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STRATEGIC MANAGEMENT

PART 1

Contents: • Understanding strategy • Purpose of strategic management • Distinguishing strategic problem from tactical problem • Formulation of a strategic plan

A) Understanding strategy:-

In understanding strategy two broad views are used, viz , strategic fit concept and strategic stretch concept !oth are discussed in the following paragraphs !ut before discussing those two concepts, we need to discuss two factors on which these two concepts lean heavily i e concept of e"ternal and internal environment

#"ternal environment lets one $now the industry in which the firm is operating It ta$es into account the product and factor mar$ets Profitability of the firm essentially depends on these two mar$ets #%uilibrium conditions in these two mar$ets determines the profitability &trategic management monitors the factors which influence the e%uilibrium
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Internal environment deals with the status of the resource base of the firm on the basis of which the firm competes in the mar$et (his concept is encapsulated in the concept of &)*( analysis &)+refers to internal environment whereas *(+,efers to the e"ternal environment (he essence is that strength and wea$nesses is matched with opportunities and threat to develop strategy -ow which environment is more important. It is in this regard that the two broad views or schools of thought differ &trategic fit concepts or the classical school lays the importance on the e"ternal environment whereas the strategic stretch concept emphasizes on the internal environment of the firm /et0s discuss both of them one by one+++

' &trategic Fit concept:

1ichael Porter and other eminent classical strategy 2urus have the dominant figure in shaping this framewor$ of business strategy 3ccording to them, the central thrust of the strategy is to gain a sustainable competitive advantage over the competitors which results in the superior profitability of the firm In their opinion, the difference in profitability among the firms operating in the industry can be attributed to the e"ternal environment and not to the internal resource base (his happens due to mobility of factors which wipes out the heterogeneity of the resource base in the long run (hen the higher profitability is attributed to the higher adaptive capacity of the firm in adapting to changing e"ternal environment &o monitor the environment, find opportunities and modify the resource base &o according to this view, strategy is a set of action plans which is used to monitor the e"ternal environment of the firm in order to adapt the firm according to the changes of the environment aiming at gaining a sustainable competitive advantage
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4 &trategic &tretch concept:

(his concept evolved out of the %uest for success of 5apanese firm in '678s when they entered the U & mar$et It was attributed to the factor that not the adaptive capacity but to the %uality of the resource base that ma$es the difference in commercial success &o, the purpose of strategic management is to improve the %uality of the resource base (he notion of core competencies is closely related to the so+called resource based view of the firm , which is most recent model to understand the mechanism for achieving competitive advantage It represents a ma9or departure from a strategic approach based on mar$et driven considerations !ut how the firm decides which resource base to use to gain positive economic profit. (he criteria are as follows+++

i) Is it easily available?

It means that the resources are traded in the mar$et or not For e"ample, the raw material or resources should not be easily available to the compete

iii) !rability: #very asset depreciates with use !ut to gain sustainable competitive advantage, firm need to have assets which don0t depreciate with use such as non+physical asset For e"ample: !rand name of (3(3
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iv) A""r#"riability: ,esources create value ,eceiver of the values varies 3s a manager, it is the duty to ta$e care that the value created by firm remains within the firm 3 strategy that is both uni%ue and sustainable generates a significant economic value (he issue of appropriability addresses the %uestion of who will capture the resulting economic rent &ometimes, the owners of the business unit do not appropriate the totality of the value created because of the gap that might e"ist between ownership and control -on owners might control complementary and specialized factors that might divert the cash proceeds away from the business (his type of dissipation of value is called holdup 3 notorious e"ample of holdup in recent business history has ta$en place in the personal computer industry, where 1icrosoft and Intel have captured manufacturing firms the meager 48 percent remaining (he second threat for the appropriability of the economic value is referred to as slac$ It measures the e"tent to which the economic value realized by the business unit is significantly lower than what potentially could have been created &lac$ is often the result of the inefficiencies or unwarranted benefits that prevent the accumulation of economic results in the business )hile holdup produces a different distribution of the total wealth created, slac$ reduces the size of this wealth

v) S!bstit!tability: If it can be substituted by anything else, then it can0t be the source of competitive advantage

vi) S!"eri#rity: )hether it is of superior value than the competiting firm or not
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the cost implicit in implementing the strategy of business unit should not offset the value generated by it (his condition is what we aspire to capture under this re%uirement of opportunism and timing in order to secure competitive advantage &) P!r"#se #' strategi( %anage%ent:(he primary concern of strategic management is to help the firm gain a sustainable competitive advantage in the mar$et place Competitive advantage is a competitive superiority in attracting customers It helps the firm to gain a continuous positive economic profit -ow economic profit is defined as +++ #conomic profit< Profit after ta" =P3(> +++ Cost of e%uity capital It is considered as a measure of competitive advantage because it considers the productivity of all the factor *n economic profit there is no claimant (hus it is called free cash which can be invested in future to meet company0s non+financial goal (he cost of e%uity capital is calculated using the capital asset pricing model developed by )illiam &harpe ? .vii) $""#rt!nis% and ti%ing: *ne other condition that is necessary to obtain competitive advantage occurs prior to establishing superior resource position It is necessary that the cost incurred in ac%uiring the resources are lower than the value created by them In other words.

the end result is given. rather has to be identified before embar$ing on the problem In case of tactical problem. e g minimize the total transportations cost A . the end result is not given. the end which is going to be achieved through solving the problem is given and in some cases has to be identified while solving the problem In strategic problem.ange.C) isting!is)ing strategi( "r#ble% 'r#% ta(ti(al "r#ble%: 3ll organizational problem can be categorized as@strategic problem and tactical problem (here are three characteristics based on which we can distinguish these two problems+++ . &cope and #nd orientation /et0s discuss each one of them one by one@ a> .ange: )hen an organizational problem is solved it creates effects across the organization (he duration of the effect is called range (he longer the range. more difficult to reverse it &trategic problem has a longer effect thus a longer range and tactical problem has a shorter range b> &cope: &cope of a problem denotes the area of an organization it encompasses and feels the effect of the problem &trategic problem has a larger scope than a tactical problem c> #nd orientation: In order to solve some problem.

) *#r%!lati#n #' a strategi( "lan: (he steps involved in developing a strategic plan can be plotted as follows: Developing mission statement  3nalysis of internal environment  3nalysis of e"ternal environment  Developing broad strategies  developing long term program  developing short term program  Implementation Strategi( iss!es at di''erent level: Corporate strategy deals with basic values and overall vision portfolio of activities =&trategic !usiness Units + &!U0s> mission of each strategic business unit overall allocation of resources !usiness strategy deals with competitive positioning of the business unit choice of segments trade+offs. specific strengths action towards customers Functional strategy deals with development of functional strengths and resources as re%uired by businesses and the corporation 7 .

ifferen-iation strategic goals " .rgani-ational/ 01 related and financial " Business plan " .esign of i$ple$entation plan " 'i$efra$e and $ilestones " Priorities " 1esponsi%ilities " 1esources " Pro3ect controlling TOOL .A strategy project may be conducted in five phases Phase # Phase ## Situational Conte4t of Strategy .escription of chosen goals options in detail and definition of related " .efinition of strategic " .esign Phase ### .e( elop$ent and assess) $ent of stra) tegic options Phase #5 Specif ication of chosen strategy Phase 5 #$ple$en) tation plan Pro3ect #nitiali-ation " #nfor $ation collection and issue analysis " Selection of tea$ $e$%ers " &or k plan " 'i$e planning " Market seg$entation " Market attracti(eness " Co$petition analysis " Synergy potential " Market position " Cost) and re(enue position " Corporate strategy * %usiness portfolio " Strength and +eak) nesses * cor e co$petences " . Friedrich Bock page 22 B .BOX MABE Strategy Consulting January 2 ! ©Prof.etailed outline of conse2uences conse2uences for " .e(elop$ent of organi-ation and strategic options 01M " 1isk * attracti(eness assess$ent of the options " Choosing of options " .

