4.

1 STRATEGIC MANAGEMENT IV MBA MODULE 1 : CONCEPT OF STRATEGY

A) 1.

Defining Strategy What is strategy? Strategy is the art of the general (Greek word Strat Agos) Used in end 18th century how a general tries to deceive an enemy. Clausewitz (1780 1831), a Prussian First great student of strategy. Father of modern study of strategy Instrument of political act and then social development. Strategy is a theoretical discipline practically applied. Generally the military principles are: The objective

The offensive of

Mass (concentration) Surprise

Economy force Security

Co-operation (unity of command) Maneuver

Simplicity

Strategy is a set of key decisions made to meet objectives. They include a complex web of Thought Experiences Memories

Ideas Goals Perceptions

Insights Expertise Expectations

That provides general guidance for specific actions in pursuit of particular Every firm competing in an industry has a strategy. Strategy may have been developed explicitly through a planning process.

ends.

Or, it may have evolved implicitly through the operations of the various functional departments.

To be effective the organisation must have answers to the following questions What business are we in? What products and services will we offer? To whom? At what prices? On what terms? Who are the competitors? On what basis will we compete?

Strategic management, then, can be looked upon as a Set of managerial decisions and actions. That determines the long term performance of a company. It includes an analysis of the environment Both internal and external Formulation of strategy Implementation Evaluation and control Definition of strategy a) Chandler (1962)

2.

Strategy is the:

Determinator of the basic long-term goals of an enterprise And the adoption of courses of action. And the allocation of resources necessary For carrying out these goals. Andrews (1971)

b)

Corporate strategy is the: Pattern of decisions in a company. 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 company is to pursue. The kind of economic and human organisation it intends to be And the nature of economic and non-economic contribution it intends to make. To its shareholders, customers and communities.

c)

Quinn (1980)

A strategy is the pattern or plan:

That integrates an organisations Major goals, policies and action sequences Into a cohesive whole

A well formulated strategy.

Helps to marshal and allocate An organisations resources Into a unique and viable posture

d)

Based upon its relative internal competencies and shortcomings Anticipated changes in the environments. And contingent moves by intelligent opponents. Prahlad (1993)

Strategy is:

More than just fit and allocation of resources It is a stretch and leveraging of resources. Porte (1996)

e) Strategy is:

About being different It means, deliberately choosing a different set of activities To deliver a unique mix of values. Mahoney (1994)

f)

Strategy is a search for balance

B) a)

Types of Strategies/Levels of Strategies/Hierarchy of Strategies Corporate Strategy: Provides the overall direction of the organisation In terms of general attitude towards growth and management of business. They fit in three main categories Stability Growth Retrenchment Business Strategy:

Infosgs (PSPD) Predictability Sustainability Profitability De-risking

b)

Strategy followed at the business unit or product level Aims at improving the competitive position in the market Infosys: Differentiation strategy in its global service delivery model Functional Strategy:

c)

An approach in a functional area To achieve corporate and business unit objectives. Concerned with the development of a distinctive competence. To provide an organisation or a business unit with competitive advantage.

Infosys: desires to be a leader in end-to-end services in the global information technology services market

d)

Hierarchy of Strategy:

C)

Strategy & Tactics Strategy Gand Broad & general General & ongoing Limited Narrowly focused Specific & situational Tactics

Aspects 1. Scale of the objective 2. Scope of the action 3. Guidance provided 4. Degree of flexibility 5. Timing in relation to action 6. Focus on resource utilisation

Adaptable, but not Fluid, quick and adjust & easily changed adapt in minor or major ways. Before action Deployment During action Employment

D)

Characteristics of Strategy:

E)

Strategic Decision Making: Strategic management emphasizes on strategic decision making As a company grows bigger and bigger and becomes complex. A higher degree of uncertainty creeps in Decision making becomes increasingly complicated and difficult

Strategic decision making has to deal with long-term future of an organisation and have 3 characteristics.

Rare: Strategic decisions are not common and have no precedents

Consequential: Strategic decisions involve committing substantial resources of the company. And hence a high degree of commitment from persons at all levels. Directive: Strategic decision can serve as precedents for less important decisions and future actions of the organisations.

