Development of Business Policy
1. Environmental Scanning:
Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation. Its purpose is to identify strategic factors those external and internal elements that will determine the future of the corporation.
The simplest way to conduct environmental scanning is through SWOT analysis. SWOT is an acronym used to describe those particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company.
The external environment consists of variables (Opportunities and Threats) that are outside the organization and not typically within the short-run control of top management. These variables form the context with which the corporation exists.
The internal environment of a corporation consists of variables (Strengths and Weaknesses) that are with the organization itself and are not usually within the short-run.
Control of top management. These variables form the context in which work is done. They include the corporation’s structure, culture, and resources. Key strengths form a set of core competencies that the corporation can use to gain competitive advantage.
2. Policy Formulation:
Policy formulation is the development of long-range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies, and setting policy guidelines.
An organization’s mission is the purpose or reason for the organization’s existence. It tells what the company is providing to society, either a service like house cleaning or a product like automobiles. A well-conceived mission statement defines the fundamental, unique purpose that sets a company apart from the other firms of its type and identifies the scope of the company’s operations in terms of products (including services) offered and markets served.
It may also include the firm’s philosophy about how it does business and treats its employees. It puts into words not only what the company is now, but also what it wants to become management’s strategic vision of the firm’s future. (Some people like to consider vision and mission as two different concepts.
A mission statement describes what the organization is now; a vision statement describes what the organizations would like to become. We prefer to combine these ideas into a single mission statement).
The mission statement promotes a sense of shared expectations in employees and communicates a public image to important stakeholder groups in the company’s task environment. It tells who we are and what we do as well as what we’d like to become.
One example of a mission statement is that of TTK Groups:
To improve the quality of home life by designing building, marketing and servicing the best appliances in the world.
A mission may be defined narrowly or broadly in scope. An example of a broad mission statement is that used by many corporations. Serve the best interests of shareowners, customers, and employees.
A broadly defined mission statement such as this keeps the company from restricting itself to one field or product line, but it fails to clearly identify either what it makes or which product/markets it plans to emphasize. Because this broad statement is so general, a narrow mission statement, such as the receding one by TTK appliances is more useful.
A narrow mission very clearly states the organization’s primary business, but it may limit the scope of the firm’s activities in terms of product or service offered, the technology used, and the market served. Instead of just stating it is a “railroad,” a company might be better calling itself a “transportation company.”
Objectives are the end results of planned activity. They state what is to be accomplished by when and should be quantified if possible. The achievement of corporate objectives should result in the fulfillment of a corporation’s mission. In effect, this is what society gives back to the corporation when the corporation does a good job of fulfilling its mission.
Robert, Chairman of Deere & Company, the world’s largest maker of farm equipment, uses the phrase “double and double again” to express ambitious objectives for the company. “It gives us a sense that we’re on the move,” explained Robert.
For example, the Deere’s current objectives is to double the market value (number of shares multiplied by stock price) of the company (8 crore in 2000) to 16 crore and then to double it again to 32 crore over 10 years.
Similarity the sales objective is to have sales (13 crore in 2000) double and double again over the next 10 years.
The term ‘goal’ is often used interchangeably with the term ‘objective’. In this paragraph, we prefer to differentiate the two terms. In contrast to an objective, we consider a goal statement of what one wants to accomplish with no quantification of what is to be achieved and no time criteria for completion.
For example, a simple statement of “increased profitability” is thus a goal, not an objective, because it does not state how much profit the firm wants to make the next year. An objective would say something like, “increase profits 10% over last year.”
Some of the areas in which a corporation might establish its goals and objectives are:
- Profitability (net profits)
- Efficiency (low costs, etc.)
- Growth (increase in total assets, sales, etc.)
- Shareholder wealth (dividends plus stock price appreciation)
- Utilization of resources (return on investment or equity)
- Reputation (being considered a ‘top’ firm)
- Contributions to employees (employment security, wages, diversity)
- Contributions to society (taxes paid, participation in charities, providing a needed product or service)
- Market leadership (market share)
- Technological leadership (innovations, creativity)
- Survival (avoiding bankruptcy)
- Personal needs of top management (using the firm for personal purposes, such as providing jobs for relatives).
A strategy of a corporation forms a comprehensive master plan stating how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage. For example, after Rockwell International Corporation realized that it could no longer achieve its objectives by continuing with its strategy of diversification into multiple lines of businesses, it sold its aerospace and defence units to Boeing. Rockwell instead chose to concentrate о commercial electronics; an area that management felt had greater opportunities for growth.
The typical business firm usually considers 3 types of strategy:
Corporate, Business and Functional.
- Corporate Strategy describes a company’s overall direction in terms of its general attitude towards growth and the management of its various businesses and product lines. Corporate strategies typically fit within the 3 main categories of stability, growth strategy by acquiring other appliance companies in order to have a full line of major home appliances.
- Business Strategy usually occurs at the business unit or product level, and it emphasizes improvement of the competitive position of a corporation’s products or services in the specific industry or market segment served by that business units.
Business strategies may fit within the two overall categories of competitive or cooperative strategies. For example, Apple Computer uses a differentiation competitive strategy that emphasizes innovative products with creative design.
