CA INTERMEDIATE

STRATEGIC MANAGEMENT

By

CA. NAMIT ARORA SIR

This book is dedicated to my Son

‘PRAGYAN ARORA’
 INDEX
S. NO. CHAPTERS NAME PAGE NO. WEIGHTAGE

1 INTRODUCTION TO STRATEGIC 1.1 – 1.29 5–8

MANAGEMENT

2 STRATEGIC ANALYSIS: 2.1 – 1.42 8 – 12

EXTERNAL ENVIRONMENT

3 STRATEGIC ANALYSIS: 3.1 – 2.38 8 – 12

INTERNAL ENVIRONMENT

4 STRATEGIC CHOICES 4.1 – 4.35 10

5 STRATEGIC IMPLEMENTATION AND 5.1 – 5.55 12 – 15

EVALUATION
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

1. MEANING AND NATURE OF STRATEGIC MANAGEMENT

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

(a) It is used with reference to a key group in an organisation in-charge of its affairs. In relation to an
organisation, management is the chief organ assigned with the task of making it a purposeful and
productive entity, by undertaking the task of bringing together and integrating the disorganised
resources of manpower, money, material, and technology, which are then combined into a
functioning whole. An organisation becomes a unified functioning system when management
systematically mobilises and utilises the diverse resources efficiently and effectively. The survival
and success of an organisation depends to a large extent on the competence and character of its
management.

(b) The term ‘Management’ is also used with reference to a set of interrelated functions and processes
carried out by the management of an organisation. These functions include Planning, Organising,
Directing, Staffing and Control. They range all the way from determination of the goals, design of the
organisation, mobilisation and acquisition of resources, allocation of tasks and resources among the

1.1
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

personnel and activity units and installation of control system to ensure that what is planned is
achieved.
Management is an influence process to make things happen, to gain command over phenomena, to
induce and direct events and people in a particular manner. Influence is backed by power,
competence, knowledge and resources. Managers formulate organisational goals, values and
strategies, to cope with, to adapt and to adjust themselves with the behaviour and changes in the
environment.

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

2. CONCEPT OF STRATEGY
In the context of business, the application of the term ‘Strategy’ relates to the ways, the business decides
to respond to dynamic and often hostile external forces while pursuing their vision, mission and ultimate
objectives.

The very incorporation of the idea of strategy into business organizations is intended to unravel
complexity and to reduce uncertainty caused by changes in the environment. Strategy is the game plan
that the management of a business uses to take market position, conduct its operations, attract and
satisfy customers, compete successfully, and achieve organizational objectives.

We may define the term ‘strategy’ as a long-range blueprint of an organization’s desired image, direction
and destination, i.e., what it wants to be, what it wants to do, how it wants to do things, and where it wants
to go. Following are also important other definitions are to understand the term:

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

1.2
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

William F. Glueck: A unified, comprehensive and integrated plan designed to assure that the basic
objectives of the enterprise are achieved.

Strategy is consciously considered and flexibly designed scheme of corporate intent and action to mobilise
resources, to direct human effort and behaviour, to handle events and problems, to perceive and utilise
opportunities, and to meet challenges and threats for corporate survival and success.

Strategy provides an integrated framework for the top management to search for, evaluate and exploit
beneficial opportunities, to perceive and meet potential threats and crisis, to make full use of resources
and strengths, and to offset corporate weaknesses.

Important to note that strategy is no substitute for sound, alert and responsible management. It must be
recognised that strategy can never be perfect, flawless and optimal.

In large organisations, strategies are formulated at:

 The corporate,
 Divisional, and
 Functional levels

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

Types of Strategy:

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

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

In other words, a company uses both proactive and reactive strategies to cope up the uncertain business

1.3
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

environment. Proactive strategy is planned strategy whereas reactive strategy is adaptive reaction to
changing circumstances.

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

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

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

Strategy helps unravel complexity and reduce uncertainty caused by changes in the environment. It also
means to identify existing problems and solving them by executing revolutionary ideas. It would be

1.4
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

pertinent to mention one such example in the recent times that is UPI, Unified Payments Interface. UPI
has changed the entire digital payments landscape in India and has now even gone global. A true example
of Made in India for the world. It was all because of a well-planned identification of existing problem
statement, formulating a strategy putting it to perfect execution.

3. IMPORTANCE AND LIMITATIONS OF STRATEGIC MANAGEMENT

The importance of Strategic Management essentially lies in enabling an organisation to perform better
than its competitors and its own past and present performance. That is, delivering superior returns to the
investors, superior value to the customers and superior performance vis-à-vis expectations of the
employees, suppliers, government and society.

The overall objectives of strategic management are two-fold:

 To create competitive advantage (something unique and valued by the customer), so that the
company can outperform the competitors in all aspects of organisational performance.
 To guide the company successfully through all changes in the environment. That is to react in the
right manner.

The organizational operations are highly influenced by the increasing rate of change in the environment
and the ripple effect created on the organization. Changes can be external to the firm, or they may be
introduced in the firm by the managers. It may manifest in the blurring of industry and firm boundaries,
driven by technology, deregulation, or, through globalization. The tasks of crafting, implementing and

1.5
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

executing company strategies are the heart and soul of managing a business enterprise.

Importance of Strategic Management:

Formulation of strategies and their implementation have become essential for all organizations for their
survival and growth in the present turbulent business environment. ‘Survival of the fittest’ as propagated
by Charles Darwin is the only principle of survival for all organizations, where ‘fittest’ are not the ‘largest’
or ‘strongest’ organizations but those who can change and adapt successfully to the changes in business
environment.
Many business giants have followed the path of extinction failing to manage drastic changes in the
business environment. For example, Bajaj Scooters, LML Scooters, Murphy Radio, BPL Television, Videocon,
Nokia, kodak and so on. Thus, it becomes imperative to study Business Strategy.

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

The major benefits of strategic management are:

 The strategic management gives a direction to the company to move ahead. It helps define the goals
and mission. It helps management to define realistic objectives and goals which are in line with the
vision of the company.
 Strategic management helps organisations to be proactive instead of reactive in shaping its future.
Organisations are able to analyse and take actions instead of being mere spectators.
 Strategic management provides frameworks for all major decisions of an enterprise such as decisions
on businesses, products, markets, manufacturing facilities, investments and organisational
structure.
 Strategic management seeks to prepare the organisation to face the future and act as pathfinder to
various business opportunities. Organisations are able to identify the available opportunities and
identify ways and means to reach them.
 Strategic management serves as a corporate defence mechanism against mistakes and pitfalls. It helps
organisations to avoid costly mistakes in product market choices or investments.
 Strategic management helps to enhance the longevity of the business. With the state of competition

1.6
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

and dynamic environment it may be challenging for organisations to survive in the long run. It helps
the organization to take a clear stand in the related industry and makes sure that it is not just
surviving on luck. Actions over expectations is what strategic management ensures.
 Strategic management helps the organisation to develop certain core competencies and competitive
advantages that would facilitate assist in its fight for survival and growth.

Limitations of Strategic Management:

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

1.7
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

communicating the strategies that may impede daily operations and negatively impact the routine
business. Planning and strategizing are important but putting them in action is where the actual
success lies. Similar to us students, planning and strategizing what to study, from where and at what
time of the day to study, consumes so much of our actual study time that by the time we have to
study, we are almost exhausted.
 Strategic management is a costly process. Strategic management adds a lot of expenses to an
organization. Strategic Management requires experts, and these experts are costly resources. Thus,
the process as a whole required good amount of funds to be spent.
 In a competitive scenario, where all organisations are trying to move strategically, it is difficult to
clearly estimate the competitive responses to a firm’s strategies. It is quite difficult to gauge the
strategic planning of competitors because most of these decisions are taken within closed doors by
the top management. For example, Apple changed the market dynamics of the speaker industry by
choosing to remove 3.5mm audio jack from iPhones. Now, to be relevant in the market, all major
speaker brands had to put concentrated efforts to develop their own true wireless speakers (TWS)
and compete with new entrants.

1.8
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

4. STRATEGIC INTENT (VISION, MISSION, GOALS, OBJECTIVES AND VALUES)

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

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

Strategic intent could be in the form of vision and mission statements for the organisation at the corporate
level. Strategic intent is generally stated in broad terms but when stated in precise terms it is an
expression of aims to be achieved operationally, i.e., goals and objectives.

1.9
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

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

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

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

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

5. VISION
Top management’s views about the company’s direction and the product-customer-market-technology
focus constitute the strategic vision for the company.

Strategic vision delineates management’s aspirations for the business, providing a panoramic view of
the “where we are to go” and a convincing rationale for why this makes good business sense for the
company. Strategic vision thus points out a particular direction, charts a strategic path to be followed in
future, and moulding organisational identity. A clearly articulated strategic vision communicates

1.10
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

management’s aspirations to stakeholders and helps steer the energies of company personnel in a common
direction.
For instance, Henry Ford’s vision of a car in every garage had power because it captured the imagination
of others, aided internal efforts to mobilize the Ford Motor Company’s resources, and served as a
reference point for gauging the merits of the company’s strategic actions.

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

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

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

Essentials of a strategic vision

 The entrepreneurial challenge in developing a strategic vision is to think creatively about how to
prepare a company for the future.
 Forming a strategic vision is an exercise in intelligent entrepreneurship.
 A well-articulated strategic vision creates enthusiasm among the members of the organisation.
 The best-worded vision statement clearly illuminates the direction in which organisation is headed.

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

1.11
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

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

Mission amplifies what brings the firm to this business or why it is there, what existence it seeks and
what purpose it seeks to achieve as a business firm. In other words, the mission serves as a justification
for the firm’s very presence and existence; it legitimises the firm’s presence.

Why should an organisation have a mission?

 To ensure unanimity of purpose within the organisation.

 To develop a basis, or standard, for allocating organisational resources.
 To provide a basis for motivating the use of the organisation’s resources.
 To establish a general tone or organisational climate, to suggest a business like operation.
 To serve as a focal point for those who can identify with the organisation’s purpose and direction.
 To facilitate the translation of objective and goals into a work structure involving the assignment of
tasks to responsible elements within the organisation.
 To specify organisational purposes and the translation of these purposes into goals in such a way
that cost, time, and performance parameters can be assessed and controlled.

A company’s mission statement is typically focused on its present business scope – “who we are and what
we do”. Mission statements broadly describe an organisations present capability, customer focus,
activities, and business makeup.

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

 LIC Ltd.’s Mission is - Ensure and enhance the quality of life of people through financial security by
providing products and services of aspired attributes with competitive returns, and by rendering
resources for economic development.

 Apple’s mission has been defined as - “to bring the best user experience to its customers through
innovative hardware, software, and services.”

1.12
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

Following points are useful while writing a mission of a company:

 One of the roles of a mission statement is to give the organisation its own special identity, business
emphasis and path for development – one that typically sets it apart from other similarly positioned
companies.
 A company’s business is defined by what needs it is trying to satisfy, which customer groups it is
targeting and the technologies and competencies it uses and the activities it performs.
 Good mission statements are – unique to the organisation for which they are developed.
A good mission statement should be precise, clear, feasible, distinctive and motivating.

What is our mission? And what business are we in?

The well-known management experts, Peter Drucker and Theodore Levitt were among the first to
agitate this issue through their writings. They emphasised that as the first step in the business planning
endeavour, every business firm must clarify the corporate mission and define accurately the business
the firm is engaged in. They also explained that towards facilitating this task, the firm should raise and
answer certain basic questions concerning its business, such as:

 What is our mission?

 What is our ultimate purpose?
 What do we want to become?
 What kind of growth do we seek?
 What business are we in?
 Do we understand our business correctly and define it accurately in its broadest connotation?
 Whom do we intend to serve?
 What human need do we intend to serve through our offer?
 What brings us to this particular business?
 What would be the nature of this business in the future?
 In what business would we like to be in, in the future?

According to Peter Drucker, every organisation must ask an important question “What business are we
in?” and get the correct and meaningful answer. The answer should have marketing or external
perspective and should not be restated to the production or generic activities of business. The table given
below will clarify and highlight the importance of external perspective.

1.13
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

6. GOALS AND OBJECTIVES

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

Objectives are organisation’s performance targets– the results and outcomes it wants to achieve. They
function as yardsticks for tracking an organisation’s performance and progress. The pursuit of objectives
is an unending process such that organisations sustain themselves. They provide meaning and sense of
direction to organisational endeavour. Organisational structure and activities are designed, and resources
are allocated around the objectives to facilitate their achievement. They also act as benchmarks for guiding
organisational activity and for evaluating how the organisation is performing.

Characteristics:
 Objectives should define the organisation’s relationship with its environment.
 They should be facilitative towards achievement of mission and purpose.
 They should provide the basis for strategic decision-making.
 They should provide standards for performance appraisal.
 They should be concrete and specific.
 They should be related to a time frame.

1.14
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

 They should be measurable and controllable.

 They should be challenging.
 Different objectives should correlate with each other.
 Objectives should be set within the constraints of organisational resources and external
environment.

A need for both short-term and long-term objectives: As a rule, a company’s set of financial and strategic
objectives ought to include both short-term and long-term performance targets. Having quarterly or
annual objectives focuses attention on delivering immediate performance improvements. Targets to be
achieved within three to five years’ prompt considerations of what to do now to put the company in
position to perform better down the road. By spelling out annual (or perhaps quarterly) performance
targets, management indicates the speed at which longer-range targets are to be approached.

Long-term objectives in seven areas:

 Profitability
 Productivity
 Competitive Position
 Employee Development
 Employee Relations
 Technological Leadership
 Public Responsibility

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

at the targeted long-term level. For instance, if a company has an ongoing objective of 15 percent profit
growth every year and is currently achieving this objective, then the company’s long-range and short-
range objectives for increasing profits coincide. The most important situation in which short-range
objectives differ from long-range objectives occurs when managers are trying to elevate organisational
performance and cannot reach the long-range target in just one year. Short-range objectives then serve
as steps toward achieving long term objective.

1.15
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

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

A few common examples of values are – Integrity, Trust, Accountability, Humility, Innovation, and Diversity.
But why are values so important? A company’s value sets the tone for how the people of think and behave,
especially in situations of dilemma. It creates a sense of shared purpose to build a strong foundation and
focus on longevity of the company’s success. Employees prefer to work with employers whose values
resonate with them - the ones they can relate to in their daily work and personal life. Interestingly,
majority of consumers say that they would prefer to buy products and services from companies that
have a purpose that reflects their own value and belief system. Hence, values have both internal as well
as external implications.

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

The above graphic represents the interconnection of Intent, Vision, Mission, Goals and Values; Values
remain the center/core of Vision, Mission, Goals and putting all them to action. Vision is followed by
Mission, followed by Goals and finally executing via real actions.

1.16
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

Values of LIC: Caring & Courtesy, Initiatives & innovation, Integrity & Transparency, Quality & Returns,
Trustworthiness & Reliability.

Values of Apple: Honesty, Respect, Confidentiality, and Compliance.

8. STRATEGIC LEVELS IN ORGANISATIONS

A typical large organization is a multi-divisional organisation that competes in several different
businesses. It has separate self-contained divisions to manage each of these businesses. For example,
Patanjali has healthcare, FMCG, Organic Foods, Medicinal Oils and Herbs, and various different businesses.
It has separate divisions which work within themselves to sustain each of these businesses.

1.17
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

Generally, there are three main levels of management:

 Corporate level
 Business level
 Functional level

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

Strategic Business Unit

If a company provides several or different kinds of products or services (conglomerate), it often duplicates
these functions and creates a series of self-contained divisions (each of which contain its own set of
functions) to manage each different product or service. The general managers of these divisions then
become responsible for their particular product line. They are responsible for deciding how to create a
competitive advantage and achieve higher profitability with the resources and capital they have at their
disposal. Such divisions are called Strategic Business Units (SBUs).

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

1.18
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

corporate-level managers provide a link between the people who oversee the strategic development of
a firm and those who own it (the shareholders). Corporate-level managers, and particularly the CEO, can
be viewed as the guardians of shareholders’ welfare. It is their responsibility to ensure that the corporate
and business strategies of the company are consistent with maximizing shareholders’ wealth. If they are
not, then ultimately the CEO is likely to be held accountable by the shareholders.

For example, Ahmedabad headquartered Adani Group is an Indian multinational conglomerate active in
a wide range of businesses, including mining, operating ports and airports, power generation and
transmission and cement. The main strategic responsibilities of its Group Chairman, Mr. Gautam Adani,
are setting overall strategic objectives, allocating resources among the different business areas, deciding
whether the firm should divest itself of any of its businesses, and determining whether it should acquire
any new ones. In other words, it is up to Mr. Adani and other senior executives to develop strategies that
span individual businesses and building and managing the corporate portfolio of businesses to maximize
corporate profitability. However, it is not their specific responsibility to develop strategies for competing
in the individual business areas, such as financial services. The development of such strategies is the
responsibility of those in charge of different businesses called business level managers.
In simple words, corporate level managers provide an organisation level view of strategy and what they
want to achieve, but it is on the business level managers to ensure that or their particular business, the
one they are responsible for.

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

Functional Level
Functional-level managers are responsible for the specific business functions or operations (human
resources, purchasing, product development, customer service, and so on) that constitute a company or
one of its divisions. Thus, a functional manager’s sphere of responsibility is generally confined to one

1.19
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

organizational activity, whereas general managers oversee the operation of a whole company or
division. Although they are not responsible for the overall performance of the organization, functional
managers nevertheless have a major strategic role: to develop functional strategies in their area that help
fulfill the strategic objectives set by business- and corporate-level general managers.

Functional managers provide most of the information that makes it possible for business- and corporate-
level general managers to formulate realistic and attainable strategies. Indeed, because they are closer
to the customer than the typical general manager is, functional managers themselves may generate
important ideas that subsequently may become major strategies for the company. Thus, it is important for
general managers to listen closely to the ideas of their functional managers. An equally great responsibility
for managers at the operational level is strategy implementation: the execution of corporate and
business-level plans.

1.20
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

9. NETWORK OF RELATIONSHIP BETWEEN THE THREE LEVELS

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

 Functional and Divisional Relationship: It is an independent relationship, where each function or a

division is run independently headed by the function/division head, who is a business level manager,
reporting directly to the business head, who is a corporate level manager. Functions maybe like
Finance, Human Resources, Marketing, etc. while Divisions may depend on the products like for a
toys manufacturer - kids toys, teenager toys, etc. could be divisions.

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

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

1.21
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

MULTIPLE CHOICE QUESTIONS

1. Strategy is a game plan used for which of the following?
(a) To take market position
(b) To attract and satisfy customers
(c) To respond to dynamic and hostile environment
(d) All of the above

2. Which of the following is correct?

(a) Strategy is always pragmatic and not flexible
(b) Strategy is not always perfect, flawless and optimal
(c) Strategy is always perfect, flawless and optimal
(d) Strategy is always flexible but not pragmatic

3. Strategy is-
(a) Proactive in action
(b) Reactive in action
(c) A blend of proactive and reactive actions
(d) None of the above

4. Reactive strategy can also be termed as-

(a) Planned strategy
(b) Adaptive strategy
(c) Sound strategy
(d) Dynamic strategy

5. Formulation of strategies and their implementation in a strategic management process is undertaken by-
(a) Top level executives
(b) Middle level executives
(c) Lower level executives
(d) All of the above

6. Which of the following are responsible for formulating and developing realistic and attainable strategies?
(a) Corporate level and business level managers
(b) Corporate level and functional level managers
(c) Functional managers and business level managers

1.22
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

(d) Corporate level managers, business level managers and functional level managers

7. Which of the following managers’ role is to translate the general statements/strategies into concrete
strategies of their individual businesses-
(a) Supervisor
(b) Functional Manager
(c) CEO of the company
(d) All of the above

8. Which statement should be created first and foremost?

(a) Strategy
(b) Vision
(c) Objectives
(d) Mission

9. Strategic management enables an organization to __________, instead of companies just responding to

threats in their business environment.
(a) be proactive
(b) determine when the threat will subside
(c) avoid the threats
(d) defeat their competitors

10. Read the following three statements:

(i) Strategies have short-range implications.
(ii) Strategies are action oriented.
(iii) Strategies are rigidly defined.

From the combinations given below select an alternative that represents statements that are true:
(a) (i) and (ii)
(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i), (ii) and (iii)

11. What involves formulating, implementing, and evaluating cross-functional decisions that enable an
organization to achieve its objectives?
(a) Strategy formulation

1.23
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

(b) Strategy evaluation

(c) Strategy implementation
(d) Strategic management

12. Strategic management allows an organization to be more

(a) Authoritative
(b) Participative
(c) Commanding
(d) Proactive

Answers to Multiple Choice Questions

1 (d), 2 (b), 3 (c), 4 (b), 5 (d), 6 (d), 7 (b), 8 (b), 9 (a), 10 (a), 11 (d) & 12 (d)

SCENARIO BASED QUESTIONS

1. Mr. Raj has been hired as a CEO by XYZ ltd a FMCG company that has diversified into affordable
cosmetics. The company intends to launch Feelgood brand of cosmetics. XYZ wishes to enrich the lives of
people with its products that are good for skin and are produced in ecologically beneficial manner using
herbal ingredients. Draft vision and mission statement that may be formulated by Raj.

2. Yummy Foods and Tasty Foods are successfully competing in the business of ready to eat snacks in Patna.
Yummy has been pioneer in introducing innovative products. These products will give them good sale.
However, Tasty Foods will introduce similar products in reaction to the products introduced by the Yummy
Foods taking away the advantage gained by the former. Discuss the strategic approach of the two
companies. Which is superior?

3. Ramesh Sharma has fifteen stores selling consumer durables in Delhi Region. Four of these stores were
opened in last three years. He believes in managing strategically and enjoyed significant sales of
refrigerator, televisions, washing machines, air conditioners and like till four years back. With shift to the
purchases to online stores, the sales of his stores came down to about seventy per cent in last four years.
Analyse the position of Ramesh Sharma in light of limitations of strategic management.

4. Dharam Singh, the procurement department head of Cyclix, a mountain biking equipment company, was
recently promoted to look after sales department along with procurement department. His seniors at the
corporate level have always liked his way of leadership and are assured that he would ensure the
implementation of policies and strategies to the best of his capacity but have never involved him in decision

1.24
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

making for the company. Do you think this is the right approach? Validate your answer with logical
reasoning around management levels and decision making.

5. ABC Limited is in a wide range of businesses which include apparels, lifestyle products, furniture, real
estate and electrical products. The company is looking to hire a suitable Chief Executive Officer. Consider
yourself as the HR consultant for ABC limited. You have been assigned the task to enlist the activities
involved with the role of the Chief Executive Officer. Name the strategic level that this role belongs to and
enlist the activities associated with it.

ANSWERS TO SCENARIO BASED QUESTIONS

1. Feelgood brand of cosmetics may have following vision and mission:
Vision: Vision implies the blueprint of the company’s future position. It describes where the
organisation wants to land. Mr. Raj should aim to position “Feelgood cosmetics” as India’s beauty care
company. It may have vision to be India’ largest beauty care company that improves looks, give
extraordinary feeling and bring happiness to people.
Mission: Mission delineates the firm’s business, its goals and ways to reach the goals. It explains the
reason for the existence of the firm in the society. It is designed to help potential shareholders and
investors understand the purpose of the company.
Mr. Raj may identify mission in the following lines:
 To be in the business of cosmetics to enhance the lives of people, give them confidence to lead.
 To protect skin from harmful elements in environment and sun rays.
 To produce herbal cosmetics using natural ingredients.

2. Yummy foods is proactive in its approach. On the other hand, Tasty Food is reactive. A proactive strategy
is a planned strategy whereas reactive strategy is an adaptive reaction to changing circumstances. A
company’s strategy is typically a blend of proactive actions on the part of managers to improve the
company’s market position and financial performance and reactions to unanticipated developments and
fresh market conditions.
If organisational resources permit, it is better to be proactive rather than reactive. Being proactive in
aspects such as introducing new products will give you an advantage in the mind of customers. At the
same time, crafting a strategy involves stitching together a proactive/intended strategy and then
adapting first one piece and then another as circumstances surrounding the company’s situation change
or better options emerge-a reactive/adaptive strategy. This aspect can be accomplished by Yummy
Foods.

1.25
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

3. Ramesh Sharma is facing declining sales on account of large-scale shift of customers to online stores.
While he is using the tools of strategic management, they cannot counter all hindrances and always
achieve success. There are limitations attached to strategic management as follows:
 Environment under which strategies are made is highly complex and turbulent. Entry of online
stores, a new kind of competitor brought a different dimension to selling consumer durables. Online
stores with their size power could control the market and offer stiff competition to traditional
stores.
 Another limitation of strategic management is that it is difficult to predict how things will shape-up
in future. Ramesh Sharma, although managing strategically failed to see how online stores will
impact the sales.
 Although, strategic management is a time-consuming process, he should continue to manage
strategically. The challenging times require more efforts on his part.
 Strategic management is costly. Ramesh Sharma may consider engaging experts to find out
preferences of the customers and attune his strategies to better serve them in a customized manner.
Such customized offerings may be difficult to match by the online stores.
 The stores owned by Ramesh Sharma are much smaller than online stores. It is very difficult for
him to visualize how online stores will be moving strategically.

4. Functional managers provide most of the information that makes it possible for business and corporate
level managers to formulate realistic and attainable strategies. This is so because functional managers
like Dharam Singh are closer to the customers/suppliers/ operations than the typical general manager
is. A functional manager may generate important ideas that subsequently may become major strategies
for the company. Thus, it is important for general managers to listen closely to the ideas of their
functional managers and invoice them in decision making.
An equally great responsibility for managers at the operational level is strategy implementation: the
execution of corporate and business level plans, and if they are involved in formulation, the clarity of
thoughts while implementation can benefit too.
Thus, the approach of Cylcix Corporate management is not right. They should involve Dharam Singh, as
well as other functional managers too in strategic management.

5. The role of Chief Executive Officer pertains to corporate level. The corporate level of management
consists of the Chief Executive Officer (CEO) and other top-level executives. These individuals occupy
the apex of decision making within the organization.
The role of Chief Executive Officer (Top Management/Corporate Level Managers) is to:
1. Oversee the development of strategies for the whole organization;

1.26
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

2. Defining the mission and goals of the organization;

3. Determining what businesses it should be in;
4. Allocating resources among the different businesses;
5. Formulating, and implementing strategies that span individual businesses;
6. Providing leadership for the organization;
7. Ensuring that the corporate and business level strategies which company pursues are consistent
with maximizing shareholders wealth; and
8. Managing the divestment and acquisition process.

DESCRIPTIVE QUESTIONS
1. What is Strategic Management? What benefits accrue by following a strategic approach to managing?
2. Are there any limitations attached to strategic management in organizations? Discuss.
3. Explain the difference between three levels of strategy formulation.
4. “Strategy is partly proactive and partly reactive.” Discuss.

ANSWER TO DESCRIPTIVE QUESTIONS

1. The term ‘strategic management’ refers to the managerial process of developing a strategic vision,
setting objectives, crafting a strategy, implementing and evaluating the strategy, and initiating
corrective adjustments were deemed appropriate.
The overall objective of strategic management is two-fold:
 To create competitive advantage, so that the company can outperform the competitors in order to
have dominance over the market.
 To guide the company successfully through all changes in the environment.

The following are the benefits of strategic approach to managing:

 Strategic management helps organisations to be more proactive instead of reactive in shaping its
future. Organisations are able to analyse and take actions instead of being mere spectators. Thereby
they are able to control their own destiny in a better manner. It helps them in working within
vagaries of environment and shaping it, instead of getting carried away by its turbulence or
uncertainties.
 Strategic management provides frameworks for all the major decisions of an enterprise such as
decisions on businesses, products, markets, manufacturing facilities, investments and
organisational structure. It provides better guidance to entire organisation on the crucial point -
what it is trying to do.

1.27
 INTRODUCTION TO STRATEGIC MANAGEMENT CHAPTER 1

 Strategic management is concerned with ensuring a good future for the firm. It seeks to prepare the
corporation to face the future and act as pathfinder to various business opportunities.
Organisations are able to identify the available opportunities and identify ways and means as how
to reach them.
 Strategic management serves as a corporate defence mechanism against mistakes and pitfalls. It
helps organisations to avoid costly mistakes in product market choices or investments. Over a
period of time strategic management helps organisation to evolve certain core competencies and
competitive advantages that assist in its fight for survival and growth.

2. The presence of strategic management cannot counter all hindrances and always achieve success. There
are limitations attached to strategic management. These can be explained in the following lines:
 Environment is highly complex and turbulent. It is difficult to understand the complex environment
and exactly pinpoint how it will shape-up in future. The organisational estimate about its future
shape may awfully go wrong and jeopardise all strategic plans.
 Strategic management is a time-consuming process. Organisations spend a lot of time in preparing,
communicating the strategies that may impede daily operations and negatively impact the routine
business.
 Strategic management is a costly process. Strategic management adds a lot of expenses to an
organization. Expert strategic planners need to be engaged, efforts are made for analysis of external
and internal environments devise strategies and properly implement. These can be really costly for
organisations with limited resources.
 In a competitive scenario, where all organisations are trying to move strategically, it is difficult to
clearly estimate the competitive responses to a firm’s strategies.

