that the acquired business needs then there is little point owning it and you are
actually more likely to destroy value.
Step 2: Assess the parenting opportunities i.e. is there any upside? An inefficient
business might have a lot of upside but some businesses will be so well run and
financed that there is little opportunity.
Step 3: Understand the characteristics of the corporate parent. Describe their skills,
experience, structure, processes, and employees.
Remember it is much easier to change the portfolio to match the parent, changing
the parent to match the portfolio is much, much harder.
The strategies are (1) overall cost leadership, (2) differentiation, and (3) focus on
a particular market niche. The generic strategies provide direction for business units
in designing incentive systems, control procedures, operations, and interactions with
suppliers and buyers, and with making other product decisions.
Notes
Cost leadership provides firms above-average returns even with strong competitive
pressures. Lower costs allow the firm to earn profits after competitors have reduced
their profit margin to zero. Low-cost production further limits pressures from customers
to lower price, as the customers are unable to purchase cheaper from a competitor.
Cost leadership may be attained via a number of techniques. Products can be designed
to simplify manufacturing. A large market share combined with concentrating selling
efforts on large customers may contribute to reduced costs. Extensive investment in
state-of-the-art facilities may also lead to long run cost reductions. Companies that
successfully use this strategy tend to be highly centralized in their structure. They place
heavy emphasis on quantitative standards and measuring performance toward goal
accomplishment.
Efficiencies that allow a firm to be the cost leader also allow it to compete effectively
with both existing competitors and potential new entrants. Finally, low costs reduce the
likely impact of substitutes. Substitutes are more likely to replace products of the more
expensive producers first, before significantly harming sales of the cost leader unless
producers of substitutes can simultaneously develop a substitute product or service
at a lower cost than competitors. In many instances, the necessity to climb up the
experience curve inhibits a new entrants ability to pursue this tactic.
5.13.2 Differentiation strategies require a firm to create something about its product
that is perceived as unique within its market. Whether the features are real, or just in
the mind of the customer, customers must perceive the product as having desirable
features not commonly found in competing products. The customers also must be
relatively price-insensitive. Adding product features means that the production or
distribution costs of a differentiated product will be somewhat higher than the price
Notes of a generic, non-differentiated product. Customers must be willing to pay more than
the marginal cost of adding the differentiating feature if a differentiation strategy is to
succeed.
Differentiation may be attained through many features that make the product or
service appear unique. Possible strategies for achieving differentiation may include
warranty (Sears tools have lifetime guarantee against breakage), brand image (Coach
handbags, Tommy Hilfiger sportswear), technology (Hewlett-Packard laser printers),
features (Jenn-Air ranges, Whirlpool appliances), service (Makita hand tools), and
dealer network (Caterpillar construction equipment), among other dimensions.
Differentiation does not allow a firm to ignore costs; it makes a firm’s products less
susceptible to cost pressures from competitors because customers see the product as
unique and are willing to pay extra to have the product with the desirable features.
Differentiation often forces a firm to accept higher costs in order to make a product
or service appear unique. The uniqueness can be achieved through real product
features or advertising that causes the customer to perceive that the product is unique.
Whether the difference is achieved through adding more vegetables to the soup or
effective advertising, costs for the differentiated product will be higher than for non-
differentiated products. Thus, firms must remain sensitive to cost differences. They
must carefully monitor the incremental costs of differentiating their product and make
certain the difference is reflected in the price.
Firms utilizing a focus strategy may also be better able to tailor advertising and
promotional efforts to a particular market niche. Many automobile dealers advertise
that they are the largest-volume dealer for a specific geographic area. Other dealers
advertise that they have the highest customer-satisfaction scores or the most awards
for their service department of any dealer within their defined market. Similarly, firms
may be able to design products specifically for a customer. Customization may range
from individually designing a product for a customer to allowing the customer input into
the finished product. Tailor-made clothing and custom-built houses include the customer
in all aspects of production from product design to final acceptance. Key decisions are
made with customer input. Providing such individualized attention to customers may not
be feasible for firms with an industry-wide orientation.
• Assuring that functional strategies mesh with business-level strategies and the
overall corporate-level strategy.
