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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
a firm is engaged in closing down of some of its business and at the same time expanding some • Strategy is future oriented. An organization may take contradictory actions either simultaneously or with a gap of time. to solve certain problems or to achieve a desirable end. we can understand the nature of strategy.After considering bothe the views. 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 may involve a contradictory action. 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. It basically includes determination and evaluation of alternative paths to an already established mission or objective and eventually. Strategic actions are required for new situations which have not arisen before in the past • . choice of best alternative to be adopted Nature of Strategy – Based on the above definations. For example. strategy can simply be put as management’s plan for achieving its objectives. internal factors are matched with them • Strategy is the combination of actions aimed to meet a particular condition.
according to a survey conducted in 1974. It provides an integrated approach for the organization and aids in meeting the challenges posed by environment Essence of Strategy – Strategy. includes the determination and evaluation of alternative paths to an already established mission or objective and eventually. choice of the alternative to be adopted. both are different and should not be used interchangeably . 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.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. However. Strategy is concerned with a unified direction and efficient allocation of an organization’s resources. A well made strategy guides managerial action and thought.
7. They should be clear and consistent. 6. Policies may be general or specific. 10. 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. Policy is the guideline for decisions and actions on the part of subordinates. In general terms. It is a general statement of understanding made for achievement of objectives. 9. They are thought oriented. For example. It is an overall guide that governs and controls managerial actions. Policies have to be integrated so that strategy is implemented successfully and effectively.1. organizational or functional. Policies are statements or a understanding of decision making. Power is delegated to the subordinates for implementation of policies. policy is concerned with course of action chosen for the fulfillment of the set of objectives. the promotion policy may require the promotion of the senior employee and hence he would be eligible for promotion. when the performance of two employees is similar. . commonly accepted 2. 5. 8. 3. 4. written or implied. 1.
deprive the enemy of the means to ii) . Strategy is a rule for making decision while policy is contingent decision. both are directed towards meeting organizational objectives. Carl Von Clausewitz . 6. actions suggested to achieve the 3. In other words. Strategies are action oriented and everyone in the organization are empowered to implement them. 4. Strategies are specific objective. Strategy cannot be delegated downward because it may require last minute decisions Strategies and policies both are the means towards the end. Strategy v/s Tactics Strategies are on one end of the organizational decisions spectrum while tactics lie on the other end.2. 5. 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. 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.
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. Thus.fight. 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) . vi) Since an attempt is made in strategy to relate the organization with its environment. etc. the time horizon in terms of strategy is flexible but in case of tactics. So the evaluation of strategy is difficult than the evaluation of tactics. Tactics is determined on a periodic basis by various organizations. it is short run and definite. 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. iv) Strategy has a long term perspective and occasionally it may have a short term duration. new ideas. occupy his territory. The decisions are taken on the basis of opportunities. the requirement of information is more than that required in tactics. A fixed time table may be made for following tactics. destroy or obtain control of his resources or make him surrender. In contrast tactical decisions are more certain as they work upon the framework set by the strategy. 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.
it is considered useful to distinguish between the levels of operation of the strategy. Reliance Industries and Ashok Leyland Limited. a SBU is created for each independent product/segment.Strategies are the most important factor of organization because they decide the future course of action for organization as a whole. Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it is serving. The fundamental concept in the SBU is the identification of dicrete independent product/market segments served by the organization. Eg. Because of the different environments served by each product. 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. which consists of companies which are single product companies. However. The SBU concept was introduced by General Electric Company (GEC) of USA to manage product business. . which have different businesses organized as different directions or product groups known as profit centres or strategic business units (SBUs) and other.
corporate level strategies are futuristic. They occupy the highest level of strategic decision making and cover the actions dealing with the objectives of the organization. the entrepreneur is both the general manager and the chief strategic manager . In small and family owned businesses. corporate level strategy serves the whole business. a strategy is formulated for each SBU (known as business level strategy) and such strategies lie between corporate and functional level strategies. It develops its strategy according to its own capabilities and needs with overall organizations capabilities and needs. diversification. etc. the single product organizations have single strategic business unit. The examples of such strategies include acquisition strategies. These are value oriented. As against the multi product organizations. The strategy is implanted at the next lower level by functional strategies.Each SBU has a clearly defined product/market segment and strategy. strategies are formulated according to organization wise policies. The board of directors and chief executive officer are the primary groups involved in this level of strategy making. In multiple product company. Such decision are made by top management of the firm. conceptual and less concrete than decisions at the other two levels. structural redesigning. cost and profit potential as well as flexibility. In these organizations. The three levels are explained as follows – Corporate level strategy – At the corporate level. innovative and pervasive in nature. These are characterized by greater risk. Mostly. Each SBU allocates resources according to its individual requirements for the achievement of organizational objectives.
e within the broad constraints and policies and long term objectives set by the corporate strategy. corporate strategy is not the sum total of business strategies of the organization. Functional level Strategy This strategy relates to single functional operation and the activities involved therein. 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. These strategies operate within the overall organizational strategies i. The decisions at this level within the organization are . strategy is a comprehensive plan providing objectives for SBUs. come under the gamut of business level strategies. The strategies are related with a unit within the organization. allocation of resources among functional areas and coordination between them for achievement of corporate level objectives. Business strategy relates with the “how” and the corporate strategy relates with the “what”. The SBU managers are involved in this level of strategy.Business Level Strategy – The strategies formulated by each SBU to make best use of its resources given the environment it faces. Business strategy defines the choice of product or service and market of individual business within the firm. This level is at the operating end of the organization. The corporate strategy has impact on business strategy. However. At such a level.
the functional level strategy of marketing function is divided into operating levels such as marketing research. This level is known as the operating level. finance. sales promotion. It comes below the functional level strategy and involves actions relating to various sub functions of the major function. manufacturing. Functional strategy deals with a relatively restricted plan providing objectives for specific function. allocation of resources among different operations within the functional area and coordination between them for achievement of SBU and corporate level objectives Sometimes a fourth level of strategy also exists. 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 . For example.described as tactical. etc contribute to the strategy of other levels.
etc. Jessops. etc that have completely become extinct and some companies which were not existing before they became the market leaders like Reliance. There have been companies like Martin Burn. The basic factor responsible for differentiation has not been governmental policies. Infosys. companies have to make clear strategies and implement them effectively so as to survive. 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 • . 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.Adaptability Insignificant Medium Significant Importance of strategy – With the increase in the pressure of external threats.
It gets managers into the habit of thinking and thus makes them. 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. 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 process of strategy was discussed in terms of four phases which are – . Initially. 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. The elements within it interact among themselves. coordination and allocation of resources With all the benefits listed above. The figure presents the process for single SBU firm and multiple SBU firm respectively. • 2) Process of Strategy The process of strategy is cyclical in nature.
