Dr. K. Govinda BhatM.Sc., M.A., LL.B., CAIIB, MBA, Ph.D.

Dy. General Manager & Principal,Staff Training Institute,

Corporation Bank, Balmatta,Mangalore - 575 002.

Dr. P.N. HarikumarM.Com., M.Phil., Ph.D. (Commerce),

MBA (HR & Marketing), Ph.D. (Management)Associate Professor & Head,

Post-graduate Department of Commerce &Tourism Catholicate College,

Pathanamthitta, Kerala - 689645.

STRATEGICMANAGEMENT

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First Edition : 2017

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PREFACE

Strategic Management is one of the key aspects of Managementand it is vast and big area of study and never-ending process too. Theneed for effective strategy is as strong as ever in today’s highly competitiveand global business environment. The challenge for academics andpractitioners alike is how best to formulate and implement to securestrategic advantage in global market. This book offers adequate and up-to-date information on the current challenges and problems to be facedby the managers in the global market. In fact, such challenges must beviewed as golden opportunities to be capitalised by the organisation withthe help of integrated plans and strategies. Such planned and timelyresponses can easily secure best rapport with dynamic economic and socialdemands and deliver rich dividend to the multinational enterprises.

I am very happy to introduce this book for the M.Com. and MBAstudents of all the universities in our country. In preparing this book, wehave freely drawn the material from different sources like books, journals,unpublished theses, internet, etc.

I am very much thankful to HIMALAYA PUBLISHING HOUSE PVT.LTD. for publishing this book as a prestigious venture. Their people behindthe curtain deserve special gratitude.

I welcome, suggestions, positive criticism, if any from both thestudents and teachers that will help me make improvement in quality andutility of the book.

Without timely guidance, help and blessings in the form of my lordGuruvayoorappa, I could not have fulfilled the mission and vision ofoffering this edition to the students and teacher community.

Author

CONTENTS

Chapter Particulars Page Nos.

1 Strategic Management – An Introduction 1-13

An overview of strategic management, What isstrategic management? Need for strategicmanagement, Levels of strategic management,Organizational strategist, Strategic managementprocess, Environmental consideration, Context ofstrategic management, Formulating and implementingstrategy, Summary

2 The Environment of Strategic Management 14-35

Why environmental analysis?, Remote environment(or general environment), The industry environment– The five forces model, Internal organizationalanalysis, How to analyse the environment?,Summary

3 The Social Environment and SocialResponsibility of Business 36-42

Ethics, Social responsibility, Social contract ofbusiness, Traditional versus emerging trends andissues, Summary

4 The Political and Legal Environment 43-47

Historic role and emerging role of government, Costand implications of government intervention,Summary

5 Technological Environment 48-53

Impact of technology on business, Planning fortechnology, Summary

6 The Economic Environment 54-59

Critical elements of economic environment, Economicenvironment and business management, Economicfacet: a conduit for social, political and technologicalforces, Role of competition, National and globaltrends, Summary

7 Mission, Vision and Goals and OrganizationalAssessment 60-74

Mission, Vision, Goals, Environmental scanning,Types of environment, Sources of environmentalinformation, SWOT analysis, Objective setting,Strategy setting, Summary

8 Tools of Strategic Management 75-92

The Boston Consulting Group Matrix, Limitationsof BCG Matrix, GE planning grid, Life cycle concept,The McKinsey 7-S framework, Summary

9 Strategies – Integration, Diversification,Disinvestment, Downsizing 93-109

Integration, Horizontal integration, Diversification,Disinvestment, Downsizing, Summary

10 Defensive, Generic, Portfolio andTurnaround and Mergers and AcquisitionsStrategies 110-139

Defensive strategy, Approaches to defensivestrategy, Advantages of defensive strategy, Genericstrategies, Cost leadership strategy, Portfoliostrategy, What is portfolio strategy?, Investmentguidelines: The investment policy statement,Corporate strategy and portfolio theory, Growthdefined, Strategies for growth, Turnaround strategy,Basic requirements for a corporate turnaround,Super-effective corporate turnaround strategies,Definition of turnaround, Industrial sickness,Features of turnaround, Essentials of successfulturnaround strategy, Mergers and acquisitionsstrategy, Strategic rationale, Speculative rationale,Management failure rationale, Summary

