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Strategic Management Module 1 (A)

How do we define Strategic Management? According to Peter Drucker Strategic Management is not a box of tricks or a bundle of techniques . It is analytical thinking and commitment of resources to action How do we define Strategic Management? According to Lawrence R Jaunch and William F Glueck Strategic Management is a stream of decisions and actions which leads to the development of an effective strategy of strategies to help achieve corporate objectives . The strategic management process is the way in which strategists determine objectives and make strategic decisions According Thompson and Strickland The tasks of crafting , implementing and executing company strategies are the heart and soul of managing a business enterprise As per Ireland , Hoskisson , Hitt A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage . A firm has a competitive advantage when it implements a strategy competitors are unable to duplicate or find too costly to try to imitate . According Thompson and Strickland In crafting a strategy , management is saying , in effect , Among all the paths and actions we could have chosen , we have decided to move in this direction , focus on these markets and customer needs , compete in this fashion , allocate our resources and energies in these ways . And rely on these particular approaches to doing business . How Stakeholders relationship could be source of competitive advantage ? Stakeholders are the individuals and groups who can affect the vision and mission of the firm are affected by the strategic outcomes achieved , and have enforceable claims on a firms performance . Claims on a firms performance are enforced through the a stakeholders ability to withhold participation essential to the organisations survival , competitiveness , and profitability . Classification of Stakeholders

: Capital Market Stakeholders 1.Shareholders 2. Debenture holders 3 . FIs , Banks , MFs , FIIs, PEs , VCs Etc. B. Product Market Stakeholders 1.Primary customers 2. Suppliers 3. Host communities 4.Unions C . Organisational Stakeholders 1.Employees 2. Managers 3. Non- Managers Strategic Leaders Strategic leaders are people located in different parts of the firm using the strategic management process to help the firm using the strategic management process to help the firm reach its vision and mission . Their location in organisational structure is not that important . Organisational Culture Refers to the complex set of ideologies , symbols , and core values that are shared through out the firm and that influences how the firm conducts business . It is social energy that drives or fails to drive the organisation . For example , highly successful Southwest Airlines is known for having a unique and valuable culture . Its culture encourages employees to work hard and have fun too . The firm also pays importance by its commitment to provide POS ( Positively Outrageous Service ) Average returns Above average returns are returns in excess of what an investor expects to earn from other investments with a similar amounts of risk . Risk is an investors uncertainty about the economi c gain or losses that will result from a particular investment . Average returns are returns equal to those an investor expects to earn from other investments with similar amount of risk . The I / O Model of Above Average Returns


Organisation ( I/O ) model of above average returns explains the external environments dominant influence on a firms strategic actions . The model specifies that the industry in which a company chooses to compete has stronger influence on performance than do the choices managers make inside their organisations . The performance is believed to be determined by primarily by a range of industry properties :a) economies of scale , b) barriers to market entry , diversification , and the degree of concentration of firms in the industry . Assumptions of I / O Model 1. External environment is assumed to impose pressures and constraints that determine the strategies that result in above- average returns . 2.Most firms competing within an industry or within a segment of industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources . 3.Resources used to implement strategies are assumed to be highly mobile across firms , so any resource differences that might develop between firms will be short lived . 4.Organisational decision makers are assumed to be rational and committed to acting in the firms best interests The I/ O Model of Above Average Returns Resource Based Model of Above Average Returns As per this model , differences in firms performances across time are due primarily to their unique resources and capabilities rather than to the industrys structural characteristics . Resources are inputs into a firms production process , such as capital equipment , the skills of individual employees , patents , finances , and talented managers . Put under 3 categories viz., physical , human and organisational capital . Resource Based Model of Above Average Returns A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner . Core competencies are resources and capabilities that serve as source of competitive advantage for a firm over its rivals .


resources are valuable , scarce , costly to imitate , and non substitutable , they have potential to constitute competitive advantage . Strategic Vision Strategic Vision so as to provide long term direction , delineate what kind of enterprise the company is trying to become and infuse the organisation with a sense of purposeful action. Instances of Strategic VisionMicrosoft Corporation In the past A computer on every desk and in every home using great software as an empowering tool . In 1999 , in the light of latest technology , it changed to Empower people through great software anytime , any place and on any device Instances of Strategic VisionMicrosoft Corporation Bill Gates We see a world where people can use any computing device to do whatever they want to do anytime , anywhere . The PC will continue to have a central role -- but it will be joined by an incredibly rich variety of digital devices accessing the poweer of the Internet Instances of Strategic VisionINTEL Our vision : Getting to a billion connected computers worldwide , millions of servers, and millions of dollars of ecommerce . Intels core mission is being the building-block supplier to the Internet company and spurring efforts to make the Internet more useful . Being conncted is now the centre of peoples computing experience . We are helping to expand the capabilities of the PC platform and internt . Instances of Strategic VisionOTIS ELEVATOR Our mission is to provide any customer a means of movin g people and things up , down , and sideways over short distances with higher reliability than any other enterprise in the world Instances of Strategic Vision AMERICAN RED CROSS The mission of the American Red Cross is to improve the quality of human life , to enhance self-reliance and concern for othrs , and to help people avoid , prepare for and cope with emergencies AVIS RENT-A-CAR

Our business is renting cars . Our mission is total customer satisfaction

Mission Statement A mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. Mission statement tends to deal with companys present business sc ope who we are and what we do where as Strategic Vision portrays a companys future business scope. Examples of Mission Statements Mc Donalds Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants. LNP GE Plastics Company Our mission is to be recognized by our customers as the leader in applications engineering. We always focus on the activities customers desire: we are highly motivated and strive to advance our technical knowledge in the areas of material, part design and fabrication technology. Business Model According Thompson and Strickland , a business model deals with the revenue-cost-profit economics of its strategy - the actual and projected revenue streams generated by the companys product offerings and competitive approaches , the associated cost structure and profit margins and the resulting earnings stream and return on investment . Strategy vs Business Model According Thompson and Strickland , strategy relates to a companys competitive initiatives and business approaches ( irrespective of the financial and competitive initiatives and business approaches while the term business deals with whether revenues and costs flowing from the strategy demonstrate business viability . Strategy vs Business Model According Thompson and Strickland, Companies that have been in business for a while and are making acceptable profits have a proven business model - there is a clear evidence of that their strategy is capable of profitability and that they have viable enterprise .

