Business Policy and Strategy bba study notes

Business Policy and Strategy


Unit-I

Business Policy – Meaning – Features – Classification – Process of Policy – Making objectives of business Policy.

Unit –II

Business strategy – Meaning – features importance – Strategic Management Process -SWOT analysis - ETOP analysis – TOWS matrix- BCG matrix.

Unit – III

Major business policies – Personnel policy - Production policy – Marketing policy - Financial policy.

Unit – IV

Major business strategies – Stability growth – retrenchment – disinvestment – mixed strategies.

Unit – V

Society and business – ethics – Social responsibilities of business – Social audit.

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UNIT 1

Business

Business is the mainspring of the modern human life. It is the major economic activity in any society. Each one of us, making some dealing in our day-to-day life with a number of business concerns.

It includes activities concerned with production, trade, banking, insurance, finance, agency, advertising, packaging, and other related activities.

What is important and what needs emphasis in the term ‘business’ is that the above activities area being organized and carried on to satisfy the consumers needs.

Business Policy

The origin of business policy can be traced back to 1911, when the Harvard Business School introduced an integrative course in management aimed at providing general management capability.

Policy making is one of the most important components of business planning. It provides guidelines as to how objectives of business are to be achieved.

The necessity of guiding the future direction of business arises at some stage in the course of existence of every company.

Definition

According to Terry, “A business policy is an implied overall guide setting up boundaries that supply the general limits and direction in which managerial action will take place”.

According to Knoontz,“ Policies define how the company will deal with stock holders, employees, customers, suppliers, distributors and other important groups. Policies narrow the range of individual discretion, so that employees act consistently on important issues”.

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As defined by Christensen and Others, business policy is “the study of the function and responsibilities of senior management, the crucial problems that affect success in the total enterprise, and the decisions that determine the direction of the organization and shape its future.”

Scope of Business Policy

No business organization can either survive or grow without definite objectives which can only be accomplished by applying different policies from time to time, depending upon the working conditions.

Business policies are actually the guidelines for organizational thinking, behavior and action.

Policies as such are formulated pertaining to different aspects of business organizations and therefore they enjoy a very wide scope in day-to-day life of any business unit.

Policies in general, have a wide scope as they are concerned with

Aim and objectives of a business unit Organizational structure Financial resources available Regional traditions and social values Fiscal and commercial policy of the government

Need for Business Policies

It goes without saying that “business policy and administration” is part and parcel of management.

No business enterprise can be managed, controlled and administered effectively if no definite policies are determined.

In fact, it is the policy that guides the course of action

Policies are so framed as to attain the goal of the enterprise and the pre-determined goal can be achieved only when actions are put into practice.

When the policies are to be implemented, every care should be taken by executives to see that implementation of policies will have no adverse effects on workers as well as on the management.

Hence, to see that policies are effective as well as fruitful, implementation has been considered as an important aspect of management. The executives concerned with

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policy implementation should execute them in such a manner as would lead to maximum return on total investment with minimum amount of discontentment among people in the organization.

Features of Policy

From the above definitions, following features of a policy can be identified

A policy provides guidelines to the members of the organization for deciding a course of action. Policy provides and explains what a member should do rather that what he is doing.

Policy limits an area within a decision is to be made and assures that the decision will be consistent with and contributive to objectives.

Policies are generally expressed in qualitative or general way. The words most often used in stating policies are to maintain, to continue, to follow, to provide, to assist, to assure, to employ, to make, to produce or to be etc.

Policy formulation is a function of all managers in the organization because some form of guidelines for future course of action is required at every level.

Policies serve an extremely useful purpose. They avoid confusion and provide clear-cut guidelines at all levels to subordinates; and therefore, they enable the business to carried on smoothly and often without break.

They also lead to better and maximum utilization of resources, human, financial and physical, by adhering to actions for conservation.

Decision-making, planning and coordination of any business organization are exclusively governed and controlled by “Business Policies”.

Consistency in the work performance by different members of firm is maintained because of clear-cut policies chalked out at executive level.

Policies normally cover the study of the nature and process of choice about the future of a business enterprise and are to be handled by responsible executives.

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Classifications

On the basis of levels of Management

Business policies are framed at different levels of the management, and accordingly they may be classified as:

Top management policies : These policies are derived from the top management planning. The top management comprise of the Board of directors, Chairman, Vice-Chairman, Managing Director, General Manager, etc.

The top management policies are concerned with the long-range such as product selection, diversification, acquisitions and mergers, extent and liability-sales forecasting, etc.

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Middle level management policies: These policies are the out come of the deliberations of the middle management consist of the deputy heads to the various sections and functional departments.

They frame policies on employment and training, industrial relations, labour welfare and social security etc. and these policies are known as middle management policies.

Lower level management policies: The lower level management people are men who have direct supervision over the working force.

They chalk out policies for the assignment of the jobs to the best suited persons, the provision of adequate tools, raw materials, training the workers, issuing of orders, improving working conditions, etc.

On the basis of Functional Areas

Policies relating to various functional areas of the management are called functional policies.

Production and Purchase policies : The policies for operational are related to the production system, operational planning and control, and research and development.

The strategy adopted and affects the nature of product also the markets to be served and the manner in which the markets are to be served.

Marketing Policies : Policies related to marketing have to be formulated and implemented on the basis of the marketing mix i.e product, price, place and promotion. The major issues and decisions related to these marketing mix factors.

The following are considered as major marketing policies.

Product Policies

Pricing Policies

Promotion Policies

Physical distribution Policies

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Financial Policies : This policies may be regarded as the most important business policies, as the entire success or failure of a business unit depends upon these. Properly framed financial policies result in prosperity and long survival, while faulty policies result in the unit’s run.

The financial policies of an organization are related to the availability, usage and management of funds. Financial policies have therefore to be determined is the areas of

Sources of Capital Policies

Working Capital Policies

Profit distribution Policies

Depreciation allowances Policies

Personnel Policies: Personnel policies are the tools for the personnel department to achieve the objectives of the organization. Personnel policy provides guidelines for a wide variety of employment relationship in the organization.

The personal policy of the organization should have two types namely

General Objective : The statement of general objective should express the top management’s basic philosophy of human resources and reflect its deep underlying convictions as to the importance of people in the organization.

Specific objectives: The statement of specific objectives should refer to the various activities of personnel administration connected with staffing, training, developing, wage and salary benefits, employee records and personnel research.

The major areas of the personnel policies are

Recruitment and Selection Policy

Training and Promotion Policy

Remuneration and Benefit Policy

Industrial relation Policy

On the basis of Expression

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Business policies may be either express or implied, which in turn may be oral or written.

Oral Policies : Oral policies are those, which are issued or stated by the word of mouth. Such policies are generally adopted when an organization is small and face-to-face communication is desired.

They are often not remembered for long and easily forgotten. Therefore, usually oral policies are not in popular use.

Written Policies : Written policies are those, which are normally put in black and white and stated in clear terms so that personal whom they are addressed to easily understand them. For putting the policies in writing, much care to be taken.

Implied policies : These are the policies, which are implied from the code of conduct or from the behavior of business employees; but they are expressed. They generally flow from the philosophy of the business, its social values and even traditions.

For example, smoking and drinking may be prohibited not in writing but it is implied by the conduct of the executives who refrain theses habits while on duty.

On the basis of nature of Origin

On the basis of nature of origin business policies can be classified in to three types. They are as follows

Formulated Policy : A formulated policy is one, which is specified by the organization for providing guidelines to its members. Most of the policies in private sector organizations fall in this category as every organization formulate various policies on different aspects. This policy may be broad giving general guidance for the action.

