SMgt Notes FINAL

8/11/2019 SMgt Notes FINAL

1/64

STRATEGIC MANAGEMENT

STRATEGIC MANAGEMENT (6.1)

STUDY MATERIAL DESIGNED

FORTY B.COM (B&I)

MODULE I

RAM 1


2/64


STRATEGY FORMULATION

Whatever action is performed by a great man, common menfollowing his footsteps and whatever standards he sets byexemplary acts, all the world pursues. - Bhagwad Gita

Strategy Formulation Strategy ImplementationStrategy Evaluation

Full length questions which can be used for 7 marks or 8 marks

A ( Total weightage for this part is 8/!"

1. Define strategic management? Explain the relevance of strategic management

for an organization.

RAM

Perform

ExternalAudit

Develop

vision and

mission

statements

Establish

long term

objectives

Generate

Evaluate

and !elect

!trategies

"mplement

!trategies#

management

issues

"mplement

!trategies#

$ar%eting

&inance

Accounting

'(D

$"! "ssues

Perform

"nternal

Audit

$easur

Evalua

Perfor

)


3/64


). *hat are the various levels of strategic management in an organization. Give

suitable example.

+. *hat is strategic management? "llustrate and explain the strategic

management process ,ith the example of a leading nationalized ban%.

-. Describe the various steps involved in the strategic management process.

"llustrate ( explain ,ith suitable examples.

. Explain the term /environment0 ,ith reference to business and discuss ,h

environmental analsis is necessar in strategic management.

2. "dentif various components of environment that affect the management of an

organisation.

3. *hat is strateg formulation. Explain the factors to be ta%en into consideration,hile formulating the strateg.

#$ (Total weightage for this part is %&/!"

4. 56usiness must be run in a sociall responsible manner7. 8omment on the

statement in the context of "ndian business.

9. *hat are the social responsibilities of business?

1:. *hat are the critical components of the social environment of business?

Explain each element ,ith examples.

11. Evaluate the historic role and emerging role of government on the business.

1). Describe the impact of technolog on business.

1+. 5Economic environment impacts business7 8riticall analse.

1-. *hat factors have made the management of the technolog at enterprise level

important? Explain.

1. ;o, does the economic environment impinge upon business management?

Explain ,ith suitable examples.

12. ;o, do social factors pla a role in strateg formulation? Explain ,ith

examples.

' ( Total weightage for this part is %/!"

' (%"

13. Distinguish bet,een mission vision and goals.

RAM +


4/64


5/64


6/64


returns !he -..0s however brought the revival of Strategicplanning and the process is widely practiced in business world

+E,E+S OF STRATEG-

In a multi business enterprise% having several S56s% there would bethree levels of strategy% vi,% corporate strategy% S56 strategy andfunctional strategy In enterprise that does not have S56s% there willbe only two levels of strategy

Cor$orate Strateg.7orporate strategy is the long(term strategy encompassing theentire organi,ation 7orporate strategy addresses fundamental8uestions such as what is the purpose of the enterprise% whatbusiness it wants to be in and how to e&pand In other words%corporate level strategic management is the management ofactivities which de+ne the overall character and mission of theorgani,ation% the product9segments it will enter and leave% and theallocation of resources and management of synergy among its S56s7orporate strategy is formulated by the top(level corporatemanagement :board of directors% 7EO% and chiefs of functionalareas;

SBU Strategy

S56(level strategy% sometimes called business strategy is concernedwith decision pertaining to the product mi&% market segments andmaneuvering competitive advantages for the S56 While corporatestrategy decides the business pro+le the competitive strategydecides the strategy to succeed in the chosen business S56strategy has to con+rm obviously to the corporate philosophy andstrategy

In short% "the S56 level strategic management of a S56s e'ort to

compete e'ectively in a particular line of business and to contributeto the overall organi,ational purposes#

!he responsibility of the S56 strategy is with the top e&ecutives ofthe S56 who are normally second(tier e&ecutives in the corporatehierarchy In single S56 organi,ations senior e&ecutives have bothcorporate and S56 level responsibilities

F!nctiona" Strateg.

RAM 2


7/64


Functional level strategies are strategies for di'erent functionalareas like production% +nance% personnel% marketing etc in otherwords% "functional level strategic management is the managementof relatively narrow areas of activity% which are of vital% pervasive% orcontinuing importance to the total organi,ation#

7haracteristics

7orporateStrategy

5usinessStrategy Functional

Strategy

Sco$e Entireorgani'atio

n

S56 orsingle

businesscompany

F!nctiona"area

Source andmotivation

5oard ofdirectors97E

O Cor$oratestrateg.

S56 strategyor singlebusinesscompanystrategy

RAM

8orporate

!trategic 6usiness >nit

&unctional

3


8/64


Res$onsibi"it.

!op levelbusiness

managers

!op levelS56

managersor top level

singlebusinesscompanymanagers

Functionallevel

managers

Timehori'on

+ong&term

a failure to accomplish annual ob=ectives could re8uire achange in strategy could re8uire a change in the +rm?s mission

!herefore% strategy formulation% implementation% and evaluationactivities should be performed on a continual basis% not =ust at theend of the year or semi(annually !he strategic managementprocess never really ends

!he strategic management process is not as cleanly divided andnearly performed in practice as the strategic management modelsuggests *pplication of the strategic management process istypically more formal in larger and well(established organi,ations

RAM 4


9/64


Strategy Formulation Strategy Implementation

Strategy Evaluation

T/E 0ROCESS OF DE,E+O0ING A MISSION STATEMENT

What is mission@

"* mission statement is an enduring statement of purpose thatdistinguishes one business from other similar +rm * missionstatement identi+es the scope of +rms operations in product and

market termsA

*ccording to


10/64


11/64


!o perform an e&ternal audit% a company +rst must gathercompetitive intelligence and information about economic% social%cultural% demographic% environmental% political% governmental% legaland technological trends Individuals can be asked to monitorvarious sources of information% such as key maga,ines% trade

=ournals% and newspapers !hese persons can submit periodicscanning reports to a committee of managers charged withperforming the e&ternal audit

!his approach provides a continuous stream of timely strategicinformation and involves many individuals e&ternal(audit process

!he Internet provides another source of gathering strategicinformation% as do corporate% university% and public librariesSuppliers% distributors% customers% salesperson and competitorsrepresent another source of vital information Once information isgathered it should be assimilated and evaluated * meeting ofmanagers is needed to collectively identify the most importantopportunities and threats facing the +rm

RAM 11


12/64


13/64


nature of diversi+cation% degree and nature of vertical integration%earnings per share and social responsibility 7learly establishedob=ectives o'er many bene+ts !hey provide direction% allowsynergy% aid in evaluation% establish priorities% reduce uncertainty%minimi,e conicts% and stimulate e&ertion and aid in both the

allocation of resources and the design of =obs ong(term ob=ectivesare needed at corporate% divisional and functional levels of anorgani,ation !hey are an important measure of managerialperformance

