Contents
5
Contents
How to Get the Most Out of
9
this Book
Strategy: An Introduction
11
The 10 Schools of Strategy
12
The Economic Goals of
13
an Organization
Strategic Planning
14
Operationalising the
15
Strategy
Change Management
17
Strategic Control
18
Evaluating and
Rewarding
20
Performance
The Road Ahead
21
Ackoff, Russell L.
25
Activity Based Costing (ABC)
25
Adaptive Planning
26
Adjacencies
26
Adjusted Present Value (APV)
27
Agency Theory
27
Alignment
28
Ansoff, Igor H.
30
Anti
-
Takeover Strategy
32
Argyris, Chris
33
Backward Integration
34
Balanced Scorecard
34
Bargaining Power of Buyers
35
Bargaining Power of Suppliers
35
Barnard, Chester
36
Barriers to Entry
37
Barriers to Imitation
38
Bartlett, Christopher A.
39
BCG Growt
h
-
Share Matrix
39
Beachhead Market
40
Benchmarking
40
Best Practices
41
BHAG
41
Bias for Action
41
Big Hairy Audacious Goals
41
(BHAGs)
Blue Ocean Strategy
42
Bottom of the Pyramid
44
Brainstorming
44
Brand Management
45
Breakeven Analysis
45
Bureaucracy
45
Business Ethics
45
Business Forecasting
46
Business Model
47
Business Process
47
Reengineering (BPR)
Business Risk
47
Buy Back
48
Cadbury Committee Report
49
Capacity Expansion
49
Capital Structure
51
Cartel
51
Cash Cow
52
Chandler, Alfred DuPont
52
Ch
ange Management
53
Christensen, Clayton M.
54
Clusters
55
Coase, Ronald
56
Code of Ethics
56
Commoditization
56
Company Profile
57
Comparative Advantage
57
Competitive Advantage
58
Competitor Analysis
59
Competitive Strategy
62
Concentration Ratio
63
Conce
ntric Diversification
64
Conglomerate Diversification
64
Contestability
64
Contingency Planning
64
Contract Manufacturing
64
Co
-
opetition
65
6
A to Z of Busi ness Strategy
Core Competence
65
Core Ideology
67
Core Values
68
Corporate Governance
68
Corporate Image
69
Corporate
Philanthropy
69
Corporate Purpose
70
Corporate Renewal
71
Corporate Restructuring
71
Corporate Social Responsibility
71
(CSR)
Corporate Venturing
72
Cost Leadership
72
Cost of Capital
74
Counterparry
74
Country of Origin Effect
74
Country Risk
74
Critical
Success Factor (CSF)
74
Cross Country Subsidization
75
Cross Holding
75
Customer Relationship
75
Management (CRM)
Customer Switching Costs
76
Cusumano, Michael
76
Decision Making
77
Deming, William Edwards
78
Demographic Environment
80
Devil’s Advocacy
80
Diamond
80
Differentiation
83
Discovery Driven Planning
84
Diseconomies of Scale
84
Disruptive Technology
85
Diversification
85
Divestiture
88
Divisional Structure
89
Downsizing
89
Drucker, Peter F.
89
Due Diligence
90
Dynamic Capability Building
91
Dyn
amic Specialization
91
Earnings Before Interest and
93
Taxes (EBIT)
Economic Value Added (EVA)
93
Economies of Scale
94
Economies of Scope
94
Emotional Intelligence
94
End
-
game Strategies
95
Enterprise Resource Planning
96
(ERP)
Enterprise Risk Managemen
t
96
(ERM)
Entrepreneurship
96
Environmental Scanning
97
Experience Curve
98
Fayol, Henri
99
First Mover Advantage
99
Five Forces Model
100
Flat Organization
101
Focus
101
Follett, Mary Parker
102
Force Field Analysis
102
Forward Integration
103
Franchise
103
Free Rider
104
Full Costing
104
Functional Strategy
104
Functional Structure
105
Game Theory
106
Garbage In, Garbage Out
106
Generic Strategy
106
Ghoshal, Sumantra
107
Global Corporations
108
Global Industry
108
Global Leverage
108
Global Value Chain
109
Configuration
Globalization
109
Goals
111
Golden Handcuffs
111
Golden Handshake
111
Golden Hello
112
Golden Key
112
Golden Parachute
112
Govindarajan, Vijay
112
Handy, Charles
113
Hedgehog Principle
113
Herfindahl Index
113
Herzberg, Frederick
114
Hierarchical Organization
115
Hostile Bid
115
Contents
7
Human Capital
115
Hygiene Factors
115
Independent Director
116
Industry
116
Industry Shakeout
118
Innovation
120
Innovator’s Dilemma
122
Institutional Investor
123
Intrapreneurship
123
Japanese Style of
124
M
anagement
Joint Venture
124
Judo Strategy
124
Just
–
in
-
Time
125
Kaizen
126
Kanban
126
Kaplan and Norton
126
Keiretsu
127
Kepner
-
Tregoe Matrix
127
Khanna, Tarun
127
Knowing
-
Doing Gap
128
Knowledge Management (KM)
128
Lateral Thinking
130
Law of Conservation
of Profits
130
Law of Unintended
130
Consequences
Leadership
132
Lean Manufacturing
136
Lean Thinking
137
Licensing
137
Long Term Objectives
138
Loss Leader
138
MBO (Management By
139
Objectives)
Managerial Grid Model
139
Market Defense
140
Market for
Corporate Control
141
Marketing Mix
141
Market Power
141
Market Signals
142
Maslow, Abraham
143
Matrix Structure
143
Mayo, Elton and
144
Roethlisberger, Fritz
McGregor, Douglas
145
McKinsey 7
-
S Framework
146
McNamara, Robert S.
147
Merger
147
Mintzberg, H
enry
148
Mission
149
Motivation
150
Multi Domestic Industry
151
Murphy’s Law
152
Nearshoring
153
Net Present Value (NPV)
153
Nine
-
Cell Planning Grid
153
Not
-
Invented
-
Here
154
Offshoring
155
Ohmae, Kenichi
155
Oligopoly
156
Operating Strategies
157
Opportunity Cost
157
Optimizing Planning
157
Organic Growth
157
Organizational Behavior
157
Organizational Chart
158
Organizational Culture
158
Organizational Design
160
Organizational Development
161
(OD)
Organizational Inertia
161
Organizational Learnin
g
162
Organizational Mapping
162
Organizational Structure
163
Outsourcing
163
Overheads
163
Palepu, Krishna G.
164
Pareto’s Principle
164
Parkinson’s Law
165
Personal Effectiveness
165
PEST (Political, Economic,
166
Social and Technological
Factors) Analy
sis
Peter Principle
167
Platform Leadership
167
Poison Pill
169
Policies
169
Political Risk
169
Porter, Michael E.
169
8
A to Z of Busi ness Strategy
Positioning
171
Price / Earnings Ratio (P / E)
172
Process Innovation
172
Process Life Cycle
174
Process Networks
175
Product Innovation
175
Product Life Cycle (PLC)
178
Product Platform
179
Prospect Theory
180
Purpose
-
Process
-
People
180
Doctrine
Pygmalion Effect
181
q
-
theory
182
Quinn, James Brian
182
Real Options
183
Regulatory Capture
183
Resource
-
based Theories
183
Responsiveness Plann
ing
184
Reverse Engineering
185
Risk
185
Rivalry
186
Satisficing
188
Scenario Planning
188
S
-
Curve
189
Senge, Peter
189
Service Level Agreement (SLA)
190
Shareholder Value
190
Simple Structure
190
Simon, Herbert A.
