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Strategic Management Q: 1 Explain the evolution, role and importance of business policy and strategic management. What would be the role of manager in this age? Answer. Evolution of Strategic management:
In the previous days, talking about the 1920’s till 1930’s, the managers used to work out the day-to-day planning method. Till this time they do not concentrate about the future work. However after this period, managers have tried to anticipate and predict about the future happenings. They started using tools like preparation of Budgets and control system like capital budgeting. However these techniques and tools also failed to emphasize the role of future adequately. Then long-range planning came into picture, giving the idea of planning for the long-term future. But it was soon replaced by Strategic planning and later by Strategic managementa term that is currently being used to describe the process of Strategic decision-making. The first phase of the planning can be tracked in the mid of 1930’s. The planning at that period was done on the premises of Ad Hoc policy making. The reason why the need for planning arose at that period was that, many businesses had just about started operations and were mostly in a single product line and the ranges of operation were in a limited area. As these companies grew they expanded their products and also increased their geographical coverage. The method of using informal control and coordination was not enough and became irrelevant as these companies expanded. Thus arose a need to integrate functional areas. Framing policies to guide managerial actions covered this task of integration. Policies helped to have predefined set of actions, which helped the manager to make decisions. Policy-making became the way owners managed their business and it was considered their prime responsibility. Thus, the increasing environment changes in the 1930’s and 1940’s planned policy formation replaced Ad Hoc policy making, which led to the shifting of emphasis to the integration of the functional areas in a policy changing environment, showing an indication of the evolution of Strategic management. The Importance of Strategic management: 1. Strategic management is a wide concept and encompasses all functions and thus it seeks to integrate the knowledge and experience gained in various functional areas of management. 2. It enables one to understand and make sense of the complex interaction that takes place between different functional areas. 3. There are many constraints and complexities, which the Strategic management deals with. In order to develop a theoretical structure of its own, Strategic management cuts across the narrow functional boundaries. This in turn helps to create an understanding of how policies are formulated and also creating a
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Strategic Management solution of the complexities of the environment that the senior management faces in policy formulation.
Role of the Managers Managers need to be in control and therefore begin by gaining an understanding of the business environment. They can become more receptive to the ideas of the senior managements. Keeping in mind today’s scenario Mr. Kamat from ICICI underlined the following roles that are always expected from a manager: 1. Managing and understanding Information Technology, which is changing the face of the business. 2. Mangers need to be oriented towards shareholder value, as public and common investors own more and more companies. Managers would need to acquire skills to maximize shareholder value. 3. It is essential for today’s manager to foresee the future and track changes in customer expectations thus take a Strategic perspective. 4. Managers should have the capability of initiating and managing change through leadership and personal qualities of patience, commitment and perseverance. 5. Managers would have to provide speedy responses to environmental changes through information systems and organizational processes, because this responsiveness is very important due to the rapid changes in the environment and scenarios that the business faces. 6. They should be capable enough to deal with the chaotic situations and the complex relationship between decision variables. 7. Managers will need courage in decision making as the situation become complex and uncertain. They would have to develop courage to make unconventional decision. 8. Managers would have to maintain high ethical standards in business and focus on social responsibility.
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Strategic Management Q:2 What is Strategy? At what levels is it formulated? Answer. The concept of Strategy is central to understanding the process of strategic management. The term derived from a Greek word, has a literal meaning of “Art of the General”. Strategy in business has taken various connotations, based on the studies and views by various management expert. Some typical decisions that managers may have to look in the course of deciding on Strategy may involve the following situations: A) B) C) D) E) How to face the competition Whether to undertake expansion or diversification Whether to be board-based or have focus How to chart a turnaround How to ensure stability or should opt of disinvestments etc.
