Notes for mba (strategic management) unit i

STRATEGIC MANAGEMENT
___ Semester III

UNIT – I

STRATEGY AND PROCESS

Conceptual Framework for Strategic Management, The Concept of Strategy and the Strategy Formation
Process – Stakeholders in Business – Vision, Mission and Purpose – Business Definition, Objectives and
Goals – Corporate Governance and Social Responsibility – Case Study

CONCEPTUAL FRAMEWORK FOR STRATEGIC MANAGEMENT
In earlier times, the managers focused on “today‟s decisions for today‟s business”. However the
rapid changes experienced by companies have made the managers to anticipate the future and
prepare for it. They have prepared systems, procedures and manuals and evolved budgets and
planning and control systems, which included capital budgeting and management by objectives.
The inadequacy of these techniques has led to the emergence of long range planning which in
turn gives rise to strategic planning subsequently to strategic management.

Strategic management deals with decision making and actions which determine an enterprise‟s
ability to excel survive or die by making the best use of a firm‟s resources in a dynamic
environment. The main purpose of study of strategic management is to examine why some
organization succeed while others fail and yet others completely change.

Consider the following examples:
 Bharat Heavy Electricals Ltd. (BHEL) is now planning to expand its range to 800 MW
supercritical power projects.
 LG Electronics India Ltd. (LGEIL) signed a MOU with Maharashtra government to
expand manufacturing facility at Pune for Rs.900 crores.
 GAIL India has received an offer from China Gas Holdings for participation in a gas
based petrochemical project to be set at Humor in Mangolia.
 The world‟s largest steel conglomerate Mittal Steel Company is to become the second
largest stakeholder in a Chinese Steel firm in Hunan Province.
 Mittal singed three MOUs with Jharkhand Government for setting up 12 million tonne
Greenfield project in two phases.
 Maruthi Udyog slashed the price of Maruti-800 by Rs.16000 in small car segment
drastically.
 Lenova, the Chinese computer giant acquired IBM in China.
 Tata Steel entered a joint venture agreement with Iranian Mines and Mining Industries
Development and Renovation Organization.

These examples illustrate how organizations react to environment and adopt suitable course of
action such as divestment, expansion and stability as part of their operations. The decisions
regarding up-gradation of product mix, joint ventures and expansion have a long term impact on
the activities and such crucial decisions are taken by senior management. The top management is
mainly responsible for providing a sense of direction and guiding future course of action for any
firm. Strategic management deals with long-term decisions taken up by top management which
gives overall direction to the organization. Strategic Management provides a cooperative,
integrated and enthusiastic approach for tackling problems and realizing opportunities.
S.N.Selvaraj, M.B.A., M.Phil., (Ph.D)., Assistant Professor (email:sn.selvaraj@yahoo.com) Page 1

An enterprise‟s success mainly depends on three board factors:
(1) The Industry, it belongs to
(2) The Nation, it is located and
(3) Its own resources, capabilities and strategies.

Fig: Determinants of Company Performance
Company Resources,
Industry Context National Context Capabilities and
Strategies

Company Performance

Industry: Some industries are profitable than others due to industry attractiveness. A company in
attractive industry will achieve success compared to a firm in a less attractive industry. During
the last decade software industry is more profitable than pharmaceutical industry.

Nation: The country also influences the competitiveness of company based within the nation.
Some countries enjoy competitive advantage with regard to certain industries. For example, the
world‟s most successful automobile and consumer electronics companies are located in Japan.
The most successful pharmaceutical companies are located in U.S. and Switzerland. Many of the
successful financial services companies are located in the United States and Great Britain. The
success or failure of individual firms depends on national competitive advantage.

Company: Firm‟s resources, capabilities and strategies are the strongest reasons for the success or
failure of the firm. Some firms thrive even in less attractive industry whereas some firms
perform poorly in spite of being in profitable industry. Often one comes across wide variation in
the performance of companies within the same industry and enjoying same national competitive
advantage. There is a grave need to understand the causes of success and failure in order to
develop strategies, which will increase the probability of success and reduce the probability of
failure.

THE CONCEPT OF STRATEGY AND THE STRATEGY FORMATION PROCESS
Strategy is a framework through which an organisation can assert its vital continuity whilst
managing to adapt to the changing environment to gain competitive advantage.

According to Igor Ansoff (1984),
Strategic Management is a systematic approach to the major and increasingly important
responsibility of general management to position and relate the firm to its environment
in a way which will assure its continued success and make it secure from surprises.


Top executives, who formulate strategy, draw information from several publications in order to
keep abreast of current developments in their industry and business. Some of the online sources
of business strategy news are as follows:
1. Business line – www.indiaserver.com/bline/
2. Financial Express – www.financialexpress.com
3. The Economic Times – www.economictimes.com
4. Times Syndication – www.timesofindia.com
5. Fortune – www.fortune.com
6. Forbes – www.forbes.com
7. Wallstreet – www.wsj.com

Strategic management tends to develop a generalist approach to managerial problems and it
enables one to view organizational issues in its totality. Hence business is viewed as a system
consisting of number of subsystems and the narrow outlook of a specialist is not recommended
for solving business problems. For instance, employee turnover apparently looks like a personnel
problem. If one probes deeply into the problem, it genesis may be deeper.

Employee turnover may be attributable to unsuitable recruitment policy, poor training, MNC‟s
attractive package, declining demand for the products of the company, poor morale, lack of job
satisfaction, uncertainty of the tenure, underutilization of capability and so on. Apparently it
looks like a personnel problem but truly speaking, it is due to various factors beyond the purview
of the Personnel Department. Hence a generalists‟ outlook, rather than that of specialists, is
desirable to deal with organizational problems in its totality.

Analytical techniques and skills are needed for developing and exploiting strategies successfully.
Understanding strategy is the first step in strategic management process.

