Chapter-1: Introduction

“Strategy”
Strategy and business model are the two basic terms we have to understand first for
studying the strategic management course.

Strategy: A company’s strategy consists of the combination of competitive moves and

business approaches that managers employ to please the customers, compete success-
fully, and achieve organizational objectives.

The term strategy originated in the battlefield where there are two opposition parties.
They always try to beat them each other and wants to have a better position. Similarly, in
the business world, a competitive move always exists. A company has lots of competitors
here. Every company takes some steps or actions in order to achieve their targets or
objectives. These steps or actions are called strategy.

Example: “Ghachang” offer from ROBI. The basic objective of such actions or steps is
to attract more new customers or to please the existing customers. Another objective of
this action is to beat or outperform its rivals. Such actions or steps are known as Strategy.

But one important thing is, if there was no competitor of ROBI. Then they would never
think about such strategies. Therefore, it can be said that, if there is no competitor, there
is no need to take any strategy.

Strategic Management
The strategic management refers to the managerial process of forming a strategic vision,
setting objectives, crafting a strategy, implementing and executing the strategy, and then
over time initiating whatever corrective adjustments in the process of formulating the
strategy.

As a strategic manager, our first task is to develop the strategic vision and business
mission for the company i.e. what would be the business condition or status after 15 or 20
years. Then the second task is to set the objectives of different departments and
individuals. Then for achieving this objective we have to take any strategy. The fourth
task is to implement and execute this strategy. Then over time we have to take some
corrective adjustments in our strategy if there are any errors or mistakes in strategy
formulation process. This whole process is known as the Strategic Management.

The five tasks of strategic management

Page 1
Strategic management has some important tasks. These are as follows:

Developing Implementation Evaluating the

strategic vision Setting Crafting a and executing the performance and
and business objectives strategy strategy initiating corrective
mission adjustments

Fig: Five tasks of strategic management.

Let us try to explain them:

Task-1: Developing strategic vision and business mission: Strategic vision portrays a
company’s future business scope whereas; a company’s mission statement describes its
present business scope. The first task of strategic manager is to determine the long-term
objective of the organization i.e. the vision.

Task-2: Setting objectives: After determining the vision, the strategic manager will set
the individual objectives for each functional department or each employee of the
organization. We know, there are some functional departments in most of the
organizations such as marketing department, production department, human resource
department etc. Every functional department will responsible to achieve their target.

Task-3: Crafting a strategy: For achieving the objectives or targets that have previously
determined, the manager has to take some steps or actions i.e. the strategy. For example,
a bank manager may provide the depositors a facility of 10% interest rate instead of 7%,
which is provided by other banks.

Task-4: Implementing and executing Strategy: In this stage, the strategic manager has
to implement or execute the strategy that has taken previously. Now the strategy is in the
market.

Task-5: Evaluating performance, monitoring new developments and initiating

corrective adjustments: After implementing and executing the strategy, the fifth task is
to evaluate the performance and progress of that strategy. There may have some errors
or mistakes in the strategy formulation process. The strategic manager has to correct it.

Page 2
Why strategic vision is important for a company?
Strategic vision is a roadmap of a company’s future. It portrays a company’s future
business scope. A strategic vision is very much important for every company for the
following reasons.
 A strategic vision generally has much greater direction setting and strategy
making value.
 An organization should give its concentration not only on present business
scope but also the future business scope. Because the demand, taste and
need of consumers are changing over time. So, the business organization
should give its focus accordingly. Otherwise, they will lose their market.
(Britain’s tea strategy )
 Managers cannot be succeed as the strategy makers without first drawing
soundly reasoned conclusion about the winds of change and then making
some fundamental choice. (Prothom Alo’s reception for A+ students. Math
Olympiad , Bhundho Shova)
 Therefore, for all the above-mentioned reasons, a strategic vision is important
for any company.

Objectives and it’s types

Objectives: Objectives are an organization’s performance targets – the results and
outcomes it wants to achieve. For example: “We want to increase 10% sales volume by
the year 2015.”
2012 2015
Sales Unit 2000 (unit) 2000+200 = 2200 (unit)

A company’s sales unit is 2000 in 2012. Now their objective is to increase the sales
volume at 10% by the year 2015. Therefore, the target or objective for the year 2015 will
be to sell 2200 units of products.