3. A typical large organization is a multidivisional organisation that competes in several different

businesses. It has separate self-contained divisions to manage each of these. There are three levels of
strategy in management of business - corporate, business, and functional.
The corporate level of management consists of the chief executive officer and other top-level executives.
These individuals occupy the apex of decision making within the organization. The role of corporate-
level managers is to oversee the development of strategies for the whole organization. This role includes
defining the mission and goals of the organization, determining what businesses it should be in,
allocating resources among the different businesses and so on rests at the Corporate Level.

The development of strategies for individual business areas is the responsibility of the general managers
in these different businesses or business level managers. A business unit is a self-contained division

1.28
CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT

with its own functions - For example, finance, production, and marketing. The strategic role of business-
level manager, head of the division, is to translate the general statements of direction and intent that
come from the corporate level into concrete strategies for individual businesses.

Functional-level managers are responsible for the specific business functions or operations such as
human resources, purchasing, product development, customer service, and so on. Thus, a functional
manager’s sphere of responsibility is generally confined to one organizational activity, whereas general
managers oversee the operation of a whole company or division.

4. Strategy is partly proactive and partly reactive. In proactive strategy, organizations will analyze possible
environmental scenarios and create strategic framework after proper planning and set procedures and
work on these strategies in a predetermined manner. However, in reality no company can forecast both
internal and external environment exactly. Everything cannot be planned in advance. It is not possible
to anticipate moves of rival firms, consumer behaviour, evolving technologies and so on.

There can be significant deviations between what was visualized and what actually happens. Strategies
need to be attuned or modified in the light of possible environmental changes. There can be significant
or major strategic changes when the environment demands. Reactive strategy is triggered by the
changes in the environment and provides ways and means to cope with the negative factors or take
advantage of emerging opportunities.

1.29
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

1. INTRODUCTION
Generally, organisations are distinguished based on their size, type of products, markets, geographical
coverage, legal status, and like because of vast organisational diversity.

Whatever their size or other distinguishing feature they do not operate in a vacuum. They continuously
act and react to what happens outside their periphery. The factors that are outside the business operations
are typically referred to as organisational / business environment. In other words, and in the specific
context of business, environment may be defined as a set of all external factors that weigh in the minds of
the managers.

The process of strategic formulation begins with a strategic analysis. Its objective is to compile information
about internal and external environments in order to assess possibilities while formulating strategic
objectives and contemplating strategic activities.

In this chapter various aspects of external environment are covered with the perspective of strategic
analysis. We will also attempt to understand how to identify, and tackle strategies to adapt within
complex and turbulent external environment.

2.1
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

2. STRATEGIC ANALYSIS
Strategy formulation is not a task in which managers can get by with intuition, opinions, instincts, and
creative thinking. Judgments about what strategies to pursue need to flow directly from analysis of a firm’s
external environment and its internal resources and capabilities. Environmental scanning is a natural and
continuous activity for every business and some do it on an informal basis, while others have a formal
structure to collect meaningful information. It is just as important to learn about changes in tax
regulations through television news as it is through a well-established reading material from experts.
The capacity to collect important information in informal settings usually separates great entrepreneurs
and managers. Using just informal techniques, on the other hand, exposes the organisation to missed
opportunities and unanticipated hazards. A systematic approach to environmental assessment is essential
for managing risk and uncertainty.

The majority of the rapidly expanding organisations use strategic planning throughout various stages of
their operations. The strategic analysis is a component of business planning that has a methodical

2.2
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

approach, makes the right resource investments, and may assist business in achieving its objective. It
forces to think about the rivals and aids in the evaluation of business plans to stay ahead of the
competition. The two important situational considerations are:
(1) Industry and competitive conditions, and
(2) An organisation’s own capabilities, resources, internal strengths, weaknesses, and market position.

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

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

The strategic analysis is a continuous process which is not without limitations. There are two major
limitations of strategic analysis that we need to be aware of. First, it gives a lot of innovative options but
doesn't tell which one to pick. The options can be overlapping, confusing or difficult to implement.
Second, it can be time consuming at times, hurting overall organisational functioning and also strain
other efficient innovations such as developing a new product or a service.

ISSUES TO CONSIDER FOR STRATEGIC ANALYSIS

Strategy evolves over a period of time: Each strategic decision must balance the different factors that
impact and constrain strategy. A key element of strategic analysis is the probable outcomes of everyday
decisions. A current strategy is the result of several little choices taken over a protracted period of time.

2.3
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

A management radically changes strategy when they try to speed up the organisational growth. Strategy
is influenced by experience, but it has to be updated when the results become clear. It therefore evolves
with time.
Balance of external and internal factors: In practise, strategic analysis necessitates creating a
reasonable balance between many and conflicting challenges, because a perfect fit between them is
unlikely. Management must consider opportunities, influences, and constraints while taking a strategic
decision.
There are factors driving a decision, such as entering a new market. Concurrently, there exist constraints
that limit the option, such as the presence of a large opponent. These limiting constraints will have
various implications on the kind, degree, volume, and significance of the impact. While some of these
aspects are under your control, there will be others way beyond the existing capabilities.

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

External risk is on account of inconsistencies between strategies and the forces in the environment. Internal
risk occurs on account of forces that are either within the organization or are directly interacting with the

2.4
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

organization on a routine basis.

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

It is evident that industries differ widely in their economic characteristics, competitive situations, and

2.5
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

future profit prospects. The economic character of industries varies according to such factors as overall
size and market growth rate, the pace of technological change, the geographic boundaries of the market
(which can extend from local to worldwide), the number and size of buyers and sellers, whether sellers’
products are virtually identical or highly differentiated, the extent to which costs are affected by
economies of scale, and the types of distribution channels used to access buyers, marketing
opportunities, disposable income of prospective buyers, government support, etc. Competitive forces
can be moderate in one industry and fierce, even cutthroat, in another. In some industries competition
focuses on who has the best price, while in others competition is centered on quality and reliability (as in
monitors for PCs and laptops) or product features and performance (as in mobile phones) or quick service
and convenience (as in online shopping and fast foods) or brand reputation (as in laundry detergents and
soft drinks). In other industries, the challenge is for companies to work cooperatively with suppliers,
customers, and maybe even select competitors to create the next round of product innovations and open
up whole new vistas of market opportunities.

Industry and competitive conditions differ so much that leading companies in unattractive industries can
find it hard to earn respectable profits, while even weak companies in attractive industries can achieve good
performance.

3. STRATEGY AND BUSINESS ENVIRONMENT

To accomplish the goals and objectives of a business, business strategist creates strategies and formulate
policies considering both internal and external factors. A framework for adjusting to the demands of an
unpredictable environment and an uncertain future is provided by strategic management.

2.6
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

The term "business environment" refers to all external factors, influences, or situations that in some way
affect business decisions, plans, and operations. Organisational success is determined by its business
environment, and even more from its relationship with it.

Strategic management is involved with choosing a long-term direction in relation to these resources and
opportunities. There is a close and continuous interaction between a business and its environment. This
interaction helps in strengthening the business firm and using its resources more effectively. It helps the
business in the following ways:

1. Determine opportunities and threats: The interaction between the business and its environment
would explain opportunities and threats to the business. It helps to find new needs and wants of the
consumers, changes in laws, changes in social behaviours, and tells what new products the
competitors are bringing in the market to attract consumers.
2. Give direction for growth: The interaction with the environment enables the business to identify the
areas for growth and expansion of their activities.
3. Continuous Learning: The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in the realm of business.
4. Image Building: Environmental understanding helps the business organizations to improve their
image by showing their sensitivity to the environment in which they operate. For example, in view of
the shortage of power, many companies have set up captive power plants with their factories to meet
their own requirement of power as well as extend surplus capacities in the vicinity.
5. Meeting Competition: It helps the businesses to analyse the competitors’ strategies and formulate
their own strategies accordingly. The idea is to flourish and beat competition for its products and
services.

Business strategies relate organisational resources to challenges and opportunities in the larger
environment. The changes happening in the external environment challenge organisations to find novel
and unique strategies to remain in business and succeed. Strategic analysis covering internal and
external environment is highly relevant and important for the strategists in organisations in order to
achieve competitive advantage, as well as ensure high performance for survival and growth.

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

2.7
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

Strategic decisions are significant aspects of business management and are essential for the success and
continued existence. Two crucial aspects for the success include are the function of top management and
the method of formulating strategic decisions. Due to the contemporary environment's changes and the
challenges that managers must overcome when making decisions, there is interest in enhancing strategic
decision-making. The environment is far more dynamic and unpredictable than it used to be.

4. MICRO AND MACRO ENVIRONMENT

The external environment can be categorised in two major types as follows:
 Micro environment
 Macro environment

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

organization regularly and directly. Micro environment consists of suppliers, consumers, marketing
intermediaries, competitors, etc. These are specific to the said business or firm and affect its working on a
direct and regular basis. Within the micro or the immediate environment in which a firm operates we
need to address the following issues:
 The employees of the firm, their characteristics and how they are organised.
 The existing customer base on which the firm relies for business.
 The ways in which the firm can raise its finance.
 Who are the firm suppliers and how are the links between the two being developed?
 The local community within which the firm operates.
 The direct competition and their comparative performance.

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

Elements of Macro Environment

Macro environment has broader dimensions as it consists of economic, sociocultural, technological,

2.8
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

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

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

1. Demographic Environment

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

Considering demographics is of immense importance for any business. Business Organizations need to
study different demographic factors. Particularly, they need to address following issues:

 What demographic trends will affect the market size of the industry?
 What demographic trends represent opportunities or threats?

2. Socio-Cultural Environment

A general factor that influences almost all enterprises in a similar manner. It represents a complex group
of factors such as social traditions, values and beliefs, level and standards of literacy, the ethical standards
and state of society, the extent of social stratification, conflict, cohesiveness and so forth. It differs from
demographics in the sense that it is not the characteristics of the population, but it is the behaviour and
the belief system of that population.

The beliefs, values and norms of a society determine how individuals and organizations should be
interrelated. The core beliefs of a particular society tend to be persistent. Businesses have to adjust to
social norms and beliefs to operate successfully. The social environment primarily affects the strategic
management process within the organization in the areas of mission and objective setting, and decisions

2.9
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

related to products and markets.

Economic Environment

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

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

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

The economic conditions of a nation refer to a set of economic factors that have great influence on
business organizations and their operations. These include gross domestic product, per capita income,
markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade,
strength of capital market, interest rates, disposable income, unemployment, inflation, etc. All these
factors generally tell the state of the economy. Whether it is doing good or is it performing poorly.

Political-Legal Environment

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

Business is highly guided and controlled by government policies. Hence the type of government running a
country is a powerful influence on business. A business has to consider the changes in the regulatory
framework and their impact on the business. Taxes and duties are other critical areas that may be levied
and affect the business.

2.10
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

Businesses prefer to operate in a country where there is a sound legal system. However, in any country
businesses must have a good working knowledge of the major laws protecting consumers, competitions
and organizations. Businesses must understand the relevant laws relating to companies, competition,
intellectual property, foreign exchange, labour and so on.

Nationalism supports measures aimed at enhancing the position of a country in International business.
Presently, there is immense thrust on nationalism in Indian business through policies like Make in India and
Aatmanirbhar Bharat. Production Linked Incentives scheme, another step in the direction, rewards
businesses for increased sales of goods produced domestically. The scheme encourages foreign businesses
to open businesses in India, and at the same time incentivises domestic businesses to open or expand their
manufacturing facilities, create more jobs, and lessen India's reliance on imports.

Technological Environment

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

Technology has impacted on how businesses are conducted. With use of technology, many organisations
are able to reduce paperwork, schedule payments more efficiently, are able to coordinate inventories
efficiently and effectively. This helps to reduce costs of companies, and shrink time and distance, thus,
capturing a competitive advantage for the company.

Changes in technology have an effect on how a business runs its operations. The technological
advancements might require a business to drastically alter its operational, production and marketing
strategies.

Technology is leading to many new business opportunities as well as making obsolete most of the
existing business products and services. Technology can act as opportunity, when a business effectively
adopts technological innovations to their strategic advantage. However, at the same time technology can
act as a threat too. Artificial intelligence, machine learning, robotic process automation is some of the
new technological tools that businesses are adopting and can act as both opportunity and threat to a
business.

2.11
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

5. PESTLE – A TOOL TO ANALYSE MACRO ENVIRONMENT

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

The PESTLE analysis is simple to understand and quick to implement. The advantage of this tool is that
it encourages management into proactive and structured thinking in its decision making.

The Key Factors

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

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

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

 Technological factors can determine barriers to entry, minimum efficient production level and
influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead

2.12
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

to innovation.

 Legal factors affect how a company operates, its costs, and the demand for its products, ease of
business.

 Environmental factors affect industries such as tourism, farming, and insurance. Growing
awareness to climate change is affecting how companies operate and the products they offer-it is
both creating new markets and diminishing or destroying existing ones.

Take a look at the table given below:

2.13
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

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

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

Characteristics of a global business

 It is a conglomerate of multiple units (located in different parts of the globe) but all linked by
common ownership.
 Multiple units draw on a common pool of resources, such as money, credit, information, patents,
trade names and control systems.
 The units respond to some common strategy. Besides, its managers and shareholders are also based
in different nations.

Developing internationally
International development is expensive and challenging. Moving on in a thorough and structured
manner is thus the ideal approach to adopt.

The steps in international strategic planning are as follows:

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

Why do businesses go global?

Technological developments and evolving political views are two important factors in the rapid rise of
multinational organisations. Because of technological advances, the process of internationalisation is
now simpler than it was previously. Worldwide communication makes it easier to define and implement

2.14
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

global strategy by linking corporate headquarters with their abroad operations. In addition, introduction
of improved transportation has increased the mobility of money, people, raw materials, and finished
items.
There are several reasons why companies go global.
 The first and foremost reason is the need to grow. Often finding opportunities in the other parts of
the globe, organisations extend their businesses and globalise their operations.
 There is rapid shrinking of time and distance across the globe, because of faster communication,
speedier transportation, growing financial flow of funds and rapid technological changes.
 It is being realised that the domestic markets are no longer adequate.
 There can be varied other reasons such as need for reliable or cheaper source of raw-materials, cheap
labour, etc. Many foreign businesses shift and set up some of their operations to take advantage of
availability of vast pool of talent.
 Companies often set up overseas plants to reduce high transportation costs. It may be cheaper to
produce near the market to reduce the time and costs involved in transportation.
 When exporting organisations find foreign markets to open up or grow big, they may naturally look
at overseas manufacturing plants and sales branches to generate higher sales and better cash flow.
 The rise of services to constitute the largest single sector in the world economy; and regional
economic integration, which has involved both the world’s largest economies as well as certain
developing economies.
 The apparent and real collapse of international trade barriers redefines the roles of state and
industry. The trade tariffs and custom barriers are getting lowered, resulting in increased flow of
business.
 Globalization has made companies in different countries to form strategic alliances to ward off
economic and technological threats and leverage their respective comparative and competitive
advantages.

7. INTERNATIONAL ENVIRONMENT
The social, cultural, demographic, environmental, political, governmental, legal, technological factors
that an international organisation faces are nearly limitless, and the number and complexity of these
factors increase manifold as the number of products produced and geographic areas served increase. An

2.15
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

assessment of the external environment is the first step toward internationalisation. Analysing
international environment is important since it allows organisation to discover opportunities in the global
market and evaluate feasibilities of capitalising on these opportunities. Assessments of the international
environment can be done at three levels: multinational, regional, and country.

1. Multinational environmental analysis involves identifying, anticipating, and monitoring significant

components of the global environment on a large scale. Understanding global developments covering
economic and other macro elements is important. Governments may have free or interventionist
tendencies in economies that needs to be carefully considered. These characteristics are evaluated
based on their present and expected future impact.

2. Regional environmental analysis is a more in-depth evaluation of the critical factors in a specific
geographical area. The emphasis would be on discovering market opportunities for a goods, services,
or innovations in the chosen location.

3. Country environmental analysis has to take a deeper look at the important environmental factors.
Study of economic, legal, political, and cultural dimensions is required in order for planning to be
successful. The analysis must be customised for each of the countries to develop effective market
entrance strategies.

International environment has become an inherent part of strategic management for businesses of all
sizes with global interests. It essentially involves various global aspects like political risks, cultural
differences, exchange rate fluctuations, legal compliances and taxation issues. Thus, it becomes more
important for the people at the decision-making levels to focus on factors comprising the international
environment.

8. UNDERSTANDING PRODUCT AND INDUSTRY

Businesses sell products. A product can be either a good or a service. It might be physical good or a
service, an experience. Business products have certain characteristics as follows:

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

2.16
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

 Product has a price. Businesses determine the cost of their products and charge a price for them. The
dynamics of supply and demand influence the market price of an item or service. The market price is
the price at which quantity provided equals quantity desired. The price that may be paid is
determined by the market, the quality, the marketing, and the targeted group.

On account of competition, businesses are not able to fix market price by adding profit margin on the
costs. Rather, they work on reducing the costs given the prevailing market price.

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

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

 A product has a useful life. Every product has a usable life after which it must be replaced, as well as a
life cycle after which it is to be reinvented or may cease to exist.

9. PRODUCT LIFE CYCLE (PLC)

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

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

The second phase of PLC is growth stage with rapid market acceptance. In the growth stage, the demand
expands rapidly, prices fall, competition increases, and market expands. The customer has knowledge

2.17
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

about the product and shows interest in purchasing it.

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

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

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

10. VALUE CHAIN ANALYSIS

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

2.18
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

down each process that their business employs. This analysis could be used to improve the sequence of
operations, enhancing efficiency and creating a competitive advantage. Value chain analysis can be used
by businesses of all sizes, from sole proprietorships to multinational organisations.

Value chain analysis is a method of examining each activity in value chain of a business in order to identify
areas for improvements. When you do a value chain analysis, you must analyse how each stage in the
process adds or subtracts value from the end product or service.

Value chain analysis has been widely used as a means of describing the activities within and around an
organization and relating them to an assessment of the competitive strength of an organization (or its
ability to provide value-for-money products or services). Value chain analysis was originally introduced
as an accounting analysis to shed light on the ‘value added’ of separate steps in complex manufacturing
processes, in order to determine where cost improvements could be made and/or value creation
improved.

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

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

2.19
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

Porter argued that an understanding of strategic capability must start with an identification of these
separate value activities. The primary activities of the organization are grouped into five main areas:
inbound logistics, operations, outbound logistics, marketing and sales, and service.

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

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

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

4. Marketing and sales provide the means whereby consumers/users are made aware of the
product/service and are able to purchase it. This would include sales administration, advertising,
selling and so on. In public services, communication networks which help users’ access a particular
service are often important.

5. Service are all those activities, which enhance or maintain the value of a product/service, such as
installation, repair, training and spares.

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

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

(b) Technology development: All value activities have a ‘technology’, even if it is simply know-how.
The key technologies may be concerned directly with product (e.g. R&D product design) or with
processes (e.g. process the development) or with a particular resource (e.g. raw materials
improvements).

(c) Human resource management: This is a particularly important area which transcends all primary
activities. It is concerned with those activities involved in recruiting, managing, training, developing

2.20
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

and rewarding people within the organization.

(d) Infrastructure: The systems of planning, finance, quality control, information management, etc. are
crucially important to an organization’s performance in its primary activities. Infrastructure also
consists of the structures and routines of the organization which sustain its culture.

11. INDUSTRY ENVIRONMENT ANALYSIS

A combination of ideas and methodologies may be utilised to create a clear picture of key industry traits,
competition intensity, industry change drivers, rival firms' market positions and tactics, competitive
success, and profit forecasts. Industry analysis enable strategic understanding about the entire state of
any industry and make decisions about whether the industry is a lucrative or not.

The goal of the industry environment analysis, which is typically an important step of strategic analysis, is
to estimate the amount of competitive pressures the business is presently facing and is expected to face in
the near future.

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

12. PORTER’S FIVE FORCES MODEL

Michael Porter believes that the basic unit of analysis for understanding is a group of competitors
producing goods or services that compete directly with each other. It is the industry where competitive
advantage is ultimately won or lost. It is through competitive strategy that the organisation attempts to
adopt an approach to compete in the industry.

The character, mix, and intricacies of competitive forces are never the same from one industry to
another. The model holds that the state of competition in an industry is a composite of competitive pressures
operating in five areas of the overall market:

2.21
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

 Competitive pressures associated with the market manoeuvring and jockeying for buyer patronage
that goes on among rival sellers in the industry.
 Competitive pressures associated with the threat of new entrants into the market.
 Competitive pressures coming from the attempts of companies in other industries to win buyers
over to their own substitute products.
 Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration.
 Competitive pressures stemming from buyer bargaining power and seller-buyer Collaboration.

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

Step 1: Identify the specific competitive pressures associated with each of the five forces.

Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate
to normal, or weak).

Step 3: Determine whether the collective strength of the five competitive forces is conducive to earn
attractive profits.

Porter’s five forces model is one of the most effective and enduring conceptual frameworks used to
assess the nature of the competitive environment and to describe an industry’s structure. The
interrelationship among these five forces gives each industry its own particular competitive

2.22
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

environment. By applying Porter’s five forces model of industry attractiveness to their own industries,
the manager can gauge their own firm’s strengths, weaknesses, and future opportunities.

I. The Threat of New Entrants

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

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

(i) Capital Requirements: When a large amount of capital is required to enter an industry, firms lacking
funds are effectively barred from the industry, thus enhancing the profitability of existing firms in the
industry.

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

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

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

(v) Brand Identity: Brand identity is particularly important for infrequently purchased products that

2.23
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

carry a high unit cost to the buyer. New entrants often encounter significant difficulties in building up the
brand identity, because to do so they must commit substantial resources over a long period.

(vi) Access to Distribution Channels: Despite the growing power of the internet, many firms may continue
to rely on their control of physical distribution channels to sustain a barrier to entry to rivals. Often,
existing firms have significant influence over the distribution channels and can retard or impede their
use by new firms.

(vii) Possibility of Aggressive Retaliation: Sometimes the mere threat of aggressive retaliation by
incumbents can deter entry by other firms into an existing industry. For example, introduction of
products by a new firm may lead incumbents firms to reduce their product prices and increase their
advertising budgets.

II. Bargaining Power of Buyers

This is another force that influences the competitive condition of the industry. This force will become
heavier depending on the possibilities of the buyers forming groups or cartels. Mostly, this is a
phenomenon seen in industrial products. Quite often, users of industrial products come together formally
or informally and exert pressure on the producer. The bargaining power of the buyers influences not only
the prices that the producer can charge but also influences in many cases, costs and investments of the
producer because powerful buyers usually bargain for better services which involve costs and investment
on the part of the producer. Buyers of an industry’s products or services can sometimes exert
considerable pressure on existing firms to secure lower prices or better services.

This leverage is particularly evident when:

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

III. Bargaining Power of Suppliers

Quite often suppliers, too, exercise considerable bargaining power over companies. The more specialised
the offering from the supplier, greater is his clout. And, if the suppliers are also limited in number, they
stand a still better chance to exhibit their bargaining power. The bargaining power of suppliers
determines the cost of raw materials and other inputs of the industry and, therefore, industry
attractiveness and profitability. Suppliers can influence the profitability of an industry in a number of
ways.
Suppliers can command bargaining power over a firm when:

2.24
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

 Their products are crucial to the buyer and substitutes are not available.
 They can erect high switching costs.
 They are more concentrated than their buyers.

IV. The Nature of Rivalry in the Industry

The rivalry among existing players is quite obvious. This is what is normally understood as competition.
For any player, the competitors influence strategic decisions at different strategic levels. The impact is
evident more at functional level in the prices being charged, advertising, and pressures on costs, product
and so on. The intensity of rivalry in an industry is a significant determinant of industry attractiveness and
profitability. The intensity of rivalry can influence the costs of suppliers, distribution, and of attracting
customers and thus directly affect the profitability. The more intensive the rivalry, the less attractive is
the industry.

Rivalry among competitors tends to be cutthroat and industry profitability low under various conditions
explained as follows:

(i) Industry Leader: A strong industry leader can discourage price wars by disciplining initiators of such
activity. Because of its greater financial resources, a leader can generally outlast smaller rivals in a price
war. Knowing this, smaller rivals often avoid initiating such a contest.

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

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

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

(v) Product Differentiation: Firms can sometimes insulate themselves from price wars by differentiating
their products from those of rivals. As a consequence, profitability tends to be higher in industries that
offer opportunity for differentiation. Profitability tends to be lower in industries involving undifferentiated
commodities such as, memory chips, natural resources, processed metals and railroads.

2.25
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

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

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

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

The collective strength of these five competitive forces determines the scope to earn attractive profits. The
strength of the forces may vary from industry to industry.

13. ATTRACTIVENESS OF INDUSTRY

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

The important factors on which the management may base such conclusions include:

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

2.26
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

 Whether competition currently permits adequate profitability and whether competitive forces will
become stronger or weaker?
 Whether industry profitability will be favourably or unfavourably affected by the prevailing driving
forces?
 The competitive position of an organisation in the industry and whether its position is likely to grow
stronger or weaker.
 The potential to capitalize on the vulnerabilities of weaker rivals.
 Whether the company is able to defend against or counteract the factors that make the industry
unattractive?
 The degrees of risk and uncertainty in the industry’s future.
 The severity of problems confronting the industry as a whole.
 Whether continued participation in this industry adds importantly to the firm’s ability to be
successful in other industries in which it may have business interests?

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

If the industry and competitive situation is judged relatively unattractive, more successful industry
participants may choose to invest cautiously, look for ways to protect their long-term competitiveness
and profitability, and perhaps acquire smaller firms if the price is right; over the longer term, strong
companies may consider diversification into more attractive businesses. Weak companies in
unattractive industries may consider merging with a rival to bolster market share and profitability or,
alternatively, begin looking outside the industry for attractive diversification opportunities.

14. EXPERIENCE CURVE

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

2.27
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

The implication is that larger firms in an industry would tend to have lower unit costs as compared to
those for smaller companies, thereby gaining a competitive cost advantage. Experience curve results
from a variety of factors such as learning effects, economies of scale, product redesign and technological
improvements in production.

Experience curve has following features:

 As business organisation grow, they gain experience.

 Experience may provide an advantage over the competition. Experience is a key barrier to entry.
 Large and successful organisation possess stronger “experience effect”.

A typical experience curve may be depicted as follows:

As a business grows, it understands the complexities and benefits from its experiences. The concept of
experience curve is relevant for a number of areas in strategic management. For instance, experience
curve is considered a barrier for new firms contemplating entry in an industry. It is also used to build market
share and discourage competition. In the contemporary Indian automobile industry, the experience curve
phenomenon seems to be working in Maruti Suzuki. The likely strategic choice for competitors can be a
market niche approach or segmentation based on demography or geography.

15. VALUE CREATION

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

2.28
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

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

At the most basic level, how profitable a company becomes depends on three factors:

(1) The value customers place on the company’s products;

(2) The price that a company charges for its products; and
(3) The costs of creating those products.

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

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

2.29
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

differentiation in case the expenses stay comparable to the costs of competitors.

The above-mentioned differentiation and cost advantage will affect a company’s ability to achieve
competitive advantage, but there are many different organizational functions that will influence whether
a company can achieve cost advantage or differentiation advantage. Michael Porter used the concept of
value chain to explore closer different functions of the organisations and mutual interactions among
those functions.

It is basically the value consumer wants to pay, over and above the price that the business wants to charge
from the consumer. This excess amount is called value creation, wherein the consumers value the product
or service more than it actually costs them.

16. MARKET AND CUSTOMER

A market is a place for interested parties, buyers and sellers, where items and services can be exchanged for
a price. The market might be physical, such as a departmental store where people engage in person. They
may also be virtual, such as an online market where buyers and sellers do not meet in person but tools
of technology to strike a deal. In addition to this broad definition, the term market can apply to a wide
range of contexts. For example, it might be used to describe the stock exchange, where securities are
traded. It may also refer to a group of individuals trying to buy a specific commodity or service in a
specific place, such as grain or vegetable market where farmers come to sell their produce. It may also
be used to define a business or industry, such as the global oil market.

While the market is a place, business strategist work on marketing to improve the chances of success. The
term "marketing" encompasses a wide range of operations, including research, designing, pricing,
promotion, transportation, and distribution. Often market activities are categorised and explained in
terms of four Ps of marketing – product, place, pricing, and promotion. These four kinds of marketing
activities help marketers identify customer needs so they may meet their demands and deliver
satisfaction. Delivering the best customer experience and establishing, maintaining, and growing
relationships with customers are the main goals of marketing.

The orientation of product marketing has evolved and acquired different dimensions centred around
product, production, sales and customers. Businesses that have product orientation think that buyers
will choose those products that have the best quality, performance, design, or features. Next, there are

2.30
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

production oriented businesses that believe that customers choose low price products. Sales-oriented
businesses believe that if they spend enough money on advertisement, sales and promotion, customers
can be persuaded to make a purchase.
In a customer or market-oriented approach strategists prioritise efforts on their customers. In order to
create better value propositions for customers, businesses gather, disseminate, and use customer and
competitive information. A customer centric business is one that continuously learn from its customers'
needs and market dynamics. In the present times success, many business lies in customer centric
approaches.