V. THE PROCESS OF GENERATING AND SELECTINGSTRATEGIES

Identifying and evaluating alternative strategies should involvemany of the managers and employees who earlier assembled theorgani,ational vision and mission statements% performed thee&ternal audit and conducted the internal audit Representativesfrom each department and division of the +rm should be included inthe process*ll participants in the strategy analysis and choice activity shouldhave the +rm?s e&ternal and internal audit information by theirsides !his information% coupled with the +rm?s mission statement%will help participants crystalli,e in their own minds particularstrategies that they believe could bene+t the +rm most 7reativityshould be encouraged in this thought process

*lternative strategies proposed by participants should be consideredand discussed in the meeting Croposed strategies should be listedin writing When all feasible strategies identi+ed by participants aregiven and understood% the strategies should be ranked in order ofattractiveness by all participants% with -J should not beeimplemented% KJ possibly implemented% LJ probably should beimplemented and MJ de+nitely should be implemented !he processwill result in a prioriti,ed list of best strategies and reect thecollective wisdom of the group

VI I


14/64


Implementing strategy a'ects an organi,ation from top to bottom> ita'ects all the functional and divisional areas of a business It isbeyond the purpose and scope of this te&t to e&amine all of thebusiness administration concepts and tools important in strategy

implementation

conse8uently% associative result may not become apparent foryears

RAM 1-


15/64


ORGANI1ATIONA+ STRATEGIES

Organi,ational strategies are classi+ed in to four types ofstrategies and they are as followsN

Integration Strategies Forward integration 5ackward integration Bori,ontal integration

Intensive Strategies


16/64


Intensive StrategiesN

-


17/64


Strategy implementation re8uires special skills in motivating managing others Strategy implementation permeates all hierarchical levels *nother very important fact to be noted is that "in all but thesmallest organi,ation% the transition from strategy formulation to

strategy implementation re8uires a shift in responsibility fromstrategists to divisional functional managers Strategy implementation% often described as the action phase ofthe strategic management process% covers strategy activation evaluation control

Some writers break the Strategy implementation phase in to threecomponents% vi,

- Operationalising the strategy Pcommunicating strategy% setting

annual ob=ectives% developing divisional strategies% policies% resource allocationQK Institutionali,ing the strategy Porgani,ational structuring leadership implementationQ

L Evaluation control of the strategy

Strateg. Form!"ation Strateg. Im$"ementation

-It is positioning forcesbefore the action

It is managing forces beforethe action

K It focuses on e'ectiveness It focuses on eciency

LIt is primarily anintellectual process

It is primarily an operationalprocess

MIt re8uires good intuitiveand analytical skills

It re8uires good leadershipand motivation skills

/It re8uires coordinationamong a few individuals

It re8uires coordinationamong many individuals

Successful Strategy Formulation 3oes Dot $uarantee SuccessfulStrategy Implementation

4USINESS EN,IRONMENT

RAM 13


18/64


* number of factors outside the +rm inuence a +rm?s choice ofdirection and action !his in turn% a'ects organi,ation?s structureand internal process !hese factors or forces can be broadly dividedinto two categories See the following +gure

Micro en%ironment or O$erating en%ironmentMacro en%ironment or Remote en%ironment

5usiness environment has decisive inuence on opportunities aswell as threats to the organi,ation In developing alternativestrategies and choosing the best strategy% an in(depth analysis ofenvironmental scanning


19/64


operates Some authors prefer to refer this as "7ompetitiveenvironment# or "!ask Environment# Operating environment hasmuch more interaction with business than remote environment

!here are many forces> prominent they are listed downN

7ompetition


20/64


Crice advantageUuality discountsShipping e&pensesUuality standards

Re=ection ratesUuality of services*bilities and reputation3ependability% especially in emergency situation

Cred"tr!N In regards to creditors following are the importantaspects giving competitive*dvantageNWillingness to value stocks fairlyReadily accepting stocks as collateral security for credits

!he Favorable credits rating of the +rms by creditorsFavorable record of leverages and working capital management bythe +rmFavorable current loan terms

!imely availability of loan at sucient level

567 Economic En%ironment

!he economic environment is by far the most signi+cant andpervasive component of the e&ternal environment It is thereforevery necessary for the +rm to appreciate how the economy workscurrently and how it will behave in future

For the purpose of the discussion we have classi+ed the economicenvironment into three main groups% namely%

- $eneral Economic 7onditionsK Industrial 7onditionL State of Supply of Resources for Croduction

!he corporate planner should also pay attention to the pattern ofincome distribution in the country because that determines the typeof products needed by people of di'erent income groups

3emand of products is also inuenced by savings and debtpatterns

Ind!stria" condition3

RAM ):


21/64


22/64


economic unit for an enterprise Bigh wages create cost problemsfor producers !hus% while deciding about the type of product to bemanufactured% the corporate planner must consider the availability%8uality price of labour

Managers3*vailability of highly 8uali+ed managers is also a critical economicinput for an organisation It is skilled management that makesoptimum utili,ation of resources ensures successful functions ofthe organi,ations Entrepreneurs% while contemplating to choose abusiness +eld% must see if 8uali+ed managers are available

87 Techno"ogica" En%ironment

7orporate planners must scan the technology environment thenuances of technology because new technological developmentsa'ect the eciency with which products can be manufactured sold !hey must be able to perceive how technological change willa'ect customer?s demand of product

!he pace of technological change in di'erent parts of the world hasbeen astounding In India too there has been rapid technologicaldevelopment% particularly in the +eld of electronics% automobiles%electricity% machine building% and information technology and there

is every possibility of this tendency to persist in the following years!hese developments have brought about breakthroughs inoperating procedures% product line% customer?s taste and fashion

!he management must% therefore% be on the look out for what isnew in the technological environment that o'ers opportunity orentails risk to the organisation !he management which possessesan active imagination and analytical faculties can foresee long(termconse8uences of new technology

!here are many sophisticated techni8ues of technologicalforecasting such as 3elphi?


