Strategic Management

MODULE V
Ms. Archana Vijay

Topics to be covered:

Business planning in different environments – Entrepreneurial Level Business planning – Multi stage
wealth creation model for entrepreneurs– Planning for large and diversified companies – brief overview
of Innovation, integration, Diversification, Turnaround Strategies - GE nine cell planning grid and BCG
matrix.

Business Planning: Business planning, also known as strategic planning or long-range planning, is a
management-directed process that is intended to determine a desired future state for a business entity and
to define overall strategies for accomplishing the desired state. Through planning, management decides
what objectives to pursue during a future period, and what actions to undertake to achieve those
objectives.

The use of formal business planning has increased significantly over the past few decades. The increase in
the use of formal long-range plans reflects a number of significant factors:

 Competitors engage in long-range planning.

 Global economic expansion is a long-range effort.
 Taxing authorities and investors require more detailed reports about future prospects and annual
performance.
 Investors assess risk/reward according to long-range plans and expectations.
 Availability of computers and sophisticated mathematical models add to the potential and
precision of long-range planning.
 Expenditures for research and development increased dramatically, resulting in the need for
longer planning horizons and huge investments in capital equipment.
 Steady economic growth has made longer-term planning more realistic.

BUSINESS PLANNING IN DIFFERENT ENVIRONMENTS

NON ECONOMIC ENVIRONMENT OF BUSINESS

 Political environment : political environment in country comprises of legislature, executive,

judiciary, which play useful role in shaping, directing and developing business activities in
country.

 E.G cigarettes packet sold in India should inform that smoking is injurious to health.

 Nestle Maggi was banned due to high level of MSG content in it.

Business responsibilities towards government

 payment of taxes
 Providing of employment to country citizens

 Provide relevant information during budget in country

 Information in policy formulation

 Development of infrastructure facility as part of corporate social responsibility of business

Government responsibilities towards business

 Reduce excise duty

 Infrastructure development required for business

 To provide financial facility required for business development in country

 Restricting monopoly

 Encouraging small scale industry

 Demographic environment : demographic environment comprises of population pattern in a

particular country.

 demographic factors like rise and growth rate of population, age and sex composition of
population, educational levels, rural urban distribution of population, caste, religion, language are
all factors relevant to business conditions.

 Size of population, growth rate of population, age composition influences demand pattern of
various goods and services in country.

 Large labour force and rapid growth of labour supply affect level of technology to be used in area
of business in country.

 E.g citizens of India are family centric people which reduces labour mobility in country resulting
in hindered career opportunity.

 India attracted many foreign automobile companies due to its large population size and
companies like Toyota and Honda have come up with mid-segment cars especially for Indian
market as most of the people belong to middle class in India.

 Socio cultural environment : includes factors such as peoples attitude towards work, role of
family, religion, marriage, education, and social responsibilities of business.

 business in country operate in socio economic environment so they have to formulate their
business policies in accordance with social system prevailing in society.

 Society in country may be conservative or liberal by nature.

 Business to succeed in country has to take care of diversified demands of customers persisting in
market.

 Culture in each society is reflected by habits, customs, beliefs, tradition, values attitude, language,
art existing in society.

 Thus to have successful business companies have to offer products and service in accordance
with taste and preference of customers in country.

 For example, McDonalds launched McAloo Tikki specifically for the Indian market.

 Technological environment : technology implies systematic application of scientific or other

organized knowledge to practical task or activities.

 Technology forces change on people whether they are prepared for it or not. Technological
changes are taking place at faster phase in country.

 Technology is self enforcing in nature which acts as a multiplier which encourages its own
development, where one invention leads numerous inventions at other places throughout the
world.

 Transfer of technology is process by which commercial technology is disseminated.

 For example, automobile companies are now making use of Robotics Technology for production
process.

Impact of technology on business

 increases level of productivity in business

 Global competition ensuring better quality of goods and services in market

 Changing job profile

 Increased need for capital

 Organizational restructuring

 Resistance to change

 Development of country's economy

 Ensures modernization in various business activities in company

 Natural environment : Geological and ecological factors, such as natural resources endowments,
weather and climatic conditions, topographical factors, location aspects in the global context, port
facilities etc., are relevant to business. Differences in geographical conditions between markets
 may sometimes call for changes in the marketing mix. Geographical and Ecological factors also
influence the location of certain industries. E.g. industries with high material index tend to be
located near the raw material sources. Topographical factors may affect the demand pattern. For
example people in North regions prefer tea more than coffee. Government would insist on the
firms to have special garbage disposal scheme to reduce air and water pollution.

