SM/U1 Topic 1 Meaning Nature, Scope, and Importance

of Strategy
Strategy
Strategy is an action that managers take to attain one or more of the organization’s goals. Strategy can
also be defined as “A general direction set for the company and its various components to
achieve a desired state in the future. Strategy results from the detailed strategic planning
process”.

A strategy is all about integrating organizational activities and utilizing and allocating the scarce
resources within the organizational environment so as to meet the present objectives. While planning
a strategy it is essential to consider that decisions are not taken in a vaccum and that any act taken by
a firm is likely to be met by a reaction from those affected, competitors, customers, employees or
suppliers.

Strategy can also be defined as knowledge of the goals, the uncertainty of events and the need to take
into consideration the likely or actual behavior of others. Strategy is the blueprint of decisions in an
organization that shows its objectives and goals, reduces the key policies, and plans for achieving
these goals, and defines the business the company is to carry on, the type of economic and human
organization it wants to be, and the contribution it plans to make to its shareholders, customers and
society at large.

Nature of Strategy
Based on the above definitions, we can understand the nature of strategy. A few aspects regarding
nature of strategy are as follows:

• Strategy is a major course of action through which an organization relates itself to its environment
particularly the external factors to facilitate all actions involved in meeting the objectives of the
organization.
• Strategy is the blend of internal and external factors. To meet the opportunities and threats provided
by the external factors, internal factors are matched with them.
• Strategy is the combination of actions aimed to meet a particular condition, to solve certain problems
or to achieve a desirable end. The actions are different for different situations.
• Due to its dependence on environmental variables, strategy may involve a contradictory action. An
organization may take contradictory actions either simultaneously or with a gap of time. For example,
a firm is engaged in closing down of some of its business and at the same time expanding some.
• Strategy is future oriented. Strategic actions are required for new situations which have not arisen
before in the past.
• Strategy requires some systems and norms for its efficient adoption in any organization.
• Strategy provides overall framework for guiding enterprise thinking and action.

Features of Strategy
Strategy is Significant because it is not possible to foresee the future. Without a perfect foresight, the
firms must be ready to deal with the uncertain events which constitute the business environment.

Strategy deals with long term developments rather than routine operations, i.e. it deals with
probability of innovations or new products, new methods of productions, or new markets to be
developed in future.

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 Strategy is created to take into account the probable behavior of customers and competitors. Strategies
dealing with employees will predict the employee behavior.

The Importance of Strategy

Having a clear and focused strategy is critically important to the success of your business, and without
a well-defined strategy, yours may stall or even fail.

If you can take the emotion out of your decision making process, you’ll have a business and a team
that is more focused, more productive, and more profitable.

A successful strategic plan does the following:

1. Provides Direction and Action Plans

It establishes in a clear, concise and strategically sound way the direction for the organization how
this will be achieved, including detailed action plans

2. Prioritizes and Aligns Activities

Strategic planning is about making choices, establishing priorities, allocating resources to strategic
initiatives and coordinating to achieve desired results.

3. Defines Accountabilities

It defines clear lines of accountability and timelines for achieving expected results on the agreed
strategic initiatives.

4. Enhances Communication and Commitment

In clarifying the vision and accountabilities, the strategic plan increases the alignment of all
organizational activities and fosters commitment at all levels.

5. Provides a Framework for Ongoing Decision Making

Since all decisions should support the strategy, the strategy and the strategic initiatives are the
reference point for decision-making.

You have to have a plan for day to day business, but you also need to spend time looking and
listening to the changes that are happening in your industry. It is a matter of having both a daily plan
to get things done and an overarching strategy to guide those daily plans so you make progress
towards your long-term goals.

M/U1 Topic 2 Meaning Nature, Scope,

and Importance of
Strategic Management
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THESTREAK23 DEC 2018 2 COMMENTS
Strategic Management
Strategic Management is all about identification and description of the strategies that managers can
carry so as to achieve better performance and a competitive advantage for their organization. An
organization is said to have competitive advantage if its profitability is higher than the average
profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a manager
undertakes and which decides the result of the firm’s performance. The manager must have a
thorough knowledge and analysis of the general and competitive organizational environment so as to
take right decisions. They should conduct a SWOT Analysis (Strengths, Weaknesses, Opportunities,
and Threats), i.e., they should make best possible utilization of strengths, minimize the organizational
weaknesses, make use of arising opportunities from the business environment and shouldn’t ignore
the threats.

Strategic management is nothing but planning for both predictable as well as unfeasible
contingencies. It is applicable to both small as well as large organizations as even the smallest
organization face competition and, by formulating and implementing appropriate strategies, they can
attain sustainable competitive advantage.

It is a way in which strategists set the objectives and proceed about attaining them. It deals with
making and implementing decisions about future direction of an organization. It helps us to identify
the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls the business and the
industries in which an organization is involved; evaluates its competitors and sets goals and strategies
to meet all existing and potential competitors; and then reevaluates strategies on a regular basis to
determine how it has been implemented and whether it was successful or does it needs replacement.

Strategic Management gives a broader perspective to the employees of an organization and they can
better understand how their job fits into the entire organizational plan and how it is co-related to other
organizational members. It is nothing but the art of managing employees in a manner which
maximizes the ability of achieving business objectives. The employees become more trustworthy,
more committed and more satisfied as they can co-relate themselves very well with each
organizational task. They can understand the reaction of environmental changes on the organization
and the probable response of the organization with the help of strategic management. Thus the
employees can judge the impact of such changes on their own job and can effectively face the
changes. The managers and employees must do appropriate things in appropriate manner. They need
to be both effective as well as efficient.

One of the major role of strategic management is to incorporate various functional areas of the
organization completely, as well as, to ensure these functional areas harmonize and get together well.
Another role of strategic management is to keep a continuous eye on the goals and objectives of the
organization.

Nature and Scope of Strategic Management

Strategic management is both an Art and science of formulating, implementing, and evaluating, cross-
functional decisions that facilitate an organization to accomplish its objectives. The purpose of
strategic management is to use and create new and different opportunities for future. The nature of
Strategic Management is dissimilar form other facets of management as it demands awareness to the
“big picture” and a rational assessment of the future options. It offers a strategic direction endorsed
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 by the team and stakeholders, a clear business strategy and vision for the future, a method for
accountability, and a structure for governance at the different levels, a logical framework to handle
risk in order to guarantee business continuity, the capability to exploit opportunities and react to
external change by taking ongoing strategic decisions.

Strategic management process encompasses of three phases.

1. Establishing the hierarchy of strategic intent

2. Strategic formulation.
3. Implementation
4. Evaluation and control.

Strategy formulation comprises of developing a vision and mission, identifying an organization’s

external opportunities and threats, determining internal strengths and weaknesses, establishing long-
term objectives, creating alternative strategies, and choosing particular strategies to follow.

Strategy implementation needs a company to ascertain annual objectives, formulate policies, stimulate
employees, and assign resources so that formulated strategies can be implemented. Strategy
implementation includes developing a strategy-supportive culture, creating an effective organizational
structure, redirecting marketing efforts, preparing budgets, developing and utilizing information
systems, and relating employee reward to organizational performance.

Strategy evaluation is the last stage in strategic management. Managers must know when particular
strategies are not working well. Strategy evaluation is the main process for obtaining this information.

Figure: Phases of Strategic management process (Source: Azhar Kozami, 2002 )

Importance of Strategic Management

• Planning or designing a strategy involves a great deal of risk and resource assessment, ways to
counter the risks, and effective utilization of resources all while trying to achieve a significant
purpose.
• An organization is generally established with a goal in mind, and this goal defines the purpose for its
existence. All of the work carried out by the organization revolves around this particular goal, and it
has to align its internal resources and external environment in a way that the goal is achieved in
rational expected time.

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• Undoubtedly, since an organization is a big entity with probably a huge underlying investment,
strategizing becomes a necessary factor for successful working internally, as well as to get feasible
returns on the expended money.
• Strategic Management on a corporate level normally incorporates preparation for future opportunities,
risks and market trends. This makes way for the firms to analyze, examine and execute administration
in a manner that is most likely to achieve the set aims. As such, strategizing or planning must be
covered as the deciding administration factor.
• Strategic Management and the role it plays in the accomplishments of firms has been a subject of
thorough research and study for an extensive period of time now. Strategic Management in an
organization ensures that goals are set, primary issues are outlined, time and resources are pivoted,
functioning is consolidated, internal environment is set towards achieving the objectives,
consequences and results are concurred upon, and the organization remains flexible towards any
external changes.
• As more and more organizations have started to realize that strategic planning is the fundamental
aspect in successfully assisting them through any sudden contingencies, either internally or externally,
they have started to absorb strategy management starting from the most basic administration levels. In
actuality, strategy management is the essence of an absolute administration plan. For large
organizations, with a complex organizational structure and extreme regimentation, strategizing is
embedded at every tier.
• Apart from faster and effective decision making, pursuing opportunities and directing work, strategic
management assists with cutting back costs, employee motivation and gratification, counteracting
threats or better, converting these threats into opportunities, predicting probable market trends, and
improving overall performance.
• Keeping in mind the long-term benefits to organizations, strategic planning drives them to focus on
the internal environment, through encouraging and setting challenges for employees, helping them
achieve personal as well as organizational objectives. At the same time, it is also ensured that external
challenges are taken care of, adverse situations are tackled and threats are analyzed to turn them into
probable opportunities.

SM/U1 Topic 3 Introduction to

Business Policy
THESTREAK23 DEC 2018 2 COMMENTS
Business Policy
Business Policy defines the scope or spheres within which decisions can be taken by the subordinates
in an organization. It permits the lower level management to deal with the problems and issues
without consulting top level management every time for decisions.

Business policies are the guidelines developed by an organization to govern its actions. They define
the limits within which decisions must be made. Business policy also deals with acquisition of
resources with which organizational goals can be achieved. Business policy is the study of the roles
and responsibilities of top level management, the significant issues affecting organizational success
and the decisions affecting organization in long-run.

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Features of Business Policy
An effective business policy must have following features:-

(i) Specific – Policy should be specific/definite. If it is uncertain, then the implementation will
become difficult.