The distinctive design and colours of its iMac line of personal computers (when contrasted with the usual beige of the competitor’s products) has successfully boosted the company’s market share and profits. In contrast British Airways followed a cooperative strategy by forming an alliance with American Airlines in order to provide global service.
- Functional Strategy is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.
Examples of R&D functional strategies are technological follower ship (imitate the products of other companies) and technological leadership (pioneer an innovation). For years, Magic Chef had been a successful appliance maker by spending little on R&D but by quickly imitating the innovations of other competitors.
This helped the company to keep its costs lower than its competitors and consequently to compete with lower prices. In terms of marketing functional strategies. Procter & Gamble is masters of marketing “pull” the process of spending huge amounts on advertising in order to create customer demand. This supports P&G’s competitive strategy of differentiating its products from its competitors.
Business firms use all 3 types of strategy simultaneously. A hierarchy of strategy is the grouping of strategy types by level in the organization. This hierarchy of strategy is a nesting of one strategy within another so that they complement and support one another. Functional strategies support business strategies, which, in turn, support the corporate strategies.
Just as many firms often have no formally stated objectives, many firms have unstated, incremental or intuitive strategies that have never been articulated or analyzed. Often the only way to sot a corporation’s implicit strategies are to look not at what management says, but at what it does.
Implicit strategies can be derived from corporate policies; programs approved (and disapproved), and authorized budgets. Programs and divisions favored by budget increases and staffed by managers who are considered to be on the fast promotion track reveal where the corporation is putting its money and its energy.
A policy is a broad guideline for decision-making that links the formulation of strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives and strategies.
For example, consider the following company policies:
Cannibalize our product line (undercut the sales of your current products) with better products before a competitor does it to you. (This supports Intel’s objective of market leadership.)
GE must be number 1 or 2 wherever it competes. (This supports GE’s objective to be number 1 in market capitalization.)
Researchers should spend 15% of their time working on something other than their primary project. (This supports 3M’s strong product development strategy.)
Policies like these provide clear guidance to managers throughout the organization.
3. Policy Implementation:
Policy implementation is the process by which strategies and policies are put into action through the development of programs, budgets, and procedures. This process might involve changes within the overall culture, structure, and /or management system of the entire organization.
Except when such drastic corporate-wide changes are needed, however, the implementation of strategy is typically conducted by middle and lower level managers with review by top management. Sometimes referred to as operational planning, strategy implementation often involves day-to-day decisions in resource allocation.
A program is a statement of the activities or steps needed to accomplish a single-use plan. It makes the strategy action oriented. It may involve restructuring the corporation, changing the company’s internal culture, or beginning a new research effort. For example, consider Intel Corporation, the microprocessor manufacturer.
Realizing that Intel world not be able to continue its corporate growth strategy without the continuous development of new generations of microprocessors, management decided to implement a series of programs:
- They formed an alliance with Hewlett-Packard to develop the successor to the Pentium Prochip.
- They assembled an elite team of engineers and scientists to do long-term, original research into computer chip design.
Another example is FedEx Corporation’s program to install a sophisticated information system to enable its customers to track their shipments at any point in time. FedEx thus installed computer terminals at 100,000 customers and gave proprietary software to another 650,000 so shippers could label much of their own packages.
A budget is a statement of a corporation’s programs in terms of money. Used in planning and control, a budget lists the detailed cost of each program. Many corporations demand a certain percentage return on investment, often called a ’’hurdle rate,” before management will approve a new program.
This ensures that the new program will significantly add to the corporation’s profit performance and thus build shareholder value. The budget thus not only serves as a detailed plan of the new strategy in action, but also specifies through pro forma financial statements the expected impact on the firm’s financial future.
Procedures, sometimes termed Standard Operating Procedures (SOP), are a system of sequential steps or techniques that describe in detail how a particular task or job is to be done. They typically detail the various activities that must be carried out in order to complete the corporation’s programs.
For example, Delta Airlines used various procedures to cut costs. To reduce the number of employees, Delta asked technical experts in hydraulics, metalworking, avionics, and other trades to design cross-functional works teams.
To cut marketing expenses, Delta instituted a cap on travel agent commissions and emphasized sales to bigger accounts. Delta also changed its purchasing and food service procedures.
4. Evaluation and Control:
Evaluation and control is the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance. Managers at all levels use the resulting information to take corrective action and resolve problems.
Although evaluation and control is the final major element of strategic management, it also can pinpoint weaknesses in previously implemented strategic plans and thus stimulate the entire process to begin again.
Performance is the end result of activities. It includes the actual outcomes of the strategic management process. The practice of strategic management is justified in terms of its ability to improve an organization s performance, typically measured in terms of profits and return on investment.
For evaluation and Control to be effective, managers must obtain clear, prompt and unbiased information from the people be low them in the corporation s hierarchy. Using this information, managers compare what is actually happening with what was originally planned in the formulation stage.
The evaluation and control of performance completes the strategic management model. Based on performance results, management may need to make adjustments in its strategy formulation, in implementation, or in both.