UNIT-I

INTRODUCTION TO STRATEGIC MANAGEMENT

Introduction (Strategic Management and Business Policy by C.Apparao, B.Parvathiswara Rao, Pg no: 46-51)

Strategy is an integral part of the modern business activity. Companies formulate different
strategies to gain competitive advantage a head of competition. An organization comes in to
existence with three objectives. Survival, profit and growth. To attain these fundamental
objectives of business, modern business managers need to adopt the organization to strategic
management. Undoubtedly strategy is one of the most significant concepts to emerge in the
subject of management studies in the recent past. It has emerged as a critical input to
organizational success and has come in handy as a tool to deal with the uncertainties that
organizations face. Strategy has helped to reduce ambiguity and provide a solid foundation as a
theory to conduct business.

The word “strategy” is derived from the Greek word strategia, which means art of troop leader.
As we all know, a troop leader does not give any information and makes the final decision based
on a long-term vision, similarly strategic decisions are also not disclosed and remain only with
the senior-level management.

Definition of strategy

 Strategy is a unified, comprehensive and integrated plan designed to assure that the basic
objectives of the enterprise are achieved.—William F. Gluck.
 Strategy is a consistent stream of decisions and actions to deal with the environment—
Henry Mintzberb.
 Basically a strategy is a set of decision making rules for the guidance of organizational
behavior—Michael E. Porter.
 Strategy means developing and communicating the company’s unique position, making
trade-off and forging fit among activities –Michael E. Porter.
 Strategy is a long-term plan, which is believed to take the company to greater heights by
exploring and exploiting all possible opportunities available and using all emerging
possibilities.

Elements of a strategy

According to Saloner et al, any strategy should have four important elements:

 Goal: A strategy invariably indicates the long term goals towards which all efforts are directed.
So, a strategy is basically the long-term direction of a company.
 Scope: A strategy defines the scope which includes the king of products it will produce, the
market it will pursue, and the broad areas of activity it will undertake.
 Competitive Advantage: A strategy also contains a clear statement of what competitive
advantages the firm will pursue and sustain.
 Logic: This is the most important element of strategy. The “why” is the logic of strategy

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The following example of a strategy illustrates how logical is the core element of a strategy:

“Our strategy is to dominate the Indian market for two-wheelers by being the low-cost producer, selling
through mass market channels. Our low-price will generate high volumes. This helps us to achieve
economies of scale which, in turn, would help us to improve our bottom-line even with a low-price.”

The above strategy logically links low price, high volume and market dominance which would ultimately
improve its profitability.

LEVELS OF STRATEGY

 Corporate Level Strategy: Corporate level strategy is concerned with the overall direction and
scope of an organization and how value will be added to the different business units of the
organization. The corporate headquarters plays a crucial role in determining how the organization
should be structured, how targets are set and performance is reviewed. Being clear about
corporate level strategy is important because it is the basis of other strategic decisions.
 Business Level Strategy: Business level strategy is about how to compete successfully in
particular markets. The concerns are therefore about how advantage over competitors can be
achieved; what new opportunities can be identified or created in markets; which products or
services should be developed in which markets and how to meet customer needs in such a way to
as to achieve the objectives of the organization such as long-term profitability and market share
growth. So, corporate strategy involves decisions about the organization as a whole, whereas
business strategy involves decisions about the strategic business unit (SBU).
 Functional Level Strategy: This level is composed of managers of different functional areas:
Human resource, Finance, Production, Marketing, Customer Service, and Research and
Development. Functional level managers are responsible for developing annual objectives and
short-term strategies of the concerned areas of operations.

Strategic Management

Strategic Management is all about identification and description of the strategies that managers
can carry so as to achieve better performance and a competitive advantage for their organization.

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An organization is said to have competitive advantage if its profitability is higher than the
average profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a manager
undertakes and which decides the result of the firm’s performance. The manager must have a
thorough knowledge and analysis of the general and competitive organizational environment so
as to take right decisions. They should conduct a SWOT Analysis (Strengths, Weaknesses,
Opportunities, and Threats), i.e., they should make best possible utilization of strengths,
minimize the organizational weaknesses, make use of arising opportunities from the business
environment and shouldn’t ignore the threats.

Definition of Strategic Management (C.Apparao, B.Parvathiswara Rao, Pg no: 29-30)

 The determination of the basic long term goals and objectives of an enterprise and the
adaption of the course of action and the allocation of resources necessary for carrying out
these goals.--- Alfred D. Chandler.
 Strategic management is a stream of decisions which leads to the development of an
effective strategy or strategies to help achieve corporate objectives. ---Glueck and Jaucb.
 Strategic management is a process of formulating, implementing and evaluating cross-
functional decisions that enable an organization to achieve its objective. ---Fed R David.
 Strategic management is the set of decisions and actions resulting in the formulation and
implementation of plans designed to achieve a company’s objectives. – Pearce and
Robinson.
 Strategic management consists of the analysis, decisions, and actions an organization
undertakes in order to create and sustain competitive advantages. – Dess, Lumpkin &
Taylor.

