mb0052-slm-unit-12

Strategic Management and Business Policy Unit 12

Sikkim Manipal University Page No. 313

Unit 12 Selection and Activation of StrategyStructure

12.1 Introduction12.2 Caselet

Objectives12.3 Process of Strategic Choice12.4 Strategy Selection Factors or Criteria12.5 Selection of Final Strategy12.6 The Strategic Plan12.7 Preparation of Strategic Budget12.8 Allocating and Managing Resources12.9 Case Study

12.10 Summary12.11 Glossary12.12 Terminal Questions12.13 Answers12.14 References

12.1 Introduction

In the last unit, we moved closer to selection of strategy by an organization.Various industry types and structures were analysed and important aspects ofcompetitive strategies in these industries were discussed. Most companies belongto one of these types of industries. Competition analysis was undertaken in detail,which enables a company to understand clearly competitor signals, moves andactions which can pose competitive threats to companies. Finally, various factorswhich determine or affect competitive advantage or disadvantage of companieswere analysed. All these give vital guidelines to companies for selection of anappropriate strategy, or a combination of strategies, under given conditions.

The present unit is more like an extension of the previous one. We willdiscuss some additional factors or criteria here. These factors or criteria shouldguide a company in selecting a final strategy from among the various alternativestrategies discussed in Unit 7 (stability strategies), Unit 8 (strategies for managingchange) and Unit 9 (expansion strategies) or a combination of some of thesestrategies depending on the particular company situation and the competitiveenvironment. These factors include the process of strategic choice, evaluationof strategic alternatives, criteria for selection of strategy, benchmarking andbest practices and critical success factors (CSFs). We shall also discuss in this



chapter various factors or issues involved in activating strategies and organizingfor success.

12.2 Caselet

An organization can determine whether its current capabilities representstrengths or weaknesses in industry competition by analysing industrystructure, industry competitors, cost structure, customer needs, availabilityof substitutes, barriers to entry, etc.,.A good example of this is the GeneralCinema Corporation, the largest US movie theatre operator for many years.The company reassessed that its internal capabilities in site analysis, creativefinancing, marketing and management of geographically dispersedoperations were key strengths compared to major success factors in thesoft drink bottling industry. This assessment proved correct and timely forthe company. Within 10 years of entering the soft drinks bottling industry,General Cinema became the largest franchised bottler of soft drinks in theUS. It was handling jobs for Pepsi, 7UP, Dr. Pepper and Sunkist.1

ObjectivesAfter studying this unit, you should be able to:

Analyse the process of strategy choice or selection Discuss strategy selection factors or criteria Highlight different benchmarking practices Analyse the process of activation of strategies Discuss the process of preparation of strategic budget Focus on allocating and managing resources

12.3 Process of Strategic Choice

Choice of a final strategy or strategies from the alternative strategies availableis the most critical and, also the most difficult job in the strategic planning process.Glueck and Jauch (1984) have defined strategic choice in terms of selectingthe best among the alternatives.

Strategic choice is the decision which selects from among the alternativegrand strategies which will best meet the enterprises objectives. Thechoice involves consideration of selection factors, evaluation of thealternatives against these criteria, and, the actual choice.2



Many companies go through the process of strategic choice or decisionmaking, but not in a very organized or systematic way. They do not guard againstthe possible pitfalls, and, as a result, imperfection or mistakes may creep in.Imperfection may creep in because of four major reasons:

(a) Not analysing carefully the impact of the strategic choice or decisionon organizational objective.

(b) Tendency to ignore problems in the false hope that those woulddisappear or resolve themselves.

(c) Incomplete evaluation of strategy alternatives.(d) Avoidance of risk which may usually be associated with strategic

planning and decision-making process.In a more positive sense, strategy choice or selection should consist of

four interrelated steps. These steps actually follow from the definition givenabove:

1. Focussing on strategy alternatives2. Evaluating strategy alternatives3. Considering/using the selection factors or criteria4. Selecting the final strategy or strategies

Selection of factors or criteria should be generally objective. But, manytimes, subjective factors also play dominant roles. Including these factors, theprocess of strategic choice may be schematically shown as given in Figure12.1.

Figure 12.1 Process of Strategic Choice



12.3.1 Focusing on Strategy AlternativesAs discussed in the previous units, strategy alternatives available to a companyare many. Most companies are faced with a dilemma: should they consider allpossible alternative strategies or should they limit themselves to selectedalternatives on the basis of certain given guidelines. Consideration of all possiblealternatives makes the process very broad based, and, it may be theoreticallyrecommended. But, the practical problems may be many. There is also thequestion of time and resources. On the other hand, if only few alternatives areconsidered, there is the possibility or risk of omission of some importantstrategies.

This clearly indicates the need for a middle course in terms of the numberof alternatives. A reasonable number of alternatives should be chosen initiallyon the basis of certain company considerations. First, every organization has acorporate mission or philosophy. This would dictate elimination of some of thestrategy choices. For example, Reliance Industries, as a corporate policy, doesnot consider any project with outlay of less than `1000 crore. Similarly, TataGroup has decided on a policy that group companies will operate only in thoseindustries in which they can occupy one of the first three positions. Second,investment requirements may eliminate some choices, i.e., strategy alternativeswith very high investment requirements may not be considered. Third, gapanalysis (discussed in Unit 6) also helps in the initial selection of some probablealternatives and exclusion of others. The gap analysis essentially shows ormeasures the gap between present performance and desired performance basedon organizational goals or priorities. Only those strategies which are relevantfor bridging the performance gap should be considered to begin with. The finalselection of strategy would be made on the basis of other factors orconsiderations.