1) Mintzbergs Model: 3 models of strategic decision making a)

Entrepreneurial mode: Strategy formulation done by a single person. Focus on opportunities Strategies guided by founders vision Characterized by bold decisions Eg. WIPRO Adaptive mode: Also called as Muddling through Characterized by reactive solutions. Proactive search for new opportunities not done. Eg. Wipro selling personal computers in response to Dell Computers entering the Indian market.

b)

c)

Planning mode: Involves systematic information gathering for situation analysis Generating alternate strategies Selection of the appropriate strategy. Includes both proactive mode And reactive solutions to the current problems. Sometimes organisations may adopt a fourth mode Called Logical Incrementalisation mode This is the synthesis of all 3 modes of strategic decision making An interactive process organisation probes the future. Experiments and learns from a series of partial (incremental) Rather than through global formulation of total strategies.

d )

commitments

2) Operating & Strategic Decisions - Interrelations: Strategic decisions involve an interface between an organisation and its external environment.

But operating decisions are more frequent and within the Effect of strategic decisions permeates through out the organisation. Since it involves committing substantial amount of resources of the Sometimes this is referred as non-self-generating decisions. This implies that though strategic decisions may be a few in The organisation should always be aware of the need to make such Interrelationships. Operating Strategic decisions decisions Clear Unclear Effective operating Clear strategy and effective Unclear strategy but effective decisions operations have contributed operations have contributed to success in the past and will to success in the past but contribute to success in the success in the future is future doubtful Ineffective operating decisions Clear strategy but ineffective operations have sometimes worked in the past in the short run, but increasing competition makes success doubtful in the future Unclear strategy and ineffective operations have meant failure in the past and will be so in the future.

organisation.

organisation.

numbers.

decision.

F)

Strategic Management Process/Approaches to Strategic Decision Making:

Planning mode of strategic management process is indicated above. The process takes place in the following stages: I The strategic planner has to define what is intended to be accomplished (not just desired) Define: objectives, strategies and policies. II the organisation. Document the current performance of

III The Board of Directors and the top management will have to review the current performance of the organisation. IV In view of the review, the organisation will have to scan the internal environments for strengths and weaknesses and the external environment for opportunities and threats. V selecting the strategic factors. VI alternatives are generated. The internal and external scan helps in At this stage a set of strategic is

VII The best strategic alternative selected and implemented through program budgets and procedures.

VIII Monitoring, evaluation and review of the strategic alternative chosen is undertaken in this mode. This can also provide a feedback on the changes in the implementation if required. 1) Step & Ladder Approach to Strategic Management Process:

2) Phases in the Development of Strategic Management: (by: Gluck, Kaufmann and Wallick, 1982)

Phase I : Annual Budgeting

Business strategy is reflected in its budgeting procedures.

The annual budgeting process reflects companys functions in terms of financial problems.

Procedures forecast revenues, costs, and capital needs. This budget identifies limits for expenses on annual basis. MIS reports functional performances to budgetary targets. Then the feedback and control is exercised. MIS could be also on sales, earnings, growth, debts, etc. CEO and his teams knowledge of the following are important: Companys products and markets. Competitors products and markets Their own cost structure, distribution systems Impact of product/market change. Complexities increase when companies become large. The number of products and markets grow very wide. Degree of technological inputs become complex.

Explicit documentation and knowledge becomes more important than explicit knowledge only. Phase II : Long Range Planning

Provides answers to:

Where is the organisation now? When is it going? Where does it want to go? What does it have to do to get to where it wants to go?

Identifies four key activities monitoring, forecasting, goal setting and implementing policies and actions to reach goals.

The cycle begins by: Monitoring selected trends of interest to the organisation Forecasting the expected future of those trends. Defining the desired future by setting organisational goals in the context of the expected future. Developing and implementing specific policies and actions to desired future/goals. Monitoring the effects of these actions and policies on the selected trends.

Limitations changing external environment is usually not taken into account systematically or comprehensively

Assumptions valid in mature industries or basic industries like Usefulness of this type of model under dynamic conditions is

mining, etc.

limited. Phase III : Environmental Scanning

As business become more competitive. Planners reach for more advanced forecasting tools. To handle the complexities of the marketplace.

Tools include: trend analysis, regression models, computers simulation models. They add information from the external environment to the long range planning process.

Such information environmental scanning is used to:

Identify new and potentially crucial information that should be added to those identified and tracked during monitoring. Identify possible development that must be used to adjust the forecasts of the internal issues derived from forecasting.

