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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
An organization may take contradictory actions either simultaneously or with a gap of time. strategy can simply be put as management’s plan for achieving its objectives. a firm is engaged in closing down of some of its business and at the same time expanding some • Strategy is future oriented. For example. 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. Strategic actions are required for new situations which have not arisen before in the past • . to solve certain problems or to achieve a desirable end.After considering bothe the views. 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. strategy may involve a contradictory action. internal factors are matched with them • Strategy is the combination of actions aimed to meet a particular condition. The actions are different for different situations • Due to its dependence on environmental variables. To meet the opportunities and threats provided by the external factors.
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. includes the determination and evaluation of alternative paths to an already established mission or objective and eventually. However. according to a survey conducted in 1974. A well made strategy guides managerial action and thought. 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. It provides an integrated approach for the organization and aids in meeting the challenges posed by environment Essence of Strategy – Strategy. both are different and should not be used interchangeably . choice of the alternative to be adopted.
9. the promotion policy may require the promotion of the senior employee and hence he would be eligible for promotion. It is an overall guide that governs and controls managerial actions. when the performance of two employees is similar. . policy is concerned with course of action chosen for the fulfillment of the set of objectives. 6.1. Power is delegated to the subordinates for implementation of policies. 3. commonly accepted 2. 10. It is a general statement of understanding made for achievement of objectives. Policies may be general or specific. 7. organizational or functional. They should be clear and consistent. 5. 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. 8. written or implied. Policies have to be integrated so that strategy is implemented successfully and effectively. For example. Policy is the guideline for decisions and actions on the part of subordinates. 1. They are thought oriented. Policies are statements or a understanding of decision making. 4. In general terms.
both are directed towards meeting organizational objectives. 6. In other words. 5. deprive the enemy of the means to ii) . actions suggested to achieve the 3. Strategies are specific objective. Strategies are action oriented and everyone in the organization are empowered to implement them. 4. Strategy cannot be delegated downward because it may require last minute decisions Strategies and policies both are the means towards the end. A few points of distinction between the two are as follows – i) Strategy determines the major plans to be undertaken while tactics is the means by which previously determined plans are executed The basic goal of strategy according to military science is to break the will of the army. Strategy v/s Tactics Strategies are on one end of the organizational decisions spectrum while tactics lie on the other end. Strategy is a rule for making decision while policy is contingent decision.2. 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”. 7. Carl Von Clausewitz .
the requirement of information is more than that required in tactics. new ideas. The decisions are taken on the basis of opportunities. Tactics is determined on a periodic basis by various organizations. Tactics use information available internally in an organization vii) 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 viii) . destroy or obtain control of his resources or make him surrender.fight. v) 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. etc. 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. A fixed time table may be made for following tactics. Thus. So the evaluation of strategy is difficult than the evaluation of tactics. occupy his territory. the time horizon in terms of strategy is flexible but in case of tactics. In contrast tactical decisions are more certain as they work upon the framework set by the strategy. vi) Since an attempt is made in strategy to relate the organization with its environment. iv) Strategy has a long term perspective and occasionally it may have a short term duration. it is short run and definite. The authority is not delegated below the levels than those which possess the perspective required for taking decisions effectively iii) Strategy is formulated in both a continuous as well as irregular manner.
Eg. The fundamental concept in the SBU is the identification of dicrete independent product/market segments served by the organization. Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it is serving. Because of the different environments served by each product. which consists of companies which are single product companies. However. Reliance Industries and Ashok Leyland Limited. On the other hand tactics are of less importance because they are concerned with specific part of the organization ix) Levels of Strategy It is believed that strategic decision making is the responsibility of top management. Strategy operates at different levels vis-à-vis: • Corporate level • Business level • Functional level There are basically two categories of companies – one.Strategies are the most important factor of organization because they decide the future course of action for organization as a whole. a SBU is created for each independent product/segment. . The SBU concept was introduced by General Electric Company (GEC) of USA to manage product business. it is considered useful to distinguish between the levels of operation of the strategy. which have different businesses organized as different directions or product groups known as profit centres or strategic business units (SBUs) and other.
strategies are formulated according to organization wise policies. etc. Mostly. corporate level strategy serves the whole business. corporate level strategies are futuristic. These are value oriented.Each SBU has a clearly defined product/market segment and strategy. conceptual and less concrete than decisions at the other two levels. Each SBU allocates resources according to its individual requirements for the achievement of organizational objectives. innovative and pervasive in nature. In small and family owned businesses. The three levels are explained as follows – Corporate level strategy – At the corporate level. structural redesigning. The board of directors and chief executive officer are the primary groups involved in this level of strategy making. It develops its strategy according to its own capabilities and needs with overall organizations capabilities and needs. diversification. the entrepreneur is both the general manager and the chief strategic manager . They occupy the highest level of strategic decision making and cover the actions dealing with the objectives of the organization. In these organizations. Such decision are made by top management of the firm. As against the multi product organizations. In multiple product company. The strategy is implanted at the next lower level by functional strategies. the single product organizations have single strategic business unit. These are characterized by greater risk. The examples of such strategies include acquisition strategies. cost and profit potential as well as flexibility. a strategy is formulated for each SBU (known as business level strategy) and such strategies lie between corporate and functional level strategies.
The corporate strategy has impact on business strategy. Business strategy defines the choice of product or service and market of individual business within the firm. However. allocation of resources among functional areas and coordination between them for achievement of corporate level objectives. Functional level Strategy This strategy relates to single functional operation and the activities involved therein. The SBU managers are involved in this level of strategy. At such a level. 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”. come under the gamut of business level strategies. 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. This level is at the operating end of the organization.Business Level Strategy – The strategies formulated by each SBU to make best use of its resources given the environment it faces. strategy is a comprehensive plan providing objectives for SBUs. The strategies are related with a unit within the organization. The decisions at this level within the organization are .e within the broad constraints and policies and long term objectives set by the corporate strategy. These strategies operate within the overall organizational strategies i.
The strategies are concerned with how different functions of the enterprise like marketing. 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 . 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. It comes below the functional level strategy and involves actions relating to various sub functions of the major function. manufacturing. the functional level strategy of marketing function is divided into operating levels such as marketing research. This level is known as the operating level. etc contribute to the strategy of other levels. For example.described as tactical. finance. Functional strategy deals with a relatively restricted plan providing objectives for specific function. sales promotion.
