Chapter 1

Strategic HRM: Pulak Das 1

Significance of Strategic Planning for Business success

Lecture slide for Chapter 1


Objective

• To Understand the meaning of a business organization and how environmental forces compel it to plan its actions well in advnace.


What is a business organization?

• An assembly of people who all volunteered to work together;

• Any difference from other types of organization e.g. local neighborhood club?– Contract of different members are different ?– Driven by the goal of creating more wealth out

of limited wealth.


How does an organization create wealth?

Markets for inputs

Businessorganizations

Markets foroutputs


Business organization as a system

• It takes in goods and services from one market and transform them into some other form and delivers that to another group of people.

• System: – It is called a system because it shows very similar

behavior like a machine such as a petrol engine of a car that runs even when the driver is not in his/her sit or the wrist watch on your hand which runs even when you are not wearing it. It is called a system because all its members are expected to behave in a particular way.


Sources of a business organization’s efficiency

• Pre-determined behavior of all its members;

• Because it is located close to the customer, it generates goods that are liked by the customers;

• It is driven by a very well recognized and visible goal of creating financial wealth.


What is Business Success ?• Traditional measures: Surplus fund generated

per unit of asset of related investment in the firm.• One can use many other measures for

evaluating the success of a firm e.g. Ratio of total employment to asset, ratio of revenue to asset etc.

• No matter what measure of success one uses, an organization’s success would depend on many forces operating in the environment from where it procures and sells its goods and services.


Efficiency and Governance• In a business organization, there are two types of

members; the owners and the employees;• The owners provide initial capital for forming the

organization and the employees provide service to run it;• Employees are hired on a fixed contract and they are

paid their dues first;• Once the employees’ due are paid the rest of the wealth

are distributed to the owners or the share holders.• This is the rule of capitalist system • The employees are in a better position when it does not

generate much wealth while share holders benefit more when it does well.


Efficiency and Governance rule

Organizationalwealth

Members share(First right)

Owners share(Residual)


How the success of a business organization could get affected?

• If it is unable to keep people working for it because of poor internal governance policy;

• If it is unable to find goods in its inputs side;• If it is unable to sell the goods produced by it;• If Govt. and public concern for its actions places extra

burden on its operation.• If others have found superior means to reach out the

customers.• The most important factors that can affect the

success of an organization is through appearance of discontinuity in any of the environmental forces.

• Why?


Driving on a smooth road


Driving on a rough road


What is a strategy ?• Strategy is a set of intended actions e.g.

– Building a new plant or closing an existing one;– Expanding one’s distribution network;– Acquisition of new business or selling off an existing business;– Launching of new products;– Going into new markets;– Expanding or contracting manpower in a selected division or

dept.• Many of these decisions are taken with incomplete

information about the state of the world. • But for some companies and industries these issues are

becoming very critical now. Why ?


Forces in the Environment

Businessorganization

Technologicalforces Social forces

Industrialcompetition

Regulatoryforces


Regulatory forces• A broad framework of rules usually made by the

Govt. of the day to ensure that business transactions between different parties are fair and free from opportunism, exploitation and discrimination.

• These rules are applicable across organizations within an industry or across all industries. These may include industry policies for prioritizing investment, environment protection policy, labor regulations, trade policy between countries etc.


Areas of concern Due to Change in Regulatory Forces

• Economic liberalization;• Protection of consumer rights;• Environmental protection laws;• Govt. tax policy in annual budget: Value added

tax, excise exemption, tariff policy;• WTO regulation and patent law change;• A change in labor regulations.• Spot an important source of discontinuity in

a company you worked or you know.


Vignette 1.1

• Cost of bending the rule:– In 2009 May, there was news that European

Commission penalized Intel Corporation to the tune of $1.45 billion for their practice of paying secret payment and rebate to Chip users in Europe so that they do not use chips from a competitor names Advanced Micro device. This practice they were following for a long period. The penalty was about 4% of Intel’s world wide sales turnover.


Vignette 1.2• Global Crisis

– Duplication of development models of the West is likely to face a crisis of running out of environmental resources not just at a country level but at a global level. Global warming due to progressive accumulation of greenhouse gases in the atmosphere is staring on the face of many industries. There is likely to be more international restrictions and regulations on how common resources of humanity could be used and abused by different countries.


Vignette 1.3• Business in a regulated space:

– Kyoto Protocol demand 5.2% reduction in emission of greenhouse gases over there level in 1990 for industrialized countries.

– Any industrial house that takes measure to reduce its carbon dioxide emission by one tonne in a year will get credit of one unit of carbon emission reduction units (CER). This CER can be exchanged with other companies who has no choice but to use high global warming gas emission technology. There was news that ITC in 2007 ITC got 140,000 carbon credits through their forestry and use of other energy saving technology in their existing plants.


Social Forces

• Society and its members interact with a business as– Customers for its goods and services;– As suppliers of parts, components, and

services;– As employees;– As members of various Govt. agents.


Sources of change for social forces

• Educational composition of the customers;• Demography of a country;• Culture of the society.• Political process of the society;


Consumer Income, Education and awareness of customer rights

• High income and education raise demand for fairness in market;

• High income and education also increases volatility of demand;

• Demand for quality product increases with increasing level of education and income.