Lets take an example of a company, which has been successful and possible very profitable in the past. This company may start facing new threat in the environment because of its tremendous success-like the emergence of new competitors- then it has to rethink the course of action it had been following by formulating new Strategy for that. With such rethinking and environmental analysis, new opportunities may emerge and may be identified in the environment, which were not there in the past or were not noticed before and even there exists a potential to create opportunities. To take the advantage of these opportunities, the company might fundamentally rethink and also reassesses the ways and means, the actions it had been following and may like to alter and change its course of action. This kind of planning is termed as building Strategies. For a company, Strategy of-course is one of the most significant concepts to emerge in the field of management, and also one of the most essential requirements for survival and success. The term Strategy can be expressed as the determination of the basic long-term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals. Companies can out perform rivals only if can establish a difference, it can preserve and deliver greater value at a reasonable cost. Strategy thus rest on unique activities- the essence of Strategy is in the activities-choosing to perform activities differently or to perform different activities than rivals. It is important to remember that Strategy is a long term process, the shifts are costly and difficult to make. There are many loopholes like concentrating only on operations effectiveness will make you better but not good. Then there is the growth trap, means overemphasis on growth can dilute Strategy. Growth can come by deepening strategy. Leadership plays an important part in Strategy selection. Thus to conclude with, Strategy can be defined as -:
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Strategic Management • • • • • • A plan/course of action/decision rules which are leading to particular or direction. It is one of the most important company’s activities. It depends on the vision/mission of the company, where it would like to reach from its current position. It deals with future, which has uncertainties. It is concerned with the resources available today and those that will be necessary in the future for implementing a plan or following a course of action. It is about making trade-offs between its different activities, and creating a fit among these activities.
Levels of Strategy The Strategy would be planned at two levels: 1) Corporate Level: formulated by the Top level managers of the organization. 2) SBU’S : In order to segregate different units or segments, each performing a common set of activities, many companies are organized on the basis of operating divisions or simply, divisions. These divisions are termed as the Strategic Business Units or SBU’S. Strategy at the corporate level: Corporate Level Strategy is the board level strategies or also called as the plans of action at the company level to achieve what the company as a whole. It would also cover the various Strategy and functions performed by different SBU’S. This Strategy needs to be in line with the objectives of the company. This it would be the allocation of resources to each SBU and board level functional Strategies. To ensure this, there would be a need to have a coordination of different businesses of SBU’S. Strategy at SBU’S level: SBU level (or business) strategy will be in- line to achieve the objectives of SBU’S, which are derived and in line with the corporate/companies objectives. It would cover allocation of resources among functional areas along with functional strategies, which are again in line to functional strategies of the corporate level. There needs to be coordination between the corporate and SBU level both in objectives and functional strategies for optimization. Functional strategy : This type of Strategy at the SBU level deals with a relatively smaller area, providing objectives for a specific function in that SBU environment, like marketing, finance, productions, operations etc. These are the three levels at which strategic plans are made for most companies. But larger companies, may need to have Strategies at some other levels too. Larges companies like Conglomerates, or companies with multiple business in different countries often need a larger level for the group as a whole. Sometimes even relatively Nitin Sawhney (200310123) 5
Strategic Management smaller companies may often need a set of strategies at a level higher than the corporate level. This is termed as the Societal strategies. A Societal strategy is a generalized view or how the company perceives itself in its role towards the society or even a country or countries, in term of particular vision/mission statement, or even a need or a set of needs that it strive to fulfill. Corporate level strategies are then derived from these Societal Strategy. Mission/Vision level Corporate Level
Functional Level Strategy(Corporate) SBU1 SBU2 SBU3
Functional Level Strategies Operational Level
In the end we can conclude the levels as: • Operational level strategies are derived from functional level. • Functional Strategies operate under the SBU level . • SBU-level strategies are put into action under the corporate level strategy. • And corporate level is derived from the societal-level strategy of a corporation.