Prahalad. According to C.K. the process comprises of five steps. They are – 1) Strategic Intent 2) Environmental Analysis 3) Evaluation of strategic alternatives and choice 4) Strategy implementation 5) Strategy evaluation and control For our understanding we divide the process into the following steps – 1) Strategic Intent 2) Environmental and Organizational Analysis 3) Identification of strategic alternatives 4) Choice of strategy 5) Implementation of strategy 6) Evaluation & Control .1) 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.
‘targets’. ‘purpose’. . an organization must define. mission. The strategic intent makes clear what an organization stands for. The answers to these questions lies in the organization’s mission. ‘objectives’. objectives and goals. 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. These terms become the base for strategic decisions and actions.‘mission’.1) Strategic Intent – Setting of organizational vision. it exists. It is reflected through vision. business definition. The organizations strive for achieving the end results which are ‘vision’. The objectives of the sub unit contribute to the objectives of the larger unit of which it is a part. etc The hierarchy of strategic intent lays the foundation for the strategic management of any organization. Vision serves the purpose of stating what an organization wishes to achieve in long run. ‘how’ it justifies that existence. From strategy formulation point of view. ‘goals’. and ‘when’ it justifies the reasons for that existence. business definition and objectives. mission and objectives is the starting point of strategy formulation. ‘why’.
Strategic process in a single SBU firm Defining vision. mission and business Organizat ional Analysis .
Environmental Analysis Setting objectives and goals Identifying alternative strategies Choice of strategy Implementation of strategy Strategy evaluation control and .
Objectives provide a direction to the organization and all the divisions work towards the attainment of the set objectives. Objectives represent desired results which the organization wishes to attain.Feedback Vision and Mission – The vision of an organization is the expectation of the owner of the organization and putting this vision into action is mission. Mission has a societal orientation and is a statement which reveals what an organization intends to do for the society. It is necessary for the organization to assess the process identifying the objectives of each functional area. After accomplishment of these objectives. the overall objectives of the organization are achieved. It motivates employees to work in the interest of the organization. Organization’s mission becomes the cornerstone for strategy. . Objectives and goals are the terms which are used interchangeably. It is a public statement which gives direction for different activities which organizations have to carry on. Objectives and Goals – Organizational objectives are defined as ends which the organization seeks to achieve by its existence and operation. An organization can have objectives in terms of profitability and productivity.
also known as environmental scanning or appraisal. For conducting an environmental analysis. Some elements indicate opportunities while others may indicate threats. The analysis emphasis on what could happen and not necessarily what will happen. The factors which comprises firms environment are of two types : . This environment may be internal or external. the strategic intent has to be very clear. ultimately the analysis of these components is aggregated to have a total view of the environment.e environmental diagnosis • Environmental analysis is an exercise in which total view of environment is taken.2) Environmental and Organizational Analysis – Every organization operates within an environment. This clarity in definition of mission and objectives helps in the detailed analysis of the environment. 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. function and relationship for searching opportunities and threats and determining where they come from. Environmental analysis. There are two aspects involved in environmental analysis: • Monitoring the environment i. A large part of the process of environmental analysis seeks to explore the unknown terrain.e environmental search Identifying opportunities and threats based on environmental monitoring i. the dimensions of future. The environment is divided into different components to find out their nature.
the next step is to identify the various strategic alternatives. “strategic alternatives revolve around the question whether to continue or change the business. legal. political. Due to the element of uncertainty.Factors which influence environment suppliers. technological. 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. According to Glueck & Jauch. customers and competitors and • • directly including Factors which influence the firm indirectly including social. environmental analysis provides for certain anticipated changes in the organization’s network. etc The environmental analysis plays a very important role in the process of strategy formulation. The analysis provides for elimination of alternatives which are inconsistent with the organization objectives. After the identification of strategic alternatives they have to be evaluated to match them with the environmental analysis. economic factors. Environmental analysis provides time to anticipate the opportunities and plan to meet the challenges. It also warns the organization about the threats. 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 . The organization equips itself to meet the unanticipated changes and face the ever increasing competition. 3) IDENTIFICATION OF STRATEGIC ALTERNATIVES After environmental analysis.
Stability – In this. This is possible when environment is relatively stable. customer functions or alternative technology. These may be broadened either singly or jointly. This kind of a strategy has a substantial impact on internal functioning of the organization Retrenchment – If the organization is going for this strategy. Expansion – This is adopted when environment demands increase in pace of activity. the company does not go beyond what it is doing now. there are basically four grand strategies alternatives: • Stability • Expansion • Retrenchment • Combination These are together known as stability strategies/basic strategies. Modernization. According to Glueck. The company serves with same product. Company broadens its customer groups.result into large number of alternatives through which an organization relates itself to the environment. It involves partial or total . then it has to reduce its scope in terms of customer group. customer functions and the technology. improved customer service and special facility may be adopted in stability. in same market and with the existing technology.
It is done to minimize the risk by spreading over several businesses. Through modernization.withdrawal from three things. it gains ownership over distribution or retailers. This kind of strategy is possible for organizations with large number of portfolios. Combination – When all the three strategies are taken together. this is known as combination strategy. Integration can be either forward or backward in terms of vertical integration. customer groups or alternative technology. In forward integration. Apart from the above four grand strategies. Diversification – Diversification involves change in business definition either in terms of customer functions. When the organization gains ownership over competitors. thus moving towards customers while in backward integration the company seeks ownership over firm’s suppliers thus moving towards raw materials. other commonly used strategies are – Modernization – In this. Example – L & T getting out of cement business. 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. it is engaged in horizontal integration. to avoid current instability in profit & sales and to facilitate higher utilization of resources. to capitalize organization strength and minimize weaknesses. Diversification can be either related or . to minimize threats. technology is used as the strategic tool to increase production and productivity or reduce cost.
The pooling of resources. two or more companies form a temporary partnership (consortium). horizontal or vertical. it is merger Takeovers – In takeovers. to gain competitive advantage. active or passive. Companies go for merger to become larger. It is of the following types – • Concentric diversification • Conglormerate diversification • Horizontal diversification Joint ventures – In joint ventures. 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. to diversify and expand.unrelated. The firms share the benefits of the alliance and control the performance of assigned tasks. it is acquisition and for organization which is acquired. to bring distinctive competences. Merger takes place with mutual consent and common goals Acquisition – For the organization which acquires another. 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. to manage political and cultural difficulty. to overcome weaknesses and sometimes to get tax benefits. there is a strong motive to acquire others for quick growth and diversification . Companies opt for joint venture for synergistic advantages to share risk.