23/64


research and engineering ideas from leading concerns particularlyma=or customers or suppliers

97 0o"itica" En%ironment

!he political atmosphere of a country is signi+cantly is relevant tobusiness organisation Do organisation can think of e&panding ordecertifying its activity of the political atmosphere is charged withturmoil and instability Where the ruling party is strong and stableand relations between central and state governments are cordialrole of opposition party is constructive% decisions(making powers arereasons ably distributed among di'erent social groups andgovernment has clear(cut +scal% +nancial and trade policies% thebusiness organisation will +nd it conducive to e&pand theiroperations !he climate in our country presents a mi&ed pictureOn the one hand% we have the democratic and federal system ofgovernment in which there is a strong and stable centralgovernment with e8ually strong state governments working inharmony with each other and businessmen have freedom to operatewithin the prescribed limits !hese aspects are 8uite encouragingfor the growth of private sector business enterprises Bowever%emerging regionalism at the political level% occasional communaldisturbances% linguistic problem and politicalisation of trade unionspresent threats to business enterprises

!hrough the regulatory role the government enacts various laws In

India as well as other democratic countries% until recently bothconsumers and business +rms had great freedom to pursue theircourse of action

Bowever% owing to social and political pressures and growingcomple&ity of technology and business practices% the governmenthas enacted a web of laws and regulations to constrain and regulatebusiness activities Some of these laws currently in vogue in Indiaare the Industries :3evelopment and Regulation; *ct%


24/64



25/64


26/64


27/64


MODULE II

STRATEGY IMLEMENTATION

If the 198!s were about "uality and the 199#s were aboutre$engineering, then the %!s will be about velocity. &bouthow "uic'ly the nature of business will change. (usiness isgoing to change more in next ten years than, it has in the lastfifty) $ (ill *ates, +hairman icrosoft +orporation


RAM

Perform

External

Audit

Develop

vision and

mission

statements

Establish

long term

objectives

Generate

Evaluate

and !elect

!trategies

"mplement

!trategies#

management

issues

"mplement

!trategies#

$ar%eting

&inance

Accounting

'(D

$"! "ssues

Perform

"nternal

Audit

$easur

Evalua

Perfor

)3


28/64


' (&"

)1. *hat is 68G matrix? "n ,hat context it is used b an organization?

)). "llustrate and explain 68G matrix. Explain its utilit.

)+. *hat is GE planning grid? ;o, can ou use GE grid in a business

organization? "llustrate and explain.

)-. *hat is $c @inse 3# ! frame,or%? ;o, can ou use $c @inse frame,or%

,hen a ne, ban% is being launched.

). Explain the Product ife 8cle concept ,ith illustration. ;o, does it affect

the !trateg?

)2. 8ompare 68G matrix ,ith product life ccle matrix

* (Total weightage for this part is &/!"

* (%"

)3. 5!tructure follo,s strateg7 Explain ,ith suitable examples.

)4. Do ou thin% strateg drives structure? Elaborate.

* +

)9. Explain the role of leadership in strategic management?

+:. 5eadership and motivation are %e drivers of strateg7. !ubstantiate ,ith

examples.

* ,

+1. Explain the role of creativit and innovation in strategic management !A.

NOTE! SOME OF T"E TOOLS OF STRATEGIC MANAGEMENT ARE IN

T"E ATTAC"MENT FILE

RAM )4


29/64


TOO+S OF COR0ORATE +E,E+ STRATEGIC MANAGEMENT

4CG MATRI2

!he 5oston 7onsulting $roup :57$; matri& provides a graphicalrepresentation for an organi,ation to e&amine the di'erent businessin its portfolio on the basis of their relative market shares andindustry growth rate

5usiness could be classi+ed on the 57$ matri& as either low or highaccording to their industry growth rate and relative market share

!he vertical a&is denotes the growth rate in sales in percentage fora particular industry !he hori,ontal a&is represents the relativemarket share% which is the ratio of a company?s sales to sales of theindustry?s largest competitor or market leader !he result ofcombining the industry growth rate and relative market share% eachalong a high and low dimension% is a four(cell matri& Each cell ofthis matri& has been given an interesting and appropriate name bythe 5oston 7onsulting $roup

!he four cell of 57$ matri& has been termed as stars% cash cows%8uestion marks:or problem children;% and dogs Each of these cells

represents a particular type of businesses

S!*RSN Stars are high(growth(high(market business which may ormay not be self(sucient in terms of cash ow !he cell correspondsclosely to the growth phase of the Croduct ife 7ycle :C7; * cogenerally pursues an e&pansion strategy to establish a strongcompetitive position with regard to a star? businessEg Cetrochemicals% fast food% electronics and communications

7*SB 7OWSN *s the term indicates% cash cows are business whichgenerates large amounts of cash but their rate of growth is slow

RAM )9


30/64


!hese businesses can adopt mainly stability strategies !he cashgenerated by cash cows? is reinvested in stars? and 8uestionmarks?EgN toothpaste for 7olgate% decorative paints for *sian Caints

U6ES!IOD


31/64


time Bere it is signi+cant to note that the life cycle concept is not tobe used as a guide to when a change will occur in the life cycleRather it is a useful guide to what changes might occur over aperiod of time% with regard to the market or industry conditions

Further% it is also important to remember that the life cycle cansometime be reversible% as seen in the case of products that arerevived after a declining trend Croducts% markets% businesses% andindustries sometimes e&perience reverse trends as often happens inthe case of fashion when discarded clothing fashion come intovogue again Strategists need to be aware of the possibility of suchreverse trends in the life cycle

!he C7 is one of the best known models of marketing It is usefulbecause it illustrates clearly that change is inevitable as an o'eringmoves through its life in the market Each of the stages of the cycleis characteri,ed by di'erent conditions of demand and supply !oget the best returns from a product at all times the manager mustbe able to change the marketing mi&% at the di'erent stages Fore&ample% a high price may be appropriate for a newly launchedinnovative product with few competitors !he skimming? strategywill generate high pro+ts early in the product?s life% but oncechallenged by competitors in the growth stage% prices need to fall ifmarket share is to be won Similarly% promotional activities mustchange from awareness generating% through persuasion to reminderas the product matures

One reason for portfolio analysis is to ensure that managers havelocated each product on its life cycle before strategies aredeveloped for them

RAM +1

)roduct life c-cle

.ntroduction rowth Maturit- *ecline

0ales 1olume

Re2enue

*uring

Maturit-3

)rofit

rowth slows down and )rofit

4e2els off

4oss Time

oteB *hilst there are various classic P8 shapes covering for example fashion goods the principal

!tages appl and the value of the model is to encourage managers to see ho, dnamic business is.


32/64


!here are a number of practical limitations to the use of the productlife cycle and some pitfalls to be avoided% but it does demonstratethe reason for developing a balanced portfolio and shows managers

why products at the height of their revenue T generating life are notpopular with the owners% because pro+t growth has levelled o'?S FRAME@OR=

*ccording to


33/64


Entrepreneurial Structure

!he entrepreneurial structure as shown in E&hibit -% is the mostelementary form of structure and is appropriate for an organi,ation

that is owned and managed by one person

E&hibit -

!he advantages that an entrepreneurial structure o'ers areN

Uuick decision(making% as power is centrali,ed !imely response to environmental changes Informal and simple organi,ational systems

!he disadvantages of the entrepreneurial structure areN

E&cessive reliance on the owner(manager and so proves to bedemanding for the owner(manager


34/64


35/64


E&hibit L

!he advantages that a divisional structure o'ers areN

Enables grouping of functions re8uired for the performance ofactivities related to a division $enerates 8uick response to environmental changes a'ectingthe businesses of di'erent divisions Enables the top management to focus on strategic matters

