Strategic Management.pdf - This page intentionally left blank Copyright \u00a9 2008 New Age International(P Ltd Publishers Published by New Age

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Unformatted text preview: This page intentionally left blank Copyright © 2008, New Age International (P) Ltd., Publishers Published by New Age International (P) Ltd., Publishers All rights reserved. No part of this ebook may be reproduced in any form, by photostat, microfilm, xerography, or any other means, or incorporated into any information retrieval system, electronic or mechanical, without the written permission of the publisher. All inquiries should be emailed to [email protected] ISBN (13) : 978-81-224-2538-3 PUBLISHING FOR ONE WORLD NEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS 4835/24, Ansari Road, Daryaganj, New Delhi - 110002 Visit us at Preface Strategic management is a stream of decisions and actions with view to develop effective long term and short term planning and policies with technological business forecasting that would help the organization achieve its superior goal. Strategic management includes strategic analysis, strategy formulation, strategic choice, strategy implementation and control strategic decision for an organization to deploy resources into new opportunities. Strategic management is important for Chartered Accountants, CEO, Directors, Managing Directors, Strategy Planners, Students and Faculty Members of BBM, MBA, M.Com, PGDM, PGDBM, PGDHRM, ICFAI and competitive examinations in India and abroad. I invite suggestions from one and all for improvements in next edition of this book. Many individuals have rendered their helping hand to me. I take this opportunity to thank all of them. I thank Dr. D.M. Basvaraja, my teacher, guide and supervisor and professor from Kuvempur University for this constant inspiration and support. I also thank Dr. C.M. Thagaraju, Dr. G.T. Govindappa, my teachers, and professors of Kuvempur University. I am immensely indebted to them. I also thank T.N. Suresh, Director of Padmashree group of institutions, Bangalore, Dr. C.N. Aswathnarayan, Chairman of Padmashree group of institutions, Bangalore, Dr. Bakkappa, Coordinator, Shiva Gangothri PG Centre, Davanagere, Dr. A.Venktaraju, Professor, ATNCC, Shimoga, Prof. Sheshchalla, KKECS, Bangalore, Chairman, Principal, HOD and staff of TIMS, Bangalore, and Prof. Shekappa and my friend Nagaraja A.P. In writing this book I have drawn on a vast amount of literature in strategic management. Naturally, I owe an intellectual debt to numerous authors who have enriched the stream of literature in strategic management by their contributions. My prefounded debt is to American scholars, George Stenier, Ansoff, Newman, Warren, Peter Drucker, Akcoff, Christenson, Kenneth, Bower and Vacil, Acherman, Robinson, Piere, Wheeler and Hunger, Charles W.L. Hill and Gareth R. Jones. In the UK I owe a great debt to Argeni, Hussey, and Barnard Taylor, Thomson and other scholars. Shri Saumya Guptha, MD, Shri Sudarshan S.P., Marketing manager, the New Age International Publisher, these persons are the main initiators and monitors of this project. I express my sincere gratitude to all of them. It is my prime responsibility to thank my parents, brother, sisters and friends for put with inconveniences caused during writing of this book. Dr. B. HIRIYAPPA. Ph. D. Bangalore This page intentionally left blank Contents Preface 1. BUSINESS ENVIRONMENT 1.1 Introduction 1.2 Definition of Business 1.3 Characteristics of Business 1.4 Components of Business 1.5 Objectives of a Business 1.6 Characteristics of Business Environment 1.7 Environmental Influences on Business 1.8 Environmental Analysis 1.9 Components of Business Environment 1.10 Relationship Between Organisation and its Environment 1.11 Internal Analysis of the Organisation/Company 1.12 The Value of Systematic Internal Assessment 1.13 Identificaion of Strategic Factors 1.14 Evalution of Strategic Internal Factors 1.15 External Environment 1.16 Economic Environment 1.17 Political-Legal Environment 1.18 Socio–Cultural Environment 1.19 Demographic Environment 1.20 Natural Environment 1.21 Technological Environment 1.22 Global Environment 1.23 Strategic Response to the Environment 1.24 Competitive Environment 1.25 Competitive Advantage (v) 1 2 3 5 5 7 11 12 15 17 17 19 20 20 26 29 35 37 38 39 41 42 44 49 50 52 viii Contents 2. BUSINESS POLICY AND STRATEGIC MANAGEMENT 2.1 Introduction 2.2 Business Policy as a Discipline 2.3 Importance of Business Policy 2.4 Classification of Business Policy 2.5 Definition of Strategy 2.6 Generic Strategic Alternatives 2.7 The Dynamics of Competitive Strategy 2.8 Meaning of Strategic Management 2.9 Dimensions of Strategic Decisions 2.10 Tasks in Strategic Management 2.11 Strategic Management Model 2.12 Vision, Mission and Objectives 2.13 The Need for explicit Mission of Organization 2.14 Defining Organisation Mission 64 64 64 65 66 73 81 85 86 90 91 92 93 96 97 3. STRATEGIC ANALYSIS 