It is referred to the disposing off a part of the business. Turnaround Strategy – When the company is sick and continuously making losses. There are three objective ways to make a choice – • Corporate portfolio analysis . it can decide on the one which is most suitable . it goes for turnaround strategy. Strategic choice is like a decision making process. While making a choice. It is the efforts in reversing a negative trend and it is the efforts to keep an organization alive. it may be possible to choose all strategic alternatives but for a single company it is quite different. All these alternatives are available to an organization and according to its objectives. For a business group. 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. The strategic alternatives has to be matched with the problem. the company which is divesting has no ownership and control in that business and is engaged in complete selling of a unit. 4) Choice of strategy After evaluation of strategic alternatives is choice of the most suitable alternative.Divestment – In divestment.
Indeed. 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. Many organizations will not wish to risk having all their products at the same stage of development. Some will be relatively new and some much older. it is quite likely that they will be in different stages of development.• Competitor analysis • Industry analysis Corporate Portfolio Analysis When the company is in more than one business. 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. 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. It is necessary to analyze the position of different business of the business house which is done by corporate portfolio analysis. It is useful to have some products with limited growth but producing profits steadily. some with low risk but dull growth and some with high risk but .
PLC concept 3. 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. 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. Experience curve 2. BCG matix 4.great potential for growth and profits. GE nine cell matrix . This is what we call as portfolio analysis.
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. and divest those businesses that have low market share and low growth prospects. Directional Policy matrix BCG MATRIX – the bcg matrix was developed by Boston Consulting group in 1970s. Its basic purpose is to invest where there is growth from which the firm can benefit. by which sales of a particular product or business unit has increased b) . It is also called as the growth share matrix. Hofer’s product market evaluation matrix 7. Space diagram 6.5. This is the most popular and most simplest matrix to describe the corporation’s portfolio of businesses or products. The BCG matrix helps to determine priorities in a product portfolio.
They are potentially profitable and may grow further to become an important product or category for the company.Analysis of the BCG matrix – the matrix reflects the contribution of the products or business units to its cash flow. Based on this analysis. The firm should focus on and invest in these products or business units. high market share Stars are products that enjoy a relatively high market share in a strongly growing market. the products or business units are classified as – Stars Cash cows Question marks Dogs Stars – high growth. The general features of stars are - .
On this basis. The other problem children may be milked or even sold to provide funds elsewhere. Over the time. it is therefore likely that they will be able to generate both cash and profits. high market share These are the product areas that have high relative market shares but exist in low-growth markets. The business is mature and it is assumed that lower levels of investment will be required.• 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 Cows – Low growth. The general features of cash cows are – • They generate both cash and profits • The business is mature and needs lower levels of investment . they may even become dogs. If they cannot hold market share. Such profits could then be transferred to support the stars. the general strategy is to take cash from the cash cows to fund stars. Overall. all growth may slow down and the stars may eventually become cash cows. Cash may also be invested selectively in some problem children (question marks) to turn them into stars.
These are products with low relative market shares in high growth markets. low market share Question marks are also called problem children or wild cats. Cash cows may however ultimately become dogs if they lose the market share.• Profits are transferred to support stars/question marks • The danger is that cash cows may become under-supported and begin to lose their market Although the market is no longer growing. the cash cows may have a relatively high market share and bring in healthy profits. No efforts or investments are necessary to maintain the status quo. 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. 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 . These businesses are called question marks because the organization must decide whether to strengthen them or to sell them. Question Marks – high growth.
These products will need low investment but they are unlikely to be major profit earners. they may actually absorb cash required to hold their position. though this is far from certain. Investments to create growth may yield big results in the future. They are often regarded as unattractive for the long term and recommended for disposal. The suggested strategy is to drop or divest the dogs when they are not profitable. Advantages – 1) it is easy to use . low market share These are products that have low market shares in low growth businesses. In practice. but make the best out of its current value. If profitable. the market for question marks is growing rapidly.Although their market share is relatively small. Further investigation into how and where to invest is advised. This may even mean selling the division’s operations. The general features of dogs are – • They are not profit earners • They absorb cash • They are unattractive and are often recommended for disposal. Turnaround can be one of the strategies to pursue because many dogs have bounced back and become viable and profitable after asset and cost reduction. Dogs – Low growth. do not invest.
BCG matrix is thus a snapshot of an organization at a given point of time and does not reflect businesses growing over time. GE Nine-cell matrix .2) it is quantifiable 3) it draws attention to the cash flows 4) it draws attention to the investment needs Limitations – 1) it is too simplistic 2) link between market share and profitability is not strong 3) growth rate is only one aspect of industry attractiveness 4) it is not always clear how markets should be defined 5) market share is considered as the only aspect of overall competitive position 6) many products or business units fall right in the middle of the matrix. and cannot easily be classified.
This is also called GE multifactor portfolio matrix. The GE matrix has been developed to overcome the obvious limitations of BCG matrix.This matrix was developed in 1970s by the General Electric Company with the assistance of the consulting firm. McKinsey & Co. 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.
• • • 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 area of each circle is proportionate to industry sales. average and weak). strategic choices are made depending on their position in the matrix. legal and human aspects The industry product-lines or business units are plotted as circles. The pie within the circles represents the market share of the product line or business unit. environmental. Spotlight Strategy GE matrix is also called “Stoplight” strategy matrix because the three zones are like green. medium or low) and business strength (strong. After plotting each product line or business unit on the nine cell matrix. The nine cells of the GE matrix represent various degrees of industry attractiveness (high. yellow and red of traffic lights.
The matrix used multiple measures to assess business strength and industry . it needs caution and managerial discretion for making the strategic choice Red indicates harvest/divest – if the product falls in the red zone. the strategic decision should be to expand. the 2) business strength is low but industry attractiveness is high. The business unit is rated against relative market share and industry growth rate 3. 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. to invest and to grow. 1) Yellow indicates select/earn – if the product falls in yellow zone. Difference between BCG and GE matrices – BCG Matrix 1. GE matrix consists of nine cells 2. BCG matrix consists of four cells 2. The matrix uses single measure to assess growth and market share GE Matrix 1. the appropriate strategy should be divestment.Green indicates invest/expand – if the product falls in green zone. the business strength is strong and industry is at least medium in attractiveness. yellow zone are like question marks and red zone are similar to dogs in the BCG matrix. The business unit is rated against business strength and industry attractiveness 3.
attractiveness 4. The matrix uses two types of classification i. The matrix uses three types of classification i. 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. they are in reality subjective judgements that may vary from one person to another .e high and low 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. Has many limitations 4.e high/medium/low and strong/average/weak 5.