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 basic factor responsible for differentiation has not been governmental policies.Adaptability Insignificant Medium Significant Importance of strategy – With the increase in the pressure of external threats. Jessops. There have been companies like Martin Burn. 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 • . etc. etc that have completely become extinct and some companies which were not existing before they became the market leaders like Reliance. Infosys. companies have to make clear strategies and implement them effectively so as to survive.
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. Initially. The elements within it interact among themselves. 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. 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.It gets managers into the habit of thinking and thus makes them. • 2) Process of Strategy The process of strategy is cyclical in nature. the process of strategy was discussed in terms of four phases which are – . coordination and allocation of resources With all the benefits listed above.
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) 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.Prahalad. the process comprises of five steps.K.
objectives and goals. ‘purpose’. ‘why’. business definition and objectives. From strategy formulation point of view.1) Strategic Intent – Setting of organizational vision. ‘targets’. business definition. an organization must define. Vision serves the purpose of stating what an organization wishes to achieve in long run. it exists. ‘how’ it justifies that existence. .‘mission’. ‘goals’. It is reflected through vision. ‘objectives’. The objectives of the sub unit contribute to the objectives of the larger unit of which it is a part. and ‘when’ it justifies the reasons for that existence. mission. The strategic intent makes clear what an organization stands for. mission and objectives is the starting point of strategy formulation. 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 organizations strive for achieving the end results which are ‘vision’. These terms become the base for strategic decisions and actions. The answers to these questions lies in the organization’s mission. etc The hierarchy of strategic intent lays the foundation for the strategic management of any organization.
mission and business Organizat ional Analysis .Strategic process in a single SBU firm Defining vision.
Environmental Analysis Setting objectives and goals Identifying alternative strategies Choice of strategy Implementation of strategy Strategy evaluation control and .
. Mission has a societal orientation and is a statement which reveals what an organization intends to do for the society. After accomplishment of these objectives. the overall objectives of the organization are achieved. Organization’s mission becomes the cornerstone for strategy. It is a public statement which gives direction for different activities which organizations have to carry on. Objectives provide a direction to the organization and all the divisions work towards the attainment of the set objectives. It motivates employees to work in the interest of the organization. An organization can have objectives in terms of profitability and productivity.Feedback Vision and Mission – The vision of an organization is the expectation of the owner of the organization and putting this vision into action is mission. It is necessary for the organization to assess the process identifying the objectives of each functional area. Objectives represent desired results which the organization wishes to attain. Objectives and goals are the terms which are used interchangeably. Objectives and Goals – Organizational objectives are defined as ends which the organization seeks to achieve by its existence and operation.
Environmental analysis. The analysis emphasis on what could happen and not necessarily what will happen. This environment may be internal or external. The factors which comprises firms environment are of two types : .e environmental diagnosis • Environmental analysis is an exercise in which total view of environment is taken.e environmental search Identifying opportunities and threats based on environmental monitoring i. also known as environmental scanning or appraisal. This clarity in definition of mission and objectives helps in the detailed analysis of the environment. A large part of the process of environmental analysis seeks to explore the unknown terrain. Some elements indicate opportunities while others may indicate threats. function and relationship for searching opportunities and threats and determining where they come from. The environment is divided into different components to find out their nature. There are two aspects involved in environmental analysis: • Monitoring the environment i. ultimately the analysis of these components is aggregated to have a total view of the environment. the strategic intent has to be very clear. For conducting an environmental analysis. the dimensions of future. 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.2) Environmental and Organizational Analysis – Every organization operates within an environment.
technological. legal. The analysis provides for elimination of alternatives which are inconsistent with the organization objectives. economic factors. environmental analysis provides for certain anticipated changes in the organization’s network. 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.Factors which influence environment suppliers. “strategic alternatives revolve around the question whether to continue or change the business. political. After the identification of strategic alternatives they have to be evaluated to match them with the environmental analysis. The organization equips itself to meet the unanticipated changes and face the ever increasing competition. According to Glueck & Jauch. It also warns the organization about the threats. customers and competitors and • • directly including Factors which influence the firm indirectly including social. Due to the element of uncertainty. the next step is to identify the various strategic alternatives. etc The environmental analysis plays a very important role in the process of strategy formulation. 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 . 3) IDENTIFICATION OF STRATEGIC ALTERNATIVES After environmental analysis.
customer functions or alternative technology. in same market and with the existing technology. Expansion – This is adopted when environment demands increase in pace of activity. the company does not go beyond what it is doing now. customer functions and the technology. then it has to reduce its scope in terms of customer group. Stability – In this. Modernization. It involves partial or total . The company serves with same product. This is possible when environment is relatively stable. These may be broadened either singly or jointly. Company broadens its customer groups.result into large number of alternatives through which an organization relates itself to the environment. there are basically four grand strategies alternatives: • Stability • Expansion • Retrenchment • Combination These are together known as stability strategies/basic strategies. According to Glueck. improved customer service and special facility may be adopted in stability. This kind of a strategy has a substantial impact on internal functioning of the organization Retrenchment – If the organization is going for this strategy.
When the organization gains ownership over competitors. customer groups or alternative technology. 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. Diversification – Diversification involves change in business definition either in terms of customer functions. In forward integration. Example – L & T getting out of cement business. this is known as combination strategy. to minimize threats. Diversification can be either related or . Integration can be either forward or backward in terms of vertical integration. This kind of strategy is possible for organizations with large number of portfolios. thus moving towards customers while in backward integration the company seeks ownership over firm’s suppliers thus moving towards raw materials. Combination – When all the three strategies are taken together. Apart from the above four grand strategies. it gains ownership over distribution or retailers. It is done to minimize the risk by spreading over several businesses. to capitalize organization strength and minimize weaknesses. to avoid current instability in profit & sales and to facilitate higher utilization of resources. Through modernization. it is engaged in horizontal integration. technology is used as the strategic tool to increase production and productivity or reduce cost. other commonly used strategies are – Modernization – In this.withdrawal from three things.
