CHAPTER 1.

CORPORATE STRATEGY

OBJECTIVE: At the end of this Chapter you should be able to: Understand the nature of corporate strategy, the characteristics of strategic decisions, the different levels of strategy, the key elements of strategic management, the challenges of Strategic Management in both the corporate world and the public sector and not-for-profit organisations
1.1 THE NATURE OF CORPORATE STRATEGY

AN INTRODCTION The word strategy means many things to different people. Therefore we need to identify the distinctive role of business strategy in the management of a company. Corporate strategy is the pattern of decisions in an organisation that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the organisation is to pursue, the kind of economic and non-economic contributions it intends to make to its shareholders, employees, customers, and communities. In an organisation of any size and diversity, corporate strategy usually applies to the whole enterprise while business strategy, which is less comprehensive, defines the choice of product or service and market of the individual businesses within the organisation. usiness strategy is the determination of how an organisation will compete in a given business and position itself among its competitors. Corporate strategy defines the businesses in which an organisation will compete, preferably in a way that focuses resources to convert distinctive competences into competitive advantage. oth are outcomes of a continuous process of strategic management. The strategic decision contributing to this pattern is one that is effective over long periods of time, affects the organisation in many different ways, and focuses and commits a significant portion of its resources to the e!pected outcomes. The patterns coming from a series of such decisions will probably define the central character and image of an organisation, the individuality it has for members and various publics, and the position it will occupy in its industry and markets. It will permit the specification of particular objectives to be attained through a timed se"uence of investments and implementation decisions and will govern directly the deployment or redeployment of resources to make these decisions effective.

#ome aspects of such a pattern of decisions may be in an established corporation unchanging overlong periods of time, like commitment to "uality, or high technology, or certain raw materials, or good labour relations. $ther aspects of strategy must change as or before the world changes, such as product line, manufacturing process, or merchandising and styling practices. The basic determinant of an organisation%s character, if purposefully institutionalised, are likely to persist through and shape the nature of substantial changes in product-market choices and allocation of resources. It would be possible to e!tend the definition of strategy for any given organisation to separate a central character and the core of its special accomplishment from the manifestations of such characteristics in the changing product lines, markets, and policies designed to make activities profitable from year to year. GENERAL STATEMENT OF STRATEGY & general statement of strategy will characterise product line and services offered or planned by the organisation, the market, and market segments for which products and services that are new or will be designed, and the channels through which markets will be reached. The means by which operations will be financed will be specified, as will the profit objectives and the emphasis to be placed on the safety of capital versus level of return. 'ajor policy in central functions such as marketing, manufacturing, procurement, research and development, labour relations and personnel, will be stated where they distinguish the organisation from others, and usually the intended size, form, and climate of the organisation will be included. (ach organisation, if it were to construct a statement of strategy from what it understands itself to be aiming at, would have a different statement with different categories of decisions emphasised to indicate what it wanted to be or do. 1.2 STRATEGIC MANAGEMENT #trategic management has three key elements which are closely interrelated. These three elements are namely) strategic analysis, strategic choice, and strategy implementation. (ach of these will now be discussed in turn. 1.2.1 Strate !" A#a$%&!& #trategic analysis is the first step in strategic planning and consists of the planner assessing the current position*performance of the organisation + including its present objectives and strategies + and relating this assessment to an analysis of the trends and changes in the organization environment. The overall aim of strategic analysis is to form an assessment of the present and likely future performance of the organisation. #trategic analysis involves an assessment of current organisational results, an evaluation of current ,

resources, and an assessment of environmental trends and changes. & key techni"ue in strategic analysis is the techni"ue of #-$T analysis, i.e. the assessment of strengths and weaknesses, and opportunities and threats. ("ually important, however, is the assessment of actual values and the e!pectations of different shareholder groups. The outcome of strategic analysis should be an assessment of the e!tent to which current objectives and strategies re"uire to be changed to meet the needs of the future. This gives rise to the need to e!ercise strategic choice. T'e BCG Matr!( ) a#a$%t!"a$ t**$ +a,Underpinning Concepts and Rationale of Portfolio Techniques The underpinning concept of .ortfolio &nalysis in 'arketing .lanning is that in the multi-product*multi-market business /such as &lpha .roducts0 not only is it important to manage individual #trategic usiness Chapters /# 1s0, but also it is important to take an overview of the collection of # 1s and for them to be managed as a total portfolio of businesses. 2or e!ample, as you are aware, some # 1s may be growing and represent the businesses of the future. $n the other hand other # 1s may be coming towards the end of their useful lives but may generate substantial amounts of cash. 3et other parts of the business may well be going nowhere and our competitive position may be very weak. #omeone in the business must decide which of the different # 1s are to be invested in for future growth, which will be used for e!ample as cash generators to fund this growth and investment, and which # 1s are unattractive and need to be run down. The various portfolio techni"ues are aimed at analysing the various # 1s in a company with a view to planning a balanced mi! of # 1s, i.e. a portfolio in order to increase the chances of long-term profits. In addition, the techni"ues provide mechanisms for appraising the competitive position of individual # 1s with a view to determining which are most attractive for investment purposes. &lthough the underpinning concepts and rationale of most portfolio techni"ues are aimed at achieving a successful balance between # 1s as described above, in fact there are several alternative techni"ues available to the planner for analysing # 1s. These different techni"ues use for e!ample different criteria for evaluation of # 1s and may be based on differing methods of assessment. 4roup. +-, The Boston Consulting Group (BCG) Product Portfolio Matrix The C4 Techni"ue is illustrative of the general approach used in most techni"ues for portfolio analysis although it is fair to say that successive techni"ues have added to this basic techni"ue and are probably more sophisticated in their approach. 5owever, a brief outline of the C4 techni"ue will serve to give you an idea of .ortfolio &nalysis. In this techni"ue individual #trategic usiness Chapters are classified into one of four cells of a matri! according to the 6elative 'arket #hare of the # 1 compared to the largest competitor in the market, and the rate of market growth. oth the relative market share a!is, and the market growth a!is are each divided into 7high% and 7low% categories. Thus giving four cells in the matri!. The matri! thus formed is shown below)

ased on their relative market share compared to the ne!t largest competitor and the percentage rate of market growth it is possible to ascertain which cell of the matri! an # 1 falls into. &ccording to which cells of the matri! the individual # 1s are in, so there are different implications for marketing planning decisions. &s is shown in the matri! above the four cells of the matri! comprise different categories of # 1. &n # 1 with a high market share and a high rate of market growth is designated a 7#tar%. &n # 1 in this category is a heavy user of cash resources but must be supported as they are the profit earners and cash generators of the future. &n # 1 with a high market share and a low market growth rate is a 7Cash Cow%. &s the term implies these are # 1s which generate large positive net cash flows but are coming towards the end of their product life cycle and at some stage will need to be replaced. These # 1s can be used to fund # 1s in other cells of the matri! and in particular #tars and can also be used to develop new products. &n # 1 with a high market growth and a low market share is designated a 79uestion 'ark%. & decision must be made whether to fund these # 1s further or to phase them out. &n # 1 with a low market share and low market growth rate is designated a 7:og% and in most cases are candidates for divestment. +", Uses and Limitations of Portfolio Planning This brief e!planation of one of the best known techni"ues of .ortfolio &nalysis illustrates the notion of achieving a 7balanced% portfolio of # 1s. 2or e!ample too many cash cows and a company does not have enough products for the future, too many #tars and a company will struggle with cash flow. & company with too many 9uestion 'arks or :ogs is, needless to say, in trouble. The techni"ue also illustrates how .ortfolio

&nalysis can be used to assess the relative attractiveness of different # 1s for investment purposes. <eedless to say the different techni"ues do have their limitations. The major limitations of the C4 'atri! are as follows) =. It only uses two variables to allocate businesses or products in the portfolio, i.e. it is simplistic. ,. It is based only on cash flow as a measure of performance. 8. It can be difficult to obtain accurate information to enable businesses to be assigned accurately within the matri!. ;. -eaker businesses with lots of possible potential may be starved of cash and investment. >. The model ignores many factors which may have an impact on performance. $ther techni"ues are more advanced but re"uire more detailed analyses and information. <one of the techni"ues are a substitute for managerial judgment but are rather an aid to decision-making. 1.2.2 Strate !" C'*!"e The second element or step in strategic management is strategic choice. This element contains three sub steps. The first of these is the generation of strategic options. 1sually there are numerous alternative ways to achieve a given objective. 2or e!ample, an objective of growth can be achieved through, say, ac"uisition or internal development. #imilarly, a company can compete on the basis of, say, cost leadership, focus or differentiation. The first step in strategic choice is to delineate the range of strategic options. The second step in strategic choice is the evaluation of these options. The most preferred options are those which build on corporate strengths and minimise company weaknesses whilst, at the same time, taking cognisance of environmental opportunity and threats. #trategies should also be evaluated with respect to feasibility and acceptability. The third step in strategic choice then is the selection of alternative strategies. &lthough selection should be as objective as possible, it is often affected by the values of managers and other groups with interests in the organisation. 1.2.. Strate % I/0$e/e#tat!*# The third element in the strategic management framework is implementation. road strategic choices need to be translated into specific action programmes. 6esources need to be allocated, responsibilities defined, organisational structures designed and, finally, systems of information and control put in place. It is often in the implementation stage that most of the problems of co-ordinating and controlling strategic plans are encountered. $f particular importance in the effective implementation of strategic plans are the human resource considerations. Care should be taken to e!ercise effective leadership and motivation. These then are the three elements of the process or framework of strategic planning and management. &gain, it should be emphasised that the elements can be seen as a number of interlinked issues or decisions rather than a series of separate se"uential steps. >

Traditional approach to strategic management assumed that strategies should be systematically planned step-by-step. The main elements of this formal planning approach include)/i0 /ii0 /iii0 /iv0 /v0 /vi0 /vii0 /viii0 /viii0 /i!0 /!0 &nalysing the organisation%s own internal situation which involves the identification of strengths, weaknesses, competencies, problems, etc. .rojecting current product lines, profits, sales, investment needs, etc. into the future? &nalysing selected e!ternal environments and competitors% actions for opportunities and threats? (stablishing broad goals as targets for subordinates% groups plan? Identifying the gap between e!pected and desired results? Communicating planning assumptions to the divisions? 6e"uesting proposed plans from subordinates with more specific target goals, resource needs, and supporting action plans? $ccasionally asking for special studies of alternatives, contingencies, or longer-term opportunities? 6eviewing and approving divisional plans and summing these for corporate needs? :eveloping long-term budgets presumably related to plans? implementing plans? 'onitoring and evaluating performance /presumably against plans, but usually against + budgets0.

It is said that while this approach is e!cellent for some purposes, it tends to focus unduly on measurable "uantitative factors and to underemphasise the vital "ualitative, organisational, and power-behavioural factors that so often determine strategic success in one situation versus another. In practice, such planning is just one of the events that really determine corporate strategy. EMERGENT STRATEGIES The central "uestion here is how strategies are made in organisations + how the process of strategy formulation takes place. 'any conflicting opinions have been voiced about the best way of forming strategies. 'any authors speak of a strategy which an organisation has decided on as a consistent course of action that it intends to pursue. $ther authors speak of strategy when an organisation has actually e!hibited a consistent course of action in practice. To distinguish these two definitions of strategy, 'intzberg and -aters /=@A>0 have proposed to refer to the former as intended strategy and the later as realised strategy. Intended strategies are patterns of decisions that organisations plan to e!ecute, while realised strategies are the pattern of action that have been accomplished.

-here realised strategies were fully intended, 'intzberg and -aters speak of deliberate strategy. 5owever, they argue that realised strategies can also come about Cdespite or in the absence of intentionsD, which they label (mergent #trategy. #trategies can emerge unintentionally as strategies take one step at a time trying to piece together a viable course of action. .atterns of action unfold overtime as strategies gradually learn and come to agree on a particular direction. 'intzberg proposed that emergent strategies are often successful and may be more appropriate than intended strategies. This may be derived from the fact that not everything works according to plan. 2or e!ample, 6ichard T .aschale of #tanford 1niversity /=@A;0 has described how this was the case for the entry of 5onda in 1#& motorcycle market. 5onda (!ecutives in Eapan had intended to establish an &merican subsidiary in =@>@ focussing on selling ,>Fcc and 8>Fcc motorbikes in the 1#& /intended strategy0, but ended up considering the market that had emerged for >Fcc motors bikes /emergent strategy0. y =@B;, the >Fcc gave the company almost half the share of the motorbikes market in the 1#&. 5owever, this is not to say that the traditional view of strategy is truly irrelevant or redundant but rather that organisations need to reorganise the process of emergence and intervene where appropriate, killing off bad emergent strategies while nurturing good ones. In practice, the strategies of most organisations are probably a combination of the intended and emergent strategies. This means that whichever way one may wish to look at strategy, there must be a starting point and the starting point should be a plan and whatever emerges later is taken care of appropriately. &ny organisation must therefore have a plan of what they intend to do in order to achieve their objectives. Corporate strategy deals with three key issues facing the corporation as a whole. /i0 /ii0 /iii0 the organisation%s overall orientation towards growth, stability or retrenchment /directional strategy0 the industries or markets in which the organisation competes through its products and business Chapters /portfolio strategy0 the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business Chapters /parenting strategy0. Corporate strategy is primarily about the choice of direction for the organisation as a whole. This is true whether the organisation is a small one-product company or a large multinational corporation. In a large multi-business company, however, corporate strategy is also about managing various product lines and business Chapters for ma!imum value. In this instance, corporate head"uarters must play the role of the organisational CparentD, in that it must deal with various product and business Chapter CchildrenD. (ven though each product line or business Chapter has its own competitive or corporative strategy that it uses to obtain it own competitive advantage in the market

place, the corporation must coordinate these different business strategies so that the corporation as a whole succeeds as a CfamilyD. Corporate strategy, therefore, includes decisions regarding the flow of financial and other resources to and from a company%s product lines and business Chapters. Through a series of coordination devices, a company transfers skills and capabilities developed in one Chapter to other Chapters that need such resources. In this way, it attempts to obtain synergies among numerous product lines and business Chapters so that the corporate whole is greater than the sum of its individual business Chapter parts. #3<(643 C$<C(.T 'ost commonly associated with the management thinker and writer Igor &nsoff, the notion of 7synergy% has long been a key concept in the area of corporate strategic planning. #ynergy is said to occur where the sum of combining resources is greater than the sum of the parts which are combined. It is fre"uently referred to as 7,H,I>%. ut what precisely does this concept mean and in particular what relevance does it have to corporate planningJ In the conte!t of corporate planning, synergy is generally applicable when considering combining two or more activities or processes. #pecifically, however, synergy is of most importance and relevance when a company is considering diversification strategies, and particularly where these strategies involve mergers with other companies. 2or e!ample consider the case of an organisation which has an e!cellent range of products but limited channels of distribution. y merging with another company which has strong channels of distribution the effect of the ac"uisition may be such as to provide e!tra benefits to the ac"uiring company as a result of linking a good product range with the ac"uired firm%s strong distribution channels. These e!tra benefits are referred to as synergy. #ynergy can arise in several areas. #ome of the more fre"uent areas and sources of potential synergy include for e!ample) Sa$e& a#1 Mar2et!# S%#er % &s we saw in our e!ample, this can occur when products and distribution channels are combined. #imilarly opportunities for 7tie-in% sales when a company ac"uires a company with a complementary range of products can give rise to synergy. $ne of the most fre"uent sources of synergy in this area is where a company can use its strong brand name or corporate identity to gain e!tra benefits in new markets. O0erat!# S%#er % $perating synergy is most often the result of increased utilisation of facilities and personnel, spreading overheads, and large-scale purchasing. I#3e&t/e#t S%#er % This type of synergy arises from for e!ample) combining plant and machinery, raw material inventories, transfer of research and development knowledge. A

Per&*##e$ S%#er % #ynergy can also arise through the combination of people and their skills. #o, for e!ample, if a company has e!tremely competent senior management skilled, say, in strategic planning, increased performance can result in ac"uired companies, giving rise to positive synergy. F!#a#"!a$ S%#er % &lthough, as we shall see, one of the possible effects of all the areas of synergy discussed so far is on overall financial performance, there can also be opportunities for synergy in the financial area itself. 2or e!ample the cash-rich company which ac"uires another company say to penetrate new markets may additionally benefit by producing e!tra profits from otherwise 7idle% cash. &ll corporations from the smallest company offering one product in only one industry to the largest conglomerate operating in many industries with many products must, at one time or another, consider one more of these issues. 1.. ELEMENTS OF STRATEGY The strategic management function has five interrelated components) =. :eveloping a concept of the business and forming a vision of where the organisation needs to be headed + in effect, infusing the organisation with a sense of purpose, providing long-term direction, and establishing a mission. ,. Translating the mission into specific long-range and short-range performance objectives. 8. Crafting a strategy to achieve the targeted performance. ;. Implementing and e!ecuting the chosen strategy efficiently and effectively. >. (valuating performance, reviewing the situation, and initiating corrective adjustments in B. 'ission, objectives, strategy, or implementation in light of actual e!perience, changing conditions, new ideas, and new opportunities.

F! 4re 151 THE FIVE TAS6S OF STRATEGIC MANAGEMENT IN DIAGRAM FORM TAS6 1 :efining the business and developing a mission TAS6 2 Translating the mission into specific long-range and shortrange performance objectives TAS6 . Crafting a strategy to achieve the performance objectives TAS6 7 Implementing and e!ecuting the strategy TAS6 8 (valuating performance, reviewing the situation, and initiating corrective adjustments.

6evise as needed

6evise as need

Improve*cha nge needed

Improve*cha nge as needed

6ecycle to tasks =,,,8, or ; as needed

KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK KKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKKK & model of the process is shown in 2igure =-= above. Let us now take a brief look at each one of these components to provide a perspective for what will follow later in the manual. DEVELOPING A VISION AND A MISSION The foremost direction-setting "uestion facing the senior managers of any enterprise is C-hat is our business and what will it beJD :eveloping a thoughtful answer to this "uestion pushes managers to consider what the organization%s business makeup should be and to develop a clearer vision of where the organization needs to be headed over the ne!t > to =F years. 'anagement%s answer to C-hat is our business and what will it beJD being the process of carving out a meaningful direction for the organization to take and of establishing a strong organisational identity. 'anagement%s vision of what the organisation seeks to do and to become is commonly termed the organisation%s mission & mission statement

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broadly outlines the organisation%s future course and serves to communicate Cwho we are, what we do, and where we%re headed.D &n organisation%s mission is the purpose or reason for that organisation%s e!istence. It tells what the organisation is providing to society + either a service like house-cleaning or a product like automobiles. & well-conceived mission statement defines the fundamental, uni"ue purpose that sets an organisation apart from other firms of its type and identifies the scope of the organisation%s operations in terms of products /including services0 offered and markets served. It may also include the organisation%s philosophy about how it does business and treats its employees. It puts into words not what the organisation is now, but what it wants to become, that is, management%s strategic vision of the organisation%s future. #ome people like to consider vision and mission as two different concepts) a mission statement describes what the organisation is now? a vision statement describes what the organisation would like to become in the future. The mission statement promotes a sense of shared e!pectations in employees and communicates a public image to important stakeholder groups in the organisation%s task environment. It tells who we are and what we do and what we would like to become. $ne e!ample of a mission statement is that of 'aytag Corporation)
To improve the quality of home life by designing, building, marketing and serving the best appliances in the World.

&nother classic e!ample is that etched in bronze at <ewport <ew #hipbuilding. 1nchanged since its foundation in =AAB)
We shall build good ships here at a profit if we can at a loss if we must but always good ships.

P4r0*&e& *9 /!&&!*# &tate/e#t& & mission statement essentially describes the overriding purpose of an organisation, i.e. what it e!ists to do, and for what reasons. The main purposes of a mission statement in the conte!t of strategic planning, therefore, are as follows) 2irst of all a mission statement provides an overall framework for the objectives and direction of the organisation. y doing so, individuals and functions both inside and outside the organisation understand what the organisation is about, or its raison d%etre. #econdly the mission statement allows a company to establish its differences from its major competitors, therefore providing clues to a possible competitive edge. Thirdly the mission statement provides a way of defining the business which in turn allows the company to identify the key re"uirements for competitive success and customer needs. ==

2ourthly the mission statement provides motivation and guidance for the employees of the organisation. 2inally, mission statements form the basis for control mechanisms and systems for the actions of the company. C*#te#t:S"*0e *9 e99e"t!3e /!&&!*# &tate/e#t& <eedless to say, specific mission statements are individual to each organisation. :espite this individual nature of mission statements, all effective mission statements cover a number of key areas which should be present in all mission statements. These key areas are the following) 2irst of all the mission statement should outline the nature of the business and the overall objectives that it wishes to achieve. #econdly, an effective mission statement will contain a statement of future objectives including any revised business definition. Thirdly the mission statement should include a declaration of the key values of the organisation with regard to key operating policies such as, for e!ample, customer care, innovation, social responsibility and so on. 2ourthly, the mission statement should reflect the needs and aspirations of the various stakeholders of the organisation. &nd finally, the mission statement should indicate standards of performance which will form the basis of control mechanisms in the organisation. C*#&!1erat!*#& !# t'e 1e3e$*0/e#t *9 /!&&!*# &tate/e#t& 'ission statements are influenced and affected by many factors and again the relative importance of these will, to some e!tent, be company specific. 5owever, some of the most important factors which will affect the development of any organisation%s mission statement are the following) 'anagement values) mission statements are affected by the values of senior management, so for e!ample, senior managers who are more socially responsible in their values will reflect this in their company mission statements. #takeholder values and power) in addition to management values, mission statements will be affected by stakeholder values including, for e!ample, shareholders, employees, suppliers and so on. (!actly how and to what e!tent these stakeholder values are reflected in mission statements will be affected by the relative power of the different stakeholder groups. Legal and 6egulatory re"uirements) mission statements often need to reflect legal and regulatory re"uirements, for e!ample with regard to, say, the approach to dealing with customers.

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(thical factors) in addition to the regulatory issues referred to above, mission statements will tend to reflect the ethical values of the society*culture in which the organisation operates. Corporate governance arrangements) these determine to a large e!tent whom the organisation is there to serve and how the purposes and priorities between different and often conflicting groups should be decided. Corporate governance arrangements are closely related to the legal and regulatory factors previously described and vary according to the nature of the organisation, e.g. profit versus voluntary organisations. In summary, mission statements are an important aspect of organizational functioning and particularly strategic planning in the contemporary organisation. They serve a number of purposes pertaining to the overall direction and purposes of an organisation and, if effectively formulated, serve to resolve issues pertaining to the strategic direction which an organisation takes. OBJECTIVES $bjectives are the end results of a planned activity. They state what is to be accomplished by when and should be "uantified if possible. The achievement of corporate objectives should result in the fulfilment of an organisation%s mission. #ome e!amples of objective statements could be stated as follows)/i0 /ii0 /iii0 To achieve =FM annual growth in earnings per share? To achieve ,FM - ,>M return on e"uity? To achieve ,GM return on capital employed. The term CgoalD is often used interchangeably with the term CobjectiveD. It is preferred to differentiate the two terms. In contrast to an objective, a goal considered to be an open-ended statement of what one wants to accomplish with no "uantification of what is to be achieved and no time criteria for completion. 2or e!ample, a simple statement of Cincreased profitabilityD is thus a goal, not an objective because it does not state how much profit the firm wants to make ne!t year. #ome of the areas in which an organisation might establish the goals and objectives are)i. ii. iii. iv. v. vi. vii. viii. i!. !. !i. !ii. .rofitability /net profit0 (fficiency /low costs, etc0 4rowth /increase in total assets, sales, etc0 #hareholder wealth /dividends plus stock price appreciation0 1tilization of resources /return on investments or capital employed0 6eputation /being considered a CtopD organisation0 Contributions to employees /employment security, wages, diversity0 Contributions to society /ta!es paid, participation in charities, providing a needed product or service0 'arket leadership /market share0 Technology leadership /innovations, creativity0 #urvival /avoiding bankruptcy0 .ersonal needs of top management /using an organisation for personal purposes, such as providing jobs for relatives0.

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CHALLENGES OF STRATEGIC MANAGEMENT $rganisations in different conte!ts are likely to emphasise different aspects of the strategic management process. 2or some organisations the major challenge will be developing competitive strategy? for others it will be building organisational structures capable of integrating comple! global operations? for yet others it will be understanding their competencies so as to focus on what they are especially good at? and for still others it will be developing a culture of innovation. #trategic priorities need to be understood in terms of the particular conte!t of an organisation. -hile it is appreciated that strategic management is important, it would be wrong to assume that all aspects of strategic management are e"ually important in all circumstances. #ome of the different conte!ts could be found in the following types of organisations. The small business conte!t The multinational corporation 'anufacturing and service organisations The innovatory organisation #trategy in the public sector .rofessional service organisations The voluntary and not for profit sectors BRIEF ANALYSIS OF EACH CONTE;T S/a$$ -4&!#e&& <2or a small business a major issue is the management of the growth. #uccessful small business grows out of the founder%s entrepreneurial vision, but growth means the founder can no longer manage all the activities alone%. 2or 'ark Nirby the implications were 75ow to attract and select the appropriate management talent? and how to market so as to spread the risk of selling a single or small range of products to one market sector%.
Mark Kirby, Managing Director of Medic aid UK

M4$t!#at!*#a$ C*r0*rat!*# 7&ny big multinational corporation is intrinsically comple!. It has multiple layers of managers and, in most cases, multiple business + it develops products, multiple countriesO. & choice /of strategy0 in principleO.has to be imbedded in a comple!