Striking Business Models Microsoft [[Linux Highly secretive code In house R &D Highly paid Employees with SOPS Highly Priced Software Open code Open R &D External Experts Free software Striking Business Models HLL Nirma Super Quality Highly focussed R &D Superior Technology Targeting high income groups Compatible Quality Indigenous R &D Manual Process Targeting low income groups The Environment Analysis Module 1 B External Environment Analysis Components : Scanning : Identifying early signals of environmental changes and trends . Monitoring : Detecting meaning through ongoing observations of environmental changes and trends . Forecasting : Developing projections of anticipated outcomes based on monitored changes ,and trends . Assessing : Determining the timing and importance of environmental changes and trends for firms strategies and their management . Series of Layers The most general layer of the environment is macro environment . Any specific factor in the general environment will affect some organisations more than others .

If the future environment is likely to be very different from the past it is

helpful to construct pictures or scenarios . Strategic groups are organisations within an industry that have similar characteristics to each other but are quite different from those in other strategic groups . The concepts of market segmentation , customer value and life cycles are relevant . General Environment /PESTEL Framework Political- Govt stability , taxation policy ,foreign trade regulation , social welfare policies , labour laws , anti-trust laws etc. Economic factors : Inflation , interest rates , Trade deficits / surpluses , Budget deficits /surpluses , Personal / Business savings rates , GDP Socio-cultural : Work force diversity , Attitudes about quality of life , Shifts in work and career preferences , shifts in preferences regarding product and service characteristics . Global : Important political events , critical global markets , newly industrialised countries , different cultural and institutional attributes . Technological : Product innovations , Applications of knowledge , Focus of private and government support , R & D Expenditures , New communication technologies . Demographic : Population size , Age structure , Geographic distribution , Ethnic mix , Income Distribution Environmental : Green house effect , environmental pollution , global warming etc. PESTEL Framework Lobbying : GOI opening up Telecom industry for private players . DOT auctioning spectrum region wise Demographics (Demography forecasting ): India having over 50 per cent of population below age group of 35 years . Socio-cultural (Environmental sensing ) : Growing health consciousness and social pressures have led to severe restrictions on use of tobacco products . PESTEL framework Technology ( R & D Policy ) :The introduction of new multi media mobile service such as data , entertainment and text messaging has been

more than just the next level . These new data services require secure transactions over mobile networks , more processing power , and increased memory capacity . As a result , smart-card manufacturers , banking applications developers and billing software developers have all increased their investments in R &D in order to capitalise on this technology , PESTEL framework Capital Markets (Financial Policy ) : Boom in IT stocks during 1999 and 2003 . Burst of Dotcom . Current phase of global recession . Labour market ( Labour Policy and industrial relations ) : Government notifying certain services as Essential Services . Regulating Strikes in such areas . Competition ( Marketing policy ) : Deregulation of Banking , Oil Sector , Telecom etc. Economic forecasting (Economic policy ):Taiwan with a population of 22 million people played vital role in electronics industry . Taiwans electronics factories evolved from contract manufacturers into designer manufacturers . Taiwans prosperity as an electronics workshop has been the result of partnering with the US Computer industry . PESTEL framework Ecology ( Environmental sensing and R & D policy )Huntingdon Life Sciences , the biggest drug-testing company in Europe was targetted by anti-vivisection protestors and animal groups following a documentary about the company in 2000 . HLS used about 70,000 animals a year to test the effectiveness of pharmaceuticals . As a result of protestors tactics and negative publicity , many shareholders sold their shares and banks called back loans , leaving HLS on the verge of bankruptcy . Suppliers ( Purchasing ) : The price of crude oil rose to near $140 per barrel . During last 4 months , crude prices collapsed to below $ 40 per barrel . OPEC and suppliers are have cut down their production levels . Poters Fundamental Determinants of a Firms Profitability

Five competitive forces : The entry of new competitors The threat of new substitutes The bargaining power of buyers

The bargaining power of suppliers The rivalry among existing competitors

Impact of Five Competitive Forces

The Five Forces determine Prices Costs Required investments

industry profitability because they influence :

Entry Barriers for New Entrants Economies of scale Proprietary product differences Brand Identity Switching costs Capital requirements Access to distribution Absolute cost advantages - proprietary learning curve - access to necessary inputs - Proprietary low cost product design Govt policy Licensing , FDI , Tax etc. Determinants of suppliers power Differentiation of inputs Switching costs of suppliers and firms in the industry . Presence of substitute products Supplier concentration Importance of volumes to suppliers Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Threat of forward integration relative to threat of backward integration by firms in the industry . Determinants of Buyer Power Bargaining Leverage Buyers concentration vs Firms concentration

Buyer volume Buyer switching costs relative to firms switching costs Buyer information Ability to backeward integration Substitute products Price Sensitivity Product Differences Brand Identity Impact on quality Performance Buyer Profits Decision Makers Incentives
Rivalry Determinants Industry Growth Fixed Storage Costs / value added Intermittent overcapacity Product differential Brand Identity Switching Costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers New Products

A new product design In

that undercuts entry barriers or increases volatility of rivalry , for example , may undermine the long run profitability an industry though imitator may enjoy higher profits temporarily . the Tobacco industry , generic cigarettes are a potentially a serious threat to industry structure . Generics may enhance the price sensitivity of buyers , trigger competition , and erode the high advertising barriers that have kept out new entrants . Structural Drivers of Change

