MB 401 STRATEGIC MANAGEMENT

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1 MB 401 STRATEGIC MANAGEMENT INSTRUCTIONS FOR PAPER-SETTER The question paper will consist of Two parts, A and B. Part A will have 15 short answer questions (40-60 words) of 2 marks each. Part B will have 12 long answer questions of 5 marks each. The syllabus of the subject is divided into 3 sections I, II and III. The question paper will cover the entire syllabus uniformly. Part A will carry 5 questions from each section and Part B will carry 4 questions from each section. INSTRUCTION FOR CANDIDATES Candidates are required to attempt all questions from Part A and 9 questions of Part B out of 12. Section I MBA Syllabus (August 2005) Page 19 of 45 Definition, nature, scope, and importance of strategy; and strategic management (Business policy). Strategic decision-making. Process of strategic management and levels at which strategy operates. Role of strategists. Defining strategic intent: Vision, Mission, Business definition, Goals and Objectives. Internal Appraisal The internal environment, organisational capabilities in various functional areas and Strategic Advantage Profile. Methods and techniques used for organisational appraisal (Value chain analysis, Financial and non financial analysis, historical analysis, Industry standards and benchmarking, Balanced scorecard and key factor rating). Identification of Critical Success Factors (CSF). Section II Environmental Appraisal Concept of environment, components of environment (Economic, legal, social, political and technological). Environmental scanning techniques- ETOP, QUEST and SWOT (TOWS). Corporate level strategies-- Stability, Expansion, Retrenchment and Combination strategies. Corporate restructuring. Concept of Synergy. Business level strategies Porter s framework of competitive strategies; Conditions, risks and benefits of Cost leadership, Differentiation and Focus strategies. Location and timing tactics. Concept, Importance, Building and use of Core Competence. Section III Strategic Analysis and choice Corporate level analysis (BCG, GE Nine-cell, Hofer s product market evolution and Shell Directional policy Matrix). Industry level analysis ; Porters s five

2 forces model. Qualitative factors in strategic choice. Strategy implementation: Resource allocation, Projects and Procedural issues. Organistion structure and systems in strategy implementation. Leadership and corporate culture, Values, Ethics and Social responsibility. Operational and derived functional plans to implement strategy. Integration of functional plans. Strategic control and operational Control. Organistional systems andtechniques of strategic evaluation.

3 MB 401 STRATEGIC MANAGEMENT INSTRUCTIONS FOR PAPER-SETTER The question paper will consist of Two parts, A and B. Part A will have 15 short answer questions (40-60 words) of 2 marks each. Part B will have 12 long answer questions of 5 marks each. The syllabus of the subject is divided into 3 sections I, II and III. The question paper will cover the entire syllabus uniformly. Part A will carry 5 questions from each section and Part B will carry 4 questions from each section. INSTRUCTION FOR CANDIDATES Candidates are required to attempt all questions from Part A and 9 questions of Part B out of 12. Section I MBA Syllabus (August 2005) Page 19 of 45 Definition, nature, scope, and importance of strategy; and strategic management (Business policy). Strategic decision-making. Process of strategic management and levels at which strategy operates. Role of strategists. Defining strategic intent: Vision, Mission, Business definition, Goals and Objectives. Internal Appraisal The internal environment, organisational capabilities in various functional areas and Strategic Advantage Profile. Methods and techniques used for organisational appraisal (Value chain analysis, Financial and non financial analysis, historical analysis, Industry standards and benchmarking, Balanced scorecard and key factor rating). Identification of Critical Success Factors (CSF). Section II Environmental Appraisal Concept of environment, components of environment (Economic, legal, social, political and technological). Environmental scanning techniques- ETOP, QUEST and SWOT (TOWS). Corporate level strategies-- Stability, Expansion, Retrenchment and Combination strategies. Corporate restructuring. Concept of Synergy. Business level strategies Porter s framework of competitive strategies; Conditions, risks and benefits of Cost leadership, Differentiation and Focus strategies. Location and timing tactics. Concept, Importance, Building and use of Core Competence. Section III Strategic Analysis and choice Corporate level analysis (BCG, GE Nine-cell, Hofer s product market evolution and Shell Directional policy Matrix). Industry level analysis ; Porters s five

4 forces model. Qualitative factors in strategic choice. Strategy implementation: Resource allocation, Projects and Procedural issues. Organistion structure and systems in strategy implementation. Leadership and corporate culture, Values, Ethics and Social responsibility. Operational and derived functional plans to implement strategy. Integration of functional plans. Strategic control and operational Control. Organistional systems andtechniques of strategic evaluation.