17. CUSTOMER
A customer is a person or business that buys products or services. Customers are important because they
provide revenue and organisations cannot exist without them. All businesses vie for customers, either
by aggressively marketing their products or by lowering their pricing to boost their customer bases. The
terms customer and consumer are practically synonymous and are frequently used interchangeably.
There is, however, a thin distinction.

Individuals or businesses that consume or utilise products and services are referred to as consumers.
Customers are the purchasers of products and services in the economy, and they might exist as consumers
or only as customers. In homes groceries are often bought by a parent and consume by all the members
of family.

Businesses routinely research the characteristics of their consumers in order to fine-tune their
marketing strategies and adjust their inventory to attract the most customers. Customers are frequently
categorised based on demographics like as age, race, gender, ethnicity, economic level, and geographic
region, which may all assist businesses in developing a profile of a perfect customer.

Customer Analysis
Customer analysis is an essential marketing component of any strategic business plan. It identifies target
clients, determines their wants, and then defines how the product meets those needs. Thus, it involves the
examination and evaluation of consumer needs, desires, and wants.

Customer analysis includes the administration of customer surveys, the study of consumer data, the
evaluation of market positioning strategies, development of customer profiles, and the selection of the

2.31
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

best market segmentation techniques.

Using the facts generated by customer analysis, an effective profiling of customers may be established.
Customer profiles can reveal demographic information about customers. A number of parties, including
buyers, sellers, distributors, salespeople, managers, wholesalers, retailers, suppliers, and creditors, can
assist in gathering information to effectively assess the needs and desires of consumers. Successful
businesses constantly monitor the behaviour of existing and prospective customers.

Customer Behaviour
Customer behaviour moves beyond the identification of customers to explain how they purchase
products. It examines elements like shopping frequency, product preferences, and the perception of your
marketing, sales, and service offerings.

Understanding these details allows businesses to communicate with customers in an effective manner.
Understanding the behaviours of customers enables businesses to establish effective marketing and
advertising campaigns, provide products and services that meet their needs, and retain customers for
repeat sales.

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

(1) External Influences: External influences, like advertisement, peer recommendations or social
norms, have a direct impact on the psychological and internal processes that influence various
consumer decisions. These aspects are divided into two groups – the company's marketing efforts
and the numerous environmental elements.

(2) Internal Influences: Internal processes are psychological factors internal to customer and affect
consumer decision making. Consumer behaviour is influenced by a combination of internal and
external influences, including motivation and attitudes.

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

2.32
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

 Make a final choice

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

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

18. COMPETITIVE STRATEGY

The competitive strategy of a business is concerned with how to compete in the business areas in which
the organization operates. In other words, competitive strategy defines how a firm expects to create and
sustain a competitive advantage over competitors. Having a competitive advantage over competitors
means being more profitable in the long run. The competitive strategy of a firm within a certain business
field is analysed using two criteria: (1) the creation of competitive advantage and (2) the protection of
competitive advantage.

An important component of industry and competitive analysis involves delving into the industry’s
competitive process to discover what the main sources of competitive pressure are and how strong each
competitive force is. This analytical step is essential because managers cannot devise a successful strategy
without in-depth understanding of the industry’s competitive character. Even though competitive
pressures in various industries are never precisely the same, the competitive process works similarly

2.33
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

enough to use a common analytical framework in gauging the nature and intensity of competitive forces.
Porter’s five forces model is useful in understanding the competition. It is a powerful tool for systematically
diagnosing the main competitive pressures in a market and assessing how strong and important each
one is. Not only is it the widely used technique of competition analysis, but it is also relatively easy to
understand and apply.

19. COMPETITIVE LANDSCAPE

Competitive landscape is a business analysis which identifies competitors, either direct or indirect.
Competitive landscape is about identifying and understanding the competitors and at the same time, it
permits the comprehension of their vision, mission, core values, niche market, strengths and weaknesses.
Understanding of competitive landscape requires an application of “competitive intelligence”.

An in-depth investigation and analysis of a firm’s competition allows it to assess the competitor’s
strengths and weaknesses in the marketplace and helps it to choose and implement effective strategies
that will improve its competitive advantage. Thus, understanding the competitive landscape is important
to build upon a competitive advantage.

Steps to understand the Competitive Landscape

(1) Identify the competitor: The first step to understand the competitive landscape is to identify the
competitors in the firm’s industry and have actual data about their respective market share.
This answers the question: Who are the competitors and how big are they?

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

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

2.34
CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

 What are their financial positions?

 What gives them cost and price advantage?
 What are they likely to do next?
 How strong is their distribution network?
 What are their human resource strengths?

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

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

20. KEY FACTORS FOR COMPETITIVE SUCCESS

An industry’s Key Success Factors (KSFs) are those things that most affect industry members’ ability to
prosper in the marketplace - the particular strategy elements, product attributes, resources,
competencies, competitive capabilities, and business outcomes that spell the difference between profit
and loss and, ultimately, between competitive success or failure. KSFs by their very nature are so
important that all firms in the industry must pay close attention to them.

Key success factors are the prerequisites for industry success or, to put it another way, KSFs are the factors
that shape whether a company will be financially and competitively successful.

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

 On what basis do customers choose between the competing brands of sellers? What product

2.35
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

attributes are crucial to sales?

 What resources and competitive capabilities does a seller need to have to be competitively successful,
better human capital, quality of product or quantity of product, cost of service, etc.?

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

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

Determining the industry’s key success factors, given prevailing and anticipated industry and
competitive conditions, is a top-priority analytical consideration. At the very least, managers need to
understand the industry situation well enough to know what is more important to competitive success
and what is less important. They need to know what kind of resources are competitively valuable.
Misdiagnosing the industry factors critical to long-term competitive success greatly raises the risk of a
misdirected strategy. In contrast, an organisation with perceptive understanding of industry KSFs can gain
sustainable competitive advantage by training its strategy on industry KSFs and devoting its energies to
being distinctively better than rivals on one or more of these factors. Indeed, business organisations that
stand out on a particular KSF enjoy a stronger market position for their, efforts being distinctively better
than rivals on one or more key success factors presents a golden opportunity for gaining competitive
advantage. Hence, using the industry’s KSFs as cornerstones for the company’s strategy and trying to gain
sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy
approach.

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

2.36
 CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

MULTIPLE CHOICE QUESTIONS

1. KSFs stand for:

(a) Key strategic factors

(b) Key supervisory factors
(c) Key success factors
(d) Key sufficient factors

2. Competitive landscape requires the application of-

(a) Competitive advantage
(b) Competitive strategy
(c) Competitive acumen
(d) Competitive intelligence

3. The term PESTLE analysis is used to describe a framework for analyzing:

(a) Macro Environment
(b) Micro Environment
(c) Both Macro and Micro Environment
(d) None of above

4. ‘Attractiveness of firms’ while conducting industry analysis should be seen in-

(a) Relative terms

(b) Absolute terms
(c) Comparative terms
(d) All of the above

5. What is not one of Michael Porter’s five competitive forces?

(a) New entrants
(b) Rivalry among existing firms
(c) Bargaining power of unions
(d) Bargaining power of suppliers

6. Which of the following constitute Demographic Environment?

(a) Nature of economy i.e. capitalism, socialism, Mixed
(b) Size, composition, distribution of population, sex ratio
(c) Foreign trade policy of Government

2.37
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

(d) Economic policy i.e. fiscal and monetary policy of Government

7. All are elements of Macro environment except:

(a) Society
(b) Government
(c) Competitors
(d) Technology

8. The emphasis on product design is very high, the intensity of competition is low, and the market growth
rate is low in the ______ stage of the industry life cycle.
(a) Maturity
(b) Introduction
(c) Growth
(d) Decline

Answers to Multiple Choice Questions

1 (c) 2 (d) 3 (a) 4 (a) 5 (c) 6 (b) 7 (c) 8 (b)

SCENARIO BASED QUESTIONS

1. Suresh Singhania is the owner of an agri-based private company in Sangrur, Punjab. His unit is producing
puree, ketchups and sauces. While its products have significant market share in the northern part of
country, the sales are on decline in last couple of years. He seeks help of a management expert who advises
him to first understand the competitive landscape.

Explain the steps to be followed by Suresh Singhania to understand competitive landscape.

2. Eco-carry bags Ltd., a recyclable plastic bags manufacturing, and trading company has seen a potential
in the ever-growing awareness around hazards of plastics and the positive outlook of the society towards
recycling and reusing plastics.
A major concern for Eco-carry bags Ltd. are paper bags and old cloth bags. Even though they are costlier
than recyclable plastic bags, irrespective, they are being welcomed positively by the consumers.

Identify and explain that competition from paper bags and old cloth bags fall under which category of
Porter’s Five Forces Model for Competitive Analysis?

3. Baby Turtle is a children's clothing brand that has been created a new age demand for washable diapers.
The major benefit for the brand has been that not many companies have shown interest in the product,

2.38
 CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

thinking it is not viable, however, customers, majorly working mothers are loving their product. The core
material needed for production is also used in many other water proofing products in various industries.

Baby Turtle sources this material from a renowned supplier at comparatively low prices. Which of the five
forces of competitive pressure would Baby Turtle experience due to above setup and what are major
factors that create such pressure for a product? Do you think Baby Shark has an advantage in some way to
fight off this pressure?

ANSWERS TO SCENARIO BASED QUESTIONS

1. Steps to understand the competitive landscape:

(1) Identify the competitor: The first step to understand the competitive landscape is to identify the
competitors in the firm’s industry and have actual data about their respective market share.
(2) Understand the competitors: Once the competitors have been identified, the strategist can use market
research report, internet, newspapers, social media, industry reports, and various other sources to
understand the products and services offered by them in different markets.
(3) Determine the strengths of the competitors: What is the strength of the competitors? What do they do
well? Do they offer great products? Do they utilize marketing in a way that comparatively reaches
out to more consumers? Why do customers give them their business?
(4) Determine the weaknesses of the competitors: Weaknesses (and strengths) can be identified by going
through consumer reports and reviews appearing in various media. After all, consumers are often
willing to give their opinions, especially when the products or services are either great or very poor.
(5) Put all of the information together: At this stage, the strategist should put together all information
about competitors and draw inference about what they are not offering and what the firm can do to
fill in the gaps. The strategist can also know the areas which need to be strengthen by the firm.

2. Eco-carry bags Ltd. faces competition from paper bags and old cloth bags and falls under Threat of
Substitutes force categories in Porter’s Five Forces Model for Competitive Analysis. Paper and cloth bags
are substitutes of recyclable plastic bags as they perform the same function as plastic bags. Substitute
products are a latent source of competition in an industry. In many cases, they become a major constituent
of competition. Substitute products offering a price advantage and/or performance improvement to the
consumer can drastically alter the competitive character of an industry.

3. Baby Turtle would experience, Bargaining Power of Suppliers, as a competitive pressure for their
washable diaper product. This is because the core material for production is sourced from a single supplier,
who is renowned and in a position to create pressure in terms of prices.

2.39
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

Further, other factors that lead to such pressure are:

1. Their products are crucial to the buyer and substitutes to the material required for production are not
available.

2. Suppliers can manipulate switching cost as the brand is in inception stage and making margins are
important.

An advantage that Baby Turtle has is even though the material required has no substitutes, but it used to
make many other products and thus there are many other suppliers who can provide that material. It might
affect operations in short term but will help to fight off the pressure created by existing supplier.

DESCRIPTIVE QUESTIONS
1. Explain the concept of Experience Curve and highlight its relevance in strategic management.
2. Write a short note on Product Life Cycle (PLC) and its significance in portfolio diagnosis.
3. Explain Porter’s five forces model as to how businesses can deal with the competition.

ANSWER TO DESCRIPTIVE QUESTIONS

1. Experience curve is similar to learning curve which explains the efficiency gained by workers through
repetitive productive work. Experience curve is based on the commonly observed phenomenon that unit
costs decline as a firm accumulates experience in terms of a cumulative volume of production.
It is represented diagrammatically as shown below:

The implication is that larger firms in an industry would tend to have lower unit costs as compared to those
of smaller organizations, thereby gaining a competitive cost advantage. Experience curve results from a
variety of factors such as learning effects, economies of scale, product redesign and technological
improvements in production.

2.40
 CHAPTER 2 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT

The concept of experience curve is relevant for a number of areas in strategic management. For instance,
experience curve is considered a barrier for new firms contemplating entry in an industry. It is also used
to build market share and discourage competition.

2. Product Life Cycle is an important concept in strategic choice and S-shaped curve which exhibits the
relationship of sales with respect of time for a product that passes through the four successive stages.

The first stage of PLC is the introduction stage in which competition is almost negligible, prices are
relatively high and markets are limited. The growth in sales is also at a lower rate.

The second stage of PLC is the growth stage, in which the demand expands rapidly, prices fall, competition
increases and market expands.

The third stage of PLC is the maturity stage, where in the competition gets tough and market gets stabilized.
Profit comes down because of stiff competition.

The fourth stage is the declining stage of PLC, in which the sales and profits fall down sharply due to some
new product replaces the existing product.

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

3. To gain a deep understanding of a company’s industry and competitive environment, managers do not
need to gather all the information they can find and waste a lot of time digesting it. Rather, the task is much
more focused. A powerful and widely used tool for systematically diagnosing the significant competitive

2.41
 STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT CHAPTER 2

pressures in a market and assessing the strength and importance of each is the Porter’s five-forces model
of competition. This model holds that the state of competition in an industry is a composite of competitive
pressures operating in five areas of the overall market:
 Competitive pressures associated with the market manoeuvring and jockeying for buyer patronage
that goes on among rival sellers in the industry.
 Competitive pressures associated with the threat of new entrants into the market.
 Competitive pressures coming from the attempts of companies in other industries to win buyers over
to their own substitute products.
 Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration.
 Competitive pressures stemming from buyer bargaining power and seller-buyer Collaboration.

2.42
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

1. INTRODUCTION

Strategic Analysis is equally important when it comes to internal environment assessment. Internal
environment refers to the sum total of people – individuals and groups, stakeholders, processes-input-
throughput-output, physical infrastructure-space, equipment and physical conditions of work, administrative
apparatus-lines of authority & power, responsibility, accountability and organizational culture intangible
aspects of working-relationships, philosophy, values, ethics- that shape an organization’s identity.

In other words, the internal environment is specific to each organisation. It is based on its structure and
business model and includes all stakeholders like top management, investors, employees, board of directors,
investors, etc.

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

Thus, it is even more important to understand the internal environment from a strategic analysis perspective.

3.1
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

2. UNDERSTANDING KEY STAKEHOLDERS

Who are Stakeholders and how do we identify them?

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

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

Generally, stakeholders include management, employees, shareholders, customers and vendors.

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

It is important to first identify the key stakeholders. Each stakeholder exerts a different level of influence
and can have differing levels of interest in the organisation.

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

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

3.2
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

Example of Key Stakeholders and their requirements for an OTT Platform

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

Mendelow suggests that one should analyse stakeholder groups based on Power (the ability to influence
organisation strategy or resources) and Interest (how interested they are in the organisation succeeding).

A thing to remember is that all stakeholders may seem to have lots of power and organisation may hope
they would have lots of interest too. But in reality, some stakeholders will hold more Power than others,
and some stakeholders will have more Interest than others.

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

3.3
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

Developing a Grid of Stakeholders

Mendelow’s Matrix is based on Power and Interest. It suggests to identify which stakeholders are
incredibly important. Metrics to define the importance being High Power and High Interest which
management would need to manage closely, while investing a lot of time and resources.

For example, the CEO is likely to have more Power to influence the work and also high interest in it being
successful. Keeping them informed almost daily should be a priority. However, those stakeholders with
low power and low interest like research institutes seeking an organisation data should be monitored
rarely and minimum effort expended on them in terms of time and money.

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

1. KEEP SATISFIED Stakeholders: High power, less interested people: Organisation should put in
enough work with these people to keep them satisfied with their intended information on a regular
basis. For example, banks, government, customers, etc.

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

3. LOW PRIORITY Stakeholders: Low power, less interested people: Organisation should only monitor
them with no actions to satisfy their expectations. Strategically, minimal efforts should be spent on

3.4
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

this group of stakeholders while keeping an eye to check if their levels of interest or power change.
For example, business magazines, media houses, etc.

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

An important thing that strategists should be aware of, is the importance to remember that environment
is highly dynamic and certain things might happen that can cause stakeholders to suddenly move between
quadrants.

For example, an organisation might inadvertently contravene a regulation, say GST compliance which
would cause the regulatory body i.e. the Indirect Taxes Department to move from High Power, Low
Interest to High Power, High Interest.

This would then require a different way of managing and communicating with this stakeholder. Equally,
the media houses would also move from Low Power, Low interest, to Low Power, High Interest. So, it’s
always worth re-analysing the Mendelow’s grid for one’s organisation in the event of a change in the
environment.

4. STRATEGIC DRIVERS

3.5
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

An important aspect of internal analysis is assessing the current performance of the business. And in
assessing current performance, the strategic drivers consider what differentiates an organisation from
its competitors.

It involves analysis of the key markets in which the organisation operates, as well as its key customers, the
products and services it provides, the channels in which the products or services are delivered, and the
organisation’s competitive advantage. Some of these components are interlinked, such as markets and
products/services, and channels and key customers in each channel.

There can be varied ways to assess the current performance of a business and it is highly subjective
based on the management’s metrics and ways of doing business. It can either be profit driven, purpose
driven or any other metrics that the management seems to fit in.

But in general, the key strategic drivers of an organisation include:

 Industry and markets
 Customers
 Products/services
 Channels

5. INDUSTRY AND MARKETS

Similar companies are grouped together into industries. Basically, industry grouping is based on the
primary product that a company makes or sells. For example, Maruti, Mahindra, Tata Motors, TVS, Bajaj
Auto, are all selling automotives as their primary product and thus categorised into Automotive Industry.
Similarly, Zara, H&M, Marks & Spencer, Pantaloons, Westside, Uniqlo, are all selling apparels and
accessories for the youth, and thus categorised under apparels industry.

A market is defined as the sum total of all the buyers and sellers in the area or region under consideration.
The value, cost and price of items traded are as per forces of supply and demand in a market. The market
may be a physical entity or may be virtual like e-commerce websites and applications. It may further be
local or global, depending on which all countries the business sells its products in.

3.6
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

Analysing Industry and Markets

Industry and market analysis is extremely important to identify one’s position as compared to the
competitors, who can be of equal size and value, or bigger in size and value or even smaller and newer.
A tool used for this is called - Strategic Group Mapping.

A strategic group consists of those rival firms which have similar competitive approaches and positions in
the market. Companies in the same strategic group can resemble one another in any of the several ways:
they may have comparable product-line breadth, sell in the same price/quality range, emphasize the same
distribution channels, use essentially the same product attributes to appeal to similar types of buyers,
depend on identical technological approaches, or offer buyers similar services and technical assistance.

An industry contains only one strategic group when all sellers pursue essentially identical strategies and
have comparable market positions. At the other extreme, there are as many strategic groups as there are
competitors when each rival pursues a distinctively different competitive approach and occupies a
substantially different competitive position in the marketplace.

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

 Identify the competitive characteristics that differentiate firms in the industry typical variables are
price/quality range (high, medium, low); geographic coverage (local, regional, national, global);
degree of vertical integration (none, partial, full); product-line breadth (wide, narrow); use of
distribution channels (one, some, all); and degree of service offered (no-frills, limited, full)
 Plot the firms on a two-variable map using pairs of these differentiating characteristics.
 Assign firms that fall in about the same strategy space to the same strategic group.
 Draw circles around each strategic group making the circles proportional to the size of the group’s
respective share of total industry sales revenues.

3.7
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

ABC, DEF, GHI, XYZ AND PQR are companies operating in the same industry. Let us assume these all are
companies selling Laptops. Now on the Y-Axis (vertical) is the reputation of the company and on the X-
Axis (horizontal) is the range of their products.

The Reputation is depicted through the size of the bubble of the company along with how high it is on the
Y-Axis. While on the X-Axis, we can see how huge their product range is, whether they have few models or
they have many models on offer for the customers.

A simple glance of the mapping chart shows us that even though ABC has few models, but it has great
reputation in the market. Similarly, GHI has a good range of products and is the most reputed company
in laptops. Another view is that XYZ and GHI have the same number of models as both are on the same
place on X-Axis, but GHI has much greater reputation than XYZ, as it has a bigger bubble and is higher on
the Y-Axis.

Strategists can analyze the market by making any number of scenarios like above to understand the
competition. Thus, this analysis helps a business understand its competition in terms of two or more
factors (like reputation and range of products in this case) in a single graphical representation.

3.8
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

6. CUSTOMERS
Understanding the different types of customers to whom the organisation’s products/services are sold or
provided, is not only important but also the first step in deciding the product/service. Different customers
may have different needs and require different sales models or distribution channels.

Consider the example of a headphones brand - the customers can be grouped under high value buyers,
medium value buyers and low value buyers based on the amount they are willing to spend on a product,
thus helping the business understand their key customers and focus areas of improvement.

As customers are often responsible for the generation of profits obtained by an organisation, it is
important to be able to collect and display data in order to show customer trends and profitability. Issues
with customers can be identified, and target areas for growth can be pursued based on the findings.

Another interesting concept is the difference between Customer and Consumer- while a customer is the
one buys a product/service, the consumer is the one who finally uses/consumes the bought product or
service. For example- A parent buying stationery products for their kids might be the customers, but
consumers of stationery are the kids who would actually use it. Thus, understanding both is important
for the marketers.
From a pricing perspective- the customer is of more importance and from value creation and
design/usability, consumer needs to be the kept at the center of decision making.

3.9
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

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

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

Product stands for the combination of “goods-and-services” that the company offers to the target market.
Strategies are needed for managing existing product over time, adding new ones and dropping failed
products. Strategic decisions must also be made regarding branding, packaging and other product features
such as warranties. The products can also be classified on the basis of industrial or consumer products,
essentials or luxury products, durables or perishables. Some products have consistent customer demand
over long period of time while others have short life spans.

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

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

For a new product, pricing strategies for entering a market need to be designed and for that matter at least
three objectives must be kept in mind:

 Have customer-centric approach while making a product.

 Produce sufficient returns through a reasonable margin over cost.
 Increasing market share.

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

3.10
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

competition in the market.

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

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

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

 Relationship Marketing: The process of creating, maintaining, and enhancing strong, value-laden
relationships with customers and other stakeholders. For example, Airlines offer special lounges at
major airports for frequent flyers. Thus, providing special benefits to selected customers to
strengthen bonds. It can go a long way in building relationships.

 Services Marketing: It is applying the concepts, tools, and techniques, of marketing to services. Services
is any activity or benefit that one party can offer to another that is essentially intangible. This
marketing requires different marketing strategies since it has peculiar characteristics of its own such
as inseparability, variability etc.

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

 Organization Marketing: It consists of activities undertaken to create, maintain, or change attitudes

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

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

3.11
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

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

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

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

 Differential Marketing: It is a market-coverage strategy in which a firm decides to target several

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

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

 Concentrated Marketing: It is a market-coverage strategy in which a firm goes after a large share of
one or few sub-markets. It can also take the form of Niche marketing.

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

8. CHANNELS
Channels are the distribution system by which an organisation distributes its product or provides its service.
To understand the concept of channels let us see some examples of how the following companies
distribute their products and services;
 Lakme - sells its products via retail stores, intermediary stores (like Nykaa, Westside, Reliance

3.12
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

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

The wider and stronger the channel the better position a business has to fight and win over competition.
Also, having robust channels of business distribution help keep new players away from entering the
industry, thus acting as barriers to entry.

There are typically three channels that should be considered: sales channel, product channel and service
channel.

1. The sales channel: These are the intermediaries involved in selling the product through each channel
and ultimately to the end user. For example, many fashion designers use agencies to sell their
products to retail organisations, so that consumers can access them.

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

3. The service channel: The service channel refers to the entities that provide necessary services to
support the product, as it moves through the sales channel and after purchase by the end user. The
service channel is an important consideration for products that are complex in terms of installation
or customer assistance. For example, a Bosch dishwasher may be sold in a Bosch showroom, and then
once sold it is installed by a Bosch contracted plumber.

Channel analysis is important when the business strategy is to scale up and expand beyond the current
geographies and markets. When a business plans to grow to newer markets, they need to develop or
leverage existing channels to get to new customers. Thus, analysis of channels that suit one’s products and
customers is of utmost importance. For example- if a healthcare brand wants to reach out to elderly
customers – they need to be more focused on offline mode of business where agents reach out physically
to the elderly as most of their potential customers (i.e. the old aged) are not active on smartphones.
Another example being- if a new drink brand wants to acquire customers – they need to place their
products via every channel possible to get more attraction from customers like placing their drinks in
stores, and shops alike, offering competitive campaigns to create awareness via online modes (social

3.13
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

media) and so and so forth.

Thus, channels, the partners in growth, play a crucial role in internal strategic alignment.

9. ROLE OF RESOURCES AND CAPABILITIES: BUILDING CORE COMPETENCY

An organization may be viewed as an entity endowed with resources and capabilities. These resources
and capabilities may be so synergized as to impart distinct competencies that the organization may
leverage to its advantage. C.K. Prahalad and Gary Hamel have advocated a concept of core competency,
which is a widely used concept in management theories. They defined core competency as the collective
learning in the organization, especially coordinating diverse production skills and integrating multiple
streams of technologies. An organization’s combination of technological and managerial know-how,
wisdom and experience are a complex set of capabilities and resources that can lead to a competitive
advantage compared to a competitor.

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

According to C.K. Prahalad and Gary Hamel, major core competencies are identified in three areas-

 Competitor differentiation,
 Customer value, and
 Application to other markets

3.14
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

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

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

The last condition refers to application of competencies to other markets. Core competence must be
applicable to the whole organization; it cannot be only one particular skill or specified area of expertise.
Therefore, although some special capability would be essential or crucial for the success of business
activity, it will not be considered as core competence if it is not fundamental from the whole
organization’s point of view. Thus, a core competence is a unique set of skills and expertise, which will be
used throughout the organisation to open up potential markets to be exploited.

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

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

3.15
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

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

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

Core technological competencies are also corporate assets; and as assets, they facilitate corporate access
to a variety of markets and businesses. For competitive advantage, a core technological competence
should be difficult for the competitors to imitate.

10. CRITERIA FOR BUILDING A CORE COMPETENCIES (CC)?

Four specific criteria of sustainable competitive advantage that firms can use to determine those
capabilities that are core competencies. Capabilities that are valuable, rare, costly to imitate, and non-
substitutable are core competencies.

1. Valuable: Valuable capabilities are the ones that allow the firm to exploit opportunities or avert the
threats in its external environment. A firm created value for customers by effectively using
capabilities to exploit opportunities.
Finance companies build a valuable competence in financial services. In addition, to make such
competencies as financial services highly successful require placing the right people in the right
jobs. Human capital is important in creating value for customers.

2. Rare: Core competencies are very rare capabilities and very few of the competitors possess this.
Capabilities possessed by many rivals are unlikely to be sources of competitive advantage for any

3.16
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

one of them. Competitive advantage results only when firms develop and exploit valuable
capabilities that differ from those shared with competitors.

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

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

The strategic value of capabilities increases as they become more difficult to substitute.
For example, Competitors are deeply aware about Apple’s operating system’s (iOS) successful model.
However, to date, no competitor has been able to imitate Apple’s capabilities. These are also
protected through copyrights.

To sum up, we can say that only when a capability is valuable, rare, costly to imitate, and non-substitutable,
it is a core competence and a source of competitive advantage. Over a time, core competencies must be
supported. Core competencies are a source of competitive advantage only when they allow the firm to create
value by exploiting opportunities in its external environment.

3.17
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

11. COMBINING EXTERNAL AND INTERNAL ANALYSIS (SWOT ANALYSIS)

SWOT analysis is the analysis of a business’s strengths, weaknesses, opportunities and threats. The primary
objective of a SWOT analysis is to help organizations develop a full awareness of all the factors (external as
well as internal), involved in making a business decision.

SWOT analysis shall be implemented before all company actions, whether it is exploring new initiatives,
revamping internal policies, considering opportunities to grow or alter a plan midway. One shall also use
SWOT analysis to discover recommendations and strategies, with a focus on leveraging strengths and
opportunities to overcome weaknesses and threats.

Since its creation, SWOT has been the most widely used tools for business owners to grow their
companies. Sometimes it’s wise to perform SWOT analysis just to check on the current landscape of your
business to improve business operations as needed. The analysis can show areas where an organization
is performing well, as well as areas that need improvement.

Let us understand with an example of a law firm - what could its SWOT analysis help understand about
its business.

3.18
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

The benefit of this analysis is that it identifies the complex issues for an organisation and puts them into
a simple framework. While on the other hand, one of the major criticisms of this tool is that it does not
generally provide for evaluation of strengths, weaknesses, opportunities and threats in the competitive
context.
Therefore, an organisation while using this tool, SWOT analysis, should consider relative competitors, and
external factors affecting the organisation. Although a simple tool, it is a useful starting point for analysis.