Are forces

likely to affect the structure of industry , sector or market . It will be the combined effect of some of these separate factors that will be so important rather than factors separately . Drivers of Globalization in some Industries Global market convergence : 1.Similar customer convergence 2.Globnal customers .3. Transferable marketing . Government influence : 1.Trade policies 2.Technical standards. 3.Host government policies . Cost advantages : 1. Scale economies 2.Sourcing efficiencies 3. Country specific costs 4.High product development costs . Global competition : Interdependence 2. Competitors global 3. High exports / imports Building scenarios The book publishing industry is facing changing environments which are hard to predict on the basis of experience or historical analysis . 1. Development of electronic communications market 2.Consumer perception of books compared with electronic substitutes . 3.Costs of paper and other raw materials 4.Government spending and regulation . Key Success Factors


Success Factors (KSFs) are those competitive factors that most industry members ability to prosper in the market place the particular strategy elements , product attributes , resources , competencies , competitive capabilities and market achievements that spell the difference being a strong competitor and a weak competitor .


apparel industry , the KSFs are appealing designs and colour combinations ( to create buyer interest ) and low cost manufacturing efficiency ( to permit attractive retail pricing and ample profit margins ) Common Types of KSFs Technology related :1. Expertise in a particular technology or in scientific research ( important in pharmaceuticals , Internet applications , mobile communications ,and most high tech industries ).2. Proven ability to improve production processes .

Manufacturing related KSFs :1. Ability to achieve scale economies and /

or capture learning curve affects. 2. Quality control knowhow.3.High utilisation of Fixed Assets .4.Access to attractive supplies of skilled labour .High labour productivity etc. Distribution related KSFs : 1. A strong network of wholesale distributors .2.Strong direct sales capabilities via the internet and/or having company owned retail outlets. Marketing-related KSFs :Breadth of product line and selection 2. A well known and well respected brand name . 3.Fast , accurate technical assistance .4.Courteous , personalised customer service .5.Accurate filling of buyers orders . 6.Customer guarantees and warranties . 7. Clever advertising . Skills and capability related KSFs :1. Talented workforce .2.National or Global distribution capabilities 3.Product innovation capabilities 4.Design expertise 5.Short-delivery-time capability .6.Supply chain capabilities .7.Strong e commerce capabilities . Other types of KSFs : Overall low costs 2. Convenient locations 3. Ability to provide fast , convenient fter sales services etc. Driving Forces

Industry conditions change because important forces are driving industry

participants ( competitors , customers , or suppliers ) to alter their actions .

Driving forces in an industry are the major underlying causes of changing

industry and competitive conditions some driving forces originate in the macro environment and some originate from within a comp anys immediate industry and competitive environment . Most Common Driving Forces 1.Growing use of the Internet and emerging new internet technology applications 2.Increasing Globalisation of industry 3.Changes in the long term industry growth rate 4.Changes in who buys the product and how they use it . 5.Product innovation 6.Technological change and manufacturing process innovation 7.Marketing Innovation 8.Entry or exit of major firms

9.Diffusion of technical know how across more companies and more countries 10.Changes in cost and efficiency 11. Growing buyer preferences for differentiated products in stead of standardized commodity products 12.Reduction in uncertainty and business risk 13.Regulatory influences and government policy changes 14.Changing social concerns , attitudes and life styles . Assessing the Impact of the Driving Forces

The following three questions are to be answered 1.Are the driving forces causing demand for the
increase or decrease ?

industrys product to

2.Are the driving forces acting to make competition more or less intense ? 3.Will the driving forces lead to higher or lower industry profitability ?
Strategic Group Mapping

Strategic group mapping is a technique for displaying the different market

or competitive positions that rival firms occupy in the industry.

strategic group is a cluster of firms in an industry with similar competitive approaches and market positions . Steps in constructing a Strategic Group Map 1. Identify the competitive characteristics that differentiate firms in the industry , typical variables are price / quality range ( high , medium , low ) , geographic coverage , ( local , regional , national , global ) , degree of vertical integration , product line breadth , use of distribution channels and degree of service offered ( no frills , limited , full ) . 2.Plot the firms on a two variable map using pairs of these differentiating characteristics . 3.Assign firms that fall in about the same strategy space to the same strategic group . 4.Draw circles around each strategic group , making the circles proportional to the size of the groups share of total industry sales revenue . What can be learned from Strategic Group Maps ?

Driving forces and Competitive pressures donot affect all strategic groups
evenly . Profit prospects vary from group to group according to the relative attractiveness of their market position . What extent industry driving forces and competitive pressures favour some strategic groups and hurt others. What extent the profit potential of different strategic groups varies due to the strengths and weaknesses in each groups market position . Closer strategic groups are to each other on the map , the stronger the cross-group competitive rivalry tends to be .

Internal Analysis Liberalisation and Globalisation Indian Industry exposed to sudden spurt in competition due to - reduction in Custom Tariffs - removal of restrictions on imports -new ventures by MNCs - expansion and diversification by existing players Necessity is the mother of invention To survive and grow in competition , Indian Industry realised to focus on Quality and Standardisation Reduce costs Become customer friendly International business practices Sources of Competitive Advantage A low cost advantage may stem from such disparate sources as a low cost physical distribution system , a highly efficient assembly process , or superior sales force distribution . Differentiation can stem from similarly diverse factors including the procurement of high quality raw materials , a responsible order entry system , or superior design system . Single Industry Firm Diversified Firm McKinsey Cos Business System Concept A firm has a series of functions e.g R & D , manufacturing , marketing , channels and and each is performing relative to others .

Value Value is measured by total revenue a reflection of the price a firms product commands and the units it can sell . Value activities classified into Primary and Supportive . Primary Activities Inbound Logistics : Activities associated with receiving , storing , and disseminating inputs to the product such as material handling , warehousing , inventory control , vehicle scheduling , and returns to suppliers . Operations : Activities associated with transforming inputs into the final product firm , such as machining , packaging , assembly , equipment , maintenance , testing , printing , and facility operations . Outbound Logistics : Activities associated with collecting , storing and physically distributing the product to buyers , such as finished goods warehousing , material handling , delivery vehicle operations , order processing , and scheduling . Marketing and Sales : Activities associated with providing a means by which buyers can purchase the product and inducing them to do so , such as advertising , channel selection , channel relations and pricing . Service : Activities associated with providing service to enhance or maintain the value of the product adjustment . Supportive Activities Procurement Technology Development Human Resource Management Firm Infrastructure Activity Types Within category of primary and support activities , there are three activity types that play a different role in competitive advantage : 1.Direct : Activities directly involved in creating value for the buyer , such as assembly , parts machining , sales force operation , advertising , product design , recruiting , etc. Indirect : Activities that make it possible to perform direct activities on a continuing basis such as maintenance , vendor record keeping , etc.