11 Organizational Structure 140-151

Does structure drive strategy or strategy drivestructure?, Matching organization structure tostrategy, Strategy-critical activities, Degree ofauthority, Providing for co-ordination, Determinantsof organizational structure, Strategy and structureproposition, Different organizational structures fordifferent strategies, Summary

12 Resource Mobilization – Money, Markets,Machine, Material and Men(Human Resources) 152-158Money, Markets, Machine, Materials, Men, Summary

13 Role of Leadership and Motivation 159-168

Importance of leadership, Exerting strategicleadership, Role of leader, Motivation, Importanceof motivation, Motivation as driver of strategy,Summary

14 Role of Creativity and Innovation 169-173

Creativity, Innovation, Role of innovation, Howinnovation can be improved?, Summary

15 Evaluation and Control of Strategies 174-185

The function of strategic control, Standard,Benchmarking, Cost benefit analysis, Performancegap analysis, Responsibility centre, Return oninvestments, Budgeting, Summary

16 Summary of the Book 186-193

Case Studies 194-220

Bibliography 221-222

Chapter 1Strategic Management

– An Introduction

An Overview of Strategic Management

It is often alleged that the Indian businessman fellows the ruleof thumb method, is intuitive, relies primarily on instinct and gutfeeling and looks for immediate gains. This observation has twoimplications. One is that strategic management is necessarily usefuland to a considerable degree enhances the effectiveness of anenterprise. Another is that there is an urgent need for understanding theprevailing strategic management practices in Indian organizationsto develop a relationship between practice and performance.

Business strategy is all about competitive advantage. Withoutcompetitors there would be no need for strategy. Sole purpose ofstrategic management is to enable a company to gain a sustainableedge over its competitors.

Strategic management is the process by which an organizationformulates its objectives and manages to achieve them. It includes asystematic study of the internal and external environments with aview to identify and assess the relevant opportunities and threats, aconstant appraisal of the organizational strengths and weaknesses,a thorough analysis of strategic choices, and evaluation of strategy.With rapid changes taking place in the various components of theorganization’s environment, it has become imperative for a firm tomanage its affairs strategically, if it is to survive and grow in theincreasingly competitive environment.

Strategy is the means to achieve the organizational ends. Astrategy is a route to the destination viz., the ‘objectives of the firm’.Picking a destination means choosing an objective. Objectives andstrategies evolve as problems and opportunities are identified,resolved and exploited. The interlocking of objectives and strategiescharacterize the effective management of an organization. The process

2 Strategic Management

binds, co-ordinates, and integrates the parts into a whole. Effectiveorganizations are tied by means-ends chain into a purposeful whole.The strategies to achieve corporate goals at higher levels oftenprovides strategies for managers at lower levels.

A central objective of strategic management is to find out whysome organizations succeed while others fail. Understanding theroots of success and failure is not an empty academic exercise. Suchunderstanding brings a better appreciation of the strategies that canincrease the probability of success and reduce the probability offailure.

What is Strategic Management?

The word 'strategy' is derived from the Greek word 'Strategtia’which was first used around 400 B.C. This connotes the art andscience of directing military forces. Simply put, strategy outlines howmanagement plans to achieve its objectives. Strategy is the productof the strategic management process.

In today’s dynamic environment, an organization, whetherlarge or small, must be managed strategically. The decisions in anorganization cannot simply be based on long standing rules, policies,or standard operating procedures. Instead the corporate managementmust look to the future, plan organization–wide objectives, initiatestrategy, and set policies.

