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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
Strategic advantage related to challenges of environment ensuring achievement of basic
Proper implementation 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 thinking and action
framework for guiding enterprise
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
Policy is the guideline for decisions and actions on the part of subordinates. It is a general statement of understanding made for achievement of objectives. Policies are statements or a understanding of decision making. They are thought oriented. Power is delegated to the subordinates for implementation of policies. In general terms, policy is concerned with course of action chosen for the fulfillment of the set of objectives. It is an overall guide that governs and controls managerial actions. Policies may be general or specific, organizational or functional, written or implied. They should be clear and consistent. commonly accepted
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.
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.
Strategies are specific objective.
actions suggested to achieve the
Strategies are action oriented and everyone in the organization are empowered to implement them. Strategy cannot be delegated downward because it may require last minute decisions Strategies and policies both are the means towards the end.
6. In other words, both are directed towards meeting organizational objectives.
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 –
Strategy determines the major plans to be undertaken while tactics is the means by which previously determined plans are executed 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 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
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.
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.
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.
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
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
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 Impact Risk Involved Profit potential Time Horizon Flexibility Levels Corporate Significant High High Long High Business Major Medium Medium Medium Medium Functional Insignificant Low Low Low Low
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 control
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 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 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
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 have
• High market share means they 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) ii) business strength 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.
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.
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 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 1. BCG matrix consists of four cells 2. The business unit is rated against relative market share and industry growth rate 3. The matrix uses single measure to assess growth and market share GE Matrix 1. GE matrix consists of nine cells 2. The business unit is rated against business strength and industry attractiveness 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 5. Has many limitations 4. The matrix uses three types of classification i.e high/medium/low and strong/average/weak 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 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. 2. 3. 4.
Profit objective – or performance objectives Market objective - increase in market share Productivity objective – cost per unit of production product development, product
Product objective – diversification, branding, etc
Social objective – tree plantation, provision for drinking water, setting up of community center, etc
Financial objective – relates to cash flow, debt equity ratio, working capital, new issues, debt instruments, etc
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 – 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.
Super ordinate goals Skills Style
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
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. 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 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
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 – Providing description of the competitive environment that inform strategist and guide strategy formulation
b) c) d)
Forecasting future development in the competitive environment and compensating for exposed competitive
Determining when a strategy is no longer viable or sustainable
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 – Identification of issues – understand the effects of external factors on business – technology driven, political, economic, competitive positioning
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 –
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 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 Logistics Operations Outbound Logistics Marketing Service & 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 – 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
Operations transform these various inputs into the final products or services –machining, packaging, assembly testing, etc
Outbound logistics collect, store and distribute the product to customers.
Marketing and sales makes consumers aware of the product or service so that they are able to purchase it.
Services activities helps improving the effectiveness or efficiency of primary activities
Support activities are as follows – Procurement – process for acquiring the various resource inputs to the primary activities and this is present in many parts of the organization
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
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. 2. 3. 4. 5. 6. 7.
planning organizing leading coordinating controlling staffing 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: 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.
Best Differentiation cost Provide
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 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 –
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.
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) 2) 3) 4) 5) 6)
to obtain economies of scale to attract merit to increase profits to become a market leader to fulfill natural urge to ensure survival
Growth strategies can be divided into three broad categories: a) b) c) Intensive strategies Integration strategies Diversification strategies
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
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 –
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
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 –
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
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) 2) 3) through mergers and acquisitions through joint ventures and strategic alliances through starting up a new unit
Reasons for diversification – 1) 2) 3) 4) 5) 6) 7) saturation or decline of the current business better opportunities sharing of resources and strengths new avenues for reducing costs obtain technologies and products use of brand name risk minimization
Types of diversification – a) b) concentric diversification conglomerate diversification
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 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 diversification between concentric and conglomerate
Concentric Diversification Diversifying into businesses related to the existing business There is commonality in markets, products or technology Main objective is to increase shareholder value through ‘synergy’ by sharing skills, resources and capabilities Less risky
Conglomerate Diversification Diversifying into businesses unrelated to the existing business No commonality in markets, products or technology Main objective is to increase shareholder value through profit maximization
Means to achieve diversification – i. ii. Mergers & Acquisitions Joint ventures
Strategic alliances Internal development
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 – 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
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) 2) 3) 4) 5) 6) 7) 8) 9) Identify industries Select sectors Choose companies Evaluate cost of acquisition and returns Rank the candidates – strategic fit, financial fit, cultural fit Identify good candidates Decide the extent of acquisition/retention Merger implementation 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 –
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 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 –
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 – 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 – 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
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