!he disadvantages of the divisional structure areN

Croblems in the allocation of resources and corporate overheadcosts> particularly if the business and corporate ob=ectives are ill(

de+ned Inconsistency arising from the sharing of authority between thecorporate and divisional levels Colicy inconsistencies between di'erent levels

Strategic 5usiness 6nit

Strategic 5usiness 6nit :S56; has been de+ned by Sharplin as "anypart of business organi,ation which is treated separately forstrategic management purposes# When organi,ations face diculty

in managing divisional operations due to an increase in diversity%si,e% and number of divisions% it becomes dicult for the topmanagement to e&ercise strategic control Bere% the culture of S56is helpful in creating an S56(organi,ational structure

7onceptually% an S56 is "a discrete element of the business servingspeci+c products(markets with readily identi+able competitors andfor which strategic planning can be constructed# Essentially% S56scan be created by adding another level of management in adivisional structure after the divisions have been grouped under adivisional top management authority on the basis of common

strategic interestsRAM +


36/64


37/64


38/64


resources and a network structure +rm relies heavily on outsiderswho are speciali,ed in their respective areas

E&hibit 2 Detwork Organi,ation Structure

!he advantages that the network structure o'ers areN

Bigh level of e&ibility to change structural arrangements inline with business re8uirements Cermits concentration on core competencies of the +rm *daptability to cope with rapid environment change

!he disadvantages of a network structure areN

oss of control and lack of coordination as there are severalpartners Risks of overspeciali,ation as most tasks are performed byothers Bigh costs as a duplication of resources could be there

0TR5'T5R6 F440 0TRAT69:

C. Do ou thin% !trateg drives structure? Elaborate.

AnsB# 5!tructure is static !trateg is dnamic7 seems to be more applied statement

in the present da scenario ,here organizations are striving for excellence in

everthing the do. 8ompetition is /getting0 intense and organizations have no other

choice but either to P'

!trateg is usuall developed at three levels 8orporate level !6> level (

Departmental level. Ever big organization has a !trategic $anagement Group

F!$G ,hich develops the !trategies for the organization to achieve in the ears to

come. =his team ,or%s on the changes in the Environment ,hich can impact and

affect the business. e, Hentures expansion turnaround ne, product development

diversifications divestures etc.

!trategies are prepared b organizations to fight competition. *ith the $alhotra

8ommittee 'eforms recommendations to privatize "nsurance business in "ndia in

1991 in place the Government opened up "nsurance !ector for private participation.

"'DA F"nsurance 'egulator Development Authorit ,as set up as an apex bod to

loo% into the ethical business practices of the "nsurance !ector. Around 14 private

RAM +4


39/64


plaers entered the "nsurance !ector in "ndia li%e "8"8" ;D&8 =A=A! 6"'A!

6AIAI 'E"A8E etc. "8 the Government plaer ,hich enjoed a virtual

monopol had to ,a%e up to beat the competition. All the plaers had big mone

and great mar%eting s%ills.

"8 ,as a mammoth plaer in the "nsurance !ector and ,as literall an undisputedplaer. "8 came to %no, that if it doesn0t revamp its strateg it cannot protect its

leadership status. "t too% a series of steps to combat competition from the private

plaers.

"8 believed that being a Government bod decision ma%ing ,as literall slo, and

this ,ould hamper the fighting spirit. !o "8 overhauled its entire


40/64


by applying their leadership attributes% such as beliefs% values%ethics% character% knowledge% and skills *lthough your position as amanager% supervisor% lead% etc gives you the authority toaccomplish certain tasks and ob=ectives in the organi,ation% this

%&erdoes not make you a leaderit simply makes you the'!!.

eadership di'ers in that it makes the followers want to achievehigh goals% rather than simply '!!"ng %e%(e ar)nd

Bow it inuences a strategy@

Inuential leaders are adept at building teams andpartnerships that rise above personal interests andcultural di'erences within organi,ations and between countries 3evelop critical leading and inuencing skills necessary tosustain long(term organi,ational success through a combination of

lecture% discussion% simulation and self(assessment 6nderstand regulatory and cultural challenges and see howcommerciali,ation has been accomplished globally 6nderstand how new technology can revolutioni,eestablished industries% presenting challenges for participants andopportunities for new entrants Strengthen your position in the global marketplace byunderstanding how knowledge is generated

eadership Implementation

eadership implementation refers to ensuring the right people inpositions responsible for implementation of the strategy Itencompasses the chief e&ecutive ocer :7EO; and the keymanager !he +rst dimension of eadership implementation is tomake sure that the right strategists are in the right position for thestrategy chosen for the S56 or +rm !he ability% integrity andcommitment of the 7EO and other top e&ecutives are very critical tothe successful implementation of the strategy !he critical role of theleader in strategic management is clear from the fact that ma=orchanges in strategy are often preceded by or 8uickly followed by achange in the 7EO It is aptly said that in strategic management thenature of the 7EO?s role is both symbolic and substantive

!he symbolic role is very important to instill con+dence and toinspire !he substantive nature of the 7EO role will be reected inthe amount of interest the 7EO has in the strategy and the amountof time he invested in implementing the strategy 5esides the 7EO%other top e&ecutives have a critical role in the strategyimplementation It is% therefore% essential to ensure that such keyposition are held by the right people

CREATI#ITY $ INNO#ATION IN STRATEGY!

RAM -:


41/64


Buman beings are relentlessly creative crucial issues thatcreativity must have some tangible outcome in products% inservices% in a new structure or strategy or more di'usely in apervasive shift in corporate culture

*n invention is the solution to a problem% often a technical one%where as innovations is the commercially successful use of thesolution Innovation starts after e&amining market needs% technicalproduction and marketing re8uirements

Successful innovations result from a conscious% purposeful searchfor innovation opportunities Innovations arise out ofN

6ne&pected occurrences

Incongruities

Crecise needs Industry and market changes

3emographic changes

7hanges in perception

Dew knowledge

Innovation means change Such changes can be incremental orradical% evolutionary or revolutionary !hey can have di'erente'ects upon procedures and users

Innovation is not a technical term Innovation creates new wealth ornew potential of action rather than new knowledge

Organisations know that it is not something that takes place withinan organi,ation but a change outside !he measure of innovation isthe impact on the environment Innovation in a business enterprisetherefore always be market focused

!he most market focused innovator succeeds like businessstrategies% an innovative strategy starts out with the 8uestion "Whatis our business and what should it be@# !he ruling assumption of an

innovative strategy is that what ever e&ists is aging E&istingproducts lines and services% e&isting markets and distillationchannels go down rather than up !he foundations of innovativestrategy is planned and systematic sloughing of the old% the dyingand the obsolete

Innovation is perhaps the single most important building block ofcompetitive advantage Successful innovations gives a companysomething uni8ue T something that the competitors lack !hisuni8ueness may allow a company to di'erentiate itself from itsrivals and change a premium price for its products *lternatively% it

RAM -1


42/64


may allow a company to reduce its unit costs for below those ofcompetitors

END OF STRATEGIC IMLEMENTATION MODULE (II)

MODULE III

STRATEGY CONTROLLING

Induce your competitors not to invest in those products, mar'ets andservices where you expect to invest the most. -hat is the mostfundamental rule of strategy) (ruce /. 0enderson


*

+). Explain the meaning nature and importance of controlling function.