Self-Assessment Questions

1. Strategic choice is the decision which selects from among the alternativegrand strategies which will best meet the enterprises objectives.(True/ False)

2. Companies must consider all possible alternative strategies before makinga strategic choice. (True/ False)



12.4 Strategy Selection Factors or Criteria

Contingency strategies are exceptional strategies for exceptional situations orcircumstances. Under normal circumstances, the choice of strategy has toproceed in a logical sequence or step-wise process. After evaluating variousstrategic alternatives in terms of company and industry/market characteristics,the next step is to use appropriate selection factors or criteria. For furtherevaluation of the alternatives or narrowing down the choices to more specificstrategies, we shall consider two selection factors or criteria:

1. SPACE technique or approach2. Benchmarking and best practices

12.4.1 Space Framework or TechniqueStrategic Position and Action Evaluation (SPACE) matrix or framework can beconsidered an improvement over the portfolio analysis (various models discussedbefore) and more comprehensive as a technique for evaluating or selectingstrategies. Compared to the two dimensions of the portfolio matrices/models,SPACE framework consists of four dimensions two internal and two externalfactors.

Internal External

Financial strength Competitive advantage

Industry strength Environmental stability

Each of these factors can be rated on a 5-point scale (05) to determine itsrelative effectiveness. Based on the relative effectiveness of these factors andtheir different combinations, different strategies can be selected (See Figure 12.2).

Four quadrants in the figure represent four different postures: conservative,aggressive, defensive and competitive. The ideal quadrant is 2 (aggressive)where both the internal factors are strong and both industry strength andenvironmental stability are high. Companies/businesses in this quadrant shouldfollow expansion strategies like diversification and integration. Actual or finalform of the strategy may be decided based on additional factors or considerations(discussed later). Companies/businesses in quadrant 4 (competitive) possesshigh financial strength but, low competitive advantage; environmental stabilityis high but industry strength is low. Such companies/businesses should adoptmerger strategy through amalgamation or consolidation to improve synergy.



They may also undertake corporate restructuring or turnaround strategies toimprove competitive advantage and become more competitive. Similarly,businesses in quadrant 1 (conservative) should predominantly adopt stabilitystrategies. Companies/businesses in quadrant 3 are in the worst situation withboth internal and external factors very weak. They should adopt strategies fordivestment and liquidation.

Figure 12.2 SPACE Matrix/Framework

Source: Adapted from H Rowe et al. Strategic Management and Business Policy:Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co.,1983), 155.

SPACE matrix/framework considers several individual factors fordetermining financial strength, competitive advantage, industry strength andenvironmental stability. These are shown in Table 12.1.

Table 12.1 SPACE Factors: Internal and External

Internal Factor External Factor

Financial Strength Industry Strength

Cash flow Growth potential Working capital Profit potential Liquidity Financial stability Return on investment Technological know-how



Leverage Resource utilization Ease of exit Capital intensity Risk in the business Ease of market entry

Productivity, capacity utilization

Competitive Advantage Environmental Stability

Technological know-how Technological change Product quality Competitive pressure Product life cycle Demand variability Market share Rate of inflation Customer loyalty Price change of competing products Competitors strengths/weaknesses Price elasticity of demand Control over suppliers and distributors Entry barriers

Note: Each individual factor is rated to arrive at an average or overall score between 0and 5 for two internal factors and two external factors.Source: H Rowe et al., Strategic Management and Business Policy: MethodologicalApproach (Massachusetts: Addisson-Wesley Publishing Co., 1982), 15556.

12.4.2 Benchmarking and Best PracticesAn organizations strategic capability or strategic choice is to be alwaysunderstood in relative terms because it involves comparison with competitorsor industry norms. This implies that organizations need to understand and analyseperformance standards, i.e., what constitutes good and bad performance. Sinceperformance is intrinsically related to strategy formulation and implementation,the relativity factor should be kept in mind during the process of selection ofthe strategy itself. A strategy, along with resource base, should be so selectedthat it can deliver results of high standards or standards which can comparewith the best in the industry. This necessitates an analysis of benchmarking andbest practices.

Benchmarking is comparison with, and adherence to, prescribed norms,standards or practices. Benchmarking can also be defined in a more functionalway:

Benchmarking is a process of identifying, understanding, and adoptingoutstanding practices from the same organization or from otherbusinesses to help improve performance.3



Based on the above definitions, five important features or characteristicscan be identified:

(a) Benchmarking enables an organization to analyse where it standsin comparison to other organizations, where it excels or lags behind.So, benchmarking is a useful diagnostic tool.

(b) Benchmarking involves identification of two things: first, what is tobe compared, i.e., product, process, performance, etc.; and, second,whom to compare with, i.e., competitors, organizations in the sameindustry, organizations outside the industry, etc.

(c) Benchmarking is applicable to all facets of business products,processes, services, methods, etc. It goes beyond traditionalcompetitor analysis and focusses on understanding what are thebest practices and, how the best practices can be emulated, if notimproved upon further.

(d) Benchmarking is not confined to comparison only with direct productcompetitors but, all those businesses or organizations which arerecognized as industry leaders or the best.

(e) Benchmarking is a continuous process and not just one-off initiative.Industry standards and practices constantly change, and an effectivebenchmarking initiative has to regularly monitor these changes andaccordingly adapt itself.

Types of BenchmarkingBenchmarking can be broadly divided into two major types or categories: thefirst category is primarily based on what is to be benchmarked, and the othertype is dominantly based on whom to benchmark against.

