Subject: Strategic Management
Q - Define the term ‘strategy’ what is its significance for any Business Organization?
Johnson and Scholes define strategy as follows:
"Strategy is the direction and scope of an organisation over the long-term: which
achieves advantage for the organisation through its configuration of resources
within a challenging environment, to meet the needs of markets and to fulfill
stakeholder expectations".
Strategy is when a firm expenses its intent to adopt a current & future course of
action that is blueprint &roadmap with clarity of objectives that need to be achieved
in short term and long term.
In other words, strategy is about:
* Where is the business trying to get to in the long-term (direction)
* Which markets should a business compete in and what kind of activities are
involved in such markets? (markets; scope)
* How can the business perform better than the competition in those markets?
(advantage)?
* What resources (skills, assets, finance, relationships, technical competence,
facilities) are required in order to be able to compete? (resources)?
* What external, environmental factors affect the businesses' ability to compete?
(environment)?
* What are the values and expectations of those who have power in and around the
business? (stakeholders)
Strategy at Different Levels of a Business
Strategies exist at several levels in any organisation - ranging from the overall
business (or group of businesses) through to individuals working in it.
Corporate Strategy - is concerned with the overall purpose and scope of the
business to meet stakeholder expectations. This is a crucial level since it is heavily
influenced by investors in the business and acts to guide strategic decision-making
throughout the business. Corporate strategy is often stated explicitly in a "mission
statement".
Business Unit Strategy - is concerned more with how a business competes
successfully in a particular market. It concerns strategic decisions about choice of
products, meeting needs of customers, gaining advantage over competitors,
exploiting or creating new opportunities etc.
Operational Strategy - is concerned with how each part of the business is
organised to deliver the corporate and business-unit level strategic direction.
Operational strategy therefore focuses on issues of resources, processes, people
etc.
Significance:
Why Strategy?
1. Survival.
2. Respond to changes in external environment.
3. The need to grow.
4. Respond to changes in customer expectations.
5. Corporate social responsibility amongst stakeholders.
6. Increase share of the market & profitability.
7. Manage competition effectively & gain business dominance in the industry.
8. Build competencies & capabilities. Technical expertise, financial capabilities
9. Customer acquisition in growing markets. Getting new customers (pursuing larger
customer base)
The business strategy of a company provides the big picture that shows how all the
individual activities are coordinated to achieve a desired end result.
It is through the strategy process that the overall direction of the business is set. This
is based on the opportunities and threats in the outside world and the internal
strengths and weaknesses of the business.
Your Strategy As A Reaction To Environmental Changes That Have Happened Or
You Expect to Happen
As the external environment changes, perhaps due to changes in customers or
competitors or perhaps due to the wider forces - political, economic, social,
technological, and environmental or legislation based - it is important to come back
and ask some fundamental questions.
The more the external environment changes, then:


The more opportunities there are likely to be for the well prepared company;
but
.
The more threats the unwary and the unprepared will face.
Even if the basic environment is stable, actions and intentions of competitors change
and companies need to review what is happening, prepare for any real or potential
competitive manoeuvres and find new insights into ways to create value for
customers.
Q - Explain 5P’s for strategy that is strategy as a plan, as pattern, as position, as
perspective and as purpose.
Mintzberg's 5 Ps for Strategy
The word "strategy" has been used implicitly in different ways even if it has
traditionally been defined in only one. Explicit recognition of multiple definitions can
help people to manoeuvre through this difficult field. Mintzberg provides five
definitions of strategy:





Plan
Pattern
Position
Perspective
Purpose
Plan
Strategy is a plan - some sort of consciously intended course of action, a guideline
(or set of guidelines) to deal with a situation. By this definition strategies have two
essential characteristics: they are made in advance of the actions to which they
apply, and they are developed consciously and purposefully.
Strategy can be defined as a direction, a guide or a course of action to get from here
to there.
Pattern
If strategies can be intended (whether as general plans or specific ploys), they can
also be realised. In other words, defining strategy as plan is not sufficient; we also
need a definition that encompasses the resulting behaviour: Strategy is a pattern specifically, a pattern in a stream of actions. Strategy is consistency in behaviour,
whether or not intended. The definitions of strategy as plan and pattern can be quite
independent of one another: plans may go unrealised, while patterns may appear
without preconception.
Plans are intended strategy, whereas patterns are realised strategy; from this we
can distinguish deliberate strategies, where intentions that existed previously were
realised, and emergent strategies where patterns developed in the absence of
intentions, or despite them.
Strategic plans and ploys are both deliberate exercises. Sometimes, however,
strategy emerges from past organizational behavior. Rather than being an
intentional choice, a consistent and successful way of doing business can develop
into a strategy.
For instance, imagine a manager who makes decisions that further enhance an
already highly responsive customer support process. Despite not deliberately
choosing to build a strategic advantage, his pattern of actions nevertheless creates
one.
To use this element of the 5 Ps, take note of the patterns you see in your team and
organization. Then, ask yourself whether these patterns have become an implicit
part of your strategy; and think about the impact these patterns should have on how
you approach strategic planning.
Position
Strategy is a position - specifically a means of locating an organisation in an
"environment". By this definition strategy becomes the mediating force, or "match",
between organisation and environment, that is, between the internal and the external
context.
"Position" is another way to define strategy - that is, how you decide to position
yourself in the marketplace. In this way, strategy helps you explore the fit between
your organization and your environment, and it helps you develop a sustainable
competitive advantage.
For example, your strategy might include developing a niche product to avoid
competition, or choosing to position yourself amongst a variety of competitors, while
looking for ways to differentiate your services.
When you think about your strategic position, it helps to understand your
organization's "bigger picture" in relation to external factors. To do this, use PEST
Analysis, Porter's Diamond, and Porter's Five Forces to analyze your environment these tools will show where you have a strong position, and where you may have
issues.
Perspective
Strategy is a perspective - its content consisting not just of a chosen position, but of
an ingrained way of perceiving the world. Strategy in this respect is to the
organisation what personality is to the individual. What is of key importance is that
strategy is a perspective shared by members of an organisation, through their
intentions and / or by their actions. In effect, when we talk of strategy in this context,
we are entering the realm of the collective mind - individuals united by common
thinking and / or behaviour.
The choices an organization makes about its strategy rely heavily on its culture –
just as patterns of behavior can emerge as strategy, patterns of thinking will shape
an organization's perspective, and the things that it is able to do well.
For instance, an organization that encourages risk-taking and innovation from
employees might focus on coming up with innovative products as the main thrust
behind its strategy. By contrast, an organization that emphasizes the reliable
processing of data may follow a strategy of offering these services to other
organizations under outsourcing arrangements.
To get an insight into your organization's perspective, use cultural analysis tools like
the Cultural Web, Deal and Kennedy's Cultural Model, and the Congruence Model.
Purpose
Using the 5 Ps
Instead of trying to use the 5 Ps as a process to follow while developing strategy,
think of them as a variety of viewpoints that you should consider while developing a
robust and successful strategy.
As such, there are three points in the strategic planning process where it's
particularly helpful to use the 5 Ps:
1. When you're gathering information and conducting the analysis needed for
strategy development, as a way of ensuring that you've considered everything
relevant.
2. When you've come up with initial ideas, as a way of testing that they're
realistic, practical and robust.
3. As a final check on the strategy that you've developed, to flush out
inconsistencies and things that may not have been fully considered.
Using Mintzberg's 5 Ps at these points will highlight problems that would otherwise
undermine the implementation of your strategy.
After all, it's much better to identify these problems at the planning stage than it is to
find out about them after you've spent several years – and millions of dollars –
implementing a plan that was flawed from the start.
Q: Explain the process of Strategic Management in any organization.
What are the various steps of Strategic Management process? Describe the
significance of each step.
STRATEGIC MANAGEMENT PROCESS (5 Stage Process)
I) Develop a strategic vision for the company
Vision – Mission statement [vision is panoramic view of where we are going & giving
specifics to business plans]
Vision – Identifies specifics competencies of the organisation, core competencies, states
your basic strength & where you wish to be [Sense of Direction]
Mission – is methodology – People, Process, Policy to get there
1. Firm exhibits strategic intent to favorably alter its market position
GE’s e.g.: “We will emerge as global leaders & the preferred choice of the consumer
segment we choose to serve. Using Technology & innovative services we will delight the
customer & be committed to their success by stake holders creating wealth “
2. The strategic vision should be intrinsically, closely linked with companies ethics, value,
beliefsE.g.., Quality, building stakeholder relationships
Customer Services
CSR
Economic Value add (wealth creation)
Creating a great place to work
Committed to the success of Internal & External stakeholders
3. The firm should communicate its strategic vision to all stake holders linked to value
chain creation
P – Price
O – Operations
C- Costs
K – Knowledge
E – Expenditure
T – Training
S – Services
E.g.: NANO
Supply Chain Cost increased Loss / Costs of 1500 Crores even before
producing a Car. Excellent Case of Ethics
Walmart
Hypermarket, sells all merchandise across categories below MRP. 70000
Merchandise 8000 stores across
Model is based on- Low Cost leadership
o Scale – Single longest player as a buyer of Merchandise
- Whatever they save based on SCM cost pass it to the customer & part of it is retained to
open new store Walmart’s KSF is “Price” is to give the best price to his customer
Profitability is based on excellent SCM & not pricing of final goods Strategic Management
Most People should have in depth knowledge of organisation
Importance of Strategic Vision: Imperative to look beyond today & think strategically about
the
1.
2.
3.
4.
5.
Impact of new technologies on the horizon
Low customer needs and expectations are changing
What will it take to overtake or outrun the competitors?
Which promising market opportunities to be aggressively pursued
Other external and internal factors the company needs to prepare for future
“There is no escaping the need for the strategic vision”
II) Setting Objectives :
The firm makes an attempt to convert strategic vision into specifics KPIs – creating results
& outcome the company wishes to achieve out of strategic intent. There are principally two
types of objectives namely classify Financial Objectives & Strategic Objectives
1) Financial Objectives
i. Increase the EPS
ii. Increase Credit ratings
iii. Acceptable Return on Investment (EVA)
iv. Stock Price appreciation (or MVA – Market Value Add)
v. Good Cash Flow
vi. Good Credit worthiness
vii. Higher Dividends
viii. Growth in Earnings / Revenue
ix. Higher Profit Margins
State the objective that serves the Management intends not only to deliver financial
performance but also to improve position of the organisation:
a. Competitive Advantage
b. Business Position
c. Long Range Business Prospects
2) Strategic Objectives
i. Increase in x% of top line and y% in bottom line this is the intent, outcome will be
financial.
ii. Improve cash flow eg: negotiate with creditors, create a system.
iii. Increase share of market.
iv. Reduce Overall cost of production.
v. Rate of innovation: Increase revenue through new product introduction and capitalise on
first mover advantage.
vi. Adopt top bottom approach, this is also called, commander approach.
vii. Create stable earning during recession; de-risk the business( Infosys gets internal
customers diverse from banking products across many sectors. Monte-Carlo, winter Wear
Company, now also in summer wear after saturation in core business areas. Inability to
grow into current market.
viii. Improve technology leapfrogging into future. Eg: Sony Walkman, Apple I-pod etc.
ix. Increase share of voice ( jargon of advertising) and augment perceived brand value.
x. Expand into new geographic market and new customer segments through brand and
product line extensions.
Eg: Dettol
a) Antiseptic
b) Talcum Powder
c) Soap
d) Band-Aid Adhesive Tape.
3) Social Objectives.
i) Corporate Governance
Transparency around financial health of the company, to the stake holders.
CSR (Corporate Social Responsibility)
i. Promise of quality and supply of product at affordable price.
ii. Concern for Environment.
Products and Practices of the businesses will not do damage to the environment.
iii. Philanthropy
Pledging to the under- privileged members of the society.
iv. EVA for shareholders.
III) Outlining Corporate Strategy.
i) The firm needs to identify a framework of initiatives to be used as a part of overall
corporate strategy in order to establish a dominant business position, across either multiple
segments in a narrow industry or across diversified businesses.
Eg: ITC.
Paper, Tobacco, Hotels, Apparels, FMCG
Pioneer in contract farming concept of e choupal.
SCA (Sustainable Corporate Advantage)
Kotlers
- effectively sell what you produce
- Managing and acquiring customers
Porters
1. Business is marketing
2. Rise above average probability; eg – differentiation
3. Managing competition - kill competition and stay ahead
4. Marketing to create industry leadership / dominate business position and create distance
from your competition
5. Achieve by serving multiple industrial segments, benefit areas, price points
- Eg. HLL, multiple products, all segments, multiple price points in a narrow industry –
NIRMA – bottom end segment
*Most important for any business
SHORT VISION + OBJECTIVE + STRATERGY = A STRATEGIC PLAN
IV) Strategic Execution – “Make it happen”
- The underlying essence of strategic execution comes from a price leadership
- The firm undertakes the operations to shape the current and future performance of core
business activities in support of the objectives around the strategic intent and also taking
both internal and external factors into consideration
- It involves creating strategic business fit for succeeding.
Important fits include strategy and operations capabilities; strategy and reward structure,
strategy and internal support system, strategy and organisational culture
o
o
o
o
Resources
PC & MAC
Access to markets,
Finance
Technology
Capabilities
o Delivery
- A firms ability to compete in a chosen industry
Eg: TCL – A Chinese company had resources but no capabilities to deliver
- Create and develop budgets to support various initiatives
- Facilitate strategy execution by utilising best practices in areas around process and policy
- Introduce or pursue change management if required to create conducive work climate
- Create good intellectual capital (role of H.R.) within the organisation, initiate performance
management system and organisation development as mandatory and motivation and
culture building.
V) Fine Line Strategy
- Identify gap indicators through performance gap analysers based on past results in
periodic reviews. Improve and control for future sustainable performance.
- Identifying lead indicators and commit resources in totality in order to neutralise
competition
- Increase strategic intent from a firm generally leads to better financial performance
- Test if winning strategy – competitive advantage test, the performance test
Q: How environmental analysis helps in deciding strategies of a business
organization? What are the steps involved in such analysis? Explain with a suitable
illustrative example.
The concept of external environment is important for every kind of business operation.
External environment is an attempt to understand the outside forces of the organisational
boundaries that are helping to shape of the organisation. The external environment can
provide both facilitating and inhibiting influences on organizational performance. Key
dimension of the external environment principally consists of a micro environment and a
macro environment.
External Environment
Micro environment
Macro environment
Micro Environment
Micro environmental factors are internal factors close to a business that have a
direct impact on its strategy. These factors include:
Customers
Organisations survive on the basis of meeting “customer needs and wants” and
providing benefits for their customers. Failure to do so will result in a failed business
strategy.
Employees
Employing the correct staff and keeping staff motivated is an essential part of an
organisation's strategic planning process. Training and development play a critical
role in achieving a competitive edge; especially in service sector marketing. This is
clearly apparent in the airline industry, where customer services are crucial in
obtaining a competitive edge.
Suppliers
Suppliers provide businesses with the materials they need to carry out their business
activities. A supplier's behaviour will directly impact the business it supplies. For
example if a supplier provides a poor service this could increase timescales or lower
product quality. An increase in raw material prices will affect an organisation's
marketing mix strategy and may even force price increases. Close supplier
relationships are an effective way to remain competitive and secure quality
products.
Shareholders
As organisations require inward investment to grow, they may decide to move from
private to public ownership and list on the stock market. The introduction of public
shareholders brings new pressures as public shareholders want a return from the
money they have invested in the company. Shareholder pressure to increase profits
will affect organisational strategy. Relationships with shareholders need to be
managed carefully as rapid short term increases in profit could detrimentally affect
the long term success of the business.
Competitors
The name of the game in marketing is differentiation. Can the organisation offer
benefits that are better than those offered by competitors? Does the business have a
unique selling point (USP)? Competitor analysis and monitoring is crucial if an
organisation is to maintain or improve its position within the market. If a business is
unaware of its competitor's activities they will find it very difficult to “beat” them. The
market can move very quickly whether that is a change in trading conditions,
consumer behaviour or technological developments. As a business it is important to
examine competitors' responses to these changes so that you can maximise the
impact of your response.
Macro Environment
There are many factors in the macro-environment that will effect the decisions of the
managers of any organisation. Tax changes, new laws, trade barriers, demographic
change and government policy changes are all examples of macro change. To help
analyse these factors managers can categorise them using the PESTEL model. This
classification distinguishes between:

Political factors. These refer to government policy such as the degree of
intervention in the economy. What goods and services does a government
want to provide? To what extent does it believe in subsidising firms? What are
its priorities in terms of business support? Political decisions can impact on
many vital areas for business such as the education of the workforce, the
health of the nation and the quality of the infrastructure of the economy such
as the road and rail system.

Economic factors. These include interest rates, taxation changes, economic
growth, inflation and exchange rates. As you will see throughout the
"Foundations of Economics" book economic change can have a major impact
on a firm's behaviour. For example:
- higher interest rates may deter investment because it costs more to
borrow
- a strong currency may make exporting more difficult because it may
raise the price in terms of foreign currency
- inflation may provoke higher wage demands from employees and raise
costs
- higher national income growth may boost demand for a firm's products

Social factors. Changes in social trends can impact on the demand for a firm's
products and the availability and willingness of individuals to work. In the UK,
for example, the population has been ageing. This has increased the costs for
firms who are committed to pension payments for their employees because
their staffs are living longer. The ageing population also has impact on
demand: for example, demand for sheltered accommodation and medicines
have increased whereas demand for toys is falling.

Technological factors: new technologies create new products and new
processes. MP3 players, computer games, online gambling and high
definition TVs are all new markets created by technological advances. Online
shopping, bar coding and computer aided design are all improvements to the
way we do business as a result of better technology. Technology can reduce
costs, improve quality and lead to innovation. These developments can
benefit consumers as well as the organisations providing the products.

Environmental factors: environmental factors include the weather and climate
change. Changes in temperature can impact on many industries including
farming, tourism and insurance. With major climate changes occurring due to
global warming and with greater environmental awareness this external factor
is becoming a significant issue for firms to consider. The growing desire to
protect the environment is having an impact on many industries such as the
travel and transportation industries (for example, more taxes being placed on
air travel and the success of hybrid cars) and the general move towards more
environmentally friendly products and processes is affecting demand patterns
and creating business opportunities.

Legal factors: these are related to the legal environment in which firms
operate. In recent years in the UK there have been many significant legal
changes that have affected firms' behaviour. The introduction of age
discrimination and disability discrimination legislation, an increase in the
minimum wage and greater requirements for firms to recycle are examples of
relatively recent laws that affect an organisation's actions. Legal changes can
affect a firm's costs (e.g. if new systems and procedures have to be
developed) and demand (e.g. if the law affects the likelihood of customers
buying the good or using the service).
Different categories of law include:




consumer laws; these are designed to protect customers against unfair
practices such as misleading descriptions of the product
competition laws; these are aimed at protecting small firms against bullying by
larger firms and ensuring customers are not exploited by firms with monopoly
power
employment laws; these cover areas such as redundancy, dismissal, working
hours and minimum wages. They aim to protect employees against the abuse
of power by managers
health and safety legislation; these laws are aimed at ensuring the workplace
is as safe as is reasonably practical. They cover issues such as training,
reporting accidents and the appropriate provision of safety equipment
Typical PESTEL factors to consider include:
Factor
Political
Economic
Social
Technological
Environmental
Legal
Could include:
e.g. Political stability, international trade, taxation policy
e.g. interest rates, exchange rates, national income, inflation,
unemployment, Stock Market
e.g. ageing population, attitudes to work, income distribution
e.g. innovation, new product development, rate of technological
obsolescence
e.g. global warming, environmental issues
e.g. competition law, health and safety, employment law
Environmental Analysis Process
A business manager should be able to analyze the environment to grasp
opportunities or face the threats. Organizations need to build strength and repair
their weakness available in the business environment. Therefore, this process consists
of not only a single step but a process of various steps.
Environmental analysis comprises scanning, monitoring, analyzing, and forecasting the
business situation. Scanning is to get the relevant information from the information
overload. It is to focus on the most relevant information. Monitoring is to check the nature
of the environmental factors. Analyzing requires data collection and use of different
required tools and techniques. Forecasting is to find the future possibilities based on
the past results and present scenario.
Environmental analysis process is not static but a dynamic process. It may differ
depending on the situation. However, a general process with few common steps can be
identified as the process of environmental analysis these are
a) Monitoring or identifying environmental factors,
b) Scanning and selecting the relevant factors and grouping them,
c) Defining variables for analysis,
d) Using different methods, tools, and techniques for analysis,
e) Analyzing environmental factors and forecasting,
f) Designing profiles, and
g) Strategic positioning and writing a report. Brief discussion is made on each of the step of
this environmental analysis process.
Q: Strategic implementation is challenging task in business organizations
dealing with a problem of organizational structure, systems, styles, culture,
power and authority. Explain with an appropriate example.
Formulating strategy is a difficult task. Making strategy work—executing or
implementing it throughout the organization—is even more difficult. This is where
most failures occur. It is not uncommon for strategic plans to be drawn up annually,
and to have no impact on the organization as a whole.
Some obstacles to effective execution
The road to effective strategy execution is full of potholes and dangers. What are
some of them?

Planning and execution are interdependent.
Strategy formulation and implementation are separate, distinguishable parts
of the strategic management process. Logically, implementation follows
formulation; one cannot implement something until that something exists. But
formulation and implementation are also interdependent, part of an overall
process of planning-executing-adapting. This interdependence suggests that
overlap between planners and “doers” improves the probability of execution
success. Not involving those responsible for execution in the planning
process threatens knowledge transfer, commitment to sought-after outcomes,
and the entire implementation process.

Execution takes time.
The successful implementation of strategy takes more time than its
formulation. This can challenge managers’ attention to execution details. The
longer time frame can also detract from managers’ attention to strategic
goals. Controls must be set to provide feedback and keep management
abreast of external “shocks” and changes. The process of execution must be
dynamic and adaptive, responding to unanticipated events. This imperative
challenges managers responsible for execution.

Execution involves many people.
Strategy implementation always involves more people than strategy
formulation. This presents problems. Communication down the organization
or across different functions becomes a challenge. Making sure that
processes throughout the organization support strategy execution efforts can
be problematical in a large organization. Linking strategic objectives with the
day-to-day objectives at different organizational levels and locations becomes
a challenging task. The larger the number of people involved, the greater the
challenge to execute strategy effectively.

Effective execution involves managers across all hierarchical levels.
Another problem is that some top-level managers believe strategy
implementation is “below them,” something best left to lower-level employees.
This view holds that one group of managers does innovative, challenging
work (planning), and then “hands off the ball” to lower-levels for execution. If
things go awry, the problem is placed squarely at the feet of the “doers,” who
somehow couldn’t implement a perfectly sound and viable plan.

Managing change is difficult.
Execution often involves change—in structure, incentives, controls, people,
objectives, responsibilities. As we know, change can be threatening. The
importance of managing change well is clearly important for effective strategy
implementation. The inability to manage change and reduce resistance to
new implementation decisions or actions can spell disaster for execution
efforts.

Other execution-related problems.
They include responsibility and accountability for execution activities and
decisions that are not clear; poor knowledge sharing among key functions or
divisions; dysfunctional incentives; inadequate coordination; poor or vague
strategy; and not having guidelines or a model to shape execution activities
and decisions. Space limitations prevent a complete discussion of how to
overcome all obstacles to strategy execution.
The easy part of managing a law firm knows what to do. The hard part is having
the vision and courage to get it done. Many solutions to strategic issues are
deceptively simple and often appear self-evident on the surface.
• For example, if your traditional markets are maturing and becoming more pricecompetitive, it is self-evident that you should diversify into new areas and/or
locations.
• The challenge, of course, is not in knowing that you should diversify, but in
successfully finding an acquisition that affords the right fit, getting the deal done,
working tirelessly to integrate “strangers” into an existing culture, and convincing
your partners that success in implementing strategy requires patience and
diligent leadership.
Companies that attempt strategic change without considering organizational
culture risk failure. Business leaders need to be aware that culture is not just
something that happens outside of a business. Companies large and small have
their own cultures as well. A culture can happen spontaneously within a company,
and managers can learn how to harness its power or be overpowered by it.
Managers can also take an active part in shaping an organizational culture, to try to
ensure that it benefits the company’s goals and its employees.
Every organization has a unique structure. An organizational structure is the
reflection of the company’s past history, reporting relationships and internal politics.
You need to take a very close look at your organization structure and evaluate if it
supports your strategy. You may need to customize your organizational structure to
fit your strategy.
Q: Explain how Michael Porter’s five forces model is helpful in forth coming
SWOT – Analysis carried out in formulation of Business strategy.
To formulate effective strategies, managers in an organization need to be aware of
realities in the business environment. Strategy formulation thus begins with a
scanning of the external as well as internal environment. Analysis of external
environment helps to identify the possible threats and opportunities while analysis of
internal environment helps to identify strengths, weaknesses and the key people
within the organisation.
PORTER'S FIVE FORCES MODEL:
Porter argues that there are five forces that determine the profitability of an industry.
They are:
Porter contends that "The collective strengths of these forces determines the
ultimate profit potential in the industry, where profit potential is measured in terms of
long run return on investment capital".
If you can manage all 5 forces, you can have Sustainable Corporate Advantage
(SCA). SCA is
a) Industry dominance/market leader
b) Above industry average profit
Let us see each of them in detail:
Threat of new entrants:
New entrants to an industry typically brings to it new capacity and desire to gain
market size and substantial sources. They are therefore threats to established
corporations. Threat of entry depends on the entry barriers and the reaction that can
be expected from the existing companies. An entry barrier is an obstruction that
makes it difficult for a company to enter into an industry. Major entry barriers include:
Economies of scale:
These exist whenever large volume firms enjoy significantly lower production cost
per unit than smaller volumes operator do. This discourages firms, which have less
volume and high production cost from entering into the market.
Cost disadvantage independent of scale:
Established competitors may have cost advantage even when the new entrant has
comparable economies of scale. This advantage may include proprietary product
knowledge such as patents, favourable access to raw materials, favourable
locations, government subsidies etc.
Product differentiation:
Differences in physical or perceived characteristics must make incumbent's product
unique in the eyes of customer and force customers to overcome existing brand
loyalty.
Capital requirement:
If the amount of investment required to enter into an industry is high, the number of
entrants who could afford it would be less.
Switching cost:
Sometimes the cost that would be incurred by the customers to switch from one
supplier to another supplier makes it difficult for the new entrants to gain market
share.
Access to distribution channel:
Existing relationship and agreements between manufacturers and key distributors in
a market may also create barriers to entry. Companies aspiring to enter a market
may look for unique distribution channel to provide access as well as to differentiate
their products. Finally in addition to these barriers firms may also deter entrants by
harsh retaliation.
Bargaining power of suppliers:
Suppliers can affect the industry through their ability to raise price or to reduce the
quality of the purchased product and services.
Following are the conditions that make suppliers powerful:
Dominance by few players and lack of substitutes:
A few players might become strong enough to dominate the suppliers industry.
Substitutes might not be readily available as well. These two factors limit customer's
option and increase the supplier's power.
Greater concentration among suppliers than among buyers:
A concentrated industry is one in which only a few large firms dominate.
Firms in highly concentrated industry, that supply material to highly fragmented
industry, can exert power over the buyer.
Relative lack of importance of the buyer to the supplier group:
Some customers are more important than others because of their size of their
purchase or the prestige that comes from supplying them.
High differentiation by the supplier and high switching cost:
A buyer could be tied to a particular supplier if other suppliers can't meet his
requirements. Any switching that might be incurred by the buyer will strengthen the
position of the suppliers.
Threat of forward integration:
Forward integration involves a supplier moving into a later stage of the
manufacturing process or distribution i.e. moving into direct competition with its
customers.
Bargaining power of buyers:
Buyers can exert bargaining power over a supplier industry by forcing its prices
down, by reducing the amount of goods they purchase from the industry or by
demanding better quality for the same price.
Factors that makes the buyer more powerful:
Undifferentiated or standard supplies:
If the product being supplied is a commodity good or service then customers can
shop around for the most favourable terms.
Credible threat of backward integration:
Backward integration involves a buyer moving to an earlier stage of manufacturing
or distribution, thus becoming a competitor for the supplier's business.
Accurate information about the cost structure of the supplier:
This allows the customers to exercise more precision in negotiating the price of the
supplier.
Price sensitivity:
Buyers are likely to be more price-sensitive if a) Suppliers represent the significant
fraction of the total cost incurred by the buyers b) The supplier product is
unimportant to the overall quality or cost of the buyer's final product and c) The
buyers already earn a low profit.
A growing trend among small businesses is to augment their bargaining power as
customers through joining or forming buying groups.
Threat of substitute products:
Substitute products are those products that appear to be different but can satisfy the
same need as another product. The availability of substitutes places a ceiling on
price limit of an industry product. When the price of the product rises above that of
the substitute product customers tend to switch over to the substitutes. Deregulation
and technology revolution has given rise to a lot of substitutes.
The intensity of rivalry among existing players:
In most industries individual firms are mutually dependent. Competitive moves by
one firm can be expected to have noticeable effects on its competitors and cause
retaliation or counter efforts. Competition can be in the form of pricing, product
differentiation, product innovation etc.
Factors that increase competitive rivalry are:
Equally balanced competitors:
The most intense competition results from well-matched rivals in a situation that
doesn't allow any particular firm to dominate.
Slow industry growth:
In slow growth markets, growth has to come by taking market share from rivals.
High fixed cost:
Additional sales volume can help to offset high fixed cost. Hence competitors might
be willing to fight for any possible sales.
Lack of differentiation or lack of switching cost:
These two factors ensure that customers can easily switch over to a rival product
and to retain them is a constant struggle.
Large increase in manufacturing capacity:
If a manufacturer can increase capacity by a large increment, by building a new
plant, it will run it at full capacity to keep the unit cost less - thus producing so much
that the selling price falls throughout the industry.
High strategic stakes:
The market is well worth fighting for because of its profit potential or the
opportunities it creates elsewhere.
High exit barriers:
For economic, strategic or emotional reasons, individual players might consider it
difficult to leave the industry.
The outcome of industry and external environment analysis results in identifying the
relevant and important opportunities and threats the organisation has to face in the
future.
SWOT AND ORGANISATION CAPABILITY ANALYSIS
SWOT analysis is the assessment of comparative strengths and weaknesses of a
firm in relation to its competitors; and environmental opportunities and threats, which
a company may have to face in the future. It should be based on logic and rational
thinking such that a proper strategy improves an organization’s business strength
and opportunities and at the same time reduces the weaknesses and threats.
Strength and weakness are internal forces and factors that are to be assessed from
continuously since more and more competitive organizations with state of the art
technology and services are entering into the market and competition is getting
intensified day by day.
Opportunities and threats are the external factors and forces in the business
environment which are also changing day by day with the change of government
policy, industrial policy, monetary policy, political situation at national and
international levels, formation of various trade blocks and trade barriers including the
changes in legal and social environment in the business world.
Strength:
Strength is the power and excellence with the resources, skills and advantages in
relation to the competitors. A strength is a distinct technical superiority with best
technical know-how, financial resources and skill of the people in the organization,
goodwill and image in the market for the product and services, company’s access to
best distribution network, the discipline, morale, attitude and mannerisms of the
employees at all levels with a sense of belonging.
Indian Institute of Technology Madras
Weakness:
Weakness is the incapability, limitation and deficiency in resources such as
technical, financial, manpower, skills, brand image and distribution pattern. It refers
to constraints or obstacles, which check movement in a certain direction and may
also, inhibit an organization in gaining a distinct competitive advantage.
Opportunities:
Environmental opportunity is an alternative area for company’s action in which the
particular company would enjoy a competitive advantage. An opportunity is a major
favorable advantage to a company. Proper analysis of the environment and
identification of new market, new and improved customer group with better product
substitutes or supplier’s relationship could represent opportunities for the company.
Threat:
Environmental threat is the challenge posed by the unavoidable trend or
development that would lead, in the absence of purposeful action to the erosion of
the company’s position. Slow market growth, entry of resourceful multinational
companies, increase bargaining power of the buyers or sellers because of a large
number of options, quick rate of obsolescence due to major technological change
and adverse situation because of change of government policy rules and regulation
is disadvantageous to any company and may pose a serious threat to business
operation.
SWOT analysis can be used in conjunction with other tools for audit and analysis,
such as Porter’s Five-Force analysis.
Setting the objective should be done after the SWOT analysis has been performed.
This would allow achievable goals or objectives to be set for the organization.
Identification of SWOTs is essential because subsequent steps in the process of
planning for achievement of the selected objective may be derived from the SWOTs.
As part of the development of strategies and plans to enable the organization to
achieve its objectives, then that organization will use a systematic/rigorous process
known as corporate planning. SWOT can be used as a basis for the analysis of
business and environmental factors.
Michael Porter developed the 5 Five Forces Analysis model to better identify factors
that shape the character of competition, to assess the structural attractiveness and
business value of any industry and to pinpoint strengths and weaknesses in a
company.
In addition to and in combination with the SWOT analysis, the Five Forces model by
Michael Porter provides another analysis tool to identify opportunities and risks when
entering untapped territory in any industry or market. Porter’s Five Forces model
when used with SWOT analysis provides clear action and thus does not rely solely
on subjective judgment. If the actions that derived from the Five Forces model are
synchronized with business requirements and goals it can become a substantial
business driver in the competitive environment and helps in formulating business
strategy.
Q: Michael Porter’s Five forces model of Industry attractiveness enables any
company to outperform their competitors. Illustrate your answer by analyzing
any Industry of your choice
Theory – as per previous question:
Illustration – Pharma industry
Industry competition
Pharma industry is one of the most competitive industries in the country with as
many as 10,000 different players fighting for the same pie. The rivalry in the industry
can be gauged from the fact that the top player in the country has only 6% market
share, and the top five players together have about 18% market share.
Thus, the concentration ratio for this industry is very low. High growth prospects
make it attractive for new players to enter in the industry.
Another major factor that adds to the industry rivalry is the fact that the entry barriers
to pharma industry are very low. The fixed cost requirement is low but the need for
working capital is high.
The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells
us that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller
companies, it would be even higher.
Many smaller players that are focused on a particular region, have a better hang of
the distribution channel, making it easier to succeed, albeit in a limited way.
An important fact is that pharma is a stable market and its growth rate generally
tracks the economic growth of the country with some multiple (1.2 times average in
India )Though volume growth has been consistent over a period of time, value
growth has not followed in tandem.
The product differentiation is one key factor, which gives competitive advantage to
the firms in any industry. However, in pharma industry product differentiation is not
possible since India has followed process patents till date, with laws favouring
imitators.
Consequently, product differentiation is not the driver, cost competitiveness is.
However, companies like Pfizer and Glaxo have created big brands in over the
years, which act as product differentiation tools. This will enhance over the long
term, as product patents come into play from 2005.
Bargaining power of buyers
The unique feature of pharma industry is that the end user of the product is different
from the influencer (read doctor). The consumer has no choice but to buy what
doctor says. However, when we look at the buyer's power, we look at the influence
they have on the prices of the product.
In pharma industry, the buyers are scattered and they as such does not wield much
power in the pricing of the products. However, government with its policies, plays an
important role in regulating pricing through the NPPA (National Pharmaceutical
Pricing Authority).
Bargaining power of suppliers
The pharma industry depends upon several organic chemicals. The chemical
industry is again very competitive and fragmented. The chemicals used in the
pharma industry are largely a commodity.
The suppliers have very low bargaining power and the companies in the pharma
industry can switch from their suppliers without incurring a very high cost.
However, what can happen is that the supplier can go for forward integration to
become a pharma company. Companies like Orchid Chemicals and Sashun
Chemicals were basically chemical companies, who turned themselves into
pharmaceutical companies.
Barriers to entry
Pharma industry is one of the most easily accessible industries for an entrepreneur
in India. The capital requirement for the industry is very low, creating a regional
distribution network is easy, since the point of sales is restricted in this industry in
India.
However, creating brand awareness and franchisee amongst doctors is the key for
long-term survival. Also, quality regulations by the government may put some
hindrance for establishing new manufacturing operations.
Going forward, the impending new patent regime will raise the barriers to entry. But
it is unlikely to discourage new entrants, as market for generics will be as huge.
Threat of substitutes
This is one of the great advantages of the pharma industry. Whatever happens,
demand for pharma products continues and the industry thrives. One of the key
reasons for high competitiveness in the industry is that as an on going concern,
pharma industry seems to have an infinite future.
However, in recent times, the advances made in the field of biotechnology, can
prove to be a threat to the synthetic pharma industry.
Conclusion
This model gives a fair idea about the industry in which a company operates and the
various external forces that influence it.
However, it must be noted that any industry is not static in nature. It's dynamic and
over a period of time the model, which have used to analyse the pharma industry
may itself evolve.
Going forward, we foresee increasing competition in the industry but the form of
competition will be different. It will be between large players (with economies of
scale) and it may be possible that some kind of oligopoly or cartels come into play.
This is owing to the fact that the industry will move towards consolidation. The larger
players in the industry will survive with their proprietary products and strong
franchisee.
In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key
players. Though consolidation within the current big names is not ruled out. Smaller
fringe players, who have no differentiating strengths, are likely to either be acquired
or cease to exist.
The barriers to entry will increase going forward. The change in the patent regime,
will see new proprietary products coming up, making imitation difficult. The players
with huge capacity will be able to influence substantial power on the fringe players
by their aggressive pricing which will create hindrance for the smaller players.
Economies of scale will play an important part too. Last but not the least, in a vast
country of India's size, government too will have bigger role to play.
Q: - Define the terms – (i) Mission (ii) Vision and (iii) Objective of a business
Organization
- Write the mission, vision and objective statements for a ‘B’
school. How do these statements help in strategy formulation
highlighting Corporate Philosophy & Corporate Governance?
- What are the role, scope and significance of vision, mission,
corporate philosophy and corporate governance in strategic
management of a business organization?
Strategic Management process begins after the Vision and Mission statement have
been set. Vision and Mission statement actually indicate the direction of strategic
management process.
Mission statement is the statement of the role by which an organization intends to
serve it’s stakeholders. It describes why an organization is operating and thus
provides a framework within which strategies are formulated. It describes what the
organization does (i.e., present capabilities), who all it serves (i.e., stakeholders) and
what makes an organization unique (i.e., reason for existence). A mission statement
differentiates an organization from others by explaining its broad scope of activities,
its products, and technologies it uses to achieve its goals and objectives. It talks
about an organization’s present (i.e., “about where we are”). For instance,
Microsoft’s mission is to help people and businesses throughout the world to
realize their full potential. Wal-Mart’s mission is “To give ordinary folk the chance to
buy the same thing as rich people.” Mission statements always exist at top level of
an organization, but may also be made for various organizational levels. Chief
executive plays a significant role in formulation of mission statement. Once the
mission statement is formulated, it serves the organization in long run, but it may
become ambiguous with organizational growth and innovations. In today’s dynamic
and competitive environment, mission may need to be redefined. However, care
must be taken that the redefined mission statement should have original
fundamentals/components. Mission statement has three main components-a
statement of mission or vision of the company, a statement of the core values that
shape the acts and behaviour of the employees, and a statement of the goals and
objectives.
Features of a Mission
a.
b.
c.
d.
Mission must be feasible and attainable. It should be possible to achieve it.
Mission should be clear enough so that any action can be taken.
It should be inspiring for the management, staff and society at large.
It should be precise enough, i.e., it should be neither too broad nor too
narrow.
e. It should be unique and distinctive to leave an impact in everyone’s mind.
f. It should be analytical,i.e., it should analyze the key components of the
strategy.
g. It should be credible, i.e., all stakeholders should be able to believe it.
A vision statement identifies where the organization wants or intends to be in future
or where it should be to best meet the needs of the stakeholders. It describes
dreams and aspirations for future. For instance, Microsoft’s vision is “to empower
people through great software, any time, any place, or any device.” Wal-Mart’s
vision is to become worldwide leader in retailing. A vision is the potential to view
things ahead of themselves. It answers the question “where we want to be”. It gives
us a reminder about what we attempt to develop. A vision statement is for the
organization and it’s members, unlike the mission statement which is for the
customers/clients. It contributes in effective decision making as well as effective
business planning. It incorporates a shared understanding about the nature and aim
of the organization and utilizes this understanding to direct and guide the
organization towards a better purpose. It describes that on achieving the mission,
how the organizational future would appear to be.
An effective vision statement must have following featuresa.
b.
c.
d.
e.
It must be unambiguous.
It must be clear.
It must harmonize with organization’s culture and values.
The dreams and aspirations must be rational/realistic.
Vision statements should be shorter so that they are easier to memorize.
In order to realize the vision, it must be deeply instilled in the organization, being
owned and shared by everyone involved in the organization.
Objectives
An organization’s mission gives a framework or direction to a firm. The next step in
planning is focusing on establishing progressively more specific organizational
direction by setting objectives. An organizational objective is a target toward which
the organization directs its efforts.
A goal is a desired future state or objective that an organization tries to achieve.
Goals specify in particular what must be done if an organization is to attain mission
or vision. Goals make mission more prominent and concrete. They co-ordinate and
integrate various functional and departmental areas in an organization. Well made
goals have following featuresa. These are precise and measurable.
b. These look after critical and significant issues.
c. These are realistic and challenging.
d. These must be achieved within a specific time frame.
e. These include both financial as well as non-financial components.
Objectives are defined as goals that organization wants to achieve over a period of
time. These are the foundation of planning. Policies are developed in an
organization so as to achieve these objectives. Formulation of objectives is the task
of top level management. Effective objectives have following featuresa. These are not single for an organization, but multiple.
b. Objectives should be both short-term as well as long-term.
c. Objectives must respond and react to changes in environment, i.e., they must
be flexible.
d. These must be feasible, realistic and operational.
Hierarchy of objectives
Vision, Mission & Objectives of a business school.
Vision:
Quality Training with focused job assistance: To excel in providing professional
education through innovative education system create desired work culture capable
of meeting global challenges to fulfil integrating industrial requirements.
Mission:
To train our young professionals by giving them a solid foothold in management
theories along with real industrial experience to meet the challenges with superior
competence, imagination and zeal which take the students seamlessly to an
advanced level.
Objectives:







To provide a platform to the aspiring students community to link their
education to employment in pharmaceutical and health care industry.
To increase the uptake of management development and education through
Institute programmes and qualifications.
To increase awareness of the Institute, and achieve recognition for its
contribution to better management practice in pharmaceutical and health care
industry.
To cater the knowledge seeker and shape up their career in the
pharmaceutical and health care professional world through Quality Education,
Research based practical know-how, Innovative and advance teaching
methodologies and Global Exposure.
To build a strong network with the pharmaceutical and health care industries
to fulfil their need of future professionals.
To design, implement and establish industry integrated professional
education programs in association with leading Universities of India & abroad.
To develop the Institute's structure, systems, intellectual capital and financial
strength to enable the organisation to fulfil its mission.
Strategy formulation is the process of determining appropriate courses of action for
achieving organizational objectives and thereby accomplishing organizational
purpose.
The purpose of a Strategic Formulation is to describe the future of the organization
through the definition of the organization’s Vision, Mission, Goals, and Objectives.
The strategy statement of a firm sets the firm’s long-term strategic direction and
broad policy directions. It gives the firm a clear sense of direction and a blueprint for
the firm’s activities for the upcoming years.
In the globalized business, companies require strategic thinking and only by evolving
good corporate strategies can they become strategically competitive. A strategy of a
business organization is a comprehensive master plan stating how the organization
will achieve its mission and objectives. Strategy is significant because it is universal.
It helps corporate to keep pace with changing environs, provides better
understanding of external environment, minimizes competitive disadvantage by
forcing to think clearly about mission, vision and objectives of enterprise. It improves
motivation of employees and strengthens decision-making. It forms the basis for
implementing actions.
Strategy making is an on-going process involving activities like defining vision,
mission and goals, analyzing organization and environment and matching them to
decide suitable actions and objectives, and implementing with a review system.
Vision, mission & objective statements create clarity and form a basis for making
both strategic and tactical decisions - all of which help a company thrive instead of
survive.
Q: Explain the concept of Business Objectives and what are the main
ingredients of the same.
Business Objectives are the end result of planned activity. They state what is to be
accomplished by when and should be quantified if possible. The achievement of
corporate objective should result in the fulfillment of a corporate mission. The areas
in which a company might establish its goals and objective are profitability, growth,
shareholder's wealth, utilization of resources etc.
Business objectives are important to give direction to a business. If you are running
a business without any business objectives, you shall not be able to grow
successfully in any direction. Having business objectives, gives you a much better
understanding of where you stand, how to improve and what changes in your current
method of working will be required to reach your objectives. Not having business
objectives leads to an un-coordinated business that has a very low probability of
being successful.
When setting business objectives, one must make sure that they are:



Quantitative: The business objectives should be expressed in terms of
numbers. It should not be expressed vaguely like, “Our sales should go up!”
Time-frame specific: Time frames should be specified in the business
objectives. This helps you to understand where you stand with respect to the
completion of the current objective.
Flexible: It is very important that your business objectives are adaptable to
change. If the situation in which the business is working changes, the
business objectives should change to reflect these changes.


Understandable: The business objectives should be made in an
understandable way. This helps in communicating your objectives to your
investors, employees, partners etc. Without this communication of business
objectives, it becomes very difficult to reach them.
Realistic: It is important that the business objectives are realistic, or you may
end up disappointing your investors and yourself.
There are principally two types of objectives namely classify Financial Objectives &
Strategic Objectives
1) Financial Objectives
i. Increase the EPS
ii. Increase Credit ratings
iii. Acceptable Return on Investment (EVA)
iv. Stock Price appreciation (or MVA – Market Value Add)
v. Good Cash Flow
vi. Good Credit worthiness
vii. Higher Dividends
viii. Growth in Earnings / Revenue
ix. Higher Profit Margins
State the objectives that serve the Management intend not only to deliver financial
performance but also to improve position of the organisation:
a. Competitive Advantage
b. Business Position
c. Long Range Business Prospects
2) Strategic Objectives
i. Increase in x% of top line and y% in bottom line this is the intent, outcome will be
financial.
ii. Improve cash flow eg: negotiate with creditors, create a system.
iii. Increase share of market.
iv. Reduce Overall cost of production.
v. Rate of innovation: Increase revenue through new product introduction and
capitalise on first mover advantage.
vi. Adopt top bottom approach, this is also called, commander approach.
vii. Create stable earning during recession; de-risk the business ( Infosys gets
internal customers diverse from banking products across many sectors. MonteCarlo, winter Wear Company, now also in summer wear after saturation in core
business areas. Inability to grow into current market.
viii. Improve technology leapfrogging into future. Eg: Sony Walkman, Apple I-pod
etc.
ix. Increase share of voice ( jargon of advertising) and augment perceived brand
value.
x. Expand into new geographic market and new customer segments through brand
and product line extensions.
Eg: Dettol
a) Antiseptic
b) Talcum Powder
c) Soap
d) Band-Aid Adhesive Tape.
3) Social Objectives.
i) Corporate Governance
Transparency around financial health of the company, to the stake holders.
CSR( Corporate Social Responsibility )
i. Promise of quality and supply of product at affordable price.
ii. Concern for Environment.
Products and Practices of the businesses will not do damage to the environment.
iii. Philanthropy
Pledging to the under- privileged
Q: How does the mission and vision get developed? What does the hierarchy
of strategy intent mean?
Vision Statements
Vision statements and mission statements are very different. A vision statement for a
firm spells out goals at a high level and should coincide with the founder's goals for
the business. Simply put, the vision should state what the founder ultimately
envisions the business to be, in terms of growth, values, employees, contributions to
society, and the like; therefore, self-reflection by the founder is a vital activity if a
meaningful vision is to be developed. As a founder, once you have defined your
vision, you can begin to develop strategies for moving the organization toward that
vision. Part of this includes the development of a company mission.


Describe an ideal future.
Reflect the essence of an organization’s mission and values.



Answer the question; what impact do we want to have on society?
Unite an organization in a common, coherent strategic direction.
Convey a larger sense of organizational purpose, so that employees see
themselves as “building a cathedral” rather than “laying stones”.
Mission Statements
The mission statement should be a concise statement of business strategy and
developed from the customer's perspective and it should fit with the vision for the
business. The mission should answer three questions:
1. What do we do?
2. How do we do it?
3. For whom do we do it?
What do we do? This question should not be answered in terms of what is physically
delivered to customers, but by the real and/or psychological needs that are fulfilled
when customers buy your products or services. Customers make purchase
decisions for many reasons, including economical, logistical, and emotional factors.
An excellent illustration of this is a business in the Twin Cities that imports handmade jewelry from east Africa. When asked what her business does, the owner
replied, "We import and market east African jewelry." But when asked why
customers buy her jewelry, she explained that, "They're buying a story in where the
jewelry came from." This is an important distinction and answering this question from
the need-fulfilled perspective will help you answer the other two questions
effectively.
How do we do it? This question captures the more technical elements of the
business. Your answer should encompass the physical product or service and how it
is sold and delivered to customers and it should fit with the need that the customer
fulfills with its purchase. In the example above, the business owner had originally
defined her business as selling east African jewelry and was attempting to sell it on
shelves of boutique retail stores with little success. After modifying the answer to the
first question, she realized that she needed to deliver the story to her customers
along with the product. She began organizing wine parties that included a slide show
of east Africa, stories of personal experiences there, and pictures and descriptions of
the villagers who make the jewelry. This method of delivery has been very
successful for her business.
For whom do we do it? The answer to this question is also vital, as it will help you
focus your marketing efforts. Though many small business owners would like to
believe otherwise, not everyone is a potential customer, as customers will almost
always have both demographic and geographic limitations. When starting out, it is
generally a good idea to define the demographic characteristics (age, income, etc.)
of customers who are likely to buy and then define a geographic area in which your
business can gain a presence. As you grow, you can add new customer groups and
expand your geographic focus.
An additional consideration with mission statements is that most businesses will
have multiple customer groups that purchase for different reasons. In these cases,
one mission statement can be written to answer each of the three questions for each
customer group or multiple mission statements can be developed. Also, as a final
thought, remember that your vision and mission statements are meant to help guide
the business, not to lock you into a particular direction. As your company grows and
as the competitive environment changes, your mission may require change to
include additional or different needs fulfilled, delivery systems, or customer groups.
With this in mind, your vision and mission should be revisited periodically to
determine whether modifications are desirable.
Strategic intent refers to an obsession with achieving an objective that stretches
the company and requires it to build new resources and capabilities. This strategic
intent usually incorporates stretch targets, which force companies to compete in
innovative ways.
Strategies are involved in the formulation, implementation and evaluation of strategy.
The hierarchy of strategic intent lays the foundation for strategic management
process. The process of establishing the hierarchy of strategic intent is very
complex. The hierarchy of strategic intent covers the vision, mission, business
definition, business model and the goals and objectives. In this hierarchy, the vision,
mission, business definition and objectives are established. Formulation of strategies
is possible only when strategic intent is clearly set up. This step is mostly
philosophical in nature. It will have long term impact on the organization.
Vision is at the top in the hierarchy of strategic intent. It is what the firm would
ultimately like to become.
Mission is the “essential purpose of the organization, concerning particularly why it is
in existence, the nature of the business it is in, and the customers it seeks to serve
and satisfy." The mission statements stage the role that organization plays in
society.
Business definition explains the business of an organization in terms of customer
needs, customer groups and alternative technologies.
Objectives refer to the ultimate end results which are to be accomplished by the
overall plan over a specified period of time. The vision, mission and business
definition determine the business philosophy to be adopted in the long run. The
goals and objectives are set to achieve them.
Q: Explain the concept of Diversification.
The important aspects that companies must consider before diversifying and
measures to judge the success of diversification.
Does it dilute the Business risk resulting in a pathway for success? Give
illustrations.
Diversification is a Risk Reduction devise and a pathway for success.
Diversification is inevitable to remain in business. Companies have adopted
different forms of diversification to achieve their objectives. What parameters can
be used to judge the quality of diversification?
What are the important aspects that companies must consider before they embark
on using diversification as a major growth engine?
Organizations usually seek growth in sales, profits, market share, or some other
measure as a primary objective. The different grand strategies in this category are:





Concentration
Integration
Diversification
Mergers and acquisitions
Joint Ventures
Diversification
Diversification is one of the grand strategies, which basically is a growth strategy.
Basically diversification involves a substantial change the business definition in
terms of product range, customers or alternative technologies. Diversification
strategies have been adopted a number of business groups and individual
companies both in the public and private sectors.
This strategy involves growth through the acquisition of firms in other industries or
lines of business as explained below.
1. Organizations in slow-growth industries may purchase firms in faster-growing
industries to increase their overall growth rate.
2. Organizations with excess cash often find investment in another industry
(particularly a fast-growing one) a profitable strategy.
3. Organizations may diversify in order to spread their risks across several
industries.
4. The acquiring organization may have management talent, financial and technical
resources, or marketing skills that it can apply to a weak firm in another industry in
the hope of making it highly profitable.
Diversification may be of different types.
Related or concentric diversification when the acquired firm has production
technology, products, channels of distribution, and /or markets similar to those of the
firm purchasing it, the strategy is called concentric diversification.. This strategy is
useful when the organization can acquire greater efficiency or market impact through
the use of shared resources.
A case of related or concentric diversification is Mahindra & Mahindra selling Cars,
Tractors and two wheelers.
Unrelated or conglomerate diversification when the acquired firm is in a completely
different line of business, the strategy is called unrelated or conglomerate
diversification An example of unrelated conglomerate diversification is Marico’s
venture into cooking oil segment.
Why diversify?
Organizations diversify due to the following reasons. Some of the common reasons
are as follows.
Synergy: Synergy is cited in the most common cause of diversification. Synergy
occurs when two or more activities produce their combined effect greater than the
sum of its parts i.e., 2 + 2 = More than 4.
o Related diversification produces synergies rooted in production technology. With
the additional technical facilities, a by-product or joint product may be produced.
o Both related and unrelated enable the companies to sell the products with same
distribution network and advertisement facilities. The advertisement of one product
spontaneously advertises other products with enhanced brand loyalty. This is
marketing synergy.
o Synergetic effect can also be noticed in financial operations, when the positive
cash flow of one business utilized in other business helps to generate more positive
cash flows.
Spreading of Risk. Diversification helps to avoid over dependence on one
product/market. It spreads the risk associated with one product line or few products.
Better opportunities. With diversification, company can exploit the better
opportunities in new product line. Every product has its own product life cycle. To
gain better market share, company has to either differentiate or diversify.
Better utilization of Resources. With diversification, company can better use
hitherto unexploited resources like finance, market channels, production facilities,
technological capabilities, managerial knowledge, etc. The idle retained earnings
could be utilized to produce new products. Their marketing may not be a problem
because the same dealers will sell the new products. Same production facilities and
technology can be utilized sometimes adding more capacity to it.
Competitive Strategy. Diversification is a good competitive strategy. A company
may enter new product lines of business to gain a competitive edge over the
competitors or discourage them by entering before their arrival.
Market Dominance. Diversification take place to exploit tremendous market
opportunities in home as well as in foreign countries with the objective of gaining
market dominance.
Types of diversification
There are three general types of diversification strategies: concentric horizontal, and
conglomerate.
Concentric Diversification
Under concentric diversification new products and services are added to the line with
the condition that these products and services are related to their existing
products/services carried by the organization. For concentric diversification it
becomes necessary that the products or services that are added must be within the
framework of the know how and experience in technology, product line, distribution
channels or customer base of the organization.
When the industry grows, the organization will get strength where concentric
diversification becomes an important strategy for its survival and growth. A study of
460 corporations accounting for two/thirds of the US corporate industrial assets
concluded, “That diversification that has led to relatively rapid rates of corporate
growth has been to markets that are related to the entering organization’s original
market. Concentric diversification has been successfully practiced by a large number
of organizations in India. For instance “Amul” has diversified in chocolates, Ice
creams, Butter, Ghee etc. On the same pattern, “Milk Food” has diversified.
Similarly, Honda has diversified into to Motor Cycles, Cars etc.
In conclusion, it may be stated that concentric diversification has been quite
successful in the past; it is expected to be successful in future also.
Horizontal Diversification
Where an organization adds unrelated products and services for existing customers,
this is called horizontal diversification. The strategy is comparatively less risky
because the customers are known. The organization is fully acquainted with their
consumers’ preference and their expectations about the quality and price of the
goods and services.
Horizontal diversification can be accomplished by acquiring the shareholding of the
competitor, by the purchase of the assets or by pooling of the interests of two
organizations. Horizontal diversification seeks to eliminate competitors. In our
country a T.V. manufacturing company Uptron has created a new division for
spreading computer education in the country.It is a combination of hardware and
software.
Conglomerate Diversification
Conglomerate diversification is a growth strategy in which new products and
services are added which are significantly different from the organization’s present
product and services.
Conglomerate diversification is effected in the hope that the addition of new products
and services may bring about some turnaround by way of conversion of losses into
profits.
Mechanics for adopting conglomerate diversification has been summarized as
follows:
1. Supporting some divisions with cash flow from other divisions during the period of
development or temporary difficulty.
2. Using the profits of one division to cover the expenses of another division without
payment of taxes from the first division.
3. Encouraging growth for its own sake or to satisfy the values and ambitions of
management or the owners.
4. Taking advantage of unusually attractive growth opportunities.
5. Distributing risk by serving several different markets.
6. Improving overall profitability and flexibility of the organization by moving into
industries that have better economic prospects than those of the acquiring
organizations.
7. Gaining better access to capital markets and better stability or growth in the
earnings.
8. Increasing the price of an origination’s stock
9. Reaping the benefits of synergy. Synergy results from “a conglomerate merger
when the combined organization is more profitable than the two organizations
operating independently.
The scheme of Conglomerate Diversification should be implemented with caution
and patience. It will create big business and will bring in turn, the problems of
management associated with big businesses. Big businesses involve greater risk in
the event of abnormal economic situation like recession or stagflation. In the light of
the above, the success of the conglomerate diversification will depend on the
following factors:
1. A clear definition of organizational objectives.
2. A determination of the organization’s ability to diversify, which includes an
analysis of its present operations (internal organizational analysis) and resources
available for diversification.
3. Establishment of specific criteria for purchasing other organizations
4. A comprehensive search for organizations and their evaluation against the
criteria.
Examples of companies that have diversified into related business concentric
diversification
GILLETTE:
o Blades and razors
o Toiletries (Right Guard, Foamy, Dry Idea, Soft & Dry , White Rain)
o Oral-B toothbrushes
o Braun shavers, coffeemakers, alarm clocks, mixers, hair dryers, and electric
toothbrushes
JOHNSON & JOHNSON
o Baby products (powder, shampoo, oil, lotion)
o Band-Aids and other first-aid products
o Women’s health and personal care products (Stay free, Carefree, Sure & Natural)
o Neutrogena and Aveeno skin care products
o Nonprescription drugs (Tylenol, Motrin, pepcid AC, Mylanta, Monistat)
o Prescription drugs
o Prosthetic and other medical devices
o Surgical and hospital products
o Accuvue contact lenses
Examples of companies that have diversified into unrelated business.
THE WALT DISNEY COMPANY
o Theme parks
o Disney Cruise Line
o Resort properties
o Move, video, and theatrical productions (for both children and adults)
o Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports,
Network, EPSN and EPSN2, E!, Lifetime, and A&E networks)
o Radio broadcasting (Disney Radio)
o Musical recordings and sales of animation art
THE TVS GROUP
o Auto & auto parts
o Coach body building
o Transport
o Fasteners
o Brake linings & clutch facings
o A citation systems for commercial vehicles
o Hire purchase
o Wheel structure & parts
o Foundation brakes
o Two wheelers
o Automobile electrical parts
o Tyres & tubes.
When to diversify
Diversification merits strong consideration whenever a single-business company is
faced with diminishing market opportunities and stagnating sales in its principal
business. But there are four other instances that signal for diversifying:
When it can expand into industries whose technologies and products complement its
present business.
o When it can leverage existing competencies and capabilities by expanding into
businesses where these same resource strengths are valuable competitive assets.
o When diversifying into closely related businesses open new avenues for reducing
costs.
o When it has a powerful and well-known brand name that can be transferred to the
products of other businesses.
When not diversify?
All the organizations cannot think of diversification as a strategy. Organizations do
not diversify under the following conditions.
o When they are small and cannot afford to try
o When they have no power to sustain
o When they anticipate some pitfalls
o When they are the first to bell the cat in that area.
o When on checking they find their functional skills are insufficient to diversify
o When they don’t want to gamble with public investments
o When they do not have attractive tax benefits after diversification
Parameters to Judge Diversification
Whether diversification is warranted or not is done by the following methods:
1) Industry attractiveness test:
Using 5 forces model where in sole criterion should be that the chosen industry must
yield good ROI.
2) Cost of entry test:
The entry barriers of the cost to entry for the target industry must not be exorbitant or
protective to make it in attractive. Since the larger the gestation time to achieve
breakeven, larger is the risk and hence threat potential to erode profitability.
However, structurally attractive industries have been known to be expensive to get
into & buying an existing company with strong market entry costs. Hence the cost of
entry test can help the firm understand the prospects of profitability and company’s
ability to deliver shareholder value.
3) “Better OFF “ Test:
Company diversifying into new business must offer potential for firms existing
business + the new business in order to perform better. Diversifying firms need to
test whether cross strategic fits will enhance the company’s competitive ability in
reducing costs, transferring skills and technologies & leveraging combined resource
into competitive advantage.
Business diversification is a risk reduction strategy that involves adding
products, services, location, customers and markets to a company’s portfolio. Many
small companies started as one-track, betting their entire futures on a single product,
service, location or even a single customer. There is nothing wrong with this start as
a narrow start enabled them to focus and concentrate on doing one thing extremely
well.
But, as a company grows larger, it found opportunities to add products, services,
locations, customers and markets. Diversifying in this way has helped many
businesses weather tough times by providing alternate sources of revenue in the
event that it is original market dry up, stops growing or hit by new competition.
It was noted that most companies that survive for long periods of time find that they
have to develop new sources of revenue as tastes change and opportunities evolve.
Diversification helps to avoid over dependence on one product/market. It spreads
the risk associated with one product line or few products.
Diversification to pool risks. The benefits of risk pooling are said to come from
merging imperfectly correlated income streams to create a more stable income
stream. According to the advocates of risk pooling, the more stable income stream
reduces the risk of bankruptcy and is in the best interests of the company's
stockholders.
Q: Generic strategy is a combination of competitive strategy and competitive
scope in Broad and Narrow segments. Explain the salient features of the
same. When should a company employ ‘STUCK IN THE MIDDLE’ strategy?
In development of competitive business strategy, it is necessary to recognize
customer needs, product differentiation, customer groups, and market
segmentation. Comment.
Explain the terms cost based strategies and niche based strategies.
If the primary determinant of a firm's profitability is the attractiveness of the industry
in which it operates, an important secondary determinant is its position within that
industry. Even though an industry may have below-average profitability, a firm that is
optimally positioned can generate superior returns.
A firm positions itself by leveraging its strengths. Michael Porter has argued that a
firm's strengths ultimately fall into one of two headings: cost advantage and
differentiation. By applying these strengths in either a broad or narrow scope, three
generic strategies result: cost leadership, differentiation, and focus. These strategies
are applied at the business unit level. They are called generic strategies because
they are not firm or industry dependent. The following table illustrates Porter's
generic strategies:
Porter's Generic Strategies
Advantage
Target Scope
Low Cost
Product Uniqueness
Broad
(Industry Wide)
Cost Leadership
Strategy
Differentiation
Strategy
Narrow
(Market Segment)
Focus
Strategy
(low cost)
Focus
Strategy
(differentiation)
Cost Leadership Strategy
This generic strategy calls for being the low cost producer in an industry for a given
level of quality. The firm sells its products either at average industry prices to earn a
profit higher than that of rivals, or below the average industry prices to gain market
share. In the event of a price war, the firm can maintain some profitability while the
competition suffers losses. Even without a price war, as the industry matures and
prices decline, the firms that can produce more cheaply will remain profitable for a
longer period of time. The cost leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by improving process
efficiencies, gaining unique access to a large source of lower cost materials, making
optimal outsourcing and vertical integration decisions, or avoiding some costs
altogether. If competing firms are unable to lower their costs by a similar amount, the
firm may be able to sustain a competitive advantage based on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:


Access to the capital required to make a significant investment in production
assets; this investment represents a barrier to entry that many firms may not
overcome.
Skill in designing products for efficient manufacturing, for example, having a
small component count to shorten the assembly process.


High level of expertise in manufacturing process engineering.
Efficient distribution channels.
Each generic strategy has its risks, including the low-cost strategy. For example,
other firms may be able to lower their costs as well. As technology improves, the
competition may be able to leapfrog the production capabilities, thus eliminating the
competitive advantage. Additionally, several firms following a focus strategy and
targeting various narrow markets may be able to achieve an even lower cost within
their segments and as a group gain significant market share.
Differentiation Strategy
A differentiation strategy calls for the development of a product or service that offers
unique attributes that are valued by customers and that customers perceive to be
better than or different from the products of the competition. The value added by the
uniqueness of the product may allow the firm to charge a premium price for it. The
firm hopes that the higher price will more than cover the extra costs incurred in
offering the unique product. Because of the product's unique attributes, if suppliers
increase their prices the firm may be able to pass along the costs to its customers
who cannot find substitute products easily.
Firms that succeed in a differentiation strategy often have the following internal
strengths:




Access to leading scientific research.
Highly skilled and creative product development team.
Strong sales team with the ability to successfully communicate the perceived
strengths of the product.
Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation by competitors
and changes in customer tastes. Additionally, various firms pursuing focus strategies
may be able to achieve even greater differentiation in their market segments.
Focus Strategy
The focus strategy concentrates on a narrow segment and within that segment
attempts to achieve either a cost advantage or differentiation. The premise is that
the needs of the group can be better serviced by focusing entirely on it. A firm using
a focus strategy often enjoys a high degree of customer loyalty, and this entrenched
loyalty discourages other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower
volumes and therefore less bargaining power with their suppliers. However, firms
pursuing a differentiation-focused strategy may be able to pass higher costs on to
customers since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product
development strengths to a relatively narrow market segment that they know very
well.
Some risks of focus strategies include imitation and changes in the target segments.
Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product
in order to compete directly. Finally, other focusers may be able to carve out subsegments that they can serve even better.
Porter used the car industry as an example of generic strategies in practice.
Toyota is (or was at the time) the low cost producer in the industry. Toyota achieves
its cost leadership strategy by adopting lean production, careful choice and control of
suppliers, efficient distribution, and low servicing costs from a quality product. Note
how the cost leadership must be in all aspects of the business (or value chain).
BMW is an example of a differentiation strategy. BMW still serves a relatively wide
range of the total market but its cars are differentiated in the eyes of the customer
who is prepared to pay a higher price for a BMW than for a Toyota, for instance, of
similar specification.
Morgan is an example of a Focus strategy. It only addresses a very small part of the
market—(i.e. those who enjoy getting wet and like the sound of an engine more than
conversation!). Each of these three companies has been successful by pushing a
particularly generic strategy successfully.
A Combination of Generic Strategies - Stuck in the Middle?
The firm can get “stuck in the middle” between low cost providers and differentiated
cost leaders and hence firms of this kind should pursue a hybrid strategy. E.g.:
Premium Padmini; Nike cheapest shoe starts at 599 up to 3999
Typically a firm can obtain a competitive advantage by two ways : Either a cost
advantage ( meaning selling a product at a lower cost) or by a differentiation strategy
(meaning having features and capabilities that are unique and can therefore be
charged at a slightly higher price) . A firm stuck in the middle is one that tries to
implement both strategies i.e a low cost and a unique feature.
An organisation can elect not to have a deliberate competitive strategy by employing
none of the three generic strategies outlined by Michael Porter. Porter’s three
generic strategies are; cost leadership strategy, differentiation strategy and the focus
strategy.
Instead of employing any of Porter three generic strategies a firm can elect to be
stuck in the middle. An organisation employing a “stuck in the middle” strategy is
neither deliberately pursuing a cost leadership strategy nor a differentiation strategy
nor a focus strategy?
The airline industry is an example of an industry where most of its players employ
the “stuck in the middle” strategy. These firms do not pursue a deliberate cost
leadership strategy or a differentiation strategy but they simultaneously employ the
cost leadership strategy and a differentiation strategy. This is evidenced by their
implied twin objectives of wanting to be perceived as charging the lowest fares than
competition and also at the same time wanting to be viewed as offering superior
quality service than their competitors.
This argument is further strengthened by the fact that most of the long haul airlines
offer economy class service, business class service and first class service
simultaneously in the same plane during the same journey and this can neither be
described as employing a cost leadership or differentiation strategy. This is in
contrast to a strategy employed by Ryanair and Easyjet.
Porter argued that being stuck in the middle does not usually lead to achievement of
competitive advantage because firms employing a stuck in the middle strategy will
struggle to compete with companies in the same industry which employ one of his
three generic strategies. This is because very few firms have the ability to be the
best in all areas. In other words a jack of all trades will struggle to compete when
competing with a master in a specific trade.
In concluding it is also worth mention that Porter also argued that being struck in the
middle may work sometimes especially when a firm is lucky enough to be competing
with competitors employing the stuck in the middle strategy. This could be one of the
reason why the stuck in the middle strategy seems to be working for firms in the long
haul airline business because all airlines seem to be using the same business
model.
Q: In today’s competitive world the survival as well as will to excel depends
upon effective combination of Supply Chain Management, Value Chain
Concepts, Strategic Cost Management and Customer Relationship
Management.
Explain all the four strategies through Value Chain and Product Life Cycle
Concept.
Explain how is value chain analysis, which is an internal analysis, useful in
identification of distinctive competencies in a business organization in
formulating various business strategies?
Value chain Concept
The resources audit provides an understanding of an organization’s capabilities. The
next step is to identify how the organizational activities contribute to the value - the
price the customers are willing to pay for the goods and services of the organization.
If this value exceeds the costs of performing those activities, company is said to be
profitable, otherwise it is a loss making company. Therefore to achieve the long run
objective of maximization of wealth and short –run goals of generating reasonable
profits, it is imperative that the company should gain a competitive edge over its
competitors.
Charles W.L. Hill and Gareth R. Jones maintain:
“To gain a competitive advantage, a company must either perform value – creation
functions at a lower cost than its rivals or perform them in a way that leads to
differentiation and a premium price. To do either, it must have a distinctive
competence in one or more of its value – creation functions. If it has significant
weaknesses in any of these functions, it will be at a competitive disadvantage”
Michael Porter suggested the concept of “value – chain” that sequences the
activities related with creation of value. These activities can be divided between
(a) Primary activities, and
(b) Support activities.
Secondary
Activities
Primary Activities
The primary activities are concerned with physical creation of the product, its
marketing and delivery to buyers and after-sales service. The support activities
provide the inputs and infrastructure for the primary activities.
Primary Activities
Some authors classify primary activities into five categories –
(a) Inbounded logistics (activities concerned with receiving, storing and distributing
the material, inventory control, warehousing, etc.)
(b) Operations (activities concerned with transformation of inputs into final product or
service: for example, matching, packing, assembly testing etc.
(c) Out bounded logistics (activities concerned with collection, storage and physical
distribution of finished goods to the consumers)
(d) Marketing and sales (activities concerned with advertising, selling, administration
of sales personnel, etc.)
(e) Service (activities that enhance or maintain the value of a product / service, such
as installation, repair, training, etc.)
Some others classify primary activities into two main functions
(a) Manufacturing (physical creation of the product)
(b) Marketing (concerned with marketing, delivery and after sales service)
Support Activities
The support activities that provide inputs and infrastructure for primary activities of
manufacturing and marketing are classified as follows:
(a) Material management activities
(b) Research and Development activities
(c) Human Resources activities
(d) Information systems activities
(e) Company infrastructure activities
Material Management activities are concerned with procurement, storage and
issuance of material to the production departments. The inventory control that aims
at keeping uninterrupted supply of material at minimum associated costs is
undertaken under this function.
Research and Development activities permeate manufacturing as well as marketing
activities. It aims at developing new products or process technology that provide
additional benefits to customers, improve quality, lower the cost of manufacturing
and ultimately contribute to the creation of value.
The human resource activities aim at meeting the personnel requirement of
manufacturing and marketing departments by proper selection of staff, their training
and development.
The information system activities ensure efficient and expeditious flow of needed
information to the concerned managers for taking decisions and actions.
The infrastructure activities embrace all other activities like finance, legal, public
relations, etc which are essential for the company.
Corporate Value Chain Analysis
It involves the following steps.
- Examine each product lines value chain in terms of various activities involved in
producing a product or service. Examine the S&W
- Identify the linkages in product lines value chain
Ex: quality control, check 100% instead of 10% to avoid repairs and returns
- Examine the synergies among value chains of different product lines or SBUS.
Ex: Cost of advertising, production etc jointly will be cheaper
After identifying the resources and relating them to strategic purpose through value
chain analysis, the next step is identification of company’s core competence.
The core competence refers to unique strength of the company that competitors
cannot easily match or imitate.
To Gary Hamel and C.K. Prahalad,
“A core- competence is a bundle of skills and technologies that enables a company
to provide a particular benefit to customers”.
Following are the examples of core-competence at global level:
Company
Sony
Federal Express
Wal-Mart
Motorola
Benefit to customer
Pocketability
on –time Delivery
Choice, availability,
Unlettered’ communication.
Core – competence
Miniaturization
Logistics Management
value Logistics Management
Wireless communication
“The diversified corporation is a large tree. The trunk and major limbs are core
products, the smaller branches are business units; the leaves, flowers and fruit are
end products. The root system that provided nourishment, sustenance, and stability
is the core competence. You can miss the strength of competition by looking only at
their end products in the same way you miss the strength of a tree if you look only at
its leaves.”
Core competence provides strategic advantage to the company. In the short run, a
company can achieve competitiveness from its price / Performance attributes; but in
the long run core competence will provide profitability. With its core – competence,
company can produce at lower cost and more speedily than competitors and can
differentiate. Thus the real strategic advantage to a company comes from its core
competence. Thus core- competence is the bedrock of a company’s strategy.
Product Life Cycle Concept
A new product progresses through a sequence of stages from introduction to growth,
maturity, and decline. This sequence is known as the product life cycle and is
associated with changes in the marketing situation, thus impacting the marketing
strategy and the marketing mix.
The product revenue and profits can be plotted as a function of the life-cycle stages
as shown in the graph below:
Introduction Stage
In the introduction stage, the firm seeks to build product awareness and develop a
market for the product. The impact on the marketing mix is as follows:



Product branding and quality level is established, and intellectual property
protection such as patents and trademarks are obtained.
Pricing may be low penetration pricing to build market share rapidly, or high
skim pricing to recover development costs.
Distribution is selective until consumers show acceptance of the product.

Promotion is aimed at innovators and early adopters. Marketing
communications seeks to build product awareness and to educate potential
consumers about the product.
Growth Stage
In the growth stage, the firm seeks to build brand preference and increase market
share.




Product quality is maintained and additional features and support services
may be added.
Pricing is maintained as the firm enjoys increasing demand with little
competition.
Distribution channels are added as demand increases and customers
accept the product.
Promotion is aimed at a broader audience.
Maturity Stage
At maturity, the strong growth in sales diminishes. Competition may appear with
similar products. The primary objective at this point is to defend market share while
maximizing profit.




Product features may be enhanced to differentiate the product from that of
competitors.
Pricing may be lower because of the new competition.
Distribution becomes more intensive and incentives may be offered to
encourage preference over competing products.
Promotion emphasizes product differentiation.
Decline Stage
As sales decline, the firm has several options:



Maintain the product, possibly rejuvenating it by adding new features and
finding new uses.
Harvest the product - reduce costs and continue to offer it, possibly to a loyal
niche segment.
Discontinue the product, liquidating remaining inventory or selling it to another
firm that is willing to continue the product.
The marketing mix decisions in the decline phase will depend on the selected
strategy. For example, the product may be changed if it is being rejuvenated, or left
unchanged if it is being harvested or liquidated. The price may be maintained if the
product is harvested, or reduced drastically if liquidated.
Supply Chain Management
A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products to
customers. Supply chains exist in both service and manufacturing organizations,
although the complexity of the chain may vary greatly from industry to industry and
firm to firm.
Traditionally, marketing, distribution, planning, manufacturing, and the purchasing
organizations along the supply chain operated independently. These organizations
have their own objectives and these are often conflicting. Marketing's objective of
high customer service and maximum sales dollars conflict with manufacturing and
distribution goals. Many manufacturing operations are designed to maximize
throughput and lower costs with little consideration for the impact on inventory levels
and distribution capabilities. Purchasing contracts are often negotiated with very little
information beyond historical buying patterns. The result of these factors is that there
is not a single, integrated plan for the organization---there were as many plans as
businesses. Clearly, there is a need for a mechanism through which these different
functions can be integrated together. Supply chain management is a strategy
through which such integration can be achieved.
Supply Chain Decisions
We classify the decisions for supply chain management into two broad categories -strategic and operational. As the term implies, strategic decisions are made typically
over a longer time horizon. These are closely linked to the corporate strategy (they
sometimes {\it are} the corporate strategy), and guide supply chain policies from a
design perspective. On the other hand, operational decisions are short term, and
focus on activities over a day-to-day basis. The effort in these type of decisions is to
effectively and efficiently manage the product flow in the "strategically" planned
supply chain.
There are four major decision areas in supply chain management: 1) location, 2)
production, 3) inventory, and 4) transportation (distribution), and there are both
strategic and operational elements in each of these decision areas.
Location Decisions
The geographic placement of production facilities, stocking points, and sourcing
points is the natural first step in creating a supply chain. The location of facilities
involves a commitment of resources to a long-term plan. Once the size, number, and
location of these are determined, so are the possible paths by which the product
flows through to the final customer. These decisions are of great significance to a
firm since they represent the basic strategy for accessing customer markets, and will
have a considerable impact on revenue, cost, and level of service. These decisions
should be determined by an optimization routine that considers production costs,
taxes, duties and duty drawback, tariffs, local content, distribution costs, production
limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough
discussion of these aspects.) Although location decisions are primarily strategic,
they also have implications on an operational level.
Production Decisions
The strategic decisions include what products to produce, and which plants to
produce them in, allocation of suppliers to plants, plants to DC's, and DC's to
customer markets. As before, these decisions have a big impact on the revenues,
costs and customer service levels of the firm. These decisions assume the existence
of the facilities, but determine the exact path(s) through which a product flows to and
from these facilities. Another critical issue is the capacity of the manufacturing
facilities--and this largely depends the degree of vertical integration within the firm.
Operational decisions focus on detailed production scheduling. These decisions
include the construction of the master production schedules, scheduling production
on machines, and equipment maintenance. Other considerations include workload
balancing, and quality control measures at a production facility.
Inventory Decisions
These refer to means by which inventories are managed. Inventories exist at every
stage of the supply chain as either raw material, semi-finished or finished goods.
They can also be in-process between locations. Their primary purpose to buffer
against any uncertainty that might exist in the supply chain. Since holding of
inventories can cost anywhere between 20 to 40 percent of their value, their efficient
management is critical in supply chain operations. It is strategic in the sense that top
management sets goals. However, most researchers have approached the
management of inventory from an operational perspective. These include
deployment strategies (push versus pull), control policies --- the determination of the
optimal levels of order quantities and reorder points, and setting safety stock levels,
at each stocking location. These levels are critical, since they are primary
determinants of customer service levels.
Transportation Decisions
The mode choice aspect of these decisions are the more strategic ones. These are
closely linked to the inventory decisions, since the best choice of mode is often
found by trading-off the cost of using the particular mode of transport with the
indirect cost of inventory associated with that mode. While air shipments may be
fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile
shipping by sea or rail may be much cheaper, but they necessitate holding relatively
large amounts of inventory to buffer against the inherent uncertainty associated with
them. Therefore customer service levels, and geographic location play vital roles in
such decisions. Since transportation is more than 30 percent of the logistics costs,
operating efficiently makes good economic sense. Shipment sizes (consolidated
bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in
effective management of the firm's transport strategy.
Strategic Cost Management
In the contemporary business environment, cost management has become a critical
survival skill for many organizations. But it is not sufficient to simply reduce costs;
instead, costs must be managed strategically
Highly competitive markets are characterized by low profit margins, low customer
loyalty and low first move advantages. Not only customers ask for cost
management, also the intense competition between well-matched competitors
increases the strategic importance of cost management.
Strategic cost management is "the application of cost management techniques so
that they simultaneously improve the strategic position of a firm and reduce costs".
Strategic cost management needs to include all aspects of production and delivering
the product; the supply of purchased parts, the design of products and the
manufacturing of these products. So, strategic cost management should be inherent
to each stage of a product's life cycle, i.e. during the development, manufacturing,
distribution and during the service lifetime of a product.
Hence, the term strategic cost management has a broad focus, it is not confined to
the continuous reduction of costs and controlling of costs and it is far more
concerned with management's use of cost information for decision-making.
There are various strategic cost management tools used like Activity based costing,
Target costing, Value Engineering, Balance score card etc.
Customer Relationship Management. It is a process or methodology used to learn
more about customers' needs and behaviors in order to develop stronger
relationships with them.
Customer relationship management is a widely implemented strategy for managing
a company’s interactions with customers, clients and sales prospects. It involves
using technology to organize, automate, and synchronize business processes—
principally sales activities, but also those for marketing, customer service, and
technical support. The overall goals are to find, attract, and win new clients, nurture
and retain those the company already has, entice former clients back into the fold,
and reduce the costs of marketing and client service. Customer relationship
management describes a company-wide business strategy including customerinterface departments as well as other departments. Measuring and valuing
customer relationships is critical to implementing this strategy.
A CRM system may be chosen because it is thought to provide the following
advantages:



Quality and efficiency
Decrease in overall costs
Decision support



Enterprise ability
Customer Attention
Increase profitability
Strategy
For larger-scale enterprises, a complete and detailed plan is required to obtain the
funding, resources, and company-wide support that can make the initiative of
choosing and implementing a system successfully. Benefits must be defined, risks
assessed, and cost quantified in three general areas:

Processes: Though these systems have many technological components,
business processes lie at its core. It can be seen as a more client-centric way
of doing business, enabled by technology that consolidates and intelligently
distributes pertinent information about clients, sales, marketing effectiveness,
responsiveness, and market trends. Therefore, a company must analyze its
business workflows and processes before choosing a technology platform;
some will likely need re-engineering to better serve the overall goal of winning
and satisfying clients. Moreover, planners need to determine the types of
client information that are most relevant, and how best to employ them

People: For an initiative to be effective, an organization must convince its staff
that the new technology and workflows will benefit employees as well as
clients. Senior executives need to be strong and visible advocates who can
clearly state and support the case for change. Collaboration, teamwork, and
two-way communication should be encouraged across hierarchical
boundaries, especially with respect to process improvement.

Technology: In evaluating technology, key factors include alignment with the
company’s business process strategy and goals, including the ability to
deliver the right data to the right employees and sufficient ease of adoption
and use. Platform selection is best undertaken by a carefully chosen group of
executives who understand the business processes to be automated as well
as the software issues. Depending upon the size of the company and the
breadth of data, choosing an application can take anywhere from a few weeks
to a year or more
Q:
Mergers and Acquisition process required a detailed SWOT Analysis.
Explain in details Mergers and Acquisition process.
What could be the probable reason for companies to use the Mergers and
acquisition Route? Please lace your answers with examples from the
corporate world.
Growth strategies:
Organizations usually seek growth in sales, profits, market share, or some other
measure as a primary objective. The different grand strategies in this category are:





Concentration
Integration
Diversification
Mergers and acquisitions
Joint Ventures
M & A are an attractive strategy for strengthening a firms competitive position .
This is particularly relevant in case of organisation heading towards global market
leadership , frequently acquire companies to build market pressure in such
countries whenever they donot compete. Similarly domestic companies trying to
establish attractive positions in the industry of the future , merge or make
acquisition in order to



Fill resource gap or correct competitive deficiencies.
Combine operations resulting in lower cost.
Access to improved technology with better product & services in wider
geographic area
No company can afford to ignore the strategic & competitive benefits of acquiring
& merging with another company to strengthen its market position & open up
avenues of new opportunity.
Merger is pooling of organizations having similar resource strengths joining hands to
form a new company, often with a new name with varying degrees of ownership
depending on stake holding.
E.g.. Sandoz and Ciba – now called Novartis across the world
Daimler – Chrysler
Brook Bond and Lipton merged to become Brooke bond India later taken over by
HUL
Acquisition is when a strong firm, down out player in the industry becomes the
acquiring firm which outright purchases the operations of the weak firm i.e. the
acquired firm.
Principally, though mergers & acquisitions are a parallel process, it may differ in
terms of engagement, ownership levels, management control and financials.
However, the objective remains the same i.e. the quest to fill a resource vulnerability
gap and in turn attain SCA.
Defn : A merger is a combination & pooling of two equally strong companies with
a new craeted company taking on a new name.
Defn : A acquisition when one company namely the acquisition purchases &
absorbs the operation of another that is the acquired.
Mergers and Acquisitions are defined by the following Strategic Objectives:
The dominant rationale used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to improve
financial performance:

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
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Economy of scale: This refers to the fact that the combined company can
often reduce its fixed costs by removing duplicate departments or operations,
lowering the costs of the company relative to the same revenue stream, thus
increasing profit margins.
Economy of scope: This refers to the efficiencies primarily associated with
demand-side changes, such as increasing or decreasing the scope of
marketing and distribution, of different types of products.
Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by
capturing increased market share) to set prices.
Cross-selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign
up the bank's customers for brokerage accounts. Or, a manufacturer can
acquire and sell complementary products.
Synergy: For example, managerial economies such as the increased
opportunity of managerial specialization. Another example are purchasing
economies due to increased order size and associated bulk-buying discounts.
Taxation: A profitable company can buy a loss maker to use the target's loss
as their advantage by reducing their tax liability. In the United States and
many other countries, rules are in place to limit the ability of profitable
companies to "shop" for loss making companies, limiting the tax motive of an
acquiring company.


Geographical or other diversification: This is designed to smooth the
earnings results of a company, which over the long term smoothens the stock
price of a company, giving conservative investors more confidence in
investing in the company. However, this does not always deliver value to
shareholders (see below).
Resource transfer: resources are unevenly distributed across firms (Barney,
1991) and the interaction of target and acquiring firm resources can create
value through either overcoming information asymmetry or by combining
scarce resources.

Vertical integration: Vertical integration occurs when an upstream and
downstream firm merges (or one acquires the other). There are several
reasons for this to occur. One reason is to internalise an externality problem.
A common example of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have
monopoly power and each firm reduces output from the competitive level to
the monopoly level, creating two deadweight losses. Following a merger, the
vertically integrated firm can collect one deadweight loss by setting the
downstream firm's output to the competitive level. This increases profits and
consumer surplus. A merger that creates a vertically integrated firm can be
profitable.

Diversification: While this may hedge a company against a downturn in an
individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a
much lower cost than those associated with a merger.
Types of Mergers
1. Horizontal Mergers
2. Vertical Mergers
3. Conglomerate Mergers
Horizontal Mergers
This type of merger involves two firms that operate and compete in a similar kind of
business. The merger is based on the assumption that it will provide economies of
scale from the larger combined unit.
Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. megamerger
The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline
Beecham PLC early this year announced plans to merge resulting in the largest drug
manufacturing company globally. The merger created a company valued at $182.4
billion and with a 7.3 per cent share of the global pharmaceutical market. The
merged company expected $1.6 billion in pretax cost savings after three years. The
two companies have complementary drug portfolios, and a merger would let them
pool their research and development funds and would give the merged company a
bigger sales and marketing force.
Vertical Mergers
Vertical mergers take place between firms in different stages of
production/operation, either as forward or backward integration. The basic reason is
to eliminate costs of searching for prices, contracting, payment collection and
advertising and may also reduce the cost of communicating and coordinating
production. Both production and inventory can be improved on account of efficient
information flow within the organisation.
Unlike horizontal mergers, which have no specific timing, vertical mergers take place
when both firms plan to integrate the production process and capitalise on the
demand for the product. Forward integration take place when a raw material supplier
finds a regular procurer of its products while backward integration takes place when
a manufacturer finds a cheap source of raw material supplier.
Example: Merger of Usha Martin and Usha Beltron
Usha Martin and Usha Beltron merged their businesses to enhance shareholder
value, through business synergies. The merger will also enable both the companies
to pool resources and streamline business and finance with operational efficiencies
and cost reduction and also help in development of new products that require
synergies.
Conglomerate Mergers
Conglomerate mergers are affected among firms that are in different or unrelated
business activity. Firms that plan to increase their product lines carry out these types
of mergers. Firms opting for conglomerate merger control a range of activities in
various industries that require different skills in the specific managerial functions of
research, applied engineering, production, marketing and so on. This type of
diversification can be achieved mainly by external acquisition and mergers and is not
generally possible through internal development. These types of mergers are also
called concentric mergers. Firms operating in different geographic locations also
proceed with these types of mergers. Conglomerate mergers have been sub-divided
into:



Financial Conglomerates
Managerial Conglomerates
Concentric Companies
Financial Conglomerates
These conglomerates provide a flow of funds to every segment of their operations,
exercise control and are the ultimate financial risk takers. They not only assume
financial responsibility and control but also play a chief role in operating decisions.
They also:





Improve risk-return ratio
Reduce risk
Improve the quality of general and functional managerial performance
Provide effective competitive process
Provide distinction between performance based on underlying potentials in
the product market area and results related to managerial performance.
Managerial Conglomerates
Managerial conglomerates provide managerial counsel and interaction on decisions
thereby, increasing potential for improving performance. When two firms of unequal
managerial competence combine, the performance of the combined firm will be
greater than the sum of equal parts that provide large economic benefits.
Concentric Companies
The primary difference between managerial conglomerate and concentric company
is its distinction between respective general and specific management functions. The
merger is termed as concentric when there is a carry-over of specific management
functions or any complementarities in relative strengths between management
functions.
The Merger & Acquisition Process can be broken down into five phases:
Phase 1 - Pre Acquisition Review: The first step is to assess your own situation
and determine if a merger and acquisition strategy should be implemented. If a
company expects difficulty in the future when it comes to maintaining core
competencies, market share, return on capital, or other key performance drivers,
then a merger and acquisition (M & A) program may be necessary.
It is also useful to ascertain if the company is undervalued. If a company fails to
protect its valuation, it may find itself the target of a merger. Therefore, the preacquisition phase will often include a valuation of the company - Are we
undervalued? Would an M & A Program improve our valuations?
The primary focus within the Pre Acquisition Review is to determine if growth targets
(such as 10% market growth over the next 3 years) can be achieved internally. If
not, an M & A Team should be formed to establish a set of criteria whereby the
company can grow through acquisition. A complete rough plan should be developed
on how growth will occur through M & A, including responsibilities within the
company, how information will be gathered, etc.
Phase 2 - Search & Screen Targets: The second phase within the M & A Process
is to search for possible takeover candidates. Target companies must fulfill a set of
criteria so that the Target Company is a good strategic fit with the acquiring
company. For example, the target's drivers of performance should compliment the
acquiring company. Compatibility and fit should be assessed across a range of
criteria - relative size, type of business, capital structure, organizational strengths,
core competencies, market channels, etc.
It is worth noting that the search and screening process is performed in-house by the
Acquiring Company. Reliance on outside investment firms is kept to a minimum
since the preliminary stages of M & A must be highly guarded and independent.
Phase 3 - Investigate & Value the Target: The third phase of M & A is to perform a
more detail analysis of the target company. You want to confirm that the Target
Company is truly a good fit with the acquiring company. This will require a more
thorough review of operations, strategies, financials, and other aspects of the Target
Company. This detail review is called "due diligence." Specifically, Phase I Due
Diligence is initiated once a target company has been selected. The main objective
is to identify various synergy values that can be realized through an M & A of the
Target Company. Investment Bankers now enter into the M & A process to assist
with this evaluation.
A key part of due diligence is the valuation of the target company. In the preliminary
phases of M & A, we will calculate a total value for the combined company. We have
already calculated a value for our company (acquiring company). We now want to
calculate a value for the target as well as all other costs associated with the M & A.
The calculation can be summarized as follows:
Value of Our Company (Acquiring Company)
Value of Target Company
Value of Synergies per Phase I Due Diligence
Less M & A Costs (Legal, Investment Bank, etc.)
Total Value of Combined Company
$ 560
176
38
( 9)
$ 765
Phase 4 - Acquire through Negotiation: Now that we have selected our target
company, it's time to start the process of negotiating a M & A. We need to develop a
negotiation plan based on several key questions:




How much resistance will we encounter from the Target Company?
What are the benefits of the M & A for the Target Company?
What will be our bidding strategy?
How much do we offer in the first round of bidding?
The most common approach to acquiring another company is for both companies to
reach agreement concerning the M & A; i.e. a negotiated merger will take place. This
negotiated arrangement is sometimes called a "bear hug." The negotiated merger or
bear hug is the preferred approach to a M & A since having both sides agree to the
deal will go a long way to making the M & A work. In cases where resistance is
expected from the target, the acquiring firm will acquire a partial interest in the
target; sometimes referred to as a "toehold position." This toehold position puts
pressure on the target to negotiate without sending the target into panic mode.
In cases where the target is expected to strongly fight a takeover attempt, the
acquiring company will make a tender offer directly to the shareholders of the target,
bypassing the target's management. Tender offers are characterized by the
following:

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
The price offered is above the target's prevailing market price.
The offer applies to a substantial, if not all, outstanding shares of stock.
The offer is open for a limited period of time.
The offer is made to the public shareholders of the target.
A few important points worth noting:

Generally, tender offers are more expensive than negotiated M & A's due to the
resistance of target management and the fact that the target is now "in play" and
may attract other bidders.

Partial offers as well as toehold positions are not as effective as a 100%
acquisition of "any and all" outstanding shares. When an acquiring firm makes a
100% offer for the outstanding stock of the target, it is very difficult to turn this
type of offer down.
Another important element when two companies merge is Phase II Due Diligence.
As you may recall, Phase I Due Diligence started when we selected our target
company. Once we start the negotiation process with the target company, a much
more intense level of due diligence (Phase II) will begin. Both companies, assuming
we have a negotiated merger, will launch a very detail review to determine if the
proposed merger will work. This requires a very detail review of the target company financials, operations, corporate culture, strategic issues, etc.
Phase 5 - Post Merger Integration: If all goes well, the two companies will
announce an agreement to merge the two companies. The deal is finalized in a
formal merger and acquisition agreement. This leads us to the fifth and final phase
within the M & A Process, the integration of the two companies.
Some of the reasons behind failed mergers are:

Poor strategic fit - The two companies have strategies and objectives that are too
different and they conflict with one another.

Cultural and Social Differences - It has been said that most problems can be traced
to "people problems." If the two companies have wide differences in cultures, then
synergy values can be very elusive.

Incomplete and Inadequate Due Diligence - Due diligence is the "watchdog" within
the M & A Process. If you fail to let the watchdog do his job, you are in for some
serious problems within the M & A Process.

Poorly Managed Integration - The integration of two companies requires a very high
level of quality management. In the words of one CEO, "give me some people who
know the drill." Integration is often poorly managed with little planning and design. As
a result, implementation fails.

Paying too Much - In today's merger frenzy world, it is not unusual for the acquiring
company to pay a premium for the Target Company. Premiums are paid based on
expectations of synergies. However, if synergies are not realized, then the premium
paid to acquire the target is never recouped.

Overly Optimistic - If the acquiring company is too optimistic in its projections about
the Target Company, then bad decisions will be made within the M & A Process. An
overly optimistic forecast or conclusion about a critical issue can lead to a failed
merger.
Q: Dr.G, the management consultant said that all strategies are evaluated only
on the basis of the following two parameters viz.
a. Sustainable Competitive Advantage
b. Risk V/s. Return Analysis
----As a strategic planner, please explain the above evaluation to the core
group of managers of your company.
Sustainable Competitive Advantage
When a firm sustains profits that exceed the average for its industry, the firm is said
to possess a Sustainable competitive advantage over its rivals. The goal of much of
business strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:


cost advantage
differentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits as
competitors but at a lower cost (cost advantage), or deliver benefits that exceed
those of competing products (differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value for its customers and superior
profits for itself.
Cost and differentiation advantages are known as positional advantages since they
describe the firm's position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources and capabilities
to create a competitive advantage that ultimately results in superior value creation.
The following diagram combines the resource-based and positioning views to
illustrate the concept of competitive advantage:
A Model of Competitive Advantage
Resources
Distinctive
Competencies
Capabilities
Cost Advantage
or
Differentiation Advantage
Value
Creation
Resources and Capabilities
According to the resource-based view, in order to develop a competitive advantage
the firm must have resources and capabilities that are superior to those of its
competitors. Without this superiority, the competitors simply could replicate what the
firm was doing and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation
advantage and that few competitors can acquire easily. The following are some
examples of such resources:


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

Patents and trademarks
Proprietary know-how
Installed customer base
Reputation of the firm
Brand equity
Capabilities refer to the firm's ability to utilize its resources effectively. An example of
a capability is the ability to bring a product to market faster than competitors. Such
capabilities are embedded in the routines of the organization and are not easily
documented as procedures and thus are difficult for competitors to replicate.
The firm's resources and capabilities together form its distinctive competencies.
These competencies enable innovation, efficiency, quality, and customer
responsiveness, all of which can be leveraged to create a cost advantage or a
differentiation advantage.
Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilities to achieve
either a lower cost structure or a differentiated product. A firm positions itself in its
industry through its choice of low cost or differentiation. This decision is a central
component of the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target.
Porter formed a matrix using cost advantage, differentiation advantage, and a broad
or narrow focus to identify a set of generic strategies that the firm can pursue to
create and sustain a competitive advantage.
Value Creation
The firm creates value by performing a series of activities that Porter identified as
the value chain. In addition to the firm's own value-creating activities, the firm
operates in a value system of vertical activities including those of upstream suppliers
and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value
creating activities in a way that creates more overall value than do competitors.
Superior value is created through lower costs or superior benefits to the consumer
(differentiation).
Strategic Options to achieve Competitive Advantage
1.) Strategy based on critical success factors (CSF)
CSF are competitive factors which affect industry members ability to prosper in
the market place.
CSF
↓
Core Competencies (SBF resource capability) (inherent strength)
↓
Brand Promise
↓
Differentiation/ Positioning
↓
Core Value Proposition
E.g.. Of CSF
1. Economies of Scales – Reliance
2. Cost Leadership - Least cost ITC HUL
a. Cost low – sell low
L superia
b. Cost low – sell VFM
M Vivel Sunsilk
c. Cost low - Sell ↑
H
FOW Dove
In all these products principal Raw material is the same which constitutes 90% of
the products. Scale brings down cost/ unit.
3. Pricing – Supply Chain Efficiencies.
E.g. WalMart – They too have the scale
4. Technology & Innovation: - Sony
5. Product line Base: Firm that serves broad industry categories in multiple
benefit areas with a variety
of price points along with brand line extensions.
6. Related Skills & Capability – skilled talented workforce.
7. Overall Low Cost.
Positioning :
Mother brand ( Brand Equity)
Extend the brand into other Areas E.g. Dettol , Bandaids, Handwash, Soaps,
Antiseptic lotion. With core value proposition remaining same.
Change the form of the Product E.G. Liril – Soaps, Talcum Powder, Deos
E.g. . Colgate- Complete Oral Solution care form.
Line is vertical extension , Brand is Horizontal.
Any Company having various price points, multiple products for multiple
segments.
A firm needs to identify the Key Success Factors from any of the above points &
concentrate all resources behind the same to create a SCA ( Sustainable
Competitive Advantage)
Use KFS’s as cornerstones of Company’s Strategies and gain SCA by excelling
in 1 KSF
2.) Strategy based on Relative Superiority
To create a distinctive competency from within internal value chain activities &
use it to exploit relative weakness of other industry competitors. E.g. Haldirams –
Ethnic Snacks.
Impulse purchase Category E.g. Lays came up with Kurkure.
Guerilla Players- Plays war in his strength play within a certain geographic
location. E.g. Balaji, Wagh Bakri Chai Garden Fresh snacks.
3.) Strategy based on Aggressive Initiatives
E.g. New Honda Model arrow v/s S x 4 of Maruti
Fantastic Model
An initiative that is undertaken to dislodge established player in the industry by
challenging the current strategic business fit. This would include product design,
technology, cost inputs & at times unique advertising measures.
4) Employ strategic degrees of freedom
Ansoff’s share growth matrix refers to strategic options for growth that is
available with the firm
Risk V/s. Return Analysis
Q: Explain the rationale for a company to take over another company.
Acquisition / Takeover Strategies:
Why do companies feel compelled to acquire other businesses? After all, the
typical buyer knows its own market niche quite well, and can safely increase its
revenues over time by continual, careful attention to internal organic growth.
Nonetheless, thousands of acquisitions occur every year. Here are some
reasons for doing so:


Business model. The target’s business model may be different from that of
the buyer, and so generates more profits. For example, a target may operate
without labor unions, or have a substantially less burdensome benefits plan.
The buyer may not be able to re-create this business model in-house without
suffering significant unrest, but can readily buy into it through an acquisition.
Cyclicality reduction. A buyer may be trapped in a cyclical or seasonal
industry, where profitability fluctuates on a recurring basis. It may deliberately
acquire a company outside this industry with the goal of offsetting the
business cycle to yield more consistent financial results.









Defensive. Some acquisitions take place because the buyer is itself the
target of another company, and simply wants to make itself less attractive
through an acquisition. This is particularly effective when the buyer already
has a large market share, and buying another entity in the same market gives
it such a large share that it cannot be bought by anyone else within the
industry without anti-trust charges being brought.
Executive compensation. A buyer’s management team may be in favor of
an acquisition for the simple reason that a larger company generally pays
higher salaries. The greater heft of the resulting organization is frequently
viewed as being valid grounds for a significant pay boost among the surviving
management team. This is not a good reason for an acquisition, but it is a
common one.
Intellectual property. This is a defensible knowledge base that gives a
company a competitive advantage, and is one of the best reasons to acquire
a company. Intellectual property can include patents, trademarks, production
processes, databases that are difficult to re-create, and research &
development labs with a history of successful product development.
Internal development alternative. A company may have an extremely
difficult time creating new products, and so looks elsewhere to find
replacement products. This issue is especially likely to trigger an acquisition
if a company has just decided to cancel an in-house development project, and
needs a replacement immediately.
Local market expertise. In some industries, effective entry into a local
market requires the gradual accumulation of reputation through a long
process of building contacts and correct business practices. A company can
follow this path through internal expansion, and gain success over a long
period of time – or do it at once through an acquisition. Local market
expertise is especially valuable in international situations, where a buyer has
minimal knowledge of local customs, not to mention the inevitable obstacles
posed by a different language.
Market growth. No matter how hard a buyer may push itself, it simply cannot
grow revenues very fast in a slow-growth market, because there are so few
sales to be made. Conversely, a target company may be situated in a market
that is growing much faster than that of the buyer, so the buyer sees an
avenue to more rapid growth.
Market share. Companies generally strive toward a high market share,
because this generally allows them to enjoy a cost advantage over their
competitors, who must spread their overhead costs over smaller production
volumes. The acquisition of a large competitor is a reasonable way to quickly
attain significant market share.
Production capacity. Though not a common acquisition justification, the
buyer may have excess production capacity available, from which it can
readily manufacture the target’s products. Usually, tooling differences
between the companies make this a difficult endeavor.
Products. The target may have an excellent product that the buyer can use
to fill a hole in its own product line. This is an especially important reason



when the market is expanding rapidly, and the buyer does not have sufficient
time to develop the product internally before other competing products take
over the market. Also, acquired products tend to have fewer bugs than ones
just emerging from in-house development, since they have been through
more field testing, and possibly through several build cycles. However,
considerable additional effort may be needed to integrate the acquired
products into the buyer’s product line, so factor this issue into the purchase
decision.
Regulatory environment. The buyer may be burdened by a suffocating
regulatory environment, such as is imposed on utilities, airlines, and
government contractors. If a target operates in an area subject to less
regulation, the buyer may be more inclined to buy into that environment.
Sales channels. A target may have an unusually effective sales channel that
the buyer thinks it can use to distribute its own products. Examples of such
sales channels are as varied as door-to-door sales, electronic downloads,
telemarketing, or a well-trained in-house sales staff. Also, the target’s sales
staff might be especially effective – in some industries, sales is considered
the bottleneck operation, and so may be the prime reason for an acquisition
offer.
Vertical integration. To use a military term, a company may want to “secure
its supply lines” by acquiring selected suppliers. This is especially important if
there is considerable demand for key supplies, and a supplier has control
over a large proportion of them. This is especially important when other
suppliers are located in politically volatile areas, leaving few reliable
suppliers. In addition to this “backward integration,” a company can also
engage in “forward integration” by acquiring a distributor or customer. This
most commonly occurs with distributors, especially if they have unusually
excellent relationships with the ultimate set of customers. A company can
also use its ownership of a distributor from a defensive perspective, so that
competitors must shift their sales to other distributors.
Targeted Options
1. Look for company for net operating losses but have strong turnaround
prospects.
2. Seek a cashless company, which has not exploited its market potential or has
undervalued licensed.
3. Seek an under capitalized company where promoter’s stake low and mount a
hostile takeover initiative.
4. Watch out for family run business with no proven successor.
Steps involved in Takeover Process
1. Estimate the degree of over subscription of the stock of the company that you
intend to acquire in consultation with primary market brokers.
2. On the basis of this information, apply for a quantum of shares whose
allotment exceeds the promoter’s stake.
3. Purchase further shares from the market to increase the holding in the
company.
4. Offer shares to be bought out from financial institutions that are looking to exit.
5. Buyout foreign investors and minority NRI stakeholders with an offer of
marginal premium.
6. Make an open offer to Indian stakeholders or their portfolio managers by
offering suitable premium.
7. Initiate all out stock market purchase on all stock exchanges with maximum
publicity.
Q:
“The world is suffering from recession today” said Dr. JG, the turnaround
strategist. Take any company of your choice and assume that this company
is suffering from the effects of recession. Please explain as to what steps
this company should take to ride over this recessionary trend in the market.
A Turnaround Strategy is used for converting a Failed company or a Sick
Company into a successful company. You have been appointed as a
consultant to turnaround a Failed Company or a Sick Company. Please
prepare an action plan to turn around a failed or a sick company. (Take any
company of your choice).
Turn around strategies for critically sick companies / crises ridden co’s
When an organization’s survival is threatened and it is not competing effectively,
retrenchment strategies are often needed.
The three basic types of
retrenchment are



Turnaround,
Divestment, and
Liquidation.
Turnaround strategy is used when an organization is performing poorly but has
not yet reached a critical stage. It usually involves getting rid of unprofitable
products, pruning the work force, trimming distribution outlets, and seeking other
methods of making the organization more efficient. If the turnaround is
successful, the organization may then focus on growth strategies.
Turnaround defined
Turnaround
derives its name from the action involved that is reversing a
negative trend.
Turnaround management refers to the measures, which reverse the negative
trends in the performance indicators of the company. In other words, turnaround
management refers to the management measures which turn a sick-company
back to a be healthy one or those measures which reverse the deteriorating
trends of the performance indicators such as falling market share, sales (in
constant rupees), and profitability and worsening debt-equity ratio.
Examples of turn around
During 1970-80 IBM dominated the computer industry world wide particularly the
PCS. During early 1990s computer sales were falling. HP, Dell, Compaq,
Gateway etc entered the market PC clones in IBM style were offered cheaply by
them. Industry experts called IBM “bureaucratic dinosaur” and profits kept on
falling in 1992-93. The BOD hired a new CEO, Louis Gerstner to lead a
‘Corporate turn around’ who leads the ‘BIG BLUE’ strategy following the rigid
dress code. The work force was reduced to 40%. Emphasis was on quicker
decision making and strong customer orientation. The CEO spoke to at least
one customer a day. A new mainframe was released once in a year. PC
business increased its market share to 8.9% in 1996. Stock price moved from $
40 in 1990 to $ 140 in 1996. Revenue increased by 40% and profits rose by
3.6%.
IBM is still in the process of turning around.
Features of crisis ridden co’s
1) It happens when firms compete in an industry with generic commodity
products, low levels of differentiation thus the PLC and as the industry matures
they at the best achieve an also ran “me too” status.
2) Such firms manage below average industry profitability and do not posses
required resources and capabilities to compete effectively in the industry
3) They are financially weak and have deployed an inefficient competitive
strategy often with poor execution capabilities. In a weak economy/ recession
and fast changing consumer preferences can further weaken the business
position for such firms.
4) All above factors can lead to financial debt due to high cost and low price
realization further burdened by excess capacity and inventory.
5) Often such firms adopt overtly aggressive pricing in the quest for scale and
market share ignoring profitability at times. They yet get beaten by more focused
rival and lack of innovation and in-house R&D is the reason for lack of any kind of
credible response.
Strategic Options:
1) Offensive turn around strategy
a) Pump in financial resources (CDR – Corporate Dept Restructuring); revamp
product line either on a low cost focus or a high differentiated focus in order to
appeal to consumers.
2) Fortify and defend:
Use variation and alternatives pursued by rival to capture market share form the
chosen rival
3) Strategy revision in following acres:
i) Revamp all internal operations and revisit cost across the value chain
ii) Revisit all functional area strategies
iii) Merge or acquire small, weak regional players that compliment the firm’s
strategic business fit.
iv) Compete on a narrow front as close as possible to core competences in
product line and geographics.
4) Boost Revenues
a) Revenue building options include price cuts, value for money products
extending he line giving value added services & increase level of promotions.
This will be adopted if the firm pursues focused cost leadership.
b) Pursue a focused differentiation strategy improve quality and brand image
and serve the quality conscious segment at higher prices
5) Sell off all non-performing assets, non-viable plants, reduce workforce and
employ content labour, eliminate wastages & unnecessary frills from the product
design that consumer’s don’t perceive as values (Bring in cash)
6) Combination efforts of many of the above point’s turnaround strategies are
fraught with danger and high risk & more often than not fail due to lack of
financial resources.
Conclusion: In case if the turnaround strategies don’t work as part of the end
game firm may pursue liquidation as the last resort. Liquidation strategy may be:
a) A quick exit by selling off to a stronger rival
b) A slow exit after harvesting short term cash flows.
Q:
What could be the probable contents of a competitor profile? Take any
company (please specify the name of the company) of your choice and
identify its main competitor and compare the strengths and weakness
of this company with that of its competitor.
Prepare a competitor profile for any organization of your choice.
Competitor analysis in marketing and strategic management is an assessment of
the strengths and weaknesses of current and potential competitors. This analysis
provides both an offensive and defensive strategic context to identify opportunities
and threats. Profiling coalesces all of the relevant sources of competitor analysis into
one framework in the support of efficient and effective strategy formulation,
implementation, monitoring and adjustment.
Competitor analysis is an essential component of corporate strategy. It is argued
that most firms do not conduct this type of analysis systematically enough. Instead,
many enterprises operate on what is called “informal impressions, conjectures, and
intuition gained through the tidbits of information about competitors every manager
continually receives.” As a result, traditional environmental scanning places many
firms at risk of dangerous competitive blind spots due to a lack of robust competitor
analysis.
Competitor profiling
The strategic rationale of competitor profiling is powerfully simple. Superior
knowledge of rivals offers a legitimate source of competitive advantage. The raw
material of competitive advantage consists of offering superior customer value in the
firm’s chosen market. The definitive characteristic of customer value is the adjective,
superior. Customer value is defined relative to rival offerings making competitor
knowledge an intrinsic component of corporate strategy. Profiling facilitates this
strategic objective in three important ways. First, profiling can reveal strategic
weaknesses in rivals that the firm may exploit. Second, the proactive stance of
competitor profiling will allow the firm to anticipate the strategic response of their
rivals to the firm’s planned strategies, the strategies of other competing firms, and
changes in the environment. Third, this proactive knowledge will give the firms
strategic agility. Offensive strategy can be implemented more quickly in order to
exploit opportunities and capitalize on strengths. Similarly, defensive strategy can be
employed more deftly in order to counter the threat of rival firms from exploiting the
firm’s own weaknesses.
Clearly, those firms practicing systematic and advanced competitor profiling have a
significant advantage. As such, a comprehensive profiling capability is rapidly
becoming a core competence required for successful competition. An appropriate
analogy is to consider this advantage as akin to having a good idea of the next move
that your opponent in a chess match will make. By staying one move ahead,
checkmate is one step closer. Indeed, as in chess, a good offense is the best
defence in the game of business as well.
A common technique is to create detailed profiles on each of your major
competitors. These profiles give an in-depth description of the competitor's
background, finances, products, markets, facilities, personnel, and strategies. This
involves:
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Background
o location of offices, plants, and online presences
o history - key personalities, dates, events, and trends
o ownership, corporate governance, and organizational structure
Financials
o P-E ratios, dividend policy, and profitability
o various financial ratios, liquidity, and cash flow
o Profit growth profile; method of growth (organic or acquisitive)
Products
o products offered, depth and breadth of product line, and product
portfolio balance
o new products developed, new product success rate, and R&D
strengths
o brands, strength of brand portfolio, brand loyalty and brand awareness
o patents and licenses
o quality control conformance
o reverse engineering
Marketing
o segments served, market shares, customer base, growth rate, and
customer loyalty
o promotional mix, promotional budgets, advertising themes, ad agency
used, sales force success rate, online promotional strategy
o distribution channels used (direct & indirect), exclusivity agreements,
alliances, and geographical coverage
o pricing, discounts, and allowances
Facilities
o plant capacity, capacity utilization rate, age of plant, plant efficiency,
capital investment
o location, shipping logistics, and product mix by plant
Personnel
o number of employees, key employees, and skill sets
o strength of management, and management style
o compensation, benefits, and employee morale & retention rates
Corporate and marketing strategies
o objectives, mission statement, growth plans, acquisitions, and
divestitures
o marketing strategies
New competitors
In addition to analysing current competitors, it is necessary to estimate future
competitive threats. The most common sources of new competitors are:
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Companies competing in a related product/market
Companies using related technologies
Companies already targeting your prime market segment but with unrelated
products
Companies from other geographical areas and with similar products
New start-up companies organized by former employees and/or managers of
existing companies
The entrance of new competitors is likely when:
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There are high profit margins in the industry
There is unmet demand (insufficient supply) in the industry
There are no major barriers to entry
There is future growth potential
Competitive rivalry is not intense
Gaining a competitive advantage over existing firms is feasible
Q: Corporate Strategy should take into account the diverse interests of all the stakeholders of
an organization. Explain.
“Our stakeholders are our business.” Standard Bank • 2005 annual report
Companies have always had relationships with their stakeholders, which include
shareowners, customers, suppliers, employees, regulators, and local communities.
In fact, it would be difficult for a company to stay in business if it did not operate with
the interests of these key groups in mind. When engaging with its stakeholders, a
business is acknowledging that it is an interdependent entity, which is impacted by
and has an impact on many different groups. For many companies, however, finding
the right approach to stakeholder engagement and tapping the wider benefits it
offers to their business is still uncharted territory.
Recent improvements in global wealth, welfare, and opportunity most likely to be
sustained in the 21st century by an economic system that operates on market
principles and provides ample opportunity for creation of new enterprises, as well as
the growth of established firms. And the long-term success of the corporate system
requires greater and systematic managerial attention to the interests and concerns
of the diverse individuals and groups who are voluntarily or involuntarily affected by
corporate activity.
Taking stakeholder concerns and interests into account can improve relationships,
which may make it easier for a company to operate, lead to ideas for products or
services that will address stakeholder needs, and allow the company to reduce costs
and maximize value. Researchers have also found correlations between stakeholder
performance indicators and conventional measures of corporate profitability and
growth. The reasons may vary. For instance, companies that take a stakeholder
view may have a more responsible approach to risk-taking, which can deliver higher
returns by not unreasonably pursuing competitive advantage. Stakeholder-oriented
companies are also welcomed more readily into new markets, as existing companies
embedded in those markets perceive them as less hostile to local values and ways
of operating.
Overall, stakeholder- responsive corporate governance results in a more
comprehensive understanding of corporate risk and opportunity while contributing to
a strong reputation over time.
Stakeholders can have economic, technological, political, social or even managerial
effects on a company and engagement is therefore an important part of anticipating
business opportunities and risks, which, in turn, is fundamental to proactive,
strategic management. Over time, as economies, labor markets, and supply chains
have become increasingly globalized, the number and variety of stakeholders
impacted by individual companies has grown and the need for stakeholder
engagement has become an essential part of doing business.
Companies can capture and respond to stakeholder concerns in three ways:



The corporation makes business decisions that take into account its
understanding of stakeholder interests.
The corporation engages with
stakeholders to get their input
on what
decisions should be made and then makes the decisions itself.
The corporation involves stakeholders in the decision making process.
Regardless of process, one also needs to consider the principles behind the
decision making process. Will the corporation take stakeholder interests into account
only when they have a direct influence on existing business performance?
Will the corporation take stakeholder interests into account when the actions of the
corporation affects stakeholders but a change will either not improve performance or
make performance worse?
Understanding stakeholder needs, interests and concerns is a fundamental part of
managing indirect or nonfinancial risks. In fact, nonfinancial risks often have their
own associated costs — whether social, environmental, or economic — and will
likely in time affect the company’s financial bottom line. Engaging with stakeholders,
and using information from stakeholder engagements in decision-making, is
fundamental to understanding nonfinanical risks and managing an enterprise
responsibly. For this reason, social investment indices, such as the Dow Jones
Sustainability Index, give more weight to stakeholder engagement than to any other
social impact measure.
Q : Consider any organization in an industry of your choice. Prepare a SWOT
analysis for that organization and then suggest on the basis of this analysis
what should be its future course of action.
SWOT Analysis
SWOT is an acronym for the internal Strengths and Weaknesses of a business and
environmental Opportunities and Threats facing that business. SWOT analysis is a
systematic identification of these factors and the strategy that reflects the best match
between them. It is based on the logic that an effective strategy maximizes a
business’s strengths and opportunities but at the same time minimizes its
weaknesses and threats. This simple assumption, if accurately applied, has
powerful implications for successfully choosing and designing an effective strategy.
Opportunities:
An opportunity is a major favorable situation in the firm’s environment. Key trends
represent one source of opportunity. Identification of a previously overlooked market
segment, changes in competitive or regulatory circumstances, technological
changes, and improved buyer or supplier relationships could represent opportunities
for the firm.
Threats
A threat is a major unfavorable situation in the firm’s environment.
It is a key
impediment to the firm’s current and / or desired future position. The entrance of a
new competitor, slow market growth, increased bargaining power of key buyers or
supplier, major technologies change, and changing regulations could represent
major threats to a firm’s future success.
Consumer acceptance of home computers was a major opportunity for IBM. The
second fundamental focus in SWOT analysis is identifying key strengths and
weakness based on examination of the company profile.
Strengths and weaknesses can be defined as follows:
Strengths
Strength is a resource, skill, or other advantage relative to competitors and the
needs of markets a firm serves or anticipates serving. a strength is a distinctive
competence that gives the firm a comparative advantage in the marketplace.
Financial resources, image, market leadership, and buyer / supplier relations are
examples.
Weaknesses
A weakness is a limitation (or) deficiency in resources, skills, and capabilities that
seriously impedes effective performance.
Facilities, financial resources,
management capabilities, marketing skills, and brand image could be sources of
weaknesses. Sheer size and level of customer acceptance proved to be key
strengths around which IBM built its successful strategy in the personal computer
market.
How is it useful?
Understanding the key strengths and weaknesses of the firm further aids in
narrowing the choice of alternatives and selecting a strategy. Distinct competence
and critical weakness are identified in relation to key determinants of success for
different market segments; this provides a useful framework for making the best
strategic choice.
SWOT analysis can be used in at least three in strategic choice decisions. The most
common application provides a logical framework guiding systematic discussions of
the business’s situation, alternative strategies, and ultimately, the choice of strategy.
What one manager sees as an opportunity, another may see as a potential threat.
SWOT analysis of Cadburys
Strength
1. Cadbury is a company, which is reputed internationally as the topmost chocolate
provider in the world.
2. The brand is well known to people & they can easily identify it from others.
3. Cadbury the world leaders in chocolate, is a well-known force in marketing and
distribution.
4. Users have a positive perception about the qualities of the brand.
5. Cadbury main strength is Dairy milk. Dairy milk is the most consumed chocolate in
India.
6. By using popular models like Cyrus Brocha, Preety Zinta and others Cadburys
has managed to portray a young and sporty image, which has resulted in converting
buyers of other brands to become its staunch loyalists.
7. Cadbury has well adjusted itself to Indian custom.
8. It has properly repositioned itself in India whenever required i.e. from children to
adults, togetherness bar to energizing bar for young ones etc.
Weakness:
1. There is lack of penetration in the rural market where people tend to dismiss it as
a high end product. It is mainly found in urban and semi-urban areas.
2. It has been relatively high priced brand, which is turning the price conscious
customer away.
3. People avoid having their chocolate thinking about the egg ingredients.
Opportunities:
1. The chocolate market has seen one of the greatest increases in the recent times
(almost @ 30%)
2. There is a lot of potential for growth and a huge population who do not eat
chocolates even today that can be converted as new users.
Threat:
1. There exists no brand loyalty in the chocolate market and consumers frequently
shift their brands.
2. New brands are coming and existing brands are introducing new variants to add
up to an already overcrowded market.
Q: Managing Change is the hallmark of any successful leader. How do you
tackle the process of change management?
A great leader not only manages change well, he is an agent of change himself
when the need arises. He is able to affect change, prepare and manage the stress
that the team has to go through during times of change. He understands the
implications of change well and hence is prepared to face the results that change
may bring.
Research shows that the success rate for implementing major organizational change
is quite low, for several reasons. First, asking organizations to change the way they
conduct their business is similar to asking individuals to change their lifestyle. It can
be done but only with the greatest determination, discipline, persistence,
commitment and a clear plan for implementing the change.
Second, resistance to change is a natural human phenomenon. All people resist
change, some more than others. Managing that resistance is an essential part of the
process.
Third, change creates uncertainty. Organizations generally achieve fairly predictable
results with their existing business model. Their outcomes may not be the desired
results, but they are predictable. Change is unpredictable. The results may be far
better – but they may also be far worse. And success often looks and feels like
failure until the change is very nearly completed. Staying the course of implementing
a change – which is essential for its success – meets with continuing human and
organizational resistance and pressure to pull the plug before the process is
completed.
How to tackle the process of change management?
1. Accept that change is a process
First, recognize that change is a process and to move from crisis to control, we must
follow the process. We must engage everyone in the change. It is not complex but it
is a journey.There were a number of sub-committees identified:
2. Move forward step by step
When companies strive to restructure or gain greater efficiency, experts warn that
moving too quickly or failing to carefully implement changes can be detrimental to
the process and ultimate result. But in the words of John Kotter, “Skipping steps
creates only the illusion of speed and never produces satisfactory results” and
“Making critical mistakes in any of the phases can have a devastating impact,
slowing momentum and negating hard-won gains.
3. Assess potential risks and generate motivation
First, executives or other players in the organization need to assess potential risks
and stir up a sense of urgency among workers and stakeholders in order to generate
the motivation to spur change within the firm. However, this sense of urgency has to
be strong enough and perpetuated by outside analysts, consumers, and other voices
in order to propel change forward.
4. Form a powerful guiding coalition
Once change is identified as the best solution to market share, profit losses, or other
catalysts, leaders throughout the organization have to band together to guide the
transformation process, and these leaders can include board members, consumers,
union leaders, executives, chairmen, and others.
5. Create a shared vision for corporate change
The group then coalesces to create a shared vision for corporate change, and this
vision should go beyond the normal five-year forward looking plan generated at most
firms annually and be easily communicated and clear. A clear vision should also
include transformation steps that are coordinated and propel the organization toward
the overall goal, and these visions should be communicated in not only words and
speeches, but also actions of managers, supervisors, and executives. The
transformation of a company should also include short-term goals that can be
tracked to show executives and workers that progress is being made toward the
ultimate vision and that the long journey will be worth it, even in spite of short-term
job cuts for instance. Experts warn, however, that transformations can take between
five and 10 years to complete, and should not be declared as complete until the
company culture has transformed to meet the vision. Leaders will know to tackle
other processes and structures reflecting the old culture of the firm and to engrain
the new behaviors and procedures into workers in order to make the change
complete.
6. Communicate that vision
Leadership should estimate how much of the vision is needed, and then multiply that
effort by a factor of ten. A transformation effort will fail unless most of the
organization understand, appreciate, commit and try to make the effort happen. The
guiding principle is simple: use every existing communication channel and
opportunity.
7. Empower others to act on the vision
Remove obstacles there may be to getting on with change. This entails several
actions. Allocate budget money to the new initiative and free up key people from
existing responsibilities so they can concentrate on the new effort. Allow people to
start living the new ways and make changes in their areas of involvement. Nothing is
more frustrating than believing in the change but then not having the time, money,
help or support needed to effect it.
8. Plan for and create short-term wins
Real transformation takes time therefore; the loss of momentum and the onset of
disappointment are real factors. Actively plan to achieve short-term gains which
people will be able to see and celebrate. This will provide proof that efforts are
working and adds to the motivation to keep going.Once change is identified as the
best solution to market share, profit losses, or other catalysts, leaders throughout the
organization have to band together to guide the transformation process, and these
leaders can include board members, consumers, union leaders, executives,
chairmen, and others.
9. Consolidate improvement and keep the momentum for change moving
A premature declaration of victory can kill momentum, allowing the powerful forces
of tradition to regain ground. Keep in mind that new approaches are fragile and
subject to regression. Use the feeling of victory as the motivation to delve more
deeply into the organization: to explore changes in the basic culture, expose the
systems relationships of the organization that need tuning, and to move people
committed to the new ways into key roles.
10. Institutionalize the new approaches
At the end of the day, change sticks when it seeps into the bloodstream of the
corporate body and becomes “the way we do things around here.” This requires a
conscious attempt to: show people how the new approaches, behaviours and
attitudes have helped improve the organization and when the next generation of
leaders believe in and embody the new ways.
Q: Distinguish between following concepts with suitable examples:
A
Vision and Mission statements
Vision
What is the future you want to create for the community you wish to address?
Mission
What do we do?
For whom do we do it?
What is the impact?
Vision - The Future
The way in which one sees or conceives something; a mental image; An overall
statement of the goal of the organization.
Mission - The Present
An assignment one is sent to carry out; a self-imposed duty. A mission statement
identifies the reason for the existence of the organization. The statement should be
linked to the overall operations and business of the organization.
Vision (Destination)
What’s the destination of the organization? Visualize what the organization would
look like in 5 and 10 years. Describe the detail: who are your customers, what do
your products or services look like, who is your market, what is your revenue, how
many employees do you have, etc. Remember this is the future.
Mission (Vehicle)
What is the focus of your organization? How are you structured to achieve your
organization’s goal or objectives? What are your organization’s values and core
competencies? Remember this is your present operation, you may identify changes
needed to your vehicle in order to reach your destination.
McDonalds Example:
Vision: “To be the world’s best quick service restaurant experience.” (The destination
or the future)
Mission: “Being the best means providing outstanding quality, service, cleanliness,
and value, so that we make every customer in every restaurant smile.” (The vehicle
to reach the destination or the present operation)
B
Growth Markets and High Velocity Markets
Growth Markets:
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Frequent launches of new competitive moves
Contains survivors
Firms are more established
Less variety of strategies
Strategic groups begin to form
Profits take off
Customers more sophisticated
Entry barriers emerge
Strategic Options:
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Must try to grow faster than the market
Drive down costs
Pursue rapid product innovation
Gain access to distribution channels and sales outlets
Expand geographic coverage
Expand product line
High Velocity Markets
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Rapid technological change
Short product life-cycles
Entry of important new rivals
Lots of competitive maneuvering by rivals
Fast evolving customer requirements and expectations
Swirling market conditions
Possible Strategies

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C
Need to figure out how to deal with change
Invest aggressively in R&D to stay on the leading edge of
technological know-how
Keep the companies products and services fresh and exciting
enough to stand out in the midst of all the change that is taking
place
Develop quick-response capability
Rely on strategic partnerships with outside suppliers and with
companies making tie-in products
Initiate fresh actions every few months
Entry barriers and Exit barriers
Barriers to entry
Barriers to entry are designed to block potential entrants from entering a market
profitably. They seek to protect the monopoly power of existing (incumbent) firms in
an industry and therefore maintain supernormal (monopoly) profits in the long run.
Barriers to entry have the effect of making a market less contestable
The economist Joseph Stigler defined an entry barrier as "A cost of producing (at
some or every rate of output) which must be borne by a firm which seeks to enter an
industry but is not borne by firms already in the industry"
This emphasises the asymmetry in costs between the incumbent firm (already inside
the market) and the potential entrant. If the existing businesses have managed to
exploit some of the economies of scale that are available to firms in a particular
industry, they have developed a cost advantage over potential entrants. They might
use this advantage to cut prices if and when new suppliers enter the market, moving
away from short run profit maximisation objectives - but designed to inflict losses on
new firms and protect their market position in the long run.
EXAMPLES OF BARRIERS TO ENTRY
Patents
Giving the firm the legal protection to produce a patented product for a number of
years (see below)
Limit Pricing
Firms may adopt predatory pricing policies by lowering prices to a level that would
force any new entrants to operate at a loss
Cost advantages
Lower costs, perhaps through experience of being in the market for some time,
allows the existing monopolist to cut prices and win price wars
Advertising and marketing
Developing consumer loyalty by establishing branded products can make successful
entry into the market by new firms much more expensive. This is particularly
important in markets such as cosmetics, confectionery and the motor car industry.
Research and Development expenditure
Heavy spending on research and development can act as a strong deterrent to
potential entrants to an industry. Clearly much R&D spending goes on developing
new products (see patents above) but there are also important spill-over effects
which allow firms to improve their production processes and reduce unit costs. This
makes the existing firms more competitive in the market and gives them a structural
advantage over potential rival firms.
Presence of sunk costs
Some industries have very high start-up costs or a high ratio of fixed to variable
costs. Some of these costs might be unrecoverable if an entrant opts to leave the
market. This acts as a disincentive to enter the industry.
International trade restrictions
Trade restrictions such as tariffs and quotas should also be considered as a barrier
to the entry of international competition in protected domestic markets.
Sunk Costs
Sunk Costs are costs that cannot be recovered if a businesses decides to leave an
industry Examples include: " Capital inputs that are specific to a particular industry
and which have little or no resale value " Money spent on advertising / marketing /
research which cannot be carried forward into another market or industry When sunk
costs are high, a market becomes less contestable. High sunk costs (including exit
costs) act as a barrier to entry of new firms (they risk making huge losses if they
decide to leave a market).
Barriers to exit
For many businesses there are also barriers to exit which increase the intensity of
competition in an industry because existing firms have little choice but to “stay and
fight” when market conditions have deteriorated. There are several costs associated
with exiting an industry.
(1) Asset-write-offs – e.g. the expense associated with writing-off items of plant and
machinery, stocks and the goodwill of a brand
(2) Closure costs including redundancy costs, contract contingencies with suppliers
and the penalty costs from ending leasing arrangements for property
(3) The loss of business reputation and consumer goodwill - a decision to leave
a market can seriously affect goodwill among previous customers, not least those
who have bought a product which is then withdrawn and for which replacement parts
become difficult or impossible to obtain.
(4) A market downturn may be perceived as temporary and could be overcome
when the economic or business cycle turns and conditions become more favourable
D
Strategic Alliance and Joint Ventures
Strategic alliances or joint ventures allow you to partner with an existing business to
share the risks and opportunities in a new market.
Joint venture is a union of two or more parties, who contractually agree to contribute
to a specific task for specified time period. Under JV two firms join and form a
separate legal entity and operate ar per partnership Act. The JV can be between
individuals or corporations.
While Stategic Alliance is mutual Coordination of strategic planning and
management in order to achieve long term objectives between two organisations.
Under this, each organisation will work independently and no separate entity is
formed. SA is considered as less risky due to less legality.
A strategic alliance is a form of collaboration between two or more companies
which can take on many forms such as:
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technology transfer
purchasing and distribution agreements
marketing and promotional collaboration
joint product development.
Each partner in the alliance usually retains their independence while contributing
towards a mutual shared goal.
A joint venture involves a potentially long term investment of funds, facilities and
resources by two or more companies to a combined venture, which benefits all
companies. All involved will have an equity stake in the new venture.
A joint venture may be formed to:
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run production facilities in another country
establish a marketing and distribution presence
use complementary technologies held by each participant.
Joint ventures can also be used to get around country trade barriers. In some cases
a joint venture with a local company may be required to enter some overseas
markets.
Short Notes:
1. Global Strategy:
During the last half of the twentieth century, many barriers to international trade fell
and a wave of firms began pursuing global strategies to gain a competitive
advantage. However, some industries benefit more from globalization than do
others, and some nations have a comparative advantage over other nations in
certain industries. To create a successful global strategy, managers first must
understand the nature of global industries and the dynamics of global competition.
Sources of Competitive Advantage from a Global Strategy
A well-designed global strategy can help a firm to gain a competitive advantage.
This advantage can arise from the following sources:

Efficiency
o Economies of scale from access to more customers and markets
o Exploit another country's resources - labor, raw materials
o Extend the product life cycle - older products can be sold in lesser
developed countries
o Operational flexibility - shift production as costs, exchange rates, etc.
change over time
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Strategic
o First mover advantage and only provider of a product to a market
o Cross subsidization between countries
o Transfer price
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Risk
o
o
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Diversify macroeconomic risks (business cycles not perfectly
correlated among countries)
Diversify operational risks (labor problems, earthquakes, wars)
Learning
o Broaden learning opportunities due to diversity of operating
environments
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Reputation
o Crossover customers between markets - reputation and brand
identification
2. Vertical and Horizontal Integration
Integration may take two forms: vertical and horizontal integration.
Vertical integration
Vertical integration strategy involves growth through acquisition of other
organizations in a channel of distribution. When an organization purchases other
companies that supply it, it engages in backward integration. The organization that
purchases other firms those are closer to the end users of the product (such as
wholesalers and retailers) engages in forward integration.
Vertical integration is used to obtain greater control over a line of business and to
increase profits through greater efficiency or better selling efforts.
The degree to which a firm owns its upstream suppliers and its downstream buyers
is referred to as vertical integration. Because it can have a significant impact on a
business unit's position in its industry with respect to cost, differentiation, and other
strategic issues, the vertical scope of the firm is an important consideration in
corporate strategy.
Expansion of activities downstream is referred to as forward integration, and
expansion upstream is referred to as backward integration.
The concept of vertical integration can be visualized using the value chain. Consider
a firm whose products are made via an assembly process. Such a firm may consider
backward integrating into intermediate manufacturing or forward integrating into
distribution, as illustrated below:
Horizontal integration
This strategy involves growth through the acquisition of competing firms in the same
line of business. It is adopted in an effort to increase the size, sales, profits, and
potential market share of an organization. This strategy is sometimes used by
smaller firms in an industry dominated by one or a few large competitors, such as
the soft drink and computer industries.
The acquisition of additional business activities at the same level of the value chain
is referred to as horizontal integration. This form of expansion contrasts with
vertical integration by which the firm expands into upstream or downstream
activities. Horizontal growth can be achieved by internal expansion or by external
expansion through mergers and acquisitions of firms offering similar products and
services. A firm may diversify by growing horizontally into unrelated businesses.
Some examples of horizontal integration include:
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The Standard Oil Company's acquisition of 40 refineries.
An automobile manufacturer's acquisition of a sport utility vehicle
manufacturer.
A media company's ownership of radio, television, newspapers, books, and
magazines.
3. Strategic Audit
It is an operational framework designed to access whether the firm’s corporate
strategy is delivering the desired results. Any strategy that is formulated is generally
speculative & the critical risks or success often lies with the external environment
which is non controllable.
Hence, firms resort to periodic appraisals of the KPI’s & to access performance gaps
and their solution as part of the audit outcome.
Some organizations do strategic audits as a matter of periodic routine while some
forms conduct it when they see negative operating signals.
What are the KPIs?
1. Qualitative and Quantitative performance indicators namely
a. Market Share
b. Net Realisation
c. Profit Margins
2. Stock Price & Earning per share
3. Market penetration, launching of new product ideas and the success there of.
4. Extent of value delivery, brand image & perception by consumers.
5. Are the policies & action plans as per the strategy approach appropriate?
6. Does the strategy build company’s strength and resource capabilities adequate
enough to gain competitive advantage?
7. Whether the company’s strategy is workable for the future.
Implementation of the audit
It aims in understanding whether the strategy employed has helped the company to
meet its benchmarked KPI’s. Following Questions need to be asked as the part of
the audit.
1. Whether strategy is consistent with the firm’s culture, capabilities, values &
ethics.
2. Whether the strategy is structured to achieving stated marketing business
objectives.
3.
Whether the information systems in the company monitor strategic
implementation and provides for real time, business intelligence that helps the firm to
fine tune strategy.
4. Whether there is a consensus within the company’s strategic formulation and
implementation.
5. Whether there is weight balance in the company’s efforts in monitoring the
present & preparing for the future.
6. Whether the strategy deployed is consistent with the actual business priorities of
the firm.
Conclusion:
It is the best way to address & access a wide array of complex and independent
issues that need to be analysed to reap growth and profits fro strategic planning.
Firm also need to periodically visit core value chain activities to ensure that
technology & processes are contemporary & their costs are an industry benchmark.
4. Global and Multi Company Operations
Global Operations:
Nike and Reebok, for example, manufacture their athletic shoes in various
countries thorough out Asia for sale on every continent. Instead of using one
international division to manage everything outside the home country, large
corporations are now using matrix structures in which product units are interwoven
with country or regional units. International assignments are now considered key
for anyone interested in reaching top management.
As more industries become global, strategic management is becoming an
increasingly important way to keep track of international developments and position
the company for long-term competitive advantage.
Multi Company Operations:
The correlation between company size and operating in multiple businesses is not
an accident. After all, most firms that stay in a single business reach a saturation
point in that business sooner or later, and have to make a choice. They can accept
the fact that they are now mature companies and settle into that status, or they can
aspire for more growth, usually by entering new businesses and new markets. While
not every large firm is a General Electric or Siemens, most large firms have
expanded beyond their original markets (both in terms of products and geography).