Assurance : Activities that ensure the quality of other activities such as monitoring , inspecting , testing , reviewing , checking , adjusting , and reworking. Linkages among value activities arise from number of generic causes : The same function can be performed in different ways : High quality inputs or high quality assurance : The cost or performance of direct activities is improved by greater efforts in indirect activities Better scheduling (an indirect activity ) reduces sales force travel time or delivery vehicle time . Activities performed inside a firm reduce the need to demonstrate explain or service a product in the field . Quality assurance function can be performed in multiple ways . Vertical Linkages Linkages exist not only within a firms value chain but between a firms chain and the value chains of suppliers and channels . The linkages between suppliers value chain and a firms value chain provide opportunities for the firm to enhance its competitive advantage . Channel linkages are similar to supplier linkages . Competitive Scope and Value Chains Competitive scope can have a powerful effect on competitive advantage , because it shapes the configuration and economies of the value chain . Segment scope : The product varieties produced and buyers served Vertical scope : The extent to which activities are performed in-house instead of by independent firms . Geographic scope : The range of regions , countries or groups of countries in which a firm competes with a coordinated strategy . Industry scope : The range of related industries in which the firm competes with a coordinated strategy . Coalition and Scope A firm can pursue the a broader scope internally or enter into coalitions with independent firms to achieve some or all of the same benefits .Coalitions are long term agreements among firms that go beyond normal transactions but fall short of mergers .

Examples : technology licenses , supply agreements , marketing

agreements , and joint ventures . The Value Chain and Organisational Structure The value chain provides a systematic way to divide a firm into its discrete activities and thus can be read to examine how the activities in a firm are and could be grouped . What is meant by Core Competence ? Core Competence may be defined as inherent superior strength of an organisation in a product or service line arising out of Technology , Governance Process ( ability to work across business and functional unit boundaries ) and Collective Learning : Core competency Core competences are activities that critically underpin an organisations competitive advantage . They create and sustain ability to meet the critical success factors of particular customer groups better than other providers in ways that are difficult to imitate . Criteria for Core Competency 1. The competence must relate to an activity or process that fundamentally underpins the value in the product or service features . 2.The competence leads to levels of performance from an activity or process that are significantly better than competitors . 3.The competence must be robust . Core Competencies for Consumer Goods . Brand . Innovation Success .Good Service .Reliable delivery: .Solving buyers problems . Good personal relations with buyers Accepting returned goods : Fast turnaround of orders . Using sub contractors for transport 24 hour dispatch What is meant by Competitive Strategy ?

A Strategy that gives advantage to compete successfully with competitors could be under stood as Competitive Strategy . Various functional areas in a Company Corporate Planning Purchases Stores and Inventory Control Production Finance Accounting and MIS Marketing Advertisement and Sales Promotion Personnel and Administration HR and Training Various kinds of industries Commodity Process Industries Agro Commodities Mineral and Metal Based industries Chemical Capital Goods Sector Hi -Tech Industries Service Industries Hospitality , Finance , Marketing , Consultancy , Education etc. Inter-Related Aspects which make Core Competence Production Technologies Human Processes Systems Customer Synergies Cost Efficiency Cost efficiency is a measure of the level of resources needed to create a given level of value . Sources are : 1. Economies of scale 2.Supply costs 3.Product or process design 4.Experience Effectiveness

Effectiveness is the ability to meet customer requirements on product

features at a given cost . It will be achieved only if managers are able to do the following : Clear about which product feaures are valued by customers . Drivers of uniquness within the organisaion Price that customers ready to pay for uniqueness Products featurs are communicated . Competitive advantage is more of product service rather than product per se . Critical Success Factors and Core Competencies that change over time Market Access :1. Global network . 2. Overseas plants . Quality / Reliability : 1. Production processes 2. Supplier management Product features (at low volume ) : 1. Life style niche marketing . 2. Agile Production Historical Comparison Historical comparison looks at the performance of an organisation in relation to previous years in order to identify any significant changes . Industry norms compare the performance of organisations in the same industry or sector against a set of agreed performance indicators Benchmarking Health Care In January 2001 , Sunday Times -Hospital Guide (in association with Dr. Foster ) published the first guide to hospitals in Britain : Mortality Index : Doctors per 100 beds Nurses per 10 beds Waiting time for in-patient treatment Waiting time for out-patient treatment Patients trust in doctors Sources of Robustness A. Rarity : 1.Unique Resources .2. Preferred access . 3. Situation dependent :4. Sunk costs . B. Complexity : 1.Internal linkage :2. External linkages .3. Linked technologies . C. Causal ambiguity : Competitors are unclear about bases of success . Culture : Culturally embedded comptences : Dificult to identify .


creation and integration Socialisation : Honda set up brain storming campus .to solve p roblems in developing projects . Externalisation : In Canons case the origin of using a disposable drum came from Hiroshi Tanaka a team leader of task force . Combination : EPOS Electronic Point of Sale produced a unique classification of stores and shoppers and were capable of pinpointing who shopped where and how Internalisation : GE documented all customer enquiries and complaints ( more than 14, 000 per day ) and then programmed into 1.5 million potential problems and their solutions . Spiral of knowledge creation : Reliance Industries Ltd Started trading in PFY Manufacturing PFY Refineriery Oil exploration A Back ward integration - Core Competence in Petrleun Technology and Processes . Using Core Competence as competitive strategy companies opted for Expansions - Horizontal Expansion - vertical - backward or forward .integration . Merger and Amalgamation with a company engaged in same or similar line Getting controlling stake in a company having similar product line and technological strengths Philips / Sony / BPL/Videocon Radios Tape Recorders Televisions and VCRs Washing machines Pencil Bastteries Mobile phones Core competence Electronics and Targetting family segment business Bajaj / Hero/TVS