CHARACTERSTICS OF STRAEGIC MANAGEMENT (C.Apparao, B.Parvathiswara Rao, Pg no: 29-30)

 Long-term direction: Strategic management is concerned with the long-term direction

of an organization.
 Recognizes change: Strategic management recognizes that environment will change and
that organizations should continually monitor internal and external events and trends, so
that timely action can be taken as needed.
 Oriented towards the future: Strategic management is oriented towards the future. It is
a long-range orientation, one that tries to anticipate events rather than simply react as
they occur.
 External emphasis: Strategic management process takes into account several
components of the external environment, including technological, political, economic and
social dimension and their impact on business.
 Concerned with scope of the organization: Strategic management is concerned with the
scope of an organization’s activities. For example, should an organization concentrate on
one area of activity or should it have many? This includes important decisions about

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 product range or geographical coverage and is concerned with the organization’s
boundaries.
 Major impact on the organization: Strategic management will have a major impact on
the success or failure of a company.
 Significant risk: Strategic management involves major risks.
 Major financial or other resources implications: Strategic management often requires
investment of substantial financial and other resources.
 Matching resources with environment: Strategic management is concerned with
matching the resources and activities of an organization to the environment in which it
operates. This is often referred to as strategic fit. The notion of strategic fit is developing
strategy by identifying opportunities in the business environment and adapting resources
and competencies to take advantage of those opportunities. Such a strategic fit is
important to achieve the correct positioning of the firm to meet clearly identified market
needs.
 Stretching resources and competences: Stretch is the leverage of the resources and
competences of organization to create opportunities or to capitalize on them. Such a
stretch provides an organization competitive advantage.
 Influenced by stakeholders: The strategic decisions of an organization are not only
influenced by environmental forces and resource availability, but also by the values and
expectations of the stakeholders of the organization.
 Affect operational decisions: Strategic management affect operational decisions because
it is at the operational level that real strategic advantage can be achieved. If the
operational aspects of the organization are not in line with the strategy, then, no matter
how well conceived the strategy is, it will not succeed.
 Competitive advantage: Strategic management aims at achieving some advantage for
the organization over competitors.
 Integrating intuition and analysis: In a sense, strategic management process integrates
intuition and analysis. Intuition means inner voice or a gut feeling. Intuition is essential
for making decisions in situations of great uncertainty or little precedents. But in most
situations, an objective, logical, systematic approach for making major decisions in an
organization is required, which is provided by strategic analysis. Analytical thinking and
intuitive thinking complement each other in strategic management.

NEED FOR STRATEGIC MANAGEMENT (P.Subba Rao, Page no: 16-16)

 Due to change: Everything, except change is not permanent. It does mean that only
change is permanent. Change makes planning difficult. But, firms may pro-act to the
change rather than just react to it. Strategic management encourages the top executives to
forecast change and provides direction and control.
 To provide guidelines: Strategic management provides guidelines to the employer about
the organization’s expectations from them. This would minimize conflict between job
performance and job demands. Thus, it provides incentive for employer and helps the
organization in achieving its objectives.

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  Developed field of study by research: Strategic management was just based on case
studies or anecdotal evidence 30 years ago. But recently, there are methodological
problem researches in this field of study. More systematic knowledge in this area
available at present. Therefore, today it is worthwhile to study strategic management.
 Probability for better performance: There is no clear research evidence that strategic
management leads to higher performance. But the majority of studies suggest that there is
a relationship between better performance and formal planning.
 Systematic business decisions: Strategic management provides data and information
about different business transactions to managers and helps them to make decisions
systematically.
 Improves communication: Strategic management provides effective communication of
information from lower level managers to middle level managers and to top level
managers.
 Improves coordination: Strategic management improves coordination not only among
the functional areas of management, but also among individual projects.
 Improves allocation of resources: Strategic planning helps in deciding upon most
feasible and viable projects and thereby improves the allocation of resources to the viable
project.
 Helps the managers to have a holistic approach: Strategic management helps the
managers to have complete understanding of the company and to have a holistic approach
towards business problems and proportions.

