Business Policy Concepts - Assignment Example

Exploration of Business Policy Concepts A business, no matter how small or large has to plan its policies to do business. In the case of a small enterprise all the business policies can be in the head of owner/ operator while the larger companies have to design business strategies which set the overall direction of the company. The corporate business policy is the highest level of management activity carried out by the chief executive and the management team. The corporate business policy must be well suited to the organization's resources, its objectives and circumstances. The policy also has to be sensitive to the social environment of the organization. A good corporate strategy should integrate an organization's goals, policies, and action sequences (tactics) into a cohesive whole. The success of Japanese companies revealed implementation policies which appeared to be unique but have now been shown to be valid in many business environments, for example management by walking around (MBWA) proved to be a successful technique for Honda. Senior management's contacts with key people resulted in appropriate choice of policies and to the success of the company philosophy. This shows that corporate choice of strategy and implementation of that strategy involves many different concepts, theories and frameworks. An understanding of major choices of corporate policies and their advantages and disadvantages is critical to the understanding of business policy process {Johnson et al, 2005]. This paper reviews the major types of strategic analysis, strategic choice an implementation techniques. The topics covered include: 1. Strategic Analysis Strategic drift Porter's 5 Forces PESTEL 2. Strategic choice SWOT The Growth Share (or BGC ) Matrix Mergers and Acquisitions 3. Strategy into Action (Strategic Implementation) Symbolic Procedures of Managing change Balogun and Hope Hailey Model (types of change) Force field analysis Styles of managing change STRATEGIC ANALYIS Strategic Drift In a perfect world a strategy planned by the management will proceed according to plan and be implemented. Unfortunately any belief that strategy can be formulated on the basis of intended and deliberate actions to result in commercial success is far from the truth. This concept rules out any opportunity to adapt to a changing market situation. In a number of cases a situation may develop where incremental changes in the strategy may result in a more advantageous position for the company. This is a positive example of strategic drift. A preplanned and formulated strategy also assumes an organization to be homogeneous where management decisions from the top can be implemented in full. In practice the decisions are effected by power behavior, cultural and political factors. Quinn [cited in Peppard et al, 1996] argued that strategy develops incrementally as a result of decision made due to developing market situations and other organizational experiences. This strategic drift results in a course which is often significantly different from formal planning. Drift in strategic planning is a fact of organizational strategy. It does not mean that strategic policy making is a useless process as it will eventually drift into something new. It only recognizes that changes often become necessary due to extraneous factors and require adjustments to the strategy to keep the broader strategy on course. Porter's 5 Forces Porter's five forces is a useful tool for analyzing the factors impacting on strategy formulation. [Porter, 1980] identified forces that impact every business. The objective of the strategy is to use these competing forces to result in a positive impact on the business. These forces identified by Porter are the driving forces of the industry. The strategy analysis thus analyses the impact of these forces on a particular business and how to minimize the impact of the negative forces and maximize the benefits of the positive forces. The five forces are: 1. The threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of customers 4. Threat of the substitutes 5. Competitive rivalries within the industry All suppliers of inputs to a business have a bargaining power. This power depends on the umber of suppliers in the market, availability or lack of availability of substitutes, the ease or difficulty of replacing the suppliers. If the business has a high profitability, can place large orders to give the supplier the advantage of economy of scale and if the business does not have many restrictions on entry of new suppliers than it can reduce the bargaining power of the suppliers. The customers bargaining power is high if substitute products are easily available in the market, the product is not of critical importance to the customers, customers have low margins and are price sensitive. Threat of easy substitution reduces profitability. Companies can counter these threats to some extent by creating brand loyalty, creating product image and marketing techniques. The ease of substitution allows threats from new entrants too. If the business requires large initial investments or high technology or is only viable if produced in large quantities due to economies of scale than the new entrants will not easily enter into the field Threats from competitors can reduce the profit margin. A very large competitor could reduce their prices below the cost price of the business for a limited period and drive the smaller business out. If it is difficult to exit the business due to high prices of installed machinery, the competition will keep the prices low for all competing businesses. The five factors mentioned above determine the attractiveness or otherwise of a business. The business has to adopt a strategy which minimizes the negative factors or counter these by appropriate strategy. Porter 5 forces allow analysis of the factors which can influence a business and allows planning of a strategy to counter the negative impact of these forces and maximize the positive ones. For example partnering or taking over a supplier or creating a dependency