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MBA Business Policy and Strategy
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Q.1 What is the difference between business policy and strategy? Discuss the process of their development in detail.
BUSINESS POLICY Broader guides for various courses of action to achieve certain objectives. Business Policy includes: • Financial policy • Operational policy • Sales promotion policy Formulation of policy • Demand for policy: • Decisions to be made about the policy • Policy statements giving formal shape to the policy • Implementation | BUSINESS POLICY Business policy means by which annual objectives are achieved. Policies include guidelines, rules and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations. Policies reveal the manager’s intentions for future time periods and are decided prior to the need for such intentions. They are broad, comprehensive, elastic, dynamic guides and require interpretation in their use. A policy defines the area in which decisions are to be made, but it does not give the decision. Policies spell out the sanctioned, general direction and areas to be followed. By keeping within these predetermined boundaries, but with freedom to decide within the stated areas, the manager’s work is performed in keeping with the overall planning of the organization. A policy is a verbal, written, or implied overall guide setting up boundaries that supply the general limits and direction in which managerial action will take place. |
Objectives: End results of planned activities, what is to be accomplished, preferably stated in quantitative form. e.g. • 25% return on capital • Reduce unit cost by 25% | Good policies are flexible, fairly easy to be interpreted, and consistent with other policies throughout the company. Preferably policies should be put in writing, and many managers feel that a policy does not actually exist unless it is in writing. |
STRATEGY • Managerial action plan for achieving organizational objectives. • Moves and approaches devised by management to produce the targeted outcomes. | There are numerous policy areas in any business: • Strategy polices; • Production policies; • Sales policies; • Financial policies; • Personnel policies; |
• A course of action, including the specification of resources required, to achieve a specific objective. | IMPORTANT CONSIDERATIONS IN POLICY FORMULATION • The use of a policy should help in achieving the objective, and a policy should be built from facts, not personal reflections or opportunistic decisions. |
• A policy should permit interpretation; it should not prescribe detailed procedure. | |
• The formulator’s thoughts and ideas of the content of the policy should be conditioned by the suggestions and reactions of those who will be affected by the policy. | |
• Whenever necessary to cover anticipated conditions, policies should be established, but care must be exercised to avoid having policies that are seldom, if ever, used. • Every policy should be expressed in definite and precise wording that is fully understood by every member of the organization. • All policies must conform to external factors such as laws and measures in the public interest. | |
LEVEL OF STRATEGY Corporate Strategy • What business or businesses the firm is in or should be in, and how integrated these businesses should be with one another? Business Strategy • How each business attempts to achieve its chosen area of activity? | BUSINESS STRATEGY Business strategy means by which long-term objectives are achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint venture. STRATEGY DEVELOPMENT Strategic planning begins by asking questions regarding the purpose and the operations to which an organization is devoted. To illustrate: “What service are we trying to provide? What is our competition? Should we be going everything we now are? Do we need more or fewer lines of products or services?” Answers to questions such as these help managers of an organization turn the radar on themselves and their activities, take a critical view of what is being done, decide what should be retained and what should be added, and put these thoughts and ideas into their plans. In brief, it is a thorough self-examination regarding the goals and means of their accomplishment so that the organization is given both direction and cohesion. |
Functional Strategy • How the different functions of the business support the corporate and business strategies? Five tasks of strategic management performed by the top management. • Developing a vision and mission | Process of strategy development consists of six distinct steps: • Determining objectives; • gathering and analyzing information; • assessing the strategic dimensions of the environment affecting the organization; • conducting a resource audit of the firm; • establishing strategic alternatives for courses of action, and; • choosing a strategic alternative to pursue and implement. |
• Setting objectives • Crafting a strategy • strategy implementation and execution • Evaluating performance, reviewing the situation, initiating corrective adjustments. | Strategies do not predict the future, but for a manager it can: • assist in coping effectively with future contingencies; • provide an early opportunity to correct inevitable mistakes; • help in making decisions about the right things at the right time; and • focus on what actions to take in order to shape the future as desired. |
FACTORS THAT AFFECT STRATEGY SELECTION • Managerial perception of external dependence (owners, competitors, customers, government, community); • Managerial attitudes toward risk; • Managerial awareness of past business strategies; • Managerial power relationships and organizational structure. |
Q.2 Discuss the need and importance of objectives in business.
Ans.