What is to be benchmarked Whom to benchmark against(Dominant factor) (Dominant factor)Product benchmarking Internal benchmarkingProcess benchmarking Competitive benchmarkingFunctional benchmarking Generic benchmarkingPerformance benchmarkingStrategic benchmarking

Product benchmarking is a comparison of product(s) with competitors orindustry leader to ascertain what customers value most. Process benchmarking



means emulating best processes, i.e., corporate practices and methods.Functional benchmarking involves comparison of major functions production,marketing, logistics, distribution, etc., with competitors or non-competitors.Performance benchmarking is overall comparison of organizational performanceincluding processes, functions, and results with competitors or industryparticipants. Strategic benchmarking is the adoption of strategybuilding system,planning process, strategic decision making, etc. Internal benchmarking involvescomparison among units and developments within the same organization toimprove unit level or departmental performance. Competitive benchmarking isa direct comparison of an organizationss competitive strengths and weaknesseswith the best of competitors. Generic benchmarking means comparingorganizational methods and practices with the best practices anywhere in anytype of organization within or outside the industry.

More common forms of benchmarking, however, are based on comparisonwith competitors and success factors within the same industry. Organizationswhich are more progressive and strive for excellence adopt genericbenchmarking. In practice, benchmarking often involves combining differenttypes (or more than one type) to improve organizational performance and results.Benchmarking: Comparison with CompetitorsA major, and very common, benchmarking practice is to develop an organizationsresources and competences in comparison with existing and potentialcompetitors. Different companies in the same industry have different financialresources, technical know-how, managerial talent, marketing skills, operatingfacilities, etc. These resources and competences can become relative strengthsor weaknesses depending on the strategy a company chooses. In selecting astrategy, the management should compare the organizationss key capabilitieswith those of competitors for securing competitive advantage.

Sears and GE are major competitors in home appliance industry in theUS. Sears principal strength is its retail networks. But, for GE, the distributionsystemthrough independent franchised dealershas been a relativeweakness. On the other hand, GEs resource base, particularly financialresources, to support its modern production system, has enabled the companyto maintain both cost and technological advantage over its competitors,particularly Sears. This major strength of GE is a relative weakness of Sears.Maintenance and repair services are important in the appliance business. Searsalways had strength in this area because it maintains fully staffed servicecomponents and distributes the cost of components over various departmentsin different retail locations. GE, in contrast, has to depend on regional service



centres and franchised local dealers. The comparison between Sears and GEshows that benchmarking efforts of the two companies should focus ondistribution network, technological capabilities, operating costs and servicefacilities. Management in both companies, in fact, developed successfulstrategies based on relative benchmarking. By benchmarking each other, theyhave developed ways to build on relative strengths, and at the same time,avoiding dependence on capabilities in which the other company excels.4

Comparison with key competitorsessentially process benchmarking orcompetitive benchmarkingcan be very useful in ascertaining whether resourcesand capabilities of an organization are competitive strengths or weaknesses.Identification of differences (strengths and weaknesses) with competitors provideimportant inputs for choice and development of strategy. Also, throughcompetitive benchmarking, a company can concentrate on those strategies whichit can effectively use to its advantage. Box 11.1 illustrates how UPS usedcompetitor comparison with FedEx to assess its strengths and weaknesses inthe package transportation and delivery industry for selection of its strategy.Benchmarking against Success Factors in the IndustryIndustry analysis (presented in the previous unit) enables a company to identifyfactors which account for strategic success in a particular industry. Keydeterminants of success in an industry can be used to assess an organizationscompetitive strengths and weaknesses. By analysing industry structure, industrycompetitors, cost structure, customer needs, availability of substitutes, barriersto entry, etc., an organization can determine whether its current capabilitiesrepresent strengths or weaknesses in industry competition. Porters 5-forcesmodel (discussed in the previous unit) of competitive levels/threats in an industryprovide a useful framework for such analysis.

A good example of this is General Cinema Corporation (see Caselet).Many other companies have successfully benchmarked industry success factorsfor development of competitive strategy. Avery Dennison is another example.Avery Dennison used industry evolution benchmarking against 3M to create anew successful strategy.Best-in-class BenchmarkingComparison with competitors or benchmarking against industry success factorshas a major shortcoming. They only help an organization to succeed or excelwithin the industry. But, best methods or practices need not be confined to onlywithin ones own industry. These can easily exist in some other business orindustry which may be really exemplary. As mentioned earlier, organizations



which aspire to be comparable to the best among all businesses or strive forexcellence should adopt generic or best-in-class benchmarking.

Best-in-class benchmarking is a comparison of an organizations methodsand practices or performance against the best in any business or industry andadoption of the same. Best-in-class benchmarking urges organizations to searchfor best practices wherever those may be found. In best-in-class benchmarking,the potential for change is enhanced, and the forces and direction of changeare facilitated by locating practices or forming partnerships across industries orsectors. For example, British Airways improved aircraft maintenance, refuellingand turnaround time by studying the processes used in Formula One GrandPrix motor racing pit stops.5 A police force wanting to improve the way it respondsto emergency telephone calls studied call centre operations in the banking andIT sectors for benchmarking the response pattern.6

Best-in-class benchmarking becomes particularly relevant for serviceorganizations. A characteristic feature of service organizations is that improvedperformance in one sectorparticularly in factors like speed and reliabilityraises the general level of expectations among customers about the same (speedand reliability) from all companies in all sectors. So, in the service sector, best-in-class benchmarking urges organizations to stretch their core competence ordevelop newer capabilities to exploit opportunities in different fields or markets.

Benchmarking Practices in Indian CorporatesWith the increase in competitive intensities and exposure to globalization, Indiancompanies, like many others in different parts of the world, are constantly seekingto improve their performance. Benchmarking, therefore, is becoming a logicalstrategic initiative. Different companies are trying to benchmark themselves indifferent ways to suit their performance requirements and benchmarkingobjectives.

