CHAPTER 1

CHANGING NATURE OF POLICY AND STRATEGY FORMULATION

 Adopting the business organization to changing environmental conditions
- Main task of the top executive prior to shift to long-rage planning.
- Developed during the period between World War 1 & 2.
 Henry Fayol
- French industrialist who first defined the approach of adopting the business organization to
changing environmental conditions.
- Conducts General survey as basis for an important decision, as stated by Luther Gulick and L.
Urwick.
 General Survey – Consisted of a size-up of the business situation with respect to the following:
(OU-CO-FI-AN)
1. Outlook for the economy and industry.
2. Competitive situation
3. Financial and Operating picture of business organization
4. Analyses of sales, production, costs, product development and executive organization
 James O. Mckinsey
- Pioneer among management consultants
- Chairman of the Board of Marshall Field and Company
- Described top management approach
 Melvin T. Copeland – “The Job of an Executive”
 Gen. Characteristic of Top Management Practice
- To decide on a course of action on the light of a situation facing the business organization at a
particular period of time.
- Concern was mainly on “immediate profits” and “adaptability to meet changes”
 Objectives – frequently “forgotten” as the new business “grew” and “became more complex”.
 Plans – became “obsolete” or “forgotten” as the organization adapted to changing conditions
 Planning – initiated only when management sensed that “serious policy problems” existed.
 Master plan – program of action when expressed as broad policies
 Centralized Organization – divide size-up along departmental lines. It is the most common size-up
approach.
 Decentralized Organization – size-up in terms of products.
 Specific attention was paid to interrelationships that might be significant for the entire business
organization.
 With the importance of clear thinking and sound reasoning, some executives found it useful to test their
reasoning by resorting to the intellectual rigor of the professional’s brief.
 Some executives and consultants found it useful to look at the:
1. Competitive situation, followed by
2. Analysis of the financial and operating situations.
 Determination of objectives required choice between alternative ways of solving the problem diagnosed
in the size-up.
 The objectives provided direction for the development of a program specifying “sequence” and “timing
of actions”.

 TRANSITION TO STRATEGY FORMULATION: (ICS)

1. Inadequacy of an open-end administration – traditional approach to policy formulation was inadequate.
2. Completing the administrative cycle – size-up of situation was replaced by “reappraisal of present policies,
its effect is a shift from open-end, short-run approach to “closed-loop, long-rang” approach.
3. Shift in emphasis to strategy formulation – shift in emphasis from diagnosis to formulation, particularly
with respect to “strategy”.
 Reappraisal of Present Policies
- Replaces the size-up of situation
- May disclose an “inadequate strategy”, “inappropriate organizational structure or processes”, or
“ineffective management performance”.
 Peter Drucker – “management attention has been focused more on the seizing of opportunities than on
the solution of problems”.
 Frank F. Gilmore and Richard G. Brandenburg – developed some approach to structure of the general
problem of policy formulation.
 THREE BASIC COMPONENTS COMPRISE THE STRATEGY: (ECP)
a. Economic Mission
- Concerned with the kind of business the business organization should be in and what its performance
objectives should be.
b. Competitive Approach
- finding the product-market sales approach that will accomplish the economic mission
- Deriving pertinent goals in various areas of the business
- Way in which the business organization is pursuing its objectives
c. Program of Action
- Involves a search for efficient means of implementing the competitive approach.
- Specifies how the activities required to accomplish the competitive approach are programmed.
 STRUCTURE OF THE STRATEGY FORMULATION PROBLEM (De-Re-Di-4F)
1. Definition of present strategy
- Present strategy is the business organization’s economic mission, competitive approach, and program
of action.
- Kind of Business – is the field or fields of endeavour within which the company operates.
- Field of Endeavor – may be a segment of an industry where the business organization may be thought
of as specialized.
- Objectives may be sought in the ff. critical areas of performance:
a. Growth, with respect to rate, continuation, and share of market
b. Flexibility, in relation to uncertainties of technological change
c. Stability in resisting major declines in the business cycle.
d. Return on investment (ROI)
2. Reappraisal of present strategy
- Involves examining the internal and external environment of the business organization for problems
and opportunities that might demand some adjustment in strategy.
- Reappraisal must be projected in the future by:
a. Establishing assumptions and planning premises
b. Estimating consequences of continuing the present strategy
c. Establishing future trends and developments.
- Three key areas involved in reappraisal/ examining internal environment: (Com-ET)
a. Competitor’s actions
b. Economic trends
c. Technological developments
- The reason for a “strategy” is the competitive advantage it affords.
- Changed circumstances - may reduce or nullify competitive advantage.
- Synergy - refers to advantages from joint programs where favourable impacts on costs and profits
results from activities that mutually reinforce one another.