DEFINITION OF OBJECTIVES • An organizational objective is a target or goal toward which the organization directs its efforts and resources. | “Objectives” are desired outcome and can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. As a managerial objective is the intended goal that prescribes definite scope and suggests direction to the planning efforts of a manager. | |||
Need for objectives • Objectives are used: - as guide in decision making - for increasing organizational efficiency - for performance appraisal Types of objectives: • Short-term objectives; - Goals to be achieved within one year - Goals are more specific • Long term objectives: - Goals to be achieved within 3 to 5 years - Goals are more broader in nature. | Effective planning must begin with a set of objectives that are to be achieved by carrying out plans. To be worthwhile and workable, objectives should be: • Clear and specific. • Stated in writing. • Ambitious, but realistic. • Consistent with one another. • Quantitatively measurable wherever possible. • Tied to a particular time period. In business, a strategy is a broad plan of action by which an organization intends to reach its objectives. | |||
CHARACTERISTICS OF OBJECTIVES • Objectives should be specific, attainable, flexible, measurable, consistent in the long term/short term periods. | ||||
 | Two organizations might have the same objective but use different strategies to reach it. For instance both firms might aim to increase their market share by 20 percent over the next 3 years. To do that, one firm might intensify its efforts in marketing, while the other might concentrate on expanding into institutional development. Conversely, two organizations might have different objectives but select the same strategy to reach them. | |||
The concept of mission, objectives, strategies, and tactics each raise an important question that must be answered by an organization seeking success in business. | ||||
| | IMPORTANCE OF OBJECTIVES Direction of the business is indicated by the objective. It shows the results to be sought and segregates these results from the many possible targets that might otherwise be pursued. This direction provides the foundation to accomplish the goals. Inappropriate and inadequate objectives can retard management success and suffocate the operations of any organization. A profitable suggestion to any manager is to sit back periodically and reiterate the objectives sought and then determine whether the action currently being taken is actually contributing to the accomplishment of these goals. Such practice helps to minimize the difficulty many management members and their subordinates have in knowing what their current objectives are, identifying them both to themselves and to their associates, updating them and using them effectively in their management work. | |||
Q.3 Discuss the business environment and explain why internal and external analysis is necessary to plan an effective business policy.
Ans.
SEARCH FOR OPPORTUNITY ENVIRONMENTAL SCANNING OR ANALYSIS • Environmental analysis or scanning is a process of monitoring the organization’s environment to identify both present and future opportunities and threats that may influence the firm’s ability to reach its goals. • By environment we mean: “The set of all factors both outside and inside the organization that can affect its progress toward attaining its goals.” | BUSINESS ENVIRONMENT All business organizations today exist in a dynamic, challenging, and exciting environment. Any organization must identify and then respond to numerous environmental forces. Some of these forces are external to the firm, while others come from within. Management can’t do much about controlling the external forces, but it generally can control the internal ones. Many of these forces influence what can and should be done in any area of business. Ultimately, a firm’s ability to adopt to its operating environment determines, in large part, its level of business success. |
NEED OF ENVIRONMENTAL ANALYSIS • To know the external factors that shape the environment in which the firm operates. • How these factors affected the firm’s operation in the past? • What are the expected trends in these factors over the longer term? • What challenges, opportunities, threats, risks, are present in the environment? | Successful achievement of goal of the organization depends largely on a company’s ability to manage its all programmes within its environment. To do this, a firm’s executives must determine what makes up the firm’s environment and then monitor it in a systematic, ongoing fashion. They must be alert to spot environmental trends that could be opportunities or problems for their organization. Then executives must be able to respond to these trends with the resources they control. IMPORTANCE OF ENVIRONMENTAL MONITORING How important is environmental monitoring to business success? In a word, large companies concluded, “Firms |
ENVIRONMENT STRUCTURE GENERAL ENVIRONMENT • External environment made up of components that are normally broad in scope and have little immediate application for managing an organization. The components may be the following: - Economic environment - Social environment - Political environment - Legal components of the external environment - Technological environment | having advanced systems to monitor events in the external environment exhibited higher growth and greater profitability than firms that did not have such systems”. WHY INTERNAL AND EXTERNAL ANALYSIS IS NECESSARY TO PLAN AN EFFECTIVE BUSINESS POLICY The management process consists of planning, implementation, and evaluation. Planning is deciding now what we are going to do later, including when and how we are going to do it. For this purpose, management defines the organization’s mission, objectives, policies, strategies, assesses its operating environment, sets long-range goals, and formulates broad strategies to achieve the goals. |
Operational Environment • Environment which is made up of components normally have relatively specific and more immediate implications for managing the organization. For instance - Supplier components - Competition components - Customer components - Labour components | To plan an effective business policy as a whole, management needs to lay plans for each major functional area, such as marketing, financing, production, etc. Of course, planning for each function should be guided by the organization-wide mission and objectives. Study of internal and external environments is essential because various environmental forces influence the activities of business. Study of these factors determine an organization’s level of success or failure in reaching its objectives. |
