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Strategic

Manageme

nt Process

Once there were two company who competed in the same industry. These decided to go on a camping trip to discuss a merger. They hiked deep into the woods. they came upon a grizzly bear that rose up on

LEARNING

OBJECTIVES

After reading this lesson you should be able to F 0 7 6 Describe the strategic management process F 07 6 Know the role of different persons in an organization in strategy making F 07 6 Explain Mintzberg’s modes of executive decision making

LEARNING OBJECTIVE

presidents two presidents possible Suddenly, its hind legs

and snarled. Instantly, the first president took off hi s

knapsack and got out a pair of jogging shoes. president said, “Hey, you can’t outrun that president responded, ” May be I can’t outrun

F 07 6 Appreciate the initiatives taken by corporate in India for effective strategy management

The second bear. The first that bear but I

surely can outrun you!” (Fred R. David, 2003,p.5)

This story captures the notion of strategic management, which is to achieve and maintain competitive advantage. How do business organizations operate successfully in the changing business environment? Strategic management has evolved as a primary value in helping organization operate successfully in a dynamic, complex environment. Even the most successful Fortune 500 companies would accept that it is definitely not by following traditional ways of doing business.

Most successful companies like General Electric have found internet mentors to tutor their managers to world wide web. The company has launched its financial network www.gefn.com in the year 2000 for its consumers. Also the company advertises heavily in Olympics. Launch of Apna PC is a strategic decision. The leader in PC business HCL Info systems has launched one PC below Rs.10, 000 (its sticker price is Rs.9, 990). It has committed to manufacture one million of them every year and expand its dealer network from 800 to 3,000. This strategy is to tap the small businesses and lower income classes in urban and rural India. Even the software probably will not be from Microsoft but from smaller companies. But the company has to take of piracy and copyright the software also. BHEL for example uses strategic management to create or modify its long-range plans, which range from 5 to 20 years.

Process of Strategic Management

Strategic management consists of four basic elements. F 07 6 Environmental scanning F 07 6 Strategy formulation F 07 6 Strategy implementation F 07 6 Evaluation and control

Figure 2. 1 shows simply how these elements interact. Figure 2 .2 expands each of these elements and serves as the model for discussion.

Environment al Scanning

Strategy formulatio n Strategy imple- mentation

Ev alu ati on an d control

External _ Societal

Mission

Reason for

Figure 2.1 Basic model

Program Objectives Prog rams

Perfor- mance

Environment General Forces Task Environment Industry

Existence What results To be Strategies Achieved

Activities Needs Budget Budgets

Figure 2.2 Expanded model for strategic Management. Environmental scanning is the monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation. Its purpose is to identity strategic factors – those external and internal elements that will determine the future of the corporation.

The external environment consists of variables ( O pportunities and T hreats) that are outside the organization and not typically within the short-run control of top management. These variables form the context within which the corporation exists.

The internal environment of a corporation consist of variables ( S trengths and W eakness) that are within the organization itself and are not usually within the short run control of top management. These variables form the context in which work is done. They include the corporation’s structure, culture, and resources.

The simplest way to conduct environmental scanning is through SWOT analysis. SWOT is an acronym used to describe those particular S trengths, W eakness, O pportunities, and T hreats that are strategic factors for a specific company

Strategy formulation is the development of long-range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines.

LIC of India is going global by entering into alliances with local counterparts in South east Asian Countries like Malaysia, China, Bangladesh and Singapore. This was never thought of by this public sector Insurance giant earlier. UCO bank has announced an innovative strategy of keeping a minimum balance of Rs.5/- for a savings bank account and issuing a cheque book for maintaining a minimum balance of Rs.250/- to attract more customers from December 2005.

Strategy implementation is the process by which strategies and polices are put into action through

the development of programs, budgets and procedures. This process might involve changes within the overall culture, structure, and/or management system of the entire organization. Most of the times strategy implementation is carried out by middle and lower level managers with top management’s review. Some times refereed to as operational planning, strategy implementation often involves day-to-day decisions in resource allocation. It includes programs, budgets and procedures. Evaluation and control is the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Managers at all levels use the resulting information to take corrective action and resolve problems. Although evaluation and control is the final major element of strategic management, it also can pinpoint weaknesses in previously implemented strategic plans and thus stimulate the entire process to begin again.

Role of strategists

Strategists are individuals or groups who are primarily involved in the formulation, implementation, and evaluation of strategy. In a limited sense, all managers are strategists.

There are persons outside the organization who are also involved in various aspects of strategic management. They too are referred to as strategists. We can identify nine strategists who, as individuals or in groups, are concerned with and play a role in strategic management.