two or more companies form a temporary partnership (consortium). horizontal or vertical. to manage political and cultural difficulty. Merger takes place with mutual consent and common goals Acquisition – For the organization which acquires another. to overcome weaknesses and sometimes to get tax benefits. to gain competitive advantage. 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. Companies go for merger to become larger. it is acquisition and for organization which is acquired. It is of the following types – • Concentric diversification • Conglormerate diversification • Horizontal diversification Joint ventures – In joint ventures. it is merger Takeovers – In takeovers. to diversify and expand. to bring distinctive competences. active or passive. The pooling of resources. there is a strong motive to acquire others for quick growth and diversification .unrelated. investment and risks occur for mutual gain Mergers – It is an external approach to expansion involving two or more than two organizations. internal or external. The firms share the benefits of the alliance and control the performance of assigned tasks. Companies opt for joint venture for synergistic advantages to share risk.
it may be possible to choose all strategic alternatives but for a single company it is quite different. While making a choice. There are three objective ways to make a choice – • Corporate portfolio analysis .Divestment – In divestment. Turnaround Strategy – When the company is sick and continuously making losses. It is the efforts in reversing a negative trend and it is the efforts to keep an organization alive. 4) Choice of strategy After evaluation of strategic alternatives is choice of the most suitable alternative. All these alternatives are available to an organization and according to its objectives. For a business group. it can decide on the one which is most suitable . 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. It is referred to the disposing off a part of the business. Strategic choice is like a decision making process. The strategic alternatives has to be matched with the problem. it goes for turnaround strategy. the company which is divesting has no ownership and control in that business and is engaged in complete selling of a unit.
some with low risk but dull growth and some with high risk but . Indeed. Many organizations will not wish to risk having all their products at the same stage of development. When an organization has a number of products in its portfolio. 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. Some will be relatively new and some much older. and some products with real growth potential but may still be in the introductory stage. So the key strategy is to produce a balanced portfolio of products. it can select more than one strategic alternative depending upon demand of the situation prevailing in the different portfolios. It is useful to have some products with limited growth but producing profits steadily.• Competitor analysis • Industry analysis Corporate Portfolio Analysis When the company is in more than one business. it is quite likely that they will be in different stages of development. 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. It is necessary to analyze the position of different business of the business house which is done by corporate portfolio analysis.
GE nine cell matrix .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. BCG matix 4. Experience curve 2. PLC concept 3.
and divest those businesses that have low market share and low growth prospects. by which sales of a particular product or business unit has increased b) . It is also called as the growth share matrix.5. This is the most popular and most simplest matrix to describe the corporation’s portfolio of businesses or products. 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 a) market growth rate – is the percentage of market growth. The BCG matrix helps to determine priorities in a product portfolio. Space diagram 6. Directional Policy matrix BCG MATRIX – the bcg matrix was developed by Boston Consulting group in 1970s. Hofer’s product market evaluation matrix 7. Its basic purpose is to invest where there is growth from which the firm can benefit.
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 products or business units are classified as – Stars Cash cows Question marks Dogs Stars – high growth.Analysis of the BCG matrix – the matrix reflects the contribution of the products or business units to its cash flow. The general features of stars are - . Based on this analysis.
it is therefore likely that they will be able to generate both cash and profits. The general features of cash cows are – • They generate both cash and profits • The business is mature and needs lower levels of investment . the general strategy is to take cash from the cash cows to fund stars. Over the time. On this basis. all growth may slow down and the stars may eventually become cash cows. 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 other problem children may be milked or even sold to provide funds elsewhere. Such profits could then be transferred to support the stars. If they cannot hold market share.• investment 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. Cash may also be invested selectively in some problem children (question marks) to turn them into stars. they may even become dogs. The business is mature and it is assumed that lower levels of investment will be required. Overall.
Cash cows may however ultimately become dogs if they lose the market share. low market share Question marks are also called problem children or wild cats. Question Marks – high growth. 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. No efforts or investments are necessary to maintain the status quo. 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 . the cash cows may have a relatively high market share and bring in healthy profits. These are products with low relative market shares in high growth markets.• 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. These businesses are called question marks because the organization must decide whether to strengthen them or to sell them.
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.Although their market share is relatively small. These products will need low investment but they are unlikely to be major profit earners. This may even mean selling the division’s operations. Advantages – 1) it is easy to use . but make the best out of its current value. The suggested strategy is to drop or divest the dogs when they are not profitable. the market for question marks is growing rapidly. low market share These are products that have low market shares in low growth businesses. though this is far from certain. In practice. they may actually absorb cash required to hold their position. Further investigation into how and where to invest is advised. They are often regarded as unattractive for the long term and recommended for disposal. Dogs – Low growth. do not invest. The general features of dogs are – • They are not profit earners • They absorb cash • They are unattractive and are often recommended for disposal. If profitable. Investments to create growth may yield big results in the future.
and cannot easily be classified.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. GE Nine-cell matrix . BCG matrix is thus a snapshot of an organization at a given point of time and does not reflect businesses growing over time.
McKinsey & Co.This matrix was developed in 1970s by the General Electric Company with the assistance of the consulting firm. This is also called GE multifactor portfolio 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 . USA. The GE matrix has been developed to overcome the obvious limitations of BCG matrix.
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. environmental. 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. After plotting each product line or business unit on the nine cell matrix. yellow and red of traffic lights. average and weak). The pie within the circles represents the market share of the product line or business unit.• • • 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. The nine cells of the GE matrix represent various degrees of industry attractiveness (high. medium or low) and business strength (strong.
The matrix used multiple measures to assess business strength and industry . BCG matrix consists of four cells 2. it needs caution and managerial discretion for making the strategic choice Red indicates harvest/divest – if the product falls in the red zone.Green indicates invest/expand – if the product falls in green zone. the strategic decision should be to expand. The business unit is rated against business strength and industry attractiveness 3. to invest and to grow. the business strength is average or weak and attractiveness is also low or medium. 3) Comparision GE versus BCG Thus products or business units in the green zone are almost equivalent to stars or cashcows. the appropriate strategy should be divestment. the 2) business strength is low but industry attractiveness is high. the business strength is strong and industry is at least medium in attractiveness. Difference between BCG and GE matrices – BCG Matrix 1. GE matrix consists of nine cells 2. 1) Yellow indicates select/earn – if the product falls in yellow zone. yellow zone are like question marks and red zone are similar to dogs in the BCG matrix. 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.
they are in reality subjective judgements that may vary from one person to another . The matrix uses two types of classification i.attractiveness 4. 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. The matrix uses three types of classification i.e high and low 5. Has many limitations 4.e high/medium/low and strong/average/weak 5. 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.