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Strategic Management Q:3 What are the issues in the Strategic decision making? Explain the role of various Strategists. Answer. There are many factors which are considered or kept in mind while framing out various Strategies on which the business should proceed, so as to achieve all the predefined targets and organizational goals. However there are some issues or difficulties that arise due to the process of framing of the organizational strategies: • A company would have different people in decision making at different periods of time. Decision often require judgments and thus is important to note that the person related factors are important in decision making and the decision make differ as that person changes. Again an individual does not take decisions alone. But often there is rumble in decisions, which could be between individual and group decision making. The decision taken by the group could be different from those that may be taken by the individual themselves. The company would need to decide on what criteria it should make its decision. Thus it need a process of objective setting, which serve as benchmarks for evaluation of the efficiency and effectiveness of the decision making process. There are three major criteria in decision making- the concept of maximization, the concept of satisfying, -the concept of incrementalism. Based on the chosen concept, Strategic decisions will differ. It is assumed that decision making is logical and thus there will be rationality in the decision making. In the context of Strategic decision making, it means that there would be a proper evaluation and then exercising a choice from among various alternative courses of action in such a way that it may lead to the achievement of the objectives in the best possible manner. As the situations are complex, straightforward thinking may not be effective. Creativity in decision making may be needed, thus the decision must be original and different. But also based on situation and circumstances there could be variability in decision making.
Role of the Strategist in framing the Company’s Strategies: There senior management is involved in the Strategic management. The role of different team players in the senior management can be described as follows: 1. Role of Boards of Directors: They are the supreme authority in a company, who represent the owners/shareholders and sometimes lenders. They are supposed to direct and are responsible for the governance of the company. The Companies Act and other laws also bind them their actions. The board though is supposed only to Nitin Sawhney (200310123) 7
Strategic Management direct, they do get involved in a lot of operational issues also. Professionals on the Board of Directors help to get new perspectives and provide guidance. They are the link between the company and the environment. Role of the Chief Executive Officer: He is the most important strategist and responsible for all aspects right from formulation/implementation to review of strategic management. The CEO is the chief architect of the organizational purpose. He is the supreme leader, builder, motivator and mentor. CEO is the link between the company and the Board of Directors and is also responsible for managing external environment and relationships. Role of Entrepreneurs: They are the ones who start new businesses and hence are independent in thought and actions. Often even internally, a company can promote entrepreneurial sprit. The entrepreneurs often provide a sense of direction and are active in implementation. Role of Senior Management: They would either look after strategic management as responsible for certain areas or as a part of the team will work upon planning those strategies. They are answerable to the Board of Directors and the CEO. Role of SBU level Executives: They would be more focused on their product line/business and also on co-ordination with the other SBU and with other senior management. They would be more in the implementation role. Role of the Corporate Planning staff: They would normally provide administrative support, tools and techniques and be a co-ordination function of the strategy planning team. Role of Consultant: Consultants may be hired for a specialized new business or expertise or even to get an unbiased opinion on the business and the strategy. Role of the Middle Level Managers: They are the vital links in planning strategies and implementation. Though they are not actively involved in formulation of strategies but are often developed to be the future top management.
4. 5. 6. 7. 8.
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Strategic Management Q: 5 Explain Core Competencies, Strategic Intent, Stretch, Leverage and Fit. Answer. Core Competencies: An organization, on the basis of its resources, the capabilities to convert the resources into output and the behavior of these resources and capabilities, develops certain strengths and weaknesses which when combined lead to Synergistic Effects. Synergy, which means the whole is greater than the sum of the parts, manifest themselves in advantages over the competition in term of organizational competencies. An organization develops its competency over a period of time. It helps them in developing a fine art of competing with its rival, and over time it tends to use competencies exceedingly well. The capability to use competencies exceedingly well turns them into core competencies. There is a distinction between the three terms: competencies, core competencies and distinctive competencies. The difference lies in the degree of uniqueness associated with the net synergetic effects occurring within the organization. Among the three the most popular one is Core Competency. Core competence is the collective learning of an organization, especially how to coordinate diverse production skills and integrate multiple steams of the technologies and in the organization of work and delivery of value. It is communication, deep involvement and commitment to work across organizational boundaries across all levels and functions. A diversified company is like a large tree. Trunk and large limbs are the core products, leaves, fruits and flowers are the end products. What is easily not visible and apparent are the roots of the tree which are hidden from the view but still provide the substance, nourishment and stability. The roots are just like core competence. Core Competency does not diminish with the usage unlike the physical assets. They act as the glue that bind existing businesses and guide market entries instead of market attractiveness. There are three tests that can be used to identify core competency: 1. It provides potential access to a wide variety of markets and diverse products. 2. It makes a significant contribution to the perceived benefits of the end products. 3. It is difficult for the competitors to imitate, especially if it is a complex mixture of individual technologies and production skills.