3.19
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

12. COMPETITIVE ADVANTAGE: USING MICHAEL PORTER’S GENERIC STRATEGIES

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

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

In other words, an organization is said to have competitive advantage if its profitability is higher than
the average profitability for all companies in its industry.

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

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

Sustainability of Competitive Advantage

The sustainability of competitive advantage and a firm’s ability to earn profits from its competitive
advantage depends upon four major characteristics of resources and capabilities:

1. Durability: The period over which a competitive advantage is sustained depends in part on the rate
at which a firm’s resources and capabilities deteriorate. In industries where the rate of product
innovation is fast, product patents are quite likely to become obsolete. Similarly, capabilities which
are the result of the management expertise of the CEO are also vulnerable to his or her retirement or

3.20
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

departure. On the other hand, many consumer brand names have a highly durable appeal.

2. Transferability: Even if the resources and capabilities on which a competitive advantage is based are
durable, it is likely to be eroded by competition from rivals. The ability of rivals to attack position of
competitive advantage relies on their gaining access to the necessary resources and capabilities. The
easier it is to transfer resources and capabilities between companies, the less sustainable will be the
competitive advantage which is based on them.

3. Imitability: If resources and capabilities cannot be purchased by a would-be imitator, then they must
be built from scratch. How easily and quickly can the competitors build the resources and capabilities
on which a firm’s competitive advantage is based? This is the true test of imitability. For example, In
financial services, innovations lack legal protection and are easily copied. Here again the complexity
of many organizational capabilities can provide a degree of competitive defense. Where capabilities
require networks of organizational routines, whose effectiveness depends on the corporate culture,
imitation is difficult.

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

13. MICHAEL PORTER’S GENERIC STRATEGIES

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

 Cost leadership emphasizes on producing standardized products at a very low per unit cost for
consumers who are price-sensitive.
 Differentiation is a strategy aimed at producing products and services considered unique industry-

3.21
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

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

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

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

Porter stresses the need for strategists to perform cost-benefit analysis to evaluate “sharing opportunities”
among the firm’s existing and potential business units.
Sharing activities and resources enhances competitive advantage by lowering costs or raising
differentiation. In addition to prompting sharing, Porter stresses the need for firms to “transfer” skills and
expertise among autonomous business units effectively in order to gain competitive advantage.
Depending upon factors such as type of industry, size of firm and nature of competition, various
strategies could yield advantages in cost leadership differentiation, and focus.

14. COST LEADERSHIP STRATEGY

It is a low-cost competitive strategy that aims at broad mass market. It requires vigorous pursuit of cost
reduction in the areas of procurement, production, storage and distribution of product or service and also
economies in overhead costs.
Because of its lower costs, the cost leader is able to charge a lower price for its products than most of its

3.22
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

competitors and still earn satisfactory profits. For example, McDonald’s fast-food restaurants have
successfully followed low-cost leadership strategy. Decathlon Group’s mega sports stores have been
following low-cost leadership strategy to gain international recognition and also beat competition.

A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost
leadership benefits. Generally, cost leadership must be pursued in conjunction with differentiation. A
number of cost elements affect the relative attractiveness of generic strategies, including economies or
diseconomies of scale achieved, learning and experience curve effects, the percentage of capacity
utilization achieved, and linkages with suppliers and distributors. Other cost elements to consider while
choosing among alternative generic strategies include the potential for sharing costs and knowledge
within the organization, R&D costs associated with new product development or modification of existing
products, labour costs, tax rates, energy costs, and shipping costs. This internal strategy of sharing
resources to build a competitive advantage is called synergy benefit.

Striving to be a low-cost producer in an industry can especially be effective,

 When the market is composed of many price-sensitive buyers and

 When there are few ways to achieve product differentiation.

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

Some risks of pursuing cost leadership are;

 That competitors may imitate the strategy, therefore driving overall industry profits down;
 That technological breakthroughs in the industry may make the strategy ineffective; or that
buyer interests may swing to other differentiating features besides price.

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

3.23
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

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

Disadvantages of Cost Leadership Strategy

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

15. DIFFERENTIATION STRATEGY

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

Differentiation does not guarantee competitive advantage, especially if standard products sufficiently
meet customer needs or if rapid imitation by competitors is possible. Durable products protected by
barriers to quick imitation by competitors’ areas better. Successful differentiation can mean greater

3.24
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

product flexibility, greater compatibility, lower costs, improved service, less maintenance, greater
convenience, or more features. Product development is an example of a strategy that offers the advantages
of differentiation.

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

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

Another risk of pursuing a differentiation strategy is that competitors may develop ways to copy the
differentiating features quickly. Firms must find durable sources of uniqueness that cannot be imitated
quickly or cheaply by rival firms. For example, Amazon Prime offers deliver within two hours. This is
quite difficult to imitate by its rivals, and thus this differentiating factor helps it to lead the market.

Basis of Differentiation
1. Product: Innovative products that meet customer needs can be an area where a company has an
advantage over competitors. However, the pursuit of a new product offering can be costly – research
and development, as well as production and marketing costs can all add to the cost of production
and distribution. The payoff, however, can be great as customer’s flock to be among the first to have
the new product. For example, Apple iPhone, has invested huge amounts of money in R&D, and the
customers’ value that. They want to be among the first ones to try the new offerings from the
company.
2. Pricing: It fluctuates based on its supply and demand and may also be influenced by the customer’s
ideal value for a product. Companies that differentiate based on product price can either determine
to offer the lowest price or can attempt to establish superiority through higher prices. For example,
Apple iPhone dominates the smart phone segment by charging higher prices for its products.
3. Organisation: Organisational differentiation is yet another form of differentiation. Maximizing the
power of a brand or using the specific advantages that an organization possesses can be
instrumental to a company’s success. Location advantage, name recognition and customer loyalty
can all provide additional ways for a company differentiate itself from the competition. For example,
Apple has been building customer loyalty since years and has a fan base of consumers that are called
“Apple Fanboys/Fangirls”.

3.25
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

Achieving Differentiation Strategy

1. Offer utility to the customers and match products with their tastes and preferences.
2. Elevate/Improve performance of the product.
3. Offer the high-quality product/service for buyer satisfaction.
4. Rapid product innovation to keep up with dynamic environment.
5. Taking steps for enhancing brand image and brand value.
6. Fixing product prices based on the unique features of product and buying capacity of the customer.

Advantages of Differentiation Strategy

A differentiation strategy may help an organisation to remain profitable even with rivalry, new entrants,
suppliers’ power, substitute products, and buyers’ power.
1. Rivalry - Brand loyalty acts as a safeguard against competitors. It means that customers will be less
sensitive to price increases, as long as the firm can satisfy the needs of its customers.
2. Buyers – They do not negotiate for price as they get special features and they have fewer options in
the market.
3. Suppliers – Because differentiators charge a premium price, they can afford to absorb higher costs of
supplies as the customers are willing to pay extra too.
4. Entrants – Innovative features are an expensive offer. So, new entrants generally avoid these features
because it is tough for them to provide the same product with special features at a comparable price.
5. Substitutes – Substitute products can’t replace differentiated products which have high brand value
and enjoy customer loyalty.

Disadvantages of Differentiation Strategy

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

3.26
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

16. FOCUS STRATEGIES

A successful focus strategy depends on an industry segment that is of sufficient size, has good growth
potential, and is not crucial to the success of other major competitors. Strategies such as market
penetration (new product for existing customers) and market development (new product for new
customers) offer substantial focusing advantages. Midsize and large firms can effectively pursue focus-
based strategies only in conjunction with differentiation or cost leadership based strategies. All firms in
essence follow a differentiated strategy. Because only one firm can differentiate itself with the lowest cost,
the remaining firms in the industry must find other ways to differentiate their products.

Focus strategies are most effective when consumers have distinctive preferences or requirements, and when
the rival firms are not attempting to specialize in the same target segment. Risks of pursuing a focus
strategy include the possibility of numerous competitors recognizing the successful focus strategy and
imitating it, or that consumer preferences may drift towards the product attributes desired by the
market as a whole. An organization using a focus strategy may concentrate on a particular group of
customers, geographic markets, or on particular product-line segments in order to serve a well-defined
but narrow market better than competitors who serve a broader market. For example, Ferrari sports cars.

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

Focused differentiation: A focused differentiation strategy requires offering unique features that fulfil
the demands of a narrow market. Similar to focused low-cost strategy, narrow markets are defined in
different ways in different settings.

Some firms using a focused differentiation strategy concentrate their efforts on a particular sales
channel, such as selling over the internet only. Others target particular demographic groups. Firms that
compete based on uniqueness and target a narrow market are following a focused differentiations
strategy. For example, Rolls-Royce sells limited number of high-end, custom-built cars.

Achieving Focused Strategy

To achieve focused cost leadership/differentiation, following strategies could be adopted by an
organization:
1. Selecting specific niches which are not covered by cost leaders and differentiators.

3.27
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

2. Creating superior skills for catering such niche markets.

3. Generating high efficiencies for serving such niche markets.
4. Developing innovative ways in managing the value chain.

Advantages of Focused Strategy

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

Disadvantages of Focused Strategy

1. The firms lacking in distinctive competencies may not be able to pursue focus strategy.
2. Due to the limited demand of product/services, costs are high, which can cause problems.
3. In the long run, the niche could disappear or be taken over by larger competitors by acquiring the
same distinctive competencies.

17. BEST COST PROVIDER STRATEGY

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

3.28
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

Best-cost provider strategy involves providing customers more value for the money by emphasizing on
lower cost and better-quality differences. It can be done through:
(a) Offering products at lower price than what is being offered by rivals for products with comparable
quality and features Or
(b) Charging similar price as by the rivals for products with much higher quality and better features.

For example, android flagship phones from OnePlus, Xiaomi, Oppo, Vivo, etc, are all rooting for giving
better quality at lowest prices to the customers. They are following the best-cost provider strategy to
penetrate market.

Activity for Michael Porter’s Generic Strategies

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

3.29
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

MULTIPLE CHOICE QUESTIONS

1. The goal of SWOT analysis is to ________ the organization's opportunities and strengths while ________ its
threats and ________ its weaknesses.
(a) avoid; neutralizing; correcting
(b) exploit; neutralizing; correcting
(c) avoid; capitalizing; neutralizing
(d) exploit; avoiding; ignoring

2. SWOT analysis is an evaluation of the organization's ________ strengths andweaknesses and its ________
opportunities and threats.
(a) external; internal
(b) internal; internal
(c) external; external
(d) internal; external

3. External opportunities and threats are usually:

(a) the minor cause of organizational demise or success
(b) least important for CEOs and the board of directors
(c) not as important as internal strengths and weaknesses
(d) largely uncontrollable activities outside the organization

4. The sustainability of competitive advantage and a firm’s ability to earn profits from its competitive
advantage depends upon:
(a) Durability, reliability, transferability, approximately
(b) Appropriability, durability, transferability, imitability
(c) Transferability, imitability, reliability, approximately
(d) Imitability, durability, reliability, appropriability

5. Internal __________ are activities in an organization that are performed especially well.
(a) Opportunities
(b) Competencies
(c) Strengths
(d) Management

6. ‘Strategic group mapping’ helps in-

3.30
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

(a) Identifying the strongest rival companies

(b) Identifying weakest rival companies
(c) Identifying weakest and strongest rival companies
(d) None of the above

7. In Michael Porter’s generic strategy _____________ emphasizes producing standardized products at a very low
per unit-cost for consumers who are price sensitive.
(a) Cheap leadership
(b) Inferior product leadership
(c) Cost leadership
(d) Cost benefit

8. Differentiation Strategy can be achieved by following measures:

1. Match products with tastes and preferences of customers.
2. Elevate the performance of the product.
3. Rapid product innovation

Which of the above is true:

(a) (1) and (2)
(b) (1) and (3)
(c) (2) and (3)
(d) (1), (2) and (3)

9. What are the three different bases given by Michael Porter’s Generic Strategies to gain competitive
advantage?
(a) differentiation, integration and compensation
(b) integration, focus and differentiation
(c) compensation, integration and focus
(d) cost leadership, differentiation and focus

10. A firm successfully implementing a differentiation strategy would expect:

(a) Customers to be sensitive to price increases.
(b) To charge premium prices.
(c) Customers to perceive the product as standard.
(d) To automatically have high levels of power over suppliers.

3.31
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

Answers to Multiple Choice Questions

1 (b) 2 (d) 3 (d) 4 (b) 5 (c) 6 (c) 7 (c) 8 (d) 9 (d) 10 (b)

SCENARIO BASED QUESTIONS

1. Rohit Sodhi runs a charitable organisation for promotion of sports in the country. His organisation
conducts regular free training camps for youths interested in playing cricket, football, hockey, badminton
and so on. Many of his trainees have reached national level contests. Rohit noticed that with success of IPL
(Cricket) tournament there is an increasing trend to extend similar format in other sports as well. He
wishes to know how the development is going help sports and to which industries it will offer opportunities
and threats.

2. Mr. Banerjee is head of marketing department of a manufacturing company. His company is in direct
competition with thirteen companies at national level. He wishes to study the market positions of rival
companies by grouping them into like positions.

Name the tool that may be used by Mr. Banerjee? Explain the procedure that may be used to implement
the technique.

3. Mohan has joined as the new CEO of XYZ Corporation and aims to make it a dominant technology
company in the next five years. He aims to develop competencies for managers for achieving better
performance and a competitive advantage for XYZ Corporation. Mohan is well aware of the importance of
resources and capabilities in generating competitive advantage.

Discuss the four major characteristics of resources and capabilities required by XYZ Corporation to sustain
the competitive advantage and its ability to earn profits from it.

4. Airlines industry in India is highly competitive with several players. Businesses face severe competition
and aggressively market themselves with each other. Luxury Jet is a private Delhi based company with a
fleet size of 9 small aircrafts with seating capacity ranging between 6 seats to 9 seats. There aircrafts are
chartered by big business houses and high net worth individuals for their personalised use. With
customised tourism packages their aircrafts are also often hired by foreigners.

Identify and explain the Michael Porter’s Generic Strategy followed by Luxury Jet.

5. Gennex is a company that designs, manufactures and sells computer hardware and software. Gennex is
well known for its innovative products that has helped the company to have advantage over its
competitors. It also spends on research and development and concerned with innovative softwares. Often

3.32
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

the unique features of their product, that are not available with their competitors helps them to gain
competitive advantage. Gennex using the strategy is consistently gaining its position in the industry over
its competitors.

Identify and explain the Porter’s generic strategy which Gennex has opted to gain the competitive
advantage.

6. Sohan and Ramesh are two friends who are partners in their business of making biscuits. Sohan believe
in making profits through selling more volume of products. Hence, he believes in charging lesser price to
the customers. Ramesh, however, of the opinion that higher price should be charged to create an image of
exclusivity and for this, he proposes that the product to undergo some change.

Analyse the nature of generic strategy used by Sohan and Ramesh.

7. Infant care is a successful store chain that caters products for expectant mothers and new moms. They
offer everything from nursing classes to strollers, toys, infant clothes, diapers and baby furniture. Due to a
one-stop shop for infants, they are charging a premium for its products.

Identify and explain how the strategy adopted by infant care.

8. A century-old footwear company “Mota Shoes” had an image of being the footwear choice for formal
occasions. In an attempt to reinvent its brand, it tied up with a foreign footwear giant “Buffrine” to
manufacture and sell its Hideseek brand in the country. Putting its best foot forward, it launched extra soft,
casual and relaxed footwear for young. Aiming at a brand and image makeover the “Mota Shoes” decided
to price the Hide Seek products at premium.

What kind of Michael Porter business level strategy is being used by “Mota Shoe company”? State its
advantages.

9. Rohit Patel is having a small chemist shop in the central part of Ahmedabad.

What kind of competencies Rohit can build to gain competitive advantage over online medicine sellers?

10. ‘Value for Money’ is a leading retail chain, on account of its ability to operate its business at low costs.
The retail chain aims to further strengthen its top position in the retail industry. Marshal, the CEO of the
retail chain is of the view that to achieve the goals they should focus on lowering the costs of procurement
of products.

Highlight and explain the core competence of the ‘Value for Money’ retail chain.

3.33
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

ANSWERS TO SCENARIO BASED QUESTIONS

1. With the success of IPL, league matches are taking place in other sports as well. These are held in a
grandeur manner between several teams. For example, league matches in magnificent manner now take
place in Football, Kabaddi and Hockey in India. These events are profit and entertainment driven.
These are going to help sports in India by generating interest in sports, making them more popular,
increasing quality of competition and bringing money into sports.

A number of entities and processes are involved in these events from various industries offering
opportunities and threats to them. An opportunity is a favourable condition in the organisation’s
environment which enables it to strengthen its position. On the other hand, a threat is an unfavourable
condition in the organisation’s environment which causes a risk for, or damage to, the organisation’s
position. An opportunity is also a threat in case internal weaknesses do not allow organization to take their
advantage in a manner rival can. It will offer opportunity and threats to the following:

Opportunities
 Stadia.
 Manufacturers of sports goods.
 Media Industry – Sports channels / television, advertisers.
 Hotel Industry linking events with their offerings.

Threats
 Entertainment industry engaged in TV serials, cinema theatres, Entertainment theme parks as
competitors will be fighting for the same viewers/target customers.
 Event Management organisation engaged in non-sports events.

2. A tool to study the market positions of rival companies by grouping them into like positions is strategic
group mapping. Grouping competitors is useful when there are many competitors such that it is not
practical to examine each one in-depth. In the given scenario there are thirteen competitors. A strategic
group consists of those rival firms which have similar competitive approaches and positions in the market.
The procedure for constructing a strategic group map and deciding which firms belong in which strategic
group is as follows:
 Identify the competitive characteristics that differentiate firms in the industry typical variables that
are price/quality range (high, medium, low); geographic coverage (local, regional, national, global);
degree of vertical integration (none, partial, full); product-line breadth (wide, narrow); use of
distribution channels (one, some, all); and degree of service offered (no-frills, limited, full).
 Plot the firms on a two-variable map using pairs of these differentiating characteristics.

3.34
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

 Assign firms that fall in about the same strategy space to the same strategic group.
 Draw circles around each strategic group making the circles proportional to the size of the group's
respective share of total industry sales revenues.

3. XYZ Corporation is aiming to transform into a dominant technology company under the leadership of
Mohan, the new CEO. He aims to develop competencies for managers for achieving better performance and
a competitive advantage for the corporation. Mohan is also well aware of the importance of resources and
capabilities in generating and sustaining the competitive advantage. Therefore, he must focus on
characteristics of resources and capabilities of the corporation.
The sustainability of competitive advantage and a firm’s ability to earn profits from it depends, to a great
extent, upon four major characteristics of resources and capabilities which are as follows:

 Durability: The period over which a competitive advantage is sustained depends in part on the rate at
which a firm’s resources and capabilities deteriorate. In industries where the rate of product
innovation is fast, product patents are quite likely to become obsolete. Similarly, capabilities which are
the result of the management expertise of the CEO are also vulnerable to his or her retirement or
departure. On the other hand, many consumer brand names have a highly durable appeal.
 Transferability: Even if the resources and capabilities on which a competitive advantage is based are
durable, it is likely to be eroded by competition from rivals. The ability of rivals to attack position of
competitive advantage relies on their gaining access to the necessary resources and capabilities. The
easier it is to transfer resources and capabilities between companies, the less sustainable will be the
competitive advantage which is based on them.
 Imitability: If resources and capabilities cannot be purchased by a would-be imitator, then they must
be built from scratch. How easily and quickly can the competitors build the resources and capabilities
on which a firm’s competitive advantage is based? This is the true test of imitability. Where capabilities
require networks of organizational routines, whose effectiveness depends on the corporate culture,
imitation is difficult.
 Appropriability: Appropriability refers to the ability of the firm’s owners to appropriate the returns
on its resource base. Even where resources and capabilities are capable of offering sustainable
advantage, there is an issue as to who receives the returns on these resources.

4. The Airlines industry faces stiff competition. However, Luxury Jet has attempted to create a niche market
by adopting focused differentiation strategy. A focused differentiation strategy requires offering unique
features that fulfil the demands of a narrow market.

Luxury Jet compete in the market based on uniqueness and target a narrow market which provides

3.35
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

business houses, high net worth individuals to maintain strict schedules. The option of charter flights
provided several advantages including, flexibility, privacy, luxury and many a times cost saving. Apart from
conveniences, the facility will provide time flexibility. Travelling by private jet is the most comfortable, safe
and secure way of flying your company’s senior business personnel.

Chartered services in airlines can have both business and private use. Personalized tourism packages can
be provided to those who can afford it.

5. According to Porter, strategies allow organizations to gain competitive advantage from three different
bases: cost leadership, differentiation, and focus. Porter called these base generic strategies.

Gennex has opted differentiation strategy. Its products are designed and produced to give the customer
value and quality. They are unique and serve specific customer needs that are not met by other companies
in the industry. Highly differentiated and unique hardware and software enables Gennex to charge
premium prices for its products hence making higher profits and maintain its competitive position in the
market.

Differentiation strategy is aimed at broad mass market and involves the creation of a product or service
that is perceived by the customers as unique.

The uniqueness can be associated with product design, brand image, features, technology, dealer network
or customer service.

6. Considering the generic strategies of Porter there are three different bases: cost leadership,
differentiation and focus. Sohan and Ramesh are contemplating pricing for their product.

Sohan is trying to have a low price and high volume is thereby trying for cost leadership. Cost leadership
emphasizes producing standardised products at a very low per unit cost for consumers who are price
sensitive.

Ramesh desires to create perceived value for the product and charge higher prices. He is trying to adopt
differentiation. Differentiation is aimed at producing products and services considered unique industry
wide and directed at consumers who are relatively price insensitive.

7. Infant care is opting for differentiation strategy. A one-stop shop is a benefit for this type of customers,
seeking convenience in a time. Infant care is catering the products only related to an infant that is perceived
by the customers as unique. Because of differentiation, the Infant care is charging a premium for its
product.

3.36
CHAPTER 3 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT

8. Mota shoes is trying to use differentiation. This strategy is aimed at broad mass market and involves the
creation of a product or service that is perceived by the customers as unique. The uniqueness can be
associated with product design, brand image, features, technology, dealer network or customer service.
Because of differentiation, the business can charge a premium for its product.
A differentiation strategy has definite advantages as it may help to remain profitable even with rivalry, new
entrants, suppliers’ power, substitute products, and buyers’ power.

i. Rivalry: Brand loyalty acts as a safeguard against competitors. It means that customers will be less
sensitive to price increases, as long as the firm can satisfy the needs of its customers.

ii. Buyers: They do not negotiate for price as they get special features and also, they have fewer options in
the market.

iii. Suppliers: Because differentiators charge a premium price, they can afford to absorb higher costs of
supplies and customers are willing to pay extra too.

iv. New entrants: Innovative features are expensive to copy. So, new entrants generally avoid these
features because it is tough for them to provide the same product with special features at a comparable
price.

v. Substitutes: Substitute products can’t replace differentiated products which have high brand value and
enjoy customer loyalty.

9. Capabilities that are valuable, rare, costly to imitate, and non-substitutable are core competencies. A
small chemist shop has a local presence and functions within a limited geographical area. Still, it can build
its own competencies to gain competitive advantage. Rohit Patel can build competencies in the areas of:
(a) Developing personal and cordial relations with the customers.
(b) Providing home delivery with no additional cost.
(c) Developing a system of speedy delivery that can be difficult to match by online sellers. Being in central
part of city, he can create a network to supply at wider locations in the city.
(d) Having extended working hours for convenience of buyers.
(e) Providing easy credit or a system of monthly payments to the patients consuming regular medicines.

10. A core competence is a unique strength of an organization which may not be shared by others. Core
competencies are those capabilities that are critical to a business achieving competitive advantage. In order
to qualify as a core competence, the competency should differentiate the business from any other similar
businesses. A core competency for a firm is whatever it does is highly beneficial to the organisation.

‘Value for Money’ is the leader on account of its ability to keep costs low. The cost advantage that ‘Value for

3.37
 STRATEGIC ANALYSIS: INTERNAL INVIRONMENT CHAPTER 3

Money’ has created for itself has allowed the retailer to price goods lower than competitors. The core
competency in this case is derived from the company’s ability to generate large sales volume, allowing the
company to remain profitable with low profit margin.

DESCRIPTIVE QUESTIONS
1. What is the purpose of SWOT analysis? Why is it necessary to do a SWOT analysis before selecting a
particular strategy for a business organization?

ANSWER TO DESCRIPTIVE QUESTIONS

1. An important component of strategic thinking requires the generation of a series of strategic
alternatives, or choices of future strategies to pursue, given the company’s internal strengths and
weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses,
opportunities, and threats is normally referred to as SWOT analysis.

 Strength: Strength is an inherent capability of the organization which it can use to gain strategic
advantage over its competitors.
 Weakness: A weakness is an inherent limitation or constraint of the organization which creates
strategic disadvantage to it.
 Opportunity: An opportunity is a favourable condition in the organisation’s environment which
enables it to strengthen its position.
 Threat: A threat is an unfavourable condition in the organisation’s environment which causes a risk
for, or damage to, the organisation’s position.

SWOT analysis helps managers to craft a business model (or models) that will allow a company to gain a
competitive advantage in its industry (or industries).

Competitive advantage leads to increased profitability, and this maximizes a company’s chances of
surviving in the fast-changing, competitive environment. Key reasons for SWOT analysis are:
 It provides a logical framework.
 It presents a comparative account.
 It guides the strategist in strategy identification.

3.38
CHAPTER 4 STRATEGIC CHOICES

CHAPTER 4 STRATEGIC CHOICES

1. STRATEGIC CHOICES
A large number of strategies with different nomenclatures have been employed by different businesses
and also suggested by different authors on strategy. For instance, William F Glueck and Lawrence R Jauch
discussed four generic strategies including stability, growth, retrenchment and combination. These
strategies have also been called Grand Strategies/Directional Strategies by many other authors.

Michael E. Porter suggested competitive strategies including Cost Leadership, Differentiation, Focus Cost
Leadership and Focus Differentiation which could be used by the corporates for their different business
units.

Besides these, we come across functional strategies in the literature on Strategic Management and
Business Policy. Functional Strategies are meant for strategic management of distinct functions such as
Marketing, Financial, Human Resource, Logistics, Production etc.

4.1
 STRATEGIC CHOICES CHAPTER 4

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

Above are the various types of strategies available for an organisation to adopt.

The organisation adopts either of these depending upon their needs and requirements. For instance, a
start-up or a new enterprise might follow either a competitive strategy i.e., entering the market where a
number of rivals are already operating, or a collaborative strategy, i.e., enter into a joint venture with an
established company. However, majority of startups are launched on a small scale and their main
strategy is to penetrate the market and to reach the breakeven stage at the earliest and later pursue
growth strategy. While a going concern can continue with the competitive strategy or resort to
collaborative strategy to ensure business growth.

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

While for implementation of the corporate and business strategies, functional strategies are formulated
in business areas like production/operations, marketing, finance, human resources etc. In fact, big
corporates follow an elaborate system of strategy formulation, implementation and control at different
levels in the company to survive and grow in the turbulent business environment. In this chapter, we
shall discuss the corporate level strategies.

4.2
CHAPTER 4 STRATEGIC CHOICES

The corporate strategies a firm can adopt may be classified into four broad categories:
1. Stability strategy
2. Expansion strategy
3. Retrenchment strategy
4. Combination strategy

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

2. STABILITY STRATEGY
One of the important goals of a business enterprise is stability strategy is to stabilise- it may be opted to
safeguard its existing interests and strengths, to pursue well established and tested objectives, to

4.3
 STRATEGIC CHOICES CHAPTER 4

continue in the chosen business path, to maintain operational efficiency on a sustained basis, to
consolidate the commanding position already reached, and to optimise returns on the resources
committed in the business.

A stability strategy is pursued by a firm when:

 It continues to serve in the same or similar markets and deals in same or similar products and services.
 This strategy is typical for those firms whose product have reached the maturity stage of product life
cycle or those who have a sufficient market share but need to retain that. They have to remain
updated and have to pace with the dynamic and volatile business world to preserve their market
share.
Hence, stability strategy should not be confused with ‘do nothing’ strategy. Small organizations may also
follow stability strategy to consolidate their market position and prepare for the launch of growth
strategies.

Characteristics of Stability Strategy

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

Major Reasons for Stability Strategy

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

4.4
CHAPTER 4 STRATEGIC CHOICES

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

Characteristics of Growth/Expansion Strategy

 Expansion strategy involves a redefinition of the business of the corporation.
 Expansion strategy is the opposite of stability strategy. While in stability strategy, rewards are limited,
in expansion strategy they are very high. In the matter of risks, too, the two are the opposites of each
other.
 Expansion strategy leads to business growth.
 The process of renewal of the firm through fresh investments and new businesses/products/markets is
facilitated only by expansion strategy.
 Expansion strategy is a highly versatile strategy; it offers several permutations and combinations for
growth. A firm opting for the expansion strategy can generate many alternatives within the strategy
by altering its propositions regarding products, markets and functions and pick the one that suits it
most.
 Expansion strategy holds within its fold two major strategy routes: Intensification and Diversification.
Both of them are growth strategies; the difference lies in the way in which the firm actually pursues

4.5
 STRATEGIC CHOICES CHAPTER 4

the growth.