Appealed Policies : Sometimes, policies may not be clearly stated and the actions of managers particularly at the higher levels provide guidelines for actions at lower levels.

In such a case, the action of a decision maker, consciously or unconsciously, depends on his own guidelines. Moreover, in the absence of any specific guidelines, decision is based on individual interpretation of the situation and consequent actions.

Imposed Policies : imposed policies arise from the influence of some outside agencies. Such agencies may be government which provides policies for all public-sector

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organizations, parent organizations overseas in the case of multinational companies operating in a country.

On the basis of scope of Organization

Business policies may also be categorized as basic policies, general policies and specific policies.

Basic Policies : These policies are basis of the organization and are framed by the top management. They spell out the approach of a company to its activities. For example, marketing policy of a firm may be “consumer-oriented” as against “product-oriented”, with the main purpose of competing with the products of competitors.

General policies : Such policies are generally more specific and apply to large segments of organization. The middle level management, e.g., mainly frames them purchasing policy to give first preference to local suppliers.

Specific or Departmental Policies : A departmental policy is specific in nature. The foremen and supervisors formulate it. It applies to routine activities in the department.

On the basis of Management Functions

The management undertakes functions, viz., planning, organizing, actuating, and controlling. Accordingly the policies may be planning policies, organizing policies, actuating or directional policies and controlling policies.

Planning Policies : These policies are concerned with the path of action, which lead to company activities and attainment of its objectives. Planning policies decide the objectives to be achieved; the policies paths that should be followed to achieve the objectives and how the objectives set are to be achieved through programs and process.

Organizing Policies : Organization is another management function, which is concerned with the division or allocation of necessary competent activities to members of the group so that through collective efforts, the objectives may be achieved.

Actuating Policies : The actuating policies, therefore include: providing effective leadership; integrating people and task and convincing them to assist in the achievement of the overall objectives; effective communication with the members; and providing climate for the subordinates development and their motivation to work.

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Controlling policies: Controlling is the process of measuring actual result, comparing with standard of performance, finding out deviations and taking corrective action when necessary.

Controlling policies involve a series of activities; continuous observation and study of periodic result of performance in order to identify potential problems; selection of the best mode of control.

Importance of Business Policy

Business policy is important as a course in the management curriculum and as a component of executive development programmes for middle-level managers who are preparing to move up to the senior management level. To highlight the importance of business policy, we shall consider four areas where this course proves to be beneficial.

For learning the course For Understanding the business environment For understanding the business organization For personal development

For Learning the course

Business policy seeks to integrate the knowledge and experience gained in various functional areas of management. It enables the learner to understand and make sense of the complex interaction that takes place between different functional areas.

Business policy deals with the constrains and complexities of real-life business. In contrast, the functional area courses are based on a structured, specialized and well developed body of knowledge, resulting from a simplification of the complex overall tasks and responsibilities of the management.

For Understanding the Business Environment

Regardless of the level of management of person belongs to, business policy helps to create an understanding of how policies are formulated. This helps in creating an appreciation of the complexities of the environment that the senior management faces in policy formulation.

By gaining an understanding of the business environment, managers become more respective to the ideas and suggestions of the management. Such an attitude on the part of the management makes the task of policy implementation simpler.

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For Understanding the Organization

Business policy presents a basic framework for understanding strategic decision making while a person is at the middle level of management. Such a framework, Combined with the experience gained while working in a specialized functional area, enables a person to make preparations for handling general management responsibilities. This benefits the organization in a variety of ways.

For Personal Development

A study of business policy offers considerable scope for personal development. It is a fact of organizational life that the different subunits within an organization have a varying value and importance at different times.

It often happens that a company which has followed a production orientation as a matter of policy gradually shifts emphasis to marketing, maybe due to increasing competition.

The Purpose of Business policy

To integrate the knowledge gained in various functional areas of management

To adopt a generalist approach to problem-solving

To understand the complex inter-linkages operating within an organization through the use of a system approach to decision-making and relating these to the change taking place in the external environment.

Business Policy Process

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Ascertaining the problem

Policy formulation

Dissemination of the policy

Acceptance of the policy

Explanation of the Policy

Policy Implementation

Policy Control

Ascertaining the Problem

The main object of generating the policy is to have smooth working in the business organization. Hence, the task of formulating policies should be assigned only to those in the management who are well versed and quite conversant with varied situations or problems of the business concerned.

Policy Formulation

This is the next step to be taken by persons concerned with policy implementation. Any policy that is to be framed should be quite suitable both to the management and to its employees.No policy can be successfully put into practice unless it is properly approved by the company personnel.

Dissemination of the Policy

Dissemination indicates announcement or making the subject-matter known to others. One of the basic elements of the policy is that whatever policy is framed it should be made known to all within the organization so as to avoid any conflict between the company management and its personnel.

Acceptance of the Policy

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When the policies are formulated, it is advisable to get the draft of the policy statement approved by those who are supposed to apply it in the interest of the organization as a whole management and personnel.

Once the basic principles on which the policies are designed and the rules and regulations included in the proposed draft policy are thoroughly understood and accepted.

Explanation of the Policy

If the policy is to be accepted at all levels of management, every attempt should be made by policy-makers that the exact meaning, significance and purpose of policy are explained in clear terms to the persons concerned.

The policy will have no opposition and an early approved if explained thoroughly, will hold relevance to the business environment in which the business enterprise is expected to operate.

Policy Implementation

This is last but one stage in the process of policy-making decisions. Implementation of policy indicates putting it into practice as and when any problem or critical situation arises. Even otherwise, corporate operations are undertaken and are also the outcome of the policy implementation.

Policy ControlThis is a very important element of business policy which is likely to be implemented at different levels on different occasion. The management in this regard should be careful to see that the policy implementation takes place in conformity with the basic principles, rules and regulations set by the policy makers.

How Policies Differ from Rules

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Policies are in the form of guidance and not the order. Rules are positive instructions or orders to do or not to do something

Infringement of rules leads to specific penalties whereas no stipulated penalties are imposed in case the policies are not strictly adhered to.

In the case of policies, there is room for variation for their use; it is not so regarding rules.

Policies give birth to rules and rules support and augment the policies.

Characteristics of Business Policies

Objectivity

Relationship to other objectives

Complementariness

Stability and Flexibility

Fairness and Honesty

Being known, understood and accepted

Policy in writing

Simple and free from ambiguity

Supplementary to other policies

Ethical standards

Objectives of the Business Policy

It is thus essential that we should first state the objectives of business policy and only then proceed further. The objectives of business policy have been stated by authors such as Christensen et.al. and Steiner and others in terms of knowledge, skills and attitudes. These objectives could be derived from the purpose of business policy.

In Terms of Knowledge

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The learners of business policy have to understand the various concepts involved. Many of these concepts like strategy, policies, plans and programmes are encountered in the functional area courses too.

It is imperative to understand theses concepts specifically in the context of business policy.

A knowledge of the external and internal environment and how it affects the functioning of an organization is vital to an understanding of business policy. Through the tools of analysis and diagnosis a learner can understand the environment in which a firm operates.

Information about the environment helps in the determination of the mission, objectives, and strategies of a firm. The learner appreciates the manner in which strategy is formulated.

In Terms of Skills

The attainment of knowledge should lead to the development of skills so as to be able to apply that which has been learnt. Such an application can take place by an analysis of case studies and their interpretation, and by an analysis of the business events taking place around us.

The study of business policy should enable a student to develop analytical ability and use it to understand the situation in a given case of incident.

Further, the study of business policy should lead to the skill of identifying the factors relevant in decision-making. The analysis of the strengths and weaknesses of an organization, the threads and opportunities present in the environment, and the suggestion of appropriate strategies and policies from the core content of general management decision-making.