Functional strategies are frequently concerned with appropriate timing. For example,
advertising for a new product could be expected to begin sixty days prior to shipment
of the first product. Production could then start thirty days before shipping begins. Raw
materials, for instance, may require that orders are placed at least two weeks before
production is to start. Thus, functional strategies have a shorter time orientation than
either business-level or corporate-level strategies. Accountability is also easiest to
establish with functional strategies because results of actions occur sooner and
are more easily attributed to the function than is possible at other levels of strategy.
Lower-level managers are most directly involved with the implementation of functional
strategies.
Summary
• Strategic management can occur at three levels
1) Corporate Level
• Types of corporate strategy are- directional strategy, portfolio analysis & parenting
strategy.
• Ansoff’s Growth Strategy Matrix presents four main strategic choices, ranging from
an incremental strategy in which current products are sold to existing customers
to a revolutionary strategy in which new products are sold to new customers. The
choices are- Market penetration, Market development, Product development,
Diversification.
Grand Strategy Selection Matrix has become an effective tool in devising alternative
strategies. The matrix is based on the following four important elements.
The Boston Consulting Group (BCG) matrix is a relatively simple technique for
assessing the performance of various segments of the business.
The BCG matrix classifies business-unit performance on the basis of the unit’s
relative market share and the rate of market growth as question marks, stars, cash
cows, dogs.
• GE MATRIX
The idea behind the matrix (a.k.a., the GE Business Screen or GE Strategic
Planning Grid) is to evaluate businesses along two composite dimensions: Market
Attractiveness and Business strength
• Common rivals
• Prices
• Customers
• Quality/Style
• Substitutability
• Divestment or liquidation
The assessment of the life cycle stage of each business is made on the basis of:
• Investment
a) Strategy formulation.
b) Strategic planning.
c) Strategic management.
d) Strategy implementation.
e) Strategy evaluation
d) Build market share, maintain industry rank, and increase business strength.
4. Which strategy is used by businesses that compete in a narrow market and use
only one common competitive weapon?
a) Differentiated strategy
b) Focus strategy
c) Analyzer strategy
d) Prospector strategy
a) Business-level strategy
b) Functional-level strategy
c) Corporate-level strategy
d) Operational-level strategy
e) Competitive-level strategy
b) How do we compete?
a) Corporate-level strategies.
b) Functional-level strategies.
c) Tactical-level strategies.
d) Business-level strategies.
e) Retrenchment strategies.
b) How do we compete?
9. How business units and product lines fit together in a logical way is the essence of--
a) Business-level strategy.
b) Portfolio strategy.
c) Competitive strategy.
d) Financial strategy.
e) Functional strategy.
3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons
4. Regular reading of all latest Business Journals : HBR, Strategist, Busienss World,
Business India, Business Today.
6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed., PHI.
Case in point:
McKinsey/GE matrix
Notes
The Directional Policy Matrix (or GE-McKinsey Matrix) illustrates which segments
the Host Company should actively pursue, and which segments should be divested.
Development of the multivariate Directional Policy Matrix came about through
recognition of the potential limitations of using only one single variable within the BCG
Matrix. It was considered that a number of additional factors should also be utilized to
develop a more representative analysis of the business.
The matrix shows the relative position of each segment using ‘Relative Competitive
Strength’ as the (horizontal) X-Axis and ‘Relative Segment Attractiveness’ as the
(vertical) Y-Axis. The diameter of each pie is proportional to the Volume or Revenue
accruing to each Segment, and the solid slice of each ‘pie’ represents the share of the
market enjoyed by the Host Company.
The company should invest in Product / Market opportunities that appear to the top
left of the matrix. The rationale is that the company should invest in segments that are
both attractive and in which it has established some measure of competitive advantage.
Product / Market opportunities appearing in the bottom right of the matrix are both
unattractive to the host company and in which it is competitively weak. At best, these
are candidates for cash management; at worst candidates for divestment. Product /
Market opportunities appearing ‘in between’ these extremes pose more of a problem,
and the host company has to make a strategic decision whether to ‘redouble its efforts’
in the hopes of achieving market leadership, manage them for cash, or cut its losses
and divest.
Objectives
• To gain an insight into strategy execution.
• To understand strategic leadership - definition and qualities of a strategic
leader
• To decipher role of organizational structure and design in strategy
implementation
• To analyze different types of organizational structures.