3. Diagnosis of need for change

- The evaluation leads to the determination of “when” and “what” extent the “present strategy” should
be changed.
4. Formulation of economic mission
- Questions arise as to what kind of business the organization should be in and what the performance
objectives should be.
- Four performance objectives that should be considered: (Gro-Fle-Sta-Ret)
a. Growth
b. Flexibility
c. Stability
d. Return on Investment
- Inherent Potential – extent to which a field of endeavour offers the possibility of achieving objectives
in the four critical areas of performance.

5. Formulation of competitive approach

- Question of how the organization should pursue its objectives in each field of endeavour specified in
the economic mission must next be resolved.
- Area that need to be explored in evaluation of alternative approaches for fields of endeavor:
a. Potential market for each product-market opportunity needs to be estimated
b. Performance market opportunity needs to be ascertained
c. Estimate capabilities and resources of potential competitors in each product-market.

6. Formulation of program of action

- Programming the activities required to accomplish the competitive approach chosen
- Concerned with the development of a program to carry out plans.
7. Framework for strategy formulation
- Consists of a series of cascaded planning loops.
 - It gives feedback of planning results from the formulation phases to the reappraisal phase for updating
the present strategy.

 QUANTITATIVE VS. QUALITATIVE APPROACHES

 Two Approaches that are capable of handling a large number of variables: (Ma-Sim)
1. Mathematical programming
2. Simulation
 Linear Programming
- Best known and best developed mathematical programming
- Applicable in those situations where relationships are linear.

 Mathematical Programming
- requires only that data be provided for an already established model
 Simulation
- requires that the model itself be constructed
 Simulation Model
- Requires a great deal of time and effort to construct and test, and is extremely difficult to validate.
 Other operations research approaches not relevant to overall decision, but relevant to parts of the
strategy decision process: (Ca-In-S)
1. Capital Budgeting
2. Inventory Theory
3. Scheduling Theory
 Operations Research - appropriate for the solution of well-defined problems where the relevant
relationships can be specified and the objectives have been decided upon.
 Systems Analysis – appropriate for use in ill-structured problems, where the relationships are not clear
and where decisions must be made among alternative objectives.
 Continuing importance of diagnosis in business policy decisions should be devoted to determining
“what is the problem that needs to be solved” as is given to selection of the best course of action from
among alternatives.
 Integrated – a company active in several related fields of endeavour within the industry
 Diversified – a company active in unrelated fields of endeavour within the industry.
 CHAPTER 2
DEVELOPING A USEFUL APPROACH TO POLICY AND STRATEGY FORMULATION AND
ADVOCACY

 PROCESS OF POLICY FORMULATION (R-I-D-F-E-C)

1. Record Present Policy
- If efforts to record present policy fail, one can fall back on the size-up approach for the next step
- In recording present policy it is important to clarify the criteria that top management want to use as to
the kind of company they want to operate and feel they ought to operate.
2. Identify Policy Problems
- Present policy is reappraised to determine whether policy problems exist.
- Forms of policy problems: (T-F-S-A-F-O)
a. Threats or opportunities in the environment
b. Failure to meet plans
c. Signs of organizational strife
d. Adverse trends with respect to share of market, competitive advantage
e. Financial results or conditions
f. Other indications of loss of health or vigor

