CHARTERED ACCOUNTANCY PROFESSIONAL CAP-III

Study Material

Strategic Management
and
Decision Making Analysis

Education Department
The Institute of Chartered Accountants of Nepal
Publisher : The Institute of Chartered Accountats of Nepal
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Second Edition (Revised) : December 2014

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 PREFACE
This study material on the subject of “Strategic Management & Decision Making Analysis”
has been exclusively designed and developed for the students of Chartered Accountancy
Professional [CAP]-III Level. It aims to high light the role of professional accountant as manager
and evaluator of information system, identify information requirement of an organization,
distinguish among the different types of information systems to recommend specific systems for
organizational requirements, assist in the analysis, design and implementation of information
systems, and learn about the management, control and evaluation of IT infrastructure as well
as information systems assets.

It broadly covers the chapters of Organizational Management and Information System,

Different Types of Information System Case Study, Information Technology Strategy and
Trends, System Development Life Cycle, System Analysis and Design, Case Study, Roles and
Functions of IT Professionals, E-Commerce and Inter organizational Systems Case Study,
E-Business Enabling Software Packages Case Study, Information System Security, Protection
and Control, Disaster Recovery and Business Continuity Planning, and Practical Evaluation
Criteria. Practical problems are included at the end of each chapter which can be useful to the
students for their self-assessment about the progress evaluation after thoroughly reading the
material.

Students are requested to accustom with the syllabus of the subject and read each topic
thoroughly for understanding on the chapter. We believe this material will be of great help
to the students of CAP-III. However, they are advised not to rely solely on this material. They
should update themselves and refer recommended text-books given in the CA Education
Scheme and Syllabus along with other relevant materials in the subject.

Last but the most, we acknowledge the efforts of Prof. Dr. Govind Ram Agrawal, who has
meticulously assisted for preparation and updating this study material. Likewise, we also
acknowledge Dr. Mahananda Chalise, who has reviewed this study material for building in
comprehensive shape.

Due care has been taken to make every chapter simple, comprehensive and relevant for the
students. In case students need any clarification, creative feedbacks or suggestions for further
improvement on the material, they may be forwarded to the Education Department.

December 2014

Education Department
The Institute of Chartered Accountants of Nepal
 Contents
1. CONCEPT OF STRATEGY 1
1.1 Concept and Characteristics of Strategy 2

1.1.1 Characteristics of Strategy 2
1.2 Levels of Strategy 4

1.2.1 Corporate Level Strategy 4

1.2.2 Business Level Strategy 5

1.2.3 Functional Level Strategy 6
1.3 Strategic Planning 8
1.3.1 Steps in Strategic Planning 10
1.4 Relevance of Strategic Thinking for Professional Accountant 14
Self Examination Questions 14

2. STRATEGIC MANAGEMENT 15
2.1 Concept of Strategic Management 16
2.2 Characteristics of Strategic Management 16
2.3 Importance of Strategic Management 17
2.4 Process of Strategic Management 19

2.4.1 Strategy Formulation 19
2.4.2 Strategy Implementation 20

2.4.3 Strategic Evaluation 21

2.4.4 Feedback 21
2.5 Elements of Strategic Management 21

2.5.1 Strategy Formulation 22
2.5.2 Strategy Implementation Element 23
2.5.3 Strategic Evaluation Element 24
Self Examination Questions 24

3. ENVIRONMENTAL ANALYSIS 25
3.1 Meaning of Environment 25
3.2 Nature of Environment 25
3.3 Elements of Environment 26
3.3.1 Elements of Political Environment 27
3.3.2 Elements of Economic Environment 30
3.3.3 Elements of Socio-cultural Environment 33
3.3.4 Elements of Technological Environment 35
3.4 Objective Setting 37
3.4.1 Levels of Objective Setting 38
 3.5 SWOT Analysis 41
3.6 Environmental Analysis Process 42

3.6.1 Scanning 43
3.6.3 Forecasting 44

3.6.2 Monitoring 45
3.6.3 Forecasting 45
3.6.4 Assessment 46
Self-Examination Questions 46

4. INTERNAL ANALYSIS 48
4.1 Concept of Internal Analysis 48
4.2 Process of Internal Analysis 49
4.3 Areas of Internal Analysis 53
4.4 Methods of Internal Analysis 55
4.4.1 Value Chain Analysis 56
4.4.2 Cost Efficiency Analysis 58

4.4.3 Effectiveness Analysis 61

4.4.4 Comparative Analysis 62
4.5 Assessment of Internal Resources and Core Competencies 65

4.5.1 Available Resources 66

4.5.2 Threshold Resources 67

4.5.3 Unique Resources 67

4.5.4 Core Competencies 68

4.6 Strategic Advantage 68
Self-Examination Questions 70

5. STRATEGIC OPTIONS 71
5.1 Concept of Strategic Options 71
5.2 Strategic Alternatives at Corporate Level 72

5.2.1 Stability Strategy 73
5.2.2 Growth Strategy (Expansion Strategy) 74

5.2.3 Retrenchment Strategy 87

5.2.4 Combination Strategy 78
5.3 Strategic Alterntives at Business Level 78
5.3.1 Porter’s Competitive Strategies 79
5.3.2 Strategic Clock-oriented Market-based Generic Strategies 85
5.4 Directions for Strategy Development 89

5.4.1 Consolidation 90
5.4.2 Market Penetration 90

5.4.3 Product Development 91

5.4.4 Market Development 91
5.4.5 Diversification 92
5.5 Methods of Strategy Development 94
5.5.1 Internal Development Method 94
5.5.2 Acquisition and Mergers Method 95
5.5.3 Joint Development and Strategic Alliances Method 96
Self Examination Questions 99

6. STRATEGY FORMULATION AND STRATEGIC CHOICE 101

6.1 Process of Strategy Formulation 101

6.1.1 Review Strategic Elements 101

6.1.2 Conduct SWOT Analysis 103

6.1.3 Identify Strategic Options 104

6.1.4 Evaluate Strategic Options 104
6.1.5 Make Strategic Choice 104
6.2 Evaluation of Strategic Alternatives (Options) 104
6.2.1 Suitability 105
6.2.2 Acceptability 107

6.2.3 Feasibility Analysis 113
6.3 Portfolio Analysis 116
6.3.1 BCG Matrix (Growth/Share Matrix) 116
6.3.2 GE Business Screen (General Electric Nine Cell Matrix) 119
6.3.3 Hofer’s Matrix (Product/Market Evolution Matrix) 120
6.4 Strategic Choice 121
6.4.1 Approaches for Strategic Choice 121
6.4.2 Process of Strategic Choice 122
Self Examination Questions 125

7. STRATEGY IMPLEMENTATION 126

7.1 Concept of Strategy Implementation 126
7.2 Process of Strategy Implementation 127
7.2.1 Operationalizing the Strategy 128
7.2.2 Designing Structure for Strategy Implementation 130
7.3 Resource Planning 140
7.3.1 Resource Planning at Corporate Level 141
7.3.2 Resource Planning at Business Level 142
7.3.3 Methods for Resource Allocation to SBUs 142
7.3.4 Resource Planning at Functional Level 144
7.3.5 Factors affecting Resource Allocation 145
 7.4 Management System for Strategy Implementation 146
7.4.1 Human Resource Management 146
7.4.2 Information Management 147

7.4.3 Leadership 148
7.4.4 Shaping Organization Culture 149

7.4.5 Reengineering 149
Self Examination Questions 150

8. STRATEGY EVALUATION 151

8.1 Concept of Strategy Evaluation 151
8.1.1 Characteristics of Strategy Evaluation 152
8.2 Types of Evaluation 152
8.2.1 Strategic Evaluation 152
8.2.2 Operating Evaluation 154
Self Examination Questions 158

9. STRATEGIC CHANGE MANAGEMENT 159

9.1 Concept of Strategic Change 159
9.2 Managing Strategic Change 159
9.2.1 Understanding the force of change 160
9.2.2 Diagnosing the change situation 162
9.3 Strategic Change Management Approaches 165
9.3.1 Structure-based Approaches 166

9.3.2 People-based Approaches 166
9.3.3 Technology-based Approaches 167
Self Examination Questions 168

10. ROLE OF CHIEF EXECUTIVE IN STRATEGIC 169

10.1 CEO’s Role in Formulation of Strategies 170
10.2 CEO’s Role in Implementation of Strategies 171
10.3 CEO’s Role in Evaluation of strategies 173
Self Examination Questions 174

11. DECISION MAKING PROCESS AND TECHNIQUES 175

11.1 Rational Decision Making Process 175
11.2 Strategic Decision Making 180
11.2.1 Concept of Strategic Decision Making 180
11.2.2 Process of Strategic Decision Making 181
11.2.3 Characteristics of Strategic Decisions 182
 11.2.4 Importance of Strategic Decisions 184
11.3 Techniques of Strategic Decision Making 185

11.3.1 Entrepreneurial Mode 185
11.3.2 Adaptive Mode 186

11.3.3 Planning Mode 186
11.3.4 Logical Incrementalism Mode 186
Self Examination Questions 186

12. STRATEGIC MANAGEMENT AND DECISION MAKING PRACTICES IN NEPAL 188

12.1 Strategic Management Practices in Nepal 188
12.1.1 Strategic Orientation 188
12.1.2. Strategic Planning and Management 190
12.1.3. Environmental Analysis 190

12.1.4 Internal Analysis 191

12.1.5 Strategic Options 192
12.1.6 Strategy Formulation 192
12.2.7 Strategy Implementation 193

12.2.8 Strategic Change 193
12.2.9 Future Perspectives 193
12.2 Decision Making Practices in Nepal 194
Self Examination Questions 196

13. CASE STUDIES 197

13.1 How to analyze a strategic case study ? 197
13.2 Case Studies 195
13.2.1 Credit Card Business of Himalayan Bank 198

13.2.2 Bakery Cafes 198
13.2.3 Gunilo Nepali Products 199
12.2.4 The Panchakanya Story 200
13.2.5 Manakamana Cable Car Company 201
13.2.6 Smart Choice Technology Network 202
13.2.7 AO Swift P. Ltd. 202
13.2.8 Rastriya Banijya Bank 203
13.2.9 National Shoe Company 204
13.2.10 Carpet Industry in Nepal 205

References and Selected Bibliography 208

 1. Concept of Strategy

1.1 Concept and Characteristics of Strategy

A strategy is the manner in which a social system – an organization-develops and uses resources to
achieve its economic and other goals.It is a set of actions arrived at by accident or design.A strategy is
a unified , comprehensive, and integrated plan that relates the strategic advantages of the firm to the
challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are
achieved through proper execution by the organization.

Environmental changes are having far reaching impact on modern business organizations.
Globalization is making the world as one big market.The world is becoming a small village due to
advances in information communication technology. Economic integration among countries is
increasing. Business organizations need a long term horizon to cope with the emerging challenges.
They need strategic orientation to achieve their objectives effectively in a dynamic environment.

A strategy begins with a concept of how to use the resources of the firm most effectively in a changing
environment.It is similar to the concept in sports of a game plan. It represents broad actions for
achieving long term objectives. It provides long term direction and scope to the organization. It is
a road map for future. It is a broad indicator of future directions to achieve objectives. It focuses
on matters of strategic importance. It consists of competitive moves and business approaches to
satisfy customers, compete successfully and achieve objectives. Its thrust is to search for competitive
advantage for the organization. It is generally formulated for five to twenty five years. (Figure 1–1)

Where do we Desired End

Objectives
want to be ? Outcomes Results

Means to
How do we Broad
Strategy achieve
get there ? Action Plan
objectives

Figure 1–1: Objectives vs. Strategy

Strategy is based on an organization's resource strengths, core competencies, human resource

capabilities and opportunities in the environment. Objectives are desired end results. Strategy
provides means to achieve objectives.Without strategies no objective will be achieved.

Strategy is a long term blueprint of an organization's desired image, direction, scope and destination.

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 Strategic Management & Decision Making Analysis
It helps to development of resources. It indicates what an organization wants to be, what it wants
to do and where it wants to go.Therefore, a strategy is the manner in which a social ystem – an
organization-develops and uses resources to achieve its economic and other goals.

Definitions
According to Jauch and Glueck
A strategy is a unified, comprehensive and integrated plan that relates the strategic
advantages of the firm to the challenges of environment.
According to Johnson and Scholes
Strategy is the direction and scope of an organization over the long term, which achieves
advantage for the organization.
According to Fred David
Strategies are the means by which long term objectives will be achieved.

Strategic decisions are big decision and affect an entire organization or a large part of it, such as whole
division or a major function.Strategy provides a sense of dynamic direction, focus and cohesiveness
to the organization. It represents integrated framework to exploit advantageous opportunities,
meet potential threats, make full use of resource strengths and minimize weaknesses. It unravels
complexity and reduces uncertainty of the environment.

The fundamental outcomes of strategy are as follows:

„„ Gaining competitive advantage and strategic advantage

„„ Efficiency in Resource Utilization

„„ Improved Productivity

„„ Better market performance and added customer value

„„ Needs fulfillment of stakeholders

„„ Increased profitability

„„ Long term survival and growth

1.1.1 Characteristics of Strategy

A Staretgy is a unified comprehensive integrated plan that relates the strategic advantages of the
firm and to the challenges of the environment .It is designec to ensure that the basic objectives of the
firms are achieved through proper execution by the organizations. Strategy consists of the following
characteristics: (Figure 1–2)

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 Concept of Strategy

Figure 1–2: Characteristics of Strategy

1. Long-term Horizon: Strategy is long term action plan to direct the company. Strategy is concerned
with the long-term direction and scope of the organization. It is not concerned with day-to-day
operations. It is forward looking for 5 to 20 years. It translates objectives into reality. It is formulated
by top management.

2. Action Oriented: Strategy means making clear cut choices about how to compete. Strategy believs
the action of the firms to be implemented. Strategy is concerned with broad action plans. The action
plans aim at objectives achievement. It is more specific than objectives. It is multi-pronged and
integrated.

3. Value-addition: Strategy is the mechanism to enhance the value of the firms. Strategy aims at adding
value. It provides advantage for the organization over competitors. It seeks customer satisfaction.
It is the bridge that matches the resources and capabilities of organization with opportunities. It is
formulated to win.

4. Strategic Decisions: Strategy is based on strategic decisions. Such decisions define the scope of the
organization’s activities. They define products and markets. They allocate resources. They pinpoint
organizational capabilities.

5. Environmental Adaptation: Today, company faces the different environmental issues and adjusts
accordingly. Strategy matches the resources and activities of the organization to the changing forces
in the environment. It aims for strategic fit by matching resources with opportunities. It facilitates
adaptation to changing environment. It is dynamic and flexible.

6. Stakeholder Expectations: Stakeholders are related parties and agencies to otrganizations. Strategy
fulfills the values and expectations of the stakeholders of the organization. They have interest in the
performance of the organization. They can be owners, employees, suppliers, customers, government,
labour unions, and financial institutions.

7. The Development of Resources: Resources are fundamentally necessary to the organization. It is also the job
of strategy to develop the resources in the organizations. Strategy is related for the development of resources. The
knowledge and other resources that the organization acquires over time are vital elements in its strategy.

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 Strategic Management & Decision Making Analysis

1.2 Levels of Strategy

Research in strategic management can be useful to practicing managers, and it seems to suggest that
formal planning contributes to success.Managers are the key players in the strategic management
process. Strategy can be of three levels in the organization. They supplement and complement each
other. They are: (Figure 1–3)

„„ Corporate level strategy

„„ Business level strategy

„„ Functional level strategy

1.2.1 Corporate Level Strategy

Many organizations diversify their activities as they grow.They gather a portfolio of more
or less related businesses.A firm with a diverse portfolio of business units is referred to as a
corporation, and it has an additional level of strategies that do not relate directly to serving users
in individual markets.These corporate level strategies relate mainly to establishing appropriate
architectures, looking at which businesses to enter and exit, and managing relationship between
them. Corporate strategy refers to the overarching strategy of the diversified firm. Such corporate
strategy answers the questions of "in which businesses should we compete?" and "how does
being in one business add to the competitive advantage of another portfolio firm, as well as the
competitive advantage of the corporation as a whole?"

It follows from objectives. It is overall strategy for the organization. It steers the organization
towards success. It provides long-term direction and scope to the organization as a whole. It seeks to
determine what business the organization should be in. It involves strategic decisions about choice
of businesses, products and markets.

■ According to Johnson and Scholes:

Corporate level strategy is concerned with the overall purpose
and scope of an organization and how value will be added to the
different parts of the organization.

Corporate level strategy can be:

a) Concentration: In single business. For example, fast foods.

b) Expansion: New segments to be served in new areas added.

c) Diversification: It can be of products, services, and business units from current markets.

d) Growth and Stability: It can be through merger, acquisition, reengineering, downsizing,

rightsizing, strategic alliances etc.

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 Concept of Strategy

1.2.2 Business Level Strategy

Business level strategies relate to choosing which users an organization should serve and which
services it should offer them. They make decide to develop specialized outputs so as to focus on the
needs of a small group or niche of customer. Business level strategy aims to achieve advantage over
competitors in a given market. It follows from corporate-level strategy. It is concerned with strategic
business units. Large organizations operate several businesses. It defines their business portfolio. It
classifies their business into Strategic Business Units (SBU). Such classification is generally based on
product category. (Box 1-1).

Figure 1–3: Levels of Strategy

A SBU is a part of the organization for which there is a distinct market. SBUs represent basket of
businesses of an organization. Each SBU should have the following characteristics:

a) Separate Market Segment: Each SBU has different products and marketing strategies. ach
SBU deals with distinct market segments. It has its own products, customer groups and
market areas. They are different from another SBU.

b) Separate Competitors: Each SBU has its own set of competitors. They are separate from
another SBU.

c) Separate Manager: Each SBU has its own manager responsible for planning, management
and control.

d) Separate Plan: Each SBU has its own strategic plan. It is separate from another SBU.

■ According to Johnson and Scholes:
Business unit strategy is about how to compete successfully in particular markets.
Business level strategy can be:
a) Market Development: It focuses on identification of new products in the existing market segments.
It has different market development strategies.

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 Strategic Management & Decision Making Analysis
b) Product Development: It focusses on choice of products in new market segments.

c) Positioning: It focuses on positioning to gain competitive advantage in a given business.

d) Objectives: It focuses on long-term profitability and market share growth for each SBU.

e) Resource Allocation: It focuses on resource allocation among functional areas of

SBU,

such as marketing, production, finance, human resources and R & D.

Contemporary theory places a lot of emphasize on business level strategies, since they determne how
well an organization competes in its chosen markets.

1.2.3 Functional Level Strategy

Each of organization's individual functions will have its own functional strategies.Functional
strategies have an important influence on the organization's value chain.Functional strategies
include marketing strategies, new product development strategies, human resource strategies,
financial strategies, legal strategies, supply-chain strategies, and information technology
management strategies. The emphasis is on short and medium term plans and is limited to the
domain of each department’s functional responsibility. Each functional department attempts to
do its part in meeting overall corporate objectives, and hence to some extent their strategies are
derived from broader corporate strategies.
Many companies feel that a functional organizational structure is not an efficient way to organize
activities so they have reengineered according to processes or strategic business units (called
SBUs). A strategic business unit is a semi-autonomous unit within an organization. It is usually
responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An
SBU is treated as an internal profit centre by corporate headquarters. Each SBU is responsible
for developing its business strategies, strategies that must be in tune with broader corporate
strategies.
It follows from business level strategy. It spells out specific tasks. It is concerned with strategy for each
function, such as production, marketing, finance, human resources, and research and development. It
deals with operations of the organization. It involves tactical decisions to achieve strategic advantage.

■ According to Johnson and Scholes:

Operational strategies are concerned with how the component parts of an organization
deliver effectively the corporate and business level strategies in terms of resources, processes
and people.

Functional strategy includes:

a) Objectives: For a specific function, such as marketing.Functional strategy is directed to

achieve the objectives.

b) Resource Allocation: For subfunctions of a function, such as product, price, place, promotion
of marketing function.Without resource, no strstegy will be implemented in the firms.Thus,
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 Concept of Strategy

there should be proper allocation of resource for the effective implementation of strategies.

The functional level strategies add value to a product by lowering costs or differentiating products.
They aim to attain superior efficiency, quality, innovation and responsiveness to customer needs.

Functional strategies can be as follows:

Production Strategies: They focus on improving efficiency and controlling costs. They deal with
plant technology, plant capacity, plant layout and location, production systems and processes,
maintenance, inventory, and quality.

Marketing Strategies: They focus on customer need satisfaction. They deal with target markets,
marketing mix, product positioning and management of product life cycle.

Finance Strategies: They focus on increasing shareholder’s wealth. They deal with financial planning,
financing decisions, investment decisions, dividend decisions, and financial control. Profit potential
of various strategic alternatives are assessed.

Human Resource Management (HRM) Strategies: They focus on quality, competence, productivity
and welfare of employees. They deal with acquisition, development, utilization and maintenance of
employees.

Research and Development (R & D) Strategies: They focus on new product development. They deal
with product innovation, modifications and imitations.

Box 1–1: SBUs for Chaudhary Group of Nepal

The various businesses of Chaudhary group can be grouped into the following SBUs (Strategic
Business Units):

1. Food SBU: Noodles, biscuits, flour, snacks, vegetable ghee, baby food, sugar, beer
businesses

2. Electronic SBU: LG products, Power systems businesses

3. Construction SBU: Apollo Tubes and Steel products, apartment businesses.

4. Automobile SBU: Vehicles, Lube oil, Spare parts businesses

5. Tourism SBU: Hotels and Resorts businesses

6. Education and Health SBU: School, Academy, Newspaper and Norvic Health center businesses

7. Financial SBU: Insurance, Finance company and Bank businesses

8. Trading SBU: All trading-related businesses.

1.3 Strategic Planning

A company's strategy consists of the competitive moves and bisiness approaches that managers are
employing to compete successfully, improve performance, and grow the business.The crafting of a
strategy reprsents a managerial commitment to pursuing a particular set of actions.

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 Strategic Management & Decision Making Analysis
Planning is predetermining future. It is the process of setting objectives and choosing actions to
achieve them. It defines the future path of the organization. It is the framework for carrying out
future activities. It relates organization to its external environment.

Strategic plan is a road map for the future direction of the organization. It is a long range plan for
five years and more. It is organizationwide. It is prepared by top management. It is the means for
formulating corporate strategy. It provides broad direction to take the organization where it wants to
be in the long run. Its thrust is to search sustainable competitive advantage for the organization.

Strategic plan establishes mission, objectives and strategies for an organization. It makes strategic
choice about future courses of action from among the strategic options. Policies for acquisition and
deployment of resources are specified.

„„ Mission is the reason for the existence of an organization. It defines the scope in terms of
product, customer and com­petitive advantage. It projects the image of the organization.

„„ Objectives are desired outcomes in terms of results to be achieved.

„„ Strategies are broad action plans to achieve objectives.

Strategic planning provides a sense of direction to operational planning. It facilitates coordinated

resource allocation. It relates the organization to its environment by making it responsive to
environmental changes.

Definition:

■ According to Anthony and Dearden:

The strategic planning is a process having to do with the formulation of long range,
strategic, policy-type plans that change the character or direction of the organization.

■ According to Steiner and Miner:

Strategic planning is the formalized, long range planning process used to define and achieve
organizational goals.

The search for sustainable competitive advantage through strategic plan can be based on:

„„ Distinctive competencies of people in the organization

„„ Core technology, innovation, quality

„„ Desired public image of organization

„„ Key markets and target customers

„„ Products and services offered in terms of features, range, dimensions

„„ Profitability desired in terms of price, cost, return on investment.

Characteristics of Strategic Planning

Strategy is about competiting differently from rivals – doing what competitors donot do or, even
better, doing what they can not do.Every strategy needs a distinctive element that attracts customers

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 Concept of Strategy

and produces a competitive edge.A company's strategy provides direction and guidance, in term of
not only what the company should do but also what it should not do.The heart and soul of strategy
is the actions and moves in the market place that managers are taking to gain competitive edge over
rivals.

1. Future Oriented: The fundamental feature of strategic planning is future oriented approach.
Strategic planning is the long-term future direction and scope, not day-to-day tasks; road
map for future. Strategy can be successful through strategic planning formulated by the
organization. It is targeted to future course of action in the firms.

2. Environment: An analysis of environment is necessary to formulate the strategic planning in

the organizations. Strategic fit between the business and its environment.Strategic planning
is based on understanding of environmental forces.Strategic planning is prepared to cope the
uncertainties due to environmental changes.

3. Opportunities: Strategic planning is necessary to grab the opportunities through the scanning
of external environmental issues. Business is the most important engine for social change in
our society.So, strategic planning helps to exploit opportunities of competitive advantage for
the organization.

4. Core Competencies: Create core competencies for sus­

tainable competitive advantage.
Strategic planning is the mechanism to build the core competencies in the firms. Core
competence is the internal activity that a company performs better than other competitively
important internal activities.It helps in differentiating a company from its competitors.

5. Portfolio: It is necessary to decide portfolio of Strategic Business Units and their product-
market scopes.The firms have different portfolio to penetrate in the market. So, the strategic
planning is useful to inject the portfolio in the market through the company.

6. Integration: Integration of various activities is required to gain the competitive advantage in

the firms. Organization as a system, not a particular function.Strategic planning is designed to
integrate the various systems and activities in the company.
7. Strategic Decisions: Strategic decisions depend upon the strategic planning in the
organizations. Strategy-related unique decisions, not operation-related routine decisions.
Strategic planning and strategic decisions are complementary issues to gain the competitive
advantage in the organizations.

8. Vision, Mission, Objectives Strategies: The strategic planning incorporates the vision,
mission, objectives and strategies of the firms. They are the outputs of strategic planning.The
strategic planning entails the vision, mission and objectives of the organizations.

1.3.1 Steps in Strategic Planning

Strategic planning is a systematic approach to analyze the opportunities and threats in the
environment. It assesses organization's strengths and weaknesses. It identifies opportunities

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 Strategic Management & Decision Making Analysis
of competitive advantage and matches them with strengths in a long-term perspective. It aims to
develop a fit between organizations strengths with opportunities in the environment through
strategic choices.

The steps involved in strategic planning are: (Figure 1–4)

Figure 1–4: Steps in Strategic Planning

1. Define Organization's Vision, Mission, Objectives, Strategies

„„ Vision: Visison is dreamt of more than it is articulated.It states where the organization wants
to be in a long-term perspective. It is also known as strategic intent. It is the aspiration of
the organization.A strategic vision describes management's aspirations for the future and
delineates the company's strategic course and long term direction.Good visions are inspiring
and exhilarating.

„„ Mission: Mission is what an organization is and why it exists. An effiectively communicated

vision is a tool for enlisting the commitment of company personnel to actions that move
the company forward in the intended direction. It states the reason for existence of the
organization. It defines the product, market and competitive scope of the organization for the

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 Concept of Strategy

long-term. It describes values and priorities. It projects image of the organization.

„„ Objectives: Objectives are the ends that state specifically how the goals shall be achieved.
The managerial purpose of setting objectives is to convert the vision and mission into specific
performance targets.They are desired outcomes. They are end results to be achieved in the
long-term.

„„ Strategies: They are broad action plans for achieving objectives. They identify sustainable
competitive advantages. They provide direction and scope to the organization.

2. SWOT Analysis:
It is the process of analyses of internal and external forces to identify the strengths, weakness,
opportunities and threats of the company. SWOT analysis provides the comprehensive
information to the compant. A SWOT analysis (Strengths, weaknesses, opportunities, threats)
is done to identify external opportunities and internal strengths of the organization. It is
analysis of strengths, weaknesses, opportunities and threats. It is based on assessment of
internal and external environmental forces.

3. Analyse External Environment:

Managers must systematically analyze and diagnose the environment, since environmental
factors are the prime influence of strategy change. Therefore, there are various factors of
environment which affect the demand for products and services and the costs of providing
them. External environmental analysis is done to detect trends and create scenarios. It consists
of political, economic, socio-cultural, and technological forces. It provides opportunities and
threats (OT) to the organization.

Opportunities of competitive advantage are identified. Such opportunities provide position of

superiority in relation to competitors. They can be in terms of superior technology, resources,
customer value and markets.

4. Analyse Internal Environment:

It is the crucial job of top-management to create conditions for effective analysis and diagnosis
of the environment.This means that the management must determine what factors in the
environment are most crucial which, in turn, influences what information will be gathered
and where in the enterprise it will be analysed and diagnosed.Strategists try to cope with the
environment through analysis and diagnosis.

Internal environment analysis focuses on organization’s resources and competencies.

Resources can be human, financial, physical and informa­tional. Organization's resource
capability is analyzed. Resource availability is determined.

Strengths and weaknesses (SW) are identified. Assessment is done to identify core
competencies. Core compe­
tencies are strengths that provide competitive edge to the
organization. Stakeholder’s expectations are considered.

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 Strategic Management & Decision Making Analysis

5. Match Strengths with Opportunities:

Environmental alanysis is the process by which strategists monitor the environmental
settings. A firm whose strategy fits the needs of its environment will be more effective. Based
on SWOT analysis, Organization's strengths are matched with opportunities of competitive
advantage to formulate strategic plan. Strategic planning options can be: build on strengths,
minimize weaknesses, exploit opportunities, and avoid threats.

6. Prepare Strategic Plan:

The strategic plan is necessary in the firm.The strategic plan is prepared to meet the future
uncertaintities. It is based on a fit of opportunities with strengths.

1.4 Relevance of Strategic Thinking for Professional Accountant

Accounting firms are knowledge-based professional service firms for which the management of
expertise is critical to success (Davenport, 1997). The management of expertise in the accounting
profession, however, has not been examined in the academic literature, as the study of expertise has
generally focused on the individual level (e.g., Ashton and Ashton, 1995; Libby and Luft 1993) or
team level whereby group processes are examined and group decisions are contrasted with decisions
made by individuals (e.g., Solomon 1987; Rich, Solomon and Trotman 1997).

Expertise at the public accounting firm level is important for several reasons. First, public accounting
firms, as professional service firms, sell knowledge and expertise. Managing their expertise is
therefore part of the production and investment functions of such “knowledge-based” or “knowledge-
intensive” firms (Starbuck, 1997; Drucker, 1998). Second, there is evidence of reorganization of many
accounting firms along expertise lines, for example by areas of industry specialization (Craswell,
Francis & Taylor, 1995; Solomon, Shields & Whittington, 1999). These reorganizations are largely
intended to improve the firms’ delivery of the most appropriate expertise to their clients, wherever
the clients or the firms’ people are located. Third, managing knowledge for most efficient use and
best competitive advantage is a major activity for public accounting firms, and a potential source of
revenue growth as a service for knowledge-dependent clients (Gibbins & Wright, 1999).Therefore,
every accounting professionals have to think strategically to provide services to clients and manage
the firms

In today's complex and rapidly changing business environment, members of all professions should
posses and use strategic thinking skills, which reported in the literature as a crucial aspect of
success. Nowadays, professional accountants are confronted with changes take place in standards
and legislations. Accounting environment faces great changes in Nepal during the adoption process
of IFRS, ISA, and the new Commercial Code. To respond adequately to these changes, the accounting
profession should have and use strategic thinking skills. The research showed the usage level of
strategic thinking skills (reframing, reflecting, and systems thinking) of CPAs and CPA trainees and
tested the effects of several variables on the usage level of those skills. Strategic management develops
the level of strategic thinking in the mind set of professional accountants. It allows professional
12 | The Institute of Chartered Accountants of Nepal
 Concept of Strategy

accountants to anticipate changing conditions and plan accordingly.Strategic thinking provides road
map for future in terms of long term direction and scope to achieve objectives. It represents broad
action plans.

Professional accountant are generally engaged in multifarious nature of work, such as auditing,
consultancy and gainful employment. They hold top management position in public as well as
private sector organizations. Globalization, liberalization and revolution in information technology
are having for reaching impact on the accounting profession. The nature and scope of the work of
professional accountant is changing.

Strategic thinking is relevant for professional accountants because of the following reasons:
1. Long term Horizon: Professional accountants need to look forward for 5 to 20 years in future.
This is essential for their survival and growth in the age of growing competition. Strategic
thinking is must to look forward. Professional accountant in the corporate world cannot
succeed without strategic thinking.they should design the accounting strategies in long term
perspectives.

2. Strategic Decisions: Professional accountants are required to make strategic decisions. They
are needed to define the scope of their activities, products and markets. They are needed to
forge strategic alliances with national and international accounting firms. Strategic thinking
is needed to make strategic decisions. They need to strategically manage their business.

3. Environmental Adaptation: External environment is fast changing. Professional accountants

need to adapt their resources and activities to the changing forces in the environment.
Strategic thinking is needed to match resources with opportunities of advantage in the
changing environment. This is also needed to prevent problems.
4. Consultancy Services: Professional accountants are providing a variety of consultancy
services that are related to long term future. Some examples are:

� Profit planning programmes

� Investment proposals
� Feasibility studies

� Tax planning for future years

� Management consultancy, etc.

Strategic thinking is required for professional accountants to provide future-oriented consultancy

services.

5. Competitive Advantage: Strategic thiniking creates competitive advantage for the professional
accountants. They can outperform their compeitors. Their market share increases. Client
satisfaction increases. Resources are effectively utilized.

6. Change Management: Professional accountants should understand the philoshopy of

change or die strategy. Strategic thinking is needed to manage change. It guides the firm
successfully to respond to all types of changes. Resistance to change decreases. Participation

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 Strategic Management & Decision Making Analysis
and communication is promoted. Uncertainty is reduced. Change management is facilitated.
Lack of strategic thinking endangers survival and growth of professional accountant.

Self Examination Questions

1. What is the concept of strategy? Discribe the characteristics of strategy.
2. Explain various levels of strategy.
3. Distinguish between objectives and strategy.
4. What is strategic planning? Explain the steps in strategic planning.
5. Justify the strategic planning thinking for professional accountant.
6. "Strategy has various levels." Comment.
7. Distinguish corporate strategy from business strategy.
8. How do functional strategies differ from corporate strtegies? What purposes do functional strategies
serve?
9. Discuss different strategic levels in organization.
10. Define mission in your own words.
11. Review literature in strategic management and read definitions of strategy.Derive the essence of the
concept of strategy from these definitions and prepare a licid note explaining the various components
of the concept of strategy.
12. Describe the different level at which strategy operates. How is integration of strategies operating at
different levels done?

14 | The Institute of Chartered Accountants of Nepal

 2. Strategic Management

2.1 Concept of Strategic Management

Crafting and executing strategy are top-priority managerial tasks for a big reason. A clear and
reasoned strategy is management's prescription for doing business, its road map to competitive
advantage, its game plan for pleasing customers, and its formula for improving performance.

Strategic management is the process whereby managers establish an organization’s long-term

direction, set specific performance objectives, develop strategies to achieve these objectives in the
light of all relevant internal and external circumstances, and undertake to execute the chosen action
plans. Straregy means making clear-cut choices about how to compete.One must have strategies to
execute dreams. Strategic management as a discipline originated in the 1950s and 60s. Although
there were numerous early contributors to the literature, the most influential pioneers were Alfred
D. Chandler, Jr., Philip Selznick, Igor Ansoff, and Peter Drucker.
Strategic management techniques can be viewed as bottom-up, top-down or collaborative
processes. In the bottom-up approach, employees submit proposals to their managers who, in
turn, funnel the best ideas further up the organization. This is often accomplished by a capital
budgeting process. Proposals are assessed using financial criteria such as return on investment
or cost-benefit analysis. Cost underestimation and benefit overestimation are major sources of
error. The proposals that are approved form the substance of a new strategy, all of which is done
without a grand strategic design or a strategic architect. The top-down approach is the most
common by far. In it, the CEO, possibly with the assistance of a strategic planning team, decides
on the overall direction the company should take. Some organizations are starting to experiment
with collaborative strategic planning techniques that recognize the emergent nature of strategic
decisions.

Strategic management is a stream of decisions and actions which leads to the development of
an effective strategy or strategies to help achieve corporate objectives.It is concerned with the
formulation, implementation and control of strategies in the organizations.

Strategic is something that is important, critical, central and long-term for future direction. It is not a
quick fix. Management gets the jobs done by working with and through people to achieve objectives
efficiently and effectively. It strives for enhancing organizational performance.

Strategic management refers to strategic decisions and actions of top management. It is concerned
with formulation, implementation and evaluation of strategy to achieve long-term objectives. It
involves decisions about allocation of significant resources consisting of people, money, technology,
time and information. It turns strategies into action.

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 Strategic Management & Decision Making Analysis
Definition

■ According to Wheelen and Hunger

Strategic management is a set of managerial decisions and actions that determine the
long-run performance of a corporation.
■ According to Pearce and Robinson:
Strategic management is the set of decisions and actions that result in the formulation
and implementation of plans designed to achieve a company’s objectives.
■ According to Johnson and Scholes:
Strategic management includes understanding the strategic position of an organization,
strategic choices for the future, and turning strategies into action.

Strategic management is a managerial process of forming vision, setting objectives, formulating

strategies, implementing strategies, controlling strategic performance and making corrective
strategic adjustments to adapt to the changing environmental forces. It is managing for future. It
seeks to establish competitive advantage at all levels of business.

Strategic management is an on-going process. It provides guidance and future direction to

organization. It makes strategic decisions. It facilitates coordinated allocation of resources. It
enhances long-range performance of the organization by turning strategies into action. It creates and
exploits new opportunities for tomorrow.

2.2 Characteristics of Strategic Management

Strategic management is a stream of decision and actions which lead to the development of an
effective strategy or strategies to help achieve corporate objectives.Staregic management focuses on
"second generation planning" that is, analysis of the business and the preparation of several scenarios
for future.The basic characteristics of strategic management are: (Figure 2–1)
1. Uncertain: Strategic management deals with future-oriented non-routine situations. They
create uncertainty. Managers are unaware about the consequences of their decisions.The
environmental issues are more uncertain and strategies help to cope such issues in effective
manner.
2. Complex: Uncertainty brings complexity for strategic management. Managers face an
environment which is difficult to comprehend. Strategies are the big weapon to make easy
and simple to complex situations in environment.
3. Organization-wide: Strategic management has organization-wide implications. It has
systemwide application. It is a continuous process. It is an interactive process among various
functional areas.It can be applied in the contextual issues in organization
4. Fundamental: Strategic management is fundamental management function for improving
the long-term performance of the organization. It is equal necessary to all sectors and types
of organizations.

16 | The Institute of Chartered Accountants of Nepal

 Strategic Management

Figure 2–1: Characteristics of Strategic Management

5. Long-term Implications: Strategic management is not concerned with day-to-day operations.

It has long-term implica­tions. Strategy is a long term acion plan to direct and guide to the
organizations.Therefore, it has long term implications and perspectives to the firms.

6. Implementation: Strategic management ensures that strategy is put into action.

Implementation is its essence. It also evaluates performance for future decision making.
Implementation is the necessary and important process of strategic management.Strategy
implementation or putting into the action is the thrust issues in the firms to formalize the
concept and plans in real situations.

2.3 Importance of Strategic Management

Strategic management is dynamic process. It is not a one time, static or mechanistic process. By being
dynamic, strategic management is a continual, evolving, iterative process.The appeal of strategy
that yields a sustainable competitive advanyage is that it offers the potential for an enduring edge
over rivals.However, managers of every company must be willing and ready to modify the strataeg
in response to changing market conditions, advancing technology, the fresh moves of competitors,
shfting buyers needs, emerging market opportunities, and new ideas for improving the strategy.
Crafitng and executing strategy are core manageenmt functions. Strategic management is important
due to following reasons: (Figure 2–2)

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 Strategic Management & Decision Making Analysis

Figure 2–2: Importance of Strategic Management

1. Participative Management: Today, management believs the participatory approach.

Strategic management also ensures the participatory issues in the organizations. Strategic
management involves interactions at all levels of organization. It promotes participative
management. It leads to employee empowerment and commitment. Group interactions
generate better strategic options.