Finally. Evaluating strategic alternatives 3. In competitive analysis. Considering decision factors – objective and subjective 4. making the strategic choice . 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. Focussing on strategic alternatives 2. The strategic choice is a decision making process having the following steps – 1.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. The difference between SWOT analysis and competitor analysis is that in competitor analysis we are concerned with only one component of the environment i.
e the rules and regulation in terms of wastage cost. The structural implementation involves designing of the organization structure and interlinking various units and sub units of the organization. There may also be frequent changes in policies. Functional implementation 6. utility. Project implementation 2. It has to make decisions regarding short term and long term allocation. etc. Structural implementation 5. Procedural implementation 3. Procedural implementation takes place by following the “Law of the Land” i.5) Implementation of Strategy Steps involved – 1. . Resource implementation 4. Resource allocation involves allocation of resources to both inside the company and outside the company. It involves completing all procedures and formalities as prescribed by the governments both state and central. Behavioural implementation Project implementation is a comprehensive plan of action from acquiring land to the installation of machinery within a time frame. The steps vary from industry to industry.
Behavioural implementation deals with those aspects of strategy implementation that have impact on behavior of people in the organization.Since human resources form an integral part of the organization. Feedback for future actions and 3. Measurement of organizational process 2. there has to be continuous monitoring of the implementation of strategy. The evaluation and control of strategy may result in various actions that the organization may have to take for successful well being. 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.Functional implementation deals with the development of policies and plans in different areas of functions which and organization undertakes. it contributes in three basic areas – 1. 6) Evaluation and Control – Last step of the strategy making process. Any departure may lead to the failure of strategy. This is an ongoing process and evaluation and control have to be done for future course of action as well. Linking performance and rewards . When evaluation and control is carried out efficiently. To get successful results and to achieve organizational objectives.
Control can be of three types – 1. Measuring actual performance 3. The process of establishing the hierarchy of strategic intent is very complex. The hierarchy of strategic intent lays the foundation for strategic management process. known as feed forward control 2. Taking corrective actions After evaluation and control. the mission. Analyzing variance 4. Control of inputs that are required in an action. the chief executive and other managers all play a very important role in strategy evaluation and on control. Control of different stages of action process. 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 board of directors. implementation and evaluation of process. Setting performance standards 2. known as concurrent control 3. the vision. 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. In this hierarchy. the strategy process continues in an efficient manner. .
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. Hamed and Prahalad coined the term strategic intent. a technology. a business. an activity) in the future” Defination by Miller and Dess “category of intentions that are broad. all inclusive and forward thinking” Advantages of having a vision – • They foster experimentation . corporate culture. The concept of stratetic intent makes clear what an organization stands for.business definition and objectives are established. Formulation of strategies is possible only when strategic intent is clearly set up. Strategic Intent – The foundation for the strategic management is laid by the hierarchy of strategic intent.
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. the competitive environment . 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 – . 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. concerning particularly why it is in existence. the nature of the business it is in.• Vision promotes long term thinking • Visions foster risk taking • They can be used for the benefit of people • They make organizations competitive.
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.A few major points of distinction – 1. 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. Mission is the societal reasoning while the purpose is the overall reason Mission is external reasoning and relates to external environment. Purpose is internal reasoning and relates to internal environment 2. 3.
4. Objectives provide a basis for decision-making. All people work to achieve the objectives 3. Profit objective – or performance objectives Market objective . etc 5. Areas for setting objectives – 1. branding. Social objective – tree plantation. 2. Objectives serve as a motivating force. Objectives help the organization to pursue its vision and mission 4.• Goals are more influenced by external environment • Goals are not quantified while objectives are quantified The difference between the two is simply a matter of degree and it may vary widely Importance of establishing objectives – 1. Objectives define the relationship of organization with internal and external environment 5.increase in market share Productivity objective – cost per unit of production product development. provision for drinking water. Objectives provide yardstick to measure performance of a department or SBU or organization 2. 3. product Product objective – diversification. setting up of community center. etc .
Financial objective – relates to cash flow, debt equity ratio, working capital, new issues, debt instruments, etc
Human resource objective – described in terms of absenteeism, turnover, number of grievances, strikes and lockouts, etc
Strategic Analysis – Strategic Management comprises of three broad activities, namely, strategic analysis, strategic formulation and strategic implementation. All the three are interrelated. Strategic analysis is the foundation for formulating strategies and basically comprises of the study of business environment as a whole. Strategic Analysis comprises of the following – 1. Environmental analysis 2. Competitive forces 3. Internal analysis
Environmental Analysis – Strategic analysis is basically concerned with the structuring of the relationship between a business and its environment. The environment in which business operates has a great influence on their success or failures. There is a strong linkage between the changing environment, the strategic response of the business to such changes and the performance. It is therefore important to understand the forces of external environment the way they influence this linkage. The external environment which is dynamic and changing holds both opportunities and threats for the
organizations. The organizations while attempting at strategic realignments, try to capture these opportunities and avoid the emerging threats. At the same time the changes in the environment affect the attractiveness or risk levels of various investments of the organizations or the investors. The macro environment in which all organizations operate broadly consist of the economic environment, the political and legal environment, the socio cultural aspects and the environment related issues like pollution, sustainability,etc. The technological temper and its progress has been the key driver behind the major changes witnessed in the external environment making it increasingly complex. Pestel framework and the Mckinsey’s 7S framework are most popularly used for such analysis.
PESTEL Framework – External forces are classified into 6 broad categories – political, economic, social, technological, environmental and legal forces. The framework primarily involves the following two areas – 1. The environmental factors affecting the organization 2. The important factors relevant in the present context and in the years to come Politcal Factors – Government stability, Political values and beliefs shaping policies, Regulations towards trade and global business, Taxation policies, Priorities in social sector
Economic Factors – GNP trends, Interest rates/savings rate, Money supply, Inflation rate, Unemployment, Disposable income, Business cycles, Trade deficit/surplus Socio-cultural Factors – Population demographics, Social mobility, Lifestyle changes, Attitudes to work and leisure, Education, Health and fitness awareness, Multiple income families Technological factors – Biotechnology, Process innovation, Digital revolution, Government spending on research, Government and industry focus on technological effects, New discoveries/development, Speed of technology transfer, Rates of obsolescence Legal – Monopolies legislation, Employment law, Health and safety,Product safety
Mckinsey’s 7S Framework – The framework suggests that there is a multiplicity of factors that influence an organization’s ability to change and its proper mode of change. Because of the interconnectedness of the variables, it would be difficult to make significant progress in one area without making progress in the others as well. There is no starting point or implied hierarchy in the shape of the diagram, and it is not obvious which of the seven factors would be the driving force in changing a particular organization at a certain point of time. The critical variables would
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. skill base. for the other S’s which is relevant. it is only its degree of support. No S is strength or a weakness in its own right.be different across organizations and in the same organizations at different points of time. including how information moves around the unit Staff – personnel categories within the unit and the use to which staff are put. Any S’s that 1. 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. . or otherwise.