191
Six Sigma
191
Skimming
192
Skunk Work
192
Sloan, Alfred P.
192
Slywotzky, Adrian J.
193
Span of Control
193
Spender, J. C.
194
Stakeholders
194
Strategic Advantage
194
Strategic Alliance
195
Strategic Architecture
196
Strategic Business Unit (SBU)
196
Strategic Choice
196
Strategic Control
19
7
Strategic Cost Management
197
Strategic Fit
197
Strategic Groups
198
Strategic Inflection Point
198
Strategic Innovation
199
Strategic Intent
201
Strategic Management
202
Strategic Market
203
Strategic Options
203
Strategic Planning
205
Strategic Pricing
207
Strategy Evaluation
209
Strategy Implementation
210
Stretch
211
Stuck in the Middle
212
Succession Planning
212
Supply Chain Management
213
(SCM)
Switching Costs
215
SWOT Analysis
215
Taylor, Frederick W.
217
Technology Risk
218
Threat of
Substitutes
220
Tipping Point
221
Total Quality Management
222
(TQM)
Utterback, James
223
Valuation
224
Value Chain
224
Value Migration
227
Value System
227
Values
227
Vertical Integration
228
Value Innovation
231
Vision
232
Whistle Blower
233
White Knigh
t
233
Williamson, Oliver E.
233
Willpower
234
Winner’s curse
234
Zero Base Budgeting
235
Bibliography
236
Strategy: An Introducti on
9
How to Get the Most
Out of this Book
Alphabetization:
All entries are alphabetized by letter rather than by
word so that mu
ltiple
-
word terms are treated as single words. In cases
where abbreviations or acronyms are more commonly used than full
terms, they are given as entries in the main text. For example,
MBO
is
more commonly used than
MANAGEMENT BY OBJECT
IVES
,
and so the
concept is explained under
MBO
. Where a term has several meanings, the
various meanings are given.
Cross References:
To offer a fuller understanding of a concept, som
e-
times it is both necessary and useful to refer to other related entries in
th
e book as well. Such cross references are printed in
SMALL CAPITALS
.
Italics
have been used to indicate titles of publications, books, journals,
etc.
Parentheses:
Parentheses have sometimes been used in entry heading
to indicate that an abbreviation is as commonly used as the term itself,
for example,
BIG HAIRY AUDACIOUS
GOALS (BHAG).
Examples, Illustrations and Tables:
The book contains numerous e
x-
amples to help y
ou better understand a concept, or to relate it to the real
business world. Illustrations and tables are also given at many places
along with their related entries.
10
A to Z of Busi ness Strategy
Strategy: An Introduction
As the business environment becomes more complex, strategic ma
n-
agement is gaining in importance. Few words are as commonly used in
management as strategy.
In simple terms, strategy means looking at the long term future to
determine what the company wants to become, and putting in place a
plan of getting there.
Stra
tegy is both art and science. Strategy is an art because it requires
creativity, intuitive thinking, an ability to visualize the future, and to
inspire and engage those who will implement the strategy. Strategy is
science because it requires analytical ski
lls, the ability to collect and an
a-
lyze information and take well informed decisions.
Without a strategy, an organization is directionless and vulnerable to
changes in the business environment. Strategy acts as some kind of a
guidepost for a company’s ong
oing evolution. Strategy provides a dire
c-
tion for the company and indicates what must be done to survive, grow
and be profitable.
According to Constantinos Markides
*
, strategy addresses three que
s-
tions:
Who are the customers?
What products / services shou
ld be offered to them?
How can the company do this efficiently?
These questions look deceptively simple. But the answers to these
questions which form the core of corporate strategy.
The term
strategic
is widely used, but often in the wrong context. So
w
e must understand the term carefully. We can call an issue strategic if
it requires top management involvement, involves commitment of major
resources, has either a long term impact or organization
-
wide implic
a-
*
Markides, Constantinos C.,
“A Dynamic View of Strategy”,
MIT Sloan Ma
n-
agement Review
. Spring 1999. pp. 55
-
63. Also see
All The Right Moves
by the
same author, published by Harvard Business School Press, 2000.
Strategy: An Introducti on
11
tions. Though the involvement of top executive
s is a must in strategic
management, people at all levels in the different business units and fun
c-
tions must also be involved. Unless plans are understood and impl
e-
mented effectively at these lower levels, the whole purpose of strategic
management would be
defeated.
The 10 Schools of Strategy
The body of knowledge on corporate strategy has evolved over time.
With different schools of thought looking at strategy in different ways,
it’s a good idea to review all of them briefly in order to get an integrated
p
icture.
According to Henry Mintzerg
*
, there are ten different schools of
strategy:
The Design School:
Aims at creating a fit between a company’s inte
r-
nal strengths and weaknesses and external threats and opportunities.
The Planning School:
Views strategy
as an intellectual, formal exe
r-
cise, involving various techniques.
The Positioning School:
The company selects its strategic position
after thoroughly analyzing the industry. Effectively, planners become
analysts.
Entrepreneurial School:
The focus here sh
ifts to the chief executive
who largely relies on intuition to formulate strategy. The emphasis is
less on precise designs, plans or positions and more on broad vision
and perspectives.
Cognitive School:
The focus here is on cognition and cognitive bia
s-
es.
Learning School:
Strategies are emergent, not deliberate. They evolve
as the organization learns.
Power School:
Strategy making is rooted in power. At a micro level,
people are involved in bargaining, persuasion and confrontation. At a
macro level, the organization uses its power over others and among
its partners in alliances, joint ventures and other network rela
tio
n-
ships to negotiate things in its favor.
*
Mintzberg, Henry; Lampel, Joseph, and Ahlstrand,
Bruce,
Strategy Safari: A
Guided Tour Through the Wilds of Strategic Management
, The Free Press,
2005.
12
A to Z of Busi ness Strategy
Cultural School:
Views strategy formulation as a process rooted in
culture. Culture shot into prominence after the Japanese style of
management became widely written about in the 1980s.
The Environment School:
Th
e focus here is on coping with the env
i-
ronment. As Mintzberg mentions, this school sees the strategy fo
r-
mation as a reactive process. The strategy is a response to the cha
l-
lenges imposed by the external environment. Where other schools
see the environment
as a factor, the environmental school sees it as
an actor.
Configuration School:
This school views the organization as a confi
g-
uration and integrates the claims of other schools. A variation of this
somewhat academic perspective is a more practitioner
-
ori
ented view
which focuses on how an organization moves from one state to a
n-
other, such as from start up to maturity.
The approaches mentioned above need not be viewed as exclusive,
watertight compartments. They can be combined in appropriate ways.
