MODULE - 4

STRATEGY IMPLEMENTATION

INTRODUCTION

The strategic-management process does not end when the firm decides what strategy or
strategies to pursue. There must be a translation of strategic thought into strategic action. This
translation is much easier if managers and employees of the firm understand the business,
feel a part of the company, and through involvement in strategy formulation activities have
become committed to helping the organization succeed. Without understanding and
commitment, strategy implementation efforts face major problems. Implementation strategy
affects an organization from top to bottom; it affects all the functional and divisional areas of
business. Even the most technically perfect strategic plan will serve little purpose if it is not
implemented. Many organizations tend to spend an inordinate amount of time money, and
effort on developing the strategic plan, treating the means and circumstances under which it
will be implemented as afterthoughts! Change comes through implementation and evaluation,
not through plan. A technically imperfect plan that is, implemented well will achieve more
than the perfect plan that never gets off the paper on which it is typed.

Concept of Strategy Implementation

Strategy formulation is not in itself sufficient for an organization. It is important to ensure
that the strategy is implemented effectively; Strategy implementation is an important aspect
of strategic management.
Strategic implementation is the sum total of all the activities and choices required for the
execution of a strategic plan. It is the process by whichstrategies and policies are put into
action through the development of programs, budgets and procedures.

Definition Daniel McCarthy Robert Minichiello and Joseph Curran in their book ' Business
Policy and Strategy ' have defined strategy implementation as: “Strategy implementation
may be said to consist of securing resources, organizing these resources and directing
the use of these resources within and outside the organization.”

Nature of Strategy Implementation Successful strategy formulation does not guarantee

successful strategy implementation. It is always more difficult to do something
(strategyimplementation) than to say you are going to do it (strategy formulation)! Although
inextricably linked, strategy implementation is fundamentally different from strategy
formulation. Strategy formulation and implementation can be contrasted in the following
ways:
 Strategy formulation is positioning force s before the action

 Strategy implementation is managing forces during the action

 Strategy formulation focuses on effectiveness

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  Strategy implementation forces on efficiency

 Strategy formulation is primarily an intellectual process

 Strategy implementation is primarily an operational process

 Strategy formulation requires good intuitive and analytical skills

 Strategy implementation requires special motivation and leadership skill

 Strategy formulation requires coordination among a few individuals

 Strategy implementation requires coordination among many individuals.

ISSUES INVOLVED IN STRATEGY IMPLEMENTATION

Strategy implementation involves several issues. Some of the important issues are

1. Annual Objectives
Establishing annual objectives is a decentralized activity that directly involves all managers
in an organization. Active participation in establishing annual objectives can lead to
acceptance and commitment. Annual objectives are essential for strategy implementation
because they (1) represent the basis for allocating resources; (2) are a primary mechanism for
evaluating managers (3) are the major instrument for monitoring progress toward achieving
long-term objectives; and (4) establish organizational, divisional and departmentalpriorities.
Considerable time and effort should be devoted to ensuring that annual objectives are well
conceived, consistent with long -term objective, and supportive of strategies to be
implemented.

2. Policies

Changes in a firm's strategic direction do not occur automatically, on a day-to-day basis,

policies are needed to make a strategy work. Policies, facilitate solving recurring problem and
guide the implementation of strategy. Broadly defined, policy refers to specific guidelines,
methods, procedures, rules, forms and administrative practices established to support and
encourage work toward stated goals. Policies are instruments for strategy implementation.
Policies set boundaries, constraints and limits on the kinds of administrative actions that can
be taken to reward and sanction the behavior; they clarify what can and cannot be done in
pursuit of an organization's objectives.

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3. Resource allocation

Resource allocation is a central management activity that allows for strategy execution. In
organization that do not use a strategic management approach to decision making, resource
allocation is often based on political or personal factors. Strategic management enables
resources to be allocated accordingly to priorities established by annual objectives. Effective
resource allocation does not guarantee successful strategy implementation because programs.
Personnel, controls and commitment must breathe life into the resources provided. Strategic
management itself is sometimes referred to as a' resource allocation process

4. Managing conflict

Interdependency of objectives and competition for limited resources often leads to conflict.
Conflict can be defined as a disagreement between two or more parties on one or more issues.
Establishing annual objectives can lead to conflict because individuals have different
expectations and perceptions, schedule create pressure, personalities are incompatible, and
misunderstanding between line managers and staff managers occur. For Example, a
collection manager's objective of reducing bad debts by 50 percent in a given year may
conflict with a divisional objective to increase sale by 20 percent. Conflict is unavoidable in
organizations, so it is important that conflict be managed and resolved before it effects
strategy implementation and organizational performance.

Various approaches for managing and resolving conflict can be classified into three
categories avoidance, diffusion, and confrontation. Avoidance includessuch actions as
ignoring the problem in hopes that the conflict will resolve itself or physically separating the
conflicting individuals (or groups). Diffusion can include playing down differences between
conflicting parties while accentuating similarities and common interest, compromising so that
there is neither a clear winner nor loser. Confrontation is exemplified by exchanging
members of conflicting parties so that each can gain an appreciation of the other's point of
view.

5. Matching structure with strategy

Change in strategy often requires changes in the way an organization is structured for two
major reasons. First structure largely dictates how objectives and policies will be established.
For example, objectives and policies established under geographic organizational structure
are couched in geographic terms. The structural format for developing objectives and policies
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can significantly impact all other strategy implementation activities and structures dictates
how resources will be allocated. A more important concern is determining what types of
structural changes are needed to implement new strategies and how these changes can best be
accomplished.

6. Managing resistance to change

No organization or individual can escape change. But the thought of change raises anxieties
because people feat of economic loss, inconvenience, uncertainty, and a break in normal
social pattern. The strategic management process itself can impose major changes on
individuals and processes. Resistance to change can be considered the single greatest threat to
successful strategy implementation. People often resist strategy implementation because they
do not understand what is happening or why changes are taking place. In that case,
employees may simply need accurate information. Successful strategy implementation hinges
upon manager's ability to develop an organizational climate conducive to change. Change
must be viewed as an opportunity rather than as a threat by managers and employees.

7. Creating a Strategy-Supportive Culture

Strategists should strive to pressure, emphasize and build upon aspects of an existing culture
that support proposed new strategies. Aspects of an existing culture that are antagonistic to a
proposed strategy should be identified and changed, Substantial research indicates that new
strategies are often market-driven and dictated by competitive forces. For this reason,
changing a firm's culture to fit a new strategy is usually more effective than changing a
strategy to fit an existing culture. Numerous techniques are available to alter an organization's
culture, including recruitment, training, transfer, and promotion, restructure of an
organization's design, role modeling, and positive reinforcement.

8. Production / Operations Concerns

Production / operations capabilities, limitations, and policies can significantly enhance or

inhibit the attainment of objectives. A major part of the strategy implementation process takes
place at production site. Production -related decisions on plant size, plant location, product
design, choice of equipment, kind of tooling, inventory control, quality control, cost control,
use of standards, job specialization , employee training, equipment and resource utilization,
shipping and packaging, and technological innovation can have a dramatic impact on the
success or failure of strategy implementation efforts.

