COURSE

GUIDE

MBA 820
CORPORATE MANAGEMENT STRATEGY

Course Team Abdullahi S. Araga (Course Developer/Writer/

Coordinator) – NOUN
Dr. Onyemaechi J. Onwe (Course Editor) – NOUN
Dr. Dimis I. Mai-Lafia (Programme Leader) –
NOUN

NATIONAL OPEN UNIVERSITY OF NIGERIA

MBA 820 COURSE GUIDE

National Open University of Nigeria

Headquarters
University Village
Plot 91, Cadastral Zone
Nnamdi Azikwe Expressway
Jabi- Abuja

Lagos Office
14/16 Ahmadu Bello Way
Victoria Island, Lagos

e-mail: centralinfo@nou.edu.ng
URL: www.nou.edu.ng

Published by

National Open University of Nigeria

Printed 2016

ISBN: 978-058-838-2

All Rights Reserved

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MBA 820 COURSE GUIDE

CONTENTS PAGE

Introduction …………………………………………….. iv
What you will Learn in this Course…………………….. iv
Course Aims……………………………………………… iv
Course Objectives………………………………………… v
Working through the Course…………………………….. v
Course Materials………………………………………….. vi
Study Units……………………………………………….. vi
Assignment File…………………………………………... vi
Presentation Schedule…………………………………….. vii
Assessments……………………………………………….. vii
Tutor-Marked Assignment ………………………………. vii
Final Examination and Grading…………………………... vii
Course Marking Scheme………………………………….. viii
Facilitators/Tutors and Tutorials…………………………. ix
Summary…………………………………………………... ix

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MBA 820 COURSE GUIDE

INTRODUCTION

MBA 820 - Corporate Management Strategy is a two-credit course for

students offering MBA Corporate Governance in the School of Business
and Human Resources Management.

The course consists of 14 units, in three modules. The material has been
developed to suit Masters Students in Corporate Governance at the
National Open University of Nigeria (NOUN) by using an approach that
takes care of fundamental issues in the strategic management of
organisational operations.

A student who successfully completes the course will surely be in a

better position to manage the operations of a corporate entity
strategically for a competitive leverage in its industry.

The course guide tells you briefly what the course is about, what course
materials you will be using and how you can work your way through
this material. It suggests some general guidelines for the amount of time
you are likely to spend on each unit of the course in order to complete it
successfully. It also gives you some guidance on your tutor-marked
assignments. Information on tutor-marked assignment is found in the
assignment file which will be available in due course.

WHAT YOU WILL LEARN IN THIS COURSE

This course will introduce you to the fundamental aspects of corporate

management strategy generally. It includes the organisational mission,
goals, organisational structure, technology and strategy, and case study.

COURSE AIMS

The course aims, among others, are to give you an understanding of the
intricacies of corporate management strategy and how to tackle case
analysis in organisational operations as far as an enterprise is concerned.

The course will help you to appreciate the essence of organisational

mission, goals, objectives and policies; internal analysis of the firm;
industry analysis and external diagnosis; strategic planning; corporate
strategic posture; strategic typologies; organisational structure; structure,
technology and strategy; and case study.

The aim of the course will be achieved by:

• Explaining the concept of strategy in general terms.
• Identifying organisational mission, goals, objectives and policies.

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MBA 820 COURSE GUIDE

• Identifying the fundamental aspects of Internal Analysis of the

Firm.
• Discussing the aspects of industry analysis.
• Analysing the aspects of external diagnosis.
• Highlighting and discussing the aspects of strategic planning.
• Analysing corporate strategic posture.
• Highlighting and discussing strategic typologies.
• Analysing organisational structure.
• Discussing structure in relation to Technology and Strategy; and
• Identifying and explaining principles of case study and case
analysis.

COURSE OBJECTIVES

On successful completion of the course, you should be able to:

• define the concept of strategy

• discuss organisational mission, goals, objectives and policies
• discuss the fundamental aspects of internal analysis of the firm
• explain the aspects of industry analysis
• discuss the aspects of external diagnosis
• analyse corporate strategic posture
• discuss strategic typologies
• describe organisational structure
• explain the influence of technology and strategy on structure
• describe the principles of case study and case analysis.

WORKING THROUGH THIS COURSE

To complete this course, you are required to study all study units,
attempt all the tutor-marked assignment and study the principles and
approach to case study and case analysis in this material. Each unit
contains self-assessment exercise, and at certain points during the
course, you will be expected to submit assignments. At the end of the
course there is a final examination. The course should take you about a
total 17 weeks to complete. Below are the components of the course,
what you have to do, and how you should allocate your time to each unit
in order to complete the course successfully on time.

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MBA 820 COURSE GUIDE

COURSE MATERIALS

The major components of the course are:

• Course Guide
• Study Units
• Textbooks
• Assignment File

STUDY UNITS

There are three modules in this course divided into 14 study units as
follows.

Module 1

Unit 1 Concepts of Strategy

Unit 2 Organisational Mission
Unit 3 Organisational Goals
Unit 4 Organisational Objectives
Unit 5 Organisational Policies

Module 2

Unit 1 Internal Analysis of the Firm

Unit 2 Industry Analysis
Unit 3 External Diagnosis
Unit 4 Strategic Planning
Unit 5 Corporate Strategic Posture

Module 3

Unit 1 Strategic Typologies

Unit 2 Organisational Structure
Unit 3 Structure, Technology and Strategy
Unit 4 Case Study

ASSIGNMENT FILE

In this file, you will find details of the work you must submit to your
tutor for marking. The marks you obtain for these assignments will
count towards the final mark you obtain for this course. Further
information on assignments will be found in the assignment file itself
and later in the section on assessment in this course guide. There are 14
tutor-marked assignments in this course; you should attempt them all.

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MBA 820 COURSE GUIDE

PRESENTATION SCHEDULE

The presentation schedule included in your course materials gives you

the important dates for the completion of tutor-marked assignment and
attending tutorials. Remember, you are required to submit all your
assignment by the due date. You should guard against falling behind in
your work.

ASSESSMENT

There are two aspects to the assessment of the course. First is the tutor-
marked assignment and second is a written examination.

In handling the tutor-marked assignment, you are expected to apply

information, knowledge and techniques gathered during the course. The
assignments must be submitted to your tutor for formal assessment in
accordance with the deadlines stated in the Presentation Schedule and
the Assignment File. The work you submit to your tutor will count for
30% of your total course mark.

At the end of the course, you will need to sit for a final written
examination of ‘three hours’ duration. This examination will also count
for 70% of your total course mark.

TUTOR-MARKED ASSIGNMENT

There are 14 tutor-marked assignments in this course and you are

advised to attempt all. Apart from the course materials provided, you
are advised to read and research widely. Consult other references which
will give you a broader viewpoint and may provide a deeper
understanding of the subject. Ensure all completed assignments are
submitted on schedule before set deadlines. If for any reasons, you
cannot complete your work on time, contact your tutor before the
assignment is due to discuss the possibility of an extension. Except in
exceptional circumstances, extensions may not be granted after the due
date.

FINAL EXAMINATION AND GRADING

The final examination for this course will be of ‘three hours’ duration
and have a value of 70% of the total course grade. All areas of the
course will be assessed and the examination will consist of questions,
which reflect the type of self-testing, practice exercises and tutor-
marked problems you have previously encountered. All areas of the
course will be assessed.

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MBA 820 COURSE GUIDE

Utilise the time between the conclusion of the last study unit and sitting
for the examination to revise the entire course. You may find it useful to
review your self-assessment tests, tutor-marked assignments and
comments on them before the examination.

COURSE MARKING SCHEME

The work you submit will count for 30% of your total course mark. At
the end of the course, you will be required to sit for a final examination,
which will also count for 70% of your total mark. The table below
shows how the actual course marking is broken down.

Table 1 Course Marking Scheme

Assessment Marks
Assignment 6 (TMAs) four assignments, best three will be
used for the Continuous
Assessment
= 10 x 3 = 30%
Final Examination 70% of overall course marks
Total 100% of course marks

ASSIGNMENT FILE

Unit Title of work Weeks Assessment

activity (end of unit)
Module 1 1

1 Concepts of Strategy
2 Organisational Mission 1
3 Organisational Goals 1
4 Organisational Objectives 1
5 Organisational Policies 1
1
Module 2

1 Internal Analysis of the Firm

2 Industry Analysis 1
3 External Diagnosis 1
4 Strategic Planning 1
5 Corporate Strategic Posture 1

Module 3

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MBA 820 COURSE GUIDE

1 Strategic Typologies 1
2 Organisational Structure 1
3 Structure, Technology and 1
Strategy
4 Case Study 1

Revision
Total 14

FACILITATORS/TUTORS AND TUTORIALS

There are 15 hours of tutorials provided in support of this course. You

will be notified of the dates, times and location of these tutorials,
together with the names and phone numbers of your tutor, as soon as
you are allocated a tutorial group.

Your tutor will mark and comment on your assignments, keep a close
watch on your progress and on difficulties you might encounter as they
will provide assistance to you during the course. You must submit your
tutor-marked assignments to your tutor well before the due date (at least
two working days are required). They will be marked by your tutor and
returned to you as soon as possible. Do not hesitate to contact your tutor
by telephone, e-mail, or discussion group if you need help.

The following might be circumstances in which you would find help

necessary.

Contact your tutor if:

• you do not understand any part of the study units or the assigned
reading
• you have difficulty with the self-assessment
• you have a question or problem with an assignment with your
tutor’s comment on an assignment or with the grading of an
assignment.

You should try your possible best to attend the tutorials. This is the only
chance to have face-to-face contact with your tutor and to ask questions
which are answered instantly. You can raise any problem encountered
in the course of your study. To gain the maximum benefit from course
tutorials, prepare a question list before attending them. You will learn a
lot from participating in discussion actively.

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MBA 820 COURSE GUIDE

SUMMARY

MBA 820 Corporate Management Strategy intends to expose you to the

nitty-gritty of managing the strategic posture of an enterprise, be it a
private or public entity. Upon completing the course, you will be
equipped with the knowledge required to produce a good research work.

We hope you enjoy your acquaintances with the National Open

University of Nigeria (NOUN). We wish you every success in future.

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 MAIN
COURSE

CONTENTS PAGE

Module 1 …………………………………………….. 1

Unit 1 Concepts of Strategy………………………. 1

Unit 2 Organisational Mission……………………. 15
Unit 3 Organisational Goals………………………. 23
Unit 4 Organisational Objectives…………………. 32
Unit 5 Organisational Policies…………………….. 44

Module 2 …………………………………………….. 55

Unit 1 Internal Analysis of the Firm………………. 55

Unit 2 Industry Analysis…………………………… 62
Unit 3 External Diagnosis…………………………. 73
Unit 4 Strategic Planning………………………….. 81
Unit 5 Corporate Strategic Posture ……………….. 108

Module 3 …………………………………………….. 129

Unit 1 Strategic Typologies………………………. 129

Unit 2 Organisational Structure…………………… 167
Unit 3 Structure, Technology and Strategy……….. 201
Unit 4 Case Study…………………………………. 214
MBA 820 MODULE 1

MODULE 1

Unit 1 Concepts of Strategy

Unit 2 Organisational Mission
Unit 3 Organisational Goals
Unit 4 Organisational Objectives
Unit 5 Organisational Policies

UNIT 1 CONCEPTS OF STRATEGY

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Conceptualisation of Strategy
3.1.1 Scope of Strategy
3.1.2 Process of Strategy Formulation
3.1.3 Influences of Choice on Strategy
3.1.4 Criteria for Assessing Strategic Alternatives
3.1.5 Inherent Advantages of Corporate Strategic
Formulation
3.2 The Need for Strategy
3.3 Forms of Organisational Strategy
3.3.1 Corporate Strategy
3.3.2 Business Strategy
3.3.3 Operational Strategy
3.3.4 Functional Strategies
3.3.5 Grand Strategies
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Corporate organisations are established with the intent of pursuing

preconceived purpose as embedded in the organisational mission. This
corporate mission is normally marshaled into desirable goals that can
serve as focus for the operational direction. These goals are not end in
themselves but just some means towards an end. The ultimate end of
organisational operations is profitable results which are derived from the
predetermined goals. These desirable operational results are normally
instituted right from the time mission and goals are hammered out for
the organisation.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

Fundamentally, corporate objectives and the related policy framework

are formalised within the framework of a corporate strategy. In the
absence of an explicit statement of strategy, it becomes more difficult
for business organisations to reconcile coordinated action with
entrepreneurial effort. Therefore, an explicit strategy for the business
organisation is necessary to ensure that people cooperate together in
order to achieve the benefits of mutual reinforcement, and to checkmate
the effects of changing environmental conditions.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain the meaning of and the need for strategy

• explain the scope of strategy
• describe criteria and steps involved in formulation of strategy
• discuss the influences of choice on strategy
• explain the inherent advantages of strategy formulation
• identify various forms of organisational strategy.

3.0 MAIN CONTENT

3.1 Conceptualisation of Strategy

Strategy is all about competition and the ultimate warfare in the business
world. Competition like warfare, as you will understand from the
discussion in this unit, is inevitable in the corporate world because all
companies are struggling to win the preferences and patronage of the
consumers and users of their products and services.

Competition is therefore inevitable. All companies compete to enhance

their operational fortunes by deploying all the relevant resources to
capture the markets, survive and please the shareholders as well as other
stakeholders. Hence, there is the inevitable formulation and use of
strategy. The relevant question is what is the meaning of this awesome
term called strategy?

In order to proffer answer to the above pertinent question, it is necessary

to consider the opinions of some writers. There are many views on the
conceptualisation of the term strategy. An array of such views on the
meaning of strategy is discussed below.

In a simple conceptualisation, Hill and Jones (2004) posit that the term
strategy refers to the determination of the basic long term goals and
objectives of an enterprise and the adoption of relevant courses of action
and the allocation of resources to carry out these goals.
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MBA 820 MODULE 1

There is another view which states that strategy involves a pattern of

decisions in a corporate enterprise that determines and reveals its
objectives, purposes or goals, and produces the principal policies and
plans for achieving these goals. Furthermore, corporate strategy defines
the range of business a business enterprise is to pursue, the kind of
economic and human organisation it intends to utilise and the nature of
the economic and non-economic contributions it intends to make to its
shareholders, employees, customers and communities. Therefore, the
strategy of a corporate entity defines the business in which it will
compete, preferably in a way that focuses resources to convert
distinctive competence into competitive advantage (Pearce II and
Robinson Jr., 1998).

In a succinctly description of strategy, Delaney (2008) opines that

strategy is the weapon fashioned against competitive attacks from
competitors in the corporate world. This is because the best weapon
against competition is preparation of relevant arsenal to ward off
competitors’ actions in the company’s line of business. This implies that
companies never believe that the competitors will never attack.
Therefore, they are always prepared for such as it will amount to sheer
folly to believe otherwise.

The various perceptions on the essence of strategy as discussed above

suggest that strategy constitutes the choice of major directions for
pursuing predetermined corporate objectives and the allocation of scarce
resources. According to Hill and Jones (2004), strategy represents a
company's game plan in the world of stiff competition.

In essence, strategy is a large scale, future oriented plans for interacting

with the competitive environment to optimise achievement of
organisation objectives. Therefore, grand strategy, for instance, specifies
how the organisation will be operated and run and what entrepreneurial,
competitive and functional area approaches and actions will be taken to
put the organisation into the desired position that would make it realise
its chosen objectives.

The various forms of strategy such as corporate strategy, business

strategy, operational strategy, and functional strategy are all necessary
towards detailing all future deployments in areas of human, financial
and material resources. Fundamentally, therefore, strategy provides a
framework for managerial decisions, and it reflects a company's
awareness of how to compete, against whom, when, where and for what.

Formulation of strategy is as important as the strategy itself and it

reflects the inherent stuff of the organisation and the seriousness in its
operational posture. A good example of weak corporate strategy is the

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MBA 820 CORPORATE MANAGEMENT STRATEGY

type displayed by the Transnational Corporation (Transcorp) Nigeria Plc

formed during the twilight days of the Obasanjo civilian administration.
The grand strategy is embedded in starting business operations with the
acquisition of some government-owned corporations. The existing
workers of these corporations, who were used to government ways of
doing business, would not succeed in enhancing the ideal business
posture of a typical private enterprise.

It implies therefore, that strategy formulation goes beyond sentiments

and political patronage. Strategy formulation involves a defined process
whereby the management develops an organisation's strategic mission,
derives specific strategic objectives, and chooses a strategy for the
operational activities of the company. The process includes all the
direction-setting components of managing the total organisation.

According to Thompson Jr. and Strickland (1987) strategies are usually

formulated in relation to the current and potential activities of
competitors. They are also formulated to deal with the vagaries of the
business environment. Formulation is an intellectual activity that is
devoid of shrewd corporate manoeuvring or connivance. It is a
continuous or systematic process aimed at challenging current and
potential threats while utilising current and potential opportunities to
improve company's results.

3.1.1 Scope of Strategy

Thompson Jr. and Strickland (1987) observe that strategy consists of

four components including product-market scope, growth vector,
competitive advantage and synergy. The product-market aspect of the
strategy indicates the particular industries to which the firm confines its
product market position and compete for patronage.

The aspect of growth posture specifies the direction in which the firm is
moving with respect to its current product market exposure. The
competitive advantage as a strategy involves identifying unique
opportunities within the scope defined by the other aspects of the
company’s strategy.

The above aspects of strategy in terms of the product-market scope,

growth posture and competitive advantage collectively indicate the
firm's posture regarding the product market posture in the external
environment. The product market defines the scope of search while the
growth posture provides directions within the scope of the strategy.

The aspect of competitive advantage describes the firm's ability to make

good the individual entries into the markets. The product-market scope,

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MBA 820 MODULE 1

growth posture and competitive advantage aspects of strategy describe

the firm's search for available profitable opportunities in the external
environment.

The aspect of synergy is indicative of the common string that measures

the firm's ability to make good on a new product market entries. By
providing capabilities for success in new ventures, synergy enables the
firm to realise its full profit potential. Synergistic efforts involve the
creation of business units that support and complement each other.

Accordingly, synergistic effect may arise from acquisition, vertical

integration, research competence, marketing network etc. A company
may adopt an aggressive or defensive posture to capitalise on its
synergy. The firm uses its outstanding competence such as its extensive
distribution network, under its aggressive posture, to enter into new
product-markets. For a defensive posture to bring successful operations,
new market entries are required to provide some key competence.

In fundamental terms, strategy is embedded in content, construct and

contextual scope. The contextual scope of the synergy incorporates the
structure, the type, the size and the environment of the strategy in terms
of the conditions and circumstances of the strategy. The construct scope
is indicative of the necessary form of the strategy. This may manifest in
areas of growth, competitive, survival or turnaround strategies. The
aspect of content in strategy involves the capacity of the strategy to
curtail an identified threat or utilise available opportunity towards good
results.

According to Thompson Jr. and Strickland (1987), citing the work of

Mintzberg (1978), the scope of strategy can be broadened into five
distinct but interlocking areas but are mutually exclusive. These are as
highlighted below.

i) Strategy as a plan: this is regarded as a consciously intended

course of action.
ii) Strategy as a ploy: this is regarded as a specific manoeuvre
intended to outwit a competitor.
iii) Strategy as a pattern: this is regarded as consistency in behaviour
whether intended or not.
iv) Strategy as a position: this is regarded as a means of locating an
organisation in an environment.
v) Strategy as a perspective: this is regarded as an ingrained way of
perceiving the world.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

The above descriptions of a strategy are indicative of the fact that

strategy is subject to different interpretations and opinions.
Nevertheless, the basic idea remains, which involves the posture adopted
by a firm to cope with the dictates of its environment for a profitable
operation.

SELF-ASSESSMENT EXERCISE

Identify and explain the various areas of the scope of strategy.

3.1.2 Process of Strategy Formulation

According to Thompson Jr. and Strickland (1987), the formulation of

strategy goes through a process with some identifiable steps such as
highlighted below.

i) Assessment of the external environment in order to identify and

forecast opportunities and threats lurking within the environment
including the analysis of the significant industry.

ii) Assessment of the internal environment of the company in order

to identify the firm’s competitive strengths and weaknesses in
relation to the competitors in the industry.

iii) Assessment of the values of top managers and stakeholders to

identify the common shared values among them for the benefit of
the firm.

iv) Matching the external environment analysis with both the internal
organisational analysis and value analysis, taking into
consideration the relevant industry.

v) Identify the strategic mission or purpose of the organisation.

vi) Formulate the long term or strategic objectives for the firm which
would invariably be narrowed down to quantitative or verifiable
objectives.

vii) Identify and appraise all possible alternative grand designs or

strategies with which the organisation can pursue formulated
objectives.

viii) Identify and make a feasible choice out of the strategic

alternatives that are open to the firm, in the luminosity of the
company exigencies, situations and capabilities.

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MBA 820 MODULE 1

The above steps in the process of formulating corporate strategy are

imperative towards having a workable grand design for the
organisational profitable operations.

3.1.3 Influences on Strategic Choice

A good number of factors would influence the choice of a particular

strategy by the company. The factors are as follows.

i) The background of the organisation which sets the path for the
organisation into the future, it would not make sense for the
organisation to abandon or divorce the path.

ii) The mission of the organisation within the realm of its product-
market definition would also suggest what strategy should be
selected.

iii) The external environment of the organisation also presents

specific opportunities and threats, which may warrant specific
adaptive strategy e.g. a competitive threat, may suggest a
competitive strategy as a response.

iv) The shareholders and indeed other stakeholders of the company

may come up with new resources, needs, expectations, agitation,
threats and opportunities which may be strategically responded
to.

v) Available operational resources of a company would also suggest

the type and the extent to which a strategy can be operated.

vi) Operational values cherished by both owners and top managers

would also determine the choice of a particular strategy. If the
core values of the owners and top executives of a company can
be located in operations then the appropriate strategies would be
selected.

vii) Distinctive competencies of a company would also dictate the

form of strategy the organisation can adopt.

viii) Strategic objective of a company would also influence in

identifying all feasible alternative strategies from which a choice
can be made. Any objective to be pursued such as capturing more
market share or market leadership would engender the adoption
of competitive strategies.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

ix) Prevailing government policies can also have a direct influence

on strategic choice of a company. For instance, a policy on the
utilisation of locally available raw materials for production may
affect a company’s strategic choice.

3.1.4 Criteria for Assessing Strategic Alternatives

According to Hill and Jones (2004) all relevant and feasible strategic
alternatives of a corporate entity should be judged against some
identifiable criteria as highlighted below:

i) Appropriateness to Available Resources

Corporate strategies should be related to the available resources which
management is willing to commit for the purpose.

ii) Appropriate Time Horizon

The strategic alternatives must also be related to time horizon which
management is willing to commit for the purpose. Strategic time horizon
must be longer. It must also allow for extended time horizon for strategy
modification and maintenance of consistency over time.

iii) Internal Consistency

Formulated strategies for a corporate entity must be assessed as
consistent with established mission statements, values and objectives.
The selected strategy must fit these and other strategic elements.

iv) External Consistency

Corporate strategies must also be evaluated against the static and
dynamic forces of the external environment. A coping strategy must be
capable of arresting threats while utilising profitable opportunities. A
strategy that cannot do this is unfit.

v) Acceptable Degree of Risk

Strategy makers should understand the degree of risk that the company
is capable of contending with in relation to operational constraints. The
degree of risk that can be assumed by a company depends on the
following factors.

• The amount of resources which continued existence or value is

not assured.
• The length of time or period for which resources are committed.
• The proportion of resources committed to a single venture.

Basically, the degree of risk varies in most cases with changes in these
factors. It has been argued that risk and payoff are correlated. Therefore,
high risk strategies go with high payoff but at the same time they are

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MBA 820 MODULE 1

susceptible to threat for the survival of an enterprise in the event that

forecast goes wrong.

3.1.5 Inherent Advantages of Corporate Strategic Formulation

As observed by Hill and Jones (2004), strategy formulation and

implementation have inherent benefits to a company such as in the
following areas of business operations.

• Enhances company growth expansion.

• Put a company in a good stead to act rather than react.
• Entails a basis for measuring performance.
• Creates strategic learning experiences in managers.
• Enhances the setting and the acceptance of common goals.
• Prepares and develops managers to inculcate strategic action
skills.
• Provides early indication of financial and other needs.
• Enhances the company’s ability to utilise available opportunities.
• Provides hedge against environmental threats.
• Enhances the company’s ability to formulate proactive measures
for growth, survival and competitive advantage, and profitable
operations.

3.2 The Need for Strategy

The absence of an organisational strategy may result in members of the

organisation working at cross purposes. The intentions of top
management may not be communicated clearly to those at lower levels
in the hierarchy who are expected to implement these intentions.
Obsolete patterns of behaviour become very difficult to modify. Change
comes about from either subjective or intuitive assessment, which
becomes increasingly unreliable as the rate of change increases.
Developing a statement of strategy demands a creative effort. If
organisational operation is to be successful, it requires different methods
of behaviour and often fundamental change in the nature of interactions
among managers (Pearce II and Robinson Jr., 1998).

According to Pearce II and Robinson Jr. (1998) once objectives have

been established, the appropriate mix of business engaged in can be
evaluated against the following criteria.

i) Probable contribution – the estimated contribution of existing

bureaucratic corporate performance given no major changes in
competitive picture.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

ii) Minimum standards – disengagement from unsatisfactory

situations where standards of performance cannot be achieved
with the existing mix of business. As well as identifying
attractive new opportunities, a well-managed corporation has an
active procedure for disengaging from unsatisfactory situations.

iii) Trade-offs – the requirement for trade-off decisions in

establishing standard for unit performance, for example, growth
versus profitability; or short term profitability versus long term
profitability.

iv) Risk level – the degree of risk represented by the portfolio.

Groups of business may be associated together within a single
company because the risk inherent in the total is less than would
be present if the businesses were separate.

v) Synergism – the nature and extent of mutual reinforcement

which individual businesses provide for the whole. This may be
either operational reinforcement where two businesses operated
jointly to improve the company’s strategic advantage, or financial
reinforcement because of the different patterns in funding,
timing, or because of the appeal of the whole to the financial
continuity.

vi) Extrapolation – the range of additional opportunities for which

an appropriate mix of businesses provides a platform, where the
company may go from the present position and what is required
to do so. This may be expressed as the normal situation. What
should be the next business added to the existing portfolio?

vii) Funds requirements – the constraint of balancing the funds

requirements and resources available in order to meet
successfully the corporate strategy. If synergy is to be assessed
rationally it must be translated into funds flow projection.

Increased business competitiveness and the dynamic external

environment have placed important emphasis on corporate strategy and
the competencies of managers. Hill and Jones (2004) observe that if
organisations are to be effective in strategic terms, they must be able to
deal with the pressures and demands of change. Managers should be
strategically aware and appreciate the origins and nature of change.
They should possess a comprehensive set of skills and competencies and
be able to deal effectively with the forces which represent opportunities
and threats to the organisation. Effective strategic management creates
productive alliance between the nature and the demands of the

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MBA 820 MODULE 1

environment, the organisation’s culture and values, and the resources

that the organisation has at its disposal.

Some form of corporate strategy is necessary for all organisations,

particularly large organisations and including service organisations and
those in the public sector. In the public sector, for example, the
government authorities are implored to adopt a corporate approach to
their affairs in order to ensure that scarce resources are deployed most
effectively.

SELF-ASSESSMENT EXERCISE

Mention and explain the reasons for the formulation of corporate

strategy.

3.3 Forms of Organisational Strategy

The various forms of strategies identified, according to Hill and Jones

(2004), include the following.

3.3.1 Corporate Strategy

These strategies are plans formulated to carry out values and

performance objectives of a company. These plans become more
specific. Corporate strategy is the art of using organisational resources to
render the goals defined by the organisation with minimum risk.

Corporate strategy also involves marshalling the available resources for

definite missions and planning alternative strategies in anticipation of
changing contingencies and creating flexible conditions in structure and
employee attitudes favourable towards achieving the corporate goal.

The corporate strategy defined a company’s general posture in the broad

economy. The business strategy outlined the competitive posture of its
operations within the domestic movie exhibition industry. However, in
order to increase the likelihood that these strategies will be successful,
more specific guidelines are needed for the business’s operating
components.

3.3.2 Business Strategy

Business strategy refers to the aggregated strategies of a single business

firm. In other words, business strategy is a strategy designed to position
the strategic business unit in a diversified corporation. Each firm
formulates a business strategy in order to achieve a sustainable
competitive advantage.

11
MBA 820 CORPORATE MANAGEMENT STRATEGY

3.3.3 Operational Strategy

The concept of operational strategy was popularised and encouraged by

Peter Drucker (1954) in his theory of management by objectives. This is
needed for the day-to-day operational activities in the organisation. It
must operate within the budget and cannot create a budget. Operational
level strategies are informed by business level strategies which, in turn,
are informed by corporate level strategies.

Other forms of strategy are the functional and grand strategies which are
discussed in detail as shown below.

3.3.4 Functional Strategy

A functional strategy is the short term game plan for a key functional
area within a company. Such strategies clarify grand strategy by
providing more specific details about how key functional areas are to be
managed in the near future. Thus, functional strategies clarify the
business strategy, giving specific, short term guidance to operating
managers.
Functional strategies must be developed in the key areas of marketing,
finance, production, operations, research, development and personnel.
They must be consistent with long term objectives and grand strategy.
Functional strategies help in the implementation of grand strategy by
organising and activating specific subunits of the company (e.g.,
marketing, finance, production, etc.) to pursue the business strategy in
daily activities.

3.3.5 Grand Strategy

Grand strategies which are also known and called master business
strategies are intended to provide basic direction for strategic actions.
Therefore, they are seen as the basis of coordinated and sustained efforts
directed towards achieving long term business objectives. More often
than not, grand strategies indicate how long-range objectives will be
achieved. Thus, a grand strategy can be defined as a comprehensive
general approach that guides major actions.

A principal grand strategy could serve as the basis for achieving major
long term objectives such as single business concentration, market
development, product development, innovation, horizontal integration,
vertical integration, joint venture, concentric diversification,
conglomerate diversification, retrenchment/turnaround, divestiture and
liquidation. A company which is involved with multiple industries,
businesses, product lines, or customer groups uses several grand

12
MBA 820 MODULE 1

strategies. Such grand strategies are discussed below with examples to

indicate some of their relative strengths and weaknesses.

4.0 CONCLUSION

Strategy is the determination of the basic long term goals and objectives
of an enterprise and the adoption of relevant courses of action and the
allocation of resources to pursue and achieve these goals. Formulation of
strategy goes through a process while some factors needed to be taken
into consideration in the course of formulating a strategy. There are
reasons and advantages which necessitate the use of strategy, and
strategy assumes various forms such as corporate strategy, business
strategy, operational strategy, functional strategy and grand strategy.

5.0 SUMMARY

In this unit, you have learnt the following topics:

• Conceptualisation of strategy
• Scope of strategy
• Process of strategy formulation
• Influences of choice on strategy
• Criteria for assessing strategic alternatives
• Inherent advantages of corporate strategic formulation
• The need for strategy
• Forms of organisational strategy.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the various forms of organisational strategy.

7.0 REFERENCES/FURTHER READING

Delaney, E. (2008). “Warfare and Modern Strategy: Lessons for

Nigerian Business”, Zenith Economic Quarterly. A publication of
Zenith Bank Plc, Vol. 3 No. 4, October, 2008, pp. 40-52.

Dilworth, J. (1983). Production and Operations Management:

Manufacturing and Non- Manufacturing. (2nd ed.). New York:
Random House, Inc.

Gupta, C. B. (1995). Corporate Planning and Policy. New Delhi: Sultan

Chand and Sons.

13
MBA 820 CORPORATE MANAGEMENT STRATEGY

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation. New Delhi:
Biztantra, An Imprint of Dreamtech Press.

Kazmi, Azhar (1995). Business Policy. New Delhi: Tata McGraw-Hill

Publishing Company Limited.
Pearce, & David, (1987). Strategic Planning and Policy. New York:
Reinholt.

Pearce II & Robinson Jr. (1998). Strategic Management: Strategy

Formulation and Implementation. (3rd ed.). Krishan Nagar,
Delhi: All India Traveller Bookseller.

Thompson, A. A. Jr. & Strickland, A. J. (1987). Strategic Management:

Concepts and Cases. Homewood, Illinois: BP Irwin.

14
MBA 820 MODULE 1

UNIT 2 ORGANISATIONAL MISSION

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Organisational Mission
3.2 Formulating a Corporate Mission
3.3 Influences on Corporate Mission
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Organisations are entities established to pursue and achieve certain

predetermined goals and objectives. Such goals and objectives are
normally determined and incorporated in the mission of the
organisation. Hence, in charting a course for a new business or
reformulating direction for an ongoing company, the basic goals,
characteristics, and philosophies that will shape a firm's strategic posture
must be determined. This company mission will guide future executive
action.

In this unit, you will be taken through the discussion on organisational

mission.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss extensively on organisational mission

• describe the formulation of corporate mission
• discuss the influences on corporate mission.

3.0 MAIN CONTENT

3.1 Meaning of Organisational Mission

Hills and Jones (2004) posit that mission statement of an organisation

refers to a description or declaration of the reason responsible for a
company’s existence and operation. Mission statement provides the
framework or context within which strategies are formulated. According
to them, the three main components of organisational mission are:
15
MBA 820 CORPORATE MANAGEMENT STRATEGY

• a statement of the raison d’être of a company or organisation, that

is, its reason for existence.
• a statement of the key values or guiding standards that will drive
and shape the actions and behaviour of the employees
• a statement of major goals and objectives.

Basically, the mission of an organisation incorporates the formal

declaration of the pre-occupation and the fundamental purpose of the
company in terms of what it is out to achieve in its operations.

In the same vein, according to Pearce II and Robinson Jr. (1998), the
organisational or corporate mission is defined as the fundamental,
unique purpose that sets a business apart from other firms of its type and
identifies the scope of its operations in product and market terms. The
mission is a broadly framed but enduring statement of company intent.

Corporate mission, according to Pearce II (1982), embodies the business

philosophy of strategic decision makers; implies the image the company
seeks to project; reflects the firm's self-concept; indicates the principal
product or service areas and primary customer needs the company will
attempt to satisfy. In short, the mission describes the product, market,
and technological areas of emphasis for the business. It does so in a way
that reflects the values and priorities of strategic decision makers.

More often than not, the mission of a corporate body contains few
specific directives, only broadly outlined or implied objectives and
strategies. Characteristically, it is a statement of attitude, outlook, and
orientation rather than of details and measurable targets.

A corporate mission, according to King and Cleland (1978) as cited by

Pearce and Robinson (1998), is normally designed to accomplish the
following.

1. To ensure unanimity of purpose within the organisation.

2. To provide a basis for motivating the use of the organisation's
resources.
3. To develop a basis, or standard, for allocating organisational
resources.
4. To establish a general tone or organisational climate, for
example, to suggest a businesslike operation.
5. To serve as a focal point for those who can identify with the
organisation's purpose and direction, and to deter those who
cannot from participating further in the organisation's activities.
6. To facilitate the translation of objectives and goals into a work
structure involving the assignment of tasks to responsible
elements within the organisation.

16
MBA 820 MODULE 1

7. To specify organisational purposes and the translation of these

purposes into goals in such a way that cost, time, performance
parameters can be assessed and controlled.

SELF-ASSESSMENT EXERCISE

What are the intended benefits of a corporate mission?

3.2 Formulating a Corporate Mission

The process of defining the mission for a specific business can be

likened to thinking about a firm at its inception. In the case of a typical
business organisation, the formulation of a mission begins with the
beliefs, desires, and aspirations or a single entrepreneur. Therefore, in
the opinion of Pearce II and David (1987), the sense of mission for such
an owner-manager is usually based on several fundamental elements
such as the followings.

1. Belief that the product or service can provide benefits at least

equal to its price.

2. Belief that the product or service can satisfy a customer need

currently not met adequately for specific market segments.

3. Belief that the technology to be used in production will provide a

product or service that is cost and quality competitive.

4. Belief that with hard work and the support of others the business
can do better than just survive, it can grow and be profitable.

5. Belief that the management philosophy of the business will result

in a favourable public image and will provide financial and
psychological rewards for those willing to invest their labour and
money in helping the firm to succeed.

6. Belief that the entrepreneur's self-concept of the business can be

communicated to and adopted by employees and stockholders.

Redefinition of the company’s mission may be necessary as the

company grows or is forced by competitive pressures to alter its
product/market/technology, if so, the revised mission statement will
reflect the same set of elements as the original. It wil1 state the basic
type of product or service to be offered, the primary markets or customer
groups to be served, the technology to be used in production or delivery,
the fundamental concern for survival through growth and profitability,

17
MBA 820 CORPORATE MANAGEMENT STRATEGY

the managerial philosophy of the firm, the public image sought, and the
self concept those affiliated with it should have of the firm.

The essential components of a corporate mission statement are:

specification of the basic product or service; primary market and
principal technology for production or delivery.

SELF-ASSESSMENT EXERCISE

Enumerate the fundamental elements of the sense of mission of an

owner-manager.

3.3 Influences on Corporate Mission

According to Pearce II and Robinson Jr. (1998), the major influences on

the formulation of a corporate mission are as follows:

1. Company Goals
Three economic goals guide the strategic direction of almost every
viable business organisation. Whether or not they are explicitly stated, a
company’s mission statement reflects a company’s intention to secure its
survival through sustained growth and profitability.

Profitability is the mainstay goal of a business organisation. Regardless

of how it is measured or defined, profit over the long time is the clearest
indication of a firm’s ability to satisfy the principal claims and desires of
employees and stockholders. The phrase in the sentence is “over the
long term”. It has been argued that decisions on a short term concern for
profitability would lead to a strategic suicide. A firm might overlook the
enduring concerns of customers, suppliers, creditors, ecologists and
regulatory agents. In the short term, the results may produce profit, but
over time the financial consequences are likely to be detrimental.

A firm’s growth is inextricably tied to its survival and profitability. In

this context, the meaning of growth must be broadly defined. For
example, growth in the number of market served, in the variety of
product offered, and in the technologies used to provide goods or
services frequently leads to improvements in the company’s competitive
ability. Growth means change, and proactive change is a necessity in a
dynamic business environment.

The issue of growth raises a concern about the definition of a company’s

mission. Hence, there arise issues such as: how can a business specify
product, market and technology that will be sufficient to provide
direction without delimiting unanticipated strategic options? How can a
company define its mission and subsequently divert from such mission

18
MBA 820 MODULE 1

while at the same time maintaining parameters that guide growth

decisions? These issues are best addressed when a firm outlines its
mission conditions under which it might depart from ongoing
operations.

2. Company Philosophy
The statement of company’s philosophy, often called a company creed,
usually accompanies or appears as part of the mission. It reflects
explicitly, basic beliefs, values, aspirations and philosophical priorities.
In turn, strategic decision makers are committed to emphasising these in
managing the firm. Fortunately, company philosophers vary little from
one firm to another. Thus, owners and managers implicitly accept a
general, unwritten, yet persuasive code of behaviour.

The use of this philosophy in a business setting is largely self-regulated.

In reality, statements of philosophy are so similar and are so full of
platitudes that they look like public relations’ statements than the
commitment to values they are meant to be.

The similarities in these philosophies notwithstanding, strategic

managers’ intentions in developing them do not warrant cynicism. In
most cases, managers attempt, often successfully, to provide a
distinctive and accurate picture of the firm’s managerial outlook.

3. Public Image
Public image is important particularly for the growing firm involved in a
redefinition of its company’s mission. Both present and potential
customers attribute certain qualities to a particular business. Thus,
mission statements often reflect public anticipation, making achieving
the firm’s goals a more likely consequence.

On the other hand, a negative public image often prompts firms to re-
emphasise the beneficial aspects reflected in their mission. A firm’s
concern for its public image is seldom addressed in an intermittent
fashion. While public agitation often stimulates greater response, a
corporation is concerned about its image even when public concern is
not expressed.

4. Company Self-concept
A major determinant of any company's continued success is the extent to
which it can relate functionally to the external environment. Finding its
place in a competitive situation requires the firm to realistically evaluate
its own strengths and weaknesses as a competitor. This knowledge in
itself is the essence of the company's self-concept.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

Fundamentally, the need for each to know the self is crucial. The ability
of a firm to survive in a dynamic and highly competitive environment
would be severely limited if the impact on others and of others is not
understood.

In some senses then, the organisation takes on a personality of its own.

It has been recognised that much behaviour in organisations is
organisationally based. Thus businesses are entities that act with a
personality transcending those of particular company members. As such,
the firm can be seen as setting decision-making parameters, based on
aims different than and distinct from the individual aims of its members.
The effects of organisational considerations are pervasive.

Fundamentally, as succinctly observed by Pearce II and Robinson Jr.

(1998), organisations do have policies, do not condone violence, and
may or may not greet you with a smile. They also manufacture goods,
administer policies, and protect the citizenry. These are organisational
actions which involve properties of organisations, not individuals. They
are carried out by individuals, even in the case of computer-produced
letters, which are programmed by individuals – but the genesis of the
actions remains in the organisation.

In essence, the actual role of the corporate self-concept has been

outlined as follows.
1. The corporate self-concept is based on management perception of
the way others (society) will respond to the corporation.
2. The corporate self-concept will function to direct the behaviour
of people employed by the company.

3. The actual response of others to the company will in part

determine the corporate self-concept.

4. The self-concept is incorporated in statements of corporate

mission to be explicitly communicated to individuals inside and
outside the company, that is, to be actualised.

Descriptions of self-concept per se do not appear in company mission

statements. Yet, strong impressions of a firm's self-image are often
evident.

5. Company Responsibility to Claimants

In defining or redefining the company’s mission, strategic managers
must recognise and acknowledge the legitimate claims of other
stakeholders of the firm. These include investors and employees as well
as outsiders' affected by the company's actions. Such outsiders
commonly include customers, suppliers, governments, unions,

20
MBA 820 MODULE 1

competitors, local communities and the general public. Each of these

interest groups has justifiable reasons to expect, and often to demand,
the company to act in a responsible manner in satisfying their claims.