2. Problem Prevention: Environmental issues provide challenges and opportunities to the

firms. Strategy can be considered as the dimension to resolve the business problems. Strategic
management enhances problem prevention capabilities of the organization. Problems
are anticipated and addressed during strategy formulation stage. This facilitates problem
prevention during strategy implementation. Organization is proactive in shaping its future.
Forward thinking is encouraged. Costly mistakes are avoided.

3. Competitive Advantage: It refers the gaining advanteges between and among the competitors.
Formulation and implementation of effective strategies enhance to gain the competitive
advanges in the organization. Strategic management creates competitive advantage. The
company can outperform the competitors. It can increase its market share to have dominance
over the market. Customer satisfaction increases.

4. Motivation: Firms formulate the strategies how to motivate the employees as the issue
of strategic human resource manangement. there are other different type of functional
strategies in the firms. Employees are motivated by performance-reward relationship. This
improves productivity and goal-directed behavior. Efforts are channelled towards goals.
Communication improves. Employees remain informed. So, the company has to formulate the
strategies relating to the different human resource practices

5. Reduced Gaps and Overlaps: Resource is very necessary thing in the company. Without
resources, the company can not make the strategies.Strategic management takes an
integrated approach to resource allocation. This reduces gaps and overlaps in activities.
Roles and responsibilities are clearly specified. Resources are effectively utilized. Discipline is
promoted.

18 | The Institute of Chartered Accountants of Nepal

 Strategic Management

6. Change Management: This is the age of change or dies strategy. Employes resist the changes.
Strategic management reduces resistance to change. The participative approach promotes
participation and communication. Uncertainty is reduced. Strategic change is facilitated. It
alerts management to respond to change. It guides the organization successfully through
all changes in the environment. Therefore, strategy can be considered as a tool of change
management.

7. Financial Benefits: Organizations using strategic management tend to be more successful.

Efficiency and effectiveness is promoted. Resources are better allocated and utilized.
Profitability improves.So, effective strategy can provide financial and other benefits to the
organization.

2.4 Process of Strategic Management

A process is the flow of information through interrelated stages of analysis toward the achievement of
an aim. Businesses vary in the processes they use to formulate and direct their strategic management
activities.Very early in the strategy-making process, a company's senior managers must wrestle
with the issues of what directional path the company should take. A company's senior executives
obviously have important strategy making roles.Therefore, the the process of strategic management
consists of the following steps: (Figure 2–3)

1. Strategy Formulation

2. Strategy Implementation

3. Strategic Evaluation

4. Feedback

2.4.1 Strategy Formulation

Strategy formulation guides executives in defining the business their firm is in, the ends it seeks,
and the means it will use to accomplish those needs. The approach of strategy formulation is an
improvement over that of traditional long range planning.Strategy formulation means the crafting
and preparation of strategies to the organizations. This step involves understanding of strategic
position. Environmental analysis is done to understand the strategic position of an organization.
Environmental analysis monitors and evaluates the changes and developments in the external
and internal environment. External environment provides opportunities and threats. Internal
environment provides strengths and weaknesses. Their impact on strategy is assessed.

A SWOT analysis (Strengths, weaknesses, opportunities, threats) is done to identify external

opportunities and internal strengths of the organization.

Organizational capabilities provide scope to strategic position. The expectations of stakeholders

determine the acceptability of strategies.

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 Strategic Management & Decision Making Analysis

Strategy Strategy Strategic

Formulation Implementation Evaluation

Feedback

Figure 2–3: Process of Strategic Management

This step also involves making strategic choices from among strategic alternatives. They serve as the
basis for formulating the following strategies:

a) Corporate-level Strategy: It is organization-wide. It provides overall direction and scope to

the organization. It is concerned with adding value to the organization.

b) Business-level Strategy: It is about how to compete successfully in a particular market. It

aims to achieve advantage over competitors. It is concerned with identifying competitive
advantage for strategic business units.

c) Functional Strategy: It is function-specific, such as for marketing, finance, research and

development. It is concerned with resources, processes and people. Its aim is effective
delivery of corporate and business level strategies.

Strategic choices are based on strategic options. Strategic options are strategic alternatives. They
should be suitable, feasible and acceptable. The options can be:
„„ Internal development of the organization
„„ Mergers and acquisitions
„„ Joint development and strategic alliances

2.4.2 Strategy Implementation

In organizations, and in the practice of strategic management, strategies must be implemented to
achieve the intended results. The most wonderful strategy in the history of the world is useless if
not implemented successfully.This is important stage in the strategic management process involves
developing an implementation plan and then doing whatever it takes to make the new strategy
operational and effective in achieving the organization's objectives.

The strategies that are formulated are implemented through a series of administrative and managerial
actions.This step involves turning strategies into action. It is concerned about implementation of
strategies. It ensures that strategies are operationalised in practice. It involves:

a) Structure Design: Proper structure is needed to implement the strategy in the organization.
The structure for strategic management is determined. It establishes reporting relationships,
span of control and chain of command. Authority and responsibility relationships are clearly
defined.

b) Resource Planning: Strategies can not be implemented effectively without planning of

20 | The Institute of Chartered Accountants of Nepal

 Strategic Management
resources. Resources consist of people, money, technology, time and information. Resources
are matched with opportunities through plans. Resource plans enable success of strategies.
They allocate financial resources to various strategic business units and functions.

c) Management System: Strategy is the dimension of management. Proper ermplementation of

strategy requires the good management syatem. A strong management team is put together.
Competent human resources are acquired, developed and managed. Information is managed.
Leadership is provided. Enabling organization culture is shaped. The change process is
managed. Barriers to change are overcome.

2.4.3 Strategic Evaluation

This step of strategic management is concerned with monitoring and evaluation of performance
results. Corrective actions are taken to resolve performance problems. Strategy is adjusted to
environmental changes.

2.4.4 Feedback
It provides information for revision of strategies as needed. Evaluation serves as the source of
performance information. Environmental changes necessitate revision of strategies.

The sum of a company's strategic vision and mission, objectives, and strategy constitutes a strategic
plan for coping with industry conditions, outcompeting rivals, meeting objectives, and making
progress towards the strategic vision.

2.5 Elements of Strategic Management

Each phase of the strategic management process consists of a number of elements, which are discrete
and identifiable activities performed in logical and sequential steps.Developing a strategic vision of
the company's future, a mssion that defines the company's current purpose, and a set of core ualues
to guide the pursuit of the vision and mission.

Strategic management process consists of strategy formulation, strategy implementation and

strategic evaluation. Each of these elements has sub-elements. They are as follows: (Figure 2–4)

The Institute of Chartered Accountants of Nepal | 21

 Strategic Management & Decision Making Analysis

Figure 2–4: Elements of Strategic Management Process

2.5.1 Strategy Formulation

Strategy formulation is the process of strategies development in the firms. The strategy formulation
includes the following elements:

a. Performing environmental appraisal

b. Doing organizational appraisal

c. Formulating corporate level and business level strategies

d. Undertaking strategic analysis

e. Exercising the strategic choices

f. Preparing strategic plan

The strategy formulation also consists of following sub-elements:

a) Environmental Analysis:

It is done to understand strategic position. It analyses:

i) External Environment: Organizations exist in a complex and dynamic environment. External

environment is located outside the organization. It consists of political-legal, economic, socio-
cultural and technological forces. It provides opportunities and threats to the organization.
Opportunities of benefits are identified by analysis of external environment.

ii) Internal Environment: It analyses:

22 | The Institute of Chartered Accountants of Nepal

 Strategic Management

a) Resources and Competencies: Internal environment of the organization consists of people,

structure, resources and processes. It provides strengths and weaknesses. It is located within
the organization. Core competencies and unique resources are identified by analysing internal
environment.

b) Stakeholder Expectations: Stakeholders are outside group who influence organization.

They have a stake in the performance of organization. They affect and are affected by the
organization. They can be customers, suppliers, competitors, government, labour unions,
financial institutions, pressure groups and media.

The acceptability of strategies formulated by management depends on the interests of

different stakeholders. Their expectations are analysed to identify strengths.

b) Strategy Formulation

This is the formulation element of strategic management. Assessment of external and

internal environment through SWOT analysis enables to identify attractive strategic options.
Opportunities of strategic advantage are identified. They are matched with resource strengths.
This provides strategic options. The selected strategic options become strategies. They are
suitable, feasible and acceptable.

Strategic options serve as the basis for formulating strategies. The sub elements consist of:

i) Corporate Level Strategy: It is organization-wide and provides future direction and scope to
the organization. It is concerned with adding value to the organization.

ii) Business Level Strategy: It deals with strategic business units. It deals with how to compete
successfully in a particular market. It is concerned with identifying competitive advantages
for SBUs.

iii) Functional Level Strategy: It deals with specific functions, such as marketing. It is concerned
with objectives, resources, processes and people for each function.

2.5.2 Strategy Implementation Element

This is the implementation element of strategic management. The strategy implemenatation is
concerned with activiating strategies, designing the structure, managing behavioural and functional
implementation and operationalising strategies.The sub-elements consist of:

a) Structure Design: The structure design for strategic management deals with
differentiation and integration. It establishes reporting relationships, span of control
and chain of command. It provides a structure to strategic management.

b) Resource Planning: Resources are the enabling element of strategic management.

They can be people, money, technology, time and information. Strategic fit is
achieved by matching resources with opportunities of competitive advantage. Resource
allocation is an important element of strategic management.

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 Strategic Management & Decision Making Analysis
Action plans specify activities. They are sequenced and made time-bound to implement
strategy.

c) Management System: A strong management team is put together. Competent human

resources are acquired, developed and managed. Information is managed. Leadership is
provided. Enabling organization culture is shaped. Change is managed by overcoming barriers
to change.

2.5.3 Strategic Evaluation Element

The strategic evaluation element includes performing strategic evaluation, exercising strategic control
and reformulating strategies.This is the control element of strategic management. It is concerned
with tracking the implementation performance of strategy. It detects problems to make necessary
adjustments to strategy. It aims at continuous improvement in strategy implementation over a long-
term. It makes organization proactive for timely response to rapid changes in the environment. This
element consists of the following sub-elements:

a) Evaluation: Actual performance results are monitored and evaluated. Deviations and their
causes are identified. Strategic planning provides standards for evaluation.

b) Control: It involves corrective actions to modify strategies and resolve performance problems.
It assesses the effectiveness of strategic actions. Strategies are revised as needed.

c) Reformulating strategies: If necessary, the firms have to reformulate the strategies after
corrective actions.

Self Examination Questions

1. What is strategic management? Explain the elements of strategic management process.
2. Describe the characteristics of strategic management.
3. "Strategic management is important for modern organizations." Justify this statement.
4. Comment on the following: Strategic management is a process consisting of elements.
5. Can we characterize the development of strategic management in Nepal as promising? Why?
6. Explain the various phases of strategic management process. Do you think that various parts of the
process are interacting?
7. The CEOs spend more time managing the process of strategic planning than they do making strategic
deisions. Why?

24 | The Institute of Chartered Accountants of Nepal

 3. Environmental Analysis

3.1 Meaning of Environment

The environment of any organization is the aggregate of all conditions, events, and influences that
surround and affect it.In essence, the job of a strategist is to understand and cope with Competition.
Every Company operates in a larger environment that goes well beyond just the industry in which
it operates.It is necessary to think strategically about a company's industry and competitive
environment. Environment refers to all forces, events and conditions which influence the development,
performance and outcome of strategic management. Its dynamism creates surprises that result from
complexity, uncertainty, and diversity. It influences the ability of strategic management to achieve its
objectives. Each organization operates in a unique environment.

Environment can be internal and external. Internal environment is located within the organization.
It provides strengths and weaknesses. It is controllable. External environment is located outside
the organization. It provides opportunities and threats. It is uncontrollable. Environment analysis is
concerned with external environment.

Definition

■ According to Robbins and Coulter

Environment refers to institutions and forces that affect the organization’s
performance.

■ According to Keith Davis

Environment is the aggregate of all conditions, events and influences that
surround and affect organization.

External environmental forces are located outside the organization. They consist of political-
legal, economic, socio-cultural and technological forces. They are dynamic, diverse, complex,
uncertain and uncontrollable. Strategic management must adapt to changing forces in the
external environment. It is environment-specific.

3.2 Nature of Environment

Every company operates in a larger environment that goes well beyond just the industry in which it
operates. Managers need to gather required information to cope the environmental uncertaintities.
The Institute of Chartered Accountants of Nepal | 25
 Strategic Management & Decision Making Analysis
Organizations exist in a complex and dynamic environment. External environment is located outside
the organization. It consists of political-legal, economic, socio-cultural and technological forces. It
provides opportunities and threats to the organization. Internal environment of the organization
consists of people, structure, resources and processes. It provides strengths and weaknesses. It is
located within the organization. Core competencies and unique resources are identified by analysing
internal environment.Opportunities of benefits are identified by analysis of external environment.

The nature of external environment consists of the following characteristics:

1. Environment is Complex: External environment consists of forces, events, conditions

and influences arising from varied sources. It is complex and unpredictable. Complexity
provides uncertainty to strategic management. It is difficult to understand in totality.External
environment is more complex to predict.

2. Environment is Dynamic: Dynamc refers to changing approach in the environment. External

environment is dynamic. It is continually changing in shape and character. Technological
changes greatly influence it. Globalisation is bringing competition everywhere.

3. Environment is Multi-faceted: External environment is multi-faceted. Different people

perceive environmental changes differently. A particular change in environment can be an
opportunity for one organization but threat for another organization.

4. Environment has far-reaching impact: External environment has far-reaching impact on

strategic management. It affects its capacity to achieve objectives. It provides opportunities
and threats to strategic management. Environment changes impact it in several different
ways.

3.3 Elements of Environment

Environment occupies a very significant place in the organizations. The environment is a complex
combination of the economic system, political system, legal restraints, society, industry, labour
relations, customer expectations, markets, competition, technology, culture, history, infrastructure,
state of the economy, shareholder demands, natural environment, labour conditions, and so on.
External environment consists of conditions and forces outside the organization. It provides
opportunities and threats to the organization. It cannot be controlled by the organization. It influences
the organization and is also influenced by the organization. Strategic management is influenced by
external environmental forces.
Organizations take inputs (raw material, money, labour) from the environment, transform them into
products, and then send them back as outputs to the environment.
External environment is the set of broad forces in an organization’s surroundings. It affects the
climate in which the strategic management operates. It is lo­cated outside the organization. It cannot
be controlled by the organization.

Elements of external environment consist of PEST (Figure 3–1)

26 | The Institute of Chartered Accountants of Nepal
 Environmental Analysis
i) Political (P) ii) Economic (E)

iii) Socio-cultural (S) iv) Technological (T)

Figure 3–1: Forces in External Environment

3.3.1 Elements of Political Environment

The political climate in a country in which a business firm operates is a very important force.The
management of a business firm, therefore, should undertake political risk analysis prior to investing
in a new project or in expansion of its existing business.The political environment consists of factors
related to management of public affairs and their impact on the business of an organization.The political
environment is one of the less predictable elements in an organisation's business environment. The fact
that democratic governments have to seek re-election every few years has contributed towards a cyclical
political environment.The political environment in its widest sense includes the effects of pressure
groups who seek to change government policies.

Political environment consists of political and legal forces that influence strategic management.

1. Political Environment
The political environment of business is dynamic in Nepal. It has the most observable impact
on business activities.Forces in the political environment are related to management of
public affairs. They define legal and regulatory boundaries. Their direction and stability are
important for strategic management. The elements of political environment are: (Figure 3–2)

a) Political System: It consists of ideological forces, political parties, election procedures,

and power centres. A stable, efficient and honest political system is essential for the growth
of strategic management. Political instability resulting from civil war, emergencies and
terrorist activities adversely affects strategic management. Government itself has become a
big customer of products in modern time. There are different possible political systems. An
open system of government is democratically elected by the population of a country.

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 Strategic Management & Decision Making Analysis
Totalitarian systems of government occur where power derives from a select group (e.g.,
communism) or based on the interests of sectional groups (often military-based).The idea that
autocratic regimes have an advantage in economic development was once quite fashionable.
The plausibility of such a notion lies in the advantages such regimes were said to have in forcing
through development in the long term. An alternative view is that democracy is likely to foster
economic development.

Corruption remains a barrier to economic development in many countries. Some companies

may survive and prosper by bribing government officials, but the success and growth of such
companies is not necessarily based on the value they create for consumers.

b) Political Institutions: They consist of legislature, execu­tive and judiciary.

„„ The legislature (parliament) enacts laws. They guide strategic management activities.

„„ The executive (Government) implements the decisions of the legislature. It lays

down policies, regulations and procedures that influence the activities of strategic
management. Government–business relations are crucial for the growth of business.

„„ The judiciary (Courts of law) serves as watchdog. Its rulings influence strategic
management practices. It settles disputes and carries out judicial review.

c) Political Philosophy: It can be democratic, totalitarian or a mix of both. Democracy vests

power in the hands of people. Totalitarian vests power in the hands of the state. A mix of both
is based on power sharing.

For business organisations, understanding shifts in dominant ideologies can be crucial to

understanding the future nature of their business environment. Two important and recurring
ideological issues which affect business organisations are the distribution of wealth between
different groups in society and the role of the state versus the private sector in delivering goods
and services.
Political philosophies influence strategic management activities. Democra­cy provides greater
role to private sector. Totalitarianism provides greater role to state. Mixed philosophies
provide roles to both private sector and state.

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 Environmental Analysis

Figure 3–2: Elements of Political Environment

It is important for organisations to monitor their political environment, because change in this
environment can impact on business strategy and operations in a number of ways:
„„ The stability of the political system affects the attractiveness of a particular national market.
„„ Governments pass legislation that directly affects the relationship between the firm and its
customers, its suppliers and other firms.
„„ Governments see business organisations as an important vehicle for social reform.
„„ The government is additionally responsible for protecting the public interest at large.
„„ The economic environment is influenced by the actions of government.
„„ Government is itself a major consumer of goods and services.

Nepal is a democratic country having unstable political syatem, where the government plays an
active role as planner, promoter, and regulator of the economic activity. Businessmen, therefore, are
conscious of the political environment that their organizations face. Most governmental decisions
related to business are based on political considerations in line with the political philosophy followed
by the ruling party at the centre. Government policies can influence the dominant social and cultural
values of a country. Therefore, organisations have to not only monitor the political environment –
they also contribute to it.

2. Legal Environment
Laws and regulations are enforced to govern the conduct of individuals and institutions in
a society.The legislative framework creates both opportunities and threats for business.
Succesful managers carefully monitor changes in laws and regulations in order to
take advantage of the opportunity they create and counter the threats they pose in an
organization's task environment. Legal environment refers to all the legal surround­ings that
affect management activities. It consists of an array of acts, rules, regulations, precedent,
institutions and processes. It defines what strategic management can and cannot do.

Legal environment is concerned with

a. Protecting the rights and interests of organization, consumers, employees, and the society.

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 Strategic Management & Decision Making Analysis
b. Providing grounds on which strategic management activities can be carried out. It encourages
or restrains activities by providing facilities to law abiders and giving punishment to law
breakers.

c. Regulating activities through legal provisions. They are relating to licenc­ing, wages, labour
relations, monopoly, for­eign investment, foreign exchange, environment protection, consumer
protec­tion, industrial location, imports, exports, pricing, and taxation.

The elements of legal environment are: (Figure 3–3)

Figure 3–3: Elements of Legal Environment

a) Law: It consists of an array of laws enacted by the Parliament. It protects the rights and
interests of consumers, labour, business and society.

b) Courts of Law: Courts are institutions established to solve legal disputes. Nepal has a three-
tier court system. The Supreme Court is at the national level. It is the highest level of judiciary.
The Courts of Appeal are at the middle level. The 75 district courts are at district level.

c) Law Administrators: Various law enforcement agencies ensure implementation of laws and
the judgements of the courts of law. Government agencies, lawyers, police and jails play an
important role in law administration.

3.3.2 Elements of Economic Environment

The economic forces provide many opportunities and threats for managers.The economic
environment consists of macro level factors related to the means of production and distribution of
wealth that have an impact on the business of an organization.The structure of a country's economy
is determined by the size and rate of growth of its population, income, and the distribution of income
etc.

Some of the important factors and influences operating in the economic environment are:

a. The economic stage in which a country eists at a given point of time

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 Environmental Analysis
b. The economic structure adopted, such as capitalistic, socialistic or mixed economy

c. Economic policies

d. Economic planning

e. Economic indices like national income, distribution of income, rate and growth of GNP, per
capita income, rate of savings and investments etc.

f. Infrastructural factors such as financial institutions, banks, modes of transportation,

communication etc.

Economic environment refers to all the economic surroundings that influence strategic management
activities. It is concerned with nature and direction of economy. Important elements of economic
environment are: (Figure 3–4)

Figure 3–4: Elements of Economic Environment

1. Economic System
The economic systems around the world can be classified as capitalist, socialist, and mixed.
The classification is based on the method of resource allocation in the system.Economic
system determines the scope of private sector partici­pation and market forces. The models of
economic system are:

a) Free Market Economy: This system is based on private sector ownership of the factors of
production. Profit serves as the driver of economic engine. The competitive market mechanism
guides business decisions. There is freedom of choice. Individual initiative is encouraged.

b) Centrally Planned Economy: This system is based on public ownership of the factors of
production. The economy is centrally planned, controlled and regulated by the government.
There is no consumer sovereignty. Public enterprises play a dominant role.

c) Mixed Economy: This system is a mix of free market and centrally planned economies. Both public
and private sectors coexist. The public sector has ownership and control of basic industries including
utilities. The private sector owns agriculture and other industries. It is regulated by the state.

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 Strategic Management & Decision Making Analysis
Nepal relied on the mixed economic system to speed up the development process from the very
beginning of its planned efforts to economic development. Both the public and private sectors were
equally active in economic activities.

2. Economic Policies
Policies are guidelines for action. Economic policies significantly influence and guide strategic
management actions.

Key economic policies influencing organization are:

a) Monetary Policy: It is concerned with money supply, interest rates and credit availability.
It influences the level of spending through interest rates. Cheap money reduces cost. Dear
money increases cost.

b) Fiscal Policy: It is concerned with the use of taxation and government expenditure to regulate
economic activities. Taxation on income, expenditure and capital are an important influence
on management decisions. Government purchases, subsidies and other transfers also
influence the activities of management.

c) Industrial Policy: It is concerned with industrial licencing, location, incentives, facilities,

foreign investment, technology transfer, and nationalization. It influences the investment
climate.

3. Economic Conditions
The important componenets of the economic dimension of an economy are: gross national
product, per capita income, personal consumption, and expenditure, inflation rates, private
investment, labour costs, level of employement etc. Economic conditions indicate the health
of the economy in which strategic management operates. The factors of economic conditions
are:

a) Income: The level and distribution of income affect expenditure, saving and investment. They
together influence the economic conditions.

b) Business Cycles: The stages of business cycle can be prosperity, recession and recovery. They
affect the health of strategic management.

c) Inflation: It is rise in price level. It influences costs, price and profits of organization.

d) Stage of Economic Development: An economy can be least developed, developing and

developed. Stratetic management activities are influenced by the stage of economic
development. Nepal is a least developed country.

These are the key economic variables thst are considered by managers to understand and
assess the general economic forces at work.

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4. Globalization
It is making the whole world as one single market. It promotes multi-country operations
through free trade and by removing tariff and other restrictions. It brings competition
everywhere. There is free flow of capital, labour, technology and management across borders.

The World Trade Organization (WTO) has been engaged in the promotion of multilateral
open trade without discrimination.

Regional groups engaged in promoting regional co-operation are:

„„ SAARC: South Asian Association for Regional Cooperation

„„ ASEAN: Association of South East Asian Nations

„„ EU: European Union

Strategists are actually aware of the importance and impact of

the economic environment on their organizations.

3.3.3 Elements of Socio-cultural Environment

The socio-cultural environment consists of factors related to human relationships within the society,
the development, forms, and functions of such a relationship and learned and shared behavior of
groups of human beings having a bearing on the business of an organization. The socio-cultural
environment primarily affects the strategic manangement process within the organization in the
areas of mission and objectives-setting and decision related to products and markets.

1. Social Environment
It refers to all the social surroundings that influence strategic manage­ment. It consists of
factors related to human relationships.Socio-cultural environment is made up of the social
institutions, class structure,beliefs, values, behaviour, customs of the people, and their
expectations. Organizations operate within the society. They primarily exist to satisfy societal
needs. Social factors influence strategic management policies, practices and activities of
organizations.The social environment imposes severe pressures on the management of a
business firm. A business firm must keep a close watch on the changing patterns of the soci-
cultural make-up of a society in which it operates.

Important elements in the social environment consist of: demo­graphics, social institutions,
pressure groups, and social change (Figure 3–5)

a) Demographics: Demography is concerned with human population and its distribution.

Demographic forces consist of:

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 Strategic Management & Decision Making Analysis
„„ Size, distribution and growth of population

„„ Age mix of population

„„ Urbanization of population

„„ Migration of population: Geographical shifts in population.

b) Social Institutions: They consist of family, reference groups and social class.

„„ Family: Two or more persons related by blood, marriage or adoption who reside together
constitute a family.

„„ Reference Groups: They consist of groups that have a direct or indirect influence on
the attitudes and behavior of consumers. They can be sports, musical and cinema
personalities. They can be professionally successful people. They influence product and
brand choices. They:
- expose to new behavior and life style;
- influence values and attitudes;
- provide norms for behavior.
„„ Social Class: It is the rank within a society determined by its members. It can be
classified into upper, middle and lower. Members of a class share similar values,
interests and behavior.
Strategic management activities are influenced by the behavior of various classes in the
society.

Figure 3–5: Elements of Social Environment

c) Social Change: Change is making things different. Social change implies modification in
relationships and behavior patterns in a society. Life style and social values promote social
change. They have profound impact on strategic management.

Life style is a person's pattern of living reflected in his activities, interests and opinions. It affects
product choice.

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Strategists, in the Nepalese context, do not seem to be fully aware of the impact of the socio-cultural
environment on business or they are so preoccupied with other environmentsl influences that they
do not give a high priority to socio-cultural factors. One reason for such a lack of interest could be the
nature of socio-cultural influences.

The socio-cultural changes take place very slowly and do not seem to have an immediate and direct
impact on short-term strategic decisions. Neverthless, some socio-cultural changes are too prominent
to be ignored. One such change in the Nepalese context is the emergence of the mass media as a
powerful socio-economic force.

2. Cultural Factors
Culture is the human made part of the environment. There are multiple dimensions of culture
which influence to the management of business.They refers to cultural surroundings that
influence strategic management. Culture is the complex whole which includes values, norms,
beliefs, customs, symbols and works of arts and architecture. It is created by society. It is
handed down from generation to generation.

Culture is learned behavior. It changes over time. It is made up of attitudes, values, beliefs,
religion, language, caste and ethnicity.

a) Attitudes: Culture creates attitudes towards work, leisure and business. Work motivation,
profit motivation, attitudes toward gift giving, meaning of body gestures and attitudes toward
time vary from culture to culture.

b) Values and Beliefs: Culture influences values and beliefs. Values are basic convictions. Beliefs
are descriptive thoughts held about something based on knowledge, opinion or faith.

c) Religion: It influences the products business should produce. The type of food people eat,
beverages they drink, clothes they wear, and materials they use for construction of houses
vary from religion to religion,.

d) Language: It creates subcultures based on caste and ethnicity. Multiplicity of languages

influences strategic management.

Cultural factors influence:

a) Type of Products: The type of food people eat, beverages they drink, and clothes they wear,
and the building materials they use for construction of houses vary from culture to culture.

b) Attitudes towards Work and Leisure: Work motivation, profit motivation, meaning of body
gestures, and attitudes toward time vary from culture to culture.

c) Values and Beliefs: Values are basic convictions. Beliefs are descriptive thoughts held about
something based on knowledge, opinion or faith. Culture influences values and beliefs.

Strategic management should be culturally sensitive. Cross-cultural changes brought about

by globalisation and information technology significantly influence it.

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 Strategic Management & Decision Making Analysis

3.3.4 Elements of Technological Environment

The technological environment consists of those factors related to knowledge applied and the
materials and machines used in the production of goods and services that have an impact on the
business of an organization. Technical environment refers to all the technological surround­ings that
influence strategic management. Technology consists of skills, methods, systems and equipment. It
includes inventions and innovations. It makes work more efficient.

Technology influences strategic management by bringing about changes in jobs, skills, life styles,
products, production methods and processes. Automation, computerization, robotics, informatics,
nano technology, biotech­nology, new materials and artificial intelligence have all influenced strategic
management. Information technology has greatly affected it.

Elements in the technological environment consist of: (Figure 3–6)

Figure 3–6: Components of Technological Environment

1. Level of Technology: The level of technology can be appropriate or sophisticated. It can be

labour-based or capital-based. The level of technology influences strategic management.

„„ Labour-based Technology: Human labour is mainly used for the operations.

„„ Capital-based Technology: Machinery is mainly used for operations. Technology is

represented by automation, computeri­zation, robotization, etc. The technology can
be high, intermediate or low.

2. Technological Change: Technology is a dynamic force. Its pace of change is accelerating.

Strategic management should adapt to the changing technological forces. It should also
upgrade the skills of human resources to effectively cope with the demands of technological
changes. It should avoid obsolescence and promote innovation.

Technological change influences management in the following ways:

„„ It can make existing industries obsolete.

„„ It can rejuvenate the existing industries through product improvements or cost reductions.

„„ It can create entirely new industries based on new products.

36 | The Institute of Chartered Accountants of Nepal
 Environmental Analysis
„„ It can increase government regulations.

„„ It can create need for technological upgradation.

3. Technology Transfer: Sources of technology can be within the organization, within the country or
foreign countries. Technology transfer implies technology imported from technologi­cally advanced
foreign countries. The speed of technology transfer is important.

Technology transfer can be through:

a) Globalisation: Global companies are the key sources of technology transfer in developing nations.
The modality can be franchising, technical collaboration, subsidiary establishment or contract.
b) Projects: Turn-key projects based on global bidding serve as a source of technology transfer.

c) Trade: Sale of equipment or machines by the manufacturer.

d) Technical Assistance: Bilateral and multilateral donors provide international consultants who
bring new technology with them.

e) Training and publications: They provide opportunities to learn about new technology.

Technology transfer influences strategic management by:

„„ Increasing efficiency and decreasing costs.

„„ New product development and product improvements

„„ Improving production systems and processes

„„ Better satisfaction of customer needs.

4) Research and Development (R & D): R & D is the essence of innovation. Expectations for
improved technology are increasing. Customers expect new products of superior quality
which are safe, comfortable and environment-friendly. This calls for increased research and
development budget. Strategic management should be proactive to technologic developments.

3.4 Objective Setting

Objectives are desired performance outcomes. They are end results to be achieved. Strategic planning
is about setting long-term objectives. Organizations are created to achieve objectives. They are
guided in their decisions and actions by objectives. They generally state their objectives in financial
or market terms. Objectives are future-oriented.

■ According to Jauch and Glueck:

Objectives are the ends which the organization seeks to achieve through its
existence and operations.
■ According to Wheelen and Hunger:
Objectives are the end results of planned activity.
■ According to Johnson and Scholes:
Objectives are statements of specific outcomes that are to be achieved.

Objectives set direction, reveal priorities and focus on coordination. They are the basis for planning,

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 Strategic Management & Decision Making Analysis
organizing, directing and controlling.

Business organizations pursue multiple objectives at the same time. They can be:

a) Profitability: Profit is excess of income over expenditure. It is return on investment or earning

per share. Organizations set target profit.

b) Survival: It is staying alive by avoiding liquidation.

c) Growth: It is all round growth in terms of assets, profit, sales, market share. It is increase
in assets and maximization of shareholder’s wealth. It is essential for organizational
sustainability.
d) Efficiency: It is low cost operations for higher productivity in relation to competitors. It is
input-output relationship with quality assurance.

e) Leadership: It is technological leadership through innovation, creativity and quality products.

It is being in the forefront of technological innovation. Market leadership can be in terms of
market share and competitive position.

f) Social Responsibility: It is contribution to society by safeguarding interests of stakeholders

and general public. It is to become responsible corporate citizens. Society sustains an
organization.

g) Reputation: It is to gain image of “top firm” or to have environment friendly image.

h) Personal Needs of Top Management: It is to provide employ­ment to friends and relatives.

Organizations in Nepal tend to pursue this objective.

i) Employee Relations and Development: It is to maintain harmonious labour relations and

increase competency of employees.

Requirements for Effective Objectives set by the organizations.

Effective objectives should be (SMART):
a) Specific: They should be stated clearly. For example: double the profit in ten years or
capture 50 percent market share in five years or 10% return on investment. They should be
understandable.

b) Measurable: They should be quantifiable. They should clearly state what will be achieved
and when will it be achieved.

c) Acceptable: Persons responsible for achieving objectives should agree to them. They should
be acceptable and understandable.

d) Realistic: They should be reasonable and achievable. They should be flexible to changing
environment. They should be challenging. They should follow from mission.

e) Time-bound: They should have a time frame for achievement.

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 Environmental Analysis

3.4.1 Levels of Objective Setting

Objectives are set at different levels of organization. They form a hierarchy. They can be set at
following levels: (Figure 3–7)

1. Corporate Level Objectives

2. Business Level Objectives (SBU level)

3. Functional Level Objectives

4. Individual Level Objectives

Figure 3–7: Levels of Objectives

1. Corporate Level Objectives (Long-term)

They are strategic objectives set by top management. They define long-term desired outcomes. They
consist of vision, mission and strategy. They are stated broadly.

„„ Vision: It states what the organization aspires to become in future from a long-term
perspective. It is the strategic intent of the organization. It is the desired future state. It is the
aspiration of the organization. It answers the question "what we want to become?"

„„ Mission: It states the reason for the existence of the organization. It defines the scope and
boundaries of the present business in terms of product, market and competitive advantage. It
answers the questions: “Why do we exist” and “What is our business ?” Mission follows from
vision. It should be in line with the values and expectations of stakeholders. It projects image
of organization to public.

„„ Strategy: It is a broad action plan for achieving objectives. It provides long-term direction
and scope to an organization. It aims to achieve competitive advantage for the organization.
It fulfills stakeholders' expectations. Strategy follows from mission. It is a road map for future
direction.

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 Strategic Management & Decision Making Analysis

Vision: What we want to become? Aspiration in future.

Mission: Why do we exist? Our business at present.
Objectives: Where do we want to be? End results desired.
Strategy: How do we get there? Broad plans to achieve objectives.

2. Business Unit Level Objectives (Division Level)

They are set for each strategic business unit (SBU) or division. They define the business
of the organization. They are desired outcomes for each SBU over long-term in particular
markets. They are set for key result areas, such as profit, market share, sales. They follow from
corporate level objectives.

SBU level objectives deal with the following aspects for each SBU:

„„ Long-term profitability

„„ Market share growth

„„ Product category scope: product line and items

„„ Positioning among competitors

„„ New business opportunities, etc.

3. Functional Level Objectives

They are milestones for short-term. They are important for strategy implementation. They
set specific targets for each function of SBU. The functions can be production, marketing,
finance, human resources and research and development. They follow from SBU objectives.
They state actions necessary to achieve SBU objectives. Functional objec­tives are short-term.
They are generally for one year. They are measurable. They deal with:

„„ Lowering cost of production

„„ Market coverage in the chosen segment

„„ Level of customer satisfaction

„„ Fund generation
„„ Programmes for human resource development

„„ New products to be launched

„„ Advertising and sales promotion targets, etc.

4. Individual Level Objectives

They are related to daily or weekly performance of each employee. They follow from functional
objectives. They deal with:

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 Environmental Analysis
„„ Level of output per employee

„„ Rejects and waste

„„ Sales per salesperson

„„ Career planning and development, etc.

Objectives at various levels form a “means-end chain”. The achievements of lower level
objectives lead to the achievement of higher level objectives.

3.5 SWOT Analysis

SWOT analysis, evolved during the 1960s at Stanford Research Institute, is a very popular strategic
planning technique having appilications in many years including management. Organizations perform
SWOT analysis to understand their internal and external environments.SWOT, which is the acronym
for strengths, weakness, opportunities and threats, is also known as WOTS-UP or TOWS analysis.
SWOT analysis is strength, weaknesses, opportunities, threats analysis. It is done to understand
the external and internal environments of an organization. The forces in the external environment
provide opportunities and threats. The forces in the internal environment provide strengths and
weaknesses. SWOT is used to generate alternative strategies at corporate and business levels.

„„ Strength: It is something the organization does well relative to competitors. It arises from
resources and competencies available in an organization. It creates strategic advantage over
competitors. It can be based on innovative product quality, market expertise and superior
research and development skills.

„„ Weakness: It is something the organization does poorly relative to competitors. It arises from
deficiency in resources and competencies. It creates strategic disadvantage. It can be due to
poor quality, bad image, lack of market expertise and undifferentiated product.

„„ Opportunity: It is a major favourable situation in an organi­zation’s external environment. It

provides position of superiority in relation to competitors. It can be based on major strategic
alliance and new market. An example is growing demand for company's products.

„„ Threat: It is a major unfavourable situation in an organiza­tion’s external environment. It

provides position of inferiority in relation to competitors. It creates risk and causes damage
for the company. It can be based on price wars, new competition and high taxation.

Through SWOT analysis, internal strengths are matched with external opportunities to
identify strategic advantage. Similarly, internal weaknesses are corrected and external threats
are avoided. The aim is to produce a fit between internal resource capability and external
opportunities. (Figure 3–8)

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 Strategic Management & Decision Making Analysis

Figure 3–8: SWOT Matrix

Organization should capitalize on the opportunities through the use of strengths. They should
neutralize the threats by minimizing the impact of weaknesses.

SWOT analysis serves the following purposes:

„„ It provides a logical framework for understanding strategic issues.

„„ It provides information about external opportunities and threats as well as internal strengths
and weaknesses. Opportunities of competitive advantage can be matched with resource
strengths.

„„ It guides the strategist in strategy identification and formulation.

3.6 Environmental Analysis Process

Analysis of environment helps to cope the uncertainties and future changes. It provides the
comprehensive information to the company. It is a crucial part of the strategic management process.
If the environment is ignored by strategic decision-makers the process can not be effective. Effective
strategists try to anticipate what is coming or attempt to influence the environment in favourable
directions.The more sectors and the more factors that are analyzed, the more effective is the
environment analysis. So, environmental analysis is the process by which strategists monitor the
environmental settings

Environmental analysis is done to understand and adapt to environmental changes. It provides

understanding of current and potential changes taking place in environment. It also provides inputs
for strategic decision making. It also fosters strategic thinking organizationwide.

Environmental analysis consists of following steps: (Figure 3–9)

1. Scanning 2. Monitoring

3. Forecasting 4. Assessment

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 Environmental Analysis

Figure 3–9: Steps in Environmental Analysis

3.6.1 Scanning
Environment scanning can be defined as the process by which organizations monitor their relevant
environment to identify opportunities and threats affecting their business for the purpose of taking
strategic decisions.Scanning involve acquiring information from the environment. It detects trends
already underway. It detects emerging trends that have potential impact on business.

The variables considered for scanning are:

„„ Changes in macro-environment: It consists of political, legal, economic, social, cultural and

technological factors.

„„ Changes in Market: Changes in the structure of market and speed of globalization.

