SM

STRATEGIC MANAGEMENT (6.1)

STUDY MATERIAL DESIGNED

FOR

TY B.COM (B&I)

STRATEGY FORMULATION

“

Whatever action is performed by a great man, common men

following his footsteps and whatever standards he sets by

exemplary acts, all the world pursues.

Strategy Formulation Strategy Implementation Strategy Evaluation

Full length questions which can be used for 7 marks or 8 marks A ( Total weightage for this part is 8/60)

1. Define strategic management? Explain the relevance of strategic management for an organization. Perform External Audit Develop vision and mission statements Establish long term objectives Generate, Evaluate and Select Strategies Implement Strategies- management issues Implement Strategies- Marketing, Finance, Accounting , R&D, MIS Issues Perform Internal Audit Measure and Evaluate Performance

2. What are the various levels of strategic management in an organization. Give suitable example.

3. What is strategic management? Illustrate and explain the strategic management process with the example of a leading nationalized bank. 4. Describe the various steps involved in the strategic management process.

Illustrate & explain with suitable examples.

5. Explain the term ‘environment’ with reference to business and discuss why environmental analysis is necessary in strategic management.

6. Identify various components of environment that affect the management of an organisation.

7. What is strategy formulation. Explain the factors to be taken into consideration while formulating the strategy.

B. (Total weightage for this part is 12/60)

8. “Business must be run in a socially responsible manner”. Comment on the statement in the context of Indian business.

9. What are the social responsibilities of business?

10. What are the critical components of the social environment of business? Explain each element with examples.

11. Evaluate the historic role and emerging role of government on the business. 12. Describe the impact of technology on business.

13. “Economic environment impacts business” Critically analyse.

14. What factors have made the management of the technology at enterprise level important? Explain.

15. How does the economic environment impinge upon business management? Explain with suitable examples.

16. How do social factors play a role in strategy formulation? Explain with examples.

C ( Total weightage for this part is 15/60) C (1)

18. Bring out the importance of organizational assessment and environmental information in strategic management.

19. What is SWOT analysis? How it is useful in strategy formulation?

20. How do mission, vision and goals drive an organization? Design mission, vision and goal for any foreign insurance company operating in India.

INTRODUCTION TO STRATEGIC MANAGEMENT

Strategic management or business policy or corporate strategy refers to those set of perspective management measures taken with a view to ensuring the survival and success of enterprise in a competitive environment. The word “strategy” is derived from the ancient Greek word strategia, which connoted the art and science of directing military forces. Strategy is thus, a well thought out systematic plan of action to defend one self or to defeat rivals. Strategy is formulated in anticipation of the possible positions, moves, actions and reactions of the rivals.

It is very relevant to point out in this context that in business the term rivalry is commonly used to refer competition. Going by the origin of the word strategy, business strategy is a well thought out systematic plan of action for survival and success, formulated by due consideration of the possible positions and defensive and offensive moves, and the relative strengths and weakness of the rival vis-à-vis those of the company.

DEFINITION OF STRATEGIC MANAGEMENT

Strategic management can be defined as “the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives.”

As this definition implies, Strategic management focuses on integrating management, marketing, finance, productions, research and development, and computer information systems to achieve organizational process.

The term Strategic management is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term Strategic management is used to refer to Strategic planning referring only to strategy formulation.

The purpose of Strategic management is to exploit and create new and different opportunities for tomorrow, long range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term Strategic planning originated in the 1950s and was very popular between the mid-1960s to mid-1970s. During these years, Strategic planning was widely believed to be the answer of all problems. At the time, much of corporate America was

“obsessed” with strategic planning.

Following that boom however strategic planning was cast aside during 1980s and various planning models did not yield higher returns. The 1990s however brought the revival of Strategic planning and the process is widely practiced in business world.

LEVELS OF STRATEGY

In a multi business enterprise, having several SBUs, there would be three levels of strategy, viz, corporate strategy, SBU strategy and functional strategy. In enterprise that does not have SBUs, there will be only two levels of strategy.

 Corporate Strategy

Corporate strategy is the long-term strategy encompassing the entire organization. Corporate strategy addresses fundamental questions such as what is the purpose of the enterprise, what business it wants to be in and how to expand. In other words,

“corporate level strategic management is the management of activities which define

the overall character and mission of the organization, the product/segments it will enter and leave, and the allocation of resources and management of synergy among its SBUs. Corporate strategy is formulated by the top-level corporate management (board of directors, CEO, and chiefs of functional areas).

 SBU Strategy

SBU-level strategy, sometimes called business strategy is concerned with decision pertaining to the product mix, market segments and maneuvering competitive advantages for the SBU. While corporate strategy decides the business profile the competitive strategy decides the strategy to succeed in the chosen business. SBU strategy has to confirm obviously to the corporate philosophy and strategy.

In short, “the SBU level strategic management of a SBUs effort to compete effectively in a particular line of business and to contribute to the overall organizational purposes.”

The responsibility of the SBU strategy is with the top executives of the SBU who are normally second-tier executives in the corporate hierarchy. In single SBU organizations senior executives have both corporate and SBU level responsibilities.

 Functional Strategy

Functional level strategies are strategies for different functional areas like production, finance, personnel, marketing etc. in other words, “functional level strategic management is the management of relatively narrow areas of activity, which are of vital, pervasive, or continuing importance to the total organization.”

Corporate

Strategic Business Unit

The strategic management model or process

The strategic management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, a shift in the economy could represent a major opportunity and require a major change in the long-term objectives and strategies; a failure to accomplish annual objectives could require a change in strategy could require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semi-annually. The strategic management process never really ends. Characteristics Corporate Strategy Business Strategy Functional Strategy Scope Entire organization SBU or single business

company Functional area Source and motivation Board of directors/CEO Corporate strategy SBU strategy or single business company strategy Responsibility Top level business managers Top level SBU managers or top level single business company managers Functional level managers

Time horizon Long-term

Medium to long-term Short to long-term Specificity General statements of overall direction and intent Concrete and operationally oriented Action and implementation oriented.