RAM

Perform

External

Audit

Develop

vision andmission

statements

Establish

long termobjectives

Generate

Evaluateand !elect

!trategies

"mplement

!trategies#management

issues

"mplement

!trategies#

$ar%eting

&inance

Accounting

'(D

$"! "ssues

Perform

"nternal

Audit

$easur

EvaluaPerfor

-)


43/64


++. Explain the meaning and various steps involved in the process of control ,ith

reference to strategic management.

+-. Explain the process of evaluation and control of strateg.

+. *hat are the various tools that can be used for controlling a strateg?

E,A+UATION AND CONTRO+ OF STRATEGIES

Once the Strategy is implemented% there is no guarantee thatthe Strategy generates the results as aimed at !herefore% theStrategist has to evaluate the strategy to assess whether theimplementation of the Strategy is as per the Strategic plan Further%a number of deviations wither in the e&ternal environment or in

organi,ational environment% may take place !hese deviations maynecessitate a change in the Strategy !hese changes may re8uire aStrategic evaluation and control

De*n"t"n+

Cntr(("ng "! t,e %re!! reg)(at"ng rgan"/at"na(at"0"t"e! ! t,at at)a( %err1ane nr1! t e2%!edrgan"/at"na( !tandard!. It "! t,e %re!! 1n"tr"ngand ad3)!t"ng rgan"/at"na( at"0"t"e! "n !), a &ay a! t

a"("tate a1%("!,1ent rgan"/at"na( '3et"0e!.

!here are two broad types of controlN-; Strategic controlK; Operational control

- Strategic 7ontrolN

Strategic control focuses on monitoring and evaluating thestrategic management process to ensure that it functions in processto ensure that it functions in the right direction !he basic purpose

of strategic control is to help top management to achieve Strategicgoals as planned !here are M basic types of Strategic controls vi,:a; premises control :b; implementation control :c; Strategicsurveillance :d; speed alert control

a; Cremises controlN Strategies are often based on premises%ie assumptions are predicted conditions * strategy maybe rated only as long as the planning premises remainvalid * strategy may be based on certain premisesrelated to the industry and environmental factors like

RAM -+


44/64


government policies and regulations 7hanges in the vitalpremises may necessitate changes on strategy

b; Implementation controlN In several cases% theimplementation of a strategy may not progress asplanned% or the cost% sales volume% revenue% etc may be

at considerable variance with the planned ones !helessons of the +rst phase of the implementations could behelpful in the implementation of the subse8uent phasesIn short% implementations control is designed to asseswhether overall strategy should be changed in the light ofunfolding events and results associated with incrementalsteps and actions that implement the overall strategy

c; Strategic surveillanceN Strategic Surveillance is designedto monitor a broad range of events inside and outside thecompany that are likely to threaten the course of the+rm?s strategy !he strategy of a company could bedefeated by certain such events It is therefore%necessary that the company e&ercise surveillance fortimely detections of such developments and correctiveactions

d; Special alert controlN Sudden and une&pecteddevelopments like alliance between competitors% takeover9 mergers% a ma=or competition move by a competitor% etccould have serious impact on a +rm?s strategy EgN In thewake of the consolidation of the market by Bindustanever by taking over !omco% $odre= Soaps felt insecure

and forged an alliance with Croctor and $amblee; Operational 7ontrolN Operational control systems guide%monitor and evaluate progress in meeting annualob=ectives With strategic control attempts to steer thecompany over an e&tended time period% operationalcontrols provide post(action evaluation and control overshort time periods

The o$erationa" contro" s.stem in%o"%es the o""oingste$s3

a7 Estab"ishing criteria and standards

b7 Meas!ring and com$aring $erormancec7 0erormance ga$ ana".sisd7 TaBing correcti%e meas!res

a; Establishing criteria and standardsN 7riteria and standardsprovide the basis for evaluation Selection of the criteriafor evaluation depends on a number of factors Fore&ample% the evaluation criteria appropriate for stabilityStrategy may not be appropriate for growth strategy orretrenchment strategy

RAM --


45/64


b;


46/64


* company may set the following standardsN

!ime StandardN these relate to the time that an employeeshould take to perform a particular activity It may be a

product produced or service rendered Croduction StandardN Croduction standard specify the

number of units of a product that should be producedwithin the time speci+ed in the time standards Fore&ample% the company can set production standard thateach employee should produce -0 units of Croduct * in onehour

7ost standardsN !he products produced or servicesrendered must be cost e'ective so as to generatema&imum pro+ts for the +rm !he cost standards specify

the cost per unit of the products produced Uuality standardsN !he 8uality standards aim at

maintaining the 8uality of products Dot only should thegoods be cost e'ective% they must also be 8ualitative innature

Once the standards have been set% the workers perform theiractivities according to these standards !he activities having beenperformed% how many units have actually been produced% at whatcost% within what time period is monitored by the managers

:b; 4ench marBing3* ma=or focus in determining a +rm?s resources and

competitiveness is comparison with e&isting and potentialcompetitor?s +rms in the same industry often have di'erentmarketing skills% +nancial resources% operating facilities andlocations% technical know(how% brand images% levels of integrationand so on !hese di'erent internal resources can become relativestrengths or weaknesses depending on the strategy the +rmchooses In choosing a strategy% managers should compare the+rm?s key internal capabilities with those of its rivals% thereby

isolating its key strengths and weaknesses

5ench marking% comparing the way our? company performs aspeci+c activity with a competitor or other company doing the samething has become a central concern of mergers in 8ualitycommercial companies worldwide In structuring the internalanalysis% managers seek to systematically benchmark the costs andresults of the smaller value activities against relevant competitorson other useful standards because it has proven to be an e'ectiveway to continuously improve that activity !he ultimate ob=ective inbench marking is to identify the "best practices# in performing an

activity% to learn how to lower costs% fewer defects% or e&cellence areRAM -2


47/64


achieved 7ompanies committed to bench marking attempt toisolate and identify where their costs or outcomes are out of linewith what the best practitioners of a particular activity e&perienceand then attempt to change their activities to achieve the new bestpractices standard

:c; Cost beneft ana".sis35usiness is done with an ultimate ob=ective of pro+ts

!herefore% the strategist should analy,e the costs associated with apro+t centre and the bene+ts accruing therefrom 5oth direct andindirect costs are taken into consideration to arrive at the costs

!otal income out of the product line is taken into consideration toarrive at the pro+ts or bene+ts !he policy of transfer pricing isfollowed to arrive at indirect bene+ts On the basis of costs andbene+ts arrived by such analysis strategy for a business line orproduct is pursued