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9. Human Resource Concerns

The job of human resource manager is changing rapidly as companies continue to downsize
and reorganize. Strategic responsibilities of the human resource manager include assessing
the staffing needs and cost for strategies proposed during strategy formulation and developing
a staffing plan for effectively implementing strategies. A well-designed strategic management
system can fail if insufficient attention is given to the human resource dimension. Human
resource problems that arise when business implement strategies can usually be traced to one
of three causes:

(1) Disruption of social and political structures,

(2) Failure to match individual's aptitudes with implementing tasks, and

(3) Inadequate top management support for implementation activities.

The process of empowering managers and employees through their involvement in strategic
management activities yields the greatest benefits when all organizational members
understand clearly how they will benefit personally if the firm does well.

STAGES IN IMPLEMENTING STRATEGY / ACTIVATING STRATEGY

Activating strategy is a process of putting strategy into action. In actual implementation of

strategy following steps are followed.

1. Institutionalization of strategy

This is the first step involved in activating the strategy. It involves two aspects

(a) Communication of Strategy- Once the strategy is formulated; it must be communicated

to those people who would implement it. Strategy communication is a process of transferring
the strategy information from theformulators to the implementers. The communication is
normally in writing. The communication should include the purpose of the strategy, and the
activities required to implement the strategy.

(b) Securing acceptance of strategy - It is not enough to communicate the strategy to the
members of organizations, but it is equally important to secure their acceptance of the
strategy, so that they implement the strategy effectively. Normally, a major problem in
strategy acceptance is that the organizational members often resist a strategy, particularly
when it requires special efforts on the part of those who are going to implement it. Therefore,

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it is advisable to prepare a preliminary draft of strategy, and it is circulated among all those
who are expected to implement it. Management may ask for their suggestions, if required
necessary modifications are made in the strategy and after that final strategy is prepared.

2. Formulation of Action plans and programmes - Once the strategy is institutionalized

through its communication and acceptance, the management proceeds to formulate action
plans and programmes.

(a) Action Plans - The management has to frame actions plans in respect of several activities
required to implement a strategy. The action plan may be in respect of purchasing new
machinery, appointing additional personnel, developing a new process, etc. The type of
action plans depends upon nature of strategy. While framing action plan, the manager must
consider the following factors.

 The purpose of action plan

 The activities required to perform the action plan
 The person(s) who would be performing the activities
 The resources required to perform the various activities.

(b) Programmes - The manager must also decide about the programmes in respect of the
strategy. A programme is a single use plan designed to accomplish a specific objective. It
clearly indicates the steps to be taken, the resources to be used, and the time period within
which the task is to be completed.

3. Translating General Objectives into Specific Objectives - The top management frame
the general objectives. In order to make these objective operative, functional managers must
set specific objectives within the framework of the general objectives. Most of the specific
objectives are of short-term in nature, with a definite time period for their accomplishment.

Translation of general objectives into specific objectives must fulfill two important criteria:

(a) The specific objectives must be realistic, achievable and time bound. The specific
objectives must be set in such a way that the performance can be easily measured and
evaluated. Setting generalized objectives does not lead to effective action. For example it has
no meaning in stating objectives like to increase sales" but it should be “to increase sales by
10 % " which is more specific.

(b) The specific objective should contribute to the accomplishment of general objectives. So
all the functional department like production, marketing, finance etc., should set such specific

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objectives which are in line with the general objectives of the organization. Further, every
individual employee should have his own set of objectives in line with his departmental
objectives. 4. Resource allocation - For successful implementation of strategy, there must be
proper resource allocation to various units and activities. The resources can be broadly
classified into 3 groups

 Financial resources
 Physical resources
 Human resources

The management need to answer several questions in resource allocation, such as

o What are the sources for obtaining resources?

o What factors affect resource allocation?
o What are the means for resource allocation?
o What are the problems in resource allocation?

Proper answer to the above questions will help to obtain the resources from the right sources,
overcome the problem in resource allocation, and allocate the resources properly so that there
can be effective implementation of strategy. 5. Procedural Requirements - An organization
must follow various procedural requirements to implement the strategy. The various
procedural requirements may include the following, if applicable

 Licensing requirements
 Import and export requirements
 Foreign exchange Management Act, 2000 requirements
 Monopolies and Restrictive Trade Practices Act, 1969.
 Labour legislations
 Securities and Exchange Board of India requirements
 Foreign Collaborations requirements etc.

6. Other activities - The implementing strategy requires other activities such as

 Creating or modifying a proper organizational structure.

 Developing or modifying leadership styles.
 Building a suitable organizational climate.

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PROJECT IMPLEMENTATION

A project can be defined as a one-shot, time limited, goal directed, major undertaking
requiring the commitment of varied skills and resources. Project implementation passes
through various phases such as

1. Conception phase - The first phase of any project is the conceptual phase. This phase is an
extension of the strategy formulation phase. In this case, project ideas are generated during
the process of strategic alternatives and strategic choice, which may be implemented in future
by the organization.

2. Project analysis phase - The project ideas have to be arranged according to priority for
the purpose of development. Before selecting a project for development, a preliminary project
analysis have to made in respect of marketing, technical, financial and other relevant aspects.
Such analysis is required to find out whether the project would appeal to the investors, banks
and financial institutions.

After the preliminary project analysis, feasibility study of the project is conducted. Feasibility
study consists of detailed analysis of the project covering areas like cost of the project, means
of financing, marketing arrangements, etc. Feasibility study is conducted to find out whether
a project is financially and technically sound, and profitable or not.

3. Planning phase – The management must undertake detailed planning of the project. The
detailed planning should cover different areas of the project such as production schedules,
plant design and layout, technical arrangements, finance requirements, marketing
arrangements, manpower requirements, and so on.

4. Organizing Phase - The management must organize for necessary resources such as
manpower, finance, systems and procedures to implement the project.The complete project
has to be properly organized in a well-structured manner so as to deals with man, machinery
etc. So as to enable the successful implementation of the project.

5. Implementation Phase – During this phase, the management must undertake detailed
engineering, order placement for equipments and material, etc., leading to the testing, trail
and commissioning of the plant.

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6. Operation Phase - The final phase involves handing over the plant to the operating
personnel for operation purpose. At this stage, the production starts as per the planned
strategy.

PROCEDURAL IMPLEMENTATION

In India before implementing any new strategy the company must check whether the changes
require any state or central government approval. These government regulations affect
strategy formulation and implementation in the company. Following are the various
government regulations

 Licensing policy
 MRTP regulation
 FERA regulation
 Capital Issue Control regulation
 Import and Export regulation
 Foreign collaboration policy
 Incentive and facilities available

1. Licensing policy

The Industrial Policy Resolutions divide all industries into 3 categories

 The first category are those that are directly handled by the government exclusively
 The second category are those industries that are handled by the government along
with the support of the private sector
 The third category are those industries that can be handled by the private sector
exclusively

The Industries (Development and Regulation) Act, 1951 provides a licensing system of the
development and also the regulation of the scheduled industries. Scheduled industries are
those industries listed in the First Schedule of the Act.

2. MRTP Regulations

The Monopolies and Restrictive Trade Practices (MRTP) Act 1969 seeks to prevent
monopolistic and restrictive trade practices conducted by a single company. This is done so
as to prevent the concentration of the economic power.

The MRTP Act also covers mergers, amalgamations, and turnovers.

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3. FERA Regulations: The Foreign Exchange Regulation Act (FERA) 1973 is with respect
to the control of foreign companies on Indian companies. If a non-Indian residents equity
holding in the company is 40 % and above, the prior permission of the Reserve Bank of India
is required.