„„ Nature of Competition: Strengths and weaknesses of com­petitors including their position as

leader, follower and nicher.
„„ Customer Needs: Changes in needs and preferences of target customers and their buying
behavior.

„„ Product Offerings: Product differentiation, positioning and product portfolios. Threat from
substitute products.

The outcome of environmental scanning is creation of scenarios. Scenarios construct pictures

of possible futures. They generate forecasts of different future conditions. They construct a time-
ordered sequence of events and analyse their interrelation­ships. They can be:

„„ Most probable scenarios

„„ Most favourable scenarios

„„ Least favourable scenarios

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 Strategic Management & Decision Making Analysis

Types of Scanning
Environmental scanning can be of two types:

a) Concentrated: It focuses on selective factors, such as technology or economic policies. It is

less expensive and consumes less time. But it may not identify crucial changes and trends.

b) Comprehensive: It focuses on all the relevant factors in the environment in a comprehensive

way. It is expensive and time consuming. But it is effective in identifying crucial changes and
trends.

Process of Environmental Scanning

The steps involved in environmental scanning are: (Figure 3–10)

Figure 3–10: The Process of Environmental Scanning

a) Identify relevant forces in the environment: They can be external forces, consisting of
political-legal, economic, socio-cultural, technological factors (PEST forces).

b) Determine sources of observation: They are determined by top management and can be:

i) Personal experiences of management.

ii) Managers, employees and competitors

iii) Experts, consultants, researchers

iv) Meetings, conferences, committees

v) Newspapers, journals, reports, books

vi) other sources

c) Select Scanning Methods: They are selected carefully and can be:

i) Extrapolation methods: Information from past is used to explore the future. Techniques
can be: forecasting, trend analysis, regression analysis.
ii) Historical analogy: Trend is studied by establishing historical parallels with other
trends.

iii) Intuitive reasoning: Rational intuition by scanner for free thinking, unconstrained by
past experiences and personal biases.

iv) Scenario building: Constructing a time-order sequence of events that have logical
cause and effect relationships. The scenario is based on analysis of interrelationship
among events.

v) Model building: Mathematical and econometric models of the environment are simulated.

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 Environmental Analysis
vi) Network methods: Contingency trees and relevance trees are studied.

vii) Delphi technique: Systematic pooling of expert opinions in varying stages. Feedback
is used to develop new forecasts.

viii) Surveys: Gathering of opinions of experts, customers and others about future
environment.

ix) Morphological Analysis: All possible ways are identified to achieve objectives.

d) Scan and Respond to Data: The collected data is studied, analysed, assessed, interpreted,
correlated and understood. Crucial developments in the environ­ment are pin-pointed. They
can be:

„„ Events: Important and specific occurances

„„ Trends: Direction or sequence of events that have some momentum and durability.

„„ Issues: Current concerns arising from events and trends

„„ Expectations: Stakeholders demands arising from issues

Environmental scanning serves as a basis for SWOT analysis (strengths, weaknesses, opportunities
and threats).

3.6.2 Monitoring
It involves tracking environmental trends and events. It is auditing of environmental influences. The
likely effects of environmental influences on business performance are identified. This step provides:

a) Specific description of environmental trends and events.

b) Identification of trends and events for further monitoring.

c) Identification of areas for forecasting.

3.6.3 Forecasting
Forecasts are predictions, projections, or estimates of future situations.The basis of any planning are
a future estimate. This step is estimate of future situation. Forecasting is used to predict exactly how
some variables will change in the future. Forecasting is primarily concerned with trying to reduce the
uncertainty that exists about some part of the future.It focuses on what is likely to happen. It lays out
a path for anticipated changes. This step provides:
a) Key forces at work in the environment. They can be political-legal, economic, socio-cultural,
and technological.
b) Understanding of the nature of key influences and drivers of change.
c) Projection of future alternative paths available to reduce uncertainty.
Scenario building, Delphi technique, extrapolation can be useful tools for forecasting.

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 Strategic Management & Decision Making Analysis

3.6.4 Assessment
This step identifies key opportunities and threats. The competitive position of business is analysed. It
indicates how the organizations stand in relation to other organization competing for same resources
or customers.

Self-Examination Questions
1. What is the concept of environment in strategic management? Describe its nature.
2. Explain the PEST elements of external environment.
3. What is environment analysis? Why is it done?
4. Describe the elements of political environment.
5. Explain the elements of economic environment.
6. "Socio-cultural factors are important for strategic management." Justify this statement.
7. "Technological factor greatly affect strategic management." Give your views.
8. What is objective setting? Describe multiple objectives of business.
9. Discuss various levels of objective setting.
10. What is SWOT analysis? Why is it done?
11. What is business environment? What are its objectives? Explain the steps in environmental analysis
process.
12. Prepare a SWOT analysis report for Institute of Chartered Accountants of Nepal.
13. Write the differences between vision and mission.
14. How can a decision maker identify strategic factors in the corporations' external environment?
15. Explain SWOT analysis. How does it help an organization in the context of strategic management?
16. What do you mean by micro and macro environment?
17. Discuss the elements of micro and macro environment?
18. Describe demographic environment of business.
19. Managers view the impact of their environment in different ways. Explain, with some examples, how
some managers may consider a change to be a threat and some as an opportunity.

20. Differentiate between environmental analysis and environmental diagnosis. Which is of direct
relevance to choice of strategy and why?

21. Enumerate the pitfalls of using the SWOT analysis indiscriminately.

22. Which sectors of environment are currently relatively more important, in general, in the Nepalese
context? What sectors are likely to gain importance in the near future?

23. Describe some of the important characterstics of environment and demonastrate how a strategist can

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 Environmental Analysis
understand it better by dividing it into external and internal components and general and relevant
environment.

24. Choose any industry and outline the factors that could either create opportunities or threats for
companies within that industry in the near future.Is it possible that the same factor could be an
opportunity for one company and a threat for another?How?

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 Strategic Management & Decision Making Analysis

4. Internal Analysis

4.1 Concept of Internal Analysis

Internal analysis describes the process which involves determining the strength and weakness
that the firm has at present or might develop.These are diagnosed in order to develop competitive
advantage and to minimize weaknesses or to consider how they will limit the strategy or can be
corrected. Strength is something a company possesses and that puts it at an advantage compared
with its competitors. Similarly, a weakness is something a company lacks or does poorly at and or
becomes a comparative handicap while fulfilling the objectives of the organization.

Internal analysis is review of an organization's strengths and weaknesses that focuses on

those factors within its domain. A detailed internal analysis will typically give a business a good
sense of its basic competencies and the desirable improvements that it can make to help meet
the requirements of potential customers within its intended market. Internal analysis is concerned
with internal environment located within the organization. It consists of conditions and forces
that provide strengths and weaknesses to strategic management. It defines the scope of strategic
management. It is controllable by organization. Internal environment analysis is based on scanning
of internal environmental forces.

Forces in the internal environment consist of: (Figure 4–1)

Figure 4–1: Forces in Internal Environment

a) Organizational goals and policies: Goals are desired outcomes. They state end results. They
can be multiple as well as conflicting. They form a hierarchy. Strategic management activities
must be conducted within the framework of goals. Policies are guidelines for managerial

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decision making. They follow from goals. Strategic management must operate within the
policy guideline framework. Therefore, there should be effective organizational goals and
policies in the organizations.

b) Organizational Structure: Structure is the design of jobs and relationships. It is concerned

with the division of activities (differen­tiation) and coordination of efforts (integration).
Strategic management must function within the boundary of structure. So, organization
structure determines the success and failure of organization.

c) Organizational Resources: Resource availability sets a limit on organizational activities.

They can be marketing, human, financial, accounting, production and information. The recent
developments in information technology have greatly facilitated strategic management.

d) Culture: Culture encompasses shared values, norms, beliefs, customs and symbols that guide
mem­ber behavior in organization. It helps to understand what the organization stands for,
how it functions, and what it considers important. Culture shapes the overall effective­ness of
strategic management

Organizational culture is reflected by:

a) Mutuality of interests between owners, managers and employees.

b) Collaboration and team spirit among employees.

c) Innovation and risk-taking by management.

d) Open communication and tolerance for conflicts.

e) Autonomy in work and freedom to make work-related decisions.

f) Human focus and faith in employees.

g) Performance-based reward system.

h) Results-orientation

Organizational culture shapes the overall effectiveness of strategic management.

4.2 Process of Internal Analysis

Internal appraisal systematically evaluates organizational capability in terms of strengths and

weaknesses in various functional areas. Capability is what an organization does well. It is located
in marketing, human resources, and production, operations, finance and accounting functions.
Functional resources without capability are useless. Corporate appraisal assesses capability gaps
and takes steps to increase capabilities.

Strength is something an organization does well in relation to competitors. It provides capability. It

arises from resources and competencies. It can be skills and expertise of human resources. It can be
availability of financial resources. It can be a distinctive product, strong brand, superior technology
or better customer service. Strength provides competitive advantage over the competitor.

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 Strategic Management & Decision Making Analysis
Weakness is something an organization does poorly in relation to competitors. It is a limitation or
constraint which creates strategic disadvantage over the competitor. It can be inappropriate plant
location and layout, obsolete technology, and uneconomic operations weakness provides competitive
disadvantage over the competitors.

Internal analysis is based on the scanning of internal environment. It is done to find out strengths
in order to exploit opportunities in the external environment. It is also done to find out weaknesses
in order to face threats in the external environment. It analyses resources and competencies. It
identifies unique resources and core competencies to locate strategic advantage for the organization.
The process of internal analysis consists of the following steps: (Figure 4–2)

1. Define Mission, Goals and Strategies

Mission states the reason for the existence of the organization. Goals are desired outcomes.
Strategies are broad action plans to achieve goals. They provide direction and scope to the
organization over the long term. Corporate appraisal must be done within the scope of
mission, goals and strategies.Mission, goals and strategies give the direction to the company.

2. Strengths and Weaknesses Analysis

The internal environment is scanned to locate strengths and weaknesses. Resource availability
is determined. Resource Capabilities are analysed. They can be in the functional areas of
human resources, marketing, production, operations, finance and accounting.

Figure 4–2: Process of Internal Analysis

3. Identify Unique Resources

It is necessary to indentify the unquie resources of the company to gain the competitive
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 Internal Analysis
aadvantage of the firms. Unique resources of the organization are identified. Such resources
are valuable, rare, costly to imitate and non-substitutable. They are the source of competitive
advantage. They provide strengths to the firms.

4. Identify Core Competencies

Capability is what an organization can do well. Capabilities are found in functional resources.
They are skills in coordinating resources for productive use. Competitive Capability is what
an organization does well compared to its competitors. If competencies are superior to those
of competitors, they are known as distinctive competencies. Core competencies are identified.
Core competency is a competitive capability which is central to the organizational strategy.
Examples of core competency are:

„„ First in market for developing new products.

„„ Integrated technology to manufacture high quality products.

„„ Low cost structure of products.

„„ Up-to-date information communication systems and networks.

„„ Learning-based organization culture.

„„ Superior after-sales service.

„„ Strong relationship marketing.

„„ State of the art technology in college.

5. Locate Strategic Advantage (Competitive Advantage)

Combinations of unique resources with core competencies are done to locate strategic
advantage. Strategic advantage is gaining advantage over competitors. An organization’s
unique resources and core competencies determine strategic advantage. Core competencies
are well-performed activities. They are central to an organization’s strategy. They generally
reside in people of organization. Strategic advantage outperforms competitors and creates
new oppor­tunities. It empowers the organization to realize its mission, goals and strategies
(Figure 4–3)

Strategic advantage can be in terms of unique resources. core competencies, superior

efficiency and superior quality.

a) Unique Resources: They are valuable and rare resources. They are costly to imitate. They are
non-substitutable. They are critical factors in providing strategic advantage.

b) Core Competencies: They are skills in coordinating resources for productive use. They reside
in functional resources. The organization does them well compared to competitors. They are
central to strategic advantage.

c) Superior Efficiency: It implies low cost leadership. The inputs are converted into outputs at
lower cost compared to competitors costs. The productivity is higher than that of competitors.

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 Strategic Management & Decision Making Analysis
d) Superior Quality: It is the result of innovation. High quality creates brand reputation for
the products. Increased quality makes higher prices possible. Quality with low cost provides
strategic advantage in this age of globalization.

Figure 4–3: Building Blocks of Strategic Advantage

Sustainable Strategic Advantage

Core competencies are the source of sustainable strategic advantage. The sustainability of a strategic
advantage depends on:

1. Durability: If the unique resources and core competencies are durable, they provide
sustainable strategic advantage. It they become obsolete, strategic advantage also disappears.
New technology poses a serious threat to durability.

2. Iimitability: It is the rate at which an organization’s unique resources and core competencies
can be duplicated by competitors. High cost of imitation sustains strategic advantage.

„„ Factors making imitation costly are:

a) Unique Historical Conditions: They contribute to unique evolutionary pattern of

growth for a particular organization. Unique location, patents and mineral rights are
examples. For example, Disney’s Mickey Mouse.

b) Causal Ambiguity: This occurs when competitors are unable to understand the
foundation of strategic advantage for an organization. They cannot figure out how
resources are combined.

c) Social Complexity: Complex social factors, such as interpersonal relationships, trust,

friendships and reputation make imitation costly.

d) Economic Deterrence: Sensitive products that involve large capital investments and
limited market size make imitation costly.
„„ Factors making imitation easy are:

a) Transparency: It is the speed with which competitors can understand the foundation
of strategic advantage. Reverse engineering facilitates imitation. Reverse Engineering

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 Internal Analysis
is taking apart a competitor’s product in order to find out how it works. This is a
technique used for imitation.

b) Transferability: It is the ability of competitor to gather resources and competencies to

imitate strategic advantage Transfer of technology facilitates imitation.

c) Reliability: It is the reliability in the ability of competitors to use duplicate resources

and competencies to imitate.

3. Substitutability: If substitutes for resources and competencies exist, strategic

advantage is imitable.

4.3 Areas of Internal Analysis

Strategic management must place realistic requirements on organizational resources. It should

match opportunities of competitive advantage with availability of resources. Corporate resource
availability should be carefully analysed to identify strengths and weaknesses. Success of strategic
management depends on how well the organization uses its internal resources.

Strength is something an organization does well relative to competitors. Weakness is something an

organization does poorly relative to competitors. Strategic management capitalizes on strengths and
overcomes weaknesses.

An organization is a bundle of resources. Organizational activities are based on deployment of

resources. The cost and availability of resources determine organizational capability.

Key areas of internal analysis are:

1. Marketing Resources
Markeitng is the management of 7Ps. Marketing encompasses all activities aimed at
identifying and satisfying customer needs through exchange relationships and analyzing
marketing strengths and weaknesses, the following factors should be considered:

i) Marketing mix consisting of product, price, place, promotion.

ii) Product lines and items in each product line. Variety of quality products. Service back-
up for products. Branding strategies.

iii) Innovative products. First in the market for new products.

iv) Market segmentation and positioning. Image of products.

v) Extent of market share in target markets. Market share of competitors. Brand loyalty
by customers.

vi) Stage of product life cycle for key products.

vii) Pricing strategy: One price, price flexibility, psychological pricing.

viii) Channel structure and logistics management.

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 Strategic Management & Decision Making Analysis
ix) Efficiency and effectiveness of promotion for advertising, public relations, sales
promotion and sales force.

x) Relationship marketing and its effectiveness in building lifelong loyal customers.

xi) E-commerce strategies.

2. Human Resources
It is the management of people which refers utilizing the human energies and competencies.
Human resources are managerial and operative employees with energy and competencies.
They are ready, willing and able to contribute to goals achievement. In analyzing human
resource strengths and weaknesses the following factors should be considered:

i) Corporate image of the organization in the minds of employees and public as a fair and
model employer.

ii) Organizational climate and its health. Safe working conditions.

iii) Effectiveness of human resource management system consisting of acquisition,

development, utilization and maintenance aspects.

iv) Effectiveness of human resource management policies.

v) Specialized knowledge and skills of employees.

vi) Training and development opportunities to employees.

vii) Employee turnover, absenteeism and indiscipline.

viii) Effectiveness of remuneration and incentive system to motivate employees.

ix) Harmony in industrial relations.

x) Level of loyalty and commitment of employees.

xi) Effectiveness of human resource management information system.

3. Production/Operations Resources
Production/Operations encompass all activities related to production of products and
services. They process inputs into outputs. In analyzing strengths and weaknesses of
production/operations the following factors should be considered:

i) Production capacity and its utilization. Automation digitalization and robotization of

production system.

ii) Cost of operations compared with costs of competitors. Economics of scale.

iii) Favourableness of plant location and layout.

iv) Richness of patent, trademark and copyright portfolio.

v) Reliability in sources of supply. Effectiveness of supplier relations.

vi) Inventory management system. Just-in-time inventory management and outsourcing.

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vii) Strategic alliances with reputed firms. Vertical integration.

viii) Total quality management for continuous quality improvement.

ix) Effectiveness of maintenance system. Preventive maintenance used.

x) Flexibility in operations use of research and development.

4. Finance and Accounting Resources

Finance is concerned with availability, utilization and management of funds. According is
concerned with recording, analyzing and reporting financial information for decision making
and control. In analyzing strength and weaknesses of finance and accounting resources the
following factors should be considered:

i) Access to financial resources in the short and long term. Credit worthiness and credit
rating.

ii) Capital structure in terms of debt-equity ratio.

iii) Cost of capital relative to that of competitors and industry.

iv) Quality of relationship with shareholders and financial institutions. Level of

shareholder's confidence.

v) Efficiency of capital budgeting and financial control system.

vi) price-earnings ratio and consistency of dividend payout.

vii) Adherence to international accounting standards in financial reporting. Timeliness in

publications of financial statements.

viii) Effectiveness of tax planning and profit planning systems.

ix) Efficiency of accounting and internal auditing system.

x) Effectiveness of management information and control system. Extent of the use of

information technology.

4.4 Methods of Internal Analysis

Internal analysis identifies strengths and weaknesses in the internal environment of an organization.
It analyses resources and competencies. It combines unique resources with core competencies to
locate strategic advantage for the organization.

The methods used for internal analysis are: (Figure 4–4)

1. Value chain analysis
2. Cost efficiency analysis
3. Effectiveness analysis
4. Comparative analysis

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 Strategic Management & Decision Making Analysis

4.4.1 Value Chain Analysis

The term valu chain analysis describes a way of looking at a business as a chain of activities that
transform inputs into outputs that customer's value. Value chain analysis (VCA) attempts to
understand how a business creates customer value by examining the contributions of different
activities within the business to that value. An organization can create strategic advantage by
managing its value chain. A value chain is a set of inter-linked value-creating activities performed
by an organization. These activities begin with inputs, go through processing, and continue up to
outputs marketed to customers. Value chain is internal to the organization. It plays a central role in
improving cost efficiency, quality, and customer responsiveness.

Figure 4–4: Techniques of Internal Analysis

Value chain analysis is helpful in understanding how value is created or lost. It examines the
organization in the context of a chain of value creating activities. It describes activities within
and around an organization which together create a product or service. It identifies separate
activities performed to produce, market, deliver and support a product. It is a tool to analyse cost
competitiveness and value creation.

Prof. Michael porter developed the value chain concept. It identifies two types of activities for an
organization: (Figure 4–5)

„„ Primary activities

„„ Support activities

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Figure 4–5: Value Chain

1. Primary Activities
They are directly related to the creation or delivery of the product to the customer. They
consist of five sub-activities:

a) Inbound Logistics: Receiving and storing raw materials; material handling, stock control,
material transport.

b) Operations: Converting raw materials into finished products; manufacturing, packaging,

assembling, testing.

c) Outbound Logistics: Order processing and physical distribution; collect, store and distribute
products to customers.

d) Marketing and Sales: Pricing, Promotion and selling products to satisfy customer needs.

e) Service: Installation, repairs, spares and training. They enhance or maintain value of product.

2. Support Activities
They are provided to sustain the primary activities. They consist of four sub-activities:
a) Procurement: Activities related to processes for purchasing inputs.
b) Technology Development: Activities related to acquiring new technologies and
research and development (R&D) for innovation.
c) Human Resource Management: Activities related to acquisition, development,
utilization and maintenance of human resources.
d) Firm Infrastructure: Activities related to infrastructure building, such as strategic
planning, quality control, accounting, finance, information management, and
organization design.
„„ Organizations should ensure efficient and effective operation of primary value chain
activities to earn profit. They should establish linkages among value-creating activities. Costs and
performance in each value creating activity should be examined. The aim should be to perform
activities better than competitors. Activities of strengths provide strategic advantage.

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 Strategic Management & Decision Making Analysis

Links in Overall Value Chain

The links in the overall value chain can be: (Figure 4–6)

Figure 4–6: Links in the value chain of an organization.

a) Supplier Value Chain: This chain is concerned with activities, costs and margins of suppliers.
Suppliers provide inputs. The costs, quality and performance of such inputs influence an
organization’s performance.
b) Organization Value Chain: This chain is concerned with internally performed activities,
costs, and margins of the organization. It processes inputs to convert them into products.
c) Channel Value Chain: This chain is concerned with activities, costs and margins of channel
members. It markets and delivers product. The costs and margins of channel members are
part of price paid by the buyer. Their activities affect buyer satisfaction.
d) Buyer Value Chain: This chain is concerned with value and satisfaction of ultimate buyer who
pays price for the product. Organizations must satisfy buyer needs. They must find a way to
become a part of buyer’s value chain.
„„ The organization is only a part in the overall value chain. Assessing cost competitiveness
involves comparing costs in all the links of value chain relative to competitors.
4.4.2 Cost Efficiency Analysis
Cost can be production costs for raw materials, labour and direct expenses. It can be distribution cost
related to middlemen and transportation. It can be office cost to run an office. All products involve
costs. Organization should aim for cost efficiency.

Efficiency is using resources wisely to minimize their costs. It is getting things right to achieve greater
output from a given input. Cost efficiency is essential for effective resource utilization.

Organizations must deliver value to customers. They must be competent in managing cost efficiency
to gain strategic advantage.

■ According to Johnson and Scholes:

Cost efficiency is a measure of the level of resources needed to create a
given level of value.

Cost efficiency provides lower prices or added product features for the same price. Cost efficiency can be a
core competency to gain strategic advantage.

1. Sources of Cost Efficiency

Cost efficiency is determined by cost drivers. They can be as follows: (Figure 4–7)

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 Internal Analysis

a) Economies of scale b) Supply costs

c) Process/ Product design d) Experience

e) Outsourcing

Figure 4–7: Sources of Cost Efficiency

a) Economies of Scale

It is reduction in the product cost resulting from expanded level of output. Modern plants
involve high capital costs. Such costs need high volume of output to get recovered. Economies
of scale become their core competency. Economies of scale can result from:

i) High volume of output.

ii) High capacity utilization.

iii) Ability to secure funding for large scale investments.

iv) Competence in mass consumer promotion.

v) Ability to develop global networks of strategic alliances for distribution.

vi) Better production planning systems.

b) Supply Costs

They are costs of inputs consisting of raw materials, semi-finished components, energy and inbound
logistics. Logistics consist of handling, receiving, storing, controlling and transporting
materials. Supply costs influence overall cost position.

Cost efficiency in supply costs can be achieved in the following ways:

i) Location: Locating manufacturing facilities close to the sources of supply.

ii) Ownership: Gaining ownership of raw materials.

iii) Relationships: Congenial supplier relationships.

iv) Information System: Innovative information systems about supply and suppliers.

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 Strategic Management & Decision Making Analysis
v) Supply Chain: Developing linkages and mutually beneficial relationships with suppliers.

vi) Nano Technology: Making things smaller to save on material costs.

vii) Negotiation: More favourable prices can be negotiated with suppliers, especially through bulk
purchases.

viii) Just–in–time: Supplies are received just in time to be used up for production. This reduces
inventory and handling costs. Vendors can also manage inventory.

c) Product Features
Simplified product features can provide cost efficiency. It can be during manufacturing stage
or for after sales service. High cost features can be reengineered. Some cost producting
features can be eliminated.

Product features are size, style, functions. They provide cost efficiency through:

i) Improvement in Capacity Fill: Special offers in service industries facilitate capacity fill.
For example, seats in an aeroplane at special low rates.

ii) Labour Productivity: Improvements in process design can improve labour productivity
and achieve cost efficiency.

iii) Yield: Improved input/output ratio can lead to higher cost efficiency.

iv) Working Capital Utilization: It can be through improved process design to achieve cost
efficiency.

d) Experience

It is a key source of cost efficiency. Experience helps organizations to conduct activities more
efficiently over time. Experience becomes a core competency. It provides cost advantage.
Experience lies in managers and employees.

e) Outsourcing
It involves purchasing activities from external suppliers who can perform than efficiently.
Outsourcing provides cost efficiency. Investment requirements are also reduced.

Outsourcing has the following benefits: (Box 3–1)

i) Access to World-class Capabilities: The specialized resources of external providers

facilitate availability of world-class capa­bilities.

ii) Resource Availability: Resources are freed from non-core activities to be used for core
activities.

iii) Risk Sharing: Reduced investment requirements make the organization flexible to
adapt to environment. The risk is shared with the external provider.

iv) Reengineering: World Class standards of outsiders help achieve reengineering

benefits within the organization.

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4.4.3 Effectiveness Analysis

Product features are physical characteristics of a product that provide value to customers. They can
be size, color, taste, look etc. For example, computer monitor with flat screen.

Organizations should deliver best value for money. They should provide the product features valued
by customers. This requires ability to operate effectively.

■ According to Johnson and Scholes:

Effectiveness is the ability to meet customer requirements on product features
at a given cost.

Effectiveness analysis assesses how well an organization is matching its products and services to the
requirements of target customers. (Figure 4–8)

Figure 4–8: Effectiveness Analysis

1. Customer Requirements
They consist of:

a) Product Attributes: Organizations must be clear about the product attributes that are valued
by customers. Attributes can be in terms of size, colour, taste, look, etc.

b) Service Expectations: Organizations must be clear about the service expectations of

customers. They can be before-sales, during-sales and after-sales services.

c) Price Sensitivity: Organizations must also be clear about price sensitivity of target customers.

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 Strategic Management & Decision Making Analysis

2. Value Added by Organization

They Consist of:

a) Product Features: Organizations need to add value to product features. Customers pay
premium for features they value.

b) Service Performance: Modern organizations should see themselves as service organizations.

Their service performance should be perceived by the customers as value addition. Service
that limits inconvenience adds value.

c) Communication: Value added by organizations in terms of product features and service

performance must be communicated to the customers.

3. Matching
The higher the degree of matching between customer requirements and value added by
organization, the greater is the effectiveness of the organization. Effectiveness is a core
competency that provides strategic advantage through customer satisfaction.

What customer values vary over time?

4.4.4 Comparative Analysis

The strategic advantage of an organization is in relation to its competitors. It is performing better
than competitors. It is the ability to meet and beat the performance of competitors.It is the process of
assessing the performance of organizations.

Comparative analysis is concerned with assessing the performance of an organization from a

comparative perspective. The comparison can be done by four methods. (Figure 4–9)
a) Historical Comparison
b) Industry Standards
c) Benchmarking
d) Robustness

Figure 4–9: Methods of Comparative Analysis

1. Historical Comparison
It looks at performance of an organization in relation to previous years to identify significant

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 Internal Analysis
changes. The analysis is internal to the organization. It assesses performance improvement
over a period of time.

Areas having consistently good performance represent strengths. Areas of consistently bad
performance represent weaknesses.

Weaknesses of Historical Analysis are:

i) It does not compare performance improvement with the competitors.

ii) It does not indicate the reasons for bad performance for taking corrective actions.

iii) It can lead to complacency. Measurement of performance based on a small base can
show dramatic improvements.

2. Industry Standards
Industry standards are agreed norms of performance in a given industry. The performance of
an organization is compared with industry norms. A set of agreed performance indicators are
used.

Industry norms help organizations to locate their strengths and weaknesses. They can
identify areas where they excel and areas where they need improvements.

The weaknesses of industry norms for comparative analysis are:

i) Industry norms are based on averages. They could lead to erroneous conclusions
about capability.

ii) Not all organizations in an industry are of similar nature. Aggregated figures of diverse
nature of organizations may not be meaningful for comparison.

iii) The overall performance of an industry can be bad in comparison to other industries.
This makes industry norms inappropriate for comparison.

iv) The boundaries of industries are changing. This poses difficulties in setting industry
norms.

3. Benchmarking
It is comparing performance with the best practices wherever it may be found. It serves as a
reference point for comparing performance. Its purpose is to meet and beat the performance
of the best in class.It is to undstand the best practices in performing og the organizations.

Objectives of Benchmarking

The objectives of benchmarking are to:

„„ Understand the best practices in performing an activity.
„„ Determine efficiency of activities performed by the organization compared to the best
performers.
„„ Learn how to lower costs to improve cost competitiveness.

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 Strategic Management & Decision Making Analysis
Types of Benchmarking

Benchmarking can be of the following types:

i) Performance Benchmarking: It compares one’s own performance with that of best

performers. It can be Best-in-class benchmarking. Comparison is made with the best
practice wherever it may be found.

ii) Process Benchmarking: It compares organization’s process and practices with that of
best processes and practices.

iii) Strategic Benchmarking: It compares organization’s strategic decisions and actions

with the best strategic decisions and actions of other organizations.

„„ Benchmarking shows where an organization excels or lags behind. Best practices

are identified and adopted. It is helpful in assessing strengths and weaknesses of an
organization.

4. Robustness Analysis
Robustness is difficulty in imitating by competitors. Resources that provide core competency
must be robust. The sources of robustness are: (Figure 4–10)

Figure 4–10: Sources of Robustness

1. Rarity: The resources that provide core competency should be rare. Competitors do not
possess them. They are scarce and in short supply. Rarity is provided by:
a) Unique Resources: Such resources are valuable, costly to imitate and are non-substitutable.
b) Preferred Access: The organization has preferred access to resources through brand and
trademark ownership, licencising, and winning the bid. Competitors cannot imitate them.
c) Situational Dependence: The core competency has situational dependence. It is of value
only to a particular organization. The transfer costs are too high. For example, use of specific
machines.
d) Sunk Costs: The operations involve heavy set-up costs. They have been written off. The
organization is able to operate at low cost.
2. Complexity: Complexity makes imitation of the knowledge base difficult. Such knowledge is
gained over time and cannot be computerized. Complexity results from:

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 Internal Analysis
a) Inter Linkages: The resources and competencies are internally interconnected. They
must be used together. For example, Custom-built software. It cannot be transferred
to competitors.

b) External Linkages: Strong relationships and linkages are built with a wider external
network. For example, through e-commerce.

c) Linked Technologies: Separate technologies are linked together to create new

products. This makes imitation difficult.

3. Causal Ambiguity: This results from high degree of uncertainty. Competitors find it difficult
to diagnose and imitate. They are unclear about bases of success. They waste resources in
imitating.

4. Culture: Competencies may be embedded in culture. They are indicated by organizational

knowledge. Competitors find them difficult to understand. Moreover, competencies may be
difficult to get identified by competitors.

4.5 Assessment of Internal Resources and Core Competencies

Resources are inputs into production process. Organizations are a bundle of resources. They work
with resources. They deploy resources in various functional activities. The capability of organization
is based on the cost and availability of resources. Internal analysis makes an assessment of internal
resources and core competencies.

■ According to Wheelen and Hunger:

A resource is an asset, competency, process, skill or knowledge
controlled by the corporation.

Resources have strategic importance. They provide strengths and weaknesses to an organization.
Opportunities of advantage in the external environment are matched with resource strengths in the
internal environment to formulate strategies.

The following resources are assessed: (Figure 4–11)

1. Available resources

2. Threshold resources

3. Unique resources

Figure 4–11: Types of Resources

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 Strategic Management & Decision Making Analysis

4.5.1 Available Resources

These resources are already deployed into various functions of the organization. They are human,
physical, financial and intellectual resources.

a) Human Resources: They consists of trained and experienced employees possessing

capabilities and competencies. They can be at managerial and operative levels. They possess:

„„ Knowledge, skills, attitudes for productivity improvement.

„„ Competencies and special qualities of employees.

„„ Potential for future development of managers.

„„ Loyalty and commitment to the organization.

„„ Adaptability to changing environment.

b) Physical Resources: They consist of physical resources that provide production possibilities.
They determine scale of operations. They impact on costs. They are represented by:

„„ Physical facilities like land, building, and other constructions in a proper location.

„„ Plant and equipment and their flexibility.

„„ Production capacity.

„„ Technical sophistication computerized, robotized, nano.

„„ Ownership of natural resources. Reserves of raw materials.

„„ Reputation for quality.

c) Financial Resources: They consists of capital, loan, cash, debtors and creditors. They provide
capacity for investment. They are represented by:

„„ Capital and cash flow

„„ Barrowings from financial institutions, creditorating

„„ Debtors and creditors

„„ Ploughing back of internally generated fund.

d) Intellectual Resources: They consist of intellectual capital. They are knowledge based. They
provide image to the organization. They are represented by:

„„ Brands, brand equity, brand loyalty, brand licencing

„„ Patents and trademarks portfolio

„„ Copyright portfolio: Books, music, software etc.

„„ Reputation and goodwill

„„ Relationships with stakeholders, customer database

„„ Research and development staff and facilities.

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 Internal Analysis

4.5.2 Threshold Resources

They are resources needed to stay in business. They are minimum requirements to serve a market
segment. They are human, physical, financial and intellectual resources of a minimum level to carry
out the functions of the organization.

The activities of competitors necessitate increase in threshold resources over time. This resource
base needs to be changed continuously to stay in business. It is easy to imitate by competitors.

4.5.3 Unique Resources

They are resources which provide competitive advantage to the organization. They also provide
strength.

■ According to Johnson and Scholes:

Unique resources are those resources which critically underpin
competitive advantage.

Unique resources are Critical Success Factors (CSF) for the organization. They provide strengths to
take advantage of opportunities and avoid threats.

Unique resources have the following characteristics:

a) Valuable: They provide value to sustain strategic advantage. They fulfill customer’s needs
better than competitors. They provide value to the customers.

b) Rare: Competitors do not possess them. They are scarce and in short supply. They are better
than competitor’s resources.

c) Costly to Imitate: They are difficult and costly to imitate. Competitors cannot easily copy or
acquire them. Patents, unique location, brand loyalty make resources inimitable.

d) Non-substitutable: The unique resources have no substitutes. The organization possessing

them is able to exploit them for its advantage.

4.5.4 Core Competencies

Core competencies are skills in coordinating resources for productive use. They are activities that
an organization does exceedingly well. They are well performed activities centeral to the strategies.
They provide competitive advantage over competitors. They are capability factors that reside in
people and other functions. The organization does them well compared to other internal activities.

Examples of core competencies are:

„„ Specialised skills possessed by employees.

„„ Expertise in developing up-to-date information communication systems and networks.

„„ Speed in developing new products to become first in the market.

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 Strategic Management & Decision Making Analysis
„„ Skills in integrating multiple technologies to manufacture superior quality products.

„„ Superior efficiency through low cost structure of production.

„„ Better capability in after-sales services.

„„ Learning based organization culture.

„„ Strong relationship marketing.

4.6 Strategic Advantage

The term strategic advantage refers to those market place benefits that exert a decisive influence
on an organization's likelihood of future success. These advantages frequently are sources of an
organization's current and future competitive success relative to other providers of similar products.
Strategic advantage is gaining advantage over competitors in terms of unique resources and core
competencies. It results from blending of unique resources, core competencies, superior efficiency
and superior quality. It outperforms competitors and creates new opportunities. It empowers the
organization to realize its goals and strategies.

Based on the analysis of internal environment, organizations prepare strategic advantage profile. It
involves the following steps: (Figure 4–12)

Figure 4–12: Steps in Preparing Strategic Advantage Profile

1. Step one
Identify key strategic factors: All key internal factors that provide competitive advantage are
identified. They are crucial to the success of organization.

The factors that provide competitive advantage can be:

1. An Important Expertise: Technological know-how, e-commerce, customer service,

promotional talents

2. Unique Physical Assets: Location and ownership of natural resources, state-of-the-

art plants.

3. Valuable Human Assets: Competent, experienced and motivated workforce.

4. Valuable Intangible Assets: Brand, patent, customer loyalty

5. Competitive Capabilities: Innovation, Leadership network, internet system and

websites.

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 Internal Analysis
6. Strategic Alliance And Joint Ventures: global networks

7. Organizational Effectiveness and Managerial Resources

8. Strong Financial Position and Performance.

9. Low cost or product differentiation.

2. Step Two
Identify importance of key strategic factors: The importance of relevant strategic factors is
identified. It is in terms of their contribution in achieving objectives.

3. Step Three
Assess strengths and weaknesses of relevant key strategic factors: It is done by comparing
with competitors’ accomplishments and own past results. The overall contribution of each
key factor in key results areas is assessed.

4. Step Four
Prepare strategic advantage profile (SAP): A profile is prepared showing the strengths and
weaknesses of each strategic factor. Strengths in key strategic factors are used to formulate
strategy.

Strategic Advantages may relate to technology, products, your operations, your capabilities and/or
your people that lead to the potential for a sustainable competitive advantage. Strategic Advantage
works with top management teams in entrepreneurial companies to help them develop and
implement strategic plans that achieve the company's long-term vision. This includes: (i) Facilitating
strategic and operational planning sessions, (ii) Helping companies design, evaluate and implement
new growth strategies, (iii) Conducting industry, competitor, and customer analysis to identify
new growth/market opportunities, and (iv) Evaluating internal operations and helping companies
develop core competencies.

Self-Examination Questions
1. What is internal analysis? Describe forces in internal environment.
2. Explain the process of internal analysis.
3. Make a distinction between mission, goals and strategies.
4. What do you understand by core competencies?
5. What is strategic advantage? Describe its building blocks.
6. Explain sustainable strategic advantage.
7. Describe areas of intenal analysis.
8. Explain methods of internal analysis.
9. Describe value chain analysis.How does it help in winning a competitive advantage?
10. Distinguish between cost efficiency analysis and effectiveness analysis.
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 Strategic Management & Decision Making Analysis
11. Write short note on comparative analysis.
12. What is resource? Describe unique resources.
13. Distinguish between available resources and threshold resources.
14. Describe the steps in preparing strategic advantage profile.
15. Explain the concept and process of internal analysis. What are the strategic advantages of internal
analysis?
16. How can a corporation identify its core competencies and distinctive competencies?
17. How are core competencies analysed.
18. Explain sources of competitive advantage.
19. What is strategic advantage profile (SAP)? How and why is it prepared?
20. "Weakness must be compared with strengths for internal assessment". Justify with suitable examples.
21. Explain the different aspects of the internal environment, emphasizing the nature of their impact on
the capability of an organization and ultimately on its strategic advantage.
22. Consider any organization in Nepalse industry of your choice. Prepare an organizational capability
profile and summarize the results in the form of a strategic advantage profile, clearly indicating the
nature of the impact of the different capability factors.

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 5. Strategic Options

5.1 Concept of Strategic Options

Strategic options are strategic alternatives. The source of strategic options is SWOT analysis
(Strengths, Weaknesses, Opportunities and Threats). This analysis identifies future opportunities
of strategic advantage and matches them with the resource strengths of the organization to
generate strategic options. Strategic options are many methods that are meant to achieve a certain
objective that is materialized in the performance of some specific activities. Examples of strategic
options include; cooperation in production, the diversification, and the informatization of activities.
Strategic options are creative alternative action-oriented responses to the external situation that an
organisation (or group of organisations) faces. Strategic options take advantage of facts and actors,
trends, opportunities and threat of the outside world.