5 MBA 401 Strategic Management Table of Contents Section Unit Title Page I Introduction, Definition, Meaning I 1 Definition, Nature, Scope of Strategic Management I 2 Defining Strategic Intent I 3 Internal Appraisal Methods and Techniques II Environmental Assessment and Corporate Strategy II 4 Environmental Appraisal II 5 Corporate Level Strategies II 6 Business Level Strategies III Strategic Choice and Implementation III 7 Strategic Analysis and Choice III 8 Strategy Implementation III 9 Strategic Control and Operational Control

6 Section I: Introduction, Definition, Meaning Unit: 1 Definition, Nature, Scope of Strategic Management 1.1 Introduction This is the first and introductory unit to this Distance Education Course MBA 401 Strategic Management. In this Unit, we will outline basic and simple concepts pertaining to the definition and meaning of Strategic Management. At the end of this Unit, you should be a little bit more familiar with what Strategic Management is, and what it can do for you. 1.2 Objectives The basic purpose and objective of this Unit is to introduce basic concepts of Strategic Management, define some common terms which you will come across later on in this Text Book, and to explain the meanings of these basic and simple concepts. 1.3 Content Exposition What is strategy? The word strategy is derived from the Greek word strategtia, which was first used around 400 BC. This word connotes the art and science of directing military forces. The Webster s Third New International Dictionary defines strategic as of great or vital importance within an organizational whole (Webster, 1995). This suggests that strategic matters may extend far down into an organization, although they are probably concentrated at the top senior management level (Bower, 1982; Shirley, 1982). We shall spend considerable time in defining and understanding the terms strategic, strategy, and management later on, but for now, to introduce the topic of this book and of this chapter, let us say the a strategy is a plan or course of action which is of vital, pervasive, or continuing importance to an organization as a whole. It is widely accepted that the rise of strategy as a major component of management can be attributed to the increased scale and pace of change both within and outside organizations. The environment of a business is now far less predictable than it was in the past, especially due to the widespread proliferation of the Internet. Technological change is happening more quickly, and technology is being applied more effectively within organizations. Customers are more demanding, and are no longer as loyal to one supplier as they used to be. Thanks to the globalization of national and trans-national economies, the economies of the world are no longer as insulated from each other as they were previously. Today, the competition for an organization need no longer arise from within

7 the same industry, or from within the same country. To add to these external changes and challenges, management is now faced with an additional complication brought about due to the organizations themselves being in a state of constant flux. Some organizations have grown so large and so complex that it is beyond the scope of traditional theory to manage them effectively. Should they be centralized? Or should they be broken up into decentralized divisions? Many organizations now have an international dimension, as mentioned above, that further adds to complexity. Employees are less compliant than they used to be. They are now demanding real jobs and career paths, and want to have a say in the overall direction and purpose of an organization. A strategy is the means used to achieve the ends (objectives). A strategy, however, is not just any plan. A strategy is a plan that is unified: it ties all parts of the enterprise together. A strategy is comprehensive: it covers all major aspects of the enterprise. A strategy is integrated: all the parts of the plan are compatible with each other and fit together well Definition A strategy is a unified, comprehensive, and integrated plan that relates the strategic advantages of the firm to the challenges of the environment, and one that is designed to ensure that the basic objectives of the enterprise are achieved through proper execution by the organization (Glueck and Jauch, 1984). A strategy begins with a concept of how to use the resources of a firm most effectively in a changing environment. It is similar to the concept of a game plan in sports. Before a team goes onto the field, an effective coach examines a competitor s past plans, and its strengths and weaknesses. Then he examines his own team s strengths and weaknesses. The objective is to win the game with a minimum of risks and injuries to the players. A game plan is not exactly a strategy, however. A game plan is oriented towards one game. A strategy for a firm is a long run game plan. A game plan is oriented against one competitor only. A firm deals with a number of competitors simultaneously, and with the government, suppliers, owners, labor unions, and others. A strategy is oriented toward basic issues such as these: What is our business? What should it be? What are our products and markets? What can our firm do to accomplish objectives? How do we leverage the advantages offered by the environmental parameters? How do we stay clear of the threats posed by the environment? Not only do the above issues have to be addressed as a part of a strategic plan, but these decisions must also be implemented effectively. The coach may have an excellent game plan, but the game is played on the field. For successful performance, then, the unified,