1. Consultants
2. Entrepreneurs
3. Board of Directors
4. Chief Executive Officer
5. Senior management
6. Corporate planning staff
7. Strategic business unit (SBU) level executives
8. Middle level managers
9. Executive Assistant

A brief description of how the different strategists approach the process is outlined here.

1. Consultants: Many organizations which do not have a corporate planning department owing to reasons like small size, infrequent requirements, financial constraints, and so on, take the help of external consultants in strategic management. Besides the Indian consultancy firms, such as, A.F.Ferguson, S.B. Billimoria and several others, now there are many foreign consultancy firms. They offer a variety of services.

McKinsey and Company, specializes in offering consultancy in the areas of fundamental change management and strategic visioning; Andreson Consulting, is in business restructuring, and info tech and systems; Boston Consulting helps in building competitive advantage; and KPMG Peat Marwick is in strategic financial management and feasibility studies for strategy implementation.

2. Entrepreneurs are promoters who conceive the idea of starting a business enterprise for getting maximum returns on their investment. They are awaiting for an environment change and thereby for an opportunity to exploit the situation in their best interest. Thus they start playing their role right from the promotion of the proposed venture. So, their strategic role to make the venture a success is very conspicuous in a new business enterprise. Therefore, it is expected of an entrepreneur that he should posses foresight, sense of responsibility, desire to work hard and dashing spirit to bear any future

contingencies. According to Drucker, “the entrepreneur always searches for change, responds to it and exploits it as an opportunity”. Here is an example of a successful women entrepreneur.

Kiran Mazumdar Shaw, a young entrepreneur, set up an export-oriented unit manufacturing a range of enzymes. As an expert in brewing technology, Mazumdur entered the field of biotechnology after experiencing problems in getting a job. Later she set up another plant for manufacturing two new enzymes created by her own research and development (R&D) department. As managing director, Mazumdar was actively involved in all aspects of policy formulation and implementation for her companies.

3. Board of Directors are professionals elected on the Board of Directors (BOD) by the shareholders of the company as per rules and regulations of the Companies Act, 1956.

They are responsible for the general administration of the organization. They are supposed to guide the top management in framing business strategies for accomplishing predetermined objectives. It is also the responsibility of the Board to review and evaluate organizational performance whether it is as per the strategy laid down or not. The Board is also empowered to make appointments of senior executives. In this connection, it should be noted that the success of strategies much depends on the relative strength in terms of power held by the Board and the Chief Executive (CE). In April 1997, the CII, under the chairmanship of Rahul Bajaj, devised a code of desirable corporate governance which, besides other recommendations, suggested that “the key to good corporate governance is a well-functioning board of directors which should have a core group of excellent, professionally-acclaimed, non-executive directors who understand their dual role of appreciating the issues put forward by the management and honesty discharging their fiduciary responsibilities towards the company’s shareholders as well as creditors.

4. Chief Executive Officer : In the management circle, the chief executive is the top man, next to the directors of the Board. He occupies the most sensitive post, being held responsible for all aspects of strategic management right from formulation to evaluation of strategy. He is designated in some companies as the managing director, executive director or as a general manager. Whatever the designation be, he is considered the most important strategist being responsible to play major role in strategic decision-making.

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5. Senior Management Starting from the chief executive to the level of functional or profit- centre heads, these managers are involved in various aspects of strategic management. Some of the members of the senior management act as directors on the board usually on a rotational basis. All of them serve on different top-level committees set up by the board to look after matters of strategic importance and other policy issues. Executive committees, consisting of senior managers, are responsible for implementing strategies and plans, and for a periodic evaluation of performance.

Strategic planning at MRF Ltd. used senior management expertise by dividing them into five groups dealing with products and markets, environment, technology, resources, and manpower. Each group had a leader who helped to prepare position papers for presentation to the board. The executive directors in the company were actively involved in SWOT analysis through the help of managers and assistant managers.

6. SBU level executives “SBU” stands for strategic business unit. Under this approach, the main business unit is divided into different independent units and is allowed to form their own respective strategies. In fact, the business is diversified and thus the departmental heads are supposed to act as the main strategist, keeping an eye on optimum benefit for their departments. Hence strategists i.e., the departmental heads enjoy the maximu m amount of authority and responsibility within their strategic business units.

At Shriram Fibres, the strategic planning system covered the different businesses ranging from nylon yarn manufacture to the provision of financial services. Strategic plans were formulated at the level of each SBU as well as at the corporate level. The corporate planning department at the head office coordinated the strategic planning exercise at the SBU-level. Each SBU had its own strategic planning cell.