Types of objectives:

Financial objective: It is one, which can be measured or expressed through numerical

values. Suppose, a company’s objective is to increase its sales by 10%. So, the production
manager can calculate it easily like 10% of 1000 =100 and 10% of 5000 = 500 etc.

Strategic objective: It is one, which can’t be measured by numerical value. This type of
objective is expressed in a statement. For example, “By the year 2005, we will be the
number one company in industry” or “we will be the market leader by 2005.”

What does a company’s strategy consist of?

A company’s strategy consists of several how’s. Such as:

Page 3
 --how to grow the business
--how to satisfy the customers
--how to compete with rivals
--how to respond to changing market conditions
--how to manage each functional piece of the business and develop needed
organizational capabilities and
--how to achieve strategic and financial objectives.

The how’s of strategy tends to be company specific and customized to a company’s own
situation and performance objectives.

Why strategic management is an ongoing process?

Strategic management deals with vision, mission, and various strategies of the company.
These vision and strategies are to set in accordance with the surrounding environment,
which is being changed in every moment. Besides, the competitors of the company are
also taking new strategies to attract their customers. The strategic managers have an ever-
present responsibility for detecting when new developments require a strategic response
and when they don’t.
Another important point is that, the task of evaluating performance and initiating
corrective adjustments is both the end and beginning of the strategic management cycle.

Therefore, from the above discussion, we see that strategic manager has to deal with the
present environment and the market condition. That’s why the process of strategic
management is not a start-stop event. That means it is an ongoing process.

Page 4
 Chapter-2

Describing the strategic management process

There are five steps in the strategic management process. These are as follows:

Missions
and Goals

External SWOT or Internal

Analysis Strategic Choice Analysis

Selecting the
strategy

Implementing
the strategy

Feedback
Fig: The Strategic Management Process.

Here are some explanations of these:

a) Mission and major goals: The mission sets out why the organization exists and
what it should be doing. For example, the mission of national airlines might be
defined as satisfying the needs of individuals and the mission of business travelers
for high-speed transportation at a reasonable price.

Major goals specify what the organization hopes to fulfill in the medium to long
term. For example, a major goal of Coca-cola has been to put a coke within an
arm’s reach of every consumer in the world.

b) External analysis: The second component of the strategic management process is

the analysis of the organization’s external operating environment. The objective
of external analysis is to identify the strategic opportunities and threats for the
organization. Three types of interrelated environment should be analyzed here:

Page 5
  Immediate or industry environment: It involves the competitive position of the
local organization and its major rivals. As a manager of the bank, he or she
must observe what types of facilities other banks are providing to attract the
consumers.

 National environment: The manager should also analyze the national

environment or country economy.

 Wider macro environment: There are various types of macro environmental

element such as social, government, legal, international, and technological
factors that may affect the organization. These should be analyzed here.

c) Internal analysis: The third component of the strategic management process is

internal analysis. The objective of internal analysis is to identify the strength and
weakness of the organization. It includes the quality, innovation, customization
facilities, skills etc.

d) Selection of strategies: By doing internal and external environment analysis, we

have already found strengths, weaknesses, opportunities and threats. On the basis
of the SWOT analysis, managers should select the most suitable strategies.

e) Implementing and executing the strategy: After selecting the suitable strategy,
the manager’s duty is to implement it or execute it in the market.

Page 6
Different levels of strategic managers

A typical multi-business company has three main levels of management. They are:
 Corporate level
 Business level
 Functional level

Here is the figure:

Head Office
Corporate Level
CEO, Board of Directors
Corporate Staff

Business Level
Divisional Managers
Division A Division B Division C
and Staff

Functional Level
Functional Managers
Marketi-ng Production R&D

Market A Market B Market C

Fig: Different levels of Strategic Managers.

Let us have some details:

Corporate level: The corporate level of management consists of the CEO, other
executives, the board of directors, and corporate staff. They occupy the apex of decision
making within the organization. The CEO is the main general manager at this level. His
or her strategic role is to observe the development of strategies for the total organization.
This role includes defining the mission and goals of the organization, determining what
business it should be in, allocating resources among the different business etc.

Business level managers: In a multinational company such as Lever Brothers, the

business level consists of the heads of individual business units within the organization
and their support staff.

Page 7
In a single industry company, the business and corporate levels are same. The main
strategic managers at the business level are the heads of divisions. Their strategic role is
to translate the general statements of direction and intent from the corporate level into
concrete strategies for individual business. They are concerned with strategies that are
specific to a particular business.