The strategic management process is not as cleanly divided and nearly performed in practice as the strategic management model suggests. Application of the strategic management process is typically more formal in larger and well-established organizations.

Strategy Formulation Strategy Implementation Strategy Evaluation

THE PROCESS OF DEVELOPING A MISSION STATEMENT

What is mission?

“A mission statement is an enduring statement of purpose that distinguishes one business from other similar firm. A mission statement identifies the scope of firms operations in product and market terms."

According to Mc Ginnis a mission statement Perform External Audit Develop vision and mission statements Establish long term objectives Generate, Evaluate and Select Strategies Implement Strategies- management issues Implement Strategies- Marketing, Finance, Accounting , R&D, MIS Issues Perform Internal Audit Measure and Evaluate Performance

• Should define what the organization is and what the organization aspires to be. • Should be limited enough to exclude some ventures and broad enough to allow

for creative growth.

• Should distinguish a given organization from all others. Goals and Objectives

Objectives may be defined as “the ends which the organization seeks to achieve by its existence and operations.”

A goal is defined as “an intermediate result to be grand plan. A plan can, therefore have many goals.”

Objectives are particularly important in strategy formulation.

According to the strategic management model, a clear mission statement is needed before alternative strategies can be formulated and implemented. It is important to involve as many managers as possible in the process of developing a mission statement, because though involvement, people become committed to an organization.

For developing a mission statement first we select several articles about mission statements and ask all managers to read these as background information. Then ask managers themselves to prepare mission statement for the organization. A facilitator, or committee of top managers, should then merge these statements into a single document and distribute this draft mission statement to all managers.

A request for modification, additions and deletions is needed next, along with the meeting to revise the document. To the extent that all managers have input and support the final mission statement document, organizations can more easily obtain managers support from other strategy formulation, implementation, and evaluation activities. Thus, a process of developing a mission statement represents a greater opportunity for strategies to obtain needed support from all managers in the firm. During the process of developing a mission statement, some organization use discussion group of managers to develop and modify the mission statement. Some organization hires an outside consultant to manage the process and help draft the language.

Sometimes an outside person with expertise in developing mission statements and unbiased views can manage the process more effectively then an internal group or committee of managers.

THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal and technological trends. Individuals can be asked to monitor various sources of information, such as key magazines, trade journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers charged with performing the external audit.

This approach provides a continuous stream of timely strategic information and involves many individuals external-audit process. The Internet provides another source of gathering strategic information, as do corporate, university, and public libraries. Suppliers, distributors, customers, salesperson and competitors represent another source of vital information. Once information is gathered it should be assimilated and evaluated. A meeting of managers is needed to collectively identify the most important opportunities and threats facing the firm.

THE PROCESS OF PERFORMING AN INTERNAL AUDIT

The process of performing an Internal Audit closely parallels the process of

performing an external Audit. Representative Managers end employees from through out the firm’s strength and weaknesses. The internal audit requires gathering and assimilating information about the firm’s management, marketing, finance, production, research and development and management information systems. Key factors should be prioritized as described so that the firm most important strengths and weakness can be determined

collectively.

Compared to the external audit, the process of performing an internal audit provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organizations. This is a great benefit because managers and employees perform better when they understand how their work affects other areas and activities of the firm.

For example, when marketing and manufacturing managers jointly discuss issues related to internal strengths and weakness, they gain a better appreciation of the issues, problems, concerns, and needs of all functional areas. In

organizations that do not use strategic management, marketing, finance, manufacturing managers often do not interact with each other in significant ways. Performing an internal audit is thus is an excellent vehicle for

improving the process of communication in the organization. Communication may be the most important word in management.

Performing an internal audit requires gathering, assimilating and evaluating information about the firms operations.

ESTABLISH LONG-TERM OBJECTIVES

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

THE NATURE OF LONG-TERM OBJECTIVES

Objectives should be quantitative, realistic, understandable, challenging, hierarchical, obtainable and congruent among organizational units. Each objective should also be associated with a time line. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share and social responsibility. Clearly established objectives offer many benefits. They provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, and stimulate exertion and aid in both the allocation of resources and the design of jobs. Long-term objectives are needed at corporate, divisional and functional levels of an organization. They are an important measure of managerial performance.

V. THE PROCESS OF GENERATING AND SELECTING STRATEGIES

Identifying and evaluating alternative strategies should involve many of the managers and employees who earlier assembled the organizational vision and mission statements, performed the external audit and conducted the internal audit. Representatives from each department and division of the firm should be included in the process.

All participants in the strategy analysis and choice activity should have the firm’s external and internal audit information by their sides. This information, coupled with the firm’s mission statement, will help participants crystallize in their own minds particular strategies that they believe could benefit the firm most. Creativity should be encouraged in this thought process.

Alternative strategies proposed by participants should be considered and discussed in the meeting. Proposed strategies should be listed in writing. When all feasible strategies identified by participants are given and understood, the strategies should be ranked in order of attractiveness by all participants, with 1= should not bee implemented, 2= possibly implemented, 3= probably should be implemented and 4= definitely should be implemented. The process will result in a prioritized list of best strategies and reflect the collective wisdom of the group.

VI. IMPLEMENT STRATEGIES: MANAGEMENT ISSUES

The strategic management process does not end when the firm decides what strategy or strategies to pursue. There must be a translation of strategic thought in to strategic action. This translation is much easier if managers and employees of the firm understand the business, feel a part of the company, and through involvement in strategy formulation activities have become committed to helping the organisation succeed. Without understanding and commitment, strategy-implementation efforts face major problems.

this text to examine all of the business administration concepts and tools important in strategy implementation.

Management issues central to strategy implementation include establishing annual objectives, devising policies, allocating resources, altering an existing organizational structure, restructuring and reengineering, revising reward and incentive plans, minimizing resistance to change, matching managers with strategy, developing a strategy-supportive culture, adapting production / operations processes, developing an effective human resource function and, if necessary, downsizing. Management changes are necessarily more extensive when strategies to be implemented move a firm in a major new direction.

