The Strategic Planning Process

In today's highly competitive business environment, budget-oriented planning or forecast-based

planning methods are insufficient for a large corporation to survive and prosper. The firm must
engage in strategic planning that clearly defines objectives and assesses both the internal and
external situation to formulate strategy, implement the strategy, evaluate the progress, and make
adjustments as necessary to stay on track.

A simplified view of the strategic planning process is shown by the following diagram:

The Strategic Planning Process

Mission &
Objectives

Environmental
Scanning

Strategy
Formulation

Strategy
Implementation

Evaluation
& Control
Mission and Objectives

The mission statement describes the company's business vision, including the unchanging values
and purpose of the firm and forward-looking visionary goals that guide the pursuit of future
opportunities.

Guided by the business vision, the firm's leaders can define measurable financial and strategic
objectives. Financial objectives involve measures such as sales targets and earnings growth.
Strategic objectives are related to the firm's business position, and may include measures such as
market share and reputation.

Environmental Scan

The environmental scan includes the following components:

 Internal analysis of the firm

 Analysis of the firm's industry (task environment)
 External macroenvironment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the external analysis
reveals opportunities and threats. A profile of the strengths, weaknesses, opportunities, and
threats is generated by means of a SWOT analysis

An industry analysis can be performed using a framework developed by Michael Porter known
as Porter's five forces. This framework evaluates entry barriers, suppliers, customers, substitute
products, and industry rivalry.

Strategy Formulation

Given the information from the environmental scan, the firm should match its strengths to the
opportunities that it has identified, while addressing its weaknesses and external threats.

To attain superior profitability, the firm seeks to develop a competitive advantage over its rivals.
A competitive advantage can be based on cost or differentiation. Michael Porter identified three
industry-independent generic strategies from which the firm can choose.

Strategy Implementation
The selected strategy is implemented by means of programs, budgets, and procedures.
Implementation involves organization of the firm's resources and motivation of the staff to
achieve objectives.

The way in which the strategy is implemented can have a significant impact on whether it will be
successful. In a large company, those who implement the strategy likely will be different people
from those who formulated it. For this reason, care must be taken to communicate the strategy
and the reasoning behind it. Otherwise, the implementation might not succeed if the strategy is
misunderstood or if lower-level managers resist its implementation because they do not
understand why the particular strategy was selected.

Evaluation & Control

The implementation of the strategy must be monitored and adjustments made as needed.

Evaluation and control consists of the following steps:

1. Define parameters to be measured

2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined standard
5. Make necessary changes
Corporate Restructuring

Corporate restructuring is the process of redesigning one or more aspects of a company. The
process of reorganizing a company may be implemented due to a number of different factors,
such as positioning the company to be more competitive, survive a currently adverse economic
climate, or poise the corporation to move in an entirely new direction. Here are some examples
of why restructuring may take place and what it can mean for the company.

Restructuring a corporate entity is often a necessity when the company has grown to the point
that the original structure can no longer efficiently manage the output and general interests of the
company. For example, a corporate restructuring may call for spinning off some departments
into subsidiaries as a means of creating a more effective management model as well as taking
advantage of tax breaks that would allow the corporation to divert more revenue to the
production process. In this scenario, the restructuring is seen as a positive sign of growth of the
company and is often welcome by those who wish to see the corporation gain a larger market
share.

In general, the idea of restructuring is to allow the company to continue functioning in some
manner. Even when corporate raiders break up the company and leave behind a shell of the
original structure, there is still usually the hope that what remains can function well enough for a
new buyer to purchase the diminished corporation and return it to profitability.

Types of Restructuring:

Expansion: Mergers, Acquisitions, Takeovers, Tender offer, Joint Venture

Contraction: Sell offs, Spin offs, Split offs, Split ups

MERGERS

• Occur between firms of somewhat similar size and usually friendly.

• Two companies agree to combine their operations into a single entity.
• The resulting firm is likely to have a name derived from its composite firms.