The difference between SWOT analysis and competitor analysis is that in competitor analysis we are concerned with only one component of the environment i. In competitive analysis. only the major competitors are assessed while in industry analysis all the competitors belonging to the industry are looked at.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. making the strategic choice . Finally. 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.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.
There may also be frequent changes in policies. Functional implementation 6. Project implementation 2. Behavioural implementation Project implementation is a comprehensive plan of action from acquiring land to the installation of machinery within a time frame. utility. The structural implementation involves designing of the organization structure and interlinking various units and sub units of the organization.e the rules and regulation in terms of wastage cost.5) Implementation of Strategy Steps involved – 1. . etc. Resource implementation 4. It has to make decisions regarding short term and long term allocation. Structural implementation 5. Resource allocation involves allocation of resources to both inside the company and outside the company. The steps vary from industry to industry. Procedural implementation takes place by following the “Law of the Land” i. It involves completing all procedures and formalities as prescribed by the governments both state and central. Procedural implementation 3.
Linking performance and rewards . Any departure may lead to the failure of strategy. their activities and behavior need to be directed in a certain way. 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. This is an ongoing process and evaluation and control have to be done for future course of action as well. When evaluation and control is carried out efficiently. Feedback for future actions and 3. there has to be continuous monitoring of the implementation of strategy. Behavioural implementation deals with those aspects of strategy implementation that have impact on behavior of people in the organization. Measurement of organizational process 2. To get successful results and to achieve organizational objectives. The evaluation and control of strategy may result in various actions that the organization may have to take for successful well being. it contributes in three basic areas – 1.Since human resources form an integral part of the organization. 6) Evaluation and Control – Last step of the strategy making process.Functional implementation deals with the development of policies and plans in different areas of functions which and organization undertakes.
Taking corrective actions After evaluation and control. the chief executive and other managers all play a very important role in strategy evaluation and on control. implementation and evaluation of process. . In this hierarchy. the strategy process continues in an efficient manner. Analyzing variance 4.The board of directors. 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. known as feed forward control 2. Measuring actual performance 3. The process of establishing the hierarchy of strategic intent is very complex. known as concurrent control 3. 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. The hierarchy of strategic intent lays the foundation for strategic management process. Control of different stages of action process. Control can be of three types – 1. the vision. the mission. Setting performance standards 2. Control of inputs that are required in an action.
a technology. a business. an activity) in the future” Defination by Miller and Dess “category of intentions that are broad. Strategic Intent – The foundation for the strategic management is laid by the hierarchy of strategic intent. Hamed and Prahalad coined the term strategic intent. corporate culture.business definition and objectives are established. Formulation of strategies is possible only when strategic intent is clearly set up. all inclusive and forward thinking” Advantages of having a vision – • They foster experimentation . 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. The concept of stratetic intent makes clear what an organization stands for.
Harvey – “A mission provides the basis of awareness of a sense of purpose. 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. 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 – .• Vision promotes long term thinking • Visions foster risk taking • They can be used for the benefit of people • They make organizations competitive. the competitive environment . 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. the nature of the business it is in. concerning particularly why it is in existence.
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. Mission is the societal reasoning while the purpose is the overall reason Mission is external reasoning and relates to external environment. 3.A few major points of distinction – 1. Purpose is internal reasoning and relates to internal environment 2. 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 . 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.
increase in market share Productivity objective – cost per unit of production product development. setting up of community center. Objectives serve as a motivating force. 2. etc 5. Objectives help the organization to pursue its vision and mission 4. branding. Objectives provide yardstick to measure performance of a department or SBU or organization 2. provision for drinking water. 4. Profit objective – or performance objectives Market objective . Social objective – tree plantation. Objectives define the relationship of organization with internal and external environment 5. Objectives provide a basis for decision-making. Areas for setting objectives – 1. product Product objective – diversification. 3. All people work to achieve the objectives 3.• 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. 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. for the other S’s which is relevant. it is only its degree of support. Any S’s that 1. 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. including how information moves around the unit Staff – personnel categories within the unit and the use to which staff are put. or otherwise. 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.
then changes in one S must be accompanied by complementary changes in the others. 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 . and this is understood at an industry level or with respect to smaller groups called strategic groups. The model highlights how a change made in any one of the S’s will have an impact on all the others.harmonises with all the other S’s can be thought of as strength and weaknesses 2. Generally understood. Structur e Strate gy Syste ms Super ordinate goals Skills Style Staff 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. Thus if a planned change is to be effective.
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 bargaining power of suppliers 5. The competitive forces are as follows – 1. Threat of New Entrants – Entry of a firm in and operating in a market is seen as a threat to the established firms in that market. Altogether the situation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry. Pressures from one direction can trigger off changes in another which is capable of shifting sources of competition. These barriers 1) . The rivalry among competitors in the industry 2. The competitive position of the established firms is affected because the entrants may add new production capacity or it may affect their market shares. The bargaining power of buyers However.different intermediate basis of understanding its relative position with respect to other organizations in the industry. They may also bring additional resources with them which may force the existing firms to invest more than what was not required before. The potential entrants 3. The substitute products 4. these five forces are not independent of each other.
are intended to discourage new entrants and this may be done by organizations. quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. 2) 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 . supplier’s ability to do all these depends on the bargaining power over buyers. However. Supplier’s decisions on prices. 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.
bricks. which may be close substitutes of each other.• 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. For example. 3) 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. with the new technologies in place now the electronic publishings are the direct substitutes of the texts published in print. steel.there will always be a difference in the bargaining power between an individual buying different construction material like cement. etc and a real estate builder buying them for the number of properties he may have been building over so many years. .
newspaper find their closest substitutes in their online versions.Similarly. though it may be a smart strategic move to position them as complementary products. 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. 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. They donot . which any industry may face. the competitive pressure. However.
scenarios resemble a set of stories. Competitive intelligence – It is the information which is relevant to strategy formulation regarding the environmental context within which a firm competes.necessarily belong to any formal group such as an industry. Scenarios are powerful planning tools precisely . trade. In practice. Such intelligence has several uses – Providing description of the competitive environment that inform strategist and guide strategy formulation a) Challenge environment b) c) d) common assumption about the competitive Forecasting future development in the competitive environment and compensating for exposed competitive Identifying weaknesses e) f) 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. scenarios give meaning to these events. built around carefully constructed plots. association or any strategic alliances and they donot necessarily differ in their average profitability. written or spoken. These stories can express multiple perspectives on complex events.