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 .harmonises with all the other S’s can be thought of as strength and weaknesses 2. Thus if a planned change is to be effective. Generally understood. and this is understood at an industry level or with respect to smaller groups called strategic groups. 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. then changes in one S must be accompanied by complementary changes in the others. The model highlights how a change made in any one of the S’s will have an impact on all the others.
Altogether the situation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry. The competitive forces are as follows – 1. The substitute products 4. The bargaining power of buyers However. these five forces are not independent of each other. The rivalry among competitors in the industry 2. The potential entrants 3. 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. Pressures from one direction can trigger off changes in another which is capable of shifting sources of competition. 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. These barriers 1) .different intermediate basis of understanding its relative position with respect to other organizations in the industry. 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 suppliers 5. They may also bring additional resources with them which may force the existing firms to invest more than what was not required before.
quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. Supplier’s decisions on prices. However. 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.are intended to discourage new entrants and this may be done by organizations. supplier’s ability to do all these depends on the bargaining power over buyers. 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 .
with the new technologies in place now the electronic publishings are the direct substitutes of the texts published in print. 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. etc and a real estate builder buying them for the number of properties he may have been building over so many years. bricks. For example.• 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. steel. . which may be close substitutes of each other.there will always be a difference in the bargaining power between an individual buying different construction material like cement.
the competitive pressure. They donot . newspaper find their closest substitutes in their online versions. Same is true for monopoly market where there is only one player and the type of product is also one.Similarly. 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. though it may be a smart strategic move to position them as complementary products. However. 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. which any industry may face.
These stories can express multiple perspectives on complex events. scenarios give meaning to these events. written or spoken. 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. association or any strategic alliances and they donot necessarily differ in their average profitability. In practice. scenarios resemble a set of stories. Scenarios are powerful planning tools precisely . built around carefully constructed plots. 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. trade.
. Unlike traditional forecasting or market research. scenarios present alternative images instead of extrapolating current trends from the present. Good scenarios are plausible and surprising. the threats and opportunities that is unfolding. Using scenarios is rehearsing the future. and create distinct competitive advantage. Scenarios also embrace qualitative perspectives and the potential for sharp discontinuities that econometric models exclude. Ultimately. A cross-functional team is instituted for the identification and monitoring of issues. scenarios provide a common vocabulary and an effective basis for communicating complex – sometimes paradoxical – conditions and options. Decisions which have been pre-tested against a range of what may offer are more likely to stand the test of time. By recognizing the warning signals.because the future is unpredictable. they have the power to break old stereotypes. and their creators assume ownership and put them to work. 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. adapt and act effectively. Without an organization. Consequently. one can avoid surprises. produce robust and resilient strategies. Employees are encouraged to participate by an incentive based process. the result of scenario planning is not a more accurate picture of tomorrow but better thinking and an ongoing strategic conversation about the future. Implementation of scenario planning – A company wide involvement in scenario planning leads to bette results in a firm.
It is based on the following 2 characteristics – i. earlier csf was authentic. . hygienic and scientific testing facilities until few big players added service features like door to door sample collection or home ii. competitive positioning 1) Classification of issues – support the issue identified with reports/propositions. load factors. political. etc are critical Competitive position – csf for a firm may also be determined by its relative position with respect to its competitors. Organizations depending on the environment they operate in and their own internal conditions can identify relevant csf’s. for a pathological laboratory center. economic. wide presence and excellent booking and reservation system is critical. Industry characterstic – industry specific csf are factors critical for the performance of the industy. Eg. 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. For example.Steps involved – Identification of issues – understand the effects of external factors on business – technology driven. while for an airline industry fuel efficiency. For a hospitality industry excellent and customized service.
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. the firm may charge more or is able to deliver same value at a lower cost. each producing value for the customer. In this framework. This ultimately adds to the organization’s financial performance.Porter 1980) . any business is seen as a number of linked activities.E.delivery of reports. Firm’s infrastructure Human Resource Management Technology development Procurement Inbound Logistics Operations Outbound Logistics Marketing Service & Sales The value chain framework (M. either of this leading to a higher profit margin. By creating additional value.
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. stock control.There are two types of activities – primary activities and support activities Primary activities constitute the following – Inbound logistics are activities concerned with receiving.area involved in recruiting. etc a) Operations transform these various inputs into the final products or services –machining. storing and distributing the inputs to the product or service. store and distribute the product to customers. c) Top Management – Role & Functions . etc b) Outbound logistics collect. assembly testing. training. managing. They include materials handling. c) Marketing and sales makes consumers aware of the product or service so that they are able to purchase it. transport. packaging.
people. The phrase "management is what managers do" occurs widely. 5. technological resources. etc. organizing. and the connection of managerial practices with the existence of a managerial cadre or class. and natural resources. Management comprises planning. far too narrow. staffing. in order to maximize its effectiveness." Some institutions (such as the Harvard Business School) . Henri Fayol considers management to consist of seven functions: 1. leading or directing.Management in all business and human organization activity is simply the act of getting people together to accomplish desired goals and objectives. as for example in charities and in the public sector. the shifting nature of definitions. every organization must manage its work. however. More realistically. financial resources. 4. Management can also refer to the person or people who perform the act(s) of management. and controlling an organization (a group of one or more people or entities) or effort for the purpose of accomplishing a goal. suggesting the difficulty of defining management. One habit of thought regards management as equivalent to "business administration" and thus excludes management in places outside commerce. 3. planning organizing leading coordinating controlling staffing motivating Some people. processes. 2. while useful. 7. many people refer to university departments which teach management as "business schools. 6. find this definition. Nonetheless. Resourcing encompasses the deployment and manipulation of human resources. however. technology.
checking progress against plans. It must be flexible and easily interpreted and understood by all employees. etc. often classified as planning. • Leading: Determining what needs to be done in a situation and getting people to do it. • The objectives of the business refers to the ends or activity at which a certain task is aimed. and may be used in the managers' decision-making. • Staffing: Job Analyzing.which may be. recruitment. • The business's strategy refers to the coordinated plan of action that it is going to take. • Formation of the business policy The mission of the business is its most obvious purpose -.use that name while others (such as the Yale School of Management) employ the more inclusive term "management." Basic functions of management Management operates through various functions. as well as the resources that it will use. leading/motivating. which may need modification based on feedback. next week. Planning: Deciding what needs to happen in the future (today. • Organizing: (Implementation) making optimum use of the resources required to enable the successful carrying out of plans. over the next 5 years. for example. next month.) and generating plans for action.. to make soap. • The business's policy is a guide that stipulates rules. • Motivating: the process of stimulating an individual to take action that will accomplish a desired goal. and hiring individuals for appropriate jobs. next year. • Controlling: Monitoring. organizing. and controlling. • The vision of the business reflects its aspirations and specifies its intended direction or future destination. regulations and objectives. to • .