8 comprehensive, integrated plan must also include operational concerns. Table 1.1 highlights the differences between operational management and strategic management. Table 1.1 Strategic Management and Operational Management Strategic Management Operational Management Ambiguity * Routinized Complexity Non-routine Organization-wide * Operationally specific Fundamental Significant change * Small-scale change Environment or Expectations driven * Resource driven Many of these issues will be discussed in greater detail later on in this book, but, for now, you will appreciate that the probability of success is enhanced with the combination of good strategic planning and good strategic implementation. Good strategy with poor implementation, or poor strategy with good implementation, is likely to lead to problems Central Concepts in Strategic Management Strategic management is the responsibility of all the managers in an organization. Although it would be considered the core function of senior manager, strategy concept must also be a part of decision-making process of operating line and staff managers. Every manager must understand how their activities add value to the overall operations of the organization. This means that strategic management is just as important in the public sector as it is in the private sector, and in large conglomerate organizations as it is in single product/service organizations or autonomous divisions of organizations. As long as there is a need for a manager to consider his or her operation within the context of a changing external environment in order to achieve some stated organizational goal, strategic management is necessary. The unit outline and this prescribed text for this course describe strategic management as The process of identifying, choosing and implementing activities that will enhance the long term performance of an organization by setting direction and by creating ongoing compatibility between the internal skills and resources of an organization and the changing external environment within which it operates. This definition clearly demonstrates the interface between the external environment and the external characteristics of an organization which characterizes the nature of strategic

9 management. It also hints at the broad activities and process, which constitute strategic management. In order to reinforce the fundamental of strategic management, it is useful to briefly describe the character of typical strategic decisions taken within organizations Collecting Information on an External Environment Due to fact that strategy is largely concerned with adapting an organization to the requirements of an ever changing environment, gathering reliable information on that environment is an important strategic decision. It requires deciding on source and cost of information concerning economic variables, social/cultural variables, technological changes, competitor activities, the influence of lobby groups, alternative sources of supply and so on Deciding the Scope of an Organisation These decision are usually related to the information gathered on the external environment and concern such issues as: what business are we in?, what business should we in? and how can be get from where we are now to where we want to be?. These decisions cannot be taken on the basis on the ignorance and, therefore, substantial environmental scanning needs to occur before the addressing such issues Acquiring Organizational Resources and the Skills to Match External Opportunities and Threats Unless an organizations has the capabilities to create the kind value that is necessary to allow it to pursue its business effectively, there is no point in analyzing the external environment for opportunities and threats. This aspect of strategic decision making usually involves a number of separate decision; for example, a decision to launch a new or revised product in response to strong customer demand may involve the acquisition of plant and equipment, the training of technical, clerical and the sales staff, new financing arrangements, the location of new suppliers, and so on. In this respect, strategic decisions have a ripple effect throughout the organization and set off a sequence of subsequent operational decisions Deciding Major Investment Patterns for the Future Strategic decisions are usually complex in nature. This is because they tend to be multidimensional (i.e. involve a large number of variables), they are based on partial ignorance (no organization can be absolutely sure of likely trends and development in its external internal environment) and they are important (they commit large amount of resources for a substantial time period). Furthermore, there are seldom right or wrong answers to strategy problems. Most strategic decision are based on managerial judgment using some

10 general guidelines. It is often difficult to tell whether an organization has made a good or bad strategic decision. If the organization is performing poorly, perhaps this is the best it could achieve given the uncertainties and difficulties facing it in it s internal and external environments. It has been found to be useful to consider the role of strategic management in organizations. This is particularly true in light of growth in recent decade in multiindustry and multinational corporations, especially conglomerate enterprises such as United Technologies, Allied corporation, and Textron. To facilitate the management of such complex organization they are usually divided into strategic business units (SBU s). A strategic business unit is any part of business organization which is treated separately for strategic management purposes. In general, an SBU engages in a single line of business. Less frequently, several related operation are combined to form as SBU. Many company set up their SBU s as separate profile centers, sometimes giving them virtual autonomy. Other companies exercise extensive control over their SBU s, enforcing corporate policies and standards down to very low levels in the organization. Corporate-level strategic management is the management of activities which define the overall character and mission of the organization, the product service segment it will enter and leave, and the allocation of resources and management of synergies among its SBUs. Corporate-level strategic management seeks to answer such questions as the following: what are the purposes of organization? What image should be organization project? What are the ideals and philosophies the organization desires its member to process? What is the organization s business or businesses? How can the organization s resources best be used to fulfill corporate purposes? Corporate-level strategic management is primarily the responsibility of the organization s top executives. The primary focus of corporate-level strategic management is upon formulating and implementing strategies to accomplish the organization s mission. Organizational mission is the organization s continuing purpose with regard to certain categories of person- in short what is to be accomplished for whom. SBU-level strategic management is the management of an SBU s effort to compete effectively in a particular line of business and to contribute to overall organizational purposes. At the SBU level, strategic question include the following: what specific products or services does the SBU produce? Who are the SBU s customers or clients? How can the SBU best compete in its particular product/services segment? How can SBU best conform to the total organization s ideals and philosophies and support organizational purposes? In general, SBU-level strategic management is the responsibility of the second tier of executives, vice president or division head, in large organizations. In single-sbu organizations, senior executive have both corporate and SBU level responsibilities. Within each SBU, practically every impotent organization is divided into two functional subdivisions. Most business have separate department for production (or operation),