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In Terms of Attitude

The attainment of the knowledge and skill objectives should lead to the inculcation of an appropriate attitude among the learners. The most important attitude developed through this course is that of a generalist. The generalist attitude enables the learners to approach and asses a situation from all possible angles.

By acing in a comprehensive manner, a generalist is able o function under conditions of partial ignorance by using his or her judgment and intuition. Typically, case studies provide only a glimpse of the overall situation and a case analyst frequently faces the frustrating situation of working with less than the required information.

UNIT 2

Business Strategy

The term ‘Strategy’ is derived from military, where it is taken to mean the process of planning the movements of troops so as to outplay the enemy in the battlefield. Originally, the term has been derived from Greek word ‘strategos’. The word strategy, therefore means the art of general. In corporate planning, strategy is the ‘grand design’, which an organization chooses in order to move to react towards the set objectives by using its resources.

Meaning / Definitions

According to knootz O Donnel “ Strategies are general programme of action towards the attainment of comprehensive objectives”.

According to Andrews, “Strategy is the pattern of objectives, purpose of goals and major policies and plans for achieving these goals stated in such a way, so as to define what business the company is in or is to be and the kind of company it is or is to be”.

According to James Brain Quinn,” the pattern of plan that integrates an organization’s major goals, policies and action sequences into a cohesive whole”.

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Analysis of Definitions of Strategy

The analysis of various definitions of strategy presents the following points:

Strategy is a central understanding of the strategic management process. Strategy is the determination of basic long-term goals and objectives of an

organization. Determining the course of action to attain the predetermined goals and

objectives. Allocating the necessary resources for implementing the course of action. Set of decision-making rules making a common thread.

Levels of Strategy

Corporate Level Strategy is an overarching plan of action covering the various functions performed by different SBU’s. the plan deals with the objectives of the company, allocation of resources and coordination of the SBU’s for optimal performance.

SBU Level Strategy is a comprehensive plan providing objectives for SBU’s, allocation of resources among functional areas, and coordination between them for making an optimal contribution to the achievement of corporate level objectives.

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Functional Strategy deals with a relatively restricted plan providing objectives for a specific function, allocation of resources among different operations within that functional area, and coordination between them for optimal contribution to the achievement of SBU and corporate level objectives.

Features of Strategy

The definition of strategy provides its following features:

Strategy relates the firm to its environment, particularly the external environment in all actions whether objective setting, or actions and resources required for its achievement.

Strategy is the right combination of factors both external and internal. In relating an organization to its environment, the management must also consider the internal factors too, particularly its strengths and weakness to taken various courses of action.

Strategy is relative combination of actions. The combination is to meet a particular condition, to solve certain problems, or to attain a desirable objective. It may taken any form; for every situation varies and therefore requires a somewhat different approach.

Strategy may even involve contradictory action. Since strategic action depends on environmental variables, a manager may take an action today and revise or reverse his steps tomorrow depending on the situation.

Strategy is forward looking. It has orientation towards the future. Strategic action is required in a new situation. Nothing new requiring solutions can exist in the past, and so strategy is relevant only to the feature.

Importance of Strategic Management

To Provide Guidelines : Strategic management provides guidelines to the employer about the organization’s expectations from them. This would minimize conflict between

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job performance and job demands. Thus it provides incentive for employer and helps the organization in achieving its objectives.

Developed field Study by Research : Strategic management was just based on case studies, 30 years ago. But recently, there are methodological problems in research in this field of study. More systematic knowledge in this area is available at present. Therefore, it is worthwhile to study strategic management at present compared to the past.

Probability for Better Performance : There is no clear research evidence that strategic management leads to higher performance. But the majority of studies suggest that there is a relationship between better performance and formal planning.

Improves Communication : Strategic management provides effective communication of information from lower level managers to middle level managers and to top level managers.

Improves Coordination : Strategic management improves coordination not only among the functional areas of management, but also among individual projects.

Improve Allocation of Resources: Strategic planning helps in deciding upon most feasible and viable projects and thereby improves the allocation of resources to the viable projects.

Benefits of Strategic Management

It helps organizations not only to respond to its relevant environment, but also to initiate and influence its environment and thereby exert control over its destiny.

It helps the organizations to achieve understanding and commitment from all managers and employees.

It helps for increased employee productivity, reduced resistance to change, clear understanding of performance-reward relationship.

It often brings order and discipline to a firm.

It allows for identification, prioritization and exploitation of opportunities.

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It provides an objective view of management problems.

It represents a framework for improved control of activities.

It minimizes the effects of adverse conditions and change.

Strategic Management Process

Strategic decision making is carried out through the process of strategic management. The way strategic management is defined the different phases in the process of strategic management, the elements that this process contains; and lastly, the model of strategic management that we have adopted.

Phases in strategic Management

The strategic management as a process consists of different phases which are sequential in nature. These four phases could be encapsulated as follows

Establishing the hierarchy of strategic intent,

Formulation of strategies

Implementation of strategies and

Performing strategic evaluation and control

The above four phases are considered as sequentially linked to each other and each successive phase provides a feedback to the previous phases. The phases in strategies management are depicted as following

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Each phase of the strategic management process consist of a number of elements which are discrete and identifiable activities performed in logical and sequential steps.

Establishing the hierarchy of strategic intent:

Creating and communicating a vision

Designing a mission statement

Defining the business

Setting objectives

Formulation of strategies:

Performing environmental appraisal

Doing organizational appraisal

Considering corporate-level strategies

Considering business-level strategies

Undertaking strategic analysis

Exercising strategic choice

Formulating strategies

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Preparing a strategic plan

Implementation of Strategies

Activating strategies

Designing structures and system

Managing behavioral implementation

Managerial functional implementation

Operational sing strategies

Performing strategies evaluation and control:

Performing strategic evaluation

Exercising strategic control

Reformulating strategies

SWOT Analysis

SWOT is a short form for the internal strengths and weaknesses of a business and environmental opportunities and threats facing that business. SWOT analysis is a systematic identification of these factors and the strategy that reflects the best match between them. It is based on the logic that an effective strategy maximizes a business’s strengths and opportunities but at the same time minimizes its weaknesses and threats.

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Strengths: Strength is resource, skill, other advantage relative to competitors and the needs of markets a firm serves or anticipates serving. It is a distinctive competence that gives the firm a comparative advantage in the marketplace. Financial resources, image, market leadership, and buyer/supplier relations are examples.

Weaknesses: A weaknesses is a limitation of deficiency in resources, skills and capabilities that seriously impedes effective performance. Facilities, financial resources, management capabilities, marketing skills and brand image could be source of weaknesses.

Opportunities: An opportunity is a major favorable situation in the firm’s environment. Key trends represent one source of opportunity. Identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationship could represent opportunities for the firm.

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Threats: A threat is a major unfavorable situation in the firm’s environment. It is a key impediment to the firm’s current and or desired future position. The entrance of a new competitor, slow market growth, increased bargaining power of key buyers or suppliers, major technological change, and changing regulations could represent major threats to a firm’s future success. ETOP Analysis

There are many techniques available to structure the environmental appraisal. One such technique, suggested by Glueck is that of preparing an Environmental Thread and Opportunity Profile (ETOP) for an organization.

The preparation of ETOP involves dividing the environment into different sectors and then analyzing the impact of each sector on the organization.

A comprehensive ETOP requires subdividing each environmental sector into sub-factors and then the impact of each sub-factor on the organization described in the form of a statement.

The following summary shows the major factors of ETOP. The summary provides an example of an ETOP prepared for an established company in the bicycle industry.