The Econ
omic Goals of an Organization
Understanding the firm’s long term economic goals is the starting point
in strategy formulation. As Pearce and Robinson
*
rightly put it, three
economic goals must drive the strategy of any organization
—
survival,
profitabili
ty and growth. A firm has to first survive, if it is to serve the
interests of its stakeholders. Survival is often taken for granted. But
many companies do go bankrupt. Indeed, the average life of a Fortune
500 company is only 40 to 50 years, according to
the research of a fo
r-
mer Shell executive Aries de Geus
†
K oeckless or expedi敮t short term
oriented decision ma歩ngI com灬acen捹 and q畩ck fixe猠 to stru捴ur慬
probl敭s are s潭e of the w慹s in w桩ch the surviv慬 of an organizatio渠
is thre慴enedK
偲ofitabili
ty is the m慩n goal of a湹 businessK kot only s桯uld a firm
make profits but it must als漠ensure that these profits are sustaina扬e i渠
the long runK j潶es 慩med m敲ely 慴 impr潶ing short t敲m profita扩lity
*
Pearce, John A. and Robinson, Richard B.,
Strategic Management
—
Strategy
Formulation & Implementatio
n,
Richard D. Irwin, 1995.
†
De Geus, Aries P., “Planning as Learning”,
Harvard Business Review
, March
-
April 1988, pp. 70
-
74.
Strategy: An Introducti on
13
must be avoided. Equally important, profits should
come from the co
m-
pany’s core business, not through non operating income (such as sale of
assets) or accounting manipulation.
The third goal is growth or, more precisely, profitable growth. A
profitable organization which is not growing is a cause for ala
rm. Lack
of growth means the company is not able to identify opportunities to
expand its market, compete with other players, develop new products,
attract new customers, etc. Lack of growth also implies that competitors
are probably moving ahead, thereby m
arginalizing the company’s co
m-
petitive position.
For example, slow growth in recent times of famous companies such
as Microsoft and Hindustan Lever has been a major source of worry for
their investors.
Strategic Planning
In general, strategic plans conta
in the following components:
Vision:
The organization’s deeply desired future.
Mission:
The organization’s purpose in terms of products, technology
and markets.
Core Competencies:
The tangible and intangible assets the company
will need to build and leve
rage to gain competitive advantage.
Values:
The driving beliefs that define a company’s culture, help
managers to set priorities and guide day
-
to
-
day operations.
Strategic Objectives:
The targets that
allow a company to measure
how it is performing in key result areas such as market share, cu
s-
tomer loyalty, quality, service, innovation and human capital.
The business environment needs to be analyzed carefully before a
strategic plan is prepared. Acco
rding to Pearce and Robinson
*
, the bus
i-
ness environment can be divided into the remote environment and ope
r-
ating environment. The remote environment includes political, econo
m-
ic, social, technological and industry factors. The operating environment
has a d
irect impact on the ability of the firm to sell its products and se
r-
vices profitably. Among the factors to be considered here are compet
i-
*
Pearce, John A. and Robinson, Richard B.,
Strategic Management
—
Strategy
Formulation & Implementation
, Richard D, Irwin, 1995.
14
A to Z of Busi ness Strategy
tive position, customer profile, reputation among its suppliers / creditors
and the labor market. The operating environ
ment is much more under
the control of a firm, compared to the remote environment. So the firm
should be more proactive in dealing with the operating environment.
Environment data must be collected for a meaningful range of fa
c-
tors. Such data should be an
alyzed to determine the implications for the
firm in terms of opportunities and threats. Strategic plans should be su
f-
ficiently flexible to deal with unexpected variations from environmental
forecasts.
During the planning stage, the company will also have
to identify key
issues; for example, weaknesses to be addressed or opportunities to be
exploited with respect to the products and services to be offered to cu
s-
tomers, the internal process changes needed to support the company’s
strategy, and the skills an
d resources needed to create value more eff
i-
ciently and effectively. Some of the important issues faced by any o
r-
ga
n
ization are costs, service, new markets and products, geographic e
x-
pansion, acquisitions, divestitures, organizational structure, core comp
e-
tencies and processes, new technologies, training and development, and
information systems.
Any strategic plan also involves commitment of resources. Adequacy
of existing resources, training needs, requirement of new information
systems, etc. must be care
fully examined.
Strategic management decisions take place at three levels: Corporate,
Business Unit and Function. Corporate level decisions tend to be macro
level and conceptual in nature. The choice of business, the kind of
growth strategy to pursue and
the kind of capital structure the company
should have are good examples. Business level decisions cover more
specific areas such as plant location, market segmentation, geographic
coverage and distribution channels. Functional level decisions tend to
cover
the next level of detail such as choice of plant / equipment, inve
n-
tory level, etc.
Operationalising the Strategy
The difference between the best and mediocre companies often lies not
in strategic planning but in the way strategy is implemented. The key
i
ssues must be translated into action plans, which must include the key
metrics, timelines, important steps involved, resources needed, cross
Strategy: An Introducti on
15
functional collaboration required, etc. Effective implementation d
e-
mands identification of annual objectives, funct
ional strategies and a
p-
propriate policies that are aligned with the long term plans / objectives.
Annual objectives effectively break down long range goals into what
needs to be achieved during the year. So they must be focused, specific
and measurable.
Examples of annual objectives include:
To reduce employee attrition by 10% by the end of the year.
To reduce time from order receipt to order execution by 20%.
To increase the member of consultants in the company, who are Six
Sigma Certified Black Belts by
30%.
Functional strategies represent the action plans for sub
-
units of the
company. Functional strategies outline how key functional areas like
marketing, finance, operations, R&D and human resources must be
managed. Functional strategies must be framed
with respect to each key
activity. Take the case of pricing, for example. The following issues
must be addressed:
1.
What segment is being targeted
—
mass market or premium end of
the market?
2.
How much of price discrimination should be practiced across cu
s-
tome
r segments?
3.
Is the cost structure aligned with the price?
4.
What kind of discount can be offered, given the cost structure?
5.
Should the price be above or below that of competition?
Policies act as specific guides for operating managers and their su
b-
ordinates
. By linking policies to long term objectives, strategy impl
e-
mentation is greatly facilitated. Policies are clear statements about how
things are to be done. They ensure disciplined decision making without
the need for frequent intervention by top manageme
nt. By standardizing
answers to many questions, policies not only speed up the decision ma
k-
ing process but also help establish consistent patterns of action and r
e-
duce the uncertainty involved while handling routine problems.
Strategy implementation will
not be effective without defining a
c-
countability. Managers need to determine who will be responsible for
the overall effort and, in turn, who will “own”, or be responsible for,
each of the different steps.
16
A to Z of Busi ness Strategy
Accountability, autonomy and responsibility go
together. Managers
need to clarify how much autonomy individuals and teams will have in
discharging their responsibilities.
Some individuals may like to consult other team members before
making a choice. Others may be capable and confident of making dec
i-
sions independently. A few others may have relatively little experience
in decision making. Managers may want to empower them to make
some lower risk decisions themselves to gain more exposure.
Communication is an integral part of operationalising the st
rategy.
Even the best thought
-
out plans cannot be executed unless team me
m-
bers clearly understand the plan, are enthusiastically convinced about it
and discharge their responsibilities skillfully.
Meetings, informal conversations, e
-
mails, and other commu
nication
channels can be used to communicate the importance of the company’s
strategy and the role of different groups in implementing it. Communic
a-
tion must focus on the following:
Rationale for the company’s strategy.
How the initiatives that are being
carried out support the corporate
strategy.
The implications if the plans are implemented successfully.
The implications if the company fails to implement its plans.
The attitudes and behavior expected from each person in the team.