The environmental scanning model was designed with 4 activities:

Scanning the external environment for threats and opportunities to the organisation.

Each potential issue is then analysed, evaluated and ranked: For the likelihood that it will emerge The nature and degree of its impact on the organisation In case the issue materialises Issues and trends are ranked as per their importance to the current planned operations.

Forecasting focuses on developing and understanding of the expected future for the most important issues and trends, using forecasting techniques.

Monitoring is used to track the continued relevance of each issue and identify areas for additional and continued scanning.

This phase require corporate planners to offer a number of alternatives to top management, each with a risk/reward profile.

This provides management the option of prioritizing different objectives of the organisation.

Phase IV : Strategic Planning Phase

By merging two models of planning long range planning and environmental scanning the strategic model is formed.

The strategic planning model Is a tool that helps an organisation in setting up goals or objectives. The analysis of the environment and the resources of the organisation. The generation of strategic options and their evaluation. And the planning, design and implementation of control systems or monitoring mechanisms.

The model consists of six identifiable stages that fulfill the requirements of the management thinkers:

Environmental scanning. Evaluation of issues Forecasting Goal setting Implementation monitoring The word strategic planning has lot of meanings:

The process is strategic because it involves preparing the best way to respond to the circumstances of the organisations environment. It is strategic because it is clear about the organisations objectives and resources. It involves anticipating the future environment of decisions that are made at present. The process is planning because it involves developing an approach to achieving the future. The plan is a set of decisions about what to do whey to do it and how to do it.

Strategic planning and management are joined together in a single process in the IV Phase.

G)

Vision, Mission & Objectives: Formulating the vision, mission and value statements is the first task of strategic management.

Statements primarily based on the internal processes of the organisation. They have greatest impact on identity and future of organisation. They reflect the strategic intent of organisation. They have distinct roles and distinct characteristics. Hierarchy of vision, mission and objectives:

Vision, mission & values are three components of focus in an organisation. They form a hierarchy Vision of the organisation leads to its mission and its values. Mission in turn leads to the objectives of the organisation.

1.

Vision: Is a long turn perspective of what is the final destination of the Vision keeps the organisation moving forward. Vision is the motivator in an organisation. It should be meaningful with a long term perspective. organisation.

It should motivate people even when the organisation is facing discouraging odds.

Vision is about feelings, beliefs, emotions and pictures

Vision Statement

Martin Luther King said: I have a dream

That vision changed the nation. A vision statement answers the questions: What will success look

like? The pursuit of this image of success is what motivates the people to work together.

When all the employees are committed to firms visions and goals business decisions will be fruitful.

It is an exercise of communication brings/galvanizes the workforce together and to act.

Vision must be encompassed by beliefs for total success.

Successful organisations have a vision that is executable.

Vision projects a similar picture to every member of organisation which is essential for high performance.

Vision statement should reflect the core values of the organisation. Beliefs, mission and environment of organisation. What you want to see in the future. Positive and inspiring. System will not have the same framework all days. Be open to dramatic modifications in organisation. Statements are specific to each organisation.

2.

Mission: Is the founders intentions at the outset of the organisation. What they wanted to achieve.

It is the striving, building and improving to fulfill the vision Some of the questions of purpose are: Why does the organisation exist? What is its value addition? What is its function? How does it want to be positioned in the market and minds of customers? What business is it in?

The above form the contest of the organisation.

Mission Statements

Draws on the belief statements of the management.

Must be future oriented and portray the organisation as it will be, as if it already exists.

Must focus on one common purpose. Must be specific to the organisation, not generic Sets the organisation apart from others. Give meaning to the reason for being, value added. Defines the business of the organisation.

Has direct implications on the diversification strategy of the organisation. A well crafted mission statement must be narrow enough to specify the real area of interest.

To serve as a signal where the top management intends to take the

firm. 3.

Objectives: An organisations ability to prosper despite their diversity in business depends upon the following: Strong entrepreneurial business units with matched autonomy based on the quality of business level managers. Institutionalized horizontal sharing and integration of knowledge and best practices. A shared ambition, a set of values and sense of identity.

The integration is achieved through a set of well defined management processes.

It is reflected in the ability of the management to translate their vision, values and goals into a workable plan.