• To understand evaluation and control of organizational strategy
• To gain an insight into managing strategic change strategy, culture and action.
“Leaders rush into implementation before they have adequately identified and
created the upstream conditions for success or before they have adequately completed
their desired state designs and tested them for feasibility”
Introduction
Strategy execution is difficult in practice for many reasons, but a key impediment
to success is that many leaders don’t know what strategy execution is or how they
should approach it. The architecture of the strategy execution process is often a
rather neglected and ignored part of the strategy process. The strategy typically goes
right from formulation to implementation, without truly considering the structure of
the process. The two most important elements of the strategy execution process
architecture are; translation of the strategy into manageable actions and steps and
continuous adaptation of the strategy to the corporate context.
Organizations need three things to successfully bridge the gap between strategy
formulation and strategy execution:
• Constant focus on avoiding the lock-in effects that damage strategy execution
and
When looked up in Collins Cobuild Dictionary (2001), the word “execution” means
to carry something out. Likewise the word “implementation” means to ensure that what
has been planned gets done. The distinction here is rather unclear.
Though it seems that “strategy execution” and “strategy implementation” are two
rather intertwining concepts, it is possible to make a somewhat clear distinction on the
basis of the aforementioned definitions. While strategy implementation is very much
The clearest distinction may be that strategy execution is primarily anchored in the
tactical level of the organization, while strategy implementation is primarily anchored
in the operational level. Therefore strategy execution works as a medium between
strategy formulation and strategy implementation.
Some middle managers think that implementation is just “doing things” or “turning
strategy into action”. However, variety of issues is identified by classifying the definitions
into Five categories which are: Management, communication, planning, control, and
daily actions.
• The middle managers who had the Management view talked about different
actions, means, methods, and tools, top-down process and organization.
• Planning view included different plans (e.g. annual plans), goal/objective setting
and recognition.
• Control view dealt with instructions, rules, policies, monitoring and measurement.
• Strategy implementation as Daily Actions means that strategy is taken into account
in every day work and it shows as changes in working practices and priorities.
Noble (1999) has made a large review of research carried out in the dispersed
Notes field of strategy implementation. Noble himself combines the perspectives and,
having a focus on the process of implementation, defines strategy implementation as
communication, interpretation, adoption and enactment of strategic plans.
Strategic leadership requires the potential to foresee and comprehend the work
environment. It requires objectivity and potential to look at the broader picture. A few
main traits / characteristics / features / qualities of effective strategic leaders that do
lead to superior performance are as follows:
• Loyalty- Powerful and effective leaders demonstrate their loyalty to their vision by
their words and actions.
• Keeping them updated- Efficient and effective leaders keep themselves updated
about what is happening within their organization. They have various formal and
informal sources of information in the organization.
• Judicious use of power- Strategic leaders makes a very wise use of their power.
They must play the power game skillfully and try to develop consent for their ideas
rather than forcing their ideas upon others. They must push their ideas gradually.
• Have wider perspective/outlook- Strategic leaders just don’t have skills in their
narrow specialty but they have a little knowledge about a lot of things.
• Motivation- Strategic leaders must have a zeal for work that goes beyond money
and power and also they should have an inclination to achieve goals with energy
and determination.
• Self-awareness- Strategic leaders must have the potential to understand their own
moods and emotions, as well as their impact on others.
• Articulacy- Strong leaders are articulate enough to communicate the vision (vision
of where the organization should head) to the organizational members in terms that
boost those members.
Strategic leaders can create vision, express vision, passionately possess vision and
persistently drive it to accomplishment.
Strategic leadership requires significantly different techniques in both scope and skill
from direct and organizational leadership. In an environment of extreme uncertainty,
complexity, ambiguity, and volatility, strategic leaders think in multiple time domains and
operate flexibly to manage change. Moreover, strategic leaders often interact with other
leaders over whom they have minimal authority.
Communication is the key interpersonal skill at the strategic level which is further
Notes complicated by the wide array of staff, functional, and operational components
interacting with each other and with external agencies. These complex relationships
require strategic leaders to employ comprehensive communications skills as they
represent their organizations.