(ii) Clear – Policy must be unambiguous. It should avoid use of jargons and connotations. There
should be no misunderstandings in following the policy.

(iii) Reliable/Uniform – Policy must be uniform enough so that it can be efficiently followed by the
subordinates.

(iv) Appropriate – Policy should be appropriate to the present organizational goal.

(v) Simple – A policy should be simple and easily understood by all in the organization.

(vi) Inclusive/Comprehensive – In order to have a wide scope, a policy must be comprehensive.

(vii) Flexible – Policy should be flexible in operation/application. This does not imply that a policy
should be altered always, but it should be wide in scope so as to ensure that the line managers use
them in repetitive/routine scenarios.

(viii) Stable – Policy should be stable else it will lead to indecisiveness and uncertainty in minds of
those who look into it for guidance.

Difference between Policy and Strategy

The term “policy” should not be considered as synonymous to the term “strategy”. The difference
between policy and strategy can be summarized as follows-

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1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While
strategy is concerned with those organizational decisions which have not been dealt/faced before in
same form.
2. Policy formulation is responsibility of top level management. While strategy formulation is basically
done by middle level management.
3. Policy deals with routine/daily activities essential for effective and efficient running of an
organization. While strategy deals with strategic decisions.
4. Policy is concerned with both thought and actions. While strategy is concerned mostly with action.
5. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target
as prescribed by a policy.

SM/U1 Topic 4 Strategic Decision-Making

Strategic decision-making is the process of charting a course based on long-term goals and a longer
term vision. By clarifying your company’s big picture aims, you’ll have the opportunity to align your
shorter term plans with this deeper, broader mission — giving your operations clarity and
consistency.

Strategic decision making involves the following 3 things:

1. The long term way forward for the company

2. Selection of proper markets for the company
3. The products and tactics needed to succeed in the targeted market.

These are important features of Strategic Decision Making

(1) Strategy is at many times at tangent with Marketing Decisions

Where marketing decisions are short term, strategic decision making might consider a long term
initiative, such as launching a very new and innovative product, or changing the existing product lines
radically. Technology or innovation is at the crux of strategic decision making.

The reason that marketing decisions and strategy decisions are difference is because marketing is
focused on retaining the existing customer base with the existing technologies. But the customer base
is sure to get tired soon of the existing products and the innovators and adopters will keep searching
for new products in the market. And hence, through strategic decisions, the firm has to stay in a place
of continuous development.

(2) There is immense risk involved while taking strategic decisions

Naturally, when you are implementing plans which will show positive or negative results only after 4-
5 years, the risk in strategic decision making is huge. Think about the time and energy, not to say
natural resources wasted to implement a plan which failed after 4-5 years.

Yet, even after the risk involved, companies have to implement risky strategic decisions from time to
time just because the directors thought a unique product had demand in the market, or that another
product is required in the market. Strategic decisions involve necessary risk and success is not
guaranteed.

(3) Strategic decisions involve a lot of Ifs and Buts

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Think of a mind map and the number of branches and nodes that can form the complete mind map.
When a brain starts thinking, the central thought might have further branches, and these branches will
have even more nodes (or sub branches if you want to call them)

Similar to the mind map, a business can face many problems in the course of its run. A competitor can
crop up, the market can become penetrative, the external environment can change, and many other
unforeseen situations can happen. The strategic decision making has to consider all these alternatives,
whether positive or negative. And the plan has to also include the action that the firm will take, if any
of the above business problems or factors come into play.

(4) Strategy implementation timelines

Whenever we make a schedule in our personal lives, we always start things when we have enough
time in our hand. For example – you will plan a holiday, when office work is not hectic. You will not
plan it when there is a product launch nearby. Similarly, when in business, timelines are very
important.

If a product is to be launched, the launch date is decided at least a year back, the sales phase has to be
implemented at least 2 months before the actual launch so that you have sellers in place when the
product is launch. Moreover, the service network is also to be planned before the launch, so that
service issues are sorted out when there are problems after the product launch. If these concepts are
not implemented, the marketing strategy and hence the product can fail miserably.

(5) Preparing for the competition’s response

Whenever you change the market equilibrium, the competitors, whose businesses you have directly
challenged, are sure to respond. When they respond, the market changes and you have to change your
strategy accordingly.

In general there are 2 ways that a company directly affects the competition and the market.

a) The company creates a completely new operating norm in the market itself.

b) It raises customer expectations and thereby changes the market equilibrium.

Most strategic decisions will call for radical changes in the way the company operates in the existing
market. Accordingly, the perception of competitors and customers will change for the company. The
company has to in turn be prepared for the response of competitors in such a case.

Implementation of strategic decisions – While implementing strategic decisions, you need to have
eyes at the front as well as the back of your head. You need to look at what was decided at the start, as
due to short term pressure, it is very much possible to deviate from the path which was already set.

SM/U1 Topic 5 Process of Strategic Management

and Levels at which Strategy Operates
The strategic management process means defining the organization’s strategy. It is also defined as the
process by which managers make a choice of a set of strategies for the organization that will enable it
to achieve better performance.
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 Strategic management is a continuous process that appraises the business and industries in which the
organization is involved; appraises it’s competitors; and fixes goals to meet all the present and future
competitor’s and then reassesses each strategy.

Strategic management process has following four steps:

1. Environmental Scanning– Environmental scanning refers to a process of collecting, scrutinizing and

providing information for strategic purposes. It helps in analyzing the internal and external factors
influencing an organization. After executing the environmental analysis process, management should
evaluate it on a continuous basis and strive to improve it.
2. Strategy Formulation– Strategy formulation is the process of deciding best course of action for
accomplishing organizational objectives and hence achieving organizational purpose. After
conducting environment scanning, managers formulate corporate, business and functional strategies.
3. Strategy Implementation- Strategy implementation implies making the strategy work as intended or
putting the organization’s chosen strategy into action. Strategy implementation includes designing the
organization’s structure, distributing resources, developing decision making process, and managing
human resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The key
strategy evaluation activities are: appraising internal and external factors that are the root of present
strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure
that the organizational strategy as well as it’s implementation meets the organizational objectives.

Components of Strategic Management Process

These components are steps that are carried, in chronological order, when creating a new strategic
management plan. Present businesses that have already created a strategic management plan will
revert to these steps as per the situation’s requirement, so as to make essential changes.

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 Figure – Components of Strategic Management Process

Strategic management is an ongoing process. Therefore, it must be realized that each component
interacts with the other components and that this interaction often happens in chorus.

The Three Levels of Strategy

Strategy is at the heart of business. All businesses have competition, and it is strategy that allows one
business to rise above the others to become successful. Even if you have a great idea for a business,
and you have a great product, you are unlikely to go anywhere without strategy.

Many of the most successful business men and women throughout history have been great strategic
thinkers, and that is no accident. If you wish to take your business to the top of the market as quickly
as possible, it is going to be strategy that leads the way.

Of course, before you can get into the process of determining your own business strategies, you need
to understand what the word ‘strategy’ really means in a business context. Does it involve long-term
planning as to the general course of the business? Or is it related to the day-to-day operations and how
they are designed in order to achieve success? Well, in practical application, strategy can refer to both
of those things and more.

To help you understand strategy in business, this article is going to look at the three levels of strategy
that are typically used by organizations. Only when all three of these levels are carefully considered
will your business be able to get on the right path toward a prosperous future.

1. Corporate Strategy

The first level of strategy in the business world is corporate strategy, which sits at the ‘top of the
heap’. Before you dive into deeper, more specific strategy, you need to outline a general strategy that
is going to oversee everything else that you do. At a most basic level, corporate strategy will outline
exactly what businesses you are going to engage in, and how you plan to enter and win in those
markets.

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 It is easy to overlook this planning stage when getting started with a new business, but you will pay
the price in the long run for skipping this step. It is crucially important that you have an overall
corporate strategy in place, as that strategy is going to direct all of the smaller decisions that you
make.

For some companies, outlining a corporate strategy will be a quick and easy process. For example,
smaller businesses who are only going to enter one or two specific markets with their products or
services are going to have an easy time identifying what it is that makes up the overall corporate
strategy. If you are running an organization that bakes and sells cookies, for instance, you already
know exactly what the corporate strategy is going to look like – you are going to sell as many cookies
as possible.

However, for a larger business, things quickly become more complicated. Carrying that example
forward to a larger company, imagine you run an organization that is going to sell cookies but is also
going to sell equipment that is used while making cookies. Entering into the kitchen equipment
market is a completely different challenge from selling the cookies themselves, so the complexity of
your corporate strategy will need to rapidly increase. Before you get any farther into the strategic
planning of your business, be sure you have your corporate strategy clearly defined.

2. Business Strategy

It is best to think of this level of strategy as a ‘step down’ from the corporate strategy level. In other
words, the strategies that you outline at this level are slightly more specific and they usually relate to
the smaller businesses within the larger organization.

Carrying over our previous example, you would be outlining separate strategies for selling cookies
and selling cookie-making equipment at this level. You may be going after convenience stores and
grocery stores to sell your cookies, while you may be looking at department stores and the internet to
sell your equipment. Those are dramatically different strategies, so they will be broken out at this
level.

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 Even in smaller businesses, it is a good idea to pay attention to the business strategy level so you can
decide on how you are going to handle each various part of your operation. The strategy that you
highlighted at the corporate level should be broad in scope, so now is the time to boil it down into
smaller parts which will enable you to take action.

3. Functional Strategy

This is the day-to-day strategy that is going to keep your organization moving in the right direction.
Just as some businesses fail to plan from a top-level perspective, other businesses fail to plan at this
bottom-level. This level of strategy is perhaps the most important of all, as without a daily plan you
are going to be stuck in neutral while your competition continues to drive forward. As you work on
putting together your functional strategies, remember to keep in mind your higher level goals so that
everything is coordinated and working toward the same end.

It is at this bottom-level of strategy where you should start to think about the various departments
within your business and how they will work together to reach goals. Your marketing, finance,
operations, IT and other departments will all have responsibilities to handle, and it is your job as an
owner or manager to oversee them all to ensure satisfactory results in the end. Again, the success or
failure of the entire organization will likely rest on the ability of your business to hit on its functional
strategy goals regularly. As the saying goes, a journey of a million miles starts with a single step –
take small steps in strategy on a daily basis and your overall corporate strategy will quickly become
successful.