Definitions
 Strategy is “a unified comprehensive and integrated plan designed to ensure that the basic
objectives of the enterprise are achieved” – Glueck

 Strategy is “a determination of the basic long term goals and objectives of an enterprise
and the adoption of courses of action and the allocation of resources necessary for carrying
out these goals” – Alfred Chandler

 Strategic management is “a stream of decisions and actions, which leads to the
development of an effective strategy to help achieve corporate objectives” – Glueck

Alternative Types of Strategy
 Planned Strategy: Leaders formulate and strive for implementation with the minimum of
distortion (Budgets, schedules etc). Formulated in the environment that is fairly
predictable or controllable.
 Entrepreneurial: More influenced by the individual, not as precise or articulate as planned
strategy, requires an ability to impose one‟s vision on the organisation. Entrepreneurial
strategy provides flexibility at the expense of specificity and articulation of intentions.
 Ideological Strategy: Shared vision collectively pursued is an ideology. Intentions can
usually be identified (Indoctrination, credo etc). Positively embraced by members of the
organisation, not passive acceptance.


 Umbrella Strategy: Relax control, leaders set guidelines for behaviour, define boundaries
and let actors man oeuvre within. All organizations actions fall under the umbrella
(Pricing strategies for example). Umbrella strategy can be both deliberate and emergent.
De Wit and Meyer (ibid) argue that all „real‟ world strategies tend to be umbrella
claiming that you cannot pre-empt the discretion of others.

Strategy Formation Process
Henry Mintzberg holds a different view about strategic management process. According to him,
strategies can emerge from within an organization without any formal plan. Strategies may
emerge from the grassroots of the organization in response to unforeseen circumstances. Strategy
is more than what a company plans to do; it is what the company does actually.

Mintzberg has defined strategy as “a pattern in a stream of decisions or actions” the pattern being
a product of whatever intended strategies (planned) are actually realized and of any emergent
(unplanned) strategies. Hence strategies may be intended (planned) as well as emergent
(unplanned). In Mintzberg‟s opinion emergent strategies are more successful than other types. In
practice, the strategies of several organizations are probably a combination of the „intended‟ and
the „emergent‟ types.

Intended Strategy

Mission and Goals

External Environment Strategic Choice Internal Environment
Analysis Analysis

INTENDED STRATEGY
Organizing for
Implementation

Emergent Strategy
External Environment Mission and Goals External Environment
Analysis Analysis

Strategic Choice
Does it fit?

EMERGENT STRATEGY

Organizational
Grassroots

Fig: Strategic Management process for Intended Strategy and Emergent Strategy


A Model of Strategy Management Process
Strategic management process involves strategic planning, strategy implementation and strategic
control. Strategic planning involves thorough study of internal and external environment factors
relevant for the organization. It results in mission, purpose, objectives, policies and programmes.

Hence the five steps in strategic management process are as follows:
 The choice of corporate mission and corporate goals
 Analysis of external competitive environment to understand the firms‟ strength and
weakness
 Selection of strategy to build on the organizations‟ strengths and correct weakness so as to
take advantage of external opportunities and counter external threats
 Strategy implementation and control

The steps involved in strategic management process are almost similar for intended strategies and
emergent strategies but the formulation of intended strategies is basically a top-down process and
that of the emergent strategies is a bottom-up process.

Mission and Goals

Internal Analysis Strategic Choice External Analysis
Strengths, Weaknesses SWOT Opportunities, Threats

Functional Level Strategy
Business Level Strategy
Corporate Level Strategy

Global Level Strategy

Strategy Implementation

Designing Organizational Conflict, Politics Designing Control
Structure & Change Systems

Matching Strategy, Structure and Control

Feed back

Fig: Strategic Management process


Mission and Goals
Defining the mission and main goals of the organization is the first step in strategic management
process. The mission tells clearly why the organization exists and what it would be doing.
Organizations set goals, which they hope to achieve in the medium to long-term basis. Normally
organizations work with a hierarchy of goals such as sizeable market share, maximizing
shareholders‟ wealth and profit and so on.

Policies: Policies act as guide in decision-making. Policies define an area within which a decision
is to be made and ensure that the decision will be consistent with and contribute to objectives.
Managers who are responsible for implementation of policy use discretion while deciding various
courses of action. Policies exist at all levels of the organization and range from major company
policies to department policies.

Fig: Pyramid of Business Policy
Major Policy
Line of Business
(code of ethics)

Secondary Policy
Selection of geographical area
Major customers, major products
Functional Polices
Marketing, Production, Research,
Finance, Procurement, etc.

Procedure and Standard Operating Plan
Handling incoming orders, servicing customers
complaints, shipping to foreign countries

Rules
Delivery of pay cheques, Loitering around the plant,
Security guard duty, Use of company car, Smoking etc.

Procedure
Infosys has 36,000 employees on its pay roll. Infosys managers the challenges of inducting and
orienting a large number of employees through an online resource called PRIDE (Process
Repository at Infosys for Driving Excellence). After induction and orientation all the employees
work in the same way.

External Analysis
The next step in strategic management process is external environmental analysis, which aims to
understand the opportunities and threats in the environment. In this stage, examination of three
environments normally takes place, the industry environment in which organization operates, the
national environment and the macro environmental forces such as social, economic, government
and legal, international and technological factors, which affect the organization. The competitive
structure of the industry, competing firms and the competitive positions are analyzed during this
phase.


Internal Analysis
Identifying strengths and weakness of the organization involves identification of quantity and
quality of resources and distinctive competencies that help in building competitive advantage to
achieve superior efficiency, quality, innovation and customer loyalty.

Strategic Choice
Strategic choice involves generating a series of alternatives in the light of internal strengths and
weakness and external opportunities and threats, which knows as SWOT analysis. The purpose of
strategic choice is to build organizations‟ strengths to exploit opportunities and set right
weakness and to minimize threat. Finally, strategies are evolved at functional level, business
level, corporate level and global level.

Functional strategies are directed to improve the effectiveness of functional operations of the
firm such as manufacturing, finance, R&D, marketing and human resources.

Business level strategies lay emphasis on the way the firm positions itself in the market place to
gain competitive advantage. The three generic business level strategies are 1) Cost leadership,
2) Differentiation and 3) Focus strategy.