One of the most prominent differences between strategic leaders and leaders
at other levels is the greater importance of symbolic communication. The example
strategic leaders set, their decisions, and their actions have meaning beyond
their immediate consequences to a much greater extent than those of direct and
organizational leaders.
Strategic leaders, more than direct and organizational leaders, draw on their
conceptual skills to comprehend national, national security, and theater strategies,
operate in the strategic and theater contexts, and improve their vast, complex
organizations. The variety and scope of their concerns demand the application of more
sophisticated concepts.
Strategic leaders need wisdom-and wisdom isn’t just knowledge. They routinely deal
with diversity, complexity, ambiguity, change, uncertainty, and conflicting policies. They
are responsible for developing well-reasoned positions and providing their views and
advice.
6.5.4 Future Focus and Vision. Strategic leaders must not only be future oriented,
but must have a “sense of time” to envision long-term system-wide programs and
schedules for their implementation. Time horizons from 12 years (for the Extended
Planning Annex) to 20 years (for programs requiring major capital resources,
such as the force modernization programs of the various services) are common in
peacetime. The importance of vision at this level is that it provides the umbrella for
defining specific and detailed programs at the organizational.
6.5.5 Proactive Reasoning. Although strategic leaders must react to immediate, near-
term events, they reduce the surprise factor by maintaining a “proactive stance.”
Being proactive is more than just seeing the future relevance of present-day events.
In this proactive process, strategic leaders use their frames of reference as a tool
to:
• Assess current position.
• Envision desired future capabilities.
• Determine the difference and define steps to close the difference.
• Initiate the future program.
• Monitor progress.
• Line Structure- This is the kind of structure that has a very specific line of
command. The approvals and orders in this kind of structure come from top to
bottom in a line, hence the name line structure. This kind of structure is suitable
for smaller organizations like small accounting firms and law offices. This is the
sort of structure that allows for easy decision-making and is also very informal in
nature. They have fewer departments, which makes the entire organization a very
decentralized one.
• Line and Staff Structure- Though line structure is suitable for most organizations,
especially small ones, it is not effective for larger companies. This is where the line
and staff organizational structure comes into play. Line and structure combines
the line structure where information and approvals come from top to bottom, with
staff departments for support and specialization. Line and staff organizational
structures are more centralized. Managers of line and staff have authority over
their subordinates, but staff managers have no authority over line managers and
their subordinates. The decision-making process becomes slower in this type of
organizational structure because of the layers and guidelines that are typical to it.
Also, let’s not forget the formality involved.
Notes • Market Structure - Market structure is used to group employees on the basis of
specific market the company sells in. A company could have 3 different markets
they use and according to this structure, each would be a separate division in the
structure.
• Team Structure - Organizations with team structures can have both vertical as well
as horizontal process flows. The most distinct feature of such an organizational
structure is that different tasks and processes are allotted to specialized teams of
personnel in such a way as a harmonious coordination is struck among the various
task-teams.
It is important to find an organizational structure that works best for the organization
as the wrong set up could hamper proper functioning in the organization.
A firm’s successive strategies are greatly affected by its past history and often take
shape through experimentation and ad hoc refinement of current plans, a process
James Quinn has termed “logical incrementalism”. Therefore, the re-examination of
past assumptions, the comparison of actual results with earlier hypotheses has become
common feature of strategic management.
a. Strategic Control
Strategic control focuses on the dual questions of whether: (1) the strategy is Notes
being implemented as planned; and (2) the results produced by the strategy are those
intended.” Strategic control is “the critical evaluation of plans, activities, and results,
thereby providing information for the future action”. There are four types of strategic
control: premise control, implementation control, strategic surveillance and special alert
control
b. Premise Control:
All premises may not require the same amount of control. Therefore, managers must
select those premises and variables that (a) are likely to change and (b) would a major
impact on the company and its strategy if they did.
c. Implementation Control:
(2) To analyze how other organizations achieve their high performance levels, and
The first step in the process is to recognize that there is a gap between desired
business performance and actual performance. This gap may be recognized by the one
or more of the following:
• A dysfunctional team.
To cope with this uncertainty and such compromise, strategies must be developed
Notes gradually so that new ideas and experiments can be tested and commitment within the
organization can be achieved whilst maintaining continual, if low scale change. This is
what has become known as ‘logical incrementalism’.