$* T+E *IRM Contents: • Cision of a firm • Developing the mission statement++++ Process and contents A) -isi#n #' a 'ir%: 3 vision gives direction for the desired future scope and position of a company:  It deals with the future  It is ambitious  It is e"pressed in simple terms + understandable at all levels of the company  It does not deal with details.E 6 . but is concrete  It does not deal with solutions  It opens space for creative forward thin$ing. based on an =emotionally appealing> DpictureE  It is not a secret plan but an open declaration  3 vision serves to create a common mind set throughout the organization  It helps to mobilize people  It creates momentum and initiative: D3m I doing enough to increase the fit of my business with the corporate vision.PART & E*INING T+E &$UN AR.

mar$ets.&) Missi#n #' a 'ir%: 1ission of a firm is the e"pression of its strategic intent &trategic intent is the fundamental ends a firm wants to pursue 1ission statement also reveals the self+concept of the firm (hus. the mission of the business is a %ualitative statement of overall business position that summarizes the $ey points with regard to products. geographic locations and uni%ue competencies 3 mission statement abstracts the important points to guide the development of business !esides others there are two pieces of information that must be contained in the mission statement+++Clear definition of current and future business scope and second the uni%ue competencies that distinguish the firm from others in the same industry Following is the detailed description of the (#ntents #' t)e %issi#n state%ent--- i> Core values: It is the beliefs which guide the behaviour of the firm (his is to be encoded in the mission statement so that the employees understand that it has to be followed at any cost ii> Core purpose: It is the fundamental end for which an organization e"ists It is the very reason of the e"istence of the firm in the mar$et '8 .

2arry Famel and C G Pralhad state that rather than trimming ambitions to match available resources. managers should instead leverage resources to reach seemingly unattainable goals (his challenge is at the heart of a proper mission statement iv> Civid description of future: 3 mission statement is grossly incomplete without the clear definition of the e"pected future business scope (his has got two dimensions+++business and ethical !usiness dimensions includes+++++++ • S(#"e #' t)e 'ir%: the description of current and future mar$et scope. that the mission statement should be organized in such a manner that it fires up the competitive zeal of the employees In their celebrated article. geographical reach scope and customer scope • P#siti#ning strategy: (his e"plains on what basis the firm wants to compete and how the firm wants itself to be $nown in the mar$et (here are two ways to create value for money for shareholders@cost leadership strategy and product differentiation strategy (he image of the firm will depend on this positioning strategy • Res"#nsibilities t# t)e sta.e)#lders: Fere the firm has to spell out how it wants to treat its different sta$eholders *a(t#rs in'l!en(ing t)e devel#"%ent #' %issi#n state%ent: '' . product scope.iii> !F32@It represents !ig Fairy 3udacious 2oal (his implies.

Following factors play a crucial role in developing and shaping the mission statement are as follows: • *rganisational power structure • Corporate culture • Personal values of C#* • &ocietal value i) $rganisati#nal "#/er str!(t!re: In every organization there are two groups of people viz Internal sta$eholders and #"ternal sta$eholders which competes with each other 3n organization is a dynamic powerstructure (he group which wins decides the shape of the mission statement *ne author has found out several power structure which wor$s toward the development of the mission statement++++ a> Continuous Chain or &imple mass output system: Fere e"ternal sta$eholders are the people who decides the mission statement For e"ample: &toc$ e"change and Post office '4 .

I!1.b> Closed system: Fere the e"ternal sta$eholders are fragmented and internal sta$eholders are more powerful and there is no clear goal of the firm to follow c> Command type system: (his is the typical power structure in an organization set up by an entrepreneur or organization passing through severe crisis Fere the entrepreneur decides the mission statement -o value system is adhered to d> 1issionary power configuration: (his is the type of organization which wor$s for a voluntary cause Fere the mission statement is driven by ideology e> Professional power configuration: (his is the organizational power structure typically found out in consulting firms li$e (C&. 1c$insey etc where some outstanding professional determine the mission statement f> Conflictive power configuration: Fere the entire organization is divided into power groups which fight with each other and the group that wins determines the mission statement ': .

it0s very much imperative that the organizational culture is ta$en into account with due importance while framing the mission statement iii) Pers#nal -al!es #' CE$: Personal values of C#*. . norms.ii) C#r"#rate (!lt!re: Corporate culture is the sum total of beliefs. determines the mission statement and also his ris$ ta$ing ability influences the mission statement iv) S#(ietal val!es: 3ny firm is a social entity &ocietal values is the timeless principle which has evolved in society over very long period of time and the firm must obey it and comply with it Advantages #' Missi#n state%ent: '. values. who is ultimately held responsible for the company0s growth. which regulate the behaviour of an employee in the organization &ince mission gets implemented by the employees.

to be served by the organization It also determines the right of every sta$eholder on the economic value created by the sta$eholders b> 1ission statement helps to avoid strategic opportunism: c> 1ission statement is a tool for communication It conveys the e"pectations of the firm from its employees '? .Developing an mission statement serves several important purpose. in other words. and of course in its development. which sta$eholder is more important and how to satisfy them &o. such asHH a> It gives the guidelines as to how to treat different sta$eholders: It is embedded in the mission statement. mission statement sets a priority amongst the sta$eholder.

I.J> (his very concept was propagated by 1ichael Porter as a tool of analyzing the firm0s internal environment and resource base It is an analytical tool that describes all activities that ma$e up the economic performance and capabilities of the firm. used to analyze and e"amine activities that create value for a given firm 3 firm can be conceived of an aggregation of discrete activities and the competitive edge arises based on how a firm performs these activities better than its competitors (he cluster of these activities is called the value chain 'A .SIS $* INTERNA0 RES$URCE &ASE AN EN-IR$NMENT Contents: • Calue chain analysis • &trategic group concept • !enchmar$ing 3> Calue chain analysis: =Describe the value chain of a firm and its significance in strategic planning@488?.PART C ANA0.

2I- L+++++++++++++++++P.UC(U.(he value chain classifies each firm0s activities into two broad categories: Primary activities and &econdary activities or support activities (he following figure represents the value chain of a firm: & u p p o r t a c t i v i FI. manufacture.#1#-( Inbound /ogistics *perations *utbound logistics 1ar$eting and sales &ervice 13. outbound logistics.# FU13..2I- (#CF-*/*2K D#C#/*P1#-( P.K 3C(ICI(I#&++++++++++++++++++++++M Pri%ary a(tivities: (he se%uence of activities through which raw materials are transformed into benefits en9oyed by the customer is called primary activities (hese activities relate directly to the actual creation.#&*U.1 I-F. sales and servicing of the product or the service to a customer Five ma9or activities are involved in this se%uence: inbound logistics. distribution.*CU.3&(. operations.C# 13-32#1#-( 13. development.I13. mar$eting and sales and service )or$ing '7 .

maintaining channel relations etc in order to induce and facilitate buyers to purchase the product 'B . materials handling. warehousing. order processing. promotion. storing. inventory control. vehicles scheduling and returns to suppliers • *perations: *perations are the activities and procedures that transform raw materials. e%uipment maintenance. assembly. pac$aging. printing. warehousing. specifying distribution channel members.together. testing. inbound logistics deal with the handling of raw materials and inventory received from the firm0s suppliers Detail activities include . facility operations • *utbound logistics: *utbound logistics refers to the transfer of finished product to the distribution channel members (he focus of outbound logistics is on managing the flow and distribution of products to the firm0s immediate customers such as wholesalers and retailers 3ctivities and procedures associated with outbound logistics include inventory control. product mi" pricing. delivery schedule maintenance etc • 1ar$eting and sales: 1ar$eting and sales include advertising.eceiving. these activities determine the $ey operational tas$s surrounding the product or services • Inbound logistics: 3s the word implies. components and other inputs into finished end products Detail activities include machining.