11 marketing, finance, and personal (or human resources management). Military installations have supply, police, and maintenance department, among others. Churches have preaching, education, and music ministries. Each of these functional subdivision is typically vital to the success of the respective SBU and, therefore, to the total organization. Functional-level strategic management is the management of relatively narrow area of activity which is of vital, pervasive, or continuing importance to the total organization. Strategic management of the finance function involves establishing budgeting, accounting, and investment policies and the allocation of SBU cash flows. In the personnel areas, policies for compensation, hiring and firing, training, and personnel planning are of strategic concern. Strategic management at the functional level does not include the supervision of day- to-day activities but mainly general direction and oversight through setting and enforcing policies. Although not a level per se, the concept of enterprise strategy is an important one. Enterprise strategies answer the question: what do we stand for? Enterprise strategy is the organization s plan for establishing the desired relationship with other social institution and stakeholder groups and maintaining the overall character of organization. In this text, enterprise strategy will be treated as an aspect of mission determination. This, in turn, is a function of corporate-level strategic management. 1.4 Revision Points The word strategy is derived from the Greek word strategtia, which was first used around 400 BC. This word connotes the art and science of directing military forces. The Webster s Third New International Dictionary defines strategic as of great or vital importance within an organizational whole (1). A strategy is oriented toward basic issues such as these: What is our business? What should it be? What are our products and markets? What can our firm do to accomplish objectives? How do we leverage the advantages offered by the environmental parameters? How do we stay clear of the threats posed by the environment? Strategic management is the responsibility of all the managers in an organization. Although it would be considered the core function of senior manager, strategy concept must also be a part of decision-making process of operating line and staff managers. Due to fact that strategy is largely concerned with adapting an organization to the requirements of an ever changing environment, gathering reliable information on that environment is an important strategic decision. Unless an organizations has the capabilities to create the kind value that is necessary to allow it to pursue it s business effectively, there is no point in analyzing the external environment for opportunities and threats. This aspect of strategic decision making usually involves a number of separate decision; for example, a decision to launch a new or revised product in response to strong

12 customer demand may involve the acquisition of plant and equipment, the training of technical, clerical and the sales staff, new financing arrangements, etc. As a result of decision concerning the scope of the organization and internal skills and resources required to achieve the scope, strategic decision will have to be taken to influence major investment patterns. Corporate-level strategic management is the management of activities which define the overall character and mission of the organization, the product service segment it will enter and leave, and the allocation of resources and management of synergies among its SBUs. Organizational mission is the organization s continuing purpose with regard to certain categories of person- in short what is to be accomplished for whom. SBU-level strategic management is the management of a SBUs effort to compete effectively in a particular line of business and to contribute to overall organizational purposes. Organizational strategists are generally considered to be those persons, who spend a large portion of their time on matters of vital or for-ranging importance to the organization as a whole. 1.5 Summary The word strategy is derived from the Greek word strategtia, which was first used around 400 BC. This word connotes the art and science of directing military forces. The Webster s Third New International Dictionary defines strategic as of great or vital importance within an organizational whole (1). A strategy is oriented toward basic issues such as these: What is our business? What should it be? What are our products and markets? What can our firm do to accomplish objectives? How do we leverage the advantages offered by the environmental parameters? How do we stay clear of the threats posed by the environment? Strategic management is the responsibility of all the managers in an organization. Although it would be considered the core function of senior manager, strategy concept must also be a part of decision-making process of operating line and staff managers. Due to fact that strategy is largely concerned with adapting an organization to the requirements of an ever changing environment, gathering reliable information on that environment is an important strategic decision. As a result of decision concerning the scope of the organization and internal skills and resources required to achieve the scope, strategic decision will have to be taken to influence major investment patterns. Corporate-level strategic management is the management of activities which define the overall character and mission of the organization, the product service segment it will enter and leave, and the allocation of resources and management of synergies among its SBUs. Organizational mission is the organization s continuing purpose with regard to certain categories of person- in short what is to be accomplished for whom. SBU-level strategic management is the