Regular communication can go a long way in making people believe
that strategy is truly
a collective responsibility
.
Change Management
Managing change is an integral part of strategic management. Analysis
of industry structure, competitive positioning, res
ources currently avai
l-
able to the firm or a sharp decline in the company’s financial perfo
r-
mance may indicate the need for launching a major change initiative.
Effective change management calls for a clear vision about where the
organization is heading, in
volvement of people, responsibility for taking
action and appropriate measurement and control systems.
Radical change is usually best implemented by outsiders, who can
bring in fresh perspectives. A new CEO promoted from within but who
Strategy: An Introducti on
17
is not closely a
ssociated with the past strategy can also spearhead such a
change initiative. Leadership of radical change initiatives usually i
n-
volves creating an inspiring vision of the future, supporting it with ta
n-
gible and symbolic actions, and generating support and
commitment
across various levels of the organization.
Change is difficult for most people due to various reasons. Change
tends to be seen as an admission that something wrong has happened.
Change also upsets status and power relationships. Resistance mig
ht
take the form of outright defiance, apparent agreement to do something
but failure to follow through, an emotional attachment to the way things
have been done in the past and a diminishing commitment to the job.
People who resist change can slow down
things. They must be dealt
with on a one
-
to
-
one basis. After understanding the reasons for their
resistance, various approaches can be tried out:
Give them plenty of information about market developments and
why a new corporate strategy and initiatives are
needed.
Invite them to participate as much as possible in planning and i
m-
plementation, so that they have a personal investment in the strategy
and initiatives.
Identify the reasons behind the resistance. Mentoring / Counseling
may overcome such resistan
ce.
Training can go a long way in facilitating change. Training can i
m-
part new skills and competencies and facilitate behavioral interve
n-
tion.
If all these approaches fail, managers may have little choice but to move
such people to areas where they are le
ss likely to do harm. In extreme
cases, people resistant to change should be dismissed in the larger inte
r-
ests of the organization.
Strategic Control
Strategy implementation may take years. But companies cannot wait till
a strategy is fully implemented t
o compare actuals with targets. Strategy
must be tracked even as it is being implemented. Suitable mid
-
course
correction must be taken in response to various developments, internal
18
A to Z of Busi ness Strategy
and external. According to Pearce & Robinson
*
, strategic control has
four a
spects:
Premise control;
Implementation control;
Strategic surveillance; and
Special alert control.
Premise control aims at systematically checking whether the assum
p-
tions made during the strategic planning exercise continue to hold good.
It is not necess
ary to track all the assumptions made during planning. It
makes sense to focus on those assumptions which are likely to change
and which would have a major impact on the organization if they did.
When these assumptions change, plans also must undergo a cor
respon
d-
ing change.
Implementation control examines whether the overall strategy should
be changed in light of unfolding events and the results of the various
actions already taken to implement the strategy. One useful technique is
a milestone review. It i
nvolves a full
-
scale reassessment of the strategy
and the advisability of continuing or changing the direction of the co
m-
pany. Such a review may take place after a passage of time, occurrence
of critical events, or at points before major resource allocatio
ns.
Strategic surveillance involves monitoring a broad range of events,
internal and external, that may derail the strategy or significantly infl
u-
ence the implementation. Special alert control is a mechanism to tho
r-
oughly, and often rapidly, reconsider th
e firm’s strategy in the wake of a
sudden, unexpected event. Occurrence of such events must trigger off an
immediate and intense reassessment of the company’s strategy and ci
r-
cumstances, and a re
-
look at the plan.
At lower levels, operating managers need
control systems to guide
the allocation and use of the company’s resources. These systems set
performance standards, measure actual performance, identify deviations
from standards and initiate suitable corrective action or adjustment. E
x-
amples of operation
al control systems include budgets, schedules and
key success factors. A budget is simply a resource allocation plan.
*
Pearce, John A. and Robinson, Richard B.,
Strategic Management
—
Strategy
Formulation & Implementation,
Richard D. Irwin, 1995.
Strategy: An Introducti on
19
Scheduling helps in allocating the use of a time
-
constrained resource or
arranging the sequence of interdependent activities. Key success
factors
must receive constant management attention.
Evaluating and Rewarding Performance
Evaluating performance entails measuring how both a unit as a whole
and its individual members have fared with respect to set objectives,
using both qualitative and quantitative criteria.
Qualitative criteria
are those where numbers cannot be put. Some
e
xamples are:
Evaluating whether the unit is
exceeding
expectations in the acco
m-
plishment of strategic initiatives.
Evaluating the commitment to learning.
Evaluating if individuals are developing innovative ways to acco
m-
plish the job.
Evaluating how well
a unit is working together as a team.
Evaluating how well team members are collaborating with one a
n-
other, resolving conflicts, and sharing what they’ve learned.
Evaluating how well the unit plans ahead.
Evaluating how deeply team members understand the
company’s
business, their own role in supporting the corporate strategy, and the
details of the action plans they’re responsible for.
Quantitative criteria focus on revenue, cost of goods, market share,
and other quantifiable and measurable parameters. F
or example, a unit
might decide to increase revenue by 20% annually over the next three
years. At the end of Year
-
1, the unit may review the situation and co
n-
firm whether revenue did, in fact, increase by 20% that year.
People can be rewarded for good wo
rk in different ways. Most pe
o-
ple want some form of financial reward for their work. A few are mot
i-
vated by non
-
monetary factors such as recognition, power and influence,
autonomy, job variety and learning opportunities. So a judicious comb
i-
nation of finan
cial and non
-
financial rewards must be used to encourage
a culture of excellence.
The reward system should be transparent. Employees must unde
r-
stand clearly what is expected of them, and the kind of rewards they will
20
A to Z of Busi ness Strategy
receive if they perform well. Some of
the issues that must be commun
i-
cated to people in a transparent manner include:
Is the reward system permanent, or will it be modified or disconti
n-
ued after some time?
Will everyone be eligible for rewards?
For example, if the reward system features bon
uses for sales of a new
product, will the R&D staff also be rewarded for their contribution?
The Road Ahead
The classical views of strategy have focused on understanding industry
structures and developing suitable capabilities to position a firm effe
c-
tive
ly in relation to competitors. But in today’s complex and changing
environment, when the very boundaries of many industries are being
constantly reshaped, does it make sense to try and understand the evol
v-
ing industry structure? Are ad hoc short
-
term movem
ents the only way
to cope with the uncertain environment? Is long term strategic planning
no longer relevant?
The short answer is that strategic planning is as relevant as ever. It
provides direction. As John Hagel III and John Seely Brown
*
mention,
spee
d without a sense of direction may result in random motion. Without
a sense of direction, companies may become reactive and sometimes
spread their resources thin by pursuing too many options simultaneou
s-
ly.
Even in tech industries which are always in a s
tate of flux, long range
planning is important. They give the example of Microsoft which deve
l-
oped a strong sense of direction in two sentences: “Computing power is
moving inexorably to the desktop. To succeed, we must own the des
k-
top.” The directional sta
tement acted as a powerful guiding force even
during times of major challenge over a period of almost two decades. To
be effective, directional statements should be brief and high level. “In
complex, rapidly evolving markets, any attempt to specify outcome
s in
detail is bound to create the illusion of greater insight and control over
events than warranted . . . it might be more accurate to describe these
*
Hagel III, John and Seely Brown, John,
The Only Sustainable Edge
,
Harvard
Business School Press
,
2005.