SM/U1 Topic 6 Strategic intent: Vision, Mission,

Business definition, Goals and Objectives
THESTREAK23 DEC 2018 2 COMMENTS
Strategic Intent can be understood as the philosophical base of strategic management process. It
implies the purpose, which an organization endeavors of achieving. It is a statement that provides a
perspective of the means, which will lead the organization, reach the vision in the long run.

Strategic intent gives an idea of what the organization desires to attain in future. It indicates the long-
term market position, which the organization desires to create or occupy and the opportunity for
exploring new possibilities.

Strategic Intent Hierarchy

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1. Vision – Vision implies the blueprint of the company’s future position. It describes where the
organization wants to land. It is the dream of the business and an inspiration, base for the planning
process. It depicts the company’s aspirations for the business and provides a peep of what the
organization would like to become in future. Every single component of the organization is required
to follow its vision.

2. Mission – Mission delineates the firm’s business, its goals and ways to reach the goals. It explains the
reason for the existence of business. It is designed to help potential shareholders and investors
understand the purpose of the company. A mission statement helps to identify, ‘what business the
company undertakes.’ It defines the present capabilities, activities, customer focus and business
makeup.

3. Business Definition – It seeks to explain the business undertaken by the firm, with respect to the
customer needs, target audience, and alternative technologies. With the help of business definition,
one can ascertain the strategic business choices. The corporate restructuring also depends upon the
business definition.
4. Business Model – Business model, as the name implies is a strategy for the effective operation of the
business, ascertaining sources of income, desired customer base, and financing details. Rival firms,
operating in the same industry relies on the different business model due to their strategic choice.
5. Goals and Objectives – These are the base of measurement. Goals are the end results, that the
organization attempts to achieve. On the other hand, objectives are time-based measurable actions,
which help in the accomplishment of goals. These are the end results which are to be attained with the
help of an overall plan, over the particular period.

The vision, mission, business definition, and business model explains the philosophy of business but
the goals and objectives are established with the purpose of achieving them.

Strategic Intent is extremely important for the future growth and success of the enterprise, irrespective
of its size and nature.

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 Unit 2
Environmental Scanning

SM/U2 Topic 1 Environmental Scanning: Factors Considered, Approaches

Organizational environment consists of both external and internal factors. Environment must be
scanned so as to determine development and forecasts of factors that will influence organizational
success. Environmental scanning refers to possession and utilization of information about
occasions, patterns, trends, and relationships within an organization’s internal and external
environment. It helps the managers to decide the future path of the organization. Scanning must
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 identify the threats and opportunities existing in the environment. While strategy formulation, an
organization must take advantage of the opportunities and minimize the threats. A threat for one
organization may be an opportunity for another.

Internal Analysis of the environment is the first step of environment scanning. Organizations
should observe the internal organizational environment. This includes employee interaction with other
employees, employee interaction with management, manager interaction with other managers, and
management interaction with shareholders, access to natural resources, brand awareness,
organizational structure, main staff, operational potential, etc. Also, discussions, interviews, and
surveys can be used to assess the internal environment. Analysis of internal environment helps in
identifying strengths and weaknesses of an organization.

As business becomes more competitive, and there are rapid changes in the external environment,
information from external environment adds crucial elements to the effectiveness of long-term plans.
As environment is dynamic, it becomes essential to identify competitors’ moves and actions.
Organizations have also to update the core competencies and internal environment as per external
environment. Environmental factors are infinite, hence, organization should be agile and vigile to
accept and adjust to the environmental changes. For instance – Monitoring might indicate that an
original forecast of the prices of the raw materials that are involved in the product are no more
credible, which could imply the requirement for more focused scanning, forecasting and analysis to
create a more trustworthy prediction about the input costs. In a similar manner, there can be changes
in factors such as competitor’s activities, technology, market tastes and preferences.

While in External Analysis, three correlated environment should be studied and analyzed:-

• immediate / industry environment

• national environment
• broader socio-economic environment / macro-environment

Examining the Industry Environment needs an appraisal of the competitive structure of the
organization’s industry, including the competitive position of a particular organization and it’s main
rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It
also implies evaluating the effect of globalization on competition within the industry.

Analyzing the National Environment needs an appraisal of whether the national framework helps in
achieving competitive advantage in the globalized environment. Analysis of Macro-
environment includes exploring macro-economic, social, government, legal, technological and
international factors that may influence the environment. The analysis of organization’s external
environment reveals opportunities and threats for an organization.

Strategic managers must not only recognize the present state of the environment and their industry but
also be able to predict its future positions.

SM/U2 Topic 1 External Environment Analysis: PESTEL

External environment analysis is an important part of strategic management.

PESTEL Analysis

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 PESTEL analysis includes Political, Economic, Social, Technological, Environmental and Legal
analysis. It is an external environment analysis for conducting a strategic analysis or carrying out
market research. It offers a certain overview of the varied macro-environmental factors that the
company has to consider.

PESTEL

• Political factors analysis is related with how and to what extent a government interferes in the
economy. Specifically, political factors include tax policy, labor law, environmental law, trade
restrictions, tariffs, and political stability. Political factors may also be related with goods and services
which the government allows (merit goods) and those that the government does not want to allow
(demerit goods). The government can have a great influence on the overall health, education, and
infrastructure of a country.
• Economic factors contain factors such as economic growth, interest rates, exchange rates and the
inflation rate. These factors may have an influential effect on how the businesses operate and make
decisions. For example, interest rates can affect the firm’s cost of capital and thereby influence
business growth and expansion. Exchange rates can affect the costs of export and the supply and price
of imports.
• Social factors contain issues such as health consciousness, population growth rate, age distribution,
career attitudes and emphasis on safety. Trends in the social factors may affect the demand for a
company’s goods and how the company operates. For example, ageing population leads to smaller
and less-willing workforce (and increases the cost of labor). Moreover, companies may change
various management strategies in sync with the social trends (such as recruiting more females).
• Technological factors include ecological and environmental aspects, such as R&D activity,
automation, technology incentives and the rate of technological change. They can determine barriers
to entry, minimum efficient production level and influence outsourcing decisions. Furthermore,
technological shifts can affect costs, quality, and lead to innovation.
• Environmental factors are the conditions such as weather, climate, and climate change, which may
especially influence tourism, farming, and insurance sectors. Growing awareness to climate change
are increasing the interest in how companies operate and what products they offer; it is both creating
new markets and damaging the existing ones.

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• Legal factors include laws pertaining to discrimination, consumer affairs, antitrust, employment, and
health and safety. These factors can affect the operations, costs, and the demand for the products.
Legal factors can also influence the brand value and reputation of a company. They are increasingly
paid more attention to in the current decade.

While in external analysis, three correlated environment should be studied and analyzed:

• immediate / industry environment

• national environment
• broader socio-economic environment / macro-environment

Examining the industry environment needs an appraisal of the competitive structure of the
organization’s industry, including the competitive position of a particular organization and it’s main
rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It
also implies evaluating the effect of globalization on competition within the industry. Analyzing
the national environment needs an appraisal of whether the national framework helps in achieving
competitive advantage in the globalized environment. Analysis of macro-environment includes
exploring macro-economic, social, government, legal, technological and international factors that may
influence the environment. The analysis of organization’s external environment reveals opportunities
and threats for an organization.

Strategic managers must not only recognize the present state of the environment and their industry but
also be able to predict its future positions.

SM/U2 Topic 3 EFE Matrix

THESTREAK27 DEC 2018 2 COMMENTS
The EFE matrix is the strategic tool used to evaluate firm existing strategies, EFE matrix can be
defined as the strategic tool to evaluate external environment or macro environment of the firm
include economic, social, technological, government, political, legal and competitive information.

The EFE matrix is similar to IFE matrix the only difference is that IFE matrix evaluate the internal
factors of the company and EFE matrix evaluate the external factors.

The EFE matrix consists of following attributes mentioned below.

EXTERNAL FACTORS
External factors are extracted after deep analysis of external environment. Obviously there are some
good and some bad for the company in the external environment. That’s the reason external factors
are divided into two categories opportunities and threats.

Opportunities

Opportunities are the chances exist in the external environment, it depends firm whether the firm is
willing to exploit the opportunities or maybe they ignore the opportunities due to lack of resources.

Threats

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 Threats are always evil for the firm, minimum no of threats in the external environment open many
doors for the firm. Maximum number of threats for the firm reduce their power in the industry.

RATING

Rating in EFE matrix represent the response of firm toward the opportunities and threats. Highest the
rating better the response of the firm to exploit opportunities and defend the threats. Rating range
from 1.0 to 4.0 and can be applied to any factor whether it comes under opportunities or threats.

There are some important point related to rating in EFE matrix.

• Rating is applied to each factor.

• The response is poor represented by 1.0
• The response is average is represented by 2.0
• The response is above average represented by 3.0
• The response is superior represented by 4.0

WEIGHT

Weight attribute in EFE matrix indicates the relative importance of factor to being successful in the
firm’s industry. The weight range from 0.0 means not important and 1.0 means important, sum of all
assigned weight to factors must be equal to 1.0 otherwise the calculation would not be consider
correct.

WEIGHTED SCORE

Weighted score value is the result achieved after multiplying each factor rating with the weight.

TOTAL WEIGHTED SCORE

The sum of all weighted score is equal to the total weighted score, final value of total weighted score
should be between range 1.0 (low) to 4.0(high). The average weighted score for EFE matrix is 2.5 any
company total weighted score fall below 2.5 consider as weak. The company total weighted score
higher then 2.5 is consider as strong in position.

STEPS IN DEVELOPING THE EFE MATRIX:

1. Identify a list of KEY external factors (critical success factors).

2. Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).
3. Assign a 1-4 rating to each critical success factor to indicate how effectively the firm’s current
strategies respond to the factor. (1 = response is poor, 4 = response is extremely good)
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores.