Benchmarking practices followed by majority of the Indian companiescan be broadly divided into three types: product or quality benchmarking,customer service benchmarking (an extension of competitive benchmarking)and comprehensive or combination benchmarking.

Quality benchmarking has been adopted by companies like BHEL, NTPC,IOC, Tata Motors, JCT Electronics and Johnson & Nicholson. Companies whichhave used benchmarking to improve customer service are HDFC, Infosys,ModiXerox, Titan and Airtel, among others. These companies focus on thosepractices which help them to serve their customers better. Companies likeReliance Industries, Ranbaxy, Maruti Suzuki, Hero Honda and Honda Motors



have resorted to comprehensive or combination benchmarking, i.e., emulatinggood or best practices in different areas to improve overall performance.

These companies have not confined themselves to benchmarking onlyagainst Indian organizations. Many of them have gone for global benchmarking.Some, like Maruti Suzuki have benchmarked their technology suppliers; otherslike Hero Honda and ModiXerox have benchmarked their joint venture partners;and some others like Honda Motors (India) have benchmarked their overseasparents.

Some of these companies have adopted benchmarking practices as theyexist. Some others have modified or improved upon the existing practices forbetter results or competitive advantage; Reliance and Infosys are among suchcompanies. Reliance has this to say about their global benchmarking: Globalbenchmarking has always been a mantra for all of us here at Reliance. Wehave now geared ourselves up to raise our levels of productivity and efficiencyfor capital, assets, people and the entire organization well beyond comparableglobal benchmarks.

12.4.3 Best Practices at Nike7

Nike can be studied as a good model of how companies grow to excellence incorporate practices through organizational evolution. Nike evolved from a posterchild for irresponsibility to a leader in progressive practices. We analyse herethe content of this evolution or the path to corporate responsibility.

Nikes business model, like that of many othersto market high-endconsumer goods produced in cost-efficient value chainswas not enough.During the past decade, the company has been grappling with complexchallenges of responsible business practices trying to strike a balance betweenpurely organizational and societal dimensions or objectives. Zadek (2004)explains this in terms of five stages of organizational learning or growth. Thefive stages of evolution are:

Stage 1 : Its not our job to fix that; this is the defensive stagecharacterized by outright rejection of allegation or denial of linksbetween the companys practices and the alleged negativeoutcome.

Stage 2 : We will do just as much as we have to, this is the compliancestagea stage of recognition that a corporate policy must beevolved and pursued for improving practices. Compliance maybe understood as a cost of doing business.



Stage 3 : Its the business...; this is the managerial stagethe companyrealizes that it is facing a long-term problem which cannot bepassed off with attempts at simple compliance or a publicrelations strategy. The company needs more fundamentalchanges in strategy and practices.

Stage 4 : It gives us a competitive edge; this is the strategic stagethecompany learns how realigning its strategy to conductresponsible business practices can give it an edge in competitionand contribute to the organizations long-term success.

Stage 5 : We need to make sure everybody does it: this is the civil orimplemention stagethe company promotes collective actionto address societys concerns. Generally, it is linked directly toorganizational strategy.8

Nikes transition from corporate irresponsibility to excellence in progressivepractices has been made possible through a series of measures and sequentialdevelopments. These have been well summarized by Zadek:

Nikes business is based exclusively on global outsourcing. Labouractivists in the early 1990s were exerting tremendous pressure onpremium brand companies to incorporate proper codes of conductin their global supply chains (appalling working conditions in someof the suppliers factories). These groups targeted Nike because ofits high profile brand and not because its business practices wereworse than its competitors.

Labour activists actions were already affecting Nikes core and highlyprofitable youth markets in north America and Europe. To preventfurther damage, Nike went professional in 1996 by creating its firstdepartment specifically responsible for managing its supply chainpartners compliance with labour standards. And, in 1998, Nikeestablished a Corporate Responsibility department.

The CEO assembled a team of senior managers and consultants/experts to be led by Nikes VP, Corporate Responsibility. Nike realizedthat it had to manage corporate responsibility as an integral orinseparable part of its business. It was also not difficult to re-engineerprocurement incentives. The review team proposed that Nike shouldgrade all factories according to their labour conditions and, thenpenalize or reward procurement teams based on the grade of thesupplier they used. But, commercially and culturally, it was not sosimple.



Nikes efforts to secure satisfactory labour conditions were servingits immediate financial objective which was the sole focus of themajority of the companys investors. Nikes challenge was to adjustits business model to reflect responsible practicesbuildingtomorrows business success without compromising todays financialbottom line. And, to do this, it had to offset any first-moverdisadvantage it had by getting both its competitors and its suppliersinvolved in the process.

Nike is a business and is accountable to its shareholders. But, thecompany has taken significant steps in evolving a strategy andpractice which transforms itself from being a target of civil activismto a key participant in civil society initiatives and processes. Nikehas perfectly positioned itself to deal with the challenges of corporateresponsibility. It rightly views the issue as integral to the realities ofglobalization and, a vital learning process pertinent to its corebusiness strategy and organizational practices.

Activity 1Use the SPACE framework and analyse the strategy selection process of acompany of your choice.


3. A comparison with, and adherence to, prescribed norms, standards orpractices is called __________.

4. An organizations strategic capability or strategic choice is to be alwaysunderstood in _______ terms because it involves comparison withcompetitors or industry norms.

5. A comparison of an organizations methods and practices or performanceagainst the best in any business or industry and adoption of the same iscalled ________ benchmarking.