Strategic options can be identified after an institutional assessment, keeping in mind the aspirations
(basic question) of an organisation. The tool ‘Strategic options’ helps to identify and make a
preliminary screening of alternative strategic options or perspectives. Developing and formulating
the strategic options include the following issues.

¾¾ Respond to one or more opportunities and/or threats

¾¾ Are actions (or results) related to output, input, mission, vision and/or relations?

¾¾ Are straightforward (clearly relate to opportunities and/or threats)

¾¾ Are also creative (there may be more than the most obvious response. And you may consider
new solutions that respond to new trends, opportunities, and threats)

¾¾ You may develop several options relating to the same opportunity or threat

¾¾ For each threat or opportunity try to formulate at least one strategic option

The scope of strategic options consists of identifying: (Figure 5–1)

a) Alternative strategies

b) Directions for strategy development

c) Methods for strategy development

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 Strategic Management & Decision Making Analysis

Figure 5–1: Scope of Strategic Options

Strategic options are identified at corporate level, business level and functional level. The role of Chief
Executive Officer (CEO) and SBU level managers is important in generating and analyzing strategic
options.Strategic options help to select the strategic issue implemented in the organizations.

5.2 Strategic Alternatives at Corporate Level

Corporate strategy is overall strategy that provides long term direction and scope to the organization.
It determines what business should the organization be in. It defines products, markets and functions.
It is also known as grand generic strategy. It is converned with managing a portfolio of businesses
and allocating resources to them.

Corporate level strategic options can be: (Figure 5–2)

1. Stability

2. Growth (expansion)

3. Retrenchment

4. Combination

Figure 5–2: Corporate Level Strategic Options

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5.2.1 Stability Strategy

There are a number of circumstances in which the most appropriate growth stance for a company is
stability, rather than growth. Often, this may be used for a relatively short period, after which further
growth is planned. Such circumstances usually involve a reasonable successful company, combined
with circumstances that either permit a period of comfortable coasting or suggest a pause or caution.
Three alternatives are outlined below, in which the actual strategy actions are similar, but differing
primarily in the circumstances motivating the choice of a stability strategy and in the intentions for
future strategic actions.

1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be
appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate
after growth or some turbulent events - before continuing a growth strategy, or (b) an uncertain or
hostile environment in which it is prudent to stay in a "holding pattern" until there is change in or
more clarity about the future in the environment.

2. No Change: This alternative could be a cop-out, representing indecision or timidity in making a

choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature, rather
stable environment, e.g., a small business in a small town with few competitors.

3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a deteriorating
situation by artificially supporting profits or their appearance, or otherwise trying to act as though
the problems will go away. It is an unstable, temporary strategy in a worsening situation, usually
chosen either to try to delay letting stakeholders know how bad things are or to extract personal gain
before things collapse.

This strategy is pursued in relatively stable environment. The existing business definition is
maintained. There is no change in products, markets and functions. The organization is the market
leader. The product is at the maturity stage in product life cycle. Current operations are made efficient.
Stability is aimed through:

a) No change strategy: Doing nothing new. Current policies and operations are continued.

b) Pause strategy: Moving with caution. Moving after rest.

c) Profit strategy: Sustaining profitability.

Benefits of Stability Strategy

The benefits of stability strategy are:

i) It is less risky. Environment is relatively stable.

ii) It is easy to pursue. Routines are not disrupted. Incremental performance is pursued.

iii) The organization is doing well and stays successful. Consoli­dation is achieved through
stability. Profitability is sustained.

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 Strategic Management & Decision Making Analysis
iv) It is action-oriented. Managers do not consider alternatives.

v) Inefficiencies are avoided.

vi) Control of business can be maintained.

5.2.2 Growth Strategy (Expansion Strategy)

All growth strategies can be classified into one of two fundamental categories: concentration within
existing industries or diversification into other lines of business or industries. When a company's
current industries are attractive, have good growth potential, and do not face serious threats,
concentrating resources in the existing industries makes good sense. Diversification tends to have
greater risks, but is an appropriate option when a company's current industries have little growth
potential or are unattractive in other ways. When an industry consolidates and becomes mature,
unless there are other markets to seek (for example other international markets), a company may
have no choice for growth but diversification.

There are two basic concentration strategies, vertical integration and horizontal growth.
Diversification strategies can be divided into related (or concentric) and unrelated (conglomerate)
diversification. Each of the resulting four core categories of strategy alternatives can be achieved
internally through investment and development, or externally through mergers, acquisitions, and/or
strategic alliances -- thus producing eight major growth strategy categories.

Comments about each of the four core categories are outlined below, followed by some key points
about mergers, acquisitions, and strategic alliances.

1. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive
position in a growing, attractive industry. A company can grow by taking over functions earlier
in the value chain that were previously provided by suppliers or other organizations ("backward
integration"). This strategy can have advantages, e.g., in cost, stability and quality of components,
and making operations more difficult for competitors. However, it also reduces flexibility, raises exit
barriers for the company to leave that industry, and prevents the company from seeking the best and
latest components from suppliers competing for their business.

A company also can grow by taking over functions forward in the value chain previously provided
by final manufacturers, distributors, or retailers ("forward integration"). This strategy provides more
control over such things as final products/services and distribution, but may involve new critical success
factors that the parent company may not be able to master and deliver. For example, being a world-class
manufacturer does not make a company an effective retailer.

Some writers claim that backward integration is usually more profitable than forward integration,
although this does not have general support. In any case, many companies have moved toward less vertical
integration (especially backward, but also forward) during the last decade or so, replacing significant
amounts of previous vertical integration with outsourcing and various forms of strategic alliances.

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 Strategic Options
2. Horizontal Growth: This strategy alternative category involves expanding the company's existing
products into other locations and/or market segments, or increasing the range of products/services
offered to current markets, or a combination of both. It amounts to expanding sideways at the
point(s) in the value chain that the company is currently engaged in. One of the primary advantages
of this alternative is being able to choose from a fairly continuous range of choices, from modest
extensions of present products/markets to major expansions -- each with corresponding amounts of
cost and risk.

3. Related Diversification : In this alternative, a company expands into a related industry, one
having synergy with the company's existing lines of business, creating a situation in which the
existing and new lines of business share and gain special advantages from commonalities such as
technology, customers, distribution, location, product or manufacturing similarities, and government
access. This is often an appropriate corporate strategy when a company has a strong competitive
position and distinctive competencies, but its existing industry is not very attractive.

4. Unrelated Diversification: This fourth major category of corporate strategy alternatives for
growth involves diversifying into a line of business unrelated to the current ones. The reasons to
consider this alternative are primarily seeking more attractive opportunities for growth in which to
invest available funds (in contrast to rather unattractive opportunities in existing industries), risk
reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage
of the product life cycle). Further, this may be an appropriate strategy when, not only the present
industry is unattractive, but the company lacks outstanding competencies that it could transfer to
related products or industries. However, because it is difficult to manage and excel in unrelated
business units, it can be difficult to realize the hoped-for value added.

Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories just
discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic
alliances. Of course, there also can be a mixture of internal and external actions.

Various forms of strategic alliances, mergers, and acquisitions have emerged and are used extensively
in many industries today. They are used particularly to bridge resource and technology gaps,
and to obtain expertise and market positions more quickly than could be done through internal
development. They are particularly necessary and potentially useful when a company wishes to
enter a new industry, new markets, and/or new parts of the world.

Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far short of
expected benefits or are outright failures. For example, one study published in Business Week in
1999 found that 61 percent of alliances were either outright failures or "limping along." Research
on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from
1990 to 1996 which found that nearly half "destroyed" shareholder value; an A. T. Kearney study of
115 multibillion-dollar, global mergers between 1993 and 1996 where 58 percent failed to create

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 Strategic Management & Decision Making Analysis
"substantial returns for shareholders" in the form of dividends and stock price appreciation; and a
Price-Waterhouse-Coopers study of 97 acquisitions over $500 million from 1994 to 1997 in which
two-thirds of the buyer's stocks dropped on announcement of the transaction and a third of these
were still lagging a year later.

Many reasons for the problematic record have been cited, including paying too much, unrealistic
expectations, inadequate due diligence, and conflicting corporate cultures; however, the most
powerful contributor to success or failure is inadequate attention to the merger integration process.
Although the lawyers and investment bankers may consider a deal done when the papers are signed
and they receive their fees, this should be merely an incident in a multi-year process of integration
that began before the signing and continues far beyond.

Growth strategy is pursued in highly competitive and changing environment. New products, markets
and functions are added. The pace of activities increases. The product is in the growth stage of
product life cycle. Growth is through increased market share and production capacity. The aim is
high growth through diversification, integration, cooperation and globalization.

„„ Growth through concentration: Specialization in one activity. The example is fast food chains.

„„ Growth through integration: Combining activities, vertical or horizontal.

„„ Growth through diversification: Change in products, markets and functions. New business is
started.

Diversification can be:

„„ Related Diversification: It is growth within the industry. It is through acquisition of firms

that are related in terms fo technology, products and markets for the acquiring firm. New but
related roducts are added. Existing skills and facilities are shared. For example, acquisition
of software firm by a computer manufacturing firm. Related diversification can be through
vertical and horizontal integration.

„„ Unrelated Diversification: It is growth through acquisition of firms that are unrelated n terms
of technology, products and markets for the acquiring firm. It is moving outside the industry.
New unrelated products are added. For example, acquisition of computer manufacturing firm
by a cement manufacturing firm. Unrelated diversification builds a portfolio of unrelated
business.

„„ Growth through cooperation: Competition through coop­eration among rival firms, e.g.
mergers, acquisitions, joint venture, strategic alliances.

„„ Growth through Globalization: Borderless world seen as one market; international expansion.

Benefits:

The benefits of growth strategy are:

i) Growth is essential for long-run survival and growth in changing environments. It facilitates
growth in size.

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 Strategic Options
ii) Effectiveness results from growth. Increased size can increase productivity and performance.

iii) High risk produces high reward. Managers remain motivated by growth. Risk spread can also
be done.

iv) Monopoly power can be gained by growth. Control can be gained through increased size.

v) Scale of operations can provide strategic advantage.

However, expansion can lead to inefficiencies.

5.2.3 Retrenchment Strategy

This strategy is pursued in threatening environment. Products, markets and functions are reduced.
The pace of activities decreases. The product is in the decline stage of product life cycle. Cash flow is
negative. Retrenchment is aimed through reduced market share, dropping product lines and markets,
and divestment. The aim is contraction of activities through turnaround, divestment and liquidation.
The Retrenchment strategy includes the following dimensions:

Turnaround: This strategy, dealing with a company in serious trouble, attempts to resuscitate or
revive the company through a combination of contraction (general, major cutbacks in size and costs)
and consolidation (creating and stabilizing a smaller, leaner company). Although difficult, when done
very effectively it can succeed in both retaining enough key employees and revitalizing the company.

Captive Company Strategy: This strategy involves giving up independence in exchange for some
security by becoming another company's sole supplier, distributor, or a dependent subsidiary.

Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or
captive company strategy, it has few choices other than to try to find a buyer and sell itself (or divest,
if part of a diversified corporation).

Liquidation: When a company has been unsuccessful in or has none of the previous three strategic
alternatives available, the only remaining alternative is liquidation, often involving a bankruptcy.
There is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top
management make the decisions rather than turning them over to a court, which often ignores
stockholders' interests.

Benefits of Retrenchment Strategy

Retrenchment strategy has the following benefits:

i) The organization is currently not doing well. Greater returns can be gained in other
opportunities.

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 Strategic Management & Decision Making Analysis
ii) The organization can put its house in order to improve performance. Profits can grow. Tax
advantages can be taken.

iii) Stakeholders pressures to improve performance can be dealt with.

iv) Crisis situations can be met. Resources become available for profitable activities.

The environment is threatening. Retrenchment strategy is the hardest to pursue. It implies failure.

5.2.4 Combination Strategy

This strategy is pursued in many and changing environments. The organization has several Strategic
Business Units (SBUs). It simultaneously uses combinations of stability, expansion and retrenchment
strategies to different parts of the organization. Old products, markets and functions are continued,
dropped or expanded. Product life cycles are in different stages. The aim is to improve performance.
The combination can be simultaneous, sequential or both.

„„ Simultaneous combination: Applied same time in different businesses.

„„ Sequential combination: Applied at different time in same business.

„„ Simultaneous and sequential: Combination of both.

Benefits of Combination Strategy

The benefits of combination strategy are:

i) This strategy is useful for large organizations having multiple SBUs.

ii) This strategy is adaptive to many environments.

iii) It is useful in periods of economic transition.

„„ This strategy is not easy to use.

5.3 Strategic Alterntives at Business Level

It is useful to consider strategy formulation as part of a strategic management process that comprises
three phases: diagnosis, formulation, and implementation. Strategic management is an ongoing
process to develop and revise future-oriented strategies that allow an organization to achieve its
objectives, considering its capabilities, constraints, and the environment in which it operates.
Large organization operates several businesses. Business strategies are concerned with strategic
business units (SBU). Each SBU consists of separate market segment, separate competitors, separate
manager and separate plan. They aim at attracting customers, withstanding competitive pressures
and strengthening market position.
Business level strategies can be: (Figure 5–3)
1. Porter's Competitive Strategy
2. Strategic Clock Strategy

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 Strategic Options

Figure 5–3: Business Strategies

5.3.1 Porter's Competitive Strategies

Michael Porter’s theory of the competitive advantage of nations provides a sophisticated tool for
analyzing competitiveness with all its implications. Porter’s theory contributes to understanding the
competitive advantage of nations in international trade and production. Its core, however, focuses
upon individual industries, or clusters of industries, in which the principles of competitive advantage
are applied. His theory begins from individual industries and builds up to the economy as a whole.
Since firms, not nations compete in international markets, understanding the way firms create and
sustain competitive advantage is the key to explaining what role the nation plays in the process.
Therefore, the essence of his argument is that “the home nation influences the ability of its firms
to succeed in particular industries”. Given this interdependence, it appears that in order to draw
conclusions on the competitiveness of the particular industry, consideration of the different facets of
the competitive diamond of the whole nation is needed.

Michael Porter considers the competitiveness of a country as a function of four major determinants:
„„ factor conditions;
„„ demand conditions;
„„ related and supporting industries; and,
„„ firm strategy, structure, and rivalry.

Even though these determinants influence the existence of competitive advantage of an entire nation,
their nature suggests that they are more specific of a particular industry rather than typical of a
country. The reason for this is that in Porter’s theory the basic unit of analysis for understanding
competition is the industry. “The industry is the arena in which the competitive advantage is won or
lost.” So, seeking to isolate the competitive advantage of a nation means to explain the role played by
national attributes such as a nation’s economic environment, institutions, and policies for promoting
firms’ ability to compete in a particular industry

Michael Porter advocated competitive strategies to gain competitive advantage. they are based on
cost, differentiation and focus. They can be: (Figure 5–4)

1. Low-cost leadership strategy

2. Broad differentiation strategy

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 Strategic Management & Decision Making Analysis

3. Best cost provider strategy

4. Focused low-cost strategy (focused at market niche)

5. Focused differentiation strategy (focused at market niche)

Figure 5–4: Porter's Competitive Strategies

Competitive strategies provide strategic options. They are based on strategic advantage sought and
market target. Strategic advantage can be linked to lower costs or product differentiation. Market
target can be broad or narrow.

1. Low-cost Leadership Strategy

This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm
hopes to take advantage of economies of scale and experience curve effects. The product is often
a basic no-frills product that is produced at a relatively low cost and made available to a very large
customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects
of the business. The associated distribution strategy is to obtain the most extensive distribution
possible. Promotional strategy often involves trying to make a virtue out of low cost product features.
To be successful, this strategy usually requires a considerable market share advantage or
preferential access to raw materials, components, labour, or some other important input. Without
one or more of these advantages, the strategy can easily be mimicked by competitors. Successful
implementation also benefits from:
„„ process engineering skills
„„ products designed for ease of manufacture
„„ sustained access to inexpensive capital
„„ close supervision of labour
„„ tight cost control
„„ ncentives based on quantitative targets.

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 Strategic Options
The strategic managers always ensure that the costs are kept at the minimum possible level.
Examples include low-cost airlines such as EasyJet and Lidl.

Striving to be the industry's overall low cost provider is a powerful competitive approach in markets
with many price sensitive buyers.A company achieves loe cost leadership when it becomes the
industry's lowest cost provider rather than just being one of perhaps several competitors with
comparatively low costs. To achieve a low cost edge over rivals, a firm's cumulative costs across its
overall value chain must be lower than competitors' cumulative costs.

The focus of this strategy is on cost. Low-cost leadership means low overall costs. Low costs mean
lower prices relative to competitors. This strategy aims to achieve low costs relative to competitors.
The organization becomes the industry’s lowest cost provider of products. It finds ways to reduce
costs by reducing waste. This strategy appeals to a broad segment of price-sensitive buyers.
Standardized products are offered.

Ways of Reducing Costs

There are following ways to reduce costs. They are:

a) Control Cost Drivers: Drive down the costs of value chain activities by doing a better job
than competitors.

b) Revamp Value Chain: By-pass some cost-producing activities.

c) Do a better job than rivals of performing value chain activities more cost effectively.

d) Striving to capture all available economies scale

e) Improving supply chain efficiency

f) Trying to operate facilities in full capacity

a) Controlling Cost Drivers to Reduce Costs

Costs are reduced in each activity segment of value chain through:

i) Economies of Scale: Activities are performed more cheaply at larger volumes. Fixed costs are
spread out over greater volume. Standardization is practiced.

ii) Experience Curve: Experience helps reduce the cost of performing activities over time.

iii) Cost of Key Resources: Costs of key resources are reduced through strong bargaining power
of buyer.

iv) Resource Sharing: Combining of like activities and sharing of resources is done across sister
units to reduce costs.

v) Outsourcing: It involves purchasing some activities from outside specialists who can perform
them cheaply. Vertical integration is also done to reduce costs.

vi) Capacity Utilization: Higher rate of capacity utilization is done to reduce costs.

vii) First Mover Advantage: Being first in the market in introducing a new product provides cost
advantage.
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 Strategic Management & Decision Making Analysis
viii) Integration: Forward, backward and horizontal integration is used to control costs.

b) Revamp Value Chain

Costs can be driven down by revamping value chain through: (Figure 5–5)

i) Shifting to E-business: Use of internet for doing business is done to reduce costs.

ii) Direct Marketing: Marketing of products directly from producer to buyers reduce is done to
costs. Channel costs are saved.

iii) Simplify Product Design: Simplified product design reduces costs by simplifying the value
chain. For example, using standardized parts and components.

iv) No-frills Offers: Offering only basic product to cut costs. There are no multiple features and
options.

v) By-pass High Cost Materials: New low cost materials are used to reduce costs. High cost
materials are by-passed.

vi) Relocate Facilities: Plants are moved closer to supplier or customer or both.

vii) Reengineering: Core business processes are reengineered to cut out low value-added
activities.

Figure 5–5: Revamping value chain of software industry

Conditions for Success of Low-cost Leadership Strategy

Low cost leadership strategy works best in conditions of:

i) Vigorous Price Competition: Price competition is vigorous among competitors.

ii) Standardized Product: All producers offer standard products.

iii) Low Product Differentiation: Product differentiation is low. Substitute products are not
attractive. Buyers do not care about brand differences.

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iv) Price Sensitiveness: Most buyers are price-sensitive.

v) Low Switching Costs: Buyers incur low switching costs.

vi) Buyer Power: Buyers have strong bargaining power. They exert pressure on pricing.

Benefits of Low-cost Leadership Strategy

i) Low cost protects from competition.

ii) Increased cost of supplies can be absorbed if sellers are powerful. Efficiency is high. Waste is
reduced.
iii) Price cut can be done if buyers are powerful.

iv) Threat of cheap substitutes can be offset by low prices.

v) Low price serves as a barrier to new entrants.

vi) Market share can be increased through market penetration.

vii) Employees participate in cost control efforts.

Risks of Low-cost Leadership Strategy

i) Profitability can be lower if price cutting is aggressive.

ii) Cost advantage may not be sustainable if rivals can copy or match low cost. Many cost saving
activities are easily duplicated.

iii) Suppliers can increase costs.

iv) Poor product features may reduce buyer appeal. It is not a market-friendly approach. It can
retard innovation.

v) Cost saving technological breakthroughs can nullify cost advantage. Cost advantages decline
over time.

vi) Sustained capital investment in needed.

2. Broad Differentiation Strategy

Differentiation strategies are attractive whenever buyers' needs and preferences are too diverse
to be fully satisfied by a standardized product offering.Differentiation is not something hatched in
marketing and advertising departments, nor is it limited to the catchalls of quality and service. It can
exist in activities all along an industry's value chain.The essence of a broad differentiation strategy is
to offer unique product attributes that a wide range of buyers find appealing.

This strategy focuses on differentiation. Differentiation aims to establish uniqueness of a brand

relative to competing brands in the perception of customers. It is making products different from
competitors' products. It incorporates differentiating product features that are valued by customers.
They cause customers to prefer a firm’s brand over the brand of rivals. Customers perceive superior
value in differentiation. They are not sensitive to price.

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Differentiation achieves uniqueness in ways that:

„„ Customers perceive it valuable. They are willing to pay higher prices.

„„ Competitors find it hard to match or copy.

„„ Cost is less than price premium that buyers will pay.

Bases of Differentiation

Differentiation can be based on:

„„ Product parameters: Size, shape, design, features, quality, performance.

„„ Services back-up: Delivery, installation, repair, trainings, availability of spare parts.

„„ Personnel: Better and experienced personnel to serve the customers.

„„ Promotion: Using differentiating claims in promotion appeals.

„„ Image: Projecting organization or brand image.

Drivers of Differentiation

Differentiation possibilities can exist all along the value chain. The drivers of differentiation are:

a) Unique Product Performance: Strict specifications for quality inputs and procurement to
raise product performance.

b) Unique Product Features: R & D activities that improve design, applications, variety, safety,
recycling capacity, and environ­ment protection. Creativity in product engineering.

c) New Technologies: Improved production methods and processes through new technologies.
They reduce manufac­turing defects and lower product costs.

d) Unique Services: Better services through unique capabilities for delivering customer value. It
is through personnel with exceptional skill or experience and improved outbound logistics.

e) Detailed Information: More and better product information to customers including

e-commerce facilities.

f) Pursuing production R&D activities.

g) Striving innovation and technological innovation

h) Sales and marketing

i) Employee skill, training, experience

j) Input quality

Conditions for Success of Broad Differentiation Strategy

Broad differentiation strategy works best when:

a) Many Ways to Differentiate: There are many ways to dif­fer­entiate a product. Many customers
perceive value in differentiation.
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b) Diverse Needs and Uses: Customer needs are diverse. So are uses for the product.

c) Few Rivals: Few rivals follow similar differentiation approach. There is no head-to-head
rivalry. Brand loyalty is high.

d) Fast Technological Change: Technological change has a fast pace. Competition is focused on
evolving product features.

e) Buyers are less sensitive to price: They are willing to pay higher prices.

Benefits of Broad Differentiation Strategy

a) Competitive rivalry is lessened.

b) Brand loyalty increases. Customers pay higher price.

c) Supplier bargaining power increases. Price increase is possible.

d) Customer focus is ensured.

e) Differentiation acts as entry barrier to new entrants.

f) Low threat of substitutes. Rivals find it hard to copy.

Risks of Broad Differentiation Strategy

a) Customers may not perceive enhancement of value from a differentiating feature.

b) Differentiation may be done beyond customer needs.

c) Price premium can be high in the perception of customers. Product switching can take place.

d) Failure to signal value to customers to justify higher price.

e) Differentiating on wrong features without regard to customer needs.

f) Differentiation may not be sustainable. Competitors may copy it. Imitation can narrow it.

g) Speed may be lacking to respond to customer needs.

3. Best-cost Provider Strategy

Best-cost provider strategies stake out a middle ground between pursuing a low-cost advantage and
a differentiation advantage and between appealing to the broad market as a whole and a narrow a
company niche. Best – cost provider strategies are a hybrid of low cost provider and differentitation
strategies that aim at providing desired quality/features/performance/service attributes while
beating rivals on price.Being a best-cost provider is different from being a low cost provider because
the additional attractive attributes entail additional costs.

This strategy aims at giving customers more value for money. It strives to have the lowest cost with
good quality relative to rivals. Products with comparable attributes are offered. The provider has
resources and competencies to combine low cost with attractive features.

Best cost provider strategy is a hybrid strategy. It balances low cost with product differentiation. The

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 Strategic Management & Decision Making Analysis
market target is value-conscious customers. This strategy is appealing to price-sensitive buyers who
prefer product differentiation.

Benefits: This strategy provides better products at low cost.

Risks: This strategy faces competition from both low cost providers and product differentiation
providers. It may get squeezed between these two strategies.

4. Focused Strategies
A focused strategy delivers competitive advantage either by achieving lower costs than rivals in
serving buyers constituting the target market niche or by developing a specialized ability to offer
niche buyers an appealing differentiated offering that meets their needs better than rival brands
do. It is also known as market niche strategy. The focused strategies concentrate on a niche of the
market. Niche is a narrow piece of the total market. It is identified by dividing a market segment into
subsegments. It consists of fairly small groups of customers whose needs have not been well served.
They require special attention. The market is narrow but well-defined.A focused strategy aimed
at securing a competitive edge based either on low cost or differentitation becomes increasingly
attractive.

The niche can be defined by:

„„ Demographic characteristics: Particular group of customers based on age, income, occupation.

„„ Geographical uniqueness: Geographic market, for example, Sherpas of Himalayas.

„„ Specialized requirements: For example, for oversized people

„„ Special product attributes: Product line, for example, Cotton clothes.

Focused strategies aim to serve buyers better than the competitors. Such strategies can be of two
types:

a) Focused Low Cost: Lower costs than competitors in serving the market niche. Cost advantage is
sought.
b) Focused Differentiation: Differentiated product attributes. Niche members perceive them as
better suited to their unique tastes and preferences. Special product attributes add new value.

Conditions for Success of Focused Strategy

a) The niche should be big enough in size to be profitable. It should have good growth potential.

b) Major competitors are not interested in the niche.

c) The customers are unique in terms of specialized requirements and unique preferences.

d) The niche should be suited to the resources and competencies of the focuser.

e) There should be no overcrowding in the same niche of the segment.

f) Customers are loyal. They are willing to pay higher prices.

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Benefits of Focused Strategies

a) Focused strategies are protected from competition.

b) Customer loyalty is strong.

c) Specialization can be practiced. It serves as a barrier to new entrants.

d) Distinctive competencies can be developed.

Risks of Focused Strategies

a) Niches can disappear owing to technology or market factors.

b) Niches can become attractive to competitors.

c) Costs tend to be higher.

d) Competitors may come up with better appealing products.

e) Needs and preference of niche customers may shift over time.

5.3.2 Strategic Clock-oriented Market-based Generic Strategies

The business level strategies can be analyzed in terms of a “Strategic Clock. It is based on price and
perceived added value. Price is money customers pay for the product. Perceived added value is
benefits perceived by the customer. (Figure 5–6)

These strategies focus on perceived value added as the basis of competitive advantage.

Figure 5–6: Strategic Clock-oriented Market-based Generic Strategies

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 Strategic Management & Decision Making Analysis
The 'Strategy Clock' is based upon the work of Cliff Bowman (see C. Bowman and D.
Faulkner 'Competitve and Corporate Strategy - Irwin - 1996). It's another suitable
way to analyze a company's competitive position in comparison to the offerings of
competitors. As with Porter's Generic Strategies, Bowman considers competitive
advantage in relation to cost advantage or differentiation advantage.

Strategic Options in Strategic Clock

1. No Fills Strategy: It combines low price with low perceived added value. It focuses on price-
sensitive market segment. Quality is not a concern.

2. Low Price Strategy: It combines low price and similar perceived added value relative to
competitors. It focuses on low price without loss of quality.

3. Hybrid Strategy: It combines low price with differentiation relative to competitors. It requires
a low cost base which competitors cannot match. Customers should perceive high added
value. It requires greater sales volume, focused market segment, and core competencies.

4. Differentiation Strategy: It provides products of unique dimensions with high perceived

added value. Differentiation can be without price premium or with price premium. The aim
is to achieve higher market share by offering better products at same price or higher price. It
can be through:

„„ Uniqueness or improvements in products.

„„ Marketing through power of brand or aggressive promotion.

„„ Core competencies that provide competitive advantage.

The organization should clearly identify who are its target customers, what is valued by
customers and who are the competitors.

5. Focused Differentiation Strategy: It combines high price with high perceived added
value It focuses on a selected market segment. Customers are willing to pay premium
price.

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6. Increased Price with Standard Value Strategy: This strategy combines high price
with standard perceived added value. This is found in monopoly situations. It has risk
of losing market share. It is destined to fail.

7. ncreased Price with Low Value Strategy: This strategy combines high price with low
perceived added value. This is also possible in monopoly situations. It is destined to
fail.

8 . Standard Price with Low Value Strategy: This strategy combines standard price
with low perceived value added. It leads to loss of market share. It is also destined to
fail.
The strategic Clock-based Generic Strategies focus on perceived added value as the
basis of competitive advantage.

5.4 Directions for Strategy Development

Strategies can be developed in different directions. Organizations have a number of options

concerning directions. They can be in terms of market coverage, products, competence base, and
expectations. The product/market matrix provides options concerning directions (Figure 5–7)
The directions available for strategy development are:

1. Consolidation

2. Market Penetration

3. Product Development

4. Market Development

5. Diversification

5.4.1 Consolidation
In this direction, organizations protect their market share and position in existing markets with
existing products. They adapt and develop their resources and competencies to maintain their
competitive position.

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 Strategic Management & Decision Making Analysis

Figure 5–7: Product/Market Matrix

Consolidation can be through:

a) Maintenance of Market Share: Organizations aim at good financial performance by maintaining

market share. They follow the strategy of higher price/higher quality.

b) Withdrawal: Organizations reduce their product lines and market segments. It can be through
divestment. It is also known as Turnaround Strategy. Withdrawal generally takes place when:

„„ Product is in the decline stage of product life cycle. Market is declining.

„„ Organization lacks resources and competencies relative to competitors. It is not doing

well.

„„ Priorities change. They require withdrawal from some activities. Better opportunities
exist elsewhere.

„„ Stakeholder expectations are not fulfilled, for example in terms of profits.

„„ Downsizing is required to cut staff and reduce costs.

„„ Asset reduction is desirable.

„„ Business cycles necessitate withdrawal.

5.4.2 Market Penetration

This direction aims at is gaining market share for existing products in existing markets. It protects
and builds market position. Innovation and low-prices are used for market penetration. It focuses on
home market through aggressive sales efforts and better products.

Factors that affect market penetration are:

a) Nature of Market: It is easy to gain market share in growing markets. It is not possible in highly
competitive saturated markets. It should be possible to increase the usage rate of customers.

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b) Resources and Competencies: Strengths in terms of superior resources and competencies
facilitate market penetration. They sustain quality, innovation and investment for economies
of scale.

c) Leader Complacency: Leaders become careless and complacent. This allows market
penetration to gain share.

5.4.3 Product Development

This direction aims for better returns at medium risk. It is delivering new products to existing
markets. It is based on knowledge of customer needs. The new products can be:

„„ Innovation: Product is new to the world.

„„ Modification: Product is new to the market.

„„ Imitation: Product is new to the organization.

Environmental changes, changing customer needs, shorter product life cycles, and existing
competencies necessitate product development.

Product development can be risky. It can be expensive in terms of R & D. Most new products fail in
the market. However, it is also the essence of survival and growth for an organization. It maintains
competitive edge when products reach maturity stage of product life cycle.

Options Available for Product Development

The options available for product development are:

a) On Existing Competencies: The existing competencies are used for product development.
Current strengths in R & D are exploited.

b) With New Competencies: New competencies are developed for product development. R & D
is strengthened.

5.4.4 Market Development

This direction aims for better returns at high risk. It is offering existing products in new markets.
This is required when there are no further opportunities in existing markets. The organization has
excess production capacity. The current market is saturated. The organization has resources to tap
new markets.

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The options available for market development are: (Figure 5–8)

„„ New segments

„„ New uses

„„ New territories

„„ New competencies

Figure 5–8: Market Development Options

a) New Segments: Existing products are offered to new market segments not currently served.

b) New Uses: New uses are developed for existing products. For example, nylon is used for
clothing, tyres, carpets and many other uses.

c) New Territories: Geographical spread is done, either nationally or internationally.

Globalisation has increased pressures for geographical spread. Nes channels of distribution
are used.

d) New Competencies: New competencies are developed for market development. Market
development usually requires product development plus competency development.

5.4.5 Diversification
This direction aims for better returns at high risk. A new product is produced. It takes the organization
away from its existing markets and products. It exploits core competencies in new businesses. It can
be of two types:
a) Related Diversification: It is within the industry. Existing skills and facilities are shared. For
example, Unilver is diversified in consumer goods industry. Related diversification can be:
(Figure 5–9)

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Figure 5–9: Vertical and Horizontal Integration

„„ Vertical Integration: Backward or forward integration into adjacent activities of current

business. Backward is related to inputs. Forward is related to outputs.

„„ The organization produces its own inputs through backward integration. It distributes its
outputs through forward integration. For example, McDonald grows its potatoes and owns
restaurants.

„„ Horizontal Integration: Integration into activities which are competitive or complementary

with present activities.

b) Unrelated Diversification: It is moving beyond the industry in new business areas. It can be in
new markets or already existing markets. It builds a portfolio of unrelated businesses. It is also
known as lateral diversification.

Reasons for Diversification

„„ Environmental adaptation is facilitated.

„„ Resources and core competencies can be exploited in new arenas.

„„ Market saturation necessitates diversification.

„„ Expectations of dominant stakeholders drive diversification.

„„ Top management’s desire to increase powerbase drives diversification.

„„ Entrepreneurial spirit of managers drive diversification.

Options for Diversification

Options for diversification can be:

a) On Existing Competencies: Current competencies of the organization are exploited

in new arenas.

b) With New Competencies: New competencies are developed for diversification in

new arenas.

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5.5 Methods of Strategy Development

The methods of strategy development are: (Figure 5–10)

1. Internal development

2. Mergers and acquisitions

3. Joint development and Strategic alliances

Figure 5–10: Methods of Strategy Development

5.5.1 Internal Development Method

The strategies are developed by building up an organization’s own resources and competencies. It is
also called organic develop­ment. It is a slow process.
Internal development method can be adopted in the following situations:
a) Developing New Products: Such products are first in the field. They are based on:
„„ High-tech design
„„ High-tech method of production
Internal development of new products helps acquire new competencies. Such competencies
provide strategic advantage to the organization.
b) Developing New Markets: It is through direct marketing. Middlemen are bypassed.
Organizations gain full understanding of the market. They are near their customers. The
market knowledge becomes a core competency.

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c) Build Competence through Learning: Internal development helps build competence through
learning. Organizations gain competence in knowledge creation and integration.

d) Cost spread: Internal development helps spread cost to other activities. It can be favourable
for small companies.

e) Environmental Issues: To address environmental issues where:

„„ The organization may be the only one in the field of developing specific new products.
It has the choice of internal development only.

„„ The organization is unable to find suitable target for acquisition.

„„ The organization wants to avoid political and cultural problems associated with acquisition.

5.5.2 Acquisition and Mergers Method

Acquisition and mergers involve permanent ownership ties. An organization develops its resources
and competencies by taking over another organization. The need to keep up with the changing
environment necessitates mergers and acquisitions.

a) Acquisition: It is one organization taking over another organization through purchase of

100% shares or ownership. The acquired organization generally keeps its separate identity
as a subsidiary.

b) Merger: It is one organization merging with another. Merger is combination of two

organizations into one. It can take the following forms:

„„ Horizontal Merger: Combination of two similar types of organizations in terms of products

and markets. For example, merger of two banks.

„„ Vertical Merger: Combination of two organizations producing complementary products. For

example, merger of sugar mill and sugar cane producer.

„„ Concentric Merger: Combination of two organizations serving same customer group. For
example, Bread and biscuits.

„„ Conglomerate Merger: Combination of two organizations unrelated to each other. For

example, biscuit and shoes.

Merger involves purchase of assets and liabilities. The merged organization generally loses its
previous identity. Mergers generally happen voluntarily. If a new organization is created through
merger, it is known as amalgamation.

Reasons for Acquisition and Mergers

The motives or reasons for acquisitions and mergers are:

i) Speed: They provide ability to speedily acquire resources and competencies not held in-
house. They allow entry into new products and new markets. Risks and costs of new product

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 Strategic Management & Decision Making Analysis
development decrease.

ii) Market Power: They build market power. Market share increases. Competition decreases.
Excessive competition can be avoided by shut down of capacity. New products can be added.
Synergistic benefits are gained.

iii) Overcome Entry Barrier: Market entry barrier can be overcome by acquiring an existing
organization. The risk of competitive reaction decreases.

iv) Financial Gain: Organizations with low share value or low price/earnings ratio can be
acquired to take short-term gains through asset stripping (Selling assets piecemeal). This
seems to be the main motive for acquisition of Harisiddhi Brick and Tile Factory in Kathmandu.
„„ Tax advantages can also be gained by acquiring organizations with accumulated losses.

„„ Cost efficiency can also be gained through economies of scale.

v) Resources and Competencies: Resources and competencies not available in-house can be
acquired. R & D expertise and technological capabilities can be availed.

vi) Stakeholder Expectations: Stakeholders may expect growth through acquisitions.

Problems of Mergers and Acquisitions

i) Integration Problems: The activities of new and old organizations may be difficult to
integrate. Cultural fit can be problematic. Synergistic benefits may not be realized during
post-merger period. Employees may resist it.

ii) High Cost: The acquirer may pay high cost, especially in cases of hostile take over bids. Value
may not be added for the acquirer.

iii) Financial Consequences: The returns from acquisitions may not be attractive. Expected cost
savings may not materialize. Experience indicates that about 70 per cent of acquisitions end
up with lower returns to shareholders.

iv) Too Much Focus: Too much managerial focus on mergers and acquisitions can be detrimental
to internal development. Exaggerated expectations may not produce results.

5.5.3 Joint Development and Strategic Alliances Method

Joint development is where two or more organizations share resources and activities to develop a
strategy. This is a cooperative approach to strategy development. It is time-bound and of a temporary
nature.

Business environment is getting complex due to globalistion, diversity, and information technology.
Internal resources and competen­cies alone of an organization may not be sufficient to cope with
complex environmental forces. Cooperation with other organizations can provide access to materials,
skills, finance, technology and markets. This becomes the core element of business strategy to close
the competitive gap.

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Joint development can be based on strategic alliance. Strategic alliance is a partnership tie-up
agreement between two or more organizations to jointly achieve mutually beneficial strategic
objectives. Resources, capabilities and core competencies are combined to pursue mutual interests.
It can be to develop/ manufacture/distribute products.

„„ Strategic alliances have a limited life span.

Reasons for Forming Strategic Alliances

The reasons for forming strategic alliances can be:

a) Resource Exploitation: Alliances help to exploit current resources and competencies. They
also explore new possibilities to expand resources and competencies. Joint management of
resources is achieved.

b) Cost and Value: Alliances co-opt competitors and providers of complementary products. This
leads to cost reduction by using shared facilities. Customer satisfaction increases through
added value and increased availability of products. Competition is avoided.

c) Co-specialisation: Alliances allow each partner to specialize in their activities of strengths.

This is essential for product innovation. Productivity also increases.

d) New Market Access: Alliances provide access to new markets and new businesses. Global
companies can enter into alliances with local companies to take advantage of market
knowledge, distribution networks and customer support services.

e) Learning: Partners learn from each other. New competencies can be developed. e-Commerce
provides an example whereby expertise of one partner can be used to develop web sites.

f) Risk Management: Alliances help manage financial, technological, and political risks. They
provide strategic advantage.