Strategic management is a stream of decisions and actionswhich lead to the development of an effective strategy or strategiesto help achieve corporate objectives. The strategic managementprocess is the way in which strategists determine objectives and makestrategic decision. Strategic management can be found in varioustypes of organizations, businesses, services, co-operatives,governments, etc.

Alfred Chandler defined strategy as, the determination of thebasic long-term goals and objectives of an enterprise, and theadoption of courses of action and the allocation of resourcesnecessary for carrying out these goals.’ The organization is depictedas choosing its goals, identifying the courses of action (or strategies)that best enable it to fulfil its goals and allocating resourcesaccordingly.

Broad-scope, large scale management processes becamedramatically more sophisticated after World War II. These processesresponded to increases in the size and number of competing firms;to the expanded role of government as a buyer, seller, regulator, andcompetitor in the free enterprise system, and to greater businessinvolvement in international trade. Perhaps, the most important in

Strategic Management – An Introduction 3

management processes came in the 1970s, when “long rangeplanning”, “new venture management”, “planning, programming,budgeting”, and “business policy” were blended. At the same time,increased emphasis was placed on environmental forecasting andexternal considerations in formulating and implementing plans. Thisall – encompassing approach is known as strategic management.Strategic management is defined as the set of decisions and actionsthat result in the formulation and implementation of plans designedto achieve a company’s objectives.

Strategic Management Process

Strategic management comprises nine critical tasks:1. Formulate the company’s mission, including broad

statements about its purpose, philosophy, and goals.2. Conduct an analysis that reflects the company’s internal

conditions and capabilities.3. Assess the company’s external environment, including

both the competitive and the general contextual factors.4. Analyze the company’s options by matching its

resources with the demands of external environment.5. Identify the most desirable options by evaluating each

option in the light of the company’s mission.6. Select a set of long-term objectives and grand strategies

that will achieve the most desirable options.7. Develop annual objectives and short-term strategies that

are compatible with the selected set of long-termobjectives and grand strategies.

8. Implement the strategic choices by means of budgetedallocation of resources in which the matching of task,people, structures, technologies, and reward systems isemphasized.

9. Evaluate the success of the strategic process as an inputfor future decision making.

The entire process is depicted in Figure 1.1. Above tasks canbe broadly classified into environmental analysis, strategyformulation, strategy implementation, and review.

As these nine tasks indicate, strategic management involves theplanning, directing, organizing, and controlling of a company’sstrategy-related decisions and actions. A strategy reflects a company’sawareness of how, when, and where it should compete; against whomit should compete; and for what purposes it should compete.

4 Strategic Management

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Strategic Management – An Introduction 5

Three ingredients are critical for the success of a strategy. First,the strategy must be consistent with the conditions in the competitiveenvironment. Specifically, it must take advantage of existing orprojected opportunities and minimize the impact of major threats.Second, the strategy must place realistic requirements on the firm’sresources. Finally, the strategy must be carefully executed.

Good strategic management should meet the objectives of theorganization and of the stakeholders. The process of strategicmanagement should assess the resources available and likely futureenvironment. The present strategies should be evaluated againstthese and if any of them is found to be not working, the managementshould then generate various alternatives to select the final revised/new strategy. After selecting the new strategy it should beimplemented. For this, an organization should have suitable cultureand appropriate structure. After implementing the strategy it shouldbe reviewed for feedback. If the feedback is not favourable, suitableamendments should be made. Sometimes, it may be required to repeatthe entire process again.

Strategic management process can be described as a set ofmanagerial decisions and actions which determines the long rundirection and performance of the organization.

Almost all organizations are engaged in strategic managementprocesses, either formally or informally. Organizations thatconsciously engage in strategic management generally follow formalprocesses, and the rest follow informal approach.