The main business of the company is in sports cycle manufacturing for the domestic and export market.

This example relates to a hypothetical company but the illustration is realistically based on the current Indian business environment.

Environmental Sectors

Nature ofImpact

Impact of each sector

Social ↑ Customer preference for sport cycles which are fashionable, easy to ride and durable

Political → No significance factorEconomic ↑ Growing affluence among urban consumers;

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experts potential highRegulatory ↑ Bicycle industry a thrust area for

ExportMarket ↑ Industry growth rate is 7 to 8 percent per year;

for sport cycle growth rate is 30 percent; largely unsaturated demand

Supplier ↑ Mostly ancillaries and associated companies supply parts and components; import of RAW material easily available.

Technological ↑ Technological up gradation of industry in progress; import of machinery simple.

International ↓ Emerging threat from cheap imports from chinaUp arrows indicate favorable impact; down arrows indicate un-favorable impact and horizontal arrows indicate natural impact.

As observed from the above summary, sport cycle manufacturing is an attractive proposition due to the many opportunities operating in the environment.

The company can capitalize on the growing demand by taking advantage of the various government policies and concession.

It can also take advantage of high export potential that already exist. Since the company is an established manufacturer of bicycle, it has a favorable supplier, as well as technological environment.

But contrast the implications of this ETOP for a new manufacturer who is planning to enter this industry.

Though the market environment would still be favorable, much would depends on the extent to which the company is able to ensure the supply of raw materials and components, and have access to the latest technology and possess the facilities to use it.

The preparation of an ETOP provides a clear picture to the strategists. By means of an ETOP, the organization knows where it stands with respect to its environment.

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Obviously, such an understanding can be of a great help to an organization in formulating appropriate strategies to take advantage of the opportunities and counter the threats in its environment.

Corporate level strategic analysis

Corporate-level strategic analysis treats a corporate entity as constituting a portfolio of business under a corporate umbrella. The analysis focuses on the question of what should a corporate entity do regarding the several business that are there in its portfolio.

Corporate Portfolio Analysis

Corporate portfolio analysis could be a set of techniques that helps strategists in taking strategic decisions with regard to individual products or business in a firm’s portfolio. It is primarily used for competitive analysis and corporate strategic planning in multiproduct and multi-business firms.

BCG Matrix : The Boston Consulting Group (BCG) matrix, such as the one shown in the following is provides a graphic representation for an organization to examine the different business in its portfolio on the basis of their relative market shares and industry growth rates.

As shown in the table, business could be classified on the BCG matrix as wither low or high according to their industry growth rate and relative market share.

The vertical axis denotes the rate of growth in sales in percentage for a particular industry.

The horizontal axis represents the relative market share, which is the ratio of a company’s sales to the sales of industry’s largest competitor or market leader.

The low and high market shares are separated by a vertical lines set at 1.0. The means that a company would have a relative market share of less than 1.0 if it does not have the largest share.

A relative market share of more than 1.0 would occur for companies that are the largest sellers in their various industries. Still, in order to get the maximum benefit out of the experience curve, the BCG matrix indicates that it is necessary to be the market leader.

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The result of combining the industry growth rate and relative market share, each along a high and low dimension, is a four-cell matrix. Each cell of this matrix has been given an interesting and appropriate name by the Boston Consulting Group.

The four cells of the BCG matrix have been termed as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

These different types of businesses with some contemporary examples from the Indian corporate world, are described below

A Typical BCG Matrix

Stars : Stars are high-growth-high-market share businesses which may or may not be self-sufficient in terms of cash flow. This cell corresponds closely to the growth phase of the product life cycle(PLC). A company generally pursues an expansion strategy to establish a strong competitive position with regard to a star business.

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Cash Cows : As the term indicates, cash cows are businesses which generate large amounts of cash but their rate of growth is slow. In terms of PLC, these are generally mature business which is reaping the benefits of the experience curve.

The cash generation exceeds the reinvestment that could profitable be made into ‘cash cows’. These businesses can adopt mainly stability strategies.

Where long-term prospects are exceptionally bright, limited expansion could be adopted.

As ‘cash cow’ industries lose their attractiveness and tend towards decline, a phased retrenchment strategy may be feasible.

Question Marks: Businesses with high industry growth but low market shares for a company are ‘question marks’. They require large amounts of cash to maintain or gain market shares. ‘question marks’ are usually new products or services which have a good commercial potential.

The logic of the experience curve dictates that the company obtaining an early lead can expect cost advantages and market leadership and can successfully create entry barriers.

No single set of strategies can be recommended here. If the company feels that it can obtain a dominant market share, it may select expansion strategies, otherwise retrenchment may be a more realistic alternative.

Dogs: The business which are related to slow-growth industries and where a company has a low relative market share are termed as ‘dogs’.

They neither generate nor require large amount of cash. In terms of PLC, the ‘dogs’ are usually products in late maturity or a declining stage.

The experience curve for the company shows that it faces cost disadvantages owing to a low market share. The only possibility for the company could be to gain market share at the expense of rival firms, a possibility that is remote owing to the high cost involved. So retrenchment strategies are normally suggested.

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TOWS analysis helps you get a better understanding of the strategic choices that you face. (Remember that "strategy" is the art of determining how you'll "win" in business and life.) It helps you ask, and answer, the following questions: How do you:

Make the most of your strengths? Circumvent your weaknesses?

Capitalize on your opportunities? and

Manage your threats?

A next step of analysis, usually associated with the externally-focused TOWS Matrix, helps you think about the options that you could pursue. To do this you match external opportunities and threats with your internal strengths and weaknesses, as illustrated in the matrix below:

TOWS Strategic Alternatives Matrix

External Opportunities(O)1.2.3.4.

External Threats (T)1.2.3.4.

Internal Strengths(S)1.2.3.4.

SO"Maxi-Maxi" Strategy

Strategies that use strengths to maximize

opportunities.

ST"Maxi-Mini" Strategy

Strategies that use strengths to

minimize threats.

Internal Weaknesses (W)1.2.3.4.

WO"Mini-Maxi" Strategy

Strategies that minimize weaknesses by taking advantage

of opportunities.

WT "Mini-Mini" Strategy

Strategies that minimize weaknesses

and avoid threats.

This helps you identify strategic alternatives that address the following additional questions:

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Strengths and Opportunities (SO) - How can you use your strengths to take advantage of the opportunities?

Strengths and Threats (ST) - How can you take advantage of your strengths to avoid real and potential threats?

Weaknesses and Opportunities (WO) - How can you use your opportunities to overcome the weaknesses you are experiencing?

Weaknesses and Threats (WT) - How can you minimize your weaknesses and avoid threats?

UNIT 3

Major Business policies

Personnel Policy

Personnel policies are the tools for the personnel department to achieve the objectives of the organization. Personnel policy provides guidelines for a wide variety of employment relationship in the organization. The personal policy of the organization should have two types namely

General Objective : The statement of general objective should express the top management’s basic philosophy of human resources and reflect its deep underlying convictions as to the importance of people in the organization.

Specific objectives: The statement of specific objectives should refer to the various activities of personnel administration connected with staffing, training, developing, wage and salary benefits, employee records and personnel research.

Key issues in personnel policy : The close interrelation between the quality of personnel and strategic management requires the top executives to be concerned with the following major policy issues bearing on personnel.

Recruitment, promotion and transfer.

Compensation and supplementary benefits.

Relation with employee unions

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Collective bargaining.

Finally, policy decisions have to be taken in connection with personnel administration, and these relate to personnel selection, training and promotion, remuneration and benefits and industrial relations.

Recruitment and Selection Policy : Policy decisions have to be taken as to how personnel is to be selected in terms of the procedure to be used. i.e, the extent of interviews requires, psychological resting to be introduced and the source of recruitment.