Functional level managers: They are responsible for specific business functions such as
human resources, production, marketing and research & development (R & D). Their
responsibility is to develop functional strategies in manufacturing, marketing, R & D
respectively.

Different levels of strategies

If we understand the different levels of strategic managers then it is very much simple to
understand the different levels of strategies. Here are these:

Corporate level Strategies: The strategies that are taken by corporate level managers are
called the corporate level strategies. These include the acquisition, licensing or
franchising etc.

Business level Strategies: The strategies that are taken by business level managers are
called the business level strategies. These include the decision or strategies for a specific
division.

Functional level Strategies: The strategies that are taken by functional level managers
are called the functional level strategies. These include the decision or strategies for a
specific functional department such as Marketing department, Production department or
Human Resource department.

Intended and emergent strategies

The general phenomenon about the strategy is that – they are the result of a formal
planning process that is done by the top-management of the organization. It reflects the
military roots of strategy. Top management plays an important role in this process. These
are the intended strategies.

But in recent years, several scholars have advocated an alternative view of strategy
making. Sometimes, some important strategies may also come from the lower level
managers or supervisors because they have the practical and deep idea about the products
of the company. Such strategies are called emergent strategies.

Page 8
 3M: Richard Drew, the young laboratory assistant, developed a new product
which is “glue-covered paper” also known as “sticky tape” or “Post-it”.

Lever
Brothers: A marketing executive developed “Vim Bar” which was previously in
liquid form and in powder. Company received a great response from the
consumers.

Now let us, define the intended and emergent strategies:

Intended strategies are the strategies for which a formal planning process is followed.
Generally, top-level executives take these strategies. They come from the top of the
organization. Top-to-bottom approach is followed for these strategies.

Emergent strategies are not the result of a formal planning process. They just emerge
from the bottom level or grass-root level of the organization. Generally, the lower level
executives or general employees take these strategies. Bottom-to-up approach is followed
for theses strategies.

Here is the figure:

Missions
and Goals

SWOT or
Strategic
Internal
External
choice Analysis
Analysis

Intended Strategy

Implementing the
strategy

Fig: The intended strategy

Page 9
 Internal
External
Missions
Analysis
Analysis
and Goals

Strategic
Choice

SWOT

Emergent Strategy

Organizational
Grassroots

Fig: The emergent strategy

Page 10
 Chapter-3

Stakeholders: kinds and impact analysis

Stakeholders: A company’s stakeholders are individuals or groups that have an interest,

claim or stake in the company, in what it does, and in how well it performs.

There are many stakeholders of an organization such as stockholders, employees,

managers, govt. and general public. Each of these stakeholders contributes to the
organization and in exchange they have some expectations from the org. For example,
stockholders provide the firm capital and in exchange they expect appropriate return on
their investment. Customers provide a company with its revenues and in exchange they
want high quality, reliable products that represent the value for money.

Types of stakeholders:

There are two types of stakeholders. These are as follows:

i) Internal stakeholders, and
ii) External stakeholders

Internal Stakeholders: Internal stakeholders are stockholders and employees, including

executive officers, other managers, and board members. They all are inside the
organization. For example, stakeholders provide the enterprise with capital and in
exchange expect an appropriate return on their investment. Employees provide labor and
skills and in exchange expect commensurate income, job satisfaction, job security and
good working conditions.

External stakeholders: External stakeholders are all other individuals and groups that
have some claim on the company. They include customers, suppliers, governments,
unions, local communities, and general public.

Customers provide a company with its revenues and in exchange they want high quality,
reliable products that represent the value for money. Suppliers provide a company with
inputs and in exchange seek revenues and dependable buyers. Governments provide
rules, regulations, and environmental facilities and in exchange they expect tax. Union
provides productive employees and expects benefits for their member in proportion to
their contributions to the company. Local communities provide companies with local
infrastructure and in exchange want companies that are responsible citizens. The general
public provides the companies with national infrastructure and in exchange seeks some
assurance that the quality of life will be improved as a result of company’s existence.

Page 11
Here is the figure:

External Stakeholders The firm

Customers
Contributions
Suppliers
Governments
Unions Inducements
Local communities
General Public

Contributions Inducements

Internal Stakeholders
Stockholders
Employees
Managers
Board Members

Fig: Stakeholders and the enterprise

Stakeholders Impact Analysis

A company cannot always satisfy the claims of all stakeholders. The goal of different
groups may conflict. In that case, the company should identify the most important
stakeholders and give highest priority to satisfy their claims. Stakeholder impact analysis
can provide such identification: There are five steps in stakeholder impact analysis.