4. Capital Issue Control Regulation

The issue of capital by companies is regulated through Capital Issues Control Act, 1956 and
the Securities Contracts Regulations Act, 1956 mainly to ensure that investments are made in
priority areas and for the promotion of capital markets and also for the protection of the
company's shareholders.

The Act will also be in force in case of mergers, amalgamation. Before the company issues
any fresh shares whether public issue or right issue, even debentures, it has to be cleared by
the Controller of Capital Issues (CCI) under the Department of Economies Affairs, Ministry
of Finance.

The clearance from CCI is required before any strategy can be implemented.

5. Import and Export Regulation

Imports of Capital Machinery or even Raw Material are necessary for some companies in
order to be effective in case of modernization, expansion.

Import substitution requires government clearance before the strategy is implemented.

Before any strategy is implemented with respect to imports or exports the company should
get the appropriate government sanctions under the Import and Export (Control) Act, 1947.

The main aim of the government is to see that the balance of payments is not adversely
affected by such a transaction of import and export through import substitution.

6. Foreign Collaboration Regulation

In some cases the strategy in case of diversification etc. calls for a foreign collaboration. The
government allows this up to a maximum limit of 51% in some areas on very selective basis.
These foreign collaboration again require prior government approval and sanction.

7. Benefits from Incentives and Facilities

The government gives incentives, subsidies to the company for implementing certain
strategies. By providing incentives the government does not play a regulatory or controlling
but a promotional role. Certain other specific measures which are undertaken by the

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government relate to backward areas incentive, development of small-scale industries and
export promotion.

STRATEGY IMPLEMENTATION – RESOURCE ALLOCATION

RESOURCE ALLOCATION

Resource allocation is an important activity in strategy implementation. Resource allocation

requires procurement and commitment of financial, human and physical resources to the
various activities required for the accomplishment of objectives. The success of the
organization depends upon the quality and quantity of resources and their utilization.

Resource allocation is a central management activity that allows for strategy execution. In
organization that do not use a strategic-management approach to decision making, resource
allocation is often based on political or personal factors. Strategic management enables
resources to be allocated accordingly to priorities established by annual objectives.

All organizations have at least 4 types of resources that can be used to achieve desired
objectives: financial, physical, human and technological resources. Allocating resources to
particular divisions and departments does not mean that strategies will be successfully
implemented. A number of factors commonly prohibit effective resource allocation, including
an overprotection of resources, too great an emphasis on short-run financial criteria,
organizational politics, vague strategy targets, a reluctance to take risks, and a lack of
sufficient knowledge.

The real value of any resource allocation program lies in the resulting accomplishment of an
organization's objectives. Effective resource allocation does not guarantee successful strategy
implementation because programs, personnel, controls, and commitment must breathe life
into the resources provided. Strategic management itself is sometimes referred to as a
resource allocation process

Steps involved in Resource Allocation

The following are the important steps involved in resource allocation

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1. Determining the type and the amount of resources – The first step involved in resource
allocation is to determine the type and amount of resources required to implement the
strategy.

A firm may require various types of resources such as human, financial, physical and
informational or technological resources. At times, a firm mayrequire only the financial
resources, as human and informational resources are already available with the firm, and that
the physical resources such as machinery or equipment’s can be purchased with the financial
resources. A firm should also decide the amount of resources required. For example
modernization strategy would require more resources that the integration strategy.

2. Determining the sources of resources - The next step is to find out the sources of
resources. The source of resources depends upon the type of resources. The human resources
can be obtained from both internal and external sources. For example mangers can be
promoted from within the organization or can be selected from external sources for the
purpose of strategy implementation. Financial resources can be obtained from internal or
external sources. For example retained earnings can be used to finance strategy
implementation or additional loan can be taken or capital can be issued to finance strategy
implementation.

3. Mobilisation of resources - After determining the amount and the type of resources, the
next step is to make arrangement to obtain the resources. Necessary procedure is required to
be followed to obtain the resources.

4. Resource Allocation – After obtaining the resources, the resources must be properly
allocated for the purpose of strategy implementation. The required physical resources can be
purchased with the help of financial resources. If required, additional human resources can be
selected for the purpose of strategy implementation. In any case, there must be proper
allocation of all the resources.

5. Utilization of Resources - The allocated resources need to be utilized in respect of various

activities. For example, the funds allocated for market development strategy need to be
utilized for various activities in connection with market development activities such as
marketing research, advertising, sales promotion, dealers incentives, etc. The funds must be
utilized for productive activities, and care must be taken to see to it that the funds are not
misused or poorly utilized.

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6. Monitoring the Resources Allocation - The management should monitor the resource
allocation to find out whether or not the allocated are properly utilized. The management
should also find out whether the resources allocated are sufficient enough to undertake the
various activities efficiently and effectively. If required, management may make necessary
changes in resource allocation, i.e., additional funds may be mobilized, if required or the
resource allocation-mix can be modified depending upon the importance of activities.

DISTINCTION BETWEEN STRATEGY FORMULATION AMD STRATEGY

IMPLEMENTATION

Successful strategy formulation does not guarantee successful strategy

implementation. Excellently formulated strategies will fail if they are not properly
implemented. It is always more difficult to do something (strategy implementation) than to
say you are going to do it (strategy formulation)! Strategy implementation is fundamentally
different from strategy formulation. Strategy formulation and implementation can be
contrasted in the following ways:

Strategy Formulation Strategy Implementation

1, Strategy Formulation includes planning and Strategy Implementation involves all
decision-making involved in developing organi- those means related to executing the
zation's strategic goals and plans, strategic plans.
2. In short, Strategy Formulation is placing the In short, Strategy Implementation is
Forces before the action, managing forces during the action.
3. Strategy Formulation is an Entrepreneurial Strategic Implementation is mainly an
Activity based on strategic decision-making. Administrative Task based on strategic
and operational decisions.
4, Strategy Formulation emphasizes on Strategy Implementation emphasizes on
effectiveness. efficiency.
5. Strategy Formulation is a rational process. Strategy Implementation is basically an
operational process.
6. Strategy Formulation requires co-ordination Strategy Implementation requires co-
among few individuals. ordination among many individuals.
7. Strategy Formulation requires a great deal of Strategy Implementation requires
initiative and -logical skills. specific motivational and leadership
traits.
8. Strategic Formulation precedes. Strategy Strategy Implementation follows
Implementation. Strategy Formulation.

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BARRIERS TO STRATEGY IMPLEMENTATION

Strategies often fail not because they were not formulated well, but for the reason that
they were not implemented effectively. Research studies report that strategists often find that
strategy implementation is more difficult than strategy formulation. Strategists have
developed skills to formulate strategies well but when it comes to implementation, there is
much left to be desired.

The main factors causing unsuccessful implementation of strategies are as follows:

1. Vague or Poor Strategy: In some cases, the chosen strategy cannot be implemented
because it is vague or defective. The strategy has to be clear and concrete. Vaguely
formulated strategies are difficult to implement.

2. Lack of Commitment: When the employees are not fully committed to the chosen
strategy, it cannot be implemented successfully.

3. Ineffective Management: Inadequate leadership, incompetent administration, ill-defined

tasks, inability to manage change are all signs of poor management. Managers are often
trained to plan and not to execute the plans. Strategy implementation is a time-consuming
process and requires the involvement of all. Top managers are often lack the patience and
aptitude needed for execution of strategies.

4. Resistance to Change: A new or modified strategy usually requires major changes in

the organization. In case the changes are resisted by the employees, implementation of
strategies is likely to be unsuccessful.