VII. IMPLEMENT STRATEGIES- MARKETING, FINANCE, ACCOUNTING, R&D, MIS ISSUES

Strategy implementation directly affects the lives of plant managers, division managers, department managers, sales managers, supervisors, and all employees. In some situations, individuals may not have participated in the strategy-formulation process at all and may not appreciate, understand, or even accept the work and thought that went in to strategy formulation. There may be foot dragging or resistance on their part. Managers and employees who do not understand the business and are not committed to the business may attempt to sabotage strategy-implementation efforts in hopes that the organization will return to its old ways.

VIII. PROCESS OF EVALUATING THE STRATEGIES

Strategy evaluation is necessary for all sizes and kinds of organizations. Strategy evaluation should initiate managerial questioning of expectations and assumptions, should trigger a review of objectives and values, and should stimulate creativity in generating alternatives and formulating criteria of evaluation.

Evaluating strategies on a continuous rather then on a periodic basis allows benchmarks of progress to be established and more effectively monitored. Some strategies take years to implement; consequently, associative result may not become apparent for years.

ORGANIZATIONAL STRATEGIES

Organizational strategies are classified in to four types of strategies and they are as follows:

 Integration Strategies  Forward integration  Backward integration  Horizontal integration

 Market penetration  Market development  Product development  Diversification Strategies  Concentric diversification  Horizontal diversification  Defensive Strategies  Retrenchment  Divestiture  Liquidation EXPLANATION :  Integration strategies:

1. Forward integration : It involves gaining ownership or increased control over distribution or retailers. Increasing numbers of manufacturers today are pursuing a forward integration strategy by establishing web sites to sell products directly to consumers. This strategy is causing turmoil in some industries.

2. Backward integration : It is a strategy of seeking ownership or increased control of a firm’s suppliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs.

3. Horizontal integration : It refers to a strategy of seeking ownership of or increased control over a firm’s competitors. One of the most significant trends in strategic management today is the increased use of the horizontal integration as a growth strategy.

 Intensive Strategies:

1. Market penetration : It seeks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies.

2. Market development : It involves introducing present products or services in to new geographic areas. The climate for international market development is becoming more favorable.

3. Product development : It is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures.

1. Concentric Diversification: It adds new but relative products or services.

2. Horizontal diversification: It adds new unrelated products and services for present customers.

 Defensive strategies :

1. Retrenchment : It occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits.

2. Divestiture: Selling a division or part of an organization is called divestiture.

3. Liquidation : Selling a company’s entire asset in parts for there tangible worth is called liquidation.

STRATEGIC IMPLEMENTATION

The activation or implementation steps in the strategic management encompass the operational details to translate the strategy in to effective practice. A good strategy by itself does not ensure success. The success depends, to a very large extent, on how it is implemented. Many strategies fail to produce the expected results because of the failure in properly implementing the strategy.

Features of Strategic Implementation

 Strategy implementation is more operational in character.

 Strategy implementation requires special skills in motivating & managing others.  Strategy implementation permeates all hierarchical levels.

 Another very important fact to be noted is that “in all but the smallest organization, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional & functional managers.

 Strategy implementation, often described as the action phase of the strategic management process, covers strategy activation & evaluation & control.

Some writers break the Strategy implementation phase in to three components, viz. 1. Operationalising the strategy [communicating strategy, setting annual objectives, developing divisional strategies, & policies, & resource allocation].

2. Institutionalizing the strategy [organizational structuring & leadership implementation]. 3. Evaluation & control of the strategy.

Successful Strategy Formulation Does Not Guarantee Successful Strategy Implementation

BUSINESS ENVIRONMENT

A number of factors outside the firm influence a firm’s choice of direction and action. This in turn, affects organization’s structure and internal process. These factors or forces can be broadly divided into two categories See the following figure.

Strategy Formulation Strategy Implementation

1

It is positioning forces before the action.

It is managing forces before the action.

2 It focuses on effectiveness. It focuses on efficiency. 3

It is primarily an intellectual process.

It is primarily an operational process.

4 It requires good intuitive and analytical skills. It requires good leadership and motivation skills. 5 It requires coordination among a few individuals. It requires coordination among many individuals.

Micro environment or Operating environment Macro environment or Remote environment

Business environment has decisive influence on opportunities as well as threats to the organization. In developing alternative strategies and choosing the best strategy, an in-depth analysis of environmental scanning.

Micro environment consists of the following - Creditors, customers, vendor’s competitors, market and general public. Macro environment consists of a number of forces like political, economical, social and cultural, demographic and geographic, technological, and ecological, regulatory and international.

Micro environment is popularly known as “Operating environment” because this provides the immediate environment in which the firm operates. Some authors prefer to refer this as “Competitive environment” or “Task Environment” Operating environment has much more interaction with business than remote environment. There are many forces; prominent they are listed down:

 Competition  Market forces

 Vendors/Suppliers and Creditors  Public Product Promotion Price Place Co. Technological Factors Political Factors Socio- cultural Factors Economic Factors Legal Factors Macro Environment Micro Environment

 Customers/consumers

Proper assessment of competitive position will enable business firm to develop realistic strategy. In doing so, Key result areas (KRA) can be prefixed based on nature of business.

A newcomer faces stiff competition while entering market, from existing competitors. In order to overcome the same extra efforts are needed. It is a fact, that none can hold sway over a given market for a long time. There re number of barriers to new products/firms. These are discussed here briefly:

Economies of scale: Economies of scale may occur in many fields like production, R& D, or marketing efforts like promotion/ advertisement, etc.

Customer loyalty: New products break the customer loyalty of old products and reinforce desire for the new one. This is an involved process based on behavior-modification theory. Another way to overcome this problem is by product differentiation and using advertising techniques.

Capital requirement: Heavy capital requirement is needed to establish new capacity, set-up new distributional channels, advertisements, ware housing, inventory holding, transportation and other promotional steps.