Page 12
The steps are:

Step-1: Identify all stakeholders of the organization

Step-2: Identify the interest and concern of stakeholders

Step-3: Identifying the claims of stakeholders

Step-4: Identify the stakeholders who are the most important from the
organization perspective

Step-5: Identify the resulting strategic challenges

The mission statement

The corporate mission statement is a key indicator of how an organization views the
claims of its stakeholders. It describes how a company intends to incorporate the claims
of stakeholders into its strategic decision making process. Thus, the mission statement
states a company’s formal commitment to its stakeholders.

The mission statement has three important elements. These are:

i) A statement of the overall vision or mission of the company;
ii) A statement that indicates the key philosophical values that
managers are committed; and
iii) The articulation of key goal that management believes.

Vision or Mission

The vision or mission (in practice the terms vision and mission are used interchangeably)
of a company is a formal declaration of what the company is trying to achieve over the
medium to long term.

Boeing:
“To be the number one aerospace company in the world and among the premier industrial
concerns in terms of quality, profitability and growth.”

Intel:
“Intel’s mission is to be the preeminent building block supplier to the new computing
industry worldwide.”

Page 13
Values: The values of a company state how managers intend to conduct themselves, how
they intend to do business, and what kind of organization they want to build. For
example, the Toyota, a car manufacturing company, wants to develop their values by
providing quality and durable product not a fashionable product. Such another example
may be the Bata. They believe in quality not in fashion.

Goal: A goal is a desired future state that a company attempts to realize. The purpose of
setting goals is to specify with precision what must be done if the company is to attain
it’s mission. Actually goal is a part of mission. For example, a company’s mission is to
be the number one company in the industries. Then it has to maintain a specific portion of
market share. This future target is known as goal.

Important characteristics of goal

There are four important characteristics of goal. These are:

i) Precise and measurable: It means that goals must be appropriate and

measurable. Otherwise, the company will be unable to assess its progress.
Suppose - a company’s goal is to increase 20% sales volume. It can be easily
calculated by managers.

ii) Address important issues: Important issue means the major function or
activity of the organization. So, it should be considered while setting the
goal.

iii) Challenging but realistic: The goals should be challenging so that the
employee has to work hard for achieving it. And it must also be realistic. For
example, a company’s present goal is: 20% sales increase. Next year it may
be 25% or 30%. But not 50%. Then it would be unrealistic

iv) Specify a time period: The last characteristic of goal is that it should specify
a time period. Deadlines can inject a sense of urgency into goal attainment
and act as motivator. If there is no time-specification, the management
activities will be slow.

Corporate governance and strategy

It includes two sub points:

-- Corporate governance problems

-- Corporate governance mechanisms

Page 14
Corporate governance problems: As the agents of stockholders, managers should
pursue the strategy that maximize the long run returns for stockholders. But in practice,
some managers take some strategies for their own interest, status and power rather than
the interest of stockholders. This gives rise to the corporate governance problem.
Corporate governance mechanisms: A number of governance mechanisms allow
shareholders to have some control over managers. These are called the corporate
governance mechanism.

They are:

i) Board of directors: Board members are directly elected by shareholders.

Typical board consist of a mix of inside directors and outside directors i.e.
directors from shareholders. That’s why, when a part of board members
try to adopt any unfair means, the other part oppose it.

ii) Stock based compensation: Here top-level executives are forced to

purchase the share at a predetermined price. Thus, they become the owner
of the company. So if the company faces some losses, a portion of that
loss is bared by the corporate level executives also.

iii) Corporate takeovers: Shareholder may sell their shares by a large

number. Then the supply of shares will be more, which will reduce the
price in share market. Then the value of the company will be worthless.

iv) Leveraged buyouts: The stockholder may replace their shares with
debentures. Then they will get a certain amount of interest at the end of
the year. This is a risk less investment.

Strategy and ethics

Ethics are the moral beliefs, ideologies and thoughts of human being. It is some how
beyond the law. It cannot be controlled by law. That’s why, it is said that, “Where law
ends, ethics starts.”

A strategy may enhance the welfare of some stakeholder groups but at the same time it
may harm others. For example, the govt. has recently stopped the activity of Adamjee
Jute Mill, the largest jut mill in the world. This decision has affected large number of
families for their survival. The jobless employees are passing a difficult situation with
financial threat in their life.