13 management of a SBUs effort to compete effectively in a particular line of business and to contribute to overall organizational purposes. Organizational strategists are generally considered to be those persons, who spend a large portion of their time on matters of vital or for-ranging importance to the organization as a whole. 1.6 Check Your Progress Revision Questions: 1. Describe your understanding of the terms strategy and strategic management in your own words. 2. Give two formal definitions of strategic management, as outlined in this text book. 3. What are the various processes involve in the central theme of strategic management? 4. Outline the various levels at which strategic management can be practiced? 1.7 References 1. Webster, Third International Dictionary. 2. Bower, J Business Policy in the 80 s. Academy of Management Review, 7:4, pp Shirley, R.C Limiting the Scope of Strategy: A Decision Based Approach. Academy of Management Review, 7:2, pp Glueck, W.F and Jausch, J.R Buiseness Policy and Strategic Management, Fourth Edition. McGraw Hill, International Student Edition, New Delhi.

14 Unit 2 Defining Strategic Intent 2.1 Introduction This Unit will highlight the importance of clearly identifying and defining the strategic intent for any business. This would imply defining the business mission, vision, and strategic objectives in clear and unambiguous terms. 2.2 Objectives The overall objective of this Unit is to define the meaning and importance of an organization s mission, vision, and strategic objectives. After going through this Unit and its related themes, you should be able to formulate the mission, vision, and objectives of any organization that has a strategic purpose and intent. 2.3 Content Exposition The Nature and Role of Mission and Vision Statements Mission statements are now relatively commonplace. They are frequently found in annual reports and financial statements, or hanging in board rooms and reception areas, or even summarized in the form of a motto and printed on company documents and invoices. A good mission statement is a strategic management tool rather than a piece of organizational finery. The existence and use of mission statements can be closely linked to the desire for participation, by employees, in the management of organizations. This results in the need to imbue people with a common sense of purpose and method, hence these become the central features of most mission statements. The construction of a mission statement, however, is not an end in itself. The mission statement should simply be the articulation of the sense of mission which already exists within the organization. In this sense, mission statements are a useful means of summarizing and reinforcing the central purpose and characteristics of an organization, they cannot create those features. The creation of a sense of sense of mission is the function of the entire strategic management process. According to Peter Drucker, A business is not defined by its name, statutes, or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and purpose of the organization makes possible clear and realistic business objectives.

15 2.3.2 What is a Mission Statement? A mission statement can be defined as the unique character and purpose of the organization which identifies the scope of its activities and which distinguishes it from other of its type. It summarises the character, identity and reason for existence of an organization. The impetus for the development of a mission statement usually comes from one to more of the following sources: Strategy consultants working in an organization normally require to see the mission of that organization at the outset of their assignment. If the mission does not exist, or has never been articulated formally, the consultants would recommend this as an urgent requirement in their report. Often one of the stakeholder groups in an organization created pressure for the development of a mission statement by developing a public statement to this effect. This, then, acts as an incentive for the company to broaden the statement to include all other stakeholders, employees, customers, and so on) and to bind these together with some formal statement of purpose. Often the appointment of a new CEO results in the development of a mission statement as that person grapples with the central features of the organization he or she now controls. Sometimes there is a ground swell of opinion from within the organization itself (usually line managers) to clarify the direction of the organization. This results in a series of management meetings and, ultimately, the development of a mission statement. Sometimes, the board of directors of an organization, or its senior management team, decides during an extended planning session to formally articulate the mission of the organization. The mission statements arising as a result of these activities usually contain two central characteristics. First, they contain a statement of the business of the organization (a matter which is not as simple as it may sound as we well see later in this topic). Second, they contain a statement or series of statements designed to reinforce the culture of the organization. Sometimes, a mission statement may contain only one of these two characteristics, but this is unlikely to persist in the long-term as the organization develops a better sense of what it is and how it goes about achieving its central purpose.