3.1 Introduction 3.2 Strategic Analysis 3.3 Issues to Consider For Strategic Analysis 3.4 Situational Analysis 3.5 The Methods of Industry and Competitive Analysis 3.6 Strategic Groups 3.7 Key Factors for Competitive Success 3.8 Swot Analysis 3.9 Tows Matrix Analysis 3.10 Portfolio Analyses 3.11 Strategic Business Units 3.12 Stages in Product/Market Evolution or Product Life Cycle 3.13 BCG Matrix 3.14 ADL Matrix 3.15 The General Elective Model 106 106 106 107 109 112 116 117 120 126 127 128 129 130 136 137 4. STRATEGIC PLANNING 4.1 Corporate Strategy 4.2 The Stages of Corporate Strategy Formulation–Implementation Process 142 142 145 ix Contents 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 Strategic Alternatives Cost Leadership Strategies Differentiation Strategy Focus Strategy Characteristics and Scope of various Grand Strategies Diversification Retrenchment, Divestment and Liquadation Stralegy Turnaround Strategy The Causes of Corporate Decline Divestment/Cutback Strategy 156 158 159 161 167 172 180 180 181 185 5. FORMULATION OF FUNCTIONAL STRATEGY 5.1 Introduction 5.2 Marketing Strategy Formualation 5.3 Developing the Marketing Mix 5.4 Dealing with the Marketing Environment 5.5 Marketing Strategy Techniques 5.6 Financial Strategy Formulation 5.7 Production Strategy Formulation 5.8 Logistics Strategy 5.9 Research and Development Strategy 5.10 Human Resource Strategy 189 190 191 193 196 197 200 206 207 208 211 6. FORMULATION OF FUNCTIONAL STRATEGY 6.1 Introduction 6.2 Interrelationships between Strategy Formulation and Implementation 6.3 Issues in Strategy Implementation 6.4 Organization and Strategy Implementation 6.5 Implementing Strategic Change: Steps in the Changing Process 6.6 Vertical Differentiation 6.7 Horizontal Differentiation 6.8 Strategic Business Units 6.9 Matrix Organizational Structure 6.10 Integration and Integrating Mechanisms 6.11 Multidomestic Strategy and Structure 219 221 221 227 230 232 236 238 244 245 249 252 x Contents 6.12 6.13 6.14 6.15 6.16 6.17 6.18 Global Organizational Structure Strategic Business Units and Core Competence The Value Chain Matching Structure and Control at the Corporate Level Strategic Leaders Operational Control Systems Strategic Reward System 253 259 262 267 279 293 295 7. REACHING THE STRATEGIC EDGE 7.1 Introdution 7.2 Business Process Reengineering 7.3 Benchmarking 7.4 Total Quality Management 7.5 Six Sigma and Management 7.6 Importance of Six Sigma in Organization 297 297 297 309 312 319 324 8. CONTEMPORARY STRATEGIC ISSUES 8.1 Introduction 8.2 Strategies for Internet Economy 8.3 Strategy Shaping Characteristics of the E-commerce Environment 8.4 Strategic Management in Non-Profit and Government Organization 329 329 329 330 332 CHAPTER 1 Business Environment Contents • Introduction • Business • Objectives of business • Environmental influences on business • Environmental analysis • Characteristics of business environment • Components of business environment • The micro and macro environment • Competitive environment • Porter’s five forces model–competitive analysis Learning Objectives The present chapter aims at: • Definitions and objective of business • Examine environment analysis, characteristics components of the organisation. Let us know the microenvironment and macro environment • Understand the competitive environment • Describe the Porter’s five-force model and its limitations. 2 Strategic Management for Chartered Accountants “Environment factors of constraints are largely if not totally external and beyond the control of individual industrial enterprises and their arrangements. These are essentially the ‘givers’ within which firms and their managements must operate in a specific country and they vary, often greatly from country to country”. Barry M. Richman and Melvyn Copen “ The environment includes outside the firm which can lead to opportunities for or threats to the firm. Although, there are many factors, the most important of the sectors are socio – economic, technical, supplier, competitors, and government”. Glueck and Jauch “Analysis is the critical starting point of strategic thinking” Kenichi Ohmae “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”. Charles Darwin “Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it”. Bruce D D.. Henderson “Awareness of the environment is not special project to be undertaken only when warning of change becomes deafening”. Clifton Garvin, Kenneth R. Andrews 1.1 INTRODUCTION The concept of strategy has been borrowed from the military and adapted for use in business. This book has reviews of strategy formulation, implementation, controlling and monitoring strategic events, which have to suggest that adopting the concept is easy to business and industry. In business, as in the military, strategy bridges the gap between policy and tactics. Together, strategy and tactics bridge the gap between ends and means. Also this book reviews various issue like business environment and components of business environment, competitive