Therefore, the two lesson of studying business ethics are:

 Business decisions have an ethical component; and

 Managers must weigh the ethical implications of strategic decisions before

Page 15
 Choosing a course of action.
Shaping the ethical climate of an organization

To foster awareness that strategic decisions have an ethical dimension, a company must
establish an organizational climate that emphasizes the importance of ethics. This
requires at least three steps:

First, top managers have to use their leadership position to incorporate an ethical
dimension into the values they stress.

Second, ethical values must be incorporated into the company’s mission

statement.

Third, ethical values must be practiced or acted on. That means, the top
management have to implement hiring, firing and incentive system that explicitly
recognize the values in strategic decision-making.

--- 0 ---

Page 16
 Chapter – 4

External analysis: Opportunities and Threats

The organization has to operate its business within a surrounding environment i.e. the
external environment. Any change in that external environment affects the organization
either positively or negatively. If it affects positively, then we treat it as opportunity or
else it is the threat.

There are some models, which can help us to identify the opportunities and threats by
analyzing the external environment. The Five Forces Model is one of them.

Five forces model (Porter’s model)

An industry can be defined as a group of companies offering products or services that are
close substitute for each other. Close substitutes are products or services that satisfy the
same basic consumer needs.

Michael E. Porter of Harvard School of business has developed the five forces model to
identify the opportunities and threats of an industry. This model has five components.
These are as follows:

Risk of entry
by potential
competitors

Bargaining
Bargaining
power of Rivalry among established firms
Power of buyers
suppliers

Threat of
substitute
products

Fig: The Five Forces Model

Page 17
Let us have some details:

1. Risk of new entry by potential competitors: Potential competitors are those

who are thinking to entire in an Industry. So, for the existing companies, it will be
a great challenge.

2. Degree of rivalry among established companies within an industry: It means

how much competition exists in a particular industry. It can be measured by some
factors like monopoly or fragmented industry structure and the demand condition.
In monopoly market, the degree of rivalry is the lowest since there is only one
producer. But in fragmented industry structure, the degree of rivalry is more.

3. The bargaining power of buyers: There are some situations in which the buyers
are the most powerful. In that situations, the bargaining power remains in the
hand of buyers. We will see those situations later.

4. Bargaining power of suppliers: There may have some other situations in which
the suppliers are the most powerful. We will see these situations later.

5. Threat of substitute products: The organization always holds a threatening

position because at any time the new competitors may come up with any
substitute products, which may reduce the demand of the existing product.

According to Porter, a strong competitive force can be regarded as a threat since it

depresses profits and a weak competitive force can be viewed as an opportunity since it
allows a company to earn greater profits.

Entry barriers and its sources

Entry barriers are factors that make it costly for companies to enter an industry. A
company must to create some entry barriers if it wants to dominate in the market in well.
High entry barriers reduce or discourage new competitors to enter in the industry.
Existing company

New company

Entry
Barrier

Page 18
 Fig: Entry barrier restricts new companies to enter in the industry
Three main sources of entry barriers are as follows:

1. Brand loyalty: It is the buyer’s preference to purchase products from his

preferred company. A company can create brand loyalty through continuous
advertising of brand and company names, product innovation, providing good
quality products etc. If a company provides these facilities then customers are
more likely to buy from them.

2. Absolute cost advantages: Some companies, for their better skill and
management system, have a cost advantage facility. That means, they are able to
produce product with lower cost. This cost advantage acts a barrier for the new
companies.

3. Economies of Scale: Economies of scale are the cost advantages associated with
large company size or large production volume. If a company has a large volume
of production then, generally the will enjoy a cost reduction facility. This type of
facility can easily make barriers for new competitors.

4. Government regulation: Sometimes, government imposes some restrictions,

strict rules and regulation in entering into some industries. As a result, new
competitors cannot enter in that industry. For example, recently govt. imposed a
new rule about the paid up capital of Banks. For starting a new bank, it should
now maintain 100 crore Taka as paid up capital. Previously, it was only 40 crore
Taka. So, this type of rules and regulations will prohibit the new competitors to
enter in the existing industry.

Factors determining the extent of rivalry

The degree of rivalry among established firms is determined by three factors. These are
as follows:

i) Industry competitive structure;

ii) Demand conditions; and
iii) The height of exit barriers.