Forms of Strategic Alliances

Strategic alliances can take many forms. They are: (Figure 5–11)

a) Ownership-based
i) Joint ventures
ii) Consortia

b) Contract-based
iii) Licensing arrangements
iv) Franchising
v) Subcontracting

c) Market-based
vi) Networks
vii) Opportunistic Alliances

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a) Owner-based Strategic Alliances

They can be:

i) Joint Ventures: They are based on ownership sharing. They are formal arrangements by
two or more independent organizations to set up a jointly owned new organization. The
ownership can be in terms of shareholding or agreements for profit sharing. They serve as
channels for foreign direct investment by multinationals.

„„ Joint ventures facilitate globalization of operations, networking, and risk minimization.

New technology can be introduced quickly.
ii) Consortia: They involve two or more organizations in a joint venture arrangement focused
on a particular project. For example, Phulbari Hotel in Pokhara is the result of consortia
between various banks. It involves pooling of resources and competencies. It facilitates joint
bidding for projects.

Figure 5–11: Forms of Strategic Alliances

b) Contract-based Strategic Alliances

They can be:

iii) Licensing: It is a contract which grants the right to manufacture a patented product for a fee.
It is common in science and technology-based industries.

iv) Franchising: It is a contract which grants the right to use a brand name for specific activities
in return for a royalty. The franchiser provides quality assurance and training. Coca-cola is an
example.

v) Subcontracting: It is subcontracting particular part of a process or service to outside

suppliers. It is outsourcing.

c) Market-based Strategic Alliances

They can be:

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vi) Networks: They are arrangements whereby two or more organizations collaborate without
formal relationships. It is based on mutual advantage and trust. It is popular in airlines
industry.

vii) Opportunistic Alliances: They are based on loose arrangements. They focus on particular
projects. They indicate market relationships.

Requirements for Successful Strategic Alliances

It is not easy to make alliances work. The factors that contribute to successful management of
alliances are:
a) Trust: Trust is the most important factor. It can be competency-based or character-based.
Climate of trust should be creatred.

b) Top management Support: Top managers of alliances should provide support to build and
sustain relationships. They should effectively manage friction and conflicts among allies.

c) Performance Expectations: They should be clearly stated and communicated to members of

alliance. They should be based on clear objectives. The gains should be specified.

d) Organizational Arrangements: They should be clear in terms of structure, authority,

responsibilities and accountabilities of partners in the alliance. People aspect should be
carefully considered.

e) Compatibility: This is essential at operational levels to achieve strong interpersonal

relationships.

f) Evolution and Change: The alliance should be an evolutionary process. Changes and needed
adjustments should be made in the alliance as needed.

Self Examination Questions

1. Explain the concept of strategic options.
2. Describe strategic alternatives available at corporate level.
3. Distinguish between stability strategy and growth strategy.
4. Explain retrenchment strategy. How does it differ from combination strategy?
5. Describe strategic alternatives at business level.
6. Explain Porter's competitive strategies to define business strategies of the firms.
7. Distinguish between low cost leadership strategy and focused low cost strategy.
8. What is broad differentiation? How does it differ from focused differentiation?
9. Describe strategic clock oriented market based business strategies.
10. Describe directions available for strategy development.
11. Distinguish between consolidation and market development directions for strategy development.

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12. Explain methods of strategy development.
13. Describe various forms of strategic alliances.
14. Why is a conglomerate or unrelated diversification strategy adopted?
15. How can a firm use horizontal integration to expand in the same industry?
16. Under what conditions are firms motivated to adopt integration strategies?
17. What is the danger in being a company having neither cost leadership nor differentiation?

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 6. Strategy Formulation and Strategic
Choice

6.1 Process of Strategy Formulation

Crafting the strategy to achieve the objectives and move the company along the strategic course that
management has charted.The task of stitching a strategy together entails addressing a series of hows:
how to grow the business, how to please customers, how to outcompete rivals, how to respond to
changing market conditions, how to manage each functional piece of the business, how to develop
needed capabilities, and how to achieve strategic and financial objectives.It also means choosing
among the various strategic alternatives – proactively searching for opportunities to do new things
or to do existing things in new or better ways.

Strategy is a broad game plan to achieve objectives. It provides direction and scope to the organization
over the long-term. The process of strategy formulation consists of the following steps: (Figure 6–1)
a) Review strategic elements
b) Conduct SWOT Analysis
c) Identify Strategic Options
d) Evaluate Strategic Options
e) Make Strategic Choice

6.1.1 Review Strategic Elements

Very early in the strategy-making process, a company's senior managers must wrestle with the issue
of what directional path the company should take. It is necessary to review the strategic elements
in the company.Developing a strategic vision of the company’s long term direction, a mission that
describes the company's purpose, and set of values to uide the pursuit of the vision and mission.
Therefore, strategy formulation starts with a review of strategic elements. They are:

i) Vision: Top management's views and conclusions about the company's long term direction
and what product-customer-market-technology mix seems optimal for the road ahead
constitute a strategic vision for the company.Vision is what the organization aspires to
become. It is desired future state. It is reexamined in the context of likely future changes
in the environment. It is restated, if necessary. A strategic vision delineates management's
aspirations for business, providing a panoramic view of "where we are going" and a convincing
rationale for why this makes good business sense for the company.
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ii) Mission: A mission statement describes the entreprise's current business and purpose – "who
we are, what we do, and why we are here." A well conceived mission statement conveys a
company's purpose in language specific enough to give the company its own identity. Mission
is the reason for the existence of the organization. It follows from the vision. It is reexamined
to ensure that it serves as a unifying theme. It is restated, if necessary. Ideally, a company
mission statement is sufficiently descriptive to :

¾¾ Identify the company's product or services

¾¾ Specify the buyer needs it seeks to satisfy

¾¾ Identify the customer groups or markets it is endeavouring to serve

¾¾ Specify its approach to pleasing customers and Give the company its own
identity

iii) Objectives: The managerial purpose of setting objectives is to convert the vision and
mission into specific performance targets.Well-stated objectives are specific, quantifiable
or measuarable, and contain a deadline for achievement. They are long-term desired
outcomes. They are end results to be achieved. They follow from mission. They are reviewed
and reformulated, if necessary. Objectives are aan organization's performance targets –
the specific results management wants to achieve.Two very distinct types of performance
targets are required: those relating to financial performance and those relating to strategic
performance.

iv) Current Strategies: They are currently followed by the organization. Reformulation of
objectives requires review and reformulation of current strategies as well. Current strategies
give directions to the company.A company's senior executives have important strategy making
roles in the firm.Developing a strategic vision and mission, setting objectives, and crafting a
strategy are basic direction-settingtasks.

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Figure 6–1: Steps in Strategy Formulation

6.1.2 Conduct SWOT Analysis

It is done to analyse the external and internal environment of the organization. SWOT analysis is a
general technique which can be applied across diverse functions and activities, but it is particularly
appropriate to the early stages of planning. Performing a SWOT analysis involves the generation and
recording of the strengths, weaknesses, opportunities, and threats in relation to a particular task
or objective. It is customary for the analysis to take account of internal resources and capabilities
(strengths and weakness) and factors external to the organisation (opportunities and threats).

SWOT analysis can provide:

„„ a framework for identifying and analysing strengths, weaknesses, opportunities and threats
„„ an impetus to analyse a situation and develop suitable strategies and tactics
„„ a basis for assessing core capabilities and competences
„„ the evidence for, and cultural key to, change
„„ a stimulus to participation in a group experience.
i) External Environment: It consists of political-legal, economic, socio-cultural and technological forces.
It is scanned to detect trends and create scenarios. Opportunities and threats to the organization are
identified.
ii) Internal Environment: It consists of resources and competencies internal to the organization. It
provides strengths and weaknesses to the organization. SAP (Strategic Advantage Profile) is prepared
from the analysis of internal environment.
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6.1.3 Identify Strategic Options

Strategic options are strategic alternatives. They are carefully identified. They can be for:

„„ Corporate strategies: They are stability, growth, retrenchment and combination strategies.

„„ Business strategies: They are low-cost leadership, product differentiation, focused and
strategy clock.

Strategic options are carefully reviewed. Attractive options of strategic advantage are earmarked for
evaluation.

6.1.4 Evaluate Strategic Options

The evaluation of strategic options is based on:

` i) Suitability: The option should be suitable to the environmental circumstances of the organization.

ii) Acceptability: The option should be acceptable in terms of risk, return and stakeholder
expectations.

iii) Feasibility: The option should be feasible in terms of resources and competencies of the
organization.

„„ The evaluated strategic options are ranked in terms of their potential strategic advantage for
objective achievement.

6.1.5 Make Strategic Choice

One or more best strategic options are chosen as strategy. Strategic choice results in corporate,
business and functional level strategies.

6.2 Evaluation of Strategic Alternatives (Options)

Strategic options should be carefully evaluated for making strategic choice. The criteria used for
evaluation of strategic options are: (Fig. 6–2)

a) Suitability b) Acceptability

c) Feasibility

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Figure 6–2: Evaluation Criteria for Strategic Options.

6.2.1 Suitability
Suitability is concerned with environmental fit of the strategic option. An organization is environment
specific. The strategic option should address the circumstances in which the organization is operating.
It should fit with the future trends and changes in the environment.

Suitability provides the rationale to a strategy. It indicates whether the strategic option makes
sense in relation to environmental circumstances. The strategic option should be suitable from the
following points of view:

„„ Exploiting opportunities and avoiding threats

„„ Capitalizing on strengths and avoiding weaknesses

„„ Addressing stakeholder expectations

Screening Methods for Suitability

Suitability of a specific strategic option is relative to other available options. The methods used for
screening suitability are:

1. Ranking 2. Decision Trees 3. Scenarios

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1. Ranking

It is a systematic way of assessing strategic options against a set of key factors in the environment,
resources and stakeholder’s expectations. It compares strategic options against the key strategic
factors identified by SWOT analysis. A rank is established by assigning weights for each option to
indicate its suitability (Table 6-1)

Table 6-1: Ranking of Strategic Options

Key Strategic Factors
Invest-
Stake- Market- Techno- Total
Strategic options ment Quality Ranking
holder ing Skills logy Points
Funds
1. Do nothing 3 1 1 2 1 8 C
2. Consolidation 3 2 3 2 1 11 B
3. Penetration 1 1 1 1 1 5 C
4. New product development 3 3 2 2 3 13 A
5. Diversification 3 3 2 2 2 12 B
6. Strategic alliances 2 2 1 1 1 7 C

3 = Favourable 2 = Unfavourable 1 = Irrelevant

A = Most suitable B = Possible C = Unsuitable

Also see: Johnson and Scholes, 2002: 387.

2. Decision Tree

They eliminate options by progressively introducing further requirements to be met. Preferred

option emerges by eliminating other options. Such requirements must be met. They can be in terms
of growth, investment, or diversity. Outcomes are weighed in probabilistic terms. (Figure 6–3)

Figure 6–3: Decision Trees

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3. Scenarios

They match strategic options to different possible future scenarios. They are useful where a high
degree of uncertainty exists. They generate forecasts of future environmental conditions to assess
suitability of strategic options.

Scenarios prepare organizations for future surprises. Contin­gency plans are prepared to respond
to them. Likely future environ­mental changes are carefully monitored to adjust strategic options
accordingly.

Steps in scenario building:

i) Prepare the background information. Select critical indicators.

ii) Search for future trends in critical indicators.

iii) Analyze reasons for past behavior for each trend.

iv) Forecast three scenarios for each critical indicator:

„„ Least favourable environment
„„ Likely environment
„„ Most favourable environment

v) Develop various scenarios from the viewpoint of future.

6.2.2 Acceptability
It is concerned with the expected performance outcome of a strategic option. The criteria for
acceptability of a strategic option are: (Figure 6–4) and (Box 6–1)

Figure 6–4: Acceptability Screening Methods

1. Return: Expected returns in terms of profitability, cost-benefit, shareholder value.

2. Risk: Level of risk in terms of financial ratio projections and sensitivity analysis.
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3. Stakeholder Reactions: Likely reaction of stakeholders.

Acceptability Screening Methods

The methods used are:

1. Analyzing Return:

It involves profitability analysis. Expected return from specific strategic options are assessed. The
approaches used for analyzing returns are:

a) Profitability Analysis:

It assesses financial return on investments. The tools used for profitability analysis are:

i) Return on Capital Employed (ROCE): It examines the relationship between net profit after tax and
capital employed. Total assets minus current liabilities is defined as capital employed.

Net profit after tax

ROCE =
Capital employed

„„ It is easy to calculate. But it ignores time value of money. Defining satisfactory rate of return
is difficult.

ii) Pay Back Period: It is used for options related to capital projects. It indicates how many years will
be needed for cash benefits to pay for the original investment. It is the time at which the cumulative
net cash flow becomes zero.

„„ Short pay pack period helps acceptability. But time value of money and cash flows after pay
back period are not considered.

iii) Discounted Cash Flow (DCF): It considers time value of money. Forecasted net cash flows from
an option are discounted at a specified rate. Net present value over the life of the project is calculated.
The cost of capital serves as the standard for discounting rate. The methods can be:

„„ Internal Rate of Return: It uses trial and error method to find out the rate of discounting.

„„ Discounted Cash Flow (DCF): It considers time value of cash flow for total life of project.
However, the discount rate used in terms of cost of capital may not be realistic.

b) Cost/Benefit Analysis (CBA):

It assesses the overall economic impact of the strategic option. All the costs and benefits of a specific
option are forecasted. Cost/Benefit ratio is calculated. Strategic options are compared on the basis of
cost/benefit ratio.
„„ For business projects, CBA analyses profitability. It is ability of the strategic option to earn
profit to investors.
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„„ For public projects, CBA analyses social profitability. Money value is put on all social costs and
benefits of a strategic option. Shadow pricing is used for this purpose.

c) Shareholder Value Analysis (SVA):

It assesses the impact of strategic option in generating shareholder value. The shareholder value is
total shareholder returns (TSR). TSR is calculated as follows:

increase in shareprice Dividends earnedin

over the year +
the year

TSR = Increase in share =

Share price at the start of the year

The strategic option should maximize the value to the owners through increased TSR.

2. Risk Analysis

The success of a business impact analysis and risk assessment depends on management involvement
and their commitment – especially the support for conducting the analysis/assessment and
reporting the results. Even though management may not be directly involved during the process,
their endorsement is very important. Some specific charges for management are:

„„ Select the business impact analysis and risk assessment team from departmental
personnel
„„ Formally delegate authority and responsibility for the task
„„ Review and support the team’s findings
„„ Make final decision on any specific recommendations or plans

It involves probability estimates about robustness of a strategic option. The level of risk is important
for acceptability of a strategic option. New product development carries high level of risk.

The approaches for analyzing risk are:

„„ Financial Ratios Projection
„„ Sensitivity analysis
„„ Simulation modeling
„„ Heuristic models
„„ Decision matrices

Figure 6–5: Risk Analysis Methods

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a) Financial Ratios Projection

It projects changes in key financial ratios resulting from a strategic option. Such changes indicate
level of risk. The ratios can be related to capital structure and liquidity.

Capital structure is indicated by debt to equity ratio

Total debt
Capital structure =
Total equity

Increased gearing increases the level of risk. Addition of long-term loans increases gearing.

Liquidity is indicated by current assets to current liability ratio.

Liquidity= Current assets

Current liability

Decrease in liquidity increases the level of risk. It may even threaten survival of the organization.

b) Sensitivity Analysis

It is “what if ?” analysis. It questions and challenges the underlying assumptions of a particular

strategic option. It tests sensitivity of performance outcomes to each of these assumptions. For
example, key assumption may be 10% growth in market demand. Sensitivity analysis asks what
would be the effect on profit if market demand grew by 5% or 15%.

c) Simulation Modeling

Simulation is abstraction of reality. It is used to analyze a strategic option when several uncertain
variables affect its outcomes. Computers are used to simulate outcomes over time by changing
certain variables for a strategic option.

Simulation builds model to represent reality of a system. It conducts a series of trial and error
experiments to predict the behaviour of the system over a period of time by changing certain
variables.
d) Heuristic Models:

Heuristics are rules of thumb. They are based on managerial memory and judgement. Risk assessment
of strategic options is based on past experience, memory, intuition, hunch, and abstract reasoning.
These models do not consider logical facts. They are judgemental shortcuts. Risk analysis is affected
by:

i) Availability: The events that are readily available in memory are assumed to be more likely to
occur in future.

ii) Representativeness: The likelihood of future occurrence is assessed by matching it with a

preexisting category.

iii) Anchor: Initial value serves as anchor.

e) Decision Matrices

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They are rectangular array of numbers arranged in rows and columns. They are used to assess the
level of risk of different strategic options. Low risk strategic options are identified.

An example for market promotion strategy is given in figure 6–6.

Figure 6–6: Decision Matrix for Market Promotion

„„ For 100,000 units sales, the lowest total cost is Rs. 500,000 for personal selling. The personal
selling option is optimistic for 100,000 unit sales.

„„ For 200,000 units sales, advertising option has the lowest total cost of Rs. 600,000. Advertising
option is optimistic for 200,000 units sales.

3. Stakeholder Reactions

Stakeholders have a stake in the outcomes of the organization. They depend on the organization to
fulfill their objectives. The organization also depends on them to fulfill its objectives. They can be
shareholders, suppliers, customers, competitors, government, labour unions, financial institutions
and pressure groups. They provide political dimension to the organization’s acceptability of a
strategic option.

The acceptability of a strategic option depends on:

„„ understanding the likely reaction of stakeholders.

„„ ability to manage stakeholders reactions

The methods for analyzing stakeholder reactions are:

i) Stakeholder Mapping

ii) Game Theory

a) Stakeholder Mapping: The power/interest Matrix is used to map stakeholders. (Figure 6–7)

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Figure 6–7: Stakeholder Mapping

Level of interest is the degree of interest in strategic option. Power is ability to influence a strategic
option. The acceptability of strategic option to key players is important for strategic choice.

b) Game Theory: It is concerned with anticipating how competitors are likely to react to
organization’s moves. It quantifies the costs and benefits of competitor reactions to assess
acceptability of strategic options.

The organization anticipates the reactions of competitors in game theory. This theory assumes:

„„ The competitor will behave rationally to win for their own benefit.

„„ The competitor is in an interdependent relationship with other competitors.

Properties of Games

All the competitive situations having the following properties are regarded as games:
a) There are finite number of competitors.
b) Each competitor has a finite number of possible courses of action.
c) Interests of competitors are conflicting.
d) Rules governing the choices are known to all competitors. No one knows opponent’s choice
until he has selected his own course of action.
e) The outcome of the game can be positive, negative or zero.
„„ The organization puts itself in the position of competitors to assess the acceptability
of a strategic option.
Strategies in Game Theory
The strategies in game theory can be:
i) Two person, zero sum game
ii) Minimax and maximin strategies
iii) Mixed strategies

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Box 6–1: Criteria for Acceptability of Strategic Options

Criteria Used to understand Tools Limitations

■ Return on capital ■ Ignores time value of
1. Return Analysis: ■ Financial return of employed; money;
a) Profitability investments ■ Pay back period; ■ Problem of discount
■ Discounted cash flow rate
■ Intangible costs/
■ Tangible and intangible
b) Cost-benefit ■ C/B analysis for projects benefits difficult to
costs/benefits
quantify
■ No standard about
c) Shareholder value ■ Impact of strategic options ■ Total Shareholder Return
TSR. Technical detail
analysis on shareholder value (TSR) analysis
difficult.
2. Risk Analysis:
■ Robustness of strategic ■ Capitalization ratios; ■ Tests financial
a) Financial Ratio option soundness
■ Liquidity ratios
Projections
b) Sensitivity ■ Tests factors
■ Test assumptions ■ “what-if” analysis
Analysis separately
c) Simulation ■ Outcome, when variables
■ Modelling
Modeling uncertain
d) Heuristic Models ■ Managerial judgement ■ Rule of thumb ■ Subjective
e) Decision Matrices ■ Impact of decisions ■ Rectangular matrix
3. Stakeholder ■ Political dimension of ■ Stakeholder mapping;
■ Largely quantitative
Reactions strategic options ■ Game theory

6.2.3 Feasibility Analysis

Feasibility is concerned with availability of resources and competencies to deliver a strategic option.
It determines an option’s implementability and workability in practice. It assesses the organization’s
capability to make the strategic option succeed. Feasibility is a measure of how beneficial or practical
the development of an information system will be to an organization. The feasibility study describes the
information management or business requirement or opportunity in clear, technology-independent
terms on which all affected organizations can agree. An information management requirement
or opportunity can be prompted by such factors as new legislation, changes to regulations, or the
growth of a program beyond the support capability of existing systems.

The methods available to analyse feasibility are: (Figure 6–8)

a) Fund Flow Analysis
b) Break Even Analysis
c) Resource Deployment Analysis

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Figure 6–8: Feasibility Analysis Methods

1. Fund Flow Analysis

It assesses financial feasibility. It forecasts the funds required and the likely sources of funds for a
strategic option. The timing of new funding requirements are identified.

Fund flows are inflows and outflows of cash and cash equivalents. Operating activities are the
principal cash inflow activities. Fixed assets, working capital, tax and dividends are the principal
cash outflow activities.

(Figure 6–9 for an example).

XYZ Company
Fund Flow Statement
2006 Rs. 2005 Rs.
Sources of Funds
Cash from Operations 10,00,000 8,00,000
Use of Funds
New Fixed Assets 8,00,000 6,50,000
Working Capital 1,00,000 80,000
Tax 60,000 50,000
Dividends 40,000 20,000
Total 10,00,000 8,00,000

Figure 6–9: Fund Flow Statement

2. Break Even Analysis

It studies cost-volume-profit relationships to assesses financial feasibility. This analysis identifies
break even point where revenue equals cost. Costs are classified into fixed and variable. Variable
costs directly vary with production levels. Fixed costs remain fixed. Profit is possible when sales
exceed the break even point.

Break even analysis helps to assess whether the strategic option is feasible in meeting profit targets.
It also provides an assessment of risk of strategic options having different cost structures. (Figure

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6–10 for Break Even Chart)

Figure 6–10: Break Even Chart

3. Resource Deployment Analysis

It identifies needs for resources and competencies for a specific strategic option. It is used to judge:

i) Sufficiency of current resources and competencies to pursue a strategic option. This is

necessary to stay in business.

ii) Need for unique resources and competencies to sustain strategic advantage. This is necessary
to compete successfully.

Some important considerations for conducting resource deploy­ment analysis relate to:

i) Staying in Business: The questions for analysis are:

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„„ Do we lack any necessary resources ?

„„ Are we performing below threshold on any activity ?

ii) Competing Successfully: The questions for analysis are:

„„ Which unique resources already exist ?

„„ Which core competencies already exist ?

„„ Could better performance create core competencies ?

„„ What new resources or activities could become core compe­tencies ?

6.3 Portfolio Analysis

Portfolio is range of investments held by an organization. Modern organizations are multi-business

enterprises. The nature of business impacts the strategic choice. Portfolio analysis helps multi-
business managers to choose what businesses to have in a portfolio. Management uses it to identify
and evaluate various businesses that make up the organization. All business units are viewed
as investments that provide returns. The objective is to achieve the highest overall return on its
investment.

Portfolio analysis is a set of tools that help top management in making strategic decisions with regard
to various businesses in its portfolio. It is used for competitive analysis and strategic planning in
multi-business companies.

A number of tools have been developed for portfolio analysis. The important ones are: (Figure 6–11)

1. BCG Matrix

2. GE’s business Screen

3. Hofer’s Product-Market Evolution Matrix

Figure 6–11: Tools for Portfolio Analysis

6.3.1 BCG Matrix (Growth/Share Matrix)

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The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson
of the Boston Consulting Group in the early 1970's. It is based on the observation that a
company's business units can be classified into four categories based on combinations
of market growth and market share relative to the largest competitor, hence the name
"growth-share". Market growth serves as a proxy for industry attractiveness, and relative
market share serves as a proxy for competitive advantage. The growth-share matrix thus
maps the business unit positions within these two important determinants of profitability.

It was developed by Boston Consulting Group. It focuses on balance of the portfolio. It uses
relationship between market share and market growth to balance the portfolio. Market share is the
share in relation to the largest competitor. Market growth is the annual market growth rate.

The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities
should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should
have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth
products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind
it is that the bigger the market share a product has or the faster the product's market grows, the better it is for the
company.

BCG Matrix is divided into four cells. (Figure 6–12)

Figure 6–12: BCG Matrix

„„ A Star is a business unit (SBU) which has a high market share and high market growth rate.
Large amount of spending is needed to protect market share. It achieves cost reduction over
time.

„„ A Question Mark (Problem Child) is a business unit with high market growth rate but low
market share. Heavy spending is needed to increase market share. It is not achieving cost
reduction. It has uncertain future.

„„ A Cash Cow is a business unit with high market share but low market growth rate. Heavy
investment is not needed. It generates high cash flow. It has low costs relative to competitors.

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„„ A Dog has low market share and low growth rate. It drains cash to survive. Its future prospect
is bleak.
Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined soley
by whether it had become the market leader during the period of high growth.
While originally developed as a model for resource allocation among the various business
units in a corporation, the growth-share matrix also can be used for resource allocation
among products within a single business unit. Its simplicity is its strength - the relative
positions of the firm's entire business portfolio can be displayed in a single diagram.

Organizations use market share and market growth rate to build-up portfolio. The aim is to achieve
balance.

The strategic options for building portfolio of SBUs can be:

„„ Build: Allocate more resources to Stars and Question Marks to gain and sustain market share.

„„ Hold: Allocate present level of resources to Cash Cows to defend market share and generate
cash flows.

„„ Harvest: Allocate less resources to weak cash cows. Eventually withdraw them from business.

„„ Divest: Do not allocate resources to Dogs. Liquidate them.

Merits of BCG Matrix

i) It is important for a business unit seeking to dominate market.

ii) It provides a balanced mix in portfolio. It facilitates analysis of generators and users of
resources.

iii) It focuses on cost reduction and planning of cash flow.

Limitations of BCG Matrix

i) The matrix is applicable only to multi SBU organizations.

ii) Market growth rate and market share may not be the sole determinants of profitability. It
varies across industries and market segments.

iii) It gives undue focus to cash at the cost of innovation.

iv) It may not be easy to liquidate dogs due to political and market reasons.
Market growth rate is only one factor in industry attractiveness, and relative market share is only
one factor in competitive advantage. The growth-share matrix overlooks many other factors in
these two important determinants of profitability.
The framework assumes that each business unit is independent of the others. In some cases, a
business unit that is a "dog" may be helping other business units gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A business unit may

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dominate its small niche, but have very low market share in the overall industry. In such a case,
the definition of the market can make the difference between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing
a corporation's business portfolio at a glance, and may serve as a starting point for discussing
resource allocation among strategic business units.

6.3.2 GE Business Screen (General Electric Nine Cell Matrix)

It was developed by General Electric Company. It uses relationship between Market Attractiveness
and Competitive Position. It focuses on the potential success of SBUs. The McKinsey/GE Matrix
overcomes a number of the disadvantages of the BCG Box. Firstly, market attractiveness replaces
market growth as the dimension of industry attractiveness, and includes a broader range of factors
other than just the market growth rate. Secondly, competitive strength replaces market share as
the dimension by which the competitive position of each SBU is assessed.

The indicators consist of:

Market attractiveness Competitive Position

� Market size and growth rate � Market share
� Cyclicality � Marketing and sales force
� Competitive structure � Research and Development
�Barriers to entry � Manufacturing
�Industry profitability � Distribution
� Technology � Financial resources
� Inflation � Competitive position regarding
� Regulation -- Image
� Workforce availability -- Product line
� Political-legal-social-environmental
-- Customer service
issues
GE Matrix is divided in nine cells. (Figure 6–13)

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Figure 6–13: GE Business Screen

Successful SBUs in GE matrix require high market attractive­ness and strong competitive position.
The matrix can be divided in three zones for strategic alternatives.

i) Cell 1, 2, 4 Invest Grow: SBUs in these cells are overall successful. They should be given
priority in portfolio. More investment should be allocated.

ii) Cell 3, 5, 7 Grow or Let Go: SBUs in these cells have medium success and attractiveness. They
should be included in the portfolio on a selective basis for investment.

iii) Cell 6, 8, 9 Harvest/Divest: SBU in these cells have low success and attractiveness. They
should be divested or closed down.

GE matrix forces managers to give attention to the design of appropriate portfolio. But the positioning
of SBUs in the cells is judgemental. Moreover, unattractive SBUs may not necessarily be unprofitable.
GE matrix provides broad strategy guidelines only.

6.3.3 Hofer’s Matrix (Product/Market Evolution Matrix)

This matrix analyses SBUs in terms of competitive position and stage of product/market evolution.
The matrix has 15 cells. (Figure 6–14)

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Figure 6–14: Hofer Product/market Evolution Matrix

The stage of the product life cycle describes the market situation. The competitive position can be
strong, average and weak. The position of SBU within the life cycle determines investment.

The strategic guidelines can be:

„„ Push: Invest aggressively

„„ For cells: 1, 2, 4, 5, 7

„„ Caution: Invest selectively

„„ For cells: 3, 6, 8, 10, 11

„„ Danger: Harvest

„„ For cells: 9, 12, 13, 14, 15

(For risk analysis see pages 112)

6.4 Strategic Choice

The process of strategic choice is essentially a decision-making process. The decision making process
consists of setting objectives, generating alternatives, choosing one or more alternatives that will
help the organization achieve its objectives in the best possible manner and finally, implementing
the choosen alternative. Strategic Choice is the decision for selection of the best strategic option. It
helps achieve the organization’s objectives. Strategic options are evaluated to assess their suitability,
acceptability and feasibility. The evaluated strategic options are ranked in order of their potential
to achieve objectives. The strategic choice is made from among these ranked alternatives. Only the
attractive strategic options are considered for strategic choice. Such options should allow businesses
to maintain or create sustainable strategic advantage. Strategic choice could be defined as the

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decision to select from among the grand strategies considered, the strategy which will best meet the
entreprise's objectives.

In order to qualify for strategic choice, the evaluated strategic option should meet the following
criteria:

a) Mutually Exclusive: The strategic option should be mutually exclusive. It must stand on its
own.

b) Success: The strategic option should have a good probability of success. It should be
implementable. It should have sustainable competitive advantage.
c) Completeness: The strategic option should take into account all the key strategic issues. It
should be complete.

d) Internal Consistency: The strategic option should not contradict vision, mission and
objectives of the organization.

e) Strategic Gap: Strategic gap is the gap between current and future desired performance. The
strategic option should help fulfill this gap.

f) Flexible: The strategic option should provide flexibility.

6.4.1 Approaches for Strategic Choice

Strategic choice involves strategic decision making. The approaches that can be used for making a
strategic choice can be:

a) Planned Approach: This approach involves formal appraisal of the relevant strategic option
for suitability, acceptability and feasibility. The appraised options are ranked in terms of their
potential for objectives achievement. The choice of the best option is made. It is suitable for
complex large organizations.

b) Enforced Choice Approach: An organization has various stakeholders. The dominant

stakeholders play an important role in strategic choice.

c) Experience-based Approach: Strategist managers possess an experience curve. Past

experience of managers in strategy implementation serves as a guideline for strategic choice.

d) Command Approach: The strategic choice is based on the command of top management. It is
top-down approach.

e) Entrepreneurial Approach: The strategic choice is based on search for new opportunities.
The risk is high. The judgement is subjective. It is suitable for business ventures.

6.4.2 Process of Strategic Choice

The process of strategic choice is essentially a decision-making process. For making a choice from
among the alternatives, a decision maker has to set certain criteria on which to accept or reject
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alternatives.The process of strategic choice consists of the following steps

a) Focusing on strategic alternatives
b) Analysing the strategic alternatives
c) Evaluating the strategic alternatives
d) Choosing from among the strategic alternatives
The major strategic choice process can be given as follows:
a) Rank attractive strategic options
b) Make strategic choice
1. Rank feasible Strategic Options: Attractive strategic options, evaluated in terms of suitability,
acceptability and feasibility are ranked. The ranking is done on the basis of their potential for
objective achievement.

2. Make strategic choice: The best options are selected as strategies. Good judgement of the
strategist managers is the essence of strategic choice.

„„ Cultural and political factors of the organization influence strategic choice.

„„ Strategic choice should be consistent with or build on past strategies that have worked
well.

Ra nk Attractive Pote ntia l for

Strategic Options Objective
Ac hievement

Ma ke Srategic Select the

Choice Be st Option

Corporate Business Functional

Strategy Strategy Strategy

Figure 6–15: Process of Strategic Choice

Strategic choice results in selection of corporate, business and functional level strategies. (Figure
6–16) (See Box 6–2)

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Figure 6–16: Outcome of Strategic Choice

Box 6–2: Strategic Choices related to Functional Strategies

a) Marketing Strategies related to customer satisfaction through:

„„ Marketing mix

„„ Market segmentation

„„ Market positioning

„„ Product life cycle

„„ Price leader or follower

„„ Exclusive dealership or multiple channels

„„ Media or online advertising

„„ Market development

„„ Diversification

b) Financial Strategies related to the best use of financial assets:

„„ Acquisition of financial resources—equity or debt, short-term or long-term

„„ Cost of capital

„„ Lease or buy fixed assets: Utilization of financial resources

„„ Dividend payout: Distribution of profit.

„„ Whether to go public, merge or acquire

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c) Human Resource Management Strategies related to best use of human assets:

„„ Traditional 10–5 work day or flexible working hours

„„ Pay-for-performance: Bonus, profit sharing, stock options

„„ Benefits and services

„„ Balancing work life and home life

d) Operations and Research and Development Strategies related to product manufacture and
innovation:

„„ In-house or outsource R & D

„„ Product development: Develop new products or improve old products or imitate

„„ Basic or applied research

„„ Budget for R & D

„„ Collaboration with competitors

„„ Choice of technology: Hi-tech or traditional

„„ Plant capacity utilization

„„ Quality control

„„ Inventory management

e) Management Information System Strategies related to use of information systems technology:

„„ Computerization

„„ e-commerce

„„ Virtual office

Self Examination Questions

1. Explain the process of strategy formulation.

2. Discuss the criteria used for evaluation of strategic alternatives.

3. Describe various methods used for risk analysis.

4. Distinguish between fund flow analysis and resource development analysis.

5. Explain portfolio analysis. Describe the tools used for this purpose.

6. Distinguish BCG matrix with GE matrix.

7. What is strategic choice? Describe the process of strategic choice.

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8. "Risk analysis has a role in strategy formulation." Comment.

9. Write short note on strategic choice.

10. How should a corporation attempt to achieve synergy among functions and business units?

11. Why do organizations undertake portfolio analysis? Discuss any two models of portfolio analysis.

12. In what ways GE matrix is superior to BCG matrix? How far are these useful in strategy formulation?

13. Why organizations undertake portfolio analysis? Describe any one model of portfolio analysis.

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 7. Strategy Implementation

7.1 Concept of Strategy Implementation

Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into
place.Strategies, therefore, have to be activated through implementation. Strategy implementation
is the function of strategic management. It is the process of putting in to action of strategies in the
firms. Strategy is a road map for future direction. Implementation is translating strategy into action.
Strategy formulation is followed by strategy implementation. They are two sides of the same coin.
Imple­mentation is a managerial job. A strategy becomes meaningful when it is implemented and
is working in practice. Objectives can be achieved only when strategies are implemented. Strategy
implementation involves change. Normally, strategy implementation includes the following nature:

¾¾ Action oriented
¾¾ Comprehensive in scope

¾¾ Demanding varied skills

¾¾ Wide-ranging involvement

¾¾ Integrated process

■ According to Wheelen and Hunger:

Strategy implementation is the process by which strategies and policies are put
into action through the development of programs, budgets and procedures.
■ According to Thompson and Strickland:
Implementing strategy entails converting the organization’s strategic plan into
action and then into results.

The key points in strategy implementation are:

a) Implementation puts strategy into action.

b) Implementation operationalises strategies.

c) Implementation focuses on both efficiency and effectiveness.

d) Implementation is a managerial job. It requires managerial skills and leadership.

e) Implementation requires coordination among all business units and functions.

f) Implementation involves strategic control.

g) Implementation involves management of change.

(See Box 7–1 for differences between strategy formulaton and strategy implementation).

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 Strategic Management & Decision Making Analysis

Box 7–1: Differences between Strategy Formulation and Strategy Implementation

Strategy Formulation Strategy Implementation

1. It is plannng of work. 1. It is working of plan.

2. It is making strategic choice from among strategic
2. It is putting strategy into action.
options.
3. It focuses on effectiveness. 3. It focuses on efficiency and effectiveness.

4. It is an intellectual process. 4. It is an operational process.

5. It requires management and leadership
5. It requires judgement and analytical skills.
skills.
6. It requires coordination among all the
6. It requires coordination among strategist managers.
divisional and functional managers.

7. It is planning for change. 7. It involves change management.

7.2 Process of Strategy Implementation

Research studies report that strategies often find that strateg implementation is much more difficult
than strategy formulation.Strategy implementation involves putting the formulated strategies into
action through the management processes.It renders the intellectual content of strategy formulation
into the operational process of practice.

The steps in the process of strategy implementation consist of: (Figure 7–1)

1. Operationalising strategy

2. Designing organization structure

3. Establishing management system

4. Exercising strategic control

Preparing
Resource
Plans
Establishing
Designing
Management
Structure
Systems

Operational- Exercising
ising Strategic
Strategy Control

Figure 7–1: Process of Strategy Implementation

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7.2.1 Operationalizing the Strategy

Operalization strategy is the fundamental dimension of strategy implementation.Strategy can be
better implemented through effective operationalizing strategies in the firm. Corporate and business
strategies need to be operatonalised into action. People actually doing the work need guidance in
exactly what needs to be done to make strategies a reality. The steps involved in operationalizing
strategy are: (Figure 7–2)

1. Set annual objectives

2. Formulate functional strategies

3. Formulate business policies

4. Develop programmes, bugets and procedures

Develop
Set Formulate Formulate
Programme,
Annual Functional Business
Budget,
Objectives Strategies Policies
Procedures

„„ Figure 7–2: Steps in Operatonalizing Strategy

1. Set Annual Objectives:

Annual objectives are set. They are linked to long term objectives. They are desired results for one
year. They provide specific guidelnes about what is to be done and actions needed in key result areas.
They provde targets which are specific, measurable, acceptable, realistic and time-bound. They assist
strategy implementation in following ways:

1. Annual objectves operationalise long term objectives. They set targets for the current year,
month or week that are measurable.

2. Annual objectves facilitate coordination. They is harmony of efforts. Potental conflicts are
avoided among various functions.

3. Annual objectives identfy measurable outcomes for functional activities. They are used as
standards to evaluate performance for control purposes.

4. Annual objectives serve as a basis for allocating resoruces to functional activities. They are set
in a sequence of importance.

5. Annual objectives serve as basis for establishing functional priorities.

Annual objectves are accompaned by action plans. Such plans:

„„ Specify activites to be undertaken during a specified period—week, month, quarter. They

state what exactly is to be done? Priorites are established for the activities.

„„ Provide time frame for completion of activities.

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 Strategic Management & Decision Making Analysis
„„ Assgn responsbility and accountability for each activity in the action plan. They state who is
responsible?