Decisions which have been pre-tested against a range of what may offer are more likely to stand the test of time. scenarios provide a common vocabulary and an effective basis for communicating complex – sometimes paradoxical – conditions and options. the result of scenario planning is not a more accurate picture of tomorrow but better thinking and an ongoing strategic conversation about the future. Employees are encouraged to participate by an incentive based process. Implementation of scenario planning – A company wide involvement in scenario planning leads to bette results in a firm. one can avoid surprises. Scenarios also embrace qualitative perspectives and the potential for sharp discontinuities that econometric models exclude. . they have the power to break old stereotypes. scenarios present alternative images instead of extrapolating current trends from the present. produce robust and resilient strategies. A cross-functional team is instituted for the identification and monitoring of issues. Good scenarios are plausible and surprising. and create distinct competitive advantage. Consequently.because the future is unpredictable. Ultimately. the threats and opportunities that is unfolding. adapt and act effectively. and their creators assume ownership and put them to work. Without an organization. By recognizing the warning signals. Using scenarios is rehearsing the future. Unlike traditional forecasting or market research. 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.
For example. competitive positioning 1) Classification of issues – support the issue identified with reports/propositions. earlier csf was authentic. Industry characterstic – industry specific csf are factors critical for the performance of the industy. . For a hospitality industry excellent and customized service. for a pathological laboratory center.Steps involved – Identification of issues – understand the effects of external factors on business – technology driven. Eg. economic. Organizations depending on the environment they operate in and their own internal conditions can identify relevant csf’s. etc are critical Competitive position – csf for a firm may also be determined by its relative position with respect to its competitors. determine the uncertainty and kind of impact of the issue 2) 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. wide presence and excellent booking and reservation system is critical. hygienic and scientific testing facilities until few big players added service features like door to door sample collection or home ii. political. while for an airline industry fuel efficiency. load factors. It is based on the following 2 characteristics – i.
Firm’s infrastructure Human Resource Management Technology development Procurement Inbound Logistics Operations Outbound Logistics Marketing Service & Sales The value chain framework (M. each producing value for the customer. This ultimately adds to the organization’s financial performance. In this framework. any business is seen as a number of linked activities. either of this leading to a higher profit margin.E.Porter 1980) . the firm may charge more or is able to deliver same value at a lower cost. 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. By creating additional value.delivery of reports.
store and distribute the product to customers. etc b) Outbound logistics collect. stock control. c) Top Management – Role & Functions .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. transport. managing. training. packaging.area involved in recruiting. c) Marketing and sales makes consumers aware of the product or service so that they are able to purchase it. etc a) Operations transform these various inputs into the final products or services –machining. They include materials handling. d) Services activities helps improving the effectiveness or efficiency of primary activities e) 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 a) 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 b) Human Resource Management. developing and rewarding people within the organization. assembly testing.
and the connection of managerial practices with the existence of a managerial cadre or class. Management can also refer to the person or people who perform the act(s) of management." Some institutions (such as the Harvard Business School) . suggesting the difficulty of defining management. in order to maximize its effectiveness. 6. 5. as for example in charities and in the public sector. however. many people refer to university departments which teach management as "business schools. planning organizing leading coordinating controlling staffing motivating Some people. 2. every organization must manage its work. 4. technological resources. Management comprises planning. and natural resources. people. far too narrow. One habit of thought regards management as equivalent to "business administration" and thus excludes management in places outside commerce. organizing. processes. 3. leading or directing. Henri Fayol considers management to consist of seven functions: 1. 7. More realistically. technology. Nonetheless. and controlling an organization (a group of one or more people or entities) or effort for the purpose of accomplishing a goal. however.Management in all business and human organization activity is simply the act of getting people together to accomplish desired goals and objectives. the shifting nature of definitions. financial resources. The phrase "management is what managers do" occurs widely. while useful. etc. Resourcing encompasses the deployment and manipulation of human resources. find this definition. staffing.
next month. • Motivating: the process of stimulating an individual to take action that will accomplish a desired goal. • The objectives of the business refers to the ends or activity at which a certain task is aimed. next week. leading/motivating. • Leading: Determining what needs to be done in a situation and getting people to do it. • The business's policy is a guide that stipulates rules. etc. to • . • Formation of the business policy The mission of the business is its most obvious purpose -. organizing. • Staffing: Job Analyzing. for example. Planning: Deciding what needs to happen in the future (today." Basic functions of management Management operates through various functions. regulations and objectives. and controlling. next year.. • Controlling: Monitoring. over the next 5 years. • 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. It must be flexible and easily interpreted and understood by all employees.which may be. to make soap.) and generating plans for action. and may be used in the managers' decision-making. • Organizing: (Implementation) making optimum use of the resources required to enable the successful carrying out of plans. which may need modification based on feedback.use that name while others (such as the Yale School of Management) employ the more inclusive term "management. • The vision of the business reflects its aspirations and specifies its intended direction or future destination. checking progress against plans. recruitment. and hiring individuals for appropriate jobs. often classified as planning.
communicate the • . • A good environment and team spirit is required within the business. stipulating how they ought to allocate and utilize the factors of production to the business's advantage. • All policies must be discussed with all managerial personnel and staff that is required in the execution of any departmental policy. Initially. • The missions. • Contingency plans must be developed.realize its vision and long-term objectives. Organizational change is strategically achieved through the implementation of the eight-step plan of action established by John P. • 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. It is a guideline to managers. 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. get the vision right. • A plan of action must be devised for each department. • Assessments of progress ought to be carried out regularly by top-level managers. just in case. it could help the managers decide on what type of business they want to form. • Managers must understand where and how they can implement their policies and strategies. How to implement policies and strategies All policies and strategies must be discussed with all managerial personnel and staff. Kotter: Increase urgency. objectives. • Contingency plans must be devised in case the environment changes. • Policies and strategies must be reviewed regularly.