It is suggested that change can fall into the following broad categories:
• Process change – This focuses on how things get done and how they can be
improved.
• Change is not a prescribed set of activities and is specific for the organisational
context.
What does this mean for creating organizational change? The answer is that to
create the desired change to maintain the health of an organization, leaders and
managers need to recognize that real change begins and ends various and sundry
workforce areas. Lead if one has the ability to do so, but as a minimum, manage the
organization with the insights and knowledge needed to create an organizational
reality that will serve both the external community but also workers who make up the
organization. Only then can the organization make the journey toward its vision a fruitful
one.
The implementation of any new strategy will usually require some or all partners to
change their behavior and this need to happen one partner at a time. “Your firm will only
travel as far and as fast as each partner and then all partners collectively are prepared
to change their individual behaviors – their appetite for change!” The success of change
depends on how effectively each partner can be coached and helped to see not only
the need for change, but also the need to take action and the need to follow through.
Summary
• Strategy execution is the practice of translating, communicating, coordinating,
adapting and allocating resources to a chosen strategy; while managing the
process of strategy implementation.
• Strategic change is the movement of a business away from its present state
towards some desired future state to improve its current circumstances. It enables
the execution of the strategy. Strategic Change is described as “a structured
approach to transitioning individuals, teams and organizations from a current state
to a desired future state
2. What are the three criteria for the robustness of strategic capability?
6. In the resource-based view of strategy, what type of strategic capabilities are the
sources of sustainable competitive advantage?
b) Dynamic capabilities.
c) Operational excellence.
d) Strategic capabilities which are valuable to buyers, rare, robust and non-
substitutable.
8. Which one of the following is not an integral part of the managerial process of
crafting and executing strategy?
a) Involves how fast to pursue the chosen strategy and reach the targeted levels
of performance.
b) Consists of thinking through what it will take to make the chosen strategy work
as planned.
d) Spells out how the company is going to get from where it is now to where it
want to go and when it is expected to arrive.
10. The difference between a company’s mission statement and the concept of a
strategic vision is that--
a) The mission statement lays out the desire to make a profit, whereas the
strategic vision addresses what strategy the company will employ in trying to
make a profit.
c) A mission deals with what a company is trying to do and a vision concerns what
a company ought to do.
a) Directional (says something about the company’s journey and destination and
the kinds of business and strategic changes that will be forthcoming)
b) Inspirational (is worded in a motivational and stirring way that will garner
enthusiastic and energetic support from company personnel and shareholders)
Questions& Exercises
1. Explain GE matrix with an example.
3. Aaker David Strategic Market Management, 5th Ed., John Wiley and sons
4. Regular reading of all latest Business Journals : HBR, Strategist, Busienss World,
Business India, Business Today.
6. Thomson & Strickla d, Business policy and Strategic management, 12th Ed., PHI.
Case in point:
Strategy execution of UGM: A Case Study
Meeting the specific needs of clients means that UGM embarks on a wide array
of assignments. Our Case Studies represent a small cross-section of our portfolio of
experience, providing brief insights into how we have helped many clients. Contact us
to learn about the numerous other projects we’ve worked on over 30 years in business.
the implementation teams since they had played a key part in developing the detailed
Notes plans that they were auctioning.
. Essentially, because the crucial buy-in phase had not been successfully negotiated
up-front, subsequent buy-in and support had only been superficial. This would likely
plague the project going forward and, additionally, people were change fatigued. Since
the project had dragged on for over two years, it was unlikely that it would achieve its
objectives without a substantial rework and additional investment. As a result of our
review the project was terminated in its present form, a key strategic decision that
would prevent any further resources being wasted. This also allowed the organisation to
focus on conerns of a higher priority.
Instead of wasting time measuring and reporting on elements that had relatively little
impact on desired outcomes, management and staff were able to focus more on those
critical few elements that really made a difference to strategic performance. In addition
to being able to monitor performance indicators that would have the biggest impact,
staff were also made aware of how they might prioritise their time. When faced with
a choice between tasks, staff were able to choose actitivities known to generate the
greatest value. Benefits of the project included measuring elements that were tightly
linked with performance and direction and providing a shared focus on those activities
to be prioritised for optimal use of available resources.