ASST PROF. JONLEN DESAASST PROF. JONLEN DESA

This model was developed by McKinsey & Co. consultants , Harvard Business School and Stanford Business School professors.The model is most often used as a tool to assess and monitor changes in the internal situation internal situation of an organization.The model is based on the theory that, for an organization to perform well, these seven elements need to be aligned.The basic premise of the model is that there are seven seven internal aspectsinternal aspects of an organization that need to be aligned if it is to be successful.The main aim of this model is to diagnose problems, solve them & improve organizational performance.

HARD ELEMENTS SOFT ELEMENTSSOFT ELEMENTS

"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems. "Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.

Improve the performance of a companyExamine the likely effects of future changes within a companyAlign departments and processes during a merger or acquisitionDetermine how best to implement a proposed strategy

It refers to the intended sequence of actions taken by a company to achieve its goals and objectives. It deals with resource allocation and includes competition, customers and the environment. Strategy are plans an organization formulates to reach identified goals, and a set of decisions and actions aimed at gaining a sustainable advantage over the competition.A sound strategy is the one that’s clearly defined , is long-term, helps to achieve competitive advantage and is reinforced by strong vision, mission and values. A good strategy is one which is well aligned with the other 6 elements.Elements of a strategy is very essential.

It refers to how the various business units are structured and how they communicate with each other. A company’s structure may be centralized or decentralized. Structure represents the way business divisions and units are organized.It also includes authority, responsibility & accountability. Structure is the organizational chart of the firm. It shows the hierarchical structure of the firm.It is also one of the most visible and easy to change elements of the framework.It shows the ways in which task and people are specialized and divided, and authority is distributed.Functional, Divisional & Matrix Structures

This includes a host of systems within an organization that define its processes and routines.Formal processes and procedures to manage the organization.Systems are the area of the firm that determines how business is done and it should be. Systems define the flow of activities involved in the daily operation of business, including its core processes and its support systems. They refer to the procedures, processes and routines that are used to manage the organization

BudgetingResource AllocationInformation SystemDistribution System

Business Process Management System (BPMS)Management information systemInnovation system Performance management systemFinancial system/capital allocation systemCompensation system/reward system Customer satisfaction monitoring system

It refers to the number and type of employees in the organization. It is very important for an organization to manage its human capital to create competitive advantage.

Staff element is concerned with what type and how many employees an organization will need and how they will be recruited, trained, motivated and rewarded.

Staffing is the process of finding the right person for the right job. It involves keeping all the various job positions filled.

These define the core competencies of the employees.

Skills are the abilities that firm’s employees have to perform very well. They also include capabilities and competences.

Different kinds of skills include communication, intellectual, problem solving, decision making, negotiation, analytical, marketing skills & skills required to perform a particular task.

This spans the core beliefs, norms and management style in the organization.

Style represents the way the company is managed by top-level managers, how they interact, what actions do they take and their symbolic value. In other words, it is the management style of company’s leaders.

Leadership style of top management and overall operating style of organization.

MANAGEMENT STYLESMANAGEMENT STYLES

DEMOCRATIC MGMT STYLE

AUTOCRATIC MGMT STYLE

LAISSEZ-FAIRE MGMT SYLE

LEADERSHIP STYLESLEADERSHIP STYLES

IMPROVISHED LEADERSHIPTASK LEADERTEAM LEADERCOUNTRY CLUB LEADERMIDDLE OF THE ROAD LEADER

PARTICIPATIVE LEADERSHIP STYLECONSULTING LEADERSHIP STYLEAUTOCRATIC LEADERSHIP STYLE

Shared Values are at the core of McKinsey 7s model. They are the norms and standards that guide employee behavior and company actions and thus, are the foundation of every organizationThese are the core values of the company that connect all the other 6 factors. These are the fundamental ideas or guiding principles that lay the foundation of businesses. Values are the identity by which a company is known throughout its business areas, what the organization stands for and what it believes in, it central beliefs and attitudes.Placing Shared Values in the middle of the model emphasizes that these values are central to the development of all the other critical elements. The original vision of the company was formed from the values of the creators. As the values change, so do all the other elements.

What is our strategy?How do we intend to achieve our objectives?How do we deal with competitive pressure?How are changes in customer demands dealt with?How is strategy adjusted for environmental issues?

How is the company/team divided? What is the hierarchy?How do the various departments coordinate activities? How do the team members organize and align themselves?Is decision making and controlling centralized or decentralized? Is this as it should be, given what we're doing? Where are the lines of communication?