2. Formulate Functional Strategies

They are specific operational plan. Functional strateges are formulated concerned with each of
function, such as production, marketng, finance, human resources, research and development (R&D).
They are short term tactics to achieve annual objectives. They specify specific actvities. They provde
guidance to functonal managers about what needs to be done to accomplish results. They facilitate
coordination among functional unts.
„„ Production strategies focus on improving effciency and controlling costs. They deal wth
producton technology, systes, processes and quality management.

„„ Maretng strateges focus on customer need satisfaction through appropriate marketng mix.
They deal with target markets, product positioning, product life cycle, pricing promotion
strategies and outsourcing.

„„ Financial strateges focus on best use of financial resources to increase shareholder’s wealth.
They deal with acquisition, use and distrbution of financial resources.

„„ Human resource strateges focus on acquistion, development, utilization and retenton of

quality people. They deal with productivity, compensation, potential development and
welfare of employees.

„„ Research and development strategies focus on new product development and through
innovation, modifcation and imtations.

3. Formulate Business Policies:

Policies are formulated. They are broad guidelines for decision makng. They empower employees.
They guide the thinking, decisions and actions of managers and employees. They ensure quicker
day-to-day decsion for routine problems. They help operationalise strategies into action. They are
instruments for strategy implementation.

Policies can be formed in a wrtten form. They also can be unwrtten in informal form. However,
wrtten policies reduce misunderstanding, provide equitable treatment and facilitate coordnation
and control. They reduce the tme managers spend making decisions.

Policies play and important role in operationalizing strategies. They empower employees to act,
overcome resistance to change and foster commitment implementation of strategy. They aid
coordination, provide stablity in the organziation, build up employee loyalty and promote efficient
use of resources.

4. Develop Programme, Budget, Procedures

Operationalization of strategy requires development of programme, budget and procedures. They
allocate resoruces as per priorities of the annual objectives. They are financal, physical, human,

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technologcal resources.

a) Programme integrates action plans for a large set of activities. It is an integrated package of
projects and functional activities. It contributes to the acheivement of annual goals.

b) Budget is a financial plan for a set of functional activities. It allocates resources to various
activities. It is prepared annually. It is based on programe. It serves as a standard for financal
control. Resource plans are prepared.

c) Procedures are steps for handling activities systematically. They are also known as standing
operating procedures (SOP). They are steps to guide actions relating to programme and
budget.

7.2.2 Designing Structure for Strategy Implementation

The Manager's role in the implementation process is to leading and keynoting the tone: pace, and
style of strategy imple­m entation. There are many ways lo proceed. A strategy implementer
can opt for an active, visible role or a low-key, behind the scenes role. He or she can elect
to make decisions authoritatively or on the basis of consensus, lo delegate much or little,
to be deeply involved in the detail* of implementation or to remain aloof from the day-to-day
problems. It is up to the strategy implementer to decide whether to proceed swiftly (launching
implementation initiatives on many fronts) or move deliberately, content with gradual progress
over a long period.
Structure is required to implement the strategies in the firms.There is strong relationship between
the strategy and structure. Organic structure is very important to effective strategy implementation
in the firms. Strategy determines the structure in a major way. It does this by providing the necessary
infrastructure and administrative mechanism that enable implementation of the chosen strategy. The
structure conversely impacts the strategy, but to a lesser extent. Structural implementation is more
concerned with the match that should exist between strategy and structure. Structure is the way the
activities are organized. It is a means to implement strategy. It is reflected in the organization chart.
It defines the levels and roles in an organization. Structure is matched with strategy. It involves:

a) Job Design: Contents of jobs required to implement strategy are defined.

b) Grouping of Jobs: Jobs are grouped in departments. Various bases for grouping can be:
function, division, territory, customer, matrix. Jobs are assigned to people and positions. It
involves differentiation.

c) Establishing Reporting Relationships: Authority and responsibility relationships are

established. They establish hierarchy. They specify who reports to whom. It involves
integration.

„„ Change in strategy requires change in structure.

The following five-sequence procedure serves as a useful guide for fitting structure to strategy:
¾¾ Pinpoint the key functions and tasks requisite for successful strategy execution

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 Strategic Management & Decision Making Analysis
¾¾ Reflect on how the strategy-critical functions and organizational units relate to those that are
routine and to those that provide staff support-
¾¾ Make strategy-critical business units and functions the main organizational build­ing blocks.
¾¾ Determine the degrees of authority needed to manage each organizational unit, bearing in
mind both the benefits and costs of decentralized decision making.
¾¾ Provide for coordination among the various organizational units.

Types of Structure
Structure in the context of strategic management is the way in which tasks and sub-tasks required
to implement a strategy are arranged. The relationship of structure and strategy creates its own
special requirements that should be satisfied by the structure.There are several types of structures
that are found in organizatios.Structure should be strategy-friendly. Organization structures for
implementation of strategy can be: (Figure 7–3)
a) Simple Structure
b) Functional Structure
c) Multi-divisional structure
d) Holding company structure
e) Matrix structure
f) Team-based structure
g) Networked Structure

Figure 7-3: Organization Structures for Strategy Implementation

1. Simple Structure
In simple structure, the organization is run by the personal control of an individual. The owner takes
most of the responsibilities of management. He is assisted by assistants. Individual relationships are
important. Newly created small businesses operate under this structure. (Figure 7–4)

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 Strategy Implementation

Figure 7–4: Simple Organization Structure

Advantages
1. The owner exercises direct control. Hierarchy is minimal.
2. Decision making is speedy. It is flexible and dynamic.
3. Motivation of the owner is high.
4. Personal relationships are developed with suppliers, employees, and customers through
direct communication.
Disadvantages
1. This structure operates effectively only upto a certain size. It s not suitable for complex
situations.
2. There is no division of work. Professionalism is lacking.
3. Authority and responsibility is not clear among subordinates.
4. There is poor motivation in subordinates.

2. Functional Structure
Generally speaking- organizing by functional specialties promotes full utilization of the most up-to-
date technical skills and helps a business capitalize on the efficiency gains result­ing from use of those
technical skills; it also helps a business capitalize an the efficiency gains resulting from the use of
specialized manpower, faculties, and equipment. These are strategically important considerations
for single-business organizations, dominant-product enterprises, and vertically integrated firms,
and account for why they usually have some kind of centralized, functionally specialized structure.

It is built around business functions of an organization. Functions are primary activities, such as
production, marketing, finance, and human resource. The chief executive has line managers under
him. This structure is suitable for smaller companies with narrow product range and single dominant
business. (Figure 7–5)

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 Strategic Management & Decision Making Analysis

Figure 7–5: Functional Structure.

Advantages

1. There is clear definition of authority, responsibility, roles and tasks. Functional expertise is
developed.

2. Efficiency is achieved through specialization. Specialists manage senior and middle levels.
Professionalism develops.

3. There is direct supervision and control by chief executive.

4. Career development of functional managers is facilitated.

5. It is simple and inexpensive.

6. Delegaton of authority is possible.

Disadvantages

1. Mangers are overburdend with routine matters. They neglect strategic issues. Narrow
specialization is promoted. Functional goals are emphasized.

2. Coordination is poor between functions. Accountability is not clear. Conflict arise.

3. It is difficult to cope with diviersity due to functional focus of managers.

4. It does not adapt with environmental changes.

5. Decision delays are common due to functional rivalry and conflicts.

3. Multi-Divisional Structure
It is composed of self-contained divisions based on products, customers, technology, and geographical
area. Each product line is regarded as a division. It allows customised product market strategies for
each division. It is suitable for multi-product organizations. (Figure 7–6)

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Figure 7–6: Multi-Divisional Structure based on Product

Advantages

1. It allows effective management of diversity. It tailors structure to needs of markets, customers,

products and areas. It is decentralized.

2. There is high product/market visibility through concentration.

3. It facilitates attention to strategy by senior management. Strategic control is easy.

4. It facilitates performance measurement of divisions. Accountability for performance is clear.

5. Management development is encouraged by specialization within a division.

6. It is flexible. Related products, customers and areas can be easily added.

Disadvantages

1. Conflict arises between divisions due to poor communication.

2. There is poor coordination of activities among divisions. They tend to become independent
businesses.

3. There is confusion over locus of responsibility. Cooperation is low.

4. It is costly due to duplication of activities. Layers of management add to costs. Resources are
poorly used.

5. It has head quarter driven control system.

4. Strategic Business Units Structure (SBU Structure)

A strategic business unit (SBU) is a grouping of business units based on some important strategic
elements common to each; the possible elements of relatedness include an overlapping set of
competitors, a closely related strategic mission, a common need to compete globally, an ability
to accomplish integrated strategic planning, com­m on key success factors, and technologically
related growth opportunities. Large organizations operate several businesses. They deal in many

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 Strategic Management & Decision Making Analysis
product lines. They have diverse busness interests divided in various divisions. They group two
or more divisions into strategic business units (SBU). The grouping is based on product category
having common strategic elements. Each SBU represents a basket of business and has following
characteristics: (Figure 7–7)

a) Distinct Market Segment: Each SBU serves a distinct market segment. It has its own product
lines, customer groups and market areas.

b) Separate Competitors: Each SBU has its own set of competitors.

c) Separate Manager: Each SBU has its own manager responsible for its strategic plan.

Figure 7–7: SBU Structure

Advantages of SBU Structure

1. This structure improves coordination between divisions with similar product lnes having
similar strategic concerns.

2. It facilitates strategic planning management and control of large diversified business

organizaton.

3. Accountability for performance of SBU is clear.

4. Management development is facilitated within SBU.

Disadvantages of SBU Structure

1. It creates extra layer of management in the organziation.

2. Competition for resoruces among SBUs may increase. Conflicts may also arise.

3. Cooperation can be low among SBUs. Confusion can arise over locus of responsibility. Control
can be complex.

4. Layers of management add to cost. Resources can be poorly utilised.

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5. Holding Company Structure

A holding company is an investment company. It has shareholdings in a variety of seprate businesses.
The subsidiaries are part of the parent company. But they operate independently in their own names.
The relationship focuses on financial issues. Multinatonal companes are holdng companies. (Figure
7–8)

Figure 7–8: Holding Company Structure

Advantages

1. There is spread of risk for holding company. Subsidaries operate flexibly and independently.

2. There are low central-level overheads

3. There is ease of divestment for holding company

4. Cheap finance is available to subsidaries from local sources.

5. Financial control can be focused.

6. Subsidares can quickly respond to local problems.

Disadvantages

1. It lacks synergistic effects. There is duplication of efforts and resoruces.

2. It has centralized control. There is lack of communication and coordination among

subsidiaries.

3. Risk of divestment to subsidiaries is high.

4. There may be lack of skills at the centre to assist subsidiaries.

6. Project-based Structure
A project is a planned investment undertaken to deliver an output. It is temporary with one-time-

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 Strategic Management & Decision Making Analysis
only set of activities. It has definite startng and ending points in the life cycle. It has constraints of
time, cost and quality performance.

The project-based structure consists of a series of projects. Every project has its own functional
departments. (Figure 7–9).

Figure 7–9: Project-based Structure

Advantages
1. This structure focuses on project objectives.
2. There is clearity of authority and responsibility.
3. There is flexibility in operatons. Resources can be availed as and when necessary.
4. Communicaton s effective within the project.
Disadvantages
1. There is duplication of resoruces and efforts.
2. There is lac of job security for employees. Commitment of employees to project can be poor.

7. Matrix Structure (Project Structure)

It is a combination of structures. It superimposes project structure on functional structure. It
integrates knowledge and skills. It temporarily assigns people from functional departments to
projects. It provides skills and resources where and when they are most needed. It depends on both
vertical and horizontal flows of authority and communication. (Figure 7–10)

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 Strategy Implementation

Figure 7–10: Matrix Structure

Advantages

1. It facilitates quick environmental adaptation.

2. There is flexibility organization wide. It accomodates wide variety of projects with clear
objectives.

3. Efficiency in utilization of resources is realised.

4. Effective use of specialised human resources is done.

5. There is increased motivation, commitment, and communi­cation.

6. Employee development takes place through involvement in decisions. It is training ground for
managers.

7. Quality decisions are possible. It fosters creativity.

Diadvantages
1. Decision making is slower. There is confusion and contradiction in policies
2. There are two bosses for one employee—functional manager and project manager. Dual
channels of authority and control is present.
3. Power struggle for allocation of resources takes place.
4. There is duplication of efforts, dilution of priorities and loss of account­ability.
5. It is costly and difficult to implement. It is complex.
6. Coflicts arise due to unclear roles and responsibilities.

8. Team-Based Structure
A team is a group whose individual efforts result in positive synergy through coordinated efforts.
Its characteristics are:

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„„ Collective peformance to achieve team objectives.

„„ Little or no supervision with individual and mutual account­ability.

„„ Shared leadership roles. Decision through discussion.

„„ Member skills are multiple and complementary.

„„ Outcome is positive synergy through coordinated efforts.

Team-based structure combines both horizontal and vertical coordination. (Figure 7–11)

Cross functional teams are used to implement strategy. They consist of members from different
departments and work areas. They are of the same level. They come together to accomplish specific
tasks. Members are experts in various specialities. They are carefully selected.

Advantages of Team Structure

1. Members of the team work collectively to achieve team objectives.

2. Team has authority to make decisions.

3. There is no rigid hierarchy.

4. Employee talents and skills are better utilized.

5. Performance evaluation is by members themselves.

6. Productivity and satisfaction is high.

Figure 7–11: Team-based Organization Structure

Disadvantages of Team Structure

1. Teams may duplicate the efforts of departments.
2. Team effectiveness is situational.
3. Conflicts may arise between team and departments.
4. Teams may work as islands.

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9. Networked Structure
Network structure is a series of independent business units linked together by computers in an
information system that desgns, produces and markets products. It is composed of a series of project
groups or collaborations linked by networks. Most activities are outsourced. The business functions
are not located in a single building. The headquarter acts as “broker” electronicaly connected to
completely owned divisions, subsidiaries and independent companies. (Figure 7–12)

Figure 7–12: Networked Structure

Advantages

1. Provides flexibility to adapt to changing environment.

2. Takes advantage of efficienty of expert firms through outsourcing.

3. Allows concentration in distinctive competencies.

Disadvantages

1. Too many partners cause conflicts.

2. Informaton sharing with networked firms can create competitors.

7.3 Resource Planning

Resources can be human, physical, financial and intellectual resources. They have a strategic
importance in strategy implementation. Resources enable the success of strategy implementation.
They provide strategic capability to an organization.

A resource plan predeter­mines future resource needs and sources of acquisition to implement
strategy. It serves as a framework for mobilizing and allocating resources to activities related to
strategy implementation.

Annual objectives serve as the basis for resource planning for divisions and functions. They provide
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 Strategic Management & Decision Making Analysis
guidelines for action. They establish priorities for allocating resources.

Action plans are prepared to achieve annual objectives and to allocate resources. They identify:

a) Activities: They are functional activities to be undertaken to achieve annual objectives. The
activities are specific, short-term and action-oriented.

b) Time Frame: A clear time table is laid down for completion of activities. It is in terms of week,
month, quarter.

c) Accountability: Responsibility for carrying out each activity is identified.

d) Outcomes: The outcomes of each activity are clearly identified.

„„ Resource planning should lead to accomplishment of objectives.

7.3.1 Resource Planning at Corporate Level

Resource planning is a systematic way of mobilizing and allocating resources to implement a strategy.
Resource planning at corporate level involves the following steps: (Figure 7–13)

Figure 7–13: Process of Resource Planning

1. Assess Available Resources: Available resources are deployed resources into the activities
and operations of an organization. They are currently owned by the organization. The strating
point of a resoruce plan is to assess the available resources of an organization.

2. Forcecast Future Resource Needs: Forecasts are made for the resources needed in future
to implement the selected strategy. Various statistical techniques are available for resource
forecasting. The judgement and experience of managers can also be useful. Critical success
factors are important to forcecast future resource needs. Planning priorities also determine
resource needs.

3. Identify Resource Gap: Resource gap is the difference between needed resources and
available resources to implement strategy. It is carefully identified.

4. Determine and Evaluate Future Sources: Future sources are determined to mobilise
resources. Sources can be external and internal. Internal sources consist of retained earnings,
reserves and provisions. External sources can be capital market for equity, long-term loan

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from banks and trade credit.

The most attractive sources are identified for evaluation purposes. Evaluation is done in terms of
risks, returns, and costs of resources.

For financial resources, the mix of equity and loan is considered. Time value of money is also
considered for capital expenditure projects.

5. Select Future Sources: Based on risks, returns, cost and judgement, the best mix of sources is
selected for mobilizing resources. This is the choice phase for resource planning.

6. Formulate Resource Action Plans: Action plans for various activities needed to implement
strategy are formulated. Action plans set targets.

Network Analysis Technique is used to identify component activities to prepare action plans.
It develops a schedule to show interrelationships among all the activities of a strategy.

7. Prepare Budget: Budget is prepared to allocate resources to various activities related to

strategy implementation. It specifies detailed ways about how the resources will be used. It
pulls a range of resources together for integration purposes. Budget also serves as a standard
for control of performance.

7.3.2 Resource Planning at Business Level

Resource planning at business level consists of allocating resources to each strategic business unit
(SBU). The corporate level resource plan and budget serve as the blueprints for resource allocation
to SBUs.

There are three approaches for allocating resources to SBUs.

1. Top-down Approach: The top management at corporate level decides the requirements and
allocates resources accordingly to SBUs.

2. Bottom-up Approach: The operating levels at SBUs determine their resource requirements.
Resources are allocated accordingly. However, the needs may get overstated under this
approach.

3. Mixed Approach: It is a mix of top-down and bottom-up approaches. The resources are
allocated on the basis of strategic budgeting. It involves an interactive form of decision
making. A series of negotiations take place between corporate managers and SBU managers
about allocating resources to SBU.

7.3.3 Methods for Resource Allocation to SBUs

The methods for allocating resources to SBUs can be:

1. Strategic budgeting

2. Capital Budgeting
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3. Programme budgeting

4. Zero-based budgeting

5. BCG matrix

6. Product life cycle-based budgeting

1. Strategic Budgeting-based Resource Allocation

It is an interactive process involving different managerial levels. It is based on assumptions about
environmental changes and core competencies and their likely impact on implementation of strategy.
The SBU managers prepare action plans and targets. They are coordinated with corporate plan. The
strategic budget is prepared and presented to top management for approval. This budget allocates
resources to SBU. (Figure 7–14).

Figure 7–14: Strategic Budgeting Based Resource Allocation

2. Capital Budgeting-based Resource Allocation

This method is used to allocate resources to SBUs for new capital projects. It uses the techniques
of pay back period, Internal Rate of Return (IRR) and Discounted Cash Flow (DCF). Time value of
money is considered in IRR and DCF. Resources to SBUs are allocated on the basis of approved capital
budgets.

3. Programme Budgeting-based Resource Allocation

The resource allocation is made to various approved future programmes of SBUs. Objectives, costs
and likely impact of each programme are carefully specified. It is also known as PPBS (Planning,
Programming, Budgeting System).

4. Zero-based Budgeting Resource Allocation

The SBU budget starts from zero base. Each future programme has to be justified in terms of benefits
and costs to warrant allocation of resources. Low Priority activities are eliminated.
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5. BCG Matrix-based Resource Allocation

This matrix is used for resource allocation to SBUs. Based on relative market share and market
growth rate, the SBUs are classified into “Stars”, “Question Marks”, “Cash cows” and “Dogs”. (Figure
7–15).

� Stars and Question Marks SBUs are allocated more resources to build and sustain market
share. Cash cows are allocated present level of resources to defend and preserve market
share. Dogs do not get any resources. They are liquidated.

Figure 7–15: BCG Matrix for Resource Allocation

6. Product Life Cycle-based Resource Allocation

Resource allocation is linked to different stages in the life cycle of SBU products. The stages can be
Introduction, Growth, Maturity and Decline.

� More resources are allocated at Introduction and Growth stages. Less resources are allocated
at Maturity stage. The product is phased out at Decline stage and receives no resource
allocation.

7.3.4 Resource Planning at Functional Level

Strategic advantage is achieved at the functional level. Resource planning at functional level is
important for effective implementa­tion of strategy.

Action plans are prepared to plan resources at functional level. They set annual targets for action.
They provide specific guidance for what is to be done. They are measureable. They assist strategy
implementation by providing:

� Targets for year, month or week.

� Coordination in resource allocation to avoid conflicts.

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� Measurable outcomes for functional activities.

Action plans are based on short term objectives. Such plans identify:

� Specific activities to be undertaken for each function.

� Clear time frame for completion of activities.

� Responsibility for carrying out each activity.

Action plans are prepared to identify:

1. Functional Activities: They are key functional activities to be undertaken to achieve short-
term objectives to build competitive advantage. The activities tend to be specific, narrow,
short-term and action-oriented. Resource plans are prepared for them.

2. Time Frame: A clear time frame is laid down for com­pletion of functional activities in terms
of week, month, quarter.

3. Accountability: Responsibility for each action is identified. Who is responsible to carry out
each action ?

4. Outcomes: The outcomes of each action are clearly identified. They are in terms of short-term
objectives to be achieved by the action.

7.3.5 Factors affecting Resource Allocation

The following factors affect resource allocation.

1. Objectives: They are desired outcomes. Resource allocation must be oriented to objectives
achievement. Objectives should be clearly laid down with strategic priorities for resource
allocation.

2. Managerial Preferences: Top managers who are dominant in strategy formulation tend to
affect resource allocation. Their preferences attract more resources for their pet projects.

3. Internal Politics: Resources are a symbol of power. Intenal politics based on negotiations and
bargaining affect resource allocation. Budget battles may take place.

4. External Influences: The demands of stakeholders also affect resource allocation. They
can be owners, suppliers, customers, employees, bankers and community. Legal provisions
may require additional resource allocation, for example pollution control, safety and labour
welfare requirements.

„„ The link should be strengthened between strategy, budget and resource allocation.

7.4 Management System for Strategy Implementation

Effective management system is required for the strategy implementation in the organizations.
Strategy implementation requires establishment of management system. Management gets the
jobs done by working with and through people to implement strategy. It performs the functions of
planning, organizing, staffing, leading and controlling. It manages change and conflicts.
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The essentials of management system for strategy implemen­tation consist of: (Figure 7–16)

7.4.1 Human Resource Management

People are at the heart of strategy implementation. The unique competencies of people are the key
strategic factors enabling the success of strategies. The components of human resource management
consist of:

a) Putting together a Strong Management Team: Team members come from within the
organization or they can be outsiders. The team should have the right personal chemistry
and mix of skills with potential to develop.

The management team should establish strategy supportive policies and procedures.

b) Acquiring Competent Employees: Talented, experienced and competent employees are

acquired for the organization.

c) Development of Employees: Training and management development should be a continuous

process to develop employees. This is essential to develop their knowledge base and build
human capital.

d) Utilization of Employees: Motivation should be the key factor for effectively utilizing people.
They should be given challenging, interesting and creative job assignments. The work
environment should be performance-friendly.

e) Retention of Employees: The salary, benefits, services and incentives should help retain high-
potential and high performance employees. Retention of quality employees is a challenging
task.

Figure 7–16: Management System for Strategy Implementation

7.4.2 Information Management

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Strategy implementation requires establishment and use of information, communication, and
e-commerce systems. They enable people to carry out their roles successfully and effectively.
Information management enables success of strategy.

Information technology is advancing rapidly. The ability of organizations to access and process
information is crucial to strategy implementation. E-commerce is a vital tool for strategy
implementation. (Figure 7–17)

Figure 7–17: Management Information System for Strategy Implementation

7.4.3 Leadership
Leadership is guiding and influencing people. It establishes direction, manages change and builds a
team. It makes decisions. It is essential to drive strategy implementation forward. Effective leaders
carry out the following tasks to put strategy into action:

a) Benchmarking: Instituting best practices and pushing for continuous improvements.

b) Performance-based Rewards: Tying rewards and incentives to implementation performance

of strategy. Employees are motivated for higher performance.

c) Supportive Environment: Creating a strategy supportive work environment conducive to

change. Political relationships are managed.

d) Open Communication: Promoting open communication to reduce conflict and manage

change.

e) Environmental Adaptation: Keep the organization responsive to changing forces that affect
implementation.

f) Team Building: Achieve synergistic effects through team building.

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g) Conflict Management: Conflict is disagreement between two or more parties on issues. It

is unavoidable in organizations. It is managed through avoidance, defusion or confrontation
approaches.

h) Leading: Guiding, influencing and motivating people for effective implementation. Staying on
top of what is happening. Pushing corrective actions. Exercising leadership style that fits the
situation. (Figure 7–18)

„„ Successful implementation depends on leader’s ability to motivate employees towards

objectives achievement.

Figure 7–18: Competencies Required of Leaders for Strategy Implementation

7.4.4 Shaping Organization Culture

Every company has its own unique culture. Organizational culture refers to the characterstics of
a company's internal work climate – as shaped by systems of shared values, ethichs and beliefs.
Management shapes supportive organization culture for strategy implemen­tation. Organization
culture refers to a set of values, beliefs, symbols and assumptions shared in common throughout the
organization. Strategy supportive culture is developed.

Strategy implementation is facilitated by culture through:

„„ Emphasizing key themes or core values in organizational philosophy. They can centre around
quality, cost, speed, differentiation.

„„ Institutionalizing systems, procedures and practices that reinforce desired values and beliefs.

„„ Use of criteria for reward systems and structures that allow open communication.

„„ Role modeling and coaching by key managers.

„„ Stories and legends about key people and events.

„„ Managing strategy-culture relationships for strategy-culture fit.

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„„ Healthy cultures that aid good strategy execution.It is necessary to have high performance
cultures and adaptive cultures in the firms for the bettere strategy implementation.

7.4.5 Reengineering
It is a management tool for strategy implementation. It is radical redesign of jobs and work processes.
It aims to achieve gains in cost, quality, service and speed. It involves change in structure, technology
and people. Old policies, rules and procedures are changed. Decentralization and information
sharing is done. The focus is changing the ways the work is carried out. The work is designed around
products and outputs. It asks: “What is needed if start is made from the scratch.” It is concerned with
employee and customer well-being.

Managers also use E-engineering for reengineering implemen­tation. The way of doing business is
reinvented to take full advantage of internet. It can be in tems of attracting and serving customers,
dealing with suppliers and distributing and promoting products.

Steps in Reengineering

1. Develop objectives and strategy for reengineering.

2. Ensure strong leadership and commitment by top management for directing reegineering
efforts.

3. Ensure employee participation by creating a sense of urgency for reengineering.

4. Start with a clean slate to:

„„ Recreate organization structure by organizing around outcomes.
„„ Reassess work processes; change old policies, rules, procedures.
„„ Link parallel activities.
„„ Build cross-functional and self-managed teams.
„„ Identify competitive advantage
„„ Develop information networks.

Self Examination Questions

1. Describe the concept of strategy implementation.
2. Explain the process of strategy implementation.
3. What do you understand by operationalizing the strategy?
4. Explain differences between strategy formulation and strategy implementation.
5. Describe matrix structure for strategy implementation.
6. Distinguish between functional structure and team-based structure for strategy implementation.
7. Explain strategic business unit structure for strategy implementation.

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8. Distinguish between holding company structure and networked structure for strategy implementation.
9. Discuss the process of resource planning at corporate level for strategy implementation.
10. Why leadership an important element in strategy implementation?
11. Explain Chief Financial Officer's key role in strategy implementation.
12. What is the role of sound organization structure for effective implementation of strategy?

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8. Strategy Evaluation

8.1 Concept of Strategy Evaluation

The purpose of strategy evaluation is to evaluate the effectiveness of a strategy in achieving

organizational objectives. It is to test the effectiveness of the strategies implemented in the
organizations. Evaluation ensures that the right things are done in the right manner and at the right
time. Strategy evaluation continually assesses the changing environment to uncover events that
significantly affect the course of the strategy.

Strategy evaluation includes the following motives in the organization

a. Need for feedback, appraisal and reward

b. Check on the validity of strategic choice

c. Congruence between decisions and intended strategy

d. Successful culmination of the staretgic management process

e. Creating input for new strategic planning

When strategy drives the control system, evaluation is likely to be more effective. Strategy evaluation
is exercised by top management under the final phase of strategic management. It is long-term
oriented. It focuses on external environment. It is proactive and provides early warning about the
performance of the strategy. Timely feedback is the cornerstone of strategic control.

Strategy evaluation involves:

a) Reexamination of Assumptions: Assumptions relate to environmental and organizational
factors. Environment is dynamic. There is time lag between strategy formulation and
implementation. Assumptions made while formulating a strategy may no longer be valid and
relevant. Strategy evaluation takes into account the changing assumptions.

b) Measuring Performance: Strategy evaluation continually evaluates the implementation

performance of a strategy. It evaluates whether the plans, programmes, projects and budget
are guiding the organization towards objectives achievement. Implementation gaps are
identified.

c) Appropriate Corrective Measures: Appropriate measures are taken to adjust the strategy to
new requirements. This is done to steer the strategy to the right direction. Due consideration
is given to the changing assumptions and implementation gaps. Corrective actions adjust the
strategy to keep it on track to achieve objectives.

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8.1.1 Characteristics of Strategy Evaluation

The nature of strategic evaluation is judgemental. Through evaluation, strategists can adjudge
whether their strategies are in consonance with the environment and whether the performance
of tasks would lead to the achievement of objectives. Strategic evaluation could be defined as the
process of determining the effectiveness of a given strategy in achieving the organizational objectives
and taking corrective actions wherever required.When strategy drives, the evaluation is likely to be
more effective.Evaluation should be focused on quality control. The major characteristics of strategy
evaluation are:

1. Right Direction: Strategy evaluation ensures that the strategy is moving in the right direction.
Strategy should help in achieving the target goals set by organizations.

2. Proactive: Strategy evaluation is an early warning system of control. It proacts by continuously

questioning the direction of strategy. It has flexibility to adapt to environmental changes and
make corrections.

3. Future-oriented: Strategy evaluation aims to steer the future direction of strategy.

4. Focus: Strategy evaluation focuses on forces and events in the external environment. It should
have strategic focus on key performance areas.

5. Time Horizon: Strategy evaluation has a long-term time horizon.

6. Responsibility: Strategy evaluation is the responsibility of top management.

7. Cost Effective: Benefits should justify the costs of strategy evaluation.

8. Techniques: Strategy evaluation is based on premises reexamination, implementation review,

strategic surveillance, and special alert.

8.2 Types of Evaluation

The process of strategic evaluation does not operate in isolation with strategic management; it works
on the basis of different organizational systems that are used to implement strategies.It is necessary
for strategists to have an idea about the techniques of strategic evaluation in order to make a choice
from among the many available and to use them. Strategy evaluation can be strategic and operational.

8.2.1 Strategic Evaluation

Strategic evaluation can be of the following four types: (Figure 8–1)
„„ Premise evaluation
„„ Implementation evaluation
„„ Strategic surveillance evaluation
„„ Special Alert evaluation

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Figure 8–1: Types of Strategic evaluation

1. Premise evaluation
Every strategy is based on certain assumptions about environmental and organizational factors.
Some of these factors are highly significant and any change in them can affect the strategy to a large
extent. Premise evaluation is necessary to identify the key assumptions and keeo track of any change
in them so as to assess their impact on strategy and implementation.

Premises are assumptions about anticipated environment. A strategy is expected to be implemented

on the basis of these assumptions. Premises are forecasts of future expectations about political-
legal, economic, socio-cultural and technological forces in the external environment. Any change in
premises affects the strategy.

Premise evaluation involves:

a) Identification of key premises made while formulating a strategy.

b) Keeping track of changes in premises and assessing their impact on strategy implementation.

c) Reexamination of the validity of premises to make necessary changes at the right time.

„„ Premise control is a continuous process. It ensures environmental relevance of a

strategy.

„„ The responsibility for premise evaluation can be assigned to the corporate planning
staff, which can identify key assumptions and keep a regular check on their validity.

2. Implementation evaluation
The implementation of a strategy results in a series of plans, programmes and projects. Resources
allocation is done for implementating these. Implementation evaluation evaluates whether the plans,
programmes, projects and budget are guiding the organization towards objectives achievement.
Resources allocated to them are withdrawn or revised to ensure envisaged benefits to the
organization. It involves strategic rethinking.

Tools of Implementation evaluation are:

a) Strategic Thrusts: The strategic thrusts for implementation are identified and monitored. For
example, strategic thrust can be in terms of new product launch or diversification programme.

b) Milestone Review: Critical milestones in strategy implemen­tation are identified. They can

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 Strategy Evaluation

be in terms of events, resource allocation or end-time. They are reviewed to reassess the
continued relevance of implementation to objectives achievement.

Implementation evaluation is aimed at evaluating whether the plans, programmes and

projects are actually guiding the organization towards its predetermined objectives or
not.

3. Strategic Surveillance Evaluation

The premise and implementation types of strategic evaluation are specific in nature.Strategic
surveillance, on the other hand, is aimed at a more generalized and overarching evaluation 'designed
to monitor a broad range of events inside and outside the company that are likely to threaten the
course of a firms' strategy'. Strategic surveillance monitors a broad range of events inside and outside
the organization which threaten the course of the strategy. It can be:

a) Selective Surveillance: Monitoring is based on selected information sources to uncover

external events likely to affect the strategy.

b) Organizational Surveillance: Information generated within the organization is captured for

monitoring.

Strategic surveillance can be done through a broad based, general monitoring, on the basis
of selected information sources to uncover events that are likely to affect the course of the
strategy of an organization.

4. Special Alert evaluation

The last approach of the strategy evaluation system is the special alert evaluation, which is based
on a trigger mechanism for rapid response and immediate reassessment of strategy in the light
of sudden and unexpected events. Special alert evaluation can exercised through the formulation
of contingency strategies and assigning the responsibility of handling unforeseen events to crisis
management teams. Organizations should hope for the best and prepare for the worst. Sudden and
unexpected events create crisis. They threaten the course of strategy. Special alert control is triggered
by detection of a crisis. It provides rapid response through immediate reassessment of strategy
during crisis situations.

Contingency strategies are formulated to handle unforeseen events. The responsibility to handle
crisis situations is given to crisis management teams.

8.2.2 Operating Evaluation

Operating evaluation is concerned with performance. It controls the allocation and use of resources
through performance evaluation of SBUs. It takes corrective actions to address variations in
performance. It ensures that the organization is achieving what it set out to achieve.

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Process of Operating Evaluation

Strategy Evaluation is as significant as strategy formulation because it throws light on
the efficiency and effectiveness of the comprehensive plans in achieving the desired
results. The managers can also assess the appropriateness of the current strategy in
todays dynamic world with socio-economic, political and technological innovations.

Operating evaluation is a cyclical process. It has four steps. (Figure 8–2)

Figure 8–2: The Process of Operating Evaluation

1. Setting Standards of Performance (Criteria for Evaluation)

While fixing the benchmark, strategists encounter questions such as - what benchmarks to set, how to set
them and how to express them. In order to determine the benchmark performance to be set, it is essential
to discover the special requirements for performing the main task. The performance indicator that
best identify and express the special requirements might then be determined to be used for evaluation.
The organization can use both quantitative and qualitative criteria for comprehensive assessment of
performance. Quantitative criteria include determination of net profit, ROI, earning per share, cost of
production, rate of employee turnover etc. Among the Qualitative factors are subjective evaluation of
factors such as - skills and competencies, risk taking potential, flexibility etc. Strategists encounter the
following three questions while dealing with standard setting:

a. What standards should be set?

b. How should these standards be set?

c. In what terms should these standards be expressed?

Standards are set for implementation process. Standards are in the form of planned or budgeted performance. They
are the performance targets for key result areas. They are critical to the success of an organization. Performance
targets relate to the outputs of an organization. It can be in terms of quality, quantity, costs, profits and time.

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„„ Standard costs, sales goals, quality standards, and standard operat­ing time are examples of
standards. They serve as benchmarks.

Operationa evaluation can be effectively exercised through a combination of quantitative and

qualitative criteria.

2. Measure Actual Performance (Performance Feedback)

The standard performance is a benchmark with which the actual performance is to be compared.
The reporting and communication system help in measuring the performance. If appropriate
means are available for measuring the performance and if the standards are set in the right manner,
strategy evaluation becomes easier. But various factors such as managers contribution are difficult
to measure. Similarly divisional performance is sometimes difficult to measure as compared to
individual performance. Thus, variable objectives must be created against which measurement of
performance can be done. The measurement must be done at right time else evaluation will not meet
its purpose. For measuring the performance, financial statements like - balance sheet, profit and loss
account must be prepared on an annual basis.

The evaluation process operates at the performance level as action takes place.Standards of
performance act as the benchmark against hich the actual performance is to be compared.It is
important, however, to understand how the measurement of performance can take place. Actual
performance is measured at predetermined times. It provides feedback about performance.A variety
of evaluatin techniques are used for measurement

„„ Internal reports relating to performance outputs provide information about actual

performance. Personal observation can supplement the reports. Timeliness of information is
important. Computers can be used to get information.

3. Evaluate Performance
While measuring the actual performance and comparing it with standard performance there may
be variances which must be analyzed. The strategists must mention the degree of tolerance limits
between which the variance between actual and standard performance may be accepted. The
positive deviation indicates a better performance but it is quite unusual exceeding the target always.
The negative deviation is an issue of concern because it indicates a shortfall in performance. Thus
in this case the strategists must discover the causes of deviation and must take corrective action
to overcome itActual performance is compared against performance standards. It can be equal to,
be higher, or be lower than standards. Deviations, their magnitude, their causes and incidence are
analysed. They can be positive or negative. The responsibility for deviation is located.
„„ The tools can be Variance Analysis for standard costs, Statistical Quality Control, ROI (Return
on Investment), Profitability Ratios.
Evaluation criteria can be both quantitative and qualitative.
i) Quantitative Criteria: They can be: profit, sales, market share, costs, dividends, share value,
investment, earning per share, ratios, budget.

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ii) Qualitative Criteria: They can be: product quality, capacity utilization, market attractiveness,
motivation, morale, loyalty, efficiency, effectiveness.

4. Corrective Actions

Once the deviation in performance is identified, it is essential to plan for a corrective action. If
the performance is consistently less than the desired performance, the strategists must carry a
detailed analysis of the factors responsible for such performance. If the strategists discover that the
organizational potential does not match with the performance requirements, then the standards must
be lowered. Another rare and drastic corrective action is reformulating the strategy which requires
going back to the process of strategic management, reframing of plans according to new resource
allocation trend and consequent means going to the beginning point of strategic management
process.Corrective actions are taken to bring performance in line with the standards. The actions can
be:

„„ Do Nothing: The deviations are within the allowable tolerance. The deviation is a chance
fluctuation.
„„ Correct Deviations: It is through design improvements, better raw materials, greter employee
motivation, more training etc.
� Change Standards: It is to make them appropriate and realistic. Strategies, action plans and
budgets are reformulated.

Contingency plans can be useful to deal with the threats and capitalize on opportunities before they
occur. They are alternative plans to deal with non-occurence of key events as expected.(Also see Box
8–1)

Box 8–1: Differences between Strategic Evaluation and Operational Evaluation

Attribute Strategic Evaluation Operational Evaluation

� Are we moving in the right
1. Basic question � How are we performing ?
direction ?
� Proactive; questioning of � Allocation and use of
2. Aim
strategic direction. resources.
3. Main concern � Steering future direction � Action control
4. Focus � External environment � Internal organization
5. Time horizon � Long-term � Short-term
� Middle management;
� Top management;
6. Locus of control directed by top
supported by other levels
management.
� Budgets;
� Environmental scanning;
� Schedules;
7. Techniques � Information gathering;
� Management by objectives
� Questioning and review
(MBO)

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Self Examination Questions

1. Explain the concept of strategy evaluation. Describe its characteristics.
2. Describe various types of strategy evaluation.
3. Describe the steps in the process of strategy evaluation.
4. Distinguish between premise evaluation and special alert evaluation.
5. Write short note on strategic surveillance.
6. Is the evaluation and control process appropriate for an organization that emphasizes creativity?
7. Distinguish between strategic and operational evaluation.