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industrial and managerial structure as that the myriad choices and daily within the organisation fall in line with the chosen strategic orientation%
Y.Doz, Introduction to Strategic Management in Multinational Companie !ergamon, "#$%, pp. %&'

Pr*9e&&!*#a$ Part#er&'!0& 7In recent years, C.rofessional .artnershipsD like accountants have become huge organisations with sales in e!cess of P>billion. 3et they still tend to be organised to serve national or regional markets, with partners being responsible for all aspects of service delivery to clients, with which they may personally identify. 3ou also need to remember that partnerships are not hierarchies) you can%t easily tell partners what to do. 5owever clients are beginning to re"uire international service delivery. This cuts across the traditional structure and culture of partnerships? for e!ample in the way it re"uires team working across national boundaries, and therefore planned integration of resources. It is not always easy to get partners to ago along with this. &s one of my colleagues said) a great deal of management of a professional service organisation has to do with Ckeeping the fleas in the bucketD.%
Da(id !itt&)at on, director of *ra+ton a ociate

C'ar!t% Se"t*r 7'any charitable organisations comprise groups with diverse values and beliefs. e!ample might be the voluntary workers who are committed to the ideals of organisation and those people employed to provide a professional service to organisation. These different groups need to be co-ordinated so that the ideals changed into work%. P4-$!" Se"t*r 7In public-sector organisations, where the government is the major stakeholder, and not the market, the motivation to meet customer needs is reduced. #taff adopt the attitude that if a particular service is considered essential then, if not economic, it will be supported by the government. The conse"uences for the organisation and the individual of failure to provide an appropriate level of service are reduced. eing dependant on government policy also means that objectives may change rapidly as policy changesO&nd this political dimension also reduces the scope of management options and increases the time for decisions to be taken.%
#tephen Colloff, formerly director of personnel development, ritish &irways

&n the the are

,o-n .aylor, .ational Secretary, YMC/

It is certainly the case that the elements of corporate strategy are broadly the same irrespective of the type of organisation or its conte!t. #o, for e!ample, the steps in developing and implementing strategic plans do not change from organisation to organisation. 5owever, the range and nature of strategic issues do to some e!tent differ according to the organisation type and its conte!t. In other words, it would be wrong to

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assume that, for e!ample, all the elements of corporate planning are e"ually important in all circumstances or indeed that their application is the same in all situations. #ome of the key differences are discussed below for each of the different types of organization and conte!ts in the "uestion. +a, C*r0*rate &trate % !# &/a$$ -4&!#e&&e& $bviously small businesses have fewer resources than their larger counterparts. .erhaps somewhat surprisingly, this means that, if anything, the importance of applying the elements of corporate planning effectively is even greater. The small business organisation simply cannot afford to make strategic mistakes. :espite this, however, the smaller business is likely to have fewer specialist managers and particularly will often lack skills and e!pertise in some of the areas re"uired for effective strategic management. #o, for e!ample, the smaller business will often find it difficult to prepare accurate forecasts or to conduct specialist marketing research and so on. ecause of this, the smaller business will often need to turn to outside help and consultancies for some of their strategic management skills. .lanning in the smaller business is often less formal than in its larger counterparts, but is often easier to communicate throughout the organisation. $ften strategic management will be done by one person and indeed will often be carried out by the owner*manager. & smaller business is limited in the ways it can compete. #o, for e!ample, it would not normally be able to compete on cost leadership. ecause of this, the small business is likely to concentrate on using the advantages which accrue from its small size such as personal service, fle!ibility, etc. The small business is likely to find it more difficult to raise finance and so growth is sometimes difficult to achieve. 2or the same reason, the smaller business may find it difficult to pursue growth through new product development. 2inally, in the small business the character, skills and vision of its owners are likely to be much more significant in business success or failure. +-, C*r0*rate &trate % !# t'e /4$t!5#at!*#a$ "*r0*rat!*# In contrast to the small business, the multi-national corporation often has substantial resources and is comple! and multi-faceted. 'ulti-nationals often operate across a range of different product markets and, in addition, are often geographically dispersed. This puts a premium in the multinational corporation on the need for careful planning of structures and mechanisms for co-ordination and control. The often widespread geographical coverage of such organisations also heightens the importance of the cultural and political elements of the environment which therefore become especially important in the planning process. Crucial to such organisations are the issues of centralisation versus decentralisation in structure and planning systems, together with the related issue of global versus local strategies. 2inally, the allocation of resources between different parts of the business is e!tremely important, but also potentially comple!. 4reat care must be taken in such organisations to balance the business portfolio. +", C*r0*rate &trate % !# 04-$!" &e"t*r *r a#!&at!*#&

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2irstly it is important to recognise that the public sector itself comprises a very wide and diverse set of types of business organisation. In fact, the public sector comprises a number of sub-sectors such as the nationalised organisational sector, government agency type organisations, and public service organisations such as hospitals, the police service etc. (ach of these sub-sectors to some e!tent has its own special characteristics with regard to the application of the strategic management elements. 5owever, recognising this, it is possible to point to some of the general differences and special considerations which arise with regard to corporate strategy in the public sector organisation. .erhaps the main difference in this type of organisation*conte!t is the influence of political considerations and factors in the development of strategic plans. #o, for e!ample, public sector organisations are often constrained and*or directly influenced by political considerations. & related issue is that public sector organisations are very much more accountable for their decisions to outside parties and indeed, in the broadest sense, often to the public in general. :ecisions by managers in such organisations will often be taken in the conte!t of political*regulatory re"uirements such as, for e!ample, a re"uirement to buy from domestic suppliers. 2inally, public sector organisations are often very formal and bureaucratic and for this reason may often be slow to respond to change.
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C*r0*rate &trate % !# t'e 3*$4#tar% a#1 #*t59*r50r*9!t &e"t*r

&s with public sector organisations, it is important to recognise that this sector contains many different varying types of organisation. 5owever, it is again possible to generalise regarding the e!tent to which there are differences regarding the nature of corporate strategy in such organisations. $ne of the key differences in this sector is that values and e!pectations of different stakeholder groups will play a very important part in the process of strategic management. 'oreover, the range of stakeholder groups is often much wider and sometimes potentially conflicting compared to the profit mailing sector. 2unding for organisations in this sector may come from several sources including, for e!ample, funding bodies and public donations, and, because of this, openness and effectiveness in the uses of funds are often a high priority. ecause, by definition, many of the organisations in this sector do not have profit objectives, clear objective setting is sometimes difficult and indeed objectives may often conflict. 2inally, in the past it has sometimes been the case that the management of companies in this sector have perhaps lacked some of the planning skills of their profit making sector counterparts. 5owever, in recent years this has changed and now managers in this sector are just as skilled in the strategic planning process and indeed often use the same concepts and techni"ues developed in the profit*commercial sector organisations.

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CHAPTER 2.0: STRATEGIC DECISION MAKING

OBJECTIVE: &t the end of this Chapter you should be able to) have understood the role of setting objectives and the nature of strategic decisions and appreciated strategic formulation processes. 2.1 NATURE OF STRATEGIC CHANGE $rganizational change can be difficult and costly. &ccording to 5ammer and Champy /=@@8) @F + @@0, despite the challenges many organizations successfully make needed changes. &doptive, fle!ible organizations have a competitive advantage over rigid static ones. 'any organizations have to undergo radical and sometimes complete reorientation with regard to the way they do business. The major objective of planned organizational change is to alter the behaviour of individuals within the organizations. In the final analysis, organizations survive, grow, prosper, decline, or fall because of employee behaviours, the things that employees do or fail to do. &ll around us in the world today, we are e!periencing changes. -e are moving forward and time where communication is occurring at an accelerating pace due to the internet, email, fa! machines, cell phones and satellite TQ. 'arkets are merging, economies are rising and falling at an astounding rate, and the world seems a smaller place than before. RESISTANCE TO CHANGE Inevitably, change will be resisted at least to some e!tent by both individuals and organizations. 6esistance to change can be baffling because it takes so many forms. 6esistance to change stems from a variety of sources. #ome are traceable to individuals, but others involve the nature and structure of organizations. 'anagers and employees need to understand the reasons for and source of resistance to change.
INTERNATIONAL RESISTANCE TO CHANGE

.erceptions- It%s the notion that people tend to perceive selectively those things that fit most comfortably into their current view of the world. $nce individuals establish an understanding of really, they resist changing it.

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 .ersonality- #ome aspects of their personality such as dogmatism and dependency may predispose some individuals to resist change. :ogmatism is the rigidity of a person%s belief- closed mindedness. .eople who are dependent on others often lack self esteem. 5abit- 1nless the situation changes dramatically individuals may continue to be rigid to stimuli in their usual ways. & habit may be a source of a satisfaction for individuals because it allows them to adjust to and cope with the world. & habit provides comfort and security. This may be a source of resistance to change. Threats to .ower and Influence + #ome people in the organizations may view change as a threat to power or influence. $nce in power position has been established, individuals or groups often resist changes that they perceive as reducing their power and influence. 2ear of the unknown- Confronting the unknown makes most people an!ious. (ach change carries with it an element of uncertainty. This may be a source of resistance to change. (conomic 6easons - 'any weighs heavily in peoples thinking, and they certainly can be e!pected to resist change that might lower their incomes.
ORGANISATIONAL RESISTANCE TO CHANGE

$rganisation :esign- The organization design increases that probability that any new idea will be screened at because it threatens the statistic. 'ore adoptive and fle!ible organizations are designed to reduce the resistance to change created by rigid organizational structures. $rganization Culture- $rganisational Culture plays a key role in change. Culture is not easy to be modified and may become a principle source of resistance to needed change. 6esources limitations + #ome organizations want to maintain the status "ue, but others would change if they had the resources to do so. Change re"uires capital, time and other resources. &t any particular time an organization, it%s managers and employees they have identified changes that could or should be made, but they had to defer or abandon some of the desired changes because of limited resources. 2i!ed Investments- 6esource limitations confined to organizations with insufficient assets. -ealthy organizations may be unable to change because of fi!ed capital investments in assets that they can not easily alter /e"uipment, buildings, and land0. The plight of central business districts in many cities illustrates this resistance to change. 6ealistically, resistance to change will never cease completely. 'anagers, however, can learn to identify and minimise resistance and thus become more effective change agents. 2.2 HO= STRATEGIC DECISIONS ARE MADE

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The distinguishing characteristic of strategic management is its emphasis on strategic decision making. &s organisations grow larger and more comple! with more uncertain environments, decisions become increasingly complicated and difficult to make. &ccording to :avid 5unger et al /=@@A?A0, unlike many other decisions, strategic decisions deal with the long-run future of the entire organisation and have three characteristics)i. 6are + strategic decisions are unusual and typically have no precedent to follow? ii. Conse"uential + strategic decisions commit substantial resources and a great deal of commitment from people at all levels? iii. :irective + strategic decisions set precedents for lesser decisions and future actions throughout the organisation. M!#t>-er ?& /*1e$ *9 &trate !" 1e"!&!*# /a2!# #ome strategic decisions are made in a flash by one person /a powerful C($0 who has a brilliant insight and is "uickly able to convince others to adopt his idea. $ther strategic decisions seem to develop out of a series of small incremental shots as that overtime push the organisation more in one direction than another. &ccording to 'intzberg, the most typical approaches, or modes of strategic decision making are)i. (ntrepreneurial 'ode + strategy is made by one power individual. The focus is on opportunities, problems are secondary. #trategy is guided by the founder%s own vision of direction and is e!emplified by large, bold decisions. The dominant goal is growth of the corporation. ii. &daptive 'ode + sometimes referred to as Cmuddling throughD, this decision making model is characterised by reactive solutions to e!isting problems rather than a proactive search for new opportunities. 'uch bargaining goes on concerning priorities of objectives. #trategy is fragmented and is developed to move the corporation forward incrementally. This mode is typical of universities, many large hospitals, a large number of government agencies, and a surprising number of large corporations. iii. .lanning 'ode + this decision making mode involves the systematic gathering of appropriate information for situation analysis, the generation of feasible alternative strategies, and the rational selection of the most appropriate strategy. It includes both the proactive search for new opportunities and the reactive solutions of e!isting problems. In some instances, a corporation might follow a fourth approach called Logical Incrementalism, which is a synthesis of the planning, adaptive, and to a lesser e!tent, the entrepreneurial modes of strategic decision making. &s described by 9uinn, top management might have reasonably clear idea of the corporation%s mission and objectives, but, in its development of strategies, it chooses to use Can interactive process in which the organisation probes a series of partial /incremental0 commitments rather than through global formulations of total strategiesD. This approach appears useful when

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the environment is changing rapidly and when it is important to build consensus and develop needed resources before committing the entire corporation to a specific strategy. G**1 ar 4/e#t& "a# -e /a1e 9*r 4&!# e!t'er t'e e#tre0re#e4r!a$ *r a1a0t!3e /*1e& +*r $* !"a$ !#"re/e#ta$!&/, !# "erta!# &!t4at!*#&. H*@e3erA !# /*&t &!t4at!*#& t'e 0$a##!# /*1eA @'!"' !#"$41e& t'e -a&!" e$e/e#t& *9 t'e &trate !" /a#a e/e#t 0r*"e&&A !& a /*re rat!*#a$ a#1 t'4& -etter @a% *9 /a2!# &trate !" 1e"!&!*#&. T'e 0$a##!# /*1e !& #*t *#$% a#a$%t!"a$A -4t !t !& a$&* /*re a00r*0r!ate 9*r 1ea$!# @!t' "*/0$e( "'a# !# e#3!r*#/e#t& The &trate !" 1e"!&!*# by managers of setting objectives serves the purpose of converting the mission and direction into something specific to shoot for, something specific to achieve. #etting challenging but achievable objectives helps guard against complacency, internal confusion over what to accomplish, and mediocre organisational performance. oth short-range and long-range objectives are needed. Short-range ob!ectives spell out what management needs to work toward over the ne!t year or two? long-range ob!ectives direct managers to consider what they can do now to boost the organisation%s performance over the longer term. $bjective-setting ideally is something all mangers decide on through a &trate !" 1e"!&!*# /a2!# 0r*"e&&. (very organisation Chapter needs concrete, measurable performance targets that specify what it will do to assist in meeting the overall or organisation wide objectives. -hen the set of overall organisation wide objectives is broken down into specific targets for each organization Chapter and when lower-echelon managers are held accountable for achieving the objectives in their area of responsibility, a result-oriented climate emerges, and the whole organization ends up pointed in the intended direction. Cra9t!# a Strate % #trategy-making brings into play the critical managerial role of the strategic decision making process of how to achieve the targeted results in light of the organisation%s situation and prospects. $bjectives are the Cends,D and strategy is the CmeansD of achieving them. The task of forming a strategy starts with hard analysis and decisions around the organisation%s internal and e!ternal situation. &rmed with an understanding of the Cbig picture,D managers can better devise a strategy of how to generate the targeted results. y way of definition, strategy is the pattern of organisational moves and managerial approaches used to achieve organi"ational ob!ectives and to pursue the organi"ation#s mission The pattern of moves and approaches already taken indicates what the prevailing strategy is? the planned moves and approaches signal how the prevailing strategy is to be embellished or changed. Thus, while strategy represents the managerial game plan for running an organization, this plan does not consist of just good intentions and actions yet to be taken. &n organisation%s strategy is nearly always a blend of prior moves, approaches already in place, and new actions being mapped out. Indeed, the biggest part of an organisation%s strategy usually consists of prior approaches and practices that are working well enough to continue. &n organization%s strategy that is mostly new most of the time signals erratic decision-making and weak CstrategizingD on ,=

the part of managers. 'ajor changes in strategy can be e!pected on occasion, especially in crisis situations, but they cannot be made often without creating internal chaos and confusion among customers. Crafting a strategy has a strongly entrepreneurial character in the sense that managers have to choose and decide among alternative business directions and pursue moves that entail at least some innovation and risk-taking. 5ow boldly managers push out in new directions and whether they press for improved organisational performance are often good indicators of their enterprising spirit. The entrepreneurial risks inherent in managerial strategy-making are becoming complacent when the present strategy is working well and being overly analytical and hesitant when a strategy starts to grow stale. The entrepreneurial challenge is to keep the organisation%s strategy fresh, to maintain the organization%s capacity for dealing with changing conditions, and to steer the organisation into doing the right things at the right time. The enterprising "uality of strategy formulation e!tends to all managers, not just senior e!ecutives. (ntrepreneurship is involved when a sales manager crafts a narrow strategy to boost sales by e"uipping sales reps% cars with mobile telephones. &nd entrepreneurship is involved when senior e!ecutives devise a broad companywide strategy to become the low-cost producer in the industry and then use the cost advantage to undercut rivals% prices, grab some of their customers, and gain market share. 5ence, entrepreneurial strategy-making falls on the shoulders of managers up and down the organisational hierarchy, in functional departments and in remote operating Chapters /plants and district offices0 as well as at the top of the organisational pyramid. #trategy-making is not something just top managers do? it is something all managers at all levels need an entrepreneurial game plan for the area he*she is in charge of. 2rom the perspective of the whole organisation, the task of CstrategizingD is an ongoing e!ercise. -hile Cthe whatsD of an organisation%s mission and long-term objectives, once chosen may remain unaltered for several years, Cthe howsD of strategy are always evolving, partly from the proactive efforts of managers to create new windows of opportChaptery, and partly from fresh ideas about how to make the strategy work better. $n occasion, major changes emerge when a new strategic move is put to the test in the real world or when a crisis strikes and managers see that the organisation%s strategy needs radical reorientation. &s a conse"uence, refinements and additions to the strategic plan, interspersed with periodic "uantum leaps, are a normal part of managerial Cstrategizing.D The ongoing stream of strategic moves and approaches means that an organisation%s strategy forms over a period of time and then reforms, always consisting of some mi! of holdover approaches and freshly planned moves. &side from crisis situations /where many strategic moves may have to be made very "uickly, producing a substantially new strategy almost overnight0 and new company start-ups /where strategy e!ists more in the form of plans and intended actions0, a company%s strategy is formed in bits and pieces, as events unfold and as managerial e!perience with the situation accumulates. (verything cannot be planned out in advance, and even the best-laid plans must be responsive to changing conditions. #trategy-making thus proceeds on two fronts + one proactively thought through in advance, the other conceived in response to new developments, ,,

special opportunities, and e!perience with the successes and failures of prior strategic moves, approaches, and actions. 2igure =-, indicates the different moves and approaches that delineate a company%s strategy. The three tasks of defining the business, setting objectives, and forming a strategy all involve direction-setting. Together, they specify where the organisation is headed and how management intends to achieve the targeted results. Together, they constitute a strategic plan. In some companies, especially large corporations that are committed to regular strategy reviews and formal strategic planning, the strategic plan is e!plicit and written /although some parts of the plan may be omitted if they are too sensitive to reveal before they are actually undertaken0. In other companies, the strategic plan is not put on paper but rather e!ists in the form of understanding among managers about what is to be carried over from the past and what new actions are to be taken. F! 4re 152 THE COMPONENTS OF STRATEGIC DECISION MA6ING

Efforts to make A quantum change In strategy Efforts to Fine-tune the Prevailing trategy Actions to respond to changing industry conditions (shifting demand patterns, new government regulations, the glo!ali"ation of competition, E#change rate insta!ility, entry or e#it of new competitors$ %oves to diversity &he company's revenue (ase and enter Altogether new Industries

&he pattern of moves and approaches that delineates what an organi"ation's strategy is

Fresh offensive moves to strengthen the company's long-term competitive position

Action to deal with )ompany-specific operating pro!lems and strategyrelated internal issues *efence moves to counter the actions of foreign or domestic competitors+ Actions to capitali"e on new opportunities (new technologies, product innovation, a chance to purchase a rival company, new trade agreements that open up foreign %oves to improve %oves and approaches in functional area activities that define how each function is !eing managed+

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%arkets$+

short-term profit performance

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2.. STRATEGY FORMULATION AS A CULTURAL PROCESS The company%s attitude towards risk taking and entrepreneurship is a critical factor in the success of strategic business planning. (ffective long-term planning re"uires a culture that encourages entrepreneur responses to risks and uncertainty. & high risk average company will find it difficult to formulate e!plicit long-term plans, and to assign e!plicit accountability for carrying them out. 'anagement of course can not avoid risks by refusing to address them. 'anagement can however,, avoid or at least attempt to avoid accountability for the mistakes and failures that re inevitable in an uncertain environment. If the culture will not tolerate such failures, entrepreneurialism and risk taking will be driven out of the business plans, and they will generate to nothing more than indisputable data, facts and numbers, rather than valuable and business intelligence. Implementation will be limited to generic strategies and ambiguous, "ualitative, and easily achieved objectives rather than specific action strategies and measurable goals against which the # 1 management can be held responsible. To avoid such sterile and defensive business plans, the corporate culture must visibly promote and reward entrepreneurialism and risk taking. It must not condone failure otherwise the # 1s will not try aggressively to succeed. 'ost # 1s will emphasise on avoiding failures that are readily identifiable and for which they can be held accountable. Changing a risk arise culture to one which promoters entrepreneurialism and risk taking is e"ually essential and difficult. The company must clearly announce the new behaviours that it desires, it must e!plain in the business conte!t that makes this new behaviour essential to continued success of the firm, and most importantly, it must visibly reward the desired behaviour.

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CHAPTER 3.0: ANALYSING THE ENVIRONMENT

OBJECTIVE: &t the end of this Chapter you should be able to) understand the nature of the environment, the dynamic and comple! conditions and nature of the environment under which strategic analysis takes place, you should also have developed an appreciation of the #-$T &nalysis as an important tool in environmental analysis.
3.1 AUDITING ENVIRONMENTAL INFLUENCES ON ORGANISATIONS

$rganisations operate in a dynamic political, economic, social and technological environment. Therefore, understanding and appreciation of this environment both internal and e!ternal to the organisation is essential in developing a realistic strategic plan that will guide future operations. efore managers can begin strategy formulation, they must scan the e!ternal and internal environment. (nvironmental analysis or simply scanning is monitoring, evaluating, and discussing information from e!ternal and internal environments to key people within the corporation. The simplest way to conduct environmental scanning is through #-$T analysis. #-$T is an acronym used to describe those particular Strengths, =eaknesses, O00*rt4#!t!e&, and Threats that are strategic factors for a specific company. The e!ternal environment consists of variables /$pportunities and Threats0 that are outside the organisation and not typically within the short-run control of top management. These variables form the conte!t within which the corporation e!ists. They may be general forces and trends within the overall societal environment or specific factors that generate within an organisation%s specific task environment + often called its industry. *iagram- - Environmental .aria!les %acro-environmental influences / the PE &E0 framework ". 1. )-at en(ironmental factor are affecting t-e organi ation0 )-ic- of t-e e are t-e mo t important at t-e pre ent time0 In t-e ne+t fe2 year 0 Economic factors & bu ine cycle & 3.! trend & intere t rate & monetary upply & inflation & unemployment ,>

Political & go(ernment tability & ta+ation policy & foreign trade regulation & ocial 2elfare policie ociocultural factors

& population demograp-ie & income di tribution & ocial re pon ibility & life tyle c-ange & attitude to 2ork and lei ure & con umeri m & le(el of education Environmental & en(ironmental protection la2 & 2a te di po al & energy con umption

& di po able income &echnological & go(ernment pending on re earc& go(ernment and indu try focu on tec-nological effort & ne2 di co(erie 4de(elopment & rate of ob ole cence 0egal & monopolie legi lation & employment la2 & -ealt- and afety & product afety

The internal environment of an organisation consists of variables /#trengths and -eaknesses0 that are within the organisation itself and are not usually within the shortrun control of management. These variables form the conte!t in which work is done. They include the organisational structure, culture, and resources. Ney strengths form a set of core competencies which the organisation can use to gain competitive strategy. &n organisation uses this tool to avoid what is called Cstrategic surpriseD and to ensure long term organisational health or survival. Strate !" A#a$%&!& ! "pportunities and Threats # $xternal nal%sis # includes &orld 'ri(ers) *ndustr% 'ri(ers and Lin+ages B! ,trengthens and &ea+nesses -*nternal nal%sis- includes .istorical Performances) Core Competence) "rganisational 'ri(ers

APPROACHES TO PERFORMING THE STRATEGY5MA6ING TAS6 Companies and managers perform the strategy-making task differently. In small, ownermanaged companies, strategy-making is developed informally. $ften the strategy is never written but e!ists mainly in the entrepreneur%s own mind and in oral understandings with key subordinates. The largest firms, however, tend to develop their plans via an annual strategic planning cycle /complete with prescribed procedures, forms, and timetables0 that includes broad management participation, lots of studies, and

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The larger and more diverse an enterprise, the more managers feel it is better to have a structured process that is done annually, involves written plans, and re"uires management scrutiny and official approval at each level. &long with variations in the organizational process of formulating strategy come variations in the way the manager, as chief entrepreneur and organisational leader, personally participates in the actual work of strategic analysis and strategic choice.

The four basic strategy-making styles used by managers are)

$he Master Strategist Approach + 5ere the manager personally functions as chief strategist and chief entrepreneur, e!ercising strong influence over the kinds and amount of analysis conducted, over the details of strategy. This does not mean that the manager personally becomes the chief architect of strategy and wields a proactive hand in shaping some or all of the major pieces of strategy. The manager acts as strategy commander and has a big ownership stake in the chosen strategy. $he %elegate &t to 'thers Approach + 5ere the manager in charge delegates the e!ercise of strategy-making to others, perhaps a strategic planning staff or a task force of trusted subordinates. The manager then personally stays off to the side, keeps in touch with how things are progressing via reports and oral conversations, offers guidance if need be, smiles or frowns as Ctrial balloonsD recommendations are informally run by him*her for reaction, then puts a stamp of approval on the Cstrategic planD after it has been formally presented and discussed and a consensus emerges. ut the manager rarely has much ownership in the recommendations and, privately, may not see much urgency in pushing truly hard to implement some or much of what has been stated in writing in the company%s Cofficial strategic plan.D &lso, it is generally understood that Cof course, we may have to proceed a bit differently if conditions changeD + which gives the manager fle!ibility to go slow or ignore those approaches*moves that Con further reflection may not be the thing to do at this time.D This strategy-making style has the advantage of letting the manager pick and choose from the smorgasbord of strategic idea that bubble up from below, and it allows room for broad participation and input from many managers and areas. The weakness is that a manager can end up so detached from the process of formal strategymaking that no real strategic leadership is e!ercised + indeed, the impression that subordinates get it that, all the lip service to the contrary, strategic planning is not an activity worth a big claim on the boss%s personal time and attention. The stage is then set for rudderless direction-setting? often the strategy-making that does occur is short-run oriented and reactive.