• . • Multi-divisional management hierarchy The management of a large organization may have three levels: Senior management (or "top management" or "upper management") 2. Top-level management Require an extensive knowledge of management roles and skills. • They have to be very aware of external factors such as markets. • Mid. don't let up. such as supervisors or team-leaders 4. • A framework is created whereby plans and decisions are made. • Their decisions are generally of a long-term nature • Their decisions are made using analytic.buy-in. directive. empower action. Middle management 3. and make change stick.and lower-level managers a good idea of the future plans for each department. Foreman 5. • They have to chalk out the plan and see that plan may be effective in the future. Rank and File 1. create short-term wins. conceptual and/or behavioral/participative processes • They are responsible for strategic decisions. Where policies and strategies fit into the planning process They give mid.and lower-level management may add their own plans to the business's strategic ones. Low-level management.
Other times managers may seek out the best practices regardless of what industry they are . 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.• They are executive in nature. • Benchmarking – Benchmarking compares an organization’s performance against ‘best in class’ performance wherever that is found. • Foreman / lead hand They are people who have direct supervision over the working force in office factory. the process is called competitive benchmarking. sales field or other workgroup or areas of activity. • Lower-level managers' decisions are generally short-term ones. • Lower management This level of management ensures that the decisions and plans taken by the other two are carried out. • They are responsible for carrying out the decisions made by toplevel management. • Rank and File The responsibilities of the persons belonging to this group are even more restricted and more specific than those of the foreman. Middle management Mid-level managers have a specialized understanding of certain managerial tasks. When the search for best practices is limited to competitors.
in. 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. 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. 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 value chain consists of a set of value activities resulting in the production of a specified product. The value activity determines the uniqueness of the product. For instance. Based on the benchmarking results it could implement major new programmes and track improvements in these programmes over time using. called functional benchmarking. Value Chain – it shows that differentiation occurs out of the firm’s value chain. SWOT Analysis – SWOT stands for Strenths. Opportunties and Threats. . It also reflects whether there are opportunities to exploit further the competencies of the organization. Weakness. Benchmarking provides the motivation and the means many firms need to seriously rethink how their organizations perform certain tasks. 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. A comprehensive internal analysis of an organization’s strengths and weaknesses must however utilize all three types of comparison standards. historical comparisons. Then it could benchmark the organization that is best at controlling the defects.
production quality. closing of geographic markets. change in population age structure. lower personal taxes. liberalization of geographic markets. change in population age-structure. The . management Weakness – Negative internal factors – absence of important skills. changes in government policies.e the focus strategy has a narrower competitive scope. The experience curve – Cost has been correlated with the accumulated experience by the experience curve. leading brands. BUSINESS LEVEL STRATEGY Business level strategies are popularly known as generic or competitive strategies.Strength – Positive internal factors – technological skills. technological advances. customer loyalty. new distribution channels. distribution channels. new distribution channels Threats – Negative external factors – changing customer tastes. unreliable product or service. low customer retention. The first two strategies are broader in concept as their competitive scope is wide enough whereas the third strategy i. technological advances. Michael Porter classified these strategies into overall cost leadership. differentiation and focus. poor management Opportunties – Positive external factors – changing customer tastes. weak brands. 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. changes in government policies. tax increase. its unit manufacturing cost decreases in a systematic manner.
Competitive strategies like the below mentioned can be developed based on experience curve – 1. and corresponding cash flows for the manager’s own as well as his/her competitor’s operations. Selling product at most competitive price 2. profit margins. Maximising profits by selling at the highest price the market can afford 3.concept of the experience curve was presented by BCG in 1966 and since then it has been accepted as an important phenomenon. Selling at a higher price initially but crashing the prices later to keep the competition out. Cost Leadership Best Differentiation cost Provide . 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.
According to Porter. One such competitive strategy is overal l cost leadership.Cost Focus Focussed differentiation Competitive strategies by Michael Porter 1) Low cost provider strategy The firms operating in this highly competitive environment are always on the move to become successful. 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. Aggressive construction of efficient scale facilities 2. following are the prerequisites of cost leadership – 1. Vigorous pursuit of cost reduction from experience 3. To strive in this competitive environment the firms should have an edge over the competitors. Tight cost and overhead control 4. To develop competitive advantage. the firms should produce good quality products at minimum costs. 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. Cost minimization . etc. Avoidance of marginal customer accounts 5.
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. it becomes essential for the firms to adopt a differentiation strategy. A firm is able to differentiate from its competitors if it is able to position itself uniquely at something that is valuable to buyers. To satisfy the diverse needs of the customers. In our day-to-day life we see many such examples of differentiated products. soaps. but in the . etc.To sustain the cost leadership throughout. etc come under the category of differentiated products. preferences. 2) Differentiation Strategy – Every individual customer is unique in itself so is his/her preferences regarding tastes. Differentiation can lead to differentiatial advantage in which the firm gets the premium in the market. The extent to which the differentiation occurs depends on the overall strategy of the firm. the firm must be clear about its accomplishment through different elements of the value chain. which is more than the cost of providing differentiation. which require high capital investment • Threat by competitors to capture still lower cost segments • Competition based on other than cost. attitudes. Previously differentiation was viewed narrowly by the firms. These needs of the customers are fulfilled by the firms by producing differentiated products. Some are • Initiation by the competitive firms • Threat of competitive firms from other countries • Firm losing cost leadership due to fast technological changes. oils. toothpastes. it is necessary for the firms to do extensive research to study the different needs of the customers. To make this strategy successful. Most of the fast moving consumer goods like biscuits.
Reliance Infocomm. This is 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.present scenario it has become one of the essential components of the firm’s strategy. offers varied products like different facilities to its customers in the CDMA telephones. 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 . There are a number of factors which result in differentiation.
which creates differentiation. the firm deals with. If the firm has a good link with suppliers and has a sound distribution channel. 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. Differentiation occurs from the specific activities a firm performs and how they affect the buyer.Sources of differentiation – Its not only the low price at which different products are offered. the credit policy. then it becomes easy for the firm to produce and supply the product to the end users . the content of activity. to what extent a particular activity be adopted. The policy choices are basically related to the type of services to be provided to the customers. skill and experience required by the employees. instead the firm can differentiate from its competitors by providing something unique. etc • Links – the uniqueness of a product depends to a large extent on the links within the value chain with suppliers and distribution channels. which is valuable to the customers of that product.
