Strategy Implementation and Evaluation PDF

CHAPTER a 5 STRATEGY IMPLEMENTATION AND EVALUATION LEARNING OUTCOMES After studying this chapter, you will be able to: ♦ Describe the process of Strategy Management: From Formulation to Implemen...

CHAPTER a 5 STRATEGY IMPLEMENTATION AND EVALUATION LEARNING OUTCOMES After studying this chapter, you will be able to: ♦ Describe the process of Strategy Management: From Formulation to Implementation ♦ Evaluate the salience of strategy implementation. ♦ Explain Strategic Change through Digital Transformation ♦ Differentiate between Organisation Structure (hard) and Culture (soft) ♦ Signify the meaning and importance of Strategic Leadership ♦ Discuss the role of Strategic Control ♦ Identify and Classify Strategic Performance Measures “Effective leadership is not about making speeches or being liked; leadership is defined by results not attributes”. - Peter Drucker “A leader is one who knows the way, goes the way, and shows the way” - John Maxwell © The Institute of Chartered Accountants of India  a 5.2 STRATEGIC MANAGEMENT CHAPTER OVERVIEW Interrelationship between Strategy Formulation and Strategic Strategic Implementation Performance Change Measures through Digital Transformation Strategy Implementation and Evaluation Organisation Strategic Structure Control (hard) and Culture (soft) Strategic Leadership 5.1 INTRODUCTION Strategy implementation and evaluation are critical phases of the process of strategic management in an organization. Implementation involves putting the plans and initiatives developed as part of the strategy into action, while evaluation refers to the process of measuring and assessing the effectiveness of these actions. In this chapter, we will explore various implementation and evaluation methods that organizations can use to assess the success of their strategy implementation and identify areas for improvement. This chapter will provide a comprehensive overview of the implementation and evaluation process and equip readers with the knowledge and skills needed to effectively execute and assess their organization's strategies. To begin with an overview of the process of strategic management is provided in the next section. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.3 a 5.2 STRATEGIC MANAGEMENT PROCESS The process of developing an organisation’s strategy is quite methodical. The organisation first develops a clear vision, mission, values and goals. They then must then discuss and analyse a number of themes to determine which options are most promising. All these aspects come together in a strategic plan that details the organisation’s vision, mission, values, goals, strategic themes, a high-level implementation plan and key performance measures. The key performance measures are included in the strategic plan and are used to link the themes back to the organisation’s goals and to measure the success of the strategy after it is implemented. The strategic management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, a shift in the economy could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objectives could require a change in policy; or a major competitor’s change in strategy could require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semi-annually. The strategic management process never really ends. Environmental Analysis Develop Vision, Generate, Strategic Implement Mission and Analyse and Evaluation and Strategies Objectives Select Strategies Control Organisation Appraisal Formulation Implementation Evaluation Figure: Strategic Management Model (Fred R David) © The Institute of Chartered Accountants of India  a 5.4 STRATEGIC MANAGEMENT The strategic management process can best be studied and applied using a model. Every model represents some kind of process. The model illustrated in the Figure: Strategic Management Model (Fred R David) is a widely accepted, comprehensive. This model like any other model of management does not guarantee sure-shot success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic management process are shown in the model. In practice, strategists do not go through the process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of an organisation. The process essentially is iterative and involves a lot of back-and-forth considerations across different stages in the strategic management process. Many organisations conduct formal meetings semi-annually to discuss and update the firm’s vision/mission, opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and performance. Creativity from participants is encouraged in meeting. Good communication and feedback are needed throughout the strategic management process. 5.2.1 Stages in Strategic Management Crafting and executing strategy are the heart and soul of managing a business enterprise. But exactly what is involved in developing a strategy and executing it proficiently? And who besides top management has strategy – formulation – executing responsibility? Strategic management involves the following stages: 1. Developing a strategic vision and formulation of statement of mission, goals and objectives. 2. Environmental and organisational analysis. 3. Formulation of strategy. 4. Implementation of strategy. 5. Strategic evaluation and control © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.5 a Stage 1: Strategic Vision, Mission and Objectives First a company must determine what directional path the company should take and what changes in the company’s product – market – customer – technology – focus would improve its current market position and its future prospect. Deciding to commit the company to one path versus other pushes managers to draw some carefully reasoned conclusions about how to try to modify the company’s business makeup and the market position it should carve out. Top management’s views and conclusions about the company’s direction and the product-customer-market- technology focus constitute a strategic vision for the company. A strategic vision delineates management’s aspirations for the organisation and highlights a particular direction, or strategic path for it to follow in preparing for the future and molds its identity. A clearly articulated strategic vision communicates management’s aspirations to stakeholders and helps steer the energies of company personnel in a common direction. Mission and Strategic Intent: Managers need to be clear about what they see as the role of their organisation, and this is often expressed in terms of a statement of mission. This is important because both external stakeholders and other managers in the organisation need to be clear about what the organisation is seeking to achieve and, in broad terms, how it expects to do so. At this level, strategy is not concerned with the details of SBU competitive strategy or the directions and methods the businesses might take to achieve competitive advantage Rather, the concern here is overall strategic direction. Corporate goals and objectives flow from the mission and growth ambition of the corporation. Basically, they represent the quantum of growth the firm seeks to achieve in the given time frame. They also endow the firm with characteristics that ensure the projected growth. Through the objective setting process, the firm is tackling the environment and deciding the focus it should have in the environment. The objective provides the basis for major decisions of the firm and also help the organisational performance to be realized at each level. The managerial purpose of setting objectives is to convert the strategic vision into specific performance targets – basically the results and outcomes the management wants to achieve - and then use these objectives as yardsticks for tracking the company’s progress and performance. © The Institute of Chartered Accountants of India  a 5.6 STRATEGIC MANAGEMENT Ideally, managers ought to use the objective-setting exercise as a tool for truly stretching an organisation to reach its full potential. Challenging company personnel to go all out and deliver big gains in performance pushes an enterprise to be more inventive, to exhibit some urgency in improving both its financial performance and its business position, and to be more intentional and focused in its actions. Objectives are needed at all organisational levels. Objective setting should not stop with top management’s establishing of companywide performance targets. Company objectives need to be broken down into performance targets for each separate business, product line, functional department, and individual work unit. Company performance can’t reach full potential unless each area of the organisation does its part and contributes directly to the desired companywide outcomes and results. This means setting performance targets for each organisation unit that support-rather than conflict with or negate-the achievement of companywide strategic and financial objectives. Stage 2: Environmental and Organisational Analysis This stage is the diagnostic phase of strategic analysis. It entails two types of analysis: 1. Environmental scanning 2. Organisational analysis The external environment of a firm consists of economic, social, technological, market and other forces which affect its functioning. The firm’s external environment is dynamic and uncertain. So, the management must systematically be analysed various elements of environment to determine opportunities and threats for the firm in future. Organisational analysis involved a review of financial resources, technological resources, productive capacity, marketing and distribution effectiveness, research and development, human resource skills and so on. This would reveal organisational strengths and weaknesses which could be matched with the threats and opportunities in the external environment. This would provide us a framework for SWOT analysis (Strength, Weakness, Opportunity and Threat) which could be in © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.7 a the form of a table highlighting various strengths and weaknesses of the firm and opportunities and threats which the environment we create for the firm. Stage 3: Formulating Strategy The first step in strategy formulation is developing strategic alternatives in the light of organisation strengths and weaknesses, and opportunities and threats in the environment. The second step is the deep analysis of various strategic alternatives for the purpose of choosing the most appropriate alternative which will serve as the strategy of the firm. A company may be confronted with several alternatives such as: i. Should the