3. Diagnose their Cause

- Possible root cause of policy problems:
a. Inadequate strategy
b. Inappropriate implemental approach
c. Ineffective management
- Effective prescription of a cure requires identifying the cause.
4. Formulate Alternative Policies
- Place for innovation rather than for logic.
- Important thing at this stage is that no possible alternative be overlooked.
5. Evaluate Alternative Policies
- Evaluation for alternatives requires analysis and comparison with respect to relevant factors.
- If one were confronted with strategy problem, relevant considerations includes:
a. Return on investment
b. Growth
c. Flexibility in adapting to technological fluctuations
d. Competitive advantage
e. Top management’s criteria of values and responsibilities
- If one is confronted with an organizational structure or processes problem, relevant considerations
are:
a. Consistency with the strategy
b. Degree of centralization or decentralization
c. Extent of autocratic vs. participation management approach
d. Relative degrees of freedom vs. prescribed behavior in the form of policies and procedures
- A change in strategy frequently carries with it the need for a corresponding:
 a. Change in organizational structure
b. Change in organizational processes
c. Changes in executive manpower
6. Choose a New Policy
- Choose of the particular policy to be proposed requires the final step of evaluating the relative
significance of the various considerations.
- Choice of new policy marks the end of the six-step procedure.
 IMPORTANCE OF GROUP EFFORT IN POLICY FORMULATION
 H. Wagner and C. Arnold
- According to them, policy formulation can be approached as a group effort.
- Such an approach should be facilitated through the use of group discussion techniques based in the
problem-solving framework just presented.
- Joint effort should hasten the process and lead to a better overall result, inasmuch as there will be a
higher probability that the most useful facts and judgments will be made available for solving the
problem.
 ADVOCATING BUSINESS POLICY PROPOSALS
 Only if a sound preparation was made in formulation can one confidently prepare a report that will
successfully advocated his proposal and show that:
a. Policy problems exist
b. Cause of the policy problems has been diagnosed
c. Proposal will remove the cause
d. Proposal is practicable
 Steps that are useful in the process of developing a presentation:
1. Phrasing the Proposition
- Stating the solution arrived at by the process of formulation as a proposition of policy.
- Three Major Kinds of Proposition: (F-V-P)
a. Proposition of Facts
b. Proposition of Values
c. Proposition of Policy
- Proposition – is an expression of a judgment for which one seeks acceptance.
- Any proposition of policy must be expressed as a “normative statement”.
- Normative Statement calls for some specific action to be performed and is characterized by the word
“should”.
2. Discovering the Issues and Formulating the Major Contentions
- Raising the vital questions on which the validity of the proposition hinges and formulating the
affirmative answers to these questions.
- Two Important Characteristics of Issues:
a. Issues are questions on which the validity of the proposition hinges.
b. Each issue is vital to the proposition; that is an affirmative position must be taken to support the
proposition.
- Affirmative position taken with respect to an issue may be defined as a major contention.
- Major contentions derived from the four issues form the main line of reasoning of the argument.
3. Marshalling the Evidence
- Selecting the facts, reasons, opinions, and assumptions to use in support of the major contentions.
- Four Sources of Evidence: (Fa-Ge-Op-As)
a. Facts
- Most reliable source, since statements of facts are “less open” to question, than interpretations of them.
b. Generalizations
- inductive reasoning gives rise to generalization
- The value of an imperfect generalization depends on: (R-E-D)
b.1 Relative size of the unobserved portion of the relevant instances
b.2 Extent to which the instances observed are representative
b.3 Degree of probability that such a generalization exists.
c. Opinions
- Cannot always be taken as valid.
- They may understate or overstate the situation or viewpoints may be biased.
d. Assumptions
- This is a statement that is not, and usually cannot be, derived from the specific data of the situation.
- May be completely unrelated to any available data, or may be based on the data.

4. Briefing the Argument

- Organizing the major contentions and evidence into logical order.
- Brief is a complete, logical development of all the material relevant to one side of the argument. It is
a preparation tool designed to organize the logic of the argument.
- Three Parts of a Brief: (In-Bo-Co)
a. Introduction
- Designed to lead to the supporting statements of the analysts’ stand on the proposition, but not set
forth that support.
b. Body
- Should present the major contention as the main point, each supported by reasons and evidence
arranged in logical order.
- The relationships between points and sub-points in a brief are indicated by the proposition “for” or
“because”.
c. Conclusion
- The conclusion should be a summary of the essential points of the body of the brief.
- It is a list of the major contentions.
- It should be a statement of the proposition.

5. Outlining the Report

- Rearranging logical argument to include audience appeal.
- Goal of a policy report is persuasion.
- Two Main Factors in Planning the Report:
a. Characteristics of the situation – the nature of the problem presented, the specific issues to be resolved,
the facts available, and so forth
 b. The predisposition of the evidence, awareness of the problem, recognition of the action, initial
receptivity to the proposition to be offered and so forth.
- Outline for Single-Page Report:
a. Proposal
b. Policy problem exist
c. Cause has been diagnosed
d. Proposal will remove cause
e. Proposal is practicable

6. Writing the Report

- Preparing the presentation.
- At this point the analyst has completed the formulation phase, developed the logic of his argument by
constructing a brief, and matched the argument to the audience by preparing an outline.
- Three Major Areas required in Policy Writing: (Or-Co-St)
a. Organization
- report should be logically and coherently
- It should be unified, and every part should be related to the preceding and following parts.
b. Contents
- It should be clear to the reader what problem is being discussed and what action is being proposed.
- Arguments should be sufficiently complete and developed but irrelevant material and repetition should
be deleted.
- The evidence offered should be clear, applicable, and adequate to support the conclusions.
c. Style
- The presentation should be edited for grammatical sentence structure, proper punctuation, accepted
usage, accurate diction, and so forth.
- Words should be carefully chosen and sentences carefully structured and related to make the ideas
clear.
 Quality of a Good Report:
a. Clear
b. Concise
c. Coherent
d. Persuasive
 CHAPTER 5
THE COMMON MANAGEMENT PERSPECTIVE OF BUSINESS POLICY AND STRATEGY