• Timing – the firms can achieve uniqueness by encashing the opportunities at the right time. • Learning – To peform better and better. • Interrelationships – a better service can be offered to the customers by sharing certain activities e. The integration level means the coordination level of value activities • Scale – Larger the scale. 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. If small volumes of products are produced . if its level of integration is high. more will be the uniqueness. For example a bank may have its branch which is accessible to the customers. 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 . If the timing is perfect then a successful differentiation strategy can be adopted.g sales force with the firm’s sister concerns. then the uniqueness of the product will be lost over a longer period of time. continuous improvement is necessary and this comes through continous learning • Integration – The firm can be termed as unique. • Location – this is one of the important factors for the firms to have uniqueness. then the bank will gain an edge towards other banks. A very good example can be home-delivery services.
Cost of differentiation – Differentiation generally involves costs. The differentiation adds costs as it involves added features to cater to the needs of the customers. 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 – . 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.
In this the focuser concentrates on a narrow buyer segment and out-competes rivals on the basis of lower cost. the competitive advantage can be achieved by optimizing strategy for the target segments. b) Differentiation focus . cost focus exploits differences in behavior in some segments. Following are the situations where a focus strategy is efficient – • Market segment large enough to be profitable .Cost focus is where a firm seeks a cost advantage in the target segment. MayBach luxury car which is targeted to segment where customers can afford to pay a sum as large as Rs. in the industry and meeting the needs of that preferred segment (or niche) better than other market competitors. According to Porter. This is basically a niche-low cost strategy whereby a cost advantage is achieved in focuser’s target segment. Focus strategy has two variants. They are – a) Cost focus . In focus strategy. This is also known as niche strategy.4 crores. the firm offers niche buyers something different from rivals. Differentiation focus exploits the specific needs of buyers in specified segments.The third business level strategy is focus. Eg. In this.5. or group of segments. Focus is different from other business strategies as it is segment based and has narrow competitive scope.Differentiation focus is where a firm seeks differentiation in the target segment. This strategy involves the selection of a market segment. Firm seeks differentiation in its target segment.
if combined with low-cost and differentiation strategy.• 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. 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 .
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. They are 1) Stability strategy – Stability strategy implies continuing the current activities of the firm without any significant change in direction. different businesses. The basic purpose of a corporate strategy is to add value to the individual businesses in it. allocation of resources among. If the environment is unstable and the firm is doing well. so that the corporate whole is greater than the sum of its individual business units. 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.Corporate strategy is primarily about the choice of direction for the corporation as a whole. Stability strategy is most likely to be pursued by small businesses or firms in a mature stage of development. then it may believe that it is better to make no changes. Types of Corporte Strategies There are four types of strategic alternatives available at corporate level. A corporate strategy involves decisions relating to the choice of businesses. transferring skills and capabilities in such a way as to obtain synergies among product lines and business units. .
stability strategy is not a ‘do nothing’ approach nor does it mean that goals such as profit growth are abandoned.Stability strategies are implemented by ‘steady as it goes’ approaches to decisions. 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 – . No major functional changes are made in the product line. The stability strategy can be designed to increase profits through such approaches as improving efficiency in current operations. markets or functions. However.
but if continued for long. the firm may decide not to do anything new. stability strategies can be very useful in the short run. especially if they have been growing too fast in the previous period. but they can be dangerous if followed for too long. If there are no significant opportunities or threats operating in the environment. Obviously.e continue current operations and policies for the foreseeable future. The profit strategy is thus usually the top management’s short term and often self serving response to the situation.Pause/Process with caution strategy – some organizations pursue stability strategy for a temporary period of time until the particular environmental situation changes. 3) Profit strategy – the profit strategy is an attempt to artificially maintain profits by reducing investments and short-term expenditures. Stability strategies enable a company to consolidate its resources after prolonged rapid growth. it will lead to a serious deterioration in the company’s position. 2) Growth/Expansion Strategies – . top management may be tempted to follow this strategy. or if there are no major new strengths and weaknesses within the organization or if there are no new competitors or threat of substitutes. Sometimes. firms that wish to test the ground before moving ahead with a full-fledged grand strategy employ stability strategy first. Rather than announcing the company’s poor position to shareholders and other investors at large. 2) No change strategy – a no change strategy is a decision to do nothing new i. 1) In general. the profit strategy is useful to get over a temporary difficulty.
A company can grow internally by expanding its operations or it can grow externally through mergers. it may be possible to attract customers by intensive advertising.Growth strategies are the most widely pursued corporate strategies. joint ventures or strategic alliances. acquisitions. a) . 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. These strategies are generally referred to as intensification strategies. Companies that do business in expanding industries must grow to survive. and by realigning the product and the market options available to the organization.
entering other channels of distribution and through advertising in other media. . advertising other uses. giving price incentives for increased use attracting the competitor’s customers by increasing promotional efforts. increasing promotional effort. establishing sharper brand differentiation. usage rate of present customers is low. This can be achieved through the following approaches – by entering new geographic market through regional expansions.There are three important intensive strategies – Market penetration – seeks to increase market share for existing products in the existing markets through greater marketing efforts. Market development – seeks to increase market share by selling the present products in new markets. This includes activities like increasing the sales force. advertising new users • This strategy is effective when currents markets are not saturated. etc. giving incentives. offering price cuts attracting non users to buy the product by inducing trail use through sampling. economies of scale can bring down the costs and when market shares of major competitors are declining while total sales are increasing. national expansion and international expansion by entering new market segments by developing product versions to appeal to other segments. Marketing penetration is generally achieved through the following approaches – increasing sales to the current customers by increasing the size of purchase.
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.This strategy is effective when new untapped or unsaturated market exists. 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. A company performs a number of activities to transform an input to output. the firm’s industry is becoming rapidly global and when the firm has resources for expanded operations. the firm has excess production capacity. These b) . 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. the firm is in a high growth industry. the firm witnesses rapid technological developments in the industry. Such a combination can be done on the basis of the industry value chain. new channels of distribution are available.