BENEFITS OF STRATEGIC MANAGEMENT (C.Apparao, B.Parvathiswara Rao, Pg no: 39-40)

 It reduces uncertainty: Planning forces managers to look ahead anticipate change and
develop appropriate responses. It also encourages managers to consider the risks
associated with alternative responses or options.
 It provides a link between long and short terms: Planning establishes a means of
coordination between strategic objectives and the operational activities that support the
objectives.
 It facilitates control: By setting out the organization’s overall strategic objectives and
ensuring that these are replicated at operational level, planning helps departments to
move in the same direction towards the same set of goal.
 It facilitates measurement: By setting out objectives and standards, planning provides a
basis for measuring actual performance.
 Enhanced awareness of external threats
 Improved understanding of competitors’ strategies
 Reduced resistance to change
 Clearer understanding of performance-reward relationship
 Enhanced problem-oriented capabilities of organization
 Increased interaction among managers at all divisional and functional levels
 Increased order and discipline
 It allows for identification, prioritization and exploitation of opportunities
 It provides objective view of management problem
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  It provides a framework for improved coordination and control of activities
 It minimizes the effects of adverse conditions and changes.
 It allows decision making to support established objectives
 It allows more effective allocation of time and resources to identified opportunities
 It encourages forward thinking

STRATEGIC MANAGEMENT PROCESS (C.Apparao, B.Parvathiswara Rao, Pg no: 32-37)

Developing an organizational strategy involves four main elements- strategic analysis, strategic
choice, strategy implementation and strategy evaluation and control. Each of these contains
further steps, corresponding to a series of decisions and actions that form the basis of strategic
management process.

Step-1 Establishing Strategic Intent

 Develop Vision and Mission: This is the first step in the strategic management process.
Every organization should have a vision and/or a mission statement. While the vision
reflects the management’s aspirations about what is wants to become in the long run, the
mission statement defines a company’s reason for existence. Thus, a company’s vision
and mission statements provide guidelines for setting objectives and generating
alternative strategies.
 Establish long-term objectives: Given the vision and mission statements and upon
analyzing the external and internal environments, the firm has to set long-term objectives
and goals. These must be specific measurable and achievable.

Step-2 Environmental Scanning

 Analyze external environment: This is the second step in the strategic management
process. It involves analysis of macro environment for assessing opportunities and threats
in the environment. Macro environment consists of such factors as political, economic,
socio-cultural, demographic, technological and suppliers, customers, competitors,
creditors etc., which directly affect the organization, and are referred to as operating
environment. In addition, industry and competitive environment should also be analyzed
to get an in-depth understanding of the industry characteristics and competitive forces
affecting the firm.
 Analyze internal environment: After the external environment, the next step for the
organization is to assess the internal environment. This involves identifying the strength
and weaknesses of the resources and functional areas of the organization. It involves
analyzing the financial, physical, human and technological resources to build distinctive
competencies and a competitive advantage.

Step -3 Strategy formulation

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  Generate, evaluate and select strategies: After analyzing external and internal
environment and setting long-term objectives, the next step for the organization is to
generate a number of strategic options at the corporate and business levels. The
alternatives generated need to be analyzed through techniques like portfolio analysis,
industry life cycle etc. and appropriate strategies are selected for pursuing.

Step-4 Strategy Implementation

 Implement the chosen strategies: The most and difficult part of strategic management
process is the implementation of strategies. Unless the chosen strategies are put into
action, even the best formulated strategies are of no value. But implementation of
strategies involves a number of decisions and actions. Resources need to be allocated;
functional and operational strategies and policies need to be formulated, and a number of
adjustments need to be made in the organizational structure, culture, and leadership etc.
to make them supportive of the strategy. This basically involves change management
within the organization.
Step-5 Strategy Evaluation and Control
 Evaluate and control the strategy: This is the last step of strategic management
process. It is concerned with tracking a strategy as it is being implemented, detecting
problems or changes in its underlying assumptions, and making necessary adjustments. In
contrast to post-action control, strategic control seeks to guide action on behalf of the
strategies as they taking place and when the end results are still several years away.

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Strategic Intent Hierarchy

Vision

Mission

Goals

Objectives

Plans

DEVELOPING A STRATEGIC VISION (C.Apparao, B.Parvathiswara Rao, Pg no: 70-77)

The first task in the process of strategic management is to formulate the organization’s vision
and mission statements. These statements define the organizational purpose of a firm. Together
with objectives, they form a “hierarchy of goals”

A clear vision helps in developing a mission statement, which in turn facilitates setting of
objectives of the firm after analyzing external and internal environment. Though vision, mission
and objectives together reflect the “strategic intent” of the firm, they have their distinctive
characteristics and play important role in strategic management.

Vision represents top management’s aspirations about the company’s direction and focus. Every
organization needs to develop a vision of the future. A clearly articulated vision moulds
organizational identity, stimulates managers in a positive way and prepares the company for the
future.