Policy decisions may also be taken with regard to the minimum educational or experience requirements.

Training and Promotion Policy : The question of manpower development or training is also an important aspect and policy decisions have to be taken with regard to manpower planning and filling up higher vacancies by promotion from within.

A policy of promotion from within presupposes the existence of adequate training policies to develop persons for such higher position.

Remuneration and Benefit Policy : Policy decisions have also to be taken in terms of the remuneration structure. For example, in case of the sales force, certain organizations prefer to rely merely on salaries whereas other which to build in a commission component to provide the necessary incentive.

The question of the extent of bonus, apart from legal requirements in India has also to be decided. Policy decisions will also be taken regarding other benefits such as sick leave, vacations, canteen facilities and working conditions.

Industrial Relations Policy : Finally, in the light of increasing strikes in India, proper policy decisions must be taken in connection with dealing with labour disputes and avoiding them in the future.

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Production and Purchase Policy

The policies for operational are related to the production system, operational planning and control, and research and development. The strategy adopted and affects the nature of product also the markets to be served and the manner in which the markets are to be served.

All these collectively influence the operations system structure and objective, which are used to determine the operations and policies. Purchase and production policies like other business policies generate a number of intricate problems.

A satisfactory handling of these problems is essential if the business is to keep on its toes. Major production and purchase policies involve the following issues;

Selection of the production process

Determining the total production capacity

Deciding about the extent of vertical interpretation

Establishing plans for maintenance and replacement

Solving manufacturing or buying problems of supply and services;

Considering how the purchasing functions should be organized and performed

Key issues in production policy : The major issues in production policy may be said to include the following

Involvement of the firm in production processes.

Choice of the production processes in includes technology to be used, division of

labour, mechanization of operations and size and location of plants

Estimate of the production capacity

Maintenance of replacement of the existing production facilities

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Production policy decisions will have to be taken in connection with the size of the run, automation, production stabilization, extent of marketing or buying components and inventory levels.

The Size of the Run Policy : This will depend on the backing and orders as well as the nature of automation introduced. It will also depend on the type of the market.

The temptation is to increase the size of the run to take advantage of avoiding the set up costs. However, these have to be weighted against the cost of heavier inventories.

Automation Policy : Policy decision at the top level may have to be taken on the question of automation. The modern trend is towards greater automation but this has to be tempered by social objectives of avoiding increasing unemployment in India.

Again automation involves consideration of technical problems apart from economic aspects.

The policy of increasing automation or mechanization may be merely with a view to avoid repetitive and uninteresting work or it may be to reduce costs. Policy decisions however, have to be taken in this behalf at the top-level.

Production Stabilization Policy : The question of production stabilization is related to the size of the run and the extent of automation production has to be stabilized through proper timing, as market demands cannot be overlooked.

In view of seasonality of demands, where they exist production stabilization is sought to be achieved by manufacturing other products instead of leaving production facilities idle.

In service industries, like our railways this is a problem where trains have to be run off-season when they are partially empty. Policy decisions therefore have to be taken in this behalf.

Make or Buy Policy : Make or buy decision is related to both the question of marketing policy as well as production policy. Policy decisions have to be taken as to the extent of the product that has to be manufactured within the organization itself and the extent, if any of purchases from outside.

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For example in the automobile industry there are many small-scale industries providing component parts for the motorcar. Such a policy decisions might be arrived at in the light of financial considerations or because of government control or directions, or in terms of social obligations of large business.

Inventory Level Policy : Finally, the questions of the levels of inventories or stocks that can be maintained have to be decided. The size of the run, product stabilization and the other policies discussed above are related to the question of inventory level of policies in connection with stocks.

This is also related to the aspect of marketing as being out of stock may result in losing customers. As against this, higher inventories increase the costs and reduce the ultimate profits.

Disposing off heavy stocks may require price slashing or reductions resulting in wastage of financial resources.

Marketing Policy :

Policies related to marketing have to be formulated and implemented on the basis of the marketing mix i.e product, price, place and promotion. The major issues and decisions related to these marketing mix factors.

In the marketing policy decisions, each firm is naturally expected to use the set of decision, variables best suited to its own strategy. But there are certain basic issues, which are common concern to most of firms.

The more important issues in marketing with respect to which guidelines need to be provided are; product line and product mix, customers to be served and channels of distribution, pricing of products and services, sales, promotion and marketing mix.

Basically marketing policies relate to each of the ‘four P’s in marketing’ namely product, pricing, promotion and physical distribution.

Product Polices: In connection with product policies, for example a policy decision might have to taken as to whether to make or buy the product. Policy decisions might have to be laid down with regard to the nature and extent of diversification.

For example whether diversification in the future will always be in terms of related products or whether new product ideas can be considered in connection with unrelated products.

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The make or buy decision can also be a part of the production policy but can be part of the marketing strategy which is concerned with the overall strategy of the business.

Pricing Policies: Similarly in the area of pricing policy decisions have to be taken. The market segment or segments aimed at will determine the price range.

The policy decisions on pricing are also affected by the type of trade channels and the discounts that might have to be offered.

Pricing policies also depend on the objectives involved which may be to skim the cream. i.e, benefit quickly in case of novelty product by charging a high price, or the policy may be rapid market penetration by keeping the price as low as possible.

Promotion Policies: The promotional policy is also tied in with the pricing policies. The policy to concentrate on certain advertising media would be dictated in terms of product policies and the customer segment involved.

Policy decisions would also help in arriving at the amount to be spend on promotional activities. Certain organizations fix a policy of budgeting a certain percentage, say 5 percent, of the sales for advertising expenditure.

Physical Distribution Policies : Finally, policy decisions have to be taken in the area of physical distribution of the product which involved considerations of channels of distribution and logistics i.e, questions of warehousing points and inventory levels.

Difficult policy decisions are involved in arriving at the selection of an appropriate set of distribution channels for the products of the company. Once established such decisions are difficult to change. Certain organizations prefer to give sole distributorships.

Financial Policy :

This policies may be regarded as the most important business policies, as the entire success or failure of a business unit depends upon these. Properly framed financial

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policies result in prosperity and long survival, while faulty policies result in the unit’s run.

The financial policies of an organization are related to the availability, usage and management of funds. Financial policies have therefore to be determined is the areas of

Sources of Capital Policies

Working Capital Policies

Profit distribution Policies

Depreciation allowances Policies

Source of Capital Policy: Policy dimensions are taken at the top level regarding the sources of capital. For example, in the case of the sole trader, the individual proprietor generally provides the capital, which is supplemented by loans, which he may be able to obtain from banks and other financial institutions.

In the case of partnership, the partners provide the basic capital. In case of joint stock companies, large capital is possible from a large number of shareholders. In addition, loans are generated through the issued of debentures. The question of the debt/equity ratio is a policy decision, which must be taken.

Working Capital Policy: The difference between the current assts and the current liabilities or the working capital determines how far the business unit can immediately meet its obligations. It constitutes the ability of the organization to meet its bills when they fall due.

Policy decisions will have to be taken with regard to how for such current assets should be held in cash or in other readily marketable securities or placed in fixed deposit to earn interest.

These policies are also concerned with the extent of bank borrowings permissible and allowances credit facilities that should be extended to the customers.

Profit Distribution Policy : Policy decisions have to be taken with regard to how much profits should be distributed by way of dividends to the share holders and how much should be ploughed back for future capital requirements.

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If adequate dividends are not distributed, when capital is required in the future it will be difficult to attract investors as new shareholders or to induce existing shareholders to take up more shares in the company.