Generally, stockholders claim appropriate returns on their investments;

employees seek broadly defined job satisfaction; customers want what
they pay for; suppliers seek dependable buyers; governments want
adherence to legislation, unions seek benefits for members in proportion
to contributions to company’s success; competitors want fair
competition; local communities want companies to be responsible
citizens; and the general public seeks improvement in the quality of life
resulting from the firm’s existence.

However, when a business attempts to define its mission to incorporate

the interests of these groups, broad generalisations are insufficient.
Thus, four steps need to be taken.
• Identification of claimants.
• Understanding of specific claims regarding the company.
• Reconciliation of claims and assigning them priorities.
• Coordination of claims with other elements of the mission.

i) Identification
Obviously though, every business faces a slightly different set of
claimants, who vary in number, size, influence, and importance. In
defining a mission, strategic managers must identify all claimant groups
and weight their relative ability to effect success.

ii) Understanding
, Strategic decision makers should understand the specific demands of
each group. Then, strategic managers will be better able to appreciate
these concerns and initiate clearly defined actions.

iii) Reconciliation and Priorities

Unfortunately, the concerns of various claimants often conflict. For
example, the claims of governments and the general public tend to limit
profitability, which is the central concern of most creditors and
stockholders. Thus, claims must be reconciled. To achieve unified
approach, managers must define a mission that resolves the competing,
conflicting, and contradictory claims. For objectives and strategies to be
internally consistent and precisely focused, mission statements must
display a single-minded, though multidimensional, approach to business
aims.

iv) Co-ordination with other Elements

Demands of claimant groups for responsible action by a company
constitute only one set of inputs to the mission. Managerial operating

21
MBA 820 CORPORATE MANAGEMENT STRATEGY

philosophies and determination of the product-market offering are the

other principal components to be considered. The latter factors
essentially pose a reality test that the accepted claims must pass. The key
question is how can the company satisfy claimants and simultaneously
optimise its success in the market place.

4.0 CONCLUSION

Organisational mission involves the declaration of the fundamental

purpose for the existence of the organisation and the major area of
operations in the society. In the formulation of a mission statement, it is
important to take into consideration variables such as nature of the
company’s operations, the product or service of the company, the
technology for production, strategies for profitable operations,
management philosophy of the business, the entrepreneur's self-concept
of the business and public image. The influences on organisational
mission include company goals, company philosophy, public image,
company’s self-concept and company’s responsibility to claimants.

5.0 SUMMARY

In this unit you have learnt the following topics:

• meaning of organisational mission;

• formulating a corporate mission
• influences on corporate mission.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the major influences on corporate mission.

7.0 REFERENCES/FURTHER READING

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, an Imprint of Dreamtech Press.

Pearce II and Robinson Jr. (1998). Strategic Management: Strategy

Formulation and Implementation. (3rd ed.). Krishan Nagar,
Delhi: All India Traveller Bookseller.

Pearce, & David, (1987). Strategic Planning and Policy. New York:
Reinhold.

22
MBA 820 MODULE 1

UNIT 3 ORGANISATIONAL GOALS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Organisational Goals
3.1.1 Meaning of Organisational Goals
3.1.2 The Functions of Organisational Goals
3.2 Integration of Personal Goals and Organisational Goals
3.3 Classification of Organisational Goals
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Corporate organisations as business entities cannot exist without certain

predetermined goals. Such goals are normally determined and
incorporated in the mission of the organisation. Hence, corporate goals
are important in charting the operational direction of the enterprise.
These goals shape a firm's strategic posture and provide standards to
guide future executive action in the organisation.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss organisational goals

• list the functions of organisational goals
• discuss the integration of personal goals and organisational goals
• describe various types of organisational goals.

3.0 MAIN CONTENT

3.1 Nature of Organisational Goals

3.1.1 Meaning of Organisational Goals

The concept of organisational goals may be difficult to define but goals

constitute the guides of corporate actions and operations. Pearce and
David (1987) opine that goals may be expressed, in the case of business
organisations, as operational efficiency and profit making. These broad

23
MBA 820 CORPORATE MANAGEMENT STRATEGY

based goals are very ambiguous and can be taken for granted. They
indicate little about the emphasis to be placed on the various activities of
the organisation in meeting its goals.

Nevertheless, profit is very important because it serves as the reward for

the shareholders’ investment. It also provides the needed tonic for
further capital, and a means of ensuring the continued existence of the
organisation and maintaining its growth and development.

According to Glueck (1980), goals are value premises which serve as

inputs to decisions. Goals at different levels within the organisation
contribute to alternatives for decision-making. Glueck sees goals more
as constraints which the organisation must satisfy. For example, profit
for shareholders, or a minimum rate of return on investments, satisfying
demands of consumers, complying with government legislation on
safety standards, providing job satisfaction for staff and protecting the
environment against pollution.

Hence, goals limit the scope of actions and decision-making at lower

levels of the organisation. Constraints may themselves be regarded as
goals in that they represent objectives which management is trying to
meet.

Members of the organisation have different and often conflicting goals.

As a result, the goals which the organisation actually pursues (informal
goals) may be distinguished from the officially stated goals (formal
goals) which are set out in broad terms as the reasons for the purpose of
the organisation. Informal goals may be inferred from the actual
decisions made and actions taken within the organisation. Managers, and
other members of the organisation, will have:

(i) their own perception of the goals of the organisation, for

example, to produce high-quality television sets which satisfy
requirements of the customers and

(ii) their personal goals, for example, to earn high wages, to achieve
promotion, to gain social satisfaction, to achieve status, which
they expect to fulfill by participating in the activities of the
organisation.

3.1.2 The Functions of Organisational Goals

According to Hill and Jones (2004) organisational goals serve a number

of important functions such as follows.

24
MBA 820 MODULE 1

• Goals provide a standard of performance. They focus attention on

the activities of the organisation and the direction of the efforts of
its members.

• Goals provide a basis for planning and management control

related to the activities of the organisation.

• Goals provide guidelines for decision-making and justification

for actions taken. They reduce uncertainty in decision-making
and give a defence against possible criticism.

• Goals influence the structure of the organisation and help

determine the nature of technology employed. The manner in
which the organisation is structured will affect what it will
attempt to achieve.

• Goals help to develop commitment of individuals and groups to

the activities of the organisation. They focus attention on
purposeful behaviour and provide a basis for motivation and
reward systems.

• Goals help to develop commitment of individuals and groups to

the activities of the organisation. They focus attention on
purposeful behaviour and provide a basis for motivation and
reward systems.

• Goals give an indication of what the organisation is really like, its

true nature and character, both for members and for people
outside the organisation.

• Goals serve as a basis for the evaluation of change and

organisation development.

• Goals are the basis for objectives and policies of the organisation.

SELF-ASSESSMENT EXERCISE

Mention the functions of organisational goals.

3.2 Integration of Personal Goals and Organisational Goals

According to Pearce II and David Jr. (1987), goals are important

features of work organisations. To be effective, goals should be
emphasised, stated clearly and communicated to all members of the

25
MBA 820 CORPORATE MANAGEMENT STRATEGY

organisation. The movement towards greater delegation and

empowerment through the hierarchy means that staff at all levels must
be aware of their key tasks and actions, and exactly what is expected of
them and their departments/sections. There must be clearly laid down
organisational goals, objectives and strategy.

The goal-setting process is of importance to all types of organisation and

facilitates the attainment of objectives. In the public sector, for example,
organisation such as hospitals, local authorities and universities have
complex, diverse and competing goals. The clarification of goals and
objectives is the basis for corporate planning, programming, and
budgeting systems approach to decision-making.

Hill and Jones (2004), observe that strictly speaking, organisations have
no goals, only people do. This is because organisational goals are
established by people, either individually, or more usually, by a number
of individuals cooperating together. For example, a group of senior
managers may collectively agree on a particular desired course of action
which may then come to be referred to as an organisational goal, but this
is still the goal of those managers who initially determined it.

Furthermore, success of the organisation is measured by the progress of

people towards goals set by people. This gives rise to the following
issues.

• How far are the goals of management compatible with the goals
of the organisation?

• To what extent do individual members obtain satisfaction of their

own goal through the attainment of organisational goals?

Hill and Jones (2004) observe that if organisational goals and personal
goals are pulling in different directions, conflict will arise and
performance is likely to suffer. An organisation will be more effective
when personal goals are compatible with organisational goals.
Organisational performance will depend ultimately on the extent to
which individuals are provided with the opportunity to satisfy their own
goals by contributing to the goals of the organisation.

Management has a responsibility to clarify organisational goals and to

attempt to integrate personal goals (including their own) with the overall
objectives of the organisation. Only when organisational goals are
shared by all members of the organisation will complete integration be
achieved. In practice, this is unlikely.

26
MBA 820 MODULE 1

Perfect integration of organisational requirements and individual goals

and needs is, of course, not a realistic objective. In adopting this
principle, we seek that degree of integration in which the individual can
achieve his goals best by directing his efforts towards the success of the
organisation.

Management should endeavour, therefore, to structure the organisation

so that people may realise their personal goals by helping the
organisation to satisfy its goals. One attempt at integrating
organisational goals with the needs of the individual members of the
organisation is provided by the approach of Management by Objectives
(MBO).

3.3 Classification of Organisational Goals

According to Pearce II and David Jr. (1987), the goals of an organisation

may be classified in a number of different ways.

1. The Concept of Compliance

Etzioni (1964), as cited by Pearce and David Jr. (1987), provides a
classification which distinguishes three types of organisational goals in
terms of their relationship with the concept of power and compliance.

• Order goals are negative and attempt to place some kind of

restraint upon members of the organisation and to prevent certain
forms of behaviour.

• Economic goals are concerned with the production of goods

and/or services for people outside the organisation.

• Cultural goals are concerned with symbolic objects and with

creating or maintaining value systems of the society. Social
goals, which serve the various needs of members of the
organisation, are classified as a sub-type under cultural goals.

Most organisations would be expected to display one of three central

combinations of organisational goals and compliance structure.
Although there are other possibilities, the three most usual combinations
are as follows.

• Organisations with order goals and a coercive compliance

structure, for example, closed persons.

• Organisations with economic goals and a utilitarian compliance

structure, for example, business firms.

27
MBA 820 CORPORATE MANAGEMENT STRATEGY

• Organisations with cultural goals and a normative compliance

structure, for example, professional bodies.

Organisations may, of course, serve more than one goal, and these goals
may not necessarily fall into the same category. Usually, however, there
is one main goal which maintains a relationship with compliance
structure in keeping with one of the three central combinations.

2. Goals as the Outcome of Bargaining

Goals as observed by Glueck (1980), result from the outcome of
bargaining among members of sub-coalitions. They identify five
organisational goals related specifically to a business firm.

• Production goal – related to minimising variations in the range

of production operatives over a given period of time, and to the
overall level of production.

• Inventory goal – aspirations related to levels of completed

goods. The inventory goal acts as a buffer between production
and sales.
• Sales goal – aspirations related to the level of sales, either in
monetary terms, number of units, or both. The sales goal
provides some general criteria of sales effectiveness.

• Market share goal – concerned with a measure of sales

effectiveness or with comparative success. The market share
goal can be used as an alternative to the sales goal, or both can be
used.

• Profit goal – linked to accounting procedures for determining

profit and loss. The profit goal may be an aspiration relating to
amount of monetary profit, or profit share, or return on
investment.

The above five goals are not listed in any necessary order of importance,
but all the goals must be satisfied by a corporation. This suggests that
most of the time no order of importance is necessary, although there
may be an implicit order of priority in different organisations.

3. A General Model of Organisational Goals

A more general model of organisational goals is related to the following
list of organisational goals:

• Satisfaction of interests. Organisations exist to satisfy multiple

interests of various people, both members of the organisation and
outsiders. These interests are hard to identify and overlapping.
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MBA 820 MODULE 1

This category of purpose might be referred to as welfare, utility,

benefit or payoff.

• Output of services or goods. The output of products, goods or

services (tangible or intangible) which the organisation makes
available to clients.

• Efficiency or profitability. The efficient use of available, scarce

inputs relative to outputs. Inputs and outputs, and the
relationship between them, may be calculated in a number of
ways. ‘Profitability’ is applicable when both outputs and inputs
can be expressed in monetary terms.

• Investment in organisational viability. The diversion of inputs

from the production of output to investment in physical, human
and organisational assets in order to maintain survival and
growth.

• Mobilisation of resources. The organisation must mobilise

resources for inputs in order to produce goods or services or to
invest in viability.

• Observance of codes. Usually expressed in terms of acceptable

margins of deviation. Codes include both formal and informal
rules developed by the organisation and patterns of behaviour
imposed by law, moral considerations and standards of
professional ethics.

• Rationality. Actions which are regarded as satisfactory in terms

of desirability, feasibility and consistency. Rationality applies on
both technical and administrative (managerial) considerations.

Organisational goals are not necessarily the same for any one group of
people, for example, top management. Rather they are representative of
the organisation as a collection of individuals and groups, and define the
characteristics and activities of the whole organisation as a system. All
organisations have multiple goals. It is difficult to develop criteria of
performance against such broadly based goals and they need to be
translated into more specific goals capable of measurement in particular
organisations.

4. A Systems view of organisational goals

There are possible classifications. However, by adopting a systems
view of organisations, we can distinguish four main types of
organisational goals.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

• Consumer goals. These relate to the nature of outputs in terms of

the market to be served and consumer satisfaction: that is, the
range and nature of goods and/or services produced or supplied in
order to meet the needs of customers or clients. Examples are
consumer products, educational services, or health care.

• Product goals. These relate to the nature and characteristics of

the outputs themselves, that is, the goods and/or services
provided. This is the main area in which organisations
deliberately attempt to distinguish themselves from other
organisations, for example in the range, design, quality and
availability of their outputs.

• Operational goals. These relate to the series of activities

involved in providing outputs, and to the operation and
functioning of the organisation. Examples are the management
of opportunities and risks, the choice of structure, the nature of
technology, and management processes.

• Secondary goals. These relate to goals that are not related to the
main aim of the organisation. They arise from the manner in
which the organisation uses its power and influence in pursuit of
its outputs, and in undertaking the series of activities to achieve
these outputs. Political aims, aid to the community, the
development of staff, and social responsibilities would come
under this heading.

SELF-ASSESSMENT EXERCISE

Mention and explain the four main types of organisational goals under
the systems view of organisations.

4.0 CONCLUSION

Organisational goals refer to the value premises of a corporation.

Therefore, they serve functions such as inputs to decisions, standard of
performance, basis for planning and management control.
Organisational goals also provide guidelines for operational actions,
reduce uncertainty in decision-making, and generally influence the
structure of the organisation. It is always necessary for the organisation
to integrate its own goals with those of the workers. Goals can be
classified on the bases such as the concept of compliance, goals as the
outcome of bargaining, general model of organisational goals, and a
systems view of organisational goals.

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MBA 820 MODULE 1

5.0 SUMMARY

In this unit, you have learnt the following topics:

• meaning and nature of organisational goals

• the functions of goals
• integration of personal goals and organisational goals
• classification of organisational goals.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the various types of organisational goals under the
general model of organisational goals.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management; An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, an Imprint of Dreamtech Press.

Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

Pearce & David (1987). Strategic Planning and Policy. New York:
Reinhold.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

UNIT 4 ORGANISATIONAL OBJECTIVES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Organisational Objective
3.2 Fallacy of the Single Objective
3.3 Annual Objectives
3.3.1 Qualities of Annual Objectives
3. 4 Long Term Objectives
3.4.1 Qualities of Long Term Objectives
3.4.2 Functional Areas of Long Term Objectives
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Corporate goals are normally translated into specific objectives, which

are sine qua non for the operational efficiency. Such objectives
established essentially to give teeth to both the mission statement and
the organisational goals which are derivatives of the former. It implies
that objectives constitute appendages to the mission and vision. Hence,
organisational objectives are designed to streamline the operational
activities of the organisation in terms of the specific expectations or
results from operations.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain organisational objectives

• state the differences between annual objectives and long term
objectives
• explain the qualities of annual objectives and long term
objectives
• discuss the functional areas of long term objectives.

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MBA 820 MODULE 1

3.0 MAIN CONTENT

3.1 Nature of Organisational Objectives

Organisational objectives are derivable from the goals, all of which are
based on the organisational mission. Goals are broad-based statements
of intent in terms of what are desirable out of the operational activities
of the organisation. On the strength of these goals, appropriate
objectives are formulated to hammer out the goals into specific and
realisable targets. These are communicated to the strategic business
units of the organisation for implementation by the various functional
managers.

According to Pearce II, and Robinson Jr. (1998), objectives are specific,
measurable statements of what the organisation is expected to achieve in
a defined period of operations. Furthermore, such objectives, if
established for subunits, become what the strategic business units are
expected to achieve in terms of contributing to the accomplishment of
the business’s strategy.

In the opinion of Hill and Jones (2004), objectives are the desired future
state in terms of what a company wants to realise. Such corporate goals
must be precise, measurable, challenging but realistic, specific, time
bound and issues focused in terms of incorporating the specific
operational results expected for the strategic business units.

3.2 Fallacy of the Single Objective

Drucker has referred to the fallacy of the single objective of a business.

The search for the one right objective is not only unlikely to be
productive, but it is certain to harm and misdirect the business
enterprise.

According to Drucker, to emphasise only profit, for instance, misdirects

managers to the point where managers may endanger the survival of the
business. To obtain profit today, managers may undermine the future.
Balancing a variety of needs and goals is to manage a business. Hence,
the very nature of business enterprise requires multiple objectives which
are needed in every area where performance and results directly and
vitally affect the survival and prosperity of the business.

Drucker goes on to suggest eight key areas in which objectives should

be set in terms of performance and results.
(i) Market standing – for example, share of market standing, range
of products and markets, distribution, pricing, customer loyalty
and satisfaction.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

(ii) Innovation – for example, innovation to reach marketing goals,

developments arising from technological advancement, new
processes and improvements in all major areas of organisational
activity.

(iii) Productivity – for example, optimum use of resources, use of

techniques such as operational research to help decide alternative
courses of action,and the ratio of ‘contributed value’ to total
revenue.

(iv) Physical and financial resources – for example, physical

facilities such as plant, machines, offices and replacement of
facilities, supply of capital and budgeting, planning for the money
needed, and provision of supplies.

(v) Profitability – for example, profitability forecasts and

anticipated time scale for capital investment policy, and
yardsticks for measurement of profitability.

(vi) Manager performance and development – for example, the

direction of managers and setting up their jobs, the structure of
management, and the development of future managers.

(vii) Worker performance and attitude – for example, union

relations, the organisation of work and employee relations.

(viii) Public responsibility – for example, demands made upon the

organisation such as by law or public opinion, responsibilities to
society and the public interest.

The organisation therefore must give attention to all those areas which
are of direct and vital importance to its survival and prosperity. Etzioni
(1964) as cited by Thompson Jr. and Strickland (1987) posits that the
systems model however, leads one to conclude that just as there may be
too little allocation of resources to meet the goals of the organisation, so
there may also be an over-allocation of these resources. The systems
model explicitly recognises that the organisation solves certain problems
other than those directly involved in the achievement of its goal.
Excessive concern with the latter may result in insufficient attention to
other necessary organisational activities, and to a lack of coordination
between the initiated goal activities and the de-emphasised non-goal
activities.

The managers in the organisation are not necessarily guided at all times
by the primary goals of the organisation. Simon (1974), as cited by
Thompson Jr. and Strickland (1987), espouses, in respect of the profit

34
MBA 820 MODULE 1

goal, that profit may not enter directly into the decision-making of most
members of a business organisation. Again, this does not mean that it is
improper or meaningless to regard profit as a principal goal of the
business. It simply means that the decision-making mechanism is a
loosely coupled system in which the profit constraint is only one among
a number of constraints and enters into most sub-systems only in
indirect ways.

The above analysis has pointed out that although the profit objective is
clearly of importance, by itself it is not a sufficient criterion for the
effective management of a business organisation. There are many other
considerations and motivations which affect the desire for the greatest
profit or maximum economic efficiency.

3.3 Annual Objectives

Annual objectives, according to Pearce II, and Robinson Jr. (1998), are
objectives which are established to be pursued and attained within a
period of one year. A critical step in successful implementation of grand
strategy is the identification and communication of annual operating
objectives that relate logically to the strategy’s long term objectives.

Accomplishment of these annual objectives adds up to the successful

execution of the business’s overall long term plan. A comprehensive set
of annual objectives also provides a specific basis for monitoring and
controlling organisational performance. Such objectives can aid in the
development of “trigger points” contribution, however, certain basic
qualities must be incorporated in developing and communicating them.

Annual objectives are specific, measurable statements of what an

organisational subunit is expected to achieve in contributing to the
accomplishment of the business’s grand strategy. Although this seems
rather obvious, problems in strategy implementation often stems from
poorly conceived or poorly stated annual objectives. To maximise these
objectives’ contribution, certain basic qualities must be incorporated in
developing and communicating them.

3.3.1 Qualities of Annual Objectives

Pearce II and Robinson Jr. (1998), provided the following qualities of

effective annual objectives for a company.

1. Linkage to Long Term Objectives

An annual objective must be clearly linked to one or more long term
objectives of the business’s grand strategy. However, to accomplish

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MBA 820 CORPORATE MANAGEMENT STRATEGY

this, it is essential to understand how the two types of objectives differ.

Four basic dimensions distinguish annual and long term objectives.

• Time frame: long term objectives are focused usually five years
or more into the future. Annual objectives are more immediate,
usually involving one year.

• Focus: long term objectives focus on the future position of the

firm in its competitive environment. Annual objectives identify
specific accomplishment for the company’s functional areas, or
other subunits over the next year.

• Specificity: long term objectives are broadly stated. Annual

objectives are very specific and directly linked to the company’s
functional area, or other subunits.

• Measurement: while both long term and annual objectives are

quantifiable, long term objectives are measured in broad; relative
terms for example, thirty five percent market shares. Annual
objectives are stated in absolute terms, such as a twenty percent
increase in sales in the next year.

Annual objectives are meant to add breadth and specificity in identifying

what must be accomplished in order to achieve the long term objective.
For example, the long term objective indicating attainment of certain
percent market share in some years clarifies where the business wants to
be. However, achieving that objective can be greatly enhanced if a
series of specific annual objectives identify what must be accomplished
each year to achieve that objective. For example, if market share is now
fifteen percent, then the likely annual objective would be to achieve a
minimum ten percent increase in relative market share in the next five
years.

Specific annual objectives should provide targets for performance of

operating areas if long term objective is to be achieved. The link
between short term and long term objectives should resemble cascades
through the business from basic long term objectives to numerous
specific annual objectives in key operating areas.

Thus, long term objectives are segmented and reduced to short term
(annual) objectives. The cascading effect has the added advantage of
providing a clear reference for vertical communication and negotiation,
which may be necessary to ensure integrated objectives and plans at the
operating level.

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MBA 820 MODULE 1

2. Integrated and Coordinated Objectives

The implementation of grand strategies requires objectives that are
integrated and coordinated. Nevertheless, a manufacturing firm might
logically prefer long production runs and plant warehousing to maximise
customers convenience. There are other functional conflicts which may
arise or obtainable. The absence of concerted effort to integrate and
coordinate annual objectives may make these natural conflicts to
contribute to the failure of long term objectives and by extension, the
grand strategy, even though the separate annual objectives are well
designed.

The successful implementation of strategy depends on coordination and

integration of the operating units. This is encouraged through the
development of short term (annual) objectives. In other words, annual
objectives provide a focal point for identifying and resolving conflicts
between organisational subunits that might otherwise impede strategic
performance.

SELF-ASSESSMENT EXERCISE

Mention and explain the basic dimensions which distinguish annual

from long term objectives.

3. Consistency in Annual Objectives

Empirical evidence indicates that managers in the same organisation will
have different ways of developing objectives. For example, managers in
different functions, departments, or other subunits will often emphasise
different criteria. Due to this lack of consistency, units may not be
comparable, commitment to objectives may differ, and the
interdependence of units may be dysfunctional.

The annual objectives are more consistent when each objective clearly
states what is to be accomplished, when it will be done, and how
accomplishment will be measured. Objectives can then be used to
monitor both the effectiveness of an operating unit and, collectively,
progress toward the business’s long term objectives. If objectives are
measurable and state what is to be done and when it will be achieved in
a clear, understandable manner, misunderstanding is less likely to occur
among the interdependent operating managers who must implement the
grand strategy.

4. Measurable
The issue of measurability cannot be overemphasised as a key quality of
annual objectives. Unfortunately, some key results are easier to measure
than others. The line units, for production, may easily be assessed by
clear, quantifiable measures, while criteria for certain staff areas (e.g.,

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MBA 820 CORPORATE MANAGEMENT STRATEGY

personnel) are more difficult to measure. However, successful

implementation requires setting measurable annual objectives in these
difficult areas, as well. This is usually accomplished by initially
focusing on measurable activity, followed by the identification of
acceptable, measurable outcomes.

There are other qualities of good objectives such as acceptable, flexible,

suitable, motivating, understandable and achievable – also apply to
annual objectives. While these will not be discussed here, the reader
should review the earlier discussion to appreciate the qualities common
to all objectives.

5. Priorities
Another critical quality of annual objectives involves the need to
prioritise short term objectives. Due to timing considerations and
relative impact on strategic success, annual objectives often have
relative priorities.

The consideration of timing often necessitates initiating or completing

one activity before another is started. For example, a company such as a
bank may encounter a problem in implementing a program designed to
expand its credit card base as part of an ambitious market development
strategy in the financial services industry. The bank’s objective for
establishing the accounting procedures to support the program may not
have been given sufficient priority.

All annual objectives are important but some deserve additional

attention because of their particular impact on the success of a strategy.
For instance, if such priorities are not discussed and indicated,
conflicting assumptions about the relative importance of annual
objectives might inhibit progress toward strategic effectiveness.

Business priorities are usually established in one of several ways. A

simple ranking may be based on discussion and negotiation during the
planning process. However, this does not necessarily communicate the
real difference in the importance of objectives, so terms such as primary,
top, or secondary may be used to indicate priority. Nevertheless,
whatever the method used to establish priorities, recognising the
priorities of annual objectives are an important dimension in
implementing the strategy.

3.4 Long Term Objectives

In the opinion of Pearce II and Robinson Jr. (1998), long term objectives
are objectives which are established to be pursued and attained over a
period of many years. The long term objectives, as benchmarks for

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MBA 820 MODULE 1

corporate and business strategies, use such measures as market share,

return on investment (ROI), and return on equity (ROE), stock price,
and new market penetration to provide guidance in assessing the
ultimate effectiveness of a chosen strategy. While such objectives
clarify the long-range purpose of a grand strategy and the basis for
judging its success, they are less useful in guiding the operating
strategies and immediate actions necessary to implement a grand
strategy.

3.4.1 Qualities of Long term Objectives

According to Pearce II and Robinson Jr. (1998), there are some qualities
of an objective which are necessary towards improving its chances of
being attained in organisational operations. Such qualities are embedded
in criteria that should be used in preparing long term objectives such as
acceptable, flexible, and measurable over time, motivating, suitable, and
achievable. These qualities are as discussed below.

1. Acceptable
The managers are most likely to pursue objectives that are consistent
with perceptions and preferences of the managers. In addition, certain
long term corporate objectives are frequently designed to be acceptable
to major interest groups external to the firm. An example might involve
air-pollution control when efforts are undertaken at the insistence of the
Environmental Protection Agency.

2. Flexible
Strategic objectives should be modifiable in the event of unforeseen or
extraordinary changes in the firm's competitive or environmental
forecasts. At the same time, flexibility is usually increased at the
expense of specificity. In the same vein, employee confidence may be
tempered because adjustment of a flexible objective may affect their job.
One recommendation for providing flexibility while minimising
associated negative effects is to allow for adjustments in the level rather
than the nature of an objective.

For instance, an objective for a personnel department to provide

managerial development training for ten supervisors per year over the
next two years can easily be understood and thereby leading to changes
in the number of people to be trained. In contrast, changing the
personnel department's objective to assisting production supervisors in
reducing job-related injuries by five percent per year would
understandably create dissatisfaction.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

3. Measurable
Strategic objectives must clearly and concretely state what will be
achieved and within what time frame. Numerical specificity minimises
misunderstandings thus, objectives should be measurable over time. For
example, an objective to "substantially improve our return on
investment" would be better stated as "increase the return on investment
on our line of paper products by a minimum of 1 percent a year and a
total of 5 percent over the next three years."

4. Motivating
The workers, who are the strategic inanimate machines, are most
productive when objectives are set at a motivating level in terms of
making them high enough to challenge but not so high as to frustrate or
so low as to be easily attained. The problem is that individuals and
groups differ in their perceptions of standards. Therefore, the ideal
situation is to develop multiple objectives, some aimed at specific
groups. More sweeping statements are usually seen as lacking
appreciation for individual and somewhat unique situations. Such tailor-
made objectives require time and involvement from the decision maker,
but they are more likely to serve as motivational forces.

5. Suitable
The objectives must be suited to the broad aims of the organisation,
which are expressed in the statement of company’s mission. Each
objective should be a step toward the attainment of overall goals. In fact,
objectives that do not coincide with company or corporate missions can
subvert the aims of the firm. For example, if the mission is growth
oriented, an objective of reducing the debt-to-equity ratio to one in order
to improve stability would probably be unsuitable and
counterproductive.

6. Understandable
The managers of the strategic business units at all levels must have a
clear understanding of what is to be achieved. They must also
understand the major criteria by which their performance will be
evaluated. Thus, objectives must be stated so that they are
understandable to the recipient as they are to the giver. In simple terms,
objectives must be prepared in clear, meaningful, and unambiguous
fashion.

7. Achievable
Another important point is that objectives must be possible to achieve.
This is easier said than done. The rumbling in the remote and operating
environments adds to the dynamic nature of business internal operations.
This creates uncertainty, limiting strategic management's accuracy in
setting feasible objectives.

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MBA 820 MODULE 1

SELF-ASSESSMENT EXERCISE

Mention and explain the qualities of long term objectives.

3.4.2 Functional Areas of Long Term Objectives

According to Pearce II and Robinson Jr. (1998), strategic managers

recognise that short-run profit maximisation is rarely the best approach
to achieving sustained corporate growth and profitability. For most
strategic managers, a small amount of profit now to maintain vitality,
but sow the majority to increase the likelihood of a long term supply is
the ideal. This is the most frequently used rationale in selecting
objectives.

In order to achieve sustained corporate growth and profitability,

strategic planners commonly establish long term objectives in seven
areas such as discussed below.

1. Profitability
The ability of any business to operate in the long run depends on
attaining an acceptable level of profits. Strategically managed firms
characteristically have a profit objective usually expressed in earnings
per share or return on equity.

2. Productivity
Strategic managers constantly try to improve the productivity of their
systems. Companies that can improve the input-output relationship
normally increase profitability. Thus, businesses almost always, state an
objective for productivity.

In terms of measurement, the items produced or services rendered per

unit of input are commonly used. Nevertheless, productivity objectives
are sometimes stated in terms of desired decreases in cost.
This represents an equally effective way to increase profitability if unit
output is maintained. For example, objectives may be set for reducing
defective items, customer complaints leading to litigation, or overtime.

3. Competitive position
One important measure of corporate success is relative dominance in the
marketplace. Larger firms often establish an objective in terms of
competitive position to gauge their comparative ability for growth and
profitability. Total sales or market shares are often used and an objective
describing competitive position may indicate a corporation's priorities in
the long term.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

4. Employee development
The employees of a corporate organisation value growth and career
opportunities in their workplace. In the prevalence of such opportunities,
productivity is often increased and expensive turnover decreased.
Therefore, strategic decision makers frequently include an employee
development objective in their long-range plans.

For instance, a company can declare an objective of developing highly

skilled and flexible employees, thereby providing steady employment
for a reduced number of workers.

5. Employee relations
Corporate organisations or companies actively seek good employee
relations, whether or not they are bound by union contracts. In fact, a
characteristic concern of strategic managers is taking proactive steps in
anticipation of employee needs and expectations. Strategic managers
believe productivity is partially tied to employees’ loyalty and perceived
management interest in workers’ welfare.

Therefore, strategic managers set objectives to improve employee

relations. For example, safety programs, worker representation on
management committees, and employee stock option plans are all
normal outgrowths of employee relations objectives.

6. Technological leadership
Corporate entities or businesses must decide whether to lead or follow in
the marketplace. While either can be a successful approach, each
requires a different strategic posture. Therefore, many corporate entities
or businesses state an objective in terms of technological leadership.

7. Public responsibility
The business entities recognise their responsibilities to customers and
the society at large. In most cases, many of them actively seek to exceed
the minimum demands made by the government regulations. In addition,
they also work to develop reputations for fairly priced products and
services. Nevertheless, they also attempt to establish themselves as
responsible corporate citizens. Hence, they are found establishing
charitable and educational foundations, training facilities for
disadvantage groups, community welfare schemes, and provision of
infrastructure.

4.0 CONCLUSION

We have discussed in this unit that organisational objectives are

derivable from the goals of the organisation, and they are in form of
annual and long term objectives. As you have observed, the former type

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MBA 820 MODULE 1

of objectives are for the strategic business units while the latter
objectives are formulated for the whole organisation. We also discussed
the qualities of both annual and long term objectives, and the differences
between the two types of objectives.

5.0 SUMMARY

In this unit, you have learnt the following topics:

• nature of organisational objective

• the fallacy of single objective
• annual objectives
• qualities of annual objectives
• long term objectives
• qualities of long term objectives, and
• functional areas of long term objectives.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the functional areas of long term objective.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). New Delhi: Biztantra, An Imprint
of Dreamtech Press.

Pearce & David (1987). Strategic Planning and Policy. New York:
Reinhold.

Pearce II, J. A. & Robinson Jr., R. B.(1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

UNIT 5 ORGANISATIONAL POLICIES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Organisational Policy
3.2 Nature of Organisational Policy
3.3 The Purpose of Organisational Policies
3.4 Distinction between Objectives and Policy
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Corporate organisations operate within the ambit of the necessary guides

which are normally the organisational procedures and regulations for
effectiveness and efficiency. Basically, policies incorporate all the
necessary operational procedures and regulations of an organisation.
Therefore, all the operational activities of an organisation are
circumscribed within the ambit of organisational policy.

Hence, the issue of organisational policy cannot be compromised. All

organisations must operate with policy as it is normally formulated for
the good of healthy operations and interrelationships among the various
subsystems of the organisation. In this unit study the discussion is on
organisational policy.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain organisational policy

• discuss the purpose of organisational policy
• state differences between objectives and policy.

3.0 MAIN CONTENT

3.1 Meaning of Organisational Policy

According to Pearce II and Robinson Jr. (1998), policies are specific

guides for operating managers and their subordinates. Policies are

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MBA 820 MODULE 1

powerful tools for strategy implementation and control once they are
clearly linked to operating strategies and long term objectives.

In the opinion of Thompson Jr. and Strickland (1987) policies are

directives designed to guide the thinking, decisions, and actions of
managers and their subordinates in implementing an organisation’s
strategy. Policies provide guidelines for establishing and controlling
ongoing operations in a manner consistent with the firm’s strategic
objectives. Often referred to as standard operating procedures, policies
serve to increase managerial effectiveness by standardising many
routine decisions and controlling the discretion of managers and
subordinates in implementing operational strategies. Logically, policies
should be derived from functional strategies (and, in some instances,
from corporate or business strategies) with the key purpose of aiding in
the execution of a strategy

In essence, a policy is a guideline for organisational actions and the

implementation of goals and objectives. Policy is translated into rules,
plans and procedures. It relates to all activities of the organisation at all
levels. Clearly stated, policy can help reinforce the main functions of the
organisation, make for consistency and reduce dependence on the
actions of individual managers.

Policy clarifies roles and responsibilities of managers and other

members of staff and provides guidelines for managerial behaviour.
Securing agreement to a new or revised policy can help overcome
reliance on outdated practices and aid the introduction of organisational
change.

Policy provides guiding principles for areas of decision-making and

delegation, for example, specific decisions relating to personnel policy
may be to:

• give priority to promotion from within the organisation.

• enforce retirement at government pensionable age.
• employ only graduate or professionally qualified accountants.
• permit line managers, in consultation with the personnel
manager, to appoint staff up to a given salary/wage level.

Some policy decisions are directly influenced by external factors, for

example, government legislation on equal opportunities.

3.2 Nature of Organisational Policy

Policies in their nature can vary in their level of strategic significance.

Some, such as travel reimbursement procedures, are really work rules

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MBA 820 CORPORATE MANAGEMENT STRATEGY

that are not necessarily linked to the implementation of a specific

strategy. A policy for instance, can make a requirement that every
location of an organisation should invest a certain percentage of its gross
revenue in local advertising. This virtually is a functional strategy.

Policies can also be externally imposed or internally derived depending

on the ownership interest. Policies regarding equality of opportunity
practices are often developed in compliance with external (government)
requirements. In the same vein, some organisational policies regarding
leasing or depreciation may be strongly influenced by current tax
regulations. Regardless of the origin, formality, and nature of the policy,
the key point to bear in mind is the valuable role policies can play in the
implementation of a strategy.

In utmost consideration, the carefully constructed policies enhance

strategy implementation in several ways. Obviously, it is imperative to
examine existing policies and ensure the existence of policies necessary
to guide and control operating activities consistent with current business
and functional strategies. Ensuring communication of specific policies
will help overcome resistance to strategic change and foster greater
organisational commitment for successful implementation of a strategy.

On the basis of the organisation’s ideology or philosophy, the goals of

the organisation are translated into objectives and policy. Terminology
and use of the two terms vary but objectives are seen here as the ‘what’,
and policy as the ‘how’, ‘where’ and ‘when’ – this means that policy
follow objective.

SELF-ASSESSMENT EXERCISE

Explain the term ‘organisational policy’.

3.3 The Purpose of Policies

According to Pearce II and Robinson Jr. (1998), policies are designed to

communicate specific guides to decisions. They are designed to control
and reinforce the implementation of functional strategies and the grand
strategy, and they fulfill these roles in several ways such as discussed
below.

1. Policies establish indirect control over independent action by

making a clear statement about how things are to be done and the
conduct of activities without direct intervention by top
management.

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MBA 820 MODULE 1

2. Policies promote uniform handling of similar activities. This

facilitates coordination of work tasks and helps reduce friction
arising from favouritism, discrimination, and disparate handling
of common functions.

3. Policies ensure quicker decisions by standardising answers to

previously and frequently asked questions that would otherwise
recur and be pushed up the management hierarchy again and
again.

4. Policies help institutionalise basic aspects of organisation

behaviour. This minimises conflicting practices and establishes
consistent patterns of action in terms of how organisational
members attempt to make the strategy work.

5. Policies reduce uncertainty in repetitive and day-to-day decision

making, thereby providing a necessary foundation for
coordinated, efficient efforts.

6. Policies can counteract resistance to or rejection of chosen

strategies by organisation members. When major strategic change
is undertaken, unambiguous operating policies help clarify what
is expected and facilitate acceptance, particularly when operating
managers participate in policy development.

7. Policies offer a predetermined answer to routine problems, giving

managers more time to cope with non-routine matters, dealing
with ordinary and extraordinary problems is greatly expedited –
the former by referring to established policy and the latter by
drawing on a portion of the manager’s time.

8. Policies afford managers a mechanism for avoiding hasty and ill-

conceived decisions in changing operations. Prevailing policy
can always be used as a reason for not yielding to emotion-based,
expedient, or temporarily valid arguments for altering procedures
and practices.

A policy can either be in writing and documented or implied. In other

words, policies may be written and formal or unwritten and informal.
The positive reasons for informal, unwritten policies are usually
associated with some strategic need for competitive secrecy.

Some unwritten policies, such as “consultation with the employees”, are

widely known (or expected) by employees and implicitly sanctioned by
management. On the contrary, unwritten, informal policies may be
contrary to the long term success of a strategy. Still, managers and

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MBA 820 CORPORATE MANAGEMENT STRATEGY

employees often like the latitude “granted” when policies are unwritten
and informal.

There are inherent advantages in the use of formal written policies such
as follows.
i) Managers are required to think through the policy’s meaning,
content, and intended use.
ii) The policy is explicit so misunderstandings are reduced.
iii) Equitable and consistent treatment of problems is more likely.
iv) Unalterable transmission of policies is ensured.
v) Authorisation or sanction of the policy is more clearly
communicated, which can be helpful in many cases.
vi) A convenient and authoritative reference can be supplied to all
concerned with the policy.
vii) Indirect control, organisation-wide coordination and key purposes
of policies, are systematically enhanced.

SELF-ASSESSMENT EXERCISE

What are the reasons for the formulation of organisational policies?

3.4 Distinction between Objectives and Policy

While objectives set out more specifically the goals of the organisation,
the aims to be achieved and the desired end-results are developed within
the framework of objectives. It provides the basis for decision-making
and the course of action to follow in order to achieve objectives.

The relationship between the organisation, its objectives and

management is espoused as one of the managerial duties of an
organisation, which is to ensure that the human and material
organisation is consistent with the objective, resources and requirements
of the concern. The established objectives and policy therefore
constitute an integral part of the process of management and a necessary
function in every organisation.

The objectives of an organisation are related to the input-conversion-

output cycle. In order to achieve its objectives and satisfy its goals, the
organisation buys inputs from the environment and through a series of
activities transforms or converts these inputs into outputs and returns
them to the environment as inputs to the systems. The organisation
operates within a dynamic setting and success in achieving its goals will
be influenced by a multiplicity of interactions with the environment.

Regardless of the type of organisation under consideration, there is the

need for lines of direction through the establishment of objectives and

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MBA 820 MODULE 1

determination of policy. Objectives and policy form a basis for the

process of management.

The choice of objectives is an essential part of the decision-making

process including future course of action. Objectives may be set out
either in general terms or in more specific terms. General objectives are
determined by top management. Specific objectives are formulated
within the scope of general objectives and usually have more defined
areas of application and time limits.