 Ecological factors have recently assumed great importance. The depletion of natural resources,
environmental pollution and the disturbance of ecological balance have caused great concern.

 Natural resources of country may prove to be major advantage for development of business as
well as country such as development of gulf country took place as result of their abundant natural
resources in country.

 Legal environment of country constitutes of legislations related to property and business

organizations, laws of contract, mutual obligations of labour, etc. Economic legislations may be
facilitative or restrictive in nature. MRPT and FERA are restrictive in nature .

 Objectives of MRPT ( monopoly and restrictive trade practices )

 Prevention of concentration of economic power to common determinant

 Control of monopolistic, restrictive and unfair trade practices which are against public interest.

Objectives of FERA ( foreign exchange regulation act )

 to regulate dealings in foreign exchange

 To regulate transaction affecting foreign exchange

 To regulate exchange of import and export of foreign currency in country

 To conserve foreign exchange reserve of country and to utilize the same in interest of economic
development in country.

 To regulate holding of immovable property outside India

 To regulate employment of foreign nationals in country

 Consumer protection act of 1986 : is intended to protect the legitimate interest of consumers
against traders, suppliers etc. Consumer councils and courts have been set up for settlement of
consumer disputes in country.

 Global environment : global business activities have an important bearing on the level of business
activities in different countries. Globalization plays important role in shaping business activity in
country. With liberalization and globalization of economy business environment of an economy
has become different when it has to bear all shock and benefits arising out of global environment.

 Implications of global environment :

  As result of globalization and growing openness of economy the extent of market for various
commodities are gradually becoming wider.

 As the result of globalization and liberalization , Indian companies are now bound to consider the
business issues from global perspective.

 With advancement of transformation and communication facility the entire globe has become
small village and therefore the concept of safe market are not existing any more.

 In order to attain international competitiveness industries should try to diversify their products so
that they can satisfy changing demand and expectations of customers in market.

 Under the global environment domestic companies are issuing new shares for raising share
capital from international market for mobilising additional resources.

 Industrialist and businessman should attain familiarity with foreign currencies and foreign
languages which indirectly helps them to expand and diversify their business activities.

 Another implication of globalization is to face political and legal uncertainties by industries and
business entities with proper mindset and logistics support.

ENTREPRENEURIAL LEVEL BUSINESS PLANNING

Meaning: Planning involves selecting missions and objectives and the actions to achieve them; it requires
decision making that is choosing from among alternative future courses of action. Plans thus provide a
rational approach to achieving preselected objectives.

ENTREPRENEURIAL LEVEL BUSINESS PLANNING

 Firm level planning : a business owner has to choose a model of planning, such as strategic
planning, that will guide the entire business. Planning is about setting goals that can be timed and
measured to determine if the company meets the desired level of performance. Without a strategic
plan, a business owner will make over reactive decisions in response to the market. With a
strategic plan , all the firms employees will know what direction to take.
 Department level planning : once business has grown to a certain point owner or manager will
begin to organize employees into departments, teams or business functions. Employees will
support specific product, perform specific function or serve customers in a defined market. At
this level, regardless of business size, a department or team manager must collaborate with the
owner or the company manager and determine what part of the firm’s goals will acquire his
departmental tactical plans.
 Operational planning: this level of planning requires that a manager considers which employee
or group will be responsible for each department goal at operational level. This will include
looking at specific activities that employees perform and how they interlace to support the
departments goal.
  Employee planning : at the direction of their manager, individuals can write goals to illustrate
specifically how they will help achieve operational goals. These should be as specific,
measurable, achievable, relevant and timed as the goals at other levels of planning. They can
suggest ways for the company to match the strength of the business with current opportunities in
the market.
Entrepreneurial Level Business planning grand Strategies

Identification of various alternative strategies is an important aspect of strategic management as it

provides the alternatives which can be considered and selected for implementation in order to arrive at
certain results. The Grand strategy covers up

1. Stability - In an effective stability strategy, Cos will concentrate their resources where the Company
presently has or can rapidly develop a meaningful competitive advantage in the narrowest possible
product-market scope consistent with the firm’s resources and market requirement.

2. Growth - Is one that an enterprise pursues when it increases its level of objectives upward in
significant increment, much higher than an exploration of its past achievement level. The most frequent
increase indicating a growth strategy; is to raise the market share and or sales objectives upward
significantly

3. Retrenchment - Is one that an entity pursues when it decides to improve its performance in reaching
its objectives by (i) focusing on functional improvement, specially reduction in cost (ii) reducing the
number of functions it performs by becoming a captive company or (iii) reducing the number of the
products and markets it serves up to and including liquidation of the business. ( Turnaround, divestment,
liquidation)

4. Liquidation Strategy: When a specific line of activity i.e. production or service is not profitable and
no future and also that there are no buyers through disinvestment process,can dismantle and liquidate the
assets and collect money to be used in the profitable areas.