Scooters Motor bikes Mopeds

General Motors , Ford , Toyoto, Suzuki Cars Vans Trucks Ashok Leyland , TELCO, Mahindra & Mahindra Trucks Vans Medium and Heavy Motor Vehicles . Bayers , Du pont , Industrial Chemicals Indian MNCs abroad Swaraj Paul Capro group in steel industry group in UK Mittals in different countries Difference old Pharma and new Pharma Groups of India . Old Groups Sarabhai alembic New Groups Ranbaxy Cipla Sun Pharma Dr Reddy Labs Oberoi Hotel Industry Indian Express /Times of India Media Print Media ) Electronic CDS Business India Group Print Medias - Business India Electronic Media - Aaz Thak MARG which merged with PRG became ORG MARG Nirma Ltd Washung Powder Detergent Cake Toilet Soaps Caustic Soda Plans to get in to Tea etc., using distribution network .

Shri Kumaram Birla of A V Birla group emphasing Concentrate on Commodities like Cement Fertlisers Textiles Keeping that Grasim took shares of L & T Want to get out of BATATA Why companies diversify in to industries where they lack core competence 1. To spread risk over different industrial segments . rather than concentrate on only one industry . 2. When a company has huge reserves and surpluses , promoters decide to expand their industrial empire and they diversify in to new areas for the following reasons : a) Current industrial segment has reached saturation and has huge capacities . b) Find new sun rising industries where the growth potentials are excellent . When promoters are very big industrial houses . The industrial houses diversify in to new areas Promoters place themselves more as entrepreneurs leaving all managerial functions to top class Professionals in the world . The best examples in the world are 1. GE 2. 3 M 3. Lever In India , it is Government of India where industries spread over highly capital intensive Oil and Petroleum to TVs , Many State Governments role of Promoter very effectively . Tata Group Birlas Hindustan Lever Industrialists also realised core competency does not ensure success always :Examples are Binny group which was wedded to only textiles .

Kirloskars by concentrating in Engineering and Electrical industries

To conclude Like any other strategy , Core Competence as Competitive Strategy also to be used with caution : Care competence as strategy could fail in areas : 1. If over all demand is shrinking due slackness in demand like in case of jute and cotton and handloom 2. If the overall performance in given industrial segment is below industrial average for various reasons Strategy Formulation Module 3 Characteristics of Strategic Decisions


is likely to be concerned with the long term direction of an organisation .

Strategic decisions are normally about trying to achieve some advantage

for the organisations over competition .


decisions are likely to be concerned with the scope of an organisations activities . Strategy can be seen as the matching of resources and activities of an organisation to the environment in which it operates This is also known as strategic fit . Strategic fit is developing strategy by identifying opportunities in the business environment and adapting resources and competences so as to ka advantage of these .


can be seen as building on or stretching an organisations resources and competences to create opportunities or to capitalise on them .

Strategies may require major resources changes for an organisation Strategic decisions are likely to affect operational decisions .
Characteristics of Strategic Decisions


strategy of an organisation is affected not only by environmental forces and resource availability but also by the values and expectations of those who have power in and around the organisation . Consequences of Characteristics of Strategy

Strategic decisions are likely to be complex in nature .

Strategic decisions may also have to be made in situations of uncertainty . Strategic decisions may also have to be made in situations of uncertainty . Strategic decisions may also have to manage and perhaps to change
relationships and networks outside the organisation .

Involve change in organisations which may prove dificult because of the

heritage of resources and because of culture Elements of Strategic Management Strategic Management : Three major elements of strategic management are : 1.Strategic position :2.Strategic choices and 3. Strategy into action .


position is concerned with impact on strategy of the external environment , internal resources and competences and the expectations and influence of stakeholders . Elements of Strategic Management

Strategic Choices involve understanding the underlying bases for future

strategy at both the corporate and business unit levels and the options for developing strategy in terms of both the directrions in which strategy might move and the methods of development .

Strategy into action is concerned with ensuring that strategies are working
in practice . Levels of Strategy

Corporate levels of strategy Business unit strategy Operations strategies

Business Level Strategy Is an integrated and coordinated set of commitments and actions the firms uses to gain a competitive advantage by exploiting core competencies in specific product markets .


level strategy indicates the choices the firm has made about how it intends to compete in individual product markets . How could we say business level strategy is core strategy ?

A firm competing in a single product market area in a single geographic

location does not need a corporate level strategy to deal with product diversity or an international strategy to deal with geographic diversity .

In contrast a diversified firm will use one of the corporate level strategies
as well as a separate business level strategy for each product market area in which it competes .

Every firm from the local dry cleaner to the multinational corporations
choose at least one business level strategy . Thus business-level strategy is the core strategy the strategy that the firm forms to describe how it intends to compete in a product market . In terms of customers , the firm must determine :

1. Who will be served ? 2.What needs those target customers have that it will satisfy ? 3.How those needs to be satisfied ?
Customers : Their relationship with Business Level Strategies

Example of Dell vs HP Dell captured a significant market share in the personal computer market
by using a low cost strategy while simultaneously satisfying customer needs

Hewlett Packard learned how to manage its supply chain to lower costs ,
thereby gaining competitive parity with Dell . It also provided a broader portfolio of goods and services that better satisfied customer needs and thereby customers from Dell Who : Determining the Customers to Serve :

Basis for Customer Segmentation : Consumer Markets : 1. Demographic factors 2.Socioecomnomic factors ( social class , stage in the family life cycle ) 3.Geographic factors (cultural , regional and national differences ) 4.Psyxchological factors (life style , personality traits ) 5.Consumption patterns ( heavy , moderate , and light users ) 6.Perceptual factors ( benefit segmentation , perceptual mapping )
Who : Determining the Customers to Serve :

Basis for Customer Segmentation : Industrial Markets : 1. End use segments (identified by SIC codes ) 2. Product segments (based on technological differences or production
economics )

3. Geographic segments (defined by boundaries between countries ) 4. Common buying factor segments (cut across product market and
geographic segments )

5.Customer size segments

Five broad approaches of Competitive Strategy

A focussed (or market niche )

strategy based on lower cost relying on narrower buyer segment and out competing rivals by serving niche members at a lower cost than rivals .