SM/U2 Topic 5 Porter’s Five Forces Model

Porter’s Five Forces is a business analysis model that helps to explain why different industries are
able to sustain different levels of profitability. The model was originally published in Michael Porter’s
book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980.

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 The model is widely used to analyze the industry structure of a company as well as its corporate
strategy. Porter identified five undeniable forces that play a part in shaping every market and industry
in the world. The forces are frequently used to measure competition intensity, attractiveness and
profitability of an industry or market.

These forces are:

1. Competition in the industry;

2. Potential of new entrants into the industry;
3. Power of suppliers;
4. Power of customers;
5. Threat of substitute products.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If
an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more
organizations compete for the same market share, profits start to fall. It is essential for existing
organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high
when:

• Low amount of capital is required to enter a market;

• Existing companies can do little to retaliate;
• Existing firms do not possess patents, trademarks or do not have established brand reputation;
• There is no government regulation;
• Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other
industries);
• There is low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or
low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has
to pay more for materials. Suppliers have strong bargaining power when:

• There are few suppliers but many buyers;

• Suppliers are large and threaten to forward integrate;

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• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong. Lower price means lower
revenues for the producer, while higher quality products usually raise production costs. Both
scenarios result in lower profits for producers. Buyers exert strong bargaining power when:

• Buying in large quantities or control many access points to the final customer;
• Only few buyers exist;
• Switching costs to other supplier are low;
• They threaten to backward integrate;
• There are many substitutes;
• Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch from one product or
service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything,
unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive and
profitable an industry is. In competitive industry, firms have to compete aggressively for a market
share, which results in low profits. Rivalry among competitors is intense when:

• There are many competitors;

• Exit barriers are high;
• Industry of growth is slow or negative;
• Products are not differentiated and can be easily substituted;
• Competitors are of equal size;
• Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested
including the sixth force: complements. Complements increase the demand of the primary product
with which they are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes
was created to complement iPod and added value for both products. As a result, both iTunes and iPod
sales increased, increasing Apple’s profits.

SM/U2 Topic 5 Internal Appraisal

The strategic analysis of the firm we consider the objective conditions which exist within the
organization. The assessment of the internal position is of importance in evaluating the
enterprise’s capabilities in the light of its resources. So we should be in a situation to judge
the organization’s capability in view of its resource profile, and as a consequence of our
external appraisal, to decide what it ought to be doing considering the environment in which
it is operating.

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For the internal analysis to be effective, the process must be underpinned by a strategic
view, preferably in a creative manner, which will allow multidimensional insights to be
obtained. In the process of strategy-formulation the objective of internal appraisal is to
produce a picture of the organization, its resources and capabilities which provides a
segmented and integrated internal perspective of the strengths and weaknesses of the firm
as a whole.

Our model of the strategy-formulation process indicated the importance of the impact of the
present situation in which the enterprise finds itself. We argued then that not only was the
current position a result of past decisions but also that it represents a starting point for
analysis. Therefore, to determine the current position involves consideration of the firm’s
resources, the business the firm is in, what its objectives are, and how well it achieves them.
The results of this analysis are crucial elements in determining the firm’s future strategy.

Further, internal appraisal not only indicates what resources the firm has but also evaluates
how well they have been used by management.

This may also lead to a judgement on how well resources may be used in the future by the
same management. The scope of internal analysis is more than just identifying and
tabulating the organization’s resources. It involves appraising management’s utilization of
resources

SM/U2 Topic 6 The

Internal Environment
THESTREAK27 DEC 2018 2 COMMENTS
The internal environment consists mainly of the organization’s owners, the board of directors,
employees and culture.

1. Owners

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Owners are people who invested in the company and have property rights and claims on the
organization. Owners can be an individual or group of person who started the company; or who
bought a share of the company in the share market.

They have the right to change the company’s policy at any time.

2. Board of Directors
The board of directors is the governing body of the company who are elected by stockholders, and
they are given the responsibility for overseeing a firm’s top managers such as the general manager.

3. Employees
Employees or the workforce, the most important element of an organization’s internal environment,
who performs the tasks of the administration. Individual employees and also the labor unions they
join are important parts of the internal environment.

If managed properly they can positively change the organization’s policy. But ill-management of the
workforce could lead to a catastrophic situation for the company.

4. Culture
Organizational culture is the collective behavior of members of an organization and the values,
visions, beliefs, habits that they attach to their actions.

An organization’s culture plays a major role in shaping its success because culture is an important
determinant of how well their organization will perform.

As the foundation of the organization’s internal environment, it plays a major role in shaping
managerial behavior.

The environment irrespective of its external or internal nature, a manager must have a clear
understanding of them. Normally, you would not go for a walk in the rain without an umbrella,
because you understand the environment and you know when it rains you can get wet.

Similarly, if a manager does not know and understand the environment of the organization, he or she
will definitively get wet or dry and the organization also in today’s fast and hyper-moving
organizational environment.

SM/U2 Topic 7 Organizational Capability Factors

An organizational capability is a company’s ability to manage resources, such as employees,
effectively to gain an advantage over competitors. The company’s organizational capabilities must
focus on the business’s ability to meet customer demand. In addition, organizational capabilities must
be unique to the organization to prevent replication by competitors. Organizational capabilities are
anything a company does well that improves business and differentiates the business in the market.
Developing and cultivating organizational capabilities can help small business owners gain an
advantage in a competitive environment by focusing on the areas where they excel.

Competitive Advantage
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Organizational capabilities provide a company with an advantage in the marketplace. When an
organization continues to create new capabilities and develops existing ones, it will maintain the
advantage over its competitors. Capabilities that provide a competitive advantage include knowledge,
product licenses and innovative designs.

Flexibility and Responsiveness

The responsiveness of an organization is its ability to change in response to customer demand.
Knowledge and skilled employees are organizational capabilities that provide a company with the
ability to respond to customer demands and remain flexible to changes in the business environment.

Knowledgeable Workforce
The skills and knowledge of a company’s workforce allow the organization to direct those skills to
achieve the business’s goals. Training programs, education assistance and effective recruiting and
hiring programs are organizational capabilities that ensure a knowledgeable workforce. To maintain
the capability, companies should ensure the workforce has the resources available to improve
continuously. Managing a talented workforce is an organizational capability that provides a
competitive advantage in the marketplace.

Improved Customer Relationships

Good customer relationships ensure the continued growth and competitiveness in the market. The
relationship between the organization and its customers is an organizational capability that affects
sales, reputation and loyalty for future business. Maintaining existing relationships with customers as
well as developing new ones ensures the company will grow and thrive in the future. A lean
manufacturing environment is an organizational capability that focuses on the voice of the customer
and meeting demand. This organizational capability improves the relationship with the customer for
the business.

SM/U2 Topic 9 Resource Based View (RBW) Analysis

THESTREAK27 DEC 2018 2 COMMENTS
The resource-based view (RBV) is a model that sees resources as key to superior firm performance.
If a resource exhibits VRIO attributes, the resource enables the firm to gain and sustain competitive
advantage.

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RBV is an approach to achieving competitive advantage that emerged in 1980s and 1990s, after the
major works published by Wernerfelt, B. (“The Resource-Based View of the Firm”), Prahalad and
Hamel (“The Core Competence of The Corporation”), Barney, J. (“Firm resources and sustained
competitive advantage”) and others. The supporters of this view argue that organizations should look
inside the company to find the sources of competitive advantage instead of looking at competitive
environment for it.

According to RBV proponents, it is much more feasible to exploit external opportunities using
existing resources in a new way rather than trying to acquire new skills for each different opportunity.
In RBV model, resources are given the major role in helping companies to achieve higher
organizational performance. There are two types of resources: tangible and intangible.

Tangible assets are physical things. Land, buildings, machinery, equipment and capital – all these
assets are tangible. Physical resources can easily be bought in the market so they confer little
advantage to the companies in the long run because rivals can soon acquire the identical assets.

Intangible assets are everything else that has no physical presence but can still be owned by the
company. Brand reputation, trademarks, intellectual property are all intangible assets. Unlike physical
resources, brand reputation is built over a long time and is something that other companies cannot buy
from the market. Intangible resources usually stay within a company and are the main source of
sustainable competitive advantage.

The two critical assumptions of RBV are that resources must also be heterogeneous and immobile.

Heterogeneous
The first assumption is that skills, capabilities and other resources that organizations possess differ
from one company to another. If organizations would have the same amount and mix of resources,
they could not employ different strategies to outcompete each other. What one company would do,
the other could simply follow and no competitive advantage could be achieved. This is the scenario of
perfect competition, yet real world markets are far from perfectly competitive and some companies,
which are exposed to the same external and competitive forces (same external conditions), are able to

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 implement different strategies and outperform each other. Therefore, RBV assumes that companies
achieve competitive advantage by using their different bundles of resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how two
companies that operate in the same industry and thus, are exposed to the same external forces, can
achieve different organizational performance due to the difference in resources. Apple competes with
Samsung in tablets and smartphones markets, where Apple sells its products at much higher prices
and, as a result, reaps higher profit margins. Why Samsung does not follow the same strategy? Simply
because Samsung does not have the same brand reputation or is capable to design user-friendly
products like Apple does. (heterogeneous resources)

Immobile
The second assumption of RBV is that resources are not mobile and do not move from company to
company, at least in short-run. Due to this immobility, companies cannot replicate rivals’ resources
and implement the same strategies. Intangible resources, such as brand equity, processes, knowledge
or intellectual property are usually immobile.

SM/U2 Topic 10 VRIO Framework

THESTREAK27 DEC 2018 2 COMMENTS
VRIO Analysis is an analytical technique briliant for the evaluation of company’s resources and thus
the competitive advantage. VRIO is an acronym from the initials of the names of the evaluation
dimensions: Value, Rareness, Imitability, Organization.

The VRIO Analysis was developed by Jay B. Barney as a way of evaluating the resources of an
organization (company’s micro-environment) which are as follows:

• Financial resources
• Human resources
• Material resources

Non-material resources (information, knowledge) Question of Value. Resources are valuable if they
help organizations to increase the value offered to the customers. This is done by increasing

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differentiation or/and decreasing the costs of the production. The resources that cannot meet this
condition, lead to competitive disadvantage.