training. technological inputs needed> • Fuman resource management: #mployees who will carry out the primary activities are recruited. procurement. trained. and other consumable items and assets> for primary activities • (echnology development: 1ethods of performing primary activities are improved =&uch as $now+how. motivated and supervised '6 . procedures. supplies. human resource management and firm level infrastructure • Procurement: &ecuring inputs =such as raw materials. parts supply and product ad9ustment in order to maintain or enhance the value of the product after sales Se(#ndary #r s!""#rt a(tivities: (he remaining activities of the value chain are underta$en to support primary activities (hey are therefore referred to as the secondary or support activities &upport activities help the firm improve co+ordinations across and achieve efficiency within the firm0s primary value adding activities &upport activities are located across the first four rows of the diagram (his includes. repair. technology development.• &ervice: Customer service is a central value adding activity that a firm can see$ to improve over time It includes installation.

and regulatory compliance are carried out to provide ancillary support for primary activities +#/ val!e ()ain analysis %atters in strategi( "lanning: 3s already stated. and three basic %uestions are tried to be answered. legal affairs. Porter has suggested the following measures++++ 48 . the competitive edge arises based on how better the firm performs the activities involved in the value chain compared to its competitor For this purpose. each activity is bro$en up in sun activities for comparison with the competitors. ii> Fow can the firm increase the benefits provided to the customers $eeping the cost constant. i> Fow can the firm $eep the benefits provided to the customers intact $eeping the cost constant. finance. iii> Fow can the firm increase the benefits provided to the customer while lowering the cost.• Firm infrastructure: 3ctivities such as accounting. For creating competitive advantage through the value chain analysis while answering these %uestions.

ways of $eeping alternative suppliers. enhance the ability to become more responsive to (he point to be noted that throughout the whole analysis every measures are to be ta$en on the basis of comparison with suppliers 4' . (o avoid this. (apered integration and part outsourcing can be adopted ii> (here might be a ris$ of disproportionate value appropriation iii> (here can be a high ris$ of elimination by suppliers • Internal integration of value chain activities: Internal integration of value chain activity gives the following benefitsH i> Improvement of %uality ii> &horten new product development cycle iii> !y integrating the firm with its e"ternal suppliers and buyers it can reduce customize the product and customers0 demand inventory holding costs.• .econfigure the value chain differently from those of the competitors • Perform the activities more efficiently than the competitors • *utsource the non+core activities: )hile outsourcing the following points are needed to be 9udged 9udiciously+++ i> (here might be a ris$ of non+performance by the supplier.

"i> financial and operating leverage. vi> product %uality. ii> brand identification. vii> technological leadership. some being totally international and some purely local 44 . "iii> relationships with home and host government )e should try to locate in the same group all firms with comparable characteristics and following a similar competitive strategy #ssentially the concept of strategic grouping is a very pragmatic approach aimed at cataloguing firms within an industry in accordance with the way they have chosen to see$ competitive advantage (his segmentation is useful when one faces a high diversity of competitive positions in a fairly comple" and heterogeneous industry (ypical e"amples of this situation are global industries with a wide variety of players. have same resources and follow similar strategy in response to the environmental forces (o carry on the value chain analysis it is very important that the firm identifies the strategic group to which it belongs Porter suggests the following dimensions to identify differences in firm strategies within an industry: i>specialization. viii> cost position. iii> a push versus pull mar$eting strategy. "> price policy. "ii> relationship with parent company.&) Strategi( gr#!" (#n(e"t: &trategic group is a group of firms within an industry which face the same environmental forces. iv> vertical integration. v>channel selection. i">service.

because every strategic group creates its own image in the mar$et place. the following points should be $ept in mind: • &trategic groups can shift over time as the needs of the customers or different technologies evolve in the mar$etplace (herefore managers should not assume that membership in a particular strategic group permanently loc$s the firm into a fi"ed strategy )ith sufficient resources and focus. the competitive conditions that define a strategic group may wor$ against the entire collection of the firms.3 useful tool that can guide the separation of strategic group in an industry is the so called strategic mapping (his is a two dimensional display that helps to e"plain the different strategies of the firm (hese two dimensions should not be interdependent because otherwise the map would show an inherent correlation 1ost important. firms can enter or e"it strategic groups over time • #ntire strategic groups and the firms that compose them can emerge and disappear over time (hus as the environment changes. resulting in the groups long term decline if competitive conditions intensify • In recent years one of the more enduring trends that have defined a growing number of industries is the hastening pace of consolidation Competitors are 4: . move from one strategic group to another is very difficult. managers must choose those dimensions that are most salient and relevant to their own particular industry (hough according to Porter.

. even if the model firm is different from its own (he steps in benchmar$ing =compared to industry> are as follows: &tep': (he firm identifies those processes within its own organization that need improvement or attention.ing: It is the process of continuously measuring and comparing the business processes against comparable process of the leading organization to obtain the information that will help the organization to identify and implement improvement programs (he essence of benchmar$ing is to contrast the firm0s performance against some challenging yardstic$s It is a multistep process in which the firm doing the benchmar$ing see$s to learn and incorporate process refinements. &tep 4: 1anagers try to locate other firms that are particularly distinctive or e"cellent in performing or managing those processes 4.now see$ing to buy or merge with their rivals to limit the effects of fierce price wars that negatively impact profitability (hus consolidation within and among industries can also mar$edly redefine the underlying stability and membership of strategic group C) &en()%ar.

C*D#E invented by the 3merican agricultural food products association • (argeting the best. so the firm $eeps itself ahead of the other competitors (ypes of !ench mar$ing: (here are four types of benchmar$ing: 4? .: (he bench mar$ing firm tries to duplicate the successful practices or processes that seem to performance and better %uality !enefits of !enchmar$ing: (he benefits of benchmar$ing are as follows: • It spar$s the creativity of internal people • (he firm can be the frontrunner of implementing practices which was never conceived of in the industry For e"ample: (he D!3.&tep :: (he benchmar$ing firm contacts the managers of the model firm to learn from their e"periences. problems and solutions &tep .

une%ual bases of comparison. &NC is put in place and as a result re9ection goes down. It may encourage more of a bad thing For e"ample. (here can be an illusion of big performance (hirdly. Competitor performance is not considered in this way 4 Industry !ench mar$ing: It refers to evaluating one own performance with industry data (he ma9or problem here is@getting stuc$ in the middle &econd. Fourthly. li$e comparing apple with orange : Functional benchmar$ing: It refers to finding one activity and finding out the best practice in that in any strategic group or in any industry and upgrade the process to that 4A . if re9ection rate is high.' Fistorical benchmar$ing: It refers to evaluating the firm0s current performance with the firm0s past performance (he problem here is that the past performance may not be impressive &econdly. !ut this is not a progress (he %uestion is why should re9ection happen at all.