5. Combination: It is a combination of stability, growth, retrenchment strategies in various forms. The

basic reason for adopting this strategy by a multi-business organization is that a single strategy does not
fit all businesses at a particular point of time, because each business faces different kinds of problems.

6. Business Restructuring: Choosing the profitable lines and ignoring the loss making or less profitable
units so that more concentration can be given to the prospering lines. Cutting down overheads by
reducing less utility manpower starting from top.

BRIEF OVERVIEW OF INNOVATION

The underlying rationale of the grand strategy of innovation is to create a new product life cycle and
thereby make similar existing products obsolete. Few innovative ideas prove profitable because research,
development and pre-marketing costs of converting a promising idea into a profitable product are
extremely high.
  Innovation is needed for both consumers and industrial markets expect periodical change and
improvements in the product offered.
 Firms seeking to make innovation as their grand strategy seek to reap the initial high profits
associated with customer’s acceptance of a new greatly improved product.
 As the product enters the maturity stage these companies start looking for a new product
innovation.
 The underlining rationale is to create a new product life cycle and thereby make similar existing
products obsolete.
 This strategy is different from the product development strategy in which the product life cycle of
an existing product is extended.
TYPES OF INNOVATION
 Product Innovation : Manual driven cars to Automated Cars
 Process Innovation : Manual technology to assemble cars to Robotics
Technology, Manual managing the order when it is ready in restaurants to
Beacons which displays the token number when the order is ready.
 Business Model Innovation ; Ola and Uber cabs Business Model.

INTEGRATION
Integration is derived from the Latin word integer, generally means combining parts so that they work
together or a form of whole. A company performs number of activities to transform an input to output.
These activities include right from procurement of raw materials to production of finished goods and their
marketing and distribution to the ultimate consumers.
 Horizontal integration: when a firms long term strategy is based on growth through the
acquisition of one or more similar firms operating at the same stage of production – marketing
chain, its grand strategy is called as horizontal integration. This take over / merger / buyout can
be done in same geography or probably in other countries or market segments or increasing the
range of products / services to current markets, or a combination of both.
 Vertical integration: when a firm’s grand strategy is to acquire firms that supply it with inputs
such as raw materials or are customers for its output such as warehouses for its finished products.
When a company expands its business into areas that are at different points on the same
production path, such as when a manufacturers owns its suppliers or distributors. Vertical
integration can help companies to reduce cost and improve efficiency by decreasing
transportation expenses and reducing turnaround time, among other advantages.
TYPES OF VERTICAL INTEGRATION
 Backward integration : it occurs when companies acquired to supply that firm with products,
components or raw materials. Backward integration strategy is most beneficial when :
a. Firm’s current suppliers are unreliable, expensive or cannot supply required inputs.
b. There are only few small suppliers but many competitors in the industry.
c. The industry is expanding rapidly.
d. Suppliers earn high profit margin.
e. A company has the necessary resources and capabilities to manage the new business.
For eg. Reliance initial business was manufacturing Vimal Sarees. For that they required
petrochemical products, So finally they set up their own petroleum refinery business.
 Forward integration : where the business tries to control the post production areas namely the
distribution network. Like a company opening its own mobile retail chain. If a manufacturing
company engages in sales or after sales industries it pursues forward integration strategy. The
strategy is implemented when the company wants to achieve economies of scale and large market
share. Forward integration strategy is effective when
a. Few quality distributors are available in the industry.
b. Distributors or retailers have high profit margin.
c. Distributors are very expensive, unreliable or unable to meet firms distribution needs.
d. The industry is expected to grow significantly.
e. There are benefits of stable production and distribution.
f. The company has enough resources and capabilities to manage the new business.
For eg. Apple is into manufacturing of Smart phones. Because of their dispute with Retailers, they
finally set up their own exclusive outlet ‘imagine’ to sell Apple products.
DIVERSIFICATION
Diversification is process of entry into a new business in the organization either market wise or
technology wise or both. Many organizations adopt diversification strategy to minimize the risk of loss. It
is also used to capitalize organizational strength.

Diversification is part of the four main growth strategies defined by Igor Ansoff's Product/Market matrix:
Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first
three strategies are usually pursued with the same technical, financial, and merchandising resources used
for the original product line, whereas diversification usually requires a company to acquire new skills,
new techniques and new facilities.