12.5 Selection of Final Strategy

The final selection of strategy by an organization may depend on judgement,bargaining or analysis.9 Evaluation of different strategy alternatives throughquantitative techniques and models and application of some selection criteria



eliminate many inappropriate alternatives. This greatly facilitates the process ofstrategic choice. But, the final choice of strategy still does not become easy orautomatic because subjective factors (in addition to objective factors) play a verymajor role in any organization. Interplay of various organizational forces sometimeslead to predominance of subjective factors (judgement or bargaining) and, insome other cases, to dominance of objective or analytical factors (Figure 12.3).

Figure 12.3 Final Choice of Strategy: Interplay of Objective and Subjective FactorsBecause final decision is taken by the management or the managers,

strategic choice cannot be governed only by objective considerations. If strategieswere selected only on the basis of objective criteria, a company would haveconsidered the organizations mission and goals, internal competences andresources, environmental opportunities and threats analysis and evaluation ofalternatives and the selection criteria discussed above. But, in actual practice,personal factors are inevitable in the choice processperceptions, biases andpreferences. So, the final choice becomes the outcome of interplay of differentand, sometimes, opposing forces. The resultant choice process narrows downlike this:

With individual group, organizational and environmental pressuresrestricting strategic choice, a clear implication for the management isthe necessity for strenuous efforts to maintain choice. If 360 can beconceived of as representing full choice, then previous strategic choicemay have eliminated 200 degrees, environmental conditions another80 degrees, and, management values 50 degrees leaving a potentialchoice range of 30 degrees or less.10

Mintzberg et al., have analysed 25 strategic decisions and arrived at certainconclusions about strategy choice by judgement, bargaining or analysis.According to them, choice by judgement is determined by decision makerspower equations. Choice by bargaining also depends on similar factors, but,the choice process is more complex; the top management or the decision-makingpower in the organization is divided and the issue may be contentious. Choice



of strategy by analysis is a more logical process. There is agreement amongthe top management on organizational goals or objectives. Choice by analysisis more commonly adopted by larger organizations with better data/informationbase and organizational size, and structure tends to support a more objectiveapproach. But, even in this approach, analysis and evaluation of alternativesare influenced by managerial attitude towards risk, internal power equations,organizational culture, etc.11

Between formulation and implementation of strategy, there exists anothermajor step. This is activation of strategies. Activation of strategy meansinstitutionalizing the strategy and mobilizing, allocating and managing resourcesfor execution of strategy. The starting point of activation of strategy is preparationof a strategic plan. We had mentioned about strategic planning and strategicplan in Unit 1. The actual use of a strategic plan becomes more contextual atthis stage. Strategy choice or selection, preparation of a strategic plan, activationof strategy and implementation form interrelated steps or stages:

Strategy selection

Strategic plan

Activation of strategy

Implementation of strategy


6. Strategic choice cannot be governed only by _______ considerations.7. Institutionalizing the strategy and mobilizing, allocating and managing

resources for execution of strategy is known as _______ of strategy.

12.6 The Strategic Plan

Strategists sometimes differ on whether strategy comes first or plan comesbefore strategy. Logically speaking, organizations first decide on a broad strategyor the strategic direction. It may be a stability strategy (for pause or caution),growth or diversification strategy or a strategy for change (restructuring,turnaround, etc.). This broad strategy or strategic direction is decided by the



CEO or the board of directors based on organizational policy or philosophy andthe current company situation. Once the broad strategic move has been decided,a strategic plan is required to work out or formulate the actual form or elementsof the strategy, the resource implications/allocations, environmental constraints,etc. For example, a companys strategic choice may be diversification. It maybe related diversification or unrelated diversification; it may be externaldiversification like joint venture, takeover, or acquisition or merger. The strategicplan examines/evaluates each of these strategic options in terms of costs andbenefits before the strategy in its final form is actually decided. So it can be saidthat the strategic plan precedes formulation of final strategy.

A strategic plan is a comprehensive document and, is developed in clearsequential steps. It should contain the following (as shown in Figure 12.4).

Figure 12.4 Strategic Plan, Activation of Strategy, and Implementation

Implementation of strategy will be discussed in Units 13, 14 and 15. Steps2 and 3 have already been dealt with in unit 5 and 6. We shall analyse here



issues connected with activating or organizing strategy for competitive advantageor success. For activating or organizing strategy, three major factors are to beconsidered:

1. Preparation of strategic budget2. Allocating and managing resources3. Integrating resources and organizing for success


8. The strategic plan ________ formulation of final strategy.9. Which of the factors are considered for activating or organizing strategy?

(a) Preparation of strategic budget(b) Allocating and managing resources(c) Integrating resources and organizing for success(d) All the above

12.7 Preparation of Strategic Budget

Budget is the instrument for resource allocation. For strategic planning andexecuting strategies, an organization needs strategic budgeting. A strategicbudget is different from the conventional accounting budget. In the accountingbudget, emphasis is on various financial entries for expenditure of a companymany of which are of an operational or routine nature; some may be ofdevelopmental nature. A strategic budget, in contrast, is prepared with particularreference to a strategic plan and its implementation. Certain assumptions aremade; a number of steps and factors are involved; and strategic budgetpreparation is often an iterative process. A typical strategic budgeting processis illustrated in Figure 12.5.

As shown in Figure 12.4 a number of steps or stages are involved in thestrategic budgeting process. The starting point is the preparation of differentposition paperson environment, internal competence/resources andperformance of past strategies. The CEO/top management may also issue someguidelines for preparation of position papers. These become inputs to thebudgeting process. Based on these inputs and corporate policy or philosophy,planning objectives are set by the CEO/top management. In the next stage,strategic plan is prepared by the planning/strategy team. The next step is the



preparation of the strategic budget subject to certain resource availability. Thebudget would be submitted to the CEO/top management for approval. Theywould also allocate resources. The budgeting process is now complete and theplan/strategy is ready for implementation. During implementation, there may bea need for budgetary review which may result in revision of the budget proposals.