What are the main systems that run the organization? Consider financial and HR systems as well as communications and document storage.Where are the controls and how are they monitored and evaluated?What internal rules and processes does the team use to keep on track?

What positions or specializations are represented within the team?What positions need to be filled?Are there gaps in required competencies?

What are the strongest skills represented within the company/team?Are there any skills gaps?What is the company/team known for doing well?Do the current employees/team members have the ability to do the job?How are skills monitored and assessed?

How participative is the management/leadership style?How effective is that leadership?Do employees/team members tend to be competitive or cooperative?Are there real teams functioning within the organization or are they just nominal groups?

What are the core values?What is the corporate/team culture?How strong are the values?What are the fundamental values that the company/team was built on?

Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision.Strategy formulation is the development of long range plans for the effective management of environmental opportunities and threats in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines. The simplest way is to conduct SWOT analysis.

Setting of Organizational Mission, Vision & Objectives.Evaluation of Organizational Environment.Analyze Internal Envt – Strengths & WeaknessesAnalyze External Envt – Opportunities & ThreatsAnalyze CompetitorsSetting Quantitative targets.Performance AnalysisAlternatives & Choice of Strategy

Strengths & Weaknesses of the firmStrengths & Weaknesses of the firmOpportunities & Threats of the firmOpportunities & Threats of the firmObjectives of the firmObjectives of the firmTimeTimeResourcesResourcesManagement StyleManagement StyleManager’s Risk taking ability.Manager’s Risk taking ability.

The Corporate Level Generic Strategies pertain to the question “Which business the company shall be in?”Which could be the most suitable strategy for the firm?

4 Types of Corporate Generic Strategies:Corporate Generic Strategies:

If a company wants to continue in the same business and it is doing reasonably well in that business & there is no scope for significant growth or expansion, the strategy to be adopted is a stability strategy.A stability strategy is one that characterized by absence of significant change.With this strategy an organization continues to serve its same market and customers while maintaining its market share.Stability strategy is likely to be pursued by small business firms or by firms in the maturity stage.

Stability strategy is a strategy in which the organization retains its present strategy at the corporate level and continues focusing on its present products and markets. The firm continues to serve the customers in the same product or service market & maintains its market share.It focuses on incremental improvement of functional performance- doing the same thing better.A firm following stability strategy does not seek to purchase new assets, nor enter new markets or gain market share.

It this strategy, a company maintains status-quo. There is not much of fluctuations or changes in the business operations, but it is fairly stable & constant. The company grows steadily.Stability strategy is perceived as a non-growth strategy.Some companies experiencing volatilities diversify to the stable portfolio businesses. Companies belonging to the cement, chemical, fertilizers, banking, iron & steel adopt stability strategies.

The company is doing fairly well and it is hopeful of the same in future.A family dominated or private company may not like to expand its business if its amounts to diluting the control or if effective supervision is not possible by the family members.The feeling that sticking to the known business is always better and safe.The company may not have the resources and capabilities for expansion.The company may not want to take the risks of growth and expansion.The management does not have the mind-set of a strategist to analyze environmental opportunities and seize the opportunities.The firm wants to give full attention on the current business and not on diversification.

When the business environment is volatile, full of uncertainties. Environmental turbulence is minimum & the firm does not foresee any major threat.The firm has just finished a phase of rapid growth.The industry is in the maturity phase with little or no growth prospects and is in a comfortable position in the industry.

Maintenance of Status QuoSustainable GrowthIncremental GrowthNo Change StrategyPause/Proceed with Caution StrategyProfit or Harvest Strategy

1.MAINTENANCE OF STATUS QUO1.MAINTENANCE OF STATUS QUOThe firms adopting this strategy maintain the same level of operation. Small business firms desire satisfactory level rather than growth.

2. SUSTAINABLE GROWTH2. SUSTAINABLE GROWTHSlow growth is more desired that maintaining status quo. It is difficult to maintain status quo, hence sustainable growth strategy is more optimistic than zero growth. This strategy is followed when the firm perceives that the external environment is not favorable due to critical resource constraints.

3. INCREMENTAL GROWTH3. INCREMENTAL GROWTHIn this strategy, the firm concentrates on one product line at a time, growing steadily. It is a low-risk, low market share, change resistant strategy followed by firms that are very comfortable with their present line of business.

4. NO CHANGE STRATEGY4. NO CHANGE STRATEGYNo change strategy is a decision to do nothing new i.e. No change strategy is a decision to do nothing new i.e. continue with the current operations in the future.continue with the current operations in the future.If there are no significant S & W in the organization or no If there are no significant S & W in the organization or no O & T in the business environment, the firm decides not O & T in the business environment, the firm decides not to do anything new.to do anything new.Companies continue the same strategy till the internal & Companies continue the same strategy till the internal & external environment are constant.external environment are constant.