Major Reasons for Growth/Expansion Strategy

 It may become imperative when environment demands increase in pace of activity.
 Strategists may feel more satisfied with the prospects of growth from expansion; chief executives may
take pride in presiding over organizations perceived to be growth-oriented.
 Expansion may lead to greater control over the market vis-a-vis competitors.
 Advantages from the experience curve and scale of operations may accrue.
 Expansion also includes intensifying, diversifying, acquiring and merging businesses.

Types of Growth/ Expansion Strategy: The growth strategies can be classified into two main types:

A. Internal growth strategies

B. External growth strategies

A. Internal growth strategies: Internal growth strategies can be further divided into:

I Expansion through Intensification

II Expansion through Diversification

I Expansion or growth through Intensification

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

1. Market Penetration: Highly common expansion strategy is market penetration/concentration on the

current business. The firm directs its market.
2. Market Development: It consists of marketing present products, to customers in related market areas
by adding different channels of distribution or by changing the content of advertising or the
promotional media.
3. Product Development: Product development involves substantial modification of existing products
or creation of new but related items that can be marketed to current customers through establish
channels.

Igor. H. Ansoff gave a framework as shown in figure below which describes the intensification options
available to a firm.

4.6
CHAPTER 4 STRATEGIC CHOICES

II Expansion or Growth through Diversification

Innovative and creative firms always look for opportunities and challenges to grow, to venture into new
areas of activity and to break new frontiers with the zeal of entrepreneurship using their internal
resources. They feel that diversification offers greater prospects of growth and profitability than
intensification.

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

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

Based on the nature and extent of their relationship to existing businesses, diversification can be classified
into two broad categories:

4.7
 STRATEGIC CHOICES CHAPTER 4

(a) Concentric diversification: diversification into related business to benefit from synergistic gains
(b) Conglomerate diversification: diversification into unrelated business to explore more opportunities
beyond existing areas of expertise
(c) Expansion through Innovation

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

1. Vertically Integrated Diversification: In vertically integrated diversification, firms opt to engage in

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

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

2. Horizontal Integrated Diversification: A firm gets horizontally diversified by integrating through

acquisition of one or more similar businesses operating at the same stage of the production-marketing
chain. They can also integrate with the firms producing complementary products or by-products or by

4.8
CHAPTER 4 STRATEGIC CHOICES

taking over competitors’ products. The following figure explains the horizontal diversification,
wherein, textile mill 1 acquires textile mill 2 and 3 as well.

(b) Conglomerate Diversification: In conglomerate diversification, no linkages related to product, market

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

4.9
 STRATEGIC CHOICES CHAPTER 4

(c) Innovation: Innovation drives upgradation of existing product lines or processes, leading to increased
market share, revenues, profitability and most important, customer satisfaction. Some may argue that
innovation leads to unnecessary expenses that do not give as much returns, but on the contrary, for a
business to grow long term, innovation offers the following;

 Helps to solve complex problems: A business strives to find opportunities in existing problems of the
society, and it does so though planned innovation in areas of expertise. This guided innovation help
solve complex problems by developing customer centric sustainable solutions. For example, the
pressing problem of environmental damage is being tackled heads on by shifting to renewable sources
of energy like solar, wind, sea waves, etc.

 Increases Productivity: Innovation leads to simplification and in most cases automation of existing tasks.
Productivity is defined as a measure of final output from a task or a process, and companies are willing
to spend millions on increasing their productivity, Innovation, by automating repetitive tasks, and
simplifying the long chain of processes, adds to productivity of teams and thereby the organisation as
a whole. For example, MS Excel, every finance professional uses this software to simplify and automate
their manual tasks. Such digital innovation which leads to improved productivity, creates
opportunities to further develop processes and products within and outside the organisatoin.

 Gives Competitive Advantage: Being ahead of competition is a need, and businesses spend majority of
their strategic time building solutions to achieve this advantage. An interesting concept about
innovation is - the faster a business innovates, the farther it goes from its competitor’s reach. Innovative
products need less marketing as they aim to provide added satisfaction to consumers, thus, creating a
competitive advantage. Innovation not only helps retain the existing customers but helps acquire new
ones with ease.

4.10
CHAPTER 4 STRATEGIC CHOICES

B. External Growth Strategies

When the organization instead of growing internally thinks of diversifying by making alliances with external
organisations, it is called external growth diversification. It can be classified in two ways:

I. Expansion through Mergers and Acquisitions

Acquisition or merger with an existing concern is an instant means of achieving the expansion. It is an
attractive and tempting proposition in the sense that it circumvents the time, risks and skills involved in
screening internal growth opportunities, seizing them and building up the necessary resource base
required to materialise growth. Organizations consider merger and acquisition proposals in a systematic
manner, so that the marriage will be mutually beneficial, a happy and lasting affair.

Apart from the urge to grow, acquisitions and mergers are resorted to for purposes of achieving a measure
of synergy between the parent and the acquired enterprises. Synergy may result from such bases as
physical facilities, technical and managerial skills, distribution channels, general administration, research
and development and so on. Only positive synergistic effects are relevant in this connection which denotes
that the positive effects of the merged resources are greater than the effects of the individual resources
before merger or acquisition.

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

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

Types of Mergers:

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

4.11
 STRATEGIC CHOICES CHAPTER 4

(a) Horizontal Merger

Horizontal merger is a combination of firms engaged in the same industry. It is a merger with a direct
competitor. The principal objective behind this type of merger is to achieve economies of scale in the
production process by shedding duplication of installations and functions, widening the line of products,
decrease in working capital and fixed assets investment, getting rid of competition and so on. For example,
formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond.

(b) Vertical Merger

It is a merger of two organizations that are operating in the same industry but at different stages of
production or distribution system. This often leads to increased synergies with the merging firms. If an
organization takes over its supplier/producers of raw material, then it leads to backward integration. On
the other hand, forward integration happens when an organization decides to take over its buyer
organizations or distribution channels. Vertical mergers help to create an advantageous position by
restricting the supply of inputs to other players, or by providing the inputs at a higher cost. For example,
backward integration and forward integration.

(c) Co-generic Merger

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

(d) Conglomerate Merger

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

II. Expansion through Strategic Alliance

A strategic alliance is a relationship between two or more businesses that enables each to achieve certain
strategic objectives which neither would be able to achieve on its own. The strategic partners maintain their
status as independent and separate entities, share the benefits and control over the partnership, and

4.12
CHAPTER 4 STRATEGIC CHOICES

continue to make contributions to the alliance until it is terminated. Strategic alliances are often formed in
the global marketplace between businesses that are based in different regions of the world.

Advantages of Strategic Alliance

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

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

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

3. Strategic: Rivals can join together to cooperate instead of competing with each other. Vertical integration
can be created where partners are part of supply chain. Strategic alliances may also be useful to create a
competitive advantage by the pooling of resources and skills. This may also help with future business
opportunities and the development of new products and technologies. Strategic alliances may also be used
to get access to new technologies or to pursue joint research and development.

4. Political: Sometimes strategic alliances are formed with a local foreign business to gain entry into a
foreign market either because of local prejudices or legal barriers to entry.

Disadvantages of Strategic Alliance

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

4.13
 STRATEGIC CHOICES CHAPTER 4

4. STRATEGIC EXITS
Strategic Exits are followed when an organization substantially reduces the scope of its activity. This is
done through an attempt to find out the problem areas and diagnose the causes of the problems. Next, steps
are taken to solve the problems.

These steps result in different kinds of retrenchment strategies. If the organization chooses to focus on
ways and means to reverse the process of decline, it adopts at turnaround strategy. If it cuts off the loss-
making units, divisions, or SBUs, curtails its product line, or reduces the functions performed, it adopts a
divestment (or divestiture) strategy. If none of these actions work, then it may choose to abandon the
activities totally, resulting in a liquidation strategy. We deal with each of these strategies below.

I. Turnaround Strategy: Retrenchment may be done either internally or externally. For internal
retrenchment to take place, emphasis is laid on improving internal efficiency, known as turnaround
strategy.

There are certain conditions or indicators which point out that a turnaround is needed if the company has
to survive. These danger signals are:

 Persistent negative cash flow from business(es)

 Uncompetitive products or services
 Declining market share
 Deterioration in physical facilities
 Over-staffing, high turnover of employees, and low morale
 Mismanagement

Action Plan for Turnaround

For turnaround strategies to be successful, it is imperative to focus on the short and long-term financing
needs as well as on strategic issues. A workable action plan for turnaround would involve the following
stages:

 Stage One – Assessment of current problems: The first step is to assess the current problems and get
to the root causes and the extent of damage the problem has caused. Once the problems are identified,

4.14
CHAPTER 4 STRATEGIC CHOICES

the resources should be focused toward those areas essential to efficiently work on correcting and
repairing any immediate issues.

 Stage Two – Analyze the situation and develop a strategic plan: Identify appropriate strategies and
develop a preliminary action plan.
For this one should look for the viable core businesses, adequate bridge financing and available
organizational resources. Once major problems and opportunities are identified, develop a strategic
plan with specific goals and detailed functional actions.

 Stage Three – Implementing an emergency action plan: If the organization is in a critical stage, an
appropriate action plan must be developed to stop the bleeding and enable the organization to survive.
The plan typically includes human resource, financial, marketing and operations actions to restructure
debts, improve working capital, reduce costs, improve budgeting practices, prune product lines and
accelerate high potential products. A positive operating cash flow must be established as quickly as
possible and enough funds to implement the turnaround strategies must be raised.

 Stage Four – Restructuring the business: The financial state of the organization’s core business is
particularly important. If the core business is irreparably damaged, then the outlook for the entire
organization may be bleak. Prepare cash forecasts, analyze assets and debts, review profits and
analyze other key financial functions to position the organization for rapid improvement. During the
turnaround, the “product mix” may be changed, requiring the organization to do some repositioning.
Core products neglected over time may require immediate attention to remain competitive. Some
facilities might be closed; the organization may even withdraw from certain markets to make
organization leaner or target its products toward a different niche. Morale building is another
important ingredient in the organization’s competitive effectiveness. Reward and compensation
systems that encourage dedication and creativity amongst employees to think about profits and return
on investments.

 Stage Five – Returning to normal: In the final stage of turnaround strategy process, the organization
should begin to show signs of profitability, return on investments and enhancing economic value-
added.

The important elements of turnaround strategy are as follows:

 Changes in the top management

 Initial credibility-building actions

4.15
 STRATEGIC CHOICES CHAPTER 4

 Neutralising external pressures

 Identifying quick payoff activities
 Quick cost reductions
 Revenue generation
 Asset liquidation for generating cash
 Better internal coordination

II. Divestment Strategy

Divestment strategy involves the sale or liquidation of a portion of business, or a major division, profit centre
or SBU. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a
turnaround has been attempted but has proved to be unsuccessful. The option of a turnaround may even
be ignored if it is obvious that divestment is the only answer.

A divestment strategy may be adopted due to various reasons:

 A business that had been acquired proves to be a mismatch and cannot be integrated within the
company.
 Persistent negative cash flows from a particular business create financial problems for the whole
company, creating the need for divestment of that business.
 Severity of competition and the inability of a firm to cope with it may cause it to divest.
 It is not possible for the business to do Technological upgradation that is required for the business
to survive, a preferable option would be to divest.
 A better alternative may be available for investment, causing a firm to divest a part of its unprofitable
business.

Characteristics of Divestment Strategy

 This strategy involves divestment of some of the activities in a given business of the firm or sell-out
of some of the businesses as such.
 Divestment is to be viewed as an integral part of corporate strategy without any stigma attached.

Major Reasons for Retrenchment/Turnaround Strategy

 The management no longer wishes to remain in business either partly or wholly due to continuous
losses and unviability.
 The management feels that business could be made viable by divesting some of the activities or
liquidation of unprofitable activities.

4.16
CHAPTER 4 STRATEGIC CHOICES

 A business that had been acquired proves to be a mismatch and cannot be integrated within the
company.
 Persistent negative cash flows from a particular business create financial problems for the whole
company, creating the need for divestment of that business.
 Severity of competition and the inability of a firm to cope with it may cause it to divest.
 It is not possible for the business to do Technological upgradation that is required for the business
to survive, a preferable option would be to divest.
 A better alternative may be available for investment, causing a firm to divest a part of its unprofitable
business.

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

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

4.17
 STRATEGIC CHOICES CHAPTER 4

6. ANSOFF’S PRODUCT MARKET GROWTH MATRIX

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

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

Market Penetration: Market penetration refers to a growth strategy where the business focuses on
selling existing products into existing markets. It is achieved by making more sales to present customers
without changing products in any major way. Penetration might require greater spending on advertising
or personal selling.

Overcoming competition in a mature market requires an aggressive promotional campaign, supported

by a pricing strategy designed to make the market unattractive for competitors. Penetration is also done
by effort on increasing usage by existing customers. For example, Gucci, a luxury clothing brand, selling
its luxury clothing in European markets with new designs, is market penetration.

Market Development: Market development refers to a growth strategy where the business seeks to sell
its existing products into new markets. It is a strategy for company growth by identifying and developing
new markets for current company products. This strategy may be achieved through new geographical

4.18
CHAPTER 4 STRATEGIC CHOICES

markets, new product dimensions or packaging, new distribution channels or different pricing policies
to attract different customers or create new market segments. For example, Gucci, a luxury clothing
brand, selling its luxury clothing in Chinese markets, is market development.

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

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

As market conditions change overtime, a company may shift product-market growth strategies. For
example, when its present market is fully saturated a company may have no choice other than to pursue
new market.

7. ADL MATRIX
The ADL matrix (derived its name from Arthur D. Little) is a portfolio analysis technique that is based on
product life cycle. The approach forms a two dimensional matrix based on stage of industry maturity and
the firms competitive position, environmental assessment and business strength assessment. Stage of
industry maturity is an environmental measure that represents a position in industry’s life cycle.
Competitive position is a measure of business strengths that helps in categorization of products or SBU’s
into one of five competitive positions:

 Dominant,
 Strong,
 Favourable,
 Tenable and
 Weak

It is four by five matrix as follows:

4.19
 STRATEGIC CHOICES CHAPTER 4

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

Dominant: This is a comparatively rare position and in many cases is attributable either to a monopoly
or a strong and protected technological leadership.

Strong: By virtue of this position, the firm has a considerable degree of freedom over its choice of
strategies and is often able to act without its market position being unduly threatened by its

4.20
CHAPTER 4 STRATEGIC CHOICES

competitions.

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

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

Weak: The performance of firms in this category is generally unsatisfactory although the opportunities
for improvement do exist.

8. BOSTON CONSULTING GROUP (BCG) GROWTH-SHARE MATRIX

The BCG growth-share matrix is the simplest way to portray a corporation’s portfolio of investments.
Growth share matrix also known for its cow and dog metaphors is popularly used for resource allocation
in a diversified company. Using the BCG approach, a company classifies its different businesses on a two
dimensional growth-share matrix. In the matrix:

 The vertical axis represents market growth rate and provides a measure of market attractiveness.
 The horizontal axis represents relative market share and serves as a measure of company strength
in the market.

Using the matrix, organisations can identify four different types of products or SBU as follows:

4.21
 STRATEGIC CHOICES CHAPTER 4

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

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

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

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

BCG Matrix: Post Identification Strategies

After a firm, has classified its products or SBUs, it must determine what role each will play in the future.
The four strategies that can be pursued are:

1. Build: Here the objective is to increase market share, even by forgoing short-term earnings in favour

of building a strong future with large market share.

2. Hold: Here the objective is to preserve market share.

3. Harvest: Here the objective is to increase short-term cash flow regardless of long-term effect.

4. Divest: Here the objective is to sell or liquidate the business because resources can be better used
elsewhere.

Is BCG Matrix really helpful?

The growth-share matrix has done much to help strategic planning; however, there are some problems
and limitations with the technique. BCG matrix can be difficult, time-consuming, and costly to implement.
Management may find it difficult to define SBUs and measure market share and growth. It also focuses
on classifying current businesses but provide little advice for future planning. They can lead the company

4.22
CHAPTER 4 STRATEGIC CHOICES

to placing too much emphasis on market-share growth or growth through entry into attractive new
markets. This can cause unwise expansion into hot, new, risky ventures or divesting established units
too quickly.

9. GENERAL ELECTRIC MATRIX [“STOP-LIGHT” STRATEGY MODEL]

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

4.23
 STRATEGIC CHOICES CHAPTER 4

yellow for caution, and red for stop. This model uses two factors while taking strategic decisions: Business
Strength and Market Attractiveness.

Understanding the GE Matrix

The vertical axis indicates market attractiveness, and the horizontal axis shows the business strength in
the industry.

The market attractiveness is measured by a number of factors like:

 Size of the market.

 Market growth rate.
 Industry profitability.
 Competitive intensity.
 Availability of Technology.
 Pricing trends.
 Overall risk of returns in the industry.
 Opportunity for differentiation of products and services.
 Demand variability.
 Segmentation.
 Distribution structure (e.g. direct marketing, retail, wholesale) etc.

4.24
CHAPTER 4 STRATEGIC CHOICES

Business strength is measured by considering the typical drivers like:

 Market share.
 Market share growth rate.
 Profit margin.
 Distribution efficiency.
 Brand image.
 Ability to compete on price and quality.
 Customer loyalty.
 Production capacity.
 Technological capability.
 Relative cost position.
 Management calibre, etc.

If a product falls in the green section, the business is at advantageous position. To reap the benefits, the
strategic decision can be to expand, to invest and grow. If a product is in the amber or yellow zone, it needs
caution and managerial discretion is called for making the strategic choices. If a product is in the red
zone, it will eventually lead to losses that would make things difficult for organisations. In such cases, the
appropriate strategy should be retrenchment, divestment or liquidation.

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

4.25
 STRATEGIC CHOICES CHAPTER 4

MULTIPLE CHOICE QUESTIONS

1. Which strategy is implemented after the failure of turnaround strategy?
(a) Expansion strategy
(b) Diversification strategy
(c) Divestment strategy
(d) Growth strategy

2. Retrenchment strategy in the organization can be explained as

(a) Reducing trenches (gaps) created between individuals.
(b) Divesting a major product line or market.
(c) Removal of employees from job through the process of reorganization.
(d) Removal of employees from job in one business to relocate them in other business.

3. An organisation diversifies in backward sequence in the product chain and enters specific product/process
to be used in existing products. It is:
(a) Forward diversification.
(b) Vertical diversification.
(c) Horizontal diversification.
(d) Reactive diversification.

4. Corporate strategy includes:

(i) expansion and growth, diversification, takeovers and mergers
(ii) Vertical and horizontal integration, new investment and divestment areas
(iii) determination of the business lines
From the combinations given below select a correct alternative:
(a) (i), and (ii)
(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i) (ii) and (iii)

5. Vertical integration may be beneficial when

(a) Lower transaction costs and improved coordination are vital and achievable through vertical
integration.
(b) Flexibility is reduced, providing a more stationary position in the competitive environment.
(c) Various segregated specializations will be combined.

4.26
 CHAPTER 4 STRATEGIC CHOICES

(d) The minimum efficient scales of two corporations are different.

6. Stability strategy is a ____________ strategy.

(a) SBU level
(b) Corporate level
(c) Business level
(d) Functional level

7. Conglomerate diversification is another name for which of the following?

(a) Related diversification
(b) Unrelated diversification
(c) Portfolio diversification
(d) Acquisition diversification

8. Diversification primarily helps to:

(a) Reduce competition
(b) Reduce risk
(c) Reduce taxes
(d) Reduce costs

9. If suppliers are unreliable or too costly, which of these strategies may be appropriate?
(a) Horizontal integration
(b) Backward integration
(c) Market penetration
(d) Forward integration

Answers to Multiple Choice Questions

1 (c) 2 (b) 3 (b) 4 (d) 5 (a) 6 (b) 7 (b) 8 (b) 9 (b)

SCENARIO BASED QUESTIONS

1. Gautam and Siddhartha, two brothers, are the owners of a cloth manufacturing unit located in Faridabad.
They are doing well and have substantial surplus funds available within the business. They have different
approaches regarding corporate strategies to be followed to be more competitive and profitable in future.
Gautam is interested in acquiring another industrial unit located in Faridabad manufacturing stationery
items such as permanent markers, notebooks, pencils and pencil sharpeners, envelopes and other office

4.27
 STRATEGIC CHOICES CHAPTER 4

supplies. On the other hand, Siddhartha desires to start another unit to produce readymade garments.

Discuss the nature of strategic choices being suggested by the two brothers with reference to the payoffs
and the risks involved.

2. XYZ Company is facing continuous losses. There is decline in sales and product market share. The
products of the company became uncompetitive and there is persistent negative cash flow. The physical
facilities are deteriorating, and employees have low morale. At the board meeting, the board members
decided that they should continue the organization and adopt such measures such that the company
functions properly. The board has decided to hire young executive Shayamli for improving the functions of
the organization.

What corporate strategy should Shayamli adopt for this company and what steps need to be taken to
implement the strategic choice adopted by Shayamli?

3. Organo is a large supermarket chain. It is considering the purchase of a number of farms that provides
Organo with a significant amount of its fresh produce. Organo feels that by purchasing the farms, it will
have greater control over its supply chain. Identify and explain the type of diversification opted by Organo?

4. With the global economic recession Soft Cloth Ltd. incurred significant losses in all its previous five
financial years. Currently, they are into manufacturing of cloth made of cotton, silk, polyster, rayon, lycra
and blends. Competition is also intense on account of cheap imports. The company is facing cash crunch
and has not been able to pay the salaries to its employees in the current month.

Suggest a grand strategy that can be opted by Soft Cloth Ltd.

5. X Pvt. Ltd. had recently ventured into the business of co-working spaces when the global pandemic
struck. This has resulted in the business line becoming unprofitable and unviable, and a failure of the
existing strategy. However, the other businesses of X Pvt. Ltd. are relatively less affected by the pandemic
as compared to the recent co-working spaces. Suggest a strategy for X Pvt. Ltd. with reasons to justify your
answer.

6. Atrix Ltd. is a company engaged in the designing, manufacturing, and marketing of mechanical
instruments like speed meters, oil pressure gauges, and so on. Their products are fitted into two and four
wheelers. During the last couple of years, the company has been observing a fall in the market share.
This is on account of shift to the new range of electronic instruments. The customers are switching away
mechanical instruments that have been the backbone of Atrix Ltd.
As a CEO of Atrix Ltd., what can be the strategic options available with you.

4.28
 CHAPTER 4 STRATEGIC CHOICES

ANSWERS TO SCENARIO BASED QUESTIONS

1. Gautam wishes to diversify in a business that is not related to their existing line of product and can be
termed as conglomerate diversification. He is interested in acquiring another industrial unit located in
Faridabad manufacturing stationery items such as permanent markers, notebooks, pencils and pencil
sharpeners, envelopes and other office supplies, which is not related to their existing product. In
conglomerate diversification, the new businesses/ products are disjointed from the existing
businesses/products in every way; it is an unrelated diversification. In process/ technology/ function,
there is no connection between the new products and the existing ones. Conglomerate diversification has
no common thread at all with the firm's present position.

On the other hand, Siddhartha seeks to move forward in the chain of existing product by adopting vertically
integrated diversification/ forward integration. The cloth being manufactured by the existing processes
can be used as raw material of garments manufacturing business. In such diversification, firms opt to
engage in businesses that are related to the existing business of the firm. The firm remains vertically within
the same process and moves forward or backward in the chain. It enters specific product/process steps
with the intention of making them into new businesses for the firm. The characteristic feature of vertically
integrated diversification is that here, the firm does not jump outside the vertically linked product-process
chain.

Both types of diversifications have their own risks. In conglomerate diversification, there are no linkages
with customer group, customer marketing functions and technology used, which is a risk. In the case of
vertical integrated diversification, there is a risk of lack of continued focus on the original business.

2. XYZ Company is facing continuous losses, decline in sales and product market share, persistent negative
cash flow, uncompetitive products, declining market share, deterioration in physical facilities, low morale
of employees. In such a scenario, Shayamli may choose turnaround strategy as this strategy attempts to
reverse the process of decline and bring improvement in organizational health. This is also important as
Board has decided to continue the company and adopt measures for its proper functioning.

For success, Shayamli needs to focus on the short and long-term financing needs as well as on strategic
issues. During the turnaround, the “product mix” may be changed, requiring the organization to do some
repositioning. A workable action plan for turnaround would involve:

Stage One – Assessment of current problems: In the first step, assess the current problems and get to the
root causes and the extent of damage.

Stage Two – Analyze the situation and develop a strategic plan: Identify major problems and opportunities,

4.29
 STRATEGIC CHOICES CHAPTER 4

develop a strategic plan with specific goals and detailed functional actions.

Stage Three – Implementing an emergency action plan: If the organization is in a critical stage, an
appropriate action plan must be developed to stop the bleeding and enable the organization to survive.

Stage Four – Restructuring the business: If the core business is irreparably damaged, then the outlook for
the entire organization may be bleak. Efforts to be made to position the organization for rapid
improvement.

Stage Five – Returning to normal: In the final stage of turnaround strategy process, the organization should
begin to show signs of profitability, return on investments and enhancing economic value-added.

3. Organo is a large supermarket chain. By opting backward integration and purchase a number of farms,
it will have greater control over its supply chain. Backward integration is a step towards, creation of
effective supply by entering business of input providers. Strategy employed to expand profits and gain
greater control over production of a product whereby a company will purchase or build a business that
will increase its own supply capability or lessen its cost of production.

4. Soft Cloth Ltd. is facing internal as well as external challenges. The external environment is in economic
recession and the organization is facing cash crunch. The company needs to work on retrenchment/
turnaround strategy.
The strategy is suitable in case of issues such as:
 Persistent negative cash flow.
 Uncompetitive products or services
 Declining market share
 Deterioration in physical facilities
 Overstaffing, high turnover of employees, and low morale
 Mismanagement

The company may consider to substantially reduce the scope of its activity. This is done through an attempt
to find out the problem areas and diagnose the causes of the problems. Next, steps are taken to solve the
problems.

These steps result in different kinds of retrenchment strategies. If the organization chooses to focus on
ways and means to reverse the process of decline, it adopts at turnaround strategy. If it cuts off the loss-
making units, divisions, or SBUs, curtails its product line, or reduces the functions performed, it adopts a
divestment strategy. If none of these actions work, then it may choose to abandon the activities totally,
resulting in a liquidation strategy.

4.30
 CHAPTER 4 STRATEGIC CHOICES

5. It is advisable that divestment strategy should be adopted by X Pvt. Ltd. In the given situation where the
business of co-working spaces became unprofitable and unviable due to Global pandemic, the best option
for the company is to divest the loss-making business.

Retrenchment may be done either internally or externally. Turnaround strategy is adopted in case of
internal retrenchment where emphasis is laid on improving internal efficiency of the organization, while
divestment strategy is adopted when a business turns unprofitable and unviable due to some external
factors. In view of the above, the company should go for divestment strategy.

Further, divestment helps address issues like:

1. Persistent cash flows from loss making segment could affect other profit-making segments, which is
the case in the given scenario.
2. Inability to cope from the losses, which again is uncertain due to pandemic.
3. Better investment opportunity, which could be the case if X Pvt. Ltd. Can invest the money it generates
from divestment.

6. Atrix is having a product portfolio that is evidently in the decline stage. The product is being replaced
with the technologically superior product. Strategically the company should minimize their dependence
on the existing products and identify other avenues for the survival and growth. As a CEO of Atrix Ltd.,
following can be the strategic options available with the CEO:

 Invest in new product development and switchover to the new technology. Atrix Ltd. also need time
to invest in emerging new technology.
 They can acquire or takeover a competitor provided they have or are able to generate enough financial
resources.
 They may also consider unrelated growth and identify other areas for expansion. This will enable Atrix
Ltd. to spread their risks.
 In longer run, they should divest the existing products. However, they may continue with the existing
products in a limited manner for such time there is demand for the product.

DESCRIPTIVE QUESTIONS
1. Describe the construction of BCG matrix and discuss its utility in strategic management.

2. An industry comprises of only two firms-Soorya Ltd. and Chandra Ltd. From the following information
relating to Soorya Ltd., prepare BCG Matrix:

4.31
 STRATEGIC CHOICES CHAPTER 4

3. Aurobindo, the pharmaceutical company wants to grow its business. Draw Ansoff’s Product Market
Growth Matrix to advise them of the available options.

4. In the context of Ansoff’s Product-Market Growth Matrix, identify with reasons, the type of growth
strategies followed in the following cases:
(a) A leading producer of tooth paste, advises its customers to brush teeth twice a day to keep breath
fresh.
(b) A business giant in hotel industry decides to enter into dairy business.
(c) One of India’s premier utility vehicles manufacturing company ventures to foray into foreign
markets.
(d) A renowned auto manufacturing company launches ungeared scooters in the market.