Figure 12.5 Strategic Budgeting Process

In large multi-business organizations, strategic budgeting often becomesan interactive or iterative process between the corporate organization and theSBUs. The budgetary process is initiated at the corporate level with corporategoals and objectives. The SBU goals and objectives follow from, or have to becompatible with or complementary to, corporate or organizational objectives.But, the SBUs give their own planning and feedback inputs and the budgetaryprocess starts. Both the corporate organization and the SBUs become equalpartners or participants in the preparation of the final SBU budgets. Theinteractive budgetary process is shown in Figure 12.6.

Figure 12.6 Interactive Strategic Budgeting: Corporate and SBU Levels




10. A strategic budget is the same as the conventional accounting budget.(True/False)

11. In large multi-business organizations, strategic budgeting often becomesan interactive or iterative process between the corporate organizationand the SBUs. (True/False)

12.8 Allocating and Managing Resources

Allocation and management of resources are major factors in activation andimplementation of strategy. In Figure 12.5, we have shown resource allocationas a decision of the CEO/top management. In practice, resource allocationproposals may originate from the planning/strategy team or the SBUs (as shownin Figure 12.6) based on the strategy and implementation programmes.Sometimes, the planning/strategy team may seek views of the functional/operational managers which form important inputs in the resource allocationprocess. But, final approval or allocation will be always by the CEO/topmanagement.

In allocating and managing or organizing resources, three types ofresources have to be considered: financial, human or managerial and technologyor innovation. Some strategic management analysts feel that informationresources should be considered as the fourth resource factor while organizingand managing organizational resources.12 So, issues relating to allocation andmanagement of resources are not confined to financial resources only as iscommonly perceived.

We shall, however, start with management of the financial resources orstrategy. All organizations face a basic decision problem as to how theirbusinesses will be financed. An organization will have a particular financialrequirement if it is planning fast growth of its business through diversificationproduct/market development or acquisition. The funding requirement will bedifferent if a company is trying to consolidate its business, i.e., pursuing a stabilitystrategy. The funding requirement would also be different during different stagesof development of an SBU. Ward (1993) has analysed funding strategy alongwith business risk and financial risk of an SBU. He has conducted the analysisby using the BCG growth share matrix (discussed in Unit 7). Wards analysis ispresented in Figure 12.7.



Figure 12.7 Funding Strategy Analysis: Use of BCG Framework

Source: Adapted from K Ward Corporate Financial Strategy (Butterworth/Heinemann,1993), Chapter 2.

The essential point emphasized in Figure 12.7 is the relationship betweenbusiness risk, financial risk and funding policy or strategy of an organization. Inother words, the analysis focusses on the need for matching financial risk andfinancial return (linked to business risk) to investors. The greater the risk toshareholders or lenders, the higher the return they expect. Debt (borrowing)has a higher financial risk than equity because of interest and also repaymentobligations. If financing is through internal accruals (reserves/retained earnings)as may be in the case of cash cows (maturity phase), shareholders may not beso concerned. Businesses in maturity stage with high market share (cash cows)usually generate enough surplus which can contribute to retained earnings,which, in turn, can be reinvested. Financing can also be through a combinationof equity and debt, which through surplus generation, augment retained earnings/reserves. Debt servicing also becomes easy. If financing is through equity forgrowth as may be in the case of stars, the investors look for immediate returns/profits. If it is equity in the form of venture capital which may be required fordevelopment of new business (question marks) with high business risk, theinvestors expect high returns. If a business is in decline, characteristically adog, equity funding is difficult because investors may not like to risk their capitalin a declining or sinking business. Financing through debt may be the onlyoption. Terms of credit is an important factor here.



All this makes mobilization, allocation and management of financialresources a complex job. Scarcity of investible resources is a commonphenomenon and SBUs make competing demands whether for equity funds ordebt funds. In practice, overstatement of resource requirements by SBUs isquite common. Also, all businesses of a company do not strictly fall in the BCGcategories of stars, cash cows, question marks and dogs. For many FMCGsand consumer durables, the market may be in the maturity stage of PLC, but,all products/brands are not cash cows. There are many examples in soaps,detergents, refrigerators, etc. These businesses follow stability or incrementalgrowth strategy. In such cases, the organization may have alternative financingoptions available, and, the management may have to carefully weigh thealternative costs of financing and commensurate returns. There is also a choicebetween short-term and long-term financing and the issue of debt servicing. Anorganization has to consider all these and related factors in organizing andmanaging financial resources.

Next to finance, human resources are the most important factor inactivating strategies. People can make a major difference between successand failure of a corporate strategy. Knowledge, skill and experience of peoplecan significantly contribute to strategic success as poor human resource canhinder adoption or implementation of successful strategies. HR systems play avital role in organizing and managing human resources. For various functional/operational strategies to support a chosen organizational strategy, the rightkind of people should be deployed in right positions or recruited to fill up theresource gap. For example, if a companys chosen strategy is diversification,and, if it involves innovative products and processes, requisite skills or expertisemay not be available in the company. Here the HR department has an importantrole to play in hiring the right talent, providing or creating proper work environmentand helping to increase managerial productivity.

Talking about the role of HR, it is also necessary to distinguish betweenhard and soft approaches to human resource management. Hard and softapproaches in HR are like hard and soft Ss in organizations. Hard humanresource approach is about how the structure, systems and procedures can beused to acquire, utilize, develop and retain people to secure strategic advantagefor the organization. Organizational needs are the predominant factor here, notthe people. In soft human resource management, dominant focus is on thepeople, individually and collectively culture, style, behaviour, etc., and howthese help or hinder organizational strategies. Many organizations concentrateon the hard approach leaning too much on the structures and systems and



overlooking or showing lack of concern for the soft factors. They tend to forgetthe fundamental fact of complementarity between the hard and soft approachesnecessary for strategic success. In practice, HR approaches and strategies inmany companies reflect adhocism because of internal and external pressures.But, this is a very shortsighted measure/solution and invariably affects activationand implementation of strategies. A more balanced approach is necessary.