16 2.3.3 What is the Vision for the Organization? It is especially important for managers and executives in any organization to agree on the basic long-term vision of the firm. The basic question attempted to be answered by a vision statement is, What do we want to become? A clear vision provides the foundation for generating a comprehensive mission statement. Many organizations have both a vision and a mission statement, but the vision statement should be established first and foremost. The vision statement should be brief, preferably one sentence, and must be jointly developed using the inputs from as many managers as possible. Hints on Creating a Sense of Vision It is highly unlikely that any organization will be able to imbue all of its employees with a cohesive sense of vision. Whilst some employees will be both emotionally and rationally supportive of the organizational vision and its approach, others will be unable to make the emotional bond. Many will simply be working for their own private motives and will remain unconvinced about either rational or emotive reasons for developing a sense of vision. This is entirely normal. However, the advantages of a sense of mission are so great that even if an organization has only the support of its key managers and small pockets of employees spread throughout the company, the benefits can be substantial. Although there are no hard and fast rules that will guarantee the success of developing a sense of vision, the following provide some guidelines: Do not expect short-term results. Creating a sense of mission in an organization can take many years. Organizations in crisis (e.g. where a drastic turnaround strategy is required) often create a sense of mission in a shorter time period out of necessity. Create and portray consensus within top management. Unless the senior managers in an organization hold the same sense of vision and mission and unless they are consistent in carrying this to the rest of the organization, a sense of mission may never be fully achieved. Actions speak louder than words. Employees in an organization are very quick to identify double standards. It is important that managers act out the values enunciated in their speeches. This is illustrated by the adage what you say I can t hear, what you do is so loud! Top managers must move around the organization carrying the message. Employees find it very difficult to identify with a message contained on a piece of paper. Face-to-face communication by senior managers with groups of employees is far more effective than a stream of memos. It also helps if the same managers are seen for a continued period of time the senior management team should

17 remain largely unchanged if possible (in the case of turnaround strategy this means after the offending managers have been removed or negated). Keep the message simple. It is important that senior managers identify the core issues around which they wish to build a sense of mission. Over a period of time, elaboration on these issues can become the focus of attention but, until such time, a simple and clear focus is necessary. From the preceding analysis it is clear that an organization s mission is best articulated after the organization has already achieved something in terms of a sense of vision. If a mission statement is formulated in isolation from any sense of vision, employees will adopt a very critical and cynical view of the process and purpose of the statement. In line with this view is the belief that the mission statement should avoid making totally unrealistic claims. For example, one Indian organization discovered that many of its employees simply did not believe the claim in its mission statement that its aim was to be the best in the world at its particular activity. These types of claims are also unnecessary in view of the fact that most successful missions are built on processes (i.e., the way things are done) rather than goals (what we hope to achieve). Most organizations find that if the processes used are appropriate, effective and efficient, the goals they hope to achieve follow as a natural consequence without forming the center point of the mission statement Importance of Vision and Mission Statements The importance of vision and mission statements is fairly well documented in the management literature (Rarick, 1995; Bart, 1998; King, 1979; Pearce, 1982; Carroll, 1984). However, the actual research results are not very flattering. Rarick (1995) found that firms with a formal mission statement have twice the average return on shareholders equity than those without a formal mission statement. Bart and Baetz (1998) found a positive relationship between mission statements and organizational performance. A recent edition of Business Week (2002) reports that firms which have mission statements, have a 30 per cent higher return on certain financial measures, than those without such statements. The extent of manager and employee involvement in developing vision and mission statements can make a difference in business success. This Chapter provides a set of guidelines for developing vision and mission statements in different types of organizations. In actual practice, there are wide variations in the nature, composition, and use of both vision and mission statements. King (1979) recommends that an organization should carefully develop a written mission statement for the following reasons: 1. To ensure unanimity of purpose within the organization; 2. To provide a basis, or standard, for allocating organizational resources; 3. To establish a general tone, or organizational climate; 4. To serve as a focal point for individuals to identify with the organization s purpose and direction;

18 5. To facilitate the translation of objectives into a work structure involving the assignment of tasks to responsible elements within the organization; and 6. To specify organizational purposes and the translation of these purposes into objectives in such a way that cost, time, and performance parameters can be assessed and controlled. Reuben Mark, the former CEO of Colgate Palmolive, maintains that a clear mission statement must also be relevant in an international sense. When it comes to rallying everyone to the corporate banner, it is essential to push one vision globally rather than to drive home different messages in different cultures. The trick is to keep the vision simple but elevated: We make the world s fastest computers or Telephone services for everyone. You are never going to get anyone to charge the machine guns only for financial objectives. It has got to be something that makes them feel better, feel a part of something. Developing a comprehensive mission statement is important because divergent views amongst managers can be revealed and resolved through the process. When we ask the question, What is our business?, there is a high probability of raising a controversy. Raising this question often reveals differences amongst the strategists in an organization. Individuals who have worked together for a long time, and who think they know each other, may suddenly realize that they are in fundamental disagreement. Negotiation, compromise, and eventual agreement on important issues are needed before focusing on more specific strategy formation activities Characteristics and Components of a Mission Statement A Declaration of Attitude A mission statement is a declaration of attitude and outlook more than a statement of specific details. It is usually broad in scope for at least two major reasons. First, a good mission statement allows for the generation and consideration of a range of feasible alternative objectives and strategies without unduly stifling management creativity. Excessive specificity would limit the potential of creative growth for the organization. On the other hand, an overly general statement that does not exclude any strategy alternatives could be dysfunctional. Secondly, a mission statement needs to be broad to be able to effectively reconcile differences, and to appeal to an organization s stakeholders. Stakeholders include: employees, managers, stockholders, board of directors, customers, suppliers, distributors, creditors, governments (local, state, federal, etc.), unions, competitors, NGO s, and the general public. Stakeholders affect, and are affected by, the organization s strategies; yet, the concerns and claims of diverse constituencies vary, and often conflict with each other.