7. Corporate-planning staff plays a supporting role in strategic management. It assists the management in all aspects of strategy formulation, implementation and evaluation. Besides this, they are responsible for the preparation and communication of strategic plans, and for conducting special studies and research pertaining to strategic management. It is important to note that the corporate planning department is not responsible for strategic management and usually does not initiate the process on its own. By providing administrative support, it fulfills its functions of assisting the introduction, working, and maintenance of the strategic management system.

8) Middle level managers: They are basically operational planners they may, at best, be involved as ‘sounding boards’ for departmental plans, as implementers of the decisions taken above, followers of policy guidelines, and passive receivers of communication about

functional strategic plans. As they are basically involved in the implementation of functional strategies, the middle-level mangers are rarely employed for any other purpose in strategic management.

9) Executive Assistant: An executive assistant is a person who assists the chief executive in the performance of his duties in various ways. These could be : to assist the chief executive in data collection and analysis, suggesting alternatives where decisions are required, preparing briefs of various proposals, projects and reports, helping in public

relations and liaison functions, coordinating activities with the internal staff and outsiders, and acting as a filter for the information coming from different sources. Among these “the most important and what one manager labels the “bread and butter role” of EA (executive assistant) could be that of corporate planner”.

Mintzberg’s modes of strategic decision-making

Henry Mintzberg has given three most typical approaches of strategic decision making which include:

F 0 7 1Entrepreneurial mode F 0 7 1Adaptive mode F 0 7 1Planning mode

We will now examine the three modes of strategic decision making

Entrepreneurial Mode : Strategy is made by one powerful individual who h as entrepreneurial competencies like innovation and risk taking. The focus is on opportunities. Problems are secondary. Generally the founder is the entrepreneur and the strategy is guided by his or her own vision of direction and is exemplified by bold decisions.

The success of Biocon India founded by Kiran Mazumdur shaw is an example of this mode of strategic decision making.

Adaptive mode : Sometimes referred to as “muddling through,” this decision-making mode is characterized by reactive solutions to existing problems, rather than a proactive search for new opportunities. Much bargaining goes on concerning priorities of objectives. Strategy is

fragmented and is developed to move the corporation forward incrementally. This mode is typical of most universities, many large hospitals and a large number of governmental agencies.

Planning mode : This decision making mode involves the systematic gathering of appropriate information for situation analysis, the generation of feasible alternative strategies, and the rational selection of the most appropriate strategy. It includes both the proactive search for new opportunities and the reactive solution of existing problems.

Hewlett-Packard (HP) is an example of the planning mode. After a careful study of trends in the computer and communications industries, management noted that the company needed to stop thinking of itself as a collection of stand-alone products with a primary focus on instrumentation and computer hardware. Led by its new CEO, Carly Florina, top management felt that the company needed to become a customer-focused and integrated provider of information appliances, highly reliable information technology infrastructure and electronic commerce service.

A fourth mode of ‘logical incrementalism’ was later added by Quinn.

Logical Incrementalism : In this mode, top management first develops reasonably clear idea of the corportion’s mission and objectives. Then in its development of strategies, it chooses to use “an interactive process in which the organization probes the future, experiments and learns from a series of partial (incremental) commitments rather than through global formulations of total strategies”. Thus the strategy is allowed to emerge out of debate, discussion, and experimentation. This approach appears to be useful when F 0B 7 the environment is changing rapidly, F 0B 7 it is important to build consensus, and

F 0B 7 needed resources are to be developed before committing the entire corporation to a specific strategy.

Dr. Reddy’s Laboratories follows this mode

Strategic management in India

After the economic liberalization announced in India in 1991, strategic management has gained greater relevance. In fact it is a major thrust area after the WTO meet of December 2005 held in Hong Kong. Figure 2.3 lists the environmental changes that have increased the relevance of strategic management. In view of this to make strategic management effective organizations are showing some new initiatives described here.

1. The abolition of public sector monopoly or dominance in a number of industries has enormously increased business opportunities. Many of them are high-tech and heavy investment sectors which make strategic management all the more relevant.
2. The delicensing has removed not only an important entry and growth barrier but also a consumption (and, therefore, demand) barrier. In the past, because of non-production/limited production and import restrictions, many goods were non- available or had limited availability (in quantity and / or variety).
3. The scrapping of most of the MRTP Act restrictions on entry, growth and Mergers &Acquisitions (M&As) , along with the dereservation and delicensing of industries referred to above, have opened up flood- gates of business opportunities for large enterprises.
4. The liberalization in policy towards foreign capital and technology, imports and accessing foreign capital markets provides companies opportunities for enhancing their strengths to exploit t he Figure 2.3 Trend setters in Indian economy

Source: Cherunilam, Francis( 2002) Strategic Management, Himalaya Publishing Company, New Delhi

(i) Developing learning organization

Strategic flexibility demands a long-term commitment to the development and nurturing of critical resources. It also demands that the company become a learning organization – an organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights. Organizational learning is a critical component of competitiveness in a dynamic environment. It is particularly important to innovation and new product development.