INTERNAL ENVIRONMENT • Level of an organization environment which exists inside the organization and normally has immediate and specific implications for managing the organization. PERFORMING ENVIRONMENTAL ANALYSIS • Determining the relevance of environment levels: - organization size and its degree of involvement in national/international business. - six and scope of business determines degree of relevance to various environment levels. | Before taking any decision management should set up a system for environmental monitoring through a process of gathering and analyzing information about external environment and the forecasting the impact of whatever trends the analysis suggests. EXTERNAL ENVIRONMENT There are six variables of external environment which are inter-related and have considerable influence on an organization’s opportunities and activities. These are described in some detail as under: Demographics: Demographics are the statistics that describes a population. Their popular characteristics include age, gender, family life cycle, education, income and ethnicity. |
ENVIRONMENTAL ANALYSIS TECHNIQUES • Environmental scanning • Threats and opportunities analysis and strengths and weaknesses analysis • Environmental forecasting. ROLES OF ENVIRONMENTAL ANALYSIS IN ORGANIZATIONS • Policy oriented role • Integrated strategic planning roles • Functions oriented | Organizations need to understand these consumer characteristics. These characteristics of demographic factors influence business policies through their proportional or disproportional change in each characteristic with rise and fall. Economic conditions: The rate of growth in the country’s economy, which can be studied by reviewing yearly change in the Gross National Product (GNP), can have a significant impact on an organization’s efforts. Other economic related factors are current and anticipated stage of the business cycle, information and interest rates that influence business policies. |
Competition: This is also one of the influence factors because a company’s competitive environment is major in its kind and often affects efforts and success because one organization sells a good or service and has control over in as a monopoly. There are three types of competition. First type comes from producer of directly similar products. Second is a substituted product, which satisfies the same need, and last is more general type of competition. | |
Social and Cultural Forces: These refers to quick change in the consumers life-style, their values and beliefs that is the way in which a person lives and spends time and money. It is a function of the social and psychological factors internalized by that person, along with his or her demographic background. Some socio-cultural trends are (i) changing gender roles (ii) a greater premium on time and (iii) added emphasis on physical fitness and health. | |
Political & Legal forces: Some legislation seek to maintain a “level playing field” for all competitors by prohibiting organizations from using their business policies that unfairly injure competitors. Some laws protect consumers rights and restricts certain business activities. The political environment often affects legislation which are always discussed before their enactment. Besides, monetary and fiscal polices and Government relationship with industries are also categories of these forces which affecting business activities. | |
Technology: Technology includes development and use of machinery, products and processes. Its advancement is costly and required employees training. Therefore, technological breakthroughs affect business policies by cost and also starting new industries, radically or virtually destroying existing industries and stimulating markets & industries not related to the new technology. | |
INTERNAL ENVIRONMENT An organization’s business policies are also shaped by internal forces that are controllable by management. These internal influences include a firm’s production, financial and personnel activities. Other forces are the company’s location, its research and development strength, and the overall image the firm projects to the public. Plant location often determines the geographic limits of a company’ market, particularly if transportation costs are high or its products are perishable. The Research and Development factor may determine whether a company will lead or follow in its industry. | |
Another thing which is considered in a firm’s internal environment is the need to coordinate its all departmental activities. Sometimes this can be difficult because of conflicts in goals and executive personalities. |
Q.4 How do the technological and economical factors affect the business policy of a firm? Cite examples to support your answer.
ECONOMIC ENVIRONMENT • Level of economic development • Population • Gross national product • Per capita income • Literacy level • Social infrastructure • Natural resources • Climate • Membership in regional economic blocks. • Monetary and fiscal policies • Nature of competition • Currency convertibility • Inflation • Taxation System • Interest rates • Wage and salary levels | TECHNOLOGY Technology has a tremendous impact on our life-styles, our consumption patterns, and our economic well-being. Just thing of the effect of technological developments such as the airplane, plastics, television, computers, antibiotics, lasers, and video games. Changing technology can dramatically alter an entire manufacturing process or the accounting procedures of a firm. Included under technological influences are the application of new ways to transfer resources into a product or service by means of the discovery and use of new materials, new methods, and new machines. | |
STATE OF TECHNOLOGY • Emerging - Developing - Maturing or Declining. • Personnel availability to use technology. • Type and availability of supportive equipment. • Sources of technology - domestic/foreign • Likelihood and time frame of technology obsolescence or replacement • On the basis of company’s internal environmental analysis its strengths and weaknesses can be easily identified • The firm’s abilities to achieve firms different strategic objectives. | Considering that some of the technological breakthroughs that are expanding our horizons. It is hard to grasp the fantastic possibilities in many fields ranging from pharmaceuticals to miniature electronics. For example, small handheld computers allow sales people to place orders directly from a customer’s location. Technological breakthroughs can affect: • By starting entirely new industries, as lasers, and robots have done. • By radically altering, or virtually destroying, existing industries. When it first came out, television crippled the radio and movie industries. And computers all but replaced typewriters, word processors. • By stimulating industries not related to the new technology. New home appliances and microwavable foods given people additional time in which to engage in other activities | |