REASONS FOR DIVERSIFICATION

 Saturation or decline of current business.
 Additional opportunities
 Risk minimization
 Better utilization of resources and strength
 Benefits of integration
 Competitive strategy
 Need related diversification
 Consolidation
RISKS OF DIVERSIFICATION
 No guarantee for success
 Huge loss in new business may adversely affect the old business

WHEN TO DIVERSIFY
 Intention of extraordinary growth in assets, revenues and profits.
 Creating a large portfolio of diverse business
 Environment helps in exploiting firm’s resources
 An uncertain environment for current products
 Diversification more portfolio than intensification
 Firms having surplus resources to use in new ventures.
TYPES OF DIVERSIFICATION
 Concentric diversification :an organization adopts concentric diversification, when it takes up
an activity that relates to the characteristics of its current business activity. An organization
prefers to diversify concentrically either in terms of customer group, customer functions or
alternative technologies of the organizations. It is also called as related strategy. e.g. acquiring
of Spice Telecom by Idea
 Conglomerate diversification : an organization adopts conglomerate diversification when it
takes up an activity that does not relate to the characteristics of its current business activity. The
 organization chooses to diversify conglometrically either in terms of customer group, customer
function or alternative technologies of the organization.It is also known as Unrelated
Diversification. e.g. acquisition of Adlabs by Anil Dirubhai Ambani Group

 Horizontal Diversification : Adding new, unrelated products or

services for present customers is called horizontal diversification.  This strategy is not as risky

as conglomerate diversification because a firm already should be familiar with its present customers.

For eg. A firm manufacturing pens will start manufacturing Notebooks for the same target customers.
 DIVERSIFICATION STRATEGIES
1. Strategies for entering new business :
a. Acquisition of an existing business is the popular means of diversifying into another industry and
has the advantage of much quicker entry into target market. It also helps the diversifier overcome
such entry barriers as technological inexperience, establishing supplier relationship etc.
b. Internal start up : diversification through internal start up involves creating a new company
under the corporate umbrella to compete in the desired industry. A newly formed organization
should not only overcome entry barriers, but also has to invest in new production capacity,
develop sources of supply, grow customer base etc.
c. Joint venture ( E.g. Mahindra , Amazon )
d. Related Diversification
e. Unrelated Diversification
2. Turnaround strategy : Turnaround strategy refers to the management measures which reverse
the negative trends in the performance indicators of the company. In other words, turnaround
management refers to the management measures which turn a sick company back to a healthy one
or those measures which reverse the deteriorating trends of the performance indicators such as
falling market share, sales and profitability and worsening debt-equity ratio.
• Sometimes the profit of a company decline due to various reasons like economic recession,
production inefficiencies and innovative breakthrough by competitors. In many cases the
management believes that such a firm can survive and eventually recover if a concerted effort is
made over a period of a few years to fortify its distinctive competences. This is known as
turnaround strategy.
Turnaround typically begun with one or both of the following forms of retrenchment being
employed either singly or in combination.
1. Cost reduction – It is done by decreasing the workforce through employee attrition, leasing
rather than purchasing equipment, extending the life of machinery, eliminating promotional
activities, laying off employees, dropping items from a production line and discontinuing low-
margin customers.
2. Asset reduction – This includes sale of land, buildings and equipment not essential to the
basic activity of the firm.
Research have showed that turnaround almost always was associated with changes in top
management. New managers are believed to introduce new perspectives, raise employee morale
and facilitate drastic actions like deep budgetary cuts in established programs.
For example, Dell is taking steps to turnaround its business and recovering from losses and decline
in its profit margins. Dell had first announced cost-cutting measures as early as May last year. In
2007, Dell changed its direct-sales model to offer computers in retail outlets, after losing the title of
top PC maker to Hewlett-Packard Co (HP). Dell is now beginning to supply similar products to
retailers like Wal-Mart, but as a smaller percentage of its business.

BCG Matrix
Resources are assigned based on the performance of the SBU in the past, its current market position,
and future potential in generating revenue for the firm. BCG / Growth-Share Matrix is an efficient tool
for assigning resources.