Some companies follow a policy of dividend equalization by setting aside profits in good years to be used for payment of dividend in lean years.

Depreciation Allowance Policy: Policy decisions have to be taken on the question of extent of depreciation to be written off while keeping in mind the tax providing as well as its possible use as source of funds for the enterprise.

UNIT 4

Major Business Strategies

Strategy refers to the manner of using resources to provide superior results. In operational terms, strategy is a comprehensive, integrated plan designed to assure that the basic objectives of the enterprise are accomplished.

Strategic planning or strategy formulation consists of a set of decisions, which leads to the development of an effective strategy. Strategy formulation presupposes environmental analysis and evaluation of internal capabilities.

Therefore, strategic planning is forward-looking exercise, which determines the future posture of the enterprise with special reference to its product, market posture, profitability, size, and rate of innovation and external institutions.

Dimension of Strategic Decisions

What decisions facing a business are strategic and therefore deserve strategic management attention? Typically, strategic issues have five identifiable dimensions:

Strategic issues require Top-management Decisions : Strategic decisions overarch several areas of a firm’s operations. Top-management involvement in decision making is imperative.

The perspective for understanding, anticipating broad implications, ramifications, and the power to authorize the resources allocations are necessary for implementation.

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Strategic issues involve allocation of Company’s Resources : Strategic decisions characteristically involve substantial resource deployment. The people, physical assets, or money needed must be either redirected from internal sources or secured from outside.

Strategic issues are future Oriented : Strategic decisions are based on what managers anticipate or forecast rather than they know. In the turbulent and competitive free enterprise environment, a successful firm must take anticipatory stance towards change.

Strategic issue usually have multi-business consequences: A strategic decisions are coordinative. Decisions about such factors as customer mix, competitive emphasis, or organizational structure necessarily involve a number of a firm’s strategic business units (SBU’s), functions, divisions, or program units.

Each of these areas will be affected by the allocation or reallocation of responsibilities and resources related to the decision.

Strategic issue necessitate considering external environment: All business firms exist in an open system and are influenced by external conditions largely beyond their control.

They must consider competitors, consumers, suppliers, creditors, government and labor.

Stability Strategy

A stability strategy arise out of a basic recognition by management that the firm should concentrate on utilizing its present resources to develop its competitive strength within a restricted product-market configuration.

In other words, stability strategy implies that the company will continue in the sale or a similar business as it now pursues, and with the same of similar objectives. The stable strategy is desirable for a firm, which has a smooth sailing and where environment is not excessively hostile.

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This type of strategy is followed by a firm when: there is no deviation from the existing strategy; it goes on serving customers in similar product or service sectors as mentioned in the business charter and; the environment is relatively stable or not much change is expected in it.

The various sub-strategies of the stable strategy include the following

Incremental Growth Strategy : To start with a strategic move, many firms prefer to adopt incremental growth as a strategy, concentrating on one product line at a time, and growing slowly but surely with a strong base to move on.

The objective may be, for instance, to enter new market segments gradually. Nothing is attempted by way of a big leap forward.

New moves are carefully tested in all respects. Such an incremental growth strategy may succeed through effective market segmentation, reducing costs of

Profit Strategy: The profit strategy is also designated as ‘end-game’ strategy. When the objectives of a firm are to generate cash immediately for itself profit strategies are followed. If necessary, the firm forgoes its market share to generate the cash.

Stability as a Pause Strategy : Having achieved a high growth level, some firms may find it difficult to maintain it and thus attempt to set a lower level of growth for the time being until conditions are changing are more propitious. It may be called some sort of a ‘breathing spell’ strategy.

Sustainable growth strategy: This strategy is desirable when external conditions are not favorable for pursuing a growth strategy due to resource constrains. Also there may be other kinds of changes in external conditions when the executives may find growth strategy no longer worthwhile.

Growth or Expansion Strategy

Expansion strategy is followed when an organization substantially broadens the scope of its customer groups, customer functions, and alternative technologies in order to improve its performance.

When a firm increases the level of objectives in terms of market share, sales revenue, etc, new products are added to the existing line, or dissimilar products are taken up for

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production and sale, or business activities are expanded through acquisition, merger, or amalgamation of firms.

In this sense, growth strategy differs from stability strategy in that the former implies exponential growth while the latter implies an extrapolation of growth based on past performance.

The growth strategy can be classified into two sub-category namely, internal growth strategy and external growth strategy.

Internal Growth Strategy: In this strategy, the company will take all necessary effort to grow its business with help of its own resources and effort.

There are two types of internal growth strategies namely, internal growth by increasing sales of the single product or service line and internal growth by diversification.

In internal growth by increasing sales of the single product or service line, the firm increases its level of objective achievement by increasing the sales and profit of its present product or service line. This may be achieved in the following ways;

By expanding sales through increasing primary demand and encouraging new

uses

Expanding sales of product by adopting a different income groups

Expanding sales by adopting a different pricing strategy

Expanding sales to different market segments by producing goods/services,

which, cater to different purposes and personalities

External growth by Merger and Joint Ventures: An external growth strategy is one by which a firm increases its level of objective achievement through mergers, joint ventures and vertical integration.

Merger: A merger is that process by which two of more firms acquire the assets and liabilities of the other in exchange of stock, or cash, or both. It can be two types namely, concentric and conglomerate.

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A concentric merger is one in which two or more firms, which are related by the production process, technology and markets combine.

A conglomerate merger involves the combination of two or more firms not closely related by technology, production process or markets.

Joint Venture: It can take place between two or more firms of the same country or between the firms operating in different countries. As they are formed with a different purpose and have a different rate of success.

Vertical Integration: Vertical integration is a growth strategy characterized by entering or leaving one or more stages in the process of the manufacture and distribution of goods and services.

It may be backward integration or forward integration. Backward integration also known as upstream development, it involves addition to activities to ensure the supply of a firm’s present inputs.

It is aimed at moving lower on the production process scale so that the firm is able to supply its own raw materials or basic components.

Retrenchment Strategy

Retrenchment strategy is followed when an organization substantially reduces the scope of its customer groups, customer functions, or alternative technologies in order to improve its performance.

Retrenchment involves total or partial withdrawal from a customer group, customer function, or use of an alternative technology. Retrenchment strategies may be used on the following circumstances;

Poor performance

Threat to survival

Redeployment resources

Insufficiency of resources

To secure better management and improved efficiency

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There are different ways in which a company may defend its existence and survive, or best serve the interest of owners in the face of internal or external crises.

The variants or sub strategies of retrenchment strategy are turnaround strategy, divestment strategy, and liquidation strategy.

Turnaround Strategy: When an enterprise has been suffering from business losses for a long period because of continued decline in sales, it takes recourse to turnaround strategy to arrest and reverse the decline performance of the business.

This strategy aims at improving the efficiency of the firm by turning around its resources. Reducing assets achieving cost reduction and increasing revenues can bring this about.

There are certain conditions, which point out that a turnaround is needed. These danger signs are; persistent negative cash flow; negative profits; declining market share; deterioration in physical facilities; over-manning, high turnover of employees , and low morale; uncompetitive products or services and mismanagement.

Divestment Strategy: In this approach the firm decides to close down a particular area of business. Such an extreme step is taken when it is found that the particular unit or division or area of business has been suffering loss for a long time and there is no possibility of any improvement in the near future.

Divestment decision should be made carefully. Before taking a final divestment decision it will be appropriate to prepare a profile of environmental opportunities, threats and strategic advantages for each division.

A divestment strategy may be adopted due to various reasons;

A project or business that proves to be unviable in the long-term

Persistent negative cash flows from a business create financial problems for the

whole company, creating the need for divestment.