Question of Rarity. Resources that can only be acquired by one or few companies are considered
rare. When more than few companies have the same resource or capability, it results in competitive
parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least
temporary competitive advantage. However, the resource must also be costly to imitate or to
substitute for a rival, if a company wants to achieve sustained competitive advantage.

Question of Organization. The resources itself do not confer any advantage for a company if it’s not
organized to capture the value from them. Only the firm that is capable to exploit the valuable, rare
and imitable resources can achieve sustained competitive advantage.

SM/U2 Topic 11 Value Chain Analysis

Value chain analysis is a process of dividing various activities of the business in primary and support
activities and analyzing them, keeping in mind, their contribution towards value creation to the final
product. And to do so, inputs consumed by the activity and outputs generated are studied, so as to
decrease costs and increase differentiation.

Value chain analysis is used as a tool for identifying activities, within and around the firm and
relating these activities to an assessment of competitive strength.

As shown in the figure, Michael Porter classified the entire value chain into nine activities which are
interrelated to one another. While primary activities include the activities that are performed to satisfy
external demand, secondary activities are those which are performed to satisfy internal requirements.

Classification of Value Chain Analysis

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 Value Chain Analysis is grouped into primary or line activities, and support activities discussed as
under:

1. Primary Activities: The functions which are directly concerned with the conversion of input into
output and distribution activities are called primary activities. It includes:
o Inbound Logistics: It includes a range of activities like receiving, storing, distributing, etc. which
make available goods and services for operational processes. Some of those activities are material
handling, transportation, stock control, etc.
o Operations: The activity of transforming input raw material to final product ready for sale, is termed
as operation. Machining, assembling, packaging are the activities covered under operations.
o Outbound Logistics: As the name suggests, the activities that help in collecting, storage and
delivering the product to the customer is outbound logistics.
o Marketing and Sales: All the activities like advertising, promotion, sales, marketing research, public
relations, etc. performed to make the customer aware of the product or service and create demand for
it, comes under marketing.
o Service: Service means service provided to the customer so as to improve or maintain the value of the
product. It includes financing service, after-sales service and so on.
2. Support Activities: Those activities which assist primary activities in accomplishment, are support
activities. These are:
o Procurement: This activity serves the organization, by supplying all the necessary inputs like
material, machinery or other consumable items, that required by the organization for performing
primary activities.
o Technology Development: At present, technology development requires heavy investment, which
takes years for research and development. However, its benefits can be enjoyed for several years and
by a multitude of users in the organization.
o Human Resource Management: It is the most common plus important activity which excel all
primary activities of the organization. It encompasses overseeing the selection, retention, promotion,
transfer, appraisal and dismissal of staff.
o Infrastructure: This is the management system, which provides, its services to the whole
organization and includes planning, finance, information management, quality control, legal,
government affairs, etc.

In the fast paced world, the main focus of the organization is customer satisfaction, and value chain
analysis is the technique that helps to attain that level. Under this, each business activity is considered
as essential, which contributes value and is constantly analyzed, to increase value as regards the cost
incurred.

SM/U2 Topic 12 IFE Matrix (Internal Factor Evaluation)

IFE (Internal factor evaluation) matrix is one of the best strategic tool to perform internal audit of any
firm. IFE is use for internal analysis of different functional areas of business such as finance,
marketing,IT, operations, accounts, Human Resources and others depend upon the nature of business
and its size.

Before going into further details, there are some important terms in IFE matrix which should be
known to the individual who shall be using this tool of internal analysis of any Company or
Organization . The explanation of each term would be clearly explained in order to make it easier to
understand the concept for when you further go into details.

Following are the important components of IFE Matrix:

INTERNAL FACTORS
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 Internal factors are the the outcome of detailed internal audit of a firm Obviously, every company
have some weak and strong points, therefor the internal factors are divided into two categories namely
strengths and weakness.

Strengths

Strengths are the strong areas or attribute of the company, which are used to overcome weakness and
capitalize to take advantage of the external opportunities available in the industry. The strengths could
be tangible or intangible; such as brand image, financial position, income, human resource.

Weaknesses

Weaknesses are the risky areas which needs to be addressed on priority to minimize its impact. The
competitors always searching for the loop holes in your company and put their best effort to capitalize
on the identified weaknesses.

HOW WE CAN DIFFERENTIATE STRENGTH AND WEAKNESS IN IFE

MATRIX?
If this question comes into mind then don’t worry its a good question and I will be the happy man to
answer this one. The strengths and weaknesses are organized in IFE matrix in different portions mean
all strengths are listed first under internal factors and then comes the internal weakness. In case if all
the factors are listed altogether then the rating will help you out to identify internal strength and
weakness.

RATING
Rating is common word I hope you are aware of it, in IFE rating is the way out to differentiate
internal strengths and weakness. Internal weakness are further divided in two categories namely minor
weakness and major weakness same goes of the strengths (minor strength and major strength)

There are some important point related to rating in IFE matrix.

• Rating is applied to each factor.

• Major weakness is represented by 1.0
• Minor weakness is represented by 2.0
• Minor strength represented by 3.0
• Major Strength represented by 4.0

Major weakness needs company attention to change into minor weakness then strength and finally
major strength.As compared to major strength minor weakness need little efforts of the company to
change it into strength. The range of rating start from minimum 1.0 which is worst and maximum 4.0
which is the best factor of the company.

WEIGHT
Weight attribute in IFE matrix indicates the relative importance of factor to being successful in the
firm’s industry. The weight range from 0.0 means not important and 1.0 means important, sum of all
assigned weight to factors must be equal to 1.0 otherwise the calculation would not be consider
correct.

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 WEIGHTED SCORE
Weighted score value is the result achieved after multiplying each factor rating with the weight.

TOTAL WEIGHTED SCORE

The sum of all weighted score is equal to the total weighted score, final value of total weighted score
should be between range 1.0 (low) to 4.0(high). The average weighted score for IFE matrix is 2.5 any
company total weighted score fall below 2.5 consider as weak. The company total weighted score
higher then 2.5 is consider as strong in position.

STEPS TO DEVELOP IFE MATRIX

[adsense]1. List key internal factors as identified in the internal audit process. Use a total of from ten
to twenty internal factors, including both strengths and weaknesses. List strengths first and then
weaknesses. Be as specific as possible, using percentages, ratios, and comparative numbers.

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all important) to each factor. The weight
assigned to a given factor indicates the relative importance of the factor to being successful in the
firm’s industry. Regardless of whether a key factor is an internal strength or weakness, factors
considered to have the greatest effect on organizational performance should be assigned the highest
weights. The sum of all weights must equal 1.0.
3. Assign a I to 4 rating to each factor to indicate whether that factor represents a major weakness (rating
= 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4).
Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings
are thus company based, whereas the weights in Step 2 are industry based.
4. Multiply each factor’s weight by its rating to determine a weighted score for each variable.
5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

WHAT ARE THE EXAMPLES OF INTERNAL FACTORS?

There are few examples of internal factors of the company.

Strengths

• Strong marketing and promotion

• Best product quality
• Strong Financial condition
• High Market Share
• High value assets

Weakness

• High cost operations

• Manufacturing cost is high
• High employee turnover rate
• Expensive products
• Loss in joint venture

WHAT IS THE DIFFERENCE BETWEEN IFE AND EFE?

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External factor evaluation matrix consider external environment for evaluation by considering
external opportunities and threats whereas IFE is the strategic tool to identify the internal factors for
internal audit.

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 UNIT 3
Strategy Formulation

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 SM/U3 Topic 1 Strategy Formulation: Corporate,
Business, Functional strategy
THESTREAK24 DEC 2018 2 COMMENTS
Strategy can be formulated at three levels, namely, the corporate level, the business level, and the
functional level. At the corporate level, strategy is formulated for your organization as a whole.
Corporate strategy deals with decisions related to various business areas in which the firm operates
and competes. At the business unit level, strategy is formulated to convert the corporate vision into
reality. At the functional level, strategy is formulated to realize the business unit level goals and
objectives using the strengths and capabilities of your organization. There is a clear hierarchy in levels
of strategy, with corporate level strategy at the top, business level strategy being derived from the
corporate level, and the functional level strategy being formulated out of the business level strategy.

In a single business scenario, the corporate and business level responsibilities are clubbed together
and undertaken by a single group, that is, the top management, whereas in a multi business scenario,
there are three fully operative levels.

Levels of Strategy

1. Corporate Level

Corporate level strategy defines the business areas in which your firm will operate. It deals with
aligning the resource deployments across a diverse set of business areas, related or unrelated. Strategy
formulation at this level involves integrating and managing the diverse businesses and realizing
synergy at the corporate level. The top management team is responsible for formulating the corporate
strategy. The corporate strategy reflects the path toward attaining the vision of your organization. For
example, your firm may have four distinct lines of business operations, namely, automobiles, steel,
tea, and telecom. The corporate level strategy will outline whether the organization should compete in
or withdraw from each of these lines of businesses, and in which business unit, investments should be
increased, in line with the vision of your firm.

2. Business Level

Business level strategies are formulated for specific strategic business units and relate to a distinct
product-market area. It involves defining the competitive position of a strategic business unit. The
business level strategy formulation is based upon the generic strategies of overall cost leadership,
33
 differentiation, and focus. For example, your firm may choose overall cost leadership as a strategy to
be pursued in its steel business, differentiation in its tea business, and focus in its automobile
business. The business level strategies are decided upon by the heads of strategic business units and
their teams in light of the specific nature of the industry in which they operate.

3. Functional Level

Functional level strategies relate to the different functional areas which a strategic business unit has,
such as marketing, production and operations, finance, and human resources. These strategies are
formulated by the functional heads along with their teams and are aligned with the business level
strategies. The strategies at the functional level involve setting up short-term functional objectives, the
attainment of which will lead to the realization of the business level strategy.

For example, the marketing strategy for a tea business which is following the differentiation strategy
may translate into launching and selling a wide variety of tea variants through company-owned retail
outlets. This may result in the distribution objective of opening 25 retail outlets in a city; and
producing 15 varieties of tea may be the objective for the production department. The realization of
the functional strategies in the form of quantifiable and measurable objectives will result in the
achievement of business level strategies as well.