$he Collaborative Approach This is a middle approach whereby the manager enlists the help of key subordinates in hammering out a consensus strategy that all Cthe key playersD will back and do their best to implement successfully. The biggest strength of this style of managing the formulation process is that those who are charged with strategy formulation are also those who are charged with implementing the chosen strategy. 4iving subordinate managers a clear-cut ownership stake in the strategy they subse"uently must implement enhances commitment to successful e!ecution. &nd, when subordinates have

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had a hand in proposing their part of the overall strategy, they can be held accountable for making it work + the CI told you it was a bad ideaD alibi won%t fly. $he Champion Approach + In this style of presiding over strategy formulation, the manager is interested neither in a big personal stake in the details of strategy nor in the time-consuming tedium of leading others through participative brainstorming or a collaborative Cgroup wisdomD e!ercise. 6ather, the idea is to encourage subordinate managers to develop, champion, and implement sound strategies. 5ere strategy moves upward from the CdoersD and the Cfast-trackers.D (!ecutives serve as judges, evaluating the strategy proposals reaching their desks. This approach is especially well-suited for large diversified corporations where it is impossible for the C($ to be on top of all the strategic and operating problems facing each of many business divisions. Therefore, if the C($ is to e!ploit the fact that many people in the enterprise can see strategic opportunities that he cannot, then he must give up some control over strategic direction in order to foster strategic opportunities and new strategy proposals put forth by a champion who believe in the opportChaptery and badly wants the blessing to go after it. -ith this approach, the total CstrategyD is strongly influenced by the sum of the championed initiatives that get approved. These four basic managerial approaches to forming a strategy illuminate several aspects about how strategy emerges. In situations where the manager-in-charge personally functions as the chief architect of strategy, the choice of what strategic course to steer is often influenced by his*her own vision of how to position the enterprise and by the manager%s ambitions, values, business philosophies, and sense of what moves to make ne!t. The primary weakness of the master strategist approach is that the calibre of the strategy depends so heavily on the strategy-making skills of the individual functioning as strategy commander. 5ighly centralized strategy-making can work fine when the manager-in-charge has a powerful, insightful vision of what needs to be done and how to do it. ut it can break down in a large, comple! organization where many strategic initiatives are needed and the C($%s grasp of the situation is stretched thinly over many issues and problems. $n the other hand, when the manager-in-charge delegates much of the strategy-making task to others, the resulting strategy seldom bears his*her personal stamps. $ften, the strategy that emerges is shaped by influential subordinates, by powerful functional departments, or by political coalitions that have a strong interest in promoting their particular version of what the strategy ought to be. C.oliticsD and the e!ercise of power are most likely to come into play in situations where there is no strong consensus on what strategy to adopt? this opens the door for apolitical solution to emerge. The collaborative approach is conducive to political strategy formation as well, since powerful departments and individuals have ample opportChaptery to build a consensus for their favoured strategic approach. 5owever, the big danger of a delegate-it-to-others approach is a serious lack of top-down direction and strategic leadership. The strength of the champion approach is also its weakness. The value of championing is that it encourages innovative ideas to bubble up from below. Individuals with attractive strategic proposals are given room and resources to try them out. #uch an approach helps

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keep strategy fresh and renews an organization%s capacity for innovation. $n the other hand, the championed actions, because they come from many places in the organization, may lack coordinating and form no coherent pattern. & manager must work conscientiously to ensure that what is championed adds power to the overall organization strategy? otherwise, strategic initiatives may be launched in directions that have no integrating links or overarching rationale. The value of top-down strategy-making is to add cohesion and Chaptery to the strategy-making necessarily done in the lower echelons of the organization. 6EY POINTS 'anagement%s direction-setting task involves developing a mission, setting objectives, and forming a strategy. (arly on in the direction-setting process, managers need to form a vision of where to lead the organization and to answer C-hat is our business and what will it beJD & well-conceived mission statement helps channel organizational efforts along the course management has charted and contributes to a strong sense of organizational identity. (ffective visions are clear, challenging, and inspiring? they prepare a firm for the future and they make sense in the marketplace. Their role is to produce employee Cbuy-inD and to serve as a beacon of long-term direction. The second direction-setting step is to establish short-range and long-range objectives for the organization to achieve. $bjectives translate the mission statement into specific performance targets. The agreed-on objectives need to be challenging but achievable, and they need to spell out precisely how much by when. In other words, objectives should be measurable and should involve deadlines for achievement. $bjectives are needed at all organizational levels. The third direction-setting step entails forming strategies to achieve the objectives set in each area of the organization. & corporate strategy is needed to achieve corporate-level objectives? business strategies are needed to achieve business-Chapter performance objectives? functional strategies are needed to achieve the objectives set in each operating and geographic Chapter. Strate % !& &'a0e1 -% -*t' *4t&!1e a#1 !#&!1e "*#&!1erat!*#&. The major e!ternal considerations are societal, political regulatory, and commChaptery factors? industry attractiveness? and the company%s market opportunities and threats. The primary internal considerations are company strengths, weaknesses, and competitive capabilities? managers% personal ambitions, philosophies, and ethics? and the company%s culture and shared values. & good strategy must be well matched to all these situational considerations. There are essentially four basic ways to manage the strategy formation process in an organization) the master strategist approach where the manager-in-charge personally functions as the chief architect of strategy, the delegate-it-to-others approach, the collaborative approach, and the champion approach. &ll four have strengths and weaknesses. &ll four can succeed or fail depending on how well the approach is managed and depending on the strategy-making skills and judgments of the individuals involved. Crafting a strategy is an analysis-driven e!ercise, not an activity where managers can succeed by sheet effort and creativity. Eudgments about what strategy to pursue ideally need to be grounded in a probing assessment of a company%s e!ternal

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environment and internal situation. 1nless a company%s strategy ends up being well matched to the full range of e!ternal and internal situational consideration, its suitability is suspect. THE ROLE OF SITUATION ANALYSIS IN STRATEGY5MA6ING -hile the phrase situation analysis tends to conjure up images of collecting reams of information and sorting through descriptive facts and figures, such a concept doesn%t fit here at all. 2rom a strategy-making standpoint, the purpose of situation analysis is to draw out the features in a company#s internal(e)ternal environment that most directly frame its window of strategic options and opportunities The effort concentrates on generating solid answers to a well-defined set of strategic "uestions, then using these answers first to form a more understandable picture of the company%s strategic situation and second to identify strategic action alternatives. In studying the methods of strategic situation analysis, it is customary to begin with single-business companies instead of diversified enterprises. This is because strategic analysis of diversified companies draws on many of the concepts and techni"ues used in evaluating the strategic situations of single-business companies. In business-level strategic analysis, the two biggest situational considerations are /=0 industry and competitive conditions /these are the heart of a single-business company%s Ce!ternal environmentD0 and /,0 a company%s own internal situation and competitive position. ..2 UNDERSTANDING THE NATURE OF THE ENVIRONMENT &nalysis of the environment is a key part of strategic planning. In fact the formulation of strategy involves a process of matching the capabilities of an organisation with its environment. 5owever, the process of environmental analysis encompasses a number of steps or aspects of analysis. 2or e!ample we must first identify what are the key environmental influences which will form the analysis. #imilarly we must also identify the key elements of the competitive environment, and the nature of e!isting and potential competition. 2inally, and most importantly, as an output of the environmental analysis, we must identify key environmental opportunities and threats in order to develop strategic objectives and plans. $ne of the most important aspects of environmental analysis is the assessment of the nature of the environment together with an understanding of the implications of how this nature affects strategic management. -hen we refer to the nature of the environment in strategic management we are essentially referring to the degree of uncertainty present in the environment. (nvironments differ with respect to the level of uncertainty found which in turn has implications for how we manage that uncertainty. -e can distinguish between three different types of environment with respect to the level of uncertainty. These are outlined and discussed below together with the key implications of the nature of each environment for strategic planning. +a, T'e &!/0$e:&tat!" e#3!r*#/e#t

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&s the term implies, in this type of environment there is comparatively little major change and in addition the environmental forces and factors are relatively easy to understand and to cope with by organisations faced with this sort of environment. ecause of this, this environment is characterized by relatively low levels of uncertainty because it is both simple and static? what few changes do occur are relatively easy to predict and therefore plan for. 2or e!ample, technology may be relatively slow changing. Competitive forces may be un-dynamic and easy to identify and understand. &t one time, many organisations operated in simple*static environments where environmental stability rather than change was the order of the day. In such an environment it is relatively easy to predict future developments from the analysis of past environmental trends. In recent years, however, we have seen fewer and fewer e!amples of the simple*static environment and because of this, many managers in the past unused to rapid environmental change, have found themselves and their companies surprised and adversely affected by une!pected or unpredicted change. +-, T'e 1%#a/!" e#3!r*#/e#t &gain as the term implies a dynamic environment is one which is characterised by major and often rapid change. Increasingly this is now the sort of environment faced by many organisations. 2or e!ample, technology changes very rapidly in many industries? political and economic changes may take place literally overnight, and many organisations find themselves faced with very dynamic competitors both at home and increasingly on a global basis. In the dynamic environment, managers find they can no longer rely on the past to make future decisions. In such an environment this means that the manager must make every effort to identify possibly new developments and future changes and because of this will need to rely on methods of forecasting the future which are not as reliant on the past. (!amples of such forecasting methods include for instance :elphi techni"ue and #cenario &nalysis. ased on these scenarios it is then possible to develop different strategies for different possible eventualities in the future and to monitor environmental changes in order to be in a position to assess which of the possible scenarios are likely to materialize and therefore which strategies are most appropriate. In the absence of such formal planning methods, the manager in a dynamic environment is reliant upon 7sensitivity% and a 7feel% for environmental trends. Clearly there are great dangers in relying upon such intuitive methods. #imilarly, however, if scenario analyses and futures forecasting are used it is important to remember that these are possibilities rather than actual events until that is of course they actually do occur. ecause of this, in the dynamic environment it is important to build fle!ible strategies and a range of possible responses as environmental events materialise. +", T'e "*/0$e( e#3!r*#/e#t The comple! environment results from the sheer diversity of environmental influences on the organisation. 2or e!ample, a company operating in international markets is faced with a potentially comple! environment due simply to the number of factors in the environment which may affect the organisation. #imilarly many

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organisations in the public sector face comple! environments again because of the range of forces and factors which affect them. It is possible of course that an organisation facing a comple! environment may also face dynamic conditions. The organization faced with a comple! environment obviously faces a more difficult task in analysing and assessing its environment. ecause of this, it is important to make sure that the organisation is managed in such a way as to facilitate a comple! analysis. 2or e!ample it may re"uire specialist knowledge in order to assess and make sense of the environment and therefore specialists may be assigned to assessing the relevant part of the environment such as technological, political, economic and so on. 5owever, it is also important to recognise that the comple! environment may come about as a result of comple! interactions between the various elements in the environment and therefore it is important that the specialist knowledge is pooled so that these interactions can be assessed. In the comple! environment, very often the planner may make use of sophisticated information processing and forecasting models which are based on sophisticated techni"ues such as model-building and simulation. It is also important to have a fle!ible organisational structure and suitable control systems to deal with comple! environments. In conclusion, it is important to recognise that environments differ in terms of their dynamism and comple!ity and that these differences must be reflected in the types of environmental analysis, the tools of forecasting, and the systems of organising and control in an organisation. ... STRUCTURAL ANALYSIS OF COMPETITIVE ENVIRONMENT Industries differ widely in their economic characteristics, competitive situations, and future outlooks. The pace of technological change can range from fast to slow. Capital re"uirements can be big or small. The market can be worldwide or local. #ellers% products can be standardized or highly differentiated. Competitive forces can be strong or weak and can centre on price or on any of several non price variables. uyer demand can be rising briskly or declining. Industry conditions differ so much that leading companies in unattractive industries are hard-pressed to earn respectable profits, while even weak companies in attractive industries can turn in good performances.

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F! 4re .51 FROM SITUATION ANALYSIS TO STRATEGIC CHOICES

INDUSTRY AND COMPETITIVE Identify the chief economic characteristics of the industry environment Identify*assess driving forces (valuate the strength of competition &ssess the COMPANY SITUATION competitive ANALYSIS positions of &nalytical steps) in the companies industry. :etermine how well the present strategy .redict who will is working /is likely make what current performance competitive moves goodJ0 ne!t :o a #-$T analysis /strengths , weaknesses, opportunities, threats0 &ssess the company%s relative competitive strength.

IDENTIFY:EVAL UATE THE COMPANY?S Ney issues -hat realistic choices*opt ions does the company have - Locked into making improvements in same basic strategy. - 6oom to make major strategy changes 5ow best to try to build a sustainable competitive advantage.

FORM A STRATEGY :ecision criteria) 5as good fit with the overall situation. 5elps build competitive advantage Contributes to higher company performance

Industry and competitive analysis utilizes a toolkit of concepts and techni"ues to get a clear fi! on changing industry conditions and on the nature and strength of competitive forces. It is a way of thinking strategically about an industry%s overall situation and drawing conclusions about whether the industry is an attractive investment for company funds.

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The framework of industry and competitive analysis hangs on seven key "uestions) =. -hat are the chief economic characteristics of the industryJ ,. -hat are the drivers of change in the industry and what impact will they have. 8. -hat competitive forces are at work in the industry and how strong are theyJ ;. -hich companies are in the strongest*weakest competitive positionsJ >. -ho will likely make what competitive moves ne!tJ B. -hat key factors will determine competitive success or failureJ G. 5ow attractive is the industry in terms of its prospects for above-average profitabilityJ A. -ith #olid answers to these "uestions, a business strategist can deduce what the company%s most realistic strategic options are and form a strategy well matched to changing industry conditions and to competitive forces. Let%s turn now to the steps of industry and competitive analysis to e!amine e!actly what is involved and the analytical tools that come into play. Pr*9!$!# t'e I#14&tr%?& D*/!#a#t E"*#*/!" C'ara"ter!&t!"& ecause industries differ so significantly in their basic character and structure, industry and competitive analysis begins with an overview of the industry%s dominant economic traits. &s a working definition, we use the word industry to mean a group of firms whose products have so many of the same attributes that they compete for the same buyers. The factors to consider in pinpointing the industry%s primary economic features are fairly standard) 'arket size #cope of competitive rivalry /local, regional, national, or global0. 'arket growth rate and where the industry is in the growth cycle /early development, rapid growth and takeoff, early maturity, late maturity and saturation, stagnant and aging, decline and decay0. <umber of rivals and their relative sizes + is the industry fragmented with many small companies or concentrated and dominated by a few large companiesJ The number of buyers and their relative sizes. The prevalence of backward and forward integration. (ase of entry and e!it. The pace of technological change in both production process innovation and new product introductions. -hether the product/s0*services/s0 of rival firms are highly differentiated, weakly differentiated, or essentially identical. The e!tent to which economies of scale are present in manufacturing, transportation, or mass marketing. -hether high rates of capacity utilization are crucial to achieving low-cost production efficiency.

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 -hether the industry has a strong learning and e!perience curve such that average Chapter cost declines as cumulative output /and thus the e!perience of Clearning by doingD0 builds up. Capital re"uirements. -hether industry profitability is above*below par.

Table 8-= illustrates a profile of an industry%s chief economic characteristics. &n industry%s economic characteristics are important because of the implications they have for strategy. 2or e!ample, when an industry entails heavy capital investment in plant and e"uipment, a firm can ease the resulting burden of high investment in plant and e"uipment, a firm can ease the resulting burden of high fi!ed costs by pursuing a strategy that promotes high utilization of fi!ed assets and generates more revenue per dollar of fi!ed-asset investment. Thus commercial airlines employ strategies to boost the revenue productivity of their e!pensive jet aircraft fleets by cutting ground time at airport gates /to get in more flights per day with the same plane0 and by discounting fares to fill up otherwise empty seats on each flight. In consumer goods industries like beer, fast foods, tires, and home appliances, where sizable scale economies accrue from building e!tensive dealer networks and using national advertising to pull products through the inplace dealer channels, company strategies aim at gaining good distribution access and trying to capture a market share big enough to support spending tens of millions of dollars annually on advertising. ..7 IDENTIFYING THE ORGANISATION?S COMPETITIVE POSITION It is recognised that a key factor affecting the choice of appropriate strategies is an organisation%s competitive position with regard to its relative market share. 2our categories of competitive position, together with the strategies most appropriate to each, are outlined and discussed below. +a, Mar2et $ea1er In most markets there is usually one organisation that leads in terms of market share. $ften this market leader effectively determines the nature and pace of competition in the market, including factors such as pricing levels, promotional spends, and rates of innovation, etc. ecause market leadership is usually the most profitable position in an industry, market leaders usually wish to retain their leadership position whilst other companies, or at least some of them, are constantly trying to become market leaders themselves. The main alternative strategies, which are not mutually e!clusive available to the market leader, are as follows) 2irstly, the market leader can pursue a strategy of e!panding the total market, say by creating new uses, new users, or more fre"uent usage. 'arket leaders usually benefit most from an e!panding market. & good e!ample is Eohnson and Eohnson who have found new users and new uses for many of their baby care products.

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#econdly, the market leader can seek to defend the e!isting position against challengers. (ffective ways of achieving this are through continuous innovation such as that practised by the #ony Corporation. &nother effective way is to ensure high levels of customer satisfaction through high service levels as in, for e!ample, the &vis car hire company. In this way the market leader can make it difficult for challengers to find any weaknesses. +-, Mar2et "'a$$e# er& 'arket challengers by definition have smaller market shares than the leader but are those companies who are close enough to pose a serious threat to the leader. The advantages already outlined which accrue to the market leader in terms of profitability act as the incentive for market challengers to attempt to grow their market shares. There are several strategies available to market challengers, principally with regard to who they decide to challenge. 2irstly, the challenger can attack the market leader. Nomatsu pursued this strategy against Caterpillar in the heavy machinery market. &ttacking leaders, however, is never easy and in fact is high risk. Leaders will usually retaliate through e.g. price cutting or heavy promotion. Challengers therefore need clear and sustainable competitive advantages to attack market leaders. #econdly market challengers can attack other challengers of a similar size. 5ere the challenger is much more likely to succeed through e.g. price competition. &gain, though, care should be taken with this strategy and the challenger should focus on areas where fellow challengers have major weaknesses such as, for e!ample, in their product range, "uality levels, distribution and so on. 2inally, the market challenger can increase market share by attacking much smaller companies and effectively buying the market share e.g. through ac"uisition. This can be a costly strategy but in some ways is much less risky than attacking market leaders or even other market challengers. +", Mar2et 9*$$*@er& &s the term implies, these are companies who do not challenge for market position in terms of trying to increase market share. This may be because, for e!ample, they lack the necessary resources to mount a serious challenge or "uite simply because they wish to avoid direct confrontation and competition. #ometimes the market follower will literally follow the market leader by, for e!ample, copying their products, advertising, distribution channels and so on. 2ollower strategies can be surprisingly successful in as much as they involve less risk and are less costly to pursue than, say, challenger strategies. 'arket followers must therefore be careful to ensure that they do not have any major weaknesses and that they are relatively cost-competitive.

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+1, Mar2et #!"'er& These are companies that, like market followers, do not have the resources to challenge for market leadership. ut unlike market followers, the market nicher deliberately seeks to avoid competition by identifying small market segments /niches0 where they can compete effectively through specialisation and where the larger companies are unwilling to enter because the markets are too small or specialised. (ssentially, then, market niching is for the small company. The key to successful niching is finding markets which are unattractive to larger companies and where the company has certain capabilities which match the needs of the market. 'arket niching can be based on product type, customer group or geographic area or a combination of these. (!amples of effective market nichers include The #ock #hop and ang R $lufsen, who both serve the needs of specialist niche markets. The main danger for market nichers is if a market leader or market challenger decides to enter the market or where the niche starts to disappear due to innovation and market change. In conclusion, then, there is no doubt that a company%s competitive position with regard to its relative market share is indeed a major determinant of strategic options and choice. ..8 S=OT ANALYSIS #-$T analysis can be a very useful way of summarising many of the previous analyses and combining them with key issues from environmental analysis. The aim is to identify the e!tent to which the current strategy of an organisation and its more specific strengths and weaknesses are relevant to, and capable of dealing with, the changes taking place in the business environment. #-$T stands for strengths, weaknesses, opportunities and thrests, but rather than just listing these in terms of managers% perception, the idea is to undertake a more structured analysis so as to yield findings which can contribute to the formulation of strategy. &lthough what follows is somewhat crude as an analytical device, it has proved in practical application to be a helpful means of achieving these aims. The procedure can be undertaken in a number of steps. Identify the current or prevailing strategy or strategies that the organisation is following. This is not necessarily the strategy as advocated or published, but the realised strategy of the organisation. This in itself might be problematic, since managers do to not always agree on the strategy they are following + so this debate is often very important. Identify the key changes in the organisation%s environment. -hile there is no fi!ed number which should be agreed upon, it is helpful if the list does not e!ceed seven or eight points. The same process should then be undertaken in terms of the resource profile of the organisation, and key limitations /weaknesses0 of the organisation. It is useful to keep the total list to no more than eight points. It is important to avoid over generalising this analysis and to keep to "uite specific points) a

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statement such as 7poor management% means very little, for e!ample and could be interpreted in any number of ways. If it means that senior managers have, historically, not been good at motivating change in the organisation, then that is a more specific and more useful point. (ffective strategic management re"uires the matching of a company%s capabilities with its environment. In particular, these capabilities must be matched against the key opportunities and threats which the organisation is likely to face in the future. & key step in strategic planning therefore is the analysis of the organisational environment so as to take account of organisational trends and changes in developing future strategies and plans. In order to understand this, we first need to be aware of what is meant by the term 7e!ternal environment%. The e!ternal environment of a company includes all those factors outside of the organisation%s boundaries over which it has little, or no, control. In broad terms, it is possible to classify the major environmental factors into, on the one hand the 7'acro% environmental factors, and on the other hand, the 7'icro% environmental factors. (ach of these categories of environmental factors are outlined and discussed below in the conte!t of their implications for identifying key opportunities and threats in the process of developing meaningful future strategies. +a, Ma"r* e#3!r*#/e#ta$ 9a"t*r& The major factors in this category comprise those environmental elements which are broad in nature and which are almost totally outside of the influence of the individual organisation. Conventionally these factors are often referred to as the #T((. factors. (ach of these is considered below. S*"!a$ 9a"t*r& + These factors include, for e!ample, lifestyle, demographics, trends and changes in cultural factors and so on. #o, for e!ample, in the Chaptered Ningdom there have been significant changes in the patterns of family life over the past decade. The traditional two-parent family with dependent children has become a minority group with an increasing number of cohabiting couples without children. Te"'#*$* !"a$ 9a"t*r& + These factors, too, change dramatically. Technology includes, for e!ample, the technology of work, i.e. how products are produced? technology of leisure such as for e!ample, access to cable television, computers etc? technologies of consumption, such as for e!ample how we shop + spend our money etc? technological trends and changes are amongst some of the most significant changes in the macro environment. E"*#*/!" 9a"t*r& + These encompass for e!ample interest rates, levels of disposable income, imports and e!ports etc. (conomic factors are clearly very much interrelated with political factors. E#3!r*#/e#ta$ 9a"t*r& + 5ere 7environmental% refers to those factors concerned with, for e!ample, resource usage and depletion, pollution, and other 7green% issues. Concern for the environment has been a major issue in recent years and as a conse"uence, these factors are now sufficiently important to constitute an additional set of factors when considering the macro environmental in general. 8A

P*$!t!"a$ 9a"t*r& + These factors encompass areas such as legislation, political policies regarding e.g. the control of the money supply, attitudes towards trade unions and so on. Clearly, political factors are determined primarily by the nature of the ruling government of the day and they tend to be closely inter-related to other facets of the macro environment outlined here. &s already indicated, trends and changes in these #T((. factors of the macro environment give rise to some of the most significant opportunities and threats facing an organisation. It is vital therefore to identify, monitor, predict, and evaluate, trends and changes in these factors with regard to their potential impact on the organisation. In particular, the strategic planner needs to assess the e!tent to which trends and changes in these factors will give rise to company opportunities and threats and, on the basis of this, to develop plans and strategies which ma!imise opportunities and minimise threats. /b0 M!"r* E#3!r*#/e#ta$ 9a"t*r& The 'icro (nvironmental factors comprise those factors which, although still outside the company%s boundaries, the company may have some degree of control over. These factors are also often referred to as the 7task% environmental factors. The major constituents of this environment are as follows) C4&t*/er& + Customers are one of the most important micro environmental factors. &s with all the environmental factors we are most concerned with trends and changes, so for e!ample, we can appreciate the significance of customers to the strategic planner if, for e!ample, customers% tastes change in favour of, say, a competing product. Changes in customer needs, attitudes, and behaviour all need to be carefully assessed by the strategic planner. C*/0et!t*r& + 'ost firms have to compete either with other firms within the industry or with substitute products or services. &ssessing competitors, therefore, is a key part of analysing the environment. -e must for e!ample identify who our competitors are, their relative strengths and weaknesses, their objectives and strategies and how they might respond to any of our initiatives in the market-place. D!&tr!-4t*r&:C'a##e$& + 'ost companies use some form of distribution to get their goods and services to the final consumer. This can include, for e!ample, retailers, wholesalers, agents, and so on. Trends and changes in distribution channels can give rise to major opportunities and threats. #o, for e!ample, some of the major grocery retailers in the Chaptered Ningdom are now so powerful that they can demand the supply of 7own label brands% from even the largest manufacturers and suppliers. S400$!er& + &t the other end of the supply chain, suppliers too are an important part of a company%s micro environment. #o, for e!ample, if a company loses a major supplier it may struggle to survive in the competitive market place unless it can replace this supplier "uickly. &s already indicated, just as with the macro environmental factors, trends and changes in any of these micro factors can give rise to significant opportunities and threats. It is just

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as important, therefore, to identify, monitor, predict, and evaluate, trends and changes in these factors with regard to their potential impact on the organisation. (nvironmental scanning and appraisal should be systematic and continuous. The strategic planner needs to identify the key factors in the environment which are critical to the future of the company. This process needs to also identify and assess interactions between the environmental factors, though this obviously can become comple!. $f particular importance is evaluating how and why changes in the environmental factors will affect strategic management of the organisation so that effective future plans can be developed in order to capitalise on the opportunities and minimise on the threats.

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CHAPTER 4.0 ANALYSING RESOURCES OBJECTIVE: &t the end of this Chapter you should be able to) understanding the Qalue Chain as a concept and as tool in the hands of management to optimise resources. This Chapter also introduces for your understanding and appreciation financial analysis via ratios and the identification of key issues. The concept of critical success factors will be discussed as well to make you understand its value in business. 7.1 VALUE5CHAIN ANALYSIS & key step in developing corporate strategies is the analysis of a company%s strengths and weaknesses through an internal resource audit of the company. #uch a resource audit is aimed at identifying and classifying the key resources of the organisation which can be used to underpin its competitive strategies. 'ichael .orter developed the 7Qalue Chain Concept% as a way of approaching this analysis of strengths and weaknesses. .orter suggested that in any organisation there are a number of key activities which can be assessed from the point of view of how they contribute to adding value to customers. The notion of value chain analysis is based on identifying those key value activities which are strategically important and around which the organisation%s competitive advantage might be built. .orter identified nine possible separate value activities in a company which together comprise a chain of adding value to products by a company and its suppliers and distributors in the marketplace. These nine activities are divided into five 7primary activities% and four 7support activities% as follows. The five primary activities are) S Inbound logistics This activity involves the movement of goods and materials etc into the business and can therefore include the activities of suppliers to the company. S $perations These activities involve the processes involved in transforming goods and materials entering the business into finished products for market. S $utbound logistics These are all those activities involved in getting products out to customers, including for e!ample) warehousing, delivery etc. These activities can involve distributors. S 'arketing and #ales

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$bviously, these are the activities involved in actually marketing and selling the products and services. S #ervice &ll those activities involved in looking after customers including e.g. technical services, customer en"uiry services etc. The four support activities are those which to varying degrees serve to facilitate the five primary activities outlined. These four activities are) S .rocurement S Technology development S 5uman resource management S Company infrastructure Taking each of these nine activities, the planner can analyse them with a view to identifying those elements of these activities that give rise to actual or potential customer value, where the company is actually or potentially strategically distinct in these elements and therefore on which a competitive advantage may be built. #o for e!ample if we take the primary activity of service, the company may find that the speed at which the company deals with customer "ueries on technical problems is on average =FM faster than the major competitor. $bviously this is a potential competitive advantage. &lternatively it might be found that although service speed is similar to that of competitors, the company%s costs in the service area are some ,FM lower than competitors. This too could be translated into a competitive advantage in the form of, say, lower prices. In fact any element of the value chain activities can potentially be used to create value for customers. Qalue, however, needs to be considered against the cost of its creation. The goal of any competitive strategy is to create value that is greater than the cost of its creation, the difference between the two being margin. It should also be noted that it is the total value of all the activities in the value chain that should be considered and compared to total costs. This simple e!ample illustrates the idea of value chain analysis in as much as it looks at the resource audit of a company%s strengths and weaknesses by e!amining key activities and then comparing them to customer needs and competitors% resource profiles with a view to developing a competitive advantage. <eedless to say value chain analysis is a little more comple! than suggested here. 2or e!ample, competitive advantage often derives from the links between the activities in the chain which are more difficult to imitate by competitors. #imilarly, as suggested earlier, the analysis should spread outside the company to include the value chains of suppliers and distributors. 2inally, it is important to remember that value chain analysis must be based on the customers% perception of value and therefore the customers% needs and wants. 2or e!ample, a company which, through its value chain activities, could offer improved speed of delivery may find that this is not a source of competitive advantage because customers do not re"uire improved speed of delivery and certainly will not pay for it.