ANSWER TO DESCRIPTIVE QUESTIONS

1. Companies that are large enough to be organized into strategic business units face the challenge of
allocating resources among those units. In the early 1970’s the Boston Consulting Group developed a model
for managing portfolio of different business units or major product lines. The BCG growth share matrix
facilitates portfolio analysis of a company having invested in diverse businesses with varying scope of
profits and growth.

The BCG matrix can be used to determine what priorities should be given in the product portfolio of a
business unit. Using the BCG approach, a company classifies its different businesses on a two-dimensional
growth share matrix.

Two dimensions are market share and market growth rate. In the matrix:
 The vertical axis represents market growth rate and provides a measure of market attractiveness.

4.32
 CHAPTER 4 STRATEGIC CHOICES

 The horizontal axis represents relative market share and serves as a measure of company’s strength
in the market.

Thus, the BCG matrix depicts quadrants as shown in the following table:

Different types of business represented by either products or SBUs can be classified for portfolio analyses
through BCG matrix. They have been depicted by meaningful metaphors, namely:

(a) Stars are products or SBUs that are growing rapidly. They also need heavy investment to maintain
their position and finance their rapid growth potential. They represent best opportunities for
expansion.
(b) Cash Cows are low-growth, high market share businesses or products. They generate cash and have
low costs. They are established, successful, and need less investment to maintain their market share.
In long run when the growth rate slows down, stars become cash cows.
(c) Question Marks, sometimes called problem children or wildcats, are low market share business in
high-growth markets. They require a lot of cash to hold their share. They need heavy investments
with low potential to generate cash. Question marks if left unattended are capable of becoming cash
traps. Since growth rate is high, increasing it should be relatively easier. It is for business
organisations to turn them stars and then to cash cows when the growth rate reduces.
(d) Dogs are low-growth, low-share businesses and products. They may generate enough cash to
maintain themselves, but do not have much future. Sometimes they may need cash to survive. Dogs
should be minimised by means of divestment or liquidation.

The BCG matrix is useful for classification of products, SBUs, or businesses, and for selecting appropriate
strategies for each type as follows.
(a) Build with the aim for long-term growth and strong future.
(b) Hold or preserve the existing market share.
(c) Harvest or maximize short-term cash flows.
(d) Divest, sell or liquidate and ensure better utilization of resources elsewhere.

4.33
 STRATEGIC CHOICES CHAPTER 4

Thus, BCG matrix is a powerful tool for strategic planning analysis and choice.

2. Using the BCG approach, a company classifies its different businesses on a two dimensional growth-
share matrix. In the matrix, the vertical axis represents market growth rate and provides a measure of
market attractiveness. The horizontal axis represents relative market share and serves as a measure of
company strength in the market. With the given data on market share and industry growth rate of Soorya
Ltd, its four products are placed in the BCG matrix as follows:

Product A is in best position as it has a high relative market share and a high industry growth rate. On the
other hand, product B has a low relative market share, yet competes in a high growth industry. Product C
has a high relative market share but competes in an industry with negative growth rate. The company
should take advantage of its present position that may be difficult to sustain in long run. Product D is in the
worst position as it has a low relative market share and competes in an industry with negative growth rate.

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

The Ansoff’s product market growth matrix is as follows:

4.34
 CHAPTER 4 STRATEGIC CHOICES

Based on the matrix, Aurobindo may segregate its different products. Being in pharmaceuticals,
development of new products is result of extensive research and involves huge costs. There are also social
dimensions that may influence the decision of the company. It can adopt penetration, product
development, market development or diversification simultaneously for its different products.

Market penetration refers to a growth strategy where the business focuses on selling existing products into
existing markets. It is achieved by making more sales to present customers without changing products in
any major way.

Market development refers to a growth strategy where the business seeks to sell its existing products into
new markets. It is a strategy for company growth by identifying and developing new markets for the
existing products of the company.

Product development refers to a growth strategy where business aims to introduce new products into
existing markets. It is a strategy for company growth by offering modified or new products to current
markets.

Diversification refers to a growth strategy where a business markets new products in new markets. It is a
strategy by starting up or acquiring businesses outside the company’s current products and markets.
As market conditions change overtime, a company may shift product-market growth strategies. For
example, when its present market is fully saturated a company may have no choice other than to pursue
new market.

4. The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a useful tool that helps
businesses decide their product and market growth strategy. This matrix further helps to analyse different
strategic directions. According to Ansoff there are four strategies that organisation might follow.
(a) Market Penetration: A leading producer of toothpaste, advises its customers to brush teeth twice a day
to keep breath fresh. It refers to a growth strategy where the business focuses on selling existing
products into existing markets.
(b) Diversification: A business giant in hotel industry decides to enter into dairy business. It refers to a
growth strategy where a business markets new products in new markets.
(c) Market Development: One of India’s premier utility vehicles manufacturing company ventures to foray
into foreign markets. It refers to a growth strategy where the business seeks to sell its existing
products into new markets.
(d) Product Development: A renowned auto manufacturing company launches ungeared scooters in the
market. It refers to a growth strategy where business aims to introduce new products into existing
markets.

4.35
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

1. STRATEGIC MANAGEMENT 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 change in long-term objectives
and strategies; a failure to accomplish annual objectives could require a change in policy; or a major
competitor’s change in strategy could require a change in the firm’s mission.

Therefore, strategy formulation, implementation, and evaluation activities should be performed on a

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

5.1
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

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

2. STAGES IN STRATEGIC MANAGEMENT

Strategic management involves the following stages:
1. Developing a strategic vision and formulation of statement of mission, goals and objectives.
2. Environmental and organisational analysis.
3. Formulation of strategy.
4. Implementation of strategy.
5. Strategic evaluation and control.

Stage 1: Strategic Vision, Mission and Objectives

First a company must determine what directional path the company should take and what changes in the
company’s product – market – customer – technology – focus would improve its current market position
and its future prospect. Deciding to commit the company to one path versus other pushes managers to
draw some carefully reasoned conclusions about how to try to modify the company’s business makeup
and the market position it should carve out. Top management’s views and conclusions about the
company’s direction and the product-customer-market-technology focus constitute a strategic vision for
the company. A strategic vision delineates management’s aspirations for the organisation and highlights a
particular direction, or strategic path for it to follow in preparing for the future and molds its identity. A
clearly articulated strategic vision communicates management’s aspirations to stakeholders and helps
steer the energies of company personnel in a common direction.

Mission and Strategic Intent: Managers need to be clear about what they see as the role of their
organisation, and this is often expressed in terms of a statement of mission. This is important because
both external stakeholders and other managers in the organisation need to be clear about what the
organisation is seeking to achieve and, in broad terms, how it expects to do so. At this level, strategy is

5.2
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

not concerned with the details of SBU competitive strategy or the directions and methods the businesses
might take to achieve competitive advantage Rather, the concern here is overall strategic direction.

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

The objective provides the basis for major decisions of the firm and also help the organisational
performance to be realized at each level. The managerial purpose of setting objectives is to convert the
strategic vision into specific performance targets – basically the results and outcomes the management
wants to achieve - and then use these objectives as yardsticks for tracking the company’s progress and
performance.

Ideally, managers ought to use the objective-setting exercise as a tool for truly stretching an organisation
to reach its full potential. Challenging company personnel to go all out and deliver big gains in
performance pushes an enterprise to be more inventive, to exhibit some urgency in improving both its
financial performance and its business position, and to be more intentional and focused in its actions.

Objectives are needed at all organisational levels. Objective setting should not stop with top
management’s establishing of companywide performance targets. Company objectives need to be
broken down into performance targets for each separate business, product line, functional department,
and individual work unit. Company performance can’t reach full potential unless each area of the
organisation does its part and contributes directly to the desired companywide outcomes and results.
This means setting performance targets for each organisation unit that support-rather than conflict with
or negate-the achievement of companywide strategic and financial objectives.

Stage 2: Environmental and Organisational Analysis

This stage is the diagnostic phase of strategic analysis. It entails two types of analysis:
1. Environmental scanning
2. Organisational analysis

The external environment of a firm consists of economic, social, technological, market and other forces
which affect its functioning. The firm’s external environment is dynamic and uncertain. So, the
management must systematically be analysed various elements of environment to determine
opportunities and threats for the firm in future.

Organisational analysis involved a review of financial resources, technological resources, productive

5.3
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

capacity, marketing and distribution effectiveness, research and development, human resource skills
and so on. This would reveal organisational strengths and weaknesses which could be matched with the
threats and opportunities in the external environment. This would provide us a framework for SWOT
analysis (Strength, Weakness, Opportunity and Threat) which could be in the form of a table highlighting
various strengths and weaknesses of the firm and opportunities and threats which the environment we
create for the firm.

Stage 3: Formulating Strategy

The first step in strategy formulation is developing strategic alternatives in the light of organisation
strengths and weaknesses, and opportunities and threats in the environment. The second step is the deep
analysis of various strategic alternatives for the purpose of choosing the most appropriate alternative
which will serve as the strategy of the firm.

A company may be confronted with several alternatives such as:

(a) Should the company continue in the same business carrying on the same volume of activities?
(b) If it should continue in the same business, should it grow by expanding the existing units or by
establishing new units or by acquiring other units in the industry?
(c) If it should diversify, should it diversify into related areas or unrelated areas?
(d) Should it get out of an existing business fully or partially?

The above strategic alternatives may be designated as stability strategy, growth/expansion strategy and
retrenchment strategy. A company may also follow a combination of these alternatives called
combination strategy.

Stage 4: Implementation of Strategy

Implementation and execution are an operations-oriented activity aimed at shaping the performance of
core business activities in a strategy-supportive manner. It is the most demanding and time-consuming
part of the strategy management process. To convert strategic plans into actions and results, a manager
must be able to direct organisational change, motivate people, build and strengthen company
competencies and competitive capabilities, create a strategy supportive work climate, and meet or beat
performance targets.

In most situations, strategy-execution process includes the following principal aspects:

 Developing budgets that steer ample resources into those activities critical to strategic success.
 Staffing the organisation with the needed skills and expertise, consciously building and
strengthening strategy-supportive competencies and competitive capabilities and organising the

5.4
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

work effort.
 Ensuring that policies and operating procedures facilitate rather than impede effective execution.
 Using the best-known practices to perform core business activities and pushing for continuous
improvement.
 Installing information and operating systems that enable company personnel to better carry out their
strategic roles day in and day out.
 Motivating people to pursue the target objectives energetically.
 Creating a company culture and work climate conducive to successful strategy implementation and
execution.
 Exerting the internal leadership needed to drive implementation forward and keep improving
strategy execution. When the organisation encounters stumbling blocks or weaknesses,
management has to see that they are addressed and rectified quickly.

Stage 5: Strategic Evaluation and Control

The final stage of strategic management process – evaluating the company’s progress, assessing the
impact of new external developments, and making corrective adjustments – is the trigger point for
deciding whether to continue or change the company’s vision, objectives, strategy, and/or strategy-
execution methods. So long as the company’s direction and strategy seem well matched to industry and
competitive conditions and performance targets are being met, company executives may decide to stay
the course. Simply fine-tuning the strategic plan and continuing with ongoing efforts to improve strategy
execution are sufficient.

3. STRATEGY FORMULATION
Corporate Strategy
The game plan that really directs the company towards success is called “corporate strategy”. Planning
may be operational or strategic. Senior management develops strategic plans for the entire organisation
after evaluating the organization's strengths and weaknesses in light of potential possibilities and
dangers in the outside world. They involve gathering and allocating resources in order to achieve

5.5
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

organisational goals. But operational plans on the other hand are made at the middle and lower-level
management. They provide specifics on how the resources are to be used effectively to achieve the goals.

Strategic Planning: The game plan that really directs the company towards success is called “corporate
strategy”. The success of the company depends on how well this game plan works. Because of this, the
core of the process of strategic planning is the formation of corporate strategy. The formation of
corporate strategy is the result of a process known as strategic planning.

 Strategic planning is the process of determining the objectives of the firm, resources required to attain
these objectives and formulation of policies to govern the acquisition, use and disposition of
resources.
 Strategic planning involves a fact of interactive and overlapping decisions leading to the
development of an effective strategy for the firm.
 Strategic planning determines where an organisation is going over the next year or more and the
ways for going there.
 The process is organisation-wide or focused on a major function such as a division or other major
function.

5.6
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

Strategic uncertainty and how to deal with it?

Strategic uncertainty refers to the unpredictability and unpredictability of future events and circumstances
that can impact an organization's strategy and goals. It can be driven by factors such as changes in the
market, technology, competition, regulation, and other external factors. Dealing with strategic
uncertainty can be challenging and organizations need to have the flexibility, resilience, and agility to
quickly respond to changes in the environment and minimize its impact. To be manageable, they need to
be grouped into logical clusters or themes. It is then useful to assess the importance of each cluster in
order to set priorities with respect to Information gathering and analysis.
 Flexibility: Organizations can build flexibility into their strategies to quickly adapt to changes in the
environment.
 Diversification: Diversifying the organization's product portfolio, markets, and customer base can
reduce the impact of strategic uncertainty.
 Monitoring and Scenario Planning: Organizations can regularly monitor key indicators of change
and conduct scenario planning to understand how different future scenarios might impact their
strategies.
 Building Resilience: Organizations can invest in building internal resilience, such as strengthening
their operational processes, increasing their financial flexibility, and improving their risk
management capabilities.
 Collaboration and Partnerships: Collaborating with other organizations, suppliers, customers, and
partners can help organizations pool resources, share risk, and gain access to new markets and
technologies.

Impact of uncertainty: Each element of strategic uncertainty involves potential trends or events that
could have an impact on present, proposed, and even potential businesses. A trend toward natural foods
may present opportunities for juices for a firm producing aerated drinks on the basis of a strategic
uncertainty.
The impact of a strategic uncertainty will depend on the importance of the impacted SBU to a firm. Some
SBUs are more important than others. The importance of established SBUs may be indicated by their
associated sales, profits, or costs. However, such measures might need to be supplemented for potential
growth as present sales, profits, or costs may not reflect the true value.

5.7
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

4. STRATEGY IMPLEMENTATION
Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into
action. It deals with the managerial exercise of supervising the ongoing pursuit of strategy, making it
work, improving the competence with which it is executed and showing measurable progress in
achieving the targeted results.

Strategic implementation is concerned with translating a strategic decision into action, which
presupposes that the decision itself (i.e., the strategic choice) was made with some thought being given
to feasibility and acceptability. The allocation of resources to new courses of action will need to be
undertaken, and there may be a need for adapting the organization’s structure to handle new activities
as well as training personnel and devising appropriate systems.

Relationship with strategy formulation

Many managers fail to distinguish between strategy formulation and strategy implementation. Yet, it is
crucial to realize the difference between the two because they both require very different skills.

The matrix in the figure below represents various combinations of strategy formulation and
implementation:

The above-mentioned figure depicts the distinction between sound/flawed strategy formulation and
excellent/ weak strategy implementation.

Square A is the situation where a company apparently has formulated a very competitive strategy but is
showing difficulties in implementing it successfully. This can be due to various factors, such as the lack of
experience (e.g. for startups), the lack of resources, missing leadership and so on. In such a situation the
company will aim at moving from square A to square B, given they realize their implementation
difficulties.

Square B is the ideal situation where a company has succeeded in designing a sound and competitive
strategy and has been successful in implementing it.

5.8
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

Square D is the situation where the strategy formulation is flawed, but the company is showing excellent
implementation skills. When a company finds itself in square D the first thing, they have to do is to
redesign their strategy before readjusting their implementation/execution skills.

Square C is denotes for companies that haven’t succeeded in coming up with a sound strategy formulation
and in addition are bad at implementing their flawed strategic model. Their path to success also goes
through business model redesign and implementation/execution readjustment.

Taken together all the elements of business strategy, it is to be seen as a chosen set of actions by means
of which a market position relative to the competing enterprises is sought and maintained. This gives us
the notion of competitive position.

It needs to be emphasized that ‘strategy’ is not synonymous with ‘long-term plan’ but rather consists of an
enterprise’s attempts to reach some preferred future state by adapting its competitive position as
circumstances change. While a series of strategic moves may be planned, competitors’ actions will mean
that the actual moves will have to be modified to take account of those actions.

In contrast to this view of strategy there is another approach to management practice, which has been
followed in many organizations. In organizations that lack strategic direction there has been a tendency
to look inwards in times of stress, and for management to devote their attention to cost cutting and to
shedding unprofitable divisions. In other words, the focus has been on efficiency (i.e., the relationship
between inputs and outputs, usually with a short time horizon) rather than on effectiveness (which is
concerned with the attainment of organisational goals - including that of desired competitive position).
While efficiency is essentially introspective, effectiveness highlights the links between the organization
and its environment. The responsibility for efficiency lies with operational managers, with top
management having the primary responsibility for the strategic orientation of the organization.

5.9
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

An organization that finds itself in cell 1 is well placed and thrives, since it is achieving what it aspires to
achieve with an efficient output/input ratio. In contrast, an organization in cell 2 or 4 is doomed, unless
it can establish some strategic direction. The particular point to note is that cell 2 is a worse place to be
than is cell 3 since, in the latter, the strategic direction is present to ensure effectiveness even if rather
too much input is being used to generate outputs. To be effective is to survive whereas to be efficient is
not in itself either necessary or sufficient for survival.
In crude terms, to be effective is to do the right thing, while to be efficient is to do the thing right.

Successful strategy formulation does not guarantee successful strategy implementation. It is always
more difficult to do something (strategy implementation) than to say you are going to do it (strategy
formulation).

5. DIFFERENCE BETWEEN STRATEGY FORMULATION AND IMPLEMENTATION

Although inextricably linked, strategy implementation is fundamentally different from strategy
formulation. Summarized are the key distinctions between strategy formulation and strategy
implementation:

5.10
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

Strategy formulation concepts and tools do not differ greatly for small, large, for profit, or non-profit
organizations. However, strategy implementation varies substantially among different types and sizes of
organizations. Implementation of strategies requires such actions as altering sales territories, adding
new departments, closing facilities, hiring new employees, changing an organization’s pricing strategy,
developing financial budgets, developing new employee benefits, establishing cost-control procedures,
changing advertising strategies, building new facilities, training new employees, transferring managers
among divisions, and building a better management information system. These types of activities
obviously differ greatly among manufacturing, service, and governmental organizations.

6. LINKAGES AND ISSUES IN STRATEGY IMPLEMENTATION

Linkages
Noteworthy is the fact that while strategy formulation is primarily an entrepreneurial activity, based on
strategic decision-making, the implementation of strategy is mainly an administrative task based on
strategic as well as operational decision-making.

 Forward Linkages: The different elements in strategy formulation starting with objective setting
through environmental and organizational appraisal, strategic alternatives and choice to the
strategic plan determine the course that an organization adopts for itself. With the formulation of
new strategies, or reformulation of existing strategies, many changes have to be affected within the
organization. For instance, the organizational structure has to undergo a change in the light of the
requirements of the modified or new strategy. The style of leadership has to be adapted to the needs
of the modified or new strategies. In this way, the formulation of strategies has forward linkages
with their implementation.

 Backward Linkages: Just as implementation is determined by the formulation of strategies, the

formulation process is also affected by factors related with implementation. While dealing with
strategic choice, remember that past strategic actions also determine the choice of strategy.
Organizations tend to adopt those strategies which can be implemented with the help of the present
structure of resources combined with some additional efforts. Such incremental changes, over a
period of time, take the organization from where it is to where it wishes to be.

5.11
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

Issues in Strategy Implementation

The implementation tasks put to test the strategists’ abilities to allocate resources, design organisational
structure, formulate functional policies, and to provide strategic leadership.
 The strategic plan devised by the organization proposes the manner in which the strategies could
be put into action. Strategies, by themselves, do not lead to action. They are, in a sense, a statement
of intent. Implementation tasks are meant to realise the intent. Strategies, therefore, have to be
activated through implementation.
 Strategies should lead to formulation of different kinds of programmes. A programme is a broad term,
which includes goals, policies, procedures, rules, and steps to be taken in putting a plan into action.
Programmes are usually supported by funds allocated for plan implementation.
 Programmes lead to the formulation of projects. A project is a highly specific programme for which
the time schedule and costs are predetermined. It requires allocation of funds based on capital
budgeting by organizations.

Thus, research and development programme may consist of several projects, each of which is intended
to achieve a specific and limited objective, requires separate allocation of funds, and is to be completed
within a set time schedule.

Given below in sequential manner the issues in strategy implementation which are to be considered:
 Project implementation
 Procedural implementation
 Resource allocation
 Structural implementation
 Functional implementation
 Behavioural implementation

It should be noted that the sequence does not mean that each of the above activities are necessarily
performed one after another. Many activities can be performed simultaneously, certain other activities
may be repeated over time; and there are activities, which are performed only once. Thus, there can be
overlapping and changes in the order in which these activities are performed.

In all but the smallest organizations, the transition from strategy formulation to strategy implementation
requires a shift in responsibility from strategists to divisional and functional managers. Implementation
problems can arise because of this shift in responsibility, especially if strategic decisions come as a
surprise to middle and lower-level managers. Managers and employees are motivated more by
perceived self-interests than by organizational interests, unless the two coincide.

5.12
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

Therefore, it is essential that divisional and functional managers be involved as much as possible in the
strategy-formulation process. Similarly, strategists should also be involved as much as possible in strategy-
implementation activities.

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

Managers and employees throughout an organization should participate early and directly in strategy-
implementation activities. Their role in strategy implementation should build upon prior involvement in
strategy-formulation activities. Strategists’ genuine personal commitment to implementation is a
necessary and powerful motivational force for managers and employees. Too often, strategists are too
busy to actively support strategy-implementation efforts, and their lack of interest can be detrimental to
organizational success. The rationale for objectives and strategies should be understood clearly
throughout the organization. Major competitors’ accomplishments, products, plans, actions, and
performance should be apparent to all organizational members. Major external opportunities and threats
should be clear, and managers and employees’ questions should be answered satisfactorily. Top-down
flow of communication is essential for developing bottom-up support.

7. STRATEGIC CHANGE THROUGH DIGITAL TRANSFORMATION

Organizations are being pushed harder than ever to shift digitally in order to stay competitive. Digital
transformation, however, may be a difficult and complicated process. To guarantee that projects for
digital transformation are effective, change management is crucial. We will now examine change
management's function in the digital transformation.

Strategic Change
Steps to initiate strategic change: For initiating strategic change, three steps can be identified as under:

5.13
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

(i) Recognize the need for change: The first step is to diagnose which facets of the present corporate
culture are strategy supportive and which are not. This basically means going for environmental scanning
involving appraisal of both internal and external capabilities may be through SWOT analysis and then
determining where the lacuna lies and scope for change exists.

(ii) Create a shared vision to manage change: Objectives of both individuals and organization should
coincide. There should be no conflict between them. This is possible only if the management and the
organization members follow a shared vision. Senior managers need to constantly and consistently
communicate the vision to all the organizational members. They have to convince all those concerned
that the change in business culture is not superficial or cosmetic. The actions taken have to be credible,
highly visible and unmistakably indicative of management’s seriousness to new strategic initiatives and
associated changes.

(iii) Institutionalise the change: This is basically an action stage which requires implementation of
changed strategy. Creating and sustaining a different attitude towards change is essential to ensure that
the firm does not slip back into old ways of thinking or doing things. Capacity for self-renewal should be
a fundamental anchor of the new culture of the firm. Besides, change process must be regularly
monitored and reviewed to analyse the after-effects of change. Any discrepancy or deviation should be
brought to the notice of persons concerned so that the necessary corrective actions are taken. It takes
time for the changed culture to prevail.

8. KURT LEWIN’S MODEL OF CHANGE

Kurt Lewin’s Model of Change: To make the change lasting, Kurt Lewin proposed three phases of the
change process for moving the organization from the present to the future. These stages are unfreezing,
changing and refreezing.

(a) Unfreezing the situation: The process of unfreezing simply makes the individuals aware of the
necessity for change and prepares them for such a change. Lewin proposes that the changes should not
come as a surprise to the members of the organization. Sudden and unannounced change would be
socially destructive and morale lowering. The management must pave the way for the change by first

5.14
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

“unfreezing the situation”, so that members would be willing and ready to accept the change.

Unfreezing is the process of breaking down the old attitudes and behaviours, customs and traditions so
that they start with a clean slate. This can be achieved by making announcements, holding meetings and
promoting the new ideas throughout the organization.

(b) Changing to the new situation: Once the unfreezing process has been completed and the members
of the organization recognise the need for change and have been fully prepared to accept such change,
their behaviour patterns need to be redefined. H.C. Kellman has proposed three methods for reassigning
new patterns of behaviour. These are compliance, identification and internalization.
 Compliance: It is achieved by strictly enforcing the reward and punishment strategy for good or bad
behaviour. Fear of punishment, actual punishment or actual reward seems to change behaviour for
the better.
 Identification: Identification occurs when members are psychologically impressed upon to identify
themselves with some given role models whose behaviour they would like to adopt and try to
become like them.
 Internalization: Internalization involves some internal changing of the individual’s thought
processes in order to adjust to the changes introduced. They have given freedom to learn and adopt
new behaviour in order to succeed in the new set of circumstances.

(c) Refreezing: Refreezing occurs when the new behaviour becomes a normal way of life. The new
behaviour must replace the former behaviour completely for successful and permanent change to take
place. In order for the new behaviour to become permanent, it must be continuously reinforced so that
this new acquired behaviour does not diminish or extinguish.

9. HOW DOES DIGITAL TRANSFORMATION WORK?

The use of digital technologies to develop fresh, improved, or entirely new company procedures, goods,
or services is known as "digital transformation". It's a fundamental adjustment that can be challenging
to identify and even more challenging to implement.

Change management in the digital transition consists of four essential elements:

1. Defining the goals and objectives of the transformation
2. Assessing the current state of the organization and identifying gaps
3. Creating a roadmap for change that outlines the steps needed to reach the desired state

5.15
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

4. Implementing and managing the change at every level of the organization

To navigate a digital transformation successfully, each of these elements is necessary. But what matters
most is how they collaborate to support organisations in achieving their goals.

How does change management work?

Change management is a process or set of tools and best practices used to manage changes in an
organization. It assists in making changes in a safe and regulated manner, reducing the possibility of
detrimental effects on the company. Any sort of organisation, including enterprises, organisations,
governmental bodies, and even families, can utilise change management to manage changes.

The role of change management in digital transformation

Digital transformation is a process of organizational change that enables an organization to use
technology to create new value for customers, employees, and other stakeholders. A good change
management strategy is necessary for a successful digital transformation.

Change management is the process of planning, implementing, and monitoring changes in an

organization. It provides organizations in achieving their objectives while reducing risks and
disruptions. For any organisation undergoing a digital transition, change management is crucial.

A properly implemented change management strategy can help an organization to:

 Specify the parameters and goals of the digital transformation
 Determine which procedures and tools need to be modified.
 Make a plan for implementing the improvements.
 Involve staff members and parties involved in the transformation process.
 Track progress and make required course corrections

10. CHANGE MANAGEMENT STRATEGIES FOR DIGITAL TRANSFORMATION

One of the most important area of focus for guaranteeing a successful transformation is change
management.

The five best practices for managing change in small and medium-sized businesses are:

1. Begin at the top: A focused, invested, united leadership that is on the same page about the

5.16
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

company's future is reflected in change that begins at the top. The culture that will motivate the rest
of the organisation to accept change can only be generated and promoted in this way.

2. Ensure that the change is both necessary and desired: The fact that decision-makers are unaware
of how to properly handle a digital transformation and the effects it will have on their firm is one of
the main causes of this. If a corporation doesn’t have a sound strategy in place, introducing too much
too fast can frequently become a major issue down the road.

3. Reduce disruption: Employee perceptions of what is required or desirable change can differ by
department, rank, or performance history. It's crucial to lessen how changes affect staff. The
introduction of new tactics or technologies intended to improve management and corporate
operations causes employee concern about change.

It is possible to reduce workplace disruption by:

(a) Getting the word out early and preparing for some interruption.
(b) Giving staff members the knowledge and tools, they need to adjust to change.
(c) Creating an environment that encourages transformation or change.
(d) Empowering change agents to provide context and clarity for changes, such as project managers
or team leaders.
(e) Ensuring that IT department is informed of changes in technology or infrastructure and is
prepared to support them.

4. Encourage communication: Create channels so that workers may contact you with queries or
complaints. Encourage departmental collaboration to propagate ideas and innovations as new
procedures take root. Communication promotes efficiency and has the power to influence culture, just
like your vision.

5. Recognize that change is the norm, not the exception: Change readiness may be defined as “the
ability to continuously initiate and respond to change in ways that create advantage, minimize risk,
and sustain performance.” In order to keep up with the customers, businesses must also adapt their
operations.

5.17
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

11. HOW TO MANAGE CHANGE DURING DIGITAL TRANSFORMATION?

Here are some pointers for navigating change during the digital transformation:

1. Specify the digital transformation’s aims and objectives: What is the intended outcome? What
are the precise objectives that must be accomplished? It will be easier to make sure that everyone
is on the same page and pursuing the same aims if everyone has a clear grasp of the goals.