Objectives may be just implicit but the formal explicit definition of

objectives will help highlight the activities which the organisation needs
to undertake as the comparative importance of its various functions. An
explicit statement of objectives may assist communication and reduce
misunderstandings, and provide more meaningful criteria for evaluating
organisational performance. However, objectives should not be stated in
such a way that they detract from the recognition of possible new
opportunities, potential danger areas, and the initiative of staff or the
need for innovation or change.

Objectives emphasise aims and are stated as expectations, but policies

emphasise rules and are stated in the form of directives. In terms of
distinction between objectives and policy, the figure below is very
relevant.

Functional Area Objective Policy

Marketing Complete market The company will sell to every
coverage retail outlet that is creditworthy, as
decided by the company’s
accountant.
Production Low units costs from The company will not produce
long production runs one-off jobs without the specific
authority of the Board.
Finance To maintain Accountant will draw up a cash
adequate liquidity budget and inform the Board if
working capital is likely to fall
below a specified limit.
Personnel Good labour Set up and maintain schemes for:
relations Joint Consultation, Job Evaluation,
and Wage Incentives.
Fig. 1.1: Comparison between Objectives and Policy

Objectives and policy together provide corporate guidelines for the

operation and management of the organisation. All the activities of the
organisation are guided towards achieving objectives in the manner
directed. The formulation of objectives and policy, and the allocation of

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MBA 820 CORPORATE MANAGEMENT STRATEGY

resources, provide the basis for strategic planning which is the first stage
in the planning and control processes of business organisations.

4.0 CONCLUSION

In this unit you have learnt that policies are directives designed to guide
the thinking, decisions and actions of managers in implementing an
organisation’s strategy. You have observed from the analysis that
policies provide guidelines for establishing and controlling ongoing
operations in a manner consistent with the firm’s strategic objectives.

You are exposed to the fact that policies are interrelated with objectives
because the former is normally designed to pursue and achieve the latter.
Lastly, you are now aware that there are fundamental differences
between policies and objectives particularly in business functional areas.

5.0 SUMMARY

In this unit, you are made aware of the following topics:

• meaning of organisational policy

• nature of organisational policy
• the purpose of policies, and
• distinction between objectives and policy.

6.0 TUTOR-MARKED ASSIGNMENT

Differentiate between policy and objective in business functional areas.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, an Imprint of Dreamtech Press.

Pearce & David (1987). Strategic Planning and Policy. New York:
Reinhold.

Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

50
MBA 820 MODULE 2

MODULE 2

Unit 1 Internal Analysis of the Firm

Unit 2 Industry Analysis
Unit 3 External Diagnosis
Unit 4 Strategic Planning
Unit 5 Corporate Strategic Posture

UNIT 1 INTERNAL ANALYSIS OF THE FIRM

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Internal Diagnosis
3.2 Identification of Strategic Internal Factors
3.3 Evaluation of Strategic Internal Factors
3.4 Quantitative versus Qualitative Approaches in Evaluating
Internal Factors
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

A prelude to the development of strategies for a corporate entity is the

internal analysis. The company’s internal strengths and weaknesses are
evaluated in relation to the competitors’ position in the industry. Hence,
it becomes imperative for the managers to pre-occupy themselves with
the industry analysis in order to determine appropriate strategic posture
to adopt towards carving a viable position for itself in the industry.

In this study unit, the discussion is on the nature of internal analysis of a

company.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain the nature of industry analysis

• discuss strategic factors in internal analysis
• evaluate the strategic internal factors of a company

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MBA 820 CORPORATE MANAGEMENT STRATEGY

• apply both qualitative and quantitative approaches to evaluate the

strategic internal factors of a company.

3.0 MAIN CONTENT

3.1 Nature of Internal Diagnosis

Pearce II and Robinson Jr. (1998) posit that internal analysis involves
the assessment of a company’s profile in relation to the dictates of the
external environment. The analysis of the internal position of a company
that leads to a realistic company profile frequently involves trade-offs,
value judgements and educated guesses as well as objective,
standardised analysis. Nevertheless, this dichotomy can lead managers
to slight internal analysis by emphasising personal opinion.

Systematic internal analysis leading to an objective company profile is

essential in the development of a realistic, effective strategy. Internal
analysis must identify the strategically important strengths and
weaknesses on which a firm should ultimately base its strategy. Ideally,
this purpose can be achieved by first identifying key internal factors
(e.g., distribution channels, cash flow, locations, technology, and
organisational structure) and second by evaluating these factors.

In actual practice, the process is neither linear nor simple. The steps
tend to overlap, and managers in different positions and levels approach
internal analysis in different ways. One major study found that
managers even use different criteria for evaluating apparent strengths
and potential weaknesses.

While the process of internal analysis in most firms is not necessarily

systematic, it is nonetheless recognised as a critical ingredient in
strategy development. If only on an intuitive basis, managers should
develop judgements about what the firm does particularly well i.e. its
key strengths or distinct competencies. And based on the match between
these strengths and defined or projected market opportunities, the firm
ultimately charts its strategic course.

In internal analysis of a company, the issue of a company profile is very

important. In the opinion of Pearce II and Robinson Jr. (1998), a
company profile is the determination of a firm's strategic competencies
and weaknesses. This is accomplished by identifying and then
evaluating strategic, internal factors.

The relevant issues in internal diagnosis are the following:

• What are strategic internal factors?
• Where do they originate?

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MBA 820 MODULE 2

• How do we decide which are truly strategic factors that must be

carefully evaluated?

The above issues might be raised by managers in identifying and

evaluating key internal factors as strengths or weaknesses on which to
base the firm's future strategy.

SELF-ASSESSMENT EXERCISE

Explain the term ‘internal diagnoses’.

3.2 Identification of Strategic Internal Factors

1. A Function Approach
Strategic internal factors are a firm's basic capabilities, limitations, and
characteristics. A typical list of factors in internal capabilities of a
company includes considerations such as the followings.

i) Marketing in areas of products, market share, channels of

distribution, pricing strategy, promotion strategy, after-sales
services, brand loyalty, and goodwill.

ii) Finance in areas of short term capital, long term capital, taxes,
debt management, leverage position, working capital, cost
control, finance size, efficient accounting system, etc.

iii) Production in areas of raw materials cost, inventory control,

economies of operation, technical efficiency, cost/benefit,
research and development, patents, trademarks, etc.

iv) Personnel in areas such as management of personnel, employees’

skill and morale, labour relations, effective personnel policies,
employee turnover, etc.

Some of the above factors are the focus of internal analysis in most
business firms. According to Pearce II and Robinson Jr. (1998), firms
are not likely to consider all of the factors as potential strengths or
weaknesses. To develop or revise a strategy, managers would rather
identify the few factors on which success will most likely depend.

Equally important, reliance on different internal factors will vary by

industry, market segment, product life cycle, and the firm's current
position. Managers are looking for what Chester Barnard calls "the
strategic factors," those internal capabilities that appear most critical for
success in a particular competitive area. For example, strategic factors

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MBA 820 CORPORATE MANAGEMENT STRATEGY

for firms in the oil industry will be quite different from those of firms in
the construction or hospitality industries.

Strategic factors can also vary between firms within the same industry.
In the mechanical writing industry, for example, the strategies of BIC
and Cross, both successful, are based on different internal strengths:
BIC's on its strengths in mass production, extensive advertising, and
mass distribution channels; Cross's on high quality, image, and selective
distribution channels.

Analysis of past trends in sales, costs and profitability is of major

importance in identifying strategic internal factors. Basically, this
identification should be based on a clear picture of the nature of the
firm’s sales. An anatomy of past trends comprising product lines,
channels of distribution, key customers or types of customers,
geographic region, and sales approach should be developed in detail.

A similar anatomy should focus on costs and profitability. Detailed

investigation of the firm’s performance history helps isolate internal
factors influencing sales, costs, profitability, or their interrelationships.
These are of major importance to future strategy decisions. To
understand such results, a firm may determine that certain key internal
factors (e.g., experience in particular distribution channels, pricing
policies, warehouse location, and technology) deserve major attention in
formulating future strategy.

The analysis of the strategic factors also requires an external focus.

When a strategist isolates key internal factors through analysis of past
and present performances, industry conditions/trends and comparisons
with competitors also provide insight. BIC’s identification of mass
production and advertising as key internal factors is based as much on
analysis of industry and competitive characteristics as on past
performance of BIC itself.

The changes in the conditions of an industry can lead to the need to

reexamine internal strengths and weaknesses in the light of new
emerging determinants of success in the industry. Furthermore, strategic
internal factors are often chosen for in-depth evaluation because firms
are contemplating expansion of products or markets, diversifications,
and so forth. Clearly, scrutinising the industry under consideration and
current competitors is a key means of identifying strategic factors if a
firm is evaluating its capability to move into unfamiliar markets.

2. The Value Chain Approach

Pearce II and Robinson Jr. (1998) posit that diagnosing a company’s key
strengths and weaknesses requires the adoption of a disaggregated view

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MBA 820 MODULE 2

of the firm. Examining the firm across distinct functional areas is one
way to disaggregate the firm for internal analysis purposes. Another
way to disaggregate the firm is to use a framework called the value
chain.

Developed by Michael Porter, a value chain is a systematic way of

viewing the series of activities a firm performs to provide a product to
its customers. The value chain disaggregates a firm into its strategically
relevant activities in order to understand the behaviour of the firm’s cost
and its existing or potential sources of differentiation. A firm gains
competitive advantage by performing these strategically important
activities, the key internal factors, more cheaply or better than its
competitors.

Fundamentally, every firm can be viewed as a collection of value

activities that are performed to design, produce, market, deliver, and
support its product. Such activities can be grouped into nine basic
categories for virtually any firm at the business unit level. Within each
category of activity, a firm typically performs a number of discrete
activities that may represent key strengths or weaknesses for the firm.

Service activities, for example, may include such discrete activities as

installation, repair, parts distribution, and upgrading – any of which
could be a major source of competitive advantage or disadvantage.
Through the systematic identification of these discrete activities,
managers using the value chain approach can target potential strengths
and weaknesses for further evaluation.

The basic categories of activities can be grouped into two broad types,
namely: the primary and secondary activities. Primary activities are
those involved in the physical creation of the firm’s product or service,
its delivery and marketing to the buyer, and its after-sale support.
Overarching each of these are support activities, which provide inputs or
infrastructure allowing the primary activities to take place on an ongoing
basis.

According to Pearce II and Robinson Jr. (1998), in order to identify the

primary value activities, the company requires the isolation of activities
that are technologically and strategically distinct. Each of the five basic
categories of primary activities is divisible into several distinct
activities, such as the following.

i) Inbound logistics
Activities associated with receiving, storing, and disseminating inputs to
the product, such as material handling, warehousing, inventory control,
vehicle scheduling, and returns to suppliers.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

ii) Operations
Activities associated with transforming inputs into the final product
form, such as machining, packaging, assembly, equipment maintenance,
testing, printing, and facility operations.

iii) Outbound logistics

Activities associated with collecting, sorting, and physically distributing
the product to buyers, such as finished goods warehousing, material
handling, delivery vehicle operation, order processing, and scheduling.

iv) Marketing and sales

Activities associated with providing the means by which buyers can
purchase the product and inducing them to do so, such as advertising,
promotion, sales force, quoting, channel selection, channel relations, and
pricing.

v) Service
Activities associated with providing service to enhance or maintain the
value of the product, such as installation, repair, training, parts supply,
and product adjustment.

Support value activities arise in one of four categories and can be

identified by isolating technologically or strategically distinct activities.
Often overlooked as sources of competitive advantage, these four areas
can typically be distinguished as follows.

a) Procurement
Activities involved in obtaining purchased inputs, whether raw
materials, purchased services, machinery, or so on. Procurement
stretches across the entire value chain because it supports every activity
– every activity uses purchased inputs of some kind. Many discrete
procurement activities are typically performed within a firm, often by
different people.

b) Technology development
Activities involved in designing the product as well as in creating and
improving the way the various activities in the value chain are
performed. People tend to think of technology in terms of the product or
manufacturing process. In fact, every activity a firm performs involves
a technology or technologies, which may be mundane or sophisticated,
and a firm has a stock of know-how for performing each activity.
Technology development typically involves a variety of discrete
activities, some performed outside the R&D department.

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MBA 820 MODULE 2

c) Human resource management

There are activities necessary to ensure the recruiting, training, and
development of personnel. Every activity involves human resources, and
thus human resource management activities cut across the entire chain.

d) Firm infrastructure
Such activities; as general management, accounting, legal, finance,
strategic planning, and all others from specific primary activities but
essential to the entire chain’s operation.

The value chain provides a useful approach to guide a systematic

internal analysis of the firm’s existing or potential strengths and
weaknesses. By systematically disaggregating a firm into its distinct
value activities across the nine activity categories, the strategist has
identified key internal factors for further examination as potential
sources of competitive advantage.

Whether using the value chain, an examination of functional areas, or

both approaches, the strategist’s next step in a systematic internal
analysis is to compare the firm’s status with meaningful standards to
determine which value activities are strengths or weaknesses. Four
sources of meaningful standards used to evaluate internal factors and
value activities are discussed in the next section.

SELF-ASSESSMENT EXERCISE

Identify and explain the four categories in which support value activities
can arise.

3.3 Evaluation of Strategic Internal Factors

As observed by Pearce II and Robinson Jr. (1998), identification and

evaluation of key internal factors have been separated for discussion, but
in practice, they are not separate, distinct steps. The objective of
internal analysis is a careful determination of a firm’s strategic strengths
and weaknesses.

An internal analysis that generates a long list of resources and

capabilities has provided little help in strategy formulation. Instead,
internal analysis must identify and evaluate a limited number of
strengths and weaknesses relative to the opportunities targeted in the
firm’s current and future competitive environment.

A factor is considered a strength if it is a distinctive competency. It is

more than merely what the firm has the competence to do. It is
something the firm does (or has the future capacity to do) particularly

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MBA 820 CORPORATE MANAGEMENT STRATEGY

well related to abilities of existing or potential competitors. A distinctive

competence (strength) is important because it gives an organisation a
comparative advantage in the marketplace.

A factor is considered a weakness if it is something the firm does poorly

or doesn’t have the capacity to do although key rivals have the capacity.
Centralised production facilities and lack of capital resources can be
major weaknesses.

The critical question is how strategists should evaluate key internal

factors and value activities as strengths or weaknesses. There are four
basic perspectives.

• comparison with the firm’s past performance,

• stage of product/market evaluation,
• comparison with competitors, and
• comparison with key success factors in the firm’s industry.

1. Comparison with past capabilities and performance

According to Pearce II and Robinson Jr. (1998), strategists use the
historical experience of the firm as a basis for evaluating internal
factors. Managers are most familiar with their firm, its internal
capabilities and problems, because they have been immersed over time
in managing the firm’s financial, marketing, production, and Research
and Development (R&D) activities.

Therefore, a manager’s assessment of whether certain internal factors–

such as production facilities, sales organisation, financial capacity,
control systems, and key personnel–are strengths or weaknesses will be
strongly influenced by his or her internal experience. In the capital-
intensive industry, for example, debt capacity is a strategic internal
factor.

2. Stages in product/market evolution

The requirements for success in product/market segments evolve and
change over time. As a result, strategists can use these changing
patterns associated with different stages in product/market evaluation as
a framework for identifying and evaluating the firm’s strengths and
weaknesses.

Four general stages of product/market evolution and the typical changes

in functional capabilities are often associated with business success at
each stage. The early development of a product/ market, for example,
entails minimal growth in sales, major R&D emphasis, rapid
technological change in the product, operating losses, and a need for
sufficient resources or slack to support a temporarily unprofitable

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MBA 820 MODULE 2

operation. Success at this stage may be associated with technical skill

with being first in new markets or with having a marketing advantage
that creates widespread awareness.

The strengths necessary for success is seen in the growth stage. Rapid
growth brings new competitors into the market. Such factors as brand
recognition, product/market differentiation, and the financial resources
to support both heavy marketing expenses and the effect of price
competition on cash flow can be key strengths at this stage.

According to Pearce II and Robinson Jr. (1998), as the product/market

moves through a “shakeout” phase and into the maturity stage, market
growth continues but at a decreasing rate. The number of market
segments begins to expand, while technological change in product
design slows considerably. The result is usually more intense
competition, and promotional or pricing advantages or differentiation
become key internal strengths.

Technological change in the process design becomes intense as the

many competitors seek to provide the product in the most efficient
manner. Where Research and Development (R&D) were critical in the
development stage, efficient production has now become crucial to a
business’s continued success in the broader market segments. Chrysler
has found efficiency a key strength in the auto industry.

When products/markets move toward a saturation/decline stage,

strengths and weaknesses centre on cost advantages, superior supplier or
customer relationships, and financial control. Competitive advantage
can exist at this stage, at least temporarily, if a firm serves gradually
shrinking markets that competitors are choosing to leave.

3. Comparison with competitors

A major focus in determining a firm’s strengths and weaknesses is
comparison with existing (and potential) competitors. Firms in the same
industry often have different marketing skills, financial resources,
operating facilities and locations, technical know-how, brand image,
levels of integration, managerial talent, and so on. These different
internal capabilities can become relative strengths (or weaknesses)
depending on the strategy the firm chooses.

In the assessment of the choice of strategy, a manager should compare

the company’s key internal capabilities with those of its rivals, thereby
isolating key strengths or weaknesses.

In ultimately developing a strategy, distribution network, technological

capabilities, operating costs, and service facilities are a few of the

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MBA 820 CORPORATE MANAGEMENT STRATEGY

internal factors to be considered. To ascertain whether their internal

capabilities on these and other factors are strengths or weaknesses,
comparison to key competitors can prove useful.

Significant favourable differences (existing or expected) are potential

cornerstones of the firm’s strategy. Likewise, through comparison to
major competitors, a firm may avoid strategic commitments it cannot
competitively support.

4. Comparison with success factors in the industry

Industry analysis involves identifying factors associated with successful
participation in a given industry. The key determinants of success in an
industry may be used to identify the internal strengths and weaknesses
of a firm. By scrutinising industry competitors, as well as customer
needs, vertical industry structure, channels of distribution, costs, barriers
to entry, availability of substitutes, and suppliers, and a strategist seeks
to determine whether a firm’s current internal capabilities represent
strengths or weaknesses in new competitive arenas.

3.4 Quantitative versus Qualitative Approaches in

Evaluating Internal Factors

Numerous quantitative tools are available for evaluating selected

internal capabilities of a firm. These entail measurement of a firm’s
effectiveness vis-à-vis each relevant factor and comparative analysis of
this measurement against both competitors (directly or through industry
averages) and the historical experience of the firm. Ratio analysis is
useful for evaluating selected financial, marketing, operating factors.
The firm’s balance sheet and income statement are important sources
from which to derive meaningful ratios. The appendix at the end of this
unit illustrates the use of these techniques for internal analysis.

Quantitative tools cannot be applied to all internal factors, and the

normative judgements of key planning participants may be used in
evaluation. Company or product image and prestige are examples of
internal factors more amenable to qualitative evaluation. But, even
though qualitative and judgmental criteria are used, identification and
serious evaluation of this type of factor are necessary and important
aspects of a thorough internal analysis.

While managers used past performance and competitive comparison in

evaluating tentative strengths, they relied heavily on normative
judgement (qualitative assessment and opinion) in evaluating probable
weaknesses.

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4.0 CONCLUSION

In this unit, you are made aware of the fact that the internal analysis of a
company involves the assessment of the operational strengths and
weaknesses in terms of the available assets of the company and in
relation to the dictates of the external environment. You have observed
that in order to diagnose the internal strengths and weaknesses of a
company, you have to identify the internal factors in functional
operational areas of production, marketing, personnel, finance, etc. You
are also exposed to both qualitative and quantitative approaches which
can be used to evaluate the internal factors of a company.

5.0 SUMMARY

In this unit, the following topics have been examined:

• nature of internal diagnosis

• identification of strategic internal factors
• evaluation of strategic internal factors and
• quantitative versus qualitative approaches in evaluating internal
factors.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss four basic perspectives in evaluation of internal

factors and value activities as strengths or weaknesses.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, An Imprint of Dreamtech Press.

Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

Pearce, & David, (1987). Strategic Planning and Policy. New York:
Reinhold.

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MBA 820 CORPORATE MANAGEMENT STRATEGY

UNIT 2 INDUSTRY ANALYSIS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Industry Competitive Forces and Strategy
3.2 Forces Driving Industry Competition
3.2.1 Threat of Entry
3.2.2 Bargaining Power of Suppliers
3.2.3 Bargaining Power of Buyers
3.2.4 Threat of Substitute Products
3.3 Formulation of Competitive Strategy
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

All industries are characterised by competition due to the fact that there
are always many companies operating in any given industry. The nature
and degree of competition in an industry are dependent on forces such as
the threat of new entrants, the bargaining power of customers, the
bargaining power of suppliers, the threat of substitute products or
services, and the competition among current contestants. In order to
establish a strategic agenda for dealing with these contending issues and
to grow despite them, a company must understand how such competitive
forces work in its industry and how they affect the company in its
particular situation.

Therefore, in this unit, you will be exposed to the assessment of the

forces that shape competition in an industry.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss the use of strategy in relation to the prevailing

competitive forces in an industry
• explain the various forces that shape competition in an industry
• describe what constitute threat to entry in a given industry
• state factors that can determine the power of suppliers
• describe various factors that determine the power of buyers

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• discuss how substitute products can pose problem to the firms in

an industry.

3.0 MAIN CONTENT

3.1 Industry Competitive Forces and Strategy

According to Pearce II and Robinson Jr. (1998) the essence of strategy

formulation is coping with competition. Yet it is easy to view
competition too narrowly and too pessimistically. While one sometimes
hears executives complaining to the contrary, intense competition in an
industry is neither coincidence nor bad luck.

Furthermore, in the fight for market share, competition is not manifested

only in the other players. Rather, competition in an industry is rooted in
its underlying economics, and competitive forces that go well beyond
the established combatants in a particular industry. Customers,
suppliers, potential entrants, and substitute products are all competitors
that may be more or less prominent or active depending on the industry.

The state of competition in an industry depends on five basic forces such

as the threat of new entrants, the bargaining power of customers, the
bargaining power of suppliers, the threat of substitute products or
services, and the competition among current contestants

The collective strength of these forces determines the ultimate profit

potential of an industry. It ranges from intense industries like tyres,
metal cans, and steel, where no company earns spectacular returns on
investment, to mild industries like oil-field services and equipment, soft
drinks, and toiletries, where there is room for quite high returns.

In the opinion of Pearce II and Robinson Jr. (1998) in the economists’

"perfectly competitive" industry, jockeying for position is unbridled and
entry to the industry very easy. This kind of industry structure, of
course, offers the worst prospect for long-run profitability. Nonetheless,
the weaker the collective forces the greater will be the opportunity for
superior performance.

Regardless of their collective strength, the corporate strategist's goal is

to find a position in the industry where his or her company can best
defend itself against these forces or can influence them in its favour. The
collective strength of the forces may be painfully apparent to all the
antagonists; but to cope with them, the strategist must delve below the
surface and analyse the sources of competition.

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Knowledge of these underlying sources of competitive pressure provides

the groundwork for a strategic agenda of action. They highlight the
critical strengths and weaknesses of the company, animate the
positioning of the company in its industry, clarify the areas where
strategic changes may yield the greatest payoff, and highlight the places
where industry trends promise to hold the greatest significance as either
opportunities or threats.

Understanding these sources also proves to be of help in considering

areas for diversification.

SELF-ASSESSMENT EXERCISE

What are the various forces that influence competitive situation in an

industry?

3.2 Forces Driving Industry Competition

The framework of forces affecting industry competition was developed

by Porter (1979). These forces, according to Porter, are the threat of new
entrants, the bargaining power of customers, the bargaining power of
suppliers, and the threat of substitute products or services. According to
Pearce II and Robinson Jr. (1998), the strongest competitive forces
determine the profitability of an industry and so are of greatest
importance in strategy formulation.

For example, a company with a strong position in an industry not

threatened by potential entrants will earn low returns, if it faces a
superior or a lower-cost substitute product-as the leading manufacturers
of vacuum tubes and coffee percolators have learned to their sorrow. In
such a situation, coping with the substitute product becomes the number
one strategic priority.

Every industry has an underlying structure, or a set of fundamental

economic and technical characteristics, that gives rise to these
competitive forces. The strategist, wanting to position his company to
cope best with its industry environment or to influence that environment
in the company's favour, must learn what makes the environment tick.

This view of competition pertains equally to industries dealing in

services and to those selling products. To avoid monotony in this article,
I refer to both products and services as "products." The same general
principles apply to all types of business. A few characteristics are
critical to the strength of each competitive force. They will be discussed
in this section.

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3.2.1 Threat of Entry

New entrants to an industry bring new capacity, the desire to gain

market share, and often substantial resources. Companies diversifying
through acquisition into the industry from other markets often leverage
their resources to cause a shape-up, as Philip Morris did with Miller
beer. The seriousness of the threat of entry depends on the barriers
present and on the reaction from existing competitors that the entrant
can expect. If barriers to entry are high and a newcomer can expect
sharp retaliation from the entrenched competitors, obviously he will not
pose a serious threat of entering.

In the opinion of Pearce II and Robinson Jr. (1998), there are six major
sources of barriers to entry as stated below.

i) Economies of scale
These economies deter entry by forcing the aspirant either to come in on
a large scale or to accept a cost disadvantage. Scale economies in
production, research, marketing, and service are probably the key
barriers to entry in the mainframe computer industry, as Xerox and GE
sadly discovered. Economies of scale can also act as hurdles in
distribution, utilisation of the sales force, financing, and nearly any other
part of a business.

ii) Product differentiation

Brand identification creates a barrier by forcing entrants to spend
heavily to overcome customer loyalty. Advertising, customer service,
being first in the industry, and product differences are among the factors
fostering brand identification. It is perhaps the most important entry
barrier in soft drinks, over-the-counter drugs, cosmetics, investment
banking, and public accounting. To create high fences around their
business, brewers’ couple brand identification with economies of scale
in production, distribution, and marketing.

iii) Capital requirements

The need to invest large financial resources in order to compete creates a
barrier to entry, particularly if the capital is required for unrecoverable
expenditures in upfront advertising or Research and Development
(R&D). Capital is necessary not only for fixed facilities but also for
customers’ credit, inventories, and absorbing start-up losses. While
major corporations have the financial resources to invade almost any
industry, the huge capital requirements in certain fields such as
computer manufacturing and mineral extraction limit the pool of likely
entrants.

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iv) Cost disadvantages independent of size

Entrenched companies may have cost advantages not available to
potential rivals, no matter what their size and attainable economies of
scale are. These advantages can stem from the effects of the learning
curve (and of its first cousin, the experience curve), proprietary
technology, access to the best raw material sources, assets purchased at
pre-inflation prices, government subsidies or favourable locations.
Sometimes, cost advantages are legally enforceable, as they are through
patents.

v) Access to distribution channels

A new food product, for example, must displace others from the
supermarket shelf via price breaks, promotions, intense selling efforts,
or some other means. The more limited the wholesale or retail channels
are and the more the existing competitors have these tied up, obviously
the tougher the entry into the industry will be. Sometimes, this barrier is
so high that, to surmount it, a new contestant must create its own
distribution channels.

vi) Government policy

The government can limit or even foreclose entry to industries with such
controls as license requirements and limits on access to raw materials.
Regulated industries like trucking, liquor retailing, and freight
forwarding are noticeable examples; more subtle government
restrictions operate in field like coal mining. Government also can play a
major indirect role by affecting entry barriers through controls such as
air and water pollution standards and safety regulations.

Pearce II and Robinson Jr. (1998) observe that the potential rival's
expectations about the reaction of existing competitors also will
influence its decision on whether to enter or not. The company is likely
to have second thoughts if incumbents have previously lashed out at new
entrants, or if the incumbents possess substantial resources to fight back,
including excess cash and unused borrowing power and productive
capacity, with distribution channels and customers.

The incumbents seem likely to cut prices because of a desire to keep

market shares or because of industry-wide excess capacity. Industry
growth is slow, affecting its ability to absorb the new arrival and
probably causing the financial performance of all the parties involved to
decline.

From a strategic standpoint, there are two important additional points to

note about the threat of entry. First, strategic decisions involving a large

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segment of an industry can have a major impact on the conditions

determining the threat of entry.

Second, it changes, of course, as these conditions change. The expiration

of Polaroid's basic patents in instant photography, for instance, greatly
reduced its absolute cost entry barrier built by proprietary technology
into the market. Product differentiation in printing has all but
disappeared. Conversely, in the auto industry, economies of scale
increased enormously with, post-World War II automation and vertical
integration-virtually stopping successful new entry.

3.2.2 Bargaining Power of Suppliers

Suppliers can exert bargaining power on participants in an industry by

raising prices or reducing the quality of purchased goods and services.
Powerful suppliers can thereby squeeze profitability out of an industry
unable to recover cost increases in its own prices.

For instance, by raising their prices, soft-drink concentrate producers

have contributed to the erosion of profitability of bottling companies
because the bottlers, facing intense competition from powdered mixes,
fruit drinks, and other beverages, have limited freedom to raise their
prices accordingly. Customers likewise can force down prices, demand
higher quality or more service, and play competitors off against each
other-all at the expense of industry profits.

The power of each important supplier or buyer group depends on a

number of characteristics of its market situation and on the relative
importance of its sales or purchases to the industry compared with its
overall business.

The supplier’s power is determined by the following factors.

1. Dominated by a few companies

It is dominated by a few companies and is more concentrated than the
industry it sells to.

2. Unique or differentiated products

Its product is unique or at least differentiated, or if it has built up
switching costs. Switching costs are fixed costs buyers face in changing
suppliers. These arise because, among other things, a buyer's product
specifications tie it to particular suppliers, it has invested heavily in
specialised ancillary equipment or in learning how to operate a supplier's
equipment (as in computer software), or its production lines are
connected to the supplier's manufacturing facilities (as in some
manufacturing of beverage containers).

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3. It is not obliged to contend with other products for sale to the

industry
For instance, the competition between the steel companies and the
aluminum companies to sell to the can industry checks the power of
each supplier.

4. Credible threat of forward integration

It poses a credible threat of forward integration into the industry's
business. This provides a check against the industry's ability to improve
the terms on which it purchases.

5. The industry is not an important customer of the supplier

group
If the industry is an important customer, suppliers' fortunes will be
closely tied to the industry, and they will want to protect the industry
through reasonable pricing and assistance in activities like research and
development, and lobbying.

SELF-ASSESSMENT EXERCISE

Mention and discuss the factors that determine the power of suppliers in
an industry.

3.2.3 Bargaining Power of Buyers

The power of each important buyer group depends on a number of

characteristics of its market situation and on the relative importance of
its sales or purchases to the industry compared with its overall business.

The power of the buyers can be determined by the following factors.

1. It is concentrated or purchased in large volumes

Large-volume buyers are particularly potent forces if heavy fixed
costs characterise the industry as they do in metal containers,
corn refining, and bulk chemicals, for examples, which raise the
stakes to keep capacity filled.

2. The products it purchases from the industry form a

component part of its product and represent a significant
fraction of its cost
The buyers are likely to shop for a favorable price and purchase
selectively. Where the product sold by the industry in question is
a small fraction of buyers' costs, buyers are usually much less
price sensitive.

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3. It earns low profits, which create great incentive to lower its

purchasing costs Highly profitable buyers, however, are
generally less price sensitive (that is, of course, if the item does
not represent a large fraction of their costs). The industry's
product is unimportant to the quality of the buyers' products or
services. Where the quality of the buyers' products is very much
affected by the industry's product, buyers are generally less price
sensitive.

4. User's impression influenced by the quality of enclosures

Industries in which this situation obtains include oil-field
equipment, where a malfunction can lead to large losses and
enclosures for electronic medical and test instruments where the
quality of the enclosure can influence the user's impression about
the quality of the equipment inside.

5. The industry's product does not save the buyer money

Where the industry's product or service can pay for itself many
times over, the buyer is rarely price sensitive; rather, he is
interested in quality. This is true in services like investment
banking and public accounting, where errors in judgment can be
costly and embarrassing, and in businesses like the logging of oil
wells, where an accurate survey can save thousands of dollars in
drilling costs.

6. A credible threat of backward integration by buyers

The buyers pose a credible threat of integrating backward to
make the industry's product. Producers and major buyers of cars
have often used the threat of self manufacture as a bargaining
lever. But sometimes an industry engenders a threat to buyers that
its members may integrate forward.

7. Buyers or consumers acting as a group

Most of these sources of buyer power can be attributed to
consumers as a group as well as to industrial and commercial
buyers; only a modification of the frame of reference is
necessary. Consumers tend to be more price sensitive if they are
purchasing products that are, expensive relative to their incomes
and of a sort where quality is not particularly important.

8. Middlemen influencing consumers purchasing decisions

The buying power of retailers is determined by the same rules,
with one important addition. Retailers can gain significant
bargaining power over manufacturers when they can influence
consumers' purchasing decisions, as they do in audio

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components, jewelry, appliances, sporting goods, and other

goods.

3.2.4 Threat of Substitute Products

According to Pearce II and Robinson Jr. (1998), placing a ceiling on

prices it can charge, substitute products or services limit the potential of
an industry. The implication is that unless it can upgrade the quality of
the product, the industry will suffer in earnings and possibly in growth.

The more attractive the price-performance trade-off offered by substitute

products, the firmer the lid placed on industry’s profit potential. Sugar
producers, confronted with the large-scale commercialisation of high-
fructose corn syrup, a sugar substitute, are learning this lesson today.

Substitutes not only limit profits in normal times, they also reduce the
bonanza that industries can reap in boom times. For instance, the
producers of fiberglass insulation enjoyed unprecedented demand as a
result of high energy costs and severe winter weather. However, the
industry’s ability to raise prices was tempered by the plethora of
insulation substitutes, including cellulose, rock wood, and Styrofoam.
These substitutes are bound to become an even stronger force once the
current round of plant additions by fiberglass insulation producers has
boosted capacity enough to meet demand.

Substitute products that deserve the most attention strategically are those
that are subject to trends improving the price-performance trade-off with
industry’s products, or are produced by industries earning high profits.
Substitutes often come rapidly into play if some developments increase
competition in their industries and cause price reduction or performance
improvement.

3.3 Formulation of Competitive Strategy

According to Pearce II and Robinson Jr. (1998), the strategic action

available to the company involved is considered herein. A company's
choice of suppliers to buy from or buyer groups to sell to should be
viewed as a crucial strategic decision. A company can improve its
strategic posture by finding suppliers or buyers who possess the least
power to influence it adversely.

Most common is the situation of a company being able to choose whom

it will sell to in other words, buyer selection. Rarely do all the buyer
groups a company sell to enjoy equal power. Even if a company sells to
a single industry, segments usually exist within that industry that
exercise less power (and that are therefore less price sensitive) than

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others. For example, the replacement market for most products is less
price sensitive than the overall market.

As a rule, a company can sell to powerful buyers and still come away
with above-average profitability only if its product enjoys some unusual,
if not unique, features. In supplying large customers with electric
motors, Emerson Electric earns high returns because its low cost
position permits the company to meet or undercut competitors' prices.

If the company lacks a low cost position or a unique product, selling to

everyone is self-defeating because the more sales it achieves, the more
vulnerable it becomes. The company may have to muster the courage to
turn away business and will sell only to less potent customers.

As the factors creating supplier and buyer power change with time or as
a result of a company's strategic decisions, naturally the power of these
groups rises or declines. In the ready-to-wear clothing industry, as the
buyers (department stores and clothing stores) have become more
concentrated and control has passed to large chains, the industry has
come under increasing pressure and suffered falling margins. The
industry has been unable to differentiate its product or engender
switching costs that lock in its buyers enough to neutralise these trends.

Once the corporate strategist has assessed the forces affecting

competition in his industry and their underlying causes, he can identify
his company’s strengths and weaknesses. The crucial strengths and
weaknesses from a strategic standpoint are the company’s posture vis-à-
vis the underlying causes of each force. The crucial considerations are
questions such as these: Where does it stand against substitutes? What
are the sources of entry barriers?

The strategist is then left with the option to devise a plan of action that
may include:

• positioning the company so that its capabilities provide the best

defense against the competitive force; and/or
• influencing the balance of the forces through strategic moves,
thereby improving the company’s position;

The strategist then will be anticipating shifts in the factors underlying

the forces and responding to them, with the hope of exploiting change
by choosing a strategy appropriate for the new competitive balance
before opponents recognise it.

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4.0 CONCLUSION

In this unit you have learnt that the essence of strategy formulation is to
cope with competition in an industry and such a competition in an
industry is rooted in its underlying economics, and competitive forces.
You have also seen how various forces shape competition in an industry.
Lastly, you are now aware of the strategy with which you can contend
with competitive forces in the industry.

5.0 SUMMARY

In this unit, you are now conversant with the following topics:

• industry competitive forces and strategy,

• forces driving industry competition,
• threat of entry into an industry,
• bargaining power of suppliers,
• bargaining power of buyers,
• threat of substitute products, and
• formulation of competitive strategy.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the various forces that shape competition in an

industry.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, An Imprint of Dreamtech Press.

Pearce II, J. A. and Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

Pearce, & David, (1987). Strategic Planning and Policy. New York:
Reinhold.

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UNIT 3 EXTERNAL DIAGNOSIS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of External Diagnosis
3.2 External Opportunities and Threats
3.2.1 External Opportunities
3.2.2 External Threats
3.3 Usefulness of SWOT Analysis
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the previous unit, the discussion was on the analysis of the industry in
which a company operates. Such consideration is a minute aspect of the
external environment of the firm. In the larger business environment are
the uncertainties, human needs, production, markets, technology,
politics, government regulations and competitions. It is pertinent at this
juncture to assess the larger external environment of the business other
than the competitive nature of an industry because the firm operates in
an omnibus environment. Therefore, in this unit you have to analyse the
larger external environment of the firm.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss the nature of external diagnosis

• explain the nature of opportunities for the firm in an external
environment
• discuss forms of threat to firm’s operations in an external
environment
• identify the advantages of SWOT analysis.

3.0 MAIN CONTENT

3.1 Nature of External Diagnosis

The environmental analysis as the assessment of the business operating

environment is a strategic planning method used to evaluate the
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strengths, weaknesses, opportunities, and threats called SWOT. The

SWOT analysis determines the following in business: the strengths and
weaknesses that are internal factors which create value or can be
harmful to achieving the objectives of business. They can include
assets, skills or resources that a company has at its disposal, compared to
its competitors. All these considerations have been discussed earlier in
this material.

Generally, strategic planning involves specifying the objective of the

business venture or programme and identifying the internal and external
factors that are favourable and unfavourable to achieving the set
objective. An aspect of this consideration is the analysis of the external
environment, which is the subject of discussion in this unit.

According to Hill and Jones (2004), opportunities and threats are

external factors or conditions that can create value or destroy the value
of business performance. A company cannot control these variables
because they are external factors to the business, but they emerge from
either the competitive dynamics of the industry/market or from
demographic, economic, political, technical, social, legal or cultural
factors.

In the opinion of Hill and Jones (2004), opportunities arise when a

company can take advantage of conditions in its external environment to
formulate and implement strategies that enable it to become more
profitable. For instance, the rise in telecommunication service industry
coupled with deregulation in Nigeria is seen as an enormous opportunity
for the new companies that have sprung up in recent times in the
provision of such services in the country.

Threats, as held by Hill and Jones (2004), arise when conditions in the
external environment endanger the integrity and profitability of the
company’s business. The advent of the numerous telecommunication
companies into the Nigerian terrain has spelt stiff competition for the
existing company such as the Nigerian Telecommunications Limited
(NITEL). The rapid entry of new companies such as Globacom, MTN,
Zain, Visa, Etisalat, Starcom, Multilink and many others to take
advantage of growing demands and profits led to the excess industry
capacity in Nigerian Telecommunication Limited (NITEL). This has
created the grave threat that is almost leading to the demise of Nigerian
Telecommunication Limited (NITEL).

The entry of many telecommunication companies to take advantage of

the expanding demand for telecom services leads to the existing price
war and falling fortunes of some of the old ones in the industry such as
Nigerian Telecommunication Limited (NITEL) and Zain. The problem

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of stiff competition partly led to crisis in Zain as a telecommunication

company which was originally known as Econet to change its name
several times from Econet to Vmobile to Celtel to Zain and invariably to
the present name as Airtel.

The diagram below, which incorporates all the elements of the SWOT
analysis, is indicative of the process of the evaluation of the prevailing
business condition in the environment. It is instructive to note that the
diagram portrays both the internal and external environment of the
business. The diagnosis of the internal environment of the business is
the internal analysis which has been discussed earlier.

Hence, the second segment is the analysis of the external environment of

the business. In other words, external analysis involves the assessment
of opportunities and threats in the external environment. The essence of
the analysis of the external environment involves the assessment of the
prevailing threats and available opportunities in the external
environment.

SWOT ANALYSIS

EXTERNAL ANALYSIS INTERNAL ANALYSIS

STRENGTHS WEAKNESSES OPPORTUNITIES THREATS

S
Fig. 2.1: SWOT Analysis Diagram

SELF-ASSESSMENT EXERCISE

Differentiate between opportunity and threat to business in the external

environment.

3.2 Environmental Opportunities and Threats

The situation in the internal environment can affect the company’s

external environment. We have to recall internal analysis in terms of the
considerations of strengths and weaknesses.

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In a typical analysis of strengths and weaknesses, the internal and the

external analyses are considered. For the internal analysis, there are
areas of strengths as stated below.

i) Specialist marketing expertise,

ii) Exclusive access to natural resources,
iii) Patents,
iv) New, innovative product or services,
v) Location of the business,
vi) Cost of advantage through owners knowledge,
vii) Quality processes and procedures,
viii) Strong brand or reputation

For the internal analysis, there are areas of weaknesses as stated below.
i) Lack of marketing expertise,
ii) Undifferentiated products and services,
iii) Location of the business,
iv) Competitors having superior access to distribution channels,
v) Poor quality of goods and services,
vi) Damaged reputation.