Distributional Channels: Existing channels of distribution of existing products are not accessible to new ones. This may results in the creation of new channels which may increase cost and make new products. Two other important aspects of are the following:

Marketing efforts vis-à-vis compétitions, price, products, etc. Substitution possibility of products.

Firms depend on vendors on creditors for the supply of raw materials, equipment and other input – services. Firm depends on creditors for their financial support for easy credits.

Vendors: In regards to vendors, following are important aspects:

Price advantage Quality discounts Shipping expenses Quality standards Rejection rates Quality of services Abilities and reputation

Dependability, especially in emergency situation

Creditors: In regards to creditors following are the important aspects giving

Willingness to value stocks fairly

Readily accepting stocks as collateral security for credits The Favorable credits rating of the firms by creditors

Favorable record of leverages and working capital management by the firm Favorable current loan terms

Timely availability of loan at sufficient level

(1) Economic Environment

The economic environment is by far the most significant and pervasive component of the external environment. It is therefore very necessary for the firm to appreciate how the economy works currently and how it will behave in future.

For the purpose of the discussion we have classified the economic environment into three main groups, namely,

1. General Economic Conditions 2. Industrial Condition

3. State of Supply of Resources for Production.

The corporate planner should also pay attention to the pattern of income distribution in the country because that determines the type of products needed by people of different income groups.

Demand of products is also influenced by savings and debt patterns.

Industrial condition:

A perceptive assessment of the dynamic environment of the industry the enterprise serves and of the industry it plans to enter also provides a strong basis from which strategy can be developed. Among the various aspects which must receive due attention from a corporate planner for studying the industrial environment, major ones are long term growth or decline of industry, stability of demand for products and stage in product life cycle.

The needs of customers undergo a change over a period of time not only because of shifts on economic and social conditions but also due to development of technology. An in-depth analysis of these changes provides useful clues about the expansionary tendency of the industry.

The life cycle of industrial products also helps in predicting demand. The product life cycle indicates distinct stages in the sales history of the product. Specific opportunities and problems are entailed in these stages.

Scanning of the natural environment also influences managerial decision regarding location of the firm. It will always be desirable for an organisation, which depends

heavily on natural resources, to be set up in the region where the resources are available in plenty.

Capital:

Availability of adequate funds to satisfy fixed capital as well as working capital needs is since quo-non for a business organisation. New organisation has to depend on capital & money market institutions for their financial needs. However, existing organizations finance a portion of their requirements out of their own funds which they have built by ploughing back their earnings. The management must analyze the existing structure of financial market & financial policies of different institutions operating in these markets & assess its impact on the cost obtaining capital. This will prove to be a very helpful exercise in taking capital expenditure decisions. Emergence of broad based institutional structure of money & capital markets & pursuance’s of subsidized landing policies of various financial institutions in India offer a great scope for Indian businessman to set up or expand their organizations to seize opportunities.

Labour:

Adequate supply of labour force with the ability & skills require to perform the task involved in translating strategy in to action is vital for the success of an organisation. Without people being able to use them effectively sophisticated technology, capital & materials are of little value. The price of labour is also an extremely important economic unit for an enterprise. High wages create cost problems for producers. Thus, while deciding about the type of product to be manufactured, the corporate planner must consider the availability, quality & price of labour.

Managers:

Availability of highly qualified managers is also a critical economic input for an organisation. It is skilled management that makes optimum utilization of resources & ensures successful functions of the organizations. Entrepreneurs, while contemplating to choose a business field, must see if qualified managers are available.

2) Technological Environment

Corporate planners must scan the technology environment & the nuances of technology because new technological developments affect the efficiency with which products can be manufactured & sold. They must be able to perceive how technological change will affect customer’s demand of product.

The pace of technological change in different parts of the world has been astounding. In India too there has been rapid technological development, particularly in the field of electronics, automobiles, electricity, machine building, and information technology and there is every possibility of this tendency to persist in the following years. These developments have brought about breakthroughs in operating procedures, product line, customer’s taste and fashion. The management must, therefore, be on the look

risk to the organisation. The management which possesses an active imagination and analytical faculties can foresee long-term consequences of new technology.

There are many sophisticated techniques of technological forecasting such as ‘Delphi’. Many of the techniques of economic forecasting can also be used for forecasting technological changes.

Generally, Research and Development (RD) department is assigned the responsibility of undertaking the task of forecasting developments on the future state of technology and assessing their impact on the company’s products, processes or markets. However, only large organisation can afford to set up separate RD department. Even small establishments with a few scientists or engineers can make such a forecast. Furthermore, small organisation can sometimes get information pertaining to results of research and engineering ideas from leading concerns particularly major customers or suppliers

3) Political Environment

The political atmosphere of a country is significantly is relevant to business organisation. No organisation can think of expanding or decertifying its activity of the political atmosphere is charged with turmoil and instability. Where the ruling party is strong and stable and relations between central and state governments are cordial role of opposition party is constructive, decisions-making powers are reasons ably distributed among different social groups and government has clear-cut fiscal, financial and trade policies, the business organisation will find it conducive to expand their operations. The climate in our country presents a mixed picture. On the one hand, we have the democratic and federal system of government in which there is a strong and stable central government with equally strong state governments working in harmony with each other and businessmen have freedom to operate within the prescribed limits. These aspects are quite encouraging for the growth of private sector business enterprises. However, emerging regionalism at the political level, occasional communal disturbances, linguistic problem and politicalisation of trade unions present threats to business enterprises.

Through the regulatory role the government enacts various laws. In India as well as other democratic countries, until recently both consumers and business firms had great freedom to pursue their course of action.

However, owing to social and political pressures and growing complexity of technology and business practices, the government has enacted a web of laws and regulations to constrain and regulate business activities. Some of these laws currently in vogue in India are the Industries (Development and Regulation) Act, Monopolies and Restrictive Trade Practices Act, Contract Act, The Companies Act, Imports and Exports (control) Act, Foreign Exchange and Regulations Act, and Essential Commodity Act, besides, there are innumerable Labour laws, taxation laws and state and local laws.