• Policies and strategies must be reviewed regularly. Organizational change is strategically achieved through the implementation of the eight-step plan of action established by John P. • A good environment and team spirit is required within the business. • Contingency plans must be devised in case the environment changes. just in case. • A plan of action must be devised for each department. • All policies must be discussed with all managerial personnel and staff that is required in the execution of any departmental policy. • Assessments of progress ought to be carried out regularly by top-level managers. • 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. How to implement policies and strategies All policies and strategies must be discussed with all managerial personnel and staff. It is a guideline to managers. it could help the managers decide on what type of business they want to form. Kotter: Increase urgency. • The forecasting method develops a reliable picture of the business's future environment.realize its vision and long-term objectives. • Contingency plans must be developed. communicate the • . • Managers must understand where and how they can implement their policies and strategies. strengths and weaknesses of each department must be analysed to determine their roles in achieving the business's mission. stipulating how they ought to allocate and utilize the factors of production to the business's advantage. get the vision right. Initially. • The missions. objectives.
and lower-level managers a good idea of the future plans for each department. • . • Their decisions are generally of a long-term nature • Their decisions are made using analytic. Rank and File 1. create short-term wins. • 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 chalk out the plan and see that plan may be effective in the future.and lower-level management may add their own plans to the business's strategic ones. Low-level management. • A framework is created whereby plans and decisions are made. Foreman 5. • Mid. • They have to be very aware of external factors such as markets.buy-in. such as supervisors or team-leaders 4. directive. empower action. and make change stick. Where policies and strategies fit into the planning process They give mid. don't let up. Middle management 3. conceptual and/or behavioral/participative processes • They are responsible for strategic decisions.
Middle management Mid-level managers have a specialized understanding of certain managerial tasks. • Lower-level managers' decisions are generally short-term ones. • They are responsible for carrying out the decisions made by toplevel management. sales field or other workgroup or areas of activity. 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. Other times managers may seek out the best practices regardless of what industry they are . the process is called competitive benchmarking.• They are executive in nature. • Lower management This level of management ensures that the decisions and plans taken by the other two are carried out. • 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. • Rank and File The responsibilities of the persons belonging to this group are even more restricted and more specific than those of the foreman. When the search for best practices is limited to competitors.
The value chain consists of a set of value activities resulting in the production of a specified product. It also reflects whether there are opportunities to exploit further the competencies of the organization. Weakness. . historical comparisons. Based on the benchmarking results it could implement major new programmes and track improvements in these programmes over time using. For instance. an organization can study industry norms to access where it stands in terms of number of complaints generated regarding defects during guarantee period of the product. A comprehensive internal analysis of an organization’s strengths and weaknesses must however utilize all three types of comparison standards. The steps of value activity range from procurement of raw material to the sale of product. 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. 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. SWOT Analysis – SWOT stands for Strenths. Value Chain – it shows that differentiation occurs out of the firm’s value chain. Benchmarking provides the motivation and the means many firms need to seriously rethink how their organizations perform certain tasks. The value activities of each differentiated product differs depending on the nature of the product. The value activity determines the uniqueness of the product.in. Opportunties and Threats. Each differentiated product has its own value activities. Then it could benchmark the organization that is best at controlling the defects. called functional benchmarking.
weak brands. technological advances.e the focus strategy has a narrower competitive scope. changes in government policies. customer loyalty. management Weakness – Negative internal factors – absence of important skills. differentiation and focus. technological advances. new distribution channels. 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.Strength – Positive internal factors – technological skills. new distribution channels Threats – Negative external factors – changing customer tastes. lower personal taxes. BUSINESS LEVEL STRATEGY Business level strategies are popularly known as generic or competitive strategies. closing of geographic markets. Michael Porter classified these strategies into overall cost leadership. low customer retention. liberalization of geographic markets. The . production quality. The first two strategies are broader in concept as their competitive scope is wide enough whereas the third strategy i. tax increase. The experience curve – Cost has been correlated with the accumulated experience by the experience curve. its unit manufacturing cost decreases in a systematic manner. poor management Opportunties – Positive external factors – changing customer tastes. change in population age-structure. changes in government policies. distribution channels. change in population age structure. leading brands. unreliable product or service.
Competitive strategies like the below mentioned can be developed based on experience curve – 1. 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. Cost Leadership Best Differentiation cost Provide . profit margins. Selling at a higher price initially but crashing the prices later to keep the competition out. and corresponding cash flows for the manager’s own as well as his/her competitor’s operations.concept of the experience curve was presented by BCG in 1966 and since then it has been accepted as an important phenomenon. Maximising profits by selling at the highest price the market can afford 3. Selling product at most competitive price 2.
To develop competitive advantage. 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. following are the prerequisites of cost leadership – 1. Vigorous pursuit of cost reduction from experience 3. Avoidance of marginal customer accounts 5. etc. According to Porter.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. Cost minimization . One such competitive strategy is overal l cost leadership. Tight cost and overhead control 4. the firms should produce good quality products at minimum costs. To strive in this competitive environment the firms should have an edge over the competitors. Aggressive construction of efficient scale facilities 2. 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.
oils. Previously differentiation was viewed narrowly by the firms. attitudes. Most of the fast moving consumer goods like biscuits. 2) Differentiation Strategy – Every individual customer is unique in itself so is his/her preferences regarding tastes. which require high capital investment • Threat by competitors to capture still lower cost segments • Competition based on other than cost. etc come under the category of differentiated products. it is necessary for the firms to do extensive research to study the different needs of the customers. In our day-to-day life we see many such examples of differentiated products. 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. which is more than the cost of providing differentiation.To sustain the cost leadership throughout. toothpastes. These needs of the customers are fulfilled by the firms by producing differentiated products. A firm is able to differentiate from its competitors if it is able to position itself uniquely at something that is valuable to buyers. soaps. The extent to which the differentiation occurs depends on the overall strategy of the firm. but in the . Differentiation can lead to differentiatial advantage in which the firm gets the premium in the market. etc. it becomes essential for the firms to adopt a differentiation strategy. preferences. To make this strategy successful. Some are • Initiation by the competitive firms • Threat of competitive firms from other countries • Firm losing cost leadership due to fast technological changes. To satisfy the diverse needs of the customers. the firm must be clear about its accomplishment through different elements of the value chain.