3.2.1 Environmental Opportunities

It has been observed earlier in this unit that opportunities arise when a
company can take advantage of conditions in its external environment to
formulate and implement strategies that enable it to become more
profitable.

Laying credence to the above view, Pearce II and Robinson Jr. (1998)
opine that opportunity is a major favourable situation in the firm’s
environment. For instance, opportunities can arise from the following
situations:
• key trends; favourable or unfavourable,
• identification of previously overlooked market segment,
• changes in competitive situation,
• changes in regulatory environment,
• changes in governmental setup,
• technological changes, and
• improved buyer or supplier relations.

For the external analysis, there are opportunities that a business may
have to exploit for the enhancement of its fortunes. The areas of
opportunity in the environment are as follows:

i) developing markets (internet)

ii) mergers, joint ventures
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MBA 820 MODULE 2

iii) moving into new attractive market segment

iv) a new international market
v) removal of international trade barriers
vi) a market that is led by weak competitors.

3.2.2 Environmental Threats

It has been observed earlier in this unit that threats arise when conditions
in the external environment endanger the integrity and profitability of
the company’s business.

According to Pearce II and Robinson Jr. (1998), a threat is a major

unfavourable situation in the firm’s environment. Therefore, it is a key
impediment to the firm’s current and desired future competitive position
in its industry. For instance, threats can arise from the following
situations:
• the entry of new competitors such as in the telecom industry in
relation to NITEL operational fortunes
• slow market growth
• increased bargaining power of key buyers
• enhanced bargaining power of key suppliers
• major technological changes
• changing regulations.

For the external analysis, there are threats that a business may have to
contend with. The other areas of threats in the external environment are
as follows:

i) a new competitors in your home market

ii) price war
iii) competitor has a new, innovative substitute production service
iv) increased trade barriers
v) a potential new taxation on your product or service.

SELF-ASSESSMENT EXERCISE

Mention examples of opportunity and threat to business in the external

environment.

There is a template developed from the studies on SWOT which can be

replicated for the purpose of our study here. The SWOT analysis can be
represented on a template such as follows.

1 Values
2 Appraise
3 Motivation
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MBA 820 CORPORATE MANAGEMENT STRATEGY

4 Search
5 Select
6 Programme
7 Act
8 Monitor and repeat steps 1, 2, and 3.

From empirical evidence, it is discovered that they could not change the
value of the team or set the objectives for the team, so they started as the
first step by asking the appraisal question, that is, what’s good and bad
about the operation? The studies involved such considerations like, what
is good in the present is satisfactory, what is good in the future is an
opportunity, what is bad in the present is a fault and what is bad in the
future is a threat.

The SWOT analysis can only be of benefit if it is related to issues which

are embedded in the programme and planning categories of:

1. product (what are we selling?)

2. process (how are we selling it?)
3. customer (to whom are we selling it?)
4. distribution (how does it reach them?)
5. finance (what are the prices, costs and investment?)
6. administration (and how do we manage all these?)

Numerous
environmental
opportunities

Cell 3: Supports a Cell 1: Supports an

Critical turnaround-oriented aggressive strategy
Substantial
internal
internal
weaknesses Cell 4: Supports Cell 2: Supports a
strengths
defensive strategy diversification strategy
Major
environmental
threats

Fig. 2.2: SWOT Analysis

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3.3 Usefulness of SWOT Analysis

The SWOT analysis is an extremely useful tool for understanding and

decision-making for all sorts of situations in business and organisations
(both profit and non-profit). SWOT is an acronym for strengths,
weaknesses, opportunities and threats.

i) SWOT analysis helps in analysing business and environmental

factors.

ii) It helps in setting objectives.

iii) It helps marketers to focus especially on their relative competitive

strengths and weaknesses.

iv) It makes marketing managers to examine each competitor’s cost

structure, sources of profits, resources, competencies, competitive
positioning and product differentiation.

v) It is a tool used in management and strategic formation.

vi) It works well in brainstorming meetings.

vii) It can be used for business planning, strategic planning,

competitors’ valuation, marketing business, product development
and research reports.

4.0 CONCLUSION

In this unit, you have been exposed to how external analysis is used to
evaluate opportunities and threats in relation to a firm’s operations in the
external environment. As you might have observed, opportunities arise
when a company can take advantage of conditions in its external
environment to formulate and implement strategies that enable it to
become more profitable. You are also aware that threats arise when
conditions in the external environment endanger the integrity and
profitability of the company’s business. The last area discussed in this
unit is the SWOT analysis, which you will find useful in analysing the
operating environment of a business enterprise generally.

5.0 SUMMARY

In this unit, the following topics have been discussed:

• nature of external diagnosis

• external opportunities and threats

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• external opportunities
• external threats
• the usefulness of SWOT analysis.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss various threats that can affect a company’s fortunes
in an external environment.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, an Imprint of Dreamtech Press.

Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

Pearce, & David, (1987). Strategic Planning and Policy. New York:
Reinhold.

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UNIT 4 STRATEGIC PLANNING

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Strategic Planning
3.2 Components of the Strategic Planning Process
3.2.1 Assessing the Mission of the Organisation
3.2.2 Establishing Relevant Goals and Objectives
3.2.3 Analysing the Internal Environment of the
Company
3.2.4 Engaging in External Diagnosis
3.2.5 Strategy Formulation
3.2.6 Strategy Implementation
3.3 Strategy Evaluation and Control
3.4 Importance and Limitation of Strategic Management
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Corporate organisations operate in a dynamic environment which is

subject to frequent changes from time to time. Therefore, the business
entities operate in a vulnerable position in relation to the interplay of the
environmental forces. The impact of such environment forces can
sometimes spell monumental consequences for the business entities. The
present world economic meltdown offers a classical scenario to justify
strategic planning.

Since all business entities are established for perpetual existence

presumably on the basis of profitable operations, there arises the need to
assess operations and plan for the future. Hence, there is the need for
strategic planning in every business enterprise.

In this unit, you will be exposed to the strategic planning process in

terms of the analysis of how business enterprises determine, on periodic
basis, the appropriate strategic posture to assume for their future
operations.

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2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss the nature of strategic planning

• explain the components of strategic planning process
• discuss assessment of mission statement
• list the corporate goals and objectives
• examine the internal analysis of a company
• explain external diagnosis of a company’s environment
• discuss strategy formulation, implementation and evaluation
• analyse the importance and limitation of strategic management.

3.0 MAIN CONTENT

3.1 Nature of Strategic Planning

According to Pearce II and Robinson Jr., (1998), strategic planning

involves the process of drawing up detailed action plans to achieve an
organisational goals and objectives, taking into account the resources of
the organisation and the environment within which it operates, and
deploying appropriate strategies to pursue and achieve such goals and
objectives.

Strategic planning, as a systematic process of determining goals and

objectives to be achieved in the foreseeable future, consists of the
following considerations:

• management’s fundamental assumptions about the future

political, economic, socio-cultural, technological and competitive
environments,
• setting of goals and objectives to be pursued and achieved within
a specified time frame.
• engaging in both internal and external analysis,
• formulating and selecting main organisational strategies to
achieve these goals and objectives,
• instituting, implementing and monitoring the operational or
tactical plans to achieve the objectives, and
• engaging in evaluation and control of the operational strategies
designed and being implemented for achievement of desired
goals and objectives.

The implementation and evaluation aspects of the process present a

unique involvement of the executives, so that immediate and appropriate
measures can be instituted in the event of any observed deviation.

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SELF-ASSESSMENT EXERCISE

What are the considerations to be taken into account in the formulation

of corporate goals and objectives?

As observed by Hill and Jones (2004), strategic planning is the key link
between strategic management and the organisation’s external
environment. Resource management is the factor that links strategic
management to the organisation’s resources, including finances,
facilities and equipment, land, access to information, goodwill and
personnel. Strategic planning is a formal process where the assumptions,
reasons and plans themselves are all written with figures to serve for
future reference.

Strategic planning is the systematic and logical planning process done at

the corporate (top) level of the organisation since it is mainly concerned
with the long term aspect of the business. Even research studies have
concluded that strategic management is an integral and important
function of organisation’s life.

Strategic management process is seen as a powerful tool and its value is

with the executives and the ability to use the tool effectively in
managing the enterprise. According to Charffee (1985), the strategic
considerations in strategic management include the following:

• strategic management involves adapting the organisation to its

business environment
• strategic management affects the entire organisation by providing
direction
• strategic management involves both strategic formation (she
called it content) and also strategic implementation (she called it
process)
• strategic management is done at several levels: overall corporate
strategy and individual business strategy.

Hence, strategic management involves the whole organisation as well as

all the strategic units of a company.

SELF-ASSESSMENT EXERCISE

Mention and explain the main elements of strategic management.

3.2 Components of Strategic Planning Process

Strategy makers and corporate planners normally carefully consider the

position of the business and the various driving forces in the

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environment such as competition, government policies, technological

changes, socio-cultural upheavals and the stage of the economic cycle in
the process of strategic planning. The analyses of the company’s
strengths and weaknesses as well as the prevailing opportunities and
threats in the external environment are very equally important in the
process of strategic planning.

As opined by Thompson Jr. and Strickland (1987), Pearce II and

Robinson Jr., (1998), the process of strategic planning involves the
following steps
i) Assessing the corporate mission of the organisation.
ii) Establishing relevant goals and objectives from the corporate
mission,
iii) Analysing the internal environment for company’s strengths and
weaknesses,
iv) Engaging in external diagnosis of the business for opportunities
and threats,
v) Formulating and selecting appropriate organisational strategies
for implementation,
vi) Implementing and monitoring the chosen strategies, and
vii) Evaluating and controlling the implementation of the strategies
and derivative plans.

3.2.1 Assessing the Mission of the Organisation

Planners carefully look at the major issues and opportunities facing the
organisation and then assess the organisational mission. Hence, the first
accomplishment of the strategic management process is assessing the
organisation’s mission statement.

The mission of a company has been discussed extensively in unit 2 of

module 1. Nevertheless, it is pertinent at this juncture to refresh your
mind about the meaning of a corporate mission.

As you aware, a mission statement is a brief written description of the

purpose of the organisation, and why a company is in operation. It also
provides the framework with which the organisational goals, objectives
and strategies are formulated.

According to Hills and Jones (2004), the mission statement of an

organisation refers to a description or declaration of the reason
responsible for a company’s existence and operation, which provides the
framework or context within which strategies are formulated. According
to them, the three main components of organisational mission are:
• a statement of the raison d’être of a company or organisation, that
is its reason for existence,

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• a statement of the key values or guiding standards that will drive

and shape the actions and behaviour of the employees, and
• a statement of major goals and objectives.

Therefore, a mission statement of a company in most cases has three

main considerations such as the followings.

a) A statement which gives reason why the organisation came into

existence and this refers to the mission or vision of the company,

b) Vision of the company in terms of what it wants to achieve in

future,

c) The statement of the key values or guiding standard which will

drive and shape the actions and behaviours of employees and a
statement of major goals or objectives.

Meanwhile, mission statements vary in nature from very brief to quite

comprehensive and including having a specific purpose statement that is
part of the overall mission statement. Many people consider the value
statement and vision statement to be part of the mission statement.

Today, vision and value statements are increasingly used. Vision

statements are usually a compelling description of how the organisation
will or should operate at some point in the future and how customers or
clients are benefitting from the organisation’s products and services.

Value statements list the overall priorities on how the organisation will
operate. Some people focus the value statement on moral values. Moral
values are values that suggest overall priorities on how people ought to
act in the world e.g. integrity, honesty, respect, etc. The formulation of
the corporate mission involves some pertinent considerations. This is the
first important step and it is to come up with a definition of the
organisation’s business. Definition will answer questions such as these.
What is our business? What will it be? What should it be?

Nevertheless, the answers to these questions above guide the

formulation of a mission statement. Therefore, from the model it is clear
that strategic planning is an ongoing event, it never ends. Once a
strategy has been formulated, its execution or implementation must be
monitored to determine the extent to which strategic goals and
objectives are actually being achieved and to what degree, competitive
advantage is being created and sustained. Once the corporate level of the
organisation collects that information, it becomes an input for the next
round of strategy formulation and implementation.

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3.2.2 Establishing Relevant Goals and Objectives

The next step is the formulation of goals and objectives from the
mission statement. Basically, a goal is a desired future state or objective
that a company attempts to realise. As Pearce & David (1987), observed,
goals may be expressed, in the case of business organisations, as
operational efficiency and profit making.

These broadly based goals are very ambiguous and susceptible to be

taken for granted, and they indicate little about the emphasis placed on
the various activities of the organisation in meeting its goals. Therefore,
these are supposed to be organised into objectives. These are discussed
earlier on in unit 3 of this study material. We have to restate the analysis
on goals herein.

Glueck (1980), goals are value premises which serve as inputs to

decisions. Goals at different levels, within the organisation, contribute
to alternatives for decision-making. Glueck sees goals more as
constraints which the organisation must satisfy; for example, profit for
shareholders, or a minimum rate of return on investments, satisfying
demands of consumers, complying with government legislation on
safety standards, providing job satisfaction for staff and protecting the
environment against pollution.

Hence, goals limit the scope of actions and decision-making at lower

levels of the organisation. Constraints may themselves be regarded as
goals in that they represent objectives which management is trying to
meet.

Members of the organisation have different and often conflicting goals.

As a result, the goals, which the organisation actually pursues (informal
goals) may be distinguished from the officially stated goals (formal
goals) which are set out in broad terms as the reasons for the purpose of
the organisation. Informal goals may be derived from the actual
decisions made and actions taken within the organisation.

Basically, managers and other members of the organisation, will have

their own perception of the goals of the organisation, for example, to
produce high-quality television sets which satisfy the requirements of
the customers and their personal goals, for example, to earn high wages,
to achieve promotion, to gain social satisfaction, to achieve status, which
they expect to fulfill by participating in the activities of the organisation.
As opined by Hill and Jones (2004), organisational goals serve a number
of important functions to the corporate entities in the following areas.

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i) Goals provide a standard of performance. They focus attention on

the activities of the organisation and the direction of the efforts of
its members.

ii) Goals provide a basis for planning and management control

related to the activities of the organisation.

iii) Goals provide guidelines for decision-making and justification

for actions taken. They reduce uncertainty in decision-making
and give a defense against possible criticism.

iv) Goals influence the structure of the organisation and help

determine the nature of technology employed. The manner in
which the organisation is structured will affect what it will
attempt to achieve.

v) Goals help to develop commitment of individuals and groups to

the activities of the organisation. They focus attention on
purposeful behaviour and provide a basis for motivation and
reward systems.

vi) Goals give indications of what the organisation is really like, its
true nature and character, both for members and for people
outside the organisation.

vii) Goals serve as a basis for the evaluation of change and

organisational development.

The above analysis portrays that goals are the basis for objectives and
policies of a corporate organisation.

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Strategy

Mission and Goal

External Analysis: SWOT Strategy Internal Analysis:

Opportunities and Choice Strengths and
Threats Weaknesses
Feedback Loop

Functional Level Strategy

Business Level Strategy

Global Strategy

Corporate Level Strategy

Corporate Performance
Governance and Ethics
Strategy
Implementation
Implementing Strategy in Implementing Strategy across
a Single Industry industries and countries

Fig. 2.3: Main Components of the Strategic Planning Process

The analysis in unit 4 is indicative of the fact that organisational

objectives are derivable from the goals, all of which are based on the
organisational mission. Goals are broad-based statements of intent in
terms of what are desirable out of the operational activities of the
organisation. On the strength of these goals, appropriate objectives are
formulated to organise the goals into specific and realisable targets.
These are communicated to the strategic business units of the
organisation for implementation by the various functional managers.

In order to avoid the fallacy of a single objective, Drucker suggested the

following eight key areas in which objectives should be set in terms of
performance and results:

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• market standing – for example: share of market standing; range

of products and markets; distribution; pricing; customer loyalty
and satisfaction

• innovation – for example: innovations to reach marketing goals;

developments arising from technological advancement; new
processes and improvements in all major areas of organisational
activity

• productivity – for example: optimum use of resources; use of

techniques such as operational research to help decide alternative
courses of action; the ratio of ‘contributed value’ to total revenue

• physical and financial resources – for example: physical

facilities such as plant, machines, offices and replacement of
facilities; supply of capital and budgeting; planning for the
money needed; provision of supplies

• profitability – for example: profitability forecasts an anticipated

time scale for capital investment policy; yardsticks for
measurement of profitability

• manager performance and development – for example: the

direction of managers and setting up their jobs; the structure of
management; the development of future managers

• worker performance and attitude – for example: union

relations; the organisation of work; employee relations

• public responsibility – for example: demands made upon the

organisation such as public opinion; responsibilities to society
and the public interest.

The organisation, therefore, must give attention to all those areas which
are of direct and vital importance to its survival and prosperity.

Also involved in determination of goals and objectives is the action

planning which is carefully laying out how the strategic goals will be
accomplished. Action planning often includes specifying objectives, or
specific results, with each strategic goal. Often, each objective is
associated with a tactic, which is one of the methods needed to reach an
objective. Therefore, implementing a strategy typically involves
implementing a set of tactics along the way and in that sense; a tactic is
still a strategy.

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Action planning also includes specifying responsibilities and timeliness

with which each objective is being met and who needs to do what and at
what time? Action planning should also include methods to monitor and
evaluate the plan, which includes knowing how the organisation will
know who has done what and when.

It is also common to develop an annual plan which is sometimes called

the operational plan that includes the strategic goals, strategies,
objectives, responsibilities and timeliness within which that should be
done in the coming year.

3.2.3 Analysing the Internal Environment of the Company

The following operational factors are the focus of internal analysis in

most business firms.

• Marketing in areas of products, market share, channels of

distribution, pricing strategy, promotion strategy, after-sales
services, brand loyalty, and goodwill.

• Finance in areas of short term capital, long term capital, taxes,

debt management, leverage position, working capital, cost
control, finance size, efficient accounting system, etc.

• Production in areas of raw materials cost, inventory control,

economies of operation, technical efficiency, cost/benefit,
research and development, patents, trademarks, etc.

• Personnel in areas such as management of personnel, employees’

skill and morale, labour relations, effective personnel policies,
employee turnover, etc.

The basic perspectives in evaluating key internal factors and value

activities as strengths or weaknesses of a company, as discussed earlier
in unit 6, are as follows.

i. Comparison with past capabilities and performance

According to Pearce II and Robinson Jr. (1998), strategists use the
historical experience of the firm as a basis for evaluating internal
factors. Managers are most familiar with their firm, its internal
capabilities and problems, because they have been immersed over time
in managing the firm’s financial, marketing, production, and R&D
activities.

Therefore, a manager should assess whether or not certain internal

factors – such as production facilities, sales organisation, financial

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capacity, control systems, and key personnel – are strengths or

weaknesses that will be strongly influenced by his or her internal
experience. In the capital-intensive industry, for example, debt capacity
is a strategic internal factor.

ii. Stages in product/market evolution

The requirements for success in product/market segments evolve and
change over time. As a result, strategists can use these changing patterns
associated with different stages in product/ market evaluation as a
framework for identifying and evaluating the firm’s strengths and
weaknesses.

Four general stages of product/market evolution and the typical changes

in functional capabilities are often associated with business success at
each stage. The early development of a product/ market, for example,
entails minimal growth in sales, major R&D emphasis, rapid
technological change in the product, operating losses, and a need for
sufficient resources to support a temporarily unprofitable operation.
Success at this stage may be associated with technical skill with the
product being first in new markets or with having a marketing advantage
that creates widespread awareness.

The strengths necessary for success in the growth stage: rapid growth
brings new competitors into the market. Such factors as brand
recognition, product/market differentiation, and the financial resources
to support both heavy marketing expenses and the effect of price
competition on cash flow can be the key strengths at this stage.

According to Pearce II and Robinson Jr. (1998), as the product/market

moves through a “shakeout” phase and into the maturity stage, market
growth continues but at a decreasing rate. The number of market
segments begins to expand, while technological change in product
design slows considerably. The result is usually more intense
competition, and promotional or pricing advantages or differentiation
become the key internal strengths.

Technological change in the process design becomes intense as many

competitors seek to provide the product in the most efficient manner.
Where Research and Development (R&D) were critical in the
development stage, efficient production has now become crucial to a
business’s continued success in the broader market segments. Chrysler
has found efficiency a key strength in the auto industry.

When products/markets move toward a saturation/decline stage,

strengths and weaknesses centre on cost advantages, superior supplier or
customer relationships, and financial control. Competitive advantage

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can exist at this stage, at least temporarily, if a firm serves gradually

shrinking markets that competitors are choosing to leave.

iii. Comparison with competitors

A major focus in determining a firm’s strengths and weaknesses is
comparison with existing (and potential) competitors. Firms in the same
industry often have different marketing skills, financial resources,
operating facilities and locations, technical know-how, brand image,
levels of integration, managerial talent, and so on. These different
internal capabilities can become relative strengths (or weaknesses)
depending on the strategy the firm chooses.

In the assessment of the choice of strategy, a manager should compare

the company’s key internal capabilities with those of its rivals, thereby
isolating key strengths or weaknesses.

In ultimately developing a strategy, distribution network, technological

capabilities, operating costs, and service facilities are a few of the
internal factors to be considered. To ascertain whether their internal
capabilities on these and other factors are strengths or weaknesses,
comparison to key competitors can prove useful.

Significant favourable differences (existing or expected) are potential

cornerstones of the firm’s strategy. Likewise, through comparison to
major competitors, a firm may avoid strategic commitments it cannot
competitively support.

iv. Comparison with success factors in the industry

Industry analysis involves identifying factors associated with successful
participation in a given industry. The key determinants of success in an
industry may be used to identify the internal strengths and weaknesses
of a firm. By scrutinising industry competitors, as well as customer
needs, vertical industry structure, channels of distribution, costs, barriers
to entry, availability of substitutes, and suppliers, and a strategist seeks
to determine whether a firm’s current internal capabilities represent
strengths or weaknesses in new competitive arenas.

3.2.4 Engaging in External Diagnosis

The next step in the strategic management process is the analysis of the
organisation’s external operating environment. Essentially, external
analysis is to identify strategic opportunities and threats in the
organisation’s operating environment that will affect how it pursues its
mission. There are three interrelated environments that need to be
examined.

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(a) Industry environment – this relates to the environment in which

the organisation operates.
(b) The country or national environment.
(c) The wider socioeconomic or macro-environment.

Analysing the industry’s environment requires an assessment of the

competitive structure of the organisation’s industry, including the
competitive position of the specific or focal organisation and its major
rivals. It also requires analysis of the nature, stage, dynamics and
history of the industry.

Due to the fact that many markets are now global markets, analysing the
industry’s environment also means assessing the impact of globalisation
on competition with an industry. Analysing the macro-environment
consists of examining macroeconomic, social, government, legal,
international and technological factors that may affect the organisation.

Internal analysis, another strategic management process, is carried out

mainly to highlight the strengths and weaknesses of the organisational
issues like identifying the quantity and quality of a company’s resources
and capabilities and ways of building skills, and competencies are
considered in the area of competitive advantage.

Building and sustaining a competitive advantage requires a company to

achieve superior efficiency, quality, innovation and responsiveness to its
customers. The company’s strengths lead to superior performance in
these areas and company’s weaknesses translate to inferior performance.

This is carried out in order to determine the available opportunities and

the prevailing threats in the external environment in relation to the
company’s operations.
Available opportunities in the external environment can involve
considerations such as the followings.
i) Developing markets (internet),
ii) Mergers, joint ventures,
iii) Moving into new attractive market segment,
iv) A new international market,
v) Removal of international trade barriers, and
vi) A market that is led by weak competitors.
The prevailing threats can involve considerations such as the followings.
i) A new competitors in your home market,
ii) Price war,
iii) Competitor has a new, innovative substitute production service,
iv) New regulations,
v) Increased trade barriers, and
vi) A potential new taxation on your product or service.
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The above scenario may not be applicable to corporate bodies.

Furthermore, the so-called threats in the external environment can
indeed hold the best of business opportunities for a given company.

3.2.5 Strategy Formulation

This is setting objectives for the organisation. It is also performing a

situation analysis, self-evaluation and competitors’ analysis both internal
and external. Objectives could be in short term and others could be on
long term. This involves crafting vision statements (long term view of a
possible future) and mission statements (the role that the organisation
gives itself in the society). Also, it states the corporate objectives (both
financial and strategic), strategic business unit objectives (both financial
and strategic) and tactical objectives. All these objectives should
suggest a strategic plan. The plan provides the details of how to achieve
these objectives.

Strategy is a road map or guide by which an organisation moves from a

current state of affairs to future desired state. It is a source from which
daily decisions are made. Also, it is a tool with which long-range future
plans and courses of action are constructed.

Strategy allows a company to position itself effectively within its

environment to reach its maximum potential, while constantly
monitoring the environment for changes that can affect it so as to make
changes in its strategic plan accordingly. Strategy allows the company
to define where you are, where you are going, and how you are going to
get there.

Strategy formulation is the process of determining appropriate courses

of action for achieving organisational objectives and thereby
accomplishes the purpose. Strategy formulation is the task of analysing
the organisation’s external and internal environments and selecting an
appropriate strategy that will achieve the corporate objectives.
Top management plays a vital role in strategy formulation which is the
outcome of a formal planning process. The first strategy formulation by
top management of an organisation is to craft a ‘mission statement.

In very large corporate bodies, there are several levels of management.

Strategic management however is the highest of these levels of
management in the sense that it is the widest, touching all parts of the
firm.

Strategic management in hierarchy gives direction to corporate values,

corporate cultures, corporate goals, and corporate missions. Under the
broad corporate strategy are the followings.

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i) Corporate strategy
Corporate strategies are plans to carry out values and performance
objectives of a company. These plans become more specific and detailed
at the lower organisational level. Corporate strategy is the art of using
organisational resources to render the goals defined by the organisation
with minimum risk.

Also, it is marshalling the resources for definite missions and planning

alternative strategies in anticipation of changing contingencies and
creating flexible conditions in structure and employee attitudes
favourable towards achieving the corporate goal.

ii) Business strategy

This is the aggregated strategies of a single business firm or is a strategic
business unit in a diversified corporation. Each firm formulates a
business strategy in order to achieve a sustainable competitive
advantage.

iii) Functional strategies

These are the core-centres of activities in the organisation. Functional
strategies include marketing strategies, legal strategies and supply-chain
strategies. These departments emphasise the short and medium term
plans and is limited to their functional responsibility. Each department
attempts to do its part in meeting overall corporate objectives.

iv) Operational strategy

This was encouraged by Peter Drucker in his theory of Management By
Objectives (MBO). This has to do with the day-to-day activities in the
organisation. It must operate within the budget and cannot create a
budget. Operational level strategies are informed by business level
strategies which, in turn, are informed by corporate level strategies.

There are some steps that should be followed when making strategic
choice. Strategic choice is one step in strategic decision- making.
Glueck et.al. (1984), defines strategic choice as “the decision to select
from among the grand strategies considered, the strategy which will best
meet the enterprise objectives”. Strategic choice decision could also be
viewed as consisting of some steps which require elaboration. The steps
are as follows.

• Focusing alternatives
Alternatives gathered must be ranked according to their scale of
preference. Alternatives that are high on this scale can be focused and
targeted for proper analysis. The alternative focused must be those that
are germane to realising the strategic objectives of the organisation. The
alternatives must be limited to a reasonable number for effective

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consideration and proper management. Factors such as: the dimensions

of the company mission, the resources available to the company,
company’s distinctive competence, the history of the organisation and
the attributes of the environment in which the business is operating
would indicate also, current – future analyses of performance would also
suggest what strategic alternatives to accept for consideration.

• Consider selection factors

The strategic alternatives focused must be assessed in terms of certain
criteria. Criteria for assessing them must be gathered. These criteria are
called selection factors. Selection factors may be objective (quantitative)
or subjective (behavioural or qualitative). Objective factors which make
use of hard data are based on rationality (optimisation) and are
normative or prescriptive.

Subjective factors are non-rational, utilise personal judgement and are

emotional, may be based on objective factors such as cost, guaranteed
functional requirements, existing market availability, availability of
needed materials, technical and financial feasibilities (e.g. productivity
of the product), risk assessment etc.

Subjective factors involved may be management value and support,

environmental opportunities or threats, designers’ factors, needs, tastes
and preferences of consumers over a long time, related product design
steps etc.

Selection of plant site would also be based on a hodge podge of

objective and subjective factors such as cost, profit, proximity to sources
of raw materials, power, social facilities, human resources and market.
Other factors are preference of owners and top management, patriotism,
politics, communal tolerance etc.

Quintessentially, the selection of a particular strategy is not usually

based on exclusive objective and subjective factors. Rather, it is always
based on consideration of both the objective as well as judgmental
factors, which must be assembled any way.

• Evaluation of strategic alternatives/portfolio

Evaluation requires the appraisal or analysis of selected or available
factors. This involves the use of mathematical or non-mathematical
tools based on the strategists’ environment which may be one of
certainty, risk or uncertainty. The strategists’ of company’s environment
would suggest the methods of analysis.

Under an environment of certainty, techniques such as linear

programming, input-output analysis, use of computer, activity analysis,

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product life-cycle analysis, experience curve analysis, trade or economic

cycle analysis, business trend analysis (etc), may be used to assess the
situation facing the company.

Evaluation of strategic alternatives under risky environment assumes

that the strategist has a partial knowledge of outcomes of decision
alternatives. The common techniques of analysis in this consideration
include: the calculation of Expected Maximum Value (EMV), the
Boston Consulting Group (BCG) matrix, the General-Electric Nine-cell
matrix Hofer’s product-market 15-cell Evolution matrix, Directional
Policy Matrix (DPM), Strategic Position and Action Evaluation (SPAE)
etc. The alternatives or Portfolio with the Expected Maximum Values
(EMV) are usually considered the best.

Evaluation of strategic alternatives or portfolio under the environment of

uncertainty requires that the probabilities associated with the states of
nature are known. Evaluation is very difficult for absolute lack of
knowledge of information. Each action here will lead to one outcome or
known set outcomes, each with known probabilities.

Examples of strategic alternatives here include, introduction of a new

product to a new market (diversification), new business establishment in
foreign environment etc. Evaluation here will require objective or hand
data but will also involve subjective judgement such as the experience or
skill of the strategist.

The choice of evaluation technique must always fit the environmental

situation of a company, but the strategist must never lose sight and
consideration of subjective factors.

After careful evaluation of strategic portfolio, one or two or more than

two strategic alternatives may be selected for adoption, implementation,
modification or continuation.

Strategic choice is a simple step that is not simple. Like the evaluation
step, it is also based on the skill and competence of the strategist. We
have witnessed or read of how management lords or even political or
religious lords have failed in matters of strategic alternatives evaluation
and choice. There are also success stories.

A strategic blueprint is the strategic plan which discusses how the

strategist will operate, it states the conditions required and also states the
contingency strategies associated with the chosen strategies.

Choice must be based on evaluation, weighing and comparison of

strategic alternatives. The point at which choice or selection of strategy
is concluded represents the point at which strategic decision is
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formulated. What immediately follows it is implementation and follow-

up.

3.2.6 Strategy Implementation

This involves allocation and management of sufficient resources

(financial, personnel, operational support, times and technology
support). Strategic implementation involves establishing a chain of
command or some alternative structures (such as cross-functional
teams). Strategic implementation requires assigning responsibility of
specific tasks or processes to specific individuals or groups. It equally
involves managing the process. This includes monitoring results,
evaluating the efficacy and efficiency of the process, controlling for
variances and making adjustments to the process as necessary.

Strategy implementation requires when implementing specific

programmes, acquiring the requisite resources, developing the process
training, process testing, documentation, and integration with legacy
process.

Problems may occur or arise during the strategy implementation such as

human relations and or the employee-communication problems.
Usually, the greatest implementation problem involves marketing
strategy, with emphasis on the appropriate time of the new products.
However, an organisation with an effective management should try to
implement its plans without signaling the fact to its competitors.

For a policy or strategy to work, the organisation must show a level of

consistency from every worker and including the management. Since
strategy implementation is the action stage of strategic management, it
then means that all decisions made to install new strategy or reinforce
the existing strategy are taken cognisance of and implemented fully.

Having chosen a set of strategies to achieve a competitive advantage and

increasing performance, managers must put that strategy into action.
Strategy has to be implemented. Therefore, strategy implementation
involves the activities and decisions that are made to install new
strategies or support the existing strategies. Some refer to it as
operational management. Strategy implementation is often called the
action stage of strategic management which is made up of so many
activities that are primarily administrative.

Strategy implementation requires personal commitment, discipline and

sacrifice, ability to motivate employees. Strategy is implemented in the
following ways:
(a) corporate performance, governance and ethics,
(b) implementing strategy in a single industry,
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(c) implementing strategy across industries and across countries.

The poor performance, the profitability of a company suffering from

persistent low profitability, usually involves a large turnaround in the
way the company operates and the strategies it pursues. However, in
most successful turnaround situations, a number of common features are
present. Changing the leadership, changing the culture of the
organisation, changing the organisation itself structurally,, and also
changing the strategy of the company may be the common features for a
successful turnaround.

Strategy implementation in single industry refers to how a company

should create, use and combine organisational structure, control system
and culture to pursue strategies that lead to a competitive advantage and
superior performance.

Organisational structure assigns employees to specific value, creating

tasks and roles and specifies how these tasks and roles are to be
performed, linked together in a way that increases efficiency, quality,
innovation and responsiveness to customers.

The purpose of organisational structure is to coordinate and integrate the

efforts of employees at all levels so that they work together in the way
that will allow it to achieve goals. A diagram showing an example of
strategy implementation in a single industry is shown below.

Organisational
Structure To achieve superior
advantage:
Coordinate • Efficiency;
Strategic Control and • Quality;
Motivate • Innovation;
Employees • Responsiveness
to customers.
Organisational
Culture

Fig. 2.4: Strategy Implementation in a Single Industry

Once a strategy has been implemented, its execution must be monitored

to determine the extent to which strategic goals and objectives are
actually being achieved and to what degree a competitive advantage is
being created and sustained.

This vital information and knowledge are passed back up to the

corporate level through the set-up system in the organisation which
becomes inputs for the next round of strategy formulation and
implementation.
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3.3 Strategy Evaluation and Control

This is the final stage but very critical in the strategic management
process. Here, managers ensure that all chosen strategies work to
achieve the organisation’s objectives. The activities also include
reviewing the internal and external factors that are the bases of current
strategies and measuring performance and taking corrective measures.

In strategic terms, their purpose is to make sure that lower-level

managers, as the agents of top managers, are acting in a way that is
consistent with the manager’s goals, which should be to maximise the
wealth of stockholders, subject to legal and ethnic constraints.
Organisation’s structure does not by itself provide the set of incentives
through which people can be motivated to make it work; hence, there is
a need for control systems.

Strategic control systems are developed to measure performance at four

levels in a company, namely, (a) corporate, (b) divisional, (c) functional,
and (d) individual. Managers at all levels must develop the most
appropriate sets of measures to evaluate corporate, business and
functional level performance.

Balanced score card model guides managers through the process of

creating the right kind of strategy control system to enhance
organisation performance. According to the model, managers used
primarily financial measures of performance as role to measure and
evaluate organisational performance.

Also, it is important that managers should use the four building blocks
of competitive advantage: efficiency, quality, innovation and
responsiveness to customers to measure organisation performance.

Balanced score card operates basically on organisational mission and

goals. Strategic managers develop a set of strategies to build competitive
advantage to achieve these goals. They can establish an organisational
structure to use resources to obtain a competitive advantage to evaluate
how well the strategy and structure are working.
Managers develop performance measures that specifically assess how
well the four building blocks of competitive advantages are being
achieved. Such building blocks of competitive advantages are as
follows.

• Efficiency – measured by the level of productivity costs, the

productivity of labour and the productivity of capital;

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• Quality – can be measured by number of rejects, number of

defective products returned from the customers, and also the level
of product reliability over time.

• Innovation – this can be measured by the number of new

products introduced and the percentage of revenue generated
from the new products.

• Responsiveness to customers – can be measured by the number

of repeat customers, customers’ defection rates, level of on-time
delivery to customers and level of customers’ service.
The above measures should be tied closely as much as possible to the
goals of achieving superior efficiency, quality, innovativeness and
responsiveness to customers.

Strategic managers choose the organisational strategies and structure

they hope will allow the organisation to use its resources most
effectively to pursue its business model and create value and profit.
Then they create strategic control system, tools that allow them to
monitor and evaluate whether in fact their strategies and structure are
working as intended, how they could be improved and how they should
be changed if they are not working.

Establish standards
and targets

Create measuring and

monitoring system

Compare actual
performance against
established targets

Evaluate results and

take action if
necessary

Fig. 2.5: Steps of an Effective Strategic Control System

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It is noted earlier that strategic control system helps managers to obtain

superior efficiency, quality, innovation and responsiveness to customers.
These advantages to the managers are as follows.

Managers can determine how efficiently they are using organisational

resources, managers must be able to measure accurately many units of
inputs i.e. raw materials, human resources etc. being used to provide a
unit of output.

Today, competition often revolves around increasing the quality of

goods and services. Therefore, strategic control is important in
determining the quality of each company’s product or goods and
services as it gives managers feedback on product quality. Strategic
control helps the managers to raise the level of innovation in an
organisation. Successful innovation comes when managers create an
organisational setting in which employees feel empowered to create a
decentralised authority to employees so that they feel free to experiment
and take risks.

Furthermore, strategic managers can help make their organisations more

responsive to customers if they develop a control system that allows
them to evaluate how well employees are performing their jobs with
customers’ contact. Monitoring employees’ behaviour can also help
managers to find ways to help increase employees’ performance level.

Strategic control systems are the formal target setting, measurement and
feedback systems that allow strategic managers to evaluate whether a
company is achieving superior efficiency, quality, innovation and
customers’ responsiveness and implementing its strategy successfully.

An effective control system should have three characteristics. It should

be flexible and should provide accurate information and should also
supply managers with the information in timely manner.

Other strategic options are evaluated in the corporate strategy, according

to Johnson and Scholes in areas such as: suitability, with the question,
would it work? Feasibility, with the question, can it be made to work?
And acceptability, with the question, will they work it?

• Suitability. This addresses the overall rationale of the strategy. It

checks whether the strategy tackles the key strategic issues
underlined by the organisation’s strategic position.

Certain questions are however asked and answered to confirm suitability

of such strategy. They are as follows.

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i) Does it make economic sense?

ii) Would the organisation obtain economies of scale?
iii) Would it be suitable in terms of environment and capabilities?

Tools that can be used to evaluate suitability include ranking strategic

options, decision trees, and ‘what if’ analysis.

• Feasibility. This is concerned with the resources required to

implement the strategy that are available, can be developed or
obtained. Resources include: funding, people, time, and
information.

Tools that can be used to evaluate feasibility include cash-flow analysis

and forecasting, breakeven analysis, and resource deployment analysis.

• Acceptability. This is concerned with the expectations of the

identified stakeholders (e.g. shareholders, employees and
customers) with the expected performance outcomes, which can
be return, risk and stakeholders’ reactions.

ii) Return – has to deal with the benefits expected by the

stakeholders.
iii) Risk – deals with the probability and consequences of failure of a
strategy.
iv) Stakeholders’ reactions – deals with anticipating the likely
reactions of stakeholders. Stakeholders could oppose the issuing
of new shares.

Tools that can be used to evaluate acceptability include ‘what if’

analysis, and stakeholder mapping.

The purpose of strategy evaluation and control is to examine the

effectiveness and efficiency of organisational strategy in achieving set
goals and objectives (Kazmi, 1995).

Therefore, organisational strategy evaluation and control may be seen as

the process of determining the effectiveness and efficiency of a given
organisational strategy in achieving set organisational goals and
objectives and taking corrective action whenever necessary.

The final stage in strategic management process is to evaluate and

control an organisation’s performance. Organisational management
should ensure that the set strategies generate the performance necessary
to achieve set goals and objectives.

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Strategic evaluation and control therefore involve the activities and

decisions that keep the process on track. Evaluation and control include
the follow-up on goal accomplishment and giving feedback to the
decision-makers on the result achieved so far.

Strategic evaluation is important because organisations face dynamic

business environments in which major internal and external factors often
change quickly and drastically. Strategic evaluation includes four
activities, namely:
• reviewing the bases of strategy or setting standards of
organisation performance,
• measuring organisational performance,
• analysing deviations between standards and measures of
performance,
• taking corrective actions.

According to Glueck (1980) the products of a business strategy

evaluation are answers to these questions.
- Are the objectives of the business appropriate?
- Are the major policies and plans appropriate?
- Do the results obtained to-date confirm or refute critical
assumptions on which the strategy rests?

The following are the steps of strategic evaluation and control process.
• Determine what to control and evaluate.
• Setting control and evaluation standards.
• Measure performance.
• Comparing standards and performance.
• Determining the reason for variations between performance and
taking corrective action.

According to Albanese (1978) organisations stand to gain the following

from strategy evaluation and control.
• Helps to achieve objectives and goals.
• Provides clear guidelines with respect to expected performance
from personnel.
• They direct energy because of employee performance towards
expectation.

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Setting Setting Actual Measurement of

plan standards of organisational organisational
objectives organisation’s performance performance
performance

Analysing variances
between set
standards and
actual performance

Fig. 2.6: Strategic Evaluation Process

Source: Yavitz & Newman (1982). Strategy in Action, p. 305.

3.4 Importance and Limitation of Strategic Management

The importance of strategic management include the following

i) Strategic management is needed to manage uncertainty in the

decision-making process.

ii) Strategic management provides a way to anticipate future

problems and opportunities.

iii) Strategic management provides employees with clear objectives

and directions for the future of the organisation.
iv) Application of strategic management gives better performance.

v) It increases employees’ satisfaction and motivation.

vi) It gives faster and better decision making process.

vii) It allows for identification and exploitation of opportunities.

viii) It allows more effective allocation of time and resources to all

identified opportunities.