19 A Customer Orientation A good mission statement describes an organization s purpose, customers, products or services, markets, philosophy, and basic technology. Vern McGinnis (1981) has suggested the following characteristics of a mission statement. It should: 1. Define what the organization is, and what the organization aspires to be; 2. Be limited enough to exclude some ventures, and broad enough to allow for creative growth; 3. Distinguish a given organization from all others; 4. Serve as a framework for evaluating current and prospective activities; and 5. Be stated in sufficiently clear terms as to be widely understood throughout the organization. A good mission statement reflects the anticipation of customers. Rather than developing a product and then trying to find customers, the tactical philosophy of an organization should be to identify the needs of customer(s), and then try to provide a product or service to meet those needs. Good mission statements identify the utility value of the product(s) or service(s) of a firm to its customers. A Declaration of Social Policy The term social policy embraces the managerial philosophy and thinking at the highest levels of an organization. For this reason, social policy affects the development of the mission statement for a business. Social issues mandate that the firm considers not only what it owes to its major stakeholders, but also what its responsibilities are to its consumers, the environmentalists, minorities, other communities and groups. The issue of social responsibility arises when a firm establishes its business mission. The impact of society on business, and that of business on society, is becoming increasingly more pronounced. Social policies directly affect a firm s customers, products and services, markets, technology, profitability, and public image. An organization s social policy should be integrated into all strategic management activities, including the development of a mission statement.

20 2.3.6 The Components of a Mission Statement A mission statement can contain any one or more of the following components and a good mission statement will contain them all: A statement of organizational purpose A description of generic strategy, i.e., the way in which the organization attempts to achieve its purpose Stakeholder promises A statement of organizational values and beliefs A statement of public image A summary of standards and behaviors expected within the organization. Organizational Purpose The statement of organizational purpose usually describes in terms of products, markets and technology, the business of the organization its reason for existence. Given that this element of the mission statement will have a strong influence on all the other elements, it should form the core of the statement and should be very clearly articulated. Generic Strategy In order to achieve its fundamental purpose an organization needs to specify the means for doing so. This part of the statement should be made in such a way that the organization can differentiate itself from its competitors in the industry. For example, it may focus on selected market niches, or it may be the cost leader in the industry, and so on. Stakeholder promises Stakeholder promises specify the commitment of the organization to all persons or groups who have an interest in that organization. They are important because different parts of the organization deal directly with different stakeholders. The responsibility of each of these should be specified for all to see, question, justify and (ultimately) abide by.

21 Organizational Values and Beliefs Organizational values and beliefs provide guidelines on how things are to be accomplished in the organization, i.e., the principles which underlie the organization s operations. Public Image This element of the mission statement specifies how the organization wishes to be seen by external constituents. Given the tremendous amount of damage which can be done by bad publicity (sometimes unjustifiably) it is important that organizations specify the behaviors and approaches to be used when dealing with external constituencies. Standards and Behaviors This section of the mission statement briefly identifies the major policies and procedures which are to be used in implementing the strategy and which will reinforce the values and beliefs of the organization. Note how the Qantas mission statement enunciates the way that responsibility will be delegated, people will be held accountable, and participation in decision-making will occur. 2.4 Revision Points A good mission statement is a strategic management tool rather than a piece of organizational finery. The existence and use of mission statements can be closely linked to the desire for participation, by employees, in the management of organizations. These result in the need to imbue people with a common sense of purpose and method, hence these become the central features of most mission statements. According to Peter Drucker, A business is not defined by its name, statutes, or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and purpose of the organization makes possible clear and realistic business objectives. A mission statement can be defined as the unique character and purpose of the organization which identifies the scope of its activities and which distinguishes it from