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There is little doubt that value chain analysis represents a powerful tool in conducting a resource audit in the organisation by allowing a comprehensive and systematic analysis of a company%s value activities in order to e!plore routes to competitive advantage.

Diagram: Va!"# C$ai% A%a!&'i' T 5irm infra tracture 6uman re ource management 7ec-nology de(elopment !rocurement
Inbound logi tic 8peration 8utbound logi tic Marketing and ale Ser(ice

ource- %+E+ Porter, )ompetitive Advantage- )reating and sustaining uperior Performance, Free Press 1234+

7.2 COMPARATIVE ANALYSIS (ach corporation has its own internal value chain of activities. .orter proposes that a manufacturing firm%s primary activities usually begin with inbound logistics /raw materials handling and warehousing0, go through an operation process in which a product is manufactured, and continue on to outbound logistics /warehousing and distribution0, marketing and sales, and finally to service /installation, repair, and sales of parts0. #everal support activities, such as procurement /purchasing0 technology development /6R:0, human resources management, and firm infrastructure /accounting, finance, strategic planning0, ensure that the primary value-chain activities operate effectively and efficiently. (ach of an organisation%s product lines has its own distinctive value chain because most corporations make several different value-chains. The systematic e!amination of individual value activities can lead to a better understanding of an organisation%s strengths and weaknesses. &ccording to .orter, Cdifferences among competitor value chains are a key source of competitive advantageD. Corporate value chain analysis involves the following. Ste0&

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=. (!amine each product line%s value chain in terms of the various activities involved in producing that product or service and then determine which activities can be considered strengths or weaknesses. ,. (!amine the ClinkagesD within each product lines value chain. LI<N&4(# are connections between the way on value chain activity /for e!ample marketing0 is performed and the cost of performance of another activity /for e!ample, "uality control0. In seeking ways of for an organisation to gain competitive advantage in the market place, the same function can be performed in different ways with different results. 8. (!amine the potential synergies among the value chains of different product lines or business Chapters. (ach value element, such as advertising or manufacturing has an inherent economy of scale in which activities are conducted at their lowest possible cost per Chapter of output. If a particular product is not being produced at a high enough level to reach economies of scale in distribution, another product could be used to share the same distribution channel. This is an e!ample of economies of scope, which result when the value chains of two separate products or services share activities such as the same marketing channels or manufacturing facilities. 2or e!ample, the cost of joint production of multiple products can be less than the cost of separate production. &s already argued above students must always remember that diagnosing a companies strengths and weaknesses is often easier when you adopt a disaggregated view of the firm. $xamining the firm across distinct functional areas) as suggested a/o(e is one 0a% to disaggregate the firm for purpose of internal anal%sis! The value chain approach must therefore be understood as a disaggregated approach. The value chain as discussed earlier disaggregates a firm into strategically important activities in order to understand the cost structure of the company and the e!isting and potential sources of differentiation. & firm or company gains competitive advantage by performing these strategically important activities at a lower cost or better than its competitors. The strategic important activities are sometimes referred to as +e% internal factors! This method is useful to all organisations because every firm or company can be viewed or disaggregated as a collection of value activities that are performed to design, produce, market, deliver, and support its product. &s portrayed in the steps discussed earlier, these activities can be grouped into nine basic categories for virtually any organisation at the business Chapter level.

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E(er"!&e 1sing any organisation with which you are familiar as a basis, carry out a value chain analysis. &s part of the analysis, evaluate .orters method in terms of its strengths and weaknesses -e now turn our attention to the analysis of the bases on which an organisation%s core competences can be built. There are several contributory aspects which may be considered and the following three constitute some of them)

=. Cost (fficiency, ,. Qalue adding, 8. Linkages between organisational activities. The pursuit of efficiency in organisations goes back a very long way. .robably the best known work in this area is that of 2redrick Taylor /=@,@0 and his derivation of the C.rinciples of #cientific 'anagementD. (fficiency, in very simple terms, is the ratio associated with converting factor inputs into saleable outputs. This is, of course, derived in the conte!t of a business organisation. (ngineers calculate the efficiency of machines in terms of energy losses incurred in transforming for e!ample electrical energy into mechanical energy with respect to an electric motor. (nergy is obtained at a cost and engineers typically also measure the efficiency of machinery in terms of the cost of energy conversion. usiness organisations can be thought of in analogous terms to machines with respect to cost efficiencies through which competitive advantage can be gained. 2actors to take into consideration when calculating cost efficiencies include) =. (conomies of scale, which are associated with the volume of product which can be produced from the productive mechanism. This mechanism can be machinery for a manufacturing organisation, or sales gained from a particular advertising campaign for a service-based organisation? The cost of obtaining the supply of factor inputs. &ny organisation must make serious attempts to obtain factor inputs at prices which enable it to minimise transformation costs. .rice reductions in factor inputs must not however, be at the e!pense of the "uality of those factor inputs, The design of the product and the process of transformation should take into account aspects such as utilisation of capacity, productivity of labour, yield of raw materials and components, the utilisation of working capital.

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8.

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&nalysis of the value-adding capability of an organisation is related to how well the organisation is matching its products*services to the identified needs of its chosen customers and the competencies which underpin this effectiveness. The sources which can contribute to value adding activities are high in variety and include) =0 the matching of customer needs and e!pectation to the product*service of the organisation, ,0 the utility and valency for the products*services in terms of customer perception, 80 the effectiveness of the organisational communication processes with respect of promotional activities prior to sale and support and service functions postsales. $rganisations should also assess their value-adding capability by considering) =. ,. The fact that end users /customers0 may not be in direct line of communication but serviced through intermediaries, Changes in customer values and e!pectations for the product*services being supplied over time.

The competitive advantage to be gained on the basis of value-adding capability is dependant on the competencies possessed by the organisation in terms of customers% rationality and not the rationality of the organisation. #hould organisational managers lose sight of this very important aspects then the organisation is doomed to failure in strategic terms. Therefore development of value-adding competencies must be geared to understanding and satisfying customer needs and e!pectations. &nything less than this will probably no assist managers in developing an appropriate and robust strategic direction for their organisation. $rganisations are traditionally structured around highly differentiated specialised functional Chapters. This is a very logical approach through which efficient use of talent and skills in specialist areas of finance, marketing, engineering and human resources can be utilised by division of labour. The CdownsideD to this approach is that Chapters with separate identities, goals and objectives are created, with the inherent dangers of the dysfunctional conflict associated with the Csilo mentalityD. The challenge for organisations in developing a corporate strategic direction is to overcome the problems of differentiation through integration of the activities of the separate functions in pursuit of common, organisation-wide, goals. It is the management of linkages within the organisation%s value chain and linkages into the supply and distribution chains which provided leverage and level of performance which are difficult to match. Eohnson and #choles /=@@G? =>A0 argue that coordination of the activities of specialist teams may create competitive advantage through improving value for money in the product or service. 6ole and activity specialisation is a common way ;B

of achieving competency of the organisation. 5owever, for the organisation to gain and then maintain competitive advantage these specialist competencies must be integrated in a systematic manner. This integration can be achieved in the following ways, =.inter-departmental co-ordination in terms of primary activities /typically this might take the form of production planning for a sales drive0, ,. .rovision of support for primary activities /for a university this may be student counselling as a support to mainstream academic staff0? 8. Coordination between support activities /this could be the management of manpower planning by personnel to support the recruitment of competent management information staff0. 1p to this point in this Chapter our discussion of linkages between competencies we have concentrated on the internal aspects. -e must also, if we are to maintain our posture of considering the organisation as an adaptive open system, take into account the e!ternal linkages. -e do this in terms of coordination between customers, suppliers and the organisation in "uestion. &gain, this coordination can be achieved in a number of ways that include? =. ,. 8. ;. Qertical integration which is intended to create ownership of more parts of the supply chain system? #pecification of raw materials and component supplies through which to control supplier performance, Total 9uality 'anagement /T9'0 which creates closer working relationships in the supply chain, Collaborative strategic alliances in the form of joint ventures. &t this stage in this Chapter our consideration will now be the issue of strategic capability. It is this to which we shall now turn our attention as it is at this stage of the analysis that a sensible assessment can be made of the strengths and weakness of an organisation in terms of their strategic importance. 7.. IDENTIICATION OF 6EY ISSUES S=OT A#a$%&!& Carrying out a #-$T analysis at this stage can be regarded as an integrating mechanism that will assist in summarising many of the previous analysis and combining them with the key issues from environmental analysis. & fundamental aim must be to establish how the strengths and weaknesses of an organisation%s current strategy possess relevance with respect to the opportunities and threats facing it. This #-$T analysis will assist in developing an appropriate reference scenario on which an organisation can design an ideal future. #uch a #-$T analysis must link the key strengths and weaknesses to the key environmental issues that face the organisation. Eohnson and #choles, /=@@G0 provide a process

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for carrying out this analysis. In this process they include in their list of key strengths and weaknesses) =. Innovative capacity /s0, ,. (mployee commitment /s0, 8. Eoint working arrangements with customers and suppliers /s0? ;. Lack of output measures /w0? >. Low financial growth /w0 . /&dapted from Eohnson and #choles, =@@G? =G;0. Included in the environmental issues which must be linked to the key strengths and weakness are) =. political activity, ,. legislation, 8. technology developments, ;. demographic trends? >. consumer e!pectations and needs? B. competitors and suppliers. /&dapted from Eohnson and #choles, =@@G? =G;0. F!#a#"!a$ A#a$%&!& $ne of the most difficult things to do is to predict the outcome of a future event with certainty. &ll financial and business decisions are however, based on future e!pectations and as such can only be proved to be right or wrong afterwards. <ot every decision can be right as no person can consistently make predictions which are correct. To keep the margin of error as low as possible, it is necessary to seek methods to increase the accuracy of decision making. &ll such methods re"uire a thorough knowledge of factors which can influence the outcome of a future event in order to take these factors into consideration during the decision making process. 6atio analysis is one way that ensures the outcome of future event is predicted with some measure of certainty. The best way to analyse financial statements is to identify ratios pertaining to each critical success factor so that each factor is analysed in detail and in isolation. $nce all the ratios have been calculated and analysed in this way, the whole picture can be considered i.e. compare all the rations with each other to give a general analysis of the business. 6emember that a ratio in isolation is meaningless. -e need to e!amine the trend of the ratios over as many years as possible. &lthough useful comparisons can be made between the data in financial statements of two consecutive years, trends can be discovered only if financial statements covering more than two years are compared. 2luctuations from one year to the ne!t may be e!ceptional and may erroneously create the impression of a long term trend. The ratios which are most fre"uently used and which will assist in making informed decisions are) =. Li"uidity + the ability to meet debts as and when they fall due. ,. 2inancial Leverage + the e!tent of the surplus and the risk profile of the

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business, 8. &ctivity +the management of assets and the utilisation of these assets in the production of turnover, ;. .rofitability-the ability of a business to earn profits over a period of time, >. 'arket Qalue-the management of risk factor associated with market value in the business e.g. dividend yield. Cr!t!"a$ S4""e&& Fa"t*r& +CSF, &n organisation needs core competences to support specific strategies. 'any organisations find the idea of C#2s a useful way of reflecting on strategic messages which should come out of resource analysis. /Eohnson and #choles, =@@G? =GB0 .C#2 are associated with underpinning the strategic direction of an organisation, they are those aspects of strategy in which an organisation must e!cel to outperform the competition. 2or e!ample, if the C#2 "uality design is associated with competitive edge in the market place, then core competencies in creativity, design technology and customer facing activities will be e!pected to underpin that C#2. 'anagers need to be aware that C#2s, and therefore the linked core competencies, are very likely to change over time. Therefore any effective C#2 analysis underlies this important relationship between resources competencies and strategic choice.

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CHAPTER 5.0

EXPECTATIONS, OBJECTIVES AND POWER

OBJECTIVE: &t the end of this Chapter you should be able to) understand that general influences on individuals and groups, and coalitions are an integral part of power and culture in an organisation. 3ou must understand that organisational culture will help the employees to make sense of their surroundings and bind them together as group through shared e!periences. This Chapter will also help you appreciate the significance of social responsibility as a function in management. 8.1 GENERAL INFLUENCES ON INDIVIDUALS AND GROUPS The preceding chapters on internal and e!ternal analysis have all offered what at first glance appear to be objective, value free methods for generating and evaluating strategic options. 5owever, it would be naUve to assume that managers are any more rational or objective in their decision making than anybody else. There interpretation of information is coloured buy their individual ways of viewing and making sense of the world around them. These world views derive from the national culture of the country in which they were brought up, their family%s value, peer group pressures, and so on. These are the value systems, beliefs and decision-making techni"ues that the individual employees bring with them into the work place. In addition, an organisation becomes like a little world of its own, a commChaptery which develops its own rules and regulations, its own hierarchies and folktales. In short, it develops its own distinctive culture. This organisational culture will help the employees to make sense of their surroundings and to bind them together as a group through shared e!periences. It is present in all organisations and can be both a help and a hindrance. & strong culture can make a company more cohesive and ease implementation of strategic decisions, but it can also >F

serve to blind management to the need for change. <ew threats may not be noticed, new opportunities may be ignored and the firm can e!perience strategic drift whereby it moves further and further out of alignment with its environment. Culture is unconsciously used to filter information presented and gathered. It can distort that information by encouraging management to interpret the data in a way that is familiar but incorrect. Culture will have this effect if the information seems to challenge the basic assumptions held by the organisation. These assumptions can be related to the nature of the environment or of competitors, to customers% needs and so on. 2or e!ample, certain sections of the #wiss watch-making industry continued to make mechanical watches even though they could not compete with the Eapanese electronics firms who were massproducing "uartz watches. The #wiss watch industry was fragmented and had a culture that took pride in craftsmanship and mechanical skills. It is, therefore, important for a company to be aware of the strength of its culture and the beliefs underpinning it in order to ensure that warning signals are not missed, or misinterpreted. .ower, on the other hand, is related to the ability to achieve something which is desired by the actor/s0. The culture of the organisation serves to legitimise and sustain the current distribution of power. #ome individuals, groups, functions and divisions will have more power than others in the organisation and this distribution may bear only a passing resemblance to the formal organisation hierarchy. .ower, however, is a very important factor in the decision making of all organisations. &s strategy is not even likely to be considered, never mind adopted or implemented, unless it has the support of the majority of the most powerful groups in the firm. It matters little how favourably a strategic option could be viewed from outside the firm, what matters is whether it challenges the e!isting distribution of power. If it does then the proposal is likely to be rejected, regardless of how necessary it may be to the firm%s survival. .olitical behaviour is played out in all companies to a greater or lesser e!tent and it permeates all decision making, particularly at the strategic level where the most important and lasting decisions are made. This chapter will consider the cultural and political dimensions in organisations. C4$t4re $rganisational culture determines the way that employees work, interact, and communicate. It operates at a subconscious level so that its adherents are not even aware of why they behave in a particular way, or why they believe the things they do. <ew employees come up realise what is e!pected of them and act accordingly. $ver time, such e!pected behaviour becomes second nature and the individual ceases to be aware of the social forces encouraging conformity. 8.2 COALITIONS AND STA6EHOLDERS C$a&&!9!"at!*#& *9 *r a#!&at!*#a$ "4$t4re $ne popular way of categorising organisations developed by 'iles and #now /=@GA0 uses the following headings) defenders, prospectors, analysers and reactors.

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De9e#1er& have conservative beliefs and are risk adverse. They seek secure markets where they concentrate on narrow segments. They adopt the planning style of strategy creation and employ tight control systems. They show little interest in anything innovative, instead they search for tried and tested solutions to problems. Pr*&0e"t*r& adopt high-risk strategies. They are innovative and are always seeking new opportunities. They are proactive and attempt to create change in the environment, thereby forcing competitors to react. A#a$%&er& adopt a rational analytical method of strategy creation. .lanning is an important part of this approach. They tend to be followers and monitor of competitors in order to copy good ideas. Rea"t*r& only respond to crises. They, therefore, have little opportChaptery to plan responses and have to make hasty decisions lurching from one crisis to the ne!t. Charles 5andy, in his =@GB te!t Understanding 'rganisations provides an alternative classification, which divides organisations into categories according to whether they have a power, role, task or person culture. P*@er "4$t4re) here the organisation is centralised. :ecisions can be taken "uickly but are dependent on the abilities of the senior managers. $ne of the major problems with this type of organisation is the "uestion of who will succeed the dominant central figure on whom the company depends. R*$e "4$t4re) this is the more typical organisation as the culture is built around job specifications and roles. The organisation is designed to be stable and the belief in rationality underpins the culture. #enior management%s role is to coordinate the activities of the rest of the organisation. Ta&2 "4$t4re) this kind of organisation is concerned with problem solving and producing results. This type of culture is useful when dealing with a rapidly changing e!ternal environment. .roblem-solving groups, drawn from all over the organisation come together on a temporary basis to solve a specific problem? for e!ample, advertising agencies, research and development departments. Per&*# "4$t4re) here the culture is centred around the needs of individual employees. The organisation provides an umbrella for specialists with some limited coordination by senior managers? for e!ample, doctors, and lawyers. $ne method of cultural analysis was developed by Eohnson and #choles /=@@>0, that of the cultural web 2igure >.= Eohnson and #tories #ymbols #choles%

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Cultural -eb /Eohnson, 4. and #choles, N. /=@@80 (!ploring Corporate #trategy) Te!t &nd Cases, .rentice 5all p.B=0. The diagram illustrates the core of the firm%s culture, comprised of its basic beliefs and assumptions, called the paradigm. In addition, the paradigm will be influenced by, and act as an influence upon, other aspects of day-to-day organisational life. In order to understand the hidden elements of the paradigm Eohnson and #choles suggest we need to analyse the remaining elements of the cultural web. St*r!e& These deal with successes and disasters in the company%s past and the folk heroes involved. They are told to new employees, outsiders and to each other. #tories will indicate what is acceptable or unacceptable and those aspects, which are likely to receive the most attention. 2or e!ample, in the health service, stories about cures are more widely retold than stories about preventative medicine. 9uestions to be asked about an organisation%s stories include) -hat core beliefs do the stories reflectJ -ho are the heroes and villains and why are they categorised as suchJ S%/-*$& #ymbols include such things as logos, office size, and standard of furnishing, car parking spaces, and job titles. These help to indicate powerful individuals and departments and, therefore, the type of behaviour that is likely to be most favourably rewarded. The language used in the organisation also helps to indicate the assumptions underpinning the paradigm. 2or e!ample, the hovercraft service distinguished itself from the ferries by using the language of the airline industry to refer to its employees and activities. 9uestions to be asked about an organisation%s symbols include) -hat language is usedJ -hat aspects of strategy are highlighted in publicJ -hat status symbols are thereJ >8 Control systems
Organisation al structures Rituals and routines

T'e Para1! /

.ower structure

Or a#!&at!*#a$ &tr4"t4re This will reflect the line of authority in the organisation. This may, or may not be an accurate reflection of the distribution of power in the firm. 9uestions to be asked about an organisation%s structure include) 5ow hierarchical are the structuresJ :o the structures encourage collaboration or competitionJ -hat type of power structure do they supportJ C*#tr*$ &%&te/& These concern the systems established to measure performance and reward employees. The methods used to monitor, and the issues, which are monitored, are important indicators of the basic beliefs of the paradigm. &n over-emphasis on "uantitative measures at the e!pense of "ualitative ones leads to an organisation obsessed with efficiency rather than effectiveness. 6eward systems will indicate what type of behaviour is encouraged and, therefore, what types are discouraged) for e!ample, individual targets rather than group targets. 9uestions to be asked about an organisation%s control systems include) -hat is most closely monitoredJ Is the emphasis on reward or punishmentJ &re there many controls or fewJ R*4t!#e& a#1 r!t4a$& 6outines are the way the various activities of the organisation are carried out on a day-today basis. They represent the way things are done in the firm. 6ituals are the events during which the firm highlights something important. This can include things such as training programmes, promotions, office parties, and award ceremonies. They serve to reinforce the routines of the organisation by indicating what is valued and will be rewarded. 9uestions to be asked about an organisation%s routines and rituals include) -hich routines are emphasised and what type of behaviour do they encourageJ -hat are the key rituals and what are the core beliefs that they representJ -hat do the training programmes emphasiseJ $nce the various elements of the cultural web have been analysed it is necessary to use the information generated to make some assessment of the overall culture of the organisation. The firm may e!hibit characteristics placing it in one or other of the cultural classifications previously mentioned.

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8.. PO=ER This involves the ability to get others in the firm to do what you want. This could include such strategic issues as the products or markets the company will invest in, additional resources, company structure and so on. .ower is not evenly distributed in an organisation? instead it accrues to those who have access to various sources of power. S*4r"e& *9 0*@er The following were identified as sources of power by .feiffer /=@A=0. H!erar"'%:$e !t!/ate 0*@er This relates to the individual%s position in the formal organisational structure. .eople have formal authority over those below them, so) supervisors have authority over shop floor employees? managers have authority over both of these groups? and senior managers have authority over everyone. This gives those at the highest levels of the firm considerable influence over its policies and actions. Per&*#a$ 0*@er This derives from the individual%s personal characteristics such as personality and physical attributes) for e!ample, charm, charisma, height, and strength. & charismatic leader can often persuade others simply through force of personality. 2ollowers may support anything proposed by the leaders, regardless of it%s merits. C*##e"t!*# 0*@er 5aving access to powerful people can be a source of power in its own right. This can include simply having the ear of a powerful individual or being a gatekeeper to a powerful player such as a secretary to the chief e!ecutive officer. C*#tr*$ *9 re&*4r"e& 6esources can include such things as information and finance. 2inance can be a very significant source of power if the individual has control over the discretionary aspects of the overall budget. This is because it is the discretionary finance that provides the organisation with the 7slack% re"uired to instigate new activities. The ability to bring in such additional monies will enable that person to have considerable input into how it is spent. E(0ert 0*@er This relates to the specialist skills and knowledge held by an individual, or group, within the firm. Those recognised as e!perts in their field will be granted relative autonomy to

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carry out their work and will have a higher status in the company) for e!ample, in-house legal advisers, or I.T. specialists. (!perts are distinguished by their own language, i.e. technical jargon, and their reluctance to share their e!pertise with outsiders. Re14"t!*# *9 4#"erta!#t% :ealing with uncertainty is one of the greatest difficulties facing any organisation. Those with the skills or information which can assist in uncertainty reduction will be more powerful. 2or e!ample, those with access to the environment through contacts with customers, suppliers, or competitors, may well be in a position to provide useful information about emerging trends. They may therefore be invited to participate in strategic decision-making and will be able to influence the strategic outcomes in a way favourable to themselves. The above sources of power are as applicable to those outside the organisation as to organisational members. It must be remembered that an organisation can be influenced by powerful e!ternal individuals and groups and accordingly any strategic options generated will need to satisfy powerful factions inside and outside the firm. I#1!"at*r& *9 0*@er .feiffer /=@A=0 suggested four useful indicators of power in an organisation) 1 Stat4& -hat is the individual%s position in the hierarchy? what salary do they commandJ -hat is their reputation in the firmJ If e!ternal players, then how do employees talk about them? are their problems responded to "uicklyJ Re&*4r"e "$a!/& -hat is the size of a particular department%s budget? how many employees work for the departmentJ 5ave the above figures been increasing or decreasing as a percentage of the firm%s overall budgetJ -hat percentage of the firm%s supplies is purchased from a particular supplierJ -hat percentage of sales does a particular customer representJ .. Re0re&e#tat!*# Is the individual or the department represented on the board of directors or on other important committeesJ Is the department or individual always the last to know of any new developmentsJ 7. S%/-*$& *9 0*@er 5ow much space is allocated to the department and where is it located + at the heart of the company or tucked away somewhere undesirableJ

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 Is the individual included on the mailing list for confidential issuesJ :oes the individual have his*her own parking space, a larger than usual office, better "uality furnishings, or a larger number of secretariesJ y analysing the sources and indicators of power it should be possible to uncover the distribution of power in the particular organisation. This will be useful in determining how successful various strategic options are likely to be and may well e!plain why some options are never even considered in the first place.