The limitations of strategic management include the following

i) When a strategy becomes internalised into a corporate culture, it

can lead to groups’ routine
ii) It can also cause an organisation to define itself too narrowly

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iii) Many theories tend either to be too narrow to build a complete

corporate strategy on, or too general and abstract to be applicable
to specific situations.

4.0 CONCLUSION

You have learnt that strategic management involves the process of

determination of detailed action plans to achieve an organisational goals
and objectives, taking into cognisance the available resources and
deploying appropriate strategies to pursue and achieve such goals and
objectives. You are now aware also of the necessary steps that are
involved in strategic management. Lastly, you have learnt the benefits
which accrued to an organisation from strategic management as well as
its limitations.

5.0 SUMMARY

In this unit, you have learnt the following topics:

• nature of strategic planning

• components of the strategic planning process
• assessing the mission of the organisation
• establishing relevant goals and objectives
• analysing the internal environment of the company
• engaging in external diagnosis
• strategy formulation
• strategy implementation,
• strategy evaluation and control
• importance and limitation of strategic management.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the stages involved in strategic management.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, an Imprint of Dreamtech Press.

Pearce & David (1987). Strategic Planning and Policy. New York:
Reinhold.

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Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). Krishan
Nagar, Delhi: All India Traveller Bookseller.

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UNIT 5 CORPORATE STRATEGIC POSTURE

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Functional Strategy
3.2 Forms of Functional Strategies
3.3 Grand Strategy
3.4 Types of Grand Strategy
3.5 Differences between Functional and Grand Strategies
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Strategy is imperative as a weapon fashioned against competitive attacks

from competitors in the corporate world. Strategy represents the best
weapon against competition in terms of the preparation of relevant
arsenal to ward off competitors’ actions in the company’s line of
business. Companies never believe that the competitors will never attack
in terms of their actions in the marketing of their products and services.
Hence, companies are always prepared for such an action, as it amounts
to sheer business suicide to believe that a corporate entity will sit idle
while engaging in business competition.

Therefore, an explicit strategy for the business organisation is necessary

to ensure that organisational members cooperate and work together in
order to achieve the benefits of mutual reinforcement, and to checkmate
the effects of changing environmental conditions.

In this unit, you will be exposed to corporate strategic posture of

companies in business operations.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain the nature of functional strategy

• describe forms of functional strategy
• describe the nature of grand strategy
• discuss various types of grand strategy.

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3.0 MAIN CONTENT

3.1 Nature of Functional Strategy

Pearce II and Robinson Jr., (1998) posit that functional strategies

constitute the core-centres of activities in the organisation. Functional
strategies are normally formulated for the various functional operations
of a corporate entity. Therefore, there are marketing strategies, legal
strategies and supply-chain strategies, among others. These strategies
emphasise the short and medium term plans and are limited to their
functional responsibilities. Each department attempts to do its part in
meeting the overall corporate objectives.

A functional strategy involves the short term game plan for a key
functional area within a company. Such strategies clarify grand strategy
by providing more specific details about how key functional areas are to
be managed in the near future. Thus, functional strategies clarify the
business strategy, giving specific, short term guidance to operating
managers.

Functional strategies must be developed in the key areas of marketing,

finance, production, operations, research, development, and personnel.
They must be consistent with long term objectives and grand strategy.
Functional strategies help in the implementation of grand strategy by
organising and activating specific subunits of the company (e.g.,
marketing, finance, production, etc.) to pursue the business strategy in
daily activities. In a sense, functional strategies translate the grand
strategy into action designed to accomplish specific annual objectives.
For every major subunit of a company, functional strategies identify and
coordinate actions that support the grand strategy and improve the
likelihood of accomplishing annual objectives.

In order to appreciate the role of functional strategies within the

operational management process, they must be differentiated from grand
strategies. Three basic characteristics differentiate functional and grand
strategies such as time horizon covered, specificity, and participation in
the development.

3.2 Forms of Functional Strategies

The various forms of functional strategies in operational activities of a

business entity, according to Pearce II and Robinson Jr., (1998), are as
identified and discussed below.

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1. Marketing functional strategies

The role of the marketing function is to profitably bring about the sale of
products/services in target markets for the purpose of achieving the
business’s goals. Functional strategies in the marketing area should
guide this endeavour in a manner consistent with the grand strategy and
other functional strategies. Effective marketing strategies guide
marketing managers in determining who will sell what, where, when, to
whom, in what quantity, and how. Marketing strategies must therefore
entail four components: product, price, place, and promotion.

i) Functional strategy for product

A functional strategy for the product component of the marketing
function is meant to clearly identify the customer needs that the firm
seeks to meet with its product and/or service. An effective functional
strategy for this component should guide marketing managers in
decisions regarding features, product lines, packaging, accessories,
warranty, quality, and new product development. This strategy provides
a comprehensive statement of the product/service concept and the target
market(s) the firm is seeking to serve. This, in turn, fosters consistency
and continuity in the daily activity of the marketing area.

ii) Functional strategy for distribution

A product or service is not much good to a customer if it is not available
when and where it is wanted. So, the functional strategy for distribution
component is to identify where, when, and by whom the
product/services are to be offered for sale. The primary concern here is
the channel(s) of distribution–the combination of marketing institutions
through which the products/services flow to the final user. This
component of marketing strategy guides decisions regarding channel.
For example, single versus multiple channels to ensure consistency with
the total marketing effort.

iii) Functional strategy for promotion

The promotion component of marketing strategy defines how the firm
will communicate with the target market. Functional strategy for the
promotion component should provide marketing managers with basic
guides for the use and mix of advertising, personal selling, sales
promotion, and media selection. It must be consistent with other
marketing strategy components and, due to cost requirements, closely
integrated with financial strategy.

iv) Functional strategy for price

Functional strategy regarding the price component is perhaps the single
most important consideration in marketing. It directly influences
demand and supply, profitability, consumer perception, and regulatory
response. The approach to pricing strategy may be cost oriented, market

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oriented, or competition (industry) oriented. With a cost-oriented

approach, pricing decisions centre on total cost and usually involve an
acceptable target price ranges. Pricing is based on consumer demand
(e.g., petroleum products pricing in a deregulated oil industry) when the
approach is market oriented. With the third approach, pricing decisions
centre on those of the firm’s competitors.

2. Functional strategies for finance

While most operating strategies guide implementation in the immediate
future, the time frame for financial functional strategies varies because
strategies in this area direct the use of financial resources in support of
the business strategy, long term goals, and annual objectives.

Financial operating strategies with longer time perspectives are meant to

guide financial managers in long term capital investment, use of debt
financing, dividend allocation, and the firm’s leveraging posture.
Operating strategies designed to manage working capital and short term
assets have a more immediate focus.

i) Capital acquisition
Long term financial strategies usually guide capital acquisition in the
sense that priorities change infrequently over time. The desired level of
debt versus equity versus internal long term financing of business
activities is a common issue in capital acquisition strategy.

ii) Capital allocation

Another financial strategy of major importance is capital allocation.
Growth-oriented grand strategies generally require numerous major
investments in facilities, projects, acquisitions, and people. These
investments cannot generally be made immediately, nor are they desired
to be. Rather, a capital allocation strategy sets priorities and timing for
these investments. This also helps to manage conflicting priorities
among operating managers competing for capital resources.

iii) Re-allocation
The retrenchment or stability often requires a financial strategy that
focuses on the re-allocation of existing capital resources. This could
necessitate pruning product lines, production facilities, or personnel to
be reallocated elsewhere in the firm. The overlapping careers and
aspirations of key operating managers clearly create an emotional
setting. Even with retrenchment (perhaps even more so!), a clear
operating strategy that delineates capital allocation priorities is
important for effective implementation in a politically charged
organisational setting.

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iv) Level of capital expenditure

Capital allocation strategy frequently includes an additional dimension;
level of capital expenditure delegated to operating managers. If a
business is pursuing rapid growth, flexibility in making capital
expenditures at the operating level may enable timely responses to an
evolving market. On the other hand, capital expenditures may be
carefully controlled if retrenchment is the strategy.

v) Dividend policy
Dividend management is an integral part of a firm’s internal financing.
Due to the fact that dividends are paid on earnings, lower dividends
increase the internal funds available for growth, and internal financing
reduces the need for external, often debt, financing. However, stability
of earnings and dividends often makes a positive contribution to the
market price of a firm’s stock. Therefore, a strategy guiding dividend
management must support the business’s posture toward equity markets.

vi) Working capital

Working capital is critical to the daily operation of the firm, and capital
requirements are directly influenced by seasonal and cyclical
fluctuations, firm size, and the pattern of receipts and disbursements.
The working capital component of financial strategy is built on an
accurate projection of cash flow and must provide cash management
guidelines for conserving and rebuilding the cash balances required for
daily operation.

SELF-ASSESSMENT EXERCISE

Identify and explain the various aspects functional strategy for finance.

3. Functional Strategies for Research and Development

With the increasing rate of technological change in most competitive
industries, Research and Development (R&D) have assumed key
functional roles in many organisations. In the technology-intense
computer and pharmaceutical industries, for example, firms typically
spend between five and ten percent of their sales on research and
development. Research and development may be a vital function, a key
instrument of business strategy. Nevertheless, in stable, less innovative
industries, research and development may be less critical as functional
strategies than marketing or finance.

i) Type of research to undertake

First, research and development strategy should clarify whether basic
research or product development research will be emphasised. Several
multinational oil companies, for instance, have solar energy subsidiaries

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with emphasis on basic research, while smaller competitors emphasise

product development research.

ii) Time orientation

Directly related to the choice of emphasis between basic research and
product development is the time orientation for these efforts mandated
by research and development strategy. The solar subsidiaries of the
major oil companies have long term perspectives, while their smaller
competitors appear to be focusing on the immediate future. These
orientations are consistent with each business’s strategy if the major oil
companies want to ensure their long term position in the energy field,
while the smaller companies want to establish a competitive niche in the
growing solar industry.

iii) Guide to research efforts

Research and development strategy should also guide all organisations.
The company should decide whether research and development efforts
should be conducted solely within the firm or should part of the work be
contracted outside. A closely related issue is whether research and
development should be a centralised or a decentralised function.

iv) Technological skill requirement

The basic research and development posture of the firm influences
decisions because strategy in this area can be offensive, defensive, or a
combination of these. In the event that the research and development
strategy is offensive, technological innovation and new product
development are emphasised as the basis for the firm’s future success, as
is true for small, high-technology firms. However, this orientation
entails high risk (and high payoff) and demands technological skill,
forecasting expertise, and the ability to quickly transform basic
innovations into commercial products.

4. Functional strategies for production

Production and operations managements are the core functions in a
business firm. Production and operations managements are the process
of converting inputs (raw materials, suppliers, people, and machines)
into value-enhanced output. These functions are mostly associated with
manufacturing firms. Nevertheless, it applies equally to all other types
of businesses including service and retail firms.

Functional strategies in production and operations management must

guide decisions regarding:

• the basic nature of the firm’s production and operations

management system, seeking an optimum balance between
investment input and production and operations output, and

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• location, facilities design, and process planning on a short term

basis.

i) Facilities and equipment

The facilities and equipment component of production and operations
management strategy involve decisions regarding plant location, size,
equipment replacement, and facilities’ utilisation that should be
consistent with grand strategy and other operating strategies.

ii) Purchasing function

The purchasing function is another area that should be addressed in the
production and operations management strategy. From a cost
perspective, are the suppliers advantageous or risky to the management
because of overdependence on them? Relevant criteria should be used
in the selection of vendors, while the volume of transactions and
delivery requirements to support operations, should be established. All
these are meant to serve as guidelines for improving implementation.

iii) Planning and control of production

For the planning and control of production and operations, management
should provide guidelines for ongoing production operations. The
guidelines are meant to encourage efficient organisation of production
resources to match long-range, overall demand. Often this component
dictates whether production/operations will be demand oriented,
inventory oriented, or subcontracting oriented.

iv) Pattern of productions and operations

If demand is seasonal, then productions and operations management
strategy must ensure that productions/operations processes are
efficiently geared to this pattern. A bathing suit manufacturer would
prefer inventories to be at their highest in the early spring, for example,
not the early fall. If demand is less seasonal, a firm might emphasise a
steady level of production. When demand fluctuations are less
predictable, many firms subcontract productions in order to handle
sudden increases in demand.

v) Coordination of production and operations strategies

Production and operations management strategies must be coordinated
with marketing strategy if the firm is to succeed. Careful integration
with financial strategy components (such as capital budgeting and
investment decisions) and the personnel functions are also necessary.

Figure 10.1 illustrates the importance of such coordination by showing

the different production and operations management concerns that arise
when different marketing/financial/personnel strategies are required as
elements of the grand strategy.

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SELF-ASSESSMENT EXERCISE

Enumerate and explain the various aspects of the production and

operations management strategies.

5. Personnel Functional Strategies

The importance of functional strategies in the personnel area has
become more widely accepted in recent years. Personnel management
aids in accomplishing grand strategy by ensuring the development of
managerial talent, the presence of systems to manage compensation and
regulatory concerns, and the development of competent, well-motivated
employees. Functional strategies in personnel should guide the effective
utilisation of human resources to achieve both the annual objectives of
the firm and the satisfaction and development of employees.

Operating strategy for recruitment, selection, and orientation guides

personnel management decisions for attracting and retaining motivated,
productive employees. The recruitment, selection, and orientation
component of personnel strategy are to provide basic parameters for
tackling issues such as:
• the key human resources needs to support a chosen strategy,
• recruitment for key human resources needs,
• level of sophistication of the selection process, and
• introduction and orientation of new employees.

The development and training component should guide personnel

actions taken to meet future human resource needs of the grand strategy.
Functional strategies in the personnel area are needed to guide decisions
regarding compensation, labour relations, government requirements,
discipline, and control to enhance the productivity and motivation of the
workforce.

The relevant concerns are: the standards for promotion, interpretation of

payment, incentive plans, benefits, and seniority policies, hiring
preference, and appropriate disciplinary steps. These are specific
personnel decisions that operating managers frequently encounter.
Functional strategies in the personnel area should guide such decisions
in a way that is compatible with business strategy, strategies for other
functional areas, and the achievement of annual objectives.

Basically, therefore, functional strategies are important because they

provide specifics on how each major sub-activity contributes to the
implementation of the grand strategy. This specificity, and the
involvement of operating managers in its development, help ensure
understanding of and commitment to the chosen strategy.

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The annual objectives, which are linked to both long term objectives and
functional strategies, reinforce this understanding and commitment by
providing measurable targets that operating managers have agreed on.
The next step in implementing a strategy involves the identification of
policies that guide and control decisions by operating managers and
their subordinates.

3.3 Grand Strategy

Grand strategies, according to Pearce II and Robinson Jr., (1998), are

also known and called master business strategies which are intended to
provide basic direction for strategic actions. Therefore, they are seen as
the basis of coordinated and sustained efforts directed towards achieving
long term business objectives. More often than not, grand strategies
indicate how long-range objectives will be achieved. Thus, a grand
strategy can be defined as a comprehensive general approach that guides
major actions.

A principal grand strategy could serve as the basis for achieving major
long term objectives such as single business concentration, market
development, product development, innovation, horizontal integration,
vertical integration, joint venture, concentric diversification,
conglomerate diversification, retrenchment/turnaround, divestiture and
liquidation. A company which is involved in multiple industries,
businesses, product lines, or customer groups uses several grand
strategies.

The following are the dimensions of strategic changes or

transformations. They are in most cases associated with grand or
systemic strategies. They include the followings.

(1) Internal/External Dimension

Internalisation is the extent to which the strategy adopted by an
organisation is independent of any other entity.

Externalisation is the extent to which the strategy adopted by an

organisation is dependent or in association with another entity.

2) Relatedness/Unrelatedness Dimension
Relatedness is the extent to which the strategy adopted by an
organisation is related to current business definition (customer groups,
customer functions, product group or alternative technologies).

Unrelatedness is the extent to which the strategy adopted by an

organisation is at variance and unrelated to its current business

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definition. Relatedness is also called concentration while unrelatedness

is also called conglomerate.

3) Horizontal/Vertical Dimension
Horizontalisation is the extent to which a newly adopted strategy
enlarges or complements the current business definition of an
organisation (customer groups, customer function, product class or
technological alternative).

Verticalisation on the other hand, is the extent to which a newly adopted

strategy enriches the current business definition of a company.
Enrichment could be backward or forward or both from the current
organisational position.

4) Active/Passive Dimension
The active dimension is the extent to which a newly adopted strategy is
offensive (aggressive) in anticipation or reaction to environmental
threats and opportunities.

Passive dimension is the extent to which a newly adopted strategy is

defensive (protective) in anticipation or reaction to environmental
threats and opportunities.

(5) Basic/Derived Dimension

A basic dimension (also called grand, generic, systemic or holistic) is
the extent to which a newly adopted strategy affects the totality of the
organisation (corporate).

A derived dimension is the extent to which a newly adopted strategy is

restricted to a specific organisation's function e.g. production strategies
such as choice of plant, layout or plant maintenance strategy.

(6) Local/Multinational Dimension

Localisation is the extent to which a newly adopted strategy is restricted
to a single business at home.

Multinationalisation is the extent to which a newly adopted strategy is

operated both at home and abroad (host economies).

(7) Diversity/Integrated Dimension

Diversity is the manifolds of the adopted strategies or the extent to
which adopted strategies are heterogeneous (diversification), or the
extent to which a newly adopted strategy can be differentiated from the
existing strategies in the organisation.

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Integration as a dimension is the extent to which a newly adopted

strategy collaborates or is in harmony with existing strategies of the
organisation.

(8) Intensiveness/Extensiveness Dimension

Intensiveness is the extent to which a newly adopted strategy
intensifies, reinforces or increases organisation's operations within the
current or potential product-market definition.

Extensiveness is the extent to which a newly adopted strategy expands

the current or potential product-market definition of a company.

(9) Cooperation/Competitive Dimension

Cooperative dimension is the extent to which a newly adopted strategy
is in alliance or is joined with other entity's strategies.

Competitive dimension is the extent to which a newly adopted strategy

rivals other entity's strategies.

(10) Complete/Facial Dimension

Full or complete dimension is the extent to which a newly adopted
strategy has permanent, interminable or durable existence (e.g. complete
merger, full integration) or the extent to which an adopted strategy
allows an organisation to participate in all stages of the process of
getting products into the hand of final users. Partial dimension is the
extent to which a newly adopted strategy is non-durable, terminable or
having temporary existence or limited in participating in all stages of
production (e.g. cartels, syndicates, pools, price rings, integration).

The former may be long term and sometimes compulsory or binding, but
the latter is short term and voluntary.

(11) Current/Potential Dimension

Current dimension is the extent to which a strategy is put to actual use or
is actualised with reference to the present time.

Potential dimension is the extent to which a strategy is put to latent use

with reference to a future time.

3.4 Types of Grand Strategy

Pearce II and Robinson Jr., (1998) identify several grand strategies

which are discussed below.

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1. Concentration Grand Strategy

The most common grand strategy is concentration on the current
business. The firm directs its resources to profitable growth of a single
product, in a single market, and with a single technology.

The reasons for selecting a concentration grand strategy are easy to

understand. Concentration is typically lowest in risk and in additional
resources required. It is also based on the known competencies of the
firm.

Further, because of their narrow base of competition, concentrated firms

are especially susceptible to performance variations resulting from
industry trends.

Concentration strategies succeed for so many businesses – including the

vast majority of smaller firms – because of the advantages of business-
level specialisation. By concentrating on one product, in one market, and
with one technology, a firm can gain competitive advantages over its
more diversified competitors in production skill, marketing know-how,
customer sensitivity, and reputation in the marketplace.

A grand strategy of concentration allows for a considerable range of

action. Broadly speaking, the business can attempt to capture a larger
market share by increasing present customers' rate of usage, by
attracting competitors' customers, or by interesting non users in the
product or service. In turn, each of these actions suggests a more
specific set of alternatives.

When strategic managers forecast that the combination of their current

products and their markets will not provide the basis for achieving the
company mission, they have two options that involve moderate cost and
risk: market development and product development.

2. Market Development Grand Strategy

Market development commonly ranks second only to concentration as
the least costly and least risky of all grand strategies. It consists of
present marketing products, often with only cosmetic modifications, to
customers in related market areas by adding different channels of
distribution or by changing the content of advertising or the promotional
media. Several specific approaches are listed under this heading in
Figure 10-1. Thus, as suggested by the figure, businesses that open
branch offices in new cities, states, or countries are practising market
development. Likewise, companies that switch from advertising in trade
publications to newspapers to supplement their mail-order sales efforts
are using a market development approach.

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Concentration - (increasing the use of present products in the

present markets)
1. Increasing present customers' rate of usage
a. Increasing the size of purchase.
b. Increasing the rate of product obsolescence.
c. Advertising other uses.
d. Giving price incentives for increased use.
2. Attracting competitors' customers
a. Establishing sharper brand differentiation.
b. Increasing promotional effort.
c. Initiating price cuts.
3. Attracting non users to buy the product
a. Inducing trial use through sampling, price incentives, and
so on.
b. Pricing up or down.
c. Advertising new uses.

Market development - (selling present products in new markets)

1. Opening additional geographical markets
a. Regional expansion.
b. National expansion.
c. International expansion.
2. Attracting other market segments
a. Developing product versions to appeal to other segments.
b. Entering other channels of distribution.
c. Advertising in other media.

Product development - (developing new products for present

markets)
1. Developing new product features
a. Adapt (to other ideas, developments).
b. Modify (change color, motion, sound, odour, form, shape).
c. Magnify (stronger, longer, thicker, extra value).
d. Magnify (smaller, shorter, lighter).
e. Substitute (other ingredients, process, and power).
f. Rearrange (other patterns, layout, sequence, components).
g. Reverse (inside out).
h. Combine (blend, alloy, assortment, ensemble, combine
units, purposes, appeals, ideas).

2. Developing quality variations

Developing additional models and sizes (product proliferation).

3. Product development grand strategy

Product development involves substantial modification of existing
products or creation of new but related products that can be marketed to

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current customers through established channels. The product

development strategy is often adopted either to prolong the life cycle of
current products or to take advantage of favourable reputation and brand
name. The idea is to attract satisfied customers to new products as a
result of their positive experience with the company’s initial offering.
The bottom section of figure 10.1 lists some of the many specific
options available to businesses undertaking product development. Thus,
a revised edition of a textbook, a new car style, and a second formula of
shampoo for oily hair each represents a product development strategy.

4. Innovation grand strategy

In many industries, it is increasingly risky not to innovate. Consumers,
as well as industrial markets, have come to expect periodic changes and
improvements in the products offered. As a result, some businesses find
it profitable to base their grand strategy on innovation. They seek to
reap the initially high profits associated with customer acceptance of a
new or greatly improved product.

Then, rather than face stiffening competition as the basis of profitable

shifts from innovation to production or marketing competence, they
move on to search for other original or novel ideas. The underlying
philosophy of a grand strategy of innovation is creating a new product
life cycle, thereby making any similar existing products obsolete. Thus,
this approach differs from the product development strategy of
extending an existing product’s life cycle.

While most growth-oriented firms appreciate the need to be innovative,

occasionally, a few companies use it as their fundamental way of
relating to their markets.

5. Horizontal integration
When the long term strategy of a firm is based on growth through the
acquisition of one or more similar businesses operating at the same stage
of the production-marketing chain, its grand strategy is called horizontal
integration. Such acquisitions provide access to new markets for the
acquiring firm and eliminate competitors.

6. Vertical integration
When the grand strategy of a firm involves the acquisition of businesses
that either supply the firm with inputs (such as raw materials) or serve as
a customer for the firm’s outputs (such as warehouse users for finished
products), vertical integration is involved. For example, if a textile
manufacturer acquires a cotton producer, the strategy is a vertical
integration. In this example, it is a backward vertical integration since
the business acquired operates at an earlier stage of operation process. If
the firm’s acquisition is into textile merchandising, it is forward vertical
integration.
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7. Joint venture
Occasionally, two or more capable companies lack a necessary
component for success in a particular competitive environment. These
cooperative arrangements could provide both the necessary funds to
build the joint facilities for the processing and marketing capacity to
profitably handle the oil production. This also applies to the joint
ventures in upstream sub–sector of the petroleum industry generally.

In recent years, it has become increasingly appealing for domestic firms

to join foreign businesses through joint ventures. The stimulus for this
joint venture was grand strategy, but such is not always the case.
Certain countries virtually mandate that foreign companies entering their
markets do so on a joint ownership basis. India and Mexico are good
examples. The rationale of these countries is that joint ventures
minimise the threat of foreign domination and enhance the skills,
employment, growth, and profits of local businesses.

Strategic managers in the typical firm rarely seek joint ventures. This
approach admittedly presents new opportunities with risks that can be
shared. On the other hand, joint ventures often limit partner’s
discretion, control, and profit potential while demanding managerial
attention and other resources that might otherwise be directed towards
the mainstream activities of the firm. Nevertheless, increasing
nationalism in many foreign markets may require greater consideration
of the joint venture approach if a firm intends to diversify
internationally.

8. Concentric diversification
Grand strategies involving diversification represent distinctive
departures from a firm’s existing base of operations. Typically, the
acquisition of a separate business with synergistic possibilities
counterbalances the strengths and weaknesses of the two businesses.
However, diversifications are occasionally undertaken as unrelated
investments because of their otherwise minimal resource demands and
high profit potential.

Regardless of the approach taken, the motivations of the acquiring firms

are the same such as highlighted below

• Increase the firm's stock value. Often in the past, mergers have
led to increases in the stock price and/or price-earnings ratio.
• Increase the growth rate of the firm.

• Make an investment that represents better use of funds then

plowing them into internal growth.

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• Improve the stability of earnings and sales by acquiring firms

which earnings and sales complement the firm's peaks and
valleys.

• Balance or fill out the product line.

• Diversify the product line when the life cycle of current products
has peaked.

• Acquire a needed resource quickly for example, high-quality

technology or highly innovative management.

• Tax reasons, purchasing a firm with tax losses that will offset
current or future earnings.

• Increase efficiency and profitability, especially if there is synergy

between the two companies.

When diversification involves the addition of a business related to the

firm in terms of technology, markets, or products, it is a concentric
diversification. With this type of grand strategy, the new businesses
selected possess a high degree of compatibility with the current
businesses. The ideal concentric diversification occurs when the
combined company profits increase its strengths and opportunities, as
well as decrease its weaknesses and exposure to risk. Thus, the acquiring
company searches for new businesses with products, markets,
distribution channels, technologies, and resource requirements that are
familiar but not identical, synergistic but not wholly interdependent.

9. Conglomerate diversification
Occasionally a firm, particularly a very large one, plans to acquire a
business because it represents the most promising investment
opportunity available. This type of grand strategy is commonly known
as conglomerate diversification. The principal and often sole concern of
the acquiring firm is the profit pattern of the venture. There is little
concern given to creating product/market synergy with existing
businesses, unlike the approach taken in concentric diversification.
Financial synergy is what is sought by some conglomerate diversifiers.
For example, they may seek a balance in their portfolio between current
businesses with cyclical sales and acquired businesses with counter-
cyclical sales, between high-cash/low-opportunity and low-cash/low-
opportunity businesses, or between debt-free and highly leveraged
businesses.

The principal difference between the two types of diversification is that

concentric acquisitions emphasise some commonality in markets,

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products, or technology, whereas conglomerate acquisitions are based

principally on profit considerations.

10. Retrenchment/turnaround
For a large number of reasons, a business can find itself with declining
profits. Economic recessions, production inefficiencies, and innovation
break-through by competitors are only three causes. In many cases
strategic managers believe the firm can survive and eventually recover if
a concerted effort is made over a period of a few years to fortify basic
distinctive competencies. This type of grand strategy is known as
retrenchment. It is typically accomplished in one or two ways, employed
singly or in combination.

1. Cost reduction. Examples include decreasing the work force

through employee attrition, leasing rather than purchasing
equipment, extending the life of machinery, and eliminating
elaborate promotional activities.

2. Asset reduction. Examples include the sale of land, buildings, and

equipment not essential to the basic activities of the business and
elimination of "perks" like the company airplane and executive
cars.

If these initial approaches fail to achieve the required reductions, more

drastic action may be necessary. It is sometimes essential to lay off
employees, drop items from a production line, and even eliminate low-
margin customers.

Since the underlying purpose of retrenchment is to reverse current

negative trends, the method is often referred to as a turnaround strategy.
Interestingly, the turnaround most commonly associated with this
approach is in management positions. Bringing in new managers was
believed to introduce needed new perspectives of the firm's situation, to
raise employee morale, and to facilitate drastic actions, such as deep
budgetary cuts in establishment programs.

11. Divestiture
A divestiture strategy involves the sale of a business or a major business
component. When retrenchment fails to accomplish the desired
turnaround, strategic managers often decide to sell the business.
However, because the intent is to find a buyer willing to pay a premium
above the value of fixed assets for a going concern, the term marketing
for sale is more appropriate. Prospective buyers must be convinced that
because of their skills and resources, or the synergy with their existing
businesses, they will be able to profit from the acquisition.

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The reasons for divestiture vary. Often they arise because of partial
mismatches between the acquired business and the parent corporation.
Some of the mismatched parts cannot be integrated into the
corporation’s mainstream and thus must be spun off. A second reason is
needs. Sometimes the cash flow or financial stability of the corporation
as a whole can be greatly improved if businesses with high market value
can be sacrificed. A third, less frequent reason for divestiture is
government antitrust action when a corporation is believed to
monopolise or unfairly dominate a particular market.

12. Liquidation
When the grand strategy is that of liquidation, the business is typically
sold in parts, only occasionally as a whole, but for its tangible asset
value and not as a going concern. In selection liquidation, owners and
strategic managers of a business are admitting failure and recognise that
this action is likely to result in great hardships to themselves and their
employees. For these reasons, liquidation is usually seen as the least
attractive of all grand strategies. However, as a long term strategy, it
minimises the loss to all stakeholders of the firm. Usually faced with
bankruptcy, the liquidating business tries to develop a planned and
orderly system that will result in the greatest possible return and cash
conversion as the business slowly relinquishes its market share.

3.5 Differences between Functional and Grand Strategies

According to Pearce II and Robinson Jr., (1998), the differences

between functional and grand strategies are discussed as follows.

i) Time horizon
The time horizon of a functional strategy is usually comparatively short.
Functional strategies identify and coordinate short term actions, usually
undertaken in a year or less. A merchandise stores, for example, might
implement a marketing strategy of increasing price discounts and sales
bonuses in its appliance division to reduce excess appliance inventory
over the next year. This functional strategy would be designed to
achieve a short-range (annual) objective that ultimately contributes to
the goal of the company’s grand strategy in its retail division over the
next five years.

This shorter time horizon is critical to successfully implementing a

grand strategy for two reasons. First, it focuses functional managers’
attention on what needs to be done now to make the grand strategy
work. Second, the shorter time horizon allows functional managers to
recognise current conditions and adjust to changing conditions in
developing functional strategies.

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ii) Specificity
A functional strategy is more specific than a grand strategy. Functional
strategies guide functional actions taken in key parts of the company to
implement grand strategy. The grand strategy provides general direction.
Functional strategies give specific guidance to managers responsible for
accomplishing annual objectives. Such strategies are meant to ensure
that managers know how to meet annual objectives. It is not enough to
identify a general grand strategy at the business level. There must also
be strategies outlining what should be done in each functional area if the
annual (and ultimately long term) objectives of the company are to be
achieved. Specific functional strategies improve the willingness (and
ability) of operating managers to implement strategic decisions,
particularly when those decisions represent major changes in the current
strategy of the firm.

Specificity in functional strategies contributes to successful

implementation for several reasons. First, it adds substance,
completeness, and meaning to what a specific subunit of the business
must do. The existence of numerous functional strategies helps ensure
that managers know what needs to be done and can focus on
accomplishing results. Second, specific functional strategies clarify for
top management’s confidence in and sense of control over the grand
strategy. Third, specific functional strategies facilitate coordination
between operating units within the company by clarifying areas of
interdependence and potential conflict.

iii) Participation
Different people participate in strategy development at the functional
and business levels. Business strategy is the responsibility of the
general manager of a business unit. Development of functional strategy
is typically delegated by the business-level manager to principal
subordinates charged with running the operating areas of the business.
The business manager must establish long term objectives and a strategy
that corporate management feels contributes to corporate-level goals.
Key operating managers similarly establish annual objectives and
operating strategies. The objectives are approved through negotiation
between corporate managers and business managers. The business
manager typically ratifies the annual objectives and functional strategies
developed by operating managers.

The involvement of operating managers in developing functional

strategies contributes to successful implementation because
understanding of what needs to be done to achieve annual objectives is
thereby approved. Most critical perhaps, is the fact that active
involvement increases commitment to the strategies developed.

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It is difficult to generalise about the development of strategies across

functional areas. For example, key variables in marketing, finance and
production are different. Furthermore, within each functional area, the
importance of key variables varies across business situations. Thus, in
the subsequent units, we will not only treat each functional area
exhaustively but will also attempt to indicate the key decision variables
that should receive attention in the functional strategies of typical areas.

4.0 CONCLUSION

In this unit, you are now aware of the fact that there are some options
that are available for strategic posture, which a company can adopt
towards ensuring strategic advantage in the competitive business
environment. You have observed that such strategic options include
functional and grand strategies as discussed in the course of the analysis
of this unit. You have also discovered that there are differences between
the functional strategies and grand strategies.

5.0 SUMMARY

In this unit, you have learnt the following:

• nature of functional strategy

• forms of functional strategy
• grand strategy
• types of grand strategy, and
• differences between functional and grand strategies

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss various types of grand strategy that can be adopted
by a corporate entity.

7.0 REFERENCES/FURTHER READING

Dilworth, J. (1983). Production and Operations Management:

Manufacturing and Non- Manufacturing. (2nd ed.). New York:
Random House, Inc.

Gupta, C.B. (1995). Corporate Planning and Policy. New Delhi: Sultan
Chand and Sons.
Hill, C. W. L. & Jones, G. R. (2004). Strategic Management: An
Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, An Imprint of Dreamtech Press.

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Kazmi, A. (1995). Business Policy. New Delhi: Tata McGraw-Hill

Publishing Company Limited.

Pearce& David (1987). Strategic Planning and Policy. New York:

Reinhold.

Pearce II & Robinson Jr. (1998). Strategic Management: Strategy

Formulation and Implementation. (3rd ed.). Krishan Nagar,
Delhi: All India Traveller Bookseller.

Thompson, A. A. Jr. & Strickland, A. J. (1987). Strategic Management:

Concepts and Cases. Homewood, Illinois: BP Irwin.

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MODULE 3

Unit 1 Strategic Typologies

Unit 2 Organisational Structure
Unit 3 Structure, Technology and Strategy
Unit 4 Case Study

UNIT 1 STRATEGIC TYPOLOGIES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Nature of Strategic Analysis
3.2 Methods of Strategic Analysis at Corporate Level
3.2.1 Business Portfolio Approach
3.2.2 The BCG Matrix
3.2.3 GE Nine-Cell Grid
3.3 Grand Strategy Selection at Business Level
3.3.1 SWOT Analysis
3.3.2 Grand Strategy Selection Matrix
3.3.3 Model of Grand Strategy Clusters
3.4 Strategic Portfolio Analysis
3.5 Corporate Strategic Choice Making
3.6 Behavioural Considerations in Strategic Choice
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

In the previous unit, you learnt about the essence of available types of
strategies that firms can adopt to cope with the competitive nature of the
external environment. Strategy therefore, is imperative, as a weapon
against competitive attacks from competitors in the industry. The
pertinent consideration is to identify the various strategic weapons that
can be adopted by firms in order to create strategic advantage or
leverage over the competitors.

The knowledge and use of appropriate strategies are necessary for the
business organisation to ensure that it remains competitive and enhance
its chances of survival. Furthermore, such appropriate choice of strategic
posture is necessary towards enhancing the fortunes of the business

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enterprise. Therefore, in this unit, you will be exposed to the discussion

on strategic typologies available to a firm.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain the nature of strategic analysis

• explain various methods of strategic analysis at corporate level
• describe business portfolio approach to strategic analysis
• explain the BCNG matrix
• describe the GE Nine-Cell Grid
• explain the portfolio analysis
• discuss the corporate strategic choice making
• list the behavioural considerations in strategic choice.

3.0 MAIN CONTENT

3.1 Nature of Strategic Analysis

According to Pearce II and Robinson Jr. (1998), the search for

alternative strategies is both incremental and creative in that strategists
begin by considering alternatives they are familiar with and think will
work. These are usually incremental alterations of past strategies.
Systematic comparison of external and internal factors is often used to
search for alternative strategies. Creativity can be important in this
internal and external comparison.

The search for multiple alternatives depends on systematic comparison

of the strengths, weaknesses, risks and trade-offs of each alternative.
Several alternatives are generated and systematically evaluated in a
comparative framework. The quality of the ultimate choice is thereby
logically enhanced. Evaluation of alternative strategies is much the
same whether new alternatives or the old strategy is considered. The
focus is the future. Both old and new strategies must be subjected to the
same systematic evaluation, if a logical choice is to be made.

3.2 Methods of Strategic Analysis at Corporate Level

3.2.1 Business Portfolio Approach

According to Pearce II and Robinson Jr. (1998), a fundamental method

of corporate strategic analysis in diversified, multi-industry companies is
the business portfolio approach. For instance, a company with many
business subsidiaries must decide how this portfolio of businesses

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should be managed to achieve corporate objectives. A corporate

strategy is sought that sets the basic “strategic thrust” for each business
unit in a manner consistent with the resource capabilities of the overall
company.

Business portfolio approach involves examining each business as a

separate entity and as a contributor to the corporation's total portfolio of
businesses. The portfolio approach, with analysis of corporate-level
strategy, distinct from business-level strategy, is adaptable to
multiproduct market firms in which each product/market is "managed as
a separate business or profit center, provided that the firm is not
dominated by one product/market. In dominant product/market
companies and single product/market firms, corporate strategy
considerations are not separate and distinct from business-level
considerations.

In a broad sense, corporate strategy is concerned with generation and

allocation of corporate resources. The firm's portfolios of businesses are,
to varying degrees, the generators and recipients of these resources. The
portfolio approach provides a simple, visual way of identifying and
evaluating alternative strategies for the generation and allocation of
corporate resources.

3.2.2 The BCG Matrix

A most widely used portfolio approach to corporate strategic analysis is

the BCG matrix. It is the growth/shared matrix pioneered by the Boston
Consulting Group, hence, the name BCG matrix. According to Pearce II
and Robinson Jr. (1998), this matrix facilitates corporate strategic
analysis of likely generators and optimum users of corporate resources.

The use of the BCG matrix involves plotting each of the company's
businesses according to market growth rate (percentage growth in sales)
and relative competitive position (market share). Market growth rate is
the projected rate of sales growth for the market to be served by a
particular business. It is usually measured as the percentage increase in
a market’s sales volume over the two most recent years.

Market growth rate provides an indicator of the relative attractiveness of

the markets served by each of the businesses in the corporation’s
portfolio of businesses. Relative competitive position is usually
expressed as the ratio of a business’s market share divided by the market
share of the largest competitor in that market.

Relative competitive position thus provides a basis for comparing the

relative strengths of the different businesses in the business portfolio in

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terms of the “strengths” of their position in each business respective

markets.
Businesses are plotted on the matrix once their market growth rate and
relative competitive positions have been computed. Figure 3.1 below
represents the BCG matrix for a company with nine businesses. Each
circle represents a business unit. The size of the circle represents the
proportion of corporate revenue generated by that business unit. This
provides the visualisation of the current importance of each business as a
revenue generator.

Market growth rate is frequently separated into "high" and "low" areas
by an arbitrary 10 percent growth line. Relative competitive position is
usually divided at a relative market share between 1.0 and 1.5, so that a
“high” matrix signifies market leadership. Once plotted, businesses in
the BCG matrix will be in one of four cells with differing implications
for their role in an overall corporate-level strategy (Pearce II and
Robinson Jr., 1998).

1) High-Growth/High Competitive Position (The Stars)

The stars are in the high-growth/high competitive position, and as the
BCG matrix labeled them, are businesses in rapidly growing markets
with large market shares. Stars represent the best long-run opportunities
(growth and profitability) in the firm's portfolio. These businesses
require substantial investment to maintain (and expand) their dominant
position in a growing market. This investment requirement is often in
excess of what can be generated internally..

2) Low-Growth/High Competitive Position (Cash Cows)

Cash cows, as represented by low-growth/high competitive position, are
high-market-share businesses in maturing low-growth markets. Because
of their strong position and minimal reinvestment requirements for
growth, these businesses often generate cash in excess of their needs.
Therefore, these businesses are selectively "milked" as a source of
corporate resources for deployment elsewhere (to stars and question
marks).

Cash cows are yesterday's stars and remain the current foundation of
their corporate portfolios. They provide the cash to pay corporate
overhead and dividends and also provide debt capacity. They are
managed to maintain their strong market share while efficiently
generating excess resources for corporate-wide use.

3) Low-Growth/Low Competitive Position (The Dogs)

These occupy the low-growth/low competitive position. The BCG
matrix calls businesses with low market share and low market growth
the dogs in the firm's portfolio. These businesses are in saturated, mature

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markets with intense competition and low profit margins. Because of

their weak position, these businesses are managed for short term cash
flow (through ruthless cost cutting, for example) to supplement
corporate-level resource needs. According to the original BCG
prescription, they are eventually divested or liquidated once the short
term harvesting is maximised.

Recent research has questioned the notion that all dogs should be
destined for divestiture/liquidation. The thrust of this research suggests
that well-managed dogs turn out to be positive, highly reliable resource
generators (although still far less resource rich than cows). The well-
managed dogs, according to these studies, combine a narrow business
focus emphasis on high product quality and moderate prices, strenuous
cost cutting, cost control and limited advertising. While suggesting that
well-managed dogs can be useful components of a business portfolio,
these studies warn that ineffective dogs should still be considered prime
candidates for harvesting, divestiture, or liquidation.