Strategy: An Introducti on
21
statements of long
-
term direction as focusing or orienting perspectives
rather than definitive statement
s of advantaged positions. The statements
help executives know when to look, rather than telling them what they
will find.”
To strike a balance between speed and direction, two different time
horizons are needed
—
a long term horizon for setting the dire
ction and
a short term horizon to focus on operational initiatives. Hagel III and
Seely Brown have come up with a frame work called FAST
—
Focus,
Accelerate, Strengthen, Tie it all together. “Focus” refers to long term
positioning, and specialization and c
apability building in the chosen area
of business. “Accelerate” means moving fast in the short term.
“Strengthen” means removing road blocks that prevent faster movement
in the short run. This includes building shared meaning and trust and
making appropria
te investments in information technology. “Tie it all
together” means integrating these three components across networks of
organizations to amplify learning and accelerate capability building. As
they mention: “The sequential approach of traditional strat
egies simply
cannot generate the rapid learning and capability building that one needs
for moving quickly back and forth between a very short
-
term operational
horizon and a much longer term strategic horizon.”
In fast paced, intensely competitive markets
, how can companies
develop superior strategic decision making skills? According to Kat
h-
leen Eisenhardt, effective strategy formulation is about
*
:
Building collective intuition;
Encouraging healthy conflict;
Maintaining a pace so that decisions are taken w
ithin a stipulated
time; and
Defusing political behavior.
Building collective intuition means gathering information on real
time basis and involving people by holding intensive discussions with
them in groups. Through such discussions, the company can get a sense
of how it should move ahead.
*
Cusumano, Michael A
. and Markides, Constantinos C. (Editors), “Strategy as
Strategic Decision Making” in
Strategic Thinking for the Next Economy,
Jossey
Bass
, 2001.
22
A to Z of Busi ness Strategy
Inviting and debati
ng divergent views is an important part of strategy
formulation. Conflict promotes creative thinking, a healthy debate on the
various options available, validation of the various assumptions made
and an overall improvement in the quality of decisions.
Com
panies which are good at strategic planning get into action mode
quickly. They encourage debate and bring a lot of energy into the di
s-
cussions. But they also know when to end the deliberations and freeze a
decision. While trying to build consensus, they kn
ow how to break a
deadlock. They take a decision even when people are finding it difficult
to agree and come to an understanding. On the other hand, companies
which are weak in strategic management tend to postpone strategic dec
i-
sions and end up making hur
ried, last minute decisions.
Strategic decision making has its associated share of politics. Politics
must be minimized, if not eliminated, by emphasizing a shared vision
and through a more balanced power structure which gives different dec
i-
sion makers l
atitude and scope to contribute. A clear definition of r
e-
sponsibilities may make managers feel more secure, more willing to
cooperate and consequently reduce unhealthy competition.
The rise of the knowledge economy and the growing importance of
knowledg
e workers are putting pressure on companies to change their
style of operating. The three Ss, Strategy, Structure, Systems are giving
way to the 3 Ps, Purpose, Process and People. The 3P doctrine deve
l-
oped by Christopher Bartlett and Sumantra Ghoshal
*
emph
asizes that the
focus must shift from enforcing compliance to facilitating cooperation
among people and valuing initiative more than discipline. Top manag
e-
ment must establish a sense of purpose within the company. Purpose
allows strategy to emerge from wit
hin the organization at different le
v-
els. Purpose generates energy and alignment. Instead of emphasizing
structure, the top management should focus on building the core organ
i-
zational processes that will promote an entrepreneurial mindset that can
help in
creating and leveraging knowledge to create value. Finally, i
n-
stead of building systems, top management should develop people and
help them in fully exploiting their potential. Senior managers should
play the role of mentors rather than rule enforcers.
*
Ghoshal, Sumantra and Bartlett, Christopher A.,
The Individualized Corpor
a-
tion
,
Harper Collins
,
1997.
Strategy: An Introducti on
23
Th
e basic principles of Porter’s competitive strategy also need to be
reinterpreted in a fast paced business environment. As Arnoldo Hax and
Dean Wilde
*
suggest, in addition to competing on cost leadership or di
f-
ferentiation, companies can explore other opti
ons. The “customer sol
u-
tions” option is based on offering a wider range of products and services
that satisfy most if not all the customers’ needs. This broad bundle of
services might be customized according to market needs. This strategy
emphasizes bondin
g with customers, anticipating their needs and wor
k-
ing closely with them to develop new products. The “system lock in”
option considers all the meaningful players in the system that contribute
to the creation of economic value. The company concentrates on
nurtu
r-
ing, attracting and retaining complementors’ share to lock out compet
i-
tors and lock in customers.
As the new millennium gets under way, there is little doubt that stra
t-
egy will play a key role for companies across industries. Flexibility,
shorter p
lanning cycles, the ability to gather data in real time, rapid mi
d-
course corrections and efficient execution will hold the key to success in
the coming years.
*
Hax,
Arnoldo C and Wilde II, Dean L. “The Delta Model: Adaptive Manag
e-
ment for a Changing World”,
Sloan Management Review,
Winter 1999, pp. 11
-
28.
24
Ackof f
, RUSSELL L.
A
Ackoff, Russell L.
One of the early
strategy gurus, Ackoff introduced rigor into strategic
planning. In his book
A Concept of Corporate Planning
, Ackoff me
n-
tions that t
here are some aspects of the future about which we can be
virtually certain. Here, companies can pursue commitment planning.
There are other aspects of the future about which we cannot be certain,
but we can be reasonably sure of what the possibilities are
. Here,
CO
N-
TINGENCY PLANNING
is useful. A good
example is planning for a military
invasion. Every possibility is identified and analyzed and a suitable
a
c-
tion plan prepared because time is of the essence, once a possibility has
become a reality. Finally, t
here are some aspects of the future, which
cannot be anticipated. Here,
RESPONSIVENESS PLANN
ING
can be used, i.e.
building flexibility into the organization.
(
See also
:
ADAPTIVE
PLANNING
)
Activity Based Costing (ABC)
Activity based costing increases the
accuracy of cost information by
linking overhead and other indirect costs to product or customer se
g-
ments more precisely. Traditional accounting systems distribute indirect
costs on the basis of direct labor hours, machine hours, or material costs.
This l
eads to a distorted picture. Decisions about which product line to
invest in and which not to invest in, become difficult. ABC undertakes
detailed economic analyses of important business activities to improve
strategic and operational decisions.
To build
a system that will support ABC, companies should:
Determine the key activities performed;
Determine the cost drivers by activity; and
Determine overhead and other indirect costs by activity, using clearly
identified cost drivers.
ABC can be used to:
Adj acenci es
25
1.
Re
-
Price Products:
Managers can analyze product profitability more
accurately by combining activity based cost data with pricing info
r-
mation. This can result in the re
-
pricing or elimination of unprofit
a-
ble products. Managers can also estimate new product
costs accurat
e-
ly.
2.
Reduce Cost:
ABC identifies the components of overhead costs and
other cost drivers. Managers can reduce costs by lowering the cost of
an activity, or the number of activities per unit.
3.