company continue in the same business carrying on the same volume of activities? ii. If it should continue in the same business, should it grow by expanding the existing units or by establishing new units or by acquiring other units in the industry? iii. If it should diversify, should it diversify into related areas or unrelated areas? iv. Should it get out of an existing business fully or partially? The above strategic alternatives may be designated as stability strategy, growth/expansion strategy and retrenchment strategy. A company may also follow a combination of these alternatives called combination strategy. Stage 4: Implementation of Strategy Implementation and execution are an operations-oriented activity aimed at shaping the performance of core business activities in a strategy-supportive manner. It is the most demanding and time-consuming part of the strategy- management process. To convert strategic plans into actions and results, a manager must be able to direct organisational change, motivate people, build and strengthen company competencies and competitive capabilities, create a strategy- supportive work climate, and meet or beat performance targets. In most situations, strategy-execution process includes the following principal aspects: ♦ Developing budgets that steer ample resources into those activities critical to strategic success. © The Institute of Chartered Accountants of India  a 5.8 STRATEGIC MANAGEMENT ♦ Staffing the organisation with the needed skills and expertise, consciously building and strengthening strategy-supportive competencies and competitive capabilities and organising the work effort. ♦ Ensuring that policies and operating procedures facilitate rather than impede effective execution. ♦ Using the best-known practices to perform core business activities and pushing for continuous improvement. ♦ Installing information and operating systems that enable company personnel to better carry out their strategic roles day in and day out. ♦ Motivating people to pursue the target objectives energetically. ♦ Creating a company culture and work climate conducive to successful strategy implementation and execution. ♦ Exerting the internal leadership needed to drive implementation forward and keep improving strategy execution. When the organisation encounters stumbling blocks or weaknesses, management has to see that they are addressed and rectified quickly. Good strategy execution involves creating strong “fits” between strategy and organisational capabilities, between strategy and the reward structure, between strategy and internal operating systems, and between strategy and the organisation’s work climate and culture. Stage 5: Strategic Evaluation and Control The final stage of strategic management process – evaluating the company’s progress, assessing the impact of new external developments, and making corrective adjustments – is the trigger point for deciding whether to continue or change the company’s vision, objectives, strategy, and/or strategy-execution methods. So long as the company’s direction and strategy seem well matched to industry and competitive conditions and performance targets are being met, company executives may decide to stay the course. Simply fine-tuning the strategic plan and continuing with ongoing efforts to improve strategy execution are sufficient. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.9 a But whenever a company encounters disruptive changes in its external environment, questions need to be raised about the appropriateness of its direction and strategy. If a company experiences a downturn in its market position or shortfalls in performance, then company managers are obligated to ferret out whether the causes relate to poor strategy, poor execution, or both and then to take timely corrective action. A company’s direction, objectives, and strategy have to be revisited anytime external or internal conditions warrant. It is to be expected that a company will modify its strategic vision, direction, objectives, and strategy over time. Proficient strategy execution is always the product of much organisational learning. It is achieved unevenly – coming quickly in some areas and proving nettlesome and problematic in others. Periodically assessing what aspects of strategy execution are working well and what needs improving is normal and desirable. Successful strategy execution entails vigilantly searching for ways or continuously improve and then making corrective adjustments whenever and wherever it is useful to do so. 5.2.2 Strategy Formulation Corporate Strategy Planning entails choosing what has to be done in the future (today, next week, next month, next year, over the next couple of years, etc.) and creating action plans. An essential element of effective management is adequate planning. Choosing a path of action to achieve defined goals is a part of planning. The game plan that really directs the company towards success is called “corporate strategy”. Planning may be operational or strategic. Senior management develops strategic plans for the entire organisation after evaluating the organization's strengths and weaknesses in light of potential possibilities and dangers in the outside world. They involve gathering and allocating resources in order to achieve organisational goals. But operational plans on the other hand are made at the middle and lower-level management. They provide specifics on how the resources are to be used effectively to achieve the goals. © The Institute of Chartered Accountants of India  a 5.10 STRATEGIC MANAGEMENT Corporate Strategy Strategic planning Operational planning Characteristics of Characteristics of Strategic planning Operational planning Shapes the organisation and its Deals with current deployment resources. of resources. Assesses the impact of Develops tactics rather than environmental variables. strategy. Takes a holistic view of the Projects current operations into organisation. the future. Develops overall objectives and Makes modifications to the strategies. business functions but not Is concerned with the long-term fundamental changes. success of the organisation. Is the responsibility of Is a senior management functional managers. responsibility. Strategic Planning: The game plan that really directs the company towards success is called “corporate strategy”. The success of the company depends on how well this game plan works. Because of this, the core of the process of strategic planning is the formation of corporate strategy. The formation of corporate strategy is the result of a process known as strategic planning. ♦ Strategic planning is the process of determining the objectives of the firm, resources required to attain these objectives and formulation of policies to govern the acquisition, use and disposition of resources. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.11 a ♦ Strategic planning involves a fact of interactive and overlapping decisions leading to the development of an effective strategy for the firm. ♦ Strategic planning determines where an organisation is going over the next year or more and the ways for going there. ♦ The process is organisation-wide or focused on a major function such as a division or other major function. Strategic uncertainty and how to deal with it? Strategic uncertainty refers to the unpredictability and unpredictability of future events and circumstances that can impact an organization's strategy and goals. It can be driven by factors such as changes in the market, technology, competition, regulation, and other external factors. Dealing with strategic uncertainty can be challenging and organizations need to have the flexibility, resilience, and agility to quickly respond to changes in the environment and minimize its impact. To be manageable, they need to be grouped into logical clusters or themes. It is then useful to assess the importance of each cluster in order to set priorities with respect to Information gathering and analysis. ♦ Flexibility: Organizations can build flexibility into their strategies to quickly adapt to changes in the environment. ♦ Diversification: Diversifying the organization's product portfolio, markets, and customer base can reduce the impact of strategic uncertainty. ♦ Monitoring and Scenario Planning: Organizations can regularly monitor key indicators of change and conduct scenario planning to understand how different future scenarios might impact their strategies. ♦ Building Resilience: Organizations can invest in building internal resilience, such as strengthening their operational processes, increasing their financial flexibility, and improving their risk management capabilities. ♦ Collaboration and Partnerships: Collaborating with other organizations, suppliers, customers, and partners can help organizations pool resources, share risk, and gain access to new markets and technologies. Impact of uncertainty: Each element of strategic uncertainty involves potential trends or events that could have an impact on present, proposed, and even potential businesses., a trend toward natural foods may present opportunities for © The Institute of Chartered Accountants of India  a 5.12 STRATEGIC MANAGEMENT juices for a firm producing aerated drinks on the basis of a strategic uncertainty. The impact of a strategic uncertainty will depend on the importance of the impacted SBU to a firm. Some SBUs are more important than others. The importance of established SBUs may be indicated by their associated sales, profits, or costs. However, such measures might need to be supplemented for potential growth as present sales, profits, or costs may not reflect the true value. 