environment, Porter’s five forces model, business policy and strategic management, major tasks in strategic management, vision and mission and objectives of the strategic enterprise, strategic analysis in terms of swot analysis, tows matrix, portfolio analysis, strategic planning, marketing, financial production, logistics, research and development and human resources strategy formulation, implementation and control and achieved the strategic edge for the purpose of clarifying the concept and placing it in this context. In this chapter, we shall discuss about the business, major objectives of business like survival, stability, growth, efficiency and profitability, environmental influence to business, environment analysis, characteristics of business environment, components of business environment, to know the relationship between the organisation and its environment, the micro and macro environment and its Business Environment 3 elements like customers, competitors, organisation, market, suppliers, intermediaries, demographic, economic, government, legal, political, cultural, technological and global environment impact on business. Companies how to enter into global market, its manifestation trends, strategic response to business, Porter’s competitive and five forces model analysis for business enterprises in industry, commerce and services sector. 1.2 DEFINITION OF BUSINESS The term ‘typically’ refers to the development and processing of economic values in society. Normally, the term is applied to portion of economic activities whose primary purpose is to provide goods and services for society in an effective manner. It is also applied to economics and commercial activities of institutions which having other purposes. Business principally comprises of an all profit seeking activities of the organisation which provide goods and services that are necessary to economic system. It is the major economic pulse of a nation, striving to increase society’s standard of living. Finally, profits are a primary mechanism for motivating these activities. Business is in any organisation which makes distribution or provides any article or service to the customers, who are belonging to members of the society. Business may be satisfied customers needs for these purpose customers are able and willing to pay for it. Business may be defined as “the organised effort by individuals to produce goods and services to sell these goods and services in a market place and to reap some reward for this effort.” Functionally, we may define business as “those human activities which involves production or purchase of goods with the object of selling them at a profit margin”. • The term business refers to the state of being busy for an individual, group, organisation or society. • It is also interpreted as one’s regular occupation or profession or economic activities. • It deals with particular entity, company, organisation, enterprise, firms or corporation. • It also interpreted as particular market segment sector like computer business and it included under term business. • It is wide and willing to use different activities • It consists of purchase, sale, manufacture, processing, marketing of products, services like manufacturing, trading, transportation, warehousing, banking and finance, insurance and advertising etc. • It is clearly stated that all business activities main purpose is to earn profit. Profit as a surplus of business and It accrues and distributed to the owners 4 Strategic Management for Chartered Accountants of the business. Business has to pay wages to workers who works in the business. People invests money in business due to getting a retain. Retain is profit from the business. This is awarded to investor due to be taking the risk. • Profit is the motive for the investor who serves, runs business and it is the stimulation effort of the business for growth, survival of business. Profit Is A Main Motive Of Business • For every kind of business organisation, profit is often regarded as motive for the entrepreneurs and it measure the overall performance of the business. • Profit is the tool for measuring and evaluation of the business efficiency and productivity at the managerial competence. • It is helpful to strategic managers how to take well decisions and actions which are turn into effective in the form of able to combine and utilize the available resource and able to sustain the organisation with growth and survival of the business entity. • Business managers who will take higher efficiency and risk and certainly expect greater volume of the profit from the business entity. • Business efficiency expressed in terms of percentage of profit to sales volume, to capital employed, to market value of corporate shares. • Outside investors eager to know the profit of the firm and to make assessment about their commit funds and effective utilization of funds will be in the business entity. Business According to Prof. R. N. Owens “Business is