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Strategic Management Strategic Intent: To develop an effective strategy, a firm should have Strategic Intent. Invariably companies look at competition traditionally i.e. focusing on the existing position and resources, rather than at the resourcefulness of the competition and their pace at which they are building competencies. Accessing the current tactical advantages of known competitors will not help to understand the resolution, stamina and inventiveness of potential competitors. Strategic Intent envisions a desired leadership position and establishes the criterion the organization will judge its progress. It is simply something more than just unfettered ambition. It captures the essence of winning and is stable over time. It sets a target that requires personal efforts and commitment. The most important question the companies ask is not, “how will next year be different?” but they ask, “ What we must do next year to get closer to our Strategic Intent?”. Strategic Intent implies a sizeable stretch for an organization. Current capabilities and resources will not suffice. This will force inventiveness to make the most of the existing resources. It will create a sense of urgency and force a competitor’s focus at all level through widespread use of competitive intelligence. The companies will invest and train employees with the skills they need to work effectively. The management will keep on invoking challenges, but also not overwhelm the employees with unreasonable pressure and demand. Companies with good Strategic Intent know the importance of documenting failure. Instead of blaming people, they are more interested in the management reasons and the orthodoxy that may have led to the failure. Thus Strategic Intent is what the organization strives for. Cannon wanted to beat Xerox. Reliance group wants to take over the Birla group one day. These are some of the Strategic Intents. It is an obsession with a particular organization. Stretch, Leverage and Fit: To achieve Strategic Intent, a company is required to stretch. As of today there is a misfit between resources and aspirations. So instead of looking at resources, company should look for resourcefulness. To achieve the Strategic Intent, company will stretch and make more innovative use of its available resources. But now this leads leveraging of the firms resources. Leveraging refers to concentrating the firm resources only to its Strategic Intent. This includes accumulating learning, experiences and competencies, in a manner that a scarce resource base can be stretched to meet the aspirations that an organizational resources to its environment. The Strategic Fit is the traditional way of looking at strategy. Strategy is taken as a compromise between what the environment has got to offer in terms of opportunities and the counteroffer that the organization makes in the form of its capabilities. Under fit, the Strategic Intent is conservative and seems to be more realistic, but the firm may not be
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Strategic Management aware of the potential, under stretch and leverage it could be improbable, even idealistic, but then the firm look at something far beyond present possibilities and look at the potential possibilities.
Q:6 Write a detailed note on Goals and Objectives. Answer. Goals: Goals are the target that an organization hopes to accomplish in a future period of time. Goals are clear and unambiguous and often an organization sets a combination of goals, like financial and non financial, quantitative and qualitative. Goals are more on an organizational level and thus in this sense they are broad in nature. So an organization could set goals on turnover, profits, returns on assets/equity, it could also have market share, customer satisfaction, employee satisfaction, etc. as its goals. The important thing is that too many goals can be confusing and can often lead to contradictions. So goals should be limited and manageable, clear, achievable and consistent with each other. Objectives: Objectives are laid down for specifying how the organizations goals would be achieved. They are concrete and specific in contrast to goals, which are generalized at the company wide level. In the manner objectives make the goals operational. While goals may be qualitative, objectives tend to be more quantitative in specification. In this way they are measurable and comparable. Objectives are set and in a way they are defined what the organization has to achieve for its employees, shareholders, customers etc. Since objectives are set with the environment in mind they define its relationship with its environment. Objectives are framed in line with the vision/mission of the organization. This consistency helps the organization to pursue its vision and mission. Objectives become the basis for strategic decision making, as the right strategies need to be formulated and implemented for achieving the objectives. Objectives are invariably quantitative. They provide clear measures and standards for performance. Characteristics of Objectives: In order to make all the employees pursue the objectives, they should be having the following characteristics: • Understandable
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• • • • •
Have a clearly defined time frame Concrete and Specific Actionable Measurable Controllable
Factors to be considered while setting the firms objectives: 1. Specificity-: They should be specific for the level they are being set. If they are too broad, they will be confused by the goals and if they are too narrow, will be confused by targets. Corporate objectives, SBU objectives, Operational level objectives need to be clearly demarked. 2. Multiplicity-: Objectives invariably are for different performance areas, hence there should be multiplicity of objectives. 3. Periodicity-: They should be formulated for different time frames, typically short term, medium term and long term and should be linked and consistent. 4. Verifiability-: Ability to check whether objectives are achieved or not is very important. Thus it requires the right measures for quantification. 5. Environment-: It should be checked whether the objectives have taken environment into account. Also there is a need to check whether they are fulfilling the needs for the stakeholders in business like customers, shareholders, employees, suppliers, etc. 6. Reality-: They should be looking at the reality of the organization’s resources and internal constraints, including politics and power relationships.