The market growth rate on the vertical axis indicates the annual growth rate of the market in
which the business operates.
Relative market share, measured on the horizontal axis, refers to the SBU’s market share relative
to that of its largest competitor.
It is divided into four cells, each indicating a different type of business:
 Question Marks – Businesses that operate in high growth markets but have low relative market
shares. A question mark requires a lot of cash because the company has to spend money on
 plants, equipment and personnel to keep up with the fast growing market and because it wants to
overtake the leader.
 Stars – If the question mark business is successful, it becomes a star. A star is the market leader
in a high-growth market. The company must spend substantial funds to keep up with the high
market growth and fight off competitor’s attacks.
 Cash Cows –When a market’s annual growth rate falls, the star becomes a cash cow if it still has
the largest relative market share. A cash cow produces a lot of cash for the company. The
company does not have to finance a lot of capacity expansion because the market’s growth rate
has slowed down. And since the business is the market leader, it enjoys economies of scale and
higher profit margins.
 Dogs – Businesses that have weak market shares in low-growth markets. They typically generate
low profits or losses, although they may generate some cash.
Strategies For SBU
Company’s next task is to determine what objective, strategy and budget to assign to each SBU.
Four strategies can be pursued :
 Build – Objective is to increase the SBU’s market share, even forgoing short term earnings to
achieve this objective. Appropriate for question marks whose market shares must grow if they are
to become stars.
 Hold – Objective is to preserve the SBU’s market share. Appropriate for stars if they are to
continue yielding a large positive cash flow.
 Harvest – Objective is to increase the SBU’s short-term cash flow regardless of long term effect.
Harvesting generally involves eliminating R&D expenditures, not replacing sales people,
reducing advertising expenditures. Appropriate for cash cows whose future is dim and from
which more cash flow is needed.
 Divest – Objective is to sell or liquidate the business because resources can be better used
elsewhere. Appropriate for dogs and question marks that are acting as a drag on the company’s
profits.
Benefits
 BCG Matrix is helpful for managers to evaluate balance in the companies’s current
portfolio of Stars, Cash Cows, Question Marks and Dogs.
 Applicable to large companies that seek volume and experience effects.
 Model is simple and easy to understand.
 Provides a base for management to decide and prepare for future actions.
Limitations
  Classifies business as low and high, but generally businesses can be medium
also.
 Market is not clearly defined in this model.
 A high market share does not always leads to high profits. There are high costs
also involved with high market share.
 Growth rate and relative market share are not the only indicators of profitability.
This model ignores other indicators of profitability.

BCG Matrix for Apple Inc

Question Mark :Apple TV is the Question Mark. Apple TV makes a bit of money, but is not reaching its
potential. If they solve some ecosystem problems, the Apple TV would definitely reach and become
rising stars.
Rising Stars : The iphone and ipad are rising stars. They are so successful that the company cant make
enough of them.
Cash Cows : Mac Book are in Cash Cows section. The MacBook are doing well currently but the future
potential is not bright.
Dogs : hard drive based ipods are just fading away and are in Dogs section.
 GE Matrix
In 1970s, General Electric was managing a huge and complex portfolio of unrelated products and was
unsatisfied about the returns from its investments in the products. . Therefore, GE consulted the
McKinsey & Company and as a result the nine-box framework was designed. The nine-box matrix plots
the SBUs on its 9 cells that indicate whether the company should invest in a product, harvest/divest it or
do a further research on the product and invest in it if there’re still some resources left. The BUs are
evaluated on two axes: Industry Attractiveness and Business Strength.

Industry Attractiveness

Industry attractiveness indicates how hard or easy it will be for a company to compete in the market and
earn profits. The more profitable the industry is the more attractive it becomes. Industry
attractiveness consists of many factors that collectively determine the competition level in it. There’s no
definite list of which factors should be included to determine industry attractiveness, but the following
are the most common: 

 Long run growth rate

 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of
substitutes and available complements
 Industry structure (use Structure-Conduct-Performance framework to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors
 Seasonality
 Availability of labor
 Market segmentation

Business Strength
Along the X axis, the matrix measures how strong, in terms of competition, a particular business unit is
against its rivals. In other words, managers try to determine whether a business unit has a  sustainable
competitive advantage or not.

The following factors determine the competitive strength of a business unit:

 Total market share

 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 Your business unit strength in meeting industry’s critical success factors
 Strength of a value chain
 Level of product differentiation
 Production flexibility
 Accordingly, three strategies are pursued :
 Grow (Build)
 Hold
 Harvest
Advantages
 Helps to prioritize the limited resources in order to achieve the best returns.
 Managers become more aware of how their products or business units perform.
 It’s more sophisticated business portfolio framework than the BCG matrix.
 Identifies the strategic steps the company needs to make to improve the performance of its
business portfolio.

Disadvantages
 Requires a consultant or a highly experienced person to determine industry’s attractiveness and
business unit strength as accurately as possible.
 It is costly to conduct.
 It doesn’t take into account the synergies that could exist between two or more business units.

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