an enterprise engaged in the production and distribution of goods for sale in a market or rendering of services for a price”. Business According to L.R. Dicksee “Business is a form of activity pursued primarily with the object of earning profits for the benefit of those on whose behalf the activity is conducted”. Business According to Urwick and Hunt “Business is any enterprise which makes, distributes or provides any article or service which other members of the community need and are willing to pay for” Business According to Haney “Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods”. Peter F Drucker has drawn some conclusions about what is a business and what are useful from the business and how to understand the term business. His conclusions are listed below: Business Environment 5 • Business is created and managed by the people. A group of people who will be taken decisions that will be determined either an organisation is going to prosper or decline, whether it will survive or will eventually perish in market. This conclusion is true in the business. • Business cannot be explained in terms of profit. 1.3 CHARACTERISTICS OF BUSINESS • Business is to provide goods and service to the people. It provides the public with the things it needs and wants in order to survive, enjoy life and improve in a material sense. From the point of view of consumer, business is the satisfier of needs and desire of the customer demands which should be provided by business in order to meet people requirements in society. • Goods that have been produced or procured for sale in retail for price enter the realm of business. This activity of selling results is the creation of the wealth for the society. In satisfying demand, business uses the resources of land, labor and capital. These resources when taken separately have little value; but business combines structures and refines the resources to produce to the value of the society. Further, business employees’ people who exchange their talents for wages and salaries. Therefore, these people exchange their compensation for the desired goods and service. • Business is profit seeking activity firm. It supplies goods and services to customers who are satisfy their demand and desire. It adds to society’s value by earning of a profit. Profit is the biggest stimulus for maintains the survival of the business and its future development. Society has permits business to earn profit as a reward for assuming the risks of operating a business. • Business is also an essential participant in society. For satisfying society demand which supplying goods and services and earning profits. Business involves the most fundamental activities of the society. As a result, Society has looks to business for something more than products, services and profits. It looks to business for leadership and direction in helping to achieve society’s objectives. It expects business to assist in the establishment of a better service to the society. 1.4 COMPONENTS OF BUSINESS Business includes the total enterprise of the country. Business activity has two branches. They are as follows: • Industry • Commerce Industry In broad sense, industry is the branch of business activity which concerned with raising production, fabrication or possessing of goods and services. In other words, industry 6 Strategic Management for Chartered Accountants is an activity concerned with conversion of raw materials or semi finished goods into finished goods. Industry provides two types of goods namely consumer goods and Industrial goods. Consumer goods are those goods manufactured by industry for ultimate use of a customer. For instance brush, paste, cloth and food products etc., Industrial\Capital goods are those goods produced and used for further production. For instance machineries, tools and raw material etc., Types of Industry Industry is further classified into five broad types. They are as listed below: 1. Extractive industries 2. Genetic industries 3. Manufacturing industries 4. Construction industries 5. Territory\Service industries Extractive industry Extractive industry are those industries concerned with extraction of wealth from surface of the earth, soil, forest, water, air etc., for instance agriculture, mining etc., Figure 1.1: Components of Business Business Industry Primary Extractive Fishing Hunting Mining Secondary Genetic Agriculture Horticultre Dairying Fish culture Manufacturing Production Transformation Assembly Commerce Trade Service Domestic trade Aids to trads International trade Banking Insurance Discount Commision Construction Buildings Roads Railway Tracks Bridges dams, flyovers Canals Genetic industries Genetic industries are those industries concerned with reproduction and multiplication of plants animals for making profit on their sale. For example, Nurseries, cattle building and poultry farming. Business Environment 7 Manufacturing industries Manufacturing industries...
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