PART C ANA0.emote environment or macro environment )e will discuss the model used to analyze those environment one by one: i) Ma(r# envir#n%ent: 1acro environment includes all those environmental forces and conditions that have an impact on every firm and organization within the economy (he main differences between operating environment and remote environment are +++++ 47 . we get two layers: i> *perating environment ii> .SIS $* E1TERNA0 EN-IR$NMENT 3nalysis of e"ternal environment of a firm is necessary while formulating strategy because+++++ i> It affects the business potential of the firm and therefore its profitability ii> It influences resource allocation among businesses in a multibusiness firm )hen we consider the e"ternal environment of the firm.

a> Forces consisting of macro environment affects all the firm directly or indirectly across the industry b> (he environmental forces comprising the e"ternal macro environment are given 3 firm cannot do anything or do very little to influence it

For analyzing the macro environment we use two models, P#&( =Political, #conomic, &ocial, (echnological> and &(##P =&ocial, (echnological, #conomic, #cological, Political>

Fowever without adhering to any particular model, we will describe the general environments included in macro environment and their effect on strategy decisions

• E(#n#%i( envir#n%ent:

(he variables included in this environment are 2-P,2DP, Distribution of 2DP and 2-P, Inflation, !alance of payments=!*P>, &ize of e"ternal debt /et0s discuss them one by one

i> 2DP and 2-P:

4B

2DP includes the mar$et value of the goods and services produced within the country by domestic and foreign factors of production whereas 2-P includes the value of goods and services newly produced by domestic factors of production at home and abroad )hen a firm is multinational, 2DP and 2-P gives the level of wealth in aparticular country and thus the economic vigour of the country

ii> Distribution of 2DP and 2-P:

Fow 2DP and 2-P is distributed across various industry and area is also important because it denotes which industry and which location are important

iii> Inflation:

Inflation also poses a big problem because it increases the price of factors of production and thus to survive the firm has to change the

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price very often Inflation also affects the firm in the following wayH

InflationHM ,ise in ban$ interest rateH M ,ise in prime lending rateH M Investment slows down for being costlyHM&low economic growth rate

iv> !alance of payments:

!*P also influences the economic environment 3dverse !*P affects in the following wayH

3dverse !*P

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Import restriction Interest rate hi$e

Cost of foreign raw material goes up

Foreign companys can0t remit dividend in foreign currency

!usiness loans get less attractive

&low economic growth

v> &ize of e"ternal debt:

&ize of e"ternal debt is also very crucial because this affects in the following wayHH Figh e"ternal debtH MImport restrictionHH MForeign currency gets dearer

• S#(ial envir#n%ent:

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size of wor$ing population etc ii> &ocial stratification: &ocial stratification means how the society is divided in different castes. tribes. starta etc (his is very important in case of mar$et segmentation and targeting and desigining the product offering according to that iii> Importance of wor$ and result iv> #mployment as a profession+++Fow people view the wor$ under someone v> (rust on people+++ Fow much is the mutual trust among people :4 .3nalyzing the social environment is also very important in formulating appropriate competitive strategy (he main variables included in this environment are as followsH i> Demographics: Demographics is the statistical variables used to define a population It influences the firm by dominating the nature of demand.

vi> Individualism versus collectivism vii> Consumer buying process@whether it is simple or comple" viii> #ducational level@If it high then tendency to white collar 9obs increases 3nalyzing social environment is particularly essential because it helps to solve the following problemH ' 1obility of labour 4 Fow much important is material reward : Fow to meet the social needs in the firm • P#liti(al and legal envir#n%ent: (he variables included in this environment which influence the strategic decision are+++ i> -umber of political parties and their ideologies ii> Form of legal system =Common law. civil law and theocratic law> :: .

employment practice. . environmental practice. group treaties and international business forums> • Te()n#l#gi(al envir#n%ent: &tatus of fundamental research. development research and technology are the main variables here It is important to analyze because it depicts the scope of innovation and infrastructural facilities that a firm can avail • E(#l#gi(al envir#n%ent: (he main variable included here are the++++ ' &tatus of natural wealth 4 Flora and fauna : /aws relating to utilization and e"ploitation of ecological resources (his is very much important because it determines to which e"tent and how a firm can use the natural environment of a country to its own benefits :.iii> /aws related to business issues =Fealth and safety. laws related to e"port import.

rather competition in an industry is rooted in its underlying economic structure and goes well beyond the behaviour of the current competitors 3ccording to Porter. where profit potential is measured in terms of long run return on invested capital 3lso $nowledge of these underlying sources of competitive pressure highlights the critical strengths and wea$nesses of the company.ii) Analy2ing t)e #"erating envir#n%ent3P#rter4s 'ive '#r(es %#del: *perating environment of a firm refers to the industry to which a firm belongs 3ccording to 1ichael # Porter an industry can be defined as D(he group of firms producing products that are close substitute to each otherE (he intensity of competition in an industry is neither a matter of coincidence or bad luc$. clarifies the areas where strategic changes may greatest payoffs and highlights the areas where industry trends promise to hold the greatest significance as either opportunities or threats Following is a diagrammatic representations of the basic five forces underlying the competitiveness of the industry: :? . animates its positioning in its industry. the state of competition in an industry depends on five basic competitive forces =which is presented in the diagram below> It is imperative to analyze this forces in order to formulate competitive strategy because the collective strength of those forces determines the ultimate profit potential in the industry.

C$MPETIT$RS SUPP0IERS !argaining power of suppliers .P$TENTIA0 ENTRANTS (hreat of new entrants IN USTR. reducing profitability (he threat of entry into an industry depends on 3> the barriers to entry that are present.#3( *F -#) #-(. thy desire to gain mar$et share and often substantial resources Prices can be bid down or incumbent0s costs inflated as a result.ivalry among e"isting firms &U.3-(&: -ew entrants to an industry bring new capacity.ERS !argaining power of buyers (hreat of substitute product or services SU&STITUTES /et0s now discuss each of these forces one by one++++++ ' (F. coupled with !> reaction from e"isting competitors that the entrant can e"pect (hese are discussed below: :A .

product differences. both undesirable options ii> Product differentiation: Product differentiation means that established firms have identification and customers loyalties. or simply being first in the industry Differentiation creates barrier to entry by forcing entrants to spend heavily to overcome customer loyalties (his effort usually involves start up losses and often ta$es an e"tended period of time &uch investments in building a brand :7 . which stem from past advertising. customer service.A5 &arriers t# entry: (here are ma9or seven sources of barriers to entry which are as follows: i) Economies of scale: #conomies of scale refer to declines in unit costs of a product =or operation or function that goes into producing a product> as the absolute volume per period increases #conomies of scale deter entry by forcing the entrant to come in at large scale and ris$ strong reaction from e"isting firms or come in at a small scale and accept a cost disadvantage.

one time costs facing the buyer who witches over from one supplier0s product to another0s v> Access to distribution channel: 3 barrier to entry can be created by the new entrants0 need to secure r its product (o the e"tent that logical distribution channels for the product have already been served by established firms. that is. particularly if the capital is re%uired for ris$y or unrecoverable up+front advertising or research and development iv> Switching costs: 3 barrier to entry is created by the presence of switching costs. the new firm must persuade the channels to accept its product through :B .name are particularly ris$y since they have no salvage value if entry fails iii> Capital requirements: (he need to invest large financial resources in order to compete creates barrier to entry.

cooperative advertising allowances and the li$e. which reduce profits vi> Cost disadvantages independent of scale: #stablished firms may have cost advantages not replicable by potential entrants no matter what their size and attained economies of scale (he most critical advantages are the factors such as the following: a> Proprietary product technology or patent b> Favourable access to raw materials c> Favourable locations d> 2overnment subsidies e> /earning or e"perience curve effect &) E6"e(ted retaliati#n 7 C#ntrived deterren(e) (he potential entrant0s e"pectations about the reaction of e"isting competitors also influence the threat of entry If e"isting competitors are e"pected to respond forcefully to ma$e the entrant0s stay in the industry an unpleasant one. then the entry may well be deterred :6 .price brea$s.

if they are relatively balanced in terms of size and perceived resources. the li$elihood of maveric$s is great and some firms may habitually believe they can ma$e moves without being noticed #ven when there are relatively few firms.4 I-(#-&I(K *F .ivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position Intense rivalry is the result of a number of interacting structural forces: i> Numerous or equally balanced competitors: )hen firms are numerous.K 31*-2 #OI&(I-2 C*1P#(I(*.&: . it creates instability because they may be prone to fight each other and have the resources for sustained and vigorous retaliation ii) Slow industry growth: &low industry growth turns competition into a mar$et share game for firms see$ing e"pansion 1ar$et share competition is a great deal more volatile than is the situation in which rapid industry growth insures that firms can improve results 9ust by $eeping up .IC3/.8 .