To ensure such an approach and to be effective, HR professionals alsoneed to orient themselves. They should familiarize themselves with theorganizations strategic process or a particular strategic initiative and humanresource requirements in terms of competence and commitment. HR activitiesor human resource management can help in the pursuit of successful strategiesin many ways. Some of the more important ones are mentioned below:

HR audit to assess resource requirements and availability in termsof competence and also to analyse skills and capabilities of individualmanagers which can form useful inputs to the future planning andstrategy building process.

Fostering team-building attitude and rewarding team work approach.Individual incentives and rewards often undermine teamwork. But,most strategies require a team approach rather than individualapproach.

Performance assessment of individuals and teams should have aclear focus on strategic inputs rather than pure functional oroperational inputs. Some have suggested a 360 degree appraisalsystem, i.e., appraisals from multiple perspectives or different partsor functional areas of the organization so that the full impact of anemployees contribution to success or otherwise of a strategy canbe more meaningfully assessed.

Devising appropriate training and development programmes. Of late,there has been a shift in focus in terms of reduction of formal trainingprogrammes and increase in coaching and mentoring for self-development. These become important developmental inputs forindividual managers if the organizations strategies are changingmore regularly.

Institutionalization of individual competence. Individual experts orhighly competent people may leave the organization or retire. So,one of the objectives of HR policies should be to institutionalize suchcompetence or expertise through proper succession planning.13



Finance and people are two basic resources of an organization. Thesetwo are the prime drivers of operations and strategies. Technology ortechnological innovation renders credibility or completeness to these operationsor strategies. So, as organizations have to match and manage financial andhuman resources, they also need to acquire, organize and manage technologyto activate strategy, particularly if the strategy pertains to product innovation ornew product development. Technology affects product quality, productivity andcost efficiency and can significantly contribute to strategic advantage of anorganization. Coping with technological advances is necessary even if a companypursues a stability strategy, let alone a growth strategy. The relationship betweencorporate strategy, technology and innovation is illustrated in Figure 12.8.

Figure 12.8 Relationship between Strategy, Technology, and Innovation

Source: Adapted from G Johnson, and K Scholes (2005), p. 514 (Exhibit 10.10).

12.8.1 Integrating ResourcesOwning resourcesfinancial, managerial or technologicaland deploying themin isolated ways are not enough because these do not ensure strategic capability.Strategic capability, in the real sense, is concerned with how the resources aredeployed, managed and controlled in a harmonious way to produce a synergisticeffect. Financial planning is done primarily by the finance people; human resourcedeployment is by HR department; technology development/management is byR&D/production group. It is, therefore, essential to coordinate or link these



resources and groups at the organizational level. This means integration ofresources for competence building.

The starting point in resource development is to obtain the threshold levelsin individual resourcesfinance, human and technology. In a highly competitiveenvironment, the threshold levels are shifting upwards. To maximize thecontribution of resources, i.e., to create a unique strategic capability (corecompetence or distinctive competence), resources have to be combined in rightproportion to create the required synergy. Enterprise resource planning (ERP)is a good method for integrating and optimizing resources. In fact, manycompanies are using ERP solutions to optimize resource allocation in anintegrated way. To conclude, we can say that it is not enough to be competent indifferent resources. It is the ability of an organization to integrate these resourceseffectively which determines the success or failure of a particular strategy or aset of strategies.

Activity 2As discussed in the unit, every company prepares a strategic plan. Choosea company and prepare a strategic plan and analyse the same.


12. In allocating and managing or organizing resources, three types ofresources have to be considered: financial, human or managerialand __________.

13. In ________ human resource management, dominant focus is on thepeople, individually and collectively culture, style, behaviour, etc., andhow these help or hinder organizational strategies.

14. Many companies are using ______ solutions to optimize resourceallocation in an integrated way.

12.9 Case Study

Crompton Greaves is a pioneer in the field of electric energy. It is Indiaslargest private sector enterprise in the business of electrical engineeringoperating for more than 50 years. Operations of the company are dividedinto four strategic business units (SBUs)



1. Power systems (transformers, switchgears, etc.)2. Industrial systems (motors, alternators, etc.)3. Consumer products (lighting, fans, appliances, etc.)4. Digital (industrial electronices, telecommunication informatics, etc.)

Strategic choice of business of the company emanates from its visionstatement which covers implementation as well as organizational learning.The vision statement:To achieve for Crompton Greaves, the status of world class company so asto ensureCustomer satisfaction

Stakeholder satisfaction and pride Profitable growth Fulfilment of social obligation Perpetuity

To achieve through the implementation of the best practices and continuousimprovement of processes focussed on:

Technology upgradation Cost effectiveness Total quality Speed Resource productivity

To create an environment which encourages organizational learning andteam effort where:

Each individual understands his or her responsibility, makes contributionand is recognized for the same.

Each individual gives his or her best to achieve the shared vision.