for the supplier will reduce the bargaining power of the supplier. Increasing customer loyalty or incorporating a feature in the product which removes the price as a primary criterion for the customer reduces the bargaining power of the customer. New entrants or impact of substitutes can be minimized by building product image, ensuring proprietary content of products etc. The competitor rivalry can be minimized by buying out the competition, avoiding price wars, creating a unique product or product image. Porter's forces present a good analysis in a perfect market oriented situation and a simple market structure, in a regulated market or in a market with complex sets of product and interrelation of the five forces makes the use of this tool meaningless. Modern businesses with technological breakthroughs, strategic alliances, electronic information systems and supply chain advantages can make the application of Porter's forces of little value. PESTEL The traditional business impact analysis such as Porter's five Forces considered only the strength, weaknesses, opportunities and threats to a business or organization and the external factors which impacted these factors for the organization. In practice the organization is affected by not only its competitor and suppliers but also by the macro environment in which the company operates. These factors are included in PESTEL Analysis: 1. Political factors (P) 2. Economic Factors (E) 3. Social Factors (S) 4. Technological factors (T) 5. Environmental Factors and (E) 6. Legal Factors (L) The political factors look at the continuation or discontinuation of existing political policies. In a stable democracy change of government has a nominal impact but if the likely outcome of a change can have an impact on the business the risk needs to be covered in the analysis. The present or future taxation policies, government involvement in foreign trade regulations or the impact of government policies on foreign trade can impact the availability of imported inputs as well as foreign customer markets. Interest rates, disposable income of the population, local unemployment and business cycle of the organization are part of the economic Analysis. Socio-cultural aspects look at population demographics, income distribution, levels of education and consumerism. The Technological analysis checks the viability of technology used in the processes and organization. How soon will they become obsolete, what is the impact of technology on the process etc The environmental protection laws, the regulations regarding waste disposal, possibility of environmental pollution and its legal impact are analyzed in environmental analysis, while the employment laws, safety and health laws and other legislations are analyzed in the legal impact analysis. Thus PESTEL is much more comprehensive analysis of strategic analysis of business. Normally the important parameters of factors included in PESTEL are isolated and detailed study performed on these important or critical factors. The effect of all the PESETL factor and their impact on the organization can be listed for analysis. Globalization is another factor which can have a strategic impact on an organization. The profitability of a company working in a non global environment can be severely affected if the markets were opened to cheap imports from other countries. STRATEGIC CHOICE SWOT Analysis The strategic choices can be made more knowledgeably by analyzing the internal Strengths (S) or Weaknesses (W) and the external factor Opportunities (O) or Threats (T). This analysis is often called SWOT Analysis. A SWOT analysis is a subjective assessment of data which is organized by the SWOT format into a logical order that helps understanding, presentation, discussion and decision-making. In SWOT the business issues are categorized for program planning [SWOT Analysis, 2006]. Typical categories are: 1. Product 2. Process 3. Customer 4. Distribution 5. Finance 6. Administration In the second step the issues in each of these categories is converted into a planning issue .The Internal Analysis (Strength/Weakness) and External Analysis (Opportunity/Threats) is converted into SWOT Matrix. The strengths, weaknesses Opportunities and threats are listed in four quadrants and the team leader can develop and define the overall agreed objectives between levels of the business hierarchy. Analysis of results shows how to build on strengths, resolve weaknesses, exploit opportunities and avoid threats. The Growth Share (or BCG) Matrix Boston Consulting Group devised a nine cell matrix to analyze business strategies. The two axes (enterprise strength vs. industry attractiveness) are divided into three cells each resulting in a 9-cell matrix. The organization present position can be marked with a circle in the appropriate cell. The competitors can also be placed on the grid according to their position (the diameter of the circle can show their size in terms of say sales).The diagonal of this matrix represents medium attractiveness. These cells represent caution in additional investment in product or services. The business should maintain its present share and nor reduce or increase it. The three cells below the diagonal cells (lower right) represent unattractive region and hint for an exit plan. The top left three cells above the diagonal cells indicate favorable position and a green light for further investment. The cell representation is as follows [BCG, 2006]. The BCG Matrix provides a good assessment of company position and also the strategy for increasing profitability, maintaining position or planning to wind up the business. Mergers and Acquisitions A strategic business policy may favor merger or acquisition as a future direction for the business. An acquisition is buying of another business and eventually controlling it. A merger is to integrate own business with another and sharing control of the business with the owner of the other merged business. Both merger and acquisition have many positive reasons. A business may acquire a wider customer base, additional skills and knowledge, revive own