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Strategic Management Q8. Explain functional planning. Answer: Definition & Purpose A functional plan reflects a Department-wide picture of how a specific function will contribute to the achievement of the Department’s corporate priorities and defense tasks. It is required only of those Senior Managers who are tasked with a functional or horizontal responsibility. Senior Managers with functional/horizontal responsibility are typically: • Assistant Deputy Minister (Human Resources - Military) (ADM(HR-Mil)); • Assistant Deputy Minister (Human Resources -Civilian) - (ADM(HR-Civ)); • Assistant Deputy Minister (Infrastructure & Environment) (ADM(IE)); • Assistant Deputy Minister (Material) (ADM(Mat)); • Assistant Deputy Minister (Science & Technology) (ADM(S&T)); and, • Assistant Deputy Minister (Information Management) (ADM(IM)). The various components of functional planning are depicted below:
Functional planning encompasses both long-term and short-term intentions.
For example, a long-term plan for human resources might cover a 5 to 10 year timeframe because necessary change may take that long to accomplish.
Some aspects of the functional plan, however, may be accomplished much sooner. Accordingly, each functional plan is expected to include both timely and timeless elements: Nitin Sawhney (200310123) 13
Aspects that may change annually; and, Aspects that may change rarely.
Long Term Functional Plan: Each function in DND/CF has:
• • • •
Different responsibilities; Levels of authority; Risks; and, Issues.
As a result, functional plans will not necessarily be similar in content or format, but will serve the specific needs of those Senior Managers who are tasked with a functional or horizontal responsibility. Accordingly, it is recognized that functional/horizontal planning is an iterative process subject to change. Long-term functional plans are presently under development in several organizations. For those Senior Managers prepared this year to develop a pilot functional plan, the plan should:
• • •
Incorporate consultation and review with all stakeholders; Receive DM/CDS endorsement; and, Provide for an integrated and coordinated approach to the functional support of the Defence Mission.
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Strategic Management Q9. Explain the various types of Expansion Strategies. Answer: Expansion is one the common goals which all organization aim at. Thus expansion strategies are most popular and common among the other strategies which the corporate of the organization designs. Companies aim for substantial growth. A growing economy, burgeoning markets, customer seeking new ways of need satisfaction, and emerging technologies offer ample opportunity for the companies to seek expansion. When a company follows the expansion strategy it aims at high growth. An expansion strategy has a significant and profound impact on a company’s internal structure and processes, leading to changes in most of the aspects on internal functioning. Expansion strategy is designed when the environment demands increase the pace of the activity, due to the increase in market size and large opportunities being available. There may be enough resources generated from existing operations that companies feel that the best way to utilize these resources is to go for expansion. There way many ways an Expansion Strategy can be undertaken. Some of them are listed below-: Expansion through Concentration Concentration involves converging resources in one or more of the company’s businesses in terms of there respective customer needs, customer functions or alternative technologies either singly or jointly. For the purpose of expansion, the method of concentration is the organization’s first preference. The simple reason for that could be all the companies would like to do more of what they are doing now. A company that is familiar with the industry would naturally like to invest more on the known businesses rather than the unknown ones. The method of concentration can be carried out by various ways-: • A company may attempt market penetration type of concentration • It may also try and attract new users or customers for the existing products resulting in a market development type of concentration. • It may also introduce newer products in the existing markets by concentration on product development. We cannot overlook the various advantages that the concentration strategy has, like-: 1. It involves very few organizational changes. 2. It is less threatening and more comfortable in staying with the present business. 3. It also enables the companies to specialize by gaining an in-depth knowledge of these businesses and thus master the knowledge. 4. Systems and processes within the company can be easily developed. 5. The decision-making has a high level of predictability.