Need for Strategic Management

The environment is becoming more and more complex.Predicting the future with accuracy is difficult. The number ofvariables to be considered in the decision making process areincreasing. Production and other management systems and relatedtechnologies become obsolete within a short span of time. The numberof events – both domestic and world – affecting the organization isincreasing. With all these happening, over-reliance on experiencemay prove to be costly. More reliance has to be placed on creativity,innovation, and new ways of looking at the organization in the worldin which we exist. A rapidly changing environment requires thatmanagers make a clear distinction between long range planning andstrategic planning which is a component of strategic management.Strategic management sets the major directions for the organization,i.e., mission, major products/services to be offered, and major marketsegments to be served. Without the major directions being set before,establishing objectives does not make much sense. The strategic

6 Strategic Management

management is the major vehicle for planning and implementingmajor changes an organization must make. It has often been seenthat change comes through implementation and not through a plan.Though strategic management begins with strategic planning, theother components are no less important. Especially, when we talkabout the implementation of strategic plans, the need for propercorporate culture, organization structure, rewards and recognition,and appropriate policies regarding performance appraisal need tobe stressed.

Levels of Strategic Management

Strategies may exist at three levels in an organization. Theyare classified according to the scope of what they are intended toaccomplish. The levels are corporate level, business level, andoperating level.

Corporate level: Strategies that address what businesses amultiple-business-unit organization will be in and how resourceswill be allocated among those businesses are referred to as corporatestrategies. They are established at the highest levels of managementand involve a long-range time horizon. The Board of Directors andthe Chief Executive Officer are the primary groups involved in thislevel of strategy making. Corporate planners and consultants mayalso be involved. In small and family owned businesses, theentrepreneur is both the general manager and chief strategic manager.Here the strategy is concerned with what from of business shouldthe company as a whole be in. Decisions like expanding the range ofbusiness interest, the types of business the company should enter,widening the range of products or services or geographic area toenter in, are strategic decisions of the general sort.

Business level: Business strategies focus on how to competein a given business. Narrower in scope than a corporate strategy,business strategy generally applies to a single business unit. StrategicBusiness Unit (SBU) managers are involved at this level in takingstrategic decisions. Here strategies are about how to compete inparticular product-markets. The strategies here are related to a unitwithin the organization.

Operating level (functional level): Functional strategies arenarrower in scope than business strategies and deal with theactivities of the functional areas – production, finance, marketing,personnel and the like. This third level of strategy is at the operatingend of the organization. Here, the strategies are concerned with howthe different functions of the enterprise like marketing, finance,manufacturing, etc. contribute to the strategies of other levels. Their

Strategic Management – An Introduction 7

contributions are important in terms of how an organization becomecompetitive. Competitive strategy may depend to a large extent ondecisions about market entry, price, product offer, financing,manpower, investment in plant, etc. In themselves, these are decisionsof strategic importance but are made, or at least strongly influencedat operational levels.

Alternative 1 – Single Business Firms

Alternative 2 – Multiple Business Firms

Fig. 1.2: Alternative Strategic Management Structures

Figure 1.2 depicts the three levels of strategic management asstructured in practice. In Alternative 1, the firm is engaged in onlyone business and the corporate – and business – level responsibilitiesare concentrated in a single group of directors, officers and managers.This is the organizational format of most small businesses.

In Alternative 2, the classical corporate structure comprisesthree fully operative levels: the corporate level, the business level,and the functional level.

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8 Strategic Management

The three levels of strategy – corporate, business, andfunctional form a hierarchy of strategy within a large corporation.They interact closely with each other and must be well integrated ifthe total corporation is to be successful.

Fig. 1.3: Hierarchy of StrategiesFigure 1.3 presents the hierarchy of strategies and relates the

same to objectives and mission of the firm.

Organizational Strategist

Strategists are individuals who are most responsible for thesuccess or failure of an organization. Strategists have various jobtitles, such as Chief Executive Officer, President, Owner, Chairman,Executive Director, General Manager, etc. General Managers (GMs)are the key players in the strategic management process. The GMs ofa firm are executives at the top level of the enterprise. They areresponsible for the survival and success of the company. They havetitles such as managing director, president, vice-president, executivevice-president, etc. If the business is divided into strategic businessunits(SBUs) or operating divisions, then the persons at the top ofthese units are also general managers.