During 199596, business strategy of CGL was reformulated keeping inview the increasing competition and entry of MNCs who were equippedwith better technology and resources. The company changed its orientationfrom a business organization to a technology organization and a newcorporate policy came into being with a thrust on technology organization.As a result of this orientation towards technology organization, three newfacilities were established at Mandideep near Bhopal. The most importantaspect of these new facilities is that they belong to that business area ofCGL which the company thinks is its core competence area and wantsdedicated centres to nurture and develop a technology area on whichmanagement can focus for long-term planning.Other key features of the new corporate strategy focus on the following:(a) Information technology implementation(b) Technology innovation and perpetuity(c) SBU technology cell(d) Customer satisfaction(e) Operational efficiencyRight strategic choice and implementation have enabled the company tomaintain robust financial health and sustain steady long-term growth.* Based on S Lomash and P K Mishra, Business and Strategic Management, NewDelhi: Vikas Publishing House, 2009

12.10 Summary

Let us recapitulate the important concepts discussed in this unit: Choice of a final strategy or strategies from alternative strategies available

is the most critical and the most difficult job in the strategic planningprocess. Many companies go through the process of strategic choice ordecision making but not in a very organized or systematic way.

After evaluating various strategy alternatives in terms of company andindustry/market characteristics, the next step is to use appropriate selectionfactors or criteria for narrowing down the choice to more specific strategies.Two important selection factors or criteria are: SPACE technique orapproach, and benchmarking and best practices



An organizations strategic capability or strategic choice is to be alwaysunderstood in relative terms because it involves comparison withcompetitors or industry norms. This shows the relevance of benchmarkingand best practices. Benchmarking means comparison with and adherenceto prescribed norms, standards or practices.

Final selection of strategy by an organization may depend on judgement,bargaining or analysis.

Activation of strategy means institutionalizing strategy and mobilizing,allocating and managing/balancing resources for execution.

12.11 Glossary

Activation of strategy: Institutionalizing the strategy and mobilizing,allocating and managing resources for execution of strategy.

Benchmarking: Comparison with, and adherence to, prescribed norms,standards or practices.

Contingency strategies: Exceptional strategies for exceptional situationsor circumstances

12.12 Terminal Questions

1. Explain the process of strategic choice. What are the four steps involvedin the process of strategic choice?

2. What is SPACE technique or framework? Explain by using a diagram.3. What is benchmarking? What are the different types of benchmarking?

Explain with some examples.4. Discuss the best practices at Nike.5. What is strategic budgeting? Explain the steps involved in the process of

strategic budgeting.6. Explain Wards analysis of funding strategy along with business risk and

financial risk of an SBU. Use the BCG framework.



12.13 Answers

Answers to Self-Assessment Questions

1. True2. False3. Benchmarking4. Relative5. Best-in-class6. Objective7. Activation8. Precedes9. (d) All the above

10. False11. True12. technology or innovation13. soft14. Enterprise resource planning (ERP)

Answers to Terminal Questions

1. Choice of a final strategy or strategies from the alternative strategiesavailable is the most critical, and, also the most difficult job in the strategicplanning process. Refer to Section 12.3 for further details.

2. Strategic Position and Action Evaluation (SPACE) matrix or frameworkcan be considered more comprehensive as a technique for evaluating orselecting strategies. Refer to Section 12.4.1 for further details.

3. Benchmarking is comparison with, and adherence to, prescribed norms,standards or practices. Refer to Section 12.4.2 for further details.

4. Nike can be studied as a good model of corporate best practice. Refer toSection 12.4.3 for further details.



5. For strategic planning and executing strategies, an organization needsstrategic budgeting. Refer to Section 12.7 for further details.

6. Allocation and management of resources are major factors in activationand implementation of strategy. Refer to Section 12.8 for further details.

12.14 References

1. Cook, S. 1995. Practical Benchmarking: A Managers Guide to CreatingCompetitive Advantage. London: Kogan Page.

2. Gupta, V, K Gollakota, and R Srinivasan. 2005. Business Policy andStrategic Management: Concepts and Applications. New Delhi: PrenticeHall of India.

3. Hofer, C W, and D Schendel. 1978. Strategy Formulation: AnalyticalConcepts. St. Paul, Minnesota: West Publishing.

4. Murdoch, A. Lateral Benchmarking or What Formula One Taught anAirline. Management Today, November, 1997.

5. Ward, K. 1993. Corporate Financial Strategy. Oxford: Butterworth-Heinemann.

6. Zadek, S. The Path to Corporate Responsibility. Harvard Business Review(Best Practice), December, 2004.

Endnotes1 J A Peace II, and R B Robinson Jr (2005), 17374. The bottling operations were, however,

subsequently sold to Pepsico.2 F Glueck and L R Jaunch, Business Policy and Strategic Managemet (New York: McGraw-

Hill, 1984), 2793 S Cook, Practical Benchmarking: A Managers Guide to Creating Competitive Advantage

(London: Kogan Page, 1995).4 J A Pearce II, and R B Robinson Jr, Strategic Management: Formulation, Implementation,

Control, 9th ed. (New Delhi: Tata McGraw Hill, 2005), 172.5 A Murdoch, Lateral Benchmarking or what Formula One Taught an Airline, Management

Today (November, 1997), 6467.6 G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (Pearson Education,

2005), 174.7 This section is based on S Zadek, The Path to Corporate Responsibility, Harvard Business

Review (December, 2004).8 S Zadek, The Path to Corporate Responsibility (Best Practice), Harvard Business Review

(December, 2004), 126-27.



9 P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons,2003), 290.

10 C Saunders, The Process of Strategic Choice in W F Glueck, and L R Jauch, BusinessPolicy and Strategic Management (McGraw Hill, 1984), 301.

11 H Mintzberg, et al., The Structure of Unstructured Decision Process, AdministrativeScience Quarterly, 21 (1976), 24675.

12 G Johnson, and K Scholes, Exploring Corporate Strategy (2005), 490500.13 G Johnson, and K Scholes, Exploring Corproate Strategy (2005), 48081.

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