Corporate level strategies enable organizations to maximize the long run profitability of the
organization. Vertical integration (backward and forward integration), diversification, strategic
alliance, acquisitions and joint ventures are examples of corporate level strategies.

Global level strategies are pursued by organizations while they expand their operations in
international business so as to increase their profitability. International strategy, multi-domestic
strategy, global strategies and transitional strategy are some of the choices before strategies.

Strategy Implementation
Strategy implementation consists of four steps namely:
 Designing appropriate organizational structure
 Designing control systems
 Matching strategy, structure and controls and
 Managing conflicts, politics and change

Structure
Structure involves allocation of duties, responsibilities and decision-making authority and
integration among the ranks and files of organization. It is widely believed that structure follows
strategy. Some of the options available in this regard are tall structure, flat structure, centralized
decision making authority, decentralized decision making authority, autonomous units and
semi-autonomous units and different mechanisms for integration of subunits.

Control
The purpose of strategic control is to determine whether the given strategy is effective in
achieving organizational objective and moving on the right tract. The organizational control may
be classified as market control, output control and bureaucratic control. Control system requires


development of perceptible organizational culture. Besides, the type of reward and incentive
systems also needs to be decided and established towards this end.

Matching Strategy, Structure and Control
In successful organizations a fit among strategy, structure and control is observed. Different
strategies and environments call for different structures and control systems. Cost leadership
strategy warrants a simple organization, which lays emphasis on efficiency whereas
differentiation strategy revolves around R&D and technical creativity. A fit among strategy,
structure and control is essential to ensure success of organizations.

Matching Conflicts, Politics and Change
Conflict is common in organizations. The reasons for conflicts are resource sharing and different
agendas of different subgroups within organizations. Power struggles and coalition building are
consequences of such conflicts. The organizational politics plays a key role in strategy
implementation. The power and conflict will cause organizational inertia and prevent
organizational change. Power, politics, conflict and inertia should be analyzed and managed
effectively so that mission could be fulfilled and change could be introduced smoothly.

Feedback
Strategic management is an ongoing process. Periodic feedback reveals whether objectives are
attainable or implementation is poor or not. The feedback is fed into next round of strategic
formulation and implementation. It may reaffirm objectives or suggest changes in goals and
objectives.

STAKEHOLDERS IN BUSINESS
A stakeholder is any individual or organisation that is affected by the activities of a business.
They may have a direct or indirect interest in the business, and may be in contact with the
business on a daily basis, or may just occasionally.

The main stakeholders in business are:
 Shareholders (not for a sole trader or partnership though) – they will be interested in their
dividends and capital growth of their shares.
 Management and employees – they may also be shareholders – they will be interested in
their job security, prospects and pay.
 Customers and suppliers
 Banks and other financial organizations lending money to the business
 Government – especially the Inland Revenue and the Customs and Excise who will be
collecting tax from them.
 Trade Unions – who will represent the interests of the workers?
 Pressure Groups – who are interested in whether the business is acting appropriately
towards their area of interest.

Stakeholders versus Shareholders
It is important to distinguish between a STAKEHOLDER and a SHAREHOLDER. They sound the
same – but the difference is crucial!
 Shareholders hold shares in the company – that is they own part of it.


 Stakeholders have an interest in the company but do not own it (unless they are
shareholders).
 Often the aims and objectives of the stakeholders are not the same as shareholders and
they come into conflict.
 The conflict often arises because while shareholders want short-term profits, the other
stakeholders‟ desires tend to cost money and reduce profits. The owners often have to
balance their own wishes against those of the other stakeholders or risk losing their ability
to generate future profits (e.g. the workers may go on strike or the customers refuse to buy
the company‟s products).

Social Responsibility of a Business to Stakeholders
Social responsibility is the duty and obligation of a business to other stakeholders.
 Shareholder – Good return on investment
 Employee – Fair pay and working conditions
 Supplier – Regular business and prompt payment
 Customer – Fair price and safe product
 Local community – Jobs and minimum disruption
 Government – Employment for local community
 Environment – Less pollution

Social responsibility for one group can conflict with other groups, especially between
shareholders and stakeholders.

Ethics in Business
Ethics refers to the moral rights and wrongs of any decision a business makes. It is a value
judgement that may differ in importance and meaning between different individuals. Businesses
may adopt ethical policies because they believe in them or they believe that by showing they are
ethical, they improve their sales. Two good examples of businesses that have strong ethical
policies are The Body Shop and Co-op.

Some examples of ethical policies are:
 Reduce pollution by using non-fossil fuels.
 Disposal of waste safely and in an environmentally friendly manner
 Sponsoring local charity events
 Trading fairly with developing countries

Approaches to Strategic Decision Making Process
There are three approaches to strategic decision-making process. They are as follows:
 Rational – analytical
 Intuitive – emotional
 Behavioral – political

Rational – Analytical Model assumes that decision maker is always intelligent and rational. He is
fully aware of all the alternatives and their consequences upon implementation to maximize
advantages.


Intuitive – Emotional Model assumes that decision maker prefers „gut feeling‟, reflective thinking
and instinct using unconscious mental processes. Managers who endorse this approach, point out
that intuitive judgment may lead to better decisions than optimizing techniques.

Political – Behavioral decision making Model assumes that real decision makers consider a
variety of pressure from people who are affected by their decisions. Even organization interacts
with a variety of stakeholders. For instance trade unions demand job security and decent wages
for workmen.

Strategists adopt a synthesis of all three approaches. So strategic decisions are made in a typically
human way using the rational conscious analysis, intuitive and „unconscious gut feeling‟ in the
light of varied political realities

Pitfalls: Strategic decision-making process is not without pitfalls and it suffers from certain
limitations. The reasons for poor decision-making are cognitive bias and groupthink. Most
strategic decision-making is done by groups. Groupthink occurs when a group of decision makers
decide on a course of action, which is purely based on emotional rather than objective criteria and
the group is pressurized for uniformity and consensus. Consequently, controversial issues and
weak arguments are never touched upon.