4) High-Growth/Low Competitive Position (Question Marks)

These occupy the high-growth/low competitive position. Question mark
businesses have considerable appeal because of their high growth rate,
yet, they present questionable profit potential because of low market
share. Question mark businesses are known as cash guzzlers because
their cash needs are high as a result of rapid growth, while their cash
generation is low due to a small market share.

Due to the fact that market growth rate is high; a favourable market
share (competitive position) should be easier to obtain than with the
dogs in the portfolio. At the corporate level, the concern is identifying
the question marks that would most benefit from extra corporate
resources resulting in increased market share and movement into the star
group. When this long-run shift in a business's position from question
mark to star is unlikely, the BCG matrix suggests divesting the business
to reposition the resources more effectively in the remaining portfolio.

The BCG matrix is a valuable initial development in the portfolio

approach to corporate-level strategy evaluation. The goal of the BCG
approach is to determine corporate strategy that best provides a balanced
portfolio of business units. BCG’s ideal, balanced portfolio would have
the largest sales in cash cows and stars, with only a few question marks
and very few dogs (the latter with favorable cash flow).

The BCG matrix makes two major contributions to corporate strategic

choice.
• The assignment of a specific role or mission for each business
unit and the integration of multiple business units into a total
corporate strategy.
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• By focusing simultaneously on comparative growth/share

positions, the underlying premise of corporate strategy becomes
exploitation of competitive advantage.

While the BCG matrix is an important visual tool with which to analyse
corporate (business portfolio) strategy, strategists must recognise six
limitations.

i) Clearly defining a market is often difficult. As a result, accurately

measuring share and growth rate can be a problem. This, in turn,
creates the potential for distortion or manipulation.

ii) Dividing the matrix into four cells based on a high/low

classification scheme is somewhat simplistic. It does not
recognise the markets with average growth rates or the businesses
with average market shares.

iii) The relationship between market share and profitability

underlying the BCG matrix-the experience curve effect varies
across industries and market segments. In some industries, a large
market share creates major advantages in unit costs; in others it
does not. Furthermore, some companies with low market share
can generate superior profitability and cash flow with careful
strategies based on differentiation, innovation, or market
segmentation. Mercedes-Benz and Polaroid are two examples.

iv) The BCG matrix is not particularly helpful in comparing relative

investment opportunities across different business units in the
corporate portfolio. For example, is every star better than a cash
cow? How one question mark should be compared to another in
terms of whether it should be built into a star or divested?

v) Strategic evaluation of a set of businesses requires examination of

more than relative market shares and market growth. The
attractiveness of an industry may increase based on technological,
seasonal, competitive, or other considerations as much as on
growth rate. Likewise, the value of a business within a corporate
portfolio is often linked to considerations other than market
share.

vi) The four colorful classification in the BCG matrix somewhat

oversimplify the types of businesses in a corporate portfolio.
Likewise the simple strategic missions recommended by the BCG
matrix often don’t reflect the diversity of options available as
seen earlier in discussing dogs.

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SELF-ASSESSMENT EXERCISE

Identify and discuss the various forms of business that are represented in
BCG Matrix.

Market Growth
Rate
STARS QUESTION MARKS

HIGH

LOW

CASH COWS DOGS

HIGH LOW
(Relative Market Share)

Fig. 3.1: BCG Growth/Share Matrix

Source: Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic

Management: Strategy Formulation and Implementation. (3rd ed.).
p.280.

3.2.3 GE Nine-Cell Grid

Pearce II and Robinson Jr. (1998) posit that the General Electric Nine-
Cell Grid is popularised by an adaptation of the BCG approach that
attempts to overcome some of the matrix limitations mentioned above.
First, the GE grid uses multiple factors to assess an industry’s
attractiveness and business strength, rather than the single measures
(market share and market growth, respectively) employed in the BCG
matrix.

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Second, GE expanded the matrix from four cells to nine -replacing the
high/low axes with high/medium/low axes to make finer distinction
between business portfolio positions. To use the GE planning grid, each
of the company's business units is rated on multiple sets of strategic
factors within each axis of the grid.

The business strength factors include the following:

• market share,
• profit margin,
• ability to compete,
• customer and market knowledge,
• competitive position,
• technology, and
• management caliber

Such factors are the factors contributing to business strength.

The industry attractiveness factors include the following:

• market growth,
• size and industry profitability,
• competition,
• seasonality and cyclical qualities,
• economies of scale,
• technology, and
• socia1/environmental/legal/human factors

The above factors are identified as enhancing industry’s attractiveness.

A business position within the planning grid is then calculated by
"subjectively" quantifying the two dimensions of the grid.

To measure industry’s attractiveness, the strategist first selects those

factors contributing to this aspect. The procedure then involves
assigning each industry’s attractiveness factor a weight that reflects its
perceived importance relative to the other attractiveness factors.
Favourable to unfavourable future conditions for those factors are
forecast and rated based on some scale (a 0- to-l scale as illustrated
below). A weighted composite score is then obtained for a business’s
overall industry’s attractiveness as shown below.

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Industry’s attractiveness factor Weight Rating * Score

Market size 20 0.5 10.0
Project market growth 35 1.0 35.0
Technological requirements 15 0.5 7.5
Concentration (a few large competitors) 30 0.0 0.0
Political and regulatory factors Must be nonrestrictive - -
Total 100 - 52.5

* High = 1.0; Medium = 0.5; Low = 0.0

Fig. 3.2: Business Overall Industry’s Attractiveness

Source: Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management: Strategy
Formulation and Implementation. (3rd ed.). p.288.

In order to assess business strength, a similar procedure is followed in

selecting factors, assigning weights to them, and then rating the business
on these dimensions, as illustrated below.

Business strength factor Weight Rating * Score

Relative market share 20 0.5 10
Production
Capacity 10 1.0 10
Efficiency 10 1.0 10
Location 20 0.0 -
Technological capability 20 0.5 10
Marketing
Sales organisation 15 1.0 15
Promotion advantage 5 0.0 -
Total 100 - 55

• High = 1.0; Medium = 0.5; Low = 0.0

Fig. 3.3: Business Rating Dimensions

Source: Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic Management: Strategy
Formulation and Implementation. (3rd ed.). p.289.

These examples illustrate how one business within a corporate portfolio

might be assessed using the GE planning grid. It is important to
remember that what should be included or excluded as a factor, as well
as how it should be rated and weighted, is primarily a matter of
managerial judgement and such ratings as a high, a medium, or a low
classifications are in terms of both the projected strength of the business
and the projected attractiveness of the industry.

Three basic strategic approaches are suggested for any business in the
corporate portfolio depending on its location within the grid:

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(1) invest to grow,

(2) invest selectively and manage for earnings, or
(3) harvest or divest for resources.

The resource allocation decisions remain quite similar to those in the

BCG approach. Businesses classified as invest to grow would be treated
like the stars in the BCG matrix. These businesses would be accorded
resources to pursue growth-oriented strategies.

While the strategic recommendations generated by the GE planning grid

are similar to those from the BCG matrix, the GE nine-cell grid
improves on the BCG matrix in three fundamental ways. First, as
research discussed earlier pointed out, the terminology associated with
the GE grid is preferable because it is less offensive and more
universally understood. Second, the multiple measures associated with
each dimension of the GE grid tap more factors relevant to business
strength and market attractiveness than simply market share and market
growth. This provides (or even forces) broader assessment during the
planning process. Considerations of strategic importance both in strategy
formulation and in strategy implementation are also brought to light.

Finally, the nine-cell format obviously allows finer distinction between

portfolio positions (most notably for "average" businesses) than does the
four-cell BCG format.

The portfolio approach is useful for examining alternative corporate-

level strategies in multi-industry companies. Portfolio planning offers
three potential benefits. First, it aids in generating good strategies by
promoting competitive analysis at the business level and substantive,
comparative discussion across the company's business units, resulting in
a strategy that capitalises on the benefits of corporate diversity.

Second, it promotes selective resource allocation trade-offs by providing

a visualisation of the corporate-wide strategic issues and a standardised,
"neutral" basis for resource negotiation. Thus, power struggles within
the company can be more objectively focused and channeled. Third,
some users feel portfolio approaches help ill implementation of
corporate strategy because increased focus and objectivity enhance
commitment.

Its visual appeal notwithstanding, the portfolio approach is useful in

evaluation because it allows a thorough and comparative analysis of
market share, market growth, industry attractiveness, competitive
position, and/or product/market evolution of each business unit. This
portfolio evaluation must be conducted routinely and repeatedly. In this

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way, the effectiveness of resource generation and allocation decisions in

achieving corporate objectives can be monitored, updated, and altered.

Once portfolio strategies have been identified, business strategies must

be determined. Portfolio approaches help clarify and determine broad
strategic intent. But this is not enough. Basic decisions involving
allocation of corporate resources and the general manner in which a
business unit will be managed (invest to grow, for example) do not
complete the process of strategic analysis and choice. Each business unit
must examine and select a specific grand strategy to guide its pursuit of
long term objectives.

Industry
Attractiveness

High

Medium

Low

Strong Average Weak

(Business Strength)

Fig. 3.4: GE Nine-Cell Matrix

Source: Pearce II, J. A. & Robinson Jr, R. B.(1998). Strategic

Management: Strategy Formulation and Implementation. (3rd ed.).
p.280.

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3.3 Grand Strategy Selection at Business Level

In the opinion of Pearce II and Robinson Jr. (1998), once business units
in a multi-industry firm have been identified in terms of invest, hold or
harvest, each business unit must identify and evaluate its grand strategy
options. If a unit has been identified as a resource generator within the
corporate portfolio strategy, for example, several alternative grand
strategies are available for fulfilling this role.

The pertinent question should be: what factors should a single business
consider in selecting its grand strategy? What is the relative
attractiveness of each of the 12 grand strategy options discussed in unit
9 for a single business? Three approaches to answering these questions
are the focus of this section.

3.3.1 SWOT Analysis

SWOT is an acronym for the internal Strengths and Weaknesses of a

business and environmental Opportunities and Threats facing that
business. SWOT analysis is a systematic identification of these factors
and the strategy that reflects the best match between them. It is based on
the logic that an effective strategy maximises a business’s strengths and
opportunities but at the same time minimises its weaknesses and threats.
This simple assumption, if accurately applied, has powerful implications
for successfully choosing and designing an effective strategy.

Environmental/industry analysis provides the information to identify

key opportunities and threats in the firm’s environment. These can be
defined as follows.

Opportunities- Opportunity is a major favourable situation in the firm’s

environment. Key trends represent one source of opportunity.
Identification of a previously overlooked market segment, changes in
competitive or regulatory circumstances, technological changes, and
improved buyer or supplier relationships could represent opportunities
for a firm.

Threats- Threat is a major unfavourable situation in the firm’s

environment. It is a key impediment to the firm’s current and desired
future position. The entrance of a new competitor, slow market growth,
increased bargaining power of key buyers or suppliers, major
technological change, and changing regulations could represent major
threats to a firm’s future success.

Understanding the key opportunities and threats facing a firm helps

managers to identify realistic options from which to choose an

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appropriate strategy. Such understanding clarifies the most effective

niche for the firm.

The second fundamental focus in SWOT analysis is identifying key

strengths and weaknesses based on examination of the company’s
profile (unit 8) Strengths and Weaknesses can be defined as follows.

Strengths- Strength is a resource, skill, or other advantage relative to

competitors and the needs of markets that a firm serves or anticipates
serving. Strength is a distinctive competence that gives the firm a
comparative advantage in the marketplace. Financial resources, image,
market leadership, and buyer/supplier relations are examples.

Weaknesses- Weakness is a limitation or deficiency in resources, skills,

and capabilities that seriously impedes effective performance. Facilities,
financial resources, management capabilities, marketing skills, and
brand image could be sources of weaknesses.

The understanding of the strengths and weaknesses of the firm further

aids in narrowing the choice of alternatives and selecting a strategy.
Distinct competence and critical weakness are identified in relation to
key determinants of success for different market segments; this provides
a useful framework for making the best strategic choice.

SWOT analysis can be used in at least three ways in strategic choice

decisions. The most common application provides a logical framework
guiding systematic discussions of the business’s situation, alternative
strategies, and ultimately, the choice of strategy. What one manager
sees as an opportunity, another may see as a potential threat. Likewise,
strength to one manager may be a weakness from another perspective.
Different assessments may reflect underlying power considerations
within the organisation, as well as differing factual perspectives. The
key point is that systematic SWOT analysis ranges across all aspects of
a firm’s situation. As a result, it provides a dynamic and useful
framework for choosing a strategy.

A second application of SWOT analysis is hereby analysed. Key

external Opportunities and Threats are systematically compared to
internal Strengths and Weaknesses in a structured approach. The
objective is identification of one of four distinct patterns in the match
between the firm’s internal and external situations. These patterns are
represented by the four cells in Fig. 3.5.

Cell 1 is the most favourable situation; the firm faces several

environmental opportunities and has numerous strengths that encourage
pursuit of such opportunities. This condition suggests growth-oriented

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strategies to exploit the favourable match. IBM’s intensive market

development strategy in the personal computer market was the result of
a favourable match between strengths in reputation and resources and
the opportunity for impressive market growth. Cell 4 is the least
favourable situation, with the firm facing major environmental threats
from a position of relative weakness. This condition clearly calls for
strategies that reduce or redirect involvement in the products/markets
examined using SWOT analysis.

Numerous
environmental
opportunities

Cell 3: Supports a Cell 1: Supports an

Critical turnaround oriented aggressive strategy
Substantial
internal
internal
weaknesses Cell 4: Supports Cell 2: Supports a
strengths
defensive strategy diversification strategy

Major
environmental
threats

Fig. 3.5: SWOT Analysis Diagram

Source: Pearce II, J. A.& Robinson Jr., R. B. (1998). Strategic

Management: Strategy Formulation and Implementation. (3rd ed.).
p.294.

In Cell 2, a firm with key strengths faces an unfavourable environment.

In this situation, strategies would use current strengths to build long
term opportunities in other products/markets. A business in Cell 3 faces
impressive market opportunity but is constrained by several internal
weaknesses. Businesses in this predicament are like the question marks
in the BCG matrix. The focus of strategy for such firms is eliminating
internal weaknesses to pursue market opportunity more effectively.

A major challenge in using SWOT analysis is in identifying the position

the business is actually in. A business that faces major opportunities
may likewise face some key threats in its environment. It may have
numerous internal weaknesses but also have one or two major strengths
relative to key competitors.

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The value of SWOT analysis does not rest solely on careful placement
of a firm in one particular cell. Rather, it lets the strategist visualise the
overall position of the firm in terms of the product/market conditions for
which a strategy is being considered.

Relevant questions in SWOT analysis are the followings. Does the

SWOT analysis suggest that the firm is dealing from a position of major
strength? Must the firm overcome numerous weaknesses in the match of
external and internal conditions? In answering these questions, SWOT
analysis helps to resolve one fundamental concern in selecting a strategy
in relation to the principal purpose of the grand strategy.

Another critical issue is this. Is it to take advantage of a strong position

or to overcome a weak one? SWOT analysis provides a means of
answering this fundamental question. And this answer is an input to one
dimension in a second, more specific tool for selecting grand strategies.
The grand strategy selection matrix is portrayed below by various
considerations.

First consideration
The following SWOT matrix suggests the type of strategies that a
company may adopt considering internal analysis factors and external
analysis factors.
Numerous Opportunities

Turnaround Strategy Aggressive Strategy

Cell 3 Cell 1
Critical
Substantial Cell 4 Cell 2
Weaknesses
Strength

Defensive strategy Diversification

Major Threats
Fig. 3.6: SPACE
Source: Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic
Management: Strategy Formulation and Implementation. (3rd ed.).
p.296.

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The analysis of the various cells as identified above are analysed as

follows.

Cell 1
This is the most favourable situation. The firm confronts lots of
opportunities and also possesses strengths to pursue the opportunities.

This suggests that growth oriented strategies should be pursued in an

aggressive manner e.g. market development.

Cell 2
The firm confronts lots of threats but has lot of strengths. Develop
strategies that would use current strengths to build long term
opportunities in other products and markets. This calls for
diversification of portfolio.

Cell 3
The firm faces lot of opportunities that has little or no strength to tap
them. Business here is analogous to the question mark of the BCG
matrix.

The firm should adopt strategies that will eliminate weaknesses and
divert resources to pursue market opportunities. This calls for
turnaround strategy.

Cell 4
This is the least favourable situation. The firm faces major threats from
a position of relative weakness. This calls for strategies that would
reduce or redirect involvement in the product/markets. This calls for
contraction strategies.

On the whole, SWOT analysis helps a firm to select a grand strategy

either to take advantage of a strong position or to overcome some
weaknesses (Pearce et. al., 1988). This is the first guide to strategy
selection.

Second consideration
This requires that the analysis adopts the above two objectives of SWOT
concept as one variable along a continuum, and you can call it the
principal purpose of a grand strategy, then you can add to it a second
variable, which is the choice of an internal or external emphasis for
growth and/or profitability.

A grand strategy selection matrix can be produced from the two new
variables as shown below.

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Overcome Weaknesses

- Turnaround retrenchment - Vertical Integration

- Divesture - Conglomerate

Diversification
- Liquidation
II II
Internal Growth External
Growth
III IV
(Redirecting resources
(Acquisition or merger
within the firm) to gain
resources)

- Concentration - Horizontal Integration

- Market Development - Concentric Diversification
- Product Development - Joint Venture
- Innovation

Maximise Strengths

Fig. 3.7: Grand Strategy Selection Matrix

Source: Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic

Management: Strategy Formulation and Implementation. (3rd ed.).
p.296.

The analysis is indicative of the second guide to grand strategy

selection, which is necessary for the understanding of the discussion.

Quadrant I

The firm here concerns itself with limited growth opportunities or

having high risks. The business must adopt vertical integration to
reduce risks by reducing uncertainty either about inputs or about access
to customers.

Alternatively, the firm may choose conglomerate diversification to

provide a profitable alternative for investment without diverting
management attention from the original business.

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Quadrant II

The firm here takes a conservative approach to overcome weaknesses.

The firm chooses to redirect resources internally. The company adopts
retrenchment, divestment or liquidation in successive stages.

Quadrant III

A firm that wants to maximise its strengths by redirecting resources

internally has four options to select from. They are concentration,
market development, product development and innovation.

Quadrant IV

A firm that wants to build its strength through external emphasis on

grand strategy may select any of horizontal integration, concentric
diversification and joint venture.

Third consideration
A third guide to selecting grand strategy is furnished by Thompson and
Strickland (1987) modifications of the BCG Portfolio matrix.

They viewed market growth as either rapid or slow; they also viewed
company’s competitive position as either strong or weak.

From these two variables of market growth and competitive position,

they were able to generate four clusters of strategies that are adoptable.

The figure below shows the model of grand strategy cluster for
illustration purpose.

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Rapid market growth

1. Concentration 1.Reformation of concentration

2. Vertical Integration 2.Horizontal Integration

3. Concentric diversification 3. Divestiture

4. Liquidation
I II
Strong Competitive IV III Weak Competitive

Position Position

1. Concentric diversification 1.Turnaround or retrenchment

2. Conglomerate diversification 2.Concentric diversification

3. Joint Ventures 3.Conglomerate diversification

4. Divestiture

5. Liquidation

Slow market growth

Fig. 3.8: Model of Grand Strategy Cluster

Source: Pearce II, J. A. & Robinson Jr., R. B. (1998). Strategic

Management: Strategy Formulation and Implementation. (3rd ed.).
p.299.

The various clusters involved in the analysis are as identified and

explained below.

Quadrant I

Firms here have strong competitive position in a rapidly growing

market. Firms here can select continued concentration, backward or
forward integration and concentric diversification to diminish risks
associated with narrow product of service line.

Quadrant II

Firms here have very weak positions in rapidly growing market. Firms
here must consider how to maintain their present approach to

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marketplace. They may reformulate concentration strategy; adopt

horizontal integration, divestiture or liquidation.

Quadrant III

Firms here have weak positions in a slow growth-market. It must give

considerations to the selection of any of contraction strategies
(retrenchment, divesture or liquidation). It may also consider concentric
or conglomerate diversification.

Quadrant IV

Firms in this category have strong position in a slow-growth market. It

must give consideration to either concentric or conglomerate
diversification, or joint ventures.

The above considerations are very useful in the SWOT analysis

regarding its relevance in analysing business environment before
decisions on strategic choice are taken.

3.3.2 Grand Strategy Selection Matrix

A second valuable guide to the selection of a promising grand strategy is

the matrix shown in fig.11.9 below. The basic idea underlying the
matrix is that two variables are of central concern in the selection
process: (1) the principal purpose of the grand strategy, and (2) the
choice of internal or external emphasis for growth and profitability.

In the 1950’s and 1960’s, planners were advised to follow certain rules
or prescriptions in their choice of strategies. Most experts now agree
that strategy selection is better guided by the unique set of conditions
that exist for the planning period and by company strengths and
weaknesses. It is valuable to note, however, that even early approaches
to strategy selection were based on matching a concern for internal
versus external growth with principal desire to either overcome
weakness or maximise strength.

The same concerns led to the development of the grand strategy

selection matrix. A firm in such situation often views itself as overly
committed to a particular business with limited growth opportunities or
involving high risks because the company has “all its eggs in one
basket”. One reasonable solution is vertical integration, which enables
the firm to reduce risk by reducing uncertainty either about inputs or
about access to customers.

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In alternative terms, a firm may choose conglomerate diversification,

which provides a profitable alternative for investment without diverting
management attention from the original business. Nevertheless, the
external orientation to overcoming weaknesses usually results in the
most costly grand strategies. The decision to acquire a second business
demands both large initial time investments and sizeable financial
resources. Thus, strategic managers, considering these approaches, must
guard against exchanging one set of weaknesses for another.

A more conservative approach to overcoming weakness is found in the

analysis. Firms often choose to redirect resources from one business
activity to another within the company. While this approach does not
reduce the company’s commitment to its basic mission, it does reward
success and enables further development of proven competitive
advantages.

The least disruptive of the strategies is retrenchment, the pruning of a

current business’s activities. If weaknesses arose from inefficiencies,
retrenchment can actually serve as a turnaround strategy, meaning the
business gains new strength by streamlining its operations and
eliminating waste. When the weaknesses are considered in operations,
wastes are eliminated.

Nevertheless, when the weaknesses are major obstructions to success in

the industry, and when the costs of overcoming the weaknesses are
unaffordable or are not justified by a cost-benefit analysis, then the
business must be considered. Divestiture offers the best possibility for
recouping a company’s investment, but even liquidation can be an
attractive option when the alternatives are on organisational resources or
bankruptcy.

A common business cliché holds that a company should build from its
strength. The premise is that growth and survival depend on an ability
to capture a market share that is large enough for essential economies of
scale. If a firm believes profitability will derive from this approach and
prefers an internal emphasis for maximising strengths, four alternative
grand strategies hold considerable promise.

The most common approach is concentration on the business, that is,

market penetration. The business that selects this strategy is strongly
committed to its current products and markets. It will strive to solidify
its position by reinvesting resources to fortify its strength.

Two alternative approaches are market and product development. With

either of these strategies, the business attempts to broaden its operations.
Market development is chosen if strategic managers feel that existing

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products would be well received by new customer groups. Product

development is preferred when existing customers are believed to have
an interest in products related to the firm’s current lines.

This approach may also be based on special technological or other

competitive advantages. A final alternative for firms is innovation.
When the business’s strengths are in creative product design or unique
production technologies, sales can be stimulated by accelerating
perceived obsolescence. This is the principle underlying an innovative
grand strategy.

Maximising a business’s strength by aggressively expanding its basis of

operations usually requires an external emphasis in selecting a grand
strategy. Preferred options here are shown in Quadrant IV. Horizontal
integration is attractive because it enables a firm to quickly increase
output capability. The skills of the original business’s managers are
often critical in converting new facilities into profitable contributors to
the parent company; this expands a fundamental competitive advantage
of the firm.

Concentric diversification is a good second choice for similar reasons.

Because the original and newly acquired businesses are related, the
distinctive competencies of the diversifying firm are likely to facilitate a
smooth, synergistic, and profitable expansion.

The final option for increasing resource capability through external

emphasis is a joint venture. This alternative allows a business to extend
its strengths into competitive arenas that it would be hesitant to enter
alone. A partner’s production, technological, financial, or marketing
capabilities can significantly reduce financial investment and increase
the profitability of success to the point that formidable ventures become
attractive growth alternatives.

3.3.3 Model of Grand Strategy Clusters

A third guide to selecting a promising grand strategy involves

Thompson and Strickland’s modifications of the BCG growth share
portfolio matrix. A business’s situation is defined in terms of the growth
rate of the general market and the company’s competitive position in
that market. When these factors are considered simultaneously, a
business can be broadly categorised in one of four quadrants:

(I) strong competitive position in a rapidly growing market

(II) weak position in a rapidly growing market
(III) weak position in a slow-growth market
(IV) strong position in a slow-growth market.

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Each of these quadrants suggests a set of promising possibilities for

selection of a grand strategy.

One obvious grand strategy for firms in an excellent strategic position is

continued concentration on their current business as it is presently
defined. Because consumers seem satisfied with the firm’s current
strategy, it would be dangerous to shift notably from the established
competitive advantages. However, if the business has resources that
exceed the demands of a concentration strategy, it should consider
vertical integration. Either forward or backward integration helps a
business protect its profit margins and market share by ensuring better
access to either consumers or material inputs. Finally, a Quadrant I firm
might be wise to consider concentric diversification to diminish the risks
associated with a narrow product or service line; with this strategy,
heavy investment in the company’s basic area of proven ability
continues.

Firms in Quadrant II must seriously evaluate maintaining their present

approach to the marketplace. If a firm was established long enough to
accurately assess the merits of its current grand strategy, it must
determine:

(1) the reasons its approach is ineffective

(2) whether the company has the capability to compete effectively.

Depending on the answers to these questions, the firm should choose

one of four grand strategy options: formulation or reformulation of a
concentration strategy, horizontal integration, or liquidation.

In a rapidly growing market, even a small or relatively weak business is

often able to find a profitable niche. Thus, formulation or reformulation
of a concentration strategy is usually the first option to consider.
However, if the firm lacks either a critical competitive element or
sufficient economies of scale to achieve competitive cost efficiencies,
then a grand strategy that directs company efforts towards horizontal
integration is often a desirable alternative. A final pair of options
involves deciding to stop competing in the market or product area. A
multiproduct firm may conclude that the goals of its mission are most
likely to be achieved if one business is dropped through divestiture. Not
only does this grand strategy eliminate a drain on resources, it may also
provide additional funds to promote other business activities. In
practical terms, this means that the business cannot be sold as a going
concern and is at best worth only the value of its tangible assets. The
decision to liquidate is an undeniable admission of failure by a firm’s
strategic management and is thus often delayed – to the detriment of the
company.

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Strategic managers tend to resist divestiture because it is likely to

jeopardise their control of the firm and perhaps even their jobs. By the
time the desirability of divestiture is acknowledged, the business has
often deteriorated to the point of ailing to attract potential buyers as a
business. The consequences of such delays are financially disastrous for
the owners of the firm, because the value of a going concern is many
times greater than simple asset value.

Strategic managers who have a business in the position of Quadrant III

and feel that continued slow market growth and a relatively weak
competitive position are going to continue will usually attempt to
decrease their resource commitment to that business. Minimal
withdrawal is accomplished through retrenchment; this strategy has the
side benefits of making resources available for other investments and of
motivating employees to increase their operating efficiency. An
alternative strategy is to divert resources for expansion through
investment in other businesses. This approach typically involves either
concentric or conglomerate diversification, because the firm usually
wants to enter more promising arenas of competition than forms of
integration or development would allow. The final options for Quadrant
III businesses are divestiture, if an optimistic buyer can be found, and
liquidation.

Quadrant IV businesses (strong competitive position in a slow-growth

market) have a basis of strength from which to diversify into more
promising growth areas. These businesses have characteristically high
cash flow levels and limited internal growth needs. Thus, they are in an
excellent position for concentric diversification into ventures that utilise
their proven business acumen. A second choice is conglomerate
diversification, which spreads investment risk and does not divert
managerial attention from the present business. The final option in joint
ventures that a domestic business can gain competitive advantages in
promising new fields is exposing itself to limited risks.

3.4 Strategic Portfolio Analysis

There are ways through which strategic alternatives can be evaluated for
selection. Some of the available techniques for assessing the choice of a
company are identified and discussed below.

1. Experience curve
The experience curve helps the strategist to gain insight into how to
apply a portfolio approach. As opined by Pearce II and Robinson Jr.
(1998), in this concept, unit costs in many manufacturing industries and
in some service industries, decline with experience or a particular
company’s cumulative volume of production. The experience curve is

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broader than the learning curve which refers to the efficiency achieved
over a period of time by workers through much repetition.

The causes of decline in unit costs are combination of factors, including

economies of scale, the learning curve for labour, capital-labour
substitution, product redesign, other learning effects, technological
improvements in production etc.

The decline in costs creates a barrier to entry because new competitors

with no “experience” face higher costs than established ones
(particularly, the producer with the largest market share) and also have
difficulties catching up with the entrenched competitors.

Hence, within the context of strategic management, the concept of

experience curve of established firms pose barriers to new firms
contemplating entry into business, helps to build market share,
discourages competition and helps the firm to sustain rapid market
growth as long as possible. It is a characteristic of the growth stage in a
product or business life cycle. The firm with experience curve in this
growth stage often pursues any or all of the following market-expanding
strategies which will increase its competitive position.

(i) Improving product quality and adding new features/ models;

(ii) Entering new market segment (market development);

(iii) Using new distribution channels to gain additional product

exposure;

(iv) Shifting promotion strategy from building product awareness to

building product acceptance and purchase;

(v) Lowering product prices at the right time to attract the next layer
of price sensitive buyers into the market.

The firm, at this stage, faces a tradeoff between high market share and
high current profit. By investing in product improvement, promotion
and distribution, it can capture a dominant position, but it forgoes
maximum current profit in the hope of making up for it at the maturity
stage.

Nevertheless, it is not all cases that the choice of a strategy should be

based on experience curve or cost decline. The significance of the
experience curve for strategic choice depends on what factors are
causing the decline. Ability of the experience to erect a barrier on new
entrants also depends on the sources or causes of cost decline.

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2. Product life cycle

The product life cycle is also a useful concept rather than portfolio
technique to guide strategic choice. Product life cycle is an S-shaped
curve which shows the relationship of sales with respect to time for a
product that goes through the four successive stages of introduction
(slow sales growth), growth (rapid market acceptance), maturity (slow
down in growth rate) and decline (sharp downward drift).

The product life cycle can be used to diagnose the stages of product or
business portfolio with a view to prescribing necessary strategic choice.
For instance, businesses or products at the introduction or growth stages
may require expansionary growth strategies, products or businesses at
maturity stages may be used as sources of cash for investment in other
businesses which need resources, and retrenchment strategies may be
selected for businesses or products at decline stage.

Hence, the product life cycle stage may reveal relevant strategic choice
for the firm to make in terms of the necessary strategy to adopt for
moving the company forward.

3. Trade cycle analysis

Just like the product life cycle analysis, a trade cycle for an organisation
or a country may also be divided into boom, recovery, recession and
depression. A business within the boom or recovery stages may suggest
the use of expansionary growth strategies, while business at depression
stage may indicate the use of retrenchment strategies.

Furthermore, the businesses or products at recessionary stage may

warrant the choice of competitive strategies based on focus,
differentiation or overall cost leadership to outwit rivals.

4. Directional policy matrix

According to Hussey (1978), the directional policy matrix as developed
by Shell Chemicals of U.K., uses two variables of “business sector
prospects” along the abscissa and “Company’s competitive abilities”
along the ordinate. Based on factors such as market growth, market
quality, market supply and other factors, business sector prospects could
be rated on three point semantic scales as unattractive, average or
attractive.

According to Rowe et al (1982), company’s competitive abilities based

on capability analysis could also be rated on a three point semantic
scales as weak, average or strong. This engenders a 3 x 3 matrix which
can be used to prescribe baseline strategies

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An extension of directional policy matrix into “risk matrix” furnishes an

alternative way to analyse environmental risk. In a risk matrix,
environmental risk is taken as a third variable and is divided into four
categories from low risk to very high risk. Each risk position is
determined on the basis of environmental threats and probability of their
occurrence.

Company’s competitive abilities

Divestment Imitation/Phased Phased withdrawal
Weak withdrawal /cash generation

Phased withdrawal/ Maintenance of position/ Expansion/Product

Average Merger market Penetration differentiation

Diversification/cash Growth/Market Market

Strong generation segmentation Leadership

Unattractive Average Attractive

(Business sector prospects)

Fig. 3.9: The Directional Policy Matrix (DPM)

Source: Pearce II, J. A. and Robinson Jr., R. B. (1998). Strategic

Management: Strategy Formulation and Implementation. (3rd ed.). p.
296.

5. Strategic position and action evaluation

According to Rowe et al (1982), strategic position and action evaluation
is a technique that considers the firm’s strategic position in tandem with
the industry’s strategic position. The firm’s strategic position is viewed
from the perspectives of both financial strength (e.g. leverage, return on
investment, liquidity etc) and competitive advantage (e.g. product
quality, market share etc).

The industry’s strategic position is also viewed from the perspectives of

both industry’s strength (e.g. growth, profit potential etc) and
environmental stability (e.g. technological changes, competitive
pressures etc). When these two dimensions of two variables are
combined, it will suggest or pinpoint likely strategic choice such as
aggressive, defensive, conservative and competitive strategies based on
simple rating system of the four variables put together (see figure
12.10).

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Firm’s financial strength

Conservative Aggressive

Firm’s competitive
Industry’s
Advantage Strength

Defensive Competitive
Environmental Stability
Fig. 3.10: Strategic Position and Action Evaluation

The suggested strategies, in this consideration, for each of the corners

are the following.

(i) Aggressive posture

Firms with this outlook may select either concentric diversification or
vertical integration strategies.

(ii) Defensive posture

Firms in this situation will select from divestment, liquidation or
retrenchment strategies, all contraction strategies.

(iii) Conservative posture

Firms in this situation will select from concentration (stability) and
conglomerate diversification strategies.

(iv) Competitive posture

Firms having this posture will select from any of concentric merger,
conglomerate merger or turnaround strategies.

It is instructive to note that the conservative posture may also suggest a

no-growth strategy. Two related forms of no-growth strategies are
redeployment and redeployment with concentration. Redeployment
involves selling existing assets while purchasing and deploying assets in
a different area such that the total assets of the firm remains essentially
constant.

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The strategy of redeployment with concentration involves redeploying

existing assets, but in a manner that makes one existing business unit a
greater percentage of total corporate assets without increasing the total
assets of the firm.

6. Hofer’s product-market evolution matrix

Hofer and Schendel (1978), offer a 15-cell life cycle portfolio matrix.
The matrix utilises two variables.

• The stage of the development of the product or market. This

factor is divided into five stages to include: development, growth,
competitive shake-out, maturity-saturation and decline – along
the ordinate.

• The competitive position of different business units in a firm’s

corporate portfolio. This factor is also divided into strong,
average and weak competitive positions along the abscissa.

Appropriately, in any of the 15 cells, circles are used to represent the

sizes of the industries involved while pie wedges or segments are used
within the circle to denote business market share.

Business could therefore be represented according to their industrial size

and market shares. As can be shown in figure below, business ‘A’
represents a product/market with high growth potential which deserves
expansion strategies.

Business ‘B’ has a strong competitive position but has a product that is
entering the shakeout stage; it requires a cautious expansion strategy.
Business ‘C’ is a potential looser and probably a dog while ‘D’
represents a business which can be used for cash generation that could
be siphoned to A and B. Business ‘E’ is a looser and may be considered
for divestment.

In this way, the product-market evolution matrix tells stories about the
distribution of the firm’s businesses across the stages of industry
evolution. What is required is analytical accuracy and completeness in
describing the firm’s current portfolio position. The ultimate purpose, of
course, is to discern how to manage corporate portfolio and get the
performance from the allocation of corporate resources.

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Product Market
Evolution Stage

Strong Average Weak

A

Development

B
Growth

C
Shakeout

Maturity- D
Saturation

E
Decline

(Competitive Position)

Fig. 3.11: Product/Market Evolution Matrix

Pearce II, J. A. and Robinson Jr., R. B. (1998). Strategic Management:

Strategy Formulation and Implementation. (3rd ed.). p. 280.

3.5 Corporate Strategic Choice Making

The corporate strategic choice making is a crucial step in strategic

management. According to Glueck et.al. (1984), strategic choice is the
decision to select from among the grand strategies considered, the
strategy which will best meet the enterprise objectives. In the process of
analysing and making strategic choice, as opined by Glueck et.al.
(1984), some steps are to be followed. Such steps are as identified and
discussed as follows.

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1. Focusing alternatives
The alternative strategies generated must be ranked according to their
scale of preference. Alternatives that are high on this scale can be
focused and targeted for proper analysis. The alternative focused on or
under consideration must be those that are germane to realising the
strategic objectives of the organisation. The alternatives must be limited
to a reasonable number for effective consideration and proper
management. Crucial factors to consider include:
• the dimensions of the company mission,
• the resources available to the company,
• company’s distinctive competence,
• the history of the organisation,
• the attributes of the environment in which the business is
operating,
• analysis of current performance.

All the above factors would suggest the ideal strategic alternatives to
accept for consideration.

2. Consider selection factors

The alternative strategies generated must be assessed in terms of certain
criteria. Criteria for assessing them must be gathered. These criteria are
called selection factors. Selection factors may be objective
(quantitative) or subjective (behavioural or qualitative). Objective
factors which make use of hard data are based on rationality
(optimisation) and; are normative or prescriptive.

The subjective factors are non-rational, they utilise personal judgement

and are emotional, they may be based on objective factors such as cost,
guaranteed functional requirements, existing market availability,
availability of needed materials, technical and financial feasibilities, risk
assessment etc.

The subjective factors involved may be management value and support,

environmental opportunities or threats, designers’ factors, needs, tastes
and preferences of consumers over a long time, related product design
steps etc.

For instance, the selection of a plant site could also be on the basis of
factors such as cost, profit, proximity to sources of raw materials, power,
social facilities, human resources and market. Other factors are
preference of owners and top management, patriotism, politics, and
communal tolerance, among others.

Basically, therefore, the selection of a particular strategy is not usually

based on exclusive objective and subjective factors. It is rather always

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based on consideration of both the objective as well as subjective

factors.

3. Evaluation of strategic alternatives

Evaluation requires the appraisal or analysis of selected or available
factors. This involves the use of mathematical or non-mathematical
tools based on the strategists’ environment which may be one of
certainty, risk or uncertainty.

The company’s environment would suggest methods of analysis to be

used. In an environment of certainty, techniques such as linear
programming, input-output analysis, use of computer, activity analysis,
product life-cycle analysis, experience curve analysis, trade or economic
cycle analysis, business trend analysis (etc), may be used to assess the
situation facing the company.

The evaluation of strategic alternatives or portfolio under the

environment of uncertainty requires that the probabilities associated
with the states of nature are known. Evaluation is very difficult for
absolute lack of knowledge of information. Each action here will lead to
one outcome or known set outcomes, each with known probabilities.
The examples of strategic alternatives here include, introduction of a
new product to a new market, business establishment in foreign
environment etc. Evaluation here will require objective or hand data but
will also involve subjective judgement such as the experience or skill of
the strategist.

The choice of evaluation technique by a strategist should always fit the

environmental situation of a company, but the strategist must never lose
sight and consideration of subjective factors.

4. Making strategic choice

The next step after careful evaluation of strategic alternatives is the
strategic choice making. This requires that one or two or more than two
strategic alternatives may be selected for adoption, implementation,
modification or continuation. The act of strategic choice is a simple step
that is not usually simple. In the case of the evaluation step, for instance,
it is also based on the skill and competence of the strategist.

The strategic roadmap is the strategic plan which discusses how the
strategy will work, it also states the conditions required and also states
the contingency strategies associated with the chosen strategies. The
favoured choice must be based on evaluation, weighing and comparison
of strategic alternatives. The point at which choice of selection of
strategy is concluded represents the point at which strategic decision is

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formulated. What immediately follows it is implementation and follow-

up.

3.6 Behavioural Considerations in Strategic Choice

The art of strategic choice is a decision-making process. From the

above analysis, at the corporate and the business levels, such decisions
determine the future strategy of the firm.

Strategic choice is a decision to adopt one of the alternatives scrutinised.

An identified alternative choice must clearly be a superior strategy or the
current strategy can be strictly adhered to if it will clearly meet future
company objectives. Such simple approach is the exception, because
making such decision can be difficult. Strategic decision makers, after
comprehensive strategic examination, are often confronted with several
viable alternatives rather than the luxury of a clear-cut, obvious choice.
Under these circumstances, several factors influence the strategic choice
decision. Some of the more important ones are discussed below.

i) Role of past strategy

A review of past strategy is the point at which the process of strategic
choice begins. As such, past strategy exerts considerable influence on
the final strategic choice.

Current strategies are often from past strategies. Substantial time,

resources, and interest have been invested in these strategies in the past,
so current strategies would logically be more comfortable with a choice
that closely follows past strategy

This familiarity and commitment to past strategy permeate the

organisation. Thus, lower-level management reinforces the top
manager’s inclination toward continuity with past strategy during the
choice process. In one study, during the planning process, lower-level
managers suggested strategic choices that were consistent with current
strategy and likely to be accepted while withholding suggestions with
less probability of approval.
Research by Henry Mintzberg suggests that the past strategy strongly
influences current strategic choice. The older and more successful a
strategy has been, the harder it is to replace. Similarly, a strategy, once
initiated, is very difficult to change because organisational momentum
keeps it going.