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. There are a number of factors which result in differentiation. This is differentiation. 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 .present scenario it has become one of the essential components of the firm’s strategy. Reliance Infocomm. offers varied products like different facilities to its customers in the CDMA telephones.
which creates differentiation. If the firm has a good link with suppliers and has a sound distribution channel. The policy choices are basically related to the type of services to be provided to the customers. the credit policy. to what extent a particular activity be adopted. the content of activity. 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. then it becomes easy for the firm to produce and supply the product to the end users .Sources of differentiation – Its not only the low price at which different products are offered. Differentiation occurs from the specific activities a firm performs and how they affect the buyer. 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. skill and experience required by the employees. the firm deals with.
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 . 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.• Timing – the firms can achieve uniqueness by encashing the opportunities at the right time. The integration level means the coordination level of value activities • Scale – Larger the scale. If small volumes of products are produced . more will be the uniqueness. then the uniqueness of the product will be lost over a longer period of time.g sales force with the firm’s sister concerns. • Location – this is one of the important factors for the firms to have uniqueness. • Learning – To peform better and better. if its level of integration is high. continuous improvement is necessary and this comes through continous learning • Integration – The firm can be termed as unique. then the bank will gain an edge towards other banks. If the timing is perfect then a successful differentiation strategy can be adopted. • Interrelationships – a better service can be offered to the customers by sharing certain activities e. A very good example can be home-delivery services. For example a bank may have its branch which is accessible to the customers.
The differentiation adds costs as it involves added features to cater to the needs of the customers.Cost of differentiation – Differentiation generally involves costs. 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.
This strategy involves the selection of a market segment. the firm offers niche buyers something different from rivals. In focus strategy.Cost focus is where a firm seeks a cost advantage in the target segment. This is also known as niche strategy. This is basically a niche-low cost strategy whereby a cost advantage is achieved in focuser’s target segment.5. the competitive advantage can be achieved by optimizing strategy for the target segments. According to Porter. Following are the situations where a focus strategy is efficient – • Market segment large enough to be profitable . In this the focuser concentrates on a narrow buyer segment and out-competes rivals on the basis of lower cost. They are – a) Cost focus . Firm seeks differentiation in its target segment. or group of segments. in the industry and meeting the needs of that preferred segment (or niche) better than other market competitors. MayBach luxury car which is targeted to segment where customers can afford to pay a sum as large as Rs. b) Differentiation focus .4 crores.Differentiation focus is where a firm seeks differentiation in the target segment. cost focus exploits differences in behavior in some segments. In this. Focus is different from other business strategies as it is segment based and has narrow competitive scope. Eg. Focus strategy has two variants.The third business level strategy is focus. Differentiation focus exploits the specific needs of buyers in specified segments.
if combined with low-cost and differentiation strategy. would increase market share and profitability Risks of focus strategy – • Market segment may not be large enough to generate profits • Segment’s need may become less distinct from the main market • Competition may take over the target-segment Corporate Strategy .• 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.
They are 1) Stability strategy – Stability strategy implies continuing the current activities of the firm without any significant change in direction. A corporate strategy involves decisions relating to the choice of businesses. different businesses.Corporate strategy is primarily about the choice of direction for the corporation as a whole. The basic purpose of a corporate strategy is to add value to the individual businesses in it. satisfied with incremental improvements of functional performance and the management does not want to take any risks that might be associated with expansion or growth. Stability strategy is most likely to be pursued by small businesses or firms in a mature stage of development. If the environment is unstable and the firm is doing well. transferring skills and capabilities in such a way as to obtain synergies among product lines and business units. 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. . allocation of resources among. Types of Corporte Strategies There are four types of strategic alternatives available at corporate level. so that the corporate whole is greater than the sum of its individual business units. then it may believe that it is better to make no changes.
However. 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 – . The stability strategy can be designed to increase profits through such approaches as improving efficiency in current operations. stability strategy is not a ‘do nothing’ approach nor does it mean that goals such as profit growth are abandoned. No major functional changes are made in the product line.Stability strategies are implemented by ‘steady as it goes’ approaches to decisions. markets or functions.
the profit strategy is useful to get over a temporary difficulty. stability strategies can be very useful in the short run. especially if they have been growing too fast in the previous period. 1) In general. Obviously. the firm may decide not to do anything new. or if there are no major new strengths and weaknesses within the organization or if there are no new competitors or threat of substitutes. it will lead to a serious deterioration in the company’s position. top management may be tempted to follow this strategy. The profit strategy is thus usually the top management’s short term and often self serving response to the situation. Sometimes. but if continued for long. 2) No change strategy – a no change strategy is a decision to do nothing new i. but they can be dangerous if followed for too long. firms that wish to test the ground before moving ahead with a full-fledged grand strategy employ stability strategy first. 3) Profit strategy – the profit strategy is an attempt to artificially maintain profits by reducing investments and short-term expenditures. If there are no significant opportunities or threats operating in the environment.Pause/Process with caution strategy – some organizations pursue stability strategy for a temporary period of time until the particular environmental situation changes. Rather than announcing the company’s poor position to shareholders and other investors at large. 2) Growth/Expansion Strategies – .e continue current operations and policies for the foreseeable future. Stability strategies enable a company to consolidate its resources after prolonged rapid growth.
Companies that do business in expanding industries must grow to survive. and by realigning the product and the market options available to the organization.Growth strategies are the most widely pursued corporate strategies. 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. joint ventures or strategic alliances. it may be possible to attract customers by intensive advertising. A company can grow internally by expanding its operations or it can grow externally through mergers. acquisitions. a) . These strategies are generally referred to as intensification strategies.
offering price cuts attracting non users to buy the product by inducing trail use through sampling. etc. . national expansion and international expansion by entering new market segments by developing product versions to appeal to other segments. advertising other uses.There are three important intensive strategies – Market penetration – seeks to increase market share for existing products in the existing markets through greater marketing efforts. establishing sharper brand differentiation. This can be achieved through the following approaches – by entering new geographic market through regional expansions. increasing promotional effort. usage rate of present customers is low. giving incentives. This includes activities like increasing the sales force. entering other channels of distribution and through advertising in other media. economies of scale can bring down the costs and when market shares of major competitors are declining while total sales are increasing. advertising new users • This strategy is effective when currents markets are not saturated. giving price incentives for increased use attracting the competitor’s customers by increasing promotional efforts. Market development – seeks to increase market share by selling the present products in new markets. Marketing penetration is generally achieved through the following approaches – increasing sales to the current customers by increasing the size of purchase.