' . price and service competition result v> Capacity augmented in large increments: )here economies of scale dictate that capacity must be added in large increments. capacity additions can be chronically disruptive to the industry supplyP demand balance particularly where there is a ris$ of bunching capacity additions vi> $iverse competitors: .with the industry and where all their financial and managerial resources may be consumed by e"panding with the industry iii> igh fi!ed or storage costs: Figh fi"ed costs create strong pressures for all firms to fill capacity which often lead to rapidly escalating price cutting when e"cess capacity is present iv> "ac# of differentiation or switching costs: )here the product or service is perceived as a commodity or near commodity.

strategic interrelationships.ivalry in an industry becomes even more volatile if a number of firms have high sta$es in achieving success there viii> igh e!it barriers: #"it barriers are economic. and relationships to their parent companies have differing goals and differing strategies for how to compete and may continually run head on to each other in the process vii> igh strategic sta#es: choice by the buyer is largely based on price and service. strategic and emotional factors that $eep companies competing in business even though they may be earning low or even negative returns on investment (he ma9or sources of e"it barriers are specialized assets.4 . fi"ed cost of e"it. personalities. emotional barriers and government and social reactions . origins.Competitors diverse in strategies. and pressure for intense.

bargaining for higher %uality or more services and playing competitors against each other+all at the e"pense of industry profitability 3 buyer group is powerful if the following circumstances hold true: i> %t is concentrated or purchases large volumes relative to seller sales: If a large portion of sales is purchased by a given buyer this raises the importance of the buyer0s business in results /arge volume buyers are particularly potent forces if heavy fi"ed costs characterize the industry ii> &he products it purchases from the industry represents a significant fraction of the buyer's cost or purchases: Fere buyers are prone to e"pend the resources necessary to shop for a favourable price and purchases selectively )hen the product sold by the industry in %uestion is a small fraction of buyer0s cost. buyers are usually much less price sensitive .&: !uyers compete with industry by forcing down the price.#3( *F (F# !UK#.: (F.: .

they are in a position to demand bargaining concessions .. are generally less price sensitive and may ta$e a long term view toward preserving the health of their suppliers vi> (uyers pose a credible threat of bac#ward integration: If buyers either are partially integrated or pose a credible threat of bac$ward integration.iii> &he product it purchases from the industry are standard or undifferentiated: !uyers. may play one company against another iv> %t faces few switching costs: &witching costs loc$ the buyer to particular sellers Conversely the buyer0s power is enhanced if the seller faces switching costs v> %t earns low profits: /ow profits create great incentive to lower purchasing costs Fighly profitable buyers. . sure that they can always find alternative supplies. however.

vii> &he industry's product is unimportant to the quality of the buyer's product or services: )hen the %uality of the buyer0s product is very much affected by the industry0s product.&: =!argaining power of the suppliers> &uppliers can e"ert bargaining power over participants in an industry by threatening to raise prices or reduce the %uality of purchased goods and services Powerful suppliers can thereby s%ueeze profitability out of an industry unable to recover cost increases in its own prices 3 supplier group is powerful if the following apply: . actual prices. this usually yields the buyer greater bargaining leverage than when information is poor . (F. and even supplier costs.#3( *F (F# &UPP/I#. buyers are less price sensitive For e"ample: medical e%uipment viii> &he buyer has full information: )here the buyer has full information about demand.? .

%uality and terms ii> %t is not obliged to contend with other substitute products for sale to the industry: (he power of even large. powerful suppliers can be chec$ed if they compete with substitutes iii> &he industry is not an important customer of the supplier group: )hen suppliers sell to a number of industries and a particular industry does not represent a significant fractions of sales.i> %t is dominated by a few companies and is more concentrated than the industry it sells to: &uppliers selling to more fragmented buyers will usually be able to e"ert considerable influence in prices.A . suppliers are much more prone to e"ert powers If the industry is an important customer. suppliers fortunes will be tied up to the industry and they will want to protect it through reasonable pricing and assistance in activities li$e .QD and lobbying iv> &he suppliers' product is an important input to the buyer's business: .

&uch an input is important to the success of the buyer0s manufacturing process or product %uality (his raises the supplier power (his is particularly true when the input is not storable.7 . thus enabling the buyer to build up stoc$s of inventory v> &he supplier group's products are differentiated or it has built up switching costs: Differentiation or switching costs facing the buyers cut off their options to play one supplier against another If the supplier faces the switching costs the effect is the reverse vi> &he supplier group poses a credible threat of forward integration: (his provides a chec$ against the industry0s ability to improve the terms on which it purchases ? (F.#3( *F &U!&(I(U(#&: It becomes high when++++ .

B . 2eneric substitutes and doing away with the product itself =(obacco> .i> #"isting products have a lower price performance ratio than the new product ii> Number of substitutes are very high iii> Switching costs for the buyers are very low (he point to be noted here. that here we have to ta$e into account the indirect substitutes such as product for product =Fa" vs #+mail>. &ubstitution of needs.

!< Perceived utility of a firm0s product It is measured by the ma"imum willingness to pay (his i e ma"imum willingness to pay is measured by auctioning the new product C< *pportunity cost of input resources that are used up to produce and distribute the product . Focus Faving analysed the operating environment through Porter0s five forces model. Differentiation. which is in turn measured by economic value -ow. a firm needs to decide on the strategies it will adopt For deciding on the strategies a firm needs to consider its goal 3 firm0s goal is to gain competitive advantage which is measured by positive economic profit. #conomic value=#C>< ! R C )here.6 .PART E *$RMU0ATING T+E STRATEGIES AN MAR8ET P$SITI$NING T+E *IRM IN T+E Contents: 3> (hree generic strategies@Cost leadership.

-ow to gain competitive advantage a firm must haveHH =!+C> M =!S ++ CS> where !S and CS are same as ! and C but for competitors -ow as the gap between =!+C> and =!S++CS> increases. !+C < =!+P>T=P+C> =!+P> is the consumer surplus and =P+C> is the producers0 surplus 2iven this the firm0s aim is to give more to consumer at a lesser cost i e to ma"imize the gap between =!+C> -ow having the aim as mentioned above. because the first two set of strategies are mutually e"clusive Cost leadership strategy focuses on C and product differentiation strategy focuses on ! -ow we will discuss these three strategies one by one@ ?8 . 1 # Porter suggests three generic strategies+++ i> Product differentiation strategy ii> Cost leadership strategy iii> Focus strategy Porter0s proposition is to focus on either ! or C . organization has more liberty -ow we can write.

esult is =!+C> greater than e%ual to =!S+CS> /et0s discuss the sources of cost leadership+++ A5 S"e(i'i( '!n(ti#nal strategy !nder (#st leaders)i" generi( strategy: Following are the different strategies under cost leadership++++ i> #conomies of scale: (his implies producing larger volume in automated structure (his helps reducing the costs thus contributing to the competitive advantage ii> 3utomate parts of manual process: ?' .15 C$ST 0EA ERS+IP STRATEG.: It aims at achieving lowest economic costs with benefits same as the competitors or bit less .