Corporate planner should also study the demographic environment and identify the broad characteristics of the population that effect the organisation. An alter management will have plenty of advance notice of potential changes in demographic factors and can start searching for new product lines and more attractive markets. Major factors in the demographic environment relevant to business organisation are trends in size, ageing, geographical shifts and literacy of population.

Growth in population has significance for the government as well as for business organisation. A growing population means increasing human need which, in turn, results in the expansion of product markets if there is sufficient purchasing power. Where growth size of population exceeds the availability of food supply and resources there will be rise in costs which will, in turn depress profit margins of businessmen. The ageing pattern of the population should also be analyzed because that affects product demand.

For instance, an increase in the population of the age of 18 to 24 will result in surging sales for motor cycles. Sports products, clothes and accessories, cosmetics, magazines etc. Shrinking population of old persons is likely to result in decline in the demand of certain medical goods and services, certain magazines read exclusively by older people etc.

Geographical shifts of population also affect business enterprises. Migration of people from rural areas to urban areas will result in the rise in demand of consumable products in urban areas. Organisation engaged in production of such goods after estimating such development will adopt the expansion strategy so as to exploit the opportunities.

Owing to the development of quick modes of transportation, sizeable sections of the working population may move from their places of work to the suburbs. This will certainly increase the demand station wagons, home workshops equipment, garden furniture, lawn and gardening tools and supplies and outdoor cooking equipment in addition to consumer goods of daily use.

5) Social-Cultural environment

A business organisation can survive in the long run only when it is responsive to the socio-cultural environment of the society in which it operates and aims at promoting social welfare. The management must, therefore, understand the existing environment of the society and visualize future changes therein before long-range plans are formulated to accomplish corporate objectives.

T h e socio-cultural environment is concerned with analysis of the attitudes, values, desires, expectations, degrees of intelligence and education, beliefs and customs of people in a society, traditions and social institutions, class structure and social group pressure and dynamics. Some of the beliefs and values are much more important to people.

For example, most Indians believe in work, getting married and living a simple life. These beliefs shape and colour more specific attitudes and behaviors found in everyday life. People also hold secondary beliefs and values that are liable to change in the- wake of new social forces. For example; belief in. early marriage is a secondary one. Management must note that it would be unwise to change core beliefs and values and should avoid formulating a business strategy that violates these beliefs. Socio-cultural factors also influence the products to be manufactured by an

organisation. An organisation has to produce that type of product which meets the requirements of the people. A demand for high quality readymade garments will lead to modification of product strategy by those in the business. Increasing awareness of better standards of living and good nutrition have brought about a proliferation of products and services such as high quality products, vitamin..-;

supplements, efficient automobiles, decent housing and better educational facilities. In order to survive successfully in the long run, the management must consider the socio-cultural factors while formulating objectives and product-market strategy.

SIGNIFICANCE OF ENVIRONMENTAL SCANNING

a) Environmental scanning also referred to as the basic monitoring system is the process of monitoring economic, competitive, technological, socio-cultural, demographic and political setting to determine opportunities for threats to the firms. b) Firms can set its future direction and targets of performance and formulate the most suitable strategy only when it has been able to visualize and perceive the opportunities and constraints in store for it.

c) The environment may offer major profit opportunities due to anticipated economic, socio-political and industrial trends and new opportunities in the market/ product / customer segment which the company can readily exploit particularly in the case of technological advances.

d) The entire environmental framework and its component parts as noted above are dynamic and the pace of changes is tumultuous and such a change affects the markets for firm’s present products, the prospects for future products, success of products and Markey choices. The environmental changes may threat on the establish strategies and call upon the management to be alert to the possibility that the opportunity they have seized will soon expire.

e) Environmental appraisal enables the firm to get clear idea about the existing competitors, their current operation, and future plan.

f) Environmental appraisal enables the management to predict future development to make the invisible more visible and thus, lessen the uncertainty about the future in the face of spectacular, powerful and rapid environmental changes.

g) Input-output relationship between a firm and environment also necessitates environmental scanning. A firm, in order to function, must procure various inputs such as human, capital, managerial, and technical from the environment.

h) The management must also scan the environment so as to find out what are the diverse claims and expectations of opportunities of different section of the society which the firm has to fulfill in order to be socially acceptable.

i) While scanning environment the management should remember that such an appraisal facilitates spotting of opportunities at the level of an industry rather than at firm’s or product’s level. As a result of this aggregation, management decisions lose the sharpness needed for choosing a particular product-market.

END OF STRATEGY FORMULATION MODULE(I)

MODULE – II

STRATEGY IMPLEMENTATION

“If the 1980’s were about quality and the 1990;s were about

re-engineering, then the 2000’s will be about velocity. About

how quickly the nature of business will change. Business is

going to change more in next ten years than, it has in the last

fifty”

- Bill Gates, Chairman Microsoft Corporation

Strategy Formulation Strategy Implementation Strategy Evaluation

C (2)

21. What is BCG matrix? In what context it is used by an organization? 22. Illustrate and explain BCG matrix. Explain its utility.

23. What is GE planning grid? How can you use GE grid in a business organization? Illustrate and explain.

24. What is Mc Kinsey 7- S framework? How can you use Mc Kinsey framework when a new bank is being launched.

25. Explain the Product Life Cycle concept with illustration. How does it affect the Strategy?

26. Compare BCG matrix with product life cycle matrix Perform External Audit Develop vision and mission statements Establish long term objectives Generate, Evaluate and Select Strategies Implement Strategies- management issues Implement Strategies- Marketing, Finance, Accounting , R&D, MIS Issues Perform Internal Audit Measure and Evaluate Performance

D (Total weightage for this part is 25/60) D (1)

27. “Structure follows strategy” Explain with suitable examples. 28. Do you think strategy drives structure? Elaborate.

D 3

29. Explain the role of leadership in strategic management?

30. “Leadership and motivation are key drivers of strategy”. Substantiate with examples.