M!#t>-er ?& 0*$!t!"a$ a/e& It is not sufficient simply to have access to sources of power? instead, an individual or group must be able to e!ercise power and this is often accomplished most successfully through political game playing. The following activities, suggested by 'intzberg /=@A80, describe the way in which players can attempt to induce others to move in a desired direction. Clearly the e!tent of such game playing will depend on the nature of the particular organisation? however, every firm is likely to witness some of the activities below at some point in time. I#&4r e#"% is usually played by those with the least power in the organisation. It involves deliberately blocking the implementation of strategies which the players find unacceptable + for e!ample, working to rule by shop floor operatives. S0*#&*r&'!0 is where an individual seeks a mentor in the organisation. This mentor is usually a more powerful figure to whom the individual remains loyal in return for protection and other benefits. E/0!re -4!$1!# often goes hand in hand with sponsorship. In empire building the superior attempts to build up a power base by promoting and favouring individuals who are loyal, rather than those who have merit. &lliance building relates to alliances forged with colleagues, i.e. those on the same hierarchical level? trade-offs take place with one individual agreeing to support another and vice versa. (ach individual then knows that they have others they can call on for support in any struggle over resources or strategic options, for e!ample. E(0ert!&e a power base is built around actual, or pretend, e!pertise which involves convincing others of the uni"ueness, and irreplaceability, of skills or knowledge essential

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to the organisation%s survival. In addition, the e!perts maintain their irreplaceability by refusing to train others in their skills + for e!ample, a manufacturing organisation in which only one person deals with payroll and refuses to train her subordinate in the full range of skills and knowledge re"uired to run it alone. L*r1!# concerns the use of legitimate power to 7lord it% over those lower down in the hierarchy, that is to show their authority at every possible opportChaptery. 2or e!ample, a manager may refuse to delegate any responsibility to underlings, or a civil servant may refuse to e!ercise discretion to assist a client member of the public. The issues of politics and culture make an impact on the strategic management process at all stages and in all kinds of ways. These features of organisational life affect the "uantity, "uality and content of any information collected. -hat is considered relevant or important from this information is determined by culture and power. The methods used to analyse the information collected about the internal and e!ternal environments are also influenced by these factors. The results of any analysis are interpreted consciously and unconsciously through these factors. The generation, evaluation and implementation of strategic options is conditioned by the way the members of the organisation view their world and those around them. This is a product of the culture and the distribution of power in the firm. The influence these factors have on the strategic process is pervasive but mostly invisible. It is, therefore, one of the most important influences on the process, but also one of the hardest to uncover and confront. 5owever, it is necessary for senior managers to be aware of the nature and e!tent of the cultural and political influences on their decision making, in order to ensure that they are alive to all strategic possibilities and do not summarily dismiss options simply because they appear to be unusual or would be difficult to implement. #ometimes the only way for the organisation to survive and progress is to change the culture and power structure of the firm. &ppeasing the most powerful group may, in the long run, only lead to disaster. #uch a radical action is e!tremely difficult to carry out successfully, indeed any strategy re"uiring some form of change causes implementation problems. These problems will be the subject of the final chapter. becomes second nature and the individual ceases to be aware of the social forces encouraging conformity. $ne popular way of categorising organisations developed by 'iles R #now /=@GA0 uses the following headings? defenders, prospectors, analysers, and reactors. De9e#1er& have conservative beliefs and are 8.7 SOCIAL RESPONSIBILITIES #hould strategic decision makers be only responsible to shareholders or do they have broader responsibilitiesJ The concept of social responsibility proposes that a private corporation has responsibilities to society that e!tend beyond making a profit. #trategic decision making often affect more than just the corporation. & decision to retrench by closing some plants and discontinuing product lines, for e!ample, affect not only the

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organisation%s workforce, but also the communities where the plants are located and the customers with no other sources of the discontinued product. #uch situations raise "uestions of the appropriateness of certain missions, objectives and strategies of the business corporations. 'anagers must be able to deal with these conflicting issues or interests in an ethical manner to formulate a viable strategic plan. RESPONSIBILITY OF A BUSINESS FIRM -hat are the responsibilities of a business organisation and how much of them must be fulfilledJ 'ilton 2riedman and &rchie Carrol offer two contrasting views of the responsibilities of business organisations to society. /i0 2riedman%s traditional view of business responsibilities 1rging a return to a laissez-faire worldwide economy with a minimum of government regulation, 'ilton 2riedman argues against the concept of social responsibility. & business person who acts CresponsiblyD by cutting the price of the firm%s product to prevent inflation, or by making e!penditures to reduce pollution, or by hiring the hardcore unemployed, according to 2riedman, is spending the shareholders% money for a general social interest. (ven if a businessman has a shareholders% permission or encouragement to do so, he or she is still acting from motives other than economic and may, in the long-run, harm the very society the firm is trying to help. y taking on the burden of these social costs, the business becomes less efficient + either prices go up to pay for the increased costs or investments in new activities and research is postponed. These results negatively affect + perhaps fatally + the long term efficiency of a business. 2riedman thus referred to social responsibility of business as a Cfundamentally subversive doctrineD and stated that) *$here is one and only social responsibility of business to use its resources and engage in activities that are designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud#. /ii0 Carrol%s four responsibilities of business &rchie Carrol proposes that the managers of business organisations have 2our 6esponsibilities) economic, legal, ethical and discretionary. =0 E"*#*/!" responsibilities of a business organisation%s management are to produce goods and services of value to society so that the organisation may repay its creditors and shareholders. ,0 Le a$ responsibilities are defined by government in laws that management is e!pected to obey. 2or e!ample, organisations are re"uired to hire and promote people based on their credential rather than to discriminate on non-job-related characteristics such as race, gender, or religion.

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80 Et'!"a$ responsibilities of an organisation%s management are to follow the generally held beliefs about behaviour in society. 2or e!ample, society generally e!pects organisations to work with the employees and the community in planning for layoffs, even though no law may re"uire this. The affected people may get very upset if an organisation%s management fails to act to generally prevailing ethical values. ;0 D!&"ret!*#ar% responsibilities are purely voluntary obligations a corporation assumes. (!amples are philanthropic contributions, training the hard-core unemployed, and providing day care centres. The difference between ethical and discretionary responsibilities is that few people e!pect an organisation to fulfil discretionary responsibilities, where as many e!pect an organisation to fulfil ethical ones. Carrol lists these four responsibilities in order of priority. & business firm must first make a profit to satisfy its economic responsibilities. To continue in e!istence, the firm must follow the laws + thus fulfil its legal responsibilities. To this point Carrol and 2riedman are in agreement. Carrol however, goes further by urging that business managers have responsibilities beyond legal and economic ones. 5aving satisfied the two basic responsibilities, according to Carrol, the firm should look to fulfil social responsibilities. #ocial responsibility, therefore, includes both ethical and discretionary, but not economical and legal responsibilities. & firm can fulfil its ethical responsibility by taking actions that society tend to value but has not yet put into law. -hen ethical responsibilities are satisfied, a firm can focus on discretionary responsibilities + purely voluntary actions that society has not yet decided are important. 2irms that are known to be ethical and socially responsible often enjoy some benefits that may even provide them with a competitive advantage. #ome of these benefits are) Their environmental concern may enable them to charge premium prices and gain brand loyalty / en R Eerry%s Ice Cream0? Their trustworthiness may help them generate enduring relationship with suppliers and distributors without needing to spend a lot of time and money on policy contracts /'aytag0? They can attract an outstanding employee at less than the market rate /.rocter R 4amble0? They are more likely to be welcomed into foreign countries /Levi #trauss0? They can utilize the goodwill of public officials for support in difficult times /'innesota supported :ayton-5udson%s fight to avoid being ac"uired by :art Industries of 'aryland0?

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 They are more likely to attract capital infusions from investors who view reputable companies as desirable long-term investments /6ubbermaid0. Corporate governance guidelines and cases of best practice offer one way to respond to poor corporate performance and a perceived lack of effective board oversight. #ome governance codes are linked to listing or legally mandated disclosure re"uirements. usiness-driven codes, such as those contained in the =@@; Ning 6eport in #outh &frica can be important drivers for changes in companies% legislation. $thers, though purely voluntary in nature, may be designed to help forestall further government or listing body re"uirements. Re&0*#&!-$e I#3e&t/e#t -the notion of socially responsible investment within the C#6 agenda is most commonly used to refer to the #ocially 6esponsible Investment movement within the financial services sector. 4overnments in some developed countries have taken steps to promote socially responsible investment, for e!ample by enacting enabling legislation such as the ritish .ensions &ct by endorsing particular systems of indicators and metrics, or by engaging in civil society led initiatives to promote socially responsible investment. In =@@; #outh &frica%s Ning Committee on corporate governance, initiated by the Institute of :irectors, issued an influential report on corporate governance. Chapter ,F of the report contained a Code of Corporate .ractices and Conduct. The #outh &frican Companies &ct was subse"uently amended to reflect certain code recommendations. The report%s successor, called Ning II report was published in ,FF, it identified social responsibility as one of seven characteristics of good corporate governance and makes e!tensive recommendation for e!isting legislation. 4enerally, philanthropy and investment in community development initiatives are common C6# strategies for businesses. 4overnments can harness the community development potential of corporate philanthropy and social investment through dialogue to optimize their alignment with public sector goals.

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CHAPTER 6.0

STRATEGIC CHOICES AND STRATEGIC OPTIONS

OBJECTIVE: &t the end of this Chapter you should be able to) 1nderstand the concept of generic strategies? identify the nature and scope of strategy of development? e!plain the strategic choice basis and strategic options and e!plain and use appropriate techni"ues to elucidate strategic options within each of three bases. B.1 GENERIC STRATEGIES .ositioning determines whether an organisation%s profitability is above or below the industry average. &n organisation that can not position itself well may earn high rates of return even though industry structure is unfavourable and the average profitability of the industry is therefore modest. The fundamental basis of the above-average performance in the long-run is sustainable competitive advantage. Though an organisation may have a myriad strength and weaknesses vis-V-vis its competitors, there are two basic types of competitive advantage an organisation may possess) low cost or differentiation. Cost advantage and differentiation in turn stem from industry structure. They result from an organisation%s ability to cope with the five forces better than its rivals. The two basic types of competitive advantage combined with the scope of activities for which an organisation seeks to achieve those leads to three generic strategies for achieving above-average performance in an industry) cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.

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(ach of the generic strategies involve a fundamentally different route to competitive advantage, combining a choice about the type of competitive advantage sought with the scope of strategic target in which competitive advantage is to be achieved. The cost leadership and differentiation seeks competitive advantage in a broad range of industry segments, while focus strategies aim at cost advantage /cost focus0or differentiation /differentiation focus0 in a narrow segment. The specific action re"uired to implement each generic strategy vary widely from industry to industry, as do the feasible generic strategies in a particular industry. -hile selecting and implementing, the generic strategy is far from simple, they are the logical routes to competitive advantage that must be probed in any industry. The notion underlying the concept of generic strategies is that the competitive advantage is at the heart of any strategy, and achieving competitive advantage re"uires an organisation to make a choice. If an organisation is to attain a competitive advantage, it must make a choice about the type of competitive advantage it seeks to attain and the scope within which it will attain it. eing all the things to all people is a recipe for strategic mediocrity and below-average performance? because it often means that an organisation has no competitive advantage at all. D!a ra/: T'ree e#er!" &trate !e& )5%PE&I&I.E A*.A6&A67E
0ower cost *ifferentiation

1. Cost Leadership .A. Cost focus

(road target

2. :ifferentiation .B. :ifferentiation focus

COMPETITIVE SCOPE

6arrow target
ource- %+ E+ Porter, )ompetitive Advantage, Free Press, 1234+

C*&t $ea1er&'!0 Cost leadership is perhaps the clearest of the three generic strategies. In it, an organisation sets out to become the low-cost producer in the industry. The organisation has broad scope and serves many industry segments. &nd may even operate in related industries + the organisation%s breadth is often important to its cost advantage. The B8

sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors. In TQ sets for e!ample, cost leadership re"uires efficient-size picture tube facilities, a low cost design, automated assembly, and global scale over which to amortize research and development /6R:0. Low cost producer status involves more than just going down the learning curve. & low cost producer must find and e!ploit all sources of cost advantage. Low cost producers typically sell standard, or no-frills, products and place considerable emphasis on reaping scale or absolute cost advantages from all the sources. If an organisation can achieve and sustain overall cost leadership, then it will be an above average performer in its industry provided it can command prices at or near the industry average. &t e"uivalent or lower prices than its rivals, or cost leader%s low cost position translates into higher returns. D!99ere#t!at!*# The second generic strategy is differentiation. In this strategy an organisation seeks to be uni"ue in its industry along dimensions that are widely valued by buyers. It selects one or more attributes that buyers in an industry perceive as important, and uni"uely position itself to meet those needs. It is rewarded for its uni"ueness with a premium price. The means for differentiation are peculiar to each industry. :ifferentiation can be based on the product itself, the delivery system by which it is sold, the market approach and a broad range of other factors. In construction e"uipment, for e!ample, caterpillar tractors% differentiation is based on the product durability, spare parts availability, service and an e!cellent dealer network. In cosmetic, differentiation tends to be based more on product image and positioning counters in the stores. &n organisation that can achieve and sustain differentiation will be an above average performer in its industry if its premium price e!ceeds the e!tra cost incurred in being uni"ue. & differentiation, therefore, must always seek ways of differentiating that lead to a premium price greater than the cost of differentiating. & differentiation thus aims at cost parity or pro!imity relative to its competitors by reducing cost in all areas that do not affect differentiation. The logic of differentiation re"uires that an organisation chooses attributes in which to differentiate itself that are different from its rivals. &n organisation must truly be uni"ue at something or be perceived as uni"ue if it is to e!pect a premium price. F*"4& The third generic strategy is focus. This strategy is "uite different from others because it rests on the choice of narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to

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the e!clusion of others. y optimising its strategy for the target segments, the focuser seeks to achieve a competitive advantage in its target segments even though it does not possess a competitive advantage overall. The focus strategy has two variants. In a cost focus an organisation seeks a cost advantage in its target segments, while in differentiation focus, an organisation seeks differentiation in its targets. oth variants of the focus strategy rest on differences between a focuser%s target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus e!ploits differentiation in cost behaviour in some segments, while differentiation focus e!ploits the special needs of a buyer in a certain segment. #uch differences imply that the segments are poorly served by broadly target competitors who serve them at the same time they serve others. The focuser can thus achieve competitive advantage by dedicating itself to the segments e!clusively. readth of target is clearly a matter of degree but the essence of focus is the e!ploitation of narrow target%s differences from the balance of the industry. <arrow focus in and of itself is not sufficient for above average performance. & focuser take advantage of sub-optimization in either direction by broadly targeted competitors. Competitors may be underperforming to meet the needs of a particular segment, which opens the opportChaptery for differentiation focus. roadly targeted competitors may also be over performing in meeting the needs of a segment, which means that they are bearing higher than cost in serving it. &n opportChaptery for cost focus may be present in just meeting the needs of such a segment and no more. If a focuser%s target segment is not different from the other segments, then the focus strategy will not succeed. In soft drinks, for e!ample, 6oyal Crown has focused on Cola drinks, while Coca-Cola and .epsi have broad product lines with many flavoured drinks. 6oyal Crown%s segment, however, can be served well by Coke and .epsi at the same time they are serving other segments. 5ence Coke and .epsi enjoy competitive advantage over 6oyal Crown in the Cola segment due to economies of having broader line. There is often room for several sustainable focus strategies in an industry, provided that focusers choose different target segments. 'ost industries have a variety of segments, and each one that involves a different buyer need or a different optimal production or delivery system is a candidate for focus strategy. St4"2 !# t'e /!11$e &n organisation that engages in each generic strategy but fails to achieve any of them is Cstuck in the middleD. It posses no competitive advantage. &n organisation that is stuck in the middle will compete at a disadvantage because the cost leader, differentiates or focusers will be better positioned to compete in any segment. If an organisation that is stuck in the middle lack enough to discover a profitable product or buyer, competitors

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with sustainable competitive advantage will "uickly eliminate the spoils. In most industries, "uite s few competitors are stuck in the middle. &n organisation that is stuck in the middle will earn attractive profits only if the structure of its industry is highly favourable, or if the organisation is fortunate enough to competitors that are also stuck in the middle. 1sually, however, such an organisation will be much less profitable than rivals achieving one of the generic strategies. Industry maturity tends to widen the performance differences between the firms with generic strategy and those that are stuck in the middle, because it e!poses ill-conceived strategies that have been carried along by rapid growth. ecoming stuck in the middle is often an organisation%s manifestation of unwillingness to make choices about to compete. It tries for a competitive advantage through every means and achieves none, because achieving different types of competitive advantage usually re"uires inconsistent actions. ecoming stuck in the middle also afflicts successful organisations, who compromise their generic strategy for the sake of growth or prestige. & classic e!ample is Laker &irways, which began with a clear cost-focus strategy based on no-frills operation in the <orth &tlantic 'arket, aimed at particular segments of the travelling public that was e!tremely price sensitive. $vertime, however, Laker began adding frills, new services, and new routes. It blurred its image, and sub-optimising its service and delivery system. The conse"uences were disastrous, and Laker eventually went bankrupt. The temptation to blur a generic strategy, and therefore, become stuck in the middle, is particularly great for a focuser once it has dominated its target segments. 2ocus involves deliberately limiting potential sales volume. #uccess can lead to a focuser to lose sight of the reasons for its success and compromise its generic strategy, an organisation is usually better off finding new industries in which to grow where it can use its generic strategy again or e!ploit interrelationships. B.2 ALTERNATIVE DIRECTIONS FOR STRATEGY DEVELOPMENT In the case of a company which is seeking to achieve an overall objective of growth there are several strategic options with regard to strategic directions which can be pursued by the company. These options are not always mutually e!clusive and may take several forms. 2our of the most popular strategic options for growth are outlined below)

+a, Pr*te"t:B4!$1 &s the term implies, this broad strategic option is concerned with protecting and building an organisation%s position with its e!isting products and in its e!isting markets. -ithin this broad option of strategy we can identify a number of possible sub-strategies as follows. 2irst of all an organisation may choose to CwithdrawD from e!isting products and markets. This can happen for a number of reasons including, for e!ample, the entry of a BB

new and powerful competitor, changes in the market which mean that the organisation no longer has the skills to compete, and so on. & second strategy in the .rotect and uild category is CconsolidationD. This is concerned with protecting and strengthening the current organisational position. (ssentially, it is concerned with the maintenance of market share. The final strategy in this category is Cmarket penetrationD. -here the total market is still growing this strategy may be achieved for e!ample through Cnatural market growthD. In markets which are static or declining, however, a market penetration strategy can only be achieved by increasing market share at the e!pense of competitors. Clearly such a strategy will re"uire aggressive marketing backed by, for e!ample, heavy price discounts, promotional activity, etc. +-, Pr*14"t 1e3e$*0/e#t .roduct development entails developing and launching new products for sale in e!isting markets. $nce again, a number of sub-strategies are possible within this broad strategic option. &t one e!treme, product development might be based on e!isting competences where product development centres on e!tensions to the e!isting product range such as for e!ample products with additional features, different packaging, different "uality levels etc. &t the other e!treme this strategy may be based on entirely new products for the market which may in turn mean that the company is developing products re"uiring entirely new competences. (ven where a company is familiar with the market through e!perience this can be a risky strategy. 6esearch indicates that more new products fail than succeed and therefore this growth strategy should be carefully evaluated. -here products are entirely new to the company this can reduce the potential for synergy with e!isting products. +", Mar2et 1e3e$*0/e#t This strategy is based on e!pansion by entering new markets but with e!isting products. 2or e!ample, the company might attempt to identify additional channels of distribution? alternatively, the company might look for new locations, for e!ample, e!port markets. & classic way of achieving growth through market development is by reaching into new market segments. 3et another way of growth through market development is by finding new uses for e!isting products. This broad strategy for growth is potentially high in synergy but the new markets must be carefully assessed with respect to, for e!ample) the attractiveness of the market for the company? the e!tent to which the resources of the company match the new markets? the potential effect on e!isting product markets. 'any companies have found to their cost that it is not always straightforward to transfer skills and e!perience into a new market particularly where that market is in another country. +1, D!3er&!9!"at!*#

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This strategic option is probably the highest risk of all the four strategic options in as much as it involves a company seeking to e!pand on the basis of new products and new markets. :iversification can take a number of forms? for e!ample a company might choose to diversify into new product markets that are similar in some way to e!isting ones. This form of diversification uses e!isting competences + technological and*or marketing know-how. The most radical, and therefore most risky, form of diversification growth is where the company diversifies into entirely new products and markets which are unrelated in any way to the e!isting business. $bviously this re"uires the organisation to develop or ac"uire new competences. This approach to diversification was very popular during the =@AFs and early =@@Fs but, because of its high risks, has forced companies to be more wary of this method of strategic growth. In conclusion we can identify four broad alternative directions for strategy development, each including a number of possible sub-strategies. Clearly the choice of strategies by an organisation will depend on a wide range of factors, over and above those which have been outlined in this answer including, for e!ample, strengths and weaknesses assessments, competitor considerations and so on. -e should also note that the strategies are not mutually e!clusive and companies can, and do, pursue all four. The strategic options arrived at by simply distinguishing between new and e!isting products and markets is, however, a very useful way of beginning to identify strategic alternatives. Strate !" "'*!"e is the core of strategic management. It is concerned with decisions about an organisation%s future and the way in which it needs to respond to the many pressures and influences identified in strategic analysis. In turn, the consideration of future strategies must be mindful of the realities of strategy implementation which can be a significant constraint on strategic choice. The making of choice, in terms of developing strategic direction for an organisation, is dependant on effective strategic analysis. In this part of the C5&.T(6 we start by dealing with the ChowsD of corporate strategy. -e shall do this through considering) =. The bases of strategic choice? ,. #trategic options and strategic evaluations

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D!a ra/ -e$*@ "a0t4re& a$$ *9 t'e a-*3e

,trategic choice is the lin+ing pin /et0een anal%sis and implementation This important fact should tell us that strategic choice is not only dependant upon effective and thorough analysis, but it is constrained by the realities associated with the implementation of the chosen strategy.
COMPETITIVE STRATEGY

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Competition is at the core of the success or failure of organisations. Competition determines the appropriateness of an organisation%s activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation. Competitive strategy is the search for a favourable competitive position in an industry, the fundamental arena in which competition occurs. Competitive strategy aims to establish a profitable and sustainable position against the forces that determines industry competition. Two central "uestions underlie the choice of competitive strategy. The first one is the attractiveness of industries for a long term profitability and the factors that determine it. <ot all industries offer e"ual opportunities for sustainable profitability, and the inherent profitability of its industry is one essential ingredient in determining the profitability of an organisation. The second central "uestion in competitive strategy is the determinants of relative competitive position within an industry. In most industries, some organisations are much more profitable than others regardless of what the average profitability of the industry may be. <either "uestion is sufficient by itself to guide the choice of competitive strategy. &n organisation in a very attractive industry may not still earn attractive profits if it has chosen a poor competitive position. Conversely, an organisation in a competitive e!cellent position may be in such a poor industry that is not very profitable, and further efforts to enhance its position will be of little benefit. oth "uestions are dynamic) Industry attractiveness and competitive position change. Industries become more or less attractive overtime and competitive positions reflects an unending battle among competitors. (ven long periods of stability can be abruptly ended by competitive moves. oth industry attractiveness and competitive positions can be shaped by an organisation, and this is what makes a choice of competitive strategy both challenging and e!citing. -hile industry attractiveness is partly a reflection of factors over which an organisation has little influence, competitive strategy has a considerable power to make an industry more or less attractive. &t the same time, an organisation can clearly improve or erode its position within an industry through its choice of strategy. Competitive strategy, then, not only responds to the environment but also attempts to shape that environment into an organisation%s favour. B.. ALTERNATIVE METHODS OF STRATEGY DEVELOPMENT 'any organisations have, as their overall strategic objective, the objective of growth. 5owever, a company may grow in any number of ways. Igor &nsoff has developed a model to help identify alternative strategic directions for growth, which has proved useful in the corporate planning process. &nsoff%s model is based on a matri! comprised of 7markets% on the vertical a!is and 7products% on the horizontal a!is. In turn, each a!is is sub-divided into 7e!isting% and 7new%. (ach cell of the matri! so formed represents a

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different strategic alternative for achieving growth. The matri! and each alternative is shown below)

Turning to each of the strategic alternatives in the matri!, we can now e!plain the characteristics of each alternative and the considerations in choosing between them. +a, Mar2et 0e#etrat!*# This strategy is based on e!panding sales from present products in present markets. -here the total market is still growing, this strategy may be achieved for e!ample through 7natural market growth%. In markets which are static or declining, however, a market penetration strategy can only be achieved by either increasing the total market through, for e!ample, increasing usage or purchasing rate with e!isting customers or by increasing market share at the e!pense of competitors. Clearly such a strategy will re"uire aggressive marketing backed by, for e!ample, heavy price discounts, promotional activity, etc. &n e!ample of an organisation successfully using market penetration to grow is the Nellogg%s company with their successful Cornflakes campaign. +-, Mar2et 1e3e$*0/e#t This strategy is based on e!pansion by entering new markets but with present products. 2or e!ample the company might attempt to identify additional channels of distribution. &lternatively, the company might look for new locations, for e!ample e!port markets. & classic way of achieving growth through market development is by reaching into new market segments. This strategy for growth is potentially high in synergy but the new markets must be carefully assessed with respect to, for e!ample, the attractiveness of the market for the company? the e!tent to which the resources of the company match the new markets? and the potential effect on e!isting product markets. 'any companies have found to their cost that it is not always straightforward to transfer skills and e!perience into a new market, particularly where that market is in another country. &n e!ample of an organisation using this strategy to grow is <estlW in the coffee-drinking market through their e!pansion into new geographical markets. +", Pr*14"t 1e3e$*0/e#t

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.roduct development entails developing and launching new products for sale in present markets. In fact these might be e!tensions to the e!isting product range such as, for e!ample, products with additional features, different packaging, different "uality levels etc. &t the other e!treme this strategy may be based on entirely new products for the market. (ven where a company is familiar with the market through e!perience, this can be a risky strategy. 6esearch indicates that more new products fail than succeed and therefore this growth strategy should be carefully evaluated. -here products are entirely new to the company, this can reduce the potential for synergy with e!isting products. &n e!ample of a company using product development as a strategy for growth is the 2ord 'otor Company with their e!pansion of the product range to include e!ecutive and lu!ury products. +1, D!3er&!9!"at!*# This strategy is probably the highest risk of all the four strategic options inasmuch as it involves a company seeking to e!pand on the basis of new products and new markets. :iversification can take a number of forms? for e!ample, a company might choose to diversify into new product markets that are similar in some way to e!isting products in that they have some relationship to e!isting technological and*or marketing know-how but which target new customer groups. The most radical, and therefore most risky, form of diversification growth is where the company diversifies into entirely new products and markets which are unrelated in any way to the e!isting business. This form of so-called 7conglomerate% form of diversification was very popular during the =@AFs and early =@@Fs but its attendant risks have forced companies to be more wary of this method of strategic growth. &n e!ample of a company using diversification to grow is #cottish .ower in the Chaptered Ningdom, which has diversified into financial services, telecoms and the water market. In conclusion the &nsoff product*market framework provides a relatively simple but robust model of the major alternative strategic directions for growth. $f course what it cannot do, nor is it intended to do so, is to evaluate and choose between the various strategic alternatives. Clearly strategy selection will depend on a wide range of factors, over and above those which have been outlined in this analysis including, for e!ample, strengths and weaknesses assessments, competitor considerations and so on . $ther alternative methods of strategy development include mergers and ac+uisitions. -hile others are ,oint development and strategic alliances & strategy of an organisation forms a comprehensive master plan stating how the organisation will achieve its mission and objectives. It ma!imises competitive advantage and minimizes competitive disadvantage.
BUSINESS ORGANISATIONS USUALLY CONSIDERS THREE TYPES OF STRAGEGY NAMELY:5

!. C*r0*rate Strate %

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This describes an organisation%s overall direction in terms of its general attitude towards growth and the management of its various businesses and product lines. Corporate strategies typically fit within the three main categories of stability, growth, and retrenchment. !!. B4&!#e&& Strate % This usually applies at the business Chapter of product level and it emphasises improvement of the competitive position of an organisation%s products or services in the specific industry or market segment served by that business Chapter. usiness strategies may fit within the two overall categories of competitive or cooperative strategies. !!!. F4#"t!*#a$ Strate % This is the approach taken by a functional area to achieve corporate and business Chapter objectives and strategies by ma!imising resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business Chapter with a competitive advantage. (!amples of functional strategies within an 6R: department are)technological followership /imitation of products of other organisations0 technological leadership /pioneering innovations0

usiness organisations use all three types of strategies simultaneously. & hierarchy of strategy is the grouping of strategy types level in the organisation. This hierarchy of strategy is a nesting of one strategy within another so that they complement and support one another. 2unctional strategies support business strategies which, in turn, support corporate strategies Eust as many organisations often have no formally stated objectives, many organisations have unstated, incremental or intuitive strategies that have never been articulated or analyzed. $ften the only way to spot an organisation%s implicit strategy is to look not at what management says, but at what it does. Implicit strategies can be derived from corporate policies, programmes approved /disapproved0 and authorised budgets. CORPORATE STRATEGY Corporate strategy deals with three key issues facing the corporation as a whole. the organisation%s overall orientation towards growth, stability or retrenchment /directional strategy0 the industries or markets in which the organisation competes through its products and business Chapters /portfolio strategy0

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the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business Chapters /parenting strategy0.

Corporate strategy is primarily about the choice of direction for the organisation as a whole. This is true whether the organisation is a small one-product company or a large multinational corporation. In a large multi-business company, however, corporate strategy is also about managing various product lines and business Chapters for ma!imum value. In this instance, corporate head"uarters must play the role of the organisational CparentD, in that it must deal with various product and business Chapter CchildrenD. (ven though each product line or business Chapter has its own competitive or cooperative strategy that it uses to obtain it own competitive advantage in the market place, the corporation must coordinate these different business strategies so that the corporation as a whole succeeds as a CfamilyD. Corporate strategy, therefore, includes decisions regarding the flow of financial and other resources to and from a company%s product lines and business Chapters. Through a series of coordination devices, a company transfers skills and capabilities developed in one Chapter to other Chapters that need such resources. In this way, it attempts to obtain synergies among numerous product lines and business Chapters so that the corporate whole is greater than the sum of its individual business Chapter parts. &ll corporations from the smallest company offering one product in only one industry to the largest conglomerate operating in many industries with many products must, at one time or another, consider one more of these issues. T'e Ba&e& *9 Strate !" C'*!"e It is important for us at this stage of the study to recognise that strategy can be developed at several levels in an organisation. 2or e!ample, an organisation may need to develop strategy at corporate and business Chapter levels. In such cases the strategy developed at business Chapter level should support and enhance that being developed at corporate level. If this should not be the case, then clearly this organisation is in danger of coming apart at the seams so to speak. This undesirable state of affairs can be prevented by considering bases of strategic choices at both the corporate and business Chapter levels and links between these which can yield strategic advantage fro an organisation. -e shall address this aspect of strategic choice through consideration of) =. .urpose of the corporate, ,. usiness Chapter strategic bases,

8. Corporate role in business Chapter strategy.

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T'e Ba&e& *9 C'*!"e + the bases of strategic choice are associated with several important facets that will answer the "uestion Con what basis are we going to make our strategic choiceJD The answers to this "uestion will form the inputs to the consideration of the ne!t "uestion which is that of C-hich direction do we move with respect to our corporate strategyJD The bases of strategic choice will govern the generation of generic competitive strategies on which an organisation seeks to achieve a lasting position in its environment by meeting the e!pectations of buyers, users or other stakeholders Corporate .urpose + unless an organisation has a raison d%etre it has no direction, meaning or identity. -ithout these an organisation is very unlikely to be able to develop a strategic direction. Clearly, the management of an organisation needs to take into account several fundamental factors in this conte!t, including) =. structure of ownership in terms of whether the organisation is publicly or privately owned. ,. The mission of the organisation in terms of its clarity and acceptability to stakeholders, . The scope and diversity with respect to knowing what business the organisation is in and why. E(er"!&e take any organisation, preferably the company in which you currently work, and write down your understanding of) =. Its ownership, ,.its strategic intent, 8.the scope and diversity of the business base, ;. -hether or not it is a global business. B4&!#e&& C'a0ter Strate !" Ba&e& + for chosen strategic direction to be effective for the whole organisation, it is necessary for managers to take a holistic approach. This means that there needs to be compatibility between corporate level strategy and the strategy of the business Chapter. There are a variety of strategies which business Chapter can adopt, but these need to achieve inter-Chapter compatibility in order for the total organisation to develop a cohesive, and, therefore, corporate posture through which stakeholders can identify with the organisation as a whole. In small organisations this, of course, is probably very easy to achieve, but for larger and more diverse organisations, with several business Chapters, this is less easy to bring about. usiness Chapter strategies, in terms of their compatibility with corporate objectives, should be developed based on the perceived added value and the pricing of products or services being offered. Eohnson and #choles /=@@G0 argue that business Chapter strategies should be considered in the conte!t of the overall generic competitive strategy which an organisation might pursue. Considering the options which are available to business Chapters in terms of added value, and pricing of the products or services being offered, develops this argument. These include) low price and low added value, low price alone, a hybrid

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of low price with high added value, added value through product differentiated products at a premium price in a particular market segment. Clearly, it is important for an organisation to achieve long-term competitive advantage through the development of generic strategies in the business Chapters. This can be achieved through) clear targeting of customers or users, identification of customer needs and bases of added value, knowledge of competitor competitencies, establishment of the most appropriate generic route for the total organisation, and operationalisation of the chosen generic strategy underpinned by appropriate competencies. C*r0*rate r*$e& !# -4&!#e&& C'a0ter &trate % + the raison d%etre of an organisation is the engine of corporate purpose and aspirations and these are important elements of strategic choice. & very important "uestion in the development of corporate strategy is to what e!tent business Chapter strategies are enhanced or how they are managed at the corporate level. Corporate level managers are held to be responsible for the overall direction of the total organisation. In that conte!t, and bearing in mind that no two organisationseven in the same industrial sector-are the same, it should not surprise us to learn that no two boards of directors see their roles in the same manner. The relationships between corporate level e!ecutives and business Chapter managers are subject to considerable variation. These relationships can take various forms including) creating business linkages between the business Chapters, the facilitation of international development, and knowledge transfer between the business Chapters. & major role for the corporate level is that of finding and promoting ways in which corporate bodies might add value to business Chapter level. These include) the management of product and services portfolios to ensure compatibility with corporate aspirations, ensuring that the business Chapter strategy is compatible with overall corporate financial strategy through appropriate funding sources for portfolio development, providing a corporate structure and environment that permits business Chapter freedom within a guiding framework. The corporate level of an organisation can also assist business Chapters by enhancing the inter-relationships between themselves. This is sometimes called managing synergy. The corporation may seek to transfer skills and competencies from one business Chapter to another. These could be competencies learned in the management of one value chain which are relevant to the value chain of another business Chapter. Strate !" O0t!*#& - the above discussion in this Chapter was concerned with the bases upon which strategic choice could be made. -e are now concerned with the broad steer for an organisation in which there are a number of specific options concerning both the direction and the method of developing the organisation%s strategies. -e now turn our attention to the options of alternative directions that face the managers. The generation of options is obviously very important, as this is the point at which an organisation starts the move away from analysis towards action. This move can involve) commitment of funds? allocation of resources? and generation of capital, manpower and facilities budget on which to base plans and control functions. This is a critical phase in the development of corporate and

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business Chapter strategic direction. 4etting things wrong at this phase can be e!tremely e!pensive for an organisation. 3et it is essential that an organisation makes the commitment and moves towards the future. Clearly this is the stage when risk becomes real and some form of risk assessment needs to built into this process. -e shall now discuss strategic options by considering new and e!isting markets, new and e!isting products. -ithin these areas we shall include) protection or building with respect to e!isting products and markets? new products within e!isting markets? new markets for e!isting products? diversification into new markets with new products. Let us now e!amine some of these options in turn. E(!&t!# Mar2et& -.rotection or building of e!isting products. 2irstly managers can choose to build on or protect the current status by Cwithdrawal from some current activities, particularly where the organisation lacks the competencies to compete. #ome of the reasons for withdrawal include) an inability to secure resources or competencies making the cost of repositioning the organisation prohibitive? a reduction in the intrinsic value of the company%s assets leading to the need to dispose of these assets? a change in organisational priorities in which withdrawal from some activities will release resources for the pursuit of more profitable activities? changes in stakeholder e!pectations? partial withdrawal permitting the licensing of activities to other organisations. Consolidation + this option is concerned with protecting and strengthening the organisation%s position in its current markets. In pursuing this option it is necessary for managers to be aware of the fact that markets will change sometimes "uite rapidly over time. Consolidation should not be a euphemism for simply standing still. 'anagers need to pay attention to the e!tent to which the organisation%s resources and competencies continue to fit the market need and or how they should be adapted to maintain the competitive position of the organisation. It is vital that managers develop an understanding of the link between organisational performance and relative market share which can be e!amined through the way in which return on investment rises steadily in line with market share. .roduct :evelopment- this option can be very attractive to organisations as it permits managers to incrementally develop products with a known market base. This method allows organisations to follow the changing needs of their customers through a policy of introducing new product lines. .roduct development will also allow managers to e!ploit the well- developed competencies. This has particular advantage under conditions where product life cycle are short- as with consumer electronics where product development becomes an essential re"uirement of an organisation%s strategy, built around a core competence in 6R: and or the ability to ac"uire new products from elsewhere. Ne@ Mar2et& + 2or e!isting products. This approach is associated with market development and many organisations develop in ways which result in limited coverage of the market by their products. It is absolutely vital that managers think carefully with respect to market coverage by the products and or services being offered by their organisation. This usually means selectivity of market coverage and it is natural to look for opportunities to e!ploit the current products in other

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markets. There are several ways in which managers can bring this about and they include) =. (!tension of the products into new markets segments which are not currently served by the organisation. ,. The development of new uses for the current portfolio of products? 8. (!tending the geographical spread into new markets. &ll of these can have significant conse"uences for an organisation and need to be pursued with thought and care prior to committing the organisation to any one of such directional changes. The potential gains can be high, but so can the risks of failure. -ith new .roducts + this approach is often referred to as diversification and there are different ways in which an organisation can pursue the option of diversifying its operations into new markets with new products. This is the highest risk option for an organisation as it is breaking entirely new ground? it can be likened to the star trek mission. To boldly go where no man had gone beforeX It is, or should be, very clear that managers must think through such diversification, its benefits and likely costs- in the event of failure-prior to taking such a step. The two basic types of diversification are related diversification through backward integration in terms of developing into activities associated with the supply chain side of the organisation%s activities? forward integration by developing into activities concerned with the output side of the organisation%s activities. 1nrelated diversification through) e!tension into new markets and or products through e!ploitation of the core competencies of the organisation? e!ploitation of core competencies by creating entirely new markets? the development of entirely new products and new markets. -e have already sounded warnings with respect to risk associated with both forms of diversification. It would be remiss of us, however, not to point out the advantage of such option for an organisation. #ynergy is a commonly cited reason for both related and unrelated diversification. .otentially, synergy can occur in situations where two or more activities or processes complement each other, to the e!tent that their combined effect is greater than the sum of the parts. -hat this means is that the rewards for successful diversification can be very high indeed, and that the risk is worth taking provided that thought has been given to the implementation before proceeding.

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CHAPTER 7.0 APPROACHES

STRATEGY EVALUATION CRITERIA AND

OBJECTIVE: &t the end of this Chapter you should be able to) 1nderstanding what strategic evaluation criteria and approaches is all about? the three basic ways of

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conducting an evaluation ? screening of options? return analysis? risk analysis? stakeholder reaction analysis? feasibility and strategy selection and formal evaluation. C.1 EVALUATION CRITERIA

5ow is the actual or proposed strategy to be judgedJ 5ow do we know that one strategy is better than anotherJ & number of important "uestions can be regularly asked. &s is already evident, no infallible indicators are available. -ith practice, they will lead to reliable intuitive discrimination. I& t'e &trate % !1e#t!9!a-$e a#1 'a& !t -ee# /a1e "$ear e!t'er !# @*r1& *r !# 0ra"t!"eD The degree to which attention has been given to the strategic alternatives available to an organisation is likely to be the basic to the soundness of its strategic decision. To cover it in empty phrases /our policy is planned profitable growth in any market we can serve well0 an absence of analysis of opportChaptery or actual determination of corporate strength is worse than to remain silent, for it conveys the illusion of a commitment when none has been made. The unstated strategy can not be tested or contested and is likely therefore to be weak. If it is implicit in the intuition of a strong leader, the organisation is likely to be weak and the demands the strategy makes upon it are likely to remain unmet. & strategy must be e!plicit to be effective and specific enough to re"uire some actions and e!clude others. D*e& t'e &trate % e(0$*!t 94$$% 1*/e&t!" a#1 !#ter#at!*#a$ e#3!r*#/e#ta$ *00*rtC'a0ter%D The relation between market opportChaptery and organisational development is a critical one in the design of future plans. 1nless growth is incompatible with the resources of an organisation or the aspiration of its management, it is likely that a strategy that does not purport to make full use of market opportChaptery will be weak also in other aspects. Qulnerability to competition is increased by lack of interest in market share. I& t'e &trate % "*#&!&te#t @!t' "*r0*rate "*/0ete#"!e& a#1 re&*4r"e&A -*t' 0re&e#t a#1 0r*Ee"te1D &lthough additional resources, both financial and managerial, are available to organisations, with genuine opportChaptery, the availability of each must be finally determined and programmed along a practical timescale. Are /aE*r 0r*3!&!*#& *9 t'e &trate % a#1 t'e 0r* ra//e *9 /aE*r 0*$!"!e& *9 @'!"' !t !& "*/0r!&e1 !#ter#a$$% "*#&!&te#tD

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$ne advantage of making as specific a statement of strategy as is practicable is the resultant availability of a careful check on fit, Chapter, coherence, compatibility, and synergy - the state in which the whole of anything can be viewed as greater than the sum of its parts. I& t'e "'*&e# $e3e$ *9 r!&2 9ea&!-$e !# e"*#*/!" a#1 0er&*#a$ ter/&D The riskness of any future plan should be compatible with the economical resources of the organisation and the temperament of the managers concerned. I& t'e &trate % a00r*0r!ate t* t'e 0er&*#a$ 3a$4e& a#1 a&0!rat!*#& *9 t'e 2e% /a#a er&D Conflicts between personal preferences, aspirations and goals of the key members of an organisation and the plan for the future are a sign of danger and a harbinger of mediocre performance or failure. I& t'e &trate % a00r*0r!ate 9*r t'e 1e&!re1 $e3e$ *9 "*#tr!-4t!*# t* &*"!et%D To the e!tent that the chosen economic opportChaptery of a firm has social costs, such as air or water pollution, a statement of intention to deal with these is desirable and prudent. D*e& t'e &trate % "*#&t!t4te a "$ear &t!/4$4& t* *r a#!&at!*#a$ e99*rt a#1 "*//!t/e#tD 4enerally speaking, the bolder the choice of goals and the wider range of human needs they reflect, the more successfully they will appeal to the capable membership of a healthy and energetic organisation. Are t'ere ear$% !#1!"at!*#& *9 t'e re&0*#&!3e#e&& *9 /ar2et& a#1 /ar2et &e /e#t& t* t'e &trate %D & strategy may pass with flying colours all the tests so far proposed, and may be in internal consistency and uni"ueness, truly an admirable work of art. ut if within a time period made reasonable by the organisation%s resources and the original plan of the strategy does not work, then it must be weak in some way that has escaped the attention. & business enterprise guided by clear sense of purpose rationally arrived at and emotionally ratified by commitment is more likely to have a successful outcome in terms of profits and social good, than a company whose future is left to the guesswork and chance. #trategies are forward looking, designed to be accomplished several years into the future, and based on management assumptions about numerous events that have not yet occurred. 5ow should managers control a strategyJ The traditional approach to control compares actual results against a standard. &fter work done, A=

the manager evaluates it and then uses that evaluation as input to control further work. &lthough this approach has its place, it is inappropriate as a means for controlling a strategy. The full e!ecution of a strategy often takes five or more years, during which many changes occur that have major ramifications for the strategy%s ultimate success. Conse"uently, the traditional approaches to control must be replaced by an approach that recognises the uni"ue control needs of longterm strategies. #trategic control is concerned with tracking a strategy as it being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments. In contrast to post action control, strategic control is concerned with guiding action in behalf of the strategy as that action is taking place and when the end result is still several years off. 'anagers responsible for the success of a strategy typically are concerned with two sets of "uestions) =. &re we moving in the proper directionJ &re key things falling into placeJ &re our assumptions about major trends and changes correctJ &re we doing the critical things that need to be doneJ #hould we adjust or abort the strategyJ ,. 5ow are we performingJ &re our objectives and schedules being metJ &re costs, revenues, and cash flows matching projectionsJ :o we need to make operational changesJ #trategic controls, augmented by certain operational controls are designed to answer these "uestions. ASSESSING THE SUITABILITY OF OPTIONS -e now have to e!amine the three fundamental criteria used for evaluating appropriate strategies. <amely these are) S4!ta-!$!t%F A""e0ta-!$!t%F G Fea&!-!$!t% It is simply not good enough to choose from a short list of one? neither is it good enough to just pick an option because it looks nice. 'anagers must be far more careful in their choice of option for strategic direction. The wrong choice can have significant conse"uences for many other people and other organisations. This is where the chips are down + at stake can be the future of the organisation, its customers? its suppliers? its employees? to mention but just a few of the stakeholders. There are three basic ways of conducting an evaluation as mentioned above. These are suitability assessment? acceptability and feasibility and strategy selection. This Chapter will now e!amine each one in turn. S4!ta-!$!t% + the best strategy to adopt for an organisation is that which is most suited to its current strengths and its position. In other words, it is the e!tent to which a proposed strategy fits the situation as identified by a strategic analysis, and how well it would sustain. $r improve the organisation%s competitive advantage. This first step is very important, and it is a process that consists of two steps) establishment of the rationale or logic for each option? and establishment of the relative merits of a particular option against other options in terms of screening. (stablishment of the rationale-the assessment of suitability of a particular strategy is concerned with whether it addresses the circumstances in which the organisation is operating and or wishes to operate. & fundamental aspect of strategic direction is concerned with

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gaining an understanding of the basis on which the suitability of strategies can be judged. #tudents must remember that it is not enough simply to identify an attractive opportChaptery. If the strategy is to be successful, it must also be an opportChaptery for which the organisation is Chaptered that is has the relevant business strengths. This is why strategy evaluation must also consider criteria by which the likely competitive position of the business can be assessed, i.e. it represents the criteria which determine how easy it would be to e!ploit the opportChaptery- the customer%s likelihood of buying what it is you want to offer. This would involve considering such things as) price, product "uality? distribution? after sales service? reputation and availability. y adding a weight to these factors it is possible to take account of the customer%s priorities for these criteria in order to establish the critical success factors. A""e0ta-!$!t%5 The key "uestion advanced by Eohnson and #choles is Cacceptable to whomJ $bviously in addition to the customers finding the product or service acceptable, it is also necessary to consider the opinions of the organisation%s interest groups, for e!ample in the case of a company the shareholders opinion may be sought or the workforce as it is they who can make or break a strategy. Fea&!-!$!t% ) the third factor which needs to be considered is whether it is possible to implement the strategy successfully. It must be asked do we have the necessary resources to put this strategy into effectJ 6esources in this conte!t are used in the broadest terms and therefore do not mean just financial capability, although this of course, is important. 6esources here mean such things as technological know how? availability of materials and machines and other necessary back up services.

CHAPTER 8.0

STRATEGY EVALUATION TECHNIQUES

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OBJECTIVE: &t the end of this Chapter you should be able to) discuss the key criteria in evaluating strategies? e!plain and use appropriate techni"ues in evaluating alternative strategies? and identify and e!plain approaches to the process of selection. H.1 SCREENING OPTIONS $ne of the benefits of which should emerge from assessment of suitability is an understanding of the underlying rationale behind particular types of strategy. 5owever, within these broad types there are likely to be a range of specific strategies which an organisation could follow, and the process of evaluation normally re"uires a narrowing down of these various options before a detailed assessment can be undertaken, although this is not to suggest that options eliminated at this stage will not be given further consideration later. This section begins by reviewing the basis on which specific strategies can be assessed + whether options are to be judged on an absolute basis, against each other, or against the 7do-nothing% situation. The section then outlines three contrasting approaches to the screening of options) -anking options against a set of predetermined factors concerning the organisation%s strategic situation. The e!tent to which specific options fit these criteria determines their position in this 7league table%. %ecision trees & key step in the strategic planning process is the evaluation and election of strategies. <ormally the planner will be faced with several alternative strategies to achieve organisational objectives. This is probably one of the most difficult and yet important issues facing the corporate strategic planner and mistakes at this stage can be costly or even fatal to the organisation. This is because strategy evaluation and selection essentially entails making decisions between alternative strategic choices. $ne of the tools*techni"ues which the corporate planner may use in strategy evaluation and selection is that of decision trees. & decision tree is essentially a method of configuring and analysing the potential outcomes of alternative decisions as an aid to choosing between these alternatives. & simple e!ample will serve to illustrate how the techni"ue works. #uppose, for e!ample, that the planner is faced with two alternative strategies with respect to, say, the use of on the one hand industrial distributors to penetrate a new market and on the other hand using the company%s own direct sales force. These two alternatives represent the first two branches of the decision tree as shown below.

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The decision maker must now identify the possible outcome, in terms of sales, of using each alternative. This re"uires the decision maker to ascertain the probabilities of any chance events that will influence the likely sales figures from each alternative. In our e!ample let us assume that these chance events are /&0 a GFM chance that there will be a large market demand and / 0 a 8F per cent chance of a relatively small market demand. These chance events and probabilities can now be added to our decision tree as shown below)

<e!t, the decision maker needs to assess the sales figures associated with each distribution alternative and with each level of market demand. Let us assume that these are as follows) Large demand I Y,F million Industrial :istributors #mall demand I Y, million Large demand I Y=, million $wn :irect #ales 2orce #mall demand I YA million These figures can now be added to the decision tree and the final sales figures calculated for each distribution alternative by multiplying the sales figures by the probabilities as shown below.

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&s can be seen from our decision tree e!ample, given our estimates of probability together with the assessments of likely pay-offs, the most profitable decision and hence the right alternative, at least from a profitability point of view, is to use industrial distributors. -e can see from this how decision trees help to structure strategic alternatives in a systematic way with the added benefit of a visual representation of key decisions and outcomes. Clearly decision trees are only as effective as the information and assessments on which they are based and hence in no way are a substitute for management e!perience and information. $verall, decision trees are useful in encouraging logical thinking with respect to strategic option selection S"e#ar!*& #trategies and strategic planning are inherently concerned with the future. ecause of this the strategic planner is often concerned with assessing the future as an input to developing corporate strategic plans. This is particularly true in the area of environmental analysis in corporate planning. The corporate planner must attempt to assess how the environment of the organisation might be configured in the future so as to develop corporate plans to take account of these envisaged configurations. & techni"ue which has been widely used and will probably continue to grow in importance in this respect is that of using scenarios in developing plans for the future. #cenarios comprise detailed and plausible views of how the business environment of an organisation might develop in the future, couched in such a way that the corporate planner is able to develop a range of strategic objectives and actions to best deal with the envisaged future. This is perhaps easiest to understand if we use an e!ample of a simple scenario statement. The following might represent a scenario for a company operating in the oil industry, say. 7The supply of oil will fail to meet increasing demand before the year ,F,F and by this time >FM of the world%s energy re"uirements will be met through non-oil based energy sources.% It is important to stress that scenarios such as the one above are not the same as forecasts. 2orecasts are made on the basis of assumptions that the future can be predicted whereas scenarios are generated on the assumption that it can%t. #cenarios are especially useful and are therefore used in circumstances where it is AB

important to take a long term view of strategy? where there are a limited number of key factors influencing strategic options? and where there is a high level of uncertainty about such influences. 1nlike a forecast, which tries to predict precisely what the future will be, scenarios represent simply plausible narratives of how the future might turn out. #o, how are scenarios built and used in the corporate planning processJ -e shall first consider the steps in building scenarios. The first step in building scenarios is to establish the purpose of creating the scenario, i.e. what is the scenario to consider and be used forJ The purpose may be wide-ranging, such as 7what will the energy market look like in the futureJ%, or more focused to support key decisions facing the organisation, such as 7should we invest in developing solar powered energy sourcesJ% The second step is to identify the strategic issues or drivers of change in the environment, i.e. the factors in the environment which may affect the future with respect to the purpose of our scenario and which we are uncertain about. 1sually these factors are readily identifiable so, for e!ample, continuing our energy e!ample, key drivers about which we are uncertain might include oil costs, discovery of new reserves, environmental protection legislation etc. The number of factors identified at this stage of scenario building should be kept relatively small otherwise the number of possible scenarios can "uickly become unmanageable. Those drivers selected should be those that have the greatest impact on possible future strategies for the organisation and about which we are most uncertain. Clearly the selection of strategic issues or drivers of change is crucial to the development of scenarios and therefore should ideally use the most e!pert and informed managers inside /or sometimes even outside0 of the organisation. 'embership of the scenario building team is a crucial factor. 5aving identified the key driving factors in our scenario analysis, the ne!t step is to identify different possible plausible futures by factor. &gain continuing our e!ample, the scenario team can assess, say, the likely future possibilities regarding environmental protection legislation. The fourth step is then to combine to build scenarios of plausible configurations of factors, considering therefore the possible range of permutations and combinations of the driving factors selected, so as to build 7complete pictures% of a possible future. The final step is to review and flesh out the range of scenarios arrived at in the previous stage, developing and fleshing out the narrative of the predicted scenarios and assessing possible likelihoods for the various scenarios predicted. -hen this has been done, then the corporate planner can begin to assess the likely implications of the scenarios developed for corporate strategic plans. This may encompass determining objectives to deal with future scenarios, assessing strategic options for the future, and, in particular, for developing possible contingency plans. These, then, are the main steps in developing and using scenarios in the corporate planning process. There are a number of other considerations in the process, such as determining the membership of the scenario building team? the time-scales for scenarios?

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and the number of scenarios to be developed. &ll of these affect the nature and effectiveness of using scenarios. #cenarios have proved to be a useful approach to dealing with unpredictable and volatile environments where conventional techni"ues of forecasting have proved ineffective and inappropriate. &gain, it is important for the planner to remember that scenarios are not forecasts, but they can be a very creative and useful approach to trying to assess the implications of a volatile future environment. H.2 ANALYSING RETURN &ssessment of the returns likely to accrue from specific options is a key measure of the acceptability of an option. 5owever, there are a number of different approaches to the analysis of return. This part of the Chapter looks at three different assessments) Pr*9!ta-!$!t% a#a$%&e& Traditional financial analyses have been used e!tensively in the evaluation of the acceptability of strategies. Three of the more commonly used approaches are as follows) i. 2orecasting the return on capital employed /6$C(0 a specific time after a new strategy in implemented /e.g. the new strategy will result is a return on capital of ,FM by ,FFA0 ii. .ayback period has been used where a significant capital injection is needed to support a new venture. The payback period refers to period of how long the project will take to pay back the original amount of investment. Thus the shorter the period the more attractive the investment is. iii. :iscounted cash flow /:C20 analysis is perhaps the most widely prescribed investment appraisal techni"ue and is essentially an e!tension of the payback period analysis. $nce the net cash flows have been assessed for each of the preceding years they are discounted progressively to reflect the fact that funds generated early are of more real value than those in later periods /years0. The <et .resent Qalue /<.Q0 of the Internal rate of 6eturn /I660 of investment are used to calculated the :C2s. C*&t:-e#e9!t a#a$%&!& , where the returns are more comple! to assess or less tangible, as occurs in many public-service organisations, where strategies are more likely to be justified in terms of improving provision rather than financial return. The measurement of value for money is important.

S'are'*$1er 3a$4e a#a$%&!& AA

Increasingly it is being suggested that perhaps the most relevant way of assessing and evaluating alternative strategies is the analysis of shareholder value. The reasons for this are essentially based on the notion that in a market economy, shareholders invest in organisations in order to reap financial returns. -ithout the investment of shareholders the plc organisation would not e!ist. In addition, it is argued, the best measure of how effectively an organisation is using economic resources, including shareholder investments, is the return on these resources. In other words, the argument for using shareholder value as the main measure for the evaluation of strategic options is an economic one based on the view that this represents the best measure of the use of scarce resources in an economy and the principal reason for shareholder investment. It is the case, of course, that if a company does not satisfy its shareholders% financial e!pectations, it will, in the long run, cease to be viable. Therefore an organisation must attempt to enhance its ability to generate returns from the operation of its businesses and to attract additional funds needed from debt or e"uity financing. $btaining e"uity financing in particular depends on the e!pectations of investors with regard to the firm%s ability to generate returns on these investments. 1nderstandably, shareholders willingly invest in a company only when they e!pect a better return on their funds than they could get from other sources with a similar degree of risk. Therefore it is suggested that a company should pursue business strategies that will produce future returns sufficient, at least, to satisfy shareholders but preferably to ma!imise the value to such shareholders. & company which does not ma!imise shareholder value will find that its share price is depressed and it will be unable to attract investment to fund future operations and growth. It also may render the company more vulnerable to takeovers by other companies who promise to give greater value to shareholders. #hareholder Qalue &nalysis, then, it is suggested should be the only way of evaluating and selecting between different strategic options. 4iven the reasons for the suggested use of shareholder value as a way of evaluating strategic options, many companies now set e!plicit objectives for this purpose. There are, however, various ways of e!pressing and therefore measuring shareholder value and it is important that careful consideration is given to which ones are used. &mongst the most common ways of e!pressing and hence measuring shareholder value are the relatively simple ones of) + return on shareholder e"uity + increase in share price + earnings per share These of course are readily understood by most investors and managers, are widely accepted as measures of shareholder performance, and are relatively easily measured. 'ore recently, though, some companies have been measuring shareholder value in terms of what is often termed 7market value added% or 'Q&. & company%s 'Q& is calculated by combining its debt and the market value of its shares and then subtracting the capital that has been invested in the company. The result shows how much wealth the company

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has created. $bviously the greater the positive value of this calculation, the greater the value to the shareholder. 'Q&, then, represents one of the more recent ways of evaluating different strategic options. -hilst there is no doubt that it is important and useful to use shareholder value in evaluating alternative strategic options, there are distinct dangers in using this as the single or even overriding means of evaluating and selecting between strategies. The first danger relates not so much to the actual use of shareholder value but rather to the dangers of using this as the only way of evaluating and choosing between strategic options. The reason for this is that most companies pursue several objectives. #o using only shareholder value to evaluate strategies may lead to neglecting other important measures of strategic options, such as measures which relate to, say, market share, market leadership objectives for innovation, etc. $nly using #hareholder Qalue &nalysis, then, is a somewhat limited and myopic view of what constitutes strategic success. 6elated to this is the fact that, although shareholders are e!tremely important to a company, there are other parties whose interests must also be considered in evaluating strategies. It is important to consider other 7stakeholders% in an organisation. #takeholders include, for e!ample) customers, suppliers, distributors, local community, employees, etc. Concentrating only on shareholder value may lead the planner to neglect strategies which provide value to the wider range of stakeholders in a company. H.. ANALYSING RIS6 &ll strategies involve some degree of risk. It can be useful therefore in assessing and evaluating between a range of strategic options to assess the risk associated with a particular strategy. This is particularly the case where strategies involve for e!ample long-term commitments, as they so often do, and*or high levels of investment, and particularly where these conditions are associated with high degrees of uncertainty such as in the case of, say, new products or diversification into new markets. There are a number of techni"ues and approaches to analysing risk some of these are outlined and discussed below) +a, F!#a#"!a$ rat!* 0r*Ee"t!*#&. 1sually, strategies affect the capital structure of a company. 2inancial ratio projections are an attempt to assess the effect of a strategy on the key elements of a company%s financial structure. These projected effects can then be assessed with regard to the degree of risk that they entail for the company. Qarious aspects of a company%s financial structure can be assessed in such an e!ercise. 2irst of all, the strategic planner can make an assessment of the effects of a particular strategy on the overall capital structure of a company. #o, for e!ample, a strategy can be assessed with regard to its effect on, say, the capital gearing of an organisation. This might be particularly important &ssessment of the returns likely to accrue from specific options is a key measure of the

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acceptability of an option. 5owever, there are a number of different approaches to the analysis of return. This part of the Chapter looks at three different assessments) +-, Se#&!t!3!t% a#a$%&!& This approach to assessing risks for strategy evaluation involves identifying the important critical assumptions which underpin a strategy and its projected outcomes. These critical assumptions can then be challenged in the form of 7what if% "uestions. #o, for e!ample, let us assume that a particular strategy is projected to give a return on capital of =>M per annum over a > year period, based on the assumption that e!change rates will be stable over this period. The strategic planner can then assess what might happen to these projected returns if this underpinning assumption proved to be incorrect and, say, e!change rates were unstable. & variety of alternative e!change rates could be presumed and the effect on projected rates of return assessed. The planner can then assess the e!tent to which the initial assumption is likely to be realistic and the e!tent to which there is a risk of alternative outcomes. In this way the planner can consider the range of possible outcomes associated with pursuing a particular strategy as assumptions change. This approach is useful in helping to focus the mind of the planner on identifying and making e!plicit any assumptions which are made. In addition, sensitivity analysis can also usefully be used to prepare contingency plans with regard to alternative strategies should assumptions prove not to be accurate. The problem with sensitivity analysis is that it can lead to a proliferation of alternative strategies, each based on different assumptions. This, in turn, can result in information overload for the planner and difficulties in arriving at definitive decisions. +", S!/4$at!*# /*1e$$!# This approach to assessing risk is based on the attempt to simulate all the future conditions which might affect the outcomes of strategies. #o, for e!ample, a simulation model might attempt to project information and forecasts about the future environment, levels of investment and commitment with regard to particular strategies on the part of the company and aspects such as competitor reactions. $bviously, simulation modeling is an attempt to take into account every possible factor which could affect the outcome of a strategic approach. &s such, no truly complete simulation models e!ist in strategic planning. If nothing else, the amount of information re"uired to build such a model which would prove to be realistic and reliable is simply too great. 5owever, partial models of strategy simulation which enable the strategic planner to at least predict some of the outcomes associated with strategies and therefore to begin to evaluate risk do e!ist. 2or e!ample, one model is the so-called .I'# model developed by the strategic planning institute. This model uses large amounts of empirical data to predict the relationship between strategic decisions and company performance. (ssentially, the model is designed to allow the strategic planner to evaluate and select between the most appropriate strategic choices in a particular product market. These partial simulation models have proved to be highly effective in enabling the assessment and choice between different strategic options. 5owever, such models do have their limitations. 2irst of all, they still re"uire large amounts of high-cost and comple! information. #econdly, as partial models,

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there is a danger that important factors affecting the risks associated with a given strategy will fail to be included. 2inally, and as a result of these limitations, these models cannot substitute for e!perience and insights on the part of the decision-maker. In conclusion, then, analysing risk is an important aspect of assessing the acceptability of pursuing particular strategies. &lthough such risk can be difficult and comple! to evaluate a number of techni"ues e!ist, three of which are outlined above, to help the strategic planner in this respect. H.7 ANALYSING FEASIBILITY The financial appraisal of alternative corporate strategies is a key part of the strategy selection process. &lthough such financial appraisal may not be carried out by the corporate planner himself, it is important that the contemporary planner at least understands each of the following major tools of financial appraisal of alternative corporate strategies. +a, Ret4r# *# "a0!ta$ e/0$*%e1 &ll strategies re"uire some financial investment. The objective, of course, is to generate a profit on such investment. Indeed corporate objectives will often be couched in terms of re"uired levels of profit. 5owever, alternative strategies will usually potentially generate different levels of absolute profit. ecause of this, a fre"uently used measure of evaluating alternative strategies is to compare forecast profit levels with the investment re"uired for each strategy and e!press this as a percentage return on capital employed. In this way alternative strategies can be ranked in a rational and objective manner with regard to profitability. In order to calculate return on capital it is necessary to be able to identify and isolate both the costs and revenues associated with each individual strategy. In practice this can present difficulties particularly where there are 7cross-over% effects into other parts of the business. It is also often difficult to accurately forecast future costs and particularly future revenues over the envisaged lifetime of a strategy. If anything, planners have a tendency to err on the side of over-optimism? with costs, most fre"uently, being under-estimated, and revenues most fre"uently overestimated. ecause of this, it is advisable to prepare a range of anticipated return on capital employed calculations based on 7optimistic%, 7pessimistic%, and 7e!pected% outcomes. +-, Pa%-a"2 0er!*1 &s the term implies, the payback period of evaluating alternative strategies involves estimating the length of time it will take to recoup the investment re"uired by a strategic option. #o, for e!ample, if a company is comparing two strategies, each of which re"uires identical investment, in general, all other things being e"ual, that strategy which pays for itself in the shortest time will be the most attractive. 5owever, rarely are 7all other things e"ual%. 2or e!ample, the appraiser must also consider the cash flow profile after investment in the strategy has been recouped. ecause of this, payback should not be used in isolation from other measures of profitability.

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1nfortunately, many companies all too fre"uently set ma!imum payback periods as a major criterion for selecting between strategic options. This can encourage 7short termism% in the evaluation and selection of strategies. -hat constitutes an acceptable payback period will, of course, vary from company to company and situation to situation. In the case of a major public sector organisation a venture such as building new infrastructure may well involve payback periods of twenty years or more. In the case of the fashion industry payback periods may be assessed in terms of periods of two or less years. +", D!&"*4#te1 Ca&' F$*@ A#a$%&!& $ften referred to as :C2 analysis, this is one of the most fre"uently used methods of financial evaluation of strategies. 1nlike the previously described payback period method, :C2 analysis e!plicitly takes into account the fact that income received in future years, in this case from the investment made in a strategic option, is, in real terms, not worth as much as income received today. In other words funds generated early in the life of a strategy are of greater real value than those generated in later years. In order to reflect this fact the :C2 techni"ue uses a discounting factor in order to reduce the value of future projected cash flows. <ormally the discounting rate is based on the current value placed on money invested in the strategy. 1sing this discounting factor each future projected annual cash flow forecast over the life of the strategy is progressively discounted and then totalled to arrive at the net present value /<.Q0 of the project. ecause it takes account of the effects of the timing element of cash return, :C2 evaluation is particularly useful in evaluating between different strategies with varied patterns of e!penditure and return. +1, C*&t:Be#e9!t A#a$%&!& (ach of the previous tools of financial evaluation of strategies uses tangible measures of profitability e.g. cash flow, investment re"uired etc. 5owever, often the evaluation of alternative strategies will involve the consideration of wider intangible costs and benefits. 2or e!ample, #trategy & may be particularly beneficial, say, to the local community where the organization is situated. #imilarly, #trategy may have 7intangible% costs in the form of, say, increased road congestion as a result of a new factory. Cost*benefit analysis involves placing a money value on all the costs and benefits of alternative strategies. $ne of the major advantages of a cost*benefit approach is that it forces the planner to consider the wider implications of strategic options. 5owever, it is often difficult to actually place a monetary value on these wider implications of strategies and is often necessarily subjective. 1sed with care, however, cost*benefit analysis is a useful addition to the armory of financial evaluation techni"ues available to the corporate planner.

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+e, F4#1& 9$*@ a#a$%&!& This techni"ue of financial appraisal of alternative strategies essentially assesses the financial feasibility of alternatives with regard to the profile of funds flow forecast associated with the strategy or project. #pecifically, it seeks to identify the funds which would be re"uired for any strategy, the likely sources of those funds and any possible funding shortfalls which will need to be addressed. #o, for e!ample, if a company was considering e!panding its business by opening a new factory in another country, it would need to first of all identify the sources of funds to support this strategy. This would necessitate a forecasting of possible sources of funds from e!isting business and also of course a forecast of any additional sources from the proposed new venture. These sources of funds would then need to be compared with the forecast uses of the funds and in particular those associated with the new project. #o, for e!ample, there will be a re"uirement for funds to build a new factory? there will also be additional working capital costs to cover stock etc. 2inally, there will be marketing and ta! liability dividend payment costs etc. oth sources and uses of funds for the project can then be compared and any funding shortfalls identified. The company can then look at alternative ways of funding any shortfall and the e!tent to which it is able and willing to do this. & project which might, using profitability or return bases for assessing its attractiveness, look to be a winner might well be very unattractive or even unviable when considered from a funds flow analysis. -hen we take into account the fact that most companies go out of business because of funds flow problems, this techni"ue of evaluating alternative corporate strategies becomes very useful indeed. H.8 SELECTION OF STRATEGIES The discussion so far has been concerned with how evaluation of strategic options can be undertaken in terms of both the suitability of particular types of strategy and also the merits of specific strategic options. 5owever, it is important to recognise that these evaluations do not by themselves determine which strategies should be or are selected for implementation. There are several different ways in which strategies are selected. +!, Se$e"t!*#& a a!#&t *-Ee"t!3e& This is a widely accepted view of how a 7rational% choice of future strategies should occur. 5ere the organisation%s objectives, "uantified where possible, are used as direct yardstick by which options are assessed. (valuation methods are therefore central to the decision making process and are e!pected to provide "uantified 7answers% regarding the relative merits of various options and to indicate the 7right% course of action. In practice, however, even where this type of selection process occurs, it is very often the case that objectives need to be adjusted as the evaluation proceeds and they then become what is often called post-rationalised. The objectives fit the strategy and vice versa. In general, it is a sound discipline to assess the e!tent to which strategic options might fit specified @;

objectives of the organisation, provided it is also recognised that there are likely to be other ways in which strategies will be selected. +!!, Re9erra$ t* a '! 'er a4t'*r!t% & common way in which the selection of strategies occurs is by referring the matter to a higher authority. Those managers responsible for evaluation may not have the authority to give the go-ahead to the 7solution%. ("ually, those senior managers who must decide on strategy may not have participated in the evaluation of options. This is a very important observation which should have a strong influence on how the results of evaluation are conveyed to senior management. In particular, it is unlikely that senior managers will have the time or inclination to unravel all the detailed ramifications of an evaluation. They are more concerned with using their judgement of the situation on the available facts, and also with seeing how different strategies will fit the overall mission of the mission. Thus the evaluation process can be seen as a means of raising the level of debate which occurs among senior managers when they are using judgement on the selection of strategy. +!!!, Part!a$ !/0$e/e#tat!*# There are many circumstances where the uncertainties which an organisation faces are such that evaluation processes leave the choice of directions for the future very finely balanced. <evertheless some organisations will need to come off the fence and commit their resources and efforts to a particular strategy. This would be true for manufacturing companies if strategic developments re"uired significant capital investment. $thers, particularly service organisations may be more favourably placed and able to cope with these uncertainties by deferral of an overall 7final% decision of strategy while committing some resources to the partial implementation of one or more strategies. This allows the organisation to gain more e!perience on the ground, to improve its understanding of the suitability of each strategy and, at a later date, to make a more informed decision on which strategies to pursue. &n added virtue of partial implementation is that it can usually be authorised at lower levels within the organisation. #o this 7testing and learning% becomes an important precursor to the bid for resources to higher authorities which might follow. +!3, O4t&!1e a e#"!e& There are often disagreements on strategy between stakeholders who have similar power within the company. This may be between management and unions, or between two different managers. In these circumstances it is not unusual for an outside agency, such a consultant, to evaluate the situation for the company. $ften this process of evaluation is described as objective and rational virtue of the consultant%s detachment from the situation. In practice, of course, consultants are @>

aware of the political reasons for their involvement. To a large e!tent their role may be one of arbitrator and the evaluation must reflect those circumstances. In multinational ventures, particularly where government is involved, it is likely that consultants will be employed to assess the merits of the various strategies or at least to act in an advisory role to the decision-makers + as happened, for e!ample, in the case of the Channel Tunnel ids in =@AB in 1N.

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CHAPTER 9.0

PLANNING AND ALLOCATION O RESOURCES

OBJECTIVE: &t the end of this Chapter you should be able to) appreciate the purpose of planning and know the definition of planning? and also appreciate the basic steps in any planning process and you will know the differences among strategic, tactical, and operational planning. INTRODUCTION There is certainly no doubt that an important aspect in developing corporate strategies is an organisation%s resources. -e can distinguish in this respect between the following types of resources in an organisation) +a, A3a!$a-$e re&*4r"e& &s the term implies, this category of resources includes those resources which a company either already owns or can easily access to support its strategies. &lthough there are several ways of categorising resources in an organisation, typically a company%s available resources fall into one of four categories, namely) S .hysical resources) e.g. materials, machines, buildings, production capacity. S 5uman resources) e.g. knowledge*e!perience, skills, adaptability. S 2inancial resources) e.g. capital, cash, debtors, suppliers of money. S Intellectual and relationship resources) e.g. patents, brands, customer databases, relationships with customers and suppliers. It is on the basis of these resources that a company develops its competitive strategies. ecause of this, it is important in developing strategies to make an objective assessment of the available resources in an organisation. The process of assessing strengths and weaknesses is in essence an analysis of a company%s available resources. It is important to stress again that sometimes strategically important resources may lie outside of the organisation. #o, for e!ample, a company which has particularly good relationships with its suppliers can count this as an important resource which potentially could be used to develop competitive strategies. It is also important to remember in assessing the four categories of resources that often it is the links between resources which are the real strengths of an organisation. +-, T're&'*$1 re&*4r"e& The notion of threshold resources is based on the idea that in most industries there e!ists a minimum level of resources which an organisation must possess in order to survive in the industry. #o, for e!ample, in many high technology industries, competitors must have at least a minimum level of resource capabilities with regard to, for e!ample, research and development skills and patent assets. &n e!ample is in the automobile industry where component suppliers will often not survive these days unless they have strong @G

relationships with their customers and therefore a minimum level of relationship assets. &ssessing threshold resources is particularly important where an organisation is considering entering an industry or market for the first time. The organisation can determine whether or not it has the assets to survive in the industry*market and, if not, whether these can be readily developed or ac"uired. It is also important to note that sometimes both the nature and level of threshold resources re"uired as a minimum to compete in an industry or market can change over time. &t one time, for e!ample, in the Chaptered Ningdom success in the banking industry re"uired large numbers of branches spread throughout the 1N. The movement towards internet banking, however, has meant that such resources are no longer as important a factor in competitive success. In many industries, increasing customer aspirations and more powerful competitors often means that the level of threshold resources re"uired tends to rise over time. +", U#!I4e re&*4r"e& .erhaps of all the types of resources an organisation has, the potentially most important and powerful resources when it comes to developing a competitive advantage are those resources, if any, which are uni"ue. 1ni"ue resources may be literally uni"ue in the sense that no other organization possesses them such as, for e!ample, an innovative product or process which has been patented. $r it may be 7uni"ue% in the sense that no other organisation possesses the resource to the same e!tent. 1ni"ue resources can e!ist in any of the categories or areas of available resources which a company possesses. #o, for e!ample, a company can have uni"ue resources because of access to raw materials, or it could have uni"ue resources because of the skills and e!perience of its staff, etc. 2or obvious reasons, where a company has uni"ue resources, it is difficult and sometimes impossible for competitors to match these and so this may provide the basis of a long term sustainable competitive advantage. In considering using uni"ue resources as a basis of competitive advantage, however, it is important to ensure that the resources identified are difficult to copy, are of value to customers, and can be communicated readily to the market place. &lthough, as already indicated, some uni"ue resources can be protected as in the case of, say, patents, eventually most resources of this kind will be ac"uired and*or copied by competitors in the long run. The organization therefore must be constantly seeking to develop new uni"ue resources. The successful implementation of strategies will invariably re"uire some degree of change in the organisation%s resource profile. The careful planning of these resource changes is therefore important. 6esource planning usually entails two levels of consideration? first, there are the broader issues of how resources should be allocated between the various functions, departments, divisions or separate businesses. These considerations should be aided by the analysis of the balance of an organisation%s resources in particular, portfolio analysis. #econdly, the more detailed issue of how resources should be deployed within any one part of the organization best to support the strategies is concerned with the operational aspect of resource planning and is supported by the detailed assessment of strategic capability, in particular, value chain analysis.

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It is also important to emphasise again that, in thinking through how strategy will be put into effect, detailed thought is in fact being given to the feasibility of its implementation. &s such, the planning of resource allocation is also part of the evaluation of strategy. There is no sense in proceeding with the implementation of a strategy if, in planning how it should done, it becomes clear that it is unrealistic. Indeed, given the often generalised nature of strategic decision making as it occurs in reality, it may be that really detailed consideration of strategic course of action does not actually take place until the planning of implementation begins. 'anagers should then realise that they are not simply planning how something is to be done, but also deciding whether it is possible or sensible to do it. J.1 RESOURCE PLANNING AT THE CORPORATE LEVEL &t the corporate level in an organisation resource planning is mainly concerned with the allocation of resources between the parts of the organization, divisions or geographical area /e.g. in a multinational, or service departments. This process needs to be understood in the conte!t of how these separate parts of the organization support the overall strategies. This section looks at how these broader issues of allocation might be tackled in order to support the implementation of strategies. 2igure @.= illustrates some stereotypes of how allocation occurs in practice. These relate to two important factors which determine the overall approach to allocation) The perception of the degree of change re"uired in the resource base if strategic change is to be achieved successfully. This could be the e!tent to which the aggregate level of resources might need to change /e.g. growth or decline or where significant shifts are re"uired between resource areas within an unchanged overall resource.
PERCEIVED NEED OR CHANGE L*@ H! '

2ormula

Imposed .riorities

2ree bargaining

$pen competition

H! ' EXTENT O

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CENTRAL DIRECTION L*@

8esource allocation at the corporate level

2igure @.= The e!tent of central direction of the allocation process- whether detailed allocations are dictated from the corporate level or are in response to the detailed plans and aspirations of the various Chapters of the organization. This relates to how the organization is structured and where, within the structure, strategic decisions are made. To illustrate these general approaches to resource allocation the following three situations will be discussed) .ew changes in overall resources or in the deployment of resources. /rowth in the overall resource base. %ecline in the overall resource base, or significant reallocations with a static resource base. In each case the contrasting approaches of centralized or decentralized control of resource planning will be considered. It should be remembered that the stereotypes represented by the four bo!ed in 2igure @.= rarely e!ist in a pure form. 6esource allocation in practice is usually tempered by varying degrees of bargaining or bidding. <evertheless these stereotypes are use useful in understating the dominant philosophy underlying resource allocation in different circumstances. J.1.1 FE= RESOURCE CHANGES

If the managers in an organization perceive strategic development as re"uiring few changes in the level or deployment of resources, they are likely to manage resource allocation in ways which reflect this perception. In 2igure above this is represented by the two e!treme stereotypes of formula-driven allocations /where ventral direction is high and free bargaining where allocation is decentralized0. & criticism of many organizations in these circumstances is that they adopt resource allocation methods which are too rigid, creating problems in making the incremental adjustments to strategies which are important to the organisation%s development. There are several shortcomings of formula-driven processes even as a starting point. 2irst, there are usually disagreements about the validity or fairness of the formula. $ften the response is to amend the formula by making it more comple! by weighing, or

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introducing additional factors, etc. This rarely solves the disagreements and if anything can make them worse because there will always be some degree of arbitrariness about this type of formula. Zero-based budgeting /discussed later in the chapter0 could be a means of putting some check on this process and relating allocations to client needs or demand. 2inally students are reminded that it is the perception of the degree of change which will determine approaches to resource allocation. Conse"uently the defender organisation is likely to operate closer to the formula end of the spectrum as it tries to minimize the changes e!perienced by the organization by seeking out strategic developments which re"uire few shifts in resource allocation. In contrast, prospector organizations are likely to encourage the active search for new opportunities by a resource allocation regime which discourages the status "uo. #o even in situations of little change they are likely to operate closer to the free bargaining approach. J.1.2 ALLOCATIONS DURING GRO=TH

-here organisations are implementing strategic changes which re"uire significant changes in resources, different approaches to the resources allocation may be necessary /see 2igure @.=0. 2or e!ample, during growth resources can often be reallocated in relative terms without any particular area of the organisation suffering a reduction in resources + simply by directing new resources selectively across the organisation. &gain, e!treme stereotypes e!ist of how this reallocation could occur. .riority areas could be established centrally and the resource allocations could be imposed from the centre. &t the other e!treme, the centre could allocate resources through a process of open competition. This could be done through operating an internal investment bank from which divisions or departments can bid for additional resources. 'ost organisations during growth will follow a middle path between these two e!treme approaches. This would be described as constrained bidding, where the departments or divisions of the organisation are able to bid for additional resources but within defined criteria and constraints. J.1.. ALLOCATING RESOURCES IN STATIC OR DECLINING SITUATIONS

'any of the same issues faced by organisations e!periencing growth also apply in static or declining situations, but there are important differences. In particular resources reallocation will re"uire some areas to reduce in absolute terms to maintain other areas and or to support new developments. There are differing approaches to these /often difficult0 reallocation problems. In some organisations the reallocation is simply imposed centrally- for e!ample, there may be some plant closures. In other circumstances the reallocation may be achieved in an openly competitive way + for e!ample, a freeze may be imposed on replacement of staff? instead, as vacancies arise they are made subject to open competition and go to those

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Chapters with the most pressing case. &gain there is a middle road + constrained bidding for resources. In this resources will be diverted from one area to another. This is often achieved by earmarking a proportion of the total organizational resources for allocation to new ventures /7top-slicing%0. 'any companies and public and public-service organisations e!perienced the difficulties of reallocating resources during the =@AFs and early =@@Fs. #ome of the ways in which this was achieved illustrate these general points) $ften reductions were achieved by amalgamating related areas or activities. &nother common solution was the creation of new Chapters outside the normal structure. The Chapter is resourced by the marginal paring back of all other areas /hence maintaining7 e"uality of pain0 (ventually, the Chapters is reassimilated back into the mainstream structure and by this obtuse process resource relocation has occurred + often to a substantial degree. There are some circumstances where resource allocation is achieved by a more overt and less subtle process + by simply closing down one part of the organisations facing crisis as a necessary evil to ensure survival. J.1.7 ALLOCATING SHARED RESOURCES $ne of the particular difficulty aspects of resource allocation at the corporate level in large organisations is the e!tent to which overlap, sharing or duplication of resources should occur between the various parts of the organisation. This arises in many different ways, from the e!tent to which services /e.g. secretarial0 should be shared between departments to bigger issues such as whether two divisions should share their production capacity or have a common salesforce. Issues of this type are very closely tied to the structure and systems of the organisation. #o strategies which are dependent on high degrees of co-ordination or co-operation between department[divisions /e.g. gaining advantages through synergy0 will need to have more central direction over detailed resource allocations to underpin strategies. In contrast, where division or subsidiaries are largely independent, such detailed direction from the centre is less important. -here sharing or overlap does e!ist there are choices of the process by which these resources should be allocated. There are three main ways J.2 RESOURCE PLANNING AT OPERATIONAL LEVEL In the discussion of resource analysis the idea of the value chain was introduced as a means of analysing the way in which organisation%s strategic capability can be understood. It was emphasised that an organisation needs to understand which particular value activities most contribute to the success of the organisation%s strategies) for e!ample, through cost advantages or differentiation from competitors /or in the public services through cost efficiency or service

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enhancement0. 'oreover, strategic capability is often determined by the way in which linkages between these value activities are managed. -hen planning the implementation of new strategies these same issues are of central importance in the resource planning. .lanning must establish which value activities are of greatest importance to successful implementation of the selected strategies and ensure that these are planned with particular care. .lanning must address resource re"uirements throughout the value chain, including linkages between value activities and with the value chains of suppliers, channels or customers. &lthough resource planning at this level is detailed, it is nonetheless important to conceive it in a strategic manner. In particular, it is important to understand how the detailed operational resource plans underpin in the strategies of the organisation. It is therefore helpful to put the detailed plan in a strategic framework by ensuring that three central "uestions are addressed. #ee the figure below.