A merger refers to the process whereby at least two companies combine to form one single
company. Business firms make use of mergers and acquisitions for consolidation of markets as
well as for gaining a competitive edge in the industry. Merger is a financial tool that is used for
enhancing long-term profitability by expanding their operations. Mergers occur when the
merging companies have their mutual consent as different from acquisitions, which can take the
form of a hostile takeover

Merger or amalgamation may take two forms:▪ Absorption is a combination of two or more
companies into an existing company.▪ Consolidation is a combination of two or more companies
into a new company.
 In merger, there is complete amalgamation of the assets and liabilities as well as shareholders’
interests and businesses of the merging companies. There is yet another mode of merger. Here
one company may purchase another company without giving proportionate ownership to the
shareholders’ of the acquired company or without continuing the business of the acquired
company.

Why Merge?
• Combined entity would be larger with large resource. Compete better in market
• Combined entities could merge similar operations and reduce cost eg. HR & Marketing
• Combined entity might have less competition in market and will not market against each
other. Better customer pool
Eg. Tech Mahindra and Satyam merged to form Mahindra Satyam.

Benefits of Merger
• Diversification of product and service offerings
• Increase in plant capacity
• Larger market share
• Utilization of operational expertise and research and development (R&D)
• Reduction of financial risk
•
Why do mergers fail
• Lack of human integration
• Mismanagement of cultural issues
• Lack of communication

Types of Merger
• Horizontal Merger
• Vertical Merger
Horizontal Merger: Those mergers where the companies manufacturing similar kinds of
commodities or running similar type of businesses merge with each other.
Eg. Lipton India and Brooke Bond

Vertical Merger: A merger between two companies producing different goods or services.
Example of Vertical Merger• Time Warner Incorporated, a major cable operation, and the Turner
Corporation, which produces CNN, TBS, and other programming.• Pixar-Disney Merger

Acquisition

• Purchase of one company that is completely absorbed as an operating subsidiary or

division of acquiring corporation
 • Acquire to obtain a specific product. It is less expensive to purchase a company a
company offering a product you’d like to sell than building the product yourself.
• Increase its size. A large company would have more visibility in market
• To obtain control over critical issues. A jewelry company acquiring a gold mine to ensure
access of gold in under their control.

Acquisition may be defined as an act of acquiring effective control over assets or management of
a company by another company without any combination of businesses or companies. A
substantial acquisition occurs when an acquiring firm acquires substantial quantity of shares or
voting rights of the target company This involves buying assets of another company. The assets
may be tangible assets like manufacturing units or intangible like brands. HLL buying brands
of lakme is an example of asset acquisition.

STRATEGIC ALLIANCE

A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon
objectives needed while remaining independent organizations. This form of cooperation lies
between mergers and acquisitions and organic growth.

Strategic Alliance

• A partnership of two or more corporations business units to achieve a common objective

• Share resources under a mutually beneficial project.
• In Strategic Alliance each company maintains its autonomy while gaining new
opportunity.

A strategic alliance in business is a relationship between two or more businesses that enables
each to achieve certain strategic objectives neither would be able to achieve on their own. The
strategic partners maintain their status as independent and separate entities, share the benefits and
control over the partnership, and continue to make contributions to the alliance until it is
terminated. Strategic alliances are often formed in the global marketplace between businesses
that are based in different regions of the world.

Advantages of Strategic Alliances

Strategic alliances usually are only formed if they provide an advantage to all the parties in the
alliance. These advantages can be broken down to four broad categories.

The first category is organizational advantages. You may wish to form a strategic alliance to
learn necessary skills and obtain certain capabilities from your strategic partner. Strategic
partners may also help you enhance your productive capacity, provide a distribution system, or
extend your supply chain. Your strategic partner may provide a good or service that
complements a good or service you provide, thereby creating a synergy. If you are relatively new
or untried in a certain industry, having a strategic partner who is well-known and respected will
help add legitimacy and creditability to your venture.

A second category is economic advantage. You can reduce costs and risks by distributing them
across the members of the alliance. You can also obtain greater economies of scale in an alliance,
as production volume can increase, causing the cost per unit to decline. Finally, you and your
partners can take advantage of co-specialization, where you bundle your specializations together,
creating additional value, such as when a leading computer manufacturer bundles its desktop
with a leading monitor manufacturer's monitor.