The traditional impression is that the GM is a reflective thinkerwho maps out strategy, designs an organization to implement theplan, and guides people through various tactical plans to accomplishobjectives using his vast experience and insight. The GM is anentrepreneur because he sets goals, he is a strategist because heplans, he is an organization builder because he organizes, he is aleader because he directs, and is a chief implementer because hecontrols. The task is to lead the firm or SBU through unchartedterritory under uncertain circumstances.

Mission

Objectives

Corporate strategy

Business unit strategies

Functional strategy

Strategic Management – An Introduction 9

The above tasks may not be so neatly compartmentalized asyou might perhaps think. Human, technical, economic, and politicalcircumstances are only partly subject to rational analysis. The generalmanager must integrate pieces of a puzzle, some of which may bemissing, distorted, or not even yet made, and most of which arecontinuously changing. The GM plays interpersonal roles,informational roles, and decision roles.

The formulation of strategy and plans for implementation areoften considered the exclusive realm of the general manager. Yetmany different individuals may be involved in the strategicmanagement process. Board of Directors, who review the results ofthe strategies and Chief Executive Officers, are the main corporate-level strategists. Corporate planning staff help top managers inplanning and implementing the strategies, and consultants may behired to help corporate planners do the corporate planning work, ifthere is no corporate planning staff. General managers of strategicbusiness units and lower-level participants are also involved withgoal setting and strategy formulation and implementation.

Environmental Consideration

A host of external factors influence a firm’s choice of directionand action and, ultimately, its organizational structure and internalprocess. These factors which constitute the external environment,can be divided into three interrelated sub-categories: (i) factors inthe remote environment, (ii) factors in the industry environment, and(iii) factors in the operating environment. In combination, thesefactors form the basis of the opportunities and threats that a firmfaces in its competitive environment.

While it is important to determine whether the current strategyis working, it is also important to determine how the strategy willwork in the likely future environment. The environment is the outsideworld; it encompasses everything outside the organization. Hence,it is likely that we can be right about the future all the time and inevery detail. Environmental analysis is not simply extrapolation. Wemay expect a future like the past. But acting on this opinion requiresjudgement about the future.

Managers must systematically analyze the environment, sinceenvironmental factors are primary influencers of strategy.Environmental analysis gives the strategic manager time to anticipateopportunities and to plan alternative responses to thoseopportunities. It also helps them to develop an early warning systemto prevent threats or develop strategies which can turn a threat tothe organization’s advantage.

10 Strategic Management

Managers Need to Search the Environment toDetermine

(i) What factors in the environment present threats to thecompany’s present strategy and accomplishment ofobjectives; and

(ii) What factors in the environment present opportunitiesfor greater accomplishment of objectives through anadjustment in the company’s strategy.

Firms which do environmental analysis are more effective thanthose which don’t. Successful firms do more and better analysis thanthe failing firms. The extent and sophistication of the analysis mustmeet the demands of the environment.

Benefits of Strategic Management

Strategic management allows an organization to be moreproactive than reactive in shaping its own future, it allows anorganization to initiate and influence activities, and thus to exertcontrol over its own destiny.

Historically, the principal benefit of strategic management hasbeen to help organizations make better strategies through the use ofa more systematic, logical, and rational approach to strategic choice.Participation of people in strategic management process motivatesthem in accomplishing the objectives. Businesses using strategicmanagement concepts showed significant improvement in sales,profitability, and productivity compared to firms without systematicplanning activities. High performing firms seem to make informeddecisions with good anticipation of both short and long termconsequences. Strategic management provides enhanced awarenessof external threats, an improved understanding of the competitor’sstrategies, reduced resistance to change.

Strategic management brings order and discipline. It renewsconfidence on the chosen strategy. Greenley stresses that strategicmanagement offers the following benefits:

It allows for identification, prioritization, andexploitation of opportunities.It provides an objective view of management problems.It presents a framework for improved co-ordination andcontrol of activities.It minimizes the effects of adverse condition and controlof activities.