For example, Hewlett-Packard uses an extensive network of informal committees to transfer knowledge among its cross-functional teams and to help spread new sources of knowledge quickly.

(ii) TQM implementation

The very purpose of strategic management is to win over its competitors. Total quality Management (TQM) is an organizational philosophy that aims at maximizing customer satisfaction by constantly striving to enhance operational efficiency through out the organization. It is a start to finish process that systematically integrates the strategy and all the function activities of the organization. Most of the Japanese companies adopted TQM practices in 1970 itself.

TQM method measures customers’ needs, measures and evaluate customer satisfaction delivered by the product or service ,and engages the organization in continuous improvement to stay tuned-in to changes in customers’ needs”. The essential characteristics of TQM are: o A customer-driven definition of quality o Strong quality leadership o Emphasis on continuous improvement o Reliance on facts, data, and analysis o Encouragement of employee participation

ISO 9000 certification and ISP 9002 etc., encourage organizations to embody these characteristics. According to Certo & Peter, the TQM philosophy demands total dedication to the customer and when an organization successfully implements TQM, it develops the following four characteristics.

Customers are intensely loyal. They are more than satisfied because the organization meets their needs and exceeds their expectations. The organization can respond to problems, needs and opportunities with minimal delays. It also minimizes costs by eliminating or minimizing tasks that do not add value. The organization’s climate supports and encourages teamwork and makes work more satisfying, motivating and meaningful for employees. The organization develops and nurtures a general ethic of continuous improvement. In addition, a method that employees understand leads them toward a state of continuous improvement.

It is imperative for a company, which has adopted the TQM to integrate it with every phase of the strategic management.

Environmental Analysis and TQM : The environmental analysis of a company with TQM connects the needs of the external customer (the entirety that buys the good or service of the company) with the various activities of the company. Organizational Decision and TQM : TQM influences the organizational direction by embodying the quality philosophy in the organizational mission. Indeed, the missions of a number of organizations emphasize that quality and continuous improvement must drive every action of the organization.

Strategy Formulation and TQM : TQM helps make strategy implementation very efficient because of the clarity of organizational goals and direction, and the work and relationships culture fostered by TQM.

Strategic control and TQM : Systems established under TQM and the favorable change in the organizational culture make strategic control more effective. Benchmarking also helps efficient control.

Information technology adaptation

Until the mid 1989 business firms were successfully making profits without using Internet or launching their websites. Today virtual shopping and online retailing supplement brick and mortar sales. A great success is that of amazon.com, which do not involve in brick and mortar retailing at all. All their sales come from online business only today.

Space providers like e-bay.com are becoming increasingly popular in India after taking over bazee.com. Executives today are electronic executives who cannot operate without World Wide Web.

Globalizing operations Nike and Reebok, for example, manufacture their athletic shoes in various countries thorough out Asia for sale on every continent. Instead of using one international division to manage everything outside the home country, large corporations are now using matrix structures in which product units are interowen with country or regional units. International assignments are now considered key for anyone interested in reaching top management.

As more industries become global, strategic management is becoming an increasingly important way to keep track of international developments and position the company for long- term competitive advantage.

Summary

Strategic management has evolved as a primary value in helping organization operate successfully in a dynamic, complex environment BHEL for example uses strategic management to create or modify its long-range plans, which range from 5 to 20 years.

Strategic management consists of four basic elements: Environmental scanning, Strategy formulation, Strategy implementation and Evaluation and control. Nine persons or groups are identified to have interest in strategic management. They are-Consultants, Entrepreneurs, Board of Directors, Chief Executive Officer, Senior management, Corporate planning staff, Strategic business unit (SBU) level executives, Middle level managers and Executive Assistant. Henry Mintzberg has given three most typical approaches of strategic decision making which include: Entrepreneurial mode, Adaptive mode and Planning mode. In India, abolition of public sector monopoly, the delicensing, scrapping of MRTP Act, liberalization policy towards technology and capital, expanding foreign markets and competition and grant of autonomy to navarathnas etc., created the need for strategic management. The key elements in strategic management are: developing learning organization, TQM implementation, and information technology adaptation and globalsing operations.