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Strategic Management But with the above advantages there are also some limitations of the concentration strategies. 1. Concentration strategies are heavily dependent on the industry, so adverse conditions in an industry can do affect a company if it is intensely concentrated. 2. Factors such as products obsolescence, fickleness of markets and emergence of newer technologies can also be threats. 3. Also doing too much of a known thing make create an organizational inertia; managers may not be able to sustain interest and find the works less challenging and less stimulating and more boring. 4. Concentration strategies may lead to cash flow problems that may pose a dilemma before a company. For expansion through concentration large cash inflows are required for building up assets while the business is growing, but when the business mature, company often faces a cash surplus with little scope for investing in the present business. Expansion through Integration Integration basically means combining of activities on the basis of the value chain related to the present activity of the company. Sets of interlink activities performed by an organization right from the procurement of the basis raw materials to right down to the marketing of the finished products is a Value Chain. So a company may need to move up or move down the value chain to expand its business. Integration results in a widening of the scope of the business definition of a company. Integration is also a part of the diversification strategies as it involves doing something different from what the company has been doing previously. Typically in a process based company like petrochemicals, steel, textile or hydrocarbons there are many good examples of integrated companies like the Reliance Group. This company deals with the product value chain extending from basic raw material to the ultimate consumer. There are certain conditions under which a company adopts integration strategy for expansion. The most common condition is the ‘Make’ or ‘Buy’ decision. In this kind of a situation the cost of making an item, used in the manufacturing of one’s own product is to be evaluated against the cost of procuring or buying that item from suppliers. If the cost of making the product is less, the company moves up the value chain to make the item itself. This is an example of Vertical (backward) Integration. For e.g. an automobile company starts with a steel mill or a tyre manufacturing plant for its own cars. Like wise, if the cost of selling the finished product is lesser than the price paid by the company to the sellers to do the same thing then it is profitable for the company to move down on the value chain and start selling the item itself.
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Strategic Management This is an example of Vertical (forward) Integration. For e.g. Titan, Bata set up their own retail outlets. We may also come across another type of Integration, known as Horizontal Integration Its when a company serving the same customer with well additional products that are different from the earlier products in any of the terms of their respective customer needs, customer functions or alternative technologies either singly or jointly. For e.g. a hardware manufacturer starts developing software also or a car manufacturer getting into vehicle insurance. Expansion through Diversification Diversification is one of the most popular strategies widespread in the industry as it involves all the dimensions of strategy. Diversification involves a drastic change in the business in term of customer functions, customer groups, or alternative technologies of one or more of a company ‘s businesses in isolation or in combination. There are three basic and important reasons why diversification strategies are adopted-: 1. They minimize the risk by spreading it over several businesses. 2. It can be used to capitalize on organizational strengths or minimize weakness. 3. This can become the only way out for expansion, if the environmental and regulatory factors have blocked the other alternative for growth. Diversification Strategies are of two types -: Concentric Diversification is termed for that diversification, when a company takes up an activity in such a manner that it is related to the existing business. Conglomerate Diversification is there when a company takes up an activity for expansion that is not at all related to the existing business.
Expansion through Cooperation There are various processes by which the expansion through cooperation can take place. Some of them are listed below. Mergers -: Mergers can be termed as merging of two firms in such a manner that both of them will be getting the benefit of that. In a Merger there is a buying firm, whose interest in merger is because it wants to increase the value of the organization’s stock. It wants to increase the growth rate by making a good investment.