Another category includes strategic advantages. You may join with your rivals to cooperate
instead of compete. You can also create alliances to create vertical integration where your
partners are part of your supply chain. Strategic alliances may also be useful to create a
competitive advantage by the pooling of resources and skills. This may also help with future
business opportunities and the development of new products and technologies. Strategic alliances
may also be used to get access to new technologies or to pursue joint research and development.

Lastly is the category of political advantages. Sometimes you need to form a strategic alliance
with a local foreign business to gain entry into a foreign market either because of local prejudices
or legal barriers to entry. Forming strategic alliances with politically-influential partners may
also help improve your own influence and position.

Portfolio Analysis

“the strategic units that make up the company and the attempts to evaluate current
effectiveness and vulnerabilities” (McDonald et al, 1992)

This analysis focuses on questions like:

 How much of our time and money should we spend on our best products to ensure that
they continue to be successful?
 How much of our time and money should we spend developing new costly products,
most of which will never be successful?

Examples of Portfolios:

Unilever : ice cream, tea, spreads

Proctor & Gamble: Detergents, nappies

Gillette : batteries, Shaving products

Virgin ; trains, planes, cola, music stores

Corporate Parenting

Corporate parenting looks at the relationship between head office and these SBUs and in
particular at how to add value to the individual business units. These questions are particularly
relevant if the firm has grown through acquisition rather than organic growth.

Goold and Campbell (1991) identified three broad approaches or 'parenting' styles :
• strategic planning
• financial control
• strategic control.

Strategic planning companies

 There is a focus on a limited number of businesses where significant synergies exist

leading to a concentration on a few core areas where it is possible to have a degree of
expertise.

 Corporate management play a major role in setting the strategies for each of the SBUs.

 The approach is based on the belief that strategic decisions occur relatively infrequently
and that when they do, it is important for corporate headquarters to frame and control the
strategic planning and decision-making process.

• There is good integration across the units, which is particularly useful when resources
may be shared.
• Decisions are made at a senior level and hence there is less likelihood of short-term views
predominating.

Financial control companies

• Planning timescales tend to be shorter.
• The head office takes a 'hands-off' approach but sets stringent short-term financial targets
that have to be met to ensure continued funding of capital investment plans.
• Failure to meet financial targets will lead to the possibility of divestment.
• This type of strategy allows for diversity and companies generally have a wide corporate
portfolio with limited links between divisions.
• Empirical evidence suggests that lower risk strategies are pursued but with resultant
higher profitability ratios.
• Much of the growth in this scenario comes from acquisition as distinct from internal
growth.
•
Strategic control companies

In strategic control companies:

• Corporate management take a middle course, accepting that subsidiaries must develop
and be responsible for their own strategies, while being able to draw on headquarters'
expertise.
• Evaluation of performance extends beyond short-term financial targets to embrace
strategic objectives such as growth in market share and technology development, that are
seen to support long-term financial and operational effectiveness.
• Diversity is coped with more readily than the 'strategic planning' style.
• There is also a danger of greater ambiguity.

BCG MODEL:

• Dogs - Dogs have low market share and a low growth rate and thus neither generate nor
consume a large amount of cash. However, dogs are cash traps because of the money tied
up in a business that has little potential. Such businesses are candidates for divestiture.

• Question marks - Question marks are growing rapidly and thus consume large amounts
of cash, but because they have low market shares they do not generate much cash. The
result is a large net cash consumption. A question mark (also known as a "problem
child") has the potential to gain market share and become a star, and eventually a cash
 cow when the market growth slows. If the question mark does not succeed in becoming
the market leader, then after perhaps years of cash consumption it will degenerate into a
dog when the market growth declines. Question marks must be analyzed carefully in
order to determine whether they are worth the investment required to grow market share.