:d; 0erormance Ga$ Ana".sis3Over all plan of a business is arrived at based on divisional

plans !he unit heads of each department?s branches in case ofmulti(locational business units are guided by the corporate goal5usiness units contribute for achievement of corporate goals Suchgoals are compared with the achievements periodically If there is agap in achievement by di'erent units% such de+cit of business iscalled as performance gap It gives incite into pro=ections andperformance Strategic manager takes corrective steps to improve

the performance gap is reduced Identi+cation of performance gapis a valuable strategic control measure


48/64


budgeted +gures !his determines the eciency ofthe revenue centre 7orrective action is taken if theestimated +gures of revenue are not achieved

:iii; Cro+t centreN !his centre is credited with theresponsibility of earning desired level of pro+ts%

computed by +nding out the di'erence betweenrevenues and costs !hese centres can be divisions%departments% or the organi,ation as a whole

:iv; Investment centreN !he pro+ts that di'erent centresearn depend upon the ecient use of assets !heinvestment centres take care to invest money inassets which will generate ma&imum revenue andpro+ts for the enterprise as a whole !he eciencyof the investment centre is =udged through thereturns that these centres earn on their investments

:f; Ret!rn on in%estments 5ROI73Return on investment is a measure of control that measures

+nancial performance of a +rm in relative terms Rather thanmeasuring company?s performance on the basis of absolute +gureof pro+t% ROI measures a rate of return that +rms are able to earn ontheir capital employed !his techni8ue of control was adopted by3u Cont company of 6S* in -.-. ROI is used to measure theeciency of capital Bigher the eciency of capital other factorsremaining the same% higher will be the ROI and higher the +nancialperformance of the +rm !he ROI measure can be used to compare

the +rm on di'erent products of the same department or di'erent+rms within the industry * company% besides comparing itsperformance with other companies% can also compare its overallperformance in the current year with reference to earlier years *trend of ROI can help company in assessing the stability of earningsthat it has been able to maintain over a period of time * directingtrend% for instance% calls for a corrective action or control !he ROIcan be calculated by the application of the following formulaN

Sa"es earnings ca$ita" sa"es

Crecisely% ROI measures the earnings of the +rm as a percentage ofits capital

:g; 4!dgeting3* budget is a statement which reects the future incomes%

e&penditures and pro+ts that can probably be earned by a +rm It isa future pro=ection of the +rm?s +nancial position Don(+nancialaspects like number of units produced% number of units sold%material and labour re8uired per unit of output% etc can also beimportant components of a budget

RAM -4


49/64


5udgeting control refers to comparison of actual performance withthe planned or budgeted performance It is a basic techni8ue ofcontrol and is used at every level of organi,ation

Curpose of budgetsN !he budget intends to serve the following

purposesN:i; It provides a yard(stick for measuring and

comparing the 8uantitative performance ofdi'erent departments% at di'erent levels and atdi'erent time periods

:ii; It facilitates co(ordination of various resourcesvis()(vis pro=ects undertaken by the businessorgani,ations

:iii; It provides guidelines about the resources ande&pectations of an organi,ation

:iv; It facilitates intra and inter(management anddivisional performance of an organi,ation

5udget as controlling deviceN 5udget is a single use plan whichprovides a standard for measurement of performance Framingstandards is an important feature of plans and a budget% therefore%can be rightly construed to mean a plan It speci+es anticipatedresults in +nancial terms which serves as a basis for controlling thefuture revenues% and e&penses *s a controlling device% it providesa basis for feedback% evaluation and follow(up It facilitatescomparison of actual performance with planned performance and

helps to detect and correct deviations in the actual performance vis()(vis the planned performance !his comparison of performanceand recti+cation of errors is the essence of control * budget can%therefore% be viewed as both a plan and a device for control

END OF E,A+UATION AND CONTRO+ OF STRATEG-MODU+E5III7

CONCE0T UESTIONS FOR STRATEGIC MANAGENT

8oncept Juestions ,hich can be as%ed for short note for mar%s

1. Define !trateg

). Define !trategic management

+. "ntegration

-. Diversification and tpes of diversification

. Divestment. *hat is Disinvestment? "s "ndia successful in disinvestment?

2. Do,nsizing

RAM -9


50/64


51/64


3ebt can be sourced as working capital from bank% e&ternalcommercial borrowings from abroad% deferred payment% factoring%bill discounting% buyer?s credit% hire purchase% leasing and so on3ividend is the cost of e8uity and interest is the cost for the debt

!here are various debt instruments through which debt can be

evidenced !he borrowing ratio indicates the component of e8uityand debt Bigher this ratio% riskier the form is a capital as acting asrisk(absorbing mechanism

K MarBets3


52/64


involves ma&imi,ing materials productivity


53/64


c; 7omparison of cost and bene+t streams accruingduring the lifetime of a pro=ect and

d; Cro=ect selection

75* has been widely applied in under(developed countries to

irrigators% hydro electric and transport investments

7reativity Innovation in StrategyN

Buman beings are relentlessly creative crucial issues thatcreativity must have some tangible outcome in products% inservices% in a new structure or strategy or more di'usely in apervasive shift in corporate culture

*n invention is the solution to a problem% often a technical one%where as innovations is the commercially successful use of thesolution Innovation starts after e&amining market needs% technicalproduction and marketing re8uirements

Successful innovations result from a conscious% purposeful searchfor innovation opportunities Innovations arise out ofN

6ne&pected occurrences

Incongruities

Crecise needs

Industry and market changes

3emographic changes

7hanges in perception

Dew knowledge

Innovation means change Such changes can be incremental orradical% evolutionary or revolutionary !hey can have di'erente'ects upon procedures and users

Innovation is not a technical term Innovation creates new wealth ornew potential of action rather than new knowledge

Organisations know that it is not something that takes place withinan organi,ation but a change outside !he measure of innovation isthe impact on the environment Innovation in a business enterprisetherefore always be market focused

!he most market focused innovator succeeds like businessstrategies% an innovative strategy starts out with the 8uestion "Whatis our business and what should it be@# !he ruling assumption of aninnovative strategy is that what ever e&ists is aging E&istingproducts lines and services% e&isting markets and distillationchannels go down rather than up !he foundations of innovative

RAM +


54/64


55/64


need less skill in marketing !e&as Instruments is a leadingpractitioner of this strategy !he problem with this strategy isthat other +rms will usually compete with still lower costs andhurt the +rm that rested its whole future on cost

Diferentiation: !he business concentrates on achieving

superior performance in an important customer bene+t areavalued by a large part of the market !he +rm cultivates thosestrengths that will contribute to the intended di'erentiation

!hus the +rm seeking 8uality leadership% for e&ample% mustmake products with the best components% put them togethere&pertly% inspect them carefully% and e'ectively communicatetheir 8uality Intel has established itself as a technologyleader by introducing new microprocessors at breakneckspeed