 General Managers – those leaders with responsibilities for managing an overall business organization.
 Chief Executive Officer – accountable for the outcomes of the business organization’s behavior, the
earnings, the balance sheet, the quality of the products and services, the safety of plant facilities, the
citizenship of the organization in the communities it operates, etc.
 Kenneth Andrews – defined the concept of corporate strategy as “the goals of the firm and the pattern of
policies and programs designed to achieve those goals”.
 Business Policy – is the “study of the functions and responsibilities of top management, the major
problems that affect the success or failure of the total organization, and the decisions that determine the
direction of the organization, mold its future, and when properly implemented, ensure its attainment”, as
stated by Joseph L. Bower.
 Strategic Management – title used to reflect the body of research that has been carried out in the last
several years in that field.
 Roles of General Management: (St-Or-Do)
1. Strategist
2. Organization Builder
3. Doer
 Tasks of the General Manager:
1. Designing the strategy of the business organization and communicating it to the organization.
2. Managing the resource allocation process so that the strategy shall be reflected.
3. Managing effectively and efficiently the selection, training, and progress of the personnel in the
organization and building a positive climate of work environment, designing the organizational
structure and systems that provide context for the operations-both so that the capabilities increase in
areas that allow moving toward strategic objectives.
4. Intervening personally where necessary to drive forward and raise the level of quality of the day-to-
day performance.
 General Manager as Strategist
- Major element of the work of a general manager
- Includes thinking about what needs to be done, communicating what has been decided, and motivating
others to share their efforts.
 General Manager as Organization Builders
- General manager shall be giving shape to processes and practices involves designing the business
organization and its systems for measure and information, for planning, for budgeting and control, and
for reward and punishment.
 General Manager as a Doer
- Role of general manager that include his ethical and intellectual standards, working hours, approach
to people, attention to customers, and consideration of family are the exemplars for the top
management.
- Shapes the behavior of the firm and its reputation in the community.
- Has critical influence in his selections of where or when to intervene.
 SKILLS OF GENERAL MANAGER
1. Analytical Skill
- Skills that must be possessed by the general manager to be capable of evaluating both the economic
and administrative components of a situation.
2. Good Judgment
- Need to be able to apply their experience and analysis quickly and decisively so that the problems get
resolved early.
3. Creativity
- Ability to take risks and the ability to integrate.
- Ability to invent a solution that turns problem into an opportunity.
4. Ability to communicate clearly one’s vision and logic
- Engaged in sharing their view of a question, a problem, an objective, or a program of action.
- Effectively engage the attention of subordinates, peers, superiors,, and other relevant constituencies
such as investors.
5. Skills with people in the organization
- Able to enlist the commitment and trust of those with whom they work.
- The communication skills of an effective general manager allow him to obtain reliable sources of help-
good ideas, good information, and good spirits, all grounded in good intentions.
 Operational Model
- A model of a business organization that means the activities in which it has selected to engage.
- It is where the business begins, where it ends, and how it adds value are selected the management shall
make.
- Adds value through skillful design, sourcing, marketing, distribution, and synergizing of these
functions.
 Economic Model
- A model of a business organization that means the relationship among price, variable costs, fixed
costs, balance sheet and financial statements.
 Strategy
- Logic of ends and means.
- Can be applied retrospectively and prospectively, in detail or in general.
- Its use can inspire or demoralize an organization.
 CHAPTER 4
IMPORTANCE OF BUSINESS STRATEGY AND ITS CRITICAL BEGINNINGS
 Strategic Planning
- It is the development of a competitive strategy or the planning that sets the long-term direction of the
organization.
- Its purpose is to guide the organization to attain its mission and to organize the allocation of resources.
- Objective of strategic planning is to continuously shape and adjust the organization’s business and
outputs to ensure that they produce the desired return on invested capital.
 Importance of Strategic Planning:
1. Strategy is an ongoing process.
2. It seeks to maintain a feasible fit between the business organization and its ever-changing environment.
3. It assists business organizations to adapt to the ever-changing environment.
4. It assists business organizations to identify resource allocation and relocation needs.
5. It is long term.
6. Good strategy is one that capitalizes on organizational strengths and minimizes internal weaknesses,
as it utilizes organizational resources to avoid or minimize environmental threats and exploit
environmental opportunities.
 FICTION VS.FACT
 Fiction – Strategic planning is a linear, smooth process.
 Fact – K.N. King states that strategic planning is not a linear process that flows seamlessly from step to
step. It should be considered as having a feedback loop at every stage, whereby new information requires
previous assumptions to be reviewed for relevancy.
 Fiction – Strategic planning should only be developed by upper management and selectively shared.
 Fact – it must be a product of extensive listening and gathering of input from all levels of the company.
The final plan must be shared with all levels, in varying detail depending on their responsibilities if it is
to be implemented.
 Fiction – Strategic plans are the same as operational effectiveness.
 Fact – Strategic changes seek to differentiate from rivals to improve sustainability and profitability.
 Fiction – Nonprofit organizations do not need strategic plans.
 Fact – At the organizational level, a strategic planning process can be valuable for demonstrating
improved performance.
 Fiction – Every organization needs strategic plan.
 Fact – Strategic planning is not for every business.
 G. Hackett – states that “while the best firms update the tactical plan annually, they make developing a
strategic plan an event-driven activity, contingent upon major shifts in the business operating environment
and not just because the calendar says its December”
 Most Effective Strategic Plans are:
a. Readable
b. Clear
c. Well written
d. Well communicated
 Three Basic Approaches to Strategic Management by J. Mariotti:
1. Hierarchical Approach
- Requires all activities to be grounded by the vision, the guiding principles, and the mission.
- Oldest formal planning model.
- Adds value by creating the overarching organizational purpose for existence and promoting oneness
of purpose among its members.
2. Electric Approach
- Based on past and present activities – where business organizations wish to acknowledge what is
working or has worked as a formal strategy.
3. Internal/External Analysis Approach
- Requires that the organization be evaluated based upon its adaptability to the external environment.
- This approach has most often been identified as a SWOT analysis.
 SWOT ANALYSIS
 Strengths and Weaknesses – internal audit of how effectively the situation performs.
 Threats and Opportunities – concentrates on the external or environmental context in which the
institution operates.
 The strategic plan needs to address a number of key issues once the analysis of mission, values, SWOT
and critical success has been undertaken. Any organization must decide on:
1. Market Identification
2. Degree of market penetration the organization expects to make
3. Its portfolio of services
4. The development of the portfolio
 Two Plans to Develop
1. Long-term plan
2. Business or Operating plan