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. if a manufacturer invests in facilities to produce raw materials or component parts that it formerly purchased from outside suppliers. integration is basically of two types – Vertical integration Horizontal integration Vertical Integration – involves gaining ownership or increased control over suppliers or distributors. it remains in the same industry. it remains in the same industry. participating in selected stages of the industry value chain. participating in all stages of the industry value chain or partial integration. but its scope of operations extend to two stages of the industry value chain. Thus. but its scope of operations extend from manufacturing to retailing. Similarly. 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’. Vertical integration can be full integration. Thus.activities are also called value chain activities. Vertical integration is of two types – . if a manufacturer opens a chain of retail outlets to market its products directly to consumers.
It decreases the dependability of the supply and quality of raw materials used as production inputs. a manufacture of finished products may take over the business of a supplier who manufactures raw materials. unreliable or incapable of meeting the firm’s needs the availability of quality distributors is limited the firm’s industry is growing and will continue to grow the advantages of stable production are high present distributors or retailers have high profit margins the firm has both capital and hr to manage new business Advantages of vertical integration – 1) a secure supply of raw materials or distribution channels . For example. 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 1) Forward integration – involves gaining ownership or increased control Over distributors or retailers.Backward integration – involves gaining ownership of firm’s suppliers. component parts and other inputs. too costly or cannot meet firm’s needs the firm’s industry is growing rapidly Number of suppliers is small. This strategy is generally adopted when 2) the present distributors are expansive. This strategy is generally adopted when present suppliers are unreliable.
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. A diversified company is one that has two or more distinct businesses. 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. The diversification strategy is concerned with c) . In other words. diversification adds new products or markets in the existing ones.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.
companies attempt to spread their risk by diversifying into several products or industries.achieving a greater market from a greater range of products in order to maximize profits. It involves acquisition a) . 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. From the risk point of view.
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. markets or products. products or markets. Advantages – b) 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 selected new business has compatibility with the firm’s current business. but unrelated businesses Is called conglomerate diversification.of businesses that are related to the acquiring firm in terms of technology. The new businesses will have no relationship to the company’s technology.
products or technology Main objective is to increase shareholder value through profit maximization 2 3 4 More risky Means to achieve diversification – i. 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 ‘synergy’ by sharing skills.the new businesses may not provide any competitive advantage if it has no strategic fits Differences diversification between concentric and conglomerate Sl.No 1 Concentric Diversification Diversifying into businesses related to the existing business There is commonality in markets. Mergers & Acquisitions Joint ventures . ii.
Friendly merger – when both firms desire a merger or acquisition. In the case of takeover.iii. 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. Consolidation is when both firms dissolve their identity to create a new firm. Demerger – or split or division of a company is the opposite of mergers and 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. The size of the company after demerger would reduce. This happens when a part of the undertaking is transferred to a newly formed company or to an existing company. i) Mergers can take place in different ways Acquisition occurs when a large organization purchases a smaller firm. . It is also known as amalgamation. It is usually done through the purchase of controlling share of voting stock in a publicly traded company. or vice versa. the acquiring firms retains its identity whereas the target firm loses its identity after restructuring. iv.
b) Vertical merger – joining of two or more companies involved in different stages of production or distribution of the same product or service.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. 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 a) . 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.
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. f) 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.Circular merger – when firms belonging to the different industries and producing altogether different products combine together under the banner of central agency. 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. where each of the partners own .
The most common forms of a joint venture include those between an international firm with a domestic firm. 2) Diversification joint venture – a firm may diversify into new products or markets through a joint venture. two or more firms in different businesses enter a new business where they could capitalize on their combined capabilities 1) iii) Strategic Alliances – In strategic alliances. some countries make it mandatory for international firms to only enter the country through a joint venture with the local partner. managerial and financial expertise from one business to another 3) Market entry joint ventures – in this type of joint ventures. one . This strategy will help the international firm to hedge its risks of product development costs specific to that market. such joint ventures will not give the firm enough control over its joint venture. Also. 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. These ventures are formed to capitalize on each other’s distinctive competencies. Further. two or more firms jointly Cooperate for mutual gain. the international partner intends to benefit from the domestic partner’s local knowledge of industry conditions of a specific industry. the specific benefits arise from transfer of technical. For example. In such joint ventures. Each partner brings knowledge or Resources to the partnership. Types of joint ventures – International joint ventures: in this type of joint ventures. so that it could compete globally against its competitors.equal or near equal stake. rather than on their own.
overcoming restrictions in competition Issues involved – assess and value partner knowledge. In an attempt to eliminate the weaknesses that are dragging the company down. establish knowledge connections between the partners.partner provides Manufacturing partner provides marketing capabilities while the other Marketing expertise. Advantages of strategic alliances – improvement of efficiency. 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. Ensure that cultures are in alignment 3) Defensive strategies – These strategies are also called retrenchment strategies. management may follow one or more of the following retrenchment strategies – a) Turnaround . access to knowledge. In the long run. determine knowledge accessibility. Overcoming local government regulations. Evaluate case of knowledge transfer. partners can learn from each other and develp new core competencies.
a firm is said to be sick when it faces a severe cash crunch or a consistent downtrend in its operating profits. This process of recovery is called turnaround strategy. Such firms become insolvent unless appropriate internal and external actions are taken to change the financial picture of the firm. Thse measures are of both shortterm and long-term nature 3) The third and final phase – involves implementation of change process and its monitoring 1) 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 . 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.b) divestment c) bankruptcy d) liquidation a) Turnaround .
• • • • • •
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
Difficult decisions must be made. No organization can afford to pursue all the strategies that might benefit the firm. d) Liquidation – occurs when an entire company is dissolved and its assets are sold. But a combination strategy can be exceptionally risky if carried too far. the company may be wound up and its assets may be sold to satisfy debt obligations. Much of the debt may be secured by the assets of the company. It allows organizations to file a petition in the court for legal protection to the firm. Liquidation becomes inevitable under the following circumstances – 1) when an organization has pursued both turnaround strategy and divestiture strategy. The court decides the claims on the company and settles the corporation’s obligations. 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. Organizations like individuals have limited . but failed 2) when an organization’s only alternative is bankruptcy. c) Bankruptcy – this is a form of defensive strategy. It is a strategy of the last resort. Priorities must be established. in case the firm is not in a position to pay its debt.financed through debt. When there are no buyers for a business which wants to be sold.
resources. so organizations must choose among alternative strategies .
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