D 4

31. Explain the role of creativity and innovation in strategic management SA.

NOTE: SOME OF THE TOOLS OF STRATEGIC MANAGEMENT ARE IN THE ATTACHMENT FILE

TOOLS OF CORPORATE LEVEL STRATEGIC MANAGEMENT BCG MATRIX

The Boston Consulting Group (BCG) matrix provides a graphical representation for an organization to examine the different business in its portfolio on the basis of their

Business could be classified on the BCG matrix as either low or high according to their industry growth rate and relative market share. The vertical axis denotes the growth rate in sales in percentage for a particular industry. The horizontal axis represents the relative market share, which is the ratio of a company’s sales to sales of the industry’s largest competitor or market leader. The result of combining the industry growth rate and relative market share, each along a high and low dimension, is a four-cell matrix. Each cell of this matrix has been given an interesting and appropriate name by the Boston Consulting Group.

The four cell of BCG matrix has been termed as stars, cash cows, question marks(or problem children), and dogs. Each of these cells represents a particular type of businesses.

STARS: Stars are high-growth-high-market business which may or may not be self-sufficient in terms of cash flow. The cell corresponds closely to the growth phase of the Product Life Cycle (PLC). A co. generally pursues an expansion strategy to establish a strong competitive position with regard to a ‘star’ business.

E.g. Petrochemicals, fast food, electronics and communications.

CASH COWS: As the term indicates, cash cows are business which generates large amounts of cash but their rate of growth is slow. These businesses can adopt mainly stability strategies. The cash generated by ‘cash cows’ is reinvested in ‘stars’ and ‘question marks’.

E.g.: toothpaste for Colgate, decorative paints for Asian Paints.

QUESTION MARKS: Businesses with high industry growth rate but low market share for a co. are ‘question marks’ or ‘problem children’. They require large amounts of cash to maintain or gain market share. ‘Question marks are usually new products or services which have a good commercial potential. No single set of strategies can be recommended here. ‘Question marks’ , therefore, may become ‘stars’ if enough investment is made, or become ‘dogs’ if ignored.

E.g.: holiday resorts, light commercial vehicles.

DOGS: Those industries which are related to slow-growth industries and where a company has a low relative market share are termed as ‘dogs’. They neither generate nor require large amount of cash. Her, retrenchment strategies are normally suggested. E.g.: cotton textiles, jute, shipping.

GE 9 GRID APPROACH: REFER TO PPT (ATTACHMENT) PRODUCT LIFE CYCLE(PLC):

Life cycle is a conceptual model that suggests that products, markets, businesses, and industries evolve through sequential stages of introduction, growth, maturity and decline. From the viewpoint of strategic analyses it is important to note that as life cycles moves from one stage to the next, the strategic conditions too change.

(slow sales growth), growth (rapid market acceptance), maturity (slow down in growth rate), and decline (sharp downward drift). If markets, business or industries are substituted for a product, the concepts of PLC could work just as well. The main advantage of the life cycle concept is that it can be used to diagnose a portfolio of products (or markets, businesses, or industries) in order to establish the stage at which each of them exists.

The life cycle concept provides a useful framework for carrying out an analysis to formulate business level strategies. Essentially the benefit of the life cycle concept lies in its ability to provide strategists with a convenient method of devising a broad approach to business strategy formulation, on the basis an understanding of the stage of the life cycle a business is in at a particular period of time. Here it is significant to note that the life cycle concept is not to be used as a guide to when a change will occur in the life cycle. Rather it is a useful guide to what changes might occur over a period of time, with regard to the market or industry conditions.

Further, it is also important to remember that the life cycle can sometime be reversible, as seen in the case of products that are revived after a declining trend. Products, markets, businesses, and industries sometimes experience reverse trends as often happens in the case of fashion when discarded clothing fashion come into vogue again. Strategists need to be aware of the possibility of such reverse trends in the life cycle.

The PLC is one of the best known models of marketing. It is useful because it illustrates clearly that change is inevitable as an offering moves through its life in the market. Each of the stages of the cycle is characterized by different conditions of demand and supply. To get the best returns from a product at all times the manager must be able to change the marketing mix, at the different stages. For example, a high price may be appropriate for a newly launched innovative product with few competitors. The ‘skimming’ strategy will generate high profits early in the product’s life, but once challenged by competitors in the growth stage, prices need to fall if market share is to be won. Similarly, promotional activities must change from awareness generating, through persuasion to reminder as the product matures.

One reason for portfolio analysis is to ensure that managers have located each product on its life cycle before strategies are developed for them.

RAM



Product life cycle

Introduction Growth Maturity Decline Sales Volume Revenue During Maturity, Profit

Growth slows down and Profit Levels off

There are a number of practical limitations to the use of the product life cycle and some pitfalls to be avoided, but it does demonstrate the reason for developing a balanced portfolio and shows managers why products at the height of their revenue – generating life are not popular with the owners, because profit growth has levelled off. Most owners expect to see profit growth. To achieve that the business needs growing products or must find strategies for extending the life of already mature products – for example, boosting sales by opening up new markets, new distribution channels or modifying the existing product to encourage repeat purchases.

MCKINSEY 7’S FRAMEWORK

According to McKinsey and company, strategy is only one seven elements in successful business practice.

The first three elements- strategy, structure, and systems- are considered “hard- ware” of success.

The next four – style, skills, staff, and shared values- are the “soft- ware”.

The first “soft” element, style, means that company employees share a common way of thinking and behaving.

The second, skills, means that the employees have the skills to carry out the company’s strategy.

The third, staffing, means that the company has hired able people, trained them well and assigned them to the right jobs.

The fourth, shared values, means that the employees share the same guiding values. When these elements are present, companies are usually more successful at strategy implementation.

ORGANISATIONAL STRUCTURE

An organization structure is the ways in which the tasks and subtasks are required to implement a strategy are arranged.

Entrepreneurial Structure

The entrepreneurial structure as shown in Exhibit 1, is the most elementary form of structure and is appropriate for an organization that is owned and managed by one person.