5. PAUSE/PROCEED WITH CAUTION STRATEGYCompanies test the environment and market conditions

when new products are introduced.They observe the reactions of the market and check the results.If the results are negative, the business operations including production and marketing are paused.If the results are positive, then they proceed with the operations.Thus the companies follow pause & proceed stability until the environment reaches stability stage.Also when there is volatility and fluctuations in the environment, firms adopt this strategy till there is stability.

6. PROFIT STRATEGY

Profit strategy aims at maintaining the same level of profit (earned by a firm during favorable economic conditions) even during uncertain & unfavorable economic conditions, through window dressing. Thus, the company support themselves artificially through the following ways:Inflating the sales figures, reducing operating expenditure, reducing investments, reducing depreciation, presenting bad debts as debtors.Through this strategy, a firm hides its poor financial position from the stakeholders.This strategy should be used cautiously & rarely or else it could lead to disastrous consequences.

Retrenchment Strategy is a corporate level defensive strategy followed by a firm when its performance is disappointing or when the survival of the firm is at stake.Retrenchment Strategies are also known as Defensive Strategies.It involves contraction of the scope or level of business or function.Economic Recession, Product inefficiencies and innovative breakthrough by competitors are the 3 main causes of retrenchment.

A firm pursues a retrenchment strategy when:It drops product line(s), market(s), market segment(s) or function(s).Focuses on functional improvements or reversing certain deteriorating trends.

It InvolvesIt InvolvesLaying off employeesAvoiding excessive promotional effortsDropping product linesRestructuring- Internal & External

Certain division/product lines/products/market segments/functions are not profitable.The profit from a business is less than the target rate.The company’s new strategy is to focus on its core business.The company is too diversified/scattered that effective management is not possible.The company has serious financial problem so that the funds obtained by divestiture can be used for strengthening other businesses.Certain current business does it to confirm the company philosophy/ethics.

The company is not doing well at all in its business.The company has not met its objectives and there is pressure from the stakeholders to improve performance.External environment posses a lot of threats and the company’ strengths are inadequate to face the threats.Prevalence of poor economic conditions.Operating & Production inefficienciesInability to implement latest technology due to technology revolution

A firm becomes a captive of another firm when it subjects itself to the decision of the other firm in return for a guarantee that a certain amount of the captive’s product will be purchased by the other firm.The independent firm takes decisions for the captive company.Companies may undertake a captive strategy as a means of reducing labor costs and reducing the size of employees. Under captive strategy, the captive firm sells majority of its products to the independent firm and it outsources its production activities to the independent firm, thus cutting down costs.This strategy is effective for a new company & companies facing problems. Hence they rely on other firms.

2. DIVESTMENT STRATEGY2. DIVESTMENT STRATEGYA divestiture strategy is pursued when a company sells or divests itself of a business or part of a business.It may because of losses, managerial problems, less than target rate of return, urgency to mobilise funds etc. Divestment is done when a company performs poorly.Divestment strategy is also known as Divestiture or Spin-Divestiture or Spin-Off.Off.

3 APPROACHES OF DIVESTMENT3 APPROACHES OF DIVESTMENTSpinning of part of the business as an independent entity both financially & managerially.Selling a business unit to another firm.Closing down a portion of firm’s operations

3. TRANSFORMATION STRATEGY3. TRANSFORMATION STRATEGYA transformation occurs when a firm makes a major change in its outlook and operations, usually including moving from one kind of business to another.Changes in strategy are quite substantial.These strategies are difficult to implement as they require a great deal of flexibility form the firm.Companies undertake this strategy when:Returns on current operations are lower than desired.Opportunities in other areas are specially attractive.A strong, flexible management team exists.The firm has a strong financial base to support its transformation.Lot of money to spend on investments.

4. LIQUIDATION STRATEGY4. LIQUIDATION STRATEGYLiquidation strategy is considered as the most extreme retrenchment strategy.It involves closing own a business firm and selling its assets. The company is sold or dissolved.This should be the last resort, as its consequences are severe.When the business of the firm is a total failure, a firm liquidates.As a result a firm closes down, operations are shut, employees loose their jobs and termination of opportunities of the firm.

REASONS

Due to the retirement or death of partners.

When sole-trader wants to take up a new job or he resigns.

As per the court order- compulsory liquidation.