2. Always, always, always communicate: It might be challenging for people to accept change and
adjust to it. Ensure that you routinely and honestly discuss the objectives of the digital
transformation and how they will affect stakeholders, including employees, clients, and other
parties.

3. Be ready for resistance: Even when a change is for the better, it can be challenging for people to
embrace it. Have a strategy in place for dealing with any resistance that may arise.

4. Implement changes gradually: Changes should ideally be implemented gradually rather than all at
once. In order to avoid overwhelming individuals with too much change at once, this will give people
time to become used to the new way of doing things.

5. Offer assistance and training: Workers will need guidance in the new procedures, software
applications, etc.

12. ORGRANISATIONAL FRAMEWORK

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The goal of the
model is to depict how effectiveness can be achieved in an organization through the interactions of hard
and soft elements. The McKinsey 7s Model focuses on how the "Soft Ss" and "Hard Ss" elements are
interrelated, suggesting that modifying one aspect might have a ripple effect on the other elements in
order to maintain an effective balance.

5.18
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

The Hard elements are directly controlled by the management. The following elements are the hard
elements in an organization.
 Strategy: the direction of the organization, a blueprint to build on a core competency and achieve
competitive advantage to drive margins and lead the industry
 Structure: depending on the availability of resources and the degree of centralisation or
decentralization that the management desires, it choses from the available alternatives of
organizational structures.
 Systems: the development of daily tasks, operations and teams to execute the goals and objectives
in the most efficient and effective manner.

The Soft elements are difficult to define as they are more governed by the culture. But these soft elements
are equally important in determining an organization’s success as well as growth in the industry. The
following are the soft elements in this model;

 Shared Values: The core values which get reflected within the organizational culture or influence
the code of ethics of the management.
 Style: This depicts the leadership style and how it influences the strategic decisions of the
organisation. It also revolves around people motivation and organizational delivery of goals.
 Staff: The talent pool of the organisation.
 Skills: The core competencies or the key skills of the employees play a vital role in defining the
organizational success.

5.19
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

But like any other strategic model, this model has its limitations as well;

 It ignores the importance of the external environment and depicts only the most crucial elements
within the organization.
 The model does not clearly explain the concept of organizational effectiveness or performance.
 The model is considered to be more static and less flexible for decision making.
 It is generally criticized for missing out the reals gaps in conceptualization and execution of strategy.

13. ORGANIZATION STRUCTURE

The ideal organizational structure is a place where ideas filter up as well as down, where the merit of ideas
carries more weight than their source, and where participation and shared objectives are valued more than
executive order. – Edson Spencer

Changes in corporate strategy often require changes in the way an organization is structured for two
major reasons. First, structure largely dictates how operational objectives and policies will be established
to achieve the strategic objectives.

The second major reason why changes in strategy often require changes in structure is that structure
dictates how resources will be allocated to achieve strategic objectives.

According to Chandler, changes in strategy lead to changes in organizational structure. Structure should
be designed or redesigned to facilitate the strategic pursuit of a firm and, therefore, structure should
follow strategy. Chandler found a particular structure sequence to be often repeated as organizations grow
and change strategy over time. There is no one optimal organizational design or structure for a given
strategy. What is appropriate for one organization may not be appropriate for a similar firm, although
successful firms in a given industry do tend to organize themselves in a similar way.

5.20
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

Every firm is influenced by numerous external and internal forces. But no firm can change its structure
in response to each of these forces, because to do so would lead to chaos. However, when a firm changes
its strategy, the existing organizational structure may become ineffective. Symptoms of an ineffective
organizational structure include too many levels of management, too many meetings attended by too
many people, too much attention being directed toward solving interdepartmental conflicts, too large a
span of control, and too many unachieved objectives. Changes in organisational structure can facilitate
strategy implementation efforts, but changes in structure should not be expected to make a bad strategy
good, to make bad managers good, or to make bad products sell.

Structure can also influence strategy. If a proposed strategy required massive structural changes, it
would not be an attractive choice. In this way, structure can shape the choice of strategy.

14. TYPES OF ORGANIZATION STRUCTURE (A) SIMPLE STRUCTURE

Simple organizational structure is most appropriate for companies that follow a single-business strategy
and offer a line of products in a single geographic market.

The simple structure also is appropriate for companies implementing focused cost leadership or focused
differentiation strategies. A simple structure is an organizational form in which the owner-manager
makes all major decisions directly and monitors all activities, while the company’s staff merely serves as
an executor.

Little specialization of tasks, few rules, little formalization, unsophisticated information systems and
direct involvement of owner-manager in all phases of day-to-day operations characterise the simple
structure. In the simple structure, communication is frequent and direct, and new products tend to be
introduced to the market quickly, which can result in a competitive advantage. Because of these
characteristics, few of the coordination problems that are common in larger organizations exist.

A simple organizational structure may result in competitive advantages for some small companies
relative to their larger counterparts. These potential competitive advantages include a broad-based
openness to innovation, greater structural flexibility, and an ability to respond more rapidly to
environmental changes.

However, if they are successful, small companies grow larger. As a result of this growth, the company
outgrows the simple structure. Generally, there are significant increases in the amount of competitively

5.21
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

relevant information that requires processing. More extensive and complicated information-processing
requirements place significant pressures on owner-managers (often due to a lack of organizational skills
or experience or simply due to lack of time).

15. TYPES OF ORGANIZATION STRUCTURE (B) FUNCTIONAL STRUCTURE

A widely used structure in business organisations is functional type because of its simplicity and low cost.
A functional structure groups tasks and activities by business function, such as production/operations,
marketing, finance/accounting, research and development, and management information systems.
Besides being simple and inexpensive, a functional structure also promotes specialization of labour,
encourages efficiency, minimizes the need for an elaborate control system, and allows rapid decision
making.

The functional structure consists of a chief executive officer or a managing director and supported by
corporate staff with functional line managers in dominant functions such as production, financial
accounting, marketing, R&D, engineering, and human resources. The functional structure enables the
company to overcome the growth-related constraints of the simple structure, enabling or facilitating
communication and coordination.

However, compared to the simple structure, there also are some potential problems. Differences in
functional specialization and orientation may impede communications and coordination. Thus, the chief
executive officer must integrate functional decision-making and coordinate actions of the overall
business across functions. Functional specialists often may develop a myopic (or narrow) perspective,
losing sight of the company’s strategic vision and mission. When this happens, this problem can be
overcome by implementing the multidivisional structure.

5.22
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

16. TYPES OF ORGANIZATION STRUCTURE (C) DIVISIONAL STRUCTURE

As a firm, grows year after year it faces difficulty in managing different products and services in different
markets. Some form of divisional structure generally becomes necessary to motivate employees, control
operations, and compete successfully in diverse locations. The divisional structure can be organized in one
of the four ways: by geographic area, by product or service, by customer, or by process.

A divisional structure has some clear advantages. First and the foremost, accountability is clear. That is,
divisional managers can be held responsible for sales and profit levels. Because a divisional structure is
based on extensive delegation of authority, managers and employees can easily see the results of their
good or bad performances. As a result, employee morale is generally higher in a divisional structure than
it is in centralized structure. Other advantages of the divisional design are that it creates career
development opportunities for managers, allows local control of local situations, leads to a competitive
climate within an organization, and allows new businesses and products in be added easily.

The divisional design is not without some limitations. Perhaps the most important limitation is that a
divisional structure is costly, for a number of reasons. First, each division requires functional specialists
who must be paid. Second, there exists some duplication of staff services, facilities, and personnel; for
instance, functional specialists are also needed centrally (at headquarters) to coordinate divisional
activities. Third, managers must be well qualified because the divisional design forces delegation of
authority better-qualified individuals requires higher salaries.

5.23
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

A divisional structure can also be costly because it requires an elaborate, headquarters-driven control
system. Finally, certain regions, products, or customers may sometimes receive special treatment, and It
may be difficult to maintain consistent, companywide practices. Nonetheless, for most large
organizations and many small firms, the advantages of a divisional structure more than offset the
potential limitations.

Way of organising Divisional Structure

A divisional structure by geographic area is appropriate for organizations whose strategies are
formulated to fit the particular needs and characteristics of customers in different geographic areas. This
type of structure can be most appropriate for organizations that have similar branch facilities located in
widely dispersed areas. A divisional structure by geographic area allows local participation in decision
making and improved coordination within a region.

The divisional structure by product (or services) is most effective for implementing strategies when
specific products or services need special emphasis. Also, this type of structure is widely used when an
organization offers only a few products or services, when an organization’s products or services differ
substantially. The divisional structure allows strict control over and attention to product lines, but it may
also require a more skilled management force and reduced top management control. For example,
General Motors, DuPont, and Procter & Gamble use a divisional structure by product to implement
strategies.

When a few major customers are of paramount importance and many different services are provided to
these customers, then a divisional structure by customer can be the most effective way to implement
strategies. This structure allows an organization to cater effectively to the requirements of clearly
defined customer groups. For example, book-publishing companies often organize their activities around
customer groups such as colleges, secondary schools, and private commercial schools. Some airline
companies have two major customer divisions: passengers and freight or cargo services. Bulks are often
organised in divisions such as personal banking corporate banking, etc.

A divisional structure by process is similar to a functional structure, because activities are organized
according to the way work is actually performed. However, a key difference between these two designs is
that functional departments are not accountable for profits or revenues, whereas divisional process
departments are evaluated on these criteria.

5.24
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

17. TYPES OF ORGANIZATION STRUCTURE (D) MULTI DIVISIONAL STRUCTURE

Multidivisional (M-form) structure is composed of operating divisions where each division represents a
separate business to which the top corporate officer delegates responsibility for day-to-day operations and
business unit strategy to division managers. By such delegation, the corporate office is responsible for
formulating and implementing overall corporate strategy and manages divisions through strategic and
financial controls.

Multidivisional or M-form structure was developed in the 1920s, in response to coordination- and control-
related problems in large firms. Functional departments often had difficulty dealing with distinct product
lines and markets, especially in coordinating conflicting priorities among the products. Costs were not
allocated to individual products, so it was not possible to assess an individual product’s profit
contribution. Loss of control meant that optimal allocation of firm resources between products was
difficult (if not impossible). Top managers became overinvolved in solving short-run problems (such as
coordination, communications, conflict resolution) and neglected long-term strategic issues.

Multidivisional structure calls for:

 Creating separate divisions, each representing a distinct business
 Each division would house its functional hierarchy;
 Division managers would be given responsibility for managing day-to-day operations;
 A small corporate office that would determine the long-term strategic direction of the firm and
exercise overall financial control over the semiautonomous divisions.

This would enable the firm to more accurately monitor the performance of individual businesses,
simplifying control problems, facilitate comparisons between divisions, improving the allocation of
resources and stimulate managers of poorly performing divisions to seek ways to improve performance.

However, because financial controls are focused on financial outcomes, they require that each division’s
performance be largely independent of the performance of other divisions. So, the Strategic Business
Units come into picture.

5.25
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

18. TYPES OF ORGANIZATION STRUCTURE (E) STRATEGIC BUSINESS UNIT (SBU)

STRUCTURE
This concept is relevant to multi-product, multi-business enterprises. It is impractical for an enterprise
with a multitude of businesses to provide separate strategic planning treatment to each one of its
products/businesses; it has to necessarily group the products/businesses into a manageable number of
strategically related business units and then take them up for strategic planning.

The question is: what is the best way of grouping the products/businesses of such large enterprises?

An SBU is a grouping of related businesses, which is amenable to composite planning treatment. As per
this concept, a multi-business enterprise groups its multitude of businesses into a few distinct business
units in a scientific way. The purpose is to provide effective strategic planning treatment to each one of
its products/businesses.

The three most important characteristics of a SBU are:

 It is a single business or a collection of related businesses which offer scope for independent planning
and which might feasibly standalone from the rest of the organization.
 It has its own set of competitors.
 It has a manager who has responsibility for strategic planning and profit performance, and who has
control of profit-influencing factors.

Historically, large, multi-business firms were handling business planning on a territorial basis since their
structure was territorial. And in many cases, such a structure was the outcome of a manufacturing or
distribution logistics. Often, the territorial structure did not suit the purpose of strategic planning.

When strategic planning was carried out treating territories as the units for planning, it gave rise to two
kinds of difficulties: (i) since a number of territorial units handled the same product, the same product
was getting varied strategic planning treatments; and (ii) since a given territorial planning unit carried
different and unrelated products, products with dissimilar characteristics were getting identical strategic
planning treatment.

The concept of strategic business units (SBU) breaks away from this practice. It recognises that just
because a firm is structured into a number of territorial units, say six units, it is not necessarily in six
different businesses. It may be engaged in only three distinct businesses. It is also possible that it is
engaged in more than six businesses. The endeavour should be to group the businesses into an
appropriate number of strategic business units before the firm takes up the strategy formulation task.

5.26
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

A strategic business unit (SBU) structure consists of at least three levels, with a corporate headquarters at
the top, SBU groups at the second level, and divisions grouped by relatedness within each SBU at the third
level. This enables the company to more accurately monitor the performance of individual businesses,
simplifying control problems. It also facilitates comparisons between divisions, improving the allocation
of resources and can be used to stimulate managers of poorly performing divisions to seek ways to
improve performance.

This means that, within each SBU, divisions are related to each other, as also that SBU groups are unrelated
to each other. Within each SBU, divisions producing similar products and/or using similar technologies
can be organised to achieve synergy. Individual SBUs are treated as profit centres and controlled by
corporate headquarters that can concentrate on strategic planning rather than operational control so
that individual divisions can react more quickly to environmental changes.

For example, Sony has been restructuring to match the SBU structure with its ten internal companies as
organised into four strategic business units. Because it has been pushing the company to make better
use of software products and content (e.g., Sony’s music, films and games) in its televisions and audio
gear to increase Sony’s profitability. By its strategy, Sony is one of the few companies that have the
opportunity to integrate software and content across a broad range of consumer electronics products.

The principle underlying the grouping is that all related products-related from the standpoint of “function”-
should fall under one SBU. In other words, the SBU concept helps a multi-business corporation in
scientifically grouping its businesses into a few distinct business units. Such a grouping would in its turn,
help the corporation carry out its strategic management endeavour better. The concept provides the
right direction to strategic planning by removing the vagueness and confusion often experienced in such
multi-business enterprises in the matter of grouping of the businesses.

5.27
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

The attributes of an SBU and the benefits a firm may derive by using the SBU Structure are as follows:
 A scientific method of grouping the businesses of a multi-business corporation which helps the firm
in strategic planning.
 An improvement over the territorial grouping of businesses and strategic planning based on
territorial units.
 An SBU is a grouping of related businesses that can be taken up for strategic planning distinct from
the rest of the businesses. Products/businesses within an SBU receive same strategic planning
treatment and priorities.
 The task consists of analysing and segregating the assortment of businesses/portfolios and
regrouping them into a few, well defined, distinct, scientifically demarcated business units.
Products/businesses that are related from the standpoint of “function” are assembled together as a
distinct SBU.
 Unrelated products/businesses in any group are separated. If they could be assigned to any other SBU
applying the criterion of functional relation, they are assigned; accordingly, otherwise they are
made into separate SBUs.
 Grouping the businesses on SBU lines helps the firm in strategic planning by removing the vagueness
and confusion generally seen in grouping businesses; it also facilitates the right setting for correct
strategic planning and facilitates correct relative priorities and resources to the various businesses.
 Each SBU is a separate business from the strategic planning standpoint. In the basic factors, viz.,
mission, objectives, competition and strategy-one SBU will be distinct from another.
 Each SBU will have its own distinct set of competitors and its own distinct strategy.
 Each SBU will have a CEO. He will be responsible for strategic planning for the SBU and its profit
performance; he will also have control over most of the factors affecting the profit of the SBU.

The questions posed at the corporate level are, first, whether the corporate body wishes to have a related
set of SBUs or not; and if so, on what basis. This issue of relatedness in turn has direct implications on
decisions about diversification relatedness might exist in different ways:

 SBUs might build on similar technologies, or all provide similar sorts of products or services.
 SBUs might be serving similar or different markets. Even if technology or products differ, it may be
that the customers are similar. For example, the technologies underpinning frozen food, washing
powders and margarine production may be very different; but all are sold through retail operations.
 Or it may be that other competences on which the competitive advantage of different SBUs are built
have similarities.

5.28
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

19. TYPES OF ORGANIZATION STRUCTURE (F) MATRIX STRUCTURE

Most organizations find that organising around either functions (in the functional structure) or around
products and geography (in the divisional structure) provides an appropriate organizational structure.
The matrix structure, in contrast, may be very appropriate when organizations conclude that neither
functional nor divisional forms, even when combined with horizontal linking mechanisms like strategic
business units, are right for the implementation of their strategies. In matrix structure, functional and
product forms are combined simultaneously at the same level of the organization. Employees have two
superiors, a product or project manager and a functional manager. The “home” department - that is,
engineering, manufacturing, or marketing - is usually functional and is reasonably permanent. People
from these functional units are often assigned temporarily to one or more product units or projects. The
product units or projects are usually temporary and act like divisions in that they are differentiated on a
product-market basis.

A matrix structure is the most complex of all designs because it depends upon both vertical and horizontal
flows of authority and communication (hence the term matrix). In contrast, functional and divisional
structures depend primarily on vertical flows of authority and communication. A matrix structure can
result in higher overhead because it has more management positions. Other characteristics of a matrix
structure that contribute to overall complexity include dual lines of budget authority (a violation of the
unity command principle), dual sources of reward and punishment, shared authority, dual reporting
channels, and a need for an extensive and effective communication system.

Despite its complexity, the matrix structure is widely used in many industries, including construction,
healthcare, research and defence. Some advantages of a matrix structure are that project objectives are
clear, there are many channels of communication workers can see the visible results of their work, and
shutting down a project is accomplished relatively easily.

In order for a matrix structure to be effective, organizations need planning, training, clear mutual
understanding of roles and responsibilities, excellent internal communication, and mutual trust and
confidence. The matrix structure is used more frequently by businesses because they are pursuing
strategies add new products, customer groups, and technology to their range of activities. Out of these
changes are coming product managers, functional managers, and geographic managers, all of whom have
important strategic responsibilities. When several variables such as product, customer, technology,
geography, functional area, have roughly equal strategic priorities, a matrix organization can be an
effective structural form.

Matrix structure was developed to combine the stability of the functional structure with the flexibility of

5.29
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

the product form. It is very useful when the external environment (especially its technological and market
aspects) is very complex and changeable. It does, however, produce conflicts revolving around duties,
authority, and resource allocation. To the extent that the goals to be achieved are vague and the
technology used is poorly understood, a continuous battle for power between product and functional
mangers is likely.

The matrix structure is often found in an organization or within an SBU when the following three
conditions exists: 1) Ideas need to be cross-fertilised across projects or products, 2) Resources are scarce
and 3) Abilities to process information and to make decisions need to be improved.

5.30
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

For development of matrix structure Davis and Lawrence, have proposed three distinct phases:

1. Cross-functional task forces: Temporary cross-functional task forces are initially used when a new
product line is being introduced. A project manager is in charge as the key horizontal link.

2. Product/brand management: If the cross-functional task forces become more permanent, the
project manager becomes a product or brand manager and a second phase begins. In this arrangement,
function is still the primary organizational structure, but product or brand managers act as the
integrators of semi-permanent products or brands.

3. Mature matrix: The third and final phase of matrix development involves a true dual-authority
structure. Both the functional and product structures are permanent. All employees are connected to both
a vertical functional superior and a horizontal product manager. Functional and product managers have
equal authority and must work well together to resolve disagreements over resources and priorities.

20. TYPES OF ORGANIZATION STRUCTURE (G) NETWORK STRUCTURE

A radical organizational design, the network structure is an example of what could be termed a “non-
structure” by its virtual elimination of in-house business functions. Many activities are outsourced. A
corporation organized in this manner is often called a virtual organization because it is composed of a
series of project groups or collaborations linked by constantly changing non-hierarchical, cobweb-like
networks. The network structure becomes most useful when the environment of a firm is unstable and is
expected to remain so. Under such conditions, there is usually a strong need for innovation and quick
response. Instead of having salaried employees, it may contract with people for a specific project or
length of time. Long-term contracts with suppliers and distributors replace services that the company
could provide for itself through vertical integration. Electronic markets and sophisticated information
systems reduce the transaction costs of the marketplace, thus justifying a “buy” over a “make” decision.
Rather than being located in a single building or area, an organization’s business functions are scattered
at different geographical locations. The organization is, in effect, only a shell, with a small headquarters
acting as a “broker”, electronically connected to some completely owned divisions, partially owned
subsidiaries, and other independent organisation. In its ultimate form, the network organization is a
series of independent firms or business units linked together by a common system that designs,
produces, and markets a product or service.

5.31
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

Companies like Airtel use the network structure in their operations function by subcontracting
manufacturing to other companies in low-cost.

The network organization structure provides an organization with increased flexibility and adaptability
to cope with rapid technological change and shifting patterns of international trade and competition. It
allows a company to concentrate on its distinctive competencies, while gathering efficiencies from other
firms who are concentrating their efforts in their areas of expertise. The network does, however, have
disadvantages. The availability of numerous potential partners can be a source of trouble. Contracting out
functions to separate suppliers/distributors may keep the firm from discovering any synergies by
combining activities. If a particular firm over specialises on only a few functions, it runs the risk of
choosing the wrong functions and thus becoming non-competitive.

The new structural arrangements that are evolving typically are in response to social and technological
advances. While they may enable the effective management of dispersed organizations, there are some
serious implications, The learning organization that is a part of new organizational forms requires that
each worker become a self-motivated, continuous learner. Employees may lack the level of confidence
necessary to participate actively in organization-sponsored learning experiences. The flatter
organizational structures that accompany contemporary structures can seem intrusive as a result of
their demand for more intense and personal interactions with internal and external stakeholders.
Combined, the conditions above may create stress for many employees.

5.32
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

21. TYPES OF ORGANIZATION STRUCTURE (H) HOURGLASS STRUCTURE

In the recent year’s information technology and communications have significantly altered the
functioning of organizations. The role played by middle management is diminishing as the tasks
performed by them are increasingly being replaced by the technological tools. Hourglass organization
structure consists of three layers with constricted middle layer. The structure has a short and narrow
middle-management level. Information technology links the top and bottom levels in the organization
taking away many tasks that are performed by the middle level managers. A shrunken middle layer
coordinates diverse lower-level activities. Contrary to traditional middle level managers who are often
specialist, the managers in the hourglass structure are generalists and perform wide variety of tasks.
They would be handling cross-functional issues emanating such as those from marketing, finance or
production.

Hourglass structure has obvious benefit of reduced costs. It also helps in enhancing responsiveness by
simplifying decision making. Decision making authority is shifted close to the source of information so
that it is faster. However, with the reduced size of middle management the promotion opportunities for
the lower levels diminish significantly. Continuity at same level may bring monotony and lack of interest
and it becomes difficult to keep the motivation levels high. Organisations try to overcome these problems
by assigning challenging tasks, transferring laterally and having a system of proper rewards for
performance.

5.33
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

22. ORGANIZATION CULTURE

Every organisation has a unique organizational culture. It has its own philosophy and principles, its own
history, values, and rituals, its own ways of approaching problems and making decisions, its own work
climate. It has its own embedded patterns of how to do things. Its own ingrained beliefs and thought
patterns, and practices that define its corporate culture.

Corporate culture refers to a company’s values, beliefs, business principles, traditions, ways of operating,
and internal work environment.

Where Does Corporate Culture Come From?

A company’s culture is manifested in the values and business principles that management preaches and
practices, in its ethical standards and official policies, in its stakeholder relationships (especially its
dealings with employees, unions, stockholders, vendors, and the communities in which it operates), in
the traditions the organization maintains, in its supervisory practices, in employees’ attitudes and
behaviour, in the legends people repeat about happenings in the organization, in the peer pressures that
exist, in the organization’s politics that permeate the work environment.

Culture: ally or obstacle to strategy execution?

An organization’s culture is either an important contributor or an obstacle to successful strategy
execution. The beliefs, vision, objectives, and business approaches and practices underpinning a
company’s strategy may or may not be compatible with its culture. When they are compatible, the culture
becomes a valuable ally in strategy implementation and execution. When the culture is in conflict with
some aspect of the company’s direction, performance targets or strategy, the culture becomes a
stumbling block that impedes successful strategy implementation and execution.

Role of culture in strategy execution

Strong culture promotes good strategy execution when there’s fit and impedes execution when there’s
negligible fit. A culture grounded in values, practices, and behavioural norms that match what is needed
for good strategy execution helps energize people throughout the company to do their jobs in a strategy-
supportive manner, adding significantly to the power and effectiveness of strategy execution.
For example, a culture where frugality and thrift are values strongly shared by organizational members
is very conducive to successful execution of a low-cost leadership strategy. A culture where creativity,
embracing change, and challenging the status quo are pervasive themes is very conducive to successful
execution of a product innovation and technological leadership strategy. A culture built around such

5.34
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

business principles as listening to customers, encouraging employees to take pride in their work, and
giving employees a high degree of decision-making authority is very conducive to successful execution
of a strategy of delivering superior customer value.

A work environment where the culture matches the conditions for good strategy execution provides a
system of informal rules and peer pressure regarding how to conduct business internally and how to go
about doing one’s job. Strategy supportive cultures shape the mood, temperament, and motivation the
workforce, positively affecting organizational energy, work habits and operating practices, the degree to
which organizational units cooperate, and how customers are treated.

A strong strategy-supportive culture nurtures and motivates people to do their jobs in ways conducive to
effective strategy execution; it provides structure, standards, and a value system in which to operate;
and it promotes strong employee identification with the company’s vision, performance targets, and
strategy. All this makes employees feel genuinely better about their jobs and work environment and the
merits of what the company is trying to accomplish. Employees are stimulated to take on the challenge
of realizing the company’s vision, do their jobs competently and with enthusiasm, and collaborate with
others as needed to bring the strategy to fruition.

Perils of Strategy-Culture Conflict: When a company’s culture is out of sync with what is needed for
strategic success, the culture has to be changed as rapidly as can be managed – this, of course, presumes
that it is one or more aspects of the culture that are out of whack rather than the strategy. While
correcting a strategy culture conflict can occasionally mean revamping strategy to produce cultural fit,
more usually it means revamping the mismatched cultural features to produce strategy fit. The more
entrenched the mismatched aspects of the culture, the greater the difficulty of implementing new or
different strategies until better strategy-culture alignment emerges. A sizable and prolonged strategy-
culture conflict weakens and may even defeat managerial efforts to make the strategy work.

Creating a strong fit between strategy and culture: It is the strategy maker’s responsibility to select a
strategy compatible with the “sacred” or unchangeable parts of prevailing corporate culture. It is the
strategy implementer’s task, once strategy is chosen, to change whatever facets of the corporate culture
hinder effective execution.

Changing a problem culture: Changing a company’s culture to align it with strategy is among the
toughest management tasks-easier to talk about than do.

The first step is to diagnose which facets of the present culture are strategy supportive and which are
not. Then, managers have to talk openly and forthrightly to all concerned about those aspects of the

5.35
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

culture that have to be changed.

The talk has to be followed swiftly by visible, aggressive actions to modify the culture actions that
everyone will understand are intended to establish a new culture more in tune with the strategy. The
menu of culture-changing actions includes revising policies and procedures in ways that will help drive
cultural change, altering incentive compensation (to reward the desired cultural behaviour), visibly
praising and recognizing people who display the new cultural traits, recruiting and hiring new managers
and employees who have the desired cultural values and can serve as role models for the desired cultural
behaviour, replacing key executives who are strongly associated with the old culture, and taking every
opportunity to communicate to employees the basis for cultural change and its benefits to all concerned.

Implanting the needed culture-building values and behaviour depends on a sincere, sustained
commitment by the chief executive coupled with extraordinary persistence in reinforcing the culture at
every opportunity through both words and deed. Neither charisma nor personal magnetism is essential.

However, personally talking to many departmental groups about the reasons for change is essential;
organizational changes are seldom accomplished successfully from an office. Moreover, creating and
sustaining a strategy-supportive culture is a job for the whole management team. Major cultural change
requires many initiatives from many people. Senior managers, department heads, and middle managers
have to reiterate values and translate the organization’s philosophy into everyday practice.

In addition, for the culture-building effort to be successful, strategy implementers must enlist the
support of first line supervisors and employee opinion leaders, convincing them of the merits of
practicing and enforcing cultural norms at the lowest levels in the organization. Until a big majority of
employees join the new culture and share an emotional commitment to its basic values and behavioural
norms, there’s considerably more work to be done in both instilling the culture and tightening the culture
strategy fit.

The task of making culture supportive of strategy is not a short-term exercise. It takes time for a new
culture to emerge and prevail; it’s unrealistic to expect an overnight transformation. The bigger the
organization and the greater the cultural shift needed to produce a culture-strategy fit, the longer it
takes. In large companies, changing the corporate culture in significant ways can take two to five years.