Influence Strategic and Operational Planning
:
ABC c
an facilitate
target costing, performance measurement for continuous improv
e-
ment, and resource allocation based on projected demand and infr
a-
structure requirements. ABC can also assist a company in identifying /
evaluating new business opportunities.
(
See also
:
FULL COSTING, STRATE
GIC COST MANAGEMENT
)
Adaptive Planning
This school of strategic planning, developed by
Russell
ACKOFF
, believes
that the principal value of planning lies not in the plans themselves but
in the process of producing them. Compa
nies should try to put in place a
system that will minimize the future need for retrospective planning, i.e.
planning aimed at removing deficiencies produced by past decisions.
This school classifies the future into three types: certainty, uncertainty
and
ignorance. When the future is reasonably certain,
commitment pla
n-
ning
can be used. When the future is uncertain but we can be reasonably
sure of what the possibilities are,
CONTINGENCY PLANNING
can be used.
Finally, there are some aspects of the future tha
t just cannot be anticipa
t-
ed. The only way to deal with such uncertainties is by building respo
n-
siveness and flexibility into the organization. This is called
RESPO
N-
SIVENESS PLANNING
.
Adjacencies
A term coined by Chris Zook and James Allen
*
for markets cl
ose to a
company’s core business. By identifying and exploiting such markets,
*
Zook, Chris,
Beyond the Core: Expand Your Market Without Abandoning
Your Roots
,
HBS Press
, 2004; Zook, Chris, an
d Allen, James,
Profit From the
Core: Growth Strategy in an Era of Turbulence,
Harvard Business School Press,
26
Adj usted
PRESENT VALUE ( APV)
companies can create a new growth trajectory. Adjacencies essentially
imply related diversification, i.e. moving into a new area which has
some resemblance to the firm’s core bus
iness and taking advantage of its
existing competencies. Adjacencies represent new growth opportunities
which have a strong fit with the existing business.
(
See also
:
CORE COMPETENCE, DIV
ERSIFICATION
)
Adjusted Present Value (APV)
NET PRESENT VALUE
(NPV) i
s a popular method of evaluating an inves
t-
ment decision. NPV involves estimating the cash flows expected from
the project and discounting them to the present value. NPV is, however,
not suitable in other more complex situations where risk is different for
different cash flows. Adjusted present value is a modified version of
NPV. APV uses different discount rates for different cash flows depen
d-
ing on the associated risk. Higher the risk, higher the discount factor
used.
Agency Theory
A theory which probes th
e relationship between principals and agents.
Principals appoint agents to get the work done. The goals of principals
usually differ from those of the agents. This gives rise to the agency
problem.
For example, advertisers (principals) tend to emphasize s
ales goals
and the cost
-
effectiveness of marketing communications, whereas adve
r-
tising agencies may be more inclined to think of creative goals and atte
n-
tion
-
getting commercials. Professors of top business schools would like
to spend most of their time d
oing research and consultancy. But the
owners expect these professors to spend more time with students both in
the classroom and outside.
Agency theory is a key concept in corporate governance. Professio
n-
al managers often pursue strategies that increase t
heir personal payoffs at
the expense of shareholders. For example, they may grant themselves
lavish perquisites, including elegant corner offices, corporate jets, large
staffs and extravagant retirement programs.
2001 and Zook, Chris, and Allen, James, “Growth Outside the Core”,
Harvard
Business
Review
,
December 2003, pp. 66
-
73.
Al i gnment
27
Managers also often tend to pursue growth
at the cost of profitability.
Shareholders generally want to maximize earnings, since growth in ear
n-
ings results in stock appreciation. Since managers are typically compe
n-
sated more for sales rather than earnings growth, they tend to be enthus
i-
astic about
strategies such as mergers and acquisitions even when this
enthusiasm is not really justified. Managers may also pursue diversific
a-
tion opportunities that are not necessarily in line with the company’s
best interests.
In other cases, managers may become
complacent and allow things to
drift. They may avoid risk since they feel they are more likely to be fired
for failure than for mediocre performance. Executives may be far less
entrepreneurial than they should be. They may not make the bold moves
that a s
ituation demands.
One way to tackle the agency problem is to align the interests of
managers with those of the owners by using appropriate incentives such
as stock option and executive bonus plans. But, ironically enough, these
schemes may also tempt mana
gers to act against the best interests of the
firm. For example, they may manipulate the financial statements to art
i-
ficially increase earnings.
(
See also
:
CORPORATE GOVERNANCE
)
Alignment
A
key factor in effective implementation of strategy.
Most large or
gan
i-
zations are divided into business units which are out of synch and work
at cross purposes. The challenge is to coordinate the activities of these
units and leverage their skills for the benefit of the organization as a
whole. Kaplan & Norton
*
call this alignment.
By aligning the activities of its various business and support units, an
organization can create additional sources of value in various ways. F
i-
nancial synergies can be generated through centralized resource alloc
a-
tion and financial
management. Value can also be created if corporate
headquarters can operate internal capital markets better than external
market mechanisms, and share knowledge across business units in a
*
Kaplan, Robert S. and Norton, David P.,
Alignment
—
Using the Balanced
Score
-
card to Create Corporate Synergies,
Harvard Business School Press,
2006.
28
Al i gnment
manner that would be difficult if the various units were independent
e
n-
t
i
ties.
Customer synergy means enhancing customer relationships by offe
r-
ing a range of complementary products and services from different bus
i-
ness units. Corporations can leverage their multiple products and se
r-
vices to create unique integrated soluti
ons, resulting in customer sati
s-
fa
c
tion and loyalty that less diversified and more focused organizations
cannot match. Companies can also generate value by delivering a value
proposition consistently throughout their decentralized units. Cross sel
l-
ing to s
pecific customers can also generate value.
Internal process synergies can be created by generating economies of
scale in activities such as procurement, logistics, information technology
and infrastructure. Sharing processes across units generates economi
es
of scale in such activities and helps cut costs. Centralized resources ha
v-
ing specialized expertise and knowledge in operating a key process or
service can be leveraged. The sharing of common philosophies, pr
o-
grams and competencies across business units
can also generate signif
i-
cant benefits. Expertise sharing can reduce the time it needs to respond
to customer needs and better equip the company to exploit emerging
opportunities in the business environment.
Learning and growth synergies can be generated
by developing and
sharing critical intangible assets, including people, technology, culture
and leadership. Corporate headquarters can put in place effective pr
o-
cesses for developing intangible assets and promote the sharing of
knowledge and best practice
s throughout all its business and support
units. New ideas can rapidly spread across the enterprise and be assim
i-
lated by the business units in a manner that would be difficult were they
independent entities. Growing leaders faster than competition can gen
e
r-
ate competitive advantage.
There are different ways of achieving alignment. One way is to start
at the top and then cascade down. Another way is to start in the middle,
namely at the business unit level, before building a corporate scorecard
and map.
Some companies launch an enterprise
-
wide initiative right at
the start. Others conduct a pilot test at one or two business units before
extending the scope to other enterprise units.
Alignment has four components:
Ansof f
, I GOR H.
29
1.
Strategic fit;
2.
Organization alignment;
3.
Hu
man capital alignment; and
4.
Alignment of planning and control systems.
Strategic fit exists when the internal performance drivers are co
n-
sistent and aligned with the desired customer and financial outcomes.