No long term benefits, costs exceeds the profits.

Attractive offer is made to the owner for liquidating the business.

CONSEQUENCESCONSEQUENCES

Loss of jobs. All operations come to a

halt. Shareholders my have to

forego their capital in part or in full.

All stakeholders will suffer due to non-payment of dues.

Law suits against the firm. Difficulty in finding a new

buyer because of huge finances involved.

5. TURNAROUND STRATEGY5. TURNAROUND STRATEGYA turnaround strategy involves management measures designed to reverse certain negative trends and to bring the firm back to normal health & profitability.Turnaround means reversing a negative trend.It helps in improving the internal efficiency of a business.It usually involves getting rid of unprofitable products, trimming the workforce, finding better ways to improve productivity.

A turnaround strategy involves management measures designed to reverse certain negative trends and to bring the firm back to normal health & profitability.Turnaround means reversing a negative trend.It helps in improving the internal efficiency of a business.It usually involves getting rid of unprofitable products, trimming the workforce, finding better ways to improve productivity.Egs: Ashok Leyland, Siemens & ITC Bhadrachalam are well known companies who followed turnaround strategies.

Continuous cash flow problemsDeclining profitsDwindling market shareHigh employee turnoverLow morale of employeesRaw material supply problemsRising input pricesStrikes & LockoutsRecessionMismanagementIncreased CompetitionContinuous lossesDeclining demand for goods & servicesIncreasing Debt

a. SURGICAL APPROACHa. SURGICAL APPROACHThis approach is mostly mechanical & requires a This approach is mostly mechanical & requires a tough attitude of the top executive.tough attitude of the top executive.The executive issues direction for change, fires The executive issues direction for change, fires employees, closes down divisions, drops employees, closes down divisions, drops products, replaces machinery, controls products, replaces machinery, controls marketing & finance etc.marketing & finance etc.This approach continues till the firm is turned This approach continues till the firm is turned around.around.Later the chief executive relaxes the tough Later the chief executive relaxes the tough environment & controls.environment & controls.

b.b. HUMAN RESOURCE DEVELOPMENT APPROACHHUMAN RESOURCE DEVELOPMENT APPROACH

The CEO conducts many meetings, encourages managers to be open, understand each other, understand problems, diagnose them & solve the same.He encourages suggestions, active participation & discussion from employees for turnaround ideas.Team spirit is fostered in the organization.He encourages employees to decide techniques, acquire skills & knowledge and modify their behavior.

The process of turnaround may be carried out either by the present CEO & his team or the new CEO & his team.

Change the LeaderChange the pricesFocus attention on specific customers & productsExtend the product’s life through improvementsReplace existing products with new onesFocus on power brandsLiquidate assets for generating cashBetter internal co-ordinationEmphasis on selling & advertising

Cost Reduction StrategyAsset Reduction StrategiesRevenue Increasing StrategiesFinancial Restructuring StrategiesProduct/Market Redefinition StrategiesManagement Change Strategies

The simultaneous pursuit by an organization of growth, stability, and retrenchment strategies.One part of the organization may go in for growth strategy while the other part for retrenchment strategy.A Combination strategy results from environmental changes & redefinition of business.A company pursues a combination strategy when it adopts more than one strategy. ( G, S, R). It includes:

Stability and Growth Strategy.Stability and Retrenchment Strategy.Growth and Retrenchment Strategy.

Combination strategy involves the implementation of 2 or more strategies.During the period of rapid environmental changes, adoption of combination strategy is necessary.Firms may liquidate one unit, develop another unit & allow the third to survive simultaneously.This is done to improve the efficiency of business & maximize profitability.Once the firms profitability improves, it can adopt a growth strategy.This strategy is used by large firms with many units, diversified products & various markets.This strategy is also known as Portfolio Restructuring Strategy

It is also known mixed or hybrid strategies.

It is a mixture of stability, expansion or retrenchment strategies, applied either simultaneously (at the same time in different businesses) or sequentially ( at different times in the same business).It is difficult for an organization to survive if it adopts only one single pure strategy. Hence combination strategy helps a firm tide over difficult times.It could include changes in products, markets (customers) or functions i.e. dropping old ones & adding new ones.Firms pursuing the combination strategy must be alert to competitor reactions.

COST LEADRESHIP STRATEGYCOST LEADRESHIP STRATEGYDIFFRENTIATION STRATEGYDIFFRENTIATION STRATEGYFOCUS STRATEGYFOCUS STRATEGY

A firm uses these 3 strategies as part of their combination strategy to gain a competitive advantage over its rivals.