Exhibit 1

The advantages that an entrepreneurial structure offers are:  Quick decision-making, as power is centralized  Timely response to environmental changes  Informal and simple organizational systems

The disadvantages of the entrepreneurial structure are:

 Excessive reliance on the owner-manager and so proves to be demanding for the owner-manager

 May divert the attention of the owner-manager to day-to-day operational matters and ignore strategic decision

 Increasingly inadequate for future requirements if volume of business expands

Functional Structure

As the volume of business expands, the entrepreneurial structure outlives its usefulness. The need arises for specialized skills and delegation of authority to managers who can look after different functional areas. A typical functional structure is shown in Exhibit 2.

Exhibit 2

Note that specialization of skills is both according to the line and staff functions. The functional structure seeks to distribute decision-making and operational authority along functional lines.

CEO

PR

Legal

Finance

Marketing

Personnel

Production

Owner-Manager Employees

The advantages that a functional organization offers are:  Efficient distribution of work through specialization  Effective delegation of day-to-day work

 Providing time for the top management to focus on strategic decisions The disadvantages of a functional structure are:

 Creates difficulty in coordination among different functional areas

 Creates specialists, which results in narrow specialization, often at the cost of the overall benefits of the organization.

 Leads to functional and line and staff conflicts

Despite the disadvantages, the functional structure is quiet common and exists in its original or modified form as the organization evolves from the initial to the mature stages of development.

Divisional Structure

The structural needs of expansion and growth are satisfied by the functional structure but only up to a limit. There comes a time in the life of organization when growth and increasing complexity in terms of geographic expansion, market segmentation, and diversification make the functional structure inadequate. Some form of divisional structure is necessary to deal with such situations. Basically, work is divided on the basis of product lines, type of customers served, or geographical area covered, and then separate divisions or groups are created and placed under the divisional-level management. Within divisions, the functional structure may still operate.

Exhibit 3 The advantages that a divisional structure offers are:

CEO

Corporate Finance Corporate Legal / PR General Manager General Manager

Marketing Marketing

Operations Operations

 Enables grouping of functions required for the performance of activities related to a division.

 Generates quick response to environmental changes affecting the businesses of different divisions.

 Enables the top management to focus on strategic matters. The disadvantages of the divisional structure are:

 Problems in the allocation of resources and corporate overhead costs; particularly if the business and corporate objectives are ill-defined.

 Inconsistency arising from the sharing of authority between the corporate and divisional levels.

 Policy inconsistencies between different levels. Strategic Business Unit

Strategic Business Unit (SBU) has been defined by Sharplin as “any part of business organization which is treated separately for strategic management purposes”. When organizations face difficulty in managing divisional operations due to an increase in diversity, size, and number of divisions, it becomes difficult for the top management to exercise strategic control. Here, the culture of SBU is helpful in creating an SBU-organizational structure.

Conceptually, an SBU is “a discrete element of the business serving specific products-markets with readily identifiable competitors and for which strategic planning can be constructed.” Essentially, SBUs can be created by adding another level of management in a divisional structure after the divisions have been grouped under a divisional top management authority on the basis of common strategic interests.

Exhibit 4 SBU Organization Structure

The advantages that the SBU-organization structure offers are:

 Establishes coordination between divisions having common strategic interests.  Facilitates strategic management and control of large, diverse organizations.  Fixes accountability at a level of distinct business units.

CEO

Group Head SBU 1 Group Head SBU 2 Group Head SBU 3

Divisions Divisions Divisions A B C D E F G H I

CEO

Finance Marketing Personnel Operations

Project Manager A Project Manager B Project Manager C Functional Specialists

The disadvantages of the SBU-organization structure are:

 There are too many different SBUs to handle effectively in a large, diverse organization.  Difficulty in assigning responsibility and defining autonomy for SBU heads.  Additional of another level of management between corporate and divisional management.

Matrix Structure

In large organizations, there is often a need to work on major products or projects, each of which is strategically significant. The result is the requirement of matrix type of organizational structure. Essentially, such a type of structure is created by assigning functional specialists to work on a special project or a new product or service. For the duration of the project, specialists from different areas form a group or team and report to the team leader. Simultaneously, they may also work in their respective parent departments. Once the project is completed, the team members revert to their respective departments.

Exhibit6 Matrix

Organizational Structure

The advantages that the Matrix structure offers are:

 Allows individual specialists to be assigned where their talent is most needed.  Fosters creativity because of pooling of diverse talents.

 Provides good exposure to specialists in general management. The disadvantages of the Matrix structure are:

 Dual accountability creates confusion and difficulty for individual team members.  Requires a high level of vertical and horizontal combination.

 Shared authority may create communication problems. Network Structure

The increasing volatility of the environment, coupled with the emergence of knowledge based industries, has lead to the creation of a network structure. Also known as the “spider’s web structure” or the “virtual organization”, the network structure is

“composed of a series of project groups or collaborations linked by constantly changing non-hierarchical cobweb networks”. This structure is highly decentralized and organized around customer groups or geographical regions. Rather than being located in one place, the business functions are scattered far and wide.

The core organization is only a shell with a small headquarters acting as a “broker” connected to the suppliers and the specialized functions performed by autonomous teams & workforce.

The network structure is most suited to organizations that face a continually changing environment requiring quick response, high level of adaptability, and strong

innovations skills. This structure makes extensive use of the outsourcing of support services required to produce and market products or services. There are few internal resources and a network structure firm relies heavily on outsiders who are specialized in their respective areas.

Exhibit 7 Network Organization Structure The advantages that the network structure offers are:

 High level of flexibility to change structural arrangements in line with business requirements

 Permits concentration on core competencies of the firm  Adaptability to cope with rapid environment change The disadvantages of a network structure are:

 Loss of control and lack of coordination as there are several partners  Risks of overspecialization as most tasks are performed by others  High costs as a duplication of resources could be there

STRUCTURE FOLLOWS STRATEGY?