5.2.3 Strategy Implementation Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into action. It deals with the managerial exercise of supervising the ongoing pursuit of strategy, making it work, improving the competence with which it is executed and showing measurable progress in achieving the targeted results. Strategic implementation is concerned with translating a strategic decision into action, which presupposes that the decision itself (i.e., the strategic choice) was made with some thought being given to feasibility and acceptability. The allocation of resources to new courses of action will need to be undertaken, and there may be a need for adapting the organization’s structure to handle new activities as well as training personnel and devising appropriate systems. Relationship with strategy formulation Many managers fail to distinguish between strategy formulation and strategy implementation. Yet, it is crucial to realize the difference between the two because they both require very different skills. Also, a company will be successful only when the strategy formulation is sound and implementation is excellent. There is no such thing as successful strategic design. This sounds obvious, but in practice the distinction is not always made. Often people, blame the strategy model for the failure of a company while the main flaw might lie in failed implementation. Thus, organizational success is a function of good strategy and proper implementation. The matrix in the figure below represents various combinations of strategy formulation and implementation: © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.13 a A B Strategy Formulation Sound C D Flawed Weak Excellent Figure: Strategy formulation and implementation matrix The above-mentioned figure depicts the distinction between sound/flawed strategy formulation and excellent/ weak strategy implementation. Square A is the situation where a company apparently has formulated a very competitive strategy but is showing difficulties in implementing it successfully. This can be due to various factors, such as the lack of experience (e.g. for startups), the lack of resources, missing leadership and so on. In such a situation the company will aim at moving from square A to square B, given they realize their implementation difficulties. Square B is the ideal situation where a company has succeeded in designing a sound and competitive strategy and has been successful in implementing it. Square D is the situation where the strategy formulation is flawed, but the company is showing excellent implementation skills. When a company finds itself in square D the first thing, they have to do is to redesign their strategy before readjusting their implementation/execution skills. Square C is denotes for companies that haven’t succeeded in coming up with a sound strategy formulation and in addition are bad at implementing their flawed strategic model. Their path to success also goes through business model redesign and implementation/execution readjustment. Taken together all the elements of business strategy, it is to be seen as a chosen set of actions by means of which a market position relative to the competing enterprises is sought and maintained. This gives us the notion of competitive position. © The Institute of Chartered Accountants of India  a 5.14 STRATEGIC MANAGEMENT It needs to be emphasized that ‘strategy’ is not synonymous with ‘long-term plan’ but rather consists of an enterprise’s attempts to reach some preferred future state by adapting its competitive position as circumstances change. While a series of strategic moves may be planned, competitors’ actions will mean that the actual moves will have to be modified to take account of those actions. In contrast to this view of strategy there is another approach to management practice, which has been followed in many organizations. In organizations that lack strategic direction there has been a tendency to look inwards in times of stress, and for management to devote their attention to cost cutting and to shedding unprofitable divisions. In other words, the focus has been on efficiency (i.e., the relationship between inputs and outputs, usually with a short time horizon) rather than on effectiveness (which is concerned with the attainment of organisational goals - including that of desired competitive position). While efficiency is essentially introspective, effectiveness highlights the links between the organization and its environment. The responsibility for efficiency lies with operational managers, with top management having the primary responsibility for the strategic orientation of the organization. Strategic Formulation Effective Ineffective Operational Management Efficient 1 2 Thrive Die Slowly Inefficient 3 4 Survive Die Quickly Figure: Principal combinations of efficiency and effectiveness An organization that finds itself in cell 1 is well placed and thrives, since it is achieving what it aspires to achieve with an efficient output/input ratio. In contrast, an organization in cell 2 or 4 is doomed, unless it can establish some strategic direction. The particular point to note is that cell 2 is a worse place to be than is cell 3 since, in the latter, the strategic direction is present to ensure effectiveness © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.15 a even if rather too much input is being used to generate outputs. To be effective is to survive whereas to be efficient is not in itself either necessary or sufficient for survival. In crude terms, to be effective is to do the right thing, while to be efficient is to do the thing right. An emphasis on efficiency rather than on effectiveness is clearly wrong. But who determines effectiveness? Any organization can be portrayed as a coalition of diverse interest groups each of which participates in the coalition in order to secure some advantage. This advantage (or inducement) may be in the form of dividends to shareholders, wages to employees, continued business to suppliers of goods and services, satisfaction on the part of consumers, legal compliance from the viewpoint of government, responsible behaviour towards society and the environment from the perspective of pressure groups, and so on. Even the most technically perfect strategic plan will serve little purpose if it is not implemented effectively. Many organizations tend to spend an inordinate amount of time, money, and effort on developing the strategic plan, treating the means and circumstances under which it will be implemented as afterthoughts. Change comes through implementation and evaluation, not through the plan. A technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is typed. Successful strategy formulation does not guarantee successful strategy implementation. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation). 5.2.4Difference between Strategy Formulation and Implementation Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Summarized are the key distinctions between strategy formulation and strategy implementation: © The Institute of Chartered Accountants of India  a 5.16 STRATEGIC MANAGEMENT Strategy Formulation Vs. Strategy Implementation Strategy Formulation Strategy Implementation Strategy Formulation includes Strategy Implementation involves all planning and decision-making those means related to executing the involved in developing organization’s strategic plans. strategic goals and plans. In short, Strategy Formulation In short, Strategy Implementation is placing the Forces before the is managing forces during the action. action. An Entrepreneurial Activity based An Administrative Task based on on strategic decision-making. strategic and operational decisions. Emphasizes on effectiveness. Emphasizes on efficiency. Primarily an intellectual Primarily an operational process. and rational process. Requires co-ordination among few Requires co-ordination among many individuals at the top level. individuals at the middle and lower levels. Requires a great deal of initiative, Requires specific motivational and logical skills, conceptual intuitive leadership traits. and analytical skills. Strategic Formulation precedes Strategy Implementation follows Strategy Implementation. Strategy Formulation. Strategy formulation concepts and tools do not differ greatly for small, large, for - profit, or non-profit organizations. However, strategy implementation varies substantially among different types and sizes of organizations. Implementation of strategies requires such actions as altering sales territories, adding new departments, closing facilities, hiring new employees, changing an organization’s pricing strategy, developing financial budgets, developing new employee benefits, establishing cost-control procedures, changing advertising strategies, building new facilities, training new employees, transferring managers among divisions, and building a better management information system. These types of activities © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.17 a obviously differ greatly among manufacturing, service, and governmental organizations. It is to be noted that the division of strategic management into different phases is only for the purpose of orderly study. In real life, the formulation and implementation processes are intertwined. Two types of linkages exist between these two phases of strategic management. The forward linkages deal with the impact of strategy formulation on strategy implementation while the backward linkages are concerned with the impact in the opposite direction. 5.2.5 Linkages and Issues in Strategy Implementation Linkages Noteworthy is the fact that while strategy formulation is primarily an entrepreneurial activity, based on strategic decision-making, the implementation of strategy is mainly an administrative task based on strategic as well as operational decision-making. ♦ Forward Linkages: The different elements in strategy formulation starting with objective setting through environmental and organizational appraisal, strategic alternatives and choice to the strategic plan determine the course that an organization adopts for itself. With the formulation of new strategies, or reformulation of existing strategies, many changes have to be affected within the organization. For instance, the organizational structure has to undergo a change in the light of the requirements of the modified or new strategy. The style of leadership has to be adapted to the needs of the modified or new strategies. In this way, the formulation of strategies has forward linkages with their implementation. ♦ Backward Linkages: Just as implementation is determined by the formulation of strategies, the formulation process is also affected by factors related with implementation. While dealing with strategic choice, remember that past strategic actions also determine the choice of strategy. Organizations tend to adopt those strategies which can be implemented with the help of the present structure of resources combined with some additional efforts. Such incremental changes, over a period of time, take the organization from where it is to where it wishes to be. © The Institute of Chartered Accountants of India  a 5.18 STRATEGIC MANAGEMENT Issues in Strategy Implementation This section focuses on the various issues involved in the implementation of strategies. The different issues involved in strategy implementation cover practically everything that is included in the discipline of management studies. A strategist, therefore, has to bring a wide range