Organization alignment explores how the various p
arts of an organiz
a-
tion can synchronize their activities to generate synergy. Human capital
alignment is achieved when employee’s goals, training and incentives
become aligned with business strategy. An alignment of planning and
control systems exists when
management systems for planning, oper
a-
tions and control are linked to strategy.
As Kaplan and Norton put it, “Strategy execution is not a matter of
luck. It is the result of conscious attention, combining both leadership
and management processes to descr
ibe and measure the strategy, to align
internal and external organizational units with the strategy, to align e
m-
ployees with the strategy through intrinsic and extrinsic motivation and
targeted competency development programs and finally, to align existing
management processes, reports and review meetings, with the execution,
monitoring and adapting of the strategy.”
(
See also
:
BALANCED SCORECARD
)
Ansoff, Igor H.
A famous strategy guru, Igor Ansoff developed the notion of corporate
strategic planning. He a
rgued that any business needs to look at its r
e-
sources, and align them with its business environment. Ansoff’s analyt
i-
cal tools, such as competence grids, flow matrices, charts and diagrams
are popular in contemporary management literature. He used the ter
m
competi
tive advantage years before Michael Porter did.
Ansoff’s book,
Corporate Strategy
:
An Analytical Approach
to
Bus
i-
ness Policy for Growth and Expansion
(1987) mentions three classes of
decisions:
5.
Strategic (the selection of the product / market m
ix);
6.
Administrative (structure); and
7.
Operating (process).
30
Ansof f
, I GOR H.
According to Ansoff, strategy should focus on three fundamental
issues:
Definition of the firm’s core objectives;
Whether the firm should diversify and, if so, into what areas; and
How the
business should exploit and develop its new or existing
market.
The closer a business stays to its existing products and markets, the
lower the risk. Introducing new products into new markets for diversif
i-
cation carries the highest risk. Hence, the recomm
endation to stick to the
knitting. Ansoff depicted this in a matrix form, with four possible strat
e-
gies, depending on the situation faced.
Old Products
New Products
Old Markets
Market Penetration
Product
Development
New Markets
Market Development
Diversification
Market penetration means increasing market share by encouraging
current customers to buy more, attracting competitors’ customers, or
convincing non
-
users to use the product.
Market development implies launching
the current product in a
new
market by expanding distribution channels, selling in new locations
or identifying additional potential users.
Product development involves launching
a new product in the current
market by developing new features, improving quality levels, etc.
Diversi
fication means moving beyond the current business.
Conce
n-
tric (related) diversification involves developing new products for the
same market segment. Conglomerate (unrelated) diversification i
n-
volves developing new products for new markets.
Ansoff is als
o famous for:
Establishing corporate planning as a formal management process.
Popularizing SWOT analysis.
Developing the idea of environmental scanning.
Anti
-
Takeover
STRATEGY
31
Repositioning “strategic planning” as part of a continuing process
rather than a once
-
a
-
year (or less f
requent) planning process.
Articulating the various advantages and disadvantages of deliberate
strategy
versus
emergent strategy.
“Gap” analysis
—
which looks at the gap between our aspirations
and the likely outcome of current strategies.
Ansoff’s semina
l book,
Corporate Strategy
emphasizes the need to
break down the strategy process into various steps:
External analysis
—
understanding market opportunities and threats;
Internal analysis
—
understanding strengths and weaknesses;
Choice (and our alternati
ves); and
Implementation.
(
See also
:
STRATEGIC OPTIONS, S
WOT ANALYSIS
)
Anti
-
Takeover
Strategy
Methods used by an incumbent management to thwart a takeover bid. A
takeover means change of ownership and, usually, a change of manag
e-
ment as well. The current management
can resist
the takeover bid in
various ways. Important methods used in thwarting takeovers include:
The
golden parachute
is a provision in a CEO’s contract to ensure
that he will get a large bonus in cash or stock if th
e company is a
c-
quired.
The
supermajority
is a defense that requires an overwhelming majo
r-
ity of shareholders to approve of any acquisition. This makes a tak
e-
over much more unlikely.
A
staggered board
of directors
prolongs the takeover process by pr
e-
venti
ng the entire board from being replaced at the same time. The
terms are staggered so that some members are elected, say, every two
years, while others are elected every four years. The acquirer may not
want to wait four years for completely reconstituting
the board.
Dual
-
class stock
allows company owners to hold on to voting stock,
while the company issues stock with little or no voting rights to the
public. This way the new investors cannot take control of the comp
a-
ny.
A
poison pill
refers to anything the target company does to make itself
less valuable or less desirable as an acquisition once such a raid has
32
Argyri s
, CHRI S
begun. For example, high
-
level managers and other employees may
threaten to leave the company if it is acquired. A specific ass
et of a
company, such as its R&D center or a particular division may be sold
off to another company, or spun off into a separate corporation.
A
flip
-
in
provision may allow current shareholders to buy more stocks
at a steep discount in the event of a takeov
er attempt. The flow of a
d-
ditional cheap shares into the total pool of shares dilutes their value
and voting power. A more drastic poison pill involves deliberately
taking on large amounts of debt.
Argyris, Chris
A social psychologist by training, Chris A
rgyris conducted pioneering
work on how individuals respond to changing organizational situations
and the impediments to organizational learning. Argyris has undertaken
extensive research on learning in teams and drawn attention to the pro
b-
lems created by
defensive behavior. The cleverer the team is, the more
difficult it becomes to maintain openness to learning, and to avoid b
e-
coming defensive. Argyris describes the process involved as “double
-
loop learning”. While “single
-
loop learning” involves doing exi
sting
things better, double
-
loop learning entails doing existing things in new
ways, or inventing new things. Effectively, double
-
loop learning i
n-
volves reframing problems and stepping outside existing mind
-
sets. A
r-
gyri’s language is sometimes hard to unde
rstand. So he is often pe
r-
ceived as an esoteric rather than a popular guru. But his ideas and
thoughts are profound and continue to guide the functioning of today’s
organizations.
(
See also
:
ORGANIZATIONAL LEARN
ING
)
Bal anced
SCO
RECARD
33
B
Backward Integration
Moving along the
VALUE CHAIN
towards the inputs side. By producing
internally some or all of the inputs, a firm can benefit in various ways. It
can avoid sharing proprietary information and data with its suppliers.
This can be an important factor if the exact specification
s of component
can reveal the key characteristics of the final product’s design to the
supplier. Backward integration may result in inputs with closely co
n-
trolled specifications, enabling the firm to improve quality and differe
n-
tiate its product. If the in
puts are critical, backward integration helps a
firm to gain greater control of the value chain and to mitigate the high
BARGAINING POWER OF
SUPPLIERS
. Some good examples of backward
integration are India’s largest aluminum manufacturer Hindalco setting
up
a power plant, Reliance moving into petroleum refining and Tata
Steel setting up its own township in Jamshedpur as also mines and co
l-
lieries in various parts of Orissa and Bihar.
On the flip side, backward integration can also reduce the flexibility
of
a business if the demand for the end
-
product slows down. Margins
might then reduce due to high overheads. Moreover, the activities i
n-
volved in backward integration can often be handled more efficiently by
a specialized external supplier.
(
See also
:
VERTIC
AL INTEGRATION
)
Balanced Scorecard
Designed by Robert
KAPLAN
and David
NORTON
, the balanced scorecard
provides a comprehensive set of objectives and performance measures to
monitor a company’s progress. These include:
Financial performance, namely
revenues, earnings, return on capital,
cash flow, etc.