QD.3utomating different parts of a manual process helps reducing costs which helps ma$e process less e"pensive (his can also be done by employing high s$illed wor$ers iii> . service. advertising and so on ?4 . sales force.edefine product: (his strategy tells to redefine the product in such a way that cost advantage is far better than benefit disadvantage For e"ample: Indian postal service and DF/ *ther initiatives that are re%uired to achieve the cost leadership strategy are+++ • Construction of efficient scale activities • Cogorous pursuit of cost reductions from e"perience • (ight costs and overhead control • 3voidance of marginal customer accounts • Cost minimization in areas li$e .

ills and res#!r(es and (#%%#n #rganisati#nal str!(t!re t# i%"le%ent (#st leaders)i" strategy: i> Commonly re%uired s$ills and .C C#%%#nly re9!ired s. detailed control reports • &tructured organization and responsibilities • Incentives based on meeting strict %uantitative targets ?: .esources: • &ubstantial capital investment and access to capital • Process engineering s$ills • Intense supervision of labour • Product designed for ease in manufacture • /ow cost distribution system ii> Common organizational re%uirements: • (ight cost control • Fre%uent.

5 Ris. .s #' C#st leaders)i" strategy: Cost leadership imposes severe burdens on the firm to $eep up its position. highly automated facilities. ruthlessly scrapping obsolete assets. aggressive bac$ward integration. avoiding product line proliferation and being alert for technological improvements Cost declines with cumulative volume are by no means automatic. and ?. which means reinvesting in modern e%uipment. nor is reaping all available economies of scale achievable without significant attention Cost leadership is vulnerable to the same ris$s as on relying on scale or e"perience as entry barriers &ome of the ris$s are++++ • (echnological change that nullifies past investment or learning • /ow cost learning by industry newcomers or followers (hrough imitation or through their ability to invest in state of the art facilities • Inability to see re%uired product or mar$eting change because of the attention placed on cost • Inflation in costs that narrow the firm0s ability to maintain enough of price differential to offset competitors brand images or other approaches to differentiation (he classic e"ample of the ris$s of cost leadership is the Ford motor company of the '648s Ford had achieved unchallenged cost leadership through limitation of models and varieties.

: (his generic strategy implies generating more perceived value of the product =!> than its competitors at the same costs of the competitor or bit higher. the mar$et began to place more of a premium on styling. such that =!+C> greater than e%ual to =!S+ CS> (he essence of this strategy is creating something that is perceived industry wide as being uni%ue A5 A""r#a()es t# di''erentiati#n: 3 firm can differentiate along several dimensions such as+++ ?? . model changes.aggressive pursuit of lower costs through learning /earning was facilitated by the lac$ of model changes Ket as incomes rose and many buyers had already purchased a car and were considering their second. comfort and closed rather than open cars Customers were willing to pay a price premium to get such features 2eneral 1otors stood ready to capitalized on this development with a full line of models Ford faced enormous costs of strategic read9ustment given the rigidity created by heavy investments in costs minimization of an obsolete model :5 PR$ UCT I**ERENTIATI$N STRATEG.

Philips> • Features =-o$ia> • Customer service =1aruti> • Dealer networ$ =Philips. thus creating a positive economic value ii> (iming: ?A . Fero RFonda> ! S"e(i'i( strategies !nder "r#d!(t di''erentiati#n strategy: (he different specific strategies under product differentiation generic strategy are as follows: i> Product features: Increase of product features implies increase of the perceived value of the product =!> which in turn involves increase in costs which forces the price to go up !ut the firm has to ensure that increase in the perceived value of the product is greater than the increase in the cost.• Design or brand image =(itan> • (echnology =&ony.

warehouses. brand also helps to increase the perceived value of the product. contributing to the competitive advantage For e"ample. recent mar$eting of C*/(3& air conditioner as a D(3(3 P.eputation: .*DUC(E v> Cross functional features: Incorporating cross functional features in the product also contributes towards the competitive advantage by increasing the ?7 .eputation of company. after sales service points 3ll these affects the early availability which helps to gain competitive advantage iv> .(iming of introduction of the new product is also very crucial to gain competitive advantage !ecause the first entrant always has an advantage of loc$ing in the customers and creating switching costs iii> /ocation: Competitive advantage is also determined by the location of factories.

perceived value of the product #"ample: Camera and video recording features in mobile phone vi> /in$age with other firms: Fere we have to remember that horizontal integration is not same as the horizontal mar$eting (wo firms coming together to produce a product. to mar$et a product etc.ills and res#!r(es and (#%%#n #rgani2ati#nal re9!ire%ents '#r "r#d!(t di''erentiati#n strategy: i> Commonly re%uired s$ills and resources: • &trong mar$eting abilities • Product engineering • Creative flair • &trong capabilities in basic research • Corporate reputation for %uality or technological leadership • /ong tradition in the industry or uni%ue combination of s$ills drawn from other businesses ?B . contributes to the competitive advantage by enhancing the perceived value of the product C C#%%#nly re9!ired s.

• &trong cooperation from channels ii> Common organizational re%uirements: • &trong coordination among functions in . product development and mar$eting • &ub9ective measurement and incentives instead of %uantitative measures • 3menities to attract highly s$illed labour.s #' "r#d!(t di''erentiati#n strategy: Differentiation involves a series of ris$s such as • (he cost differential between low cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty !uyers thus sacrifice some of the features. scientists and creative people D Ris. services.QD. or image possessed by the differentiated firm for large costs savings • !uyers need for the differentiating factor falls (his can occur as buyers become more sophisticated ?6 .

*I Dollar investment of the product in warehouse 3 string of new products -o of patents (he factors in the first bo" after the circle in each direction is called the critical success factors and the following bo" is the measurement criteria of that critical success factors -ow all these factors are given weight to be measured A8 . a common occurrence as industries mature # S!((ess'!l i%"le%entati#n #' "r#d!(t di''erentiati#n strategy: (his will depend on several factors which are depicted below in the diagramH Figh %uality service (imely distribution of products through distribution channel 3nnual customer survey &uccessful implementation #conomic profit .• Imitation narrows perceived differentiation.

then reconfigure the value chain to satisfy the needs of the customers (his is practiced by organizations with limited resources or with a very ris$y product 3lthough the low cost and differentiation strategies are aimed at achieving their ob9ectives industrywide. geographical mar$et etc. buyer group..: (his strategy postulates selecting or focusing on a particular mar$et. it does achieve one or both of these positions vis+U+vis its narrow mar$et target Fere to achieve competitive advantage the firm has to do two thingsH i> Create economic value: =Discussed earlier> ii> Capture economic value: A' .5 *$CUS STRATEG. segment of the product line. the entire focus strategy is built around serving a particular target very well and each functional policy is developed with this in mind (he strategy rests on the premise that the firm is thus able to serve its narrow strategic target more efficiently and effectively than competitors who are competing more broadly 3s a result. the firm achieves either differentiation from better meeting the needs of the particular target or lower costs in serving the target or both #ven though the focus strategy doesnot achieve low cost or differentiation from the perspective of the mar$et as a whole.