In fact, it is usually tougher to reshape a deeply ingrained culture that is not strategy-supportive than it
is to install a strategy-supportive culture from scratch in a brand-new organization.

5.36
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

In conclusion, an excessive focus on the hard management, at best will result in a linear improvement in
performance. On the other hand, performance can be improved exponentially by concentrating on the
soft side of the management.

23. STRATEGIC LEADERSHIP

A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we
did it ourselves.—Lao Tzu

A manager as a strategic leader has to play many leadership roles to play: visionary, chief entrepreneur
and strategist, chief administrator, culture builder, resource acquirer and allocator, capabilities builder,
process integrator, crisis manager, spokesperson, negotiator, motivator, arbitrator, policy maker, policy
enforcer, and head cheerleader. Sometimes it is useful to be authoritarian; sometimes it is better to be a
perceptive listener and a compromising decision maker; sometimes a strongly participative, and
sometimes being a coach and adviser is the proper role.

A strategic leader is a change agent to initiates strategic changes in the organisations and ensure that the
changes successfully implemented. For the most part, major change efforts have to be top-down and
vision-driven. Leading change has to start with diagnosing the situation and then deciding which of
several ways to handle it.

Managers have five leadership roles to play in pushing for good strategy execution:
1. Staying on top of what is happening, closely monitoring progress, solving out issues, and learning
what obstacles lie in the path of good execution.
2. Promoting a culture of esprit de corps that mobilizes and energizes organizational members to
execute strategy in a competent fashion and perform at a high level.
3. Keeping the organization responsive to changing conditions, alert for new opportunities, bubbling
with innovative ideas, and ahead of rivals in developing competitively valuable competencies and
capabilities.
4. Exercising ethical leadership and insisting that the company conduct its affairs like a model corporate
citizen.
5. Pushing corrective actions to improve strategy execution and overall strategic performance.

5.37
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

Leadership role in implementation: The strategic leaders must be able to use the strategic management
process effectively by guiding the company in ways that result in the formation of strategic intent and
strategic mission, facilitating the development and implementation of appropriate strategic plans and
providing guidance to the employees for achieving strategic goals.

Strategic leadership entails the ability to anticipate, envision, maintain flexibility, and empower others
to create strategic change as necessitated by external environment. In other words, strategic leadership
represents a complex form of leadership in companies. A manager with strategic leadership skills exhibits
the ability to guide the company through the new competitive landscape by influencing the behaviour,
thoughts, and feelings of co-workers, managing through others and successfully processing or making
sense of complex, ambiguous information by successfully dealing with change and uncertainty.

5.38
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

A Strategic leader has several responsibilities, including the following:

 Making strategic decisions.
 Formulating policies and action plans to implement strategic decision.
 Ensuring effective communication in the organisation.
 Managing human capital (perhaps the most critical of the strategic leader’s skills).
 Managing change in the organisation.
 Creating and sustaining strong corporate culture.
 Sustaining high performance over time.

Strategic leadership sets the firm’s direction by developing and communicating a vision of future and
inspire organization members to move in that direction. Unlike strategic leadership, managerial
leadership is generally concerned with the short term, day-to-day activities.

Two basic approaches to leadership can be transformational leadership style and transactional leadership
style.
1. Transformational leadership style uses charisma and enthusiasm to inspire people to exert them for
the good of the organization. Transformational leadership style may be appropriate in turbulent
environments, in industries at the very start or end of their life-cycles, in poorly performing
organizations when there is a need to inspire a company to embrace major changes.
Transformational leaders offer excitement, vision, intellectual stimulation and personal satisfaction.
They inspire involvement in a mission, giving followers a ‘dream’ or ‘vision’ of a higher calling so as to
elicit more dramatic changes in organizational performance. Such a leadership motivates followers to
do more than originally affected to do by stretching their abilities and increasing their self-confidence,
and also promote innovation throughout the organization.

2. Transactional leadership style focuses more on designing systems and controlling the
organization’s activities and are more likely to be associated with improving the current situation.
Transactional leaders try to build on the existing culture and enhance current practices.
Transactional leadership style uses the authority of its office to exchange rewards, such as pay and
status.
They prefer a more formalized approach to motivation, setting clear goals with explicit rewards or
penalties for achievement or non-achievement.
Transactional leadership style may be appropriate in static environment, in mature industries, and
in organizations that are performing well. The style is better suited in persuading people to work
efficiently and run operations smoothly.

5.39
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

24. STRATEGIC CONTROL

The controlling function involves monitoring the activity and measuring results against pre-established
standards, analysing and correcting deviations as necessary and maintaining/adapting the system. It is
intended to enable the organisation to continuously learn from its experience and to improve its
capability to cope with the demands of organisational growth and development.

The process of control has the following elements:

(a) Objectives of the business system which could be operationalized into measurable and controllable
standards.
(b) A mechanism for monitoring and measuring the performance of the system.
(c) A mechanism (i) for comparing the actual results with reference to the standards (ii) for detecting
deviations from standards and (iii) for learning new insights on standards themselves.
(d) A mechanism for feeding back corrective and adaptive information and instructions to the system,
for effecting the desired changes to set right the system to keep it on course.

Primarily there are three types of organizational control, viz., operational control, management control
and strategic control.

Operational Control: The thrust of operational control is on individual tasks or transactions as against
total or more aggregative management functions. For example, procuring specific items for inventory is
a matter of operational control, in contrast to inventory management as a whole. One of the tests that
can be applied to identify operational control areas is that there should be a clear-cut and somewhat
measurable relationship between inputs and outputs which could be predetermined or estimated with
least uncertainty.

Many of the control systems in organisations are operational and mechanistic in nature. A set of
standards, plans and instructions are formulated. The control activity consists of regulating the
processes within certain ‘tolerances’, irrespective of the effects of external conditions on the formulated
standards, plans and instructions. Some of the examples of operational controls can be stock control
(maintaining stocks between set limits), production control (manufacturing to set programmes), quality
control (keeping product quality between agreed limits), cost control (maintaining expenditure as per
standards), budgetary control (keeping performance to budget).

Management Control: When compared with operational control, management control is more inclusive
and more aggregative, in the sense of embracing the integrated activities of a complete department,

5.40
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

division or even entire organisation, instead or mere narrowly circumscribed activities of sub-units.
The basic purpose of management control is the achievement of enterprise goals – short range and long
range – in a most effective and efficient manner. The term management control is defined by Robert
Anthony as ‘the process by which managers assure the resources are obtained and used effectively and
efficiently in the accomplishment of the organisation’s objectives. Controls are necessary to influence the
behaviour of events and ensure that they conform to plans.

Strategic Control: According to Schendel and Hofer “Strategic control focuses on the dual questions of
whether: (1) the strategy is being implemented as planned; and (2) the results produced by the strategy
are those intended.”

There is often a time gap between the stages of strategy formulation and its implementation. A strategy
might be affected on account of changes in internal and external environments of organisation. There is
a need for warning systems to track a strategy as it is being implemented. Strategic control is the process
of evaluating strategy as it is formulated and implemented. It is directed towards identifying problems
and changes in premises and making necessary adjustments.

Types of Strategic Control: There are four types of strategic controls, which are as follows:

 Premise control: A strategy is formed on the basis of certain assumptions or premises about the
complex and turbulent organizational environment. Over a period of time these premises may not
remain valid. Premise control is a tool for systematic and continuous monitoring of the environment
to verify the validity and accuracy of the premises on which the strategy has been built.

It primarily involves monitoring two types of factors:

(a) Environmental factors such as economic (inflation, liquidity, interest rates), technology, social
and legal-regulatory.
(b) Industry factors such as competitors, suppliers, substitutes.

It is neither feasible nor desirable to control all types of premises in the same manner. Different premises
may require different amount of control. Thus, managers are required to select those premises that are
likely to change and would severely impact the functioning of the organization and its strategy.

 Strategic surveillance: Contrary to the premise control, the strategic surveillance is unfocussed. It
involves general monitoring of various sources of information to uncover unanticipated information
having a bearing on the organizational strategy. It involves casual environmental browsing. Reading

5.41
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

financial and other newspapers, business magazines, attending meetings, conferences, discussions
and so on can help in strategic surveillance.
Strategic surveillance may be loose form of strategic control but is capable of uncovering
information relevant to the strategy.

 Special alert control: At times, unexpected events may force organizations to reconsider their
strategy. Sudden changes in government, natural calamities, terrorist attacks, unexpected
merger/acquisition by competitors, industrial disasters and other such events may trigger an
immediate and intense review of strategy. To cope up with such eventualities, the organisations
form crisis management teams to handle the situation.

 Implementation control: Managers implement strategy by converting major plans into concrete,
sequential actions that form incremental steps.
Implementation control is directed towards assessing the need for changes in the overall strategy
in light of unfolding events and results associated with incremental steps and actions. Strategic
implementation control is not a replacement to operational control. Unlike operational control, it
continuously monitors the basic direction of the strategy.

The two basic forms of implementation control are:

(a) Monitoring strategic thrusts: Monitoring strategic thrusts helps managers to determine whether
the overall strategy is progressing as desired or whether there is need for readjustments.
(b) Milestone Reviews: All key activities necessary to implement strategy are segregated in terms of
time, events or major resource allocation. It normally involves a complete reassessment of the
strategy. It also assesses the need to continue or refocus the direction of an organization.

5.42
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

These four strategic controls steer the organisation and its different sub-systems to the right track. They
help the organisation to negotiate through the turbulent and complex environment.

25. STRATEGIC PERFORMANCE MEASURES

A company's performance depends heavily on execution of strategy. Companies that continuously
outperform their competitors are those who execute well. Executives in a variety of businesses should
explore about utilizing strategic performance measurement (SPM). SPM is a method that increases line
executives' understanding of an organization's strategic goals and offers a continuous system for tracking
progress towards these objectives using clear-cut performance measurements. SPM helps to eliminate
silos by establishing a common language among all divisions of the organisation so they may
communicate openly and productively.

Strategic performance measures are key indicators that organizations use to track the effectiveness of
their strategies and make informed decisions about resource allocation. The measures provide a
snapshot of the organization's performance, enabling leaders to assess whether their strategies are
aligned with their goals and objectives and to make necessary adjustments to improve their
performance.

Key performance measures and indicators must be created, selected, combined into reports and acted
upon so that strategy implementation can have tangible outcomes. Firstly, there needs to be a clear cause
and effect relationship between the indicators and strategic outcomes. Secondly, KPIs need to be carefully
chosen because they will influence the behaviour of people within the organisation. However, managers
should be aware of paralysis by over analysis.

Managing the political aspects of implementing a strategy

People involved in the planning process for the implementation of a strategy may be affected by two sets
of forces. The "rational" forces of openness, communication, and self-analysis can exist on the one hand. On
the other hand, there could be political forces concerned with preserving empires and fostering internal
rivalry that urge knowledge retention, selective communication, and caution. When these two
techniques conflict, the politically acceptable aspects may end up in the explicit strategy while the
sensitive elements may form an unspoken plan that contains the implicit strategy.

Types of Strategic Performance Measures

5.43
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

There are various types of strategic performance measures, including:

 Financial Measures: Financial measures, such as revenue growth, return on investment (ROI), and
profit margins, provide an understanding of the organization's financial performance and its ability
to generate profit.
 Customer Satisfaction Measures: Customer measures, such as customer satisfaction, customer
retention, and customer loyalty, provide insight into the organization's ability to meet customer
needs and provide high-quality products and services.
 Market Measures: Market measures, such as market share, customer acquisition, and customer
referrals, provide information about the organization's competitiveness in the marketplace and its
ability to attract and retain customers.
 Employee Measures: Employee measures, such as employee satisfaction, turnover rate, and
employee engagement, provide insight into the organization's ability to attract and retain talented
employees and create a positive work environment.
 Innovation Measures: Innovation measures, such as research and development (R&D) spending,
patent applications, and new product launches, provide insight into the organization's ability to
innovate and create new products and services that meet customer needs.
 Environmental Measures: Environmental measures, such as energy consumption, waste reduction,
and carbon emissions, provide insight into the organization's impact on the environment and its
efforts to operate in a sustainable manner.

5.44
CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

The Importance of Strategic Performance Measures

 Goal Alignment: Strategic performance measures help organizations align their strategies with
their goals and objectives, ensuring that they are on track to achieve their desired outcomes.
 Resource Allocation: Strategic performance measures provide organizations with the information
they need to make informed decisions about resource allocation, enabling them to prioritize their
efforts and allocate resources to the areas that will have the greatest impact on their performance.
 Continuous Improvement: Strategic performance measures provide organizations with a
framework for continuous improvement, enabling them to track their progress and make
adjustments to improve their performance over time.
 External Accountability: Strategic performance measures help organizations demonstrate
accountability to stakeholders, including shareholders, customers, and regulatory bodies, by
providing a clear and transparent picture of their performance.

Choosing the Right Strategic Performance Measures

Organizations should choose strategic performance measures that are aligned with their goals and
objectives and that provide relevant and actionable information. In selecting the right measures,
organizations should consider the following factors:
 Relevance: The measure should be relevant to the organization's goals and objectives and provide
information that is actionable and meaningful.
 Data Availability: The measure should be based on data that is readily available and can be
collected and analyzed in a timely manner.
 Data Quality: The measure should be based on high-quality data that is accurate and reliable.
 Data Timeliness: The measure should be based on data that is current and up-to-date, enabling
organizations to make informed decisions in a timely manner.

5.45
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

MULTIPLE CHOICE QUESTIONS

1. ______________leadership style may be appropriate in turbulent environment.
(a) Transactional
(b) Transformational
(c) Autocratic
(d) None of these

2. An organizational structure with constricted middle level is:

(a) Divisional structure
(b) Network structure
(c) Hour Glass structure
(d) Matrix structure

3. You are the head of operations of a company. When you focus on total or aggregate management functions
in the sense of embracing the integrated activities of a complete department et al, you are practicing: -
(a) Strategic Control
(b) Management control
(c) Administrative Control
(d) Operations Control

4. Which of the following would be chosen by the core strategist to implement operational control: -

(a) Premise Control

(b) Special Alert Control
(c) Implementation Control
(d) Budgetary Control

5. Compliance, Identification and Internalization are the three processes involved in:
(a) Refreezing
(b) Defreezing
(c) Changing behavior patterns
(d) Breaking down old attitudes

6. Which one is NOT a type of strategic control?

(a) Operational control
(b) Strategic surveillance

5.46
 CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

(c) Special alert control

(d) Premise control

Answers to Multiple Choice Questions

1 (b) 2 (c) 3 (b) 4 (d) 5 (c) 6 (a)

SCENARIO BASED QUESTIONS

1. Ramesh, is owner of a popular brand of Breads. Yashpal, his son after completing Chartered Accountancy
started assisting his father in running of business. The approaches followed by father and son in
management were very different. While Ramesh preferred to use authority and having a formal system of
defining goals and motivation with explicit rewards and punishments, Yashpal believed in involving
employees and generating enthusiasm to inspire people to deliver in the organization.

Discuss the difference in leadership style of father and son.

2. Suresh Sinha has been recently appointed as the head of a strategic business unit of a large multiproduct
company. Advise Mr Sinha about the leadership role to be played by him in execution of strategy.

3. KaAthens Ltd., a diversified business entity having business operations across the globe. The company
leadership has just changed as Mr. D. Bandopadhyay handed over the pedals to his son Aditya
Bandopadhyay, due to his poor health. Aditya is a highly educated with an engineering degree from IIT,
Delhi. However, being very young he is not clear about his role and responsibilities,

In your view, what are the responsibilities of Aditya Bandopadhyay as CEO of the company.

4. Manoj started his telecom business in 2010. Over next five years, he gradually hired fifty people for
various activities such as to keep his accounts, administration, sell his products in the market, create more
customers, provide after sales service, coordinate with vendors.

Draw the organization structure Manoj should implement in his organization and name it.

5. Moonlight Private Limited deals in multi-products and multi-businesses. It has its own set of
competitors. It seems impractical for the company to provide separate strategic planning treatment to each
one of its product or businesses.

As a strategic manager, suggest the type of structure best suitable for Moonlight Private Limited and state
its benefits.

5.47
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

6. Sanya Private Limited is an automobile company. For the past few years, it has been observed that the
progress of the company has become stagnant. When scrutinized, it was found that the planning
department was performing fairly well but the plans could not be implemented due to improper use of
resources, undesirable tendencies of workers and non-conformance to norms and standards. You are hired
as a Strategic Manager. Suggest the elements of process of control to overcome the problem.

ANSWERS TO SCENARIO BASED QUESTIONS

1. Ramesh is a follower of transactional leadership style that focuses on designing systems and controlling
the organization’s activities. Such a leader believes in using authority of its office to exchange rewards, such
as pay and status. They prefer a more formalized approach to motivation, setting clear goals with explicit
rewards or penalties for achievement or non-achievement. Transactional leaders try to build on the
existing culture and enhance current practices. The style is better suited in persuading people to work
efficiently and run operations smoothly.

On the other hand, Yashpal is follower of transformational leadership style. The style uses charisma and
enthusiasm to inspire people to exert them for the good of the organization. Transformational leaders offer
excitement, vision, intellectual stimulation and personal satisfaction. They inspire involvement in a
mission, giving followers a ‘dream’ or ‘vision’ of a higher calling so as to elicit more dramatic changes in
organizational performance. Such a leadership motivates followers to do more than originally affected to
do by stretching their abilities and increasing their self-confidence, and also promote innovation
throughout the organization.

2. Leading change has to start with diagnosing the situation and then deciding which of several ways to
handle it. Managers have five leadership roles to play in pushing for good strategy execution:
(a) Staying on top of what is happening, closely monitoring progress, solving out issues, and learning
what obstacles lie in the path of good execution.
(b) Promoting a culture of esprit de corps that mobilizes and energizes organizational members to
execute strategy in a competent fashion and perform at a high level.
(c) Keeping the organization responsive to changing conditions, alert for new opportunities, bubbling
with innovative ideas, and ahead of rivals in developing competitively valuable competencies and
capabilities.
(d) Exercising ethical leadership and insisting that the company conduct its affairs like a model corporate
citizen.
(e) Pushing corrective actions to improve strategy execution and overall strategic performance.

5.48
 CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

3. Aditya Bandopadhyay, an effective strategic leader of KaAthens Ltd. must be able to deal with the diverse
and cognitively complex competitive situations that are characteristic of today’s competitive landscape.

A Strategic leader has several responsibilities, including the following:

 Making strategic decisions.
 Formulating policies and action plans to implement strategic decision.
 Ensuring effective communication in the organisation.
 Managing human capital (perhaps the most critical of the strategic leader’s skills).
 Managing change in the organisation.
 Creating and sustaining strong corporate culture.
 Sustaining high performance over time.

4. Manoj has started a telecom business. Accounts, Administration, Marketing (customer creation, after
sales service, vendor coordination) are the functional areas that are desired in the organisational structure.
Further there is inherent need to have a department for the management of telecom services/ operations.

Thus, the functional structure in the telecom business of Manoj can be as follows:

5. It is advisable for Moonlight Private Limited to follow the strategic business unit (SBU) structure.

Moonlight Private Limited has a multi-product and multi-business structure where, each of these
businesses has its own set of competitors. In the given case, Strategic Business Unit (SBU) structure would
best suit the interests of the company.

SBU is a part of a large business organization that is treated separately for strategic management purposes.
It is separate part of large business serving product markets with readily identifiable competitors. It is
created by adding another level of management in a divisional structure after the divisions have been
grouped under a divisional top management authority based on the common strategic interests.

5.49
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

Very large organizations, particularly those running into several products, or operating at distant
geographical locations that are extremely diverse in terms of environmental factors, can be better managed
by creating strategic business units, just as is the case for Moonlight Private Limited. SBU structure
becomes imperative in an organization with increase in number, size and diversity.

Benefits of SBUs:
1. Establishing coordination between divisions having common strategic interest.
2. Facilitate strategic management and control.
3. Determine accountability at the level of distinct business units.
4. Allow strategic planning to be done at the most relevant level within the total enterprise.
5. Make the task of strategic review by top executives more objective and more effective.
6. Help to allocate resources to areas with better opportunities.

Thus, an SBU structure with its set of advantages would be most suitable for the company with the given
diverse businesses having separate identifiable competitors, but a common organizational goal.

6. Sanya Private Limited deteriorating performance due to poor implementation of plans that is improper
use of resources, undesirable tendencies of the workers, and non-conformance to norms and standards, all
point towards weak controls in the organization. Implementation of plans cannot assure results unless
strong and sufficient controls are put in place. The management of the company should focus diligently on
developing controls especially in the identified problem areas.

The process of control has the following elements:

(a) Objectives of the business system which could be operationalized into measurable and controllable
standards.
(b) A mechanism for monitoring and measuring the performance of the system.
(c) A mechanism (i) for comparing the actual results with reference to the standards (ii) for detecting
deviations from standards and (iii) for learning new insights on standards themselves.
(d) A mechanism for feeding back corrective and adaptive information and instructions to the system, for
effecting the desired changes to set right the system to keep it on course.

Above elements of control would ensure a proper check on improper use of resources, undesirable
tendencies of the workers, and non-conformance to norms and standards and ensure a result oriented
implementation of plans.

5.50
 CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

DESCRIPTIVE QUESTIONS
1. What is a strategic business unit? What are its advantages?
2. Draw 'Divisional Structure' with the help of a diagram. Also, give advantages and disadvantages of this
structure in brief.
3. What is an ‘hourglass structure’? How can this structure benefit an organization?
4. How can you differentiate between transformational and transactional leaders?
5. What is strategic change? Explain the change process proposed by Kurt Lewin that can be useful in
implementing strategies?
6. What are the differences between operational control and management control?
7. What is strategic control? Briefly explain the different types of strategic control.
8. What is implementation control? Discuss its basic forms.

ANSWER TO DESCRIPTIVE QUESTIONS

1. A strategic business unit (SBU) is any part of a business organization which is treated separately for
strategic management purposes. The concept of SBU is helpful in creating an SBU organizational structure.
It is discrete element of the business serving product markets with readily identifiable competitors and for
which strategic planning can be concluded. It is created by adding another level of management in a
divisional structure after the divisions have been grouped under a divisional top management authority
based on the common strategic interests.

Advantages of SBU are:

 Establishing coordination between divisions having common strategic interests.

 Facilitates strategic management and control on large and diverse organizations.
 Fixes accountabilities at the level of distinct business units.
 Allows strategic planning to be done at the most relevant level within the total enterprise.
 Makes the task of strategic review by top executives more objective and more effective.
 Helps allocate corporate resources to areas with greatest growth opportunities.

2. Divisional structure is that organizational structure which is based on extensive delegation of authority
and built on division basis. The divisional structure can be organized in one of the four ways: by geographic
area, by product or service, by customer, or by process. With a divisional structure, functional activities are
performed both centrally and in each division separately.

5.51
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

Advantages of Divisional Structure:

 Accountability is clear: Divisional managers can be held responsible for sales and profit levels. Because
a divisional structure is based on extensive delegation of authority, managers and employees can
easily see the results of their good or bad performances and thus their morale is high.
 Other advantages: It creates career development opportunities for managers, allows local control of
local situations, leads to a competitive climate within an organization, and allows new businesses and
products to be added easily.

Disadvantages of Divisional Structure:

 Higher cost: Owing to following reasons: (i). requires qualified functional specialist at different
divisions and needed centrally (at headquarters); (ii). It requires an elaborate, headquarters –driven
control system.
 ♦ Conflicts between divisional managers: Certain regions, products, or customers may sometimes
receive special treatment, and it may be difficult to maintain consistent, company-wide practices.

3. In the recent years information technology and communications have significantly altered the
functioning of organizations. The role played by middle management is diminishing as the tasks performed
by them are increasingly being replaced by the technological tools. Hourglass organization structure
consists of three layers in an organisation structure with constricted middle layer. The structure has a short
and narrow middle management level.

Information technology links the top and bottom levels in the organization taking away many tasks that
are performed by the middle level managers. A shrunken middle layer coordinates diverse lower level
activities.

5.52
 CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

Hourglass structure has obvious benefit of reduced costs. It also helps in enhancing responsiveness by
simplifying decision making. Decision making authority is shifted close to the source of information so that
it is faster. However, with the reduced size of middle management, the promotion opportunities for the
lower levels diminish significantly.

4. Difference between transformational and transactional leadership

1. Transformational leadership style uses charisma and enthusiasm to inspire people to exert them for
the good of organization. Transactional leadership style uses the authority of its office to exchange
rewards such as pay, status symbols etc.
2. Transformational leadership style may be appropriate in turbulent environment, in industries at the
very start or end of their cycles, poorly performing organisations, when there is a need to inspire a
company to embrace major changes. Transactional leadership style can be appropriate in static
environment, in growing or mature industries and in organisations that are performing well.
3. Transformational leaders inspire employees by offering excitement, vision, intellectual stimulation
and personal satisfaction. Transactional leaders prefer a more formalized approach to motivation,
setting clear goals with explicit rewards or penalties for achievement and non-achievement.
Transactional leaders focus mainly to build on existing culture and enhance current practices.

5. The changes in the environmental forces often require businesses to make modifications in their existing
strategies and bring out new strategies. Strategic change is a complex process and it involves a corporate
strategy focused on new markets, products, services and new ways of doing business.

To make the change lasting, Kurt Lewin proposed three phases of the change process for moving the
organization from the present to the future. These stages are unfreezing, changing and refreezing.

(a) Unfreezing the situation: The process of unfreezing simply makes the individuals or organizations aware
of the necessity for change and prepares them for such a change. Lewin proposes that the changes should
not come as a surprise to the members of the organization. Sudden and unannounced change would be

5.53
 STRATEGIC IMPLEMENTATION AND EVALUATION CHAPTER 5

socially destructive and morale lowering. The management must pave the way for the change by first
“unfreezing the situation”, so that members would be willing and ready to accept the change. Unfreezing is
the process of breaking down the old attitudes and behaviours, customs and traditions so that they start
with a clean slate. This can be achieved by making announcements, holding meetings and promoting the
ideas throughout the organization.

(b) Changing to New situation: Once the unfreezing process has been completed and the members of the
organization recognise the need for change and have been fully prepared to accept such change, their
behaviour patterns need to be redefined. H.C. Kellman proposed three methods for reassigning new
patterns of behavior as compliance, identification and internalisation.

(c) Refreezing: Refreezing occurs when the new behaviour becomes a normal way of life. The new
behaviour must replace the former behaviour completely for successful and permanent change to take
place. In order for the new behaviour to become permanent, it must be continuously reinforced so that this
newly acquired behaviour does not diminish or extinguish. Change process is not a onetime application
but a continuous process due to dynamism and ever changing environment. The process of unfreezing,
changing and refreezing is a cyclical one and remains continuously in action.

6. Differences between Operational Control and Management Control are as under:

1. The thrust of operational control is on individual tasks or transactions as against total or more
aggregative management functions. When compared with operational, management control is more
inclusive and more aggregative, in the sense of embracing the integrated activities of a complete
department, division or even entire organisation, instead or mere narrowly circumscribed activities of
sub-units. For example, procuring specific items for inventory is a matter of operational control, in
contrast to inventory management as a whole.
2. Many of the control systems in organisations are operational and mechanistic in nature. A set of
standards, plans and instructions are formulated. On the other hand, the basic purpose of management
control is the achievement of enterprise goals – short range and long range – in an effective and
efficient manner.

7. Strategic Control focuses on the dual questions of whether: (1) the strategy is being implemented as
planned; and (2) the results produced by the strategy are those intended.

There are four types of strategic control:

 Premise control: A strategy is formed on the basis of certain assumptions or premises about the
environment. Premise control is a tool for systematic and continuous monitoring of the

5.54
 CHAPTER 5 STRATEGIC IMPLEMENTATION AND EVALUATION

environment to verify the validity and accuracy of the premises on which the strategy has been
built.
 Strategic surveillance: Strategic surveillance is unfocussed. It involves general monitoring of various
sources of information to uncover unanticipated information having a bearing on the organizational
strategy.
 Special alert control: At times, unexpected events may force organizations to reconsider their
strategy. Sudden changes in government, natural calamities, unexpected merger/acquisition by
competitors, industrial disasters and other such events may trigger an immediate and intense
review of strategy.
 Implementation control: Managers implement strategy by converting major plans into concrete,
sequential actions that form incremental steps. Implementation control is directed towards
assessing the need for changes in the overall strategy in light of unfolding events and results.

8. Managers implement strategy by converting major plans into concrete, sequential actions that form
incremental steps. Implementation control is directed towards assessing the need for changes in the
overall strategy in light of unfolding events and results associated with incremental steps and actions.
Strategic implementation control is not a replacement to operational control.

Strategic implementation control, unlike operational controls continuously monitors the basic direction of
the strategy. The two basic forms of implementation control are:

1. Monitoring strategic thrusts: Monitoring strategic thrusts help managers to determine whether the
overall strategy is progressing as desired or whether there is need for readjustments.
2. Milestone Reviews. All key activities necessary to implement strategy are segregated in terms of time,
events or major resource allocation. It normally involves a complete reassessment of the strategy. It
also assesses the need to continue or refocus the direction of an organization.

5.55