Strategic Management – An Introduction 11

It minimizes the effects of adverse conditions andchanges.It allows major decisions to better support establishedobjectives.It allows more effective allocation of time and resourcesto identify opportunities.It allows fewer resources and less time to be devoted tocorrecting erroneous or ad hoc decisions.It creates a framework for internal communication amongpersonnel.It helps to integrate the behaviour of individuals into atotal effort.It gives encouragement for forward thinking.It provides a co-operative, integrated and enthusiasticapproach to tackling problems and opportunities.It encourages a favourable attitude to change.It gives a degree of discipline and formality to themanagement of a business.

Context of Strategic Management

Using the strategic management approach, managers at alllevels of the firm interact in planning and implementing. As a result,the behavioural consequences of strategic management are similarto those of participative decision making. Therefore, an accurateassessment of the impact of strategy formulation on organizationalperformance requires not only financial evaluation criteria but alsonon-financial evaluation criteria (measures of behaviour-basedeffects). In fact, promoting positive behavioural consequences alsoenables the firm to achieve its financial goals. However, regardlessof the profitability of strategic plans, several behavioural effects ofstrategic management improve the firm’s welfare:

1. Strategy formulation activities enhance the firm’s abilityto prevent problems. Managers who encouragesubordinates’ attention to planning are aided in theirmonitoring and forecasting responsibilities bysubordinates who are aware of the needs of strategicplanning.

2. Group-based strategic decisions are likely to be drawnfrom the best available alternatives. The strategicmanagement process results in better decisions becausegroup interaction generates a greater variety of strategies

12 Strategic Management

and because forecasts based on the specializedperspectives of group members improve the screening ofoptions.

3. The involvement of employees in strategy formulationimproves their understanding of the productivity –reward relationship in every strategic plan and, thus,heightens their motivation.

4. Gaps and overlaps in activities among individuals andgroups are reduced as participation in strategyformulation clarifies differences in roles.

5. Resistance to change is reduced. Though theparticipants in strategy formulation may be no morepleased with their own decisions than they would bewith authorization decisions, their greater awareness ofthe parameters that limit the available options makesthem more likely to accept those decisions.

Formulating and Implementing Strategy

Strategy formulation guides executives in defining the businesstheir firm is in, the ends it seeks, and the means it will use toaccomplish those ends. The approach of strategy formulation is animprovement over that of traditional long-range planning. Strategyformulation combines a future–oriented perspective with concern forthe firm’s internal and external environments.

The strategy formulation process begins with the definition ofthe company’s mission. The mission statement is followed by externaland internal analysis and choosing a strategic choice. The task ofanalyzing the organization’s external and internal environment andthen selecting an appropriate strategy is normally referred to asstrategy formulation. Strategic formulation is concerned with thetranslation of general directions of strategy into action.

Last phase of strategic management process is strategicimplementation. Earlier phases of strategic management, viz.,strategic formulation, analysis of alternative strategies, and strategicchoice, though important, by themselves alone cannot ensure success.To ensure success, the strategy must be translated into carefully,implemented action. Strategy implementation typically involvesdesigning appropriate organizational structures and control systemsto put the organization’s chosen strategy into action.

Strategic Management – An Introduction 13

Summary

This chapter sets the stage for the study of strategicmanagement. Our model of strategic management includesformulation and implementation, plus evaluation and control. In thischapter the concept of strategy and strategic management isintroduced. Strategic management is a stream of decisions and actionswith a view to developing an effective strategy which would helpthe organization achieve its corporate goals. Strategic managementinvolves strategic analysis, strategic choice making, and strategicimplementation. Strategies exist at all levels – corporate level,business level, and operational level. Strategic management processexplain's in detail the steps involved. Importance of strategicmanagement in the emerging context is provided. Distinction ofstrategy formulation and implementation is brought out.

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