Industry Competitive Structure: Competitive structure refers to the number and size
distribution of companies in an industry. Here, size is determined with the amount of
investment. Structures vary from fragmented to consolidated and have different
implications for rivalry.

Page 19
 Fragmented
Highly Consolidated
Many firms One firm or one dominant firm (monopoly)
No dominant firm

Few firms
Shared dominance
(oligopoly)

Fig: The continuum of Industry Structure

A fragmented industry contains a large number of small or medium sized companies,

none of which in a position to dominate the industry. Here the degree of rivalry is high.

On the other hand, a consolidated industry contains a small number of large companies in
which a single company can dominate the whole industry. Here, the degree of rivalry is
low.

Demand condition: The demand of a product changes during the Product Life Cycle
(PLC). Demand conditions may have two forms: growing demand and declining demand.

Growing demand tends to reduce rivalry because all companies can sell more without
taking market share away from other companies. Therefore, there is no need to take any
aggressive strategy.

Declining demand tends to increase the rivalry because every company fights to maintain
revenues and market shares. Therefore, aggressive strategies will require for achieving
market share and profit.

Exit Barriers: Exit barriers are economic strategic and emotional factors that keep
companies in an industry even when returns are low. If exit barriers are high, companies
can become locked into an unprofitable industry in which overall demand is static or
declining.

Common exit barriers include the following:

a) Investments in plant and equipment that have no alternative uses and cannot be
sold off.

Page 20
 b) High fixed costs of exit. It includes the cost of dissolution of the company and
others.
c) Emotional attachments to an industry.
d) Economic dependence on the industry. The company has no other diversified
business and thus no other income source.

The bargaining power of buyers

It is a situation in which buyers are more powerful. A company’s buyers may be the
customers who ultimately consume its products. But they may also be the companies that
distribute its products to the end users such as retailers, whole sellers etc. According to
Porter, buyers are more powerful in the following circumstances.

1. When supply industry is composed of many small companies and the buyers
are few in number and large. That’s why no one can dominate the market. As a
result, buyers are powerful.
2. When buyers purchase in larger quantities.
3. When supply industry depends on the buyers for a large percentage of its total
orders.
4. When buyers can switch orders between supply companies at a low cost.
5. When it is economically feasible for the buyers to purchase the input from
several companies at once.
6. When buyers can use the threat to supply their own needs through vertical
integration as a device for forcing down prices.

Buyers can be viewed as a competitive threat when they have the bargaining power and
thus force the company to lower the price or improve the quality.

Bargaining power of suppliers

There may have some situations where suppliers are powerful. According to porter,
suppliers are more powerful in the following circumstances.

1. When the product that suppliers sell has few substitutes and is important to the
company.
2. When the company’s industry is not an important customer of the supplier. In
that case, the suppliers’ health does not depend on the company’s industry.
3. When suppliers’ respective products are differentiated to such an extent that it is
costly for a company to switch from one supplier to another.
4. When, to raise prices, supplier can use the threat of vertically integrating
forwarding into the industry and competing directly with the company.
5. When buying companies cannot use the threat of vertically integrating backward
and supplying their own needs as a means of reducing input prices.

Page 21
Suppliers can be viewed as a threat when they are able to force up the price of raw
materials or to reduce the quality of input they supply.

Strategic groups

Companies in an Industry, often differ from each other with respect to factors such as the
distribution channels they use, the market segments they serve, the quality of their
products, customer service, pricing policy, advertisement and promotion policy they
follow. So it is possible to observe the groups of companies in which each member
follows the same basic strategy as other companies in the group but follows a different
strategy than that of companies in other groups. These groups of companies are known as
strategic groups.

Example may be our banking industry. We observe two different groups of banks. In one
group there are Standard Chartered Bank, HSBC, AMEX, Dhaka Bank or Eastern Bank.
In another group there may have Rupali Bank, Prime Bank, Janata Bank, Pubali Bank or
Mercantile Bank. The target customer or market segments of each group is different.

These two groups are named as:

 Proprietary group; and

 Generic group

Each group has some distinctive and unique features. Here are some of them:

1. Proprietary group:

 Heavy R&D spending;

 Develop new proprietary and innovative products;
 Pursue high risk-high return strategy.

2. Generic group:

 Low R&D spending;

 Emphasis on price competition;
 Pursue low risk-low return strategy.