Definition of Vision

 Vision is “a picture or view of the future. Something not yet real, but imagined. What the
organization could and should look like. Part analytical and part emotional”. –
Thornberry.
 Vision as “a clear mental picture of a future goal created jointly by a group for the benefit
of other people, which is capable of inspiring and motivating those whose support is
necessary for its achievement”—Johnson.
 Vision can be defined as “a mental image of a possible and desirable future state of the
organization”-- Bennis

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  It is “a vividly descriptive image of what a company wants to become in the future”--
Nanus

Vision Examples
 Microsoft: “ to help individuals and businesses realize their full potential.”
 Wal-Mart: “To be the best retailer in the hearts and minds of consumers and
employees.”
 ITC: “Either we become world-class or we leave business”.
 Britannia industries: “Every third Indian must be a Britannia consumer”.

Two Components of Vision

According to Collins and Porras, a well-conceived vision consists of two major components.

1. Core Ideology: It is based on the enduring values of the organization (what we stand for?
and why we exist?), which remain unaffected by environmental changes.
2. Envisioned Future: It consists of a long-term goal (what we aspire to become, to
achieve, to create?), which demands significant change and progress.

Characteristics of Vision Statement

According to Thompson and Strickland, some important characteristics of an effective vision

statement are:

 It must be easily communicable: Everybody should be able to understand it clearly.

 It must be graphic: It must paint a picture of the kind of company the management is
trying to create.
 It must be Directional: It must say something about the company’s journey or
destination.
 It must be feasible: It must be something which the company can reasonably expect to
achieve in due course of time.
 It must be focused: It must be specific enough to provide managers with guidance in
making decisions.
 It must be appealing: Appealing to the long term interests of the stakeholders.
 It must be flexible: It must allow company’s future path to change as events unfold and
circumstances change.

Importance/Significance of Vision:

Thompson and Strickland point out the significance of vision which is broadly as follows:

 It crystallizes top management’s own view about firm’s long-term direction.

 It serves as a tool for maximizing the support of organization members for internal
changes.
 It serves as a beacon to guide managers in decision-making.
 It helps the organization to prepare for the future.

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  It is inspiring and exhilarating.
 A good vision represents integrity. It is truly genuine and can be used for the benefit of
people.

Formulating a Vision Statement: Nutt and Back off identify three different processes for
creating a vision:

1. Leader-Dominated Approach: The CEO provides the strategic vision for the
organization. This approach is criticized because it is against the philosophy of
empowerment, which maintains that people across the organization should be involved in
processes and decisions that affect them.
2. Pump- Printing Approach: The CEO provides visionary ideas and selects people and
groups within the organization to further develop those ideas within the broad parameters
set out by the CEO.
3. Facilitation Approach: It is a “co-creating approach” in which a wide range of people
participate in the process of developing and articulating a vision. The CEO acts as a
facilitator.

DEVELOPING MISSION (C.Apparao, B.Parvathiswara Rao, Pg no: 70-77)

As Fred R. David observes, mission statement is also called a creed statement, a statement of
purpose, a statement of philosophy etc. It reveals what an organization wants to be and whom
it wants to serve. It describes an organization’s purpose, customers, products, markets,
philosophy and basic technology.

In simple, a mission statement is the purpose or reason for the organization’s existence and is
essential for effective establishing objectives and formulating strategies.

Definition of Mission
 Mission as “The essential purpose of the organization, concerning particularly why it is
in existence, the nature of the business it is in, and the customers it seeks to serve and
satisfy.”—Thompson
 Simply call the mission as the “purpose or reason for the organization’s existence.”--
Hunger and Wheelen

Mission Examples
1. Microsoft: “to empower every person and every organization on the planet to achieve
more.”
2. Wal-Mart: “Saving people money so they can live better.”

Components of a Mission Statement

 Basic Product or Service: What are the firm’s major products or services?
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  Primary markets: Where does the firm compete
 Customers: Who are the firm’s customers?
 Concern for survival, growth and profitability: Is the firm committed to growth and
financial soundness?
 Company philosophy: What are the basic beliefs, values, aspirations and ethcal
priorities of the firm?
 Company self-concept: What is the firm’s distinctive competence or major competitive
advantage?
 Concern for public image: Is the firm responsive to social, community and
environmental concerns?
 Concern for employee: Are employers considered a valuable asset of the firm?
 Concern for quality: Is the firm committed to highest quality?