It also requires a combination of strong entrepreneurial abilities with shared ambition and a sense of identity of the organisation

Strategic Objectives

Often called as corporate objectives. Evolve directly from the mission statement of the firm. Key questions: where do we wish to reach and when? Based on long term benefits to the organisation. May not bring in measurable results in the short term. Have greater competitiveness and stronger market position of the

firm. A commitment of the organisation to direct efforts and energy on what needs to be accomplished.

A bench mark for judging organisation performance. May be specific or measurable in the short run. Different objectives may be Profit maximization Focus on core capabilities Innovation Market dominance Diversification Increased market share Stability Social changes

Business Process Objectives Are specific, measurable objectives, developed at all levels of enterprise

Objectives represent managerial commitment to: Achieve specific Measurable performance targets In a measurable time frame. Such objectives are based on a network of events and desired. If the networking is not good, results may be bad.

When developing specific measurable objectives, six categories have to be considered.

Financial Products/service Human resources Marketing/sales Operations Community

The SMART formula

SMART formula is a useful method of examining objectives

Specific: Clearly state what it is we want to do/achieve by way of a factual description Measurable: Ensure that the success of your business objective can be measured against concrete criteria

Achievable: Is the objective achievable given your current operational resources and/or competence/capacity?

Realistic: Is the scope of the objective within the bounds of what is recognizable as a proper business fit?

Timely: Include a time scale within which the objectives should be achieved

Role of objectives

H)

Corporate Planning Process: Ducker says corporate planning is: A continuous process of making entrepreneurial decisions systematically and with best knowledge of their futurity; organise systematically the effort needed to carry out these decisions and measuring the results against expectations through organised systematic framework

This definition brings out the emphasis of corporate planning strategy. In essence, corporate planning is a systematic approach to strategic decision making. Long range planning in most cases, assumes that the current environment with respect to the organisation will continue as in the past.

It is simply a forward projection of existing operations Whereas, strategic planning asks:

What activities should be company be in? What will be the long term goals on the basis of present? What are the future environmental factors available? What will be long term goals based on the likely new environments?

Strategic plan is implied in corporate plan But the time span for strategic plan is about 3 years and for corporate plan about 5 years. In some organisations corporate planning is called as strategic planning The sketch below gives the conceptual model of corporate planning. Objectives and Goals: In management literatures these two terms are used in a variety of ways. Many times in conflicting ways. Some writers refer Some other writers refer Goals to the long run outcomes Objectives to the immediate, short run outcomes Objectives to long run Goals to short run. Goals for broad organisation wide performances Objectives to designate specific targets of operating divisions

I)

Others use it interchangeably. Others refer

Actually, it does not matter any one way. Some say: goal as an open-ended statement of what an organisation wants to accomplish without qualifications and time criteria While objectives can be considered as providing both. Goals can be considered as motivators in an organisation Some areas where an organisation can set goals and objectives are:

Efficiency (reduction in costs). Profitability (increase in net profits) Growth (increase in total assets, sales, etc) Wealth for shareholders (dividends, stock market appreciation) Resource utilization (ROI, ROE) Brand reputation Contribution to employees (job security, compensation) Societal contribution (taxes, community service, etc.) Leadership of market (Market share) Leadership in technology (innovation, creativity) Strategic Business Units (SBU):

J)

Definition:

An autonomous division or organisational unit Small enough to be flexible And large enough to exercise control Over most of the factors affecting its long term performance. Because SBUs are more agile, usually they have independent missions and objectives They allow the management to respond quickly to changing economic or market situations

What is a Strategic Business Unit (SBU)?

A set of products or product lines

With clear independence from other products or product lines. For which a business or marketing strategy should e designed.

Characteristics of viable SBU

Unique business mission Definable set of competitors Integrative planning done independently Responsible for resource management in all areas Large enough but no so large as to become bureaucratic

SBU Structure

An individual CEO cannot manage the entire complex strategic information Problems related to functional managers need to be off loaded to them. In such cases SBU structure is appropriate. SBU structure composed of operating units where each unit represents a separate business to which the top corporate officer delegates responsibility for day-to-day operations and business unit strategy to its managers. Corporate officer is responsible for formulating and implementing overall corporate strategy. And managers SBU through strategic and financial controls More accurate monitoring the performances of SBUs Simplification of control problems Facilities comparisons between SBUs. Improves allocation of resources Poorly performing managers get stimulated for better performances.

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