Page 22
 Price charged
High Proprietary
High group
- Stan Chart
- Stan Chart
- HSBC
- HSBC
- AMEX
- AMEX
- Dhaka Bank
- Dhaka Bank

- Rupali Bank
- Rupali Bank
- Prime Bank
- Prime Bank
- Janata Bank
- Janata Bank
- Pubali Bank
- PubaliGeneric
Bank
group
Low
Low

Low
Low RR&&DDSpending
High
Spending
High
Fig: Strategic groups in the Banking Industry of Bangladesh

Implications of strategic groups

Strategic groups have number of implications for identifying the opportunities and
threats. These are:

 A company’s closest competitors are those in its strategic group - not those in
other strategic groups. The competitor of Rupali bank may be the Pubali bank
not HSBC.

 Different strategic groups have different standings with respect to each of

porter’s five competitive forces.

For proprietary group – risk of new entry may not be the threat but
For generic group – it will act as a threat because their services are the basics of
a bank.

 If the environment of another strategic group is more attractive or feasible then

moving into that group can be regarded as an opportunity. But this will include
mobility barriers i.e. both the entry barriers and exit barriers.

Page 23
Limitations of five forces model

The five forces model has some shortcomings or limitations. Two important
shortcomings are as follows:

1. It presents a static picture of competitions that ignores the role of innovation of a

company.

Innovation is an intangible resource of a company. But Porter ignores this concept

in his model. Some companies have more innovative power than others. With the
help of this power they can overcome any of the threats.

2. It de-emphasizes the significance of individual company differences while over

emphasizing the importance of industry and strategic group.

Globalization

Globalization is a process of merging several economies into one integrated economy.

This is the global economy. The national territory or boundary is removed in
globalization. It is the most talked and discussed topic throughout the world during the
last decades.

Implications of globalization:

The trend toward the globalization has several important implications for competition
within an industry.

First: It is crucial for companies to recognize that an industry’s boundaries do not

stop at national borders. Because, many industries are becoming the member of
global economy every day. Potential competitors exist not only in a company’s
home market, but also in other national markets.

Second: The shift from national to global markets during the last twenty years has
intensified competitive rivalry in industry after industry.

Third: As competitive intensity has increased, so has the rate of innovation.

Companies strive to gain an advantage over their competitors by pioneering, new
products, processes and ways of doing business.

Finally: Even though globalization has increased both the threat of entry and the
intensity of rivalry within many formerly protected national markets, it has also
created enormous opportunities for companies based in those markets. The steady

Page 24
 decline in trade barriers has opened up many once-protected markets to
companies based outside them.
Chapter – 5

Internal analysis: Strengths and Weaknesses

We will study this chapter to identify the industry strengths and weaknesses. The
strengths and weaknesses will be identified by internal environment of the industry.
Efficiency, innovation, quality and customer responsiveness etc. are the main sources of
strength and weakness. If these factors are present in any industry, then it will be treated
as weakness. The competitive advantage is the central issue of the discussion.

Competitive advantage and value creation

Competitive advantages are the special advantages or benefits that a company or industry
has but do not have the other rivals. The industry, which has the competitive advantage,
can make some extra profit.

A company has a competitive advantage when its profit rate is higher than the average for
its industry. It has a sustained competitive advantage when it is able to maintain the high
profit rate over a number of years.

Two basic conditions determine a company’s profit rate and hence whether it has a
competitive advantage. These are:

 The amount of value the consumers place on the company’s goods or services;
 The company’s cost of production.

That’s why, for gaining competitive advantage, the company should try to create some
value for their products. Now let us see the value creation process.

V–P

V P–C V = Value to consumer

V = Value to consumer
P = Price
P = Price
P C = Costs of production
C = Costs of production
V – P = Consumer surplus
C V – P = Consumer surplus
C P – C = Profit margin
P – C = Profit margin

Page 25
 Fig: Value Creation
Here, in figure, the value of a product to a consumer may be V, the price that the
company can charge for that product is P, and the cost of producing that product is C.
The company’s profit margin is equal to P – C, while the consumer’s surplus is equal to
V – P. The company can make a profit so long as P > C.

The gap between V and C

The important thing is, the value created by a company is measured by the difference
between V and C (V – C). A company can create more values for its customers either by
lowering C or by making the product more attractive through superior design, quality and
the customer responsiveness, so that the consumers place a greater value on it (P
increases). So, the ultimate target of all strategic managers is to increase the gap between
V and C (V – C).