Techniques for improving strategic decision-making
To enhance the effectiveness of strategic decision-making, techniques like devils‟ advocacy and
dialectic inquiry are recommended.

In Devils’ Advocacy, a plan is evolved and is critically analyzed. One member highlights the
reason why the plan is unacceptable and acts like the devil‟s advocate. The main advantage of
this method is to highlight all possible dangers involved in the course of action.

In Dialectic Inquiry, a plan and a counter plan are evolved in order to reflect plausible and
conflicting courses of action. The debate between advocates of plan and counter plan reveals
problem areas with definitions, suggested courses of actions and assumptions. Based on the
identification of problem areas, final plan is evolved which is comprehensive.

Impact of e-commerce
A survey undertaken by Booz-Allen & Hamilton and Economist intelligence unit of 525 top
executives revealed that Internet is reshaping the global market place. According to 90% of
executives, internet would transform and would have major impact on their corporate strategy
within two years.

Learning Organization
In the wake of liberalization, organizations are forced to cope up with intense competitive forces
arising from dynamic and complex environment and hyper competition. So competitive
advantage could not be built on permanent basis but short-term strategic thrusts are aimed at.
Hence strategic management process requires a learning organization in order to adopt to change
quickly. An important characteristic of learning organization is its strategic flexibility. A
learning organization is skilled in creating, acquiring and transferring knowledge and modifying
its behavior to reflect new knowledge and insights. According to Senge, the main activities
undertaken by a learning organization are:
 Systematic problem solving

 Experimentation with new approaches
 Learning from new experiences and from others and
 Transferring knowledge quickly and efficiently throughout the organization

Employees at all levels are involved in strategic management process in a learning organization.
They do environment scanning for vital information; understand shifts in environment in order to
improve work methods, procedures and evaluation techniques. For example at Xerox, all
employees are trained in small group activities and problem solving skills, which enabled the
company to come out with improved products.

VISION, MISSION AND PURPOSE
Mission statement embodies an organization‟s purpose of existence. When strategists raise
certain fundamental questions related to business such as:
 What is our business?
 Why are we in the business?
 What will it be after 5 years?
the need for mission statement arises. The survival of an organization mainly depends on its
ability to satisfy specific needs of the society. Mission statement defines the role that an
organization plays in a society. For example, BSNL satisfies the communication needs of the
society. Mission statement describes what the company stands for, its purpose, image and
character to different stake holders. A survey by Bain and Company indicates that planning and
developing mission and vision statements are the popular management tools of strategic
management.

Thompson defines mission as “the essential purpose of the organization, concerning particularly
why it is in existence, the nature of the business it is in, and the customers it seeks to serve and
satisfy”.

Wheelan and Hunger view that “mission is the purpose or reason for the organization‟s
existence”.

According to John Pearce “mission is an enduring statement of purpose that distinguishes one
firm from other similar firms”.

In Drucker’s opinion “mission focuses the organization on action. It defines the specific
strategies needed to attain goal. It creates a disciplined organization… The business purpose and
business mission are so rarely given adequate thought, is perhaps the most important single cause
of business failure and business frustration”.

In order to survive for a long period, organizations perform various functions, which are valued
by the society. Mission statements usually give internal direction for the future of the
organization.

Ambition and visionary zeal are the main constituents of mission. Organizational values hold the
mission intact. The mission specifies what qualities the organization will uphold and impart to
the society and community. The organization‟s beliefs are embedded in the mission. Thomas


Watson Jr. of IBM holds the view “I firmly believe that any organization, in order to survive and
achieve success, must have a sound set of beliefs on which it premises al its policies and actions”.

 A mission statement is full of enthusiasm.
 A mission statement is marked by grandeur.
 It is unique and personal.
 It is not time bound because the future envisioned in a mission statement cannot be
achieved in a day.

How Mission is formulated?
Strategists, consultants and chief executives are involved in formulated mission statements.
Contrary to the popular practice, State Bank of India solicits the cooperation of employees union
for formulation of mission statement. In Hyderabad Bakelite Hylam, discussions are held at all
levels and all employees are involved in the exercise of framing a mission statement. Sathyam
Computers conducts extensive discussions with clients and overseas joint venture partners for
framing mission statements. In HCL, a core management team has analyzed the strengths and
weaknesses and designed a customer-centric mission statement for team building, mutual trust,
internal customer service and empowerment.

After independence, public sector organizations derived their mission from national priority of
building a strong and self-reliant India. So they focused on developing infrastructure industries.

The mission statements of some Indian companies are given below:
Infosys: “The primary purpose of corporate leadership is to create wealth legally and ethically.
This translates to bringing a high level of satisfaction to five constituencies – customers,
employees, investors, vendors and the society at large. The reason de „e‟tre of every corporate
body is to ensure predictability, sustainability and profitability of revenues year after year”.

The Gindal Group: “To become a globally competitive player with a burning desire to become
number one in the steel industry”.

Unit Trust of India: “To keep the common man in sharper focus; to encourage saving and
investment habits among them”.

Ranbaxy: “To become a $1 billion research based global pharmaceutical company”.
Merck: “To preserve and improve human life”.
McKinsey: “To help business corporations and governments to be more successful”.
Unilever: “To make cleanliness common place, to lessen work for women, to foster health and to
contribute to personal attractiveness that life may be more enjoyable for the people who use our
products”.

ONGC: “To be a world class oil and gas company integrated in energy business with dominant
Indian leadership and global business”.

Nirma: “Nirma is a customer focused company committed to consistently offer better quality
products and services that maximize value to the customer”.


SBI: “With you, all the way”.
Asian Paints: “Leadership through excellence”.
Bajaj Auto: “Value for Money, for years”.

It is observed from these mission statements that mission provides direction to internal
organization and it embodies the values and philosophy of the founders of the organization.