Characteristics of Mission Statement

 It should be feasible: A mission statement should be feasible, keeping in mind the

resources available to achieve those missions. It must not be an impossible statement yet
should always reach for greater heights.
 It should be precise: A mission statement should be precise. It should be neither too
narrow nor too broad.
 It should be clear: A mission statement should give a clear idea about the main purpose
of an organization and hence, it should be well defined and clear so that it can lead to
action.
 Reflects the firm’s worth: A mission statement should generate the impression that the
firm is successful, has direction and is worthy of support and investment.
 Enduring: A mission statement should continually guide and inspire the pursuit of
organization goals. It may not be fully achieved, but it should be challenging for
managers and employees of the organization.
 It should be inspiring: A mission statement must be formulated in such a way that
members of the society as well as the employees in an organization are motivated to
strive hard and think of the organization as a well-reputed one.
 It should be unique: Every company should have its own unique mission statement in
order to create an impact because if all companies had the same mission statement, then
there would not be any uniqueness in each company’s mission.
 It should indicate major components of strategy: The major components of the
organization’s strategy must be indicated by the mission statement along with the main
organizational purpose.
 Basis for guidance: Mission statement should provide useful criteria for selecting a basis
for generating and screening strategic options.
 Customer orientation: A good mission statement identifies the utility of a firm’s
products or services to its customers, and attracts customers to the firm.
 A declaration of social policy: A mission statement should contain its philosophy about
social responsibility including its obligations to the stakeholders and the society at large.

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  Values, beliefs and philosophy: The mission statement should lay emphasis on the
values the firm stands for; company philosophy, known as “company creed”, generally
accompanies or appears within the mission statement.
 It should indicate how objectives are to be accomplished: A mission statement should
provide hints as to the ways in which these objectives will be met.
 It should arouse positive feelings and emotions of both employees and outsiders about the
organizations.

Importance/Significance of Mission Statement

It is important to develop a mission statement for the following reasons:

 It helps to ensure unanimity of purpose within the organization.

 It provides a basis or standard for allocating organizational resources.
 It establishes a general tone or organizational climate.
 It serves as a focal point for individuals to identify with the organization’ purpose and
direction.
 It facilitates the translation of objectives into tasks assigned to responsible people
within the organization.
 It specifies organizational purpose and then helps to translate this purpose into
objectives.

Formulation of the Mission Statement

An organization’s mission statement lies in the basic philosophy of those who create, manage,
and grow the organization; their roles are defined below:

 Role of Entrepreneur: Corporate philosophies which define the way in which strategic
and operational activities are carried out are usually laid down by the entrepreneurs of
organization. Depending on the entrepreneur’s views and decisions in the beginning of
the company’s progress, mission statements can be created.
 Role of Strategist: Just like the entrepreneur, major strategists are also responsible in the
development of a mission statement. Unlike an entrepreneur, these strategists do it in a
very formal manner by discussing and then penning down the mission statement.
 Role of Chief Executives: Chief Executives have a particular ways to formulate a
mission statement. Some of the ways include setting up executive committees to have
discussions in a formal manner in order to decide on a mission statement or else they
voice out a corporate philosophy for people to follow for strategic management

GOALS

The main aims and objectives of an organization or department are termed as goals. For instance,
the goal of a dancer is to become an extremely good performer, the goal of a basketball team is
to win a basketball match, and the goal of a project manager is to get maximum outcome from
the employees for the benefit of the entire company.

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Definition of Goal
Goal is defined as “what the organization wants to achieve during or by the end of a given
period.”

Based on the time frame, goals may be classified as short-term or long-term goals. Short-term
goals are those which are to be achieved in less than a year where as the time frame for long-
term goals is more than a year.

Goal-Mission Relationship

The goals are always set within the scope of the mission statement. Take, for instance, Facebook,
the international social networking company who has a mission that says, “Facebook’s mission is
to give people the power to share and make the world more open and connected.” In such a
scenario, the developers and coders of the organization would have the responsibility of coming
up with new dimensions and additions to the website, which would help enhance openness and
connectivity among people.

Significance of Goal Setting:

Setting goals is critical for the success of an organization. The reasons why goal setting is
important are as follows:
 Focus: Goals help you to stay focused, especially in a business environment, which is
constantly evolving and hence is also distracting at times. Clearly laid out goals ensure
you stick to your path.
 Clarity: Goals provide clarity in an organization’s decision-making process, as actions
that are counter-productive to that vision are immediately prevented.
 Sense of Purpose: Goals that are clear, precise, and inspiring give employees a sense of
purpose and hence help achieve higher and better levels.
 Encouragement: Goals give a sense of purpose and thus a sense of satisfaction when
those goals are achieved or over-achieved. This encourages employees and it leads to
enthusiasm among the work force.
 Organization: Clear-cut goals help removing many unnecessary work-related activities
and processes and help organize work, for individuals and teams, in a better way.
 Productivity enhancement: Goals ensure that employees have a clear idea about where
they are, from a performance point of view. This helps them gauge and hence their
productivity.
 Better leadership: Clear cut goals lead to better focus and performance on the job.
Better performance leads to more recognition at the work place, which in turn leads to
more responsibility at work, and a chance to lead efforts and showcase leadership
potential.