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. Can be achieved through developing new product features. new channels of distribution are available. the firm’s industry is becoming rapidly global and when the firm has resources for expanded operations. Product development – seeks to increase market share by developing new or improved products for present markets. A company performs a number of activities to transform an input to output. developing quality variations and by developing additional models and sizes (product proliferation) • This strategy is effective when the firm’s products are in maturity stage. the firm witnesses rapid technological developments in the industry. 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 has excess production capacity.This strategy is effective when new untapped or unsaturated market exists. the firm is in a high growth industry. Such a combination can be done on the basis of the industry value chain. These b) .
but its scope of operations extend to two stages of the industry value chain. integration is basically of two types – Vertical integration Horizontal integration Vertical Integration – involves gaining ownership or increased control over suppliers or distributors. but its scope of operations extend from manufacturing to retailing. participating in all stages of the industry value chain or partial integration. Vertical integration is of two types – . it remains in the same industry. if a manufacturer invests in facilities to produce raw materials or component parts that it formerly purchased from outside suppliers. it remains in the same industry. Thus. A firm can pursue vertical integration by starting its own operations or by acquiring a company already performing the activities it wants to brings inhouse. Thus. 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’.activities are also called value chain activities. Vertical integration can be full integration. participating in selected stages of the industry value chain. if a manufacturer opens a chain of retail outlets to market its products directly to consumers.
component parts and other inputs. It decreases the dependability of the supply and quality of raw materials used as production inputs. This strategy is generally adopted when 2) the present distributors are expansive. 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. a manufacture of finished products may take over the business of a supplier who manufactures raw materials. too costly or cannot meet firm’s needs the firm’s industry is growing rapidly Number of suppliers is small.Backward integration – involves gaining ownership of firm’s suppliers. 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 . This strategy is generally adopted when present suppliers are unreliable.
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.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. diversification adds new products or markets in the existing ones. In other words. A diversified company is one that has two or more distinct businesses. 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. The diversification strategy is concerned with c) .
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. From the risk point of view.achieving a greater market from a greater range of products in order to maximize profits. but related business is called Concentric diversification. companies attempt to spread their risk by diversifying into several products or industries. It involves acquisition a) .
but unrelated businesses Is called conglomerate diversification.of businesses that are related to the acquiring firm in terms of technology. 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 . products or markets. The selected new business has compatibility with the firm’s current business. The new businesses will have no relationship to the company’s technology. markets or products. 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.
Mergers & Acquisitions Joint ventures .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. products or technology Main objective is to increase shareholder value through profit maximization 2 3 4 More risky Means to achieve diversification – i. ii. 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.
i) Mergers can take place in different ways Acquisition occurs when a large organization purchases a smaller firm.iii. 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. or vice versa. It is usually done through the purchase of controlling share of voting stock in a publicly traded company. It is also known as amalgamation. the acquiring firms retains its identity whereas the target firm loses its identity after restructuring. iv. . This happens when a part of the undertaking is transferred to a newly formed company or to an existing company. Friendly merger – when both firms desire a merger or acquisition. In the case of takeover. Consolidation is when both firms dissolve their identity to create a new firm. The size of the company after demerger would reduce. Demerger – or split or division of a company is the opposite of mergers and acquisition. 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.
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) . b) Vertical merger – joining of two or more companies involved in different stages of production or distribution of the same product or service. c) Lateral or allied merger – when the firms producing different products which are related in some way come together d) Conglomerate merger – the merger of two or more companies producing unrelated products.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.
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. where each of the partners own . A joint venture occurs when two or more companies join together to form a separate legal entity. 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.Circular merger – when firms belonging to the different industries and producing altogether different products combine together under the banner of central agency. financial fit. which may doom the induced benefits ii) Joint Ventures – joint ventures are assuming an increasingly prominent role in the strategy of leading firms.
2) Diversification joint venture – a firm may diversify into new products or markets through a joint venture. The most common forms of a joint venture include those between an international firm with a domestic firm. two or more firms jointly Cooperate for mutual gain. managerial and financial expertise from one business to another 3) Market entry joint ventures – in this type of joint ventures. For example. Each partner brings knowledge or Resources to the partnership.equal or near equal stake. the specific benefits arise from transfer of technical. 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. In such joint ventures. 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. Types of joint ventures – International joint ventures: in this type of joint ventures. These ventures are formed to capitalize on each other’s distinctive competencies. so that it could compete globally against its competitors. one . some countries make it mandatory for international firms to only enter the country through a joint venture with the local partner. the international partner intends to benefit from the domestic partner’s local knowledge of industry conditions of a specific industry. 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. Further. rather than on their own. Also.
Advantages of strategic alliances – improvement of efficiency. In the long run. Overcoming local government regulations. partners can learn from each other and develp new core competencies. Evaluate case of knowledge transfer. access to knowledge.partner provides Manufacturing partner provides marketing capabilities while the other Marketing expertise. overcoming restrictions in competition Issues involved – assess and value partner knowledge. determine knowledge accessibility. management may follow one or more of the following retrenchment strategies – a) Turnaround . 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. establish knowledge connections between the partners. In an attempt to eliminate the weaknesses that are dragging the company down. Ensure that cultures are in alignment 3) Defensive strategies – These strategies are also called retrenchment strategies.
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. This process of recovery is called turnaround strategy.a firm is said to be sick when it faces a severe cash crunch or a consistent downtrend in its operating profits. 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 .b) divestment c) bankruptcy d) liquidation a) Turnaround . The three phases of turnaround – First phase – is the diagnosis of impending trouble. Such firms become insolvent unless appropriate internal and external actions are taken to change the financial picture of the firm.
• • • • • •
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
It allows organizations to file a petition in the court for legal protection to the firm. c) Bankruptcy – this is a form of defensive strategy. the company may be wound up and its assets may be sold to satisfy debt obligations. But a combination strategy can be exceptionally risky if carried too far. Liquidation becomes inevitable under the following circumstances – 1) when an organization has pursued both turnaround strategy and divestiture strategy. When there are no buyers for a business which wants to be sold.financed through debt. The court decides the claims on the company and settles the corporation’s obligations. but failed 2) when an organization’s only alternative is bankruptcy. d) Liquidation – occurs when an entire company is dissolved and its assets are sold. in case the firm is not in a position to pay its debt. Priorities must be established. No organization can afford to pursue all the strategies that might benefit the firm. Much of the debt may be secured by the assets of the company. It is a strategy of the last resort. Organizations like individuals have limited . Difficult decisions must be made. 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.
so organizations must choose among alternative strategies .resources.
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