Characteristics of a Mission Statement
A mission statement incorporates the basic business purpose and the reason for its existence by
rendering some valuable functions for the society. An effective mission statement should possess
the following characteristics.

1) Feasible: The mission should be realistic and achievable. For instance, UTI declared its
mission as “to encourage saving and investment habits among common man”. By
providing tax relief under Sec 88c, the investment upto 1 lakh in UTI is exempted from
income tax. Hereby common man‟s savings habit is encouraged by UTI.
2) Precise: A mission statement should not be narrow or too broad.
3) Clear: A mission statement should lead to action. BSNL‟s mission of „connecting India‟
leads it to a variety of service with varied tariff structure so as to cater to the preferences
of mobile phone users.
4) Motivating: The mission should be motivating for the employees to be inspired for action.
For example, India Post‟s mission is to „exceed the expectations of the customer‟ with
dedication, devotion and enthusiasm.
5) Distinctive: A mission statement will indicate the major components of the strategy to be
adopted. The mission should be unique.
6) Indicates Major Components of Strategy: The mission statement of IOC emphasizes
petroleum refining, marketing and transportation with international standards and modern
technology. It indicates that IOC is going to adopt diversification strategy in future.

The mission provides direction to insiders and outsiders on what the firm stands for. It is the
guiding star for any firm.

How Mission Contributes to Strategic Management?
Mission contributes to strategic management in many ways:
1. It provides direction to corporate planning.
2. It clarifies the firm‟s aspirations.
3. It communicates to employees at various levels the direction in which they should move.
4. It focuses on business purpose and long-term objective of the firm.

BUSINESS DEFINITION, OBJECTIVES AND GOALS
Definition of 'Business'
1. An organization or enterprising entity engaged in commercial, industrial or professional
activities. A business can be a for-profit entity, such as a publicly-traded corporation, or a non-
profit organization engaged in business activities, such as an agricultural cooperative.


2. Any commercial, industrial or professional activity undertaken by an individual or a group.

3. A reference to a specific area or type of economic activity.

'Business' can be defined as:
1. Businesses include everything from a small owner-operated company such as a family
restaurant, to a multinational conglomerate such as General Electric.

2. To "do business" with another company, a business must engage in some kind of transaction or
exchange of value with that company.

3. In this sense, the word "business" can be used to refer to a specific industry or activity, such as
the "real estate business" or the "advertising business".

A business (also known as enterprise or firm) is an organization engaged in the trade of goods,
services, or both to consumers. Businesses are predominant in capitalist economies, where most
of them are privately owned and administered to earn profit to increase the wealth of their
owners. Businesses may also be not-for-profit or state-owned. A business owned by multiple
individuals may be referred to as a company, although that term also has a more precise meaning.

Basic forms of ownership
Although forms of business ownership vary by jurisdiction, there are several common forms
which are as follows:
 Sole proprietorship: A sole proprietorship is a business owned by one person for-profit.
The owner may operate the business alone or may employ others. The owner of the
business has unlimited liability for the debts incurred by the business.
 Partnership: A partnership is a business owned by two or more people. In most forms of
partnerships, each partner has unlimited liability for the debts incurred by the business.
The three typical classifications of for-profit partnerships are general partnerships, limited
partnerships, and limited liability partnerships.
 Corporation: A corporation is a limited liability business that has a separate legal
personality from its members. Corporations can be either government-owned or privately
owned, and corporations can organize either for-profit or not-for-profit. A privately
owned, for-profit corporation is owned by shareholders who elect a board of directors to
direct the corporation and hire its managerial staff. A privately owned, for-profit
corporation can be either privately held or publicly held.
 Cooperative: Often referred to as a "co-op", a cooperative is a limited liability business that
can organize for-profit or not-for-profit. A cooperative differs from a for-profit
corporation in that it has members, as opposed to shareholders, who share decision-
making authority. Cooperatives are typically classified as either consumer cooperatives or
worker cooperatives. Cooperatives are fundamental to the ideology of economic
democracy.

Classification of Business
There are many other divisions and subdivisions of businesses.
 Agriculture and mining businesses are concerned with the production of raw material,
such as plants or minerals.


 Financial businesses include banks and other companies that generate profit through
investment and management of capital.
 Information businesses generate profits primarily from the resale of intellectual property
and include movie studios, publishers and packaged software companies.
 Manufacturers produce products, from raw materials or component parts, which they then
sell at a profit. Companies that make physical goods, such as cars or pipes, are considered
manufacturers.
 Real estate businesses generate profit from the selling, renting, and development of
properties comprising land, residential homes, and other kinds of buildings.
 Retailers and distributors act as middle-men in getting goods produced by manufacturers
to the intended consumer, generating a profit as a result of providing sales or distribution
services. Most consumer-oriented stores and catalog companies are distributors or
retailers.
 Service businesses offer intangible goods or services and typically generate a profit by
charging for labor or other services provided to government, other businesses, or
consumers. Organizations ranging from house decorators to consulting firms, restaurants,
and even entertainers are types of service businesses.
 Transportation businesses deliver goods and individuals from location to location,
generating a profit on the transportation costs.
 Utilities produce public services such as electricity or sewage treatment, usually under a
government charter.

Objectives and Goals
Objectives and goals are used interchangeably in management literature but the recent strategic
management literature shows a subtle distinction between these two terms. Objective is the end,
which the organization tries to achieve through its operations. „Goal‟ is an open-ended statement,
which does not quantify what needs to be achieved, and time frame for completion. So „growth‟
is a goal whereas an objective is to „increase growth by 10% in terms of market share and sales
over last year‟. Usually the long-term goals and short-term objectives are derived from mission.

Significance of Objectives
Objectives are formulated from mission statements. Objectives form the basis for all other
functional decisions such as finance, manufacturing, marketing and human resource. Objectives
are split into business wise objectives and functional targets and performance targets. While
setting objectives, the organization encounters the environment and determines the locus it will
devise to attain in the environment such as a dominant player, a meek player or one among the
herd. Objectives and strategy put together, explain the firm‟s concept of business. Objectives
indicate the organizational performance to be realized and expected over a period of time.