SM/U3 Topic 2 Strategies – Stability, Expansion,

Retrenchment and Combination strategies
Growth is essential for an organization. Organizations go through an inevitable progression from
growth through maturity, revival, and eventually decline. The broad corporate strategy alternatives,
sometimes referred to as grand strategies, are: stability/consolidation, expansion/growth,
divestment/ retrenchment and combination strategies. During the organizational life cycle,
managements choose between growth, stability, or retrenchment strategies to overcome deteriorating
trends in performance.

At the core of strategy must be a clear logic of how the corporate objectives, will be achieved. Most
of the strategic choices of successful corporations have a central economic logic that serves as the
fulcrum for profit creation.

Some of the major economic reasons for choosing a particular type strategy are:

(a) Exploiting operational economies and financial economies of scope.

(b) Uncertainty avoidance and efficiency.

(c) Possession of management skills that help create corporate advantage.

(d) Overcoming the inefficiency in factor markets and

(e) Long term profit potential of a business.

The non-economic reasons for the choice of strategy elements include :

(a) Dominant view of the top management,

34
(b) Employee incentives to diversify (maximizing management compensation),

(c) Desire for more power and management control,

(d) Ethical considerations and

(e) Corporate social responsibility.

STABILITY STRATEGY
Stability strategy is a strategy in which the organization retains its present strategy at the corporate
level and continues focusing on its present products and markets. The firm stays with its current
business and product markets; maintains the existing level of effort; and is satisfied with incremental
growth. It does not seek to invest in new factories and capital assets, gain market share, or invade new
geographical territories. Organizations choose this strategy when the industry in which it operates or
the state of the economy is in turmoil or when the industry faces slow or no growth prospects. They
also choose this strategy when they go through a period of rapid expansion and need to consolidate
their operations before going for another bout of expansion.

EXPANSION STRATEGY
Firms choose expansion strategy when their perceptions of resource availability and past financial
performance are both high. The most common growth strategies are diversification at the corporate
level and concentration at the business level. Reliance Industry, a vertically integrated company
covering the complete textile value chain has been repositioning itself to be a diversified
conglomerate by entering into a range of business such as power generation and distribution,
insurance, telecommunication, and information and communication technology services.

Diversification is defined as the entry of a firm into new lines of activity, through internal or external
modes. The primary reason a firm pursues increased diversification are value creation through
economies of scale and scope, or market dominance. In some cases firms choose diversification
because of government policy, performance problems and uncertainty about future cash flow. In one
sense, diversification is a risk management tool, in that its successful use reduces a firm’s
vulnerability to the consequences of competing in a single market or industry. Risk plays a very vital
role in selecting a strategy and hence, continuous evaluation of risk is linked with a firm’s ability to
achieve strategic advantage (Simons, 1999). Internal development can take the form of investments in
new products, services, customer segments, or geographic markets including international expansion.
Diversification is accomplished through external modes through acquisitions and joint ventures.
Concentration can be achieved through vertical or horizontal growth. Vertical growth occurs when a
firm takes over a function previously provided by a supplier or a distributor. Horizontal growth occurs
when the firm expands products into new geographic areas or increases the range of products and
services in current markets.

RETRENCHMENT STRATEGY
Many firms experience deteriorating financial performance resulting from market erosion and wrong
decisions by management. Managers respond by selecting corporate strategies that redirect their
attempt to turnaround the company by improving their firm’s competitive position or divest or wind
up the business if a turnaround is not possible. Turnaround strategy is a form of retrenchment
strategy, which focuses on operational improvement when the state of decline is not severe. Other
possible corporate level strategic responses to decline include growth and stability.

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 COMBINATION STRATEGY
The three generic strategies can be used in combination; they can be sequenced, for instance growth
followed by stability, or pursued simultaneously in different parts of the business unit. Combination
Strategy is designed to mix growth, retrenchment, and stability strategies and apply them across a
corporation’s business units. A firm adopting the combination strategy may apply the combination
either simultaneously (across the different businesses) or sequentially. For instance, Tata Iron & Steel
Company (TISCO) had first consolidated its position in the core steel business, then divested some of
its non-core businesses. Reliance Industries, while consolidating its position in the existing businesses
such as textile and petrochemicals, aggressively entered new areas such as Information Technology.

SM/U3 Topic 3 Concentration Strategies

THESTREAK24 DEC 2018 2 COMMENTS
A growth strategy adopted by the company to concentrate by investing more resources in
marketing and production of only one primary product or market.

The benefits of the strategy are to build a strong reputation within a market and generate
loyalty among the customers. But it has disadvantages because of the nature of shift of the
demand of customers due to innovations in technology. This may led to the product
becoming obsolete, and also a sudden economic turndown could lead to its failure.

For many firms, concentration strategies are very sensible. These strategies involve trying to
compete successfully only within a single industry. McDonald’s, Starbucks, and Subway are
three firms that have relied heavily on concentration strategies to become dominant
players.Concentration strategies involve trying to grow by successfully competing only within
a single industry.

There are three concentration strategies:

(a) Market penetration,

(b) Market development, and

(c) Product development.

1. Market Penetration
A firm can use one, two, or all three as part of their efforts to excel within an industry (Ansoff,
1957). Market penetration involves trying to gain additional share of a firm’s existing markets
using existing products. Often firms will rely on advertising to attract new customers with
existing markets.

Nike, for example, features famous athletes in print and television ads designed to take
market share within the athletic shoes business from Adidas and other rivals. McDonald’s
has pursued market penetration in recent years by using Latino themes within some of its
advertising. The firm also maintains a Spanish-language website
at http://www.meencanta.com; the website’s name is the Spanish translation of McDonald’s
slogan “I’m lovin’ it.” McDonald’s hopes to gain more Latino customers through initiatives
such as this website.

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2. Market Development
Market development involves taking existing products and trying to sell them within new
markets. One way to reach a new market is to enter a new retail channel. Starbucks, for
example, has stepped beyond selling coffee beans only in its stores and now sells beans in
grocery stores. This enables Starbucks to reach consumers that do not visit its
coffeehouses.

Entering new geographic areas is another way to pursue market development. Philadelphia-
based Tasty Baking Company has sold its Tastykake snack cakes since 1914 within
Pennsylvania and adjoining states. The firm’s products have become something of a cult hit
among customers, who view the products as much tastier than the snack cakes offered by
rivals such as Hostess and Little Debbie. In April 2011, Tastykake was purchased by
Flowers Foods, a bakery firm based in Georgia. When it made this acquisition, Flower Foods
announced its intention to begin extensively distributing Tastykake’s products within the
southeastern United States. Displaced Pennsylvanians in the south rejoiced.

3. Product Development
Product development involves creating new products to serve existing markets. In the
1940s, for example, Disney expanded its offerings within the film business by going beyond
cartoons and creating movies featuring real actors. More recently, McDonald’s has gradually
moved more and more of its menu toward healthy items to appeal to customers who are
concerned about nutrition.

In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would
appeal to their customers when they do not have easy access to a Starbucks store or a
coffeepot. The soft drink industry is a frequent location of product development efforts.
Coca-Cola and Pepsi regularly introduce new varieties—such as Coke Zero and Pepsi
Cherry Vanilla—in an attempt to take market share from each other and from their smaller
rivals.

SM/U3 Topic 4 Integration Strategies: Horizontal

& Vertical
Integration Growth and expansion are the two needs of every firm, irrespective of its size and nature.
Firms can grow and expand themselves by way of integration. There are two major forms of
integration, i.e. Horizontal Integration and Vertical Integration. Horizontal Integration is a kind of
business expansion strategy, wherein the company acquires same business line or at the same level of
value chain so as to eliminate competition to a greater extent.

Conversely, Vertical Integration is used to rule over the entire industry by covering the supply
chain. It implies the integration of various entities engaged in different stages of the distribution
chain.

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 Horizontal Integration
The merger of two or more firms, which are engaged in the same line of business and their activity
level is also same; then this is known as Horizontal Integration. The product may include
complementary product, by-product or any other related product, competitive product or entering into
the product’s repairs, services, and maintenance section.

Horizontal Integration reduces competition between firms in the market, as if the producers of the
product get combined they can create a monopoly. However, it can also create an oligopoly if there
are still some independent manufacturers in the market.

It is a tactic used by most of the companies to expand its size and achieve economies of scale due to
increased production level. This will help the company to approach new customers and market.
Moreover, the company can also diversify its products and services.

Vertical Integration
Vertical Integration is between two firms that are carrying on business for the same product but at
different levels of the production process. The firm opts to continue the business, on the same product
line as it was done before integration. It is an expansion strategy used to gain control over the entire
industry.

There are two forms of vertical integration, as described below:

Forms of vertical integration

• Forward Integration: If the company acquires control over distributors, then it is downstream or
forward integration.
• Backward Integration: When the company acquires control over its supplier, then it is upstream or
backward integration.

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 The cause of integration is to strengthen the production-distribution chain and to minimize the cost
and wastage of products at various levels. The integration also enables the company to keep upstream
and downstream profits and eliminate intermediaries.

Apple is the best example of vertical integration; it is the biggest and a renowned manufacturer of
smartphones, laptops and so on. It controls the whole production and distribution process itself, from
the beginning to the end. Another example of this is Alibaba, a Chinese e-commerce company, that
owns the entire system of payment, delivery, search engine and much more.

Key Differences between Horizontal and Vertical Integration

The following are the major differences between horizontal and vertical integration:

1. Horizontal Integration occurs between two firms whose product and production level are same.
Vertical Integration is an integration of two firms that operates in different stages of the
manufacturing process.
2. Horizontal Integration aims at increasing the size of business and scale of production, whereas
Vertical Integration focuses on strengthening and smoothening its production-distribution process.
3. The greatest advantage of horizontal integration is that it eliminates competition between firms, which
ultimately extends the market share of the company. Conversely, Vertical Integration results in
lowering the cost of production and wastage.
4. Horizontal Integration only brings synergy, but not self-sufficiency while Vertical Integration helps
the company gain synergy with self-sufficiency.
5. Horizontal Integration helps to acquire control over the market, but Vertical Integration is a strategy
used for gaining control over the whole industry.