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9. Strategic Change Management

9.1 Concept of Strategic Change

Strategy should be reviewed continuously to adapt to environmental changes. It should evolve in

such a way that competitors cannot duplicate it. Change is making things different. It is departure
from status quo. Organizations operate in a dynamic environment. Ability to adapt to changing
environmental forces is the essence of organizational survival and effectiveness. Strategic change
management is a systematic approach to dealing with change, both from the perspective of an
organization and on the individual level. A somewhat ambiguous term, change management has at
least three different aspects, including: adapting to change, controlling change, and effecting change.
A proactive approach to dealing with change is at the core of all three aspects.

For an organization, strategic change management means defining and implementing procedures
and/or technologies to deal with changes in the business environment and to profit from changing
opportunities.

Strategic change implies change in strategy. It consists of rethinking, reviewing and changing strategy
to adapt to envronmental changes and changing resource capabilites. It involves management tasks
and processes for organziatonal renewal. Strategic drift occurs when the current strategy loses
relevance to changing environmental forces.

9.2 Managing Strategic Change

Designing a structure and putting in place appropriate resources does not ensure that strategic
change will happen. The major problems managers report in managing change is the tendency
towards inertia and resistance to change – i.e. people will hold onto the existing ways of doings
things.

There are different issues in managing the types of strategic change are as follows:

a. Adaptation – can be accommodated within current culture and occurs incrementally. It is the
most common form of change.
b. Reconstruction­– change needed may be rapid but does not change the culture i.e. as in
turnaround situations where there is need for major cost cutting programs to deal with
changing market conditions or poor financial performance.
c. Revolution – rapid and major change but also change within the culture even environmental

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and competitive pressure might require fundamental change– i.e. when a takeover threatens
the firm
d. Evolution – requires a culture change but over time (incremental). Managers could anticipate
the need for transformational change and then be in the position of planned evolutionary
change, with time in which to achieve it. Evolution can also be explained in terms of a learning
organisation where an organisation continuously changes its strategy as the environment
changes.

Change is necessary for the development. Organization has to manage the strategic changes to gain
the competitive advantage. Strategc change needs to be managed effectively. The process of strategic
change management consisgts of following steps:

1. Understanding the force of change

2. Diagnosing the change situation

3. Change management

4. Levers for managing change

9.2.1 Understanding the force of change

Organizations today operate in a dynamic environment. Dynamic environment requires more change.
Both external and internal forces in the environ­ment act as stimulants for strategic change. (Figure
9–1)

Figure 9–1: Forces of Strategic Change

1. External Forces of Change (PEST)

External forces are dynamic. They are non-controllable. They are located outside the organization.
They are:

a) Political Forces of Change

Political forces are related to management of public affairs. They are reflected by:

„„ Changing political system, institutions and philosophies.

„„ Changing world politics, such as collapse of Soviet union, re­unification of Germany, etc.

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 Strategic Management & Decision Making Analysis
„„ Increasing activities of pressure groups.

„„ Changing role of government from doer to facilitator.

„„ New laws enacted by the government which organizations must comply. Regulations and
deregulations.

b) Economic Forces of Change

Economic forces are related to economic parameters. They are reflected by:

„„ Economic system, policies and conditions.

„„ Economic health of the country indicated by per capita income and growth rate.

„„ Inflation and exchange rate changes.

„„ Income distribution and poverty incidence.

„„ Resource availability in terms of physical, human, financial.

„„ Regional economic groupings such as SAARC, ASEAN, EU.

„„ Economic shocks, such as changes in world oil prices, Asian economic crisis, world recession.

„„ Liberalization and privatization.

„„ Increasing globalization that brings ompetition everywhere. Corporate restructuring takes

place through mergers, takeovers, downsizing, reengineering. The world becomes one
market.

„„ Growth of e-commerce. It is growing fast.

„„ Workforce diversity in terms of culture, gender, age, skills, and professionalism, etc.

c) Socio-Cultural Forces of Change

They are reflected by:

„„ Demographic changes related to population. The nature of workforce is changing. Learning
orgaizations are staffed by knowledge workers.

„„ Social trends, such as delayed marriages, antismoking atti­tudes, nuclear families.

„„ Social change causes differences among people.

„„ Cross-cultural influences and their impact on values, beliefs and attitudes.

„„ Ethical problems and dilemmas.

d) Technological forces of Change

They are reflected by:

„„ Changes in the level of technology and the rate of techno­logical change; change in technological
process and meth­ods.

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„„ Information technology has been a key force of change. It is represented by faster and cheaper
computer processing power, internet, e-commerce.

„„ Innovations and experimentation to develop new or improved products or processes.

„„ Redesigning jobs arising from new developments in tech­nology. Process reengineering.

„„ Virtual offices resulting from information technology.

„„ Learning organizations with continuous capacity to adapt and change are emerging.

2. Internal Forces of Change

Internal forces of change are controllable by the organization. They are reflected by:

a) Goal Changes: The goals of employees change. Organi­

zational goals also experience
succession and displacement.

b) Structure Changes: They affect job design and re­lationships. Coordination mechanisms also
change.

c) Resource Changes: Technology changes make manually performed jobs automated and
computerized. Human, financial and information resources also change.

d) Organization Climate Changes: Changes in quality of working environment reflected by changes

in:

i) Mutuality of interests of labour and management.

ii) Openness in communication and tolerance for conflicts.

iii) Collaboration among employees.

iv) Team spirit– grouping activities around teams for results.

v) Autonomy in job-related decisions.

vi) Innovation and risk taking.

vii) Performance-based rewards

viii) Climate of trust and human focus.

9.2.2 Diagnosing the change situation

The change situation needs to be carefully diagnoised. It involves the following steps:

1. Identify the type of strategc change required

2. Examine the importance of context

3. Consider organizatonal culture

4. Conduct forcefield analysis

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1. Identify the type of Srategic Change Requried

The nature and scope of strategic change required is identified. Strategic change can be of four types:
(Figure 9–2)

a) Adaptation

b) Reconstruction

c) Evolution

d) Revolution

Figure 9–2: Types of Change

a) Adaptation: This change in strategy occurs incrementally. It can be accommodated within the
current paradigm. Paradigm refers to current beliefs and assumptions about the way of doing
things. It involves realignment. This is the most common form of change in strategy.

b) Reconstruction: This change is strategy occurs rapidly. But it does not lead to fundamental
change in paradigm. For example, structural change or cost-cutting program to deal with
changing market situations.

c) Evolution: This change in strategy is incremental. It requires paradigm change. It is

transformational change. Learning organizations continually change their strategies to
environmental changes.

d) Revolution: This change in strategy occurs with a big bang. It requires fundamental change
in paradigm. For example, significant decline in profit may require revolutionary change in
strategy.

2. Examine the Importance of Context

The success of strategic change depends on the context in which the change is taking place. The
contexts can be quite different for a private sector corporation compared to public sector corporation.
The contextual features can be:

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a) Time: How quickly change is needed? The tme available for change should be carefully
considered.

b) Scope: What degree of change is needed? The scope of change can be adoptation,
reconstruction, evolution, revolution.

c) Preservation: What aspects of organizational resoruces and capabilities need to be

preserved? Change should be based on organzational competencies.

d) Diversity: What is the extent of diversity in the organization? Diversity in experience, views
and opinions of staff facilitates change. Homogeneity hampers change.
e) Capability: What is the capability to implement change in the organization? Managers and
workforce should have experience of managing change in the past.

f) Capacity: What is the capacity in terms of resoruce availability? Change needs money plus
management time.

g) Readiness: How ready is the workforce for change? There should be readiness for change
throughout the organization. Resistance to change should be absent.

h) Power: Who has the power to effect change? The chief executive as change leader should have
power to impose change.

„„ The organization shold have capacity, capability, readiness and power to achieve the
scope of strategic change.

3. Consider Organizational Culture

Culture encompasses shared values, beliefs, customs, stories and symbols that guide organizational
behavior. It shapes the overall effectiveness of the organization. It helps to understand what the
organization stands for, how it functions and what it considers important. The cultural context of
strategic change should be carefully considered. It shapes and guides strategic change.

Organizational culture is reflected by:

„„ Mutuality of interests among stakeholders.

„„ Collaboration and team spirit among manager and employees.

„„ Innovation and risk-taking by management.

„„ Open communication at all levels of organization.

„„ Tolerance for conflicts.

„„ Autonomy in work and freedom in work-related decisions.

„„ Performance-based reward system.

„„ Results-orientation.

„„ Human focus and faith in employees.

„„ Taken-for-granted assumptions or paradigm.

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Cultural Web

The cultural web represents the paradigm or taken-for-granted assumptions of an organization. It

is preconceived idea of what organization is, what it should be like and how should it operate. It is
the physical manifestation of organizational culture. It helps to understand organizational culture. It
consists of following elements which make up paradigm:

„„ Rituals and routines: Special events, ways the things are done.

„„ Stories and symbols: Important events and personalities, language used.

„„ Power structures: Powerful groupings.

„„ Organizational structure: Relationships

„„ Control systems: Measurement and reward systems

4. Conduct Force-field Analysis

Force-field analysis identifies forces for and against change. It provides an initial view of change
problems that need to be tackled. It can either push or resist change. (Figure 9–3)

Figure 9–3: Force-field Analysis

9.3 Strategic Change Management Approaches

The approaches to managing strategic change are (Figure 9–4)

a) Structure-based approaches

b) People-based approaches

c) Technology based approaches

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Figure 9–4: Approaches to Managing Strategic Change.

9.3.1 Structure-based Approaches

These approaches involve organizational reengineering. They consist of the following levers:

i) Change in Structure: The differentiation and coordination mechanisms are changed. Jobs are
redesigned. Authority-respon­sibility relationships are changed. Span of control is changed.
Top management effects such changes.

ii) Change in Control Systems: Standards and systems for measuring and appraising
performance are changed. The reward system is also changed. These changes are made by
top management.

iii) Change in Routines: Routines are ways of doing things. They tend to persist overtime. They
guide people’s behavior. They represent work practices. Organizational routines are changed.

9.3.2 People-based Approaches

These approaches emphasize change in people’s styles and roles. They consist of the following levers:

i) Change in Styles: Management styles are changed to manage strategic change. They can be
through following styles:
„„ Education and Communication: This involves explanation of reasons for strategic
change. It can be through group briefings.
„„ It overcomes misinformation. But it is top-down approach. It does not involve those
affected by change.
„„ Participation (Collaboration): Those affected by change are involved in the planning of
strategic change. Task forces are used.
„„ This style is useful for incremental change. It ensures ownership of change process.
But it is time consuming.
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 Strategic Management & Decision Making Analysis
„„ Intervention: The change agent retains coordination and control. Elements of change
process are delegated to task forces.
„„ It ensures control by change agent and involvement by implementors. But there is risk
of manipulation.
„„ Direction: It uses authority to establish future change strategy.
„„ It has clarity and speed. But it may lack acceptance.
„„ Coercion: It is imposition of change.

It is useful in crisis situations only.

Management styles should differ according to the nature of organization. They should fit the contexts.

ii) Power and Politics: Reconfiguration of power structure is done to manage strategic change.
The source of power can be from within the organization and outside the organization.
Political processes are carefully considered while reconfiguring power structure.

iii) Symbols: They are objects, events, acts or people. Changing symbols reshapes beliefs and
expectations. Organizational rituals are also changed.

iv) Communication: It is transfer of message and meaning about change. Members of the
organization must clearly understand the need for change and what is involved in change. The
involvement of organizational members in planning of change is a means of communication.

„„ Communication reduces resistance to change by overcoming counter-communication

(rumours, gossips). Feedback is the essence of effective communication.

9.3.3 Technology-based Approaches

These approaches involve change in technology. Technology is changing fast. Technology-based
approaches consist of the following levers:

i) New Technology: The strategic change can be based on adoption of new technology. For
example, use of computerization, robotics, information technology, and nanotechnology.

ii) Change in Processes and Methods: Production processes and methods of doing work are
changed. For example, assembly lines can be changed to teams. Manual processes can be
automated.

iii) Change in Tactics: Tactics facilitate the execution of strategic change process. They can be:

„„ Timing: The right timing should be chosen to promote change.

„„ Windows of Opportunities: They should be provided by the change process.

„„ Job Losses: They should be carefully planned. Retraining, counseling, outplacement,

and redeployment approaches can be useful to manage strategic change.
There are different types of strategic change, which can be thought of in extent and nature and is
achieved through incremental change, or big bang approach. Different approaches and means of

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managing change are likely to be required for different types of change. It is also important to diagnose
wider aspects of organisational context such as resources and skills that need to be preserved, the
degree of homogeneity or diversity in the organisation, the capability, capacity and readiness got
change and the power to make change happen.

The cultural web and force-field analysis are useful as mean of identifying blockages and facilitators
to change. Change agents may need to adopt different styles of managing strategic change according
to different contexts and in relation to the involvement and interest of different groups. Levers for
managing strategic change need to be considered in terms of the type of change and context of change.
Such levers include surfacing and challenging the taken for granted, the need to change operational
processes, routines and symbols and the importance of political processes and other change tactics.

Self Examination Questions

1. Explain the concept of strategic change.
2. Describe the process of strategic change management.
3. Explain the steps needed for diagnosing change situation.
4. Describe force-field analysis.
5. Describe approaches to strategic change management.
6. Describe the process of diagnosing strategic change needs in an organization.
7. Explain strategic change process. How can strategic change be diagonised?
8. Write short note on cultural web.

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10. Role of Chief Executive in Strategic

Management

Chief executive officer is the most important figure in strategic management process. She/he
plays many roles in an organization. Planning, organizing, leading, and controlling are the major
parts of management activities that a manager performs. Actually, strategic management is the
top-level management. It covers all the management functions because it starts from planning
such as environmental analysis and strategic choice, associated with organizing and leading in
implementation phase, and lastly also evaluates and controls the results. Similarly, CEO also uses his
or her conceptual, human relation and technical skills in strategic management process.

CEO is the head of employees and major executives representative of board of directors. He/she
plays vital role to make amicable relationship with customers, competitors, suppliers, and other
stakeholders on behalf of organization. Generally, chief executives perform general management
functions. Chief executive requires various types of skills. The Chief Executive Officer (CEO) is
responsible for leading the development and execution of the Company’s long term strategy with a
view to creating shareholder value. The CEO’s leadership role also entails being ultimately responsible
for all day-to-day management decisions and for implementing the Company’s long and short term
plans. The CEO acts as a direct liaison between the Board and management of the Company and
communicates to the Board on behalf of management. The CEO also communicates on behalf of the
Company to shareholders, employees, government authorities, other stakeholders and the public.
More specifically, the Roles and responsibilities of the CEO include the following:

1. To lead, in conjunction with the Board, the development of the

Company’s strategy
2. To lead and oversee the implementation of the Company’s long and short term plans in
accordance with its strategy

3. To ensure the Company is appropriately organized and staffed and to have the authority to
hire and terminate staff as necessary to enable it

to achieve the approved strategy;

4. To ensure that expenditures of the Company are within the authorized annual budget of the
Company;

5. To assess the principal risks of the Company and to ensure that these risks are being monitored
and managed;

6. To ensure effective internal controls and management information systems are in place;

7. To ensure that the Company has appropriate systems to enable it to conduct its activities
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both lawfully and ethically;

8. To ensure that the Company maintains high standards of corporate citizenship and social
responsibility wherever it does business;

9. To act as a liaison between management and the Board;

10. To communicate effectively with shareholders, employees, Government authorities, other

stakeholders and the public;

11. To keep abreast of all material undertakings and activities of the Company and all material
external factors affecting the Company and to ensure that processes and systems are in place
to ensure that the CEO and management of the Company are adequately informed;

12. To ensure that the Directors are properly informed and that sufficient information is provided
to the Board to enable the Directors to form appropriate judgments;

13. To ensure the integrity of all public disclosure by the Company;

14. To abide by specific internally established control systems and authorities, to lead by
personal example and encourage all employees to conduct their activities in accordance with
all applicable laws and the Company’s standards and policies, including its environmental,
safety and health policies.

The Chief Executive Officer (CEO) is the executive head of the organization. He is variously designated
as General Manager, Managing Director, Executive Director, Executive Chairman and President.
Together with the Board of Directors, the CEO represents the top management.

CEO is a strategist. His principal duty is to define long-term direction and scope of the organization.
He has ultimate responsibility for success of strategy. He leads the implementation of the strategy. He
controls the strategic performance.

Strategy formulation, implementation and control involve team work of multiple participants. The
Chief Executive Officer plays the key role in:

i) Formulation of Strategies;
ii) Implementation of Strategies.

iii) Evaluation of Strategies

10.1 CEO’s Role in Formulation of Strategies

The chief executive officer of organization is responsible to formulate the strategies required
to organization.He/she has to manage the team work in formulating the strategies.Strategies are
required to gain the competitive advantage in the firms. Strategy provides future direction and scope
to the organization to gain competitive advantage. The roles of CEO in strategy formulation are:
(Figure 10–1)

a) Key Strategist Role: CEO plays the role of chief architect in defining vision, mission and

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objectives of the organization. He also conceptualizes and crafts strategies to achieve
objectives. This job cannot be delegated.

b) Decision Making Role: CEO analysis and organises information and makes strategic decisions
related to strategy formulation. He makes strategic choice from among strategic options. This
role involves risk-taking.

c) Resource Planning Role: This role of CEO involves coordinated allocation of significant
resources through action plans. Such plans can be organization-wide or related to strategic
business unit or function. Resources can be people, money, technology, time and information.

„„ In the role of resource planning, the CEO aims for strategic fit. He carries out
environmental scanning. Identifies opportunities of competitive advantage.
Organizational resources of strengths are matched with such opportunities. Resources
are committed for long-term period.

„„ Standards of performance are also set.

Figure 10–1: Role of CEO in Strategy Formulation

d) Negotiator Role: Strategy must fulfill the expectations of various stakeholders of the organization.
The CEO balances their conflicting interests by negotiating disputes. The stakeholders can be owners,
customers, employees, suppliers, government, labour unions, financial institutions, and pressure
groups. The CEO ensures the acceptability of strategy by stakeholders.

10.2 CEO’s Role in Implementation of Strategies

Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into
place.The strategic plan devised by the organization proposes the manner in which the strategies could
be put into action.Strategy implementation is very important componenet of strategic management
of the organizations. It requires the various types of resources to the firms. Implementation is putting

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strategy into action.Strategies, therefore, have to be activiated through implementation. The CEO
ensures that strategies are operationalised in practice. The roles of CEO in strategy implementation
are as follows: (Figure 10–2)

Figure 10–2: Role of Chief Executive in Strategy Implementation

a) Informational Role: The CEO disseminates information about strategy to the implementors
within the organization. He also transmits information about strategy outside the organization.
He also serves as a spokesperson for strategy implementation.

„„ Effective communication serves as the key to effective implementation of strategy. It

should be supported by an effective management information system.

b) Leadership Role: The CEO in the role of Chief Adminis­trator assumes overall leadership for
the implementation of strategy. He inspires trust and self-confidence among implementors
of strategy. He ensures their participation. He motivates them for higher productivity. He
provides direction for implementation of strategy.

„„ The CEO creates congenial organizational climate for strategy implementation. He also
manages change and conflicts. He links the reward to implementation performance.

c) Organiser Role: The CEO is an organization builder. He determines the structure for strategy
implementation. He establishes reporting relationships and span of control. He assigns
authority and responsibility for positions and people in the organization for key result areas.

„„ Tasks are assigned to various positions and people of the organization to ensure
effective internal functioning of the organization.

d) Resource Manager Role: This role of CEO ensures efficient and effective mobilization,
allocation and utilization of resources for implementing strategies. Budgets are prepared for
management and control of resources.

„„ The CEO ensures adequate and timely availability of resources.

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10.3 CEO’s Role in Evaluation of strategies

The purpose of strategic evaluation is to evaluate the effectiveness of a strategy in achieving

organizational objectives.It is the role of CEO to test the effectiveness of strategy as well as to take
corrective action to keep it continually effective. Chief executives are ultimately responsible for all the
administrative aspects of strategic evaluation and control.Evaluation ensures that the right things are
done in the right manner and at the right time. The Chief Executive Officer performs the following
evaluation roles in strategy management: (Figure 10–3)

Figure 10–3: Role of Chief Executive Strategy Evaluation

a) Srategic Control Role: Strategic control continually assesses the changing environment to
uncover events that significantly impact the course of strategy. The CEO performs the strategic
control role by:

i) Reexamination of Assumptions: There is time log between strategy formulation and

implementation. Assumptions made during strategy formulation may no longer be
valid. The CEO reexamines such assumptions during implementation of strategy. This
is also known as premise control.

ii) Performance Evaluation: The CEO continually evaluates the implementation

performance of strategy. Gaps in performance are identified. This is also known as
implementation control.

iii) Corrective Actions: The CEO takes necessary steps to adjust the strategy to the right
direction. It is kept on track to achieve objectives.

b) Strategic Surveillance Role: The CEO monitors a broad range of events both inside and
outside the organizations that threaten the course of strategy.

c) Special Alert Control Role: The CEO also monitors sudden and unexpected events that create
crisis for strategy. Rapid response is provided to handle crisis situations.

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Self Examination Questions
1. Describe the roles of chief executive in strategic management.
2. Explain chief executive's role in formulation and implementation of strategies.
3. Write short note on role of chief executive in strategy evaluation.
4. "Chief executive has a crucial role in strategy formulation and implementation." Comment.

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11. Decision Making Process and

Techniques

11.1 Rational Decision Making Process

Under the rational model of decision making, the assumption is made that participants have agreed
in advance that making a decision is the right process to follow and that the rules and language of
decision making are understood by all. The rational model aims at making optimal decisions on the
basis of a careful evaluation of alternative courses of action. Depending on the complexity of the
problem, computational or quantitative techniques may be used to assist this process. The model is
claimed to be the basis of much decision making in private and commercial life and is effective under
the conditions it assumes: a finite choice situation, relevant and unproblematic data, and clear and
uncontroversial choice criteria. The model views the decision-making process as a sequential series
of activities leading from an initial recognition of a problem, through the delineation and evaluation
of alternative courses of action, and the selection of the preferred alternative, to the implementation
of action.

Consider the decision processes involved in the choice about which of two new products should
be launched. If the agreed objective was profitability, rationalists would say that it is a relatively
straightforward procedure to estimate incomes and expenditures associated with both proposed
products and to determine the preferred alternative. In these circumstances, decision making
becomes largely a matter of technical expertise. Where there are adequate information, clear choice
criteria and agreed goals, then the rational model is said to work well. However, not all decision
situations are as clear cut as the example suggests, and the assumptions indicated above cannot
always be presumed.

One major assumption is that the rational approach provides ‘one best way’ to reach decisions.
However, the advocates of the rational approach pay little heed to the organizational context of
decision making. As pointed out by Hickson et al. (1986), this context influences the way problems
are defined, information gathered and choice criteria formulated. The use of logical frameworks and
quantitative techniques do not of themselves make a decision rational. It would be better to regard
such techniques as one input into a process which is influenced by the preferences and interests of
key organizational participants (Pfeffer 1981: 31). For example, in the case of the product decision
previously discussed, it would be illuminating to know how the organizational agenda was set to
allow the emergence of the choice situation, that is, what events led to the decision to offer a new
product. Which other potential products did not make it into the final pair of alternatives? What

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 Decision Making Process and Techniques
other profit-making alternatives were eliminated or overlooked in the process leading up to the
choice situation (i.e. the competing choices)? Which organizational participants stand to gain or lose
by the decision? Who supplied the information and to what extent have biases or values influenced
the information-gathering process? What groups were not represented in the decision process (i.e.
choice suppression)? Thus every organizational decision is influenced by a history, a social context
and anticipated consequences for organizational participants.

The rational model has been greatly influenced by classical management and economic theory,
especially in terms of the notion of a world populated by individuals ‘rationally’ seeking the best
rewards, using the best methods to achieve them: that is, profit or ‘utility’ maximization through
choice optimisation, as per ‘economic man’. However, in practice, time and cost frequently rule out
the search for optimal solutions, and profit maximization is not the only criterion applied to choice
situations (Hopwood 1974: 125). More fundamentally, what ‘rationality’ might be, and who might
decide on this question, is seldom, if ever, explicated in the work of proponents of the rational model.
Within the context of classical theory, decision making assumes a unitary frame of reference and
a stable or predictable environment (Dessler 1976: 313–14) although there is seldom agreement
in organizations about goals and the means to achieve them, and environments are frequently
characterized by uncertainty. In mathematics, a ‘rational number’ is one which is expressible as a
ratio of integers, as a relation between two whole numbers. The world in which we live, however,
is not always easily divisible into whole, discrete entities, and it is even rarer that the magnitude of
such entities is ascertainable on a common or consistent scale. In such circumstances there is no
incontrovertibly largest or smallest to be selected as evidently the best, and thus little possibility of
‘rational’ decision making.

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 Strategic Management & Decision Making Analysis

Decision making is number one job of managers. All levels of managers must make decisions.
All functions of management involve decision making. All decisions influence organizational
performance.

Decision making is the act of choosing one alternative from among a set of alternatives. Rational
decision making process consists of: (Figure 11–1)

a) Recognize and define the problem

b) Identifying appropriate alternatives

c) Evaluate selected alternatives

d) Choose the best alternatives

e) Implement decision

f) Evaluate and follow-up

Figure 11–1: Rational Approach to Decision Making

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 Decision Making Process and Techniques

1. Recognize and Define the Problem

Problem is the difference between actual and desired states of affairs in the organizations. As
stratenge as it may seem, the most common problem solving difficulty lies in the identification
of problems. Busy managers have a tendemcy to rush into generating and selecting alternatives
solutions before they have actually isolated and understood the real problem. A problem is the gap
between the existing situation and the desired situation. Decision making begins with the existence
of a problem. The problem should be properly defined. Wrong definition of problem leads to wrong
solution.Managers need to define problems according to the gaps between the actual and the desired
situations.A production manager, for example, would be wise to concentrate on the gap between
the present level of weekly production and the desired level. This focus is much more fruitful than
complaining about the current low production or wishfully thinking about high production.The
challenege is discovering a workable alternative for closing the gap between actual and desired
production. Thus, there are three common stumbling blocks for those attempting to identify the
problems:
a. Defining the problem according to a possible solution.
b. Focusing on narrow, low priority areas.
c. Diagnosing problems in terms of their symptoms.

2. Identify Appropriate Alternatives (Decision Alternatives)

After the problem and its most probable cause have been identified, attention turns to generating
alternative solutions. This is the creative step in problem solving. It takes time, patience, and practice
to become a good generator of alternative solutions.Managers should have to identify the appropriate
alternatives for the further decision making process in the organizations. Almost all problems have
alternatives for solution. Appropriate alternative courses of actions to solve the problem should be
identified. Managers should be creative and innovative to identify alternatives. They are based on
information collection and alalysis.

The sources of alternatives can be:

a. File search: The information contained in the problem file generally contains alternatives.

b. Discussions with subordinates, customers, sales force etc.

c. Opinions of experts

d. Management information system search

e. Creative methods: Brainstorming, Delphi Techniques, Electronic meeting, etc.

f. Brainstroming

g. Free association

h. Attribute listening: Ideal characterstics of a given object are collected and then screened for
useful insights.

I. Creative leap: This technique involves thinking up idealistic solutions to a problem and then

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 Strategic Management & Decision Making Analysis
working back to a feasible solution.

3. Evaluate selected Alternatives

Generally, alternatives solutions should be screened for the most appealing balance of effectiveness
and efficiency in view of relevant constraints and intangibles. After developing the various
alternatives, the managers evaluate the available alternatives to select the best one. Each selected
alternative should be evaluated in terms of decision criteria. Key considerations are:

a) Feasibility of the alternative in terms fo costs, time, legal constraints, human and other
resources.
b) Satisfactoriness of the alternative for solving the problem.

c) Affordability of the alternative

„„ The evaluated alternatives are ranked according to their benefit/cost ratios.

4. Choose the best Alternative

Specifically, decision making is the process of selecting the best alternative to be implemented in the
organizations. This is the choice phase for choosing the best alternative. The approaches for making
the choice can be:

a) Experience: Experience is the best teacher. Decision making is not only a rational process but
also a judgemental process. Experience can be a useful basis for choosing a course of action.
The judgement of the decision maker is important in selecting the best alternative.

b) Experimentation: It is pre-testing the alternative. Market testing of new products is an

example.Best decision can be chosen on the basis of experimentation.

c) Research and Analysis: A model is built to simulate the problem. Research is very important
dimension to select the best alternative decision to be implemented in the organization.

11.2 Strategic Decision Making

11.2.1 Concept of Strategic Decision Making

Organization’s performance has been measured substantially based on their profit achievement.
None of any organizations wanted to have losses being marked for their business operations during
the given accounting period. Thus managers in the organizations were urged to make profit in
the course of business operations, and at the end of their business accounting period. This profit
achievement will be the benchmark for the board and top management to recognize their managers’
efforts in making profitable business arrangements and deals.

Behind those profits, managers have to make strategic decisions in charting their organization’s
path in achieving its objectives as directed by the board and top management. Managers needed

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substantial information in order for them to make a sound business decisions. Although, the
managers had substantial information prior to make decisions, they may not come up with the right
or perfect strategic decision making for the organizations. Thus, these poor business operations
will be reflected in the company’s profit and loss account. Nevertheless, managers made decisions
affecting the organization daily and communicate those decisions to other organization members
(Zaleznik, 1989 and Main & Lambert, 1998 in Certo, 2003).

Decision making is the most important function of any manager.Strategic decision making is the
primary task of the senior management.The decision which provides the long term impact in the
organization is called the strategic decision making. A decision is a choice from among alternatives. It
is a course of action chosen from acceptable alternatives to achieve objectives. Strategy formulation
requires strategic decision making.Strategic decision has significant influence in the organization.

Strategic decision making makes a choice regarding the course of action for the long-term future of the
organization. It is based on the consideration of strategic alternatives. Strategic decisions are made
by top management. They are unique and non-programmed decisions. They are made in the context
of uncertain decision making environment. Decision makers are unaware about the consequences of
decisions.

Strategic decisions are related to the choice of mission, objectives, strategies and policies. Mission
states the reason for the existence of the organization. Objectives are desired outcomes which the
organization wants to achieve. Strategies deal with broad action plans to achieve objectives. Policies
provide guidelines for decision making.

Strategic decisions aim for competitive advantage in the long-term. They are concerned with matching
organization’s internal resources and activities with opportunities in the environment. They define
the scope of business activities. They identify markets to be served, products to be offered, resources
to be committed, and capabilities to be enhanced. Capabilities are what an organization can do
exceedingly well.

■ According to Johnson and Scholes:

Strategic decisions are normally about trying to achieve some advantage for
the organization over competition. They are concerned with the scope of an
organization’s activities.
■ According to Jauch and Glueck:
Strategic decisions encompass the definition of the business, products and
markets to be served, functions to be performed, and major policies needed for the
organization to execute these decisions to achieve objectives.

Strategic decisions search for strategic positioning in relation to competitors. Positioning describes
how an organization’s products differ in relation to its competitors in the minds of target customers.

Strategic decisions are concerned with the future scope of activities. They affect operational
decisions in organizations. The basic thrust of strategic decision making, in the process of strategic
management, is to make choice regarding the course of action to adopt. They aim for strategic
advantage at the operational level (Box 11–1).

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 Strategic Management & Decision Making Analysis
„„ Global factors affect all strategic decisions.

Box 11–1: Examples of Strategic Decisions

For Business Organization

„„ Should we enter a new market?

„„ Should we introduce a new product?

„„ Should we acquire a competitor organization?

For a Student

„„ What career should I pursue ?

„„ Should I go for employment or further studies ?

„„ Should I get married ?

11.2.2 Process of Strategic Decision Making

Many executives realize that to prosper in the coming decade, they need to turn to the
fundamental issue of strategy. What is strategy? To use a simple yet powerful definition from
The Economist, strategy answers two basic questions: "Where do you want to go?" and "How
do you want to get there?"1

Traditional approaches to strategy focus on the first question. They involve selecting an attractive
market, choosing a defensible strategic position, or building core competencies. Only later, if at all,
do executives address the second question. Yet in today's high velocity, hotly competitive markets,
these approaches are incomplete. They overemphasize executives' ability to analyze and predict
which industries, competencies, or strategic positions will be viable and for how long, and they
underemphasize the challenge of actually creating effective strategies.

The process of strategic decision making consists of: (Figure 11–2)

a) Awareness of strategic issues

b) Formulation of strategic issues

c) Solution development

d) Solution selection

a) Awareness of Strategic Issues

Issues are problems. Strategic decision maker must have awareness of strategic issues. Such
awareness can result from:

„„ Previous experience and “gut feeling” of decision makers.

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„„ Deviations in sales, profit performance, or productivity.

„„ Budget variances.

„„ Customer reaction on quality, price and service.

Figure 11–2: Process of Strategic Decision Making

b) Formulation of Strategic Issues

Strategic decision maker should formulate and define strategic issues. It can be based on:
„„ Information gathering and analysis about strategic issues.
„„ Debate and discussion of issues with stakeholders.
„„ Making sense of information, debate and discussion about strategic issues.
„„ Formulation of key strategic issues.

c) Solution Development
Alternative solutions for strategic issues are developed. They can be based on:

„„ Known and tried solutions in the past. They serve as precedents.

„„ Drawing on judgement and experience of the decision maker.

„„ Collective wisdom of management and key employees.

„„ Strategic workshops to develop alternative solutions.

d) Solution Selection
Solution selection is made from among the alternative solutions. It can be based on:

„„ Judgement: Experience, hunch and rule of thumb of managers.

„„ Negotiation: With stakeholders of the organization.

„„ Bargaining: With various SBUs and functions of the organization.

Strategic decisions are the outcome of managerial judgement within a social, political and cultural
context.

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11.2.3 Characteristics of Strategic Decisions

Strategic decision making forms the core of strategic management.Strategic decision making is
difficult to perform. Decision makers are unable to describe the eact manner in which strategic
decisions are made. The following are the characteristics of strategic decisions: (Figure 11–3)

Figure 11–3: Characteristics of Strategic Decisions

1. Non-programmed: Strategic decisions are unique and rare. They deal with complex, novel
and non-routine problem situations. There are no standard operating procedures for decision
making.

2. Future-oriented: Strategic decisions are future-oriented. They are concerned with long-
term scope of the organization. The decision environment is uncertain. The consequences of
strategic decisions are not known. Their impact is long-term.

3. Dynamic: Strategic decisions take place within a changing external environment. Changing
political, economic, socio-cultural and technological forces increase dynamism in strategic
decision making.

4. Top management-oriented: Strategic decisions are made by top management. The values,
philosophy, and expectations of top management affect strategic decisions.

5. Competitive Advantage: Strategic decisions search for unique resources and core
competencies that result in competitive advantage. They aim for strategic positioning in
relation to competitors.

6. Strategic Fit: Strategic decisions are concerned with strategic fit. They match activities and
resources of the organization with the opportunities in the environment.

7. Commitment: Strategic decisions involve long-term commitment of large amounts of

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resources. They relate to multibusiness units and have multifunctional consequences.

8. Choice: Strategic decisions involve choice from among strategic alternatives. The judgement
of the decision maker is important in making the choice. The conflicting interests of
stakeholders are carefully balanced.

11.2.4 Importance of Strategic Decisions

Though decision making has never been easy, it is especially challenging for today's managers. In an
era of accelerating change, the pace of decision making has also accelerated. Strategic decisions make
strategic choice from among strategic alternatives. They are important due to the following reasons:
(Fig. 11–4)

1. Future Direction: Strategic decisions provide long-term future direction to the organization.
They facilitate strategic planning and strategic management. The organization stays on track
to achieve objectives.

2. Strategy Formulation: Strategic decisions are the essence of strategy formulation.

Organizations can opt for leader strategies or follower strategies or nicher strategies for their
future activities through strategic decisions.
3. Resource Allocation: Strategic decisions require long-term commitment of resources. They
facilitate effective allocation and coordination of resources among various strategic business
units. This helps maintain organizational effectiveness.

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Figure 11–4: Importance of Strategic Decisions

4. Environmental Positioning: Strategic decisions identify opportunities of competitive

advantage. They match organization’s resources with such opportunities. This facilitates
environmental positioning and strategic fit of the organization.

5. Managerial Evaluation: Strategic decisions influence managerial performance. Effective

strategic decisions increase managerial effectiveness. The quality of strategic decisions serves
as a yardstick for evaluating the performance of managers.

6. Strategic Control: Strategic decisions facilitate strategic control. They focus on anticipated
problems. They predetermine standards for future performance. Actual performance is
evaluated with standards for taking corrective actions. They aim at continuous improvement.

11.3 Techniques of Strategic Decision Making

Decision making is the fundamental part of management because it requires choosing among
alternative course of action. In addition to having to cope with an era of accelerating change, today's
decision makers face the challenges of dealing with complexity, uncertainty, the need for flexible
thinking, and decision traps. Strategic decision making involves choices regarding the courses of
action for the long term future of the organization.

The techniques or modes of strategic decision making are:

„„ Entrepreneurial Mode

„„ Adaptive Mode

„„ Planning Mode

„„ Logical Incrementalism

11.3.1 Entrepreneurial Mode

This mode of decision is made by one powerful individual such as entrepreneur or powerful chief
executive officer. Such individual has entrepreneurial qualities of vision, inspiration, creativity and
risk taking and achievement-orientation.

The main features of this strategic decision making mode are:

a) The focus is on opportunities. Problems are secondary. The decision maker constantly
searches for opportunities. He exploits them for the benefit of the organization.

b) Decision making is guided by the decision maker’s own vision of direction. He has
brilliant insight. He is quickly able to convince others to adopt his idea.

c) Large and bold decisions are made by the decision maker.

d) The dominant goal of decision making is the growth of the organization.

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11.3.2 Adaptive Mode

This mode of strategic decision making is based on “muddling through”. Its main features are:

a) Decision making is characterized by reactive solutions to existing problems. It does not take a
proactive approach to search new opportunities.

b) Priority of objectives are not clear. It is decided through bargaining.

c) Decision making is fragmented. It takes an incremental approach to forward movement of the

organization.

d) The decision maker reviews and adapts decisions to changes in the environment.

11.3.3 Planning Mode

This mode of strategic decision making is based on:

„„ Systematic gathering of appropriate information for situation analysis.

„„ Generation of feasible alternatives.

„„ Rational selection of most appropriate alternative.

The main features of this mode are:

a) It includes proactive search for new opportunities.

b) It involves reactive solution of existing problems.

c) It gathers information to generate alternatives as well as their consequences.

d) Decision is based on rational choice. Logical facts are carefully considered in decision making.
The decision maker behaves rationally.

11.3.4 Logical Incrementalism Mode

This mode was added by Quinn to Mintzberg’s modes. It is a synthesis of planning, adaptive and
entrepreneurial modes. Strategic decisions develop out of a series of small incremental choices over
time in a changing environment. The main features of this mode are:

a) Top management has clear idea of mission and objectives.

b) Decisions are not made at one go. It is based on small incremental choices. A series of partial
commitments are made.

c) Decision is allowed to emerge out of debate, discussion and experimentation. An interactive

process is used.

d) It pushes organization in one direction.