• Consumer court and consumer right movement are some of the outcomes of these developments.


Some potential changes of the social forces

• 1. Slowing down of population growth rates; • Annual growth rates• 1981 1991 2001• 2.22% 2.14% 1.93%• Life Expectancy at birth• 1981 1991 2001• Male• 54.1 Y 59Years 62.3years• Female• 54.7 years 59.7Years 65.3 Years• Question: Why population growth rate could be a source of

opportunity or threat.• 2. Demographic characteristics and demand for goods and

services.• 3. Demography and manpower supply.• 4. Demography and population burden from retired population.


Population distribution by age range

• Age Group (male) 1991 (%) 2001• 0-9 25.7 23.3• 10-19 21.85 23.3• 20-29 16.4 16.8• 30-39 13.1 13.9• 40-49 9.7 10.2• 50-59 6.5 6.5• 60+ 6.67 6.93• 60+ in Japan 25%, Germany 25%, UK 22%, US

17%


Culture and Human Behavior• What is culture ?

– Inter-personal exchange that are not contract driven are guided by culture or commonly accepted code of conduct. It can also be a characteristics of social contracts.

Culture affects some of these areas• Demand for services:

– Lack of prior experience of similar services can make it harder to create demand for education, preventive healthcare, organized banking, insurance, cosmetic products.

Manpower service–permitted vs non-permitted

• Importance of informal contracts: – Informal contract may be flexible to accommodate contingency or no flexibility.

• Value system: Eastern vs Western value: – what drives people to work hard. – Intrinsic vs extrinsic rewards


Political Process as a force of instability

• A very unstable Government can be a force of high instability in the economic environment because of its effect on regulations.

• Do social forces has anything to do with this instability?

• A heterogeneous society and limited economic space may throw up lots of varieties of political forces which may have the potential to create high level of political instability.


Social forces and its effects

• Which kind of companies are more vulnerable to such slow change in social forces?

• Identify any important change in social forces which may create serious problems for the company you worked or planning to take employment after graduation.


Industry Level Competition• Economic liberalization and change in structure of industry• Vanishing industrial boundary• IT and Computer got merged; banking and insurance are getting merged; Railway and hotel

industry are coming closer.• Merger and acquisition and change in nature of competitors

– After Jet Airways acquired Sahara its market share jumped to 55%• Joint Venture and Strategic alliance

– In 2006 there was news that Corporation Bank, Indian Bank and Oriental Bank of Commerce were going to share infrastructural resources in the area of IT, E-payment system, joint training and international ventures.

• Overcrowding by domestic based company: – Pressure on factor market; raw materials manpower and other resources; Pressure on product market: lower

margin• International competition: Entry of MNC

– International fund transfer, technology, quality, higher staying power in the face of low profitability, high expenditure on product promotion.

– In 2005, Korean steel major Posco signed MOU with Orissa Govt. for building a steel plant there. Immediately, there was news of capacity expansion move by tata Steel, SAIL, Essar, Ispat, Jindal and Vijaynagar Steel. But the operating cost of Posco was far less than those of others. SAIL needs 10,000 operators for a million tonne plant, Tata uses 40000 for a 4 million tonne plant but Posco uses 14000 for a 30 million tonne plant.

• How can a discontinuity appear from a change in these areas ?


Technological Change• Technology and fast diminishing product life cycles;

– Computers and many other technology intensive products are becoming obsolete at a faster and faster rate.

• Product Standardization and Organizational size– Size of Manufacturing organizations are becoming smaller and smaller.

• New Product with better appeal to customers;– Entry of mobile phone sealed the fate of land-line phone business.– Entry of flat screen technology in TV business is posing serious danger to the CRT

picture tube business. • Widespread use of IT;

– By using IT, one can manage business with fewer employees. Example: banks branch may not require that many employees to run.

• Change in manufacturing technology: – integrated manufacturing is bringing down the size of company and raising the level of

minimum skill required from the operators;• Innovation in business practice:

– Product innovation, service innovation and innovation in business process.• Could you spot any recent discontinuous change in the technological

environment of your past employer?


Key learning • A business organization is an assembly of many people.

Its success depend how well it can manage its relations with the changing environment in which it has decided to do its business. There are four types of forces in the business environment of an organization viz. technological opportunities and threats, other industries and companies, social forces, and regulatory forces. These environmental forces are not static but are changing constantly. A strategic or future oriented plan is required to position one’s company and business in such a way that the stress from these changes are minimal.


Questions - 1

• A few years back when Govt. tried to introduce value added tax, it was vehemently opposed by small business houses but not big business organizations. Why?


Question-2

• There was news that since 1990s, Indian Revenue service was loosing its talent pool of officers at a fast rate. What could be the reasons for such exodus of IRS officers?


Question-3

• In 2005, there was news that UK Govt. was changing the pension rule that led to huge protests by Govt. employees e.g. school teachers, health workers, transport workers etc. As per old rule one was eligible for pension if retired at the age of 60 years. According to new rule, one would be eligible for pension only if the age of retirement plus years of service add up to 85 or more. What do you think, prompted the Govt. to go for such policy?

Chapter 1

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