• Stars - Stars generate large amounts of cash because of their strong relative market share,
but also consume large amounts of cash because of their high growth rate; therefore the
cash in each direction approximately nets out. If a star can maintain its large market
share, it will become a cash cow when the market growth rate declines. The portfolio of a
diversified company always should have stars that will become the next cash cows and
ensure future cash generation.

• Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is
greater than the market growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as little cash
as possible. Cash cows provide the cash required to turn question marks into market
leaders, to cover the administrative costs of the company, to fund research and
development, to service the corporate debt, and to pay dividends to shareholders. Because
the cash cow generates a relatively stable cash flow, its value can be determined with
reasonable accuracy by calculating the present value of its cash stream using a discounted
cash flow analysis.
 Porter's Five Forces
Michael Porter provided a framework that models an industry as being influenced by five forces.
The strategic business manager seeking to develop an edge over rival firms can use this model
to better understand the industry context in which the firm operates.

Diagram of Porter's 5 Forces

SUPPLIER POWER
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry
THREAT OF
NEW ENTRANTS
Barriers to Entry
Absolute cost advantages THREAT OF
Proprietary learning curve
SUBSTITUTES
Access to inputs
-Switching costs
Government policy
-Buyer inclination to
Economies of scale
substitute
Capital requirements
-Price-performance
Brand identity
trade-off of substitutes
Switching costs
Access to distribution
Expected retaliation
Proprietary products
BUYER POWER DEGREE OF RIVALRY
Bargaining leverage -Exit barriers
Buyer volume -Industry concentration
Buyer information -Fixed costs/Value added
Brand identity -Industry growth
Price sensitivity -Intermittent overcapacity
Threat of backward integration -Product differences
Product differentiation -Switching costs
Buyer concentration vs. industry -Brand identity
Substitutes available -Diversity of rivals
Buyers' incentives -Corporate stakes
GE McKinsey Matrix

GE-McKinsey nine-box matrix is a strategy tool that offers a systematic approach for the multi
business corporation to prioritize its investments among its business units.
GE-McKinsey is a framework that evaluates business portfolio, provides further strategic
implications and helps to prioritize the investment needed for each business unit (BU).

Industry Attractiveness

Industry attractiveness indicates how hard or easy it will be for a company to compete in the
market and earn profits. The more profitable the industry is the more attractive it becomes. When
evaluating the industry attractiveness, analysts should look how an industry will change in the
long run rather than in the near future, because the investments needed for the product usually
require long lasting commitment.

Industry attractiveness consists of many factors that collectively determine the competition level
in it. There’s no definite list of which factors should be included to determine industry
attractiveness, but the following are the most common: [1]

 Long run growth rate

 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of
substitutes and available complements (use Porter’s Five Forces analysis to determine
this)
 Industry structure (use Structure-Conduct-Performance framework to determine this)
 Product life cycle changes
 Changes in demand
  Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation

Competitive strength of a business unit or a product

Along the X axis, the matrix measures how strong, in terms of competition, a particular business
unit is against its rivals. In other words, managers try to determine whether a business unit has a
sustainable competitive advantage (or at least temporary competitive advantage) or not. If the
company has a sustainable competitive advantage, the next question is: “For how long it will be
sustained?”

The following factors determine the competitive strength of a business unit:

 Total market share

 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine this)
 Your business unit strength in meeting industry’s critical success factors (use
Competitive Profile Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and Benchmarking to determine
this)
 Level of product differentiation
 Production flexibility
 Porter's Diamond of National Advantage
Michael E. Porter argued that a nation can create new advanced factor endowments such as
skilled labor, a strong technology and knowledge base, government support, and culture. Porter
used a diamond shaped diagram as the basis of a framework to illustrate the determinants of
national advantage. This diamond represents the national playing field that countries establish for
their industries.

The individual points on the diamond and the diamond as a whole affect four ingredients that
lead to a national comparative advantage. These ingredients are:

1. the availability of resources and skills,

2. information that firms use to decide which opportunities to pursue with those resources
and skills,
3. the goals of individuals in companies,
4. the pressure on companies to innovate and invest.

The points of the diamond are described as follows.