Example

Horizontal Integration

Integration of Exxon and Mobil, oil companies to increase market dominance is an example of
Horizontal Integration.
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 Vertical Integration

Firms like Mafatlal, National Textile Corporation, etc have opened up retails stores owned by them,
in order to have an effective control over distribution activities.

SM/U3 Topic 5 Diversification: Related & Unrelated

Diversification is the art of entering product markets different from those in which the firm is
currently engaged in. It is helpful to divide diversification into ‘related’ diversification
and ‘unrelated’ diversification.

A related diversification is one in which the two involved businesses have meaningful commonalties,
which provide the potential to generate economies of scale or synergies based upon the exchange of
skills or resources. In a related diversification the resulting combined business should be able to
achieve improved ROI because of increased revenues, decreased costs, or reduced investment, which
are attributable to the commonalties.

An important issue in any diversification decision is whether, in fact, there is a real and meaningful
area of commonality that will benefit the ultimate ROI. If such a meaningful commonality is lacking,
the diversification may still be justifiable, but the rationale will need to be different.

Related diversification

1. Exchanging skill and resources

Related diversification provides the potential to attain synergies by the exchanged or sharing of skills
or resources. One business unit must have skills or resources that are ‘exportable’ to another company
or business unit. Thus, a first condition for successful related diversification is to identify skills or
resources that are exportable or that are needed and can be ‘imported!

The second condition is to find a partner or business unit that can either provide or use them. The
third is to ascertain whether the organizational integration needed to accomplish the exchange is
feasible. Skills or resources that can be usefully imported or exported can take a variety of forms.

2. Brand name

One commonly found resource that is exportable is a strong established brand name like Coca-Cola,
Microsoft, Pepsi, Puma, BMW, or Nivea.

3. Marketing skills

Usually a firm will either possess or lack a strong skill in marketing for a particular market. Thus, a
frequent motive to diversify is to export or import a marketing talent. The typical case in this regard is
the introduction of Microsoft products into the People’s Republic of China (PRC). PRC was moving
from the socialistic pattern of society to market economy.

During the 1990s, urbanization started increasing and a shift was seen from agriculture to the service
sector. Agriculture, science and technology, industry and defence were targeted for modernization.
Richard Fade, vice-president in charge of Microsoft’s Far-east operations, pondered Microsoft’s
planned introduction of products into China.

40
 In the Chinese computer hardware industry of 36 domestic vendors accounted for 82 per cent of the
units of domestically manufactured PCs. In the software industry, State Owned Enterprises (SOEs)
dominated the market. Since, the SOEs were answerable to the government, all their revenues accrued
directly to national government.

The following are the key tasks that need to be done while localizing:

(i) The local character sets need to be supported.

(ii) The interface needs to be translated in a form that is familiar to the local user.

(iii) All documents should be in local language.

(iv) Configure the software so that it can support locally available software and hardware.

(v) Provide local customer service.

Microsoft in 1984 signed its first OEM agreement in Taiwan, home of over 3,000 PC systems and
component manufacturers, before opening an office in 1989. Five years later Microsoft opened an
office in China. It was estimated that 95 per cent of PCs had the English version of Microsoft DOS
installed together with one of the many Chinese shells.

Microsoft had worked with SV earlier on a smaller project and so it agreed to work with them on P-
DOS project. Based on their earlier experience, it was understood that it was very difficult to parcel
out a particular major software localization task to one SV and hence opted for a ‘consortia’ of SVs
and set UP a product development centre. This eventually paid the company a ‘prize reward’ by
limiting other competitors in the market.

4. Service

A small company can often create or enter a market area and do well with an innovative product. As
the market matures, however, the necessity for a strong service organization becomes important. The
smaller firm might then consider joining forces with a larger firm which has a service organization
that can be adapted to the involved product. Typical example is the Bluetooth technology of
Blackberry.

5. R&D and product development

A firm may be highly skilled at R&D and new product development, but it may lack skills in either
marketing or production. Godrej is marketing the mosquito repellent Good knight and mango juice
Jumpin, which are typical products of small entrepreneurs. Sun silk shampoo of HUL is manufactured
in SSI units of Pondicherry.

6. Exploiting excess capacity

One type of resources that is often easily exchanged is excess capacity. Bottling plants of SDC (Soft
Drink Concentrates) are now widely engaged in bottling fresh juices of orange, apple, mango,
pineapple, grapes, tender coconut and lemon juice for MNCs Pepsi and Coke in India.

7. Achieving economies of scale

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 Related diversification can sometimes provide economies of scale. Two smaller consumer product
firms, for example, may not be able to afford an effective sales force, new product development or
testing programme, or warehousing and logistics systems. However, the two firms together may be
able to operate at an efficient level. Similarly, two firms when combined may be able to justify an
expensive piece of automated production equipment.

8. Risks of related diversification

Even related diversification can be risky. There are three major problems. First, relatedness and
potential synergy simply don’t exist. Strategists delude themselves that there is a synergistic
justification not on the basis of judgement supported by a thorough external and self-analysis, but by
manipulating semantics.

Second, potential synergy may exist but is never realized because of implementation problems. This
happens when the diversification move involves integrating two organizations that have fundamental
differences and/or because one of the two organizations lacks the ability or motivation to undertake
necessary programmes to make the diversification work.

Third, possible violations of antitrust laws in the west and MRTP (Monopolies and Restrictive Trade
Practice) law in India create an additional risk when an acquisition or merger is involved. Ironically,
as the degree of relatedness and the synergy potential increase so does the possibility of an antitrust or
MRTP problem. Jet Airways and Sahara deal is a typical example.

Jet Airways has extended its service to the mass market under Jet Lite. Similarly, Kingfisher acquired
Air Deccan and symbolically kept the Kingfisher logo in the wings and POS outlets in the country,
which includes all post offices and petrol pumps.

Unrelated Diversification
Unrelated diversification lacks commonality in markets, distribution channels, production technology,
and R&D thrust to provide the opportunity for synergy through the exchange or sharing of assets or
skills. Reliance entered into retailing by allocating Rs25, 000 crore in a phased manner is a typical
example.

1. Manage and allocate cash flow

Unrelated diversification can balance the cash flows of SBU entities. A firm, which has many SBUs
that merit investment might buy or merge with a cash cow to provide a source of cash. The
acquisition of the cash cow may reduce the need to raise debt or equity over time, although if the cash
cow is acquired, resources will need to be expected.

Typical example is Kingfisher Airlines, where the chairman and CEO Vijay Mallya himself routed
the surplus cash from this liquor business to give the ‘Fly the good times’ experience to Indian
aviation. So there’s KF Fun TV with seven channels (lifestyle, entertainment, sports, English
premium, toon (cartoon), flight guide and view from the top channels, and KF Radio with 10 channels
chartbusters and hindi pop, hindi retro (the golden oldies), Hindi Easy Listening, ghazals, english pop,
english retro (an earful of vintage), Easy Listening (Honey trenched notes that remind the listener that
world is still a wonderful place), Club (dance floor) Jazz and Blues and Lounge (lie back in the lap of
lounge with the soothing notes of lounge music) supported with state of the art aircraft and
technology for in-flight, catering. The reservation system is a remarkable attempt to reposition the
image of the Indian industry.

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2. Entering business areas with high ROI prospects

A basic diversification motivation is to improve ROI by moving into business areas with high ROI
prospects. One approach is to enter high growth business areas. According to life style consumption
study by Edelweiss Securities, organized retail trade in India is now finding its feet. Its share in the
total retail pie is set to increase from the current 2 per cent to about 10 per cent by 2010. This will
translate into approximately Rs1, 400 billion of retail trade by 2010 (Figure 8.19).

The study further says retail space is expected to increase from 10 million sq. ft. in 2002 to 80 million
sq. ft. in 2010. Retail space development in leading centres will provide high impetus to retail growth
as about 38 per cent of India’s high income households live in the top five cities (Mumbai, Delhi,
Kolkata, Chennai and Bangalore), and an additional 28 per cent stay in mid-sized cities.

Significant growth in organized retailing during the next three years is expected in the metros and
mini-metros through better performance of the existing stores, as well as opening of new stores. From
25 operational malls in 2003, the country is expecting over 600 malls by 2010. Accordingly Videocon
Industries spotted organized retailing as the bright spot for future investments to the tune of Rs25, 000
crore by 2010.

3. Obtaining a ‘bargain’ price for a business

Another way to improve the ROI is to acquire a business at a ‘bargain’ price so the involved
investment is low and the associated ROI is therefore high.

4. The potential to restructure a firm

Allen, Oliver, and Schwallie, three Booz Allen acquisition specialists have suggested another
possibility: that an acquisition can provide the basis for a restructuring of the acquired firm, the
acquiring firm, or both.

5. Reducing risk

The reduction of risk can be another motivation for unrelated diversification. The heavy reliance upon
a single product line can stimulate a diversification move. Reducing risk can also lead to entering into
businesses that will counter or reduce the cyclical nature of the existing earnings.

6. Risks of unrelated diversification

The very concept of an unrelated business, where by definition there is no possibility to improve that
business through synergy, suggests risk and difficulty. Many knowledgeable people have made
blanket statements warning against unrelated diversification. Peter Drucker claims that all successful
diversification requires a common core or unity represented by common markets, technology, or
production processes. He states that without such a unity, diversification can never work; financial
ties alone are insufficient.

SM/U3 Topic 6 Internationalization

Internalization has been of great interest to nearly every company. There is no single and universally
accepted definition of internationalization but from an economics point of view, it is defined as the
process where business gets more involved in the international markets. In the contemporary world,
businesses begin their operations domestically but must draw up a long-term plan on how the business
43
will be going international. Internationalization phenomenon has significantly changed the landscape
for most business resulting to a very dynamic market situation with severe competition for the
companies.

The reason behind going for international market varies from one company to another. However, most
firms pursue internationalization because domestic market has become inadequate because of the
economies of scale and multiple opportunities that are available in the foreign markets. Most
successful executives will always want to try another market after any successful one.