Focus: !he business focuses on one or more narrow market

segments !he +rm gets to know these segments intimatelyand pursues either cost leadership or di'erentiation within thetarget segment *irwalk shoes came to fame by focusing onthe very narrow e&treme(sports segment

DO@NSI1ING3

Where there is surplus workforce% trimming of labour force will benecessary !he trimming or downsi,ing plan shall indicate>

- Who is to be made redundant and where and when>

K Clans for re(development or re(training% where this has notbeen covered in the re(development plan>L Steps to be taken to help redundant employees +nd new =obs>M Colicy for declaring redundancies and making redundancypayments> and/ Crogramme for consulting with unions or sta' associations andinforming those a'ected

*nother method of dealing with surplus labour is to retain allemployees but reduce the work hours :thus reali,e payrolls savings;perhaps to a four day% LK( hour work week In this way a companycan spread a K0 percent decrease in demand :and in pay; e8uitablyacross the whole workforce% rather than keep 40percent of theemployees full(time and lay(o' K0 percent of them

3epending on the nature of the surplus% a +rm may be able totransfer or reassign employees to =obs in parts of the organi,ationthat are still e&periencing demand Or if the +rm e&pects the surplusto be short(lived and can a'ord to keep e&cess workforce on payroll%the company can use the slack time to provide cross training inrelated =obs to enhance workforce skills and e&ibility *lternatively%

the surplus workers can perform e8uipment maintenance andRAM


56/64


overhaul or engage themselves in other activities that werepostponed when demand was high

O'ering high incentives for early retirement I another way ofhandling surplus labour Euphemistically called as Voluntary

Retirement Scheme :VRS;% this method is widely practiced 5ut hrplanners and trainers may be forced to scramble to deal with asudden short fall of e&perienced sta'% particularly when VRS isselected by a large number of employees

aying(o' is another strategy for dealing with surplus sta' !hisaction is determinal to both employees and employers Foremployers% lay(o' means =oblessness and for employees it meansloss of reputation Dotwithstanding this% several +rms are laying o'their surplus employees

DISIN,ESTMENT

- !he action of an organi,ation or government selling or li8uidatingan asset or subsidiary *lso known as AdivestitureA

K * reduction in capital e&penditure% or the decision of a companynot to replenish depleted capital goods

Investopedia SaysN

- * company or government organi,ation will divest an asset orsubsidiary as a strategic move for the company% planning to put theproceeds from the divestiture to better use that garners a higherreturn on investment

K * company will likely not replace capital goods or continue toinvest in certain assets unless it feels it is receiving a return that

=usti+es the investment If there is a better place to invest% they maydeplete certain capital goods and invest in other more pro+tableassets

DI,ERSIFICATIONN

- Raising resourcesN

!he +rst main ob=ective of disinvestment of public sector units is toraise resources from within public sector units to meet threecategories of cost associated with transformation of public sectorenterprises !hey are as followsN

RAM 2


57/64


58/64


1 5uilding up of competitive environmentN

Finally the ma=or ob=ective of disinvestment was to build up healthycompetitive environment in the economy !he govt would ensure

that the disinvestment does not result in creation of pvt this is a factorbecause forward integration reduces an organi,ations ability todiversify if its basic industry falters

When an organi,ation has both the capital and humanresources needed to manage the new business of distributing itsown products

When the advantages of stable production areparticularly high> this is a consideration because an organi,ation canincrease the predictability of the demand for its output throughforward integration

When present distributors or retailers have high pro+tmargins> this situation suggests that a company pro+tably coulddistribute its own products and price them more competitively byintegrating forward

K; 5ackward Integration T

5oth manufacturers and retailers purchase needed materials fromsuppliers 5ackward integration is a strategy of seeking ownershipor increased control of a +rm?s suppliers !his strategy can beespecially appropriate when a +rm?s current suppliers are unreliable%

too costly% or cannot meet the +rm?s needsRAM 4


59/64


Seven guidelines for when backward integration may be anespecially e'ective strategy areN

When an organi,ation present suppliers are especially e&pensive% or

unreliable% or incapable of meeting a +rms needs for parts%components% assemblies% or raw materials

When the numbers of supplier?s are small and the number ofcompetitors is large

When an organi,ation competes an industry that is growing rapidly>this is a factor because integrative type strategies reduce anorgani,ations ability to diversify in a declining industry

When an organi,ation has both capital and human resources tomanage the new business of supplying its own raw materials

When the advantages of stable prices are particularly important>

this is a factor because an organi,ation can stabili,e the cost of itsraw materials and the associated price of its products throughbackward integration

When present suppliers have high pro+t margins% which suggestthat the business of supplying products or services in the givenindustry is a worthwhile venture

When an organi,ation needs to ac8uire a needed resource 8uickly

L; Bori,ontal Integration T

Bori,ontal integration refers to a strategy of seeking ownership of or

increased control over a +rm?s competitors One of the mostsigni+cant trends in strategic management today is the increaseduse of hori,ontal integration as a growth strategy


60/64


organi,ation possesses> note that hori,ontal integration would notbe appropriate if competitors are doing poorly% because in that caseoverall industry sales are declining

DI,ERSIFICATION STRATEGIES3&

!here are three general types of diversi+cation strategiesN7oncentric% Bori,ontal and 7onglomerate Overall% diversi+cationstrategies are becoming less popular as organi,ations are +nding itdicult to manage diverse business activities In the -.10?s and-.20?s% the trend was to diversify so as not to be dependent on anysingle industry% but the -.40?s saw a general reverse of thatthinking 3iversi+cation is now on the retreat

-; 7oncentric 3iversi+cation T

*dding new% but related% products or services is widely called asconcentric diversi+cationSi& guidelines for when concentric diversi+cation may be ane'ective strategy are provided belowN

When an organi,ation competes in a no growth or a slowgrowth industry

When adding new% but related% products wouldsigni+cantly enhance the sales of current products

When new% but related% products could be o'ered athighly competitive prices

When new% but related% products have seasonal saleslevels that counterbalance an organi,ation?s e&isting peaks andvalleys

When an organi,ation?s products are currently in thedeclining stage of the product?s lifecycle

When an organi,ation has a strong management team

K; Bori,ontal 3iversi+cationN

*dding new% unrelated products or services for present customers iscalled hori,ontal diversi+cation !his strategy is not as risky asconglomerate diversi+cation because a +rm already should befamiliar with its present customers

Four guidelines for when hori,ontal diversi+cation may be ane'ective strategy are provided belowN

When revenues derived from an organi,ation?s currentproducts or services would increase signi+cantly by adding the new%

unrelated productsRAM 2:


61/64


When an organi,ation competes in a highly competitiveand9or a no growth industry% as indicated by low industry pro+tmargin and returns

When an organi,ation?s present channels of distributioncan be used to market the new products to current customers

When the new products have counter(cyclical salespatterns compared to an organi,ation?s present productsL; 7onglomerate 3iversi+cationN *dding new% unrelated productsor services is called conglomerate diversi+cation