under performing business through merger or acquisition of additional assets, reduces competition, reduces costs and overheads and access to funds for new development. Merger or acquisition may be good strategic choices if the target business is undervalued, is poorly managed, has poorly utilized assets and /or adds to the product range of the existing business. Merger or acquisition can become problematic too, for example if other competitors start bidding for the company increasing its share price, if the other owner remains involved in the business and conflict result due to involvement of the owner of the merged company, if the business culture is incompatible or if the merged or acquired company does not perform to the expectation. The merger or acquisition must be carefully analyzed before it is used as a strategy for survival of the company or for increasing the market share. STRATEGY INTO ACTION (STRATEGIC IMPLEMENTATION) A well planned and analyzed strategy does not result in the success of an enterprise. The successful implementation of a well planned strategy is the key to the success of the business or organization. As the circumstances or operating parameters change due to unexpected variation in internal or external parameters, the strategy may need to be adjusted to cover for the impact of these changes. The drift however can be minimal in a well planned and analyzed strategy. Symbolic Procedures of Managing Change The symbolic procedure of managing change requires radically changing the way of managing business. The old hierarchical approach wastes both talent and time. The business managers have to provide leadership and trust to see their strategy succeed. The role of management in managing change process is to ensure that the change delivers benefit to the organisation and its people. The procedure must inform the staff the context of change and ensure that they handle the politics of major change without becoming entangled in the resistance to change. The role of the management is to co-ordinate, prioritise and oversee the change process, whilst allowing the formation of working groups. Balogun and Hope Hailey Model (types of change) The people process model allows development of frameworks in which the various themes of change can be placed and examined in relation to each other [Balogun and Hope-Hailey 1999]. Balogun and Hope Hailey (1999) argue that three levels of interactions to overcome the resistance to change can be described as below two concepts can be combined in order to show designers of change what interventions in the overall process can achieve for individuals experiencing change. UNFREEZE MOVE ACCEPTANCE SUSTAIN MINIMISE SHOCK COMMUNICATE EARLY EXPECT RESISTANCE HELP INDIVIDUALS TO CHANGE GIVE SUPPORT EDUCATE & TRAIN ENCOURAGE REFLECTION SUPPORT INDIVIDUALS IN NEW ROLES CELEBRATE SUCCESS Three Level of Interaction [Ref Balogun and Hope-Valley, 1999] Force Field Analysis Forced Field Analysis is used when implementing a strategy that involves or affects the people. The analysis identifies the forces that are likely to resist the change to strategy implementation. The Analysis requires debating the reasons why the implementation might be resisted. [ACIG, 2000] A solution has to be developed to reduce or overcome the resistance. These driving forces are than prioritized to influence the resisting forces according to their impact on resistance, ease of implementation and response time to take effect. The Style of Managing Change The management should not be seen to be imposing change but rather "delivering a platform which everyone wanted". [Balogun and Hope Hailey, 1999] identify style to enable the management to implement the desired changes. STYLE DESCRIPTION ADVANTAGES DISADVANTAGES EDUCATION AND COMMUNICATION SMALL GROUP BRIEFINGS DISCUSSION AND EXPLANATION. GAIN SUPPORT FOR CHANGE BY GENERATING UNDERSTANDING & COMMITMENT SPREADS SUPPORT FOR CHANGE. ENSURES A WIDE BASE OF UNDERSTANDING TIME CONSUMING. EASY TO VOICE SUPPORT THEN DO NOTHING. DEBATE MAY NOT BE ENOUGH TO CONVINCE PEOPLE OF THE NEED FOR CHANGE COLLABORATION WIDESPREAD INVOLVEMENT OF EMPLOYEES SPREADS SUPPORT AND OWNERSHIP TIME CONSUMING. LITTLE CONTROL OVER DECISIONS MAD PARTICIPATION/ INTERVENTION CONSULTATION OF EMPLOYEES ABOUT HOW TO DELIVER THE DESIRED CHANGES SPREADS OWNERSHIP & SUPPORT. MORE CONTROL & EASIER TO SHAPE GROUP DECISIONS CAN BE MANIPULATIVE DIRECTION CHANGE LEADERS MAKE THE MAJORITY OF DECISIONS. USE OF AUTHORITY TO DIRECT CHANGE PROVIDES A CLEAR CHANGE OF FOCUS AND DIRECTION. LESS TIME CONSUMING POTENTIALLY LESS SUPPORT AND COMMITMENT. MAY CAUSE SOME RESISTANCE TO CHANGE COERCION USE OF POWER TO IMPOSE CHANGE ALLOWS FOR PROMPT ACTION UNLIKELY TO ACHIEVE SUPPORT WITHOUT A CRISIS Management Styles [Ref. Day, 2000] Bibliography 1. ACIG, Australian Continuous Improvement Group, Forced Field Analysis, 2000, Johnson G. Scholes K., and Whittington R. "Exploring Corporate Strategy", 7th Edition, Prentice Hall, 2005 2. Balogun, J. & Hope-Hailey, V. (2004) Exploring Strategic Change. London, FT Prentice Hall 3. BCG Growth Share Matrix, Retrieved from Internet on 14 April 2006, http://www.business-strategy-brs.com/models/model17.asp 4. Day, G., Change Management, October 2000, retrieved from Internet on 14 April 2006,http://www.fitting-in.com/Daymba.htm, 5. Lynch R., "Corporate Strategy". 3rd edition, FT Prentice Hall, 2003 6. Mergers and acquisitions, Retrieved from Internet on 14 April 2006, http://www.insolvencyhelpline.co.uk/business_advice/grow_your_business/planning_strategy/mergers.htm 7. Peppard, J., Dhillon, G., and R. Hackney, R., Emergent Strategies, Strategic Renewal and Serendipity in Business Strategy Creation, Presented at BIT Conference, Manchester, November 1996 8. Porter, M. E., Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980, available from http://www.amazon.com/exec.obidos/ASIN/068484187/managementpor20 9. SWOT Analysis, Retrieved from Internet on 14 April 2006, http://www.businessballs.com/swotanalysisfreetemplate.htm#SWOT%20analysis%20inventors,%20origins%20and%20history%20of%20SWOT%20analysis Read More