5. A focussed ( market niche ) strategy based on differentiation :

Concentrating on a narrow buyer segment and out competing rivals by offering niche members customised attributes that meet their tastes and requirements better than rivals products . A best-cost provider strategy upscale attributes

HDFC Bank and iCICI Bank . Bata TVS , Bajaj Agro Industry Nescafe and BRU Annapuna Tata Salt
A low cost provider strategy

Nirma Akai Parle Link Zenith

SBI Loans Lifebuoy soap of HLL

A broad differentiation strategy :.

Tooth paste Tooth Powder Face cream Health Beverage Drink VIP
Vicco Vajradhanti Daburs Laldant Manjan Vicco Vanishing Cream Horlics Safety : Less Weight and Durability A focussed (or market niche ) lower cost than rivals

Citi Bank British Airways Sterling Resorts Transport , Food ,

Concentrating on a narrow buyer segment and out competing rivals by offering niche members customised attributes

Apollo Hospitals Eimco Elecon Capital Equipment SOTC YMCA LIONS CLUB ROTARY In respect of thirteen customers provide imported equipment

Life time members get Heavy discounts

CITI BANK , ANZ , AMEX Thomas Cook and Western Union . Hero Honda Passport Flying Clubs :

Golf Clubs Race Clubs

Strategy at Business Level Customers : Their Relationships with Business Level Strategies Dell captured a significant market share in PC market by using low cost strategy . HP learned how to manage its supply chain to lower costs . Dell became too inward focused and did not take actions to avoid the imitation of the capabilities . Effectively Managing Relationships with Customers The firms relationships with its customers are strengthened when it delivers superior value to them . Harrahs Entertainment believes that it provides superior value to customers by being service oriented company in gaming .. is an Internet based venture widely recognised for the quality of information it maintains about its customers , the services it renders , and its ability to anticipate its customers needs . CEMEX SA a leading building-solutions company in the world uses internet to link its customers , cement plants and main control rooms , allowing the firm to automate orders and optimise truck deliveries . Reach , Richness and Affiliation Reach dimension of relationships with customers is concerned with the firms access and connection to customers offers more than 4.5 million titles and is located on tens of millions of computers. Richness is concerned with the depth and detail of the two way flow of information exchanges with their customers .Amazon bills itself as customer centric company . Affiliation is concerned with facilitating useful information with customers . E.g MSN Autos helps online clients find and sort information . In terms of customers , the firm must determine : 1. Who will be served ? 2. What needs those target customers have that it will satisfy ? 3.How those needs to be satisfied ? Who : Determining the Customers to Serve :

Basis for Customer Segmentation : Consumer Markets : 1. Demographic factors 2.Socioecomnomic factors ( social class , stage in the family life cycle ) 3.Geographic factors (cultural , regional and national differences ) 4.Psyxchological factors (life style , personality traits ) 5.Consumption patterns ( heavy , moderate , and light users ) 6.Perceptual factors ( benefit segmentation , perceptual mapping ) Who : Determining the Customers to Serve : Basis for Customer Segmentation : Industrial Markets : 1. End use segments (identified by SIC codes ) 2. Product segments ( technological differences or production economics ) 3. Geographic segments (defined by boundaries between countries ) 4. Common buying factor segments (cut across product market and geographic segments ) 5.Customer size segments What : Determining Which Customer Needs to Satisfy Successful firms learn how to deliver to customers what they want and when they want it . Needs are related to a products benefits and features . From strategic perspective , a basic need of all customers is to buy products that create value for them . Most effective firms continuously strive to anticipate changes in customers needs . How Determining Core Competencies Necessary to Satisfy Customer Needs. Firms use core competencies (how) to implement value-creating strategies and thereby satisfy customers needs . SA Institute is the worlds largest privately owned software company . Allocating more than 30% of revenues on R&D SAS relies on its core competence in R & D t satisfy the data related needs of customers US Census Bureau etc. Purpose a Business Level Strategy

To create difference between the firms position and those of its

competitors . Choosing to perform activities differently or to perform different activities than rivals is the essence of business-level strategy . Firms develop an activity map to show how they integrate the activities they perform . Types of Business Level Strategies Cost Leadership Differentiation Focused Leadership Focused Differentiation Integrated cost leadership / differentiation Cost Leadership Strategy The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost , relative that of competitors . Cost leaders concentrate on finding ways on finding ways to lower their costs relative to those of their competitors by constantly rethinking their primary and support to reduce costs still further while maintaining competitive levels of differentiation . Firms implement a cost leadership strategy through each of 5 forces Rivalry with Existing Competitors :Walmart is known for its ability to both control and reduce costs making it difficult for firms to compete . Bargaining Power of Buyers : Powerful customers can force a cost leader to reduce its prices . Walmart has to compete with Costco. Bargaining power of Suppliers : Cost leader operates with greater margins than those of competitors make it possible for the cost leader to absorb increases . Potential entrants : Because of ever improving levels of efficiency ( economies of scale ) enhance profit margins they serve as a significant entry barrier to potential competitors . Product substitutes : A product substitute becomes an issue for the cost leader when its features and characterstics are potentially attractive to the firms customers Competitive Risks of the Cost Leadership Strategy

1.Risk of Process of obsolescence : Process used by cost leader may

become obsolete because of innovation by competitors . 2.Too much focus by the cost leader on cost reduction may occur at the expense of trying to understand customers perceptions of competitive levels of differentiation Differentiation Strategy Is an integrated set of actions taken to produce goods or services (at an acceptable cost ) that customers perceive as being different in ways that are important to them . Firms implement a differentiation strategy through each of 5 forces Rivalry with Existing Competitors : Customers tend to be loyal purchasers of product differentiated in ways that are meaningful to them . As loyalty increases , sensitivity to price increases decreases . Bargaining Power of Buyers : Customers are willing to accept a price increase when a product still satisfies their perceived unique needs better than a competitors offering can . Bargaining power of Suppliers : The high margins the firm earns partially insulate it from the influence of suppliers in that higher supplier costs . Potential entrants : Customer loyalty and the need to overcome the uniqueness of a differentiated product present substantial barriers to potential entrants . Product substitutes :Firms selling brand-name goods and services to loyal customers are positioned effectively against product substitutes . Competitive Risks of Differentiated Strategy 1. Customers might decide that the price differential between the differentiators product and the cost leaders product is too large . 2. A differentiated product becomes less valuable if imitation by rivals cause customers to perceive that competitors offer essentially same goods . 3.Experience can narrow customers perceptions of the value a products differentiated features . Focus Strategies Firms choose a focus strategy when they intend to use their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others .