Technology is a mixed blessing in some ways. A new technology may improve our lives in one area while creating environmental and social problems in other areas. Television provides built-in baby-sitters, but it is criticized for reducing family discussions and reading by children. The automobile makes life great in some ways, but it also creates traffic jams and air pollution. | ||
ECONOMIC FACTORS This major area influencing the business policies and strategies include the basic economic system - whether private or public ownership prevails, the fiscal policy of government expenditure, the organization of capital markets, the size of the market, and the total purchasing power of the population. Also of interest are the controls over commercial bank operations, credit, discounting and availability of power, water, and transportation as well as labour skills and productivity. Economics has always had a significant influence on the development of business polices and strategies in which it is practiced especially by such economic factors as the current and anticipated stage of the business cycle, as well as inflation and interest rates. In management, economics deals with decision making involving the use of resources devoted to different goals. Modern economics emphasizes questions of international trade, taxation, and government regulations that are all areas of major contemporary importance. | ||
Stages of the business cycle: The traditional business cycle goes through stages: prosperity, recession, and recovery. • Prosperity is a period of economic growth. During this stage, organizations tend to expand their policies and strategies. • Recession is a period of retrenchment for businesses and tighten the economic belts. People can become discouraged, scared, and angry. naturally, these feeling affect their purchasing power, which in turn, has major implications for companies, often leading to economic losses. • Recovery is the period when the economy is moving from recession to prosperity. The management’s challenge is to determine how quickly prosperity will return and to what level. As unemployment declines and disposable income increases, companies expand their efforts to improve sales and profit. | ||
Inflation:- is a rise in the prices of goods and services. When prices rise at a faster rate than personal incomes, purchasing power declines. Inflation rates affect government policies, consumer psychology, and too business polices and strategies. | ||
Interest rates:- Interest rates are another external economic factor that influences business policies and strategies. When interest rates are high, consumers tend not to make long-term purchasing such as housing. | ||
Q.5 Explain how to conduct an internal strategic management audit?
EVALUATION OF CURRENT SITUATION PERFORMANCE • How is the firm performing in terms of - Return on investment - Overall market share - Profitability trends - Earning per share STRATEGIC POSTURE • What are the firm’s current mission, objectives, strategies, and policies? • Are the clearly stated or are they merely implied from performance? | INTERNAL STRATEGIC MANAGEMENT AUDIT Management audits have developed over the years as a way to evaluate the effectiveness and efficiency of various systems within an organization, from social responsibility to accounting control. Management audits may be performed for either internal or external purposes. Some of the tools and approaches can be used for both. Internal management audit may be used to determine specific strengths and weaknesses in the functional area of business to improve the planning process as well as internal control systems. The periodic assessment of a company’s managerial planning, organizing, staffing, training, coordinating, controlling compared to what might be called the norm of successful operation is the essential meaning of an internal strategic management audit. It reviews the company’s past, present, and future. | |
EVALUATION OF CURRENT MANAGEMENT Board of directors • Who are they? • What is their knowledge, skills, background? • What is their level of involvement in strategic management? Top Management • What person or group constitutes top management. • What are top management’s main characteristics in terms of skills, knowledge background • What is their level of involvement in strategic management? • Is the top management sufficiently skilled to cope with likely future challenges? | The areas the company covers are examined with a view to determining whether the company is achieving maximum results from its endeavours, identifying areas where improvements are needed, and keeping expenditures to a minimum while carrying out required operations. TEAM & SCOPE OF AUDIT An internal study team for management audits can be formed with managers from the following organizational areas: • Operations management • Financial management • Internal auditing • Electronic data process systems management • The board of directors (or their audit committee) | |
ENVIRONMENT ANALYSIS • SWOT analysis • PEST Analysis • Should the mission and objectives be changed if so how. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY IMPLEMENTATION PLAN MONITORING AND EVALUATION SYSTEM | The diversity of the study team suggests the scope of control systems that must be investigated. ATTRIBUTES USED IN AUDITING To perform a internal strategic management audit it is helpful to draw up a list of qualifications desired and attach a credit valuation to each. The selection and respective weights given these qualifying factors are highly flavoured with judgement and in many cases quite controversial. | |
The audit itself assesses: • what the company has done for itself; and • what it has done for its customers or recipients of the products or service provided. To reach these assessments, evaluations on a number of factors may be deemed necessary. These include attributes dealing with financial stability, production efficiency, sales effectiveness, economic and social affluence, personnel development, earnings growth, public relations, and civic responsibility. | ||
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