Technological up-gradation is required if the business is to survive but where it is

not possible for the firm to invest in it.

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Divestment may be done because by selling off a part of business the company

may be in a position to survive

Liquidation strategy: The liquidation strategy may be regarded as a strategy of last resort. It involves selling off or closing down a firm to avoid bankruptcy and securing a better deal for shareholders than running at a loss. Such a decision is taken under the following circumstances:

When the business condition of a firm is perilous and there is no hope of

recovering from the present crises.

The managers may feel the business is at its peak but the future is uncertain and

the firm is unable to see any direction in which it can enter and operate. In such

a situation, they decide to get out of the present line of business.

A firm may be suffering from a business crises and it may not have adequate

resources to get out of the present rut.

When a firm has been faring very badly in the past few years and has

consequently suffered considerable losses and some other firm offers to buy it

for tax consideration or any other reason.

Sometimes a firm may be offered a price higher than it real worth and the

management may be tempted to sell off the business.

Evaluation of Alternatives: After the above steps have been followed, the strategy maker should consider the best one. Quite often only two alternatives are present i.e to follow are not to follow.

In order to examine the best strategy the relative strength and weaknesses should be evaluated with respect to technical feasibility. After analysis of all these factors only the best strategy may be selected.

Selection of Strategy: The identification and evaluation of various alternatives will narrow down the range of policies, which can seriously be considered for choice. Choice

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is deciding the acceptable alternative among the several which fits with the organizational objective.

Normally at this stage, personal values and expectations of decision-maker play an important role in strategy because he will decide the course of action depending on his own likings and disliking.

This happens because in one way, the organizational objectives reflect the personal philosophy of individuals particularly at the top management level.

Implementation: After the Strategy has been chosen, it is put to implementation, which is it is put into action. Choice of Strategy is mostly analytical and conceptual while implementation is operational or putting into action.

Various factors which are necessary for implementation are design of suitable organization structure, developing and motivating people to take up work, designing effective control and information system, allocation of resources etc.,

When these may produce results, which can be compared in the light of objectives set, and control process comes into operation. If the results and objectives differ, a further analysis is required to find out the reasons for the gap and taking suitable actions to overcome the problems because of which the gap exists.

This may also require a change in strategy if there is a problem because of the formulation inadequacy.

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The 7-S-Model

By Dagmar Recklies

The 7-S-Model is better known as McKinsey 7-S. This is because the two persons who developed this model, Tom Peters and Robert Waterman, have been consultants at McKinsey & Co at that time. Thy published their 7-S-Model in their article “Structure Is Not Organization” (1980) and in their books “The Art of Japanese Management” (1981) and “In Search of Excellence” (1982).

The model starts on the premise that an organization is not just Structure, but consists of seven elements:

Skills Style

Strategy Systems

SharedValues

Staff

Structure

www.themanager.org

Those seven elements are distinguished in so called hard S’s and soft S’s. The hard elements (green circles) are feasible and easy to identify. They can be found in strategy statements, corporate plans, organizational charts and other documentations.

The four soft S’s however, are hardly feasible. They are difficult to describe since capabilities, values and elements of corporate culture are continuously developing and changing. They are highly determined by the people at work in the organization. Therefore it is much more difficult to plan or to influence the characteristics of the soft elements. Although the soft factors are below the surface, they can have a great impact of the hard Structures, Strategies and Systems of the organization.

Description

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The Hard S’sStrategy Actions a company plans in response to or anticipation of

changes in its external environment.Structure Basis for specialization and co-ordination influenced primarily

by strategy and by organization size and diversity. Systems Formal and informal procedures that support the strategy and

structure. (Systems are more powerful than they are given credit)

The Soft S’sStyle / Culture The culture of the organization, consisting of two components:

Organizational Culture: the dominant values and beliefs, and norms, which develop over time and become relatively enduring features of organizational life.

Management Style: more a matter of what managers do than what they say; How do a company’s managers spend their time? What are they focusing attention on? Symbolism – the creation and maintenance (or sometimes deconstruction) of meaning is a fundamental responsibility of managers.

Staff The people/human resource management – processes used to develop managers, socialization processes, ways of shaping basic values of management cadre, ways of introducing young recruits to the company, ways of helping to manage the careers of employees

Skills The distinctive competences – what the company does best, ways of expanding or shifting competences

Shared Values / Superordinate Goals

Guiding concepts, fundamental ideas around which a business is built – must be simple, usually stated at abstract level, have great meaning inside the organization even though outsiders may not see or understand them.

Effective organizations achieve a fit between these seven elements. This criterion is the origin of the other name of the model: Diagnostic Model for Organizational Effectiveness.

If one element changes then this will affect all the others. For example, a change in HR-systems like internal career plans and management training will have an impact on organizational culture (management style) and thus will affect structures, processes, and finally characteristic competences of the organization.

In change processes, many organizations focus their efforts on the hard S’s, Strategy, Structure and Systems. They care less for the soft S’s, Skills, Staff, Style and Shared Values. Peters and Waterman in “In Search of Excellence” commented however, that most

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successful companies work hard at these soft S’s. The soft factors can make or break a successful change process, since new structures and strategies are difficult to build upon inappropriate cultures and values. These problems often come up in the dissatisfying results of spectacular mega-mergers. The lack of success and synergies in such mergers is often based in a clash of completely different cultures, values, and styles, which make it difficult to establish effective common systems and structures.

The 7-S Model is a valuable tool to initiate change processes and to give them direction. A helpful application is to determine the current state of each element and to compare this with the ideal state. Based in this it is possible to develop action plans to achieve the intended state.

UNIT 5

Society and Business

Business is an integral part of the social system; and it influences other elements of society, which in turn affect business. The type of products to be manufactured and marketed, the marketing strategies to be employed, the way the business should be organized, are influenced by society.

The social system also on the other hand, is influenced by the way the business functions, innovations, transmission on diffusion of information and new ideas may affect society.

Thus business activities have greatly influenced by social attitudes, values, outlooks, customs, traits, etc. Responsibility of business towards society includes concern for ecology; consumerism; rural development and new projects.

Business may or may not have direct or day-to-day interaction with these interest groups. The well being of society is the well being of business.

Business Ethics

Business ethics is concerned with the relationship of business goals and techniques to specific human needs. It studies the impact of acts on the good of the individual, the firm, the business community and the society as a whole.

In these words of Garrett, ‘business ethics is a study of moral rightness and wrongness of the acts involved in the production, distribution and exchange of economic goods and services’.

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Need for Business Ethics

The need for business ethics, i.e, for a set of generally standards of personal conduct, is evident throughout the world. The legislative representatives establish status and administrative laws in critical areas of inter-personal conduct where the safety and personal welfare on the people can be vitally affected by unethical practices, for furthering ethical practices in business community and professional people, the concept of Professional Codes or Codes of conduct have also assumed great importance. These have been and developed by the trade associations concerned with the following objectives.

Publication of a Code of Ethics is likely to improve the confidence of customers,

clients, employees, etc., in the quality of service they may expect;

Business codes govern the inter-relationships of the members. Business cannot

be carried on without trust in the ethical standards of vendors and suppliers,

financiers and government agencies.

The interest of all those who deal with business the stock holders, employees,

customers, competitors, dealers and suppliers and the local community-need to

be protected from the unethical practices.

The consumer’s right can be saved and served well only when there is some type

of moral binding on the business community

Business today is confronted with various social issues, such as : people oriented

management ecology and environmental protection consumerism and the

energy being inter-related, need that business should feel some obligation for

meeting these issues.

Factors affecting business Ethics

The business executive has to decide what is ethical or unethical. Many factors influence this decision. There are as follows

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Personal code of behavior of Individual: The personal Code of Behavior of the individual is the result of the complex environment that influences one’s life.