The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment . Firms can create value for customers in specific and unique product segments by using focused cost leadership or focused differentiated strategy Competitive Risks of Focus Strategies A competitor may be able to focus on more narrowly defined competitive segment and out focus the focus . A company competing on an industry wide basis may decide that the market system served by the focus strategy firm is attractive and worthy of competitive pursuit . The needs of customers within narrow competitive segment may become more similar to those of industry wide customers as a whole over time . Integrated Cost Leadership / Differentiation Strategy The objective of using this strategy is to efficiently produce products with differentiated attributes . Efficient production is the source of maintaining low costs while differentiation is the source of unique value . Flexible Manufacturing System Flexible Manufacturing System increases the flexibilities of human , physical , and information resources that the firm integrates to create relatively differentiated products at relatively low costs . FMS is a computer controlled process used to produce a variety of products in a moderate , flexible quantities with a minimum of manual intervention . Information Net Works and TQM Firms develop and use TQM systems in order to 1. increae customer satisfaction 2. cut costs 3. reduce the amount of time required to introduce innovative products to the market place . Competitive Risks of Integrated Cost Leadership / Differentiation Strategy Firms that fail to perform the primary and support activities in an optimum manner become stuck in middle means that the firms cost structure is not low enough to allow it so attractively price its products and

that its products are not sufficiently differentiated to create value for the targeted customer . Firms can be stuck in middle when they fail to successfully implement cost leadership or differentiation strategy . Corporate Level Strategy

Specifies actions a firm takes to gain competitive advantage by selecting

and managing a group of different businesses competing in different product markets.

Product diversification

, primary form of corporate level strategies , concerns the the scope of the markets and industries in the firm competes as well as how managers buy , create and sell different businesses to match skills and strengths with opportunities presented to the firm . Reasons of Diversification A. Value Creating Diversification 1.Economies of Scope ( related diversification) a) Sharing Activities b) Transferring core comptencies 2. Market Power (related diversification ) a) Blocking competitors through multipoint competition b) Vertical integration 3.Financial Economies (unrelated diversification ) a) Efficient internal capital allocation b) Business restructuring B. Value Neutral Diversification i. Anti Trust Legislation 2. Tax Laws 3.Low performance 4..Uncertain future cash flows 5. Risk reduction for firm 6. Tangible resources 7. Intangible resources C. Value Reducing Diversification 1. Diversifying managerial employment risk 2.Increasing managerial compensation

Value Creating Diversification Related Constrained and Related Linked Diversification Firm builds upon or extends its resources and capabilities to create value . Economies of Scope are cost savings that the firm create by successfully sharing some of its resources and capabilities or transferring one or more corporate level core competencies that were developed in one of its businesses to another of its businesses . Operational Relatedness : Sharing Activities : P&G s paper towel business and baby diaper business . Market Power : exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level or both . Nestle is attempting to do by acquiring Gerber Products , firms can create market power through multipoint competition and vertical integration . Multi point competition exists when two or more diversified firms simultaneously compete in same product areas or geographic markets .

Value Neutral Diversification Incentives to Diversify : External Incentives include

anti trust regulations and tax laws .Internal incentives include low performance , uncertain future cash flows , and the pursuit of synergy and reduction of risk for the firm .


Reducing Diversification :The desire for increased compensation reduced managerail risk are two motives for top-level executives may diversify a firm beyond value creating and value neutral levels . Top executives may diversify a firm in order to diversify their own employment risk as long as profitability does not suffer excessively . Acquisitions and Restructuring Strategies


is a strategy through which two firms agree to integrate their operations on a relatively co-equal basis . Daimler Chrysler AG was termed a merger of equals .

Acquisition is a strategy through which one firm buys a controlling or 100

percent interest in another firm with the intent of making acquired firm a subsidiary business within its portfolio .

A takeover is a special type of an acquisition strategy where in target firm

does not solicit the acquiring firms bid . Reasons for Acquisitions 1.Increased Market Power : exists when a firm is able to sell its goods and services above competitive levels or when the cost of its primary or support activities are lower than those of its competitors . Companies resort to a) Horizontal Acquisitions ( increases a firms market power by exploiting cost-based and revenue based synergies) . B) Vertical Acquisitions (a firm acquiring a supplier or distributor of one or more of its goods or services ) c. Related Acquisition ( acquisition of a firm in a highly related industry ) .

2. Overcoming Entry Barriers : Factors associated with the market or with

the firms currently operating the market or with the firms currently operating in it , which increase the expense and difficulty faced by new ventures trying to enter that particular market .

Ex: Cross border acquisitions : Acquisitions made between two companies

with headquarters in different countries are called cross-border acquisitions

3.Reshaping the Firms Competitive Scope : To reduce the negative effect

of an intense rivalry on their financial performance , firms may use acquisitions to lessen their dependence on one or more products or markets . Reducing a companys depence on one specific markets alters the firms competitive scope . 3.Learning New Capabilities

Pharma , IT Software etc., are industries

Problems in Achieving Success

1. Integration dificulties 2.Inadequate evaluation of target 3.Large or extraordinary debt 4.Inability to achieve synergy 5.Too much diverisification 6.Managers overly focused on acquisitions 7.Too large
International Strategy

Is a strategy through which the firm sells its goods and services outside its
domestic market

Raymond Vernon suggested that typically a firm discovers an innovation

in its home market , especially in countries like USA , often demand for the product then develops in other countries .