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OBJECTIVES (Business Policy and Strategic Management by P.Subba Rao, Page no: 71-79)

The accomplishment of purpose or mission of an organization requires the formulation of a

number of objectives. Achievement of the organizational objectives, in turn, requires the
formulation and fulfillment of departmental and unit goals. As presented in below figure, the
objectives can be structured as a hierarchy.

Areas of objectives
Objectives are set for all areas and departments of an organization. Though the objectives can
vary widely from one organization to another organization, they can be broadly divided into
 Profitability:
 Market share:
 Productivity:
 Innovation:
 Product:
 Financial resources:
 Physical facilities:
 Organization structure and activities:
 Manager performance and development:
 Employee performance and attitude:
 Customer service:
 Social responsibility:

Characteristics of effective objectives

All organizations formulate objectives in one form or the other, the utility of objectives is
determined by their level of effectiveness. The important guidelines for the formulation of
effective objectives include.

 Objectives should be Specific: It becomes clear exactly what is to be achieved, when,

how and by whom, when the objectives are formulated specifically. All organizational
members know and understand what is expected of them, if the objectives are specific.
 It should reflect the Level of efforts: Objectives should be set realistically. Ground
realities should be taken into consideration while deciding the efforts needed. Objectives
should be set to that level, at which employers can extend themselves somewhat to
achieve them. They should not be set at so high a level that employees become frustrated
and stop trying to achieve them.
 Objectives should be measurable: The objectives should be measurable in quantitative
terms like 10% increase in profit per share over the last year’s profit.
 Objectives should be time frame: Organizational objectives that reflect a time frame.
 Objectives should be challenging:

Need and Importance of objectives/ Role of objectives

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Why do organizations formulate objectives? And what is their importance? The following factors
explain the need and importance of objectives.

 Objectives help to define the organization in its environment:

 Objectives help in formulating decisions and decision-makers:
 Objectives help in formulating strategies:
 Objectives provide standards for assessing organizational performance:
 Objectives are more tangible targets than the mission statement:
 Objectives help to reflect the changes in the environment:

Guidelines for formulating objectives

Management should formulate the objectives with great care as they serve as basis for
organizational activities. The following guidelines are taken into account while formulating the
objectives.

 Involve all those employees responsible for carrying it out:

 All objectives within an organization should support the overall objectives:
 Objectives should have some reach:
 Objectives should be realistic:
 Objectives should be contemporary as well as innovative:
 The number of objectives for each manager should not be too many:
 Objectives should be ranked according to their relative priority:
 Objectives should be in balance within a given enterprise:

POLICIES (R.Srinivasan, Page no: 8-9)

Policies can be considered as a guide to action. According to Steiner, Miner and Gray, they are
guide to action or channels for thinking. Policy provides a definition of the common purpose for
the organizational components as a whole. It is desirable that persons responsible for
implementation of policy use discretion and judgment in appraising and deciding among
alternative courses of action. Sometimes policy and strategy are used synonymously. This is
especially true when strategy is considered as a means for achieving organizational purpose or
mission.

FACTORS THAT SHAPE A COMPANY STRATEGY (P.Subba Rao, 85-144)

The essence of strategy formulation is coping with number of factors like internal and external
factors. While formulating strategy we should consider various factors, because these factors are
influencing the company’s strategy.

Internal organizational analysis

 Resources and capabilities:

 Core competencies:
 Value chain analysis:

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  SWOT analysis:
 Research and development:
 Internal Environmental scanning:
 Forecasting the environment:

External analysis

Analysis of macro environment

 Economic factors
- Economic systems:
- Economic growth:
- Balance of payments:
- Gross Domestic product:
- Fiscal and Monetary Policies:
- Capital availability:
- RBI Rules and Regulations:
- Annual budget:
- Inflation:
- Balance of payments:

 Political and Legal factors

- Political system:
- Attitude of the Government towards business:
- Stability of the Government:
- Ideology of the political parties:
- Democracy:
- Centre-state relations:
- Totalitarianism:
- Political relations and international business:
- Size of plant:
- Industrial licensing:
- Location of industry:
 Technological factors
- Technology life cycle:
- Promotion of technology:
- Production methods:
- Establishment of technology related institutions:
- Technology and globalization:
 Social and cultural factors
- Cultural attitude and business:
- Behavioral differences :
- Consumer behavior:
- Population:

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 - Education:
- People attitude:
- Career orientation of women:

Analysis of Micro environment

 Analysis of the Industry

- Market environment:
- Customer:
- Competitors:
- Demographic factors:
- Geographical factors: competitors:
- Bargaining power of suppliers:
- Bargaining power of buyers:
- Industry boundaries:
- Threat of new entrants:
- Threat of substitute:
- Rivalry among firms:
 A frame work for Competitors analysis
- Future goals:
- Capabilities:
- Current strategy:
- Structural analysis within industries:
- Industries change:
- Firm’s profitability:

INDUSTRY ANALYSIS (C.Apparao, B.Parvathiswara Rao, Page no: 126-131)

Each business operates among a group of firms that produce competing products or services
known as an industry. An industry is thus a group of firms producing similar products or
services. By similar products we mean products that customers perceive to be substitute for one
another. Harvard professor Michael E.Porter propelled the concept of industry environment.
Industry environment refers the general conditions for competition that influence all businesses
that provide similar products and services.

Importance of industry analysis

The importance of industry analysis can thus be summarized as follows

 Industry related factors have a more direct impact on the firm than the general
environment.
 An industry’s dominant economic characteristics are important because of their
implication for crafting strategy.
 Industry analysis reveals industry attractiveness and its prospects for growth.
 It helps the firm to identify such aspects as:

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 - Current size of the industry
- Product offerings
- Relative volumes
- Performance of the industry in recent years.
- Forces that determine competition in the industry
 It focuses attention on the firm’s competitors
 It helps to determine key success factors
 A thorough understanding of industry provides a basis for thinking about appropriate
strategies that are open to the firm.

Frame of industry analysis

Industry analysis covers two important components

 Industry environment/Analysis
 Competitive environment/ Analysis

Industry analysis

 Industry features: Industries differ significantly. So, analyzing a company’s industry

begins with identifying the industry’s dominant economic features and forming a picture
of the industry landscape. An industry’s dominant economic features include such factors
as.
- Overall size
- Market growth rate
- Geographic boundaries of the market
- Number and size of competitors
- Pace of technological change
- Product innovations etc.

Going a handle on an industry a features promotes understanding of the kinds of strategic

moves that mangers should employ.

 Industry boundaries: All the firms in the industry are not similar to one another. Firms
within the same industry could differ across various parameters, such as:
- Breach of market
- Product/service quality
- Geographic distribution
- Level of vertical integration
- Profit motives

Suppose a firm competes in the micro computer industry. Where do the boundaries of
this industry begin and end?

 Industry environment: Based on environment, industries are basically of two types:

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 - Fragmented industries: It consists of a large number of small or medium sized
companies, none of which is in a position to determine industry price. Manay
fragmented industries are characterized by low entry barriers and commodity type
products that are hard to differentiate.
- Consolidated industries: It is dominated by a small number of large companies ( an
oligopoly) or in extreme cases, by just one company ( a monopoly). These companies
are in a position to determine industry prices. In consolidated industries, one
company’s competitive actions or moves directly affect the market share of its rivals,
and thus their profitability. When company cuts prices, the competitors also cut
prices. Rivalry increases as companies attempt to undercut each other’s prices of offer
customers more value in their products. Pushing industry profits down in the process.
 Industry structure: Defining an industry’s boundaries is incomplete without an
understanding of its structural attributes. Structural attributes are the enduring
characteristics that give an industry its distinctive character. Industry structure consists of
four elements.
- Concentration: It means the extent to which industry sales are dominated by only a
few firms. In a highly concentrated industry, the industry of competition declines
overtime.
- Economies of scale: This is an important determination of competition in an
industry. Firms that enjoy economies of scale can charge lower prices than their
competitors, because of their savings in per unit cost of production.
- Product differentiation: Real perceived differentiation often intensifies competition
among existing firms.
- Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to
enter an industry, and the competition from new entrants depends mostly on entry
barriers.
 Industry attractiveness: Industry attractiveness is dependent on the following factors
- Profit potential
- Growth prospects
- Competition
- Industry barriers etc.
 Industry performance: This requires an examination of data relating to
- Production
- Sales
- Profitability
- Technological advancements etc.
 Industry practices: Industry practices refer to what a majority of players in the industry
do with respect to product, pricing, promotion, distribution etc. this aspect involves issues
relating to
- Product policy
- Pricing policy
- Promotion policy
- Distribution policy

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 - Research and Development policy
- Competitive tactics
 Industry future prospects: The future outlook of an industry can be anticipated based on
such factors as
- Innovation in products and services
- Trends in consumer preferences
- Emerging changes in regulatory mechanisms
- Product life cycle of the industry
- Rate of growth etc.

COMPETITIVE ANALYSIS (C.Apparao, B.Parvathiswara Rao, Page no: 134-154)

In addition to the general and operating environment s well as the industry environment,
managers should also analyze the competitive environment because the nature of competition in
an industry as well as its profit potential are directly influenced by the competitive forces
operating in that industry.

Meaning of Competitor analysis: A competitor analysis is a detailed analysis of firm’s

competition.

It helps a firm understand the positions of its major competitors and the opportunities that are
available. A competitive analysis grid is a tool for organizing the information of a firm to
collects about its competitors.

Objectives of competitive analysis

- To provide the groundwork for a strategic agenda

- To highlight the competitive strengths and weaknesses of the company
- To animate the positioning of the company in its industry
- To clarify the areas where strategic changes may yield the greatest payoff
- To highlight the sources of greatest significance, either as opportunity or threat.
Understanding these sources will also help in considering areas for diversification.

Competitive analysis models

1. Porter’s five force model

In 1979, the Harvard Business Review published the article “How competitive forces shape
strategy” by the Harvard Professor Michael Porter. It started a revolution in the strategy filed.
In subsequent decades, Porter’s five forces have shaped a generation of academic research
and business practice.
The Porter’s five force model developed by Michael E.Porter has been the most commonly
used analytical tool for examining competitive environment. According to this model, the
intensity of competition in an industry depends on five basic forces; each of the forces affects
a firm’s ability to compete in a given market. These five forces are.
 Threat of new entrants: Act as a deterrent against new competitors. It includes.

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 - Economies of scale:
- Product differentiation:
- Capital requirements:
- Switching costs:
- Access to distribution channels:
- Government policy:
- Cost disadvantages:

 Intensity of rivalry among competitors: (degree of competition among

existing firms) intense competition leads to reduced profit potential for
companies in the same industry. It includes.
- Numerous competitors:
- Slow industry growth:
- High fixed but low marginal costs:
- Lack of differentiation or switching costs:
- Capacity augmentation in large increments:
- High exit barriers:
 Bargaining power of buyers: Powerful buyers have a significant impact on
prices. It includes.
- Number of customers:
- The products are standard or undifferentiated:
- Switching cost:
- The buyer earns low profits:
- The quality of buyer’s products:
 Bargaining power of suppliers: Powerful suppliers can demand premium
prices and limit your profit. It includes.
- Number and size of suppliers:
- Product differentiated:
- Dependence of supplier group on the firm:
- Importance of the product of the firm :
- Threat of forward integration:
- Lack of substitutes:
-
 Threat of substitute products and services: Availability of substitute products will
limit your ability to raise prices. It includes.
- Number of substitute products available:
- Buyer prosperity to substitute:
- Relative price performance of substitute:
- Switching cost:
- Perceived level of product differentiation:

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With Porter’s frame work, a strong competitive force can be regarded as a threat because it
depresses profit. A weak competitive force can be viewed as an opportunity because it allows a
company to earn greater profits.

2. Strategic group concept

A strategic group is one where competitors are following similar strategies or have
similar characteristics or where competitors are targeting the same market segments.
Strategic group in a particular industry can be mapped by plotting the market positions or
industry competitors in a two dimensional graph using (a) breadth of product line and (b)
price.

Steps in strategic group analysis

- Select two broad characteristics, such as price and breadth of the product line, those
that differentiate the firms in an industry from one another.
- Plot the firms using these two characteristics as the dimensions.
- Draw a circle around those companies that are close to one another as one strategic
group, varying the size of the proportion to the group’s share of total industry sales.

Other dimension such as quality, service, location or degree of vertical integration, can
also be used in additional graphs to gain a better understanding of how the various firms
in the industry compete. When choosing the dimension, one should take care to see that
they are not highly correlated. Otherwise, the circles on the map will simply lie along the
vertical axis.

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 3. The value net
Branderburger and Nalebuff recently introduced the concept of value net is an extension
to the five force analysis. The value net represents all the players in the game and
analyses how their interactions affect the firm’s ability to generate and appropriate value.
The vertical dimension of the net includes suppliers and customers. The firm has direct
transactions with them. The horizontal dimension of the net includes substitutes and
complements. The firm interacts with them, but may not necessary interact

4. Industry life cycle analysis

A useful tool for analyzing competitive forces is the industry life cycle model. Managers
have to anticipate how the strength of competitive forces will change at each stage of
cycle and formulate strategies that take advantage of opportunities and counter emerging
threats.

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