I. Factor Conditions

 A country creates its own important factors such as skilled resources and technological
base.
 The stock of factors at a given time is less important than the extent that they are
upgraded and deployed.
 Local disadvantages in factors of production force innovation. Adverse conditions such
as labor shortages or scarce raw materials force firms to develop new methods, and this
innovation often leads to a national comparative advantage.
II. Demand Conditions

 When the market for a particular product is larger locally than in foreign markets, the
local firms devote more attention to that product than do foreign firms, leading to a
competitive advantage when the local firms begin exporting the product.
 A more demanding local market leads to national advantage.
 A strong, trend-setting local market helps local firms anticipate global trends.

III. Related and Supporting Industries

 When local supporting industries are competitive, firms enjoy more cost effective and
innovative inputs.
 This effect is strengthened when the suppliers themselves are strong global competitors.

IV. Firm Strategy, Structure, and Rivalry

 Local conditions affect firm strategy. For example, German companies tend to be
hierarchical. Italian companies tend to be smaller and are run more like extended
families. Such strategy and structure helps to determine in which types of industries a
nation's firms will excel.
 In Porter's Five Forces model, low rivalry made an industry attractive. While at a single
point in time a firm prefers less rivalry, over the long run more local rivalry is better since
it puts pressure on firms to innovate and improve. In fact, high local rivalry results in less
global rivalry.
 Local rivalry forces firms to move beyond basic advantages that the home country may
enjoy, such as low factor costs.
 UNIT -5

Strategy Implementation Through Structure

• Changes in the environment tend to be reflected in changes in a corporation’s

strategy.
• Thus leading to changes in the corporation’s structure.
• Strategy, Structure and the environment need to be closely aligned otherwise
organizational performance will suffer.

Types of Structure:
• Entrepreneurial Structure
• Functional Structure
• Divisional Structure
• SBU Structure
• Matrix Structure
• Network Structure

Structures for Business Strategies:

Structure for attaining Cost Leadership:

• Strong central Authority
• Tight Cost control
• Detailed control reports
• Standard Operating Procedures
• Close Supervision
• Limited or no employee empowerment.

Structure for attaining differentiation

• Learning orientation
• Flexible
• More of horizontal coordination
• Freedom to employees for being innovative & creative
• Rewards for risk taking
• Liberal amount of employee empowerment

Few More..
• Structures for Integration Strategies
• Structure for Diversification Strategies
• Structure for Internationalization Strategies
• Structures for Cooperative Strategies
• Structures for Digitalization Strategies.

Strategy Implementation through Human Resource

• HRM strategy among other things addresses
 1) Hire large number of low skilled employees who most likely quit after short time
span (eg. McDonald’s)
2) Hire skilled employees who receive high pay and train them into self managing
teams.

• Use of temporary and part time employees.

• Experimenting with leasing employees from manpower leasing companies.
• Having a diverse workforce leads to competitive advantage.

• Personnel Plan & Policies

1) Private Sector companies have considerable leeway in designing & changing

their personnel plans & policies
2) Public sector enterprises have to abide by directions of the administrative
ministries and nodal agencies.

McKinsey 7S Framework
Developed by:
3) Robert H. Waterman, Jr.
4) Tom Peters

Objective
1) Improve the performance of a company
2) Examine the likely effects of future changes within a company
3) Align departments and processes during a merger or acquisition
 4) Determine how best to implement a proposed strategy

The Seven Interdependent Elements

The basic premise of the model is that there are seven internal aspects of an organization that
need to be aligned if it is to be successful

Hard Elements
• Strategy
• Structure
• Systems
Soft Elements
• Shared Values
• Skills
• Staff
• Style

Activity-based costing

Activity-based costing (ABC) is an accounting method that identifies the activities that a firm
performs and then assigns indirect costs to products. An activity-based costing (ABC) system
recognizes the relationship between costs, activities and products, and through this relationship,
it assigns indirect costs to products less arbitrarily than traditional methods.

Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as
management and office staff salaries are sometimes difficult to assign to a particular product
produced. For this reason, this method has found its niche in the manufacturing sector.
Organizational Life-Cycle