Consider the objectives of some organizations:
Canara Bank: “The bank‟s stated objectives are growth, innovativeness, and high profits as a
barometer of efficiency, highly involved employees distinctively charged with pride”.

Maruti: “We don‟t just sell more car than No.2. We sell more cars than the entire competition put
together”.

Areas Where Objectives Are Set?
Organizations follow multiple objectives such as:
 Growth

 Profitability
 Market share
 Productivity
 Technology
 R&D and Innovation
 Corporate Social Responsibility
 Image
 Employee Satisfaction

Growth: Growth in sales, in profits and assets are indicators of a firm‟s financial soundness and
long-term welfare. Reliance Industries is a typical example, for growth objectives. Growth of a
firm is ensured if growth in sales, profits and assets are ensured.

Profitability: Profitability has several dimensions and it is measured in terms of return on
investment, net worth, assets, revenue and earning per share. With profitability objective, the firm
examines the profit potential of present portfolio and reallocates accordingly. Some of the
specific issues are:
(a) How are the present investments of the firm behaving?
(b) What is the rate of return?
(c) How is the spread of the investment?
The example of ITC is worth studying. ITC has made investments in five main businesses
namely tobacco, agro products, financial services, paper and packaging, hotel and tourism.

Market Share: Market share is a crucial indicator of the firm‟s growth and around market share
objective, business level strategies are formulated. For many Japanese firms, building market
share is synonymous with long run profits and brand building. Tata, Colgate BPL and P&G are
companies that focus on market share as the key corporate objective. Colgate firmly believes that
it should have always 50% market share. The policy of P&G is „Profit via market share‟ and it is
prepared to accept short-term loss to win over the established leader HLL and be a market leader
ultimately.

Technology: Corporate objectives are set in technology for companies like Du Pont and Intel. For
Du Pont, leadership in chemical technology and continuous new product development are their
major objectives. Product innovation is the key objective of Intel. Ranbaxy and 3M maintain that
R&D and new product development constitute a major objective for them.

Human Resource: The software giant Infosys, set objective in human resource. Development of a
cadre of software professional is set as a major corporate objective. „Human Capital‟ is shown in
the balance sheet of Infosys as additional information.

Corporate Image: Tata Group has set the objective of being viewed as a respectable business
group. They maintain transparency with regard to donations to political parties for their election
campaigns and created an electoral fund. They project as a role model in the matter of corporate
governance.

Social Responsibility: Social responsibility includes setting objectives in community welfare,
public welfare and environmental protection. Tata Group has objectives relating to society. They
are involved in rehabilitation of handicapped children.

Peter Drucker has recommended that companies should set goals and objectives in the following
areas:
1) Return on Investment
2) Market Share
3) Innovation
4) Productivity
5) Physical and Financial Resource
6) Manager Performance and Development
7) Worker Performance and Attitude
8) Social Responsibility

In recent times, Management By Objectives (MBO) receives much attention from the strategists.

Characteristics of Objectives
Objective setting is complex process. Well-formulated objectives possess certain characteristics.
a) Specific
b) Time bound
c) Measurable
d) Challenging
e) Objectives form a hierarchy
f) Constraints
g) Verifiable
h) Timeframe

Formulation of Objectives
Formulation of objectives and goals is a complex process. The strategists should consider the
four factors while evolving objectives.
1) The forces in the environment: The government regulations, powerful consumer groups,
trade unions and influential suppliers exert enormous pressure on organization. The
stakeholders, their priorities and views influence objective setting.
2) Realities of firm‟s resources and power relationship: Material and human resource are
always scarce and powerful dominant groups try to take upper hand and exercise power
over other group in framing objectives of their choice and allocate scarce resources in their
favour. Internal power relationship influences objective setting.
3) The values of top management: Values of enduring beliefs, about what is good or bad,
desirable or undesirable. The top management may have entrepreneurial value and a
philanthropic value or social responsibility value which in turn will influence their goal
setting.
4) Past Strategies: Strategies and objectives followed in the recent past are likely to have
deep impact and radical deviation from them will not be possible. The changes from
current objectives will be marginal and incremental in nature.

Objectives and Strategic Management
Objectives are important for strategic management for the following reasons:
1. Objectives help to relate the organization in the environmental context. It helps to attract
people with identical frame of mind.
2. Objectives help to coordinate decisions. All employees are aware of the objectives and
stated objectives proved to be a means of coordination.

3. Objectives serve as standards of appraising organizational performance. They serve as a
basis for evaluating success or failure of organization.

CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY
A corporation is a business entity in which different stakeholders contribute capital, labour and
know-how for their mutual benefit. Management runs the business without being personally
responsible for providing fund. The stakeholders share the profit without being responsible for
the operations and they have limited liability. They elect the directors who have the authority and
responsibility to establish basic corporate policies. The Board of Directors normally approves all
decisions that affect long-term performance of the Corporation.

Board of Directors, who supervises top management with the concurrence of the shareholders,
governs the corporation. The term „corporate governance‟ means the relationship among the three
groups i.e. Board of Directors, Shareholders and Top management, in determining the direction
and performance of the organization. Corporate governance also enables the Board of Directors,
institutional investors and large shareholders to monitor the firm‟s strategies to ensure effective
managerial response.

Board of Directors
The Board has collective responsibility for the functioning of the enterprise. The Board exercises
its authority in accordance with the Memorandum of Association and Articles of Association of
the company. The Income Companies Act defines „Director‟ as any person occupying the
position of the Director. The Board of Directors is a group of persons wherein each one is a
Director.

In Section 252 of the Indian Companies Act, a public limited company should have three
directors at least and the maximum may be twenty. The Board of Directors in public sector banks
appoints Works Director. The Government appoints Directors on the board of public sector
enterprises and they are drawn from the concerned Administrative Ministry and Finance
Ministry. The Board is involved in selection of Chief Executive Officer and in the selection of
mission and goals for the organization.