Q. Do you think Strategy drives structure? Elaborate.

Project A Project Group M Function X Project B Project Group N Function Y CORPORATE HEADQUATERS

Ans:- “Structure is static, Strategy is dynamic” seems to be more applied statement in the present day scenario, where organizations are striving for excellence in everything they do. Competition is ‘getting’ intense, and organizations have no other choice, but either to PROSPER or PERISH! Organisational structures have also undergone tremendous makeovers in the recent years. Tall structures have given way to FLAT STRUCTURES. Decision making is speedier in flat than tall structures. HMT watches lost to TITAN watches in this aspect.

Strategy is usually developed at three levels – Corporate level, SBU level & Departmental level. Every big organization has a Strategic Management Group (SMG) which develops the Strategies for the organization to achieve in the years to come. This team works on the changes in the Environment which can impact and affect the business. New Ventures, expansion, turnaround, new product development, diversifications, divestures, etc.

Strategies are prepared by organizations to fight competition. With the Malhotra Committee Reforms recommendations to privatize Insurance business in India in 1991 in place, the Government opened up Insurance Sector for private participation. IRDA (Insurance Regulatory Development Authority) was set up as an apex body to look into the ethical business practices of the Insurance Sector. Around 18 private players entered the Insurance Sector in India like ICICI, HDFC, TATAS, BIRLAS, BAJAJ, RELIANCE, etc. LIC, the Government player which enjoyed a virtual monopoly had to wake up to beat the competition. All the players had big – money and great marketing skills.

LIC was a mammoth player in the Insurance Sector and was literally an undisputed player. LIC came to know that, if it doesn’t revamp its strategy, it cannot protect its leadership status. It took a series of steps, to combat competition from the private players.

LIC believed that being a Government body, decision making was literally slow and this would hamper the fighting spirit. So, LIC overhauled its entire Organisation Structure. A lot of changes were initiated to bring in more transparency and faster decision making. From a tall hierarchical structure, LIC worked on various departments of the organization and tried to bring flat structures, where flexibility is there and would ultimately lead to faster decision making.

LIC also initiated massive promotional plans. They created new advertisements mostly through outdoors. They also – unveiled their new punchline “Jeevan ke sath bhi, jeevan ke baad bhi”. If LIC did not wake up to the increasing competition, it would have died a natural death. To drive the Strategy, LIC did make slight structural adjustments in their organizational structure to make the smooth flow of their strategy. A record 10 million policies were sold by LIC in March 2006, earning a premium income of Rs. 6,000 crore. LIC’s first premium from new policies rose 48.5 percent to Rs. 18,085 crore, from Rs. 12,170 crore last year, thus proclaiming its market leadership.

The above example, signifies that Strategy should always try to fit into the Structure. An organization cannot change its structure, just to meet its strategy requirements. However, if the need arises, a slight change in the structure can also power the strategy. But, in many instances, Structures follow the Strategy.

LEADERSHIP IN STRATEGIC MANAGEMENT

Who is the leader?

A leader is someone who has the authority to tell a group of people what to do. A leader can also represent a group of people. Good leaders are made not born. If you have the desire and willpower, you can become an effective leader. Good leaders develop through a never ending process of self-study, education, training, and experience.

Define leadership:

Leadership is a process by which a person influences others to accomplish an objective and directs the organization in a way that makes it more cohesive and coherent. Leaders carry out this process by applying their leadership attributes, such as beliefs, values, ethics, character, knowledge, and skills. Although your position as a manager, supervisor, lead, etc. gives you the authority to accomplish certain tasks and objectives in the organization, this power does not make you a leader...it simply makes you the boss. Leadership differs in that it makes the followers want to achieve high goals, rather than simply bossing people around.

How it influences a strategy?

 Influential leaders are adept at building teams and partnerships that rise above personal interests and cultural differences within organizations and between countries.

 Develop critical leading and influencing skills necessary to sustain long-term organizational success through a combination of lecture, discussion, simulation and self-assessment.

 Understand regulatory and cultural challenges and see how commercialization has been accomplished globally.

 Understand how new technology can revolutionize established industries, presenting challenges for participants and opportunities for new entrants.

 Strengthen your position in the global marketplace by understanding how knowledge is generated

Leadership Implementation

Leadership implementation refers to ensuring the right people in positions responsible for implementation of the strategy. It encompasses the chief executive officer (CEO) and the key manager. The first dimension of Leadership implementation is to make sure that the right strategists are in the right position for the strategy chosen for the

SBU or firm. The ability, integrity and commitment of the CEO and other top executives are very critical to the successful implementation of the strategy. The critical role of the leader in strategic management is clear from the fact that major changes in strategy are often preceded by or quickly followed by a change in the CEO. It is aptly said that in strategic management the nature of the CEO’s role is both symbolic and substantive.

The symbolic role is very important to instill confidence and to inspire. The substantive nature of the CEO role will be reflected in the amount of interest the CEO has in the strategy and the amount of time he invested in implementing the strategy. Besides the CEO, other top executives have a critical role in the strategy implementation. It is, therefore, essential to ensure that such key position are held by the right people.

CREATIVITY & INNOVATION IN STRATEGY:

Human beings are relentlessly creative & crucial issues that creativity must have some tangible outcome in products, in services, in a new structure or strategy or more diffusely in a pervasive shift in corporate culture.

An invention is the solution to a problem, often a technical one, where as innovations is the commercially successful use of the solution. Innovation starts after examining market needs, technical production and marketing requirements.

Successful innovations result from a conscious, purposeful search for innovation opportunities. Innovations arise out of:

• Unexpected occurrences • Incongruities

• Precise needs

• Industry and market changes • Demographic changes • Changes in perception • New knowledge.

Innovation means change. Such changes can be incremental or radical, evolutionary or revolutionary. They can have different effects upon procedures and users.

Innovation is not a technical term. Innovation creates new wealth or new potential of action rather than new knowledge.

Organisations know that it is not something that takes place within an organization but a change outside. The measure of innovation is the impact on the environment. Innovation in a business enterprise therefore always be market focused.

The most market focused innovator succeeds like business strategies, an innovative strategy starts out with the question “What is our business and what should it be?” The ruling assumption of an innovative strategy is that what ever exists is aging. Existing products lines and services, existing markets and distillation channels go