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Strategic Management Apart from a buyer, there is also a seller in a merger whose wants that so as to increase the value of the owner’s stock and investment and also wants to get the benefit from tax concessions. Joint Ventures -: Joint ventures are common within industries and in various countries, but they are especially useful for entering the international markets. There are various reasons why a need for joint venture arises -: • When carrying out business is uneconomical for an organization alone. • When the risk of the business has to be shared and, is reduced for the participation companies. • When there is a need to bring together the distinctive competence of two or more organizations.
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Strategic Management Q:11 What are the advantages and disadvantages of Mergers? What are joint ventures and Strategic Alliances? When are they feasible? Answer. Merger -: Merger is an external growth Strategy. A merger means combination of two or more firms into one. It may occur in two ways -: Take over or acquisition of one company by another. Creation of a new company by complete consolidations of two or more units. While the former is termed as Absorption, the latter is known as Amalgamation. Merger however has many advantages and disadvantages. Advantages of Mergers 1. 2. 3. 4. 5. A merger provides economies of large-scale operations. Better utilization of funds can be made to increase profits. There always remains a possibility of diversification. More efficient use of available resources can be made. Merging them with strong and efficient concerns can rehabilitate sick or unproductive firms. 6. It is often cheaper to acquire an existing unit than to set up a new one. 7. It is possible to gain quick entry into new lines of business. 8. It can provide access to scarce raw materials and distribution network and managerial expertise. Disadvantages of Mergers Mergers may not be successful due to the following drawbacks -: • • The combined enterprise may be unwieldy. Effective co-ordination and control becomes difficult. As a result profitability and efficiency may decline. Mergers give rise to monopoly and concentration of economic power, which often operate against the interests of the society and country. • •
Joint Ventures When two or more independent firms together establish a new enterprise, contribute to the total equity capital and participate in its business operations, it is known
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Strategic Management as a Joint Venture. A joint venture is a temporary partnership between two or more companies for a specified purpose. Firms within a country as the firms from different Countries may participate in a joint venture. There are several examples of Joint ventures in India -: • • • • Tata Iron and Steel Co. joined hands with IPICOL a wholly owned corporation of the Govt. of Orissa to promote IPITATA Sponge Iron Ltd. in 1984. Tungabhadra Industries Ltd. of India and Yamaha Motor Company Ltd. of Japan promoted Birla Yamaha together. Eicher Goodearth Ltd. and Mitsubishi Motors Corporation of Japan set up the Eicher Motors ltd. DCM and Daewoo Corporation of Korea have established DCM Daewoo Motors Ltd.
Joint Ventures are likely to be more feasible or appropriate under the following circumstances -: 1. When an activity is uneconomical for a single firm. 2. When the risk of business has to be shared and reduced for the participating firms. 3. When the distinctive competence of two or more firm can be brought together. 4. When setting up a venture requires overcoming hurdles such as import quotas, tariffs, nationalistic political interests, and cultural road blocks. Thus Joint Ventures are an effective growth strategy when development costs have to be shared, risks are to be spread out and expertise has to be combined to make effective use of resources. Strategic Alliances A Strategic Alliances is one when two or more entities join hands for mutual benefits. They unite to pursue a set of agreed goals. They are interdependent for these goals, but are otherwise independent. The entities share the benefits of the alliance and control over the performance of interdependence tasks and contribute on a continuing basis in one or more key strategic areas like marketing, technology etc. A Strategic Alliance is therefore a cooperative arrangement between two or more companies when a common strategy is developed in unison and all parties develop a winwin attitude. The relationship is reciprocal, with each partner prepared to share specific strengths with each other. There is a pooling of resources, investments, and risks occur for mutual (rather than individual) gain. This could help in entering new markets, reducing manufacturing costs, developing and diffusing technology.