The collective body of Board of Directors has total power over the Chief Executive Officer. In
private sector company like Hindustan Unilever Limited, Larsen and Toubro (L&T) and in public
sector company like BHEL, The Board shows and active involvement in the strategic affairs of
the company. Enterprises such as Hindustan Unilever Limited, Indian Tobacco Company (ITC)
and Indian Explosives Ltd have a larger proportion of Whole Time Directors. Firms such as
Larsen and Toubro and TISCO go for Whole Time Directors and Part Time Directors in equal
number. The Part Time Director is usually an outstanding technologist, an economist, a legal
expert, a renowned banker, a consultant or a leading businessman.

Role of Board of Directors
The Board carries out three basic tasks for strategic management.
1) Monitor: The Board should be aware of the developments within and outside the
organizations and bring it to the notice of the management.
2) Evaluate: A Board should analyze the plans, decisions and actions of management and
highlight the positive and negative side of the issues and suggest alternate proposal.


3) Initiative and Determine: In evolving the mission and finalizing the strategic choice, the
Board can exhibit its aggressive nature.

Kenneth Andrews observes “A responsible and effective Board should require of the management
a unique and durable corporate strategy, review it periodically for its validity, use it as a reference
point of all other Board decisions and share with management the risks associated with its
adoption”.

Though one could notice a vast difference between the functioning of Boards in private, public,
family owned and multinational corporations, the Board is expected to provide direction in
matters of vital significance such as technology collaborations, new products development and
senior management appointments. Boards are usually active in evaluating corporate strategy and
performance and they evaluate corporate performance on both financial and nonfinancial
grounds. Strategists discuss their strategies with the Board to find out the Board‟s feedback about
their stewardship and strategy.

Responsibilities of Board
In India, Section 291 of the Indian Companies Act 1956 enlists the general powers of the Board
as follows:
1. Subject to the provisions of the Act, the Board of Directors of a company shall be entitled
to exercise all such powers and to do all such acts and things, as the company is authorized
to exercise and do.
2. No regulation made by the company is general meeting shall invalidated any prior act of
the Board which would have been valid if the regulation had not been made.

Chief Executives Officers (CEO)
The CEO of a firm performs different roles such as strategist, organization builder and a leader
but in India CEOs gets involved in day-to-day operations and they get less time for strategic
issues. Peter Waterman has concluded in “In Search of Excellence” that “associated with almost
every company was a strong leader who seemed to have had a lot to do with making the company
excellent in the first place”.

The CEO is responsible for defining what business the firm is in and aligns the best product or
market opportunities with the best use of enterprises‟ resources. The CEO has to conceptualize
the strategy and continue with the strategic management process.

According to Mintzberg, the CEO alone is making major key decisions about programmes in
order to exploit particular opportunities and he serves as a pivotal figure in strategy formulation.

George Steiner rightly points out that “there can and will be no effective strategic planning in an
organization in which chief executive does not give firm support and make sure that others in the
organization understand his depth of commitment.

Mintzberg has conducted in his research study that CEO does as many as ten roles such as:
1. Figure head role 2. The leader role
3. The leader role 4. The liaison role
5. The recipient role 6. The disseminator role
7. The disseminator role 8. The spokesperson role


9. The entrepreneur role 10. The disturbance handler role
11. The negotiator role 12. The resource allocator role

CEOs responsibilities include executive leadership and strategic vision. In the words of John
Jack Welch Jr., CEO of GE “Good business leaders create a vision, articulate the vision,
passionately own the vision and relentlessly drive it to completion.

Bill Gates of Microsoft, Anita Roddick of the Body Shop, Ted Turner at CNN, Steve Jobs at
Apple Computer, Herb Kellher of Southwest Airlines, Narayanamurthy of Infosys, Asim Premji
at Wipro, Bai Parvindar Singh at Ranbaxy and Andy Grove at Intel are charismatic leaders with
positive attitude.

According to the survey among 1500 senior executives drawn from 20 countries, 98% of
respondents consider that “a strong sense of vision” must be conveyed by a CEO, which is an
inevitable trait a CEO should have.

Corporate Planning Staff
These planners are found in large organizations and they are staff specialists and provide staff
support services. They identify business opportunities, scan environmental factors, analyze
strategic choice and review strategic performance. Firms such as Gujarat Steel Tubes, Sundaram
Clayton Ltd, Max India and Essar Steel have separate planning departments.

Consultants
The public sector enterprises and family owned enterpr4ises make use of consultant‟s services
extensively. Tata Consultancy Services, Price Waterhouse, ABC Consultants and A.F.Ferguson
are some notable consultants. Many consultants offer service in the area of strategic management.
They serve as advisors to the chief executives and help in designing and implementing a formal
strategic management system. Outside consultants are hired where the corporate planning
department does not exist. Sometimes consultants are employed to get unbiased and objective
view about the situation and the firm.

Board Committees
The Board of Directors can appoint committees according to the proviso to Section 292 of the
Indian Companies Act for the following purposes.
a) Borrowing money for the company other than by debentures
b) Investing the funds of the company and
c) Making loans

They are called Standing Committees of the Board and members of these committees are outside
Directors. The Board of Directors appoints these committees for specific issues for a specific
period and they will submit the report after analyzing the issues.

In public sector banks they are called Audit Committee, Credit Committee, Risk Management
Committee, Investors‟ Grievance Committee and Management Committee. These committees
meet during the interval between Board meetings.

Corporate Social Responsibility
Corporate social responsibility has become an integral part of corporate strategy. It means open
and transparent business practices that are based on ethical values and respect for employees,

community and the natural environment. It is designed to deliver sustainable value to society at
large as well as to shareholders. Some of the benefits of being socially responsible is that they
can attract good employees who prefer working for a responsible firm (P&G).

Theory
The corporate social responsibility theories and related approaches are classified into four groups:
1. The instrumentation theories, in which the corporation is seen as only an instrument for
wealth creation and its social activities are only a means to achieve economic results.
2. Political theories, which concern themselves with the power of corporations in society and
a responsible use of this power in the political arena.
3. Integrative theories, in which the corporation is focused on the satisfaction of social
demands.
4. Ethical theories, based on ethical responsibilities of corporations to society.

