Strategic Management
University of Mumbai
Strategic management
In a nut shell the total questions which will cover strategic management subject are
1)
Long range planning- step inputs & stages
2)
Porters 5 forces model – attractiveness of Industry e.g industry of your choice.
3)
Usefulness of Vision/mission- statement with e.g Parameters to formulate
Vision/Mission
4)
BCG share growth matrix – as a tool for/to evaluate business /strategic thrust ,
market share, market mix & functional strategies.
Criticism /drawback
5)
Change management
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6)
Diversification with Indian example..
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7)
Strategies/competitive strategy/competitive advantage with E g
Strategic options for gaining competitive advantage
Outline critical success factors & pitfall for each option.
Outline steps in Strategic mgmt process
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10)
Why do companies opt for it
State strategic objectives
Steps in takeover process
Offensive steps to target companies
Hostile takeovers
Differentiation
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9)
Different forms & their stated objectives
Parameters to judge diversification
Mergers & Acquisitions
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8)
Factors /key elements
How is it different from other areas of strategic management
How to implement change mgmt.
To build /consolidate in a changing business scenario
Key elements in the process/main frame work
Strategic audit
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Critical questions covered in the audit
Methods to get information
Aims & conclusion
11)
Short notes
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12)
Value chain analysis
Product differentiation
Strategic business units
Competitive advantage- strategies
Strategic audit
Corporate objectives
Global strategies
Bench marking
Diversification –strategic option
Strategies for Fragmented Industries
Distinguish between
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Competency & core competency
Vertical v/s horizontal integration
Strategic alliance v/s joint ventures
Supplier value chain v/s Forward value chain
Star v/s cash cow in BCG matrix
Entry v/s exit barriers
Offensive v/s defensive strategies
Strategies of market leader v/s market challenger.
Divestment v/s demergers
Portfolio mgmt & restructing diversification.
Global v/s multi country operations
Declining market v/s fragmented market.
Outline steps in Strategic mgmt process To build /consolidate in a changing business
scenario Key elements in the process/main frame work
The term “ STRATEGIC MANAGEMENT “ refers to the managerial process of forming
a)
b)
c)
d)
e)
Strategic vision
Setting objectives
Crafting a strategy
Enabling it to implement & execute the set strategy.
Evaluating Performance
As an ongoing process overtime
one has to initiate whatever corrective
adjustments that may be deemed necessary in the above parameters may be
carried out
Five components in the strategic management process are typically called as the 5task framework
Develop
Mission and
vision
Set Objective
Develop
Mission and
vision
Implement
and execute
Strategy
Continues
improvement
a) Develop strategic vision :
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What is the long term direction
where are we headed to as a company
what
type
of
future
should
we
embrace
in
terms
technology/product/customer focus.
What is the industry standing we wish to achieve in the next five years.
of
Mangers need to take a hard look at the companies internal & external environment
in order to arrive at views & conclusions on the future business scope & focus that
it intends to pursue.This pursuit constitutes the strategic vision for a company &
reflects on the management’s aspiration for the organization & its business. The
strategic vision generally helps direction setting & strategy making value enabling
organization leader to make clear business courses in terms of resource allocation
& strategy to reach the company to its logical goal of being an industry leader.
b) Setting objectives :The purpose of setting objectives is to convert statements of strategic vision &
business mission into specific result oriented targets which has to be achieved .
Objective setting is required by all managers . Every functional unit in a company
needs concrete & measurable performance target that contribute meaningfully
towards achieving company objectives .All managers of each unit are held
accountable for achieving them. Thus building a result oriented climate towards
the enterprise .
The objective may be defined as those relating to
1)
2)
Financial Performance : That is profitability , results of which are extremely
crucial for the long term health & survival of the firm.
Strategic objective: Aims at achieving increased competitiveness & stronger
business position that is gaining market share overtaking competitors on
quality & service , achieving lower cots, improving technology & gaining
International Exposure.
C) Crafting a Strategy :A corporate strategy represents the management’s answers to the fundamental
business objectives of an organisation. For e.g.
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Whether to concentrate on a simple business or have diversified portfolios
Whether to focus on a market Niche of broad base the customer range.
Whether to pursue competitive advantage based on lower cost or superior
technology.
How to respond to changing customer preferences
What type of geographical markets needs to be covered.
A strategy thus reflects managerial choices among its alternatives & signals
focussed commitment to particular product markets , competitive approaches &
ways of operating the enterprise . Hence strategy brings into play the critical
issue of how the targeted results will be achieved .
Strategy continuously evolved & changed depending on continuously changing
trends of technology , products , consumer & competition. Its not a one time
event , that it needs to reform to adopt the changes from time to time & to
prepare for tomorrows market & condition.
d) Implementing/Executing Strategy :The core task of the mgmt here is to develop an organisation capable of carrying
out the strtegy in order to reach targeted objectives & product results . The
process involves
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Allocating company resources I E people & funds.
Establish policies & operating procedures.
Continuously monitor & Fine tune performance & reform strategy wherever
necessary
Motivate people to pursue targeted objectives with a reward structure for
achievement
Create favorable company culture & work climate, conducive to successful
implementation.
Instituting the best practice & program with adequate leadership for continuos
improvement.
Hence strategy execution is fundamentally on action oriented process . The key
task being
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Developing Competencies
Budgeting
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Policy making
Motivating
Culture building &
Innovative leadership.
e) Evaluating performance :Many a times strategies may not be progress as expected or changes in internal
circumstances from time to time require fine tuning & adjustments in the
company’s long term strategy . This may involve
 Revising budgets
 Changing policies
 Re-organizing & revamping activities
 Building new competencies &
 Changing personnel may be typical eg of managerial action to improve strategy
through regular progress review.
It is appropriate to point out that the role of strategy making doesn’t rest solely
with the CEO of the company. Every manager at his /her level is a strategy maker
& implementers for the areas under his supervision . Lower down the hierarchy the
strategy making is more specific & becomes broader as we move up the hierarchy.
Porters 5 forces model – attractiveness of Industry e.g Industry of your choice
Long run success of a company is largely dependant on crafting the right strategy.
To do so the mgmt requires to undertake a solid analysis of the company’s
external environment & internal situation . The two most important consideration
are
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Industrial competitive condition
The firms own competitive capability , resources & market position.
All oragnisation operate in a macro environment consisting of the economy at
large , population lifestyle & value. Government regulations & technology factors
. Even closer to that are the company’s immediate industry & competitive business
environment .
The entire macro environment V/S the organisation may be depicted
following figure.
br the
Structural attractiveness of an industry can be determined by undergoing a
competitive force analysis involving identifying main sources of competitive
pressures & their strengths , management can then devise successful strategies
through a thorough understanding of an industries competitive character.
The best method adopted was the five force model made by Michael porter to
understand the state of Competition in an industry.
Diagram to be drawn
Figure to be drawn
The economy at
large
Legislation &
regulation
Technology
Surplus
Substitutes
Company
Rival firm
Society value and
lifestyles
Buyers
New entrants
Population
demographics
Substitutes
Competition pressure from
Outsiders offering substitutes to win buyers
Surplus
Comp. Pressure
Arising from
Suppler, seller
Bargaining
Rivalry among
competitors – Pressures
created by rallying for
better market position
and advantage
Comp. Pressure
buyer seller
bargaining
Buyers
Comp. Pressure from trait of new rivals
Potential entrants
This model is widely used technique of competition analysis.
1) Rivalry among Competing sellers
The intensity of rivalry among competing sellers depends on how vigorously they
employ tactics such as
 Lowering prices
 Improving with innovative features
 Expand customer service
 Longer warranties Special promotion
 New product introduction
The rivalry can change as also competitive forces depending on how frequently &
aggressively companies undertake fresh moves that threaten Rivals profitability &
gain a competitive advantage. This however is a dynamic & ever changing process
& competitive markets have become economic battle fields . The main factors are
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Rivalry intensifies as number of competitors increase in size & capability.
Rivalry is stronger when demand is growing slowly.
Rivalry is more intense when slack industrial condition tempt competitor to cut
price to boost unit sales.
Rivalry is stronger when cost of switching brands are low.Rivalry tends to be
higher when exit barriers are high.
2) Entry of new Competitors
New entrants in the market bring about increase in production capacity to cater
to the same finite market which brings about increase in competitive pressure .
However a new entrant is also thwarted by two factors namely
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Barriers of entry
Reaction of existing players to the new entry.
The main types of entry barriers could be
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Economies of scale
Cost & resource disadvantage
Inability to match technology & know-how of existing firms.
Brand preferences & customer loyalty
Capital requirements
Access to distribution channels
Regulatory policies
Trade & tariff restrictions
Hence a new entrant needs to evaluate the entry barriers by looking at
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How formidable the entry barrier is vis-a vis
How attractive the profit prospects are in motivating the potential entrant to
commit his resources to overcome such barriers.
Threat of entry is stronger when entry barriers are low.
3) Pressure from substitute products
Firms in one industry are quite often in close competition from firms in another
industry, since their products are good substitutes. For E G Producer of Eye glasses
compete with makers of contact lenses .Competitive pressure from substitute
products depend on three factors
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Whether substitutes are attractively priced
Whether buyers view substitutes as beneficial in terms of quality performance.
Cost of switch is low.
4) Supplier bargaining power
Supplier seller relationship
depending on
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represents
a weak or strong competitive force
Whether supplier exercises sufficient bargaining power to influence terms &
condition of supply in their favour.
Extent of supplier – seller collaboration supplier bargaining power can create
competition pressure under the following condition.
Commodity product supplier has little or no bargaining power since it is
available in the open market from numerous supplier with ample capacities
only when supply position become tight they are in a position to bargain.
Suppliers are regulated to a weak position when there are good substitutes for
their products
Suppliers tend to have less leverage to bargain over price & terms when the
company under supply is a big & major corporate customer
5) Competition pressure from Buyer bargaining power
The circumstances under which buyers have bargaining leverage are
 Their (buyers) numbers are large & they purchase a sizeable % of the output.
 Cost of switching to competing brands or substitutes is low.
 If the numbers of buyers are small or if a customer is important to the seller.
 When buyers are well informed about seller, product, pricing & cost.
Implications of 5- Force model
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The five force model thoroughly exposes a potential entrant to each of the 5competitive pressures in the market , including the strength of each of the
forces & the nature comprising such forces.
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The stranger the collective impact of the 5 forces , the lower the total
profitability of the total industry , hence the competitive structure of an
industry is clearly “UNATTRACTIVE” from profit making point of view. If
rivalry is very strong , entry barriers are low, competition among substitutes are
strong & both suppliers & customers are able to exercise considerable
bargaining leverage.
In contrast when competitive firms are not collectively strong the competitive
structure of the industry is considered attractive or favorable.
For e g the TYRE industry
 Rivalry among sellers is very strong
 No entry barriers exist allowing rivals to gain market share
 Suppliers & customers are able to exercise considerable bargaining
 Threat of substitute in terms of Raw materials always looms large.
( This is the answer for structural attractiveness of industry/ entry barriers)
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Mergers & Acquisitions
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Why do companies opt for it
State strategic objectives
Steps in takeover process
Offensive steps to target companies
Hostile takeovers
Ans)
Strategic objectives of M & A
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Pursuit of gains in terms of efficiency , capability , competitive advantage ina firecely
compewtitive market.
Used as a tool for diversification to expand product portfolio & enter new sectors
The early mover advantage can be established through M & A with no start up time &
ready access to a manufacturing facilities & distribution channel thus giving rapid
foothold in the market.
Economies of scale
Tax advantage- while acquiring a company at time , the sole purpose would be to get
into tax-shield particularly in case if the target company being a sick company.
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
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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.
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.
Vertical Integration strategies
Vertical Integration extends the firms competitiveness within the same industry . It
involves expanding the firm activities backwards into source of supply &/or forward
towards user of the final product.
For e.g – Manufacturer invest in facilities to produce components it formerly purchased
from suppliers .It essentially remain in the same industry goes backward in the value
chain . Similarly a consumer goods manufacturer opts to integrate forwards by opening
100 retail store to sell directly to consumers , it remains in the same business. If it
extends its competitive scope forward in the industry chain.
Vertical integration can be “full Integration” that is participating all stages in the value
chain as partial integration in selected stages. Thus vertical integration has an appeal only
if it achieves greater competitiveness in terms of quality , customer service or enhance
the same.While integrating forward & finally earn bigger profit for the company.
Significant drawback include higher capital investment & increased business risk due to
high exit barriers . Moreover such integration often calls for radically different
capabilities at various ends of the value chain & often outsourcing is cheaper.
The five Distinct Competitive strategic approach
Ans.)
1) Low cost provider strategy
The aim is to operate the business in a highly cost effective manner & open up a
sustainable cost advantage over competition .A company achieves low cost leadership
when it becomes the industries lowest cost producer. Hence pursuing cost reduction in
manner that sabotages the attractiveness of the companies product offering , that will
turn buyers off. The company should achieve low cost advantage In a way difficult for
rivals to match. It should always be sustainable in the long term in order to yield a
valuable edge in the market . A low cost producer has two options
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To underprice competition & attract the price sensitive buyers in larger numbers to
increase total profits
Refrain from cutting price & use the low cost edge to earn higher profit per unit.
Cost advantage may be achieved by performing internal value chain activities more
efficiently than competition or/and bypass some cost producing activity altogether.
Key success factors
Company managers have to scrutinize each cost creating activity to determine what
drives such cost . One has to manage these cost drivers & exhaustively pursue cost
savings in each section of the value chain.
Pitfalls
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On getting carried away by excessive aggressive price cut ending up with lower rather
than higher profitability. This may be due to prices being cut by less than the cost
advantage.
The value of cost advantage is not sustainable in the long run & rivals manage to copy
or match it shortly.
Cost reduction if pursued as a singular goal, may end up with a product offering too
few features that may not appeal to buyers.
2) Differentiation Strategy
The essence of differentiation strategy is to be able to be unique (when buyers needs &
preferences are diverse) in ways that are valuable to customer and that can be sustained.
A firm needs to study buyers needs to learn what they consider as important in terms of
value, attributes and p[product offerings for which they are willing to pay for.
A competitive advantage results once a sufficient number of buyers become attached to
the differentiated attributes resulting in bonding of customers with the company giving
rise to competitive advantage in terms of;
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Firm can command a premium price
Increase unit volume by attracting new buyers
Gain long term buyer loyalty
Enhance profitability through higher pricing/ greater market share attained through
differentiation strategies
e.g. of differentiation are
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Unique taste – e.g. Listerine & Wrigley’s
Multiple features – e.g. MS Office
Superior service – FedEx
Value for money – WALMART
Design & performance – Mercedes
Prestige – Rolex in watches
Reliability/ Quality – Johnson & Johnson in baby products
Differentiation can be created not only through marketing & advertising but also in the
internal value chain for e.g. in raw material procurement, product development &
technology related activities, manufacturing processes, distribution & marketing.
How to achieve differentiation based advantage or success factors
Incorporate superior product attributes & features so as to
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Lower cost
Raise the performance
Enhance buyer satisfaction
Deliver value to customers that rivals cannot match
Pitfalls
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No guarantee that the differentiation will always produce competitive advantage. It
‘value delivered’ to buyer versus ‘value perceived’ may not be match
Differentiation can be easily copied
Over differentiation resulting to too high a price or quality/ service levels in excess of
buyer needs
Not understanding what buyers consider as value
3) Best cost provider Strategy
The most successful best cost producers have competencies and capabilities to
simultaneously manage unit cost downwards & product caliber upwards. This strategy aims
at giving customer MORE VALUE FOR MONEY by satisfying their needs on key attributes
like quality/ service/ performance while exceeding their expectation on price.
In other words the best cost provider must have resources and capabilities to produce
excellent quality at a lower cost than rivals, incorporate better features, match product
performance along with customer service at such cost.
Pitfalls
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The greater danger to a best cost provider is that the user will get squeezed between
firma offering low costs & differentiation strategies
Low cost leaders may be able to draw customers with lower price
While high end differentiation may steal customers with better product attributes
Thus to be successful in strategy the best cost provider must offer buyers a significantly
better product to justify the price changed above the low cost leader
Similarly it has to provide at a lower price than the high end differentiator who is
providing better feature’s for his price
4) Focussed Strategies
Also known as market niche strategies.
Competitive advantage is either
1. Lower cost than competitors in the niche
2. The differentiated strategy i.e. ability to offer niche competitors something unique to
suit their tastes & preferences
Focussed low cost strategies are fairly common for e.g producers of private label goods are
able to achieve low product development marketing distribution and advertising by
concentrating on generic items & selling directly to retail chain wanting a basic brand to
sell to price sensitive shoppers. Pursuing cost advantage via focussing works well when a
firm can lower cost significantly while limiting its customer base.
Most markets contain a buyer segment willing to pay a higher price or premium for finest
items available thus opening a niche for firms to pursue a differentiation strategy at the
very top end of the marketing pyramid. For e.g. Porsche cars.
Success factors
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Target market niche should be big enough and growing to be profitable
Niche should be suited to the firm resource strength’s & capabilities
There should be fewer rivals attempting to specialize in the same segment
Pitfalls
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Merchandising i.e. competition offering similar or more appealing product offerings
thus offsetting focussers strengths
Shifting preferences & needs of niche member over time
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Diversification with Indian e.g.
Different forms & their stated objectives
Parameters to judge diversification
Ans.
Diversification
Defn: Most companies have their business roots in a single industry from where substantial
parts of their revenue & profits usually come from diversification becomes an attractive
strategy when a company runs out of profitable growth opportunities in its core business
.
The purpose of diversification is to build/enhance share holder value. To create share
holder value a diversified company must get into business that can perform better under
common management than as stand alone businesses. Diversifying cos. Will aim to
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Add value for customer
Gain competitive advantage by broadening present business
Transfer existing capabilities to new businesses
Save cost by diversifying into related businesses
There are two forma of diversification
1. Into relate business diversification
2. Unrelated diversification
1. Into relate business diversification
When there is competitively valuable relationship amounts to activities comprising their
respective value chains. It involves adding businesses whose value chains posses similar
‘STRATEGIC FITS’ with the value chain of the existing businesses i.e.
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Firm can transfer expertise & technology from one business to another
Combine activities of separate businesses into a single operation to lower cost
Share common branding
Create enhance resource strength & capabilities through related diversification
Cross business strategic fits can exist along the value chain.
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R&D/ technology – Diversifying into businesses where there is potential for sharing
common technology & its derivatives, transferring technology from one business to
another. This results in potential cost savings & time in R&D & product development
Supply chain – Can perform better together because of potential for transfer of skills in
procuring raw material, greater bargaining power with suppliers for better input costs
Manufacturing – Strategic fits in production related activities can give rise to
competitive advantage when diversifiers expertise in quality & cost efficient methods.
JIT systems, or training can be transferred to another business
Distribution – Business with closely related distribution activities can perform better
together than a part because of cost savings in sharing similar distribution facilities to
access customers
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Sales activities – A variety of cost savings arises from diversifying into businesses with
closely related sales & marketing activities. Sales costs are often reduced by using the
same sales force for both businesses
Advantages
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Related diversification can lead to huge cost savings whenever strategic fit along the
two value chains is achieved to consolidate the overall business position. Such savings is
known as Economies of scale where increase in size of numbers lowers unit cost. While
economies of scope are cross business cost saving opportunities
Related diversification is attractive as opportunity to convert strategic fit between
value chain of two businesses into a competitive advantage over rivals.
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2. Unrelated diversification
Certain companies exhibit a willingness to diversify into ‘ANY INDUSTRY WITH GOOD
PROFIT OPPORTUNITIES’. There is no deliberate effort to seek businesses having strategic
fit.
The basic pre-condition of unrelated diversification is that any company that can be
acquired on good financi9al terms & has satisfactory profit prospects, represents a good
business to diversify into. Unrelated diversification is achieved by entering new
businesses by generally acquiring an established companies whose
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Assets are under valued
Those who are financially distressed cos.
Companies pursuing unrelated diversification across diverse industries are known as
‘CONGLOMERATES’.
Pros of unrelated diversification
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Risk is scattered over diverse industries
Resources can be employed in areas where best profit prospects are offered
Profitabilit6y will be somewhat more stable i.e. hard times in one industry will be
offset good times in other industries
Cons of unrelated diversification
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3)
Diversifying into a business without knowing how to run it
No competitive advantage due to lack of strategic fit in value chain between
businesses
Combination of Related & Unrelated diversification
This is when a company’s core business accounts for 50 – 80% of the total revenues & a
collection of small related & unrelated business account for the remainder.
Strategies for entering new business
1. Acquisition – It is a most popular means of diversifying. Easy to enter target market
offers effective ways to cross entry barriers & gain market for foothold.
2. Internal start-up – Involves creating a new company under existing umbrella to compete
in the desired industry.
3. JV & Strategic partnerships – JVs have two involved partners who get together to pursue
opportunities in new industries central to their corporate strategy. It is a collaborative
arrangement.
Parameters to judge diversification
The main objective of diversification is to increase shareholder value. It is possible to
make an assessment of whether the diversification is warranted or not may be done by the
following methods
1. Industry attractiveness test – The industry chosen for diversification must be attractive
enough to yield good returns on investment. Whether an industry is attractive depends
chiefly on the presence of favorable competitive conditions & the market environment
conducive to long terms profitability.
2. Cost of entry test – The cost to enter the target industry must not be so high so as to
erode the potential for good profitability. However the most attractive the industry ,
the more expensive it is to get into it. Entry barriers if are low, there would be a rush
of new entrants which would erode potential for good profitability. Buying a company
already in the industry with strong fundamentals often entails high acquisition cost.
Hence costly entry undermines the prospects of profitability and diminishes
shareholders value.
3. The better off test – Diversifying into new business must offer potential for the
company’s existing business plus new business to perform better together. Such
outcomes can occur when a form diversifies into businesses that have value chain
strategic fit match with the existing business which will reduce cost, transfer skills/
technology, create new competencies & leverage existing resources. In absence of such
fits firms should be skeptical of diversification.
Diversification that satisfies all three tests have the greatest potential to build shareholder
value. Other moves to diversification which pass less than three tests are suspects
Strategic objectives of Mergers & Acquisitions
1. Pursuit of gain in terms of efficiency, capability, competitive advantage ina fiercely
competitive market.
2. Used as a tool for diversification to expand product portfolios & enter new sectors.
3. The early mover advantage can be established through M&A with no start up time &
ready access to manufacturing facilities & distribution channel, thgus giving rapid
foothold in the market.
4. Economies of scale
5. Tax advantage – While acquiring a company at times the sole purpose would be to get
into tax shield particularly in case if target being a sick company.
Steps in take overs
Options –
1) Target options
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Look for companies with net operating losses but strong turn around prospects
Seek cash rich company which are not exploiting their potential to the fullest or the
undervalued assets.
Seek an under capitalized company where promoters stake is low & mount a hostile
attack (this is also called as hostile take over)
Watch out for family run businesses where promoter has no successor.
2) Estimate the degree of oversubscription by consulting primary market brokers
3) On these basis apply for a quantum of shares , large enough to ensure that the
allotment exceeds promoters stake .
4) Purchase further shares after the script is listed to increase holding.
Secondary market
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Offer shares to be bought out from Financial institutions
Buy out foreign investors & NRI stakes by offering them 10 % premium
Make offer to other Indian share holders as a portfolio managers.
Initiate stock market purchase on all stock exchanges & ensure maximum publicity.
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Strategic audit
Critical questions covered in the audit
Method to get info
Aims & conclusions
Ans.)
Strategic audit
It is an operational framework designed to access whether a firms corporate strategy is
working or not ie it is a method evaluation of decided strategy. Any strategy that is
formulated is speculative
& rest heavily on certain assumption about external
environment , hence periodic appraisal on the performance indicator of the strategy in the
form of an audit informs management whether things are as per plan.
An audit should be conducted when
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Operational signals suggest that there is a problem
Fine tuning is hence required
Key questions
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Is the evidence that strategy is working
- Performance indicator
- Quantitative & qualitative identification of performance & strengths
- Sales earning , stock price , market share , profit margin
- Penetration of new market , products & process
Are objectives & strategies consistent
- Objective policies & actions are the basic corner stones of strategy
- All three should be renewed to ensure consistency in results
-
Is the strategy practical
- Assessment includes the extent to which strategy builds on company’s strength &
whether resources required are adequate
-
Are the assumptions valid while making the strategy
- Many assumptions fail because they are not well conceived & purely on the basis of
beliefs rather than facts.
- Adequate data collection is required internally & externally & same to be
integrated with planning process
Implementation of audit
It aims at identifying the following aspects of strategy :1.
2.
3.
4.
Whether its is consistent with the management’s style , values & preferences.
Whether organization is structured to achieve marketing objective
Whether information system monitor the strategic implementation at all times.
Whether there is a consensus within the company in regards to this strategy.
5. Whether there is a balance between preparing for the future & maximizing the
present.
6. Whether strategy is consistent with the actual priorities of the company.
Conclusion
Strategic audit is the best way to get a wide number of complex & independent issues that
need to be analyzed in order to reap growths & profits from strategic planning.
Methods of Evaluating SBU portfolios

BCG as a tool to evaluate
1. Current business position
2. Areas of strategic thrust, market share, market mix, functional strategies.
3. Drawbacks of the method
Ans.)
SBU – Defn
In the case of highly diversified multi product companies , competitive analysis & strategic
planning is a highly complex problem. However companies can solve this problem by
dividing the organization into manageable profit centers based on product categories or
operational characteristics. Each unit has its independent planning & has to meet its own
performance target within the financial constraints. Firms that separate their product into
such portfolios are called SBUs. Each SBU undertakes strategic planing to match resources
with business potential . It also involves transfer of resources from one portfolio to the
other.
BCG
20%
 Star
Market
Growth
Rate
(Cash 10%
use)
Question Mark
Modest Positive or Negative
Cash Flow
-?
Large Negative Cash
Flow
optimum cash flow
Cash Hogs
Dog -X
$- cash cow
Large Positive Cash flow
4.0
2.0
1.0
0.5
Relative market share
(Cash Generation)
0.25
The four general principals in interpretation are
1. Margins & cash generated depend on market share
2. Sales growth requires cash input to finance working capital & other needs. Hence
participation in growing markets requires cash inputs to maintain share.
3. An increase in market share requires cash input to finance increase advertising
expenditure & added capacities .
4. Growth in each market peaks ultimately on maturity. Cash generated from such
products can be re-invested into still growing products.
Hence under the concept of SBU the strategic issue is how to invest cash generated by
cash cows to finance market share increase for the question marks. If successful , this
strategy produces new stars which inturn will become cash cows in future. Dogs should be
divested preferably if they donot contribute to cash flow.
Uses of BCG matrix
It helps to analyze the competitive position of the various product portfolios
organization.
in an
1. The portfolio display should be examined to see where the products are distributed in
the four quadrants. Products with larger sales should appear as stars or cash cows &
fewer products should appear in question mark. It is desirable that least number of
products should appear as dogs since they are cash traps.
2. Portfolios should be scrutinized over three to five years which will help understand the
portfolio movements & ascertain the effects of current investments & identify future
investment opportunities.
3. The product portfolio can be used to assess competitive strength of various products
particularly in terms of industry position & market leadership.
4. The BCG matrix helps a firm understand the cash needs for each product at any given
time .
Criticisms
1. Cash generation is primarily held dependent on cost differentials (Profit margin) which
is a function of experience curve effects .I E firms with greater experience in a product
has lowest cost of production.
2. The market share- profitability relationship will be diluted if proper segmentation is
not done during analysis.
3. Long range strategic planning should not be done on the basis of this short term
analysis
4. It is not a useful tool for short term or interim assessments.
Change management



Factors /key elements
How to implement
How is it different from other areas of strategic management.
Ans.)
Change is a process that can be schematically represented as
Present State
Pain
Transition
state
Remedy
Desired state
For eg Liberalization , downsizing with VRS , merger & acquisition (change culture)
The pre-requisites of change are
1. Pain – critical mass of information breaks the current status quo.
2. Remedy – certain desirable & accessible action solve the problem or take advantage of
the current status of the situation.
The key issues are



Will the people choose to accept change
If not should you force change
If you do force change will people value the benefit
The major requirement to effect change are






Continuos commitment & involvement of top management
High degree of trust at all levels of organization facilitates change
Patience in terms of time frame to allow benefits of change
Change is always expensive but has to be done if maintaining current status is even
more prohibitive.
Change will result in significant disruptions of peoples expectations , resulting in loss of
control over some important aspects of their lives & environment .
Change consistent with current organization cultures are usually successful
Change Process
Stage 1- Choosing the target actions




Identify possibilities/opportunity
Select the best one
Gain sufficient commitment to initiate the process
Set a target & general direction for efforts by clearly describing future situation
Stage 2- Setting Goals



Test feasibility of making change
Develop specific goals & action plans to achieve targets
Develop clear understanding of future requirements in terms of resources, skills , tools
& timing.
Gain substantial commitment to time & resources required

Stage 3- Implementing action




Initiate the plan
Involve all those who must change . tell them how & why
Shift the working pattern
Demonstrate effectiveness of plan & progress towards goals & tangible proof of
benefits of change.
Stage 4 – Review



Complete the implementation process
Encourage & support people who are making efforts to change
Improve upon the approach based on feedback
Stage 5 – Re balancing & accommodating change


Identify ripple effects of change on department , systems, organization structure
Integrate changes with existing attitudes & systems
Stage 6- Consolidation



Audit accomplishments against original goals
Identify what worked & what didn’t & analyze why
Share the learning process
Leadership in the change process
An effective leader will be a visionary & a catalyst with creativity & intuition who will be
the key driver in the change process .He will effectively target change by planning an
effective path with a conducive climate to initiate the process. He will involve all
concerned to realize the benefits of change & with continuos communication &
commitment with adequate flexibility , he would lead the organization on the path way of
change.


Usefulness of Vision /mission statements
Parameters to formulate mission/vision
Ans.)
A strategic vision is a road map of a company’s future – providing specific info about
technology , customer focus , geographic markets , products to be pursued , capabilities &
competencies to be developed , In short the total organization the management is trying
to create. Thus the chief concerned addressed by strategic vision is “where are we going” .
The mission statement however tends to deal with the current & present business scope –
“who are we & what are we doing”.It stresses on the company’s present products &
services , its customers & as to what technological & business capabilities it has .It does
not say where the company is headed or what its future scope is .
Effective strategy begins with a strategic vision of where the organization needs to head.
& what the company is trying to create. It is not a management jargon but in fact is an
carefully thought out exercise on “Where do we go from here” with a clear commitment to
follow such a path.
The three elements of strategic vision are



Coming up with an appropriate mission statement which defines the current business
in the essence of “ who are we , what do we do & where are we now”.
Using mission statement as a basis for deciding “long term course “ while making a
choice about “ where we are going”. I E charting a strategic path for the company to
pursue
Communicating the strategic vision in clear exciting terms
so as to arouse
organizational commitment
The mission statement is the starting point for forming a strategic vision. One of the roles
of the mission statement is to give the organization its own special identity , business
emphasis & path for development – one that typically sets it apart from similarly situated
company .A strategically revealing mission statement incorporates the following



What is being satisfied i.e. customer needs
Who is being satisfied – which customer segments
How the enterprise intends to create & deliver value to its customers
Technology, competencies & activities in a mission statement are important in defining a
company’s business because they indicate the boundaries of operation. Diversified
companies would have broader missions & business definitions than single business
enterprises.
It is also possible to put in place a mission statement for key department’s within a
business indicating the direction where each department is headed in its overall
contribution to the company’s business.
It is also critical to convert the mission statement into a strategic vision which should have
a time horizon of Five years plus subject to volatile market conditions. However this
conversion needs to address the following issues




What changes could occur in the market in these five plus years & what are then
implications
Changing consumer needs & buyer segments
New products & geographic markets
What should the company’s business make up look like in five years & what are we
trying to become .
It is a course of astute entrepreunership in developing a strategic vision in a creative
manner to prepare the company for the future. A well chosen strategic vision helps
company’s not just to survive but to remain successful
It is equally important to communicate the strategic vision to lower level managers & all
employees to convey the sense of purpose while setting the organizations long term
direction. People need to believe that the management knows where it is trying to take
the company & see the changes that lie ahead both internally & externally. Most
organization members will rise to this challenge provided the purpose is worthy &
beneficial to customers .
Many firms put their vision statements in writing which is crisp & clear & conveys the
unmistakable meaning while illuminating the direction in which the firm is headed. Hence
a well conceived strategic vision will result in the following



Gives the firm long term direction & reduces rudderless decision making
Conveys firms purpose clearly & motivates all members
It provides a guiding light for all departments to set departmental objectives to
synergise overall strategy to prepare for the future.
Short notes on
1) Global strategies:
Companies expand into foreign markets for the following reasons:




To
To
To
To
gain access to the new customers
achieve lower cost and enhance firm’s competitiveness
capitalize a core competencies
spread business risk across the wider mkt. base
A Company is considered as a global competitor when it is pursuing or has mkt. presence in
most continence and virtually in all major countries.
The main concerns faced by companies competing in foreign mkt. are cross country
variation in culture, demographic and mkt. conditions besides having into customized their
offerings in each country differently in order to match local preferences. Global companies
however offer standardized product worldwide which leads to scale economies and
experience curve effects contributing to low cost advantage.
Global competition exists when competitor conditions across national mkt. are linked
together strongly enough to form a truly international mkt. In global competition a firm’s
competitive advantage grows out of its worldwide operations, a competitive advantage
created at home is supplemented by advantages growing out of its operations in other
countries. E.g. of global competitions are, automobiles, t.v. tyres, watches and aircraft.
The key strategic options for competing globally are,

Export from single country production base or license to foreign firms or employ
franchising. These are generic strategies wherein country to country variation is
minimum.

Employ a global low cost strategy to gain cost leadership over global and local rivals.

Opt for global differentiation strategy, thus endeavoring to set itself apart from rivals
and create an image and mkt. position on this basis.

Follow a global best cost strategy and strive to provide bias the best value.

Adopt a global focused strategy serving certain select niches in each strategically
important mkt.
Hence key aspects of global strategy are aimed at,


Same strategy and product standards worldwide
Plans located on the basis of maximum competitive advantage i.e. low cost countries,
close to major mkt. and dispersed in order to minimize transport cost.
2) Benchmarking:
Benchmarking is a tool that allows a company top determine whether the manner in which
it performs various functions and activities compare with the industry’s best practices in
terms of costs and effectiveness. Benchmarking entails doing cross company comparison on
how basic functions and activities in the value chain are performed i.e. how materials are
purchased, how inventories are managed, how products are assembled, how fast
companies enter the new markets with new products, how quality control is performed,
how employees are trained, how distribution is done and how maintenance is performed.
The way in which the above activities are performed and the costs associated with these
activities are compared with leaders in the field. The objectives of benchmarking are to
identify the best practices in performing the activity and to learn how other companies
who are leaders achieve lower cost and better results in the said activities across the value
chain.
The analysis that benchmarking will reveal will give managers an idea where they have to
take action to improve company’s competitiveness in terms of costs and results vis a vis
the competition. Thus benchmarking has proven to be a potent tool for learning which
companies are best at performing particular activities and then utilizing their best practice
techniques to improve cost and effectiveness of company’s own activities.
The tough part of benchmarking is gaining access to information about other company’s
practices and costs. This information can be complied from public reports, trade groups,
research firms, industry analyst, customers and suppliers.
3) Value Chain Analysis:
A Company’s value chain identifies the primary activities that create value for customers
and related support activities. The value chain consist of separate activities, functions and
business processes that are performed in designing, producing, mktg. and supporting a
product or service. The chain of value creating activity starts with raw material supply i.e.
supplier’s value chain, continues through component production, manufacturing and
assembling, distribution to the end user i.e. forward value chain.
Company’s value chain shows the linked set of activities and functions that performs
internally as shown in the diagram
Primary activities and costs
Distributor Value chain
(Supplier Value chain)
Company VC
Purchased
supplies
Support
activities
And
costs
Operation
s
Distribution
/ logistics
Sales /
mktg.
Customers value chain
Service
Profit
margin
Product R&D, Technology, and systems Development
Human Resources Management
General Administration
The value chain includes profit margin because the mark up over the cost of performing
firm’s value creating activities is a part of the total cost to be born by the buyer. Further,
creating value that exceeds the cost of creating it is the fundamental objective of
business. Each activity in the value chain incurs cost and ties up assets and it is essential to
arrive at cost estimates for each activity in the chain.
A company’s cost competitiveness depends not only on cost of internally performed
activities i.e its own value chain but also on cost of value chain of suppliers and forward
channel allies. Thus managers need to understand the entire value chain system in order to
access the company’s competitiveness in end use mkts.
Supplier’s value chain are relevant because supplier’s perform activities and incur cost in
creating and delivering the purchased units used in the company’s own value chain, costs
and quality of such inputs influence company’s own costs and capabilities. Hence
companies need to reduce its supply costs and supply effectiveness to enhance its own
competitiveness.
Forward channel value chains are relevant because,


The cost and margins of down strains companies i.e. distributors and strategic partners
are part of the price paid by the customer/end user.
The activities that forward channel allies perform effect end user’s satisfaction
Thus a company should work closely with forward channel allies to revise or reinvent their
value chains to enhance mutual competitiveness. A company may also improve its
competitiveness by undertaking activities that beneficially impact both its value chain and
customer value chain.
Actual value chains vary with industry, type of company and products. Value chain analysis
is a tool to achieve strategic cost analysis for each and every function performed as
compared to cost incurred.
4) Strategies for fragmented industries:
Typical features in a fragmented industry are,






No. of players are small or large but total mkt. size is small
There is distinct, absence of a mkt. leader since no one firm as a substantial of industry
sales
Low entry barriers, allow small firms to enter quickly and cheaply.
Buyers require relatively small quantities of customized products
Many paths of specialization have been formed in the industry’s value chain
Industry is young with aspiring contenders with undeveloped resource base and
capabilities.
In fragmented industries, growth rates are slow as the mkt. matures. If the competition is
stiff, then the growth is even slower and weak, inefficient firms are weeded out.
Competitive rivalry in fragmented industry can be moderately strong to fierce. Suitable
strategy options include;




Become a low cost operator – since price competition is intense and margins under
pressure, companies with no frill operations featuring low overheads, high productivity
and small capital budgets can stand out as low cost producers who can play a price
discounting game and still earn profits above industry avg.
Specializing by product type – when a fragmented industry products include a range of
styles/services, a strategy to focus on one product or service can be very effective.
Specialization by customer type – a firm can carve out a market niche by offering to
customers who are interested in low prices , unique attributes , customized features &
better service
Focusing on limited geographic area – even though a firm is in a fragmented industry
& cannot win total country wide sale s, it can still attempt to dominate a regional
geographic area.Concentrating company’s effort on a limited territory can produce
better operating efficiency , brand awareness through saturated advertising while
avoiding dis-economies of stretching operations over a wider area.
5)
Competitive advantage strategies
write Porter five force GENERIC MODEL.
6) Environment scanning
involves studying & interpreting the sweep of social , political , economic , ecological &
technological events in an effort to spot emerging trends & conditions that could become
key driving forces. It involves time frames in excess of three to five years for e g
Forecasting demand for electric power 10 years hence or how will people communicate in
the future or how will income levels & consumer habits change .
Environmnet scanning thus attmepts to spot futuristic possibilities & their implications
.The purpose of environment scanning is to raise consciosness of managers about potential
developments that could have an important impact on industry & pose new opportunity or
threats.
ES can be accomplished by systematically monitoring & studying current events &
constructing future scenarios . These methods are highly qualitative & subjective & despite
its speculative nature it helps managers lengthen the planning horizon, translate vague
issues for future opportunities or threats into clearer strategic issues .
Distinguish Between
Competence & Core competence
A company’s competence is the product of learning an experience & represents real
proficiency in performance of internal activities. such competencies have to be consciously
built & developed overtime. Such efforts entails selecting people with the required skill &
knowledge upgrading capabilities within the co-op group effort to create a capability
which can perform consistently at an acceptable cost. Thus competence consist of a
bundle of skills , know-how , resources & technology as opposed to a single discrete
activity
Core competence is something that a company does well relative to the other internal
activities .The core competency as opposed to the normal competence is that it si central
to the company’s competitiveness & profitability. It can relate to any of the many aspects
of the business for e g Good after sales service. Core competency gives a company
competitive capability & it resides within its people I e the intellectual capital & not in
the assets. Thus knowledge & Intellectual capital both intangible resources are key
ingredients of core competency & firms competitive ability.
A company’s core competency represents a DISTINCTIVE COMPETENCY when such
competency is superior relative to competitors capability. Hence a core competency
becomes a basis for competitive advantage only when it is a distinctive competency.
Vertical Integration V/S Horizontal integration
Vertical Intg extends a firms competitive scope within the same industry .It involves
expanding the firms range of activities backward into sources of supply &/or forward
towards end users of the final product. Thus if a manufacturer invest in production
facilities to produce certain components that was formerly outsourced , it essentially
remains in the same industry & is an eg of backward integration. Similarly forward
integration can be done by a firm by opening retail shops to market its own products.
Horizontal integration occurs when a firm extends its competitive scope by diversifying
into totally different industries .In this case it is not in a position to utilize its
competencies develop in the existing value chain & relies totally on developing new
competencies & abilities in the unrelated industry. This can be done in a short period of
time by acquiring a ready & established firm which enables it to get ready access to all
aspects in the value chain of the new industry as well as market foothold.
Strategic alliances V/S Joint ventures
Joint ventures typically entail forming a new corporate entity owned by the partners
normally two partners who join together to pursue opportunities that were some what
peripheral to the strategic interest of both partners. Very few companies have used joint
ventures to diversify into new industries central to their corporate strategy. JV s are some
times the only way to gain entry into foreign markets where entry is restricted by govt. &
company’s must secure local partner to enter . JVs with local partners are a useful way to
surmount tariff barriers & quotas
In recent years strategic alliances have replaced joint ventures as the favored mechanism
for joining forces to pursue strategically important diversification opportunities .They also
readily accommodate multiple partners & are more flexible & adaptable to changing
market situations. Strategic alliances involve pooling of resources & competencies of two
or more independent organizations to generate capabilities required to succeed.
Offensive V/S defensive strategies
Offensive strategies are basically employed to achieve competitive advantage that cannot
be easily broken by rivals in areas of cost advantage , differentiation advantage & resource
advantage. Offensive strategies are used to CREATE AN ADVANTAGE & SUSTAINABLE
EGDE .It involves a build up period where the moves produce competitive advantage
followed by a benefit period where the size of advantage is achieved after which there is
an erosion period where rivals counter attack to narrow the gap. One of the most powerful
offensive a strategies is to challenge rivals with a better product at a lower price ,
leapfrogging into next generation technology , expanding product line s& developing
customer service capabilities that rivals do not have.
The purpose of defensive strategy is to lower the risk of being attacked , weaking the
impact of any attack that may occur .However the foremost purpose of defensive strategy
is to protect competitive advantage & fortify firms competitive position . The two basic
approaches are
 Block challengers option for initiating an attack by may be introducing new features &
broaden product lines to close of gaps & niches
 Signaling that retaliation is imminent by may be cutting price increasing capacities &
generally announce management commitment to defend its present share.
Strategies for market leaders V/S Challengers
The main strategic concern for a leader revolves around how to defend & strengthen its
leadership position by becoming a DOMINANT LEADER as opposed to just a leader. The
strategic posture adapted by market leader are

offensive strategy – it rests on the principle of being the first mover & staying a step
ahead of the competition forcing rivals to be in the reactive catch up mode

Fortify & defend – The essence here is to make it harder for challengers to gain ground
or new firms to enter. The goals here are to hold on to present share strengthen market
position & protect competitive advantage by introducing more product versions ,
improve product attributes ,fill vacant niches & by keeping prices reasonable for the
best quality

Muscle flexing strategy – here the dominant player is fiercely competitive when
smaller rivals resort to undercutting price or mount market offensives to threaten its
position. specific responses could be exceed challengers price cut , increase advertising
campaigns & offering better deals to customers .
Market challengers are the up & coming firms which employ offensive strategies to gain
market share & build stronger market position. Strategies employed include







Pioneer a technology break through
Get newer & better products to adapt to changing market conditions
Use price cuts to win over customers from high cost , high price rivals .To be able to
do this challenger firm must pursue aggressive cost reduction in its own value chain
Craft attractive differentiation strategy based on quality, technology , customer
service , product innovations etc.
Increase market share & competitive position via acquiring smaller rivals to forma a
bigger enterprise plus enhancing strength
Focussed niche strategy by identifying gaps & vacant niches
Be a content follower & refrain from initiating any of the above & continue to react
from time to time.
Entry barriers & Exit barriers
New entrants to the market bring with them a new production capacity , a desire to
establish a secure place in the market & some time s substantial resources to compete . A
barrier to entry exists whenever it is hard for anew comer to break into the market or the
economic factors that needs to be surmounted which poses a disadvantage to the new
entrant relative to the competition. Entry barriers may be classified as :







Economies of scale deter entry because they force new players to enter on a large
scale which is costly or accept cost disadvantage /lower profitability which is risky.
Existing firms will have cost & resource advantages due to learning curve effects
Successful entry may require complex technology & know how not readily available to
the new comer.
Brand preferences & customer loyalty are often attached to establish brands & the
cost that the entrant incurs to force the switch is high.
Capital requirements would be high in terms of plant , technology , advertising &
start up period
Access to distribution channels – potential entrant may have to “buy” such access .
Regulatory policies , tariffs & trade restrictions
Exit barriers are higher when it is more costly to abandon the market than to stay &
compete . Rivalry hence tends to get more vigorous when it cost more to get out of the
business than to stay in & compete, even though they may be earning lower profits or
even making losses.
Divestment & Demerger
In multi product , highly diversified companies , it is essential to regularly study which
products & businesses are doing well in terms of competitive positions , market share &
ability to generate cash & profits . This can be done if then products are grouped into
portfolios &/or SBUs based on similarity in characteristics & operations . By using tools like
BCG share growth matrix & the nine cell GE mckinsey screen matrix , it is possible to plot
the above parameters over a period of time .
If a business or product exhibits poor financial fit & soaks up a disproportionate share of
the company financial resources , if it is a below sub-par bottom line contributor &
threatens to jeopardize the entire enterprise then such portfolios /product may be
divested i.e. withdrawn/discontinued or sold of for the best possible price.
De-merger is a major restructuring activity for delivering value to share holder. It involves
spinning of part of the diversified co. into a new co. an undertaking free distribution of the
shares of the spun off co. to the original shareholders of the original co. Eg. Sandoz demerged its industrial chemical business into a new co. Clariant India Ltd. Unlike divesting,
the parent co. does not receive any proceeds of the de-merger since the de-merged co.
shares are directly distributed to co. shareholders.
Hence, the major motives of de-merger are to close the value gap, improve mgmt. Focus
and avoid cross subsidisation between business portfolio