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Strategic Management Q: 14 What do you understand by Strategic Evaluation and Control? Answer The purpose of Strategic Evaluation is to evaluate the effectiveness of the strategy in achieving organizational objectives. Thus it is process of determining the effectiveness of a given strategy in achieving the organizational objectives and taking corrective action whenever required. Strategic Evaluation operates at two levels: • Strategic Evaluation, where the concentration is more on the consistency of the strategy with the environment. • Operational Evaluation, where the effort is directed at the assessing how well the organization is pursuing a given strategy. The importance of Strategic evaluation lies in its ability to coordinate the tasks performed by the individual managers, divisions or SBUs, through the control of performance. In the absence of evaluation, individual managers may pursue goals, which are inconsistence with the overall objectives. There is a need for feedback, appraisal and reward; check on the validity of strategic choice; congruence between decision and intended strategy; and creating inputs for new strategic planning. Strategic evaluation helps to keep a check in the validity of a strategic choice. An ongoing process of evaluation would in fact provide feedback on the continued relevance of the strategic choice made during the formulation phase. This is due to the efficiency of the strategic evaluation to determine the effective of the strategy. Control Every Strategy is based on certain assumptions about environmental and organizational factors. Some of these factors are highly significant and any change in them can affect the strategy to a great extent. Premise control is necessary to identify the key assumptions, and keep track of any change in them so as to access their impact on strategy and its implementation. It enables the strategist to take corrective action at the right time. Control should involve only the minimum amount of information. Too much information tends to create confusion. Control should monitor only the managerial activities and results even if the evaluation id difficult to perform. Long term and short term controls should be used so that a balanced approach to evaluation can be adopted and controls should aim at pinpointing exceptions. The 80:20 principles, where 20 percent of the activities result in 80 percent of the achievement, needs to be emphasized. Rewards for meeting or exceeding standards should be emphasized so that, managers are motivated to perform. Unnecessary emphasis on penalties tends to pressurize the managers to rely on efficiency rather than effectiveness.
Nitin Sawhney (200310123)
Strategic Management Q:11 Write a note on Integration and Diversification. Answer Integration Integration basically means combining of activities on the basis of the value chain related to the present activity of the company. Sets of interlink activities performed by an organization right from the procurement of the basis raw materials to right down to the marketing of the finished products is a Value Chain. So a company may need to move up or move down the value chain to expand its business. Integration results in a widening of the scope of the business definition of a company. Integration is also a part of the diversification strategies as it involves doing something different from what the company has been doing previously. Typically in a process based company like petrochemicals, steel, textile or hydrocarbons there are many good examples of integrated companies like the Reliance Group. This company deals with the product value chain extending from basic raw material to the ultimate consumer. There are certain conditions under which a company adopts integration strategy for expansion. The most common condition is the ‘Make’ or ‘Buy’ decision. In this kind of a situation the cost of making an item, used in the manufacturing of one’s own product is to be evaluated against the cost of procuring or buying that item from suppliers. If the cost of making the product is less, the company moves up the value chain to make the item itself. This is an example of Vertical (backward) Integration. For e.g. an automobile company starts with a steel mill or a tyre manufacturing plant for its own cars. Like wise, if the cost of selling the finished product is lesser than the price paid by the company to the sellers to do the same thing then it is profitable for the company to move down on the value chain and start selling the item itself. This is an example of Vertical (forward) Integration. For e.g. Titan, Bata set up their own retail outlets. We may also come across another type of Integration, known as Horizontal Integration Its when a company serving the same customer with well additional products that are different from the earlier products in any of the terms of their respective customer needs, customer functions or alternative technologies either singly or jointly. For e.g. a hardware manufacturer starts developing software also or a car manufacturer getting into vehicle insurance. Diversification Diversification is one of the most popular strategies widespread in the industry as it involves all the dimensions of strategy. Diversification involves a drastic change in the business in term of customer functions, customer groups, or alternative technologies of one or more of a company ‘s businesses in isolation or in combination.
Nitin Sawhney (200310123)
Strategic Management There are three basic and important reasons why diversification strategies are adopted-: 1. They minimize the risk by spreading it over several businesses. 2. It can be used to capitalize on organizational strengths or minimize weakness. 3. This can become the only way out for expansion, if the environmental and regulatory factors have blocked the other alternative for growth. Diversification Strategies are of two types -: Concentric Diversification is termed for that diversification, when a company takes up an activity in such a manner that it is related to the existing business. Conglomerate Diversification is there when a company takes up an activity for expansion that is not at all related to the existing business.
Nitin Sawhney (200310123)