(his concept is related with price elasticity of demand Depending upon that. two strategies are adoptedH a> Margin strategy: (his strategy tells to increase the profitability by concentrating on the increase of unit product margin b> S)are strategy: (his strategy concentrates on increasing the mar$et share resulting in the sales volume as well as profit -ow we shall compare this strategy with cost leadership and product differentiation strategy Price #lasticity of demand #pM' Cost /eadership Differentiation &mall fall in price<M/arge &mall increase in increase in sales <M &hare price<M/arge fall in sales<M strategy i e decrease price &hare strategy i e maintain marginally than competitors price and e"ploit benefit parity with and higher the e"ploit mar$et A4 from competitors benefit of increasing mar$et share .

then also cost leadership strategy is adopted ii> Product differentiation strategy is adopted in case of e"perience product. non commodity and non+price sensitive product =5 +#/ t# i%"le%ent t)e generi( strategies: (here are four levers to implement this strategy (hey are as following: i> 1anagement communication and information system =1CI&> ii> 1anagement control system =1C&> iii> *rganisation structure =*&> iv> #"ecutive compensation system =#C&> A: .share #pL ' !ig fall in by giving more Provide perceived value price<M/ittle 1argin strategy: increase in sales<M 1argin more benefit at higher price strategy i e maintain price parity and lower cost drives the higher profit margin <5 Sele(ti#n #' (#st leaders)i" and di''erentiati#n strategy: i> Cost leadership strategy is ideal for commodity mar$et where consumers are price sensitive )hen it is a search product.

labour. .eward for ta$ing ris$ : Policy of e"perimentation E1ECUTI-E C$MPENSATI$N S. Focus on narrow range of e"ploit business new business opportunities : Isolated poc$ets of MANAGEMENT C$NTR$0 S. 3 cost leadership ' .eward for creative flair involved in cost reduction : 1ultidimensional A.-ow let0s ta$e a loo$ at the comparison of these levers under two generic strategies: /evers $RGANISATI$N STRUCTURE 7$S) Cost leadership strategy Product differentiation divisionalPcross product strategy ' Few layers in organization ' Cross structure functional 4 &imple. inventory guidelines and overhead .eward for cost reduction 4 Incentive for all employees 4 .STEMS 7MCS) ' (ight cost control 4 Nuantitative cost goal intensive creative efforts ' !road decision ma$ing guide lines : Close supervision of raw 4 1anagerial freedom within materials. U type reporting development team relationships : &mall corporate staff 4 &emi permanent structure to organization .STEM 7ECS) philosophy ' .

performance MANAGEMENT C$MMUNICATI$N AN IN*$RMATI$N S.STEM5 7MCIS) system ' &trategic plan =Cision. 1ission etc > 4 !udget : Company newsletter . (heme of the year measurement A? .

if we produce O and K.K> AA .PART * *UNCTI$NA0 STRATEGIES Contents: ' #conomies of scope 4 &trategic gap analysis and 2rowth strategies =3nsoff growth strategies> : Different growth form+ strategic alliance. an the cost function of O and K are N=O> and N=K> and if the cost function for producing the items 9ointly in one plant is N=O.8> T N=8.K> then N=O.K>LN=O.Diversification. 9oint venture. it is cheaper than producing the items separately in different plantsE &. 1erger and ac%uisition 15 EC$N$MIES $* SC$PE: #conomies of scope implies D )hen more than one item is produced at a plant.

preferably to the core competency of the organization :5 STRATEGIC GAP ANA0.SIS AN ANS$** GR$>T+ STRATEGIES: &o far we have discussed the generic strategies and what are the sources of the !asically generic strategies set a broad guiding principles as to how would the firm operate in the mar$et place !ut to tac$le competitors under different mar$et conditions re%uires different set of strategies which helps the firm to grow in the mar$et (hese are called growth strategies In deciding upon the growth strategies two steps are involved: i> &trategic gap analysis ii> Deciding on the particular growth strategies )e will discuss tham one by one: i> &trategic gap analysis: 2ap analysis is basically done to measure the gap between the current situation and future e"pected situation It reveals the gap that has to be fulfilled in futures on different fonts 2ap analysis is a very useful tool for helping mar$eting managers to decide upon mar$eting strategies and tactics 3gain. the products O and K has to be related. the simple tools are the most effective (hereVs a straightforward structure to follow (he first step is to decide upon how A7 . distribution etc !ut for economies of scope.#conomies of scope can be observed in other functions other than production such as purchase.

you will go on to write tactics + see the lesson on mar$eting plans (he diagram below uses 3nsoffVs matri" to bridge the gap using strategies: Strategi( Ga" Analysis5 AB . by profit. by mar$et share. by sales and so on (his will help you to write &13.you are going to 9udge the gap over time For e"ample.( ob9ectives (hen you simply as$ two %uestions + where are we now? and where do we want to be? (he difference between the two is the GAP + this is how you are going to get there (a$e a loo$ at the diagram below (he lower line is where youVll be if you do nothing (he upper line is where you want to be >)at is Ga" Analysis? Kour ne"t step is to close the gap Firstly decide whether you view from a strategic or an operationalPtactical perspective If you are writing strategy.

four growth strategies can be formed =Please refer to ne"t page> A6 .ii> Deciding on particular growth strategies+++3nsoff 2ro%th 1atri": (he ProductP1ar$et 2rid of 3nsoff is a model that has proven to be very useful in business unit strategy processes to determine business growth opportunities (he ProductP1ar$et 2rid has two dimensions: products and mar$ets *ver these 4 dimensions.

and regular client into heavy clients (ypical systems are volume discounts. such as when we sell the same product for another purpose &mall modifications may be necessary !eware of cultural differences (he main target isH i> Convert the non+users to users and ii> #"pand geographically 78 . bonus cards and Customer . more purchasing power.et evel#"%ent &ell more of the same products or services in new mar$ets (hese strategies often try to lure clients away from competitors or introduce e"isting products in foreign mar$ets or introduce new brand names in a mar$et -ew mar$ets can be geographic or functional. overhead sharing 1ain target is H i> Increase the amount and fre%uency of use 4 Mar.elationship 1anagement &trategy is often to achieve economies of scale through more efficient manufacturing.*$UR GR$>T+ STRATEGIES IN T+E PR$ UCT?MAR8ET GRI ' Mar. more efficient distribution.et Penetrati#n &ell more of the same products or services in current mar$ets (hese strategies normally try to change incidental clients to regular clients.

e"isting communication channels are used .: Pr#d!(t evel#"%ent &ell new products or services in current mar$ets (hese strategies often try to sell other products to =regular> clients (hese can be accessories. because a large corporation can spread certain ris$s if it operates on more than one mar$et Diversification can be done in four ways: o ori)ontal diversification (his occurs when the company ac%uires or develops new products that could appeal to its current customer groups even though those new products may be technologically unrelated to the e"isting product lines o *ertical diversification (he company moves into the business of its suppliers or into the business of its customers o Concentric diversification (his results in new product lines or services that have technological andPor mar$eting synergies with e"isting product lines. even though the products may appeal to a new customer group o Conglomerate diversification (his occurs when there is neither technological nor mar$eting synergy and this re%uires reaching new customer groups &ometimes used by large companies see$ing ways to balance a cyclical portfolio with a non+cyclical one 7' . iversi'i(ati#n &ell new products or services in new mar$ets (hese strategies are the most ris$y type of strategies *ften there is a credibility focus in the communication to e"plain why the company enters new mar$ets with new products *n the other hand diversification strategies also can decrease ris$. add+ons. or completely new products Cross+selling *ften.

tapered integration. a firm with its own sales force instead could have contracted. it is said to be forwardly vertically integrated In other words when the firms owns and controls the downstream activities in a value chain i e outbound logistics. Franchisee. an independent selling organization to supply the selling services it re%uires )hen a firm owns and controls the customers sub9ect to the moves closer to the end users of productPservice. selling andPor other economic processes within the confines of a single firm 3s such it represents a decision by the firm to utilize internal or administrative transactions rather than mar$et transactions to accomplish its economic purpose For e"ample.-ow while adopting these strategies a firm can decide to perform in all the segments of the value chain or decide to outsource some of them depending on the margin being contributed by the activity Fere comes the %uestion of transactions )hether the firm will depend on internal transactions or e"ternal mar$et transactions to accomplish the growth ob9ective Fere comes the %uestion of vertical integration. 5oint venture )e will discuss them one by oneH A) -ERTICA0 INTEGRATI$N: -erti(al integrati#n gives the stages at which the firm operates in the value chain 3ccording to Porter Dvertical integration is the combination of technologically distinct production. distribution. through the mar$et. strategic alliance. mar$etingPsales and service it is said to be forward vertical integration 74 .