of knowledge, skills, attitudes, and abilities. The implementation tasks put to test the strategists’ abilities to allocate resources, design organisational structure, formulate functional policies, and to provide strategic leadership. ♦ The strategic plan devised by the organization proposes the manner in which the strategies could be put into action. Strategies, by themselves, do not lead to action. They are, in a sense, a statement of intent. Implementation tasks are meant to realise the intent. Strategies, therefore, have to be activated through implementation. ♦ Strategies should lead to formulation of different kinds of programmes. A programme is a broad term, which includes goals, policies, procedures, rules, and steps to be taken in putting a plan into action. Programmes are usually supported by funds allocated for plan implementation. ♦ Programmes lead to the formulation of projects. A project is a highly specific programme for which the time schedule and costs are predetermined. It requires allocation of funds based on capital budgeting by organizations. Thus, research and development programme may consist of several projects, each of which is intended to achieve a specific and limited objective, requires separate allocation of funds, and is to be completed within a set time schedule. Implementation of strategies is not limited to formulation of plans, programmes, and projects. Projects would also require resources. After resources have been provided, it would be essential to see that a proper organizational structure is designed, systems are installed, functional policies are devised, and various behavioural inputs are provided so that plans may work. Given below in sequential manner the issues in strategy implementation which are to be considered: ♦ Project implementation © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.19 a ♦ Procedural implementation ♦ Resource allocation ♦ Structural implementation ♦ Functional implementation ♦ Behavioural implementation It should be noted that the sequence does not mean that each of the above activities are necessarily performed one after another. Many activities can be performed simultaneously, certain other activities may be repeated over time; and there are activities, which are performed only once. Thus, there can be overlapping and changes in the order in which these activities are performed. In all but the smallest organizations, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional and functional managers. Implementation problems can arise because of this shift in responsibility, especially if strategic decisions come as a surprise to middle and lower-level managers. Managers and employees are motivated more by perceived self-interests than by organizational interests, unless the two coincide. Therefore, it is essential that divisional and functional managers be involved as much as possible in the strategy-formulation process. similarly, strategists should also be involved as much as possible in strategy-implementation activities. Management issues central to strategy implementation include establishing annual objectives, devising policies, allocating resources, altering an existing organizational structure, restructuring and reengineering, revising reward and incentive plans, minimizing resistance to change, developing a strategy-supportive culture, adapting production/operations processes, developing an effective human resource system and, if necessary, downsizing. Management changes are necessarily more extensive when strategies to be implemented move a firm in a new direction. Managers and employees throughout an organization should participate early and directly in strategy-implementation activities. Their role in strategy implementation should build upon prior involvement in strategy-formulation activities. Strategists’ genuine personal commitment to implementation is a necessary and powerful motivational force for managers and employees. Too often, strategists are too busy © The Institute of Chartered Accountants of India  a 5.20 STRATEGIC MANAGEMENT to actively support strategy-implementation efforts, and their lack of interest can be detrimental to organizational success. The rationale for objectives and strategies should be understood clearly throughout the organization. Major competitors’ accomplishments, products, plans, actions, and performance should be apparent to all organizational members. Major external opportunities and threats should be clear, and managers and employees’ questions should be answered satisfactorily. Top-down flow of communication is essential for developing bottom-up support. Firms need to develop a competitor focus on all hierarchical levels by gathering and widely distributing competitive intelligence; every employee should be able to benchmark her or his efforts against best-in-class competitors so that the challenge becomes personal. This is a challenge for strategists of the firm. Firms should provide training for both managers and employees to ensure that they have and maintain the skills necessary to be world-class performers. 5.3 STRATEGIC CHANGE THROUGH DIGITAL TRANSFORMATION Organizations are being pushed harder than ever to shift digitally in order to stay competitive. Digital transformation, however, may be a difficult and complicated process. To guarantee that projects for digital transformation are effective, change management is crucial. We will now examine change management's function in the digital transformation. 5.3.1 Strategic Change The changes in the environmental forces often require businesses to make modifications in their existing strategies and bring out new strategies. Strategic change is a complex process that involves a corporate strategy focused on new markets, products, services and new ways of doing business. Steps to initiate strategic change: For initiating strategic change, three steps can be identified as under: (i) Recognize the need for change: The first step is to diagnose which facets of the present corporate culture are strategy supportive and which are not. This basically means going for environmental scanning involving appraisal of both © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.21 a internal and external capabilities may be through SWOT analysis and then determining where the lacuna lies and scope for change exists. (ii) Create a shared vision to manage change: Objectives of both individuals and organization should coincide. There should be no conflict between them. This is possible only if the management and the organization members follow a shared vision. Senior managers need to constantly and consistently communicate the vision to all the organizational members. They have to convince all those concerned that the change in business culture is not superficial or cosmetic. The actions taken have to be credible, highly visible and unmistakably indicative of management’s seriousness to new strategic initiatives and associated changes. (iii) Institutionalise the change: This is basically an action stage which requires implementation of changed strategy. Creating and sustaining a different attitude towards change is essential to ensure that the firm does not slip back into old ways of thinking or doing things. Capacity for self-renewal should be a fundamental anchor of the new culture of the firm. Besides, change process must be regularly monitored and reviewed to analyse the after-effects of change. Any discrepancy or deviation should be brought to the notice of persons concerned so that the necessary corrective actions are taken. It takes time for the changed culture to prevail. Kurt Lewin’s Model of Change: To make the change lasting, Kurt Lewin proposed three phases of the change process for moving the organization from the present to the future. These stages are unfreezing, changing and refreezing. (a) Unfreezing the situation: The process of unfreezing simply makes the individuals aware of the necessity for change and prepares them for such a change. Lewin proposes that the changes should not come as a surprise to the members of the organization. Sudden and unannounced change would be socially destructive and morale lowering. The management must pave the way for the change by first “unfreezing the situation”, so that members would be willing and ready to accept the change. Unfreezing is the process of breaking down the old attitudes and behaviours, customs and traditions so that they start with a clean slate. This can be © The Institute of Chartered Accountants of India  a 5.22 STRATEGIC MANAGEMENT achieved by making announcements, holding meetings and promoting the new ideas throughout the organization. (b) Changing to the new situation: Once the unfreezing process has been completed and the members of the organization recognise the need for change and have been fully prepared to accept such change, their behaviour patterns need to be redefined. H.C. Kellman has proposed three methods for reassigning new patterns of behaviour. These are compliance, identification and internalization. Compliance: It is achieved by strictly enforcing the reward and punishment strategy for good or bad behaviour. Fear of punishment, actual punishment or actual reward seems to change behaviour for the better. Identification: Identification occurs when members are psychologically impressed upon to identify themselves with some given role models whose behaviour they would like to adopt and try to become like them. Internalization: Internalization involves some internal changing of the individual’s thought processes in order to adjust to the changes introduced. They have given freedom to learn and adopt new behaviour in order to succeed in the new set of circumstances. (c) Refreezing: Refreezing occurs when the new behaviour becomes a normal way of life. The new behaviour must replace the former behaviour completely for successful and permanent change to take place. In order for the new behaviour to become permanent, it must be continuously reinforced so that this new acquired behaviour does not diminish or extinguish. Change process is not a one-time application but a continuous process due to dynamism and ever changing environment. The process of unfreezing, changing and refreezing is a cyclical one and remains continuously in action. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.23 a 5.3.2 How does digital transformation work? The use of digital technologies to develop fresh, improved, or entirely new company procedures, goods, or services is known as "digital transformation." It's a fundamental adjustment that can be challenging to identify and even more challenging to implement. Change management enters into the picture here. Organizations can plan, prepare for, and carry out changes to their operations, including digital transformations, with the aid of the discipline of change management. When implemented correctly, change management may assist firms in overcoming the obstacles posed by the digital transition and reaping the full rewards of their investment. But how does change management appear when applied to digital transformation? Change management in the digital transition consists of four essential elements: 1. Defining the goals and objectives of the transformation 2. Assessing the current state of the organization and identifying gaps 3. Creating a roadmap for change that outlines the steps needed to reach the desired state 4. Implementing and managing the change at every level of the organization To navigate a digital transformation successfully, each of these elements is necessary. But what matters most is how they collaborate to support organisations in achieving their goals. How does change management work? Change management is a process or set of tools and best practices used to manage changes in an organization. It assists in making changes in a safe and regulated manner, reducing the possibility of detrimental effects on the company. Any sort of organisation, including enterprises, organisations, governmental bodies, and even families, can utilise change management to manage changes. Change management models and methods come in a wide variety, but they all have key things in common. These include creating a clear vision for the change, involving stakeholders in the process, coming up with a plan for putting the change into action, and keeping an eye on the results. Although change management is © The Institute of Chartered Accountants of India  a 5.24 STRATEGIC MANAGEMENT frequently viewed as a difficult and complicated process, it is vital for ensuring that digital transformation projects are successful. The role of change management in digital transformation Digital transformation is a process of organizational change that enables an organization to use technology to create new value for customers, employees, and other stakeholders. A good change management strategy is necessary for a successful digital transformation. Change management is the process of planning, implementing, and monitoring changes in an organization. It provides organizations in achieving their objectives while reducing risks and disruptions. For any organisation undergoing a digital transition, change management is crucial. A properly implemented change management strategy can help an organization to: ♦ Specify the parameters and goals of the digital transformation ♦ Determine which procedures and tools need to be modified. ♦ Make a plan for implementing the improvements. ♦ Involve staff members and parties involved in the transformation process. ♦ Track progress and make required course corrections A crucial component of any digital transition is change management. Why it gains more importance in the current times is because organizations can improve their chances of success by approaching change in a proactive and organized manner. 5.3.3Change Management Strategies for Digital Transformation One of the most important area of focus for guaranteeing a successful transformation is change management. Businesses nowadays increasingly find themselves responsible for managing more than simply their staff, clients, and products. Additionally, they are handling the introduction of new technology, the unexpected emergence of new market opportunities, and changes in customer preferences regarding the brands they choose, interact with, and hold to. In essence, modern firms must be able to manage change. They must modify their © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.25 a management techniques in order to achieve this. The five best practices for managing change in small and medium-sized businesses are: 1. Begin at the top: A focused, invested, united leadership that is on the same page about the company's future is reflected in change that begins at the top. The culture that will motivate the rest of the organisation to accept change can only be generated and promoted in this way. 2. Ensure that the change is both necessary and desired: The fact that decision-makers are unaware of how to properly handle a digital transformation and the effects it will have on their firm is one of the main causes of this. If a corporation doesn’t have a sound strategy in place, introducing too much too fast can frequently become a major issue down the road. 3. Reduce disruption: Employee perceptions of what is required or desirable change can differ by department, rank, or performance history. It's crucial to lessen how changes affect staff. The introduction of new tactics or technologies intended to improve management and corporate operations causes employee concern about change. It is possible to reduce workplace disruption by: a. Getting the word out early and preparing for some interruption. b. Giving staff members the knowledge and tools, they need to adjust to change. c. Creating an environment that encourages transformation or change. d. Empowering change agents to provide context and clarity for changes, such as project managers or team leaders. e. Ensuring that IT department is informed of changes in technology or infrastructure and is prepared to support them. 4. Encourage communication: Create channels so that workers may contact you with queries or complaints. Encourage departmental collaboration to propagate ideas and innovations as new procedures take root. Communication promotes efficiency and has the power to influence culture, just like your vision. The people who will be affected the most by these © The Institute of Chartered Accountants of India  a 5.26 STRATEGIC MANAGEMENT changes are reassured that they are not in danger through effective communication, which keeps everyone on the same page. 5. Recognize that change is the norm, not the exception: Change readiness may be defined as “the ability to continuously initiate and respond to change in ways that create advantage, minimize risk, and sustain performance.” In order to keep up with the customers, businesses must also adapt their operations. They must prepare for change in advance and expect them. It may run into difficulties because change is not a project but rather an ongoing process. 5.3.4How to manage change during digital transformation? Any organisation may find the work of digital transformation challenging and overwhelming. To ensure that a digital transition is effective, change management is essential. Here are some pointers for navigating change during the digital transformation: 1. Specify the digital transformation’s aims and objectives: What is the intended outcome? What are the precise objectives that must be accomplished? It will be easier to make sure that everyone is on the same page and pursuing the same aims if everyone has a clear grasp of the goals. 2. Always, always, always communicate: It might be challenging for people to accept change and adjust to it. Ensure that you routinely and honestly discuss the objectives of the digital transformation and how they will affect stakeholders, including employees, clients, and other parties. 3. Be ready for resistance: Even when a change is for the better, it can be challenging for people to embrace it. Have a strategy in place for dealing with any resistance that may arise. 4. Implement changes gradually: Changes should ideally be implemented gradually rather than all at once. In order to avoid overwhelming individuals with too much change at once, this will give people time to become used to the new way of doing things. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.27 a 5. Offer assistance and training: Workers will need guidance in the new procedures, software applications, etc. In conclusion, effective completion of the massive project known as digital transformation depends on meticulous planning and change management. Digital transformation efforts are more likely to fail without change management. Organizations can successfully integrate a new digital system by planning for and managing the changes that must take place. Any project involving digital transformation must include it. 5.4 ORGRANISATIONAL FRAMEWORK The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The goal of the model is to depict how effectiveness can be achieved in an organization through the interactions of hard and soft elements. The McKinsey 7s Model focuses on how the "Soft Ss" and "Hard Ss" elements are interrelated, suggesting that modifying one aspect might have a ripple effect on the other elements in order to maintain an effective balance. Hard elements are: Strategy: What steps does the company intend to take to address current and futures challenges? Structure: How is work divided, how do different departments work and collaborate? Systems: Which formal and informal processes is the company’s structure based on? Soft elements are: Shared Values: What is the idea the organization subscribes to? Is this idea communicated credibly to others? Staff: This elements refers to employees development and relevant processes, performances and feedback programs etc. Skill: What is the company’s base of skills and competencies? Style: This depicts the leadership style and how it influences the strategic decisions of the organization. © The Institute of Chartered Accountants of India  a 5.28 STRATEGIC MANAGEMENT The Hard elements are directly controlled by the management. The following elements are the hard elements in an organization. ♦ Strategy: the direction of the organization, a blueprint to build on a core competency and achieve competitive advantage to drive margins and lead the industry ♦ Structure: depending on the availability of resources and the degree of centralisation or decentralization that the management desires, it choses from the available alternatives of organizational structures. ♦ Systems: the development of daily tasks, operations and teams to execute the goals and objectives in the most efficient and effective manner. The Soft elements are difficult to define as they are more governed by the culture. But these soft elements are equally important in determining an organization’s success as well as growth in the industry. The following are the soft elements in this model; ♦ Shared Values: The core values which get reflected within the organizational culture or influence the code of ethics of the management. ♦ Style: This depicts the leadership style and how it influences the strategic decisions of the organisation. It also revolves around people motivation and organizational delivery of goals. ♦ Staff: The talent pool of the organisation. ♦ Skills: The core competencies or the key skills of the employees play a vital role in defining the organizational success. But like any other strategic model, this model has its limitations as well; ♦ It ignores the importance of the external environment and depicts only the most crucial elements within the organization. ♦ The model does not clearly explain the concept of organizational effectivness or performance. ♦ The model is considered to be more static and less flexible for deicion making. ♦ It is generally criticized for missing out the reals gaps in conceptualization and execution of strategy. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.29 a 5.4.1 Organization Structure The ideal organizational structure is a place where ideas filter up as well as down, where the merit of ideas carries more weight than their source, and where participation and shared objectives are valued more than executive order. – Edson Spencer Changes in corporate strategy often require changes in the way an organization is structured for two major reasons. First, structure largely dictates how operational objectives and policies will be established to achieve the strategic objectives. For example, objectives and policies established under a geographic organizational structure are couched in geographic terms. Objectives and policies are stated largely in terms of products in an organization whose structure is based on product groups. The structural format for developing objectives and policies can significantly impact all other strategy-implementation activities. The second major reason why changes in strategy often require changes in structure is that structure dictates how resources will be allocated to achieve strategic objectives. If an organization’s structure is based on customer groups, then resources will be allocated in that manner. Similarly, if an organization’s structure is set up along functional business lines, then resources are allocated by functional areas. According to Chandler, changes in strategy lead to changes in organizational structure. Structure should be designed or redesigned to facilitate the strategic pursuit of a firm and, therefore, structure should follow strategy. Chandler found a particular structure sequence to be often repeated as organizations grow and change strategy over time. There is no one optimal organizational design or structure for a given strategy. What is appropriate for one organization may not be appropriate for a similar firm, although successful firms in a given industry do tend to organize themselves in a similar way. For example, consumer goods companies tend to emulate the divisional structure-by-product form of organization. Small firms tend to be functionally structured (centralized). Medium-size firms tend to be divisionally structured (decentralized). Large firms tend to use an SBU (strategic business unit) or matrix structure. As organizations grow, their structures generally change from simple to complex as a result of linking together of several basic strategies. © The Institute of Chartered Accountants of India  a 5.30 STRATEGIC MANAGEMENT New Organizational New strategy is administrative performance formed problems emerge declines Organizational A new organizational performance structure is established improves Figure: Chandler’s Strategy-Structure Relationship Every firm is influenced by numerous external and internal forces. But no firm can change its structure in response to each of these forces, because to do so would lead to chaos. However, when a firm changes its strategy, the existing organizational structure may become ineffective. Symptoms of an ineffective organizational structure include too many levels of management, too many meetings attended by too many people, too much attention being directed toward solving interdepartmental conflicts, too large a span of control, and too many unachieved objectives. Changes in organisational structure can facilitate strategy- implementation efforts, but changes in structure should not be expected to make a bad strategy good, to make bad managers good, or to make bad products sell. Structure can also influence strategy. If a proposed strategy required massive structural changes, it would not be an attractive choice. In this way, structure can shape the choice of strategy. But a more important concern is determining what types of structural changes are needed to implement new strategies and how these changes can best be accomplished. We will examine this issue by focusing on the following basic types of organizational structure: functional, divisional by geographic area, divisional by product, divisional by customer, divisional process, strategic business unit (SBU), and matrix. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.31 a In order to implement and manage strategies that have been formulated, all companies need some form of organizational structure. And, as companies formulate new strategies, increase in size, or change their level of diversification, new organizational structures may be required. Types of Organization Structure Organizational structure is the company’s formal configuration of its intended roles, procedures, governance mechanisms, authority, and decision-making processes. Organizational structure, influenced by factors such as an organization’s age and size, acts as a framework which reflects managers’ determination of what a company does and how tasks are completed, given the chosen strategy. The most important issue is that the company’s structure must be congruent with or fit with the company’s strategy. A Simple Structure Simple organizational structure is most appropriate for companies that follow a single-business strategy and offer a line of products in a single geographic market. The simple structure also is appropriate for companies implementing focused cost leadership or focused differentiation strategies. A simple structure is an organizational form in which the owner-manager makes all major decisions directly and monitors all activities, while the company’s staff merely serves as an executor. Little specialization of tasks, few rules, little formalization, unsophisticated information systems and direct involvement of owner-manager in all phases of day- to-day operations characterise the simple structure. In the simple structure, communication is frequent and direct, and new products tend to be introduced to the market quickly, which can result in a competitive advantage. Because of these characteristics, few of the coordination problems that are common in larger organizations exist. A simple organizational structure may result in competitive advantages for some small companies relative to their larger counterparts. These potential competitive advantages include a broad-based openness to innovation, greater structural flexibility, and an ability to respond more rapidly to environmental changes. However, if they are successful, small companies grow larger. As a result of this growth, the company outgrows the simple structure. Generally, there are significant increases in the amount of competitively relevant information that requires © The Institute of Chartered Accountants of India  a 5.32 STRATEGIC MANAGEMENT processing. More extensive and complicated information-processing requirements place significant pressures on owner-managers (often due to a lack of organizational skills or experience or simply due to lack of time). Thus, it is incumbent on the company’s managers to recognise the inadequacies or inefficiencies of the simple structure and change it to one that is more consistent with company’s strategy. To coordinate more complex organizational functions, companies should abandon the simple structure in favour of the functional structure. The functional structure is used by larger companies and by companies with low levels of diversification. B Functional Structure A widely used structure in business organisations is functional type because of its simplicity and low cost. A functional structure groups tasks and activities by business function, such as production/operations, marketing, finance/accounting, research and development, and management information systems. Besides being simple and inexpensive, a functional structure also promotes specialization of labour, encourages efficiency, minimizes the need for an elaborate control system, and allows rapid decision making. Chief Executive Officer Strategic Corporate Corporate Corporate Corporate Planning R&D Finance Marketing Human Sales & Human Finance Production Engineering Accounting Marketing Resource Figure: Functional Structure The functional structure consists of a chief executive officer or a managing director and supported by corporate staff with functional line managers in dominant functions such as production, financial accounting, marketing, R&D, engineering, and human resources. The functional structure enables the company to overcome the growth-related constraints of the simple structure, enabling or facilitating communication and coordination. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.33 a However, compared to the simple structure, there also are some potential problems. Differences in functional specialization and orientation may impede communications and coordination. Thus, the chief executive officer must integrate functional decision-making and coordinate actions of the overall business across functions. Functional specialists often may develop a myopic (or narrow) perspective, losing sight of the company’s strategic vision and mission. When this happens, this problem can be overcome by implementing the multidivisional structure. C Divisional Structure As a firm, grows year after year it faces difficulty in managing different products and services in different markets. Some form of divisional structure generally becomes necessary to motivate employees, control operations, and compete successfully in diverse locations. The divisional structure can be organized in one of the four ways: by geographic area, by product or service, by customer, or by process. With a divisional structure, functional activities are performed both centrally and in each division separately. Chief Executive Corporate Finance Corporate Legal/PR General Manager Division A General Manager Division B Marketing Marketing Production Production Personnel Personnel Figure: Divisional Structure A divisional structure has some clear advantages. First and the foremost, accountability is clear. That is, divisional managers can be held responsible for sales and profit levels. Because a divisional structure is based on extensive delegation of authority, managers and employees can easily see the results of their good or bad © The Institute of Chartered Accountants of India  a 5.34 STRATEGIC MANAGEMENT performances. As a result, employee morale is generally higher in a divisional structure than it is in centralized structure. Other advantages of the divisional design are that it creates career development opportunities for managers, allows local control of local situations, leads to a competitive climate within an organization, and allows new businesses and products in be added easily. The divisional design is not without some limitations. Perhaps the most important limitation is that a divisional structure is costly, for a number of reasons. First, each division requires functional specialists who must be paid. Second, there exists some duplication of staff services, facilities, and personnel; for instance, functional specialists are also needed centrally (at headquarters) to coordinate divisional activities. Third, managers must be well qualified because the divisional design forces delegation of authority better-qualified individuals requires higher salaries. A divisional structure can also be costly because it requires an elaborate, headquarters-driven control system. Finally, certain regions, products, or customers may sometimes receive special treatment, and It may be difficult to maintain consistent, companywide practices. Nonetheless, for most large organizations and many small firms, the advantages of a divisional structure more than offset the potential limitations. A divisional structure by geographic area is appropriate for organizations whose strategies are formulated to fit the particular needs and characteristics of customers in different geographic areas. This type of structure can be most appropriate for organizations that have similar branch facilities located in widely dispersed areas. A divisional structure by geographic area allows local participation in decision making and improved coordination within a region. The divisional structure by product (or services) is most effective for implementing strategies when specific products or services need special emphasis. Also, this type of structure is widely used when an organization offers only a few products or services, when an organization’s products or services differ substantially. The divisional structure allows strict control over and attention to product lines, but it may also require a more skilled management force and reduced top management control. For example, General Motors, DuPont, and Procter & Gamble use a divisional structure by product to implement strategies. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.35 a When a few major customers are of paramount importance and many different services are provided to these customers, then a divisional structure by customer can be the most effective way to implement strategies. This structure allows an organization to cater effectively to the requirements of clearly defined customer groups. For example, book-publishing companies often organize their activities around customer groups such as colleges, secondary schools, and private commercial schools. Some airline companies have two major customer divisions: passengers and freight or cargo services. Bulks are often organised in divisions such as personal banking corporate banking, etc. A divisional structure by process is similar to a functional structure, because activities are organized according to the way work is actually performed. However, a key difference between these two designs is that functional departments are not accountable for profits or revenues, whereas divisional process departments are evaluated on these criteria. D Multi Divisional Structure Multidivisional (M-form) structure is composed of operating divisions where each division represents a separate business to which the top corporate officer delegates responsibility for day-to-day operations and business unit strategy to division managers. By such delegation, the corporate office is responsible for formulating and implementing overall corporate strategy and manages divisions through strategic and financial controls. Multidivisional or M-form structure was developed in the 1920s, in response to coordination- and control-related problems in large firms. Functional departments often had difficulty dealing with distinct product lines and markets, especially in coordinating conflicting priorities among the products. Costs were not allocated to individual products, so it was not possible to assess an individual product’s profit contribution. Loss of control meant that optimal allocation of firm resources between products was difficult (if not impossible). Top managers became over- involved in solving short-run problems (such as coordination, communications, conflict resolution) and neglected long-term strategic issues. Multidivisional structure calls for: ♦ Creating separate divisions, each representing a distinct business ♦ Each division would house its functional hierarchy; © The Institute of Chartered Accountants of India  a 5.36 STRATEGIC MANAGEMENT ♦ Division managers would be given responsibility for managing day-to-day operations; ♦ A small corporate office that would determine the long-term strategic direction of the firm and exercise overall financial control over the semi- autonomous divisions. This would enable the firm to more accurately monitor the performance of individual businesses, simplifying control problems, facilitate comparisons between divisions, improving the allocation of resources and stimulate managers of poorly performing divisions to seek ways to improve performance. When the firm is less diversified, strategic controls are used to manage divisions. Strategic control refers to the operational understanding by corporate officers of the strategies being implemented within the firm’s separate business units. An increase in diversification strains corporate officers’ abilities to understand the operations of all of its business units and divisions are then managed by financial controls, which enable corporate officers to manage the cash flow of the divisions through budgets and an emphasis on profits from distinct businesses. However, because financial controls are focused on financial outcomes, they require that each division’s performance be largely independent of the performance of other divisions. So, the Strategic Business Units come into picture. E Strategic Business Unit (SBU) Structure This concept is relevant to multi-product, multi-business enterprises. It is impractical for an enterprise with a multitude of businesses to provide separate strategic planning treatment to each one of its products/businesses; it has to necessarily group the products/businesses into a manageable number of strategically related business units and then take them up for strategic planning. The question is: what is the best way of grouping the products/businesses of such large enterprises? An SBU is a grouping of related businesses, which is amenable to composite planning treatment. As per this concept, a multi-business enterprise groups its multitude of businesses into a few distinct business units in a scientific way. The purpose is to provide effective strategic planning treatment to each one of its products/businesses. © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.37 a The three most important characteristics of a SBU are: ♦ It is a single business or a collection of related businesses which offer scope for independent planning and which might feasibly standalone from the rest of the organization. ♦ It has its own set of competitors. ♦ It has a manager who has responsibility for strategic planning and profit performance, and who has control of profit-influencing factors. Historically, large, multi-business firms were handling business planning on a territorial basis since their structure was territorial. And in many cases, such a structure was the outcome of a manufacturing or distribution logistics. Often, the territorial structure did not suit the purpose of strategic planning. When strategic planning was carried out treating territories as the units for planning, it gave rise to two kinds of difficulties: (i) since a number of territorial units handled the same product, the same product was getting varied strategic planning treatments; and (ii) since a given territorial planning unit carried different and unrelated products, products with dissimilar characteristics were getting identical strategic planning treatment. The concept of strategic business units (SBU) breaks away from this practice. It recognises that just because a firm is structured into a number of territorial units, say six units, it is not necessarily in six different businesses. It may be engaged in only three distinct businesses. It is also possible that it is engaged in more than six businesses. The endeavour should be to group the businesses into an appropriate number of strategic business units before the firm takes up the strategy formulation task. The SBU structure is composed of operating units where each unit represents a separate business to which the top corporate officer delegates responsibility for day-to-day operations and business unit strategy to its managers. By such delegation, the corporate office is responsible for formulating and implementing overall corporate strategy and manages SBUs through strategic and financial controls. Hence, the SBU structure groups similar products into strategic business units and delegates authority and responsibility for each unit to a senior executive who reports directly to the chief executive officer. This change in structure can © The Institute of Chartered Accountants of India  a 5.38 STRATEGIC MANAGEMENT facilitate strategy implementation by improving coordination between similar divisions and channelling accountability to distinct business units. President Corporate Corporate Strategic Corporate Corporate Human R&D Finance Planning Marketing Resources Strategic Strategic Strategic Strategic Business Unit A Business Unit B Business Unit C Business Unit D Division Division Division Division Division Division Figure: SBU Structure A strategic business unit (SBU) structure consists of at least three levels, with a corporate headquarters at the top, SBU groups at the second level, and divisions grouped by relatedness within each SBU at the third level. This enables the company to more accurately monitor the performance of individual businesses, simplifying control problems. It also facilitates comparisons between divisions, improving the allocation of resources and can be used to stimulate managers of poorly performing divisions to seek ways to improve performance. This means that, within each SBU, divisions are related to each other, as also that SBU groups are unrelated to each other. Within each SBU, divisions producing similar products and/or using similar technologies can be organised to achieve synergy. Individual SBUs are treated as profit centres and controlled by corporate headquarters that can concentrate on strategic planning rather than operational control so that individual divisions can react more quickly to environmental changes. For example, Sony has been restructuring to match the SBU structure with its ten internal companies as organised into four strategic business units. Because it has been pushing the company to make better use of software products and content (e.g., Sony’s music, films and games) in its televisions and audio gear to increase © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.39 a Sony’s profitability. By its strategy, Sony is one of the few companies that have the opportunity to integrate software and content across a broad range of consumer electronics products. The principle underlying the grouping is that all related products-related from the standpoint of “function”-should fall under one SBU. In other words, the SBU concept helps a multi-business corporation in scientifically grouping its businesses into a few distinct business units. Such a grouping would in its turn, help the corporation carry out its strategic management endeavour better. The concept provides the right direction to strategic planning by removing the vagueness and confusion often experienced in such multi-business enterprises in the matter of grouping of the businesses. The attributes of an SBU and the benefits a firm may derive by using the SBU Structure are as follows: ♦ A scientific method of grouping the businesses of a multi-business corporation which helps the firm in strategic planning. ♦ An improvement over the territorial grouping of businesses and strategic planning based on territorial units. ♦ An SBU is a grouping of related businesses that can be taken up for strategic planning distinct from the rest of the businesses. Products/businesses within an SBU receive same strategic planning treatment and priorities. ♦ The task consists of analysing and segregating the assortment of businesses/portfolios and regrouping them into a few, well defined, distinct, scientifically demarcated business units. Products/businesses that are related from the standpoint of “function” are assembled together as a distinct SBU. ♦ Unrelated products/businesses in any group are separated. If they could be assigned to any other SBU applying the criterion of functional relation, they are assigned; accordingly, otherwise they are made into separate SBUs. ♦ Grouping the businesses on SBU lines helps the firm in strategic planning by removing the vagueness and confusion generally seen in grouping businesses; it also facilitates the right setting for correct strategic planning and facilitates correct relative priorities and resources to the various businesses. © The Institute of Chartered Accountants of India  a 5.40 STRATEGIC MANAGEMENT ♦ Each SBU is a separate business from the strategic planning standpoint. In the basic factors, viz., mission, objectives, competition and strategy-one SBU will be distinct from another. ♦ Each SBU will have its own distinct set of competitors and its own distinct strategy. ♦ Each SBU will have a CEO. He will be responsible for strategic planning for the SBU and its profit performance; he will also have control over most of the factors affecting the profit of the SBU. The questions posed at the corporate level are, first, whether the corporate body wishes to have a related set of SBUs or not; and if so, on what basis. This issue of relatedness in turn has direct implications on decisions about diversification relatedness might exist in different ways: ♦ SBUs might build on similar technologies, or all provide similar sorts of products or services. ♦ SBUs might be serving similar or different markets. Even if technology or products differ, it may be that the customers are similar. For example, the technologies underpinning frozen food, washing powders and margarine production may be very different; but all are sold through retail operations, and Unilever operates in all these product fields. ♦ Or it may be that other competences on which the competitive advantage of different SBUs are built have similarities. Unilever would argue that the marketing skills associated with the three product markets are similar example. The identification of SBUs is a convenient starting point for planning. Once the company’s strategic business units have been identified, the responsibilities for strategic planning can be more clearly assigned. F Matrix Structure Most organizations find that organising around either functions (in the functional structure) or around products and geography (in the divisional structure) provides an appropriate organizational structure. The matrix structure, in contrast, may be very appropriate when organizations conclude that neither functional nor divisional © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.41 a forms, even when combined with horizontal linking mechanisms like strategic business units, are right for the implementation of their strategies. In matrix structure, functional and product forms are combined simultaneously at the same level of the organization. Employees have two superiors, a product or project manager and a functional manager. The “home” department - that is, engineering, manufacturing, or marketing - is usually functional and is reasonably permanent. People from these functional units are often assigned temporarily to one or more product units or projects. The product units or projects are usually temporary and act like divisions in that they are differentiated on a product-market basis. A matrix structure is the most complex of all designs because it depends upon both vertical and horizontal flows of authority and communication (hence the term matrix). In contrast, functional and divisional structures depend primarily on vertical flows of authority and communication. A matrix structure can result in higher overhead because it has more management positions. Other characteristics of a matrix structure that contribute to overall complexity include dual lines of budget authority (a violation of the unity command principle), dual sources of reward and punishment, shared authority, dual reporting channels, and a need for an extensive and effective communication system. Despite its complexity, the matrix structure is widely used in many industries, including construction, healthcare, research and defence. Some advantages of a matrix structure are that project objectives are clear, there are many channels of communication workers can see the visible results of their work, and shutting down a project is accomplished relatively easily. In order for a matrix structure to be effective, organizations need planning, training, clear mutual understanding of roles and responsibilities, excellent internal communication, and mutual trust and confidence. The matrix structure is used more frequently by businesses because they are pursuing strategies add new products, customer groups, and technology to their range of activities. Out of these changes are coming product managers, functional managers, and geographic managers, all of whom have important strategic responsibilities. When several variables such as product, customer, technology, geography, functional area, have roughly equal strategic priorities, a matrix organization can be an effective structural form. Matrix structure was developed to combine the stability of the functional structure with the flexibility of the product form. It is very useful when the external © The Institute of Chartered Accountants of India  a 5.42 STRATEGIC MANAGEMENT environment (especially its technological and market aspects) is very complex and changeable. It does, however, produce conflicts revolving around duties, authority, and resource allocation. To the extent that the goals to be achieved are vague and the technology used is poorly understood, a continuous battle for power between product and functional mangers is likely. Top Management Manufacturing Sales Finance Personnel Manufacturing Personnel Sales Unit Finance Unit Unit Unit Manufacturing Personnel Sales Unit Finance Unit Unit Unit Manufacturing Personnel Sales Unit Finance Unit Unit Unit Manufacturing Personnel Sales Unit Finance Unit Unit Unit Figure: Matrix Structure The matrix structure is often found in an organization or within an SBU when the following three conditions exists: 1) Ideas need to be cross-fertilised across projects or products, 2) Resources are scarce and 3) Abilities to process information and to make decisions need to be improved. Changing organizational design Old Organizational Design New Organizational Design ♦ One large corporation ♦ Mini-business units and cooperative relationships ♦ Vertical communication ♦ Horizontal communication © The Institute of Chartered Accountants of India  STRATEGY IMPLEMENTATION AND EVALUATION 5.43 a ♦ Centralised top-down decision ♦ Decentralised participative decision making making ♦ Vertical integration ♦ Outsourcing & virtual organizations ♦ Work/quality teams ♦ Autonomous work teams ♦ Functional work teams ♦ Cross-functional work teams ♦ Minimal training ♦ Extensive training ♦ Specialised job design focused ♦ Value-chain team-focused job design on individual For development of matrix structure Davis and Lawrence, have proposed three distinct phases: 1. Cross-functional task forces: Temporary cross-functional task forces are initially used when a new product line is being introduced. A project manager is in charge as the key horizontal link. 2. Product/brand management: If the cross-functional task forces become more permanent, the project manager becomes a product or brand manager and a second phase begins. In this arrangement, function is still the primary organizational structure, but product or brand managers act as the integ