Si& guidelines for when conglomerate diversi+cation may be anespecially e'ective strategy to pursue are listed belowN

When an organi,ation?s basic industry is e&periencing

declining annual sales and pro+ts When an organi,ation has the capital and managerialtalent needed to compete successfully in the new industry

When the organi,ation has the opportunity to purchasean unrelated business that is an attractive investment opportunity

When there e&ists +nancial synergy between theac8uired and ac8uiring +rm

When the e&isting markets for an organi,ation?s presentproducts are saturated

When anti(trusts actions could be charged against anorgani,ation that historically has concentrated on a single industry

Ga$ ana".sis!he concept3*nother important step in strategic management is the gap

analysis $ap analysis is also a means for motivating topmanagement to initiate steps for strategic management $ap isthe deviation between events which is perceived% planned orforecasted and that of actual 5ased on the system analysis% theoutcome is based on the ob=ectives% which is conditioned by the

criteria and constraints Bence% broadly% gap analysis is classi+edunder the following categoriesN

$ap analysis on outcome $ap analysis on the ob=ective $ap analysis on the constraints like environment $ap analysis on the criteria like planning promises andassumptions

5ased on e&isting strategy% organisation has evolved a particularway of planning to accomplish a given set of ob=ectives * formal

RAM 21


62/64


evaluation must be made as to the way the e&isting strategy isworking 5ased on analysis of environment% anew set ofopportunities is opened up

In order to take advantage of the new opportunities% a set of new

strategies are contemplated !herefore at a future date there aretwo sets of outcome% which are to be achieved One set of outcomeis those based on e&isting strategy% which is considered as"e&pected outcome# *nother set of outcome is that which comesout of the contemplated new strategy% considered as "desiredoutcome# !he analysis between the two outcomes is called gapanalysis of the outcome$ap analysis is an important techni8ue in motivating topmanagement to initiate strategic management process !hecapability of gap analysis to do so depends upon three conditionsthey are as followsN

- Signi+canceN !he gap itself can provide the "catalytic e'ect#of top management !his depends on the signi+cance of the gapSuppose the "e&pected outcome#% at a future date is the same ornearly the same as that of the "desired outcome#% there is no needto change the e&isting strategy In other words% the gap acts as a"triggering agent# for initiating a new strategy% provided the gap issigni+cant

K ImportanceN $ap analysis% can act as a motivation providedthe gap is important Suppose% the company +nds that there is ascope for improving the market share from the present level of -0to K/ in the ne&t year *t the same time e&pected increase ofshare with e&isting strategy for the ne&t year is only -/ then therewill be a genuine motivation is generated because there is a gapbetween the e&pected and desired outcome in one of its ob=ectives%vi,% market share

L ReducibilityN !his is ma=or important criterion of success !his

is the belief of top management that the pro=ected gap is reducibleIn other words% this is the con+dence level of top management inthe capacity of the proposed strategy to reduce the gap !here arecertain constraints% which are beyond the capacity of theorganisation to correct

M Responsibility centers 7ontrol systems can be established tomonitor speci+c functions% pro=ects% or divisions 5udgets are onetype of control system that is typically used to control the +nancialindicators of performance Responsibility centers are used to isolate

a unit so that it can be evaluated separately from the rest of theRAM 2)


63/64


corporation Each responsibility center% therefore% has its ownbudget and is evaluated on its use of budgeted resources !hemanager responsible for the center?s performance heads it !hecenter uses resources to produce a service or a product !here are+ve ma=or types of responsibility centers !he type is determined by

the way the corporation?s control system measures these resourcesand services or products

/ Standard cost centersN Crimarily used in manufacturingfacilities% standard costs are computed for each operation on thebasis of historical data In evaluating the center?s performance% itstotal standard costs are multiplied by the units produced !he resultis the e&pected cost of production% which is then compared to theactual cost of production

1 Revenue centersN Croduction% usually in terms of unit or dollarsales% is measured without consideration of resource costs !hecenter is thus =udged in terms of e'ectiveness rather than eciency

!he e'ectiveness of a sales region% for e&ample% is determined bycomparing its actual sales departments have very limited inuenceover the cost of the products they sell

2 E&pense centersN Resources are measured in dollars withoutconsideration for service or product costs !hus budgets will havebeen prepared for engineered e&penses and for discretionarye&penses !ypical e&pense centers are administrative% service% and

research departments !hey cost organisation money but they onlyindirectly contribute to revenues

4 Cro+t centersN Cerformance is measured in terms of thedi'erence between revenues * pro+t center is typically establishedwhenever an organi,ational unit has control over both its resourcesand its products or services 5y having such centers% a company canbe organi,ed in to divisions of separate product lines !he managerof each division is given autonomy to the e&tent that she or he isable to keep pro+ts at a satisfactory level

. Investment centersN 5ecause many divisions in largemanufacturing corporations use signi+cant assets to make theirproducts% their asset base should be factored in to theirperformance evaluation !hus it is insucient to focus only onpro+ts% as in the case of pro+t centers !hus it is insucient to focusonly on pro+ts% as in the case of pro+t centers *n investmentcenter?s performance is measured in terms of the di'erencebetween its resources and its services or products

RAM 2+


64/64


-0 ROI budgeting !he most commonly used measure of corporateperformance is return on investments :ROI; It is simply the result ofdividing net income before ta&es by total assets *lthough ROI hasseveral advantages% it also has several distinct limitations*dvantagesN

-; ROI is a single comprehensive +gure inuenced by every thingthat happensK; It measures how well the division manager uses the propertyof the company to generate pro+ts It is also a good way to check onthe accuracy of capital investment proposalsL; It is a common denominator that can be compared with manyentitiesM; It provides an incentive to use e&isting assets eciently/; It provides an incentive to ac8uire new assets only when doingso would increase the returnimitationsN-; ROI is very sensitive to depreciation policy 3epreciation write(o' variances between divisions a'ect ROI performance *ccelerateddepreciation techni8ues increase ROI% conicting with capitalbudgeting discounted cash(ow analysisK; ROI is sensitive to book value Older plants with moredepreciated assets have relatively lower investment bases thannewer plants% thus increasing ROIL; In many +rms that use ROI% one division sells to another *s aresult% transfer pricing must occur E&penses incurred a'ect pro+tSince% in theory% the transfer price should be based on the total

impact on +rm pro+t% some investment center managers are boundto su'er E8uitable transfer prices are dicult to determineM; If one division operates in an industry that has favorableconditions and another division operates in an industry that hasunfavorable conditions% the former division will automatically "look#better than the other/; !he time span of concern here is short range !heperformance of division managers should be measured in the longrun !his is top management?s time span capacity1; !he business cycle strongly a'ects ROI performance% oftendespite managerial performance

*33I!IOD* IDC6!S FRO<

Date post:	02-Jun-2018
Category:	Documents
Upload:	bhawanachitlangia
View:	228 times
Download:	0 times

SMgt Notes FINAL

Documents