Mintzberg’s work and research by Barry Staw found that even, as the
strategy begins to fail due to changing conditions, strategists often
increase their commitment to the past strategy. Firms may thus replace
key executives when performance has been inadequate for an extended

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period because replacing top executive lessens the influence of

unsuccessful past strategy on future strategic choice.

ii) Degree of the firm’s external dependence

A comprehensive strategy is meant to effectively guide a firm’s
performance in the larger external environment. Owners, suppliers,
customers, government, competitors, and unions are a few of the
elements in a firm’s external environment. A major constraint on
strategic choice is the power of environmental elements in supporting
this decision. If a firm is highly dependent on one or more
environmental factors, its strategic alternatives and ultimate choice must
accommodate this dependence. The greater a firm’s external
dependence, the lower its range and flexibility in strategic choice.

iii) Attitude towards risk

Attitudes towards risk exert considerable influence on strategic choice.
These attitudes may vary from eager risk taking to strong aversion to
risk, and they influence the range of available strategic choices. Where
attitudes favour risk, the range and diversity of strategic choices expand.
High-risk strategies are acceptable and desirable. Where management is
averse to risk, the diversity of choices is limited, and risky alternatives
are eliminated before strategic choices are made. Risk-oriented
managers prefer offensive, opportunistic strategies.

Managers averse to risk prefer defensive, safe strategies. Past strategy is

quite influential in the strategic choices made by managers who are
averse to risk, but it is less of a factor for risk-oriented managers. Figure
11.12 illustrates the relationship between attitudes toward risk and
strategic choice.

Industrial volatility can influence managerial propensity towards risk.

In highly volatile industries, top managers must absorb and operate with
greater amounts of risk than their counterparts in the stable industries.
Therefore, managers in volatile industries consider a broader, more
diverse range of strategies in the strategic choice process.

Product/market evolution is another determinant of managerial risk

propensity. If a firm is in the early stages of product/market evolution, it
must operate with considerably greater risk than a firm later in the
product/market evolution cycle.

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Risk Averse Risk Prone

Decrease choices Expand choices

Defensive strategies Offensive strategies
Stability Growth
Incremental Innovation
Minimise company weaknesses Maximise company strengths
Strong ties to past strategy Few ties to past strategy
Stable industry Volatile industry
Maturing product/market evolution Early product/market evolution

Fig. 3.12: Managerial Risk Propensity and Strategic Choices

Pearce II, J. A. and Robinson Jr., R. B. (1998). Strategic Management: Strategy
Formulation and Implementation. (3rd ed.). p.305

In making a strategic choice, risk-oriented managers lean towards

opportunistic strategies with higher payoffs. They are drawn to
offensive strategies based on innovation, company strengths, and
operating potential. Risk-averse managers lean towards safe,
conservative strategies with reasonable, highly probable returns. The
latter are drawn to defensive strategies to minimise a firm’s weaknesses
and external threats, as well as the uncertainty associated with
innovation-based strategies.

A recent study examined the relationship between the willingness of

Strategic Business Unit (SBU) managers to take risks and SBU’s
performance. The study found a link between risk taking and strategic
choice. Looking first at SBU’s star strategic missions within a corporate
portfolio, researchers found that the general managers of higher-
performing SBUs had greater willingness to take risks than did their
counterparts in lower-performing star SBUs. Looking next at SBU’s
assigned harvest strategies, successful units had general managers less
willing to take risks than general managers in lower-performing harvest
SBUs.

This study supports the idea that managers make different decisions
depending on their willingness to take risks. Perhaps most importantly,
the study suggests that being either risk prone or risk averse is not
inherently good or bad. Rather, SBU’s performance is more effective
when the risk orientation of the general manager is consistent with the
SBU’s strategic mission (build or harvest). While this is only one study
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and not a final determination of the influence of risk orientation on

strategic choice, it helps illustrate the importance of risk orientation on
the process of making and implementing strategic decisions.

iv) Internal political considerations

Power/political factors influence strategic choice. The existence and use

of power to further individual or group interests is common
organisational life. An early study by Ross Stagner found that strategic
decisions in business organisations were frequently settled by power
rather than by analytical maximisation procedures.

A major source of power in most organisations is the Chief Executive

Officer (CEO). In smaller enterprises, the CEO is consistently the
dominant force in strategic choice, and this is also often true in large
firms, particularly those with a strong or dominant CEO. When the
CEO begins to favour a particular choice, it is often unanimously
selected.

Cyert and March identified another power source that influences

strategic choice, particularly in larger firms. They called this the
coalition phenomenon. In large organisations, subunits and individuals
(particularly key managers) have reason to support some alternatives
and oppose others. Mutual interest often draws certain groups together
in coalitions to enhance their position on major strategic issues. These
coalitions, particularly the more powerful ones (often called dominant
coalitions), exert considerable influence in the strategic choice process.
Numerous studies confirm the use of power and coalitions on a frequent
basis in strategic decision making. Interestingly, one study found that
managers occasionally try to hide the fact that they prefer
judgmental/political bargaining over systematic analysis and that when
politics was a factor, it slowed decision-making.

Each phase in the process of strategic choice presents a real opportunity

for political action intended to influence the outcome. The challenge to
strategists is in recognising and managing this political influence. If
such processes are not carefully overseen, various managers can be
biased concerning the content of strategic decisions in the direction of
their own interests. For example, selecting the criteria used to compare
alternative strategies or collecting and appraising information regarding
these criteria may be particularly susceptible to political influence. This
must be recognised and, where critical, “managed” to avoid
dysfunctional political bias. Reliance on different sources for obtaining
and appraising information might be effective in this context.

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Rather than simply being denoted as “bad” or inefficient, organisational

politics must be viewed as an inevitable dimension of organisational
decision making that must be accommodated in strategic management.
Some authors argue that politics are a key ingredient in the “glue” that
holds an organisation together. Formal and informal negotiating and
bargaining between individuals, subunits, and coalitions are
indispensable mechanisms for organisational coordination. Recognising
and accommodating this in choosing future strategy will result in greater
commitment and more realistic strategy. The costs are likely to be
increased time spent on decision making and incremental (as opposed to
drastic) change.

v) Timing considerations

The time element can have considerable influence on strategic choice.

A final aspect of the time dimension involves the lead time required for
alternative choices and the time horizon the management is
contemplating. Management’s primary attention may be on the short or
long run, depending on current circumstances. Logically, strategic
choice will be strongly influenced by the match between management’s
current time horizon and the lead time (or payoff time) associated with
different choices.

vi) Competitive reaction

In weighing strategic choices, top management frequently incorporates

perceptions of likely competitors’ reactions to different options. For
example, if management chooses an aggressive strategy that directly
challenges a key competitor, that competitor can be expected to mount
an aggressive counter strategy. Management of the initiating firm must
consider such reactions, the capacity of the competitor to react, and the
probable impact on the chosen strategy’s success.

4.0 CONCLUSION

In this unit you have learnt that strategic analysis involves the search for
alternative strategies, and it calls for systematic comparison of external
and internal factors. You have observed that there are many and varied
methods of assessing and making choice of strategies by strategists in
organisations. Such methods, from our discussion in this unit, include
BCG matrix, GE Nine-Cell Matrix, and Strategic Portfolio Analysis,
among several others. Lastly, you are now aware that strategic choice
making by corporate entities involves consideration of many variables
and such managerial decisions are affected by behavioral issues.

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5.0 SUMMARY

In this unit, you have learnt the following topics:

• nature of strategic analysis

• methods of strategic analysis at corporate level
• business portfolio approach
• the BCG matrix
• GE nine-cell grid
• strategic portfolio analysis
• corporate strategic choice making
• behavioural considerations in strategic choice.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss various ways through which strategic alternatives

can be evaluated for selection by a firm.

7.0 REFERENCES/FURTHER READING

Glueck, W. F. (1980). Business Policy and Strategic Management. New

York: McGraw-Hill.

Hill, C. W. L.& Jones, G. R. (2004). Strategic Management: An

Integrated Approach. (6th ed.). Indian Adaptation, New Delhi:
Biztantra, an Imprint of Dreamtech Press.

Kazmi, A. (1995). Business Policy. New Delhi: Tata McGraw-Hill

Publishing Company Limited.

Pearce & David (1987). Strategic Planning and Policy. New York:
Reinhold.

Pearce II & Robinson Jr. (1998). Strategic Management: Strategy

Formulation and Implementation. (3rd ed.). Krishan Nagar,
Delhi: All India Traveller Bookseller.

Thompson, A. A. Jr. & Strickland, A. J. (1987). Strategic Management:

Concepts and Cases. Homewood, Illinois: BP Irwin.

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UNIT 2 ORGANISATIONAL STRUCTURE

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Strategic Consideration in Organisational Structure
3.2 The Meaning and Nature of Organisational Structure
3.2.1 Meaning of Organisational Structure
3.2.2 Dimensions of Organisational Structure
3.3 Levels of Organisational Structure
3.4 People – Organisation Relationship
3.4.2 Clarification of Tasks
3.4.1 Clarification of Objectives
3.4.3 The Division of Work
3.5 Forms of Relationship in Organisation
3.6 Types of Organisational Structure
3.7 Common Features of Work Organisations
3.8 Problems of Work Organisation
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

An organisation is necessary if strategic purpose is to be accomplished.

Thus, organisational structure is a major priority in implementing a
carefully formulated strategy. If activities, responsibilities, and
interrelationships are not organised in a manner that is consistent with
the strategy chosen, the structure is left to evolve on its own. If structure
and strategy are not coordinated, the result will probably be
inefficiencies, misdirection, and fragmented efforts.

The need for structure becomes apparent as a business evolves. In a

small firm, where one person manages current operations and plans for
the future, organisational structure is relatively simple. Owner-managers
have no organisational problem. As the magnitude of business activity
increases, the need to subdivide activities, assign responsibilities, and
provide for the integration and coordination of the new organisational
parts becomes imperative. Thus, how to structure the organisation to
effectively execute the business's strategy has become a major concern.

In this unit, you will be taken through the general overview on the field
of organisational behaviour.

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2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain organisational structure

• describe the levels of organisational structure
• explain the dimensions of people-organisation relationship
• describe the forms of relationship in an organisation
• identify the types of organisational structure
• explain common features of work organisations
• analyse problems inherent in work organisation.

3.0 MAIN CONTENT

3.1 Strategic Considerations in Organisational Structure

The division of tasks for efficiency, clarity of purpose and coordination

between the interdependent parts of the organisation to ensure
organisational effectiveness calls for the use of structure. Structure
balances the need for specialisation with the need for integration. It
provides the formal means of decentralising and centralising which are
consistent with the organisational and control needs of the strategy.

Structure is not the only means for getting "organised" to implement the
strategy. Reward systems, planning procedures, information and
budgetary systems are other examples that should be employed. In the
day-to-day implementation of strategy, these elements operate
interdependently with the formal organisational structure to shape how
things are done. These other means may also be important, but it is
through structure that strategists attempt to balance internal efficiency
and overall effectiveness within a broader environment.

In terms of structural choices, five basic types are currently used by

most business firms. These are structures classified as simple,
functional, divisional, strategic business unit, and matrix. These are
considered in subsequent sections of this study unit.

Diversity and size create unique structural needs for each firm, but these
five structural choices involve basic underlying features common to
most business organisations making requirements resulting from
increased diversity and size.

A divisional structure allows corporate management to delegate

authority for the strategic management of a distinct business entity. This
can expedite critical decision making within each division in response to
varied competitive environments, and it forces corporate management to
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concentrate on corporate-level strategic decisions. The semi-

autonomous divisions are usually given profit responsibility. The
divisional structure thus seeks to facilitate accurate assessment of profit
and loss.

3.2 The Meaning and Nature of Organisational Structure

3.2.1 Meaning of Organisational Structure

According to Mullins (2000) structure is the pattern of relationships

along positions in the organisation and among members of the
organisation. The purpose of structure is the division of work among
members of the organisation, and the coordination of their activities so
they are directed towards achieving the goals and objectives of the
organisation. The structure defines tasks and responsibilities, work roles
and relationships and channels of communication.

Structure makes possible the application of the process of management

and creates a framework of order and command through which the
activities of the organisation can be planned, organised, directed and
controlled.

Drucker (1989) suggests the organisation structure should satisfy three

requirements. These requirements are as follows:

• It must be organised for business performance

The more direct and simple the structure, the more efficient it is because
there is less change needed in the individual activities directed to
business performance and results. Structure should not rest on past
achievements but be geared to future demands and growth of the
organisation.

• The structure should contain the least possible number of

management levels
The chain of command should be as short as possible. Every additional
level makes for difficulties in direction and mutual understanding,
distorts objectives, sets up additional stresses, creates inertia and slack,
and increases the difficulties of the development of future managers
moving up through the chain. The number of levels will tend to grow
by themselves without the application of proper principles of the
organisation.

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• Organisational structure must make possible the training and

testing of future top management
In addition to their training, future managers should be tested before
they reach the top. They should be given autonomy in positions of
actual managerial responsibility while still young enough to benefit from
the new experience. They should also have the opportunity of at least
observing the operation of the business as a whole, and not be narrowed
by too long an experience in the position of a functional specialist.

Drucker suggests that, in order to satisfy these three requirements, the

organisation structure must be based preferably on the principle of
regional decentralisation, with activities integrated into autonomous
product businesses with their own product and market, and with
responsibility for their profit and loss. According to Drucker, if regional
decentralisation is not possible, then the organisation structure should be
based on the principle of functional decentralisation with integrated
units having the maximum responsibility for major and distinct stages of
the business process.

The objectives of organisational structure, according to Knight (1977),

are as follows.
i) The economic and efficient performance of the organisation and
the level of resource utilisation.
ii) Monitoring the activities of the organisation.
iii) Accountability for areas of work undertaken by groups and
individual members of the organisation.
iv) Coordination of different parts of the organisation and different
areas of work.
v) Flexibility in order to respond to future demands and
developments, and adapt to changing environmental influences
and
vi) The social satisfaction of members working in the organisation.

According to Knight, these objectives provide the criteria for structural

effectiveness. Structure, though, is not an end in itself but a means of
improving organisational performance.

3.2.2 Dimensions of Organisational Structure

According to Mullins (2000) the variables, which determine the

dimensions of organisation structure can be identified in a number of
ways but are usually taken to include the grouping of activities, the
responsibilities of individuals, levels of hierarchical authority (the scalar
chain), span of control and formal organisational relationships. The
dimensions of structure can be identified in a number of ways.

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Child (1988) suggests six major dimensions as components of an

organisational structure which are as follows.

• Allocation of individual tasks and responsibilities, job

specialisation and definition.
• Formal reporting relationships, levels of authority and spans of
control.
• Grouping together of sections, departments, divisions and larger
units.
• Systems for communication of information, integration of effort
and participation.
• Delegation of authority and procedures for monitoring and
evaluating the use of discretion.
• Motivation of employees through the systems for appraisal of
performance and reward.

Mintzberg (1979) suggests another approach to the identification of

dimensions of structure and gives a set of nine essential design
parameters which form the basic components of organisational structure.
They are as follows.

• How many tasks should a given position in the organisation

contain and how specialised should each task be?
• To what extent should the work content of each position be
standardised?
• What skills and knowledge should be required for each position?
• On what basis should positions be grouped into units and units
into larger units?
• How large should each unit be? How many individuals should
report to a given manager?
• To what extent should the output of each position or unit be
standardised?
• What mechanisms should be established to facilitate mutual
adjustment among positions and units?
• How much decision-making power should be delegated to the
managers of the units down the chain of authority?
• How much decision-making power should pass from the line
managers to the staff specialists and operators?

These nine design parameters, according to Mullins (2000), can be

grouped under four broad headings: design of position, design of
superstructure, design of lateral linkages, and design of decision-making
systems.

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Information technology is an additional dimension of structural design.

The computer-based information and decision-support systems influence
choices in the design of production or service activities, hierarchical
structures and organisation of support staff. Information technology
may influence the centralisation/decentralisation of decision-making and
control systems (Mullins, 2000).

According to Mullins (2000), the impact of information technology will

have significant effects on the structure, management and functioning of
most organisations. The introduction of new technology will demand
new patterns of work organisation. It will affect individual jobs, the
formation and structure of groups, the nature of supervision and
managerial roles. Information technology results in changes to lines of
command and authority, and influences the need for restructuring the
organisation and attention to the job design.

Mullins maintains that new technology has typically resulted in a

‘flatter’ organisational pyramid with fewer levels of management
required. In the case of new office technology, it allows the potential for
staff at clerical/operator level to carry out a wider range of functions and
to check their own work. The result is a change in the traditional
supervisory function and a demand for fewer supervisors.

Structure provides the framework for the activities of the organisation

and must harmonise with its goals and objectives. The first step,
therefore, is to examine the objectives of the organisation. It is only
when objectives have been clearly defined that alternative forms of
structure can be analysed and compared.

3.3 Levels of Organisational Structure

According to Parsons (1980), organisations are structured in layers.

This implies that the determination of policy and decision-making, the
execution of work, and the exercise of authority and responsibility are
carried out by different people at varying levels of seniority throughout
the organisational structure. Therefore, it is possible to look at
organisations in terms of interrelated levels in the hierarchical structure
such as the technical level, the managerial level and the community
level. These are discussed below.

1. The Technical Level

The technical level is concerned with specific operations and discrete
tasks, with the actual job or tasks to be done, and with performance of
the technical function. Examples are: the physical production of goods
in a manufacturing firm, the administrative processes giving direct

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service to the public in government departments, and the actual process

of teaching in an educational establishment.

2. The Managerial Level

The technical level interrelates with the managerial level, which is
concerned with the coordination and integration of work at the technical
level. Decisions at the managerial level relate to the resources necessary
for performance of the technical function, and to the beneficiaries of the
products or services provided. Decisions will be concerned with:

• mediating between the organisation and its external environment,

such as the users of the organisation’s products or services, and
the procurement of resources; and
• the ‘administration’ of the internal affairs of the organisation
including the control of the operations of the technical function.

3. The Community Level

In turn, the managerial level interrelates with the community level and it
is concerned with the broad objectives and the work of the organisation
as a whole. Decisions at the community level will be concerned with
the selection of operations, and the development of the organisation in
relation to external agencies and the wider social environment.

Examples of the community level within organisations are:

• the board of directors of joint stock companies,
• governing bodies of educational establishments which include
external representatives, and
• trustees of non-profit organisations.

Such bodies provide a mediating link between the managerial

organisation and coordination of work of the technical organisation, and
the wider community interests. Control at the institutional level of the
organisation may be exercised, for example, by legislation, codes of
standards or good practice, trade or professional associations, political or
governmental actions, and public interest.

In practice, all these levels are interrelated, and there is not a clear
division between determination of policy and decision-making,
coordination of activities and the actual execution of work. Most
decisions are taken with reference to the execution of wider decisions,
and execution of work involves decision.

Decisions taken at the institutional level determine objectives for the

managerial level, and decisions at the managerial level set objectives for
the technical level. Therefore if the organisation as a whole is to
perform effectively, there must be clear objectives, a soundly designed

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structure, and good communication, both upwards and downwards,

among the different levels of the organisation (Mullins, 2000).

The managerial level, for example, would be unable to plan and

supervise the execution of work of the technical function without the
knowledge, expertise, practical know-how and enthusiasm of people
who are closest to the actual tasks to be undertaken. People operating at
the technical level should, therefore, make known to higher levels the
practical difficulties and operational problems concerning their work. It
is the duty of the managerial level to take appropriate action on this
information, and to consult with people at the community or institutional
level (Mullins, 2000).

3.4 People – Organisation Relationship

3.4.1 Clarification of Objectives

A clarification of objectives is necessary in order to provide a basis for

the division of work and grouping of duties into sub-units. The
objectives for these sub-units must be related to the objectives of the
organisation as a whole in order that an appropriate pattern of structure
can be established.

According to Mullins (2000), clearly stated and agreed objectives will

provide a framework for the design of structure, and a suitable pattern of
organisation to achieve those objectives. The nature of the organisation
and its strategy will indicate the most appropriate organisational levels
for different functions and activities, and the formal relationships
between them. Clearly defined objectives will help facilitate systems of
communication between different parts of the organisation and the
extent of decentralisation and delegation. The formal structure should
help make possible the attainment of objectives. It should assist in the
performance of the essential functions of the organisation and the major
activities which it needs to undertake.

3.4.2 Clarification of Tasks

According to Woodward (1980), tasks are the basic activities of the

organisation which are related to the actual completion of the productive
process and directed towards specific and definable end results. To
ensure the efficient achievement of overall objectives of the
organisation, the results of the task functions must be coordinated.

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There are four essential functions that the organisation must perform
such as follows.

(i) The goods or service must be developed.

(ii) Something of value must be created. In the case of the business

organisation, this might be the production or manufacture of a
product; in the case of the public sector organisation, the
provision of a service.

(iii) The product or services must be marketed. They must be

distributed or made available to those who are to use them.

(iv) Finance is needed in order to make available the resources used

in the development, creation and distribution of the products or
services provided.

There are other activities of the organisation, called element functions,

which are not directed towards specific and definable ends but are
supportive of the task functions and an intrinsic part of the management
process. These include personnel, planning, management services,
public relations, quality control and maintenance. In other organisations,
noticeably in service industries, personnel can be seen as closely
associated with a task function. But in the majority of organisations, the
personnel function does not normally have any direct accountability for
the performance of a specific end-task.

These two kinds of functions, task and element, differ in a number of

ways and these differences have important implications for an
organisation. Failure to distinguish between the two types of functions
can lead to confusion in the planning of structure and in the relationship
between members of the organisation.

According to Woodward, for example, activities concerned with raising

funds for the business, keeping accounts and determination of financial
policy are task functions. But management accounting, concerned with
prediction and control of production administration, is an element
function, and is primarily a servicing and supportive one.

Relationships between the accountants and other managers seemed

better when the two functions were organisationally separated. This is
the case especially in divisionalised organisation when each product
division has its accounting staff providing line managers with the
necessary information to control their own departments.

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3.4.3 The Division of Work

According to Mullins (2000), work has to be divided among its

members and different jobs related to each other within the formal
structure of an organisation. The division of work and the grouping
together of people should, wherever possible, be organised by reference
to some common characteristic which forms a logical link between the
activities involved. It is necessary to maintain a balance between an
emphasis on subject matter or function at higher levels of the
organisation, and specialisation and concern for staff at the operational
level.

Work can be divided, and activities linked together in a variety of

different ways such as follows.

i) Major Purpose or Function

The most commonly used basis for grouping activities is according to
specialisation, the use of the same set of resources, or the shared
expertise of members of staff. It is a matter for decision in each
organisation as to which activities are important enough to be organised
into separate functions, departments or sections.

ii) Product or Service

In division by product or service as shown in the figure below, the
contributions of different specialists are integrated into separate, semi-
autonomous units with collective responsibility for a major part of the
business process or for a complete cycle of work. This form of grouping
is more common in the larger diversified organisations and may be used
as a means of sub-dividing departments into sections.

A good example is the bringing together of all activities concerned with

a particular production line, product or service. A difference is in a
hospital where medical and support staff members are grouped together
in different units dealing with particular treatments such as accidents
and emergency, medical and surgery. The danger is that with grouping
by product or service, there is a danger that the divisions may attempt to
become too autonomous, presenting management with a problem of
coordination and control.

iii) Location
In division by location, as shown in Fig. 3.13., different services are
provided by area or geographical boundaries according to particular
needs or demands, the convenience of consumers, or for ease of
administration.

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Examples are the provision of local authority services for people living
in a particular locality; the sitting of hospitals or post offices; the
provision of technical or further agricultural education in industrial or
rural areas; sales territories for business firms; or the grouping of a
number of retail shops under an area manager. Another example is
provided by organisations with multi-site working and the grouping of a
range of similar activities or functions located together on one site.
One problem with grouping by location is difficulty in the definition of
the geographical boundaries and the most appropriate size for a given
area. The improvement in communications, particularly
telecommunications, tends, however, to reduce the importance of
location. For example, administrative staff may no longer need to be
located within the main production unit.

Managing Director
Personnel

Research and Production (P) Marketing (M) Finance (F)

development
(R&D)

Product 1 Product 2 Product 3

Fig. 3.13: Division of Work by Major Purpose or Function

Managing Director

Personnel

Product 1 Product 2 Product 3

R&D P M F R&D P M F R&D P M F

Fig. 3.14: Division of Work by Product or Service

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Managing Director

Personnel

Area A Area B Area C

R&D P P P R&D P P P R&D P P P

Fig. 3.15: Division of Work by Location

Legend:
R&D:- Research and Development
P: - Product
M: - Marketing
F: - Finance

iv) Nature of the Work Performed

Division may be according to the nature of the work performed where
there are some special common features of the work, such as: the need
for speedy decisions, accuracy, confidentiality/security, or where local
conditions require first-hand knowledge not immediately available
elsewhere. Another example may be the grouping together of pieces of
equipment or machinery which are noisy or which produce dust, fumes
or unpleasant odours.

v) Common Time Scales

Division may be according to time scales, for example, shift working
and the extent to which different tasks should be undertaken by different
shifts. In a further education college, there may be separate departments
or groupings to deal with the different needs of full-time day students
and part-time evening students. Another example of activities grouped
according to time is in a hotel.

Activities in the kitchen tend to be short term, especially when guests in

the restaurant are waiting to be served, and a range of different tasks
have to be coordinated very quickly. Other activities, for example,
market research and forecasting future room occupancy, are longer-term
decisions, and subject to different organisational requirements.

vi) Common Processes

When common processes are used in a range of different activities, this
may be used as the basis of division. This method of grouping is similar
to the division by nature of the work, but includes, for example, the
decision whether to establish a centralised resource centre for all

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departments of the organisation or to allow each department to have its

own service.

In the manufacturing industries, a range of products may pass through a

common production facility or configuration of machines which may be
grouped together in a single unit: for example, a batch production
engineering firm having departments based on like skills or methods of
operation. Services using expensive equipment such as mainframe
computers may need to be grouped together in this way for reasons of
efficiency and economy.

vii) Staff Employed

The allocation of duties and responsibilities may be according to
experience, or where a particular technical skill or special qualification
is required: for example, the division of work between surgeons, doctors
and nurses; or between barristers, solicitors and legal executives.
Another good example is the sharing of routine work processes among
members of a supervised group. In smaller organisations, the allocation
of work may be on an ad hoc, personal basis according to the knowledge
and skills contributed by individuals. Work may also be planned
deliberately to give a variety of tasks and responsibilities to provide
improved job satisfaction or to assist in the training of staff.

viii) Customer to be Served

Separate groups may be established to deal with different consumer
requirements: for example, the division between trade or retail
customers, or between home or export sales. In hospitals, there are
different groupings dealing with, for example, patients in the
gynecology, and children’s wards. In large clothes shops, there may be
separate departments for men’s, women’s and children’s clothing.

Another example is the provision of canteen services which may be

grouped by customers’ demands according to price; range or standard of
meals available, speed of service; or type of customers. This gives rise
to separate facilities; for instance, directors’ dining room, staff dining
room, and separation of students’ dining room from lecturers’ dining
room in educational establishments.

These different ways of dividing work can be combined in various forms

most suitable for organisations in terms of their scope of operations.
Some activities might be grouped according to one method and the other
according to operational activities.

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Decisions on the methods of grouping will include considerations of:

• the need for coordination,
• the identification of clearly defined divisions of work,
• economy,
• the process of managing the activities,
• avoiding conflict, and
• the design of work organisation which takes account of the nature
of staff employed, their interests and job satisfaction.

The management team must decide upon the most significant factors
which will determine the methods for division of work and linking of
activities appropriate to the changing circumstances within the particular
organisation.

SELF-ASSESSMENT EXERCISE

Mention and explain the various ways through which operations of an

organisation can be organised.

3.5 Forms of Relationship in Work Organisation

Some formal relationships between individual positions will arise from

the defined pattern of responsibilities in any organisational structure.
These individual authority relationships may be identified as line,
functional, staff or lateral.

The design of organisational structure in terms of the principle of line,

functional, staff or lateral, determines the pattern of role relationships
and interactions with other roles, discussed in the next unit.

(i) Line Relationships

In line relationships, authority flows vertically down through the
structure, for example, from the managing director to managers, section
leaders, supervisors and other staff. There is a direct relationship
between superior and subordinate, with each subordinate responsible to
only one person. Line relationships are associated with functional or
departmental division of work and organisational control. Line
managers have authority and responsibility for all matters and activities
within their own departments.

(ii) Functional Relationships

Functional relationships apply to the relationship between people in
specialist or advisory positions, and line managers and their
subordinates. The specialist offers a common service throughout all the
departments of the organisation, but has no direct authority over those
who make use of the service. There is only an indirect relationship.
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For example, the personnel manager has no authority over staff in other
departments – this is the responsibility of the line manager. But, as the
position and role of the personnel manager would have been sanctioned
by top management, other staff might be expected to accept the advice
which is given. The personnel manager, however, could be assigned
some direct, executive authority for certain specified responsibilities
such as, for example, health and safety matters throughout the whole
organisation. Note, however, that specialists, in a functional relationship
with other managers, still have a line relationship with both their own
superior and their own departmental subordinate staff.

(iii) Staff Relationships

Staff relationships arise from the appointment of personal assistants to
senior members of staff. Persons in a staff position normally have little
or no direct authority in their own right but act as an extension of their
superior and exercise only ‘representative’ authority. They often act in a
‘gatekeeper’ role. There is no direct relationship between the personal
assistant and other staff except where delegated authority and
responsibility have been given for some specific activity. In practice,
however, personal assistants often do have some influence over other
staff, especially those in the same department or grouping. This may be
partially because of the close relationship between the personal assistant
and the superior, and partially dependent upon the knowledge and
experience of the assistant, and the strength of the assistant’s own
personality.

(iv) Lateral Relationships

Lateral relationships exist between individuals in different departments
or sections, especially individuals on the same level. These lateral
relationships are based on contact and consultation and are necessary to
maintain coordination and effective organisational performance. Lateral
relationships may be specified formally, but in practice, they depend
upon the cooperation of staff and in effect are of informal relationship.

SELF-ASSESSMENT EXERCISE

Mention and explain different forms of relationship in organisation.

3.6 Types of Organisational Structure

1. Line and Staff Organisation

An area of management which causes particular difficulty is the concept
of line and staff. As organisations develop in size and work becomes
more complex, the range of activities and functions undertaken are
bound to increase. People with specialist knowledge have to be
integrated into the managerial structure. Line and staff organisation is

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concerned with different functions which are to be undertaken. It

provides a means of making full use of specialists while maintaining the
concept of line authority. It creates a type of informal matrix structure.

According to Mullins (2000), the concept of line and staff relationships

presents a number of difficulties. With the increasing complexity of
organisations and the rise of specialist services, it becomes harder to
distinguish clearly between what is directly essential to the operation of
the organisation, and what might be regarded only as an auxiliary
function. The distinction between a line manager and a staff manager is
not absolute. There may be a fine division between offering
professional advice and the giving of instructions.

Friction inevitably seems to occur between line and staff managers.

Neither side may fully understand nor appreciate the purpose and role of
the other. Staff managers are often criticised for unnecessary
interference in the work of the line manager and for being out of touch
with practical realities. Line managers may feel that the staff managers
have an easier and less demanding job because they have no direct
responsibility for producing a product or providing a service for the
customer, and are free from day-to-day operational problems.

Furthermore, staff managers may feel that their own difficulties and
work problems are not appreciated fully by the line manager. Staff
managers often complain about resistance to their attempts to provide
assistance and coordination, and the unnecessary demands for
departmental independence by line managers. A major source of
difficulty is to persuade line managers to accept, and act upon, the
advice and recommendations which are offered.

Personal Secretary
Owner – Manager

Employees

Fig. 3.16: Line and Staff Structure

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2 Functional Organisation
Under this structure, the division of work and the grouping together of
people are organised by reference to some common characteristic which
forms a logical link between the activities involved. This emphasises
functions of the organisational operations as well as specialisation.

The most commonly used bases for grouping activities are according to
functions which are: specialisation, the use of the same set of resources,
and the shared expertise of members of staff. It is a matter for decision
in each organisation as to which activities are important enough to be
organised into separate functions, departments or sections. Work may be
departmentalised and based on differentiation between task and element
functions.

The essential advantages of functional structure are as follows.

(i) Effective delegation of day-to-day operational functions.

(ii) Enables top management to focus on strategic decisions.

(iii) Efficient allocation of work through specialisation or

organisational technology.

(iv) Improved development of future managers’ functional expertise,

and distinctive competence.

(v) Permits centralised control of strategic decisions and results.

(vi) Maintains power and prestige of major functions, processes and

equipment;

(vii) Furnishes a logical reflection of organisational functions for

implementing strategy.

(viii) Very well suited for structuring a single business.

(ix) Conducive for exploiting learning/experience curve effects

associated with functional specialisation;

(x) Good for social, political and economic projects. For instance, in
social ceremonies, people are grouped around the processes of
food making, canopy arrangement, supply of music, video
recordings, servers, bottle collection, supply of light / electricity
etc.

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The obvious disadvantages of functional structure are as follows.

(i) Functional walls create difficulty in coordination of different

functions to achieve overall results.

(ii) Specialists with very narrow skills are created, often at the
expense of the overall benefit of the organisation. This is over-
specialisation.

(iii) It often generates inter-functional conflicts, rivalry and empire-

building e.g. functional line versus staff conflicts.

(iv) Limits internal development of general managers.

(v) Makes economic growth of company as a system difficult.

(vi) Creates problems of communication and control within and

across functions, inter-functional decision-making is difficult.

(vii) Forces responsibility for profit to the top only.

(viii) May create uneconomical small units or underutilisation of

specialised facilities, manpower and capacities.

(ix) Functional experiences often create resistance to change

(Paradigm paralysis);

(x) Functional myopia is always anti-entrepreneurship, anti-

creativity, anti-innovation and anti-restructuring of activity-cost
chain;

(xi) May lead to group sabotage, functional make-belief, eye-service,

and dereliction of duty, functional promotion on the basis of
seniority to a level of incompetence, functional pomposity,
functional subterfuge and shameless profligacy.

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Chief Executive

Staffing functions e.g. Staff functions e.g.

auditing, public relations legal

Personnel Production Marketing Finance

Fig. 3.17: Functional Structure

3. Project Organisation
The division of work and methods of grouping described earlier tend to
be relatively permanent forms of structure. With the growth in newer,
complex and technologically advanced systems, it has become necessary
for organisations to adapt traditional structures in order to provide
greater integration of a wide range of functional activities.

In recent years, greater attention has been given, therefore, to more

flexible forms of structure and the creation of groupings based on
project teams and matrix organisation. Members of staff from different
departments or sections are assigned to the team for the duration of a
particular project.

Therefore, a project organisation may be set up as a separate unit on a

temporary basis for the attainment of a particular task. When this task is
completed, the project team is disbanded or members of the unit are
reassigned to a new task. Project teams may be used for people working
together on a common task or to coordinate work on a specific project
such as the design and development, production and testing of a new
product; or the design and implementation of a new system or
procedure.

For example, project teams have been used in many military systems,
aeronautics and space programmes. A project team is more likely to be
effective when it has a clear objective, a well-defined task, and a definite
end-result to be achieved, and the composition of the team is chosen
with care.

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4. Matrix Organisation
The matrix organisation consists of the following combination of:

(i) functional departments which provide a stable base for

specialised activities and a permanent location for members of
staff; and
(ii) units that integrate various activities of different functional
departments on a project team, product, programme, geographical
or systems basis. For example, the university system is run on
the basis of a matrix structure; where the academic staff members
do not restrict themselves to only their departments and faculties
but lecture in many departments and faculties simultaneously.

A matrix structure might be adopted in a university or college with

grouping both by common subject specialism, and by association with
particular courses or programmes of study. See Fig. 12.6 below.

Therefore, the matrix organisation establishes a grid, or matrix, with a

two-way flow of authority and responsibility. On the basis of the
functional departments, authority and responsibility flow vertically
down the line, but the authority and responsibility of the project
manager flow horizontally across the organisation structure

Managing Director

Research and Purchasing Production Quality

Development Control

Project
Manager

Project
Manager

Project
Manager
:
Fig. 3.18: A Matrix Structure

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Reasons for the use of a matrix structure include the following.

(i) More than one critical orientation to the operations of the

organisation
For example, an insurance company that has to respond
simultaneously to both functional differentiation such as life, fire,
marine, motor, and to different geographical areas.

(ii) A need to process simultaneously large amounts of information.

For example, a local authority social services department seeking
help for an individual will need to know where to go for help
from outside agencies such as police, priest, community relations
officer; and at the same time whom to contact from internal
resources within the organisation such as the appropriate social
worker, health visitor or housing officer.

(iii) The need for sharing of resources.

This could only be justified on a total organisational basis such
as the occasional or part-time use by individual departments of
specialist staff or services.

Matrix organisation offers the advantages of flexibility, greater security

and control of project information, and opportunities for staff
development. Nevertheless, there are difficulties associated with matrix
structure. Developing an effective matrix organisation, however, takes
time, and a willingness to learn new roles and behaviour which means
that matrix structures are often difficult for management to implement
effectively.

There may be a limited number of staff reporting directly to the project

manager with extra staff assigned as required by departmental managers.
This may result in a feeling of ambiguity. Staff may be reluctant to
accept constant change and prefer the organisational stability from
membership of their own functional grouping.

Matrix organisation can result in a more complex structure. By using

two methods of grouping, it sacrifices the unity of command and can
cause problems of coordination.

There may be a problem of defining the extent of the project manager’s

authority over staff from other departments and of gaining the support of
the functional managers. Functional groups may tend to neglect their
normal duties and responsibilities.

According to Bartlett and Ghoshal (1990), matrix structures have proved

all but unmanageable. Dual reporting leads to conflict and confusion,

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the proliferation of channels of communication creates informational

log-jams, and overlapping responsibilities result in a loss of
accountability.

5. Strategic Business Units

Some firms encounter difficulty in controlling their divisional operations
as the diversity, size, and number of these units continue to increase.
Corporate management may encounter difficulty in evaluating and
controlling its numerous, often multi-industry divisions. Under these
conditions, it may become necessary to add another layer of
management to improve strategy implementation, promote synergy, and
gain greater control over the diverse business interests. This can be
accomplished by grouping various divisions (or parts of some divisions)
in terms of common strategic elements. These groups, commonly called
strategic business units (SBUs), are usually structured, based on the
independent product/market segments served by the firms.

The advantages of strategic business unit structure are as follows.

1. Forces coordination and necessary authority down to the

appropriate level for rapid response.
2. Places strategy development and implementation in closer
proximity to the divisions’ unique environment;
3. Frees chief executive officer for broader strategic decision
making.
4. Retains functional specialisation with each division.
5. Good training ground for strategic managers.
6. Furnishes a strategically relevant technique of organising large
number of different business units.
7. Permits strategic planning to take place at the most appropriate
levels within the total enterprise (corporate and business levels).
8. Allows the task of strategic evaluation by top managers to be
more objective and more effective.
9. Improves coordination between divisions with similar strategic
concerns and product/market environments.
10. Permits efficient allocation of corporate resources to areas with
greatest growth opportunities.
11. Facilitates the coordination of related activities within a strategic
business unit, thereby helping to acquire the benefits of strategic
fits in the strategic business unit.
12. Promotes strong cohesiveness among the various divisions of the
strategic business units.
13. Focuses accountability to distinct business units.

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The disadvantages of strategic business unit structure are as follows.

1. Problem with the extent of authority given to division managers.

2. Potential for policy inconsistencies between divisions.
3. Problem of arriving at a method to distribute corporate overhead
cost that is acceptable to different division managers with profit
responsibility.
4. Dysfunctional competition for corporate resources may increase.
5. Adds another layer of management between the divisions and
corporate management.
6. The role of the group vice president can sometimes be difficult to
define.
7. Presents difficulty in defining the degree of autonomy for the
group vice presidents and divisional managers.
8. Strategic business units may grow to a large numbers that may
compromise efficient and effective management.
9. Strategic business units can still be myopic in charting their
future direction.
10. Unless the strategic business units head is strong-willed, very
insignificant strategy coordination is likely to occur across
business units in the strategic business unit.
11. Performance recognition is blurred. Credit for strategic business
unit’s performance tends to go to corporate chief executive
officer, then to divisional head and last to group vice president.
12. When the basis of grouping a strategic business unit is based on
factors other than the nitty-gritty of strategy coordination, then
the groupings lose real strategic significance.

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Chief Executive
Officer

Vice President Vice President

(Administrative Services) (Operating Services)

Group Vice Group Vice

President, SBU 1 Group Vice President, SBU 3
President, SBU 2

1 2 3 4 5 6 7 8

Fig. 3.19: SBU Organisational Structure

The numbers above, as shown on the diagram, such as 1, 2, etc represent

divisions of the company.

3.7 Common Features of Work Organisations

A basic aim for the study of organisations is to indicate both the

common features of organisations and the main distinguishing features
between different types of organisations. It provides a useful framework
for the comparative study of organisations.
Some of these common features to organisations are as discussed below.

1. Organisational Sub-Systems
The transformation or conversion of inputs into outputs is a common
feature of all organisations. Within the organisation (system) as a whole,
each of the different transformation or conversion activities may
themselves be viewed as separate sub-systems with their own input-
conversion-output process interrelated to, and interacting with, the other

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sub-systems. The analysis of an organisation could perhaps be based

upon the departmental structure as sub-systems.

The important point is the interrelationships and coordination of sub-

systems in terms of the effectiveness of the organisation as an integrated
whole. The interrelationship and interdependence of the different parts
of the system raise the question of the identification of these sub-
systems.

The boundaries are drawn at the discretion of the observer and sub-
systems are identified according to the area under study. These sub-
systems may be identified, therefore, in a number of different ways,
although there is a degree of similarity among the alternative models.

2. Socio-Technical System
According to Mullins (2000), the socio-technical system is concerned
with the transformation or conversion process itself, the relationships
between technical efficiency and social considerations and the effect on
people.

Researchers observed that new methods of work and changes in

technology disrupted the social groupings of workers, and therefore,
brought about undesirable changes to the psychological and sociological
properties of the old method of working. As a result, the new method of
work could be less efficient than it could have been despite the
introduction of new technology.