The Ethical standards imposed: The ethical code imposed by the superior on the subordinates also influences the morality of behavior. If the superior condones unethical activities such as padding expense accounts, the subordinate is encouraged to look upon this activity as on acceptable practice.

Policies of the company: Standards of behavior in an industry are often influenced greatly by the dominant firms in that industry. Garrett puts this idea when he says” the best protection is the example presented by the conduct of top management and the atmosphere it creates, when leaders are scrupulous, the employees know what is considered right.

When example is supported by explicit policy, the followers have a clear idea of how to translate the example of leaders into action.

Role of Trade Associations in Business Ethics

Trade associations, which are voluntary organizations of businessmen formed to promote their common interest, can play an important role to promote business ethics. Trade associations can promote business ethics in the following ways

Education and persuasion

Code of Ethics

Moral sanctions

Principles of Business Ethics

There are certain principles of business ethics, which are may be stated as below

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Human value grows with the increase in size of business to which it applies. Therefore, the importance and dignity of human labor has not only to be accepted but also practically applied to.

The purpose of all economic activity is to meet consumer needs and to contribute to the well being of the community; for business is not an end in itself but is only a mean to achieve an end.

Therefore, business has to contribute to man’s material happiness and to his mental, moral and spiritual growth.

“Business must be held in trust legally and morally for the benefit of the people whom the business wants to serve”.

Business must be just, efficient and dynamic. Modern business has manifold responsibilities; and the task of management is to ‘reconcile and harmonize these separate and sometimes conflicting responsibilities’.

The social role of business can best be assumed in an atmosphere of freedom into the least possible restraint on healthy and open competition and absence of undesirable restriction or interference from the government.

As such ‘concentration and monopoly have to watched and guarded and wherever necessary dispersed.

Social Responsibility of Business

Business depends on society for existence, sustenance and encouragement. Dependence on society is so complete that as long as the latter wants the former, business has reason to exist. Being so much dependent, business has definite responsibility towards society.

This is popularly known as social responsibility. Every decision the businessman takes and every action he contemplates have social implications.

According to Raymond Bauer, “Social responsibility is seriously considering the impact of the company’s actions on society”.

Social Responsibility Models

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There are two basic approaches to the concept of social responsibility. The first concept on the micro level analysis, try to show individual companies how they can be more socially responsive.

On the other hand, the macro level of analysis, assuming that the government, not individual companies should establish a country’s social goals.

ACKERMAN’S MODEL: Ackerman described three phase through which companies commonly tend to pass in developing a response to social issues.

In Phase – 1: At this state, no one asks the company to deal with it. The chief executive officer merely acknowledges the problems by making a written or oral statement of the company’s policy towards it.

In Phase – 2: the company hires staff specialists to study the problem and to suggest ways of dealing with it. Company has limited itself to declaring its intentions and formulating its plans.

Phase – 3 : The company integrates the policy into its ongoing operations. Unfortunately, implementation often comes slowly and often not until the government or public opinion forces the company to act.

Ackerman thus advices that, the management should act early in the life cycle of any social issue in order to enjoy the largest amount of managerial discretion over the outcome.

ORGANIZATIONAL PHASES OF ORGANIZATIONAL INVOLVEMENT

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LEVEL PHASE -1 PHASE -2 PHASE -3Chief Executive Issue: Corporate

obligation Action: Write and communicate policyOutcome: Enriched purpose, increased awareness

Obtain knowledge. Add staff specialists

Obtain organizational commitment. Change performance expectations.

Staff Specialists Issue: Technical problems.Action: Design data system and interpret environment.Outcome: Technical and infrastructural groundwork.

Provide response from operating units. Apply data system to performance measurement.

Division Management

Issue: Management problem.Action: Commit resources and modifyOutcome: Increased responsiveness.

CARROLL’S FOUR-PART MODEL

Archie B. Carrol has promulgated the four-part model. The model suggests that business firms are basically an economic activity; its primary responsibility is economic. It mist produce the goods that society wants and must sell them at a profit. Legal responsibilities are also basic.

Firms should operate within the law. In this model, ethical responsibilities refer to behavior by the firm that is expected by society. The category of discretionary responsibilities encompasses voluntary activities undertaken for the public good.

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Specific discretionary activities are not mandated by law nor demanded by public opinion. However, more and more frequently business are expected to get involved in these of activities.

Economic Responsibilities

LegalResponsibilities

EthicalResponsibilities

Discretionary Responsibilities

TOTAL SOCIAL RESPONSIBILITIES

Dimensions of Social Responsibilities

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Social Audit

Business unit has obligations to its employees, owners, buyers, government and environment. The question now is how to assess the performance of a particular business unit.

The answer is ‘social audit’. The social audit is an approach for monitoring, appraising and measuring the social performance of business. Kreps may regarded as the founding father of the idea.

He included among these measurements; employment, production, consumer effort commanded, consumer funds absorbed, pay rolls and dividend and interest. The basic purpose of a business is to maximize the financial return earned on its financial investment plus the amount of social return on its social investment.

To make rational investment decisions in the social area it is necessary to know what the social returns are, and if we are to assess them by the same measures as for financial investment, these must be expressed in monetary terms.

A social audit is a systematic study and evaluation of an organization’s social performance, as distinguished from its economic performance. It is concerned with the possible influence on the social quality of life instead of the economic quality of life.

Social audit leads to a report on the social performance of a business unit. It is the evaluation or assessment of a company’s performance against planned goals in the area of social responsibility.

The internal and external bodies may carry out the assessment, different people have interpreted the term social audit differently.

To some it means the public disclosure of a company’s social responsibility and to some others social audit is a comprehensive evaluation of the way a company discharge all its responsibilities to shareholders, customers, and employees and to the wider community.

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Features of Social Audit

The nature of social audit can be made clearer if we bring out its salient features.

Social audit include any activity : Social audit include any activity which has a significant social impact, such as activities affecting environmental quality, consumerism, opportunities for women and other disadvantages people in society and similar others.

Difficult to audit : Social performance is difficult to audit because most of the results of social activities occur beyond the company’s gate and the company has no means of securing data on the result.

Even if data are available it is difficult to establish how of them have occurred due to company’s actions.

Social audit use both qualitative and quantitative data: social audits use both qualitative and quantitative data. The pressure to use quantitative approach is strong because of objectivity.

Quantitative data are precise and convincing, but in the area of social philosophy and human values it is misleading to report only in quantitative terms.

Assessing organizational commitments to society : Social audit determine only what an organization is doing in social areas, not the amount of social good that results from these activities. It is process audit rather than an audit for results.

Objectives of Social Audit

Because of the differing view about social audits, they have multiplied motives, which include, increasing the wisdom of social programmes, improving public relations, and enhancing the credibility of the business.

The particular issues are minority employment, pollution/environment, working conditions, community relations and consumerism issues.

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The following are the objectives of the responsible company

The extension, development and improvement of business and the building up of

its financial independence

The payment of fair and regular dividends to the shareholders

The payment of fair wages and bonus to the workers

The reduction of price to the consumers

To assist in promoting the amenities of the locality

Benefits of Social Audit

The benefits of social audit are as follows;

Social audit enables the company to take close look at itself and understand how

for the company has lived up to its social objectives.

The social audit encourages greater concern for social performance throughout

the organization.

Social audit provides data for comparing effectiveness of the different types of

programmes.

Social audit provides cost data on social programmes so that management can

relate the data to budgets, available resources, company’s objectives and

projected benefits of programmes.

Social audit provides information for effective response to external claimants that make demand on the organization.

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