5. Poor Communication: Strategies need to be communicated and explained so that those

who are to implement understand and accept them. Poor or inadequate information sharing,
unclear responsibilities, poor comprehension of roles are the major hurdles in successful
implementation.

6. Poor Resources: Lack of financial and physical resources is an important problem in

implementation of strategies. Quantity, quality and timely availability of the resources are
essential for the successful implementation of strategies.

7. Other Threats: Internal and external factors may work against the organization’s power
structure. These factors or elements may have vested interests in making strategies
unsuccessful.

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 In order to overcome barriers to strategy implementation and to make it effective, the
following steps may be taken:

a) Clear guidelines may be laid down for implementing strategies. These guidelines
can specify the major issues/elements in the implementation process. Otherwise manager’s
act as per their wishes and abilities and implementation becomes an unsystematic and uneven
process.

b) Management must manage changes effectively. Changes in culture, leadership

styles and employee behavior are much more difficult to carry out than structural changes.
Optimum implementation requires effective management of the change process.

ORGANIZATIONAL STRUCTURE

Strategists must design and implement an appropriate organizational structure in order

to implement various strategies. The organization structure refers to established pattern of
relationship among the components or parts of an organization. It is through the structure that
the various parts of an organization are interrelated or interlinked. Organization structure
involves issues such as division of work among various units or departments, and the co-
ordination of activities to accomplish organizational objectives.

The organization has to be designed according to the needs of the strategy implementation.
Effective implementation of strategy requires the right organization structure. Any changes in
corporate strategy may require some changes in the organization structure and in the skills
required in certain positions. Managers must, therefore closely examine the way their
company is structured in order to decide what changes should be made in the way work is
accomplished. Although it is agreed that the organizational structure must change with
environment conditions, which in turn, affect an organizational strategy, there is no
agreement about an optimal structural design.

INTERRELATIONSHIP BETWEEN STRATEGY AND STRUCTURE

There is a close interdependence between strategy and structure. This interdependence is both
forward and backward.

1. Forward Relationship: Effective implementation of strategy requires a suitable

organizational structure. According to Chandler "structure follows strategy". Growth strategy
requires a different structure than stability strategy. Organizational structure is not an end

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itself but a means for strategy implementation. Therefore, an organization’s structure
shouid.be such that it enables effective implementation of the chosen strategy. When there is
a significant change in the strategy, the structure has to be redesigned, (the reasons are
explained below)

2. Backward Relationship: Structure also influences strategy. Structural considerations

affect the implementation of present strategy and the formulationof future strategies.

MATCHING STRUCTURE WITH STRATEGY

The steps that can be taken c match organization structure with the strategy are given below:

1. Identify Key Activities: The functions and tasks essential for execution of strategy are
pinpointed. For example, strict cost control is a key task in case of cost leadership strategy.

2. Understanding Interrelationship among Activities: The strategic relationship among

the critical, supportive and routine activities should be analyzed. Activities may be related
through the flow of material, production process, type of customers served etc. Geographical
location may help in grouping or regrouping of activities during organizational redesigning.

3. Grouping Activities into Units: The critical activities should be used as the main
building blocks in structuring the organization. The role and power of key groups should be
duly recognized. Adequate resources should be allocated to critical activities.

4. Deciding Degree of Authority: Strategies are implemented by managers at different

levels. Enough authority should be delegated to them. But activities, and organizational units
with a crucial role in strategy implementation process should not be subordinate to routine
and non-key activities.

5. Coordination among Units: Coordination among different organizational units is

essential to ensure that these do not work at cross purposes but supplement efforts of one
another.

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TYPES OF ORGANIZATIONAL STRUCTURES

Successful companies tend to follow a pattern of structural development as they grow

and expand. Beginning with the simple structure used by entrepreneurial firm characterized
decision making moves on to divisional structure to manage different product lines. The
following are the different stages in organizational development and strategy structure:

Stage I: Simple Structure Stage I firms are small enterprises managed by the founder. The
entrepreneur makes all the important decisions and is involved in every detail and phase of
the organization. The strategies adopted may be of expansion type. The greatest advantages
of Stage I firm are its flexibility and dynamism. The greatest disadvantages are its extreme
reliance on the entrepreneur to decide general strategies as well as detailed procedures. The
problems of managing the organization all by himself and therefore, he may go for functional
structure.

Advantages of such firms are:

 Since there is only one decision maker, the decisions are taken faster.
 Quick and timely on the spot decisions are taken depending on the environmental
changes and competition.
 These firms are very simple in nature.
 These firms are very informal in nature.

Disadvantages of such firms are:

 Since the owner has to do nearly everything including taking decisions has time can
be demanded by almost everyone. He concentrates so much on day to day activities
that major expansion decisions are left pending.
 Future expansion only depends on the owner’s ability to invest money.

Stage II: Functional Structure Stage

II is the point when a team of managers who have functional specializations replaces the
entrepreneur. The transition to this stage requires a substantial managerial style change for
the chief executive, especially if he was the Stage I entrepreneur. He must learn to delegate,
otherwise having a team of managers bring no benefit. The organizational structure is
functional type divided into various departments such as finance, marketing, personnel and
production. There can be further departmentalization such as area wise , process wise product
wise, etc. depending upon the size and business operations. The strategies is adopted may

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range from stability to expansion. The greatest advantages are that the firm can effectively
concentrate and specialize in one industry. However, concentration in one industry may not
help the firm, as it may no longer remain attractive. Therefore, firm may move in diversified
product lines.

Advantages of such firms are:

 The day to routine work is delegated to people thus the owner/chief executive can
concentrate on strategic business decisions.
 Efficient distribution of work through specialization. Hence work is done faster.

Disadvantages of such firms are:

 Co-ordination between different departments is difficult. Everyone wants to work in

watertight compartments.
 Line and staff departments usually conflicts.
 This creates specialists which results in narrow specialization.

Stage III: Divisional Structure / Departmental Structure

As a small organization grows, it has more difficulty managing different products and
services in different markets. Some form of divisional structure generally becomes necessary
to motivate employees, control operations and compete successfully in diverse locations.

The functional structure may not work well for large firms with diverse product lines.
Managers managing diversified product lines need more decision making powers than the top
management is willing to provide to them. The company needs to move to a different
structure, i e. divisional structure. Each division is semi-autonomous and linked to the
headquarters but functionally independent.

Divisional Structure is the result of grouping of jobs, processes and resources into logical
units to perform some organizational task. A large organization divides its organizational
structure into units and sub-units so as to effectively and efficiently plan, organize, direct and
control its activities to achieve desired objectives.

Structure Divided On The Basis Of Functions

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Area wise Division of Structure

Product wise Division of Structure

The advantages of such firms are:

 This structure encourages the grouping of various functions which are required for the
performance of activities with respect to a particular division.
 Here the top management can concentrate on strategic business policies and decisions
while the day to day operations are conducted by those in the lower rung of the
ladder.
 This structure generates quick response to environmental changes affecting the
businesses of different divisions.

The Disadvantages are:

 Company overheads increase duplication of work in each unit is also there.

 Policy inconsistencies between the different divisions.

Stage IV: Strategic Business Unit (SUB):

The SBU structure group’s similar divisions into strategic business units and delegate’s
authority and responsibility for each unit to a senior executivewho reports directly to the chief
executive officer. This change in strategy can facilitate strategy implementation by improving
coordination between similar divisions and channeling accountability to distinct business
units. An SBU has three characteristics:

 It is a single business or collection of related business that can be planned separately

from the rest of the company.
 It has its own set of competition.