The recommendation calls for a socio-technical approach in which an

appropriate social system could be developed in keeping with the new
technical system. It has been observed that there are three sub-systems
common to any organisation such as:

• the technological sub-system,

• the sub-system of formal role structure, and
• the sub-system of individual members’ feelings or sentiments.

Another form of analysis results in seeing the organisation as an open,

socio-technical system with five major sub-systems such as follows.

Goals and values – the accomplishment of certain goals

determined by the broader system and in conformity with social
requirements.

Technical – the knowledge required for the performance of tasks,

and the techniques and technology involved.

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Psychological – the interactions of individuals and groups, and

behaviour of people in the organisation.

Structure – the division and coordination of tasks, and formal

relationships between the technical and psychosocial sub-
systems.

Managerial – covering the whole organisation and its

relationship to the environment, setting goals, planning, structure
and control.

An alternative model is suggested by Hersey and Blanchard, who

identify four main interrelated sub-systems.

• Human / social focuses on the needs and motivations of

members of the organisation and styles of leadership.
• Administrative / structural focuses on authority and
responsibility, and the structure within the organisation.
• Informational / decision-making focuses on key decisions and
informational needs necessary to keep the organisation
operational.
• Economic / technological focuses on the work to be undertaken
and its cost-effectiveness related to the goals of the organisation.

Another useful model is that of Leavitt who suggests that the

organisation consists of four main elements – task, structure,
information and control and people – which interact with one another
and with the external environment.

• Task – involves problem-solving and improving organisational

performance.
• Structure – refers to patterns of organisation, authority and
responsibility, and communications.
• Information and control – techniques for controlling and
processing information, such as accounting techniques.
• People – involves attitudes and interpersonal relations.

According to Mullins (2000), from the above analysis, therefore, there

are five main interrelated sub-systems which form the basis for the
analysis of work organisations.

i) Task – the goals and objectives of the organisation. Task is the

nature of inputs and outputs, and the work activities to be carried
out in the transformation or conversion process.

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ii) Technology – the manner in which the tasks of the organisation

are carried out and the nature of work performance. The
materials, systems and procedures, and equipment used in the
transformation or conversion process.

iii) Structure – patterns of organisation, lines of authority, formal

relationships and channels of communication among members.
Structure is the division of work and coordination of tasks by
which the series of activities are carried out.

iv) People – the nature of the members undertaking the series of

activities: such as their attitudes, skills and attributes, needs and
expectations, interpersonal relations and patterns of behaviour,
group functioning and behaviour, informal organisation and
styles of leadership.

v) Management – coordination of task, technology, structure and

people, and policies and procedures for the execution of work.
Corporate strategy dictates the direction of the activities of the
organisation as a whole and its interactions with the external
environment.

The attention given to organisational sub-systems can be related to

developments in management thinking and organisational behaviour.
The classical approach emphasised the structural and the managerial
sub-systems and the development of general principles of organisation.

The human relations approach emphasised the psychological and

sociological aspects and gave attention to the importance of people in
the organisation and such factors as the social needs of individuals,
motivation and group behaviour. The systems approach focuses
attention on the organisation as a whole, as a socio-technical system, and
considers the interrelationships between the different sub-systems and
the importance of environmental influences. The contingency approach
concentrates on situational factors as determinants of alternative forms
of organisation and management.

3. Interaction between Organisation and Environment

An open systems approach is an attempt to view the organisation as a
purposeful, unified whole in continual interaction with its external
environment. The organisation (system) is composed of a number of
interrelated parts (sub-systems). Any one part of the organisation’s
activities affects other parts.

Managers cannot afford to take a narrow, blinkered view. They need to

adopt a broader view of the organisation’s activities. Managers should

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recognise the interrelationships between various activities and the

effects that their actions and decisions have on other activities.

Using the above framework of five main interrelated sub-systems – task,

technology, structure, people, and management – provides a useful basis
for the analysis of organisational performance and effectiveness.

ENVIRONMENT ENVIRONMENT

Series of activities
Transformation or conversion process
Interrelated sub-systems

A socio-technical approach

Task

Technology Management Structure

People

Fig. 3.20: Organisational Sub-Systems

Task - the nature of the work activities to be carried out

Technology - the manner in which activities are carried out
Structure - patterns of organisation and formal relationships
within which activities are carried out
People - the nature of members undertaking the activities
Management- effective coordination of the sub-systems and
direction of activities of the organisation as a
unified whole.

The manager must realise that in order to improve organisational

effectiveness, attention should be focused on the total work organisation
and on the interrelationships between the variables which affect
organisational performance. The organisation is best viewed as an open
system and studied in terms of the interactions between technical and
social considerations, and environmental influences. Changes in part of

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the system will affect other parts and thus the whole organisation. The
open systems approach provides a perspective in which to compare and
contrast different types of organisations and their methods of operation.

4. Situational Organisation
The analysis of organisational effectiveness requires an understanding of
relationships within the organisation’s structure, the interrelated sub-
systems and the nature of its external environment.

Irrespective of the identification of sub-systems, the nature and scale of

the series of activities involved in converting inputs to outputs will
differ from one organisation to another in terms of the interrelationships
between technology, structure, methods of operation, and the nature of
environmental influences. Contingency models of organisation highlight
these interrelationships and provide a further possible means of
differentiation between alternative forms of organisation and
management.

The contingency approach takes the view that there is no one best,
universal form of organisation. There are situational factors that
influence organisational performance. Contingency models can be seen
as an ‘if-then’ form of relationship. If certain situational factors exist,
then certain organisational and managerial variables are most
appropriate. Managers can utilise these models to compare the structure
and functioning of their own organisation (Mullins, 2000).

3.8 Problems of Work Organisation

As observed by Mullins (2000), the important point is not so much

whether competing sub-groups and conflicts are seen as inevitable
consequences of organisation structure, but how conflicts, when found
to exist within the structure, are handled and managed.

There are many potential sources of conflicts arising from structure,

which include the following.

1. Differences in perception
Individuals see things in different ways. They all have their own, unique
picture or image of how they see the ‘real’ world. Differences in
perception result in different people attaching different meanings to the
same stimuli. As perceptions become a person’s reality, value judgments
can be a potential major source of conflict.

2. Limited resources.
Most organisational resources are limited, and individuals and groups
have to fight for their shares; for example, at the time of the allocation of

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the next year’s budget or when cutbacks have to be made. Usually, the
greater the limitation of resources, the greater potential for conflicts. In
an organisation with reducing profits or revenues, the potential for
conflict is likely to be intensified.

3. Departmentalisation and specialisation

Most work organisations are divided into separate departments with
specialised functions. Because of familiarity with the manner in which
they undertake their activities, departments tend to turn inwards and to
concentrate on the achievement of their own particular goals. When
departments need to cooperate with each other, there is a frequent source
of conflict.

Differing goals and internal environments of departments are also

potential sources of conflicts. For example, a research and development
department is more likely to be concerned with the long-run view and,
confronted with pressures for new ideas and production innovation, the
department is likely to operate in a dynamic environment and with an
organic structure. A production department, however, is concerned
more with short term problems such as quality control and meeting
delivery dates. The department tends to operate in a more stable
environment and with a bureaucratic structure.

4. The nature of work activities

Where the task of one person is dependent upon the work of others,
there is potential for conflict; for example, if a worker is expected to
complete the assembly of a given number of components in a week but
the person forwarding the part-assembled components does not supply a
sufficient number on time. If reward and punishment systems are
perceived to be based on keeping up with performance levels, then the
potential for conflict is even greater.

In sequential interdependence, where the work of a department is

dependent upon the output of another department, a crisis situation could
arise, especially if this situation is coupled with limited resources; for
example, where the activities of a department, which budget has been
reduced below what is believed necessary to run the department
efficiently are interdependent with those of another department, which
appears to have received a more generous budget allocation.

5. Role conflict
A role is the expected pattern of behaviours associated with members
occupying a particular position within the structure of the organisation.
In practice, the manner in which people actually behave may not be
consistent with their expected pattern of behaviour. Problems of role

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incompatibility and role ambiguity arise from inadequate or

inappropriate role definition and can be a significant source of conflict.

6. Inequitable treatment
Unjust treatment such as in the operation of personnel policies and
practices, or in reward and punishment systems, can lead to tension and
conflict. For example, according to the equity theory of motivation, the
perception of inequity will motivate a person to take action to restore
equity, including changes to inputs or outputs, or through acting on
others.

7. Violation of territory
People tend to become attached to their own ‘territory’ within work
organisations; for example, to their own area of work, or kinds of clients
to be dealt with; or to their own room, chair or packing space. Jealousy
may arise over other people’s territory; for example, size of room,
company car, allocation of a secretary or other perks; through access to
information, or through membership of groups. A stranger walking into
a place of work can create an immediate feeling of suspicion or even
resentment because people do not usually like ‘their’ territory entered by
someone they do not know, and whose motives are probably unclear to
them.

Mullins (2000), observes that ownership of territory may be conferred

formally, for example, by organisation charts, job descriptions or
management decisions. It may be established through procedures, for
example, circulation lists or membership of committees. Or it may arise
informally, for example through group norms, tradition or perceived
status symbols. The place where people choose to meet can have a
possible, significant symbolic value.

The relevant strategies for managing conflicts arising from work

organisation include the followings.

i) Clarification of goals and objectives

The clarification and continued refinement of goals and objectives, role
definitions and performance standards will help to avoid
misunderstandings and conflicts. Focusing attention on super ordinate
goals that are shared by the parties in conflict may help to diffuse
hostility and lead to more cooperative behaviour.

ii) Resource distribution

It may not always be possible for managers to increase their allocated
share of resources, but they may be able to use imagination and initiative
to help overcome conflict situations; for example, making a special case
to higher management; flexibility in virement headings of the budget;

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delaying staff appointments in one area to provide more money to

another area.

iii) Personnel policies and procedures

Careful and detailed attention to just and equitable personnel policies
and procedures may help to reduce areas of conflict. Examples are: job
analysis, recruitment and selection, job evaluation; systems of reward
and punishment; appeals, grievance and disciplinary procedures;
arbitration and mediation; recognition of trade unions and their officials.

iv) Non-Monetary rewards

Where financial resources are limited, it may be possible to pay greater
attention to non-monetary rewards. Examples are job design, more
interesting, challenging or responsible work, increased delegation or
empowerment, flexible working hours, attendance at courses or
conferences, unofficial perks or more relaxed working conditions.

v) Development of interpersonal/group process skills

This may help to encourage a better understanding of one’s own
behaviour, the other person’s point of view, communication processes
and problem-solving. It may also encourage people to work through
conflict situations in a constructive manner.

vi) Group activities

Attention to the composition of groups and to factors which affect group
cohesiveness may reduce dysfunctional conflict. Overlapping group
membership with a ‘linking-pin’ process, and the careful selection of
project teams or task forces for problems affecting more than one group,
may also be beneficial.

vii) Leadership and management

A more participative and supportive style of leadership and managerial
behaviour is likely to assist in conflict management; for example,
showing an attitude of respect and trust, encouraging personal self-
development and creating a work environment in which staff can work
cooperatively together. A participative approach to leadership and
management may also help to create greater employee commitment.

viii) Organisational processes

Conflict situations may be reduced by attention to such features as: the
nature of the authority structure, work organisation, patterns of
communication and sharing of information, democratic functioning of
the organisation, unnecessary adherence to bureaucratic procedures, and
official rules and regulations.

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ix) Socio-technical approach

Viewing the organisation as a socio-technical system in which
psychological and social factors are developed in keeping with structural
and technical requirements, will help in reducing dysfunctional conflict.

4.0 CONCLUSION

The unit has exposed you to the fact that organisational structure relates
to pattern of relationships along positions in the organisation and among
members of the organisation, which defines tasks and responsibilities,
work roles and relationships and channels of communication among
organisational members.

You have understood that essential factors are normally taken into
consideration in designing organisational structure. There are different
types of structure and relationship in an organisation.

5.0 SUMMARY

In this study unit, the following topics have been extensively examined:
• The meaning and nature of the organisational structure; that
structure defines positions and responsibilities in an organisation
and that it keeps on changing.
• The levels of organisation structure such as technical,
management, and community levels.
• Dimensions of people – organisation relationship such as
clarification of objectives, clarification of tasks, and division of
work.
• Forms of relationship in organisation in areas of line, staff,
function and lateral relationships.
• Types of organisational structure like line and staff, functional,
project and matrix organisations.
• Common features of organisations such as organisational sub-
systems, socio-technical system, interaction between the
organisation and the environment, and organisational situations.
• Influence of technology on organisation in areas of behaviour of
people, organisational climate, conditions of work, information
technology, and work design.
• Problems of work organisation such as differences in perception,
limited resources, specialisation, nature of work, role conflict,
and violation of territory.

6.0 TUTOR-MARKED ASSIGNMENT

Mention and discuss the forms of relationship in an organisation.

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7.0 REFERENCES/FURTHER READING

Child, J. (1988). Organisation: A Guide to Problems and Practice. (2nd

ed.). New York: Paul Chapman.

Drucker, P. F. (1989). The Practice of Management. London:

Heinemann Professional.

Gray, J. L. & Starke, F. A. (1988). Organisational Behaviour: Concepts

and Applications. (4th ed.). New York: Merrill Publishing
Company.

Mullins, J. L. (1995). Hospital Management: A Human Resources

Approach. (2nd ed.). London: Pitman Publishing.

Stewart, R. (1991). Managing Today and Tomorrow. London:

Macmillan.

Woodward, J. (1980). Industrial Organisation: Theory and Practice.

(2nd ed.). Oxford: Oxford University Press.

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UNIT 3 STRUCTURE, TECHNOLOGY AND

STRATEGY

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Influence of Technology on Organisational Structure
3.2 Linking Structure to Strategy
3.3 Role of Organisational Leadership
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

The advent of technology has great impact on the ways business

organisations carry out their operations. The modern corporate entities
cannot operate with a defined involvement of technology in one form or
the other. This is because technology affects work setting, production
methods, systems and procedures, and all other sundry operational
activities in a given business organisation. Therefore, technology does
influence the structural disposition of a business enterprise.

The structure adopted by a business enterprise is affected by the chosen

strategy of the enterprise. Hence, it is observed that the best
organisational structure is dependent on the organisational strategy of
the firm. The structural design normally intricately ties together key
activities and resources of the firm. Therefore, such structural design
must be closely aligned with the demands of the firm's strategy.

In this study unit, therefore, the discussion is on the influence of both

technology and strategy on the organisational structure being adopted
and used by a business enterprise.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

• discuss impacts of technology on organisation

• explain organisational structure
• describe levels of organisational structure
• discuss dimensions of people-organisation relationship
• explain forms of relationship in an organisation
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• describe types of organisational structure

• explain common features of organisations
• analyse problems inherent in work organisation.

3.0 MAIN CONTENT

3.1 Influence of Technology on Organisational Structure

According to Mullins (2000), the systems and contingency approaches

have drawn attention to the importance of technology in the structure,
management and functioning of work organisations. It is important to
note that the meaning of technology is interpreted broadly to include
both:

• the physical aspects of machines, equipment, processes and work

layout (machine technology) involved in the transformation or
conversion process, and
• the actual methods, systems and procedures involved (knowledge
technology) in carrying out the work of the organisation and
transforming or converting inputs into outputs.

There is a close interrelationship between the machine side of

technology and the specialist knowledge side of technology. The nature
of technology can, therefore, be applied to the analysis of all
organisations.

In a university, for example, the machine side of technology would

include: blackboards or whiteboards; overhead projectors; computers;
televisions and video recorders; closed circuit television; scientific and
engineering equipment and library facilities. The knowledge side of
technology would include: lectures, seminars and tutorials; case studies;
role-playing; practical laboratory work; visiting lecturers; project and
assignment work; examinations.

The work processes of a university, and other educational

establishments, give rise to the specialist study of educational
technology. A university will receive inputs of students and, through
the process of educational technology, ‘transform’ them and return them
as outputs into the broader society.

1. Technology and the Behaviour of People

According to Mullins, the nature of technology can influence the
behaviour of people in work organisations in many ways including, for
example, the followings.

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It influences the specific design of each member’s pattern of

work including the nature and variety of activities performed, and
the extent of autonomy and freedom of action.

It affects the nature of social interactions, for example, the size

and nature of work groups, the extent of physical mobility and of
contacts with other people. A person working continuously on a
single, isolated machine in a mass production factory will have
very limited social interactions compared with, say, a team of
receptionists in a large conference hotel.

It can affect role position and the nature of rewards. People with
higher levels of specialist technical knowledge and expertise such
as engineers or systems analysts tend to receive higher status and
pay than machine operators on an assembly line.

It can impose time dimensions on workers and may require set

times for attending to operations and a set pace of work; for
example, the mechanical pacing of work on a mass-production
assembly line.

It can result in distinguishing features of appearance; for

example, the requirement to wear a standard uniform or
protective clothing, compared with a personal choice of smart
clothes.

SELF-ASSESSMENT EXERCISE

Describe five ways in which technology can influence the behaviour of

people in work organisations?

2. Technology and General Climate of Organisation

Technology is a major influence on the general climate of the
organisation and the behaviour of people at work.

The nature of technology is also a potential source of tension and stress

and affects motivation and job satisfaction. The systems approach
should serve to remind managers that activities managed on the basis of
technical efficiency alone are unlikely to lead to optimum improvements
in organisational performance. It is important to maintain the balance of
the socio-technical system. Changes to the work organisation, as a
result of new developments in technology, must take account of human
and social factors as well as technical and economic factors.

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3. Information Technology
The importance of the effective management of technical change has
been highlighted by recent and continuing developments in information
technology. The term ‘information technology’ originated in the
computer industry, but it extends beyond computing to include
telecommunications and office equipment. Advances in technical
knowledge, the search for improved economic efficiency and
government support for information technology have all prompted a
growing movement towards more automated procedures of work.

The impact of information technology demands new patterns of work

organisation, especially in relation to administrative procedures. It
affects the nature of individual jobs, and the formation and structure of
work groups. There is a movement away from large-scale, centralised
organisation to smaller working units. Processes of communication are
increasingly linked to computer systems with the rapid transmission of
information and immediate access to other national or international
offices.

Improvements in telecommunications imply that support staff need no

longer be located within the main ‘production’ unit. Modern methods of
communication may reduce the need for head office clerical jobs.

Changes brought by information technology relate to the nature of the

management task itself. Information technology bears heavily on the
decision-making processes of the organisation and increasingly forms an
essential part of management information and corporate strategy.

4. Technology and Conditions of Work

The growth of information technology implies that individuals may
work more on their own, from their personal work stations or even from
their own homes, or work more with machines than with other people.
One person may be capable of carrying out a wider range of activities.
There are changes in the nature of supervision and in the traditional
hierarchical structure of jobs and responsibilities.

Computer-based information and decision support systems provide an

additional dimension of structural design. They affect choices such as
division of work, individual tasks and responsibilities. The introduction
of information technology undoubtedly transforms, significantly, the
nature of work and employment conditions for staff.

Advances in technical knowledge tend to develop at a faster rate with

consideration for related human and social consequences. For example,
fatigue and low morale are two major obstacles to the efficiency of staff.
Research is now being conducted into possible health hazards such as

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eye strain, backache, general fatigue and irritability for operators of

visual display units. This concern has prompted proposals for
recommended working practices for computer operators. There has
been a call for regular health checks and eyesight tests for operators, and
a 20-minute break every two hours.

5. Technical Change and Human Behaviour

Mullins (2000) observes that failure to match technical change to the
concomitant human and social considerations means that staff may
become resentful, suspicious and defensive. People’s cognitive
limitations, and their uncertainties and fears, may result in a reluctance
to accept change.

The psychological and social implications of technical change, such as

information technology and increased automation, must not be
underestimated. New ideas and innovations should not be seen by
members of staff as threats.

The manager has to balance the need for adaptability in meeting

opportunities presented by new technology with an atmosphere of
stability and concern for the interests of staff. The manner in which
technical change is introduced into the organisation will influence
people’s attitudes to work, the behaviour of individuals and groups, and
their level of performance.

6. Technology and Work Design

According to Mullins (2000), continued technical change is inevitable
and likely to develop at an even greater rate. Managers must be
responsive to such change. Information technology and automation
create a demanding challenge. The systems nature of organisations
emphasises the interrelationships among the major variables or sub-
systems of the organisation. The implementation and management of
technological change need to be related to its effect on the task, the
structure and the people.

Managers need to develop working practices based on an accurate

understanding of human behaviour and the integration of people’s needs
with organisational needs. It is important to avoid destructive conflict,
alienating staff including managerial colleagues, or evoking the anger
and opposition of unions. At the same time, it is important to avoid
incurring increasing costs or a lower level of organisational performance
caused by delays in the successful implementation of new technology.
What needs to be considered is the impact of technical change on the
design of the work organisation, and the attitudes and behaviour of staff.
It will be necessary for managers and supervisors to develop more agile
skills in organisation. This calls for the effective management of human

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resources and a style of managerial behaviour which helps to minimise

the problems of technical change. The management of conflict and
organisational change is discussed in detail in other units.

3.2 Linking Structure to Strategy

According to Thompson Jr. and Strickland (1987), empirical evidence

reveals that the ideal or best organisational structure is dependent on the
strategy of the firm. This is in view of the fact that the structural design
ties together key activities and resources of the firm. Therefore, it must
be closely aligned with the needs or demands of the firm's strategy.
The work of Chandler (1962), represents a landmark study in
understanding the choice of structure as a function of strategy. Chandler
studied 70 large corporations over an extended time period and found a
common strategy-structure sequence which reveals the following:

• choice of a new strategy.

• emergence of administrative problems; decline in performance.
• a shift to an organisational structure more in line with the
strategy's needs.
• improved profitability and strategy execution.

Thompson Jr. and Strickland (1987), posit that General Electric's recent
history supports Chandler's thesis. Operating with a simple divisional
structure in the late 1950s, GE embarked on a broad diversification
strategy. In the 1960s, GE experienced impressive sales growth.
However, GE also experienced administrative difficulties in trying to
control and improve the corresponding lack of increase in profitability.
In the early 1970s, GE executives redesigned its organisational structure
to accommodate the administrative needs of strategy (ultimately
choosing the strategic business unit structure), subsequently improving
profitability of and control over the diversification strategy.

• Chandler's research and the General Electric example lead to four

important observations. All forms of organisational structure are
not equally effective in implementing a strategy.
• Structures seem to have a life of their own, particularly in larger
organisations. As a result, the need for immediate and radical
changes in structure is not immediately perceived. Once the need
is perceived, lagging performance may be necessary before
politically sensitive structure is changed or organisational power
redistributed.
• Sheer growth can make restructuring necessary.

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• As firms diversify into numerous related or unrelated products

and markets, structural change appears to be essential if the firm
is to perform effectively.

Research findings on corporate stages of development provide further

understanding of the structure-strategy relationship. After studying
numerous business firms, researchers concluded that companies move
through several stages as size and diversity increase. Figure 13-1 is a
synthesis of these stage-of-development theories. The figure shows that
a firm moves through each stage, size, diversity, and competitive
environment change (Thompson Jr. and Strickland, 1987).

Table 3.1: Corporate Stages of Development

Stage Characteristics of the firm Typical structure
I. Simple small businesses. Offering one Simple to
product/service or one line of function
products/services to a small, distinct local
or regionalised market.
II.
Singular or closely related line of Functional to
products/services but to a larger and divisional
sometimes more diverse market geography,
III. channels, or customers.

Expanded but related lines of Divisional to

IV. products/services to diverse, large markets. matrix

Diverse, unrelated lines of

products/services to large, diverse markets. Divisional to
SBUs

Source: Thompson, A.A. Jr. and Strickland, A.J. (1987). Strategic

Management: Concepts and Cases. p.137.

The figure above reveals competing effectively at different stages

requires, among other things, different structures. Nevertheless, the
choice of structure appears contingent on the strategy of the firm in
terms of size, diversity of the products/services offered, and markets
served.

Therefore, the choice of structure must be determined by the firm’s

strategy. More so, the structure must segment key activities and/or
strategic operating units to improve efficiency through specialisation,
response to a competitive environment, and freedom to act. At the same
time, the structure must effectively integrate and coordinate these
activities and units to accommodate interdependence of activities and
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overall control. Hence, the choice of structure reflects strategy in terms

of the firm’s:

(1) size,
(2) product or service diversity,
(3) competitive environment and volatility,
(4) internal political considerations, and
(5) information or coordination needs for each component.

It has been argued that even a change in strategy, with its accompanying
alteration of administrative needs, does not lead to an immediate change
in structure. Basically, the research of Chandler and others suggests that
commitment to a structure lingers even when it has become
inappropriate for a current strategy. Regardless of the main reason
responsible, such as inertia, organisational politics, or a realistic
assessment of the relative costs of immediate structural change,
historical evidence suggests that the existing structure will be
maintained and not radically redesigned until a strategy’s profitability is
increasingly disproportionate with increasing sales.

3.3 Role of Organisational Leadership

According to Mullins (2000), while organisational structure provides the

overall framework for strategy implementation, it is not in itself
sufficient to ensure successful execution. Within the organisational
structure, individuals, groups, and units are the mechanisms of
organisational action. And the effectiveness of their actions is a major
determinant of successful implementation.

In this context, two basic factors encourage or discourage effective

action – leadership and culture. This section examines the leadership
dimension as a key element in strategy implementation.

Leadership, while seemingly vague and esoteric, is an essential element

in effective strategy implementation. Secondly, leadership issues are of
fundamental importance here considering the role of the chief executive
officer (CEO) and the assignment of key managers.

1. Role of the Chief Executive Officer

Mullins (2000), observes that the chief executive officer is the catalyst
in strategic management. This individual is most closely identified with
and ultimately accountable for the success of a strategy.. In most firms,
particularly larger ones, chief executive officers spend much of their
time developing and guiding strategy.

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The nature of the chief executive officer’s role is both symbolic and
substantive in strategy implementation. First, the chief executive officer
is a symbol of the new strategy. This individual actions and the
perceived seriousness of his or her commitment to a chosen strategy,
particularly if the strategy represents a major change, exert a significant
influence on the intensity of subordinate managers’ commitment to
implementation.

Second, the firm’s mission, strategy, and key long term objectives are
strongly influenced by the personal goals and values of its chief
executive officer. To the extent that the chief executive officer invests
time and personal values in the chosen strategy, he or she represents an
important source for clarification, guidance, and adjustment during
implementation.

Major changes in strategy are often preceded or quickly followed by a

change in the chief executive officer. The timing suggests that different
strategies require different chief executive officers if they are to succeed.

Research has concluded that a successful turnaround strategy “will

require almost without exception either a change in top management or a
substantial change in the behaviour of the existing management team”.
Clearly, successful strategy implementation is directly linked to the
unique characteristics, orientation, and actions of the chief executive
officer.

2. Assignment of Key Managers

A major concern of top management in implementing a strategy,
particularly if it involves a major change, is that the right managers are
in the right positions for the new strategy. Of all the tools for ensuring
successful implementation, this is the one CEOs mention first.
Confidence in the individuals occupying pivotal managerial positions is
directly and positively correlated with top-management expectations that
a strategy can be successfully executed (Mullins, 2000).

This confidence is based on the answers to two fundamental questions

such as the followings.
• Who holds the current leadership positions that are especially
critical to strategy execution?

• Do they have the right characteristics to ensure that the strategy

will be effectively implemented?

The relevant issue is in relation to the characteristics that are most

important in this context. According to Mullins (2000), it would be

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impossible to specify this precisely, but probable characteristics include

the followings.

i) Ability and education.

ii) Previous track record and experience.
iii) Personality and temperament.

The above considerations, combined with gut feeling and top managers’
confidence in the individual, provide the basis for this key decision.

Researchers have been made to match "preferred" managerial

characteristics with different grand strategies. These efforts are meant to
capture, for example, the behavioral characteristics appropriate for a
manager responsible for implementing an "invest to grow" strategy in
contrast to those for a manager implementing a "harvest" strategy.

Widespread theoretical discussion of this idea notwithstanding, two

recent studies covering a broad sample of companies did not find a
single firm that matched managerial characteristics to strategic mission
in a formal manner. Nevertheless, they did find several firms addressing
such considerations in an informal, intuitive manner (Mullins, 2000).

The empirical evidence portrays that for effective implementation,

different strategies require different skills. Nonetheless, many corporate
executives still avoid too rigid an approach to matching managerial
characteristics and strategy for reasons such as follows.

• Exposure to arid experience at managing different kinds of

strategies and businesses is viewed as an essential component of
managerial development.
• Too rigid a differentiation is viewed as much more likely to result
in some managers being typecast as "good builders" and some
others as "good harvesters," thereby creating motivational
problems for the latter.
• A "perfect match" between managerial characteristics and
strategy is viewed as more likely to result in over-commitment
(or) self-fulfilling prophecies.

An important consideration in making key managerial assignments

when implementing strategy is whether to emphasise current or -
promotable - executives or bring in new personnel. This is obviously a
difficult, sensitive, and strategic issue.

While key advantages and disadvantages can be clearly outlined; actual

assignment varies with the situation and the decision maker. Two
fundamental aspects of the strategic situation strongly influence the

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managerial assignment decision: (1) the changes required to implement

the new strategy and (2) the effectiveness of past organisational
performance.

Advantages of using existing executives to implement new strategy are

as follows.

• Already know key people, practices, and conditions.

• Personal qualities better known and understood by associates.

• Have established relationships with peers, subordinates,

suppliers, buyers, etc.

• Symbolises organisational commitment to individual careers.

The disadvantages of using existing executives to implement new

strategy are as follows.

• Less adaptable to major strategic changes because of knowledge,

attitudes, and values.

• Past commitments may hamper hard decisions required in

executing a new strategy.

• Less ability to become inspired and credibly convey the need for
change.

On comparable terms, advantages of bringing in outsiders to implement

new strategies are as follows.

i) Outsiders may already believe in and have “lived” the new

strategy.
ii) Outsiders are unencumbered by internal commitments to people.
iii) Outsiders come to the new assignment with heightened
commitment and enthusiasm.
iv) Outsider can send powerful signals throughout the organisation
that change is expected.

2. The inherent disadvantages in bringing in outsiders to implement

new strategies are as follows.

i) Often costly, both in terms of compensation and “learning-to-

work-together” time.
ii) Candidates suitable in all respects (i.e. exact experience) may not
be available, leading to compromise choices.

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iii) Uncertainty in selecting the right person.

iv) The “morale” costs when an outsider takes a job several insiders
wanted.
v) There is the likelihood of the outsiders performing poorly if not
properly guided.

4.0 CONCLUSION

In this study unit, you have discovered that the advent of technology has
great impact on the ways business organisations carry out their
operations. Furthermore, the modern corporate entities cannot operate
with a defined involvement of technology in one form or the other. You
have also learnt that the structure adopted by a business enterprise is
affected by the chosen strategy of the enterprise. The choice of the best
organisational structure is dependent on the organisational strategy of
the firm.

In this unit, you are now aware that the use of technology is not
sufficient to ensure successful execution of strategy even within the best
of organisational structure. Hence, the effectiveness of the actions of
organisational subsystems is a function of leadership.

5.0 SUMMARY

In this study unit, you have been exposed to the following topics.
• Influence of technology on organisation structure
• Linking structure to strategy
• Role of organisational leadership

6.0 TUTOR-MARKED ASSIGNMENT

Describe various ways in which organisational operations can be

affected by technology.

7.0 REFERENCES/FURTHER READING

Atkinson, P. (1985). “The Impact of Information Technology and Office

Automation on Administrative Management”. British Journal of
Administrative Management. Vol. 35, no. 3, June.

Child, J. (1988). Organisation: A Guide to Problems and Practice. (2nd

ed.). New York: Paul Chapman.

Drucker, P. F. (1989). The Practice of Management. London:

Heinemann Professional.

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Gray, J. L. & Starke, F. A. (1988). Organisational Behaviour: Concepts

and Applications. (4th ed.). New York: Merrill Publishing
Company.

Mullins, J. L. (1995). Hospital Management: A Human Resources

Approach. (2nd ed.). London: Pitman Publishing.

Stewart, R. (1991). Managing Today and Tomorrow. London:

Macmillan.

Thompson, A. A. Jr. & Strickland, A. J. (1987). Strategic Management:

Concepts and Cases. Homewood, Illinois: BP Irwin.
Woodward, J. (1980). Industrial Organisation: Theory and Practice.
(2nd ed.). Oxford: Oxford University Press.

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UNIT 4 CASE STUDY

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Case Study
3.2 Objectives of Case Study
3.3 Preliminary Considerations in Case Analysis
3.4 Principles for Analysis of a Case Material
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Case studies constitute an integral aspect of the study of corporate

strategic management. Case studies are in varied forms and may be
presented in a number of different ways. Cases can be a brief account of
events in organisational operations, which may be actual, contrived or a
combination of both. Cases can also be formulated on hypothetical
situations but portraying the normal business problems in respect of
environmental upheavals such as changes in the internal operational
methods, procedures, and processes.

There can be complex and multi-dimensional cases portraying the

descriptive account of actual situations in the real organisational
environment in areas of competitive postures of industry rivals and
government policy measures. There are other external environmental
variables such as technological changes, and changes in consumer tastes
and preferences. The present economic meltdown around the world also
poses some operational rethink which calls for redesigning of strategies
with which to cope with its monumental impact.

The preceding study units have been used to discuss the theoretical
underpinnings of corporate strategic management. In this study unit,
therefore, case study is discussed necessarily to introduce you to the
practical situations which will require you to make use of the concepts
and ideas to which you have been exposed to in this course material.

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2.0 OBJECTIVES

At the end of this unit, you should be able to:

• explain the concept of case study

• discuss the objectives of case study
• describe the necessary considerations in case analysis
• analyse the principles of case analysis
• analyse any given case about a corporate entity.

3.0 MAIN CONTENT

3.1 Meaning of Case Study

In the opinion of Hill and Jones (2004) case study presents an account of
what happened to business organisations over a number of years.
Furthermore, it chronicles the events that managers have to deal with in
the course of steering the affairs of the business organisations. To lay
credence to this view, Mullins (2000), posits that case study is basically
problem solving analysis and decision-making exercise.

The treatment of cases may require you to work on individual basis or it

may involve group work with your classmates. In analysing cases, you
have to assume the position of either a manager in the company
involved or a consultant. This is simply because you are required to
solve the case as if you are a manager in the company or an outside
consultant.

SELF-ASSESSMENT EXERCISE

Explain the term ‘case study’.

3.2 Objectives of Case Study

Mullins (2000) and Hill and Jones (2004) outline the following
objectives for a case study.

i) It is meant to make you apply the theoretical knowledge to

practical situations.
ii) It is meant to provide you with an opportunity to demonstrate
analytical ability, logical reasoning, judgement and
persuasiveness and skills of communication in the presentation of
answers.

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iii) It also provides a means of assessing your performance and

ability to apply the knowledge you have gained from the
theoretical background of corporate strategic management.
iv) If the case analysis is undertaken as a group, it provides a means
of assessing both the performance of the group as a whole.
v) It provides you with experience of organisational problems that
you probably have not had the opportunity to experience
firsthand.
vi) Case analysis makes you have the opportunity to appreciate the
problems faced by many business organisations.
vii) It also exposes you to the application of transfer of learning
which you should have gained from other areas such as your own
organisation.
viii) You will be able to evaluate the actions that some managers had
taken which backfired that result in the case situation.
ix) By analysing cases, you will be able to improve your skills of
diagnostic investigation.
x) You will enjoy the thrill of testing your problem-solving ability
in the real world.

SELF-ASSESSMENT EXERCISE

Do you consider case analysis to be important to you? Give reasons for

your answer.

3.3 Preliminary Considerations in Case Analysis

There are preliminary considerations which are imperative in an attempt

to analyse a case. Such considerations are given below.

i) Nature of the company’s strategic posture (e.g. harvesting,

divesting, downsizing, retrenchment, outsourcing, integration,
etc).
ii) Nature of the company’s organisational structure in relation to
strategic posture.
iii) The leadership styles of the managers in the company.
iv) The company’s strategic control system.
v) Composition of the staff strength of the company.
vi) The company’s strategies for motivating the workers.
vii) The Company’s strategic business units.
viii) The company’s choice of production technology or the level of
technological innovation in operations.
ix) Nature of distribution strategy in relation to reaching out to the
customers and users of the company’s products or services.
x) Franchising arrangement of the company, if any.
xi) Strength of the labour union in the company.

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xii) Operational relationship among various departments, units or

subsidiaries of the company.
xiii) The identification of the company’s internal strengths and
weaknesses.
xiv) The nature of the external environment surrounding the company.
xv) An analysis of the company’s opportunities and threats in its
environment.
xvi) The kind of corporate-level strategy that the company is
pursuing.
xvii) The nature of the company’s business-level strategy.

3.4 Principles for Analysis of a Case Material

The following principles, according to Mullins (2000), are important in

the analysis of a case material.

i) Read the whole of the case study.

ii) Read the case study a second time.
iii) Look at the material carefully and try to identify with the
situation.
iv) Check carefully on what you are required to do exactly and the
instructions you will use to present your answer.
v) Apportion available time to different parts of the case, if any.
vi) Approach the analysis of the case with an open mind.
vii) Refrain from bias or prejudice to avoid any predisposition that
may influence your perception of the case material.
viii) Adopt a brainstorming approach and take the case apart by
exploring all reasonably possible considerations.
ix) Search for hidden meanings and implicit issues and pieces of
information.
x) Study all the details provided in the case material to extract facts
for relevant deductions or inferences from the case material.
xi) Concentrate on what you think to be the more important matters
as opposed to irrelevant or any red herrings that may confuse
you.
xii) The use of margin notes, underlining, numbering, colours or
highlighting pens may all be useful.
xiii) Do not make your analysis too complicated or confused.
xiv) Where necessary, relate your analysis of the case material to your
theoretical studies, general points of principle and the work of
leading writers.
xv) The use of diagrams, charts or tables may enhance the
presentation of your answer, but make sure such displays are
accurate and clear and relate directly to your analysis of the case
material, and to the questions of the case.

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xvi) Bearing in mind the question, clearly identify existing or

potential difficulties or problem areas and indicate where you see
the need for most urgent action.
xvii) Draw up a plan of key points as the basis of your answer.
xviii) Where you have identified a number of possible courses of
action, indicate your recommendation priorities.
xix) Give reasons in support of your recommendations.
xx) Allow time to read through and check your work.

SELF-ASSESSMENT EXERCISE

Mention the important principles in the analysis of a case material.

4.0 CONCLUSION
In this unit, you are now aware of the importance of case studies. You
are now conversant with stating the objectives of a case study, which are
important in order for you to derive the benefits of analysing a case
material. You are also knowledgeable in the preliminary considerations
for analysis of a case material. Lastly, you are exposed to various
approaches to case analysis.

5.0 SUMMARY

In this study unit, you have learnt the following:

• Meaning of case study

• The objectives of a case study
• Preliminary considerations in the analysis of a case material
• Principles of analysis of a case material.

This is the last study unit of the course and it is expected that you have
covered all the study units in a very meticulous manner. This is
important because you need to study all the units towards gaining
appropriate knowledge that will put you in good stead for surmounting
challenges of dealing with human beings in your organisation.

6.0 TUTOR-MARKED ASSIGNMENT

Toyota Motor Corporation has adjusted its forecast and now estimates a
loss equivalent to US $4.9 billion for the 2008 fiscal year, which ended
March 31st, 2009. It is the company’s first loss since 1950. Consolidated
vehicle sales for the third quarter, which ended December 31st, 2008,
were 1.84 million units, a decrease of 443,000 vehicles compared to the
same period in 2007. In Japan, sales dropped by 76,000 vehicles to

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465,000, while in the U.S., sales dropped by 235,000 vehicles to

521,000 units.

In other markets, sales fell by 73,000 vehicles in Europe; by 19,000 in

Asia; and by 40,000 in Central and South America, Oceania, Africa and
the Middle East. “Both revenues and profits declined severally during
this period,” said Vice-president Mitsuo Kinoshita. “The negative results
are largely due to lower vehicle sales volume under difficult market
conditions mainly in the U.S. and Europe, and the rapid appreciation of
the Yen against the U.S. dollar and the Euro.”

Toyota estimated vehicle sales for the fiscal year will be 7.32 million
units, a decrease of 220,000 vehicles from the forecast it announced in
December 2008. Konishita said that the company has been operating
under the ‘Emergency Profit Improvement Committee” since November
2008.

… “There are a lot of rumors going around right now, but it does not
look good,” Lee Sperduti, a long-time Toyota worker has said. “A lot of
workers here (at both plants) are very worried. They fear for their jobs
… They used to say Toyota was recession-proof. Now, that has
changed.” The shop floor is rife with rumors Toyota may reduce the
speed of its production line …”

… “We are just not selling cars, just drive by and look at the parking
lots and they are full. No one is buying,” said Sperduti.

(Source: Fadeyi, S. (2009). “Global financial crisis: Toyota forecasts US$5bn loss”,
Financial Standard. Lagos, p.22.

Case questions

i) What are the reasons responsible for the situation in Toyota

Motor Corporation?
ii) What type of marketing functional strategy is being used by
Toyota Motor Corporation?
iii) What are the strategic options available to Toyota Motor
Corporation in tackling its present predicament?
iv) What should Toyota Motor Corporation do to assuage the
workers’ fear in this circumstance?
v) What are the likely future marketing options available to Toyota
Motor Corporation in its international operations?
vi) What should Toyota Motor Corporation do to elicit buyers’
interest in its range of vehicles?
vii) What strategic action should Toyota Motor Corporation take in
the case of the Nigerian market?

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viii) What are the options for cost control and cost reduction in the
operations of the Company?

7.0 REFERENCES/FURTHER READING

Hill, W. L. & Jones, R. J. (2004). Strategic Management: An Integrated

Approach. (6th ed.). New Delhi: Biztantra.

Mullins, L. J. (2000). Management and Organisational Behaviour. (4th

ed.). London: Pitman Publishing.

Pearce II, J. A. (1998). Strategic Management: Strategy Formulation

and Implementation. (3rd ed.). Krishan Nagar Delhi: All India
Traveler Bookseller.

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