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STRATEGIC MANAGEMENT
Strategic Management can be defined as “the art and science of
formulating, implementing and evaluating cross-functional decisions
that enable an organization to achieve its objective”.
Stages of Strategic management:
The strategic management process consists of three stages:
Strategy Formulation (strategy planning)
Strategy Implementations
Strategy Evaluation
Strategic Formulation:
Strategic formulation means a strategy formulate to execute the business
activities. Strategy formulation includes developing:-
Vision and Mission (The target of the business)
Strength and weakness (Strong points of business and also weaknesses)
Opportunities and threats (These are related with external environment for
the business).
Strategy formulation is also concerned with setting long term goals
and objectives, generating alternative strategies to achieve that long
term goals and choosing particular strategy to pursue.
The considerations for the best strategy formulation should be as follows:
Allocation of resources
Business to enter or retain
Business to divest or liquidate
Joint ventures or mergers
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Whether to expand or not
Moving into foreign markets
Trying to avoid take over
Strategy Implementation
Strategy implementation requires a firm to establish annual
objectives, devise policies, motivating employees and allocate resources
so that formulated strategies can be executed. Strategy implementation
includes developing strategy supportive culture, creating an effective
organizational structure, redirecting marketing efforts, preparing
budgets, developing and utilizing information system and linking
employee compensation to organizational performance.
Strategy implementation is often called the action stage of strategic
management. Implementing means mobilizing employees and managers
in order to put formulated strategies into action. It is often considered to
be most difficult stage of strategic management. It requires personal
discipline, commitment and sacrifice. Strategy formulated but not
implemented serve no useful purpose.
Strategy evaluation:
Strategy evaluation is the final stage in the strategic management
process. Management desperately needs to know when particular
strategies are not working well; strategy evaluation is the primary means
for obtaining this information. All strategies are subject to future
modification because external and internal forces are constantly
changing.
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Nature of Strategic Management
The strategic-management process does not end when the firm
decides what strategy or strategies to pursue.
There must be a translation of strategic thought into strategic action.
This translation is much easier if managers and employees of the firm
understand the business, feel a part of the company, and through
involvement in strategy-formulation activities have become committed
to helping the organization succeed.
Without understanding and commitment, strategy-implementation
efforts face major problems. Implementing strategy affects an
organization from top to bottom; it impacts all the functional and
divisional areas of a business. It is beyond the purpose and scope of this
text to examine all the business administration concepts and tools
important in strategy implementation.
Even the most technically perfect strategic plan will serve little purpose
if it is not implemented. Many organizations tend to spend an inordinate
amount of time, money, and effort on developing the strategic plan,
treating the means and circumstances under which it will be
implemented as afterthoughts! Change comes through implementation
and evaluation, not through the plan. A technically imperfect plan that is
implemented well will achieve more than the perfect plan that never gets
off the paper on which it is typed.
Key Terms in Strategic Management
There are eight basic key terms in studying strategic management,
Strategists
Mission statements
External opportunities and threats
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Internal strengths and weaknesses
Long-term objectives
Strategies
Annual objectives
Policies
Strategists
Strategists are individuals who are most responsible for the success
or failure of an organization. Strategists are Individuals who form
strategies. Strategists have various job titles, such as chief executive
officer, president, and owner, chair of the board, executive director,
chancellor, dean, or entrepreneur. Strategists help an organization
gather, analyze, and organize information.
Vision Statements
Many organizations today develop a "vision statement" which answers
the question, what do we want to become? Developing a vision
statement is often considered the first step in strategic planning,
preceding even development of a mission statement. Many vision
statements are a single sentence, for example the vision statement of
Stokes Eye Clinic in Florence, South Carolina, is "Our vision is to take
care of your vision.
Mission Statements
Mission statements are "enduring statements of purpose that
distinguish one business from other similar firms.
A mission statement identifies the scope of a firm's operations in
product and market terms. It addresses the basic question that faces all
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strategists: What is our business? A clear mission statement describes
the values and priorities of an organization.
External Opportunities and Threats
External opportunities and external threats refer to economic, social,
cultural, demographic, environmental, political, legal, governmental,
technological, and competitive trends and events that could significantly
benefit or harm an organization in the future. Opportunities and threats
are largely beyond the control of a single organization, thus the term
external.
Internal Strengths and Weaknesses/Internal assessments
Internal strengths and internal weaknesses are an organization's
controllable activities that are performed especially well or poorly. They
arise in the management, marketing, finance/accounting,
production/operations, research and development, and computer
information systems activities of a business. Identifying and evaluating
organizational strengths and weaknesses in the functional areas of a
business is an essential strategic-management activity. Organizations
strive to pursue strategies that capitalize on internal strengths and
improve on internal weaknesses.
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The Strategic-Management Model:
A Comprehensive Strategic-Management Model
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Benefits of Strategic management
Following are the major benefits of Strategic management:
Proactive in shaping firm’s future
Initiate and influence actions
Formulate better strategies (Systematic, logical, rational approach)
Financial benefits:
Improved productivity
Improved sales
Improved profitability
Non-Financial benefits:
Increased employee productivity
Improved understanding of competitors’ strategies
Greater awareness of external threats
Understanding of performance reward relationships
Better problem-avoidance
COMPREHENSIVE STRATEGIC MODEL
Mission statement:
An enduring statement of purpose
Distinguishes one firm from another in the same business
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declaration of a firm’s reason for existence
Mission Statements reveal what an organization wants to be and
whom it wants to serve and how? Mission Statements are essential for
effectively establishing objectives and formulating strategies.
Characteristics of good Mission Statements:
Broad in scope
Generate range of feasible strategic alternatives
Not excessively specific
Reconcile interests among diverse stakeholders
Finely balanced between specificity & generality
Arouse positive feelings and emotions
Motivate readers to action
Generate the impression that firm is successful, has direction, and is
worthy of time, support, and investment
Provide criteria for selecting strategies
Basis for generating & screening strategic options
Are dynamic in orientation
A mission statement should answer are given here.
Customer: Who are the firm’s customers?
Products or services: What are the firm’s major products or services?
Markets: Geographically, where does the firm compete?
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Technology: Is the firm technologically current?
Concern for survival, growth, and profitability: Is the firm
committed to growth and financial soundness?
Philosophy: What are the basic beliefs, values, aspirations, and ethical
priorities of the firm?
Self-concept: What is the firm’s distinctive competence or major
competitive advantage?
Concern for public image: Is the firm responsive to social, community,
and environmental concerns?
Concern for employees: Are employees a valuable asset of the firm?
VISION STATEMENT:
“Vision is the art of seeing things invisible”
A vision statement is sometimes called a picture of your company in the future
but it’s so much more than that. Your vision statement is your
inspiration, the framework for all your strategic planning.
A lucid and clear vision lays down a foundation on which a sound
mission statement can be built.
Many organizations develop both a mission statement and a vision
statement. Whereas the mission statement answers the question, what is
our business? The vision statement answers the question, what do we
want to become? Many organizations have both a mission and vision
statement.
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The Process of Developing a Mission Statement
A clear mission is needed before alternative strategies can be formulated
and implemented.
Mission is important to have as broad a range of participation as
possible among managers in developing the mission.
As indicated in the strategic-management model, a clear mission
statement is needed before alternative strategies can be formulated and
implemented. It is important to involve as many managers as possible in
the process of developing a mission statement, because through
involvement, people become committed to an organization.
A widely used approach to developing a mission statement is first to
select several articles about mission statements and ask all managers to
read these as background information. Then ask managers themselves to
prepare a mission statement for the organization. A facilitator, or
committee of top managers, then should merge these statements into a
single document and distribute this draft mission statement to all
managers. A request for modifications, additions, and deletions is
needed next, along with a meeting to revise the document. To the extent
that all managers have input into and support the final mission statement
document, organizations can more easily obtain managers' support for
other strategy formulation, implementation, and evaluation activities.
Thus the process of developing a mission statement represents a great
opportunity for strategists to obtain needed support from all managers in
the firm.
Importance of Vision and Mission Statements
Unanimity of purpose within the organization
Basis for allocating resources
Establish organizational climate
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Focal point for direction
Translate objectives into work structure
Cost, time and performance parameters assessed and controlled
Most companies are now getting used to the idea of using mission
statements.
EXTERNAL ASSESSMENT
External Strategic Management Audit Is also called:
Environmental scanning
Industry analysis
An external audit focuses on identifying and evaluating trends and
events beyond the control of a single firm, such as increased foreign
competition, population shifts to the Sunbelt, an aging society,
information technology, and the computer revolution. An external audit
reveals key opportunities and threats confronting an organization so that
managers can formulate strategies to take advantage of the opportunities
and avoid or reduce the impact of threats.
Key External Forces
External forces can be divided into five broad categories:
Economic forces;
Social, cultural, demographic, and environmental forces;
Political, governmental, and legal forces;
Technological forces; and
Competitive forces.
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Relationships among these forces and an organization are depicted in
Figure External trends and events significantly affect all products,
services, markets, and organizations in the world.
The Nature of an External Audit
The purpose of an external audit is to develop a finite list of
opportunities that could benefit a firm and threats that should be
avoided. As the term finite suggests, the external audit is not aimed at
developing an exhaustive list of every possible factor that could
influence the business; rather, it is aimed at identifying key variables
that offer actionable responses. Firms should be able to respond either
offensively or defensively to the factors by formulating strategies that
take advantage of external opportunities or that minimize the impact of
potential threats.
The Process of Performing an External Audit
The process of performing an external audit must involve as many
managers and employees as possible. To perform an external audit, a
company first must gather competitive intelligence and information
about social, cultural, demographic, environmental, economic, political,
legal, governmental, and technological trends. Individuals can be asked
to monitor various sources of information such as key magazines, trade
journals, and newspapers. These persons can submit periodic scanning
reports to a committee of managers charged with performing the
external audit. This approach provides a continuous stream of timely
strategic information and involves many individuals in the external-audit
process. The Internet provides another source for gathering strategic
information, as do corporate, university, and public libraries. Suppliers,
distributors, salespersons, customers, and competitors represent other
sources of vital information.
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Once information is gathered, it should be assimilated and evaluated.
A meeting or series of meetings of managers is needed to collectively
identify the most important opportunities and threats facing the firm.
These key external factors should be listed on flip charts or a
blackboard. A prioritized list of these factors could be obtained by
requesting all managers to rank the factors identified, from 1 for the
most important opportunity/threat to 20 for the least important
opportunity/threat. These key external factors can vary over time and by
industry. Relationships with suppliers or distributors are often a critical
success factor.
INDUSTRY ANALYSIS
The EFE Matrix and five-force model can help strategists evaluate
the market and industry, but these tools must be accompanied by good
intuitive judgment. Multinational firms especially need a systematic and
effective external-audit system because external forces among foreign
countries vary so greatly.
Industry Analysis: The External Factor Evaluation (EFE) Matrix
An External Factor Evaluation (EFE) Matrix allows strategists to
summarize and evaluate economic, social, cultural, demographic,
environmental, political, governmental, legal, technological, and
competitive information. The EFE matrix consists of five steps process,
Five-Step process:
• List key external factors (10-20)
Opportunities & threats
• Assign weight to each (0 to 1.0)
Sum of all weights = 1.0
• Assign 1-4 rating to each factor.
• Multiply each factor’s weight by its rating
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• Produces a weighted score
• Sum the weighted scores for each
• Highest possible weighted score for the organization is 4.0; the lowest, 1.0.
Average = 2.5
The Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm's major
competitors and their particular strengths and weaknesses in relation to a
sample firm's strategic position.
The weights and total weighted scores in both a CPM and EFE have
the same meaning. However, the factors in a CPM include both internal
and external issues; therefore, the ratings refer to strengths and
weaknesses, where 4 5 major strength, 3 5 minor strength, 2 5 minor
weakness, and 1 5 major weakness.
There are some important differences between the EFE and CPM. First
of all, the critical success factors in a CPM are broader; they do not
include specific or factual data and even may focus on internal issues.
The critical success factors in a CPM also are not grouped into
opportunities and threats as they are in an EFE.
In a CPM the ratings and total weighted scores for rival firms can be
compared to the sample firm. This comparative analysis provides
important internal strategic information.
IFE MATRIX
The Internal Factor Evaluation (IFE) Matrix
A summary step in conducting an internal strategic-management audit
is to construct an Internal Factor Evaluation (IFE) Matrix. This strategy-
formulation tool summarizes and evaluates the major strengths and
weaknesses in the functional areas of a business, and it also provides a
basis for identifying and evaluating relationships among those areas.
Intuitive judgments are required in developing an IFE Matrix, so the
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appearance of a scientific approach should not be interpreted to mean
this is an all-powerful technique.
An IFE Matrix can be developed in five steps:
1. List key internal factors as identified in the internal-audit process. Use total
of from ten to twenty internal factors, including both strengths and
weaknesses. List strengths first and then weaknesses.
Be as specific as possible, using percentages, ratios, and comparative numbers.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to
each factor. The weight assigned to a given factor indicates the relative
importance of the factor to being successful in the firm's industry.
Regardless of whether a key factor is an internal strength or weakness,
factors considered to have the greatest effect on organizational
performance should be assigned the highest weights. The sum of all
weights must equal 1.0.
3. Assign a 1-to-4 rating to each factor to indicate whether that factor
represents a major weakness (rating = 1), a minor weakness (rating = 2),
a minor strength (rating = 3), or a major strength (rating = 4). Note that
strengths must receive a 4 or 3 rating and weaknesses must receive a 1
or 2 rating. Ratings are, thus, company based, whereas the weights in
Step 2 are industry based.
4. Multiply each factor's weight by its rating to determine a weighted score for
each variable.
5. Sum the weighted scores for each variable to determine the total weighted
score for the Organization.
Regardless of how many factors are included in an IFE Matrix, the total
weighted score can range from a low of 1.0 to a high of 4.0, with the
average score being 2.5. Total weighted scores well below 2.5
characterize organizations that are weak internally, whereas scores
significantly above 2.5 indicate a strong internal position. Like the EFE
Matrix, an IFE Matrix should include from 10 to 20 key factors. The
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number of factors has no effect upon the range of total weighted scores
because the weights always sum to 1.0.
The Nature of an Internal Audit
Basis for objectives & strategies:
Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
Functional business areas:
Vary by organization
Divisions have differing strengths and weaknesses
Distinctive Competencies:
A firm’s strengths that cannot be easily matched or imitated by
competitors.
Building competitive advantage involves taking advantage of distinctive
competencies.
Strategies designed in part to improve on a firm’s weaknesses and turn
to strengths.
Internal Audit is Parallels process of external audit. It gathers & assimilates
information from:
Management
Marketing
Finance/accounting
Production/operations
Research & development
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Management information systems
The Process of Performing an Internal Audit
The process of performing an internal audit closely parallels the process of
performing an external audit.
Representative Managers and employees from throughout the firm
need to be involved in determining a firm's strengths and weaknesses.
The internal audit requires gathering and assimilating information about
the firm's management, marketing, finance/accounting,
production/operations, research and development (R&D), and computer
information systems operations.
Functions of Management
Planning >>>>>>>>>>>Strategy Formulation
Organizing >>>>>>>>>>Strategy Implementation
Motivating >>>>>>>>>>Strategy Implementation
Staffing >>>>>>>>>>>>>Strategy Implementation
Controlling>>>>>>>>>>>>>Strategy Evaluation
Functions of Management
Marketing:
Marketing can be described as the process of defining, anticipating, creating,
and fulfilling customers' needs and wants for products and services.
There are seven basic functions of marketing:
1. Customer analysis,
2. Selling products/services,
3. Product and service planning,
4. Pricing,
5. Distribution,
6. Marketing research, and
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7. Opportunity analysis.
Understanding these functions helps strategists identify and evaluate marketing
strengths and weaknesses.
INTERNAL ASSESSMENT (FINANCE/ACCOUNTING)
Finance/Accounting Functions
Determining financial strengths and weaknesses key to strategy
formulation
Investment decision (Capital budgeting)
Financing decision
Dividend decision
Production/Operations
The production/operations function of a business consists of all
those activities that transform inputs into goods and services.
Production/operations management deals with inputs, transformations,
and outputs that vary across industries and markets. A manufacturing
operation transforms or converts production/operations management
comprises five functions or decision areas: process, capacity, inventory,
workforce, and quality inputs such as raw materials, labor, capital,
machines, and facilities into finished goods and services.
Research and Development
The fifth major area of internal operations that should be examined
for specific strengths and weaknesses is research and development
(R&D). Many firms today conduct no R&D, and yet many other
companies depend on successful R&D activities for survival. Firms
pursuing a product development strategy especially need to have a
strong R&D orientation.
The purpose of research and development are as follows:
Development of new products before competition
Improving product quality
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Improving manufacturing processes to reduce costs.
Management information systems:
MIS is a general name for the academic discipline covering the
application of information technology to business problems. In business,
information systems support business processes and operations,
decision-making, and competitive strategies.
TYPES OF STRATEGIES:
INTEGRATION STRATEGIES:
Forward Integration: Gaining ownership or increased control over
distributors or retailers.
Backward Integration: Seeking ownership or increased control of a
firm's suppliers.
Horizontal Integration: Seeking ownership or increased control over
competitors.
INTENSIVE STRATEGIES:
Market Penetration:
Seeking increased market share for present products or services in
present markets through greater marketing efforts.
Market Development: Introducing present products or services into
new geographic area.
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Product Development: Seeking increased sales by improving present
products or services or developing new ones.
DIVERSIFICATION STRATEGIES:
Concentric Diversification: Adding new, but related, products or
services.
Conglomerate Diversification: Adding new, unrelated products or
services.
Horizontal Diversification: Adding new, unrelated products or services
for present customers.
Joint Venture: Two or more sponsoring firms forming a separate
organization for cooperative purposes.
Retrenchment: Regrouping through cost and asset reduction to reverse
declining sales and profit.
Divestiture: Selling a division or part of an organization.
Liquidation: Selling all of a company's assets, in parts, for their
tangible worth.
STRATEGY-FORMULATION FRAMEWORK
Important strategy-formulation techniques can be integrated into a
three-stage decision-making framework, as shown below. The tools
presented in this framework are applicable to all sizes and types of
organizations and can help strategists identify, evaluate, and select
strategies.
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Stage-1 (Formulation Framework)
1. External factor evaluation
2. Competitive matrix profile
3. Internal factor evaluation
Stage-2 (Matching stage)
1. TWOS Matrix (Threats-Opportunities-Weaknesses-Strengths)
2. SPACE Matrix (Strategic Position and Action Evaluation)
3. BCG Matrix (Boston Consulting Group)
4. IE Matrix (Internal and external)
5. GS Matrix (Grand Strategy)
Stage-3 (Decision stage)
1. QSPM (Quantitative Strategic Planning Matrix)
The Nature of Strategy Implementation
It is possible to turn strategies and plans into individual actions,
necessary to produce a great business performance. But it's not easy.
Many companies repeatedly fail to truly motivate their people to work
with enthusiasm, all together, towards the corporate aims. Most
companies and organizations know their businesses, and the strategies
required for success. However many corporations - especially large ones
- struggle to translate the theory into action plans that will enable the
strategy to be successfully implemented and sustained.
Strategy formulation and implementation can be contrasted in the following
ways:
Strategy formulation is positioning forces before the action.
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Strategy implementation is managing forces during the action.
Strategy formulation focuses on effectiveness.
Strategy implementation focuses on efficiency.
Strategy formulation is primarily an intellectual process.
Strategy implementation is primarily an operational process.
Strategy formulation requires good intuitive and analytical skills.
Strategy implementation requires special motivation and leadership
skills.
Strategy formulation requires coordination among a few individuals.
Strategy implementation requires coordination among many persons.
Annual Objectives
1) Corporate level
These are objectives that concern the business or organization as a whole
Examples of “corporate objectives might include:
• We aim for a return on investment of at least 15%
• We aim to achieve an operating profit of over £10 million on sales of at least
£100 million
• We aim to increase earnings per share by at least 10% every year for the
foreseeable future
2) Functional level
E.g. specific objectives for marketing activities
Examples of functional marketing objectives” might include:
• We aim to build customer database of at least 250,000 households within the
next 12 months
• We aim to achieve a market share of 10%
• We aim to achieve 75% customer awareness of our brand in our target
markets
Both corporate and functional objectives need to conform to the commonly
used SMART criteria.
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The SMART criteria
Specific - the objective should state exactly what is to be achieved.
Measurable - an objective should be capable of measurement – so that
it is possible to determine whether (or how far) it has been achieved
Achievable - the objective should be realistic given the circumstances in
which it is set and the resources available to the business.
Relevant - objectives should be relevant to the people responsible for
achieving them.
Time Bound - objectives should be set with a time-frame in mind.
These deadlines also need to be realistic.
Establishing annual objectives is a decentralized activity that
directly involves all managers in an organization. Active participation in
establishing annual objectives can lead to acceptance and commitment.
Annual objectives are essential for strategy implementation because
they,
1) Represent the basis for allocating resources
2) Is a primary mechanism for evaluating managers?
3) Is the major instrument for monitoring progress toward achieving long-
term objectives?
4) Establish organizational, divisional, and departmental priorities.
Annual objectives should be measurable, consistent, reasonable,
challenging, clear, communicated throughout the organization,
characterized by an appropriate time dimension, and accompanied by
commensurate rewards and sanctions. Annual objectives should be
compatible with employees' and managers' values and should be
supported by clearly stated policies. Clear annual objectives do not
guarantee successful strategy implementation but they do increase the
likelihood that personal and organizational aims can be accomplished.
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RESOURCE ALLOCATION
In strategic planning, a resource-allocation decision is a plan for
using available resources, especially human resources especially in the
near term, to achieve goals for the future. It is the process of allocating
resources among the various projects or business units.
The plan has two parts: Firstly, there is the basic allocation decision
and secondly there are contingency mechanisms. The basic allocation
decision is the choice of which items to fund in the plan, and what level.
All organizations have at least four types of resources that can be used to
achieve desired objectives: financial resources, physical resources,
human resources, and technological resources.
Conflict
Conflict is a state of opposition, disagreement or incompatibility
between two or more people or groups of people, which is sometimes
characterized by physical violence.
Types and Modes of Conflict
A conceptual conflict can escalate into a verbal exchange and/or result
in fighting.
Conflict can exist at a variety of levels of analysis.
• intrapersonal conflict (though this usually just gets delegated out to
psychology)
• interpersonal conflict
• group conflict
• organizational conflict
• community conflict
• intra-state conflict (for example: civil wars, election campaigns)
• international conflict
Organizational Structure
Functional Structure
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The organization is structured according to functional areas instead
of product lines. The functional structure groups specialize in similar
skills in separate units. This structure is best used when creating
specific, uniform products. A functional structure is well suited to
organizations which have a single or dominant core product because
each subunit becomes extremely adept at performing its particular
portion of the process. They are economically efficient, but lack
flexibility. Communication between functional areas can be difficult.
Divisional Structure
Divisional structure is formed when an organization is split up into
a number of self-contained business units, each of which operates as a
profit centre. Such a division may occur on the basis of product or
market or a combination of the two with each unit tending to operate
along functional or product lines, but with certain key function (e.g.
finance, personnel, corporate planning) provided centrally, usually at
company headquarters.
The Strategic Business Unit (SBU) Structure
Strategic Business Unit or SBU is understood as a business unit
within the overall corporate identity which is distinguishable from other
business because it serves a defined external market where management
can conduct strategic planning in relation to products and markets.
When companies become really large, they are best thought of as being
composed of a number of businesses (or SBUs).The SBU structure
group’s similar divisions into strategic business units and delegate’s
authority and responsibility for each unit to a senior executive who
reports directly to the chief executive officer. This change in structure
can facilitate strategy implementation by improving coordination
between similar divisions and channeling accountability to distinct
business units.
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The Matrix Structure
A matrix structure is the most complex of all designs because it
depends upon both vertical and horizontal flows of authority and
communication (hence, the term matrix). In contrast, functional and
divisional structures depend primarily on vertical flows of authority and
communication. A matrix structure can result in higher overhead
because it creates more management positions. Other characteristics of a
matrix structure that contribute to overall complexity include dual lines
of budget authority (a violation of the
unity-of-command principle), dual sources of reward and punishment,
shared authority, dual reporting channels, and a need for an extensive
and effective communication system.
Restructuring—also called downsizing, rightsizing, or delivering—involves
reducing the size of the firm in terms of number of employees, number
of divisions or units, and number of hierarchical levels in the firm's
organizational structure. This reduction in size is intended to improve
both efficiency and effectiveness. Restructuring is concerned primarily
with shareholder well-being rather than employee well-being.
In contrast, reengineering is concerned more with employee and
customer well-being than shareholder well-being. Reengineering—also
called process management, process innovation, or process redesign—
involves reconfiguring or redesigning work, jobs, and processes for the
purpose of improving cost, quality, service, and speed. Reengineering
does not usually affect the organizational structure or chart, nor does it
imply job loss or employee layoffs.
Managing Resistance to Change
Resistance to change can be considered the single greatest threat to
successful strategy implementation.
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Resistance in the form of sabotaging production machines,
absenteeism, filing unfounded grievances, and an unwillingness to
cooperate regularly occurs in organizations. People often resist strategy
implementation because they do not understand what is happening or
why changes are taking place. In that case, employees may simply need
accurate information. Successful strategy implementation hinges upon
managers' ability to develop an organizational climate conducive to
change. Change must be viewed as an opportunity rather than as a threat
by managers and employees.
Resistance to change can emerge at any stage or level of the strategy-
implementation process.
Managing the Natural Environment
All business functions are affected by natural environment
considerations or striving to make a profit.
However, both employees and consumers are especially resentful of
firms that take from more than they give to the natural environment;
likewise, people today are especially appreciative of firms that conduct
operations in a way that mends rather than harms the environment.
The ecological challenge facing all organizations requires managers
to formulate strategies that preserve and conserve natural resources and
control pollution. Special natural environmental issues include ozone
depletion, global warming, depletion of rain forests, destruction of
animal habitats, protecting endangered species, developing
biodegradable products and packages, waste management, clean air,
clean water, erosion, destruction of natural resources, and pollution
control.
Creating a Strategy-Supportive Culture
Strategists should strive to preserve, emphasize, and build upon
aspects of an existing culture that support proposed new strategies.
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Aspects of an existing culture that are antagonistic to a proposed
strategy should be identified and changed. Substantial research indicates
that new strategies are often market-driven and dictated by competitive
forces. For this reason, changing a firm's culture to fit a new strategy is
usually more effective than changing a strategy to fit an existing culture.
Numerous techniques are available to alter an organization's culture,
including recruitment, training, transfer and promotion, restructure of an
organization's design, role modeling, and positive reinforcement.
Production/Operations Concerns When Implementing Strategies
Strategy in action means implementation requires complete
transparent process. Production/ operations department that mainly
concern with the achievement of organization goals and targets.
Production processes typically constitute more than 70 percent of a
firm's total assets. Production department plays a crucial role for
implementing organization strategy. Production-concerned decisions on
plant location, plant size, product design, choice of equipment, size of
inventory, inventory control, quality control, cost control, use of
standards, shipping and packaging, and technological innovation, job
specialization, employee training, equipment and resource utilization.
Human Resource Concerns When Implementing Strategies
The other important concern while implementing the strategy is
human resource. Human resource is the backbone of any organization
without efficient human resource organization cannot perform well and
fail to achieve the organizational strategy.
The human resource department must develop performance
incentives that clearly link performance and pay to strategies. The
process of empowering managers and employees through involvement
in strategic management activities yields the greatest benefits when all
organizational members understand clearly how they will benefit
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personally if the firm does well. Linking company and personal benefits
is a major new strategic responsibility of human resource managers.
Market segmentation
Market segmentation is the process in marketing of grouping a
market (i.e. customers) into smaller subgroups. This is not something
that is arbitrarily imposed on society: it is derived from the recognition
that the total market is often made up of submarkets (called 'segments').
These segments are homogeneous within (i.e. people in the segment are
similar to each other in their attitudes about certain variables).
Because of this intra-group similarity, they are likely to respond
somewhat similarly to a given marketing strategy
The requirements for successful segmentation are:
• Homogeneity within the segment
• Heterogeneity between segments
• Segments are measurable and identifiable
• Segments are accessible and actionable
• Segment is large enough to be profitable
Bases for Segmentation in Consumer Markets
Consumer markets can be segmented on the following customer characteristics.
• Geographic
• Demographic
• Psychographic
• Behavioralistic
Market segmentation Link with strategy implementation
Market segmentation is widely used in implementing strategies,
especially for small and specialized firms.
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Market segmentation can be defined as the subdividing of a market
into distinct subsets of customers according to needs and buying habits.
Market segmentation is an important variable in strategy
implementation for at least three major reasons.
First, strategies such as market development, product development,
market penetration, and diversification require increased sales through
new markets and products. To implement these strategies successfully,
new or improved market-segmentation approaches are required. Second,
market segmentation allows a firm to operate with limited resources
because mass production, mass distribution, and mass advertising are
not required. Market segmentation can enable a small firm to compete
successfully with a large firm by maximizing per-unit profits and per-
segment sales. Finally, market segmentation decisions directly affect
marketing mix variables: product, place, promotion, and price.
FINANCE/ACCOUNTING ISSUES
Like marketing and human resource concern while implementing
strategy the other important issue is accounting and finance. Some
examples of decisions that may require finance/accounting policies are:
1) To raise the amount of capital by issuing shares or obtaining a debt from
external parties.
2) To enhance the inventory turnover level
3) To make or buy fixed assets.
4) To extend the time of accounts receivable.
5) To establish a certain percentage discount on accounts within a specified
period of time.
6) To determine the amount of cash that should be kept on hand
7) To determine an appropriate dividend payout ratio.
8) To use LIFO, FIFO
Research and Development (R&D) Issues
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Research and development (R&D) management can plays part in strategy
implementation.
“New products and improvement of existing products that allow for effective
strategy implementation”
OR
“New products and improvement of existing products that allow for effective
strategy implementation”
R&D employees and managers perform tasks that include
1) Transferring complex technology,
2) Adjusting processes to local raw materials,
3) Adapting processes to local markets,
4) Altering products to particular tastes and specifications
STRATEGY REVIEW, EVALUATION AND CONTROL
Strategy Evaluation
Organizations are most vulnerable when they are at the peak of their
success.
R.T. Lenz
“Strategy evaluation alerts management to potential or actual problems in a
timely fashion.”
– It is Complex and sensitive undertaking
– Overemphasis can be costly and counterproductive
Systematic Review, Evaluation & Control
1. Strategies become obsolete
2. Internal environments are dynamic
3. External environments are dynamic
Purpose of strategy evaluation
• Strategy evaluation is vital to the organization’s well-being
• Alert management to potential or actual problems in a timely fashion
• Erroneous strategic decisions can have severe negative impact on
organizations
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Basic Activities –
1. Examining the underlying bases of a firms’ strategy
2. Comparing expected to actual results
3. Corrective actions to ensure performance conforms to plans
In many organizations, evaluation is an appraisal of performance –
• Have assets increased?
• Increase in profitability?
• Increase in sales?
• Increase in productivity?
• Profit margins, ROI and EPS ratios increased
The process of evaluating Strategies
1) Strategy evaluation is necessary for all sizes and kinds of organization.
Strategy evaluation should initiate managerial questioning of
expectations and assumptions should trigger a review of objectives and
values and should stimulate creativity in generating alternative and
formulating criteria of evaluation
2) Evaluating strategies on continuous rather than a periodic basis allows
benchmark of progress to established and o\more effectively monitored
3) Managers and employees of the firm should be continually aware of
progress being made towards achieving the firm’s objectives. As a
critical success factors change, organization members should be
involved in determining appropriate corrective action.
A Strategy-Evaluation Framework
Strategy evaluation activities in terms of key questions that should
be addressed, alternative answers to those questions, and appropriate
actions for an organization to take. Notice that corrective actions are
almost always needed except when
1) external and internal factors have not significantly changed and
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2) The firm is progressing satisfactorily toward achieving stated objectives.
REVIEWING BASES OF STRATEGY
Reviewing the underlying bases of an organization's strategy could be
approached by developing a revised EFE Matrix and IFE Matrix. A revised IFE
Matrix should focus on changes in the organization's management, marketing,
finance/accounting, production/operations, R&D, and computer information
systems strengths and weaknesses. A revised EFE Matrix should indicate how
effective a firm's strategies have been in response to key opportunities and
threats. This analysis could also address such questions as the following:
1) How have competitors reacted to our strategies?
2) How have competitors' strategies changed?
3) Have major competitors' strengths and weaknesses changed?
4) Why are competitors making certain strategic changes?
5) Why are some competitors' strategies more successful than others?
6) How satisfied are our competitors with their present market positions
and profitability?
7) How far can our major competitors be pushed before retaliating?
8) How could we more effectively cooperate with our competitors?
Measuring Organizational Performance
Another important strategy-evaluation activity is measuring
organizational performance. This activity includes comparing expected
results to actual results, investigating deviations from plans, evaluating
individual performance, and examining progress being made toward
meeting stated objectives. Both long-term and annual objectives are
commonly used in this process. Criteria for evaluating strategies should
be measurable and easily verifiable. Criteria that predict results may be
more important than those that reveal what already has happened.
Taking Corrective Actions
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The final strategy-evaluation activity, taking corrective actions,
requires making changes to reposition a firm competitively for the
future. Examples of changes that may be needed are altering an
organization's structure, replacing one or more key individuals, selling a
division, or revising a business mission. Other changes could include
establishing or revising objectives, devising new policies, issuing stock
to raise capital, adding additional salespersons, allocating resources
differently, or developing new performance incentives. Taking
corrective actions does not necessarily mean that existing strategies will
be abandoned or even that new strategies must be formulated.
CHAPTER 2: INTRODUCTION
KAPCO is the largest Independent Power Producer (IPP) having
the largest Combined Cycle Power Plant in Pakistan with total capacity KAPCO LTD
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of 1600 MW. The plant is located in Kot Addu; district Muzaffargarh
on 180 acres of land. A further 200 acres are covered by the residential
colony which comprises of over 900 houses, a ten bed hospital, staff and
officer’s recreational facilities, two shopping centers, a bachelor hostel,
three guest houses, two schools with over 1,400 students and three
mosques.
KAPCO is the first industrial privatization in Pakistan and came
into being on 27th of June 1996 under an agreement between the
Government of Pakistan, National Power – the UK’s largest power
company (Now called “International Power”) and the Water And Power
Development Authority (WAPDA).
The company has the solid background of profits and efficiency
catering to the 7 % energy requirements of the country with a share of
29 % in the total power generation of IPPs in Pakistan. In theory the
tariff structure of every IPP is such that its shareholders are guaranteed a
fixed return, assuming they meet certain conditions set in Power
Purchase Agreement (PPA) with WAPDA. KAPCO has a three way
relation with WAPDA. All at the same time, WAPDA is its customer,
lender as well as shareholder.
Initial Public Offering (IPO):
Privatization Commission of Pakistan has offered 20 % shares to
Resident / Non-resident Pakistani Investors and the transferred KAPCO
employees. Initially 88.025 million shares have been offered to general
public at Rs. 30 per share.
Who constitute Kot Addu Power Company?
There are two main shareholders of KAPCO.
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International Power plc, U.K is a leading independent electricity
generating company with facilities in operation (10990 MW net) and
under construction (610 MW net) in countries such as UAE, USA, UK,
Australia, Czech Republic, Portugal, Turkey, Malaysia, Pakistan and
Thailand.
International Power has 15% management shares. Remaining 20%
sale in stock exchange
WAPDA, the Water and Power Development Authority, was created
in 1958 as a Semi-Autonomous Body for the purpose of accelerated and
unified development of water & power resources. WAPDA is one the
largest organization in Pakistan with regard to infrastructure, assets and
human resources.
WAPDA holds 64 % shares as well as it is the only customer for
getting the electricity produced by KAPCO.
Description of the Plant KAPCO is a combined cycle power plant with 10 gas turbines and 5
steam turbines. It is the most modern and economical combined cycle
power plant in Pakistan. KAPCO plant with a capacity of 1600 MW is a
multi fuel fired power plant running on Gas, HSD and Low Sulphur
Furnace Oil (LSFO) simultaneously to avoid interruption in production
and also to reduce cost of generation. It is also the only major power
plant in the country with the ability to self start in case of a country wide
blackout.
The gas turbines have low installation cost, easy and speedy
erection and high loading rate as compared to conventional steam
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turbines. At gas turbine exhaust, substantial amount of heat energy is
available in the form of hot exhaust gases, which leave the turbine at
about 550 °C. This wasteful energy is used to generate steam in
conduction type boiler commonly known as HEAT RECOVERY
STEAM GENERATOR. High pressure steam so generated is then used
to run the steam turbine which thus produces power without any fuel.
This raises the plant efficiency to nearly 49 % against the 28 % of the
conventional gas turbine. Generally a combined cycle power plant
comprises of two gas turbines and one steam turbine. For reliability of
machines, each gas turbine is provided with exhaust gases control
dampers. These dampers lead the hot gases into the boiler or to the
atmosphere as per operation mode of the plant. With this provision, the
gas turbine can be run in simple cycle mode if the associated steam
turbine is under maintenance or unavailable due to some other reason.
Agreements between WAPDA & KAPCO
WAPDA entered into an agreement with KAPCO for the purchase of the power
for next 25 years from this plant. The tariff covered two kinds of
payments viz. capacity and energy payment. The capacity payment is
made on the available capacity of the plant and is mainly used by the
company to meet the fixed expenses and 756 million dollar debt liability
that it inherited from WAPDA. The energy payment is done on the
actual dispatch from the plant. It covers the fuel cost and there is hardly
and saving from this part.
The agreement allows 36 complex days for the scheduled outages
and 500 complex hours for the unscheduled / forced outages. In case the
accumulated outage period over the year exceeds the agreed allowance,
the company is liable to pay the liquidated damages at a rate of 1.6 times
of what it gets as capacity payment.
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The first year of the business went very well. WAPDA was
prompt in making payments, but it did not lost very long. WAPDA as
well as Govt. of Pakistan were in financial crises because of corruption
and in efficiencies. Ultimately WAPDA engaged KAPCO and National
Power in a complicated legal battle over the tariff issue by filing
petitions in the high court. The court finally passed an interim order in
October 1998 that restricts KAPCO to receive Rs. 1.98 per KWh of
electricity. The objective behind this legal wrangling was to pressurize
KAPCO / National Power to agree and out of court settlement for
deduction of tariff. With the incoming of present Govt. the matters have
been solved to fair extent.
Performance History
The project has performed well thought the period ever since it has been
privatized i.e. June 1996. The contribution of block 3 in overall
generation of the complex has been much beyond the satisfactory levels.
CHAPTER 3: STRTAEGY FORMULATION
Strategies are developed to run the organization effectively and efficiently.
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In KAPCO, strategies are developed by mutual consent of WAPDA, which has
65% of shares in KAPCO, and International Power UK which owns 20 % of
shares in KAPCO. Remaining 15% of shares are sold to the general public, as
KPACO is listed on all the three Stock Exchanges of Pakistan, and London
Stock Exchange, and NY stock exchange.
For the purpose of running the organization and planning and developing
strategies, four Directors are appointed by WAPDA, and two by International
Power UK, and remaining one is elected by General Share Holders. These
seven members of BOD then elect a CEO by voting.
Strategy Making and Approval Process in KAPCO:
When BOD formulate any strategy with mutual consent of CEO, then CEO
present that particular strategy to the top management of both the parent
companies WAPDA and International Power Inc UK. If they approve then
these strategies are forwarded to middle level managers for implementation.
MISSION AND VISION STATEMENTS OF KAPCO:
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A firm’s mission statement answers several fundamental questions. An
understanding of the firm’s mission helps managers enter ideas and design new
products and services. If its mission is too broadly defined, the firm could enter
areas in which it has no experience. If the mission is to narrowly defined, the
firms could miss growth opportunities. This should also include the aspects like
environment and core competencies. The management should be able to
identify and deal with environmental changes when formulating mission
statements.
Application at KAPCO
The organization does not have any formal MISSION or VISION statement
ever since its privatization. The employees in the organization just know that
they have to work and produce electricity / power with minimum possible
expenditure.
In the process of the organization development an in formal Mission Statement
has been devised which is kept forth for achieving the organizational goals.
The proposed Mission Statement is as under:
“KAPCO is an independent power producers that provides electricity for
WAPDA distribution network. It will continue to contribute in the developing
economy of Pakistan by maintaining its capacity and maximizing
availabilities.”
KAPCO has also developed its Mission and Vision statements
Mission Statements:
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To be a responsible corporate citizen
To maximize shareholders' return
To provide reliable and economical power for our customer
To excel in all aspects relating to safety, quality and environment
To excel in all aspects relating to safety, quality and environment
Vision Statement:
To be a leading power generation company, driven to exceed our shareholders'
expectations and meet our customer’s requirements.
An External Audit:
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Nature of External Audit:
The purpose of an external audit is to develop a finite list of opportunities that
could benefit a firm and threats that should be avoided.
Main Opportunity for KAPCO is that threats is an increasing demand of
electricity in Pakistan, so KAPCO has availed that opportunity in agreement,
International Power UK is increasing the plant capacity from 1690MW to
2100MW.but KAPCO has availed an extra opportunity that international Power
UK will now increase the plant capacity to 2700 MW.
External Assessment has been done by developing the External Factory
Evaluation Matrix (EFE Matrix).
External Factor Evaluation Matrix (EFE) For KAPCO
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Key External Factors Weight Rating W.Score
Opportunities All expansion programs are free of tax till 10 years 0.1 4 0.4 Increasing electricity demand 0.09 3 0.27 No fuel problem for company 0.08 2 0.16 Gain high profit on one time investment 0.1 3 0.3 Competitive energy cost 0.08 3 0.24 Direct sales to WAPDA 0.1 3 0.3 Threats Oil supply disturbs due to nonpayment by WAPDA 0.05 3 0.15 company is bound to supply electricity to WAPDA only 0.12 2 0.24I Improper security conditions in Pakistan 0.1 3 0.3 Several other energy projects coming in Pakistan 0.1 4 0.4 Govt. support for Rental power (political issues) 0.08 3 0.24
Total 1.0
3.0
Conclusion
KAPCO overall weighted score is 3.0, which shows that it is working well.
Their strategies are good and they are responding to the available opportunities
and threats in well manners.
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INTERNAL AUDIT:
Internal Audit is done by the organizations for identifying and evaluating a firm
strengths and weaknesses in the functional area of the business, including
management, marketing, finance/accounting, production/operations, R & D and
MIS.
Nature of Internal Audit:
All the organizations have strengths and weaknesses in the functional area of
the business. No enterprise is equally strong or weak in all areas.
It is being done by developing an Internal Factor Evaluation Matrix (IFE
Matrix).
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INTERNAL FACTOR EVALUATION MATRIX OF KAPCO:
Key Internal factor
Strengths Weight RatingWeighted Score
Hardworking , cooperative & trained staff 0.09 4 0.36 Best Packages offered for employees 0.09 4 0.36 ISO 9001,14001,18001 under umbrella of IMS through SGS 0.07 3 0.21 All Manual procedure has been computerized 0.08 3 0.24 Health and safety Department 0.08 3 0.24 Largest power production plant in south Asia 0.1 4 0.4 It has the biggest store in Pakistan 0.09 3 0.27 Weaknesses WAPDA is only buyer 0.12 3 0.36 After 2006 It is paying high taxes 0.1 3 0.3 No expansion since last ten years 0.1 2 0.2 Fear of inquires by GOVT. is always there (political issues) as 0.08 2 0.16 new GOVT. has changed some points of power purchase agreement.
Total 1
3.06
Conclusion
KAPCO overall weighted score is 3.0, which shows that it is working well.
Their strategies are good and they are responding to the available opportunities
and threats in well manners.
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STRATEGY ANALYSIS AND CHOICES
A COMPREHENSIVE STRATEGY-FORMULATION FRAMEWORK
This framework has the following three stages.
1. The Input stage
2. The Matching stage
3. The Decision stage
Each of the stage has some matrixes.
The Input Stage:
1. External Factor Evaluation (EFE) Matrix
2. Internal Factor Evaluation(IFE) Matrix
The Matching Stage:
1. SWOT Matrix
2. IE Matrix
The Decision Stage:
1. Quantitative Strategic Planning Matrix(QSPM)
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STRENGTHS-WEAKNESSES-OPPURTUNITIES-THREATS (SWOT)
MATRIX:
Strengths Weaknesses
1. Hardworking & trained staff 1. paying higher taxes2.Turnover ratio is very low 2.Wapda is only buyer
3.Manual procedure has been3.No expansion since ten years
computerized 4.Govt interference4. It has the biggest store in Pakistan5.iso 9001,14001 18001 certified
Opportunities SO Strategy WO strategy
1.Increasing demand of1.Company can increase capacity of
1.KAPCO can charge WAPDA
electricity plant higher prices in short term
2.No fuel problem2.KAPCO can store cheaper fuel for
3.Can Gain high profit on future usage low investment4.Compatitive energy cost5.Direct sales to Wapda
Threats ST Strategy WT strategy
1.Bound to supply electricity to wapda only
1.KAPCO can charge low prices as compare to rental power which are so costly
1.KAPCO will stop expansion programs if Govt. supports
2.security conditions is some security problems3.other power projects coming4.Govt. support for rental power
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Quantitative Strategic planning matrix (QSPM) Strategic Alternatives 1 2 Increase capacity of plant Low Prices as compare to rental power plant
Key Factors Weight A.S T.A.S A.s T.A.SOpportunities 1. All expansion programs are free of tax 0.1 3 0.3 2 0.2 till 10 years 2. Increasing electricity demand 0.09 4 0.36 2 0.18 3.No fuel problem for company 0.08 4 0.32 2 0.16 4.Gain high profit on one time investment 0.1 5.Competitive energy cost 0.08 3 0.24 4 0.326.Direct sales to WAPDA 0.1Threats 1.Oil supply disturbs due to nonpayment 0.05 2 0.10 3 0.15by WAPDA 2.company is bound to supply electricity to 0.12 WAPDA only3.Improper security conditions in Pakistan 0.1 3 0.3 2 0.2 4 Several other energy projects coming 0.1 3 0.3 3 0.3 in Pakistan 5. Govt. support for Rental power 0.08 3 0.24 2 0.16 (political issues)Total 1
Strengths 1.Hardworking , cooperative & trained staff 0.09 4 0.36 1 0.09 2. Best Packages offered for employees 0.09 3 0.27 3.ISO 9001,14001,18001 under umbrella of 0.07 3 0.21 IMS through SGS 4.All Manual procedure has been 0.08 3 0.24 2 0.16computerized 5.Health and safety Department 0.08 6.Largest power production plant in south Asia 0.1 3 0.3 2 0.2 7.It has the biggest store in Pakistan 0.09 4 0.36 3 0.27Weaknesses 1.WAPDA is only buyer 0.12 4 1 0.12 2.After 2006 It is paying high taxes 0.1 1 3 0.3 3.No expansion since last ten years 0.1 4.Fear of inquires by GOVT. is always 0.08 3 0.24 1 0.08 there (political issues) as new GOVT. has changed some points of power Purchase agreement.Total 1 3.66 3.37
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Chapter 4
Strategy Implementation
1. Annual Objectives of KAPCO:
The project has been completed to achieve the following objectives:
To reduce mass scale load shedding.
To firm up Hydrel Power Generation during water shortage
period.
To facilitate operation and maintenance of other power stations.
To cover emergencies and power shortages with quick generation
of power supply from this power station which is the salient
feature of gas turbines?
2. Policies of KAPCO:
KAPCO is managed through a suite of agreements signed between it and its
customer (WAPDA), Government of Pakistan, and fuel suppliers. These
include:
Power Purchase Agreement ("PPA")
The PPA is between WAPDA and KAPCO. Inter alia, the PPA determines
the tariff structure and principles of operating the Power Plant. The PPA
includes an implicit return built into the tariff provided. KAPCO maintains
its available capacity at the contractual level identified in the PPA. KAPCO
has robust and effective engineering, financial, procurement and HR
strategies in place to ensure that contractual capacity levels are maintained.
Over the last two years, dependable capacity levels have been significantly
above the contracted levels.
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Gas Supply Agreement ("GSA")
The GSA is between Sui Northern Gas Pipelines Limited ("SNGPL") and
KAPCO. Inter alia, the GSA guarantees a certain quantity of gas deliveries
during off peak months from SNGPL.
Oil Supply Agreement ("OSA")
The OSA is between KAPCO and Pakistan State Oil Company Limited
("PSO"). PSO is the largest oil marketing company in Pakistan and is engaged
in the nationwide storage, distribution and marketing of various petroleum, oil
and lubricant products. Inter alia, the OSA covers the supply to KAPCO of
fuel, diesel, oil, greases, lubricants and additives for the requirement of the
Power Plant.
3) Resource allocation:
Existing PARCO facility for transportation of HSD from Karachi to
Mehmood Kot, which is about 35 km from Kot Addu. From Mehmood
Kot, a 10 inches diameter pipeline has been to laid this power station
and HSD pumping was commissioned in June 1989. (Later on it has
been switched over to furnace oil since 2nd Feb. 1991.).
Sweet underground water
Future load center of North West areas
possible use of gas from nearby Dhodak Field
Near to Kot Addu junction Railway Station
To provide job opportunity to the Location
General uplift and development of area.
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4) Restructuring and Reengineering
KAPCO had done the downsizing in 2002 in transport, civil and security
department due to some frauds and low performance of workers there.
KAPCO has also installed the machinery for purification of wastage
water and its all operations are environment friendly.
5) Production & Operation concern in implementing strategies
Production and operation functions are the back bone of every
organization. KAPCO is a power generation organization and a little
mistake in its production and operation function will lead the organization
to a big loss, therefore it needs full concentration, and this concentration is
gained by employees only when all their basic needs are fulfilling. KAPCO
has made such strategies that benefits al the workers and organization itself.
6) Human Resource Management Concern in Implementing Strategies
Human resource is a greatest asset of any organization. Each organization
either a manufacturing or service oriented does its best for the proper
arrangement of its employees. These are the employees who are the distinction
between organizations. These are the pillars of success in services or
manufacturing organization.
People are needed to manage people. There must be in charge to direct and
guide people in the organizations. So, human resource management is the art of
managing people in the organization. For this purpose almost every
organization has separate department which is called human resource
department or personnel department.
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In KAPCO this department was named as ADMIN in earlier as in WAPDA. In
2004 a new department “Human resource & corporate services” formed. This
department has the following sections;
1. Operations
2. Organizational development
3. Corporate services
4. Security
1. Operations
The human resources (ops) section is performing all day to day activities
of KAPCO regarding human resource. This section is performing
following functions.
New recruitment and selection
Orientation and training
Promotion and benefits
Apprentices and Internship
Updating personal information
Maintain record of leave, loan, EPF,EOBI, etc
Dealing with trade unions
2. New recruitments
HR operation deals with the recruitment of all kinds of employment including,
regular employment, apprentices, Graduate Trainee engineers and wages
employees.
A) Requisition of new employee
Sectional head not below the rank Grade M-2 sends employee’ s requisition
form to HR Manager through Head of Department/General manager after
obtaining approval from competent authority (chief executive officer).
B) Advertisement
The vacant position is advertised internally through notice board or externally
through national newspapers. HR Manager with the help of the concerned
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sectional head finalizes the contents and format of advertisement outlining the
following important points;
Clear name of position
Grade
Job description
Qualification
Experience, age limit
Last date of submission of applications.
HR Manager advertises the post after receipt of the approved requisition.
C) Scrutiny of applications
The applications are short listed on the basis of following;
lack of appropriate qualification, lack of experience, age, any other reason.
New recruitments of trainee engineers carried out during my first week of
internship.
d) Selection procedure
I saw recruitment procedure closely. The following procedure was carried out.
Test
Presentation
Group discussion
Interview
E) Post interview process
Immediately following the final interview, each panel member -independently
ranked the candidates before any discussion takes place amongst them. Then
the HR section representatives collate the rankings and after mutual discussion,
the panel arrive at a consensus on their recommendation for appointment on the
prescribe number of posts and 10 % reserve candidates. The KAPCO sends the
feedback to the unselected candidates and mentioned the reasons of their
failure.
F) Orientation
The orientation is introduction of new employees to the organization and their
work. The new employees are given information of
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Organizational structure
Policies and rules applicable in the company
Attendance and leave procedure
General discussion about the company
The time of orientation is not more than two hours in KAPCO. But in case of
trainee the orientation was not covering all the elements as mentioned above.
They were not aware of policies and rules even after orientation.
2) Employee’s provident fund (E.p.f)
The record of employee’s provident fund is also maintained by this section.
The employee can contribute up to 10 % of his basic salary. Employees can
take loan from this fund but maximum installment for repayment is 48
and also interest is charged on the outstanding loan. He can also take an
option of permanent withdrawal once in his service time.
3) Company loan
Employees apply here for company loan. They can take loan for the following
purposes;
Purchase of house
Purchase of plot of land
Repaying house building loan
Purchase of conveyance
Marriage of self and children
Their 50 % of provident fund is retained as security. The employee also gives
the guarantee of another employee of KAPCO.
4) Medical facilities, leaves & allowances
The HR Ops maintains the current information of employees. They update their
record. For medical facility they provide record of dependents of employees.
The record of employees leaves is also updated here e.g. annual leaves, frozen
leaves, study leaves etc. The allowances are also calculated on basic salary by
this section. Gross salary of employer is calculated here.
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5) Training
The HR Ops Is also responsible for the training of staff.
6) Pension
Different organizations are providing the facility of pension to its employees
which are paid to the employee at the time of his retirement. It is totally
employer’s contribution and no deduction is made from the salary of the
employee.
In KAPCO the pension is calculated as per company policy which varies from
year to year. The employees are able to get this facility after the 25 year of
service. In case of death of the employee his family can get pension amount but
the employee must have completed 10 year of service. The pension is paid 50
percent in lump sum at the time of retirement of the employee and balance is
commutated.
Organizational development
This section was formed on 2006. They perform the following functions
1) Training of officers
2) Performance appraisal of officers
1) Training of officers
For this purpose a training need assessment is carried out. There are two types
of training
In- house training
External training
In-house training
This is carried out for operations, Maintenance and safety. The last t raining
was conducted by a company NAVITUS. This was a in house training for the
purpose of safety.
External training
In this the employees are sent to different training institutions. The engineers
were sent to LUMS for management training for one year.
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Evaluation of training
The evaluation of training is done through tests, discussion or exams during or
at the end of training program. At the end of training an assessment panel may
check improvement of trainees through interviews.
Performance appraisal
Performance refers to the degree of accomplishment of the tasks that make up
an employee’s job. Whereas performance appraisal refers to the evaluation and
communication to an employee how he or she is performing the job and
establishing a plan for the improvement.
Performance appraisal method at KAPCO
The KAPCO is using the management by objective method for the
performance appraisal of the employees. This process is still limited up to the
officers but in future there is plan for the same type of system for staff. The
targets are set and performance is measured on quarterly basis and on the final
analysis of one year the employees are awarded with cash bonuses. They are
according to their performance which meets the targets or work more than
these targets.
I5 % of annual basic pay who meets expectancy
30% of annual basic pay who works more than expectancy
35% of annual basic pay for those who works is exceptional.
Corporate Services
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The concept of corporate services in human resources department is
new for us. The human resources department of KAOCO is also providing
many corporate services to its employees. This section consists of four
employees who are responsible to answer the GM HR and CS.
The corporate services section is providing the different functions for the
employees of the KAPCO. These functions are
Hospitality services
It includes the stay arrangements of guests, meal arrangements and
maintenance of the residential areas.
Transportation services
Requisition handling, vehicle insurance and claim, officer’s cars insurance,
vehicle maintenance and driver’s professional training.
Administrative services
It includes the availability of furniture and fixture, offices allocation and
setting, Canteen services and printing and stationary.
Traveling and hotel arrangements
International and domestic traveling, hotel arrangements etc are the main parts
of this function.
Social action programmed
This function includes the services to arrangements of the medical camps,
infrastructure improvements in schools and hospitals of the local community. It
also includes the general welfare projects.
Fair price shop
It includes the requisition for the purchase of items and inventory and quality
management at the shop and also sale of the items as per defined quota for the
employees.
Functions and celebration
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The preparation of the budget for upcoming functions, support to the
organizing committee and providing them the transportation and medical
facilities is also the function of this section.
7) Finance/ Accounting concern in strategy Implementation:
Finance Manger is supervising the all activities of this department. Financial
Controller is responsible for accounting procedure and Tax & treasurer is
responsible about the matters of taxation, and investment. Very first and an
important function of finance department is recording the business transactions
on vouchers. This is also called process of vouching. This is made for internal
record keeping. Auditors specifically audit vouchers. Wrong vouching will lead
to error in the system and ultimately create problems.
From vouchers information is recorded in daybook and cashbook. As each
voucher along with its invoice, PO and other necessary documents are kept in
the record room so daybook is one that can give information about parties DR
and name of account CR along with amount.
In order to see accounts in condense form ledger is used. From daybook all the
entries are posted in ledger. Ledger represents DR or CR balance of each party.
So from ledger we can see amount that is to be paid to a party or the amount
that is to be received and the balance at the end of the month.
After this all the DR balances and CR balances of all the parties are posted in
trial balance. The trial balance must be equal at both sides. Otherwise there is
any error in recording the transactions.
Now trial balance becomes the source of profit and loss and balance sheet.
This department also designs the accounting policies. All the work in this
department is being take place on accrual basis.
The department prepares trial balance at the end of every three months and
Profit and loss accounts and balance sheet are prepared at the end of year. The
financial year ends on june30 of each year. The financial statements are
presented to shareholders.
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Exact Software:
KAPCO is using accounting software named as EXACT. This software helps
in preparing the final annual statements.
The Finance department of KAPCO is responsible for the entire accounting
process of the organization and for an efficient handling of the accounts. The
accounts department mainly performs the following functions:
Short term investment
The finance department of KAPCO is responsible for investment of
funds in different companies but with the approval of the finance manager. The
short term investment of KAOPCO in different companies is with the name of
placements. The company has TFC of following companies
Engro pvt ltd
Bank al-habib
Jahangir Siddqui bank
PMCL
Defense saving certificate
The interest on DSC is recorded as accruals and it is received on maturity with
the principal.
Payments to suppliers
The finance department makes the payments to all suppliers regarding their
sales to the company. The engineers send the inspection report with invoice
and goods received note to the purchase department, which sends these
documents to the finance department for payment. If the delivery is late and no
information is given than the finance department is charge .5percent for late
delivery. The payments are recorded in purchase ledger invoice.
Petty cash book
For the payments which are less than 10000 the company has maintained the
petty cash book. For getting amount from petty cash the individual has to fill a
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form which is approved by finance manager. Than the payment will be made to
the individual and entry will be
Name of the employee Dr
Cash Cr
After the person submits the invoice of the purchase than the entry will be
Name of the expense Dr
Name of the employee Cr
Sale invoice recording
There are different companies which are using the residences and electricity,
gas, house rent facilities of the KAPCO. So it the responsibility of the cash
dealing officer to issue sale invoices to these different firms. The issue entry
will be
Name of the company Dr
Name of the income Cr
Fair price shop dealings
The quotas of different employees are set for their purchasing
From fair price shop and it is totally on cards which issued to each employee.
The deductions are made on monthly basis from the salaries of the employees.
When purchases are made for the fair price shop the entry will be
Fair price shop DR
Name of the contractor Cr
Purchases
There are two types of purchases which are handling by the finance department
of the KAPCO. It may be
Stock item
Direct charge expense
In case of stock item the entry will be
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Stock Dr
Bills Payable Cr
In case of direct charge expense
Expense by name Dr
Account payable Cr
Financial Analysis
Financial analysis involves the use of various financial statements.
These statements do several things. First the balance sheet summarizes the
assets, liabilities, and owner equity of business at a moment of time. Next the
income statement summarizes the revenues and expenses of the firm over a
particular of time.
To see the financial positions of any company for short term and long term
investment and for giving loan the analysis of different ratio is very necessary
for a finance manager. Financial ratio is an index that relates two accounting
numbers and is obtained by dividing one number by the other.
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STRATEGIES IN ACTION
OPERATIONAL STRATEGY
Corporate Strategy
Whatever the type of firm, top management’s responsibility is to plan the
organization’s long-term future. Corporate strategy defines the business (es)
that the company will pursue, new opportunities and threats in the
environment. Also addressed is business strategy, or how a firm can
differentiate itself from the competitors. Choices could include producing
standardized products versus customized products or competing on the basis of
cost advantage versus responsive delivery. Corporate strategy provides an
overall direction that serves as the framework for carrying out all the
organization’s functions.
Strategic Choices
Corporate strategy defines the direction of the organization over the long term
and determines the goals that must be achieved for the firm to be successful.
Management sets corporate strategy by making three strategic choices:
determining the firm’s mission, monitoring and adjusting to changes in the
environment, and identifying and developing the firm’s core competencies.
Application at KAPCO
Before the privatization the organization was working under WAPDA like a
typical Govt. Organization and had no formal corporate strategy. However,
after privatization in June 1996, the organization is working on the subject and
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a draft corporate strategy has been finalized. The strategy is being kept secret at
the moment and no further details are available.
CORE COMPETENCIES AND COMPETITIVE PRIORITIES
Core Competencies
Core competencies are organizational unique resources and strengths which
management considers formulating strategy. These core competencies include:
1. Workforce
2. Facilities
3. Market and financial know how
4. System and technology
Competitive Priorities
A firm gains an advantage with its operating system by outperforming
competitors in terms of one or more of these capabilities. There are eight
possible competitive priorities for operations, which fall into four groups.
Cost
1. Low cost operations
Quality
1. High performance design
2. Consistent quality
Time
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1. Fast delivery
2. On time delivery
3. Development speed
Flexibility
1. Customization
2. Volume flexibility
A firm may organize itself into one or more operating systems, each designed
to support a particular set of competitive priorities for a particular set of
products or services.
Application at KAPCO
Core competencies
Work force
A work force of approximately 612 employees is working in the organization
in 4 technical shifts and 1 general shift as following:
Technical shifts 3 x shifts work 8 hourly daily on rotational basis
1 x shifts remains at rest
General Shift for 8 hours on daily basis (from 0800 to 1600 hrs)
Market and Financial know how
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There is no marketing department nor are there any competitors. The
organization does not carry out any marketing function. However, a
commercial and financial department exists. For the billing purpose formal
financial procedures are adopted.
System Technology
In the recent past the organization has installed new technology plant for power
production. There are combinations of hybrid technology plants i.e. Gas and
Furnace Oil combination, Gas and High Speed Diesel combination and Steam
Operated Turbines. The company is also shifting their information system on
the modern lines gradually. And company also installed multi fuel system
turbines which can run on every type of fuel.
Competitive Priorities
Cost
All efforts at every level are directed to reduce the production cost. This is
being achieved by the very extensive use of Gas Turbine plant i.e. block
3.called CCR 3
Quality
High performance quality in the organization is referred as efficient use of
plant i.e. with minimum cost maximum output.
Time The aspect is of utmost importance. Priorities like Fast Delivery and On
Time Delivery are applicable as the company is producing required amount of
voltage at prescribed timing with complete accuracy.
Flexibility
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There is no concept of flexibility, which is being implemented. The company is
rather tied up with the strict schedules of using various plants.
Strategy Based On Flows
These are five fundamental manufacturing and service strategies based on
flows are:
1. Make-to-Stock Strategy
2. Standardized service strategy
3. Assemble-to-order strategy
4. Make-to-order strategy
5. Customized service strategy
Application at KAPCO
No concept of strategy based on flows is being followed / observed in the
organization. However, all production is being done on the orders / demand
received from WAPDA. One may say that make to order strategy is being
follows for production of electricity.
DECISION MAKING IN OPERATIONS
Operations managers make many choices as they deal with various decision
areas. Although the basic steps include:
1. Recognize and clearly defined the problem.
2. Collect the information needed to analyze possible alternatives.
3. Choose and implement the most feasible alternative.
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Sometimes hard thinking in a quiet room is sufficient. At other times reliance
on more formal procedures is needed. Various methods used are break-even,
preference matrix, decision theory and decision tray.
Application at KAPCO
None of the above method is being implemented by the company for estimating
demand. The demand is received directly from WAPDA (The only customer of
the company) and company produces power / electricity accordingly. If there is
any problem in fulfill demand and supply targets given by wapda then
management refers it to concern department and that department work on it as
a team not depend on individuals.
WORKFORCE MANAGEMENT
Team
Employee involvement, also called worker participation or labor-management
joint-ness, is a key tactic for improving competitiveness. One way to achieve
employee involvement is by the use of teams, which are small groups of people
who have a common purpose, set their own performance goals and approaches,
and hold themselves accountable for success. Teams differ from their more
typical “working group” because:
The members have a common commitment to an overarching purpose
that all believe in and that transcends individual priorities.
The leadership roles are shared rather than held by a single, strong
leader.
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Performance is judged not only by individual contributions, but also by
collective “work products” that reflect the joint efforts of all the
members.
Open-ended discussion, rather than a managerially defined agenda, is
prized at meetings.
The members of the team do real work together, rather than delegating
to subordinates.
Employee Empowerment
The three approaches to teamwork most often used are problem solving teams,
special purpose teams, and self-managing teams. All three use some amount of
employee empowerment, which moves responsibility for decision farther down
the organizational chart – to the level of the employee actually doing the job.
Application at KAPCO
Generally the concept of problem solving team or special purpose team exist in
the organization culture. This is more evident when major overhauls of the
plants are done. Individuals are not made responsible in different teams (each
selected from respective shift) for specific jobs but the concerned employees
work as a team.
TRAINING
In a global marketplace, firms face changing market conditions brought on by
new competitors and changing customer preferences. Firms must rely on their
employees to anticipate possible problems, develop new products and services,
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and increase productivity to remain competitive. The emphasis on efficient
process requires the employees have a broader base of skills so that they can
take on greater variety of assignments and communicate with employees in
other areas. Firms engage in a variety of training programs, including the
following:
Global training
Administrative training
Technical training
Application at KAPCO
Although the company does not have any competitors yet the company faces a
great a cost of electricity demand from WAPDA. To this demand a highly
skilled personal; (especially Engineers) are required. As the project kept on
developing in phases i.e. from 1984 (1st phase) to 1992 (last phase), To improve
the skill and update the technical knowhow of the working staff for the new
machinery, a training program was launched right from the beginning of the
project. As a result of this a number of station engineers received foreign
training in different fields. Entire program of training to different categories of
staff was out in five Phases.
Phase I
As per contract agreement 7 engineers were trained in Germany and 9 in Italy.
The training was conducted at the training center / factories of the machine
manufacturers. Besides the above one month’s local training was also imparted
to the staff at site.
Phase II
Under this phase 30 engineers received training in the field of operation and
maintenance of plant. The training was arranged in France.
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A local training was also arranged at site for the staff where operation and
maintenance of the gas turbines unit 5-8 was taught for a month.
Phase-III
For the combined cycle plant unit forty engineers were trained in Germany.
Locally the operation and maintenance staff for these units was trained at site
by the foreign expertise for a period of 24 weeks.
Phase-IV
For operation and maintenance of steam turbine units 11&12, twenty engineers
received foreign training in the relevant field. Training was imparted at France.
In addition to the foreign training, a local training was also impacted by foreign
experts to the operation and maintenance staff. A batch of 20 officials attended
the course.
Phase-V
15 engineers were sent to Germany under this phase. The participants of this
course received training in the field of Electrical, Mechanical and I&C
maintenance of power plant.
A multi field training course, covering a span of 13 weeks was arranged at the
plant for local training of staff. About 50 persons availed this training to get
acquaintance with the new machinery.
In 1996 after KAPCO is privatized, organization has made it must for every
employee(management and Technical Staff) to get training of 15 days inside
plant, and that training is given by NOVARTAS and SEIMENS and
Management training is given by LUMS institute.
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Capacity
Capacity is the maximum rate of output for a facility. The facility can be a
workstation or an entire organization. The operations manager must provide the
capacity to meet current and future demand; otherwise, the organization will
miss opportunities for growth and profits. Capacity plans are made at two
levels. Long-term capacity plans. These plans cover at least two years into the
future. Whereas, short-term capacity plans focus on work-force size, overtime
budgets, inventories, and other types of decisions.
Capacity Planning
Capacity planning is central to the long-term success of an organization. Too
much capacity can be as agonizing as too little. When choosing a capacity
strategy, managers have to consider questions such as the following. How
much of a cushion is needed to handle variable, uncertain demand? Should we
expand capacity before the demand is there or wait until demand is more
certain?
Measures of Capacity
No single capacity measure is applicable to all types of situations. Output
measures are the usual choice for line flow processes. Input measures are the
usual choice for flexible flow processes.
Peak Capacity
The maximum output that a process or facility can achieve under ideal
conditions is called peak capacity. Peak capacity can be sustained for only a
short time, such as a few hours in a day or a few days in a month. A firm
reaches it by using marginal methods of production, such as excessive
overtime, extra shifts, temporarily reduced maintenance activities, overstaffing,
and subcontracting.
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Effective Capacity
The maximum output that a process or firm can economically sustain under
normal conditions are its effective capacity. In some organizations, effective
capacity implies a one-shift operation; in others it implies a three-shift
operation.
Steps Determining Capacity Cushions
Businesses find large cushions appropriate when demand varies.
Large cushions also are necessary when future demand is uncertain.
Another type of demand uncertainty.
Supply uncertainty also favors large capacity cushions.
Small cushions have other advantages; they reveal inefficiencies that may be
masked by capacity excesses-problems with absenteeism, for example, or
unreliable suppliers. Once managers and workers have identified such
problems, they often can find ways to correct them.
Application at KAPCO
Power Generation
Peak Capacity
Peak capacity of the project is 1690 MW which is achieved through combined
cycle power plants.
Effective Capacity
Effective capacity of the plant is 1690 MW at any instance during the entire
year.
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According to the contract the company is bound to provide same
amount of power i.e. 1690 MW (equal to effective capacity for the next
25 years to WAPDA) and international power co uk increase it up to
2100 MW till 2012.
Although the demand for power supply is received from WAPDA is any
instance during the year. However as a process 95 days before the
commencement of the next year, average ten at demand is received in
giga watts / hrs from WAPDA. Basing on this forecast capacity
planning by the company is done.
Chapter 5 STRATEGY EVALUATION
Strategy Evaluation Framework:
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THE PROCESS OF STRATEGY EVALUATION
The Process of Strategy evaluation at KAPCO is done in following steps.
1. Identifying the Problems
2. Measuring actual performance with standards
3. Taking corrective actions
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1. Identifying the Problems:
Concerned Officers of each department prepare report about the
performance and working of all the employees and send daily report to
the head of the department. In every shift working at KAPCO, There is a
reporter who reports the performance of each employee and send it to
the reporting manager, The employees also mention any problem related
to their working in this report, the reporting manager then compile all
these reports in a single report and send it to higher management with
the suggestions for solving the related problem.
2. Measuring actual performance with standards:
The higher management then after analyzing that report compare the
actual performance of the workers quantitatively & qualitatively with
the standards set by the BOD at KAPCO.
3. Taking corrective actions
If the performance is not according to the standards then it means that
their implemented strategies are not working well, they need to take
some corrective actions by doing modification in that strategy or by
implementing a new strategy.
Minor problems at departmental level are solved by the concerned
departmental manager with his/team while some major or serious
problems are handled by top management.
In 2004, the KAPCO has done downsizing in some department on the
bases of their weak performance.
DIFFERENCES IN THEORY AND PRACTICAL APPLICATION OF
STRATEGIES
After studying the practical application of strategic management, we
have identified the following differences between theory and practical
application at KAPCO.
1. Management style is different from that we have studied in book.
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2. Decision making is mostly done at top level but departmental managers
also have the authority to modify & change the ways to achieve the
targets.
3. Top level management whenever implements a strategy. They always
consult with employees and take their opinion on strategies that are
going to be implementing in future.
4. The Mission statement that KAPCO is following is prepared by mutual
concern of KAPCO and International Power UK, employees were not
considered in making the Statement.
5. The contracts with other company are made by procurement department
and procurement department doesn’t consult with other departments.
6. KAPCO has made the strategies for its 25 years joint venture with
WAPDA. But their annual and short term objectives can change.
7. KAPCO cant make the policies for itself, all its policies are made by
WAPDA, so their joint venture has no role in making the policies and he
reason for that is, WAPDA has four members in the Board of Directors
of KAPCO.
8. There is no marketing department in KAPCO because it doesn’t need it,
it has only one buyer i.e. WAPDA.
9. Sometime it happens in KAPCO, that when a particular strategy is
made, The labor union are not agree with it, so the management of
KAPCO then review that strategy, and some deals with them that could
benefit both the union and the organization.
RECOMMENDATIONS
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1. The decision making should be decentralized up to some extent not
depend upon teamwork, individual must have some authority to
take decisions.
2. KAPCO must consider its employees and workers concern while
preparing the mission and vision statements.
3. The procurement department should consult with other relevant
department when they do contract with other companies.
4. KAPCO should get the authority from WAPDA for making their
own policies up to some extent, and they should also concern their
internal employees for making policies.
5. The top management of KAPCO should also concern the opinion
of the technical staff while making and implementing the
strategies, because KAPCO is an engineering related firm and the
top level management don’t have deep knowledge related to the
machinery and it’s working.
QUESTIONAIRE
1. How you develop your mission and vision?
2. What is importance of mission and vision in front of your organization?
3. What sort of technique KAPCO is using for external audit?
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4. How you perform your external audit
5. What are the factors in your opinion which affect your organization?
6. Are you using competitive intelligence?
7. Are you using management information system?
8. What are KAPCO’s long term objectives?
9. For the purpose of achieving long term objectives, is your organization
is using intensive strategies like (market penetration, market
development and market development)?
10. What is the KAPCO’s procedure to implement strategies?
11. What your organizations do for achieving long-term objectives?
12. What are human recourse concerns while implementing strategies?
13. What are marketing concerns while implementing strategies?
14. On which basis you evaluate the performance of your organization?
15. How you remove the weakness, if any found in the evaluation process?
16. What sort of tools/techniques you used for evaluation process?
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