 Three Generic Strategies in Developing the Long-term Plan: (Co-Di-Fo)
1. Cost-leadership Strategy
- Requires being the lowest cost organization within your market
- It is important that quality must not be scarified in the drive to reduce unit costs.
2. Differentiation Strategy
- Requires an organization to be unique in some way from its competitors.
3. Focus Strategy
- Involves concentrating on a particular geographical area, a customer group, or a market segment.
- It is a strategy of differentiation through market segmentation.
- It emphasizes the needs of the targeted groups to gain a competitive advantage.
 Business or Operating Plan
- It is the short-term, usually one year, detailed plan for achieving particular aspects of the organization’s
long-term plan.
 Strategic Plan
- sometimes called a corporate development plan
- Details the measures which the organization intends to take to achieve its mission.
- It sets a medium-term time-scale, usually over three-year period.
- Aim is to give the organization guidance and direction.
 Vision Statement
- Should be focused on the future, usually looking out no more than three to five years.
- Should be revised, as needed, to keep it fresh and useful.
 A.M. Zuckerman, C.C. Russell – states that “A vision statement should project to a point in time far
enough from the present so that the future for the organization is unpredictable.
 M.G. Brown – states that “one of the keys to a good strategic plan is that everyone can understand the
company’s vision, that is to say where it wants to be in the future”.
 Characteristics of a Good Vision:
1. An effective vision should describe the desired state that the organization wants to develop into in the
next 3 to 5 years.
2. It should be concrete, visual and descriptive of an ideal condition that provides direction for the
organization and all of the internal stakeholders of the organization.
3. It should be brief and focused, easily understood, and remembered by the employees.
4. It should be verifiable; measures used should be indicative that the goals of the vision are being
realized.
5. It should be inspirational and paint a picture of the future of the organization.
6. It should be challenging so that executives and employees can set and attain ambitious goals.
7. It should be appealing to all employees and shareholders.
8. The vision for an organization should be the vision of the CEO and, if applicable, the vision of the
board of directors.
 Methods that can be Used for Vision Statement Development
1. Hire a consultant
2. Look at the vision statements that other companies have used.
 Values
- Principles that determine how an organization operates and earns profit.
- If a person is in disagreement with the values of the organization, he or she will leave the organization
or conform only within their limits of tolerance.
 S. Shellenbarger – states that “values, or deeply held principles and beliefs, can be powerful motivators
that, when shared, form a foundation for corporate culture.”
 Identification of Guiding Principles and Organizational Values
1. Value statements should be short and clear.
2. Organizational values closely reflect the personal values of upper management.
3. When conflict exists between stated values and an organization’s actions, believe action.
4. Values must be operationalized.
5. Customer needs should be a value because those who put customer first, succeed.
6. Values that are operational determine to a large extent how well the organization will do.
7. It is best if organizational values are not directly linked to religious values.
 Methods Used to Develop Organizational Value Statements
1. Open Listing Approach
- Uses nominal groups and brainstorming to help identify values usually with the aid of a facilitator
over several meetings.
 2. Stakeholder Listing Approach
- Similar to open listing approach, however, values are characterized by those who have special interest
in the success of organization including owners, customers, employees, the community, suppliers, and
creditors.
3. Business-function Listing Approach
- Requires that values be sorted and determined by individual business functions.
 Recommendations for Writing a Good Statement:
1. Involve everyone
2. Allow customization
3. Expect and accept resistance
4. Keep it short
5. Avoid religious references
6. Challenge it
7. Observe the values
 Mission Statement
- focus on the present
- typically about 2 to 4 sentences long and describes what the organization does and the reason for the
organization’s existence, as stated by M.G. Brown
- an effective mission statement specifies guidance for strategic plans.
- the mission statement should be very specific that it applies only to the concerned organization.
- usually communicated through posters, employee manuals, annual report, plaques, newsletter,
company seminars, workshops, training sessions, and word-of-mouth.
 J. A. Bailey
- states that, “one of the main reasons for writing a mission statement is to develop a road map showing
management where the organization should be and giving general directions for how to get there.”
- states that “the organization is most likely to achieve its mission objectives where it can develop and
maintain a competitive advantage”
 C. K. Bart
- Mentioned that the process of developing the mission statement is as important as the mission
statement itself in that it determines its effectiveness and its ultimate success.
- States that “the two areas in which managers should consider placing greater emphasis in
disseminating their mission are customers and shareholders.
 Characteristics of a Mission Statement
1. Comprehensible
2. Reliable
 CHAPTER 5
UNDERSTANDING EXISTING STRATEGY
 Michael Porter
- Specified 3 generic business strategies
- First two strategies, low-cost leadership and product differentiation, are based on the product’s
appeal to the customer and the organization’s ability to attain above-industry-norm profits.
- The third strategy known as focused strategy is based on the target market, that is, narrow focus
(niche) or broad focus.
 Porter’s Generic Business Strategies
1. Low-cost Leadership Strategy
- Allows the organization to sell at or around market price and make above-industry-norm returns
because of lower costs.
- Organization’s that adopt this strategy often utilize “operational leverage” to replace people with
equipment, thus replacing a variable labor cost with a more fixed automation cost.
2. Product Differentiation Strategy
- Allows a business organization to sell at a price higher than the market price for similar products
because the product has been differentiated in some way from its would-be competitors, and thus it
creates a perceived higher value and corresponding return.
3. Focused Strategy
- It is the application of one of the above strategies to a niche market.
- Seek to concentrate on a particular market segment within which the company has found it possible
to favorably compete.
- The danger in doing this is that the niche they have chosen might be easily threatened by others
entering the same niche.
 Strategic Thrust
- Expenditures of funds that establishes the strategic direction of the organization.
- In most cases, the available support for strategic thrusts is less than 6%.
 Value Creation
- Expansion of value chain analysis
- It is the process by which the organization transforms its resources from raw inputs into a product or
service that the customer is willing to purchase.
 Cheryl Van Deusen, Steven Williamson and Horold C. Babson
- According to them, the open system concept is a classic value chain
- Value addition begins with the inbound logistic process, progresses through each step of the
transformation process, and ends with the outbound logistics process.
 Value Chain Concept
- Cannot stand by itself because it is a linear system, sequential in design , and not all systems are
sequential in nature, although all systems are likely to have some sequential process.
 Pooled Interdependent System
- Makes use of intensive technology
- Multiple resources are used in service of the customer.
- Satisfaction of client is derived from the sum total of the client’s experience.
 - Examples are Insurance Companies, Hospitals, Car Manufacturing Companies and Cruise Ships

 Reciprocal Interdependent System

- Utilizes mediating technology to add value through convenience by facilitating the transaction.
- Examples are Banking, Railroads, Finance, and Retail Organizations.
- Distribution, consolidation, and facilitations are the only products that this kind of organization
actually sells.
 Core Technology
- It is the process by which an organization adds value in providing a product or service to the
consumer.
- According to J. Thompson, core technology is how an organization accomplishes its value creation
activities.
- It deals with the transformation of inputs to outputs-not computers, electronics, or networks.
- Classification of core technology: (L-I-M)
1.Long-linked Technology
- Exhibits sequential interdependence in which the output of a given unit becomes the input of
another’s work process.
2.Intensive Technology
- Focuses on using knowledge, within the organization, to solve customer problems by employing
pooled interdependence, in which each task in the process is separate from the others.
- Referred to as value shop.
3.Mediating Technology
- It is based on the idea of value network.
- These networks link customers or clients who wish to be interdependent.
- Facilitates exchange relationships among customers distributed in space and time.
 Core Business
- Identifying the type of business in which an organization wants to be involved.
- Three situations in which an organization identifies its Core Business:
1. In the planning stages of a new organization with the development of business plan.
2. Through the development of an existing organization’s strategy.
3.When an organization has identified its core business in the past, but feels the need to study and
possibly reinvent its current business.
 Core Competency
- It is an internal organizational process that allows it to successfully compete.
- Gives an organization with a competitive advantage.
 Internal Resource Audit – it is critical to being able to analyze external opportunities and threats that
come from neutral external events.
 Resource Based View
- According to J. Barney, it is a relatively new approach to strategy development and requires the
strategist to view organizations as a collection of resources.
- Requires that resources be identified and evaluated.
- Resources are evaluated based upon their value, rarity, immutability, and the extent to which the
organization exploits the resource.
 - Four Broad Categories of Resources:
1.Physical – property, plant, and equipment (anything tangible)
2.Human - people
3.Financial – money that is available to the organization
4.Organizational all of the intangible resources (culture, various systems, morale, patents, intellect)

CHAPTERS 6
RECOGNITION OF KEY PERFORMANCE MEASURES
 Performance Metric
- As a method of analyzing overall organizational performance must be incorporated in developing a
strategic plan of an organization.
- Measures developed to ensure that attainment of the desired performance at the individual manager’s
level will lead to the organization itself meeting its own performance objectives.
 Traditional finance-based measures place an unbalanced importance on short-term results.
 Both financial and non-financial measures should be considered to achieve the long-term vision of the
organization.
 Personnel within the organization need to be evaluated in areas and behaviors that they are responsible for
and what they control.
 All metrics must be meaningful, align with the organization’s main goal of customer satisfaction, and
drive the organizational activities in the same direction.
 Four Primary Control Structures:
1. Cost – production function, manager is only responsible for inputs.
2. Expense – no production function, manager only controls inputs consumed in achieving goals.
3. Profit – pricing function, manager controls marketing mix, pricing decisions, advertising, and
commission structure.
4. Investment – capital function, manager controls capital and working capital decisions
 Four Performance Categories by J. DeFeo: (Fi-Cu-Em-In)
1. Financial
2. Customer
3. Employee
4. Internal Processes
 D. Rivers – recommended the following performance measures based on historical financial and current
operational data.
 Operational performance linked to an organization’s objectives, goals, and mission are superior to
traditional financial measures.
 Benchmarking – provides business organizations with a useful measuring device for performance
metrics.
 External Benchmarking – involves the search for practices, systems, and processes that can be imported
and applied to assist organizations to focus on customers instead of direct competition.
 B. Stivers and T. Joyce – states that “it is critical for business organizations to track and make decisions
on those skills, systems, and values that will decide to future success of the organization.”
 M. Frigo and K. Krumwiede – states that “it is believed that a more balanced approach, with each metric
having customer-centric design, will allow the organizational mission and strategy.”
 Customer – is someone who utilizes a service that the business organization offers.
 Financial performance - is a by-product of satisfying the customer and has little, if anything, to do with
beating your competition.
 C. Goulian and A. Mersereau states that “financial performance measures should only be one element
of a well-balanced program of metrics, which, at its core, should focus on satisfying the customers.”
 Net income – is not the best performance metric measure because it can be easily manipulated by cutting
expenses.
 Profit Zone – defined by A. Sywotzky and D. Marrison as the arena of an organization’s economic
activity where high profit is achieved.
 Value creation, profitability, and customer satisfaction are all included in the stock price of the
organization.
 Sales to Breakeven – utilizes sales in pesos to breakeven in pesos where the overall average organization
contribution margin is used.
 Customer Performance Measures: (Fe-Cu-Cu-Se-Nu-Cy-Nu)
1. Feedback and Complaints
- Two methods of collecting customer transactional satisfaction information are through the use of self-
reporting cards and self-reporting mechanisms accessible to the customer through the use of a code on
the organization’s Website.
- Surrogate and distal measures are also used because they can provide information that is based more
on hard data than the perception-based customer satisfaction questionnaires.
- Tracking customer callbacks, returns, and warranty repairs through the use of check sheets or
checklists is another method of determining customer satisfaction. After collecting the data, it must be
transformed into analyzable data.
2. Customer Tracking
- Every business organization needs to know who its customers are and understand their purchase
behaviors.
3. Customer Satisfaction Ratings
- According to S. M. Salvador, G.T. Baysa, F. Cullar and E. F. Geronimo, managers cannot be able to
know the quality of their business organization’s service level unless customers are being asked.
- Ways of Gathering Customer Information:
a.Through the use of SERQUAL instrument – it is a two-part set of questions, one addressing
customer expectations, and the other addressing customer perceptions of the service they consume,
as stated by P. Kueng.
b. Another is to define quality criteria, and have customers rate both the degree of satisfaction and
the importance of each criterion.
4. Service Level
- This measurement is the probability of a stock-out not occurring.
- Important measurement in determining if the organization is able to meet the demands of the customer.
- An increase in service level will improve customer service, add value, and ultimately increase
profitability.
 5. Number of On-time Deliveries
- One of many proactive performance measures as it is intended to measure operational events.
- Proper design of this metric will lead business organizations to provide the appropriate service level
to clients in ways that will foster future loyalty and growth, as stated by Rivers.
6. Cycle Time
- The time it takes a customer order to be fulfilled successfully.
- A reduction in cycle time will improve customer service, adding value, and ultimately increasing
profitability.
7. Number of Recorders
- Can be defined as the number of customer orders that were not correctly completed the first time, and
needed to be redone.
- Places emphasis on the internal processes of the organization.
 Employee Performance Measures
 Employee-related performance measures that actually measures performance in two distinct areas should
be developed:
1. Measures the organization’s ability to utilize its human resources
2. Measures how well the organization meets the needs of its employees.
 Employee Attitudinal Questionnaires
- Examples are job satisfaction, morale, quality of work life, etc.
- Answers tend to reflect the employees perception of what may serve as the appropriate responses, and
not their true feelings.
- Ask the respondent to dredge up all the unpleasantness of the past and bring them to mind at one time
that may lead to lowering of individual satisfaction and organization morale.
 Employee Turnover Rate
- Core work force refers to employees in an organization that possess key skill and knowledge sets.
- Core turnover destroy value, as customer relationships are jeopardized and new hire and training costs
negatively affect organizational profitability.
- Non-core turnover is the turnover of employees that can easily be replaced because they possess no
specific skill set or knowledge important to the organization. Turnover among these employees is often
counted on by management to hold down overall payroll costs.
- Two Types of Turnover: (- & +)
a. Negative Turnover – consists of employees that pursue opportunities outside the business
organization.
b. Positive Turnover – consists of measure undertaken by business organizations to ensure that
employees are promoted within the organization or moved to a different but lateral job position.
 Frequency of Training and Development
- Rapid changing environment requires both the organization and its employees to adapt to new
methods, processes, and technologies.
- The more advanced the training, the more difficult it becomes to measure Return On Training
Investment (ROTI)
- The concept of Economic Value Added recognizes the difficulty in measuring ROTI and suggests that
organizations capitalize and amortize training and development costs for the purpose of calculating
EVA, reducing the organization’s temptation to cut expenditures in this critical area.
 Advancement Opportunities
- It is very important for all organizations to ensure that their advancement opportunities are consistently
applied and that metric are maintained that demonstrate the organization’s commitment to equal
opportunity and fairness.
 Quality of the Work Environment
- Work environment that does not permit optimal performance will frustrate those employees who seek
to perform to the best of their abilities.
- Importance of this metric is that the management is made aware of the importance of the quality of
work environment for assessment and subsequent improvement.

 Internal Process Performance Measures

 Internal Process Performance Metrics
- Address the efficiency and effectiveness of the various systems within an organization critical to its
survival.
 Input Metrics
- Should include measures that monitor and evaluate all those systems that must perform prior to the
throughput phase.
- Supplier, procurement, internal support, and front-end staging are all interrelated systems that must be
performance tracked.
 Supplier Metrics
- It is a key indicator of organization performance and therefore requires the organization to actively
monitor and manage its supplier relations.
 Procurement Metrics
- Procurement area must be evaluated both on its efficiency and effectiveness in procuring the required
inputs in a timely fashion.
- It is as equally as important for the procurement function to be evaluated on its ability to insure the
quality and timeliness of the input as to negotiate for low price inputs.
 Front-End Staging Metrics
- The metrics that need to be put into place to access performance in this area will depend on the
activities involved.
- Normally includes monitoring of all receiving activities as well as some type of quality check of the
materials being received, and actual staging and distribution processes.
 Throughput Metrics
- These are put into place to measure the efficiency and effectiveness of the transformation of statistical
processes control (SPC) measures, machines and employee productivity and performance measures,
labor and material waste metrics, cycle time, and many others.
 Output Metrics
- The final stage of the Open Systems Model (OSM) is output.
- Performance measures used in this stage depend on the actual value creation method utilized by the
organization.
- Specific processes to monitor might include the movement of finished goods to the warehouse and all
warehousing processes, as well as movement from the warehouse to customer’s location.
 Support Function Metric and Asset Utilization
 One of the keys to maintaining a positive Economic Value Added (EVA) is through Asset Management
(AM).
 Assets need to be used to full potential, and nonperforming assets need to be eliminated.
 Three Metrics that can assist the management to identify and manage such assets:
1.Fixed asset turnover ratio – sales divided by net fixed assets
2.Total asset turnover ratio – sales divided by total fixed assets
3.AR/DSO – accounts receivables divided by average daily sales
 Utilization of fixed asset turnover and total asset turnover will allow managers to identify assets that may
be underperforming or unprofitable.
 High AR/DSO is associated with higher bad debt expense.
 The net effect of these metrics is to focus management upon factors that will have a significant and positive
impact upon EVA.
 Inventory Turnover
- It is measured by dividing total sales by the amount of inventory on hand.
- Higher inventory turnover reduces the holding costs, yielding lower working capital.