A number of studies have conducted to determine the correlation between corporate social
responsibility and corporate financial performance. Research studies show a positive correlation
between them.

Wealth Creation
Friedman views that any business exists for wealth creation and he accepts free market, laws and
ethical customs. Friedman argues against the concept of social responsibility. According to him,
if the firm acts responsibly by cutting the price of company products, spending on pollution
prevention, it is spending the stakeholders‟ money for general social interest.

In his opinion “there is one and only one social responsibility of business – to use resources and
engage in activities designed to increase in profits so long it engages in open and free
competition. A firm is basically an economic institution.

According to Archie Carroll business organizations have four responsibilities: economic, legal,
ethical and discretionary.

Carrol’s three dimensional conceptual model of corporate performance
Economics Legal Ethical Discretionary
Must do Have to do Should do Might do

Social responsibilities

 The firms are expected to produce goods and services of value to society.
 The firms should obey laws which are in force
 Ethical behavior includes the firms‟ responsibility to follow generally held beliefs about
behavior in a society.
 Discretionary responsibilities are purely voluntary obligations, which a corporation
undertakes such as training to agriculturist, rural development schemes etc.

Friedman believes that socially responsible actions hurt a firms‟ efficiency whereas Carroll
points out that absence of social responsibility results in government regulation and resentment in
the minds of various stakeholders.


Keith Davis’s point of view provides another perspective to social responsibility. According to
Davis, organizations draw resources from society as members of society. They have a
responsibility to return to society the value of those resources as desired by the society. In his
opinion
1. Social responsibility arises from social power enjoyed by the firm.
2. The firm should disclose its activities to the public through social audit.
3. The social costs and benefits of social responsibility activities and services should be
calculated for decision making.
4. The social cost should be included in the price.
5. The firm should solve societal problems by improving education.

Areas of social responsibility
(a) Pollution control (b) Health and Hygiene
(c) Training self-help (d) Philanthropic activities

Indian organizations like ICICI and Canara Bank have provided that socially responsible
behavior and world-class performance can go together.

A few case studies of Indian IT companies are worth mentioning.
 Tata Consultancy Services has developed computerized programmes to address the adult
literacy program in India. TCS has undertaken special adult literacy projects in Andhra
Pradesh and Tamilnadu.
 V.Moksha is educating young girls with necessary hardware training programme.
 Dr.Reddy‟s Laboratories started LABS (Livelihood Advancement Business School) in
1999. Under LABS Dr.Reddy‟s Labs trains underprivileged youngsters, street children, for
livelihood earnings and for entry level positions.
 Sundrop is popular edible oil company which contributes to Rs.1 to Narayana Hrudayala
Heart Hospital for every one litre of sundrop sold in order to treat children with cardiac
disorders.
 India Today set up Care Today Foundation during the Kargil conflict in 1999. The
foundation works for rehabilitation of Kargil soldiers, cyclone victims, drought victims
and earth quake victims with medical care.

Many Indian companies such as Asian Paints, TISCO, ITC, Colgate, BHEL, Brooke Bond carry
out social responsibility activities. However it falls short of a vast nation‟s requirement.

Business Ethics
Ethics is defined as the discipline dealing with good and bad and with moral duty and
obligations. Business ethics is concerned with truth, justice and a variety of aspects such as the
expectations of society, fair competition, advertising, public relations, social responsibilities,
consumer autonomy and corporate behaviour at home country and abroad. Managers and top
management have a responsibility to institutionalize ethics by framing a code of ethics for the
organization.

Values are those which are considered to be desirable by individuals. A value is a view of life and
a judgment of what is desirable that is part of a person‟s personality and group morale. So
benign attitude to labour, service mindedness are values. While J.R.D. Tata describing Tata


Group of Concerns point out “I would call it a group of individually managed companies united
by two factors.
o First, a feeling that they are part of a larger group which carries the name and prestige of
Tatas and public recognition of honesty, reliability and trust worthiness.
o The other reason is more metaphysical. There is an innate loyalty, a sharing of certain
beliefs; we all feel a certain pride that we are somewhat different from others”.

The KPMG India survey points out that the major unethical concerns among Indian companies
are misuse of confidential information, poor quality of goods and services, insider trading,
receiving gifts or favours from suppliers and corruption.

Some of the areas where ethical practices needed are:
 Recruitment and selection to ensure compatibility of the character traits of potential
employes with the system
 Incorporating values, ethics in employee training
 Top management and superiors‟ compliance with ethical standard
 Monitoring areas where unethical activities could happen such as purchase, supplier,
government, external agencies etc.

Theories
In the filed of ethics three types of ethics have been developed.
1) The Utilitarian Theory
2) The Theory based on Rights
3) The Theory of Justice

The Utilitarian Theory suggests that plans and actions should be evaluated by their consequences.
It means that plans and actions should produce the greatest goods for greatest number of people.
When the Utilitarian Theory is extended to an enterprise, it should optimize satisfaction to all
stakeholders.

The Theory based on Rights holds that all people have basic rights and it should be respected in
all decisions. Rights of al individuals should be respected and those decisions, which interfere
with other individuals‟ freedom, should be avoided.

However, business managers are aware that ethical standards differ from nation to nation. For
example, business houses in India make contributions to political parties. In some countries
government officials are influenced with money to handle business transactions favourably.
Corruption in many countries is rampant and is looked upon as normal. Managers have to make
crucial choices when ethical standards differ from one country to another.

References
1. Azhar Kazmi, Strategic Management & Business Policy, Tata McGraw Hill, New Delhi,
3rd Edition, 2008.
2. Dr.M.Jeyarathnam, Strategic Management, Himalaya Publishing House, 5th Edition,
2011.
3. Charles W.L. Hill & Gareth R.Jones, Strategic Management Theory, An Integration
Approach, Biztantra, Wiley India, 2007.


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