Another motive for firms to become multinational is to secure needed

resources .

New large scale , emerging markets , such as China and India , provide a
strong internationalization incentive based on their potential demand for consumer products and services . Identify International opportunities

Increased market size Return on investment Economies of scale and learning Location advantages
Explore Resources and Capabilities

International strategies : International business level strategy Multi-domestic strategy Global Strategy Transnational strategy
Use Core Competence

Modes of Entry Exploring Licensing Strategic Alliance Acquisitions Newly wholly owned subsidiary
Strategic Competitiveness outcomes Better Performance

Innovation Michael Porters National Advantage International Corporate Level Strategy

Multi-domestic strategy :is an international strategy in which strategic and

operating decisions are decentralized to the strategic business strategy in each country so as to allow that unit to tailor products to the local market .

Global strategy: to offer standardized products across country markets. Transnational Strategy: is an international strategy through which firm
seeks to achieve both global efficiency and local responsiveness. AXIS Bank Banking on Technology and Market Segments for Competitive Space Vision 2015 and Core Values VISION 2015: To be the preferred financial solutions provider excelling in customer delivery through insight, empowered employees and smart use of technology Core Values Customer Centricity Ethics Transparency Teamwork Ownership The Bank Today Is Capitalized To The Extent Of Rs. 408.84 Crores With The Public Holding (Other Than Promoters And Gdrs) At 53.81%. The Bank Has A Very Wide Network Of More Than 1095 Branches (Including 57 Service Branches/Cpcs As On 30th September 2010). The Bank Has A Network Of Over 4846 Atms (As On 30th September 2010) Providing 24 Hrs A Day Banking Convenience To Its Customers. This Is One Of The Largest Atm Networks In The Country. Performance in 2008 1. Expansion of Branch Network 143 new branches during year (total to 651 ) 2.Significant Presence in Semi Urban and Rural Areas .( 158 branches about 25% )

3.Geographical Reach extends to 29 States and 3 Union Territories

covering 405 Centre (as per Annual Report 2008) and Shift in Strategy Initial Business Model : Corporate assets being the main focus area . Corporate advances witnessed a high growth rate and accounted for 80 % funds lent till 2002 Strategic Inflection Point : In 1999 , the Banks net NPAs to advances ratio jumped to 6.3% in FY 1999 from 3.7% in FY 97. Reflected from a marginal in 17% growth in Banks Total Advances in FY 02 from a CAGR of 44% . Shift in Strategy from Corporate to Retail Retail Focus with building up of physical and technological infrastructure Branches increased to 450 from just 35 in FY 99 95 extension counters and 1890 +ATMs First Bank in the country to adopt Finacle as its core banking software 9 of Infosys) First Indian Bank to have a remote disaster recovery management system to protect its business from any eventualities . AXISs Current Strategy Broad Differentiation : 1.Managing changing customer needs : a. Moving to increasingly powerful back office hubs b. Centralised Phone Banking Centre c. Zonal level Nodal Offices to ensure quick redressal of Customers Grievances d . Implementation of KYC norms Growth Strategy Objectives 1. Increasing the market share in various businesses resulting in an enhancement in its core income streams . 2. Improve the quality of its income streams .

Complementary Strategies for Growth and Development A. Strategic alliances and Collaborative partnerships : i) Tie-ups with Maruti and Hyundai Co-financing pact with India Infrastructure Finance Company Ltd. Tieup with Bajaj AlliancZ General Insurance Tieup with MetLife as Bancassurance Partner . ATM sharing with other Banks Economic Times Remit 2India for money transfer . Outsourcing Selected Value Chain Activities 1. Outsourcing recruitments to Monster India .com Benefit Time costs are halved . Relies on headhunters for specialised positions . 2. Outsourcing Print operations to Xerox : Benefit : able to mail personalised cheque books to its customers within 24 hours of a request . 3.Outsourcing of electronic bill payment (EBP) and ATM management to Billjunction a specialist bill management service provider . Offensive Strategic Moves Aggressive strategy to to tap retail domain via the use of ATMs and alternate tech-enabled business . Superior Customer service : Customer oriented approach , deepening of customer relationships and increasing cross-selling activities Range of services on ATM machines : Network of more than 18000 ATM machines , LIC premium payments for service providers like MTNL and BSNL and mobile facilities for Airtel , Hutch , Orange and Idea cellular service providers . Aggressive growth in cards business : Debit Cards (grew from by nearly 10 lacs in 2005-06 ) in association with VISA and MasterCard .First to introduce travel currency card , a foreign denominated pre-paid card , Remittance Card and Rewards Card . Offensive Strategic Moves Risk Management : processes are guided by well-defined policies appropriate for various risk categories , independent risk oversight and independent risk management committee of the Board . Risk limits are set according to a number of criteria like market analysis , business strategy and management experience .

Dealing with Regulations : Undertaken an internal assessment of its

preparedness for the implementation of the Basel II Accord . Keeping pace with Technology :The Banks IT team developed a process called SETU (Seamless Electronic Transfer to AXIS Bank ) internet based funds transfer . I trade to route corporate procurement transactions . Product and service innovation : Low cost ATMS , Channel Finance Hub , ATM-centred delivery models . Expansion of geographical reach to semi urban , rural aras . SMI and agricultural sectors . Financial advisory services Q1.Banking Industry Scenario and Global Driving Forces Scenario for Banking Industry : Consolidation and move towards Universal Banking Moving from a regime of "large number of small banks" to "small number of large banks." The new era is going to be one of consolidation around identified core competencies. Mergers and acquisitions in the banking sector are going to be the order of the day. Successful merger of HDFC Bank and Times Bank earlier and Stanchart and ANZ Grindlays three years ago has demonstrated that trend towards consolidation is almost an accepted fact. NPAs,. Financial super market chain, making available all types of credit and nonfund facilities under one roof. Potentially dramatic changes that include, among others, a sliding dollar, rising interest rates, introduction of Basel II accord and international accounting standards, and the possible flattening of consumer lending boom.