Customer value performance, namely market share, customer sati
s-
faction, customer loyalty, etc.
34
Bargai ni ng
POWER OF BUYERS
Internal business process performance, namely productivity, quality,
delivery, etc.
Learning and growth
—
percent of revenue from new products, e
m-
ployee suggestions, rate of improvement, employee morale,
knowledge, turnover, use of best demonstrated practices.
The challenge in implementing balanced scorecard lies in identifying
the key metrics and measuring t
hem on an ongoing basis so that the firm
can systematically achieve its objectives. Too many metrics can make
things complicated. So a few key metrics must be carefully chosen.
(
See also
:
ALIGNMENT
)
Bargaining Power of Buyers
One of the forces in Porter
’s
FIVE FORCES MODEL
. The higher the bargai
n-
ing power of buyers, less attractive the industry.
The bargaining power of buyers is high under the following circu
m-
stances:
Few buyers who purchase in large quantities.
Low switching costs, resulting in low l
oyalty.
Numerous, and relatively small, sellers.
The item being purchased is not an important one for buyers who can
either
take
it
or
leave
it.
Buyers
have
a
lot
of
information
about
competitive
offers,
which
they
can
use
for
bargaining.
There
is
a
good
possibility
that
buyers
may
decide
to
integrate
bac
k-
wards,
namely
make
the
product
themselves
rather
than
buy
it.
(
See
also
:
PORTER,
MICHAEL
E.
)
Bargaining
Power
of
Suppliers
One
of
the
forces
in
Porter’s
FIVE
FORCES
MODEL
.
Higher
the
bargaining
power
of
suppliers,
the
less
attractive
the
industry.
*
Abstracted from the book,
The Essence of Competitive Strategy
by David
Faulkner and Cliff Bowman, Prenti
ce Hall of India, 2002.
Barnard
, CHESTER
35
Bargaining
power
of
suppliers
tends
to
be
high
under
the
following
circumstances:
The
purchase
is
important
to
the
buyer.
Buyers
face
high
switching
costs.
There
are
few
alternative
sources
of
supply.
Any
particular
buyer
is
not
an
important
customer
for
the
supplier.
There
is
a
strong
possibility
that
the
supplier
may
integrate
forward.
(
See
also
:
PORTER,
MICHAEL
E.
)
Barnard,
Chester
One
of
the
first
management
thinkers
to
think
differently
from
the
then
gurus,
Frederick
Taylor
and
Max
Weber,
Barnard
spent
his
whole
career
as
a
business
executive
with
the
Bell
Tele
phone
Company.
He
wrote
two
influential
books,
The
Functions
of
the
Executive
(1938)
and
Organiz
a-
tion
and
Management
(1948).
Barnard
emphasized
the
importance
of
communication
and
shared
values
in
organizations.
Barnard
excelled
at
organization
building
skills.
His
tenure
as
CEO
was
marked
by
a
sense
of
public
service
and
personal
integrity
that
are
almost
unimaginable
to
many
today.
He
showed
exemplary
commitment
to
corporate
welfare
policies.
For
example,
at
the
height
of
the
Depre
s-
sion
in
1933,
Barnard
announced
a
no
-
layoff
policy
choosing
to
reduce
employee’s
working
hours
instead.
Management
authority,
he
realized,
rested
in
its
ability
to
persuade
rather
than
to
command.
The
challenge
was
to
balance
the
inherent
te
n-
sion
between
the
needs
of
individual
employees
and
the
goals
of
an
o
r-
ganization.
He
also
recognized
that
much
of
the
creative
potential
of
an
organization
lay
in
informal
networks,
not
in
its
formal
hierarchy.
He
understood
the
role
of
constructive
conflict.
Barnard
viewed
the
organization
as
a
complex
social
system.
The
main
challenge
for
management
was
achieving
cooperation
among
its
groups
and
individuals
to
facilitate
the
achievement
of
organizational
goals,
i.e.
resolving
the
tension
between
achieving
organizational
goals
and
the
need
for
individuals
to
achieve
personal
goals.
Organizational
goals
could
not
be
accomplished
unless
the
leadership
of
the
organiz
a-
tion
acknowledged
individual
aspirations
and
devised
a
means
of
hel
p-
ing
employees
achieve
them.
36
Barri ers
TO ENTRY
For
Barnard,
conventional
incentive
schemes
were
essentially
a
self
-
fulfilling
prophecy.
Much
before
Maslow,
Barnard
argued
that
beyond
a
certain
level
of
equitable
compensation,
employees
would
not
necessar
i-
ly
be
motivated
by
financial
incentives.
Bonuses
and
incentives
only
created
a
culture
of
greed.
Barnard
argued
that
management
had
to
focus
on
the
“strategic”
few
that
would
offer
“the
greatest
leverage
over
the
outcomes
of
a
particular
decision”.
He
suggested
that
deciding
what
decisions
not
to
make
was
as
important
as
which
decisions
to
make.
“The
fine
art
of
executive
dec
i-
sion
consists
in
not
deciding
questions
that
are
not
now
pertinent,
in
not
deciding
prematurely,
in
not
making
decisions
that
cannot
be
made
e
f-
fective,
and
in
not
making
decisions
that
others
should
make.”
Here,
Barnard
seemed
to
be
in
agreement
with
Peter
Drucker.
Barriers
to
Entry
One
of
the
five
forces
in
Porter’s
famous
FIVE
FORCES
MODEL
.
barriers
to
entry
are
the
obstacles
that
a
firm
must
overcome
in
order
to
enter
an
industry.
When
high
entry
barriers
exist
in
an
industry,
competition
is
usually
less
intense
and
profitability
tends
to
be
high.
On
the
other
hand,
when
entry
barriers
are
low,
new
firms
can
enter
the
industry
more
eas
i-
ly.
While
demand
may
not
go
up
immediately,
the
new
entrants
bring
along
additional
capacity
and
reduce
the
overall
level
of
profitability
in
the
industry.
The
barriers
to
entry
can
be
tangible
or
intangible.
Tangible
barriers
include
capital
and
various
kinds
of
physical
assets
like
plant
and
m
a-
chinery
and
infrastructure.
Tangible
barriers
are
easier
to
replicate
than
intangible
barriers,
such
as
brands,
corporate
reputation,
customer
l
oya
l-
ty
and
relationships
with
vendors
/
distribution
channels.
Barriers
to
entry
may
be
high
under
the
following
circumstances
*
:
Economies Of Scale
:
If
there
are
major
cost
advantages
to
be
gained
from
operating
on
a
large
scale
or
scope
then
new
entrants
will
not
find
it
easy.
*
Abstracted from the book,
The Essence of Competitive Strategy
by David
Faulkner and Cliff Bowman, Prentice Hall of India, 2002.
Barri ers
TO I MI TATI ON
37
Learning Curve:
If
low
unit
costs
can
be
achieved
by
accumulated
learning,
inexperienced
new
entrants
will
be
at
a
unit
cost
disa
d-
vantage.
Knowledge and Skills:
Access
to
process
knowledge
and
particular
skills
can
make
entry
difficult.
Customer Brand Loyalty:
Customers
may
have
preferred
brands,
or
they
may
have
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