on the volume of products or services the firm purchases from or sells to the ad9acent stage relative to 7: . we will discuss the when and why of vertical integration: • >)en t# g# in '#r verti(al integrati#n: (he firm should go in for vertical integration when the following situations are there i> )hen there are low no of suppliers and distributors ii> )hen the value of an investment in a transaction is much higher than its value in alternate channel iii> Uncertainty and comple"ity of contract • &ene'its #' 7s#!r(es #' (#%"etitive advantage) verti(al integrati#n: (he benefits of vertical integration depend.)hen a firm owns and controls the input resources sub9ect to it moves closer to the raw materials resources the firm is said to move closer to the bac$ward vertical integration In other words when the firms owns and controls the upstream activities of its value chain i e the inbound logistics and raw material resources it is said the bac$ward vertical interagration -ow. first of all.

sales. purchasing. for e"ample. in 9oint production. this move. control and other areas Following economies can be achieved: i> #conomies of combined operation: !y putting technologically distinct operations together. the firm can sometimes gain efficiencies In manufacturing. the most commonly cited benefit of vertical integration is the achievement of the economies. and utilize the slac$ capacity which arises from indivisibilities in one stage ii> #conomies of Internal control and coordination: 7. or cost savings. reduce handling costs. .the size of efficient production facility in that stage Following are the benefits of vertical integration: 3> #conomies of integration: If the volume of the throughput is sufficient to reap available economies of scale. can reduce the number of steps in the production process.

demand and prices can be spread over all parts of the integrated firm. negotiating.(he costs of scheduling. whereas they would have to be borne by each entity in an uninegrated firm iv> #conomies of avoiding the mar$et: !y integrating. 7? . may be able to develop more efficient. price shopping. the firm can potentially save on some of the selling. or more li$ely. may reduce the overall costs of gaining information (he fi"ed costs of monitoring the mar$et and predicting supply. coordinating operations and responding to emergencies may be lower if the firm is integrated 3d9acent location of the integrated units facilitates coordination and control iii> #conomies of information: Integrated operations may reduce the need for collecting some types of information about the mar$et. and transactions costs of the mar$et transactions v> #conomies of stable relationships: !oth upstream and downstream stages. $nowing that their purchasing and selling relationship is stable.

specialized procedures for dealing with each other that would not be feasible with an independent supplier or customer+++where both the buyer and the seller in the transaction face the competitive ris$ of being dropped or s%ueezed by the other party !> (ap into technology: 3nother important benefit of vertical integration is a tap into technology In some circumstances it can provide close familiarity with technology in upstream and downstream businesses that is crucial to the succees of the base business. a form of economy of information so important as to deserve separate treatment C> 3ssured supply and demand: Certical integration assures the firm that it will receive available supplies in tight periods or that or that it will have an outlet for its products in periods of low overall demand to the e"tent that the downstream unit can absorb the output of the upstream unit D> #nhanced ability to differentiate: 7A .

Certical integration can improve the ability of the firm to differentiate itself from others by offering a wider slice of value added under the control of the management (his aspect. it can raise mobility barriers (he benefits give the integrated firm. for e"ample. in the form of higher prices.allow better control of channels of distribution in order to offer superior service or provide opportunities for differentiation through in house manufacture of proprietary components #> *ffset bargaining power and input cost distortion: If a firm dealing with suppliers or customers who weild significant bargaining power and reap returns on investment in e"cess of the opportunity cost of capital. it pays for the firm to integrate even if there are no other savings from integration *ffsetting bargaining power through integration may not only lower costs of supply =by bac$ward integration> or raise price realization =by forward integration> but also allow the firm to operate more efficiently by eliminating otherwise valueless practices used to cope with the powerful suppliers or customers F> #levate entry or mobility barriers: If vertical integration achieve any of these benefits. lower costs or lower ris$s 77 .

and the use of internal organizational versus mar$et incentives 3> Cost of overcoming mobility barriers: 7B . balance.2> #nter a higher return business: 3 firm may sometimes increase its overall return on investment by vertically integrating If the stages of production into which integration is being contemplated has a structure that offers a return on investment greater than the opportunity cost of capital for th firm. ability to manage the integrated firm.fle"ibility. then it is possible to integrate even if there is no economies of integration per se F> Defend against foreclosure: #ven if there are no positive benefits of integration. it may be necessary to defend against foreclosure of access to suppliers or customers if competitors are integrated • C#sts #r disadvantages #' verti(al integrati#n: (he strategic costs of vertical integration basically involve entry cost.

for e"ample.Certical integration obviously re%uires the firm to overcome the mobility barriers to compete in the upstream or downstream business Integration is after all a special case =though a common one> of the general strategic option of entry into a new business !> Increased operating leverage: Certical integration increases the proportion of a firm0s costs that are fi"ed If the mar$et. for e"ample. all the costs of that input would be variable C> #levate and entry and mobility barriers: Certical integration implies that the fortunes of a business unit are at least partly tied to the ability of its in+house supplier or customer =who might be its distribution channel> to compete successfully Certical integration raises costs of changeover to another supplier or customer relative to contracting with independent entities D> Figher overall e"it barriers: 76 . all the costs of that input on the spot mar$et.

Integration that further increases the specialization of assets. whereas dealing with an independent entity uses investment capital or outsiders Certical integration must yield a return higher than the to the firm0s opportunity cost of capital F> Foreclosure of access to suppliers or consumer research andPor $now how: !y integrating the firm may cut itself off from the flow of technology from its suppliers and customers Integration usually means that a company must accept responsibility for developing its own technological capability rather than piggybac$ying on others 2> 1aintaining balance: (he productive capacities of the upstream and downstream units in the firm must be held in balance or potential problem arise (he stage of the B8 . which have an opportunity cost within the firm. or emotional ties to a business may raise overall e"it barriers #> Capital investment re%uirements: Certical integration consumes capital resources. strategic interrelationships.

technology. and management despite having a vertical relationship &ince vertically lin$ed business transact business with each other.however. there is a subtle tendency to view them as similar business from a managerial point of view • Parti(!lar bene'its in '#r/ard verti(al integrati#n: i>Improve ability to differentiate the product: B' .vertical chain with e"cess capacity =or e"cess demand> must sell some of its output=or purchase some of its inputs> on the open mar$et or sacrifice the mar$et position F> Dulled incentives: Certical integration means that buying and selling will occur through a captive relationships (he incentives for the upstream business to perform may be dulled because it sells in+house instead of competing for the business I> Differing managerial re%uirements: !usiness can be different in structure.

Forward integration can often allow the firm to differentiate its product more successfully because the firm can control more elements of the production process or the way the product is sold For e"ample: forward integration in retailing sometimes allow the firm to control the salespersons and other elements of the retailing selling function that help to differentiate the product ii> 3ccess to distribution channels: Forward integration solves the problem of access to distribution channels and removes any bargaining power the channels have iii> !etter access to mar$et information: In a vertical chain the underlying demand for the product =and the decision ma$er who actually ma$es the choices among competing brands> often are located in a forward stage (his stage determines both the size and the composition of demand of the upstream stages of production (his is called the demand leading stage Forward integration into demand leading stage can provide the firm with B4 .

it may realize higher prices on sales to other customers Fowever other firms selling the product must also be integrated. that allows the entire vertical chain to function more effectively iv> Figher price realization: In some cases forward integration can allow the firm to realize the higher overall prices by ma$ing it possible to set different prices for different customers for essentially the same product If the firm integrates into businesses that should be charged with lower price because its demand is more elastic.critical mar$et information. or the firm0s product must be differentiated B: .