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Self Examination Questions

1. Describe rational decision making process.
2. Explain the concept of strategic decision making.
3. Explain the process of strategic decision making.
4. Why is strategic decision making important in modern organization?
5. Explain the characteristics of strategic decision making.
6. Describe techniques of strategic decision making.
7. Why is the mode of strategic decision making superior to entrepreneurial and adaptive modes?

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 12. Strategic Management and Decision
Making Practices in Nepal

12.1 Strategic Management Practices in Nepal

Strategic management is the process whereby managers establish an organization’s long-term
direction, set specific performance objectives, develop strategies to achieve these objectives in the
light of all relevant internal and external circumstances, and undertake to execute the chosen action
plans. The strategic management function is perhaps the most fundamental and most important
aspect of management and managing. It takes superior entrepreneurship and competent strategy
implementation and execution to produce superior organizational performance over the long-run.

The major components of Strategic Management practiced by Nepalese organoizations are as follows:

1. Defining the organization’s business and developing a strategic mission as a basis for
establishing what the organization does an doesn’t do and where it is headed;
2. Establishing strategic objectives and performance targets;
3. Formulating a strategy to achieve the strategic objectives and targeted results;
4. Implementing and executing the chosen strategic plan;
5. Implementing strategic performance and making corrective adjustments in strategy and/
or how it is being implemented in light of actual experience, changing conditions, and new
ideas and opportunities.
The Nepalese scenario presents an encouraging picture of the development of strategic
management and business policy. We find that all management education programmes
have component in the curriculum deveoted to strategic management. Research in strategic
management, though perfunctory, is slowly picking up in Nepalse context.Practice in organization
is fast imbibing the tenets of strategic management. Managers in Nepal have developed some
shared understanding of key aspects of strategic management and practice some important
aspects of strategic management, much remains to be done in order for them to develop a clear
strategic focus so that they could develop their abilities to compete with global players and to
create competitive advantages (Shrestha, 2012). Nepalese organizations do not give much
attention to developing their managers to assume greater responsibilities in the future.

12.1.1 Strategic Orientation

Strategic Orientation is a focus on the big picture, an attention to defining the future direction of the
enterprise, and in using this definition to direct and guide the efforts of all in the organization. Most
people would agree that Strategic Orientation is a positive factor for organisations. But what does

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that mean? How do you determine how Strategically Oriented your organisation is, and what can
you do to improve the situation?

There are five levels of Strategic Orientation. Each one builds on the previous one, providing you
with a road map and a measure of progress towards Strategic Orientation. The five levels are:
i) Engaging in Strategic Dialogue
ii) Strategic Planning
iii) Strategic Measurement
iv) Developing a Strategic Calendar
v) Integrating Strategic Dialogue
The major issues of strategic orientation in Nepalese organization can be highlighted as follows:

1.1 Nepalese organizations generally lack long-term strategic orientation. Most of them lack
vision, mission and strategy statements.

„„ They lack a long term vision of what they aspire to become.

„„ They are unclear about why do they exist in terms of mission.

„„ They are confused about their future strategic direction and scope.

„„ They survive with annual budgeting exercises.

„„ They manage by crisis. They react to pressing problems of the day. Events dictate their
decisions.
1.2 Nepalese organizations state their objectives in terms of desired outputs.

„„ Most organizations have profit as their objective. However the profit objective is
generally not measurable. They aim at “Maximizing profits” in short term.

„„ The growing competition from globalization, together with the growth of big business
houses, have made market share an important objective in recent years. The race to
capture greater market share among noodles, liquor, soap and soft drinks industries
provide examples.

„„ The growing presence of global enterprises has made survival an important objective
for Nepalese organizations.

„„ Most organizations lack strategic perspective in decision making. This has led to
suboptimization and lack of synergistic effects. Strategic decision making process is
not based on careful development of strategic issues and solution alternatives.

1.3 Most Nepalese organizations lack strategy formulation at corporate and business unit
levels.

1.4 The growing presence of global enterprises has been gradually bringing consciousness about
the importance of strategy in Nepalese organizations.

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12.1.2. Strategic Planning and Management

2.1 Strategic planning can provides a road map for the future of organizations. It can identify their
unique resources and core competencies to exploit opportunities of competitive advantage. It
also can help allocate resources in an integrated manner.

2.2 Nepalese organizations suffer from a poor tradition of planning. Strategic planning is not
important for Nepalese managers. However, some selected organizations have formulated
strategic plans in their specific areas of activities.

„„ Agricultural perspective plan (Twenty Years)

„„ Twenty Year Strategic plan for Tribhuvan University

„„ Long term strategic plan for the health sector.

„„ Strategic plan for water resources development

„„ Strategic plan of Kantipur Television to develop human resources.

2.3 Global business houses do prepare strategic plans. But Nepalese business houses dismally
lack strategic planning.

2.4. Effective SWOT analysis is lacking for strategic planning exercises in Nepal. Planning
assumptions also lack accuracy and consistency. Environmental scanning is poorly done.

2.5. The National Planning Commission has also prepared a skeleton Twenty Year Perspective
Plan for the development of the Country. This is a start in the right direction.

2.6 The lack of strategic orientation and strategic planning has led to poor practice of strategic
management. Nepalese managers poorly analyse their strategic position for making strategic
choices. This has constrained turning strategies into action.

2.7 Nepalese top managers generally lack competencies for strategic planning and management.
They seem least concerned about strategic fit.

2.8 In public sector, Nepalese Chief Executive officers tend to practice adhocism. They postpone
decision making for “tomor­row”. They survive in their positions by creating and managing
crisis. Strategic management is not an area of their priority.

12.1.3. Environmental Analysis

3.1 Environmental forces greatly influence the development, performance and outcomes of
Nepalese organizations. Business environment in Nepal is characterized by rapid change,
growing uncertainty and emerging globalisation. It is not very conducive. Information
technology is having a far reaching impact on the ways of doing business.

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3.2 Environmental forces in Nepal consist of political, economic, socio-cultural and technological
forces. The key emerging forces are:

a) Increasing political uncertainties and growing terrorism.

b) Low economic growth but growing role of services. Liberal­ization, privatization and
globalization are greatly impacting the economic environment.

c) Changing socio-cultural forces. Modernization coupled with cross-cultural influences. High

rates of migration.

d) Slow pace of technological change. Increasing role of infor­mation technology.

3.3 The Nepalese environment is undergoing a sea change. This is clear from the following points.

„„ Industrial licensing has been liberalized.

„„ Foreign exchange regime has also been liberalized. Imports are subject to open
general licensing. Imports tariffs have been lowered.

„„ Exports are being encouraged.

„„ Foreign direct investment is being attracted. The financial sector has been opened
up to foreign joint ventures. It has grown substantially. Further reforms are on going
through reengineering exercises.

„„ Price controls have been dismantled to a great extent.

„„ Subsidies have mostly been phased out.

„„ Nepal has become a member of WTO.

3.4 Nepalese managers do not carry out systematic auditing of environ­mental influences for
strategic considerations. Scenario analysis is little emphasized.

3.5 Competitive analysis in terms of five forces is not effectively done. Competitive rivalry is
growing. So is threat of entry. Threats of substitutes are increasing. The power of suppliers
and customers are not properly analysed. The state of competitive position is not very clear
to the managers of Nepalese organizations. Competitor analysis is not effective.

3.6 Nepalese managers face more threats than opportunities from the environment. Very
little emphasis is given to environmental scanning to identify opportunities of competitive
advantage. It is unsystematic and fragmented.

12.1.4 Internal Analysis

4.1 Resources provide internal strengths and weaknesses to Nepalese organizations. They can be
human, physical, financial and intellectual. Unique resources provide strategic advantage.

4.2 Unique resources are critical success factors. They provide core competencies. However,
most Nepalese organizations give less importance to their unique resources. Nepalese
business organiza­tions suffer from a poor resource base. They give importance to finance and
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production aspects. Human capital is neglected. Marketing is poor.

4.3 Nepalese organizations have not been able to gain strategic advantage over competitors.
The cheap imports form China, India and overseas have adversely affected Nepal’s industrial
growth and survival.

4.4 Nepalese organizations do not carry out resource audits to assess internal strengths and
weaknesses. Intellectual property rights are not well protected.

4.5 Most Nepalese organizations are unaware about value chain analysis. They have remained
inefficient in revamping and managing their value chain.
4.6 Nepalese organizations suffer from inefficient and ineffective utilization of resources. Cost
efficiency is neglected. Functions that can be outsourced are being performed by armies of
employees. Benchmarking is hardly done

4.7 SWOT analysis is lacking in most Nepalese organizations. This means that they have poor
knowledge about their opportunities, threats strengths and Weaknesses.

12.1.5 Strategic Options

5.1 Strategic options are strategic alternatives. The lack of strategy-orientation has resulted in
very little attention to strategic options by Nepalese organizations.

5.2 Most Nepalese organizations give little consideration to grand generic strategies, such a
stability, expansion, retrenchment and combination. Market-based generic strategies, such as
low cost leadership, product differentiation and focused strategies are somewhat considered
as options. The strategic clock strategies have not been practiced by most managers.

5.3 Nepalese organizations lack clear direction for strategy development in terms of protect/
build diversification. Withdrawal and market penetration are most commonly used strategies
in Nepal. Diversification strategy is pursued by some big houses. For example, Chaudhary
Group has diversified into education and health.

5.4 Methods of strategy development get little attention. Internal development is pursued by
some organizations, especially noodles and liquor industries. Mergers and acquisitions are
few. But strategic alliances are increasing in financial and hospitality sectors.

„„ Joint ventures are also increasing in Nepal.

12.1.6 Strategy Formulation

6.1 Strategy formulation is not effective in Nepalese organizations. SWOT analysis, strategic
options identification and evaluation, and strategic choice is not effectively done. Suitability,
acceptability and feasibility of strategic options are poorly analyzed. Heuristic models are
generally used for strategic choice.

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6.2 Portfolio analysis for resource allocation to strategic business units is missing. Even big
houses are not practicing portfolio analysis exercises.

12.2.7 Strategy Implementation

7.1 A strategy has no use if it is not implemented. Poor implementation has been a critical
constraint for strategic success in Nepal. organization climate is also not friendly to strategy
implementation.

7.2 The organization structure for strategy implementation is not strategy-friendly. Mostly,
outdated tall hierarchical functional structures are used to implement strategies. They do not
support strategy. Authority-responsibility relationships tend to be distorted. Accountability
is generally missing.

„„ The resource allocation is also not based on proper plans and budgets. Programme
budget has been a failure and zero-based budget is not used.

7.3 The management systems for strategy implementation is weak in Nepalese organizations.
Frequent changes in top manage­ment distort strategy implementation. Human resource
management is not performance-based. Motivation is lacking. So is decentral­
ization.
Leadership does not give proper consideration to participative approach. Conflicts and
personality clashes constrain effective implementation.

„„ Organization culture inhibits self-expression and initiative.

7.4 Strategic evaluation is ineffective in Nepal. Most things are not done in right manner and at the
right time. Project implementation delays tend to be high. Corrective actions stay postponed.

12.2.8 Strategic Change

8.1 The frequent changes in top management of Nepalese organizations lead to frequent changes
in strategy. This Change, however is of adaptation type. The diagnosis of change needs and
the management of change tend to be ineffective. Structure-based approaches predominate
change management. Poor communication is the greatest barrier to change management.

8.2 Nepalese organizations lack strategic leadership to manage strategic change. Change agency
is also not very effective. Outside consultants are gradually emerging to facilitate strategic
change. But their role has been limited.

12.2.9 Future Perspectives

9.1 The advent of global organizations has transferred modern management skills and technology
in Nepal. Profes­sionalism is also gradually on the increase in management.

9.2 A new breed of strategist manages is emerging. They are not only strategic thinkers but
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 Strategic Management and Decision Making Practices in Nepal
also effective implementers of strategies. They are strategic managers. They provide hope for
strategic responses to strategic problems of Nepalese organizations.

9.3 Nepal has become a member of WTO. It has to face global competition. The South Asian Free
Trade Area (SAFTA) is also a reality. Nepalese organizations must become strategy-oriented
to reduce threats and reap benefits of opportunities. This is the essence of survival and
growth for Nepalese organizations and their managers in the long run.

12.2 Decision Making Practices in Nepal

Strategic decision makings and Nepalese managers cannot be separated. They go inline together.
Moreover with the organization’s concern on the firm performance, strategic decision makings are
considered crucial to managers that manage the organization. They have to make sound decisions
in order to ensure the organization that they work with will manage the turbulences of business.
Moreover due to the demands of globalization, managers have to make several strategic decision
makings in their managerial functions.

Nevertheless, Nepalse managers are affected with several factors in their strategic decision makings
for organization. These factors will directly and indirectly affect their well being of the organization.
As such various studies were conducted in looking into various aspects and factors in relation to
managers, strategic decision makings, and firm performance.

Some researchers will relate managers with the factors in relation to their strategic decision makings.
They studied factors in relation to strategic decision makings and organization performance
(Hambrick and Mason, 1984; Byars, 1987; Provan, 1989; Lloyd, 1990; Priem, 1990; Mahmood
and Mann, 1993; Barton and Martin, 1994; Bartol and Martin, 1994; Crook, Pearce and Robinson,
1997; Burke and Steensma, 1998; Kang and Sorenson, 1999; Winter-Ebmer and Zweimuller, 1999;
Tsekouras et al., 2002; McNamara, Luce, and Tompson, 2002; Lee and Bose, 2002; Kannan and Tan,
2003; Certo, 2003; Roberto, 2003; Ketchen, and Snow, 2003; Rausch, 1996; Vroom, 2003; Foster,
Beaujanot, and Zuniga , 2002; Skaggs and Youndt, 2004; Jurkiewicz and Giacalone, 2004; and Kotey,
2005; and Robbins and Coulter, 2005). Further, the above relationships revealed factors as such
external and internal environment (Provan, 1989), decision approach (Barton and Martin, 1994),
leadership behavior (Blake and Mouton, 1985), organizational justice (Cropanzano, 1993; Greenberg,
1993; Colquitt, 2001; Colquitt et al., 2001; and Tatum et al., 2003), and intuition (Behling and Eckel,
1991; Marjchrzak and Gasser, 2000). The major features of decision making practices in Nepal are as
follows:

1. Feudocratic Tradition
The fusion and interaction of bureaucracy with feudalism has led to a unique "Feudocratic model"
in Nepal. This model sets the climate for decision making. It stifles initiative and retards creativity in
decision making. It discourages con­cern for better performance through results.

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2. Poor Participative Management

Nepalese managers are little concerned about improving organizational effectiveness through
effective decision mak­ing.

■ Managers of public enterprise suffer from insta­bil­ity of tenure and political interference in
decision making. Traditional management practices perpetuate central­ized decision making.

■ Private sector enterprises are mostly family owned and man­aged. They do not believe in
participative decision making.

■ Management by "Mansaya" has replaced "Management by Exception" in Nepal. Subordinates

follow the will and liking ("mansaya") of the superiors for decision making.

■ Much of decision making by Nepalese managers is concerned with "men, money and motor
cars." Hiring the favoured ones, spending the available budget and misusing motor cars
represent key decision making areas.

3. Lack of Rationality
Rational decision making in Nepal is not ef­fective. The reasons are:

■ Efforts are not made to clearly identify and understand the problem. Symptoms are taken as
problems. Infor­mation collection about the problem is inadequate.

Nepalese managers tend to decide before properly understanding the problem. They lack
listen­ing skills and well-ordered sense of priorities.

■ Nepalese managers identify few alternatives for problem solving. File search is the main
source. The tradition of discussing alternatives with subordinates is non-ex­istent. Creative
methods like Brainstorming and Delphi Technique are missing. Participative decision making
is lacking.

■ The evaluation of alternatives is generally based on judgment of the superiors. Quantitative

techniques are not effectively used for evaluation purposes.
■ The choice of the course of action is based on the manager's experience, hunch and intuition.
The best alternatives are not chosen in terms of feasibility, satisfactoriness and affordability
to organization.
■ Decisions in Nepal are not effectively implemented unless the parties benefiting from decisions
put pressures for implemen­tation. Employ­ees remain unwilling partners in implementation
of decisions.

■ Decisions in Nepal generally lack effective monitoring, evalu­ation and follow-up. Feedback is
poor.

4. Decision Avoiding
The decision making scenario in the public sector of Nepal is as follows:

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■ Decisions are postponed for "Bholi" (Tomorrow). And tomor­row never seems to come for
Nepalese decision makers. This is the great art of decision avoiding.

■ Committees are formed to make decisions. Managers spend a lot of their time in committees.
But committees tend to de­lay decision making.

■ Memo-based decision making involves too many levels. Prob­lems tend do get lost in upward
and downward movements of memos.

■ There is little tolerance for risk and ambiguity. Managers "look up" to their superiors even for
repetitive decisions. Subordinates are afraid to voice their disagreements.
■ "Source-force-and pressures" from informal power centres greatly influence the decision
choice.

■ Corruption has infested the process of decision making. It is widespread.

■ Nepalese management is expert in decision avoiding. There is lack of linkage between

performance and rewards. Non-performance bags rewards in Nepal.

5. Lack of Delegation
Mnagares should delegate the authority as per requirements. He/she empowers his/her subordinates
by giving the certain authority under the span of management. Managers are unwilling to delegate
authority. They lack trust in the capability of subordinates. They fear misuse of delegated authority
by subordinates. Above all, they are afraid of being thrown out of their positions by the subordinates.

6. Management by Crisis
Management by crisis" characterizes decision mak­ing in Nepal. Managers keep on postponing the
problems and do not want to seek the responsibilities. Unsolved problems become crisis. Then leads
to chaos and disaster. Crisis endangers the survival of managers. They find temporary solutions
to deal with crisis situa­tions. This strengthens their power positions. However, this has retarded
strategic decision making.

7. Professionalism
Professionalism is lacking in Nepalese managers. However, it is on the rise in the middle level
managers. The advent of global enterprises has brought awareness about the need for effective
decision making.Professionalism is necessary to Nepalse managers while taking the decisions in the
organizations.

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Self Examination Questions

1. Write short note on strategic management practices in Nepal.
2. Explain strategy formulation and implementation practices in Nepal.
3. Provide a scenario of decision making practices in Nepal.

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 Case Studies

13. Case Studies

13.1 How to analyze a strategic case study ?

A case study is a method for teaching and learning. It describes an organization’s situation at a
point in time. It describes external and internal environmental forces. It raises issues about mission,
objectives and strategies. It describes the problems.

The following steps should be followed to analyze the case study:

1. Read the case carefully: Determine the main points of the case. It may not provide all the
information. Carry out library and internet search. This should be for the decision date of the
case.

2. Identify the Problem: Every case is problem-based. Define the main problem clearly. Do not
confuse symptoms with the causes.
„„ Make reasonable assumptions about unknowns. But state them clearly.

3. Analyze the Case: Analyze the problem clearly and systemati­cally. Understand all the causes
of the problem.

„„ Develop a mindset of what, why, when, how, where, who.

„„ Use appropriate analytical tools for analysis. They can be ratio analysis for analysis of
financial statements. Compare with industry averages.

4. Examine Relevant Alternatives: Most problems have a number of alternatives for solution.
Present the advantages and disadvantages of relevant alternatives. It can be in terms of
profitability, productivity, costs, market and others.

5. Recommend Strategies: Select a course of action in terms of strategy. There is no one best
solution to a case. It varies according to situation, time, place and people. Give justification for
your recommen­dation, reasons for selecting, and their implications. Be realistic.

„„ Consider implementation aspects of strategy recommended. Draw up a plan of action.

„„ Use Charts, tables, diagrams, graphs, pictures and information technology to make
presentation about the case.

„„ Be creative and innovative.

„„ Develop cooperative spirit in group work.

„„ Most cases are handled by groups in the classroom situation. Be a team player.

„„ Work hard. Be a good listener and contributor.

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13.2 Case Studies

13.2.1 Credit Card Business of Himalayan Bank
Himalayan Bank Ltd. (HBL) was established in 1992 under a joint venture with Habib Bank of
Pakistan. It has ten branches in Kathmandu Valley and fifteen branches outside the valley. It has
correspondence relationships with 180 international banks. It has already installed Global accounting
software to provide better services to its customers.

HBL accepts deposits and grants loans to the customers. Tele-banking, All Branch Banking, Automatic
Teller Machine (ATM), 24 Hour Banking, Credit Card, Foreign Exchange and Letter of Credit etc. are
the other services offered by the Bank. An innovative feature is accidental death insurance (maximum
cover Rs. 500,000) for individual saving account holders. The Premium Saving Account (PSA) scheme
provides incentives for account with balance over Rs. 50,000. Those maintaining average balance
over Rs. 1,00,000 are eligible to participate in lucky draw prizes.

The Bank has established the credit card department and issued HBL Gold Card and HBL Regular
Card. Presently, Himalayan Bank Ltd. also deals with VISA International and Master Card. It has 30
percent share of credit card business in Nepal. However, the competition is getting tougher.

HBL faces a number of problems in its credit card business. Most Nepalese people lack awareness
about credit card. They feel that having a credit card involves extra costs in subscription and service
charges. Moreover, not all the shops accept credit cards. The use of credit cards is generally limited
to city centers. Customers do not report loss of credit cards promptly. Fraudulent activities are
increasing, especially in e-commerce transactions. Risks are getting higher. Support from other
departments of the Bank are also lukewarm.

The top management of the Bank feels that its credit card business needs streamlining and
strengthening.

Questions
1. What are the strengths and weaknesses of Himalayan Bank Ltd.?
2. Identify the opportunities and threats of HBL.
3. What are the problems faced by HBL related to credit card business?
4. What strategy would you suggest for effective management of credit card business?

13.2.2 Bakery Cafes

At the tender age of 19, Shyam Kakshapati opened “Sam’s Grocery Shop” at Ratna Park. It became the
“best candy shop in town”. He added a juice fountain to sell lemonade which was an instant success.
However, he was not satisfied to be a grocer. He opened Cafe de Park to cater to young professionals
segment.

While enjoying the growing success of the business of the cafe for about three years, he identified

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that the pasture was greener in Durbar Marg area which was attracting ever increasing number of
travel agencies, airlines offices and banks. So he moved there and set up Nanglo Restaurant in 1976
which soon became a famous rendezvous first for the young people and gradually for people of all
ages. In 1978, he expanded the restaurant to add a Chinese room. Gradually the facility developed a
capacity to serve 300 persons at a time under the same roof. It targeted youth, working people and
tourists.

Kakshapati has also faced failures. One is the story about Nanglo Bazaar. The business could not last
long. The other is the taxi service company (Kathmandu Yellow Cab) that Kakshapati tried with his
friends in 1994. Both of the businesses had to close down.
While Nanglo Bazaar was about to close down, another project was taking the shape in Kakshapati’s
mind. And that materialized in the form of the first bakery cafe at Durbarmarg. It was a hangout for
the young in the style of the Cafe de Park which had closed in 1980. At Baneshwor and Maharajgunj
he introduced hearing-impaired staff and Kakshapati describes it as a beginning of a new business
concept of “service to the needy”. There are fifteen bakery cafes in Nepal. The latest ones are at
Dharahara and Boudha of Kathmandu. Total employees are 500.

As reports say, Nanglo is also about to expand outside Nepal. He will send his company public when
he expands the business across the national boundary. Nanglo has been a trendsetter in Nepal’s food
industry.

Questions:
1. Conduct SWOT analysis for Nanglo and bakery cafes.
2. Formulate Corporate level strategies for bakery cafes.

13.2.3 Gunilo Nepali Products

Bindu Kumari Karki, a housewife of Pokhara, is very good in home production of traditional Nepalese
food products. Family members and friends immensely enjoy eating her food products.

Bindu was not happy remaining a mere housewife within the four walls of the house. She often
thought that her skills were not properly being utilised. She hit upon an idea to undertake production
of traditional Nepalese food products on a commercial basis. She established a factory “Shital Agro
Products”. The brand name of products is “Gunilo” which means nutritious and beneficial to health.
The processing and packing is done hygienically in polythene bags.

The raw materials of best quality is collected from farmers all over the country that do not use
chemical fertilisers. A total of 50 products are processed, packed and marketed. Some popular
products are:
1. Gundruk (Rayo, Kauli, Tori) 11. Jimbu
2. Mashyora 12. Timbur
3. Sinki (Mula) 13. Shilam

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4. Phapar Flour 14. Chuk Amilo
5. Kodo Flour 15. Tejpat
6. Khatte Rice 16. Dried apple
7. Simi (Jomsom) 17. Dried ginger
8. Mas dal 18. Akbare chilli
9. Gahat dal 19. Methi
10. Cow urine (Gahut) 20. Duna/Tapari

Bindu has given employment to 10 women. She started with a capital of Rs. 50,000 in 1998. Today,
her sales exceed Rs. 1,000,000. The business is growing.

About two dozen department stores of Pokhara carry Gunilo products. Foreigners buy these products
to send as gifts to their friends. Nepalese buy them for high quality. They also send these products
to their friends and relatives in foreign countries. Chau-chau is manufactured from “Phapar flour”.
Restaurants sell cookies, bread and other delicacies made out of Gunilo products.

The participation in a one-week marketing management training organised by Pokhara Chamber

of Commerce opened the eyes of Bindu Karki. She now has a specialty shop called “Green House” in
Shree Complex Vegetable Market of Pokhara to directly market her products. She is also marketing
her products through various department stores of Kathmandu. She also has plans for export to
Nepalese living in foreign countries through e-commerce.

Questions:
„„ Conduct SWOT analysis for Gunilo Nepali Products.
„„ Prepare functional level strategies for Gunilo Nepali products.

12.2.4 The Panchakanya Story

Panchakanya is a brand which has not only captured the niche market but has been able to maintain
the brand name known for its quality even after two decades.

After the success of the rice and saw mills there was no looking back for the Panchakanya Group. The
trust, fame and recognition the brand has gained today have led the company to diversify its product
under the same brand name.

Fulfilling the nation’s vital needs, manufacturing essential goods and development materials such as
power generators, heavy equipments and cement for economic growth, the brand has come a long
way.

Thirty-five years ago, there was no such thing as launching a brand. The brand name thrived on the
quality of its product. The quality sold the product.

That was more than 30 years back. Now the company is seriously taking the brand image into
consideration and has been taking help of the media to introduce new and better products under the

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brand name.

The brand name sells but there are certain strategies needed to remain at the top. Choosing to lead,
the company has come up with various strategies. Panchakanya’s product comes along with an
awareness package. Dealers are considered important and they too are provided training as how they
can express themselves to the customers. The brand name sells not only in Nepal but in neighbouring
countries like India and Bangladesh and Tibet too.

When it comes to big brand all are same, promising best quality, customer satisfaction and value for
money. But Panchakanya is the first industry to help stop pollution. It is contributing to schools in
some way or other. Since Nepal is the earthquake zone it is spreading awareness about disaster.

Question:
1. Discuss the above case from strategic view point.

13.2.5 Manakamana Cable Car Company

Manakamana Cable Car is the technological wonder of Nepal. It became operational on 24 November
1998. Its visionary entrepreneur is Mr. L.B. Shrestha. It is located 104 kilometers west of Kathmandu
in Kurintar. It takes about 3 hours to get there by road from Kathmandu. Hindu devotees use it for
pilgrimage to “wish fulfillment” goddess Manakamana. Foreign tourists take a ride on it to enjoy
natural beauty. The Cable Car ride is about 9 minutes. The technology for cable car was supplied
by the world famous Dopplemary Company of Austria. It covers a distance of 2.3 kilometers. The
elevation increases from 258 meters in Cheres to 1302 meters in Manakamana village. It has 34
wagons of which 31 are used for passengers and 3 are used for cargo. One compartment carries
6 passengers or cargo not exceeding 450 kg in weight. It can transport 600 persons per hour. It
employs 121 persons.
Before the establishment of Manakamana Cable Car, about 50,000 devotees took a difficult track to
Manakamana Temple annually. The cable car transports about 300,000 persons annually. The ticket
rate is Rs. 315 for adult and Rs. 220 for children. Students and elderly pay Rs. 250. Local residents get
80% discount. Tourists pay US$ 12 for adults and $ 8 for children. The company has insured every
passenger for Rs. 100,000.
In order to attract customers, the company is operating hotels, restaurants, souvenir soaps, car
parking, small zoo, conference hall, health club, and children’s playground.
The company has been engaged in socially responsible activities. It provides annual donation
of Rs. 50,000 to Manakamana Village Committee. So far, it has spent about Rs. 60 million for local
development, including rehabilitation of Manakamana Temple and its protection from landslides. It
has also prepared a master plan for integrated development of Manakamana area.
Questions
1. Prepare SWOT analysis for Manakamana Cable Car.
2. Formulate corporate level strategies for the company.

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 Strategic Management & Decision Making Analysis

13.2.6 Smart Choice Technology Network

Nepal is fast catching up with the technological advancements from all around the world and Nepali
economy, which was more paper-based, is rapidly turning into a plastic based economy. With the
advent of debit and credit cards, banking has become a very handy and easy option here. VISA and
Master Card are available widely in the market. This is when Smart Choice Technologies Pvt. Ltd. was
established to give easier ATM facilities to the financial institutions.
The company has deployed a first-of-its-kind initiative in Nepal creating an integral shared services
network (SCT Network) for Automated Teller Machines (ATMs) and Point-of-Sale (POS) Terminals,
managed through a national switch.
Established in the year 2001, Smart Choice Technologies started its operations in March 2004
providing ATM facilities. From February 16, 2005, Point-of-Sale Terminals also started operating
expanding the network of SCT furthermore. The network initially had four banks under its flagship,
and has now grown, to a total of 20 institutions in just a very short span of time.
The SCT Network is a fully integrated network supporting multiple device types and card acquiring
standards. This network has been made available, on a Subscription Basis (Pay-per-use), to banks
and financial insititutions across the country.
Besides the network, this national switch also operates and manages domestic and international
gateways and settlement systems.
The SCT started with only 2,000 cards initially and has proudly reached a number of 80,000 cards at
the moment.
The company has for now finalised 40 ATM locations around the country besides integrating the
existing ATMs of its member banks thereby making available a total of 100 ATMs under its network. It
also plans to install 800 of its own POS terminals in and around Kathmandu and 1200 POS terminals.
SCT also has an in-house support team, which makes sure that all the ATMs and POS terminals
operate perfectly. SCT has brought about a revolution in banking and has certainly made banking
user-friendlier and more accessible.
Questions:
1. Identify opportunities and threats for SCT.
2. Formulate corporate strategy for SCT.

13.2.7 AO Swift P. Ltd.

AO Swift (Pvt) Ltd. was promoted nineteen years back as company manufacturing automobile parts
with an investment of Rupees 5 crores by Bishal Shrestha. He took over as its chief executive and
is occupying the same position till date. Bishal, an automobile engineer, himself possessed rich
experience of working abroad and in Hindustan Motors Ltd. in India.
Bishal is dynamic and ready to take risk. He always puts emphasis on maintaining high quality
standards. Initially, the products were supplied to automobile service centers all across the country.
The market was small and the company suffered some losses. Eight years after its inception the
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company entered into an agreement with Maruti Udyog Ltd. to manufacture and supply specific
components for their small car.
This agreement was a turning point for the company. Later the company was able to enter agreements
with other companies entering India. The company is able to manage a growth rate of over 25% in
last five years. Its turnover in the last financial year exceeded 800 crores. The overall market is also
witnessing a very high growth rate.
Bishal allowed some autonomy and discretion to the senior managers of the company. He felt that
the company can grow still faster if it enters other markets outside India. Various options were
analysed and efforts were made to discuss and negotiate with major manufacturers of the world.
Getting positive response from two manufacturers in European Union the company opened an office
in London.
Bishal closely monitored the working of London office. All major decisions were taken by himself. He
will also visit London every month to have first hand information about its working. However, it is
becoming increasing difficult for him to manage this office. He also wants to expand further. He called
a meeting with head of various departments. In the meeting following alternatives were considered
for entering foreign market:
„„ Continue to manufacture products in India and export them to other countries.
„„ Initiate manufacturing activities in other countries.
„„ Takeover existing manufacturers of the products in other countries.
Questions:
1. Identify reasons for AO Swift Ltd. to open office in London?
2. What should be the strategy of the company in a high growth market? Why?
3. Make an analysis of various alternatives that are being considered for expanding in foreign
markets and make recommendation.

13.2.8 Rastriya Banijya Bank

After adoption of liberal economic policy by the government since 1980, many banks and finance
companies have been established in Nepal. Presently, there are 30 commercial banks and 80 finance
companies operating in the country. Most of the banks and a few finance companies are joint venture
operations. All joint venture and private sector banks have competent and professional human
resources. They have computerized operations in their customer services on one hand and have
worldwide network in the other. They have already introduced credit cards, ATM and Internet services.
They have adopted unique strategy to compete with both the local as well as global competitors.
Rastriya Banijya Bank is a fully government-owned bank. It was established in 1966. It has four
decades long history and has 120 branches all over the country. It provides employment opportunities
to 5000 persons. Despite the special role in the banking and finance sector, the bank is characterized
by over staffing, weak management practices, traditional work culture and technology, absence of
committed workforce, poor customer services, undue political pressures, corruption, etc. The volume

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of outstanding loan is increasing day by day. But, the management of the bank could not play effective
role for collecting its dues particularly from influential persons and parties.
With a view of improving performance, the management of the bank is given to a foreign party. The
new management initiated many reform measures. But the efficiency in the operations has shown no
substantive improvement. The bank has already implemented a golden handshake package to solve
the overstaffing problem. Unfortunately, the majority of the competent, particularly managerial staff
left the bank, but incompetent employees continued their service. All such step affected the bank
negatively including customer services, collection of outstanding loans, corruption and overall in the
competitive strengths.
Questions:
1. Identify the major strengths and weaknesses of Rastriya Banijya Bank.
2. Who are the principal stakeholders of the bank?
3. What are the external environmental forces that affect the operations of the bank?
4. In view of the growing competition in the banking sector, which strategies would you
recommend for the bank's effective performance?

13.2.9 National Shoe Company

National Shoe Company (NSC) Pvt. Ltd. was established in 1981. It is located in Bansbari, Kathmandu.
Recently, Government of Nepal has decided to shift the location of this factory due to increased
environmental pollution in capital city. There were very few competitors in this field when it was
established. Therefore, it was quite possible to be a leader in the shoe product. Now there are many
competitors in shoe market both at national and international levels. The main raw materials used
for making shoes include leather, rubber sole, chemical, bottom etc. The raw leather is collected
from various parts of the country, but that is not adequate in terms of both quantity and quality. The
rubber shoe is imported from Italy where as required chemicals and bottoms are imported from
India and additional leather from Pakistan. However, the government increased import duty by
10% on raw materials. The government levied only 15% tariff rate on finished shoes imported from
foreign country.
The demand for the products of NSC is quite satisfactory. It captures about 35% market of Kathmandu
valley. However, the company is suffered from outdated technology, lack of well-trained staff,
traditional management culture, etc. Many obsolete machines and equipment need to be replaced by
high-tech ones, which requires additional investment. The factory should also increase its capacity to
satisfy the increasing demand of customers.
The middle class Nepali families have positive attitude towards domestic products including the
shoes. The many domestic firms manufacture varieties of shoes with attractive design on one hand
and the prices of Nepali-made shoes are relatively cheaper on the other. Moreover, Nepali shoes have
demand in other South Asian nations too. But the shortage of skilled workers to satisfy the demand
of foreign customers is another problem of this factory.
Leather Wings Co. and Birat Shoe Factory, main competitors of NSC, have already provided six
206 | The Institute of Chartered Accountants of Nepal
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months warranty to their customer which also creates a big challenge to this factory. Shoes imported
from foreign companies, especially Bentley products are better in quality, but there market is very
negligible due to high cost. National Shoe Company has been an effective company in terms of cost and
acceptable quality particularly for valley customers. But the new location may not serve the existing
customers effectively. It is, thus, a high time to assess the competitive strength of the company and
the possible impact of location change of the factory.
Questions
1. State and explain the principal stakeholders of National Shoe Company.
2. Identify the major problems of the Company.
3. Conduct SWOT analysis for NSC.
4. As a strategic manager, what strategies would you suggest to improve competitive strength of
the company?

13.2.10 Carpet Industry in Nepal

Nepal is famous for hand-knotted woolen carpets. Carpet industry has emerged as one of the leading
export industries of Nepal. The Tibetan refugees brought carpet weaving tradition in Nepal in late
1950s. The Swiss assistance was instrumental in initiating commercial production of carpets. The
export of carpets began in 1966/67. It has created its special place in the world market.
Nepal exports carpets to more than 35 countries of the world. The major markets are Germany, USA,
Switzerland, Belgium, UK, Austria, Netherlands and Canada. Germany accounted for 57% of total
carpet exports from Nepal in 2001/02.

The competitors of Nepal in the World market are: Iran, India, Turkey, China, Pakistan, Morocco,
Tunisia and Afghanistan. The share of Nepali carpets in world market is 7%.

Growth of Carpet Industry

The exports of carpets have grown significantly during the last two decades. In 1966/67, the
beginning was made with exports worth Rs. 0.5 million. In 1999/2000, it peaked to Rs. 9,842 million.
The decline started mainly due to poor quality control and negative publicity about the use of child
labour. In terms of value, carpet exports declined to Rs. 5,048 million in 2007/2008.

The share of carpets in total overseas exports of Nepal declined from 57% in 1993/94 to 24% in
2007/2008. Carpet still remains an important export industry of Nepal. However, it is declining.

Table: Exports of Carpets from Nepal

Quantity Value Share in Total

Year
(Sq. Meters) (Rs. Million) Overseas Export (%)
1993/94 3,325,100 9534 56.5
1998/99 2,604,475 9802 42.3
1999/00 2,509,452 9842 33.9

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 Strategic Management & Decision Making Analysis

2004/05 1.657,000 5869 29.6

2007/08 1,171,000 5048 24.4

Source: FNCCI, 2007

Scenario of Carpet Industry

It is indicated by:
1. Lack of Quality Standards: Nepal lacks proper mecha­nism to test, verify and implement
quality standards for carpets. Unscrupulous producers are using inferior wool and poor
quality hazardous dyes. Illegal imports of poor quality carpets from India for exports from
Nepal have further damaged image of Nepalese carpets.
2. Child Labour: The negative publicity about the widespread use of child labour has adversely
affected the sales of Nepalese carpets. Working conditions in carpet industries are deplorable
for workers.
„„ Nepal has 2.6 million child labour—about 10% of total population.
3. Increasing Competition: Nepalese carpets are facing tough competition from China and
India. Incentive mechanism is lacking to maintain the competitive edge of Nepalese carpets.
„„ Market diversification for carpet exports is also lacking.
4. Poor Research and Development Support: Nepalese carpets lack research and development
support for new product development, design creation, consumer needs identification and
new technology. Lack of reliable information about world carpet industry has constrained
research and development efforts. There is no strategic thinking for the long-term
development of this industry.
5. Poor Human Resource Development: Human resource development is lacking in carpet
industry. There are no training institutes to develop skills related to carpets. Skilled human
resources are in short supply.
6. Weak Institutional Support: Institutional support for market development and promotion of
carpets is weak, ineffective and inadequate. Government policies lack proper implementation.
7. Theft in Transit: Air Cargo has limited capacity in Nepal and is expensive. Transport of carpets
through land and sea routes is cheaper but suffers from theft, pilferage, and procedural
complexities.
8. Environment Pollution: The lack of actions on the part of carpet manufactures to control
pollution has created public sentiments against carpet industry.
Questions:
1. Identify the main forces in the external environment of Nepal’s carpet industry.
2. Analyse the competitive forces through Michael Porter’s five forces model.
3. Design a strategy package to revive Nepal’s carpet industry.

u
208 | The Institute of Chartered Accountants of Nepal
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