The Generic Building Blocks of Competitive Advantage

There are four generic building blocks of competitive advantage. They are:

 Efficiency
 Quality
 Innovation and
 Customer responsiveness

They are called the generic building blocks of competitive advantage because any
company can adopt them regardless of its industry or the products it produces. Here is the
figure:

Superior
Quality

Competitive
Superior Advantage Superior customer
efficiency Low cost responsiveness
Differentiation

Superior innovation

Page 26
 Fig: Generic Building Blocks of Competitive Advantage

Efficiency

Efficiency is the ratio between outputs and inputs. Symbolically,

Outputs
Efficiency = Inputs

The more efficient the company, the fewer the inputs required to produce a given output.
Therefore, for attaining competitive advantage, achieving efficiency is required. The
most important component of efficiency is the employee productivity. So, organization
should try to increase its productivity also.

Quality

Quality is a relative term. It is the degree to which the product or service meets the design
specification and customer expectations. Quality products are those that are reliable in the
sense that they do the job they were designed for. The high quality products increase the
value of those products in the eye of consumers.

Innovation

Innovation is the power or ability to develop something new with new idea. It includes
advances in the kinds of products, production process, management system, and
organizational structure. Innovation is perhaps the single most important building blocks
of competitive advantage.

Customer responsiveness

Customer responsiveness is the ability to satisfy the unique needs of customers. When a
company is more customer responsive then the customers will place more value on its
products.

Impact of Building Blocks on Unit Costs and Prices

The four generic building blocks have the impact on the unit cost and unit price of
products or services. It can be better expressed in following figure:

Page 27
 Efficiency

Lower unit cost

Innovation Quality

Higher unit price

Customer responsiveness

Fig: The impact of building blocks on unit costs and unit prices

In the above figure, wee see that, innovation and quality have the impact both on the unit
cost and unit price and efficiency and customer responsiveness have the impact on unit
cost and unit price only.

Durability of Competitive Advantage

When a company achieves the competitive advantage then a big question to them is that –
for how much time this company will be able to keep sustains this advantage? That
means how much durable the competitive advantage is? It depends on the following
factors:

1. Barriers to imitation
2. Capability of competitors and
3. Industry dynamism

Barriers to imitation

A company with a competitive advantage will earn higher than average profit. This profit
send a signal to rivals that the company is in progress. Then they will try to imitate or
copy the tangible and intangible resources such as the production process it follows and
the technology it uses etc. Therefore, the company should try to make a barrier so that the
other rivals cannot copy its resources.

Page 28
Barriers to imitation are the factors that make it difficult for a competitor to copy a
company’s distinctive competency. The greater the barrier to such imitation, the more
sustainable is a company’s competitive advantage.

The two important factors for achieving distinctive competency are:

 The resources (tangible) and

 The capabilities (intangible)

It is much more easy to imitate tangible resources than that of the intangible capabilities.
That’s why the strategic managers should give their concentration more on intangible
capabilities.

Capability of competitors

If the competitors have the capacity to imitate or copy the tangible and intangible
resources then the durability of competitive advantage will be shorter.

Industry dynamism

A dynamic industry environment is one that is changing rapidly. If the industry

environment is dynamic then the durability of competitive advantage will be shorter
because it is then easy to lose the present goodwill and status of an existing firm.

Avoiding Failure and Sustaining Competitive Advantage

Once a firm achieves the competitive advantage then a question may arise that how long
that firm will be able to sustain or hold this achievement. There are some mechanisms or
strategies to sustain the competitive advantage by avoiding the failure. They are the
followings:

Focus on the building blocks

To avoid failure and sustain competitive advantage the firm should continuously focus on
the four generic building blocks – efficiency, quality, innovation and customer
responsiveness.

Page 29
Institute continuous improvements

The only constant in the world is change. Today’s source of competitive advantage may
soon be rapidly imitated by capable competitors. Therefore, the firm should develop their
products and improve its efficiency, quality etc. on a regular basis.

Track best industrial practice and use benchmarking

Benchmarking is the process of measuring the company against the products, practices
and services of some of its most efficient global competitors. To sustain the competitive
advantage, the firm should practice suck type of measurement.

Overcome inertia

A further reason for failure is an inability to adapt changing conditions because of

organizational inertia. Inertia is a situation where organization finds it difficult to change
its strategy to adapt with the environment. So, the organization should avoid such kind of
complexity in their strategy.

***

Page 30