8esource identification Detailed re ource re9uirement :e ource configuration

Fit with e#isting resources .e2 re ource C-anging old re ource :econfiguring re ource

Fit !etween resources Con i tency ;inkage

Matc-ing operational re ource plan to trategie

-esource identification + e!actly what resources will a strategy re"uire, and how should these resources be configuredJ .it with e)isting resources + to what e!tent do these resources build on or are they a change from e!isting resourcesJ .it between resources + can the re"uired resources be integrated with each otherJ This figure above illustrates how the value chain can be used as a checklist in planning the resource re"uirements to deliver the strategy successfully. This checklist should be used to identify those value activities which are of critical

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importance to the strategy and the related issues of fit + both with e!isting resources and between the separate resources and activities. J.. PREPARING RESOURCE PLANS #o far the discussion in the Chapter has dealt with some of the underlying principles behind the planning of resources at both corporate and business levels, and has discussed some of the detailed resource issues which need to be resolved during implementation. This final section is concerned with the process of resource planning and considers ways in which resource plans can be prepared.

76= !;/. S68U;D /DD:=SS Critical ucce factor Key ta k !rioritie 7e ting a umption

7-roug- one or more of <..

!;/..I.3 788;S *udget 5inancial plan Manpo2er plan .et2ork analy i >pro?ect plan@

E$e/e#t& *9 a re&*4r"e 0$a# The figure above identifies the main issues which a resource plan should address, and some of the planning tools which are commonly used are) Critical success factors are those factors on which the strategic change is fundamentally dependant for its success) for e!ample, the need to improve customer care or reduce product cost. & resource plan should also itemise the key tasks which need to be undertaken to ensure that the critical success factors are actually achieved. This may re"uire the creation of new value activities or the development of new linkages within the value chain, or with suppliers, channels or customers. 0riorities on the other hand, are more to do with timing. They are the actions that need to be tackled to get the project under way) designing and commissioning of plant or ensuring that financial resources are available might be priorities in this sense. The identification of priorities and key tasks also provides a basis for the allocation of responsibilities. -ho is to be responsible for each of the key areasJ -here key areas interlink, who is responsible for co-ordinationJ It is also worth being e!plicit about what is not so important. -hat are the things that should or can be left until later or, more likely, which of the

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different priorities being advocated are to be followed up and which are notJ

E(er"!&e =. ,. 8. ; >. :escribe the formal planning process. -hy is it importantJ -hat are the fundamental steps in any planning processJ -hat are the differences among strategic, operational, and tacticalJ planningJ -hat are the components of the strategic management processJ -hat is the different between corporate and business level strategiesJ 5ow does functional strategy differ from a business-level strategyJ

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CHAPTER 10.0

IMPLEMENTATION OF STRATEGY

OBJECTIVE: &t the end of this Chapter you should be able to) &ppreciate the different ways in which strategy is implemented, the resistance that is e!pected to take place in changing the way things are done at strategy implementation, the management of that resistance. (lements to be aware of at strategy implementation. #trategy implementation could be said to be the sum total of activities and choices re"uired for the e!ecution of a strategic plan /-heelen and 5unger) =A80. It is a process by which strategies and policies are put into action through the development of programmes, budgets, and procedures. Implementation is a key part of strategic management. ORGANISATIONAL STRUCTURE ) INTRODUCTION There is no doubt that a key element in the effective implementation of corporate strategies is the design of the organisational structure itself. -ithout a suitable organisational structure, decision-making is likely to be slow, e!pensive, ineffective, or all of these. 5owever, there is no one right form of organisation structure. <eedless to say, the type of structure which will be most appropriate varies according to, for e!ample, the size of the company, its geographical spread of markets, the rate of change in the environment, and so on. 6egardless, however, of which type of structure is eventually determined as being most appropriate, the corporate planner must obviously first appreciate and understand the different types of structure which can be used. $utlined below are four of the alternative ways of structuring an organisation, together with some of the main characteristics of each and their relative advantages and disadvantages. /i0 T'e F4#"t!*#a$ Str4"t4re

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& functional organisational structure is organised around the primary activities that have to be carried out in an organisation including, for e!ample, marketing, finance, production and so on. This type of structure is often found in smaller companies, or those with relatively narrow product and*or market ranges. #ometimes, however, the functional structure is found within other types of structure such as the multi-divisional one with the divisions themselves being organized on a functional basis. The main advantages of a functional structure are first that it is relatively simple to understand, establish and operate. In addition, it enables functional specialists, with similar areas of interest and e!pertise, to be grouped together. 5owever, the functional structure can lead to problems of co-ordination between the different functional areas of a business. In addition, such structures are often poor in coping with diversity and with rapid environmental and market change.

/ii0 T'e M4$t!51!3!&!*#a$ Str4"t4re This type of structure is where the organisation is divided into Chapters on the basis of, for e!ample, products, geographical areas, markets or services. #o, for e!ample, one division in the company may deal with, say, the institutional markets, whereas another division in this company may deal with, say, the retail sector. The multi-divisional structure is particularly useful where there is considerable diversity facing the organisation. (ach division can concentrate on the specific issues and skills re"uired for its particular business environment. This, in turn, enables strategies to be developed to meet the re"uirements of each division, thereby improving competitive strategy. In addition, multi-divisional structures enable measurement of each division%s performance and can be very useful for developing managerial and staff e!pertise. The disadvantages of the multidivisional structure include) possible conflict between divisions, potentially high costs of administration and staffing, and potential comple!ity in achieving co-ordination between the different divisions in the company. /iii0 T'e H*$1!# C*/0a#% Str4"t4re This type of company structure usually comprises an investment parent company which holds shareholdings in a number of separate business operations with the parent company e!ercising simple control. (ssentially, the different parts of the business in which the parent company invests operate independently. This type of structure has been particularly popular with companies that have grown through merger and ac"uisition. The main advantage of this type of company structure is that each of the business Chapters in which the holding company invests can operate within their own product markets and develop their own strategies. This, in turn, means that each part of the business is likely to have a high degree of autonomy in decision-making and can operate and develop strategies in ways best suited to the circumstances of each particular part of the business. The disadvantages of this type of structure centre around the dangers of poor co-

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ordination and cohesion between the different business Chapters. $ften, holding company structures can give rise to duplication of effort, say, in research and development and innovation between the different parts of the business. In addition, individual companies within the holding company structure can often feel isolated and sometimes threatened by the parent company head office. /iv,T'e Matr!( Str4"t4re $riginally developed for managing one-off projects such as the development of new products, this type of structure consists of a combination of structures, so, for e!ample, it may take the form of a product divisional structure operated in combination with a geographical divisional structure. The matri! structure is usually used where a single divisional or functional structure would be inappropriate. #o, for e!ample, if a company was e!tending its international markets whilst at the same time developing new product lines, it may operate a structure based on divisions combining geographical and product areas. The advantages of a matri! structure principally lie in the fle!ibility which such a structure has to meet the needs of specific situations. #o, for e!ample, combinations of product and market e!pertise may be achieved. 5owever, matri! structures can be problematical in that they are more comple! to understand and operate. They can also lead to conflicts between the different personnel and divisions brought together in the matri! structure. 2inally, matri! structures can lead to slower decision-making and problems in determining and identifying responsibilities for decisions and control etc. 10.1 ORGANISATIONAL STRUCTURE IN STRATEGY IMPLEMENTATION efore plans can lead to actual performance, a corporation should be appropriately organized, programmes should be ade"uately staffed and activities should be directed toward achieving desired objectives. &ny change in corporate strategy is very likely to re"uire some sort of change in the way the organization is structured and in the level of staff needed in particular positions. It is management responsibility to therefore closely e!amine the way their company is structured or to decide if any changes should be made in the way work is accomplished. #hould activities be grouped differentlyJ #hould authority to make key decisions be centralized at head"uarters or decentralized to managers in distant locations. #hould the company be managed like a Ctight ship with many rules and controlsD, or Cloosely with few rules and controlsDJ #hould the corporation be organized into a CtallD structure with many layers of managers each having a narrow span of control /that is few employees per supervisor0 to better control his subordinates. $r should it be organized in a CflatD structure with fewer layers of managers each having a wide span of control /that is more employees per supervisor0 to give more freedom to his or her subordinatesJ #tructure follows strategy. In a classic study of large 1# corporations, &lfred Chandler concluded that structure follows strategy + that is changes in corporate strategy lead to changes in organizational structure /-heelen R 5unger =@@A)=AG0. Chandler also =FA

concluded that organizations follow a pattern of development from one trend of structural arrangement to another as they e!pand. &ccording to Chandler, these structural changes occur because the old structure, having been pushed too far has caused inefficiencies that have become too obviously detrimental to bear. Chandler, therefore found that in their early years, corporations tend to have a centralized organizational structure that is well suited to producing and selling a limited range of products. &s they add new product lines, purchase their own distribution networks, they become too comple! for highly centralized structures. To remain successful, this type of organization needs to shift to a decentralized structure with several semi autonomous divisions. Changes in the environment tend to be reflected in changes in a corporation%s strategy, thus leading to changes in a corporation%s structure. #trategy, structure, and the environment need to be closely aligned? otherwise, organizational performance will likely suffer /Eennings and #eawan, Euly =@@;) ;>@-;G>0. &lthough there is a general agreement that organizational structure must vary with different environmental conditions, which, in turn, affect an organizational strategy, there is no agreement about an optional organizational design. $rganisations in the same industry, however, tend to organise themselves similarly. The general conclusion seems to be that organisations following similar strategies in similar industries tend to adopt similar structures. 10.2 PEOPLE AND SYSTEMS To begin the implementation process, a strategy must consider certain human resources factors such as who are the people who will carryout the strategic plan and how is everyone going to do want is intended. 1nless management look into these issues seriously even the best planned strategy is unlikely to provide the desired outcome. :epending on how the organisation is organised, those who implement the strategic plans will probably be a much diverse set of people than those who formulate it. -e might as well say the implementers are everyone. (very operational manager down to the first-line supervisors and every employee is involved in some way in the implementing of corporate business and functional strategies. $rganising a company%s activities and people to implement strategy involves more than simply redesigning a corporate%s overall structure, it involves redesigning the way jobs are done. The implementation of new strategies and policies often calls for new human resource management priorities and different use of personnel. It re"uires hiring new people with new skills, firing people with inappropriate or substandard skills training e!isting employees to learn new skills. The design of jobs and subse"uent job performance are therefore increasingly being considered as sources of competitive advantage. Eob design refers to the study of individuals% tastes in an attempt to make them more relevant to the organisation and the individual*s. This is very important in strategy implementation. To minimise some of the =F@

adverse conse"uences of task specialisation, corporations have turned to new job design techni"ues? such as job enlargement /combining tasks to give a worker more of the same type of duties to perform0, job rotation /moving workers through several jobs to increase variety0, and job enrichment /alternating the jobs by giving the worker more autonomy and control over activities0. 10.. PROJECT MANAGEMENT .roject management offers a structural approach to managing projects. The purpose of project management today and in the near future, is to outline the latest planning and control techni"ues used by industry, commerce, sport, and domestic projects, and especially those used by the project planning software. &s the use of project become felt everywhere, a lot of mangers are now entering the field of project management. Their success will be helped by their ability to develop a fully integrated information and control system to plan, instruct, monitor, and control large amounts of data, "uietly and accurately to facilitate the problem-solving and decision making process. To achieve these goals as a project manager, you need a comprehensive toolkit /just as a plumber works with a bag of tools0. .roject management is defined by the .roject 'anagement /.' $N0 as) ook of Nnowledge

CThe application of knowledge, skills, tools, and techni"ues to project activities in order to meet stakeholders% needs and e!pectations from a projectD This definition clearly clarifies that the purpose of the project is to meet the stakeholders needs and e!pectations. It is therefore a fundamental re"uirement for the project manager to establish who are the stakeholders /besides the client0 and analyse their needs and e!pectations, to define, at the outset, the purpose of the project, its scope of work and objectives. -hereas .eter 'orris /=@@;0 sees project management as) Cthe process of integrating everything that needs to be done as the project evolves through its life cycle in order to meet the project%s objectivesD. 'any organisations are changing in nature as more and more of them are accomplishing their business through projects. This approach has been used in engineering, construction, aerospace and defence for many years and now we see other organisations using it for e!ample, in pharmaceutical, medical, telecommunications, software development, systems development, energy, manufacturing, educational and service organisations. 'anagement-by-projects approach encourages)i. organisational fle!ibility ==F

ii. decentralised management responsibility iii. holistic view of problems iv. goal-oriented problem solution processes The benefits of using a project management approach, obviously follows on from addressing the needs of the project. The project manager is responsible for developing a plan through which the project can be tracked and controlled to ensure the project meets preset objectives. To do this effectively a project manager needs or rather re"uires accurate and timely information. This information must be supplied by the planning control system, which outlines the scope of work and measures performance against the original plan. $ne of the most difficult aspects of the strategic management process is the implementation of the strategy. &ny change in e!isting strategy, no matter how small, will result in implementation problems. These arise because organisations are comprised of people and, unlike machines, they cannot simply be reprogrammed. Instead they must be 7persuaded% to adapt their present routines and beliefs to new circumstances. .eople are notoriously unenthusiastic about change in their lives, especially when it is forced on them by someone else. They may feel happy with the way things are and see no reason to adopt new working practices or to take on more responsibilities. If the change re"uired is even greater, for e!ample, a reorganisation, they may be faced with changing offices and working with new colleagues. This amounts to a great deal of upheaval and inconvenience for everyone concerned. It will be clear, therefore, that people are often resistant to changes proposed by senior management. 5ow such resistance can be dealt with, and possibly overcome, is the topic of this final chapter. This is a vital topic since many worthwhile strategies have failed at the implementation stage. &n alternative solution to the problem of strategic change is to develop a fle!ible organisation, i.e. one that is constantly seeking change and embracing opportunities to innovate in all areas. $nce such a culture has been generated the problems of resistance should be considerably lessened. In addition, the organisations hold is less likely to drift out of alignment with its environment or cling for too long to outdated competencies. The final part of this chapter will consider the characteristics needed for such a company and how it might be brought into being.

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CHAPTER 11.0 GLOBALISATION

11.1 A CHALLENGE TO STRATEGIC MANAGEMENT

<ot too long ago, a business corporation could be successful by focussing only on marketing and selling goods and services within its boundaries. International consideration was minimal. .rofits earned from e!porting products to foreign lands were considered as frosting on the cake, but not really essential on the corporate success. :uring =@BFs, for e!ample, most of the companies organised themselves around a number of product divisions that made and sold goods only to 1#. &ll manufacturing and sales outside 1#& were typically managed through one international division. &n international assignment was usually considered a message that the person was no longer profitable and should be looking for another job. Today everything has changed. 4lobalisation the internationalisation of markets and corporations has changed the way modern corporations do business. To reach the economies of scale necessary to achieve the low costs, and thus the low prices, needed to be competitive, companies are new thinking global /-orldwide0 markets instead of national market. <ike and 6eebok for e!ample, manufacture their athletic shoes in various countries in &sia for sale in every continent. Instead of using one international division to manage everything outside the home country, large corporations are now using matri! structures in which product Chapters are interwoven with country or regional Chapters. International assignments are now considered key for everyone interested in reaching top management.

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&s more industries become global, strategic management is becoming an increasingly important way to keep tract of international developments and position the company for a long term competitive advantage. 4lobalisation presents a real challenge to the strategic management of business corporations. 5ow can anyone group of people in anyone company keep track of all the changing technological, economical, political, legal, and social cultural trends around the -orldJ This is clearly impossible. 'ore and more companies are realising that they must shift from vertically organised, type of organisation to a mere horizontally managed interactive organisation. They are attempting to adapt more "uickly to changing conditions by becoming learning organisations. 11.2 NATURE OF GLOBAL COMPETITION In the recent year, globalisation has become a key theme in every discussion of international strategy. .roponents of the philosophy of CglobalD products and brands, such as .rofessor Theodoc Levitt of 5arvard, and the highly successful advertising agency #aatchi and #aatchi, argue that in a -orld of growing internalisalisation, the key to success is the development of global products and brands, in other words, a focus on standardised products and brands world-wide. $thers, however, point to the numerous barriers of standardisation, and suggest that greater returns are to be obtained from adapting products and marketing strategies to the specific characteristics of individual markets. The growing integration of international markets as well as the growth of competition on a -orld-wide scale implies that adoption of a global perspective has become increasingly imperative in planning strategy. 5owever, to conclude that this mandates the adoption of strategy of universal standardisation appears naUve and simplistic. In particular, it ignores the inherent comple!ity of operations in international markets and the formulation of an effective strategy to penetrate these markets. -hile global products and brands may be appropriate to certain markets and in targeting certain segments, adopting such an approach as a universal strategy in relation to all markets may not be desirable and may lead to major strategic blunders. 2urthermore, it implies a product orientation and a product driven strategy, rather than a strategy grounded in a systematic analysis of customer behaviour and response patterns and market characteristics. efore a company decides whether or not to sell abroad, a company must thoroughly understand the international marketing environment. That environment has changed a great deal in the last decades creating both new opportunities and new problems. The world economy has globalised. 2irst world trade and investment have grown rapidly, with many attractive markets opening up in western and (astern (urope, 6ussia, China, and else where. In fact, during the =@@Fs, international trade has grown faster than world output. 2inancial systems have become comple! and fragile. In some country markets, foreign companies face increasing trade barriers, created to protect domestic markets against outside competition.

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11.. DEVELOPMENT OF THE GLOBAL BUSINESS The -orld economy has undergone radical change during the last three decades. 4eographical and cultural distances have shrunk with the advancement of Eet .lanes? fa! 'achines, 4lobal Computers Telephones, -orld Television satellite and Cable roadcasts, and other technological advances. This has allowed organisations greatly e!pand their geographical market coverage, purchasing and manufacturing. 'any organisations are trying to create a global structure to move ideas swiftly around the -orld. The picture is one of a usually more comple! and marketing environment for both organisations and consumers. Today, almost every organisation, large and small is touched in someway by global competition. (uropean and 1# organisations, for e!ample, are being challenged at home by the vibrant and skilful marketing of the Eapanese and other &sian multinational organisations. $rganisations like Toyota, 5onda, #ony and #amsung have often outperformed their western competitors in overseas markets. #imilarly western organisations in a wide range of industries have found new opportunities abroad. 'any others have developed global operations, making and selling their products -orldwide, many more organisations are moving aggressively to take advantage of international marketing opportunities. Today, organisations are not trying to sell more of their products locally produced into international markets? they are also buying and making more components and obtaining supplies abroad. Increasingly, international organisations have to coordinate functional operations across boarders and to increase efficiency. Conse"uently, many domestically purchased goods and services are ChybridsD with design, material purchases, manufacturing and marketing taking place in several countries. Cars provide a good e!ample. Eapanese lu!ury car makers such as 5onda /&cura0 and Toyota /Le!us0 have moved some production to &merica. The 4erman 'ercedes is building spot-utility vehicles at its &merican assembly plant in &labama. 6ival '-%s factory in #outh Carolina, already makes several versions of the 8-series as well as the ,8 coupe for e!port to dozens of markets around the -orld + including 4ermany. uyers, who want high "uality and low price are now prepared to accept &merican- built-lu!ury cars. Thus managers in countries around the -orld are asking? just what is global marketingJ 5ow does it differ from domestic marketingJ 5ow do global competitors and forces affect our businessJ To what e!tent should we Cgo globalDJ The technological and marketing resources needed to con"uer world markets in sectors such as telecommunications, airlines, cars and media, are forcing organisations to seek partners. 'any organisations are forming strategic alliances with foreign organisations, even competitors, who serve as suppliers or marketing partners. -inning organisations in the decade already may well be those that have built the best global partnerships and networks.

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11.7 MANAGING THE GLOBAL ECONOMY The multinational enterprise /'<(0 is an organisation that takes global approach to foreign markets and production, thus it is willing to consider market production locations anywhere in the -orld. '<(s as well as any organisation with multinational operations can be separated into two categories) global company and multi domestic company. & global company, sometimes called a globally integrated company, integrates its operations that are located in different countries. 2or e!ample, it might design a product or service with a global market segment in mind. $r it might depend on its operations in different countries to produce the components used in its products and services. In this type of a company, the development of capabilities and the decisions to defuse them globally are essentially made in the company%s home country. Today the pressure on firms operating in global industries is not just to e!port to other countries but to strive to be a global firm. & global industry is one in which the strategic position of competitors in given geographical or national markets are affected by their overall global positions. -hereas a global company, therefore, is one, that by operating in more than one country, gains research and development, production, marketing and financial advantages in its costs and reputation that are not available to purely domestic competitors. The global company sees the world as one market. It minimises the importance of national boundaries and raises capital, resource materials and components and manufactures and markets goods wherever it can do the best job. 2or e!ample, 2ord%s C-orld TruckD sports a cab made in (urope and a chassis build in <orth &merica. It is assembled in razil and imported to the 1# for sale. Thus global firms gain advantages by planning, operating and coordinating their activities on a worldwide basis. These gains are a key reason behind recent global companies. 4lobal marketing therefore is concerned with integrating or standardising marketing actions across a number of geographical markets. This does not rule out forceful adoption of the marketing mi! to individual countries, but suggests that firms where possible ignore traditional market boundaries and capitalise on similarities between markets to build competitive advantage. #everal firms have passed beyond the international division stage and become truly global organisations. They stop thinking of themselves as national markets that sell abroad and start thinking of themselves as global markets. The top corporate management and staff plan worldwide manufacturing facilities, marketing policies, financial flows and logistical systems. The global operating Chapters report directly to the chief e!ecutive of the organisation, not the head of international division. (!ecutives are trained in worldwide operations, not just-domestic or international. The organisation recruits management from many countries, buy components and supplies where they cost less, and invests where the e!pected returns are greatest. $rganising for effective international marketing is a considerable challenge that besets multinational firms of any size. The tension between centralisation and decentralisation is a very tight one, on the one hand, managers must agree upon the key strategic decisions and activities to centralise. $n the other hand, they must give as much autonomy as

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possible to local staff who are close to market conditions. It is said that there is no one correct combination of centralised-decentralised organisation. It is important to heed the ma!im CThink global, act localD. The organisational structure varies according to the firm%s circumstances and overtime. The firm must ensure that its structure fits with its international environment, while at the same time having the internal fle!ibility re"uired to implement its strategic goals. 11.8 PROCESS OF STRATEGIC MANAGEMENT IN ORGANISATIONS OVER THE NE;T DECADE $ne thing is certain, and that is that corporate planners and the organizations in which they work are likely to face many new challenges and developments over the ne!t decade. This is principally because we live in a dynamic environment which gives rise to key new corporate challenges presenting both opportunities and threats. Clearly the precise impact on and implications of any particular development or trend for any particular organisation and the process of corporate planning within it will depend on the circumstances of that organisation) its strengths and weaknesses, the fle!ibility of its management and staff and so on. 4iven this, however, it is possible to outline some of the general implications of each of the four factors in the "uestion for corporate planners over the ne!t decade. +a, Te"'#*$* !"a$ C'a# e $ver the ne!t decade organisations will face continued challenges stemming from technological change and innovation. <eedless to say, technological change and innovation are not new, but what it is the pace at which technology and products change. $ver the ne!t decade, companies are likely to have to cope with an increasingly rapid pace of technological change and innovation. &s a result, planners will have to deal with, for e!ample, shortening product life cycles, and possibly the growth of whole new technologies and industries. There are many implications of this increased pace of technological change for the process of strategic management, but in particular the manager will have to deal with) the need for improved technological forecasting techni"ues? an increased emphasis on innovation and new product development in strategic plans? the need to have e!tremely fle!ible planning systems and organisational structures? and the need for fle!ible and adaptable staff and effective systems of retraining etc. Technological changes will include, for e!ample, changes in materials and components technology? changes in the technology of production including even greater automation? and changes in facilitating technologies which underpin, for e!ample, systems of delivery and logistics. +-, S*"!a$:"4$t4ra$ "'a# e& &s with technological change, the key aspect underpinning the strategic challenge here is the increased pace of change in these factors. #ocial and cultural patterns and practices

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are changing rapidly in many societies. The strategic planner will need to be increasingly aware of both the pattern and pace of changes in these areas, and their implications for planning. (!amples of likely trends in these areas over the ne!t decade include for e!ample) an increase in many societies of the percentage of women going out to work, and indeed more enlightened attitudes towards the role of women in society in general and work in particular? an increased interest in and awareness of healthy lifestyles? increasing social*cultural interchange through, for e!ample, wider travel, better education etc. &s stressed earlier, these trends and changes give rise to significant opportunities and threats for most organisations, and the strategic planner will therefore need to identify and increasingly forecast and anticipate developments in these areas. +", S*"!a$ re&0*#&!-!$!t%:e#3!r*#/e#ta$ !&&4e& 'any would argue that the trends and developments here over the ne!t decade stem in part from the broader social*cultural changes previously outlined. 5owever, whatever the reasons, growth of the interest in both social responsibility and the related issues of concern for the environment and, for e!ample, the development of 7green marketing% will doubtlessly continue over the ne!t decade. 3et again, this will pose both major opportunities and threats, but, overall, managers and planners in organisations will need to be aware of and respond to the call for organisations to be more socially and environmentally responsible. Companies will need to consider the social and environmental impacts of their strategies and to take into account a broader range of interest groups in terms of, for e!ample, 7the stakeholders% and not just the shareholders in an organisation. (!amples of areas affected by changes in this area include) the use of recyclable materials? product testing on animals? healthy and safe products? policies on pollution and protecting the environment. +1, C*/04ter& a#1 I#9*r/at!*# Te"'#*$* % $bviously related to technological change, but perhaps among the most significant developments in recent years, which will continue to affect companies and therefore the process of strategic management in ever more significant ways over the ne!t decade, are those relating to the continued use and application of computers and information technology in organisations. #trategic management and planning over the ne!t decade will increasingly be affected by, and utilise, the technology which is available and will become available in these areas. 'anagers will be able to, for e!ample, access and process real time information from their computer and communication systems. :ecision making is likely to be potentially enhanced particularly as regards speed and accuracy based on up to date information. Qirtually every aspect of strategic management from analysis through to the implementation and control of plans is likely to be affected by developments in information and communication systems. In summary then, just as in the previous decade, these four factors will continue to pose new and e!citing challenges to corporate planners and their organisations.

==G

==A

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==@

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