22 other of its type. It summarizes the character, identity and reason for existence of an organization. The mission statements arising as a result of these activities usually contain two central characteristics. First, they contain a statement of the business of the organization. Second, they contain a statement or series of statements designed to reinforce the culture of the organization. It is especially important for managers and executives in any organization to agree on the basic long-term vision of the firm. The basic question attempted to be answered by a vision statement is, What do we want to become? A clear vision provides the foundation for generating a comprehensive mission statement. Many organizations have both a vision and a mission statement, but the vision statement should be established first and foremost. The vision statement should be brief, preferably one sentence, and must be jointly developed using the inputs from as many managers as possible. From the preceding analysis it is clear that an organization s mission is best articulated after the organization has already achieved something in terms of a sense of vision. If a mission statement is formulated in isolation from any sense of vision, employees will adopt a very critical and cynical view of the process and purpose of the statement. In line with this view is the belief that the mission statement should avoid making totally unrealistic claims. 2.5 Summary A good mission statement is a strategic management tool rather than a piece of organizational finery. The existence and use of mission statements can be closely linked to the desire for participation, by employees, in the management of organizations. According to Peter Drucker, A business is not defined by its name, statutes, or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and purpose of the organization makes possible clear and realistic business objectives. A mission statement can be defined as the unique character and purpose of the organization which identifies the scope of its activities and which distinguishes it from other of its type. It summarizes the character, identity and reason for existence of an organization. From the preceding analysis it is clear that an organization s mission is best articulated after the organization has already achieved something in terms of a sense of vision. If a mission statement is formulated in isolation from any sense of vision, employees will adopt a very critical and cynical view of the process and purpose of the statement. In line with this view is the belief that the mission statement should avoid making totally unrealistic claims.

23 2.6 Check Your Progress Revision Questions: 1. You may wish to perform the organizational purpose exercise amongst your own colleagues or management team by asking individuals (separately) What is the most important thing this organization must do in the next 3-5 years to make it as successful as it could possibly be?. How uniform/disparate are the answers? What does this tell you about the need (or lack of need) for improved strategic management in your organization? 2. What are the broad needs of your customers? Can you think of any ways in which you are not currently helping them satisfy their needs? What further action do you need to take? 3. Identify your current customer groups. Are there any further customer groups which you have the capability to serve? What are they? What skills and resources will you need to develop within the organization in order to satisfy these groups? 4. Can you isolate any distinctive characteristic, which differentiates your organization from others of its type? (Note: whether this differentiation is on the basis of customer groups, customer needs or technology, whether it is some function which supports these aspects of organizational purpose.) 2.7 References 1. Rarick, C. and Vitton, J Mission Statements make Cents. Journal of Business Strategy, 16, pp Bart, C. and Baetz, M The Relationship Between Mission Statements and Firm Performance: An Exploratory Study. Journal of Management Studies, 35, pp King, W.R. and Cleland, D.I Strategic Planning and Policy. Van Norstrand Reinhold, New York. 4. Pearce, J The Company Mission as a Strategic Tool. Sloan Management Review, 23, No. 3, pp Carroll, A. and Hoy, F Integrating Corporate Social Policy into Strategic Management. Journal of Business Strategy, 4, No. 3, pp. 57.

24 Unit 3 Internal Appraisal Methods and Techniques 3.1 Introduction Having seen the importance of strategic planning and decision making, and having understood the importance of vision and mission statements, we will now, in this Unit, turn our attention to the methods and techniques of internal appraisal of an organization. The idea here is to provide you with the capabilities for assessing the strengths and weaknesses of the organization. This will help you subsequently to formulate and implement appropriate strategies for the specific organization. 3.2 Objectives The basic objective in learning the contents of this Unit is to enable you to conduct an internal appraisal of an organization. Specifically, we will teach you, in this Unit, the various methods and techniques to conduct an internal organizational appraisal. These techniques can be used by you to find out the strengths and weaknesses of the particular organization. 3.3 Content Exposition The Internal Assessment Objectives: Describe how to perform an internal strategic-management audit. Discuss key interrelationships among the functional areas of business. Compare and contrast culture in America versus other countries. Identify the basic functions or activities that make up management, marketing, finance/accounting, production/operations, research and development, and computer information systems. Explain how to determine and prioritize a firm's internal strengths and weaknesses. Explain the importance of financial ratio analysis. Discuss the nature and role of computer information systems in strategic management. Develop an Internal Factor Evaluation (IFE) Matrix Notable Quotes: