Busiess Strategy

Strategic Management

(1) The concept of Strategy

Introduction – The top management of an organization is

concerned with the selection of a course of action from among

different alternatives to meet the organizational objectives. The

process by which objectives are formulated aand achieved is

known as strategic management and strategy acts as the means to

achieve the objective. Strategy is the grand design or an overall

‘plan’ which an organization chooses in order to move or react

towards the set of objectives by using its resources. Strategies most

often devote a general programme of action and an implied

deployed of emphasis and resources to attain comprehensive

objectives. An organization is considered efficient and

operationally effective if it is characterized by coordination

between objectives and strategies. There has to be integration of

the parts into a complete structure. Strategy helps the organization

to meet its uncertain situations with due diligence. Without a

strategy, the organization is like a ship without a rudder. It is like a

tramp, which has no particular destination to go to. Without an

appropriate strategy effectively implemented, the future is always

dark and hence, more are the chances of business failure.

Meaning of strategy – The word ‘strategy’ has entered in the

field of management from the military services where it refers to

apply the forces against an enemy to win a war. Originally, the

word strategy ha s been derived from Greek, ‘strategos’ which

means generalship. The word as used for the first time in around

400 BC. The word strategy means the art of the general to fight in

war.

The dictionary meaning of strategy is “the art of so moving or

disposing the instrument of warfare as to impose upon enemy, the

place time and conditions for fighting by one self”

In management, the concept of strategy is taken in more broader

terms. According to Glueck, “Strategy is the unified,

comprehensive and integrated plan that relates the strategic

advantage of the firm to the challenges of the environment and

is designed to ensure that basic objectives of the enterprise are

achieved through proper implementation process”

This definition of strategy lays stress on the following –

a) Unified comprehensive and integrated plan

b) Strategic advantage related to challenges of environment

c) Proper implementation ensuring achievement of basic

objectives

Another definition of strategy is given below which also relates

strategy to its environment. “Strategy is organization’s pattern of

response to its environment over a period of time to achieve its

goals and mission”

This definition lays stress on the following –

a) It is organization’s pattern of response to its environment

b) The objective is to achieve its goals and missions

However, various experts do not agree about the precise scope of

strategy. Lack of consensus has lead to two broad categories of

definations:strategy as action inclusive of objective setting and

strategy as action exclusive of objective setting.

Strategy as action, inclusive of objective setting –

In 1960’s, Chandler made an attempt to define strategy as “the

determination of basic long term goals and objective of an

enterprise and the adoption of the courses of action and the

allocation of resources necessary for carrying out these goals”

This definition provides for three types of actions involved in

strategy :

a) Determination of long term goals and objectives

b) Adoption of courses of action

c) Allocation of resources

Strategy as action exclusive of objective setting –

This is another view in which strategy has been defined. It states

that strategy is a way in which the firm, reacting to its

environment, deploys its principal resources and marshalls its

efforts in pursuit of its purpose. Michael Porter has defined

strategy as “Creation of a unique and valued position involving

a different set of activities. The company that is strategically

positioned performs different activities from rivals or performs

similar activities in different ways”

The people who believe this version of the definition call strategy a

unified, compreshensive and integrated plan relating to the

strategic advantages of the firm to the challenges of the

environment

After considering bothe the views, strategy can simply be put as

management’s plan for achieving its objectives. It basically

includes determination and evaluation of alternative paths to an

already established mission or objective and eventually, choice of

best alternative to be adopted

Nature of Strategy –

Based on the above definations, we can understand the nature of

strategy. A few aspects regarding nature of strategy are as follows

–

· Strategy is a major course of action through which an

organization relates itself to its environment particularly the

external factors to facilitate all actions involved in meeting the

objectives of the organization

· Strategy is the blend of internal and external factors. To meet the

opportunities and threats provided by the external factors, internal

factors are matched with them

· Strategy is the combination of actions aimed to meet a particular

condition, to solve certain problems or to achieve a desirable end.

The actions are different for different situations

· Due to its dependence on environmental variables, strategy may

involve a contradictory action. An organization may take

contradictory actions either simultaneously or with a gap of time.

For example, a firm is engaged in closing down of some of its

business and at the same time expanding some

· Strategy is future oriented. Strategic actions are required for new

situations which have not arisen before in the past

· Strategy requires some systems and norms for its efficient

adoption in any organization

· Strategy provides overall framework for guiding enterprise

thinking and action

The purpose of strategy is to determine and communicate a picture

of enterprise through a system of major objectives and policies.

Strategy is concerned with a unified direction and efficient

allocation of an organization’s resources. A well made strategy

guides managerial action and thought. It provides an integrated

approach for the organization and aids in meeting the challenges

posed by environment

Essence of Strategy –

Strategy, according to a survey conducted in 1974, includes the

determination and evaluation of alternative paths to an already

established mission or objective and eventually, choice of the

alternative to be adopted. Strategy is characterized by four

important aspects –

· Long term objectives

· Competitive Advantage

· Vector

· Synergy

Strategy v/s Policies

Strategy has often been used as a synonym of policy. However,

both are different and should not be used interchangeably

1. Policy is the guideline for decisions and actions on the part of

subordinates.

2. It is a general statement of understanding made for

achievement of objectives.

3. Policies are statements or a commonly accepted

understanding of decision making.

4. They are thought oriented.

5. Power is delegated to the subordinates for implementation of

policies.

6. In general terms, policy is concerned with course of action

chosen for the fulfillment of the set of objectives.

7. It is an overall guide that governs and controls managerial

actions.

8. Policies may be general or specific, organizational or

functional, written or implied.

9. They should be clear and consistent.

10. Policies have to be integrated so that strategy is

implemented successfully and effectively.

For example, when the performance of two employees is similar,

the promotion policy may require the promotion of the senior

employee and hence he would be eligible for promotion.

1. Strategies on the other hand are concerned with the direction in

which human and physical resources are deployed and applied

in order to maximize the chances of achieving organizational

objectives in the face of environmental variable.

2. Strategies are specific actions suggested to achieve the

objective.

3. Strategies are action oriented and everyone in the organization

are empowered to implement them.

4. Strategy cannot be delegated downward because it may require

last minute decisions

5. Strategies and policies both are the means towards the end.

6. In other words, both are directed towards meeting organizational

objectives.

7. Strategy is a rule for making decision while policy is contingent

decision.

Strategy v/s Tactics

Strategies are on one end of the organizational decisions spectrum

while tactics lie on the other end.

Carl Von Clausewitz , a Prussian army general and military

scientist defines military strategy as making use of battles in the

furtherance of the war and the tactics as “the use of armed forces

in battle”. A few points of distinction between the two are as

follows –

i)Strategy determines the major plans to be undertaken while tactics

is the means by which previously determined plans are executed

ii) The basic goal of strategy according to military science is to

break the will of the army, deprive the enemy of the means to

fight, occupy his territory, destroy or obtain control of his

resources or make him surrender. The goal of tactics is to achieve

success in a given action and this forms one part of a group of

related military action

iii) Tactics decisions can be delegated to all the levels of an

organization while strategic decisions cannot be delegated too low

in the organization. The authority is not delegated below the levels

than those which possess the perspective required for taking

decisions effectively

iv) Strategy is formulated in both a continuous as well as irregular

manner. The decisions are taken on the basis of opportunities, new

ideas, etc. Tactics is determined on a periodic basis by various

organizations. A fixed time table may be made for following

tactics.

v) Strategy has a long term perspective and occasionally it may

have a short term duration. Thus, the time horizon in terms of

strategy is flexible but in case of tactics, it is short run and definite.

vi) The decisions taken as part of strategy formulation and

implementation have a high element of uncertainty and are taken

under the conditions of partial ignorance. In contrast tactical

decisions are more certain as they work upon the framework set by

the strategy. So the evaluation of strategy is difficult than the

evaluation of tactics.

vii)Since an attempt is made in strategy to relate the organization

with its environment, the requirement of information is more than

that required in tactics. Tactics use information available internally

in an organization

viii) The formulaltion of strategy is affected considerably by the

personal values of the person involved in the process but the same

is not the case in tactics implementation

ix) Strategies are the most important factor of organization because

they decide the future course of action for organization as a whole.

On the other hand tactics are of less importance because they are

concerned with specific part of the organization

Levels of Strategy

It is believed that strategic decision making is the responsibility of

top management. However, it is considered useful to distinguish

between the levels of operation of the strategy.

Strategy operates at different levels vis-à-vis:

· Corporate level

· Business level

· Functional level

There are basically two categories of companies – one, which have

different businesses organized as different directions or product

groups known as profit centres or strategic business units (SBUs)

and other, which consists of companies which are single product

companies. Eg. Reliance Industries and Ashok Leyland Limited.

The SBU concept was introduced by General Electric Company

(GEC) of USA to manage product business. The fundamental

concept in the SBU is the identification of dicrete independent

product/market segments served by the organization. Because of

the different environments served by each product, a SBU is

created for each independent product/segment. Each and every

SBU is different from another SBU due to the distinct business

areas (DBAs) it is serving.

Each SBU has a clearly defined product/market segment and

strategy. It develops its strategy according to its own capabilities

and needs with overall organizations capabilities and needs. Each

SBU allocates resources according to its individual requirements

for the achievement of organizational objectives. As against the

multi product organizations, the single product organizations have

single strategic business unit. In these organizations, corporate

level strategy serves the whole business. The strategy is implanted

at the next lower level by functional strategies. In multiple product

company, a strategy is formulated for each SBU (known as

business level strategy) and such strategies lie between corporate

and functional level strategies.

The three levels are explained as follows –

Corporate level strategy –

At the corporate level, strategies are formulated according to

organization wise policies. These are value oriented, conceptual

and less concrete than decisions at the other two levels. These are

characterized by greater risk, cost and profit potential as well as

flexibility. Mostly, corporate level strategies are futuristic,

innovative and pervasive in nature. They occupy the highest level

of strategic decision making and cover the actions dealing with the

objectives of the organization. Such decision are made by top

management of the firm. The examples of such strategies include

acquisition strategies, diversification, structural redesigning, etc.

The board of directors and chief executive officer are the primary

groups involved in this level of strategy making. In small and

family owned businesses, the entrepreneur is both the general

manager and the chief strategic manager

Business Level Strategy –

The strategies formulated by each SBU to make best use of its

resources given the environment it faces, come under the gamut of

business level strategies. At such a level, strategy is a

comprehensive plan providing objectives for SBUs, allocation of

resources among functional areas and coordination between them

for achievement of corporate level objectives. These strategies

operate within the overall organizational strategies i.e within the

broad constraints and policies and long term objectives set by the

corporate strategy. The SBU managers are involved in this level of

strategy. The strategies are related with a unit within the

organization. The SBU operates within the defined scope of

operations by the corporate level strategy and is limited by the

assignment of resources by the corporate level. However, corporate

strategy is not the sum total of business strategies of the

organization. Business strategy relates with the “how” and the

corporate strategy relates with the “what”. Business strategy

defines the choice of product or service and market of individual

business within the firm. The corporate strategy has impact on

business strategy.

Functional level Strategy

This strategy relates to single functional operation and the

activities involved therein. This level is at the operating end of the

organization. The decisions at this level within the organization are

described as tactical. The strategies are concerned with how

different functions of the enterprise like marketing, finance,

manufacturing, etc contribute to the strategy of other levels.

Functional strategy deals with a relatively restricted plan providing

objectives for specific function, allocation of resources among

different operations within the functional area and coordination

between them for achievement of SBU and corporate level

objectives

Sometimes a fourth level of strategy also exists. This level is

known as the operating level. It comes below the functional level

strategy and involves actions relating to various sub functions of

the major function. For example, the functional level strategy of

marketing function is divided into operating levels such as

marketing research, sales promotion, etc

The three levels of strategies have different characterstics as shown

below –

Dimensions Levels

Corporate Business Functional

Impact Significant Major Insignificant

Risk

Involved

High Medium Low

Profit

potential

High Medium Low

Time

Horizon

Long Medium Low

Flexibility High Medium Low

Adaptability Insignificant Medium Significant

Importance of strategy –

With the increase in the pressure of external threats, companies

have to make clear strategies and implement them effectively so as

to survive. There have been companies like Martin Burn, Jessops,

etc that have completely become extinct and some companies

which were not existing before they became the market leaders like

Reliance, Infosys, etc. The basic factor responsible for

differentiation has not been governmental policies, infrastructure

or labour relations but the type of strategic thinking that different

companies have shown in conducting the business

Strategy provides various benefits to its users:

· Strategy helps an organization to take decisions on long range

forecasts

· It allows the firm to deal with a new trend and meet competition

in an effective manner

· With the help of strategy, the management becomes flexible to

meet unanticipated changes

· Efficient strategy formulation and implementation result into

financial benefits to the organization in the form of increased

profits

· Strategy provides focus in terms of organizational objectives and

thus provides clarity of direction for achieving the objectives

· Organizational effectiveness is ensured with effective

implementation of the strategy

· Strategy contributes towards organizational effectiveness by

providing satisfaction to the personnel

· It gets managers into the habit of thinking and thus makes them,

proactive and more conscious of their environment

· It provides motivation to employees as it paves the way for them

to shape their work in the context of shared corporate goals and

ultimately they work for the achievement of these goals

· Strategy formulation and implementation gives an opportunity

to the management to involve different levels of management in

the process

· It improves corporate communication, coordination and

allocation of resources

With all the benefits listed above, it is quite clear that strategy

forms an integral part of an organization and is the means to

achieve the end in an efficient and effective manner.

2) Process of Strategy

The process of strategy is cyclical in nature. The elements within it

interact among themselves. The figure presents the process for

single SBU firm and multiple SBU firm respectively. The process

has to be adjusted for multiple SBU firms because there it is

conducted at corporate level as well as SBU levels as these firms

insert SBU strategy between corporate strategy and functional

strategy. Initially, the process of strategy was discussed in terms of

four phases which are –

1) Identification phase

2) Development phase

3) Implementation phase

4) Monitoring phase

The process of strategy does not have the same steps as stated by

different authors. According to C.K.Prahalad, the process

comprises of five steps. They are –

1) Strategic Intent

2) Environmental Analysis

3) Evaluation of strategic alternatives and choice

4) Strategy implementation

5) Strategy evaluation and control

For our understanding we divide the process into the following

steps –

1) Strategic Intent

2) Environmental and Organizational Analysis

3) Identification of strategic alternatives

4) Choice of strategy

5) Implementation of strategy

6) Evaluation & Control

1) Strategic Intent –

Setting of organizational vision, mission and objectives is the

starting point of strategy formulation. The organizations strive for

achieving the end results which are ‘vision’,‘mission’, ‘purpose’,

‘objectives’, ‘goals’, ‘targets’, etc

The hierarchy of strategic intent lays the foundation for the

strategic management of any organization. The strategic intent

makes clear what an organization stands for. It is reflected through

vision, mission, business definition and objectives. Vision serves

the purpose of stating what an organization wishes to achieve in

long run. The process of assigning a part of a mission to a

particular department and then further sub dividing the assignment

among sections and individuals creates a hierarchy of objectives.

The objectives of the sub unit contribute to the objectives of the

larger unit of which it is a part. From strategy formulation point of

view, an organization must define, ‘why’, it exists, ‘how’ it

justifies that existence, and ‘when’ it justifies the reasons for that

existence. The answers to these questions lies in the organization’s

mission, business definition, objectives and goals. These terms

become the base for strategic decisions and actions.

Strategic process in a single SBU firm

Defining vision,

mission and business

Organizat

ional Analysis

Setting

objectives and

goals

Identifying

alternative

strategies

Choice of strategy

Implementation of

strategy

Strategy

evaluation and

control

Environmental

Analysis

Feedback

Vision and Mission – The vision of an organization is the

expectation of the owner of the organization and putting this vision

into action is mission. Mission has a societal orientation and is a

statement which reveals what an organization intends to do for the

society. It is a public statement which gives direction for different

activities which organizations have to carry on. It motivates

employees to work in the interest of the organization.

Objectives and Goals – Organizational objectives are defined as

ends which the organization seeks to achieve by its existence and

operation. Objectives represent desired results which the

organization wishes to attain. An organization can have objectives

in terms of profitability and productivity. Objectives provide a

direction to the organization and all the divisions work towards

the attainment of the set objectives. Objectives and goals are the

terms which are used interchangeably.

It is necessary for the organization to assess the process identifying

the objectives of each functional area. After accomplishment of

these objectives, the overall objectives of the organization are

achieved. Organization’s mission becomes the cornerstone for

strategy.

2) Environmental and Organizational Analysis –

Every organization operates within an environment. This

environment may be internal or external. For conducting an

environmental analysis, the strategic intent has to be very clear.

This clarity in definition of mission and objectives helps in the

detailed analysis of the environment. Environmental analysis, also

known as environmental scanning or appraisal, is the process

through which an organization monitors and comprehends various

environmental factors and determines the opportunities and threats

that are provided by these factors. There are two aspects involved

in environmental analysis:

· Monitoring the environment i.e environmental search

· Identifying opportunities and threats based on environmental

monitoring i.e environmental diagnosis

Environmental analysis is an exercise in which total view of

environment is taken. The environment is divided into different

components to find out their nature, function and relationship for

searching opportunities and threats and determining where they

come from, ultimately the analysis of these components is

aggregated to have a total view of the environment. Some elements

indicate opportunities while others may indicate threats.

A large part of the process of environmental analysis seeks to

explore the unknown terrain, the dimensions of future. The

analysis emphasis on what could happen and not necessarily what

will happen. The factors which comprises firms environment are of

two types :

· Factors which influence environment directly including

suppliers, customers and competitors and

· Factors which influence the firm indirectly including social,

technological, political, legal, economic factors, etc

The environmental analysis plays a very important role in the

process of strategy formulation. The environment has to be

analysed to determine what factors in the environment present

opportunities for greater accomplishment of organizational

objectives and what factors present threats. Environmental analysis

provides time to anticipate the opportunities and plan to meet the

challenges. It also warns the organization about the threats. The

analysis provides for elimination of alternatives which are

inconsistent with the organization objectives. Due to the element of

uncertainty, environmental analysis provides for certain anticipated

changes in the organization’s network. The organization equips

itself to meet the unanticipated changes and face the ever

increasing competition.

3) IDENTIFICATION OF STRATEGIC ALTERNATIVES

After environmental analysis, the next step is to identify the

various strategic alternatives. After the identification of strategic

alternatives they have to be evaluated to match them with the

environmental analysis. According to Glueck & Jauch, “strategic

alternatives revolve around the question whether to continue or

change the business, the enterprise is currently improving the

efficiency or effectiveness with which the firm achieves its

corporate objectives in its chosen business sector” the process may

result into large number of alternatives through which an

organization relates itself to the environment.

According to Glueck, there are basically four grand strategies

alternatives:

· Stability

· Expansion

· Retrenchment

· Combination

These are together known as stability strategies/basic strategies.

Stability – In this, the company does not go beyond what it is

doing now. The company serves with same product, in same

market and with the existing technology. This is possible when

environment is relatively stable. Modernization, improved

customer service and special facility may be adopted in stability.

Expansion – This is adopted when environment demands increase

in pace of activity. Company broadens its customer groups,

customer functions and the technology. These may be broadened

either singly or jointly. This kind of a strategy has a substantial

impact on internal functioning of the organization

Retrenchment – If the organization is going for this strategy, then it

has to reduce its scope in terms of customer group, customer

functions or alternative technology. It involves partial or total

withdrawal from three things. Example – L & T getting out of

cement business.

Combination – When all the three strategies are taken together, this

is known as combination strategy. This kind of strategy is possible

for organizations with large number of portfolios.

Apart from the above four grand strategies, other commonly used

strategies are –

Modernization – In this, technology is used as the strategic tool to

increase production and productivity or reduce cost. Through

modernization, the company aims to gain competitive and strategic

strength

Integration – The company starts producing new products and

services of its own by either creating facility or killing others.

Integration can be either forward or backward in terms of vertical

integration. In forward integration, it gains ownership over

distribution or retailers, thus moving towards customers while in

backward integration the company seeks ownership over firm’s

suppliers thus moving towards raw materials. When the

organization gains ownership over competitors, it is engaged in

horizontal integration.

Diversification – Diversification involves change in business

definition either in terms of customer functions, customer groups

or alternative technology. It is done to minimize the risk by

spreading over several businesses, to capitalize organization

strength and minimize weaknesses, to minimize threats, to avoid

current instability in profit & sales and to facilitate higher

utilization of resources. Diversification can be either related or

unrelated, horizontal or vertical, active or passive, internal or

external.

It is of the following types –

· Concentric diversification

· Conglormerate diversification

· Horizontal diversification

Joint ventures – In joint ventures, two or more companies form a

temporary partnership (consortium).

Companies opt for joint

venture for synergistic advantages to share risk, to diversify and

expand, to bring distinctive competences, to manage political and

cultural difficulty, to take technological advantage and to explore

unexplored market

Strategic Alliance – When two or more companies unite to pursue

a set of agreed upon goals but remain independent it is known as

strategic alliance. The firms share the benefits of the alliance and

control the performance of assigned tasks. The pooling of

resources, investment and risks occur for mutual gain

Mergers – It is an external approach to expansion involving two or

more than two organizations. Companies go for merger to become

larger, to gain competitive advantage, to overcome weaknesses and

sometimes to get tax benefits. Merger takes place with mutual

consent and common goals

Acquisition – For the organization which acquires another, it is

acquisition and for organization which is acquired, it is merger

Takeovers – In takeovers, there is a strong motive to acquire others

for quick growth and diversification

Divestment – In divestment, the company which is divesting has

no ownership and control in that business and is engaged in

complete selling of a unit. It is referred to the disposing off a part

of the business.

Turnaround Strategy – When the company is sick and continuously

making losses, it goes for turnaround strategy. It is the efforts in

reversing a negative trend and it is the efforts to keep an

organization alive.

All these alternatives are available to an organization and

according to its objectives, it can decide on the one which is most

suitable .

4) Choice of strategy

After evaluation of strategic alternatives is choice of the most

suitable alternative. For a business group, it may be possible to

choose all strategic alternatives but for a single company it is quite

different. The strategic alternatives has to be matched with the

problem. While making a choice, two types of factors have to be

considered –

· Objective factors

· Subjective factors

Objective factors are the ones which can be quantified while

subjective factors are the ones which cannot be quantified and are

based on experience and opinion of people. Strategic choice is like

a decision making process. There are three objective ways to make

a choice –

· Corporate portfolio analysis

· Competitor analysis

· Industry analysis

Corporate Portfolio Analysis

When the company is in more than one business, it can select more

than one strategic alternative depending upon demand of the

situation prevailing in the different portfolios. It is necessary to

analyze the position of different business of the business house

which is done by corporate portfolio analysis.

Portfolio analysis is an analytical tool which views a corporation as

a basket or portfolio of products or business units to be managed

for thebest possible returns.

When an organization has a number of products in its portfolio, it

is quite likely that they will be in different stages of development.

Some will be relatively new and some much older. Many

organizations will not wish to risk having all their products at the

same stage of development. It is useful to have some products with

limited growth but producing profits steadily, and some products

with real growth potential but may still be in the introductory

stage. Indeed, the products that are earning steadily may be used to

fund the development of those that will provide the growth and

profits in the future.

So the key strategy is to produce a balanced portfolio of products,

some with low risk but dull growth and some with high risk but

great potential for growth and profits. This is what we call as

portfolio analysis.

The aim of portfolio analysis is

1) to analyze its current business portfolio and decide which

businesses should receive more or less investment

2) to develop growth strategies, for adding new businesses to

the portfolio

3) to decide which business should not longer be retained

Balancing the portfolio –

Balancing the portfolio means that the different products or

businesses in the portfolio have to be balanced with respect to four

basic aspects –

1) Profitability

2) Cash flow

3) Growth

4) Risk

This analysis can be done by any of the following technologies –

1. Experience curve

2. PLC concept

3. BCG matix

4. GE nine cell matrix

5. Space diagram

6. Hofer’s product market evaluation matrix

7. Directional Policy matrix

BCG MATRIX – the bcg matrix was developed by Boston

Consulting group in 1970s. It is also called as the growth share

matrix. This is the most popular and most simplest matrix to

describe the corporation’s portfolio of businesses or products.

The BCG matrix helps to determine priorities in a product

portfolio. Its basic purpose is to invest where there is growth from

which the firm can benefit, and divest those businesses that have

low market share and low growth prospects.

Each of the products or business units is plotted on a two

dimensional matrix consisting of

a) relative market share – is the ratio of the market share of the

concerned product or business unit in the industry divided by the

share of the market leader

b) market growth rate – is the percentage of market growth, by

which sales of a particular product or business unit has increased

Analysis of the BCG matrix – the matrix reflects the contribution

of the products or business units to its cash flow. Based on this

analysis, the products or business units are classified as –

 Stars

 Cash cows

 Question marks

 Dogs

Stars – high growth, high market share

Stars are products that enjoy a relatively high market share in a

strongly growing market. They are potentially profitable and may

grow further to become an important product or category for the

company. The firm should focus on and invest in these products or

business units. The general features of stars are –

· High growth rate means they need heavy

investment

· High market share means they have

economies of scale and generate large amount of cash

· But they need more cash than they generate

The high growth rate will mean that they will need heavy

investment and will therefore be cash users. Overall, the general

strategy is to take cash from the cash cows to fund stars. Cash may

also be invested selectively in some problem children (question

marks) to turn them into stars. The other problem children may be

milked or even sold to provide funds elsewhere.

Over the time, all growth may slow down and the stars may

eventually become cash cows. If they cannot hold market share,

they may even become dogs.

Cash Cows – Low growth, high market share

These are the product areas that have high relative market shares

but exist in low-growth markets. The business is mature and it is

assumed that lower levels of investment will be required. On this

basis, it is therefore likely that they will be able to generate both

cash and profits. Such profits could then be transferred to support

the stars. The general features of cash cows are –

· They generate both cash and profits

· The business is mature and needs lower levels of investment

· Profits are transferred to support stars/question marks

· The danger is that cash cows may become under-supported and

begin to lose their market

Although the market is no longer growing, the cash cows may have

a relatively high market share and bring in healthy profits. No

efforts or investments are necessary to maintain the status quo.

Cash cows may however ultimately become dogs if they lose the

market share.

Question Marks – high growth, low market share

Question marks are also called problem children or wild cats.

These are products with low relative market shares in high growth

markets. The high market growth means that considerable

investment may still be required and the low market share will

mean that such products will have difficulty in generating

substantial cash. These businesses are called question marks

because the organization must decide whether to strengthen them

or to sell them.

The general features of question marks are –

· Their cash needs are high

· But their cash generation is low

· Organization must decide whether to strengthen them or sell

them

Although their market share is relatively small, the market for

question marks is growing rapidly. Investments to create growth

may yield big results in the future, though this is far from certain.

Further investigation into how and where to invest is advised.

Dogs – Low growth, low market share

These are products that have low market shares in low growth

businesses. These products will need low investment but they are

unlikely to be major profit earners. In practice, they may actually

absorb cash required to hold their position. They are often regarded

as unattractive for the long term and recommended for disposal.

The general features of dogs are –

· They are not profit earners

· They absorb cash

· They are unattractive and are often recommended for disposal.

Turnaround can be one of the strategies to pursue because many

dogs have bounced back and become viable and profitable after

asset and cost reduction. The suggested strategy is to drop or divest

the dogs when they are not profitable. If profitable, do not invest,

but make the best out of its current value. This may even mean

selling the division’s operations.

Advantages –

1) it is easy to use

2) it is quantifiable

3) it draws attention to the cash flows

4) it draws attention to the investment needs

Limitations –

1) it is too simplistic

2) link between market share and profitability is not strong

3) growth rate is only one aspect of industry attractiveness

4) it is not always clear how markets should be defined

5) market share is considered as the only aspect of overall

competitive position

6) many products or business units fall right in the middle of the

matrix, and cannot easily be classified.

BCG matrix is thus a snapshot of an organization at a given point

of time and does not reflect businesses growing over time.

GE Nine-cell matrix

This matrix was developed in 1970s by the General Electric

Company with the assistance of the consulting firm, McKinsey &

Co, USA. This is also called GE multifactor portfolio matrix.

The GE matrix has been developed to overcome the obvious

limitations of BCG matrix. This matrix consists of nine cells (3X3)

based on two key variables:

i) business strength

ii) industry attractiveness

The horizontal axis represents business strength and the vertical

axis represent industry attractiveness

The business strength is measured by considering such factors as:

· relative market share

· profit margins

· ability to compete on price and quality

· knowledge of customer and market

· competitive strengths and weaknesses

· technological capacity

· caliber of management

Industry attractiveness is measured considering such factors as :

· market size and growth rate

· industry profit margin

· competitive intensity

· economies of scale

· technology

· social, environmental, legal and human aspects

The industry product-lines or business units are plotted as circles.

The area of each circle is proportionate to industry sales. The pie

within the circles represents the market share of the product line or

business unit.

The nine cells of the GE matrix represent various degrees of

industry attractiveness (high, medium or low) and business

strength (strong, average and weak).

After plotting each product

line or business unit on the nine cell matrix, strategic choices are

made depending on their position in the matrix.

Spotlight Strategy

GE matrix is also called “Stoplight” strategy matrix because the

three zones are like green, yellow and red of traffic lights.

1) Green indicates invest/expand – if the product falls in green

zone, the business strength is strong and industry is at least

medium in attractiveness, the strategic decision should be to

expand, to invest and to grow.

2) Yellow indicates select/earn – if the product falls in yellow

zone, the

business strength is low but industry attractiveness is high, it needs

caution and managerial discretion for making the strategic choice

3) Red indicates harvest/divest – if the product falls in the red zone,

the business strength is average or weak and attractiveness is also

low or medium, the appropriate strategy should be divestment.

Comparision GE versus BCG –

Thus products or business units in the green zone are almost

equivalent to stars or cashcows, yellow zone are like question

marks and red zone are similar to dogs in the BCG matrix.

Difference between BCG and GE matrices –

BCG Matrix GE Matrix

1. BCG matrix consists of

four cells

1. GE matrix consists of nine

cells

2. The business unit is rated

against relative market share

and industry growth rate

2. The business unit is rated

against business strength and

industry attractiveness

3. The matrix uses single

measure to assess growth

and market share

3. The matrix used multiple

measures to assess business

strength and industry

attractiveness

4. The matrix uses two types

of classification i.e high and

low

4. The matrix uses three

types of classification i.e

high/medium/low and

strong/average/weak

5. Has many limitations 5. Overcomes many

limitations of BCG and is an

improvement over it

Advantages –

1) It used 9 cells instead of 4 cells of BCG

2) It considers many variables and does not lead to simplistic

conclusions

3) High/medium/low and strong/average/low classification enables

a finer distinction among business portfolio

4) It uses multiple factors to assess industry attractiveness and

business strength, which allow users to select criteria appropriate

to their situation

Limitations –

1) It can get quite complicated and cumbersome with the increase

in businesses

2) Though industry attractiveness and business strength appear to

be objective, they are in reality subjective judgements that may

vary from one person to another

3) It cannot effectively depict the position of new business units in

developing industry

4) It only provides broad strategic prescriptions rather than

specifics of business policy

Competitor Analysis – Analysis is done on what the competitor has

and what he does not have. The difference between SWOT

analysis and competitor analysis is that in competitor analysis we

are concerned with only one component of the environment i.e

competitor while in SWOT analysis focus is on all the factors of

the environment

Industry Analysis – Here all the competitors belonging to the

particular industry with which the organization is associated is

looked at. In competitive analysis, only the major competitors are

assessed while in industry analysis all the competitors belonging to

the industry are looked at.

The strategic choice is a decision making process having the

following steps –

1. Focussing on strategic alternatives

2. Evaluating strategic alternatives

3. Considering decision factors – objective and subjective

4. Finally, making the strategic choice

5) Implementation of Strategy

Steps involved –

1. Project implementation

2. Procedural implementation

3. Resource implementation

4. Structural implementation

5. Functional implementation

6. Behavioural implementation

Project implementation is a comprehensive plan of action from

acquiring land to the installation of machinery within a time frame.

Procedural implementation takes place by following the “Law of

the Land” i.e the rules and regulation in terms of wastage cost,

utility, etc. It involves completing all procedures and formalities as

prescribed by the governments both state and central. The steps

vary from industry to industry. There may also be frequent changes

in policies.

Resource allocation involves allocation of resources to both inside

the company and outside the company. It has to make decisions

regarding short term and long term allocation.

The structural implementation involves designing of the

organization structure and interlinking various units and sub units

of the organization.

Functional implementation deals with the development of policies

and plans in different areas of functions which and organization

undertakes.

Behavioural implementation deals with those aspects of strategy

implementation that have impact on behavior of people in the

organization.Since human resources form an integral part of the

organization, their activities and behavior need to be directed in a

certain way. Any departure may lead to the failure of strategy.

6) Evaluation and Control –

Last step of the strategy making process. This is an ongoing

process and evaluation and control have to be done for future

course of action as well. To get successful results and to achieve

organizational objectives, there has to be continuous monitoring of

the implementation of strategy. The evaluation and control of

strategy may result in various actions that the organization may

have to take for successful well being, such actions may involve

any kind of corrective measures concerned with any of the steps

concerned with any of the steps involved in the whole process be it

choice for setting mission or objectives.

When evaluation and control is carried out efficiently, it

contributes in three basic areas –

1. Measurement of organizational process

2. Feedback for future actions and

3. Linking performance and rewards

The board of directors, the chief executive and other managers all

play a very important role in strategy evaluation and on control.

Control can be of three types –

1. Control of inputs that are required in an action, known as feed

forward control

2. Control of different stages of action process, known as

concurrent control

3. Past action control based on feedback from completed action

known as feedback control

Control is exercised by managers in the form of four steps –

1. Setting performance standards

2. Measuring actual performance

3. Analyzing variance

4. Taking corrective actions

After evaluation and control, the strategy process continues in an

efficient manner. The effectiveness could be assessed only when

the strategy helps in the fulfillment of organizational objectives

3) Strategic Framework –

Introduction – Strategies are involved in the formulation,

implementation and evaluation of process. The hierarchy of

strategic intent lays the foundation for strategic management

process. The process of establishing the hierarchy of strategic

intent is very complex. In this hierarchy, the vision, the mission,

business definition and objectives are established. Formulation of

strategies is possible only when strategic intent is clearly set up.

Strategic Intent – The foundation for the strategic management is

laid by the hierarchy of strategic intent. The concept of stratetic

intent makes clear what an organization stands for. Hamed and

Prahalad coined the term strategic intent. Characterstics of

strategic intent –

· It is an obsession with an organization

· This obsession may even be out of proportion to their resources

and capabilities

Involves the following –

· Creating and communicating a vision

· Designing a mission statement

· Defining the business

· Setting objectives

Vision –

Defination by Kotler “description of something (an organization,

corporate culture, a business, a technology, an activity) in the

future”

Defination by Miller and Dess “category of intentions that are

broad, all inclusive and forward thinking”

Advantages of having a vision –

· They foster experimentation

· Vision promotes long term thinking

· Visions foster risk taking

· They can be used for the benefit of people

· They make organizations competitive, original and unique

· Good vision represent integrity

· They are inspiring and motivating to people working in an

organization

Mission –

Defination by Hynger and Wheelen – “purpose or reason for the

organization’s existence”

Defination by David F.Harvey – “A mission provides the basis of

awareness of a sense of purpose, the competitive environment ,

degree to which the firm’s mission fits its capabalities and the

opportunities which the government offers”

Defination by Thompson “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”

Examples of mission statement –

India Today – The complete new magazine

Bajaj Auto – Value for money for years

HCL – To be a world class competitor

HMT – Timekeepers of the nation

Mission vs Purpose –

A few major points of distinction –

1. Mission is the societal reasoning while the purpose is the overall

reason

2. Mission is external reasoning and relates to external

environment. Purpose is internal reasoning and relates to internal

environment

3. Mission is for outsiders while purpose is for its own employees

Objectives and Goals –

Objectives refer to the ultimate end results which are to be

accomplished by the overall plan over a specified period of time.

Meaning –

· Objective are open ended attributes denoting a future state or

outcome and are stated in general terms

· When the objectives are stated in specific terms, they become

goals to be attained

· Goals denote a broad category of financial and non-financial

issues that a firm sets for itself

· Objectives are the ends that state specifically how the goals shall

be achieved

· It is to be noted that objectives are the manifestation of goals

whether specifically stated or not

Difference between objectives and goals –

· The goals are broad while objectives are specific

· The goals are set for a relatively longer period of time

· Goals are more influenced by external environment

· Goals are not quantified while objectives are quantified

The difference between the two is simply a matter of degree and it

may vary widely

Importance of establishing objectives –

1. Objectives provide yardstick to measure performance of a

department or SBU or organization

2. Objectives serve as a motivating force. All people work to

achieve the objectives

3. Objectives help the organization to pursue its vision and mission

4. Objectives define the relationship of organization with internal

and external environment

5. Objectives provide a basis for decision-making.

Areas for setting objectives –

1. Profit objective – or performance objectives

2. Market objective – increase in market share

3. Productivity objective – cost per unit of production

4. Product objective – product development, product

diversification, branding, etc

5. Social objective – tree plantation, provision for drinking water,

setting up of community center, etc

6. Financial objective – relates to cash flow, debt equity ratio,

working capital, new issues, debt instruments, etc

7. Human resource objective – described in terms of absenteeism,

turnover, number of grievances, strikes and lockouts, etc

Strategic Analysis – Strategic Management comprises of three

broad activities, namely, strategic analysis, strategic formulation

and strategic implementation. All the three are interrelated.

Strategic analysis is the foundation for formulating strategies and

basically comprises of the study of business environment as a

whole.

Strategic Analysis comprises of the following –

1. Environmental analysis

2. Competitive forces

3. Internal analysis

Environmental Analysis –

Strategic analysis is basically concerned with the structuring of the

relationship between a business and its environment. The

environment in which business operates has a great influence on

their success or failures. There is a strong linkage between the

changing environment, the strategic response of the business to

such changes and the performance. It is therefore important to

understand the forces of external environment the way they

influence this linkage. The external environment which is dynamic

and changing holds both opportunities and threats for the

organizations. The organizations while attempting at strategic

realignments, try to capture these opportunities and avoid the

emerging threats. At the same time the changes in the environment

affect the attractiveness or risk levels of various investments of the

organizations or the investors.

The macro environment in which all organizations operate broadly

consist of the economic environment, the political and legal

environment, the socio cultural aspects and the environment

related issues like pollution, sustainability,etc. The technological

temper and its progress has been the key driver behind the major

changes witnessed in the external environment making it

increasingly complex.

Pestel framework and the Mckinsey’s 7S framework are most

popularly used for such analysis.

PESTEL Framework –

External forces are classified into 6 broad categories – political,

economic, social, technological, environmental and legal forces.

The framework primarily involves the following two areas –

1. The environmental factors affecting the organization

2. The important factors relevant in the present context and in the

years to come

Politcal Factors – Government stability, Political values and beliefs

shaping policies,

Regulations towards trade and global business, Taxation policies,

Priorities in social sector

Economic Factors – GNP trends, Interest rates/savings rate, Money

supply,

Inflation rate, Unemployment, Disposable income, Business

cycles, Trade deficit/surplus

Socio-cultural Factors – Population demographics, Social mobility,

Lifestyle changes,

Attitudes to work and leisure, Education, Health and fitness

awareness,

Multiple income families

Technological factors – Biotechnology, Process innovation, Digital

revolution,

Government spending on research, Government and industry focus

on technological effects, New discoveries/development, Speed of

technology transfer, Rates of obsolescence

Legal – Monopolies legislation, Employment law, Health and

safety,Product safety

Mckinsey’s 7S Framework – The framework suggests that there

is a multiplicity of factors that influence an organization’s ability

to change and its proper mode of change. Because of the

interconnectedness of the variables, it would be difficult to make

significant progress in one area without making progress in the

others as well. There is no starting point or implied hierarchy in the

shape of the diagram, and it is not obvious which of the seven

factors would be the driving force in changing a particular

organization at a certain point of time. The critical variables would

be different across organizations and in the same organizations at

different points of time.

The 7 S –

Superordinate goals – are the fundamental ideas around which a

business is built

Structure – salient features of the units’s organizational chart and

inter connections within the office

Systems – procedures and routine processes, including how

information moves around the unit

Staff – personnel categories within the unit and the use to which

staff are put, skill base, etc

Style – characterization of how key managers behave in order to

achieve the unit’s goals

Shared values strategy – the significant meanings or guiding

concepts that the unit imbues on its members

Skills – distinctive capabilities of key personnel and the unit as a

whole

The 7 S model can be used in two ways –

1. Considering the links between each of the S’s one can identify

strengths and weaknesses of an organization. No S is strength or a

weakness in its own right, it is only its degree of support, or

otherwise, for the other S’s which is relevant. Any S’s that

harmonises with all the other S’s can be thought of as strength and

weaknesses

2. The model highlights how a change made in any one of the S’s

will have an impact on all the others. Thus if a planned change is

to be effective, then changes in one S must be accompanied by

complementary changes in the others.

The Mckinsey 7-S Framework

The competitive forces – The competitive environment refers to

the situation which organisation’s face within its specific area of

operation, and this is understood at an industry level or with

respect to smaller groups called strategic groups. Generally

understood, the industry in the economy is recognized as a group

of firms producing the same principal product or more broadly the

group of firms producing products that are close substitutes for

each other and in a given industry different organizations have

Structur

e

Strate

gy

Syste

ms

Super ordinate

goals

Skills Style

Staff

different intermediate basis of understanding its relative position

with respect to other organizations in the industry.

Porter’s Five Forces Framework –

The five forces framework developed by Michael Porter is the

most widely known tool for analyzing the competitive environment

which helps in explaining how forces in the competitive

environment shape strategies and affect performance.

The competitive forces are as follows –

1. The rivalry among competitors in the industry

2. The potential entrants

3. The substitute products

4. The bargaining power of suppliers

5. The bargaining power of buyers

However, these five forces are not independent of each other.

Pressures from one direction can trigger off changes in another

which is capable of shifting sources of competition.

1) Threat of New Entrants – Entry of a firm in and operating in a

market is seen as a threat to the established firms in that market.

The competitive position of the established firms is affected

because the entrants may add new production capacity or it may

affect their market shares. They may also bring additional

resources with them which may force the existing firms to invest

more than what was not required before. Altogether the situation

becomes difficult for the existing firms if not threatening always

and therefore they resort to raising barriers to entry. These barriers

are intended to discourage new entrants and this may be done by

organizations, be in any one or more ways as follows –

· Economies of scale

· Learning or experience effect

· Cost disadvantage independent of scale

· Brand benefits

· Capital requirements

· Switching costs

· Access to distribution channels

· Anticipated growth

2) Bargaining power of suppliers – Business organizations have a

large dependency on suppliers and the latter influence their profit

potential significantly. Supplier’s decisions on prices, quality of

goods and services and other terms and conditions of delivery and

payments have significant impact on the profit trends of an

industry. However, supplier’s ability to do all these depends on the

bargaining power over buyers.

Supplier bargaining power would normally depend on –

· Importance of the buyer to the supplier group

· Importance of the supplier’s product to the buyers

· Greater concentration among suppliers than buyers

· High switching costs for buyers

· Credible threat of forward integration by suppliers

3) Bargaining power of customers – Customers with stronger

bargaining power relative to their suppliers may force supply

prices down or demand better quality for the same price and may

demand more favourable terms of business. Eg.there will always

be a difference in the bargaining power between an individual

buying different construction material like cement, steel, bricks,

etc and a real estate builder buying them for the number of

properties he may have been building over so many years.

Following factors attach greater power to buyers –

· Undifferentiated or standard suppliers

· Customer’s price sensitivity

· Accurate information about the cost structure of suppliers

· Greater concentration in buyer’s industry than in supplier’s

industry and relatively large volume purchase

· Credible threat of backward integration by buyers

4) Threat of substitutes –

Often firms in an industry face competition from outside industry

products, which may be close substitutes of each other. For

example, with the new technologies in place now the electronic

publishings are the direct substitutes of the texts published in print.

Similarly, newspaper find their closest substitutes in their online

versions, though it may be a smart strategic move to position them

as complementary products.

However, the competitive pressure, which any industry may face,

depends primarily on three factors –

· Whether the substitutes available are attractively priced

· Whether buyers view substitutes available as satisfactory in

terms of their quality and performance

· How easily buyers can switch to substitutes

5) Competitive rivalry –

The level of rivalry is minimum in a perfectly competitive market

where there are large number of buyers and sellers and the product

is uniform with everyone. Same is true for monopoly market where

there is only one player and the type of product is also one. The

following factors determine the level of rivalry –

· The stability of environment

· The life expectancy of competitive advantage

· Characteristics of the strategies pursued by competitors

Strategic groups – they are conceptual clusters in the sense that

they are grouped together for purposes of improving analysis and

understanding competition within their industry. They donot

necessarily belong to any formal group such as an industry, trade,

association or any strategic alliances and they donot necessarily

differ in their average profitability.

Competitive intelligence – It is the information which is relevant

to strategy formulation regarding the environmental context within

which a firm competes. Such intelligence has several uses –

a) Providing description of the competitive environment that

inform strategist and guide strategy formulation

b) Challenge common assumption about the competitive

environment

c) Forecasting future development in the competitive environment

d) Identifying and compensating for exposed competitive

weaknesses

e) Determining when a strategy is no longer viable or sustainable

f) Indicating when and how strategy should be adjusted to

changing competitive environment

Scenario planning –

Scenarios are tools for ordering one’s perception about alternative

future environment in which today’s decision might be framed. In

practice, scenarios resemble a set of stories, written or spoken,

built around carefully constructed plots. These stories can express

multiple perspectives on complex events, scenarios give meaning

to these events. Scenarios are powerful planning tools precisely

because the future is unpredictable. Unlike traditional forecasting

or market research, scenarios present alternative images instead of

extrapolating current trends from the present.

Scenarios also embrace qualitative perspectives and the potential

for sharp discontinuities that econometric models exclude.

Consequently, creating scenarios requires decision-makers to

question their broadest assumptions about the way the world works

so that they can foresee decisions that might be missed or denied.

Without an organization, scenarios provide a common vocabulary

and an effective basis for communicating complex – sometimes

paradoxical – conditions and options. Good scenarios are plausible

and surprising, they have the power to break old stereotypes, and

their creators assume ownership and put them to work. Using

scenarios is rehearsing the future. By recognizing the warning

signals, the threats and opportunities that is unfolding, one can

avoid surprises, adapt and act effectively.

Decisions which have been pre-tested against a range of what may

offer are more likely to stand the test of time, produce robust and

resilient strategies, and create distinct competitive advantage.

Ultimately, the result of scenario planning is not a more accurate

picture of tomorrow but better thinking and an ongoing strategic

conversation about the future.

Implementation of scenario planning –

A company wide involvement in scenario planning leads to bette

results in a firm. A cross-functional team is instituted for the

identification and monitoring of issues. Employees are encouraged

to participate by an incentive based process.

Steps involved –

1) Identification of issues – understand the effects of external

factors on business – technology driven, political, economic,

competitive positioning

2) Classification of issues – support the issue identified with

reports/propositions, determine the uncertainty and kind of impact

of the issue

3) Analyzing and problem solving

Critical success factors (CSF) – critical success factors are those

which contribute to organization’s success in a competitive

environment and therefore the organization needs to improve on

them since poor results may lead to declining performance.

Organizations depending on the environment they operate in and

their own internal conditions can identify relevant csf’s. It is based

on the following 2 characteristics –

i. Industry characterstic – industry specific csf are factors critical

for the performance of the industy. Eg. For a hospitality industry

excellent and customized service, wide presence and excellent

booking and reservation system is critical, while for an airline

industry fuel efficiency, load factors, etc are critical

ii. Competitive position – csf for a firm may also be determined by

its relative position with respect to its competitors. For example,

for a pathological laboratory center, earlier csf was authentic,

hygienic and scientific testing facilities until few big players added

service features like door to door sample collection or home

delivery of reports. Very soon approachability and ease became the

additional csf’s for the players

The value chain framework –

This is another framework most commonly used to guide analysis

of any firm’s strength and weaknesses. In this framework, any

business is seen as a number of linked activities, each producing

value for the customer. By creating additional value, the firm may

charge more or is able to deliver same value at a lower cost, either

of this leading to a higher profit margin. This ultimately adds to the

organization’s financial performance.

Firm’s infrastructure

Human Resource Management

Technology development

Procurement

Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales

The value chain framework (M.E.Porter 1980)

There are two types of activities – primary activities and support

activities

Primary activities constitute the following –

a) Inbound logistics are activities concerned with receiving, storing

and distributing the inputs to the product or service. They include

materials handling, stock control, transport, etc

b) Operations transform these various inputs into the final products

or services –machining, packaging, assembly testing, etc

c) Outbound logistics collect, store and distribute the product to

customers.

d) Marketing and sales makes consumers aware of the product or

service so that they are able to purchase it.

e) Services activities helps improving the effectiveness or

efficiency of primary activities

Support activities are as follows –

a) Procurement – process for acquiring the various resource inputs

to the primary activities and this is present in many parts of the

organization

b) Technology development – there are key technologies attached

to different activities which may be directly linked with the

product or with processes or with resource inputs

c) Human Resource Management- area involved in recruiting,

managing, training, developing and rewarding people within the

organization.

Top Management – Role & Functions

Management in all business and human organization activity is

simply the act of getting people together to accomplish desired

goals and objectives. Management comprises planning, organizing,

staffing, leading or directing, and controlling an organization (a

group of one or more people or entities) or effort for the purpose of

accomplishing a goal. Resourcing encompasses the deployment

and manipulation of human resources, financial resources,

technological resources, and natural resources.

Management can also refer to the person or people who perform

the act(s) of management.

Henri Fayol considers management to consist of seven functions:

1. planning

2. organizing

3. leading

4. coordinating

5. controlling

6. staffing

7. motivating

Some people, however, find this definition, while useful, far too

narrow. The phrase “management is what managers do” occurs

widely, suggesting the difficulty of defining management, the

shifting nature of definitions, and the connection of managerial

practices with the existence of a managerial cadre or class.

One habit of thought regards management as equivalent to

“business administration” and thus excludes management in places

outside commerce, as for example in charities and in the public

sector. More realistically, however, every organization must

manage its work, people, processes, technology, etc. in order to

maximize its effectiveness. Nonetheless, many people refer to

university departments which teach management as “business

schools.” Some institutions (such as the Harvard Business School)

use that name while others (such as the Yale School of

Management) employ the more inclusive term “management.”

Basic functions of management

Management operates through various functions, often classified as

planning, organizing, leading/motivating, and controlling.

· Planning: Deciding what needs to happen in the future (today,

next week, next month, next year, over the next 5 years, etc.) and

generating plans for action.

· Organizing: (Implementation) making optimum use of the

resources required to enable the successful carrying out of plans.

· Staffing: Job Analyzing, recruitment, and hiring individuals for

appropriate jobs.

· Leading: Determining what needs to be done in a situation and

getting people to do it.

· Controlling: Monitoring, checking progress against plans,

which may need modification based on feedback.

· Motivating: the process of stimulating an individual to take

action that will accomplish a desired goal..

Formation of the business policy

· The mission of the business is its most obvious purpose — which

may be, for example, to make soap.

· The vision of the business reflects its aspirations and specifies

its intended direction or future destination.

· The objectives of the business refers to the ends or activity at

which a certain task is aimed.

· The business’s policy is a guide that stipulates rules, regulations

and objectives, and may be used in the managers’ decision-making.

It must be flexible and easily interpreted and understood by all

employees.

· The business’s strategy refers to the coordinated plan of action

that it is going to take, as well as the resources that it will use, to

realize its vision and long-term objectives. It is a guideline to

managers, stipulating how they ought to allocate and utilize the

factors of production to the business’s advantage. Initially, it could

help the managers decide on what type of business they want to

form.

How to implement policies and strategies

· All policies and strategies must be discussed with all managerial

personnel and staff.

· Managers must understand where and how they can implement

their policies and strategies.

· A plan of action must be devised for each department.

· Policies and strategies must be reviewed regularly.

· Contingency plans must be devised in case the environment

changes.

· Assessments of progress ought to be carried out regularly by

top-level managers.

· A good environment and team spirit is required within the

business.

· The missions, objectives, strengths and weaknesses of each

department must be analysed to determine their roles in achieving

the business’s mission.

· The forecasting method develops a reliable picture of the

business’s future environment.

· A planning unit must be created to ensure that all plans are

consistent and that policies and strategies are aimed at achieving

the same mission and objectives.

· Contingency plans must be developed, just in case.

All policies must be discussed with all managerial personnel and

staff that is required in the execution of any departmental policy.

· Organizational change is strategically achieved through the

implementation of the eight-step plan of action established by John

P. Kotter: Increase urgency, get the vision right, communicate the

buy-in, empower action, create short-term wins, don’t let up, and

make change stick.

Where policies and strategies fit into the planning process

· They give mid- and lower-level managers a good idea of the

future plans for each department.

· A framework is created whereby plans and decisions are made.

· Mid- and lower-level management may add their own plans to

the business’s strategic ones.

Multi-divisional management hierarchy

The management of a large organization may have three levels:

1. Senior management (or “top management” or “upper

management”)

2. Middle management

3. Low-level management, such as supervisors or team-leaders

4. Foreman

5. Rank and File

Top-level management

· Require an extensive knowledge of management roles and skills.

· They have to be very aware of external factors such as markets.

· Their decisions are generally of a long-term nature

· Their decisions are made using analytic, directive, conceptual

and/or behavioral/participative processes

· They are responsible for strategic decisions.

· They have to chalk out the plan and see that plan may be

effective in the future.

· They are executive in nature.

Middle management

· Mid-level managers have a specialized understanding of certain

managerial tasks.

· They are responsible for carrying out the decisions made by toplevel

management.

Lower management

· This level of management ensures that the decisions and plans

taken by the other two are carried out.

· Lower-level managers’ decisions are generally short-term ones.

Foreman / lead hand

· They are people who have direct supervision over the working

force in office factory, sales field or other workgroup or areas of

activity.

Rank and File

· The responsibilities of the persons belonging to this group are

even more restricted and more specific than those of the foreman.

Benchmarking – Benchmarking compares an organization’s

performance against ‘best in class’ performance wherever that is

found. Managers seek out the best examples of a particular practice

in other companies as part of an effort to improve the

corresponding practice in their own firm.

When the search for best practices is limited to competitors, the

process is called competitive benchmarking. Other times managers

may seek out the best practices regardless of what industry they are

in, called functional benchmarking. Benchmarking provides the

motivation and the means many firms need to seriously rethink

how their organizations perform certain tasks.

A comprehensive internal analysis of an organization’s strengths

and weaknesses must however utilize all three types of comparison

standards. For instance, an organization can study industry norms

to access where it stands in terms of number of complaints

generated regarding defects during guarantee period of the product.

Then it could benchmark the organization that is best at controlling

the defects. Based on the benchmarking results it could implement

major new programmes and track improvements in these

programmes over time using, historical comparisons.

Value Chain – it shows that differentiation occurs out of the

firm’s value chain. The value activity determines the uniqueness of

the product. The value chain consists of a set of value activities

resulting in the production of a specified product. The value

activities of each differentiated product differs depending on the

nature of the product. The steps of value activity range from

procurement of raw material to the sale of product. Each

differentiated product has its own value activities.

SWOT Analysis –

SWOT stands for Strenths, Weakness, Opportunties and Threats. A

SWOT analysis summarizes the key issues from the external

environment and the internal capabilities of an organization those

which become critical for strategy development. The aim through

this is to identify the extent to which the strength and weakness are

relevant to and capable to dealing with changes in the business

environment. It also reflects whether there are opportunities to

exploit further the competencies of the organization.

Strength – Positive internal factors – technological skills, leading

brands, distribution channels, customer loyalty, production quality,

management

Weakness – Negative internal factors – absence of important skills,

weak brands, low customer retention, unreliable product or

service, poor management

Opportunties – Positive external factors – changing customer

tastes, liberalization of geographic markets, technological

advances, changes in government policies, lower personal taxes,

change in population age-structure, new distribution channels

Threats – Negative external factors – changing customer tastes,

closing of geographic markets, technological advances, changes in

government policies, tax increase, change in population age

structure, new distribution channels.

BUSINESS LEVEL STRATEGY

Business level strategies are popularly known as generic or

competitive strategies. Michael Porter classified these strategies

into overall cost leadership, differentiation and focus. The first two

strategies are broader in concept as their competitive scope is wide

enough whereas the third strategy i.e the focus strategy has a

narrower competitive scope.

The experience curve – Cost has been correlated with the

accumulated experience by the experience curve. Let us take the

example of production –

The underlying principle behind the experience curve is that as

total quantity of production of a standardized item is increased, its

unit manufacturing cost decreases in a systematic manner. The

concept of the experience curve was presented by BCG in 1966

and since then it has been accepted as an important phenomenon.

Causes of experience curve effect –

· Improved productivity of labour

· Increased specialization

· Innovation in production methods

· Value engineering and fine tuning

· Balancing production line

· Methods and system rationalization

The experience curve relationship provides a good framework for

managerial considerations for predicting industrial scenario with

respect to future costs, profit margins, and corresponding cash

flows for the manager’s own as well as his/her competitor’s

operations.

Competitive strategies like the below mentioned can be developed

based on experience curve –

1. Selling product at most competitive price

2. Maximising profits by selling at the highest price the market can

afford

3. Selling at a higher price initially but crashing the prices later to

keep the competition out.

Cost Leadership Best Differentiation

cost

Provide

r

Cost Focus Focussed

differentiation

Competitive strategies by Michael Porter

1) Low cost provider strategy –

The firms operating in this highly competitive environment are

always on the move to become successful. To strive in this

competitive environment the firms should have an edge over the

competitors. To develop competitive advantage, the firms should

produce good quality products at minimum costs, etc. This means

that the firms should provide high quality at low cost so that the

customer gets the best value for the product he/she is buying. One

such competitive strategy is overal l cost leadership, which aims at

producing and delivering the product or service at a low cost

relative to its competitors at the same time maintaining the quality.

According to Porter, following are the prerequisites of cost

leadership –

1. Aggressive construction of efficient scale facilities

2. Vigorous pursuit of cost reduction from experience

3. Tight cost and overhead control

4. Avoidance of marginal customer accounts

5. Cost minimization

To sustain the cost leadership throughout, the firm must be clear

about its accomplishment through different elements of the value

chain.

Though low cost can be one of the most important competitive

advantages enjoyed by firms all over the globe it does have its own

drawback. Some are

· Initiation by the competitive firms

· Threat of competitive firms from other countries

· Firm losing cost leadership due to fast technological changes,

which require high capital investment

· Threat by competitors to capture still lower cost segments

· Competition based on other than cost.

2) Differentiation Strategy – Every individual customer is unique

in itself so is his/her preferences regarding tastes, preferences,

attitudes, etc. These needs of the customers are fulfilled by the

firms by producing differentiated products. In our day-to-day life

we see many such examples of differentiated products. Most of the

fast moving consumer goods like biscuits, soaps, toothpastes, oils,

etc come under the category of differentiated products. To satisfy

the diverse needs of the customers, it becomes essential for the

firms to adopt a differentiation strategy. To make this strategy

successful, it is necessary for the firms to do extensive research to

study the different needs of the customers. A firm is able to

differentiate from its competitors if it is able to position itself

uniquely at something that is valuable to buyers. Differentiation

can lead to differentiatial advantage in which the firm gets the

premium in the market, which is more than the cost of providing

differentiation. The extent to which the differentiation occurs

depends on the overall strategy of the firm. Previously

differentiation was viewed narrowly by the firms, but in the

present scenario it has become one of the essential components of

the firm’s strategy. Reliance Infocomm, offers varied products like

different facilities to its customers in the CDMA telephones. This

is differentiation.

There are a number of factors which result in differentiation. Some

of them are –

· To compete against the rivals

· To create entry barriers for newcomers by building a unique

product

· To reduce the threats arising from the substitutes

· To develop a differentiation advantage

Different areas of differentiation –

Purchasing – quality of components and material acquired

Design – aesthetic appeal

Manufacturing – minimization of defects

Delivery – speed in fulfilling customer orders, reliability in

meeting promised delivery items

HRM – improved training and motivation increases customer

service capability

Technology management – permits responsiveness to the needs of

specific customers

Financial management – improves stability of the firm

Marketing – building of product and company reputation through

advertising

Customer service – providing pre-sales information to customers

Sources of differentiation – Its not only the low price at which

different products are offered, which creates differentiation,

instead the firm can differentiate from its competitors by providing

something unique, which is valuable to the customers of that

product. Differentiation occurs from the specific activities a firm

performs and how they affect the buyer.

Some examples of differentiation –

· Ability to serve customers needs anywhere

· Simplified maintenance for the customers

· Single point at which the buyer can purchase

· Superior compatibility among products

· Uniqueness

Factors/Drivers for differentiation –

· Policy choice – every firm decides its own policies regarding the

activities to be performed and the activities to be ignored. The

policy choices are basically related to the type of services to be

provided to the customers, the credit policy, to what extent a

particular activity be adopted, the content of activity, skill and

experience required by the employees, etc

· Links – the uniqueness of a product depends to a large extent on

the links within the value chain with suppliers and distribution

channels, the firm deals with. If the firm has a good link with

suppliers and has a sound distribution channel, then it becomes

easy for the firm to produce and supply the product to the end

users

· Timing – the firms can achieve uniqueness by encashing the

opportunities at the right time. If the timing is perfect then a

successful differentiation strategy can be adopted.

· Location – this is one of the important factors for the firms to

have uniqueness. For example a bank may have its branch which is

accessible to the customers, then the bank will gain an edge

towards other banks.

· Interrelationships – a better service can be offered to the

customers by sharing certain activities e.g sales force with the

firm’s sister concerns.

· Learning – To peform better and better, continuous

improvement is necessary and this comes through continous

learning

· Integration – The firm can be termed as unique, if its level of

integration is high. The integration level means the coordination

level of value activities

· Scale – Larger the scale, more will be the uniqueness. If small

volumes of products are produced , then the uniqueness of the

product will be lost over a longer period of time. A very good

example can be home-delivery services. The type of scale leading

to differentiation varies depending on the individual firm’s

activities

· Institutional factors – This factor sometimes play a role in

making a firm unique, like relationship of management with

employees

Differentiation is governed by value activities in a value chain and

these activities in turn are governed by certain driving factors

which make the form unique

Cost of differentiation –

Differentiation generally involves costs. The differentiation adds

costs as it involves added features to cater to the needs of the

customers. Usually the cost is incurred in the following cases:

· Increased expenditure on training

· Increased advertising spend to promote the product

· Cost of hiring highly skilled salesforce

· Use of more expensive material to improve the quality of the

product, etc

Advantages of differentiation –

· Premium price for the firm

· Increase in number of units sold

· Increase in brand loyalty by the customers

· Sustaining competitive advantage

Disadvantage of differentiation –

· Uniqueness of the product not valued by buyers

· Excess amount of differentiation

· Loss due to differentiation

3) Focus Strategy –

The third business level strategy is focus. Focus is different from

other business strategies as it is segment based and has narrow

competitive scope. This strategy involves the selection of a market

segment, or group of segments, in the industry and meeting the

needs of that preferred segment (or niche) better than other market

competitors. This is also known as niche strategy.

In focus strategy, the competitive advantage can be achieved by

optimizing strategy for the target segments.

Focus strategy has two variants. They are –

a) Cost focus – Cost focus is where a firm seeks a cost advantage

in the target segment. This is basically a niche-low cost strategy

whereby a cost advantage is achieved in focuser’s target segment.

According to Porter, cost focus exploits differences in behavior in

some segments. In this the focuser concentrates on a narrow buyer

segment and out-competes rivals on the basis of lower cost.

b) Differentiation focus – Differentiation focus is where a firm

seeks differentiation in the target segment. In this, the firm offers

niche buyers something different from rivals. Firm seeks

differentiation in its target segment. Differentiation focus exploits

the specific needs of buyers in specified segments. Eg. MayBach

luxury car which is targeted to segment where customers can

afford to pay a sum as large as Rs.5.4 crores.

Following are the situations where a focus strategy is efficient –

· Market segment large enough to be profitable

· Market segment has good growth potential

· Market segment is not significant to the success of major

competitors

· Focuser has efficient resources

· Focuser is able to defend against challenges

· High costs are difficult to the competitors to meet the

specialized need of the niche

· Focuser is able to choose from different segments

Advantages of focus strategy –

· Focuser can defend against Porters competitive forces

· Focuser can reduce competition from new firms by creating a

niche of its own

· Threat from producers producing substitute products is reduced

· The bargaining power of the powerful customers is reduced

· Focus strategy, if combined with low-cost and differentiation

strategy, would increase market share and profitability

Risks of focus strategy –

· Market segment may not be large enough to generate profits

· Segment’s need may become less distinct from the main market

· Competition may take over the target-segment

Corporate Strategy

Corporate strategy is primarily about the choice of direction for the

corporation as a whole. The basic purpose of a corporate strategy

is to add value to the individual businesses in it. A corporate

strategy involves decisions relating to the choice of businesses,

allocation of resources among, different businesses, transferring

skills and capabilities in such a way as to obtain synergies among

product lines and business units, so that the corporate whole is

greater than the sum of its individual business units.

Types of Corporte Strategies

There are four types of strategic alternatives available at corporate

level. They are

1) Stability strategy –

Stability strategy implies continuing the current activities of the

firm without any significant change in direction. If the

environment is unstable and the firm is doing well, then it may

believe that it is better to make no changes. A firm is said to be

following a stability strategy if it is satisfied with the same

consumer groups and maintaining the same market share, satisfied

with incremental improvements of functional performance and the

management does not want to take any risks that might be

associated with expansion or growth.

Stability strategy is most likely to be pursued by small businesses

or firms in a mature stage of development.

Stability strategies are implemented by ‘steady as it goes’

approaches to decisions. No major functional changes are made in

the product line, markets or functions.

However, stability strategy is not a ‘do nothing’ approach nor does

it mean that goals such as profit growth are abandoned. The

stability strategy can be designed to increase profits through such

approaches as improving efficiency in current operations.

Why do companies pursue a stability strategy?

1) the firm is doing well or perceives itself as successful

2) it is less risky

3) it is easier and more comfortable

4) the environment is relatively unstable

5) too much expansion can lead to inefficiencies

Situations where a stability strategy is more advisable than the

growth strategy:

a) if the external environment is highly dynamic and

unpredictable

b) strategic managers may feel that the cost of growth may be

higher than the potential benefits

c) excessive expansion may result in violation of anti trust

laws

Types of stability strategies –

1) Pause/Process with caution strategy – some organizations

pursue stability strategy for a temporary period of time until the

particular environmental situation changes, especially if they have

been growing too fast in the previous period. Stability strategies

enable a company to consolidate its resources after prolonged rapid

growth. Sometimes, firms that wish to test the ground before

moving ahead with a full-fledged grand strategy employ stability

strategy first.

2) No change strategy – a no change strategy is a decision to do

nothing new i.e continue current operations and policies for the

foreseeable future. If there are no significant opportunities or

threats operating in the environment, or if there are no major new

strengths and weaknesses within the organization or if there are no

new competitors or threat of substitutes, the firm may decide not to

do anything new.

3) Profit strategy – the profit strategy is an attempt to

artificially maintain profits by reducing investments and short-term

expenditures. Rather than announcing the company’s poor position

to shareholders and other investors at large, top management may

be tempted to follow this strategy. Obviously, the profit strategy is

useful to get over a temporary difficulty, but if continued for long,

it will lead to a serious deterioration in the company’s position.

The profit strategy is thus usually the top management’s short term

and often self serving response to the situation.

In general, stability strategies can be very useful in the short run,

but they can be dangerous if followed for too long.

2) Growth/Expansion Strategies –

Growth strategies are the most widely pursued corporate strategies.

Companies that do business in expanding industries must grow to

survive. A company can grow internally by expanding its

operations or it can grow externally through mergers, acquisitions,

joint ventures or strategic alliances.

Reasons for pursuing growth strategies –

1) to obtain economies of scale

2) to attract merit

3) to increase profits

4) to become a market leader

5) to fulfill natural urge

6) to ensure survival

Growth strategies can be divided into three broad categories:

a) Intensive strategies

b) Integration strategies

c) Diversification strategies

a) Intensive strategies – without moving outside the

organization’s current range of products or services, it may be

possible to attract customers by intensive advertising, and by

realigning the product and the market options available to the

organization. These strategies are generally referred to as

intensification strategies.

There are three important intensive strategies –

· Market penetration – seeks to increase market share for

existing products in the existing markets through greater marketing

efforts. This includes activities like increasing the sales force,

increasing promotional effort, giving incentives, etc. Marketing

penetration is generally achieved through the following approaches

–-

increasing sales to the current customers by increasing

the size of purchase, advertising other uses, giving price incentives

for increased use

– attracting the competitor’s customers by increasing

promotional efforts, establishing sharper brand differentiation,

offering price cuts

– attracting non users to buy the product by inducing trail

use through sampling, advertising new users

This strategy is effective when currents markets are not saturated,

usage rate of present customers is low, economies of scale can

bring down the costs and when market shares of major competitors

are declining while total sales are increasing.

Market development – seeks to increase market share by selling

the present products in new markets. This can be achieved through

the following approaches –

– by entering new geographic market through regional

expansions, national expansion and international expansion

– by entering new market segments by developing product

versions to appeal to other segments, entering other channels of

distribution and through advertising in other media.

This strategy is effective when new untapped or unsaturated

market exists, new channels of distribution are available, the firm

has excess production capacity, the firm’s industry is becoming

rapidly global and when the firm has resources for expanded

operations.

· Product development – seeks to increase market share by

developing new or improved products for present markets. Can be

achieved through developing new product features, developing

quality variations and by developing additional models and sizes

(product proliferation)

This strategy is effective when the firm’s products are in maturity

stage, the firm witnesses rapid technological developments in the

industry, the firm is in a high growth industry, competitors bring

out improved quality products from time to time and the firm has

strong R & D capabilities

b) Integration Strategies – integration basically means

combining activities relating to the present activity of a firm. Such

a combination can be done on the basis of the industry value chain.

A company performs a number of activities to transform an input

to output. These activities include right from the procurement of

raw materials to the production of finished goods and their

marketing and distribution to the ultimate customers. These

activities are also called value chain activities. The firm that adopts

integration may move forward or backward the industry value

chain

Expanding the firm’s range of activities backward into the souces

of supply and/or forward into the distribution channel is called

‘vertical integration’. Thus, if a manufacturer invests in facilities to

produce raw materials or component parts that it formerly

purchased from outside suppliers, it remains in the same industry,

but its scope of operations extend to two stages of the industry

value chain. Similarly, if a manufacturer opens a chain of retail

outlets to market its products directly to consumers, it remains in

the same industry, but its scope of operations extend from

manufacturing to retailing. Vertical integration can be full

integration, participating in all stages of the industry value chain or

partial integration, participating in selected stages of the industry

value chain.

A firm can pursue vertical integration by starting its own

operations or by acquiring a company already performing the

activities it wants to brings inhouse. Thus, integration is basically

of two types –

 Vertical integration

 Horizontal integration

Vertical Integration – involves gaining ownership or

increased control over suppliers or distributors. Vertical integration

is of two types –

1) Backward integration – involves gaining ownership of firm’s

suppliers. For example, a manufacture of finished products may

take over the business of a supplier who manufactures raw

materials, component parts and other inputs. It decreases the

dependability of the supply and quality of raw materials used as

production inputs. This strategy is generally adopted when

– present suppliers are unreliable, too costly or cannot meet

firm’s needs

– the firm’s industry is growing rapidly

– Number of suppliers is small, but the number of competitors

is large

– Stable prices are important to stabilize cost of raw materials

– Present suppliers are getting high margins

– The firm has both capital and hr to manage the new business

2) Forward integration – involves gaining ownership or

increased control

Over distributors or retailers. This strategy is generally adopted

when

– the present distributors are expansive, unreliable or

incapable of meeting the firm’s needs

– the availability of quality distributors is limited

– the firm’s industry is growing and will continue to grow

– the advantages of stable production are high

– present distributors or retailers have high profit margins

– the firm has both capital and hr to manage new business

Advantages of vertical integration –

1) a secure supply of raw materials or distribution channels

2) control over raw materials and other inputs required for

production or distribution channels

3) access to new business opportunities and technologies

4) elimination of need to deal with a wide variety of suppliers

and distribution

Disadvantages of vertical integration –

1) increased costs, expenses and capital requirements

2) loss of flexibility in investments

3) problems associated with unbalanced facilities or unfulfilled

demand

4) additional administrative costs associated with managing a

more complex set of activities

Horizontal Integration – is a strategy seeking ownership or

increased control over a firm’s competitors.

Advantages are

– it eliminates or reduces competition

– it yields access to new markets

– it provides economies of scale

– it allows transfer of resources and capabilities

c) Diversification Strategies – is the process of adding new

businesses to existing businesses of the company. In other words,

diversification adds new products or markets in the existing ones.

A diversified company is one that has two or more distinct

businesses. The diversification strategy is concerned with

achieving a greater market from a greater range of products in

order to maximize profits. From the risk point of view, companies

attempt to spread their risk by diversifying into several products or

industries.

Diversification can be achieved through a variety of ways:

1) through mergers and acquisitions

2) through joint ventures and strategic alliances

3) through starting up a new unit

Reasons for diversification –

1) saturation or decline of the current business

2) better opportunities

3) sharing of resources and strengths

4) new avenues for reducing costs

5) obtain technologies and products

6) use of brand name

7) risk minimization

Types of diversification –

a) concentric diversification

b) conglomerate diversification

a) Concentric diversification – adding to new, but related

business is called Concentric diversification. It involves acquisition

of businesses that are related to the acquiring firm in terms of

technology, markets or products. The selected new business has

compatibility with the firm’s current business.

Advantages –

– businesses sharing tangible and intangible resources

– increasing the firm’s stock value

– increases the growth rate of the firm

– better use of funds than ploughing them back into internal

growth

– improves the stability of earning and sales

– balances the product line when the life cycle of the current

products have peaked

– helps to acquire a needed resource quickly

– achieves tax savings

– increases efficiency and profitability through synergy

– reduces risk

b) Conglomerate diversification – adding to new, but unrelated

businesses Is called conglomerate diversification. The new

businesses will have no relationship to the company’s technology,

products or markets.

Advantages –

– business risk is scattered over diverse industries

– financial resources are invested in industries that offer the

best profit prospects

– buying distressed businesses at a low price can enhance

shareholder wealth

– company profitability can be more stable in economic

upswings and downswings

Disadvantages –

– it is difficult to manage different businesses effectively

– the new businesses may not provide any competitive

advantage if it has no strategic fits

Differences between concentric and conglomerate

diversification

Sl.No Concentric

Diversification

Conglomerate

Diversification

1 Diversifying into

businesses related to

the existing business

Diversifying into

businesses unrelated

to the existing

business

2 There is

commonality in

markets, products or

technology

No commonality in

markets, products or

technology

3 Main objective is to

increase shareholder

value through

‘synergy’ by sharing

skills, resources and

capabilities

Main objective is to

increase shareholder

value through profit

maximization

4 Less risky More risky

Means to achieve diversification –

i. Mergers & Acquisitions

ii. Joint ventures

iii. Strategic alliances

iv. Internal development

i) Mergers & Acquistions – a merger occurs when two or

more organizations of about equal size combine to become one

through an exchange of stock or cash or both.

Mergers can take place in different ways

Acquisition occurs when a large organization purchases

a smaller firm, or vice versa.

Consolidation is when both firms dissolve their identity

to create a new firm. It is also known as amalgamation.

Friendly merger – when both firms desire a merger or

acquisition, it is termed as friendly merger

Takeover – a surprise attempt by one company to acquire

control of another Company against the will of the current

management is called a takeover or hostile takeover. It is usually

done through the purchase of controlling share of voting stock in a

publicly traded company. In the case of takeover, the

acquiring firms retains its identity whereas the target firm loses its

identity after restructuring.

Demerger – or split or division of a company is the

opposite of mergers and acquisition. This happens when a part of

the undertaking is transferred to a newly formed company or to an

existing company. The size of the company after demerger would

reduce.

Reasons for mergers & acquisitions –

 To gain economies of scale

 To achieve diversification of the portfolio

 To quickly acquire valuable resources

 To reduce risks and borrowing costs

 To achieve growth

 To gain additional capacity

 To obtain taxation or investment incentive

 To gain managerial expertise

 To acquire market supremacy

 To bypass legal hurdles

 To take over sick units

Types of mergers –

a) horizontal merger – companies producing the same product

or doing same business join together.

b) Vertical merger – joining of two or more companies

involved in different stages of production or distribution of the

same product or service.

c) Lateral or allied merger – when the firms producing different

products which are related in some way come together

d) Conglomerate merger – the merger of two or more

companies producing unrelated products.

e) Concentric merger – if the activities of the segments brought

together are so related that there is carryover of specific

management functions or complimentarity in relative strengths

among them

f) Circular merger – when firms belonging to the different

industries and producing altogether different products combine

together under the banner of central agency.

The merger process –

1) Identify industries

2) Select sectors

3) Choose companies

4) Evaluate cost of acquisition and returns

5) Rank the candidates – strategic fit, financial fit, cultural fit

6) Identify good candidates

7) Decide the extent of acquisition/retention

8) Merger implementation

9) Post-merger integration

Demerits of M & A

1) sometimes expensive premiums are paid to acquire a

business

2) a number of difficulties are faced in integrating the activities

and resources of the acquired firm into the operations of the

acquiring firm

3) synergies can be quickly imitated by the competitors

4) cultural clashes create a major challenge, which may doom

the induced benefits

ii) Joint Ventures – joint ventures are assuming an

increasingly prominent role in the strategy of leading firms.

A joint venture occurs when two or more companies join together

to form a separate legal entity, where each of the partners own

equal or near equal stake. These ventures are formed to capitalize

on each other’s distinctive competencies. The most common forms

of a joint venture include those between an international firm with

a domestic firm.

Types of joint ventures –

1) International joint ventures: in this type of joint ventures, the

international partner intends to benefit from the domestic partner’s

local knowledge of industry conditions of a specific industry. This

strategy will help the international firm to hedge its risks of

product development costs specific to that market. Further, some

countries make it mandatory for international firms to only enter

the country through a joint venture with the local partner, rather

than on their own. The primary disadvantage in this type of joint

venture is that the international firm might lose control of its

technology to its joint venture partner. Also, such joint ventures

will not give the firm enough control over its joint venture, so that

it could compete globally against its competitors.

2) Diversification joint venture – a firm may diversify into new

products or markets through a joint venture. In such joint ventures,

the specific benefits arise from transfer of technical, managerial

and financial expertise from one business to another

3) Market entry joint ventures – in this type of joint ventures,

two or more firms in different businesses enter a new business

where they could capitalize on their combined capabilities

iii) Strategic Alliances – In strategic alliances, two or

more firms jointly Cooperate for mutual gain. Each partner brings

knowledge or Resources to the partnership. For example, one

partner provides Manufacturing capabilities while the other

partner provides marketing

Marketing expertise. In the long run, partners can

learn from each other and develp new core

competencies.

Advantages of strategic alliances – improvement of efficiency,

access to knowledge,

Overcoming local government regulations, overcoming

restrictions in competition

Issues involved – assess and value partner knowledge, determine

knowledge accessibility,

Evaluate case of knowledge transfer, establish knowledge

connections between the partners,

Ensure that cultures are in alignment

3) Defensive strategies – These strategies are also

called retrenchment strategies. A company may pursue

retrenchment strategies when it has a weak competitive

position in some or all of the product lines resulting in poor

performance – sales are down and profits are dwindling.

In an attempt to eliminate the weaknesses that are

dragging the company down, management may follow one or

more of the following retrenchment strategies –

a) Turnaround

b) divestment

c) bankruptcy

d) liquidation

a) Turnaround – a firm is said to be sick when it faces a severe

cash crunch or a consistent downtrend in its operating profits. Such

firms become insolvent unless appropriate internal and external

actions are taken to change the financial picture of the firm. This

process of recovery is called turnaround strategy.

The three phases of turnaround –

1) First phase – is the diagnosis of impending trouble. Many authors

and research studies have indicated distinct early warning signals of

corporate sickness

2) Second phase – involves analyzing the causes of sickness to

restore the firm on its profit track. Thse measures are of both shortterm

and long-term nature

3) The third and final phase – involves implementation of change

process and its monitoring

When turnaround becomes necessary –

· Decreasing market share

· Decreasing constant rupee sales

· Decreasing profitability

· Increasing dependence on debt

· Restricted dividend policies

· Failure to reinvest sufficiently in the business

· Diversification at the expense of the core business

· Lack of planning

· Inflexible chief executive

· Management succession problems

· Unquestioning boards of directors

· A management team unwilling to learn from its competitors

Types of turnaround strategies –

a) strategic turnaround

b) operating turnaround – revenue increasing strategies, cost

cutting strategies, asset reduction strategies, combination strategies

Turnaround Process

i) revival of a sick unit requires the formulation and

implementation of a new strategy

ii) localizing problems and sequencing the corrective actions

helps in the revival of the sick unit

iii) the successful implementation of the turnaround strategy

requires appropriate organization structure, a participative type

of decision making environment, effective administrative and

budgetary controls, training, performance evaluation, career

progression and rewards.

iv) The turnaround strategy must focus on profit generation and

profits must be regarded as a legitimate goal

v) The acceptance and commitment of managers and employees

of the organization towards revival measures

vi) Openness in the change process leads to confidence in the top

management and its strategy

vii) Understanding of technical processes and problem solving

attitude in overcoming technical snags is essential for turning

around of sick companies

viii) The vital role of consultants

ix) Active support given to the chief executive

x) Focused leadership

b) Divestiture – selling a division or part of an organization is

called divestiture.

Generally used in the following circumstances –

– when the business cannot be turned around

– when the business needs more resources than the

company can provide

– when a business is responsible for a firm’s overall poor

performance

– when a business is a misfit with the rest of the

organization

– when a large amount of cash is required quickly

– when government’s legal actions threaten the existence of

a business

Types –

1) Spin-off – a new company comes into existence. The

shareholders of the parent company become the shareholders of the

new company spun off. It is a kind of demerger when an existing

parent company distributes on a pro-rata basis the shares of the new

company to the shareholders of the parent company free of cost.

There is no money transaction, subsidiary’s assets are not revalued,

and transaction is treated as stock dividend. Both the companies

exist and carry on their businesses independently after spin-off. Eg.

ITC has spun off hotel business from the company and formed ITC

Hotels Ltd

Involuntary spin-off – when faced with an adverse regulatory

ruling, a firm may be forced to spin-off to comply with the legal

formalities.

Defensive spin-off – defensive spin-off is a takeover defence.

Company may choose to spin-off divisions to make it less attractive

to the bidder

Tax consequences of spin-off : Shares allotted to the shareholders

during spin-off is not taxed as capital gain or as dividend

2) Sell-off – it is a form of restructuring, where a firm sells a

division to another company. When the business unit is sold,

payment is received generally in the form of cash or securities

3) Voluntary corporate liquidation or bust-ups – it is also known

as complete sell-off. The companies normally go for voluntary

liquidation because they create value to the shareholders. Here the

firm sells its assets/divisions to multiple parties which may result in

a higher value being realized than if they had to be sold as a whole.

Through a series of spin-offs or sell-offs a company may go

ultimately for liquidation

4) Equity carveouts – it is a different type of divestiture and

different form of spin-off and sell-off. The parent company may

sell a 100% interest in subsidiary company or it may choose to

remain in the subsidiary’s line of business by selling only a partial

interest (shares) and keeping the remaining percentage of

ownership.

5) Leveraged buyouts (LBO’s) – a leveraged buyout is an

acquisition of a company in which the acquisition is substantially

financed through debt. Much of the debt may be secured by the

assets of the company.

c) Bankruptcy – this is a form of defensive strategy. It allows

organizations to file a petition in the court for legal protection to the

firm, in case the firm is not in a position to pay its debt. The court

decides the claims on the company and settles the corporation’s

obligations.

d) Liquidation – occurs when an entire company is dissolved and

its assets are sold. It is a strategy of the last resort. When there are

no buyers for a business which wants to be sold, the company may

be wound up and its assets may be sold to satisfy debt obligations.

Liquidation becomes inevitable under the following circumstances

–

1) when an organization has pursued both turnaround strategy

and divestiture strategy, but failed

2) when an organization’s only alternative is bankruptcy.

3) When the shareholders of a company can minimize their losses

by selling the assets of a business

Combination strategy – a company can pursue a combination of

two or more corporate strategies simultaneously. But a combination

strategy can be exceptionally risky if carried too far. No

organization can afford to pursue all the strategies that might

benefit the firm. Difficult decisions must be made. Priorities must

be established. Organizations like individuals have limited

resources, so organizations must choose among alternative

strategies