Internationalization has been one of the strategies being used by most executives to reduce the cost of
operations. Businesses with overhead costs can have the excess cost cut down in countries that have
relatively deflated currencies as well as low cost of living. Most business in the United States finds it
relatively cheaper operating in countries that have free trade arrangement with U.S.

One way in which internationalization help companies reduce the cost of doing is business is through
reduced labor costs. Companies that are interested in going international usually look for those
markets that have a low cost of leaving as that makes it cheaper hiring employees in such countries.
There are those companies that consider going international when in the financial crisis. Executives of
companies that are experiencing a financial crisis in the domestic market will formulate the budget
and go for the foreign markets. Institutions are commonly defined as humanly made constraints the
give economic, social interactions and political shape. The institution can also be looked at as a wide
range of structures that widely affect contract enforcement, protection of investors, economic
outcome, property rights, and even political system.

Institutions play a very crucial role in the market economy. The main aim of institutions is to ensure
that there is effective functioning of the market mechanism. This sees to it that those firms that take
part in the market can carry out their transactions without suffering undue loss or being exposed to
risk. Some of the reason behind the popularity of internationalization among current companies
include opening up of trade borders by most countries across the world, elimination of trade barriers
among many others.

Companies are no longer secure staying in the domestic market and therefore most companies tend to
go for internationalization to be able to spread their risks. Internationalization has become much
easier due to the communication and technological advancement. Communication and technological
advancement are vital in ensuring that foreign businesses are properly and timely operated without
experiencing problems. Internationalization is achieved through very different ways.

There are those companies that take part through exporting their products to foreign countries and
continue to strengthen their home market. Some adopt a highly aggressive approach which includes
acquiring firms, coming up with alliances, embrace joint venture or just establish their subsidiary. All
these entry strategies differ in regards to the risk associated with each, control, level of resource
commitment and return on investment that internationalization promises.

There are many entry modes that companies can use to join foreign markets but all these modes can
be categorized in two broad modes. The first mode is the non-equity mode, which comprises of export
and contractual agreements. The second mode is referred to equity mode of entry, which is known to
include wholly owned subsidies and joint ventures. From all the available market entry, the one that
offers the lowest risk level and the lowest market control is the export and import.

The one with the highest risk level but highest market control is considered to be expected return on
investment. The expected return on investment is majorly connected with a direct investment such as
acquisition as well as Greenfield investments. Export and importing is the most common strategy that
44
most firms use to pursue internationalization. Export is known as the process of selling services and
goods to countries other than the domestic one. The company can directly be involved in the export or
use an agent.

The other strategy that is equally popular is licensing. International licensing firms are known to give
out licensee patent rights, copyrights, trademark rights, or even know-how on processes and products.
Licensee does a production of licensor’s products, marketing it within the assigned territory and
payment of licensor’s fee together with sales-related royalties in return. This strategy is mostly
welcome by foreign public authorities as it is the way through which technology is leaked into the
country.

Reasons for entering International Markets

Internationalization is more of an expansion of business from its home market into foreign markets.
The decision to internationalize is one of the strategic decisions that have a fundamental effect on any
firm and all its internal and external operations. It equally affects the management of the company.

In the current world, the rate at which companies operate outside their domestic market has
significantly increased. Even though internationalization has become a very popular thing amongst
many companies around the world, it is highly important for every company to consider their motives
for going international. There are multiple reasons why companies consider going international.

The most common reason for going international is the need for pursuing potential abroad and the
desire to diversify risk. Most companies consider expanding their product line in the foreign market
when launching a new product. Companies like Coca-Cola had only to introduce bottled water after
going to nearly every country in the world. In most cases domestic competition grows so fierce to the
extent that companies consider foreign markets so attracting.

It explains why Ford which was second after General Motors in United States market became
internationalized much faster compared to General Motors. Most of the Chinese firms are considering
internationalization due to intense competition in china’s market. The other good reason for going to a
foreign market is to avoid the risk that comes with operating in a single market.

Most firms go international with an aim of diversifying risk. With an alternative market in a foreign
land can be greatly of help in offsetting negative results various uncertainties such as economic
downturns or political intolerance. Starbuck’s is a good example of companies that enjoyed the
advantages of going international during U.S. recession, which significantly devastated sales within
the home market. Foreign market covered company loses through the overwhelming performance
overseas.

Many other companies consider going international to achieve a different growth rate. Different
markets have different growth rate and most companies in slow-growth countries will always consider
internationalization with an aim of going to countries with faster growth rate. Companies operating in
the food industry have varied growth rate from one market to another. The variations come when
some countries experience maturity in say food production. Such companies will; look for countries
whose markets are still at the advancing stage.

Besides major reasons that attribute to profitability, companies equally consider going international
not to gain financially but to gain knowledge. There are so many firms that have entered the
international market to find out what need to be changed from the existing product to make it
acceptable globally. Government incentives also promote internationalization.

45
There are those companies that consider going overseas not for growth, not because of competition in
the domestic market but because the government gives them incentives to export some of the local
products. Through government incentives, most companies have managed to access markets that they
would have not accessed. So many countries such as the United States provide its companies with a
wealth of help to start the business of exporting products to foreign countries.

SM/U3 Topic 7 Porters Model of

Competitive Advantage of Nations
THESTREAK25 DEC 2018 2 COMMENTS
Increasingly, corporate strategies have to be seen in a global context. Even if an organization does not
plan to import or to export directly, management has to look at an international business environment,
in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may
influence the domestic market. Information technology is reinforcing this trend.

Michael Porter introduced a model that allows analyzing why some nations are more competitive than
others are, and why some industries within nations are more competitive than others are, in his book
The Competitive Advantage of Nations. This model of determining factors of national advantage has
become known as Porters Diamond. It suggests that the national home base of an organization plays
an important role in shaping the extent to which it is likely to achieve advantage on a global scale.
This home base provides basic factors, which support or hinder organizations from building
advantages in global competition. Porter distinguishes four determinants:

Factor Conditions

The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which
are relevant for competition in particular industries. These factors can be grouped into human
resources (qualification level, cost of labor, commitment etc.), material resources (natural resources,
vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include
factors like quality of research on universities, deregulation of labor markets, or liquidity of national
stock markets. These national factors often provide initial advantages, which are subsequently built
upon. Each country has its own particular set of factor conditions; hence, in each country will develop
those industries for which the particular set of factor conditions is optimal.

46
This explains the existence of so-called lowcost-countries (low costs of labor), agricultural countries
(large countries with fertile soil), or the start-up culture in the United States (well developed venture
capital market). Porter points out that these factors are not necessarily nature-made or inherited. They
may develop and change. Political initiatives, technological progress or socio-cultural changes, for
instance, may shape national factor conditions. A good example is the discussion on the ethics of
genetic engineering and cloning that will influence knowledge capital in this field in North America
and Europe.

One internationally successful industry may lead to advantages in other related or supporting
industries. Competitive supplying industries will reinforce innovation and internationalization in
industries at later stages in the value system. Besides suppliers, related industries are of importance.
These are industries that can use and coordinate particular activities in the value chain together, or
that are concerned with complementary products (e.g. hardware and software).

A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and
leather, but with related products and services such as leather working machinery, design, etc.

Home Demand Conditions

Describes the state of home demand for products and services produced in a country. Home demand
conditions influence the shaping of particular factor conditions. They have impact on the pace and
direction of innovation and product development. According to Porter, home demand is determined
by three major characteristics: their mixture (the mix of customers needs and wants), their scope and
growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Porter states
that a country can achieve national advantages in an industry or market segment, if home demand
provides clearer and earlier signals of demand trends to domestic suppliers than to foreign
competitors. Normally, home markets have a much higher influence on an organization’s ability to
recognize customers’ needs than foreign markets do.

Related and Supporting Industries

The existence or non-existence of internationally competitive supplying industries and supporting

industries. One internationally successful industry may lead to advantages in other related or
supporting industries. Competitive supplying industries will reinforce innovation and
internationalization in industries at later stages in the value system. Besides suppliers, related
industries are of importance. These are industries that can use and coordinate particular activities in
the value chain together, or that are concerned with complementary products (e.g. hardware and
software).

A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and
leather, but with related products and services such as leather working machinery, design, etc.

Firm Strategy, Structure, and Rivalry

The conditions in a country that determine how companies are established, are organized and are
managed, and that determine the characteristics of domestic competition Here, cultural aspects play
an important role. In different nations, factors like management structures, working morale, or
interactions between companies are shaped differently.

This will provide advantages and disadvantages for particular industries. Typical corporate objectives
in relation to patterns of commitment among workforce are of special importance. They are heavily

47
influenced by structures of ownership and control. Family-business based industries that are
dominated by owner-managers will behave differently than publicly quoted companies. Porter argues
that domestic rivalry and the search for competitive advantage within a nation can help provide
organizations with bases for achieving such advantage on a more global scale.

Porters Diamond has been used in various ways

Organizations may use the model to identify the extent to which they can build on home based
advantages to create competitive advantage in relation to others on a global front. On national level,
governments can (and should) consider the policies that they should follow to establish national
advantages, which enable industries in their country to develop a strong competitive position globally.
According to Porter, governments can foster such advantages by ensuring high expectations of
product performance, safety or environmental standards, or encouraging vertical co-operation
between suppliers and buyers on a domestic level etc.

SM/U3 Topic 8 Cooperative: Mergers &

acquisition Strategies
Merger and acquisition are the corporate strategies that deal with buying, selling or combining
different companies with a goal to achieve rapid growth. However, the decisions on mergers and
acquisitions are taken after considering a few facts like the current business status of the companies,
the present market scenario, and the threats and opportunities etc. In fact, the success of mergers and
acquisitions largely depend upon the merger and acquisition strategies adopted by the organizations.

Merger and acquisition strategies are the roadmap for the corporate development efforts of an
organization. The strategies on merger and acquisition are devised to transform the strategic business
plan of the organization to a list of target acquisition prospects. The merger and acquisition strategies
offer a framework, which evaluates acquisition candidates and helps the organization to identify the
suitable ones.

Many big companies continuously look out for potential companies, preferably smaller ones, for