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  It has a manager who is responsible for strategic planning and profit performance and
who controls most of the factors affecting profit.

The advantages of SBU are:

 Establishes co-ordination between divisions having common strategic interests.

 Facilitates strategic management and control of large, diverse organizations.
 Fixes accountability at very distinct business units.

The Disadvantages are:

 There are too many different SBU‟s to handle affectively in a large diverse
organization.
 Difficulty in assigning responsibility and defining autonomy for SBU heads.
 By adding another layer of management it means it takes longer to take a corporate
decision.

Stage V: Matrix Structure:

This type of organization structure was first developed in the United States in the early 1960s
to solve management problems emerging in the aerospace industry. It uses two or more co-
existing structures. It can combine project organization with functional organization structure.
In such a structure theproject managers work in close and co-operation with functional or
departmental heads. Authority of departmental heads flows downwards, and the authority of
the project manager flows across, thereby forming a grid or rectangular array and is called
Matrix Structure.

20
Matrix Management is also known as product management/ market management
organization. Companies that produce many products flowing into many markets face a
dilemma. They could use a product management system which requires product managers to
be familiar with highly divergent markets.

A matrix organization would seem desirable in a multi-product, multi- Market Company.

Such a type of structure is created by assigning functional specialists, who normally work in a
department in their area of specialization to work on a special project or a new product or
service. For the duration of the project, the specialists from different areas form a group or
team to report to the team leader. Simultaneously they also work in their respective parent
departments. Once the project is completed, the team members fully revert to their parent
departments.

Advantages

 Individual specialists are assigned where their talent is needed most.

 Fosters creativity because of pooling of diverse talents
 Provides good exposure to specialists in general management

Disadvantage

 Dual accountability creates confusion and thus difficulty to individual team members
 This system is costly and conflictual
 There are questions about where authority and responsibility should reside. Shared
authority creates communication problem.
 Requires a high level of vertical and horizontal co-ordination.

Stage VI: Network Structure

A network organization outsources or subcontracts many of its major functions to separate

companies and coordinates their activities from a small headquarters. Rather than being
housed under one roof, activities like design, manufacturing, marketing, distribution etc. are
outsourced to separate organizations that are connected electronically to the central office.
For example, Athletic shoe companies like Nike and Reebok have outsourced manufacturing
of their shoes to countries such as China and Indonesia, where labour costs are low. What
Nike or Reebok does is the design and marketing of shoes.

21
Advantages

 Network structure is truly global. It can draw on resources worldwide to achieve the
best quality and price.
 It has work force flexibility and challenge.
 Reduced administrative overhead.

Disadvantages

 No hands-on control, managers have to rely on contracts, coordination, and

electronics' linkage to hold thing together
 If a subcontractor fails to deliver or goes out of business, the headquarters
organization will be temporarily out of business
 Employee loyalty can weaken, because they may feel they can be replaced by contract
services.

Stage VII: Virtual Organization

This is an extension of the network structure. In this approach, independent organizations

form temporary alliances to exploit specific opportunities, and then disband when their
objectives are met. The term virtual means "being in effect but not actually so". The virtual
organizations consist of a network of independent companies - suppliers, customers or even
competitors - linked together to share skills, costs, markets and rewards. The members of a
virtual organization pool and share the knowledge and expertise of each other.

Advantages

 It can draw on expertise worldwide.

 It is highly flexible and responsive.
 It reduces overhead costs.

Disadvantages

 Lack of control because the boundaries of a virtual organization are weak and
ambiguous.
 Virtual teams place new demands on managers, who have to work with new people,
new ideas and new problems.
 Virtual organization poses communication difficulties, and managers may lose
motivation.

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CORPORATE CULTURE

Every company has a culture which exercises considerable influence on the behaviour of its
managers and employees. According to Charles O' Reilly, "organizational culture is the set of
assumptions, beliefs, values and norms that are shared by an organization’s members."

A company's culture is manifested in the values and business principles that management
preaches and practices. For example, culture is manifested in:

 Corporate stories
 Attitudes and behaviour of employees
 Core values
 Organization’s policies
 Relationship with stakeholders; and
 Atmosphere that permeates its work environment

An organization culture is similar to an individual's personality. Just as an individual's

personality influences the behaviour of an individual, the shared assumptions (beliefs and
assumptions) among a firm's members influence the opinions and actions within the firm.

TYPES OF CULTURES

Company cultures vary widely in nature, strength and makeup.

Strong vs Weak Cultures

Some cultures are strongly embedded, while others are weak or fragmented cultures. Strong
culture companies have a well-defined corporate character, values and behavioural norms
which are so deeply rooted in them that it is hard to change them.

In contrast to strong culture companies, weak culture companies are fragmented in the sense
that no one set of values is consistently preached or widely shares. They typically lack any
deeply felt sense of identity or corporate character.

Unhealthy vs Adaptive Cultures

Unhealthy cultures are characterized by self-serving politics, resistance to change, and inward
focus. They are often precursors to declining company performance.

In adaptive cultures, work climate is receptive to new ideas, experimentation, innovation,

new strategies, and practices. An adaptive culture is an advantage, especially in fast changing

23
business environment, because employees are receptive to risk taking, experimentation,
innovation, etc.

Dominant vs Sub-cultures

In seeking to understand the relationship between culture and strategy, it may be possible to
identify some aspects of culture that pervade the whole organization which we call the
dominant culture. However, there may also be important subcultures within the organizations.
For example, there may be sub-cultures in different geographical divisions of a multinational
company or in different functional groups such as finance, marketing and operations,

IMPACT OF CULTURE

Corporate culture provides the framework within which the behaviour of people takes place.
It influences strategy implementation in several ways:

1. Decision-Making: Culture affects the way managers take decisions about the company's
relationship with its environment and strategy.

2. Resistance to Change: A strong culture facilitates smooth implementation of strategy by

reducing resistance to change.

3. Communication and Control: Strong corporate culture facilitates communication and

control in the organization.

4. Co-operation and Commitment: In a strong culture, members of the organization have a

high sense of identity, and a high degree of loyalty and commitment.

5. Innovation: Organizations with a strong culture are relatively creative and entrepreneurial.

6. Work Ethics: Culture determines the ethical standards of an organization and its members.
In a healthy culture employees consider *work as worship' and work hard.

7. Motivation Level: Culture determines the attitudes of people to their jobs and life. In
achievement-orientedculture, people are self-motivated..

CULTURAL BARRIERS TO STRATEGY IMPLEMENTATION

Culture acts as a barrier to implementation when it does not match the organization’s
strategy. For example, an organization with low-performing culture finds it very difficult to
implement a strategy that requires high performing culture.

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1.Low-Performing Cultures: Rigid rules and policies, resistance to change, centralized
decision-making are the main characteristics of a low-performing culture. Organizations
which operate for long in a stable environment and captive markets tend to' become
complacent. When they have to change their strategies due to significant changes in
environment, they face cultural barrier. For example, telecommunications and automobile
firms operated in a competition-free market before 1985. They became complacent about
product quality and delivery schedule. After economic liberalization they suffered badly due
to low-performing culture.

Culture in any organization doesn't change easily. It is formed over a mummer of years from
the actions and behavior of management and employees.

2. Cultural Diversity: When two or more companies join together, cultural diversity
becomes a barrier in strategyimplementation. In case of strategic alliance and joint ventures,
differences in the cultures of the partners create problems in objective setting and in choosing
the method of achieving objectives. Since liberalization and globalization, takeovers and
mergers have become very common. When the cultures of the acquirer and acquireddiffer
significantly, integration becomes difficult. For example, several high-level managers left
Madura Coats when it was acquired by the Birla Group. They resigned due to the fear that
they would not be able to adjust with the new management culture.

Developing Sound Corporate Culture

In this era of cut throat competition and global business, companies need a high-performing
culture. The following guidelines are helpful in developing such culture:

1.Preserve core ideologies while allowing for change.

2. Stimulate progress through challenging objectives, purposeful evaluation, and continuous

self-improvement.

3. Encourage experimentation and accept mistakes.

4. Create alignment by translating core values into goals, strategies and practices.

5. Grow newmanagers internally by promotion from within.

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DIVERSIFICATION

Meaning

Diversification means spreading investment over several enterprises or products, especially to

reduce the risk. Here the manufacturer expands his operations to products and those areas
which may or may not have any connection, direct and indirect, to the existing product or
products. Nowadays competition has intensified tremendously, so relying on one product and
one brand for survival and growth is very risky. So the companies nowadays prefer to
diversify their operations. E.g. HLL has diversified into soaps, cosmetics, washing powder
tea, salt, toothpaste etc. It is India’s largest FMCG Company. It has around 100 toothpaste
etc. It has around 100 products out of which 30 are doing exceedingly well. Therefore the risk
gets diversified which facilitates survival.

Following are the Features of diversification

1. Variety of business:Diversification involves starting those activities or venturing into

those areas which are totally different from the existing line of business. It leads to variety of
activities undertaken by the organization e.g. a company manufacturing cement may diversify
in into textiles, to petrochemicals etc. Reliance group is a classic example of a diversified
company.

2. Internal or external:Diversification can take place internally or externally, internally by

using its own resources. External diversification is through amalgamations, absorptions, joint
ventures. Internal diversification is a smooth affair as internal people are involved. However
external diversification involves takeovers, acquisitions which can be volathe.

3. Suitable for big companies:Diversification is suitable for big companies. Acquiring land,
installing new machinery, finding new markets, appointing people etc. is quite costly affairs.
So big companies like the Tata, the Birlas, the Reliance etc .with huge financial and physical
resources at their disposal find it convenient to diversify their operations. By diversifying,
their resources are also used in optimum manner.

4. Suitable for dynamic environment: Environmental factors like economic, social,

technological etc. are very dynamic. They keep on changing very fast, thereby creating a lot
of opportunities and posing a lot of threats. Success would depend upon makingmost of the
given opportunities. This would be possible only if the company has diversified its operations
in order to make the most of the changes that have taken place in different sectors.

26
5. Preferred option after expansion:If the company desires to grow then generally it opts
for expansion i.e. increase the production capacity of the same product or produce allied
products as it is relatively easy. Only when the market reaches a saturation level making
further expansion impossible, the company generally contemplates of diversification.

6. Cater to different markets: Diversification involves selling different products, which

automatically involves different segments of the society e.g. HLL cosmetics is for young
ladies, while its Kissan Jam is targeted at children. Thus not only the area of sale may be
different but also diversified customers are approached.

7. Increase in activities: Diversification ultimately results in increase in the activities of the

business unit. Production, distribution, promotion, after sales service etc. increases. The
organization should contemplate of increasing the activities only if it has the resources:
physical, financial and technical at its disposal.

NEED FOR DIVERSIFICATION OF BUSINESS

1. Spread risk: Here the company diversifies into different brands and different products. It
is possible that brand fatigue and even product fatigue may enter the minds of the customers
e.g. ink pens are hardly used nowadays as product fatigue has entered in the minds of most of
consumers in case of ink pens. So those companies which did not diversify their operations
has to close their business.

2. Accelerated growth: Every organization wants to have rapid growth. But the economy
passes through boom and depression. Similarly during different times, different sectors grow
rapidly. Nowadays information technology products are having rapid growth. Thus most of
the companies like Tatas, Larsen & Toubro etc. have diversified their operations in the
information technology technology sector.

3. Capture market Every company is desirous of expanding its share in the market. There is
intense competition in any sector. So it becomes very difficult to increase its market share.
Samsung electronics has targeted the premium end of the market with the launch of the
world’s first multifunctional monitor.

4. Better utilization of resources The resources of the company are put to the best use.
Various products which have the potential to succeed in different markets are introduced e.f.
API Polymers (India) Pvt. Ltd., the makers of action shoes, has launched new shoes called
floaters for summer. The company claims that due to global warming and oppressive Indian
summer, something cool and casual is needed.
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5. Face competition effectively Competition exists in any area as there are large number of
producers in each product category. The only way to survive and grow is to overcome that
competition. And one way is to diversify into new areas which were not catered before e.g.
Tatas have Tata Tea, Titan Industries in watches, Tata engineering and locomotive etc.

6. Improves corporate image The image of company which has diversified into different
sectors is very positive especially if it has been successful in most of the areas e.g. Godrej;
Godrej cupboards, Godrej locks etc.

TYPES OF DIVERSIFICATION

Following are the various types by which an organization can diversify its operations:

1. Vertical diversification Vertical diversification means involving all or some of the levels
in an organizational hierarchy or stages in the production of a class of goods. Here the
company either starts producing or acquiring the raw material required for its product or
decides to market the product produced by it on its own. The former is a backward
integration and the latter one is called forward integration. In other words the company
intends to do everything right from acquiring the raw material, producing the product and
distributing it to the final consumers on its own. If necessary the company may even acquire
another company which is supplying the raw material.

E.g. Nicholas Piramal is today one of the largest pharmaceutical companies manufacturing
and marketing bulk drugs and formulation. For a backward integration it acquired the basic
research unit of Hoechst Marion Roussel (India) for Rs. 20 crores. Similarly it even went for
forward diversification in 1997. It entered into strategic joint ventures with Ambalal Sarabhai
and Reckitt and Colman. The agreement with Ambalal Sarabhai was to market Sarabhai
health- care products.

2. Horizontal diversification: Here the two companies are at par i.e. they are manufacturing
and marketing the same products to the same customers. So instead of competing with each
other these firms come together either by way of joint venture or collaboration or merger e.g.
Merger of TOMCO Ltd. with Hindustan Lever Ltd. is a good example of horizontal
integration.

3. Lateral or Conglomerative diversification: Conglomerative means a group or

corporation formed by the merging of separate and diverse companies. A company on its own
may also diversify into different fields like oil, iron and steel, cars etc. or it may tie up with
some other firm for diversifying into new area. In other words Conglomerative diversification
28
involves entering into those areas which have no relation with the existing line of business.
For example, the Essel Group of companies was founded as a trading company. Over the
years company has diversified into areas of packaging, exports, property development and
recreation (Essel World). The latest addition to the company’s diversified field is Zee
Telefilms.

4. Concentric diversification: Concentric means having a common centre especially of a

circle. Here the core business is in the centre and other businesses revolve around it, in a
sense they are not directly related to it but are indirectly related e.g. Great Eastern Shipping
Company ( GE Shipping ) has floated a joint venture company – United Helicharters – with
Qatar General Petroleum Corporation and UB Air. The new company will charter helicopters
and lease it to offshore operators in India.

TURNAROUND STRATEGIES

Meaning

Turnaround is a technique applied to loss making unit with a view to bring it back on
profitable track. Turnaround simple means turning the enterprise from loss making to profit
making, from the path of decline to the path of progress, from negative to positive action in
the different areas like cash-flows, marketing, profit-making etc. Strategies adopted by the
management to reverse the deteriorating trends of the performance of a business are termed
as “Turnaround Strategy”. It is a type of strategy specifically developed by the management
to improve operational efficiency and productivity with a view to increase overall
profitability of business. Management has to adopt several trial and error techniques in order
to reduce the negative impact of such forces which are considered detrimental to the growth
of business.

The main objective of turnaround is to improve the performance of the business enterprise.
Turnarounds bring about a change in the trends of an undertaking from downwards to
upwards, from negative to positive and from loss making to profit making enterprise.
Turnaround involves taking a „ U ‟ turn to the declining fortunes of the company and making
it viable again.

Turnaround means turning the loss making unit back into profitability. It is nothing but
retrieving the business unit back to prosperity e.g. Indian Bank posted a net profit of Rs.

29
33.22 crores in 2001-02. This seems creditable as it has come after six years of continuous
loss. This was possible because the Bank’s new focus on retail lending and on housing loans.
Moreover they adhered to the restructuring plan which included VRS despite of misgivings
that the additional expenses would cripple the bank.

Definition According to Dictionary of Marketing (edited by P. Collin) “Turnaround means

making the company profitable again.”

Features of Turnaround

1. Objective The strategy does not aim at selling or disposing of loss making unit but works
to improve the performance of the unit by re-arranging the available resources.

2. Long Term Strategy Turnaround is one type of long term strategy and does not aim at
providing temporary relief or short cut method to company problems. It studies the problem
in- depth and tries to solve it forever.

3. Scope of Turnaround The scope of turnaround is confined to sick or loss making

industrial units. It is a type of crisis management. Turnaround is not short cut or magical
formula. It cannot work on all sick units under all circumstances. It is effective in case of loss
making units but having growth or future prospects.

4. Requires Cooperative effort Turnaround strategy can be effective only when there is co-
operation from all parties concerned. The parties involves: 1. Employees 2. Shareholders 3.
Bank and FI‟s 4. Other concerned parties

5. Involves restructuring Turnaround is possible only when the company decides to

restructure its operations. It may include marketing restructuring whereby marketing of loss
making products are stopped or when the out-dated machinery is replaced i.e. technological
restructuring and so on. These steps are necessary in order to stop the closure of the
enterprise.

6. Internally or externally Turnaround can be undertaken by company’s own experts or by

outside consultants. Both have their advantages and limitations e.g. internal experts are aware
of the company’s culture, resources, level of technology better, however they may be biased
as their interest are involved. External experts may unbiased but their suggestions may not be
practical and the sentiments of the employees may not be considered. So an organization
must strike a proper balance between using internal and external experts.

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7. Involves replanning: Turnaround necessitates replanning. It involves rearranging the
structure to convert a loss making unit into profitable one. Since environmental factors are
dynamic, it would make the company sick and unless resources are rearranged and replanned,
turnaround is not possible.

8. Involves money When product become obsolete, there is decline in its demand e.g. Pagers.
Here in order to have a turnaround, technological restructuring, marketing restructuring etc. is
necessary which may involve a lot of money. Thus turnaround is not possible for all
companies, especially if they do not have extra resources at their disposal.

9. Permanent effect Turnaround involves a permanent effect on the structure and operations
of the company. This is because the company may close its unviable product out of the
existing range of product or may change the technology from labour intensive to capital
intensive thereby reducing the workers or even amalgamate with some other company
thereby forming a totally new entity.

10. Optimum utilization of resources The company which is suffering losses, is not is a
position to make an optimum utilization of human, physical and financial resources.
Turnaround involves restructuring and reorganizing these resources. It tries to focus the
resources on profitable ventures and to discontinue the non-profitable ones.

Approaches of Turnaround The following are the two main approaches of turnaround
strategy 1. Surgical Approach 2. Human Approach

1. Surgical Approach – This approach is stricter in its nature. The new chief executive has to
issues strict orders of change and keeps strict control on all operations of the enterprise. If
certain plants are uneconomic and showing constant losses should be closed down
mercilessly. If some employees are required to be retrenched the chief executive has to do it
without any hesitation. All operations and activities need to be watched till they show the
sign of improvement i.e. turnaround. The fear is expected of its opposition from some
subordinate personnel. But the chief executive should not yield to this type of pressure and
continue with the approach. If the approach is given up in the middle it will bring disastrous
result to the business enterprise.

2. Human Approach – This method is humanistic in its approach. The chief executive while
implementing the turnaround programme in the enterprise has to soften and not to be strict
unlike in the earlier approach. The chief executive must approach to the problems of the
enterprise objectively, inviting opinions of every one working in the enterprise, which will be

31
acceptable to all. This indeed is the democratic approach. The negotiations are made and
differences are settled down amicably rather than removing the hard nuts. The idea behind
this approach is to bring the enterprise out of difficulties with the help and cooperation of all
employees. This approach is beneficial in the long run because when the interest of no one is
harmed every one cooperates to improve the situation of the enterprise.

MERGER OR ACQUISITIONS

Meaning

In merger a firm may acquire another firm or two or more firms may combine together to
improve their competitive strength or to gain control over additional facilities. It is a
combination of two or more companies into one company, wherein only one company
survives and the other company ceases to exist. The merger takes place for a consideration,
which the acquiring company pays either in cash or by offering its share.

E.g.: the merger of Reliance Petroleum with Reliance Industries.

External growth or merger can be of two types:

i. under the first category, a firm merges with another firms in the same industry having
similar or related products, using similar processes and distributing through similar channels.
Such a merger creates problem of coordination between the merged units.

ii. In the second type of merger known as conglomerate, firms merging together are engaged
in altogether different lines of business and have little common in their products, processes
and distribution channel.

Reason for mergers

1. To undertake diversification This follows the need of a narrowly based business to

reduce the risks by broadening its activities. To reduce the risks effectively, the acquired firm
must not be subject to the same risk promoting factors as a parent firms even though it may
operate in a different fields.

2. To secure scare sources of supply Where any of the resources which the business needs
are in short supply or subject to other difficulties, one solution for it is to acquire its own
sources. By merging the different resources available with two or more units can be pooled
together.

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3. To secure economies of scale Increase in volume of often leads to decrease in operating
costs, thereby enabling a larger capacity bank to survive. Merger is considered when the bank
has low profitability and through merger bank can secure economies of scale.

4. To have better management Where the business suffer from poor management and it
does not appear possible to rectify this in the near future, the problem may be resolved by
merging with good management team.

5. To improve the financial standing When two firms join together, the strengths of both of
them are added together and the market may put a higher valuation on such combination than
on the constituent parts.

6. To achieve a monopoly position The elimination of competition by absorption gives a

firm a greater control over a market. The competition in the market can be reduced with the
merger of firms engaged in the similar market.

7. Revival of Sick units Merger can bring out a revival of sick units. The sick units can
merged with strong companies, and therefore, the problem of industrial sickness can be
avoided in case of certain units.

CORPORATE PORTFOLIO ANALYSIS

When the company is in more than one business, it can select more than one
strategicalternative depending upon demand of the situation prevailing in the
differentportfolios. It is necessary to analyse the position of different business of the
businesshouse which is done by corporate portfolio analysis.

Portfolio analysis is an analytical tool which views a corporation as a basket orportfolio of

products or business units to be managed for thebest possible returns.When an organization
has a number of products in its portfolio, it is quite likely thatthey will be in different stages
of development. Some will be relatively new and somemuch older. Many organizations will
not wish to risk having all their products at thesame stage of development. It is useful to have
some products with limited growthbut producing profits steadily, and some products with real
growth potential but maystill be in the introductory stage. Indeed, the products that are
earning steadily maybe used to fund the development of those that will provide the growth
and profits inthe future.

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This analysis can be done by any of the following technologies –

A) BCG matrix

B) GE nine cell matrix

A) BCG MATRIX – the BCG matrix was developed by Boston Consulting group in1970s. It
is also called as the growth share matrix. This is the most popular and simplest matrix to
describe the corporation’s portfolio of businesses or products.The BCG matrix helps to
determine priorities in a product portfolio. Its basic purposeis to invest where there is growth
from which the firm can benefit, and divest thosebusinesses that have low market share and
low growth prospects.Each of the products or business units is plotted on a two dimensional
matrixconsisting of

a) Relative market share – is the ratio of the market share of the concernedproduct or
business unit in the industry divided by the share of the marketleader

b) Market growth rate – is the percentage of market growth, by which sales ofa particular
product or business unit has increased

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Analysis of the BCG matrix – the matrix reflects the contribution of the products orbusiness
units to its cash flow. Based on this analysis, the products or business unitsare classified as –

i) Stars

ii) Cash cows

iii) Question marks

iv) Dogs

i) Stars – high growth, high market share

Stars are products that enjoy a relatively high market share in a strongly growingmarket.
They are potentially profitable and may grow further to become an important product or
category for the company. The firm should focus on and invest in theseproducts or business
units. The general features of stars are -

 High growth rate means they need heavy investment

 High market share means they have economies of scale and generate largeamount of
cash
 But they need more cash than they generate

The high growth rate will mean that they will need heavy investment and will therefore be
cash users. Overall, the general strategy is to take cash from the cash cows to fund stars. Cash
may also be invested selectively in some problem children (question marks) to turn them into
stars.

Over the time, all growth may slow down and the stars may eventually become cash cows. If
they cannot hold market share, they may even become dogs.

ii) Cash Cows – Low growth, high market share

These are the product areas that have high relative market shares but exist in low growth
markets. The business is mature and it is assumed that lower levels of investment will be
required. On this basis, it is therefore likely that they will be able to generate both cash and
profits. Such profits could then be transferred to support the stars.

The general features of cash cows are –

 They generate both cash and profits

 The business is mature and needs lower levels of investment
 Profits are transferred to support stars/question marks

35
  The danger is that cash cows may become under-supported and begin to losetheir
market

Although the market is no longer growing, the cash cows may have a relatively high market
share and bring in healthy profits. No efforts or investments are necessary to maintain the
status quo. Cash cows may however ultimately become dogs if they lose the market share.

iii) Question Marks – high growth, low market share

Question marks are also called problem children or wild cats. These are products with low
relative market shares in high growth markets. The high market growth means that
considerable investment may still be required and the low market share will mean that such
products will have difficulty in generating substantial cash. These businesses are called
question marks because the organization must decide whether to strengthen them or to sell
them.

The general features of question marks are –

 Their cash needs are high

 But their cash generation is low
 Organization must decide whether to strengthen them or sell them

Although their market share is relatively small, the market for question marks is growing
rapidly. Investments to create growth may yield big results in the future, though this is far
from certain. Further investigation into how and where to invest is advised.

iv) Dogs – Low growth, low market share

These are products that have low market shares in low growth businesses. These products
will need low investment but they are unlikely to be major profit earners. In practice, they
may actually absorb cash required to hold their position. They are often regarded as
unattractive for the long term and recommended for disposal.

The general features of dogs are –

 They are not profit earners

 They absorb cash
 They are unattractive and are often recommended for disposal.

Turnaround can be one of the strategies to pursue because many dogs have bounced back and
become viable and profitable after asset and cost reduction. The suggestedstrategy is to drop

36
or divest the dogs when they are not profitable. If profitable, do not invest, but make the best
out of its current value. This may even mean selling the division’s operations.

Advantages –

 it is easy to use
 it is quantifiable
 it draws attention to the cash flows
 it draws attention to the investment needs

Limitations –

 it is too simplistic
 link between market share and profitability is not strong
 growth rate is only one aspect of industry attractiveness
 it is not always clear how markets should be defined
 market share is considered as the only aspect of overall competitive position
 many products or business units fall right in the middle of the matrix, andcannot
easily be classified.

BCG matrix is thus a snapshot of an organization at a given point of time and does not reflect
businesses growing over time.

B) GE Nine-cell matrix

This matrix was developed in 1970s by the General Electric Company with theassistance of
the consulting firm, McKinsey & Co, USA. This is also called GEmultifactor portfolio
matrix.

The GE matrix has been developed to overcome the obvious limitations of BCG matrix.This
matrix consists of nine cells (3X3) based on two key variables:

i) Business strength

ii) Industry attractiveness

The horizontal axis represents business strength and the vertical axis representsindustry
attractiveness

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The business strength is measured by considering such factors as:

 relative market share

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  profit margins
 ability to compete on price and quality
 knowledge of customer and market
 competitive strengths and weaknesses
 technological capacity
 caliber of management

Industry attractiveness is measured considering such factors as:

 market size and growth rate

 industry profit margin
 competitive intensity
 economies of scale
 technology
 social, environmental, legal and human aspects

The industry product-lines or business units are plotted as circles. The area of each circle is
proportionate to industry sales. The pie within the circles represents the market share of the
product line or business unit.

The nine cells of the GE matrix represent various degrees of industry attractiveness (high,
medium or low) and business strength (strong, average and weak). After plotting each
product line or business unit on the nine cell matrix, strategic choices are made depending on
their position in the matrix.

Stoplight Strategy

GE matrix is also called “Stoplight” strategy matrix because the three zones are like green,
yellow and red of traffic lights.

1) Green indicates invest/expand – if the product falls in green zone, the business strength
is strong and industry is at least medium in attractiveness, the strategic decision should be to
expand, to invest and to grow.

2) Yellow indicates select/earn – if the product falls in yellow zone, the business strength is
low but industry attractiveness is high, it needs caution and managerial discretion for making
the strategic choice

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3) Red indicates harvest/divest – if the product falls in the red zone, the business strength is
average or weak and attractiveness is also low or medium, the appropriate strategy should be
divestment.

Advantages –

1) It used 9 cells instead of 4 cells of BCG

2) It considers many variables and does not lead to simplistic conclusions

3) High/medium/low and strong/average/low classification enables a finer distinction among

business portfolio

4) It uses multiple factors to assess industry attractiveness and business strength, which allow
users to select criteria appropriate to their situation.

Limitations –

1) It can get quite complicated and cumbersome with the increase in businesses

2) Though industry attractiveness and business strength appear to be objective,they are in

reality subjective judgements that may vary from one person toanother

3) It cannot effectively depict the position of new business units in developingindustry

4) It only provides broad strategic prescriptions rather than specifics of businesspolicy

Comparison GE versus BCG -

Thus products or business units in the green zone are almost equivalent to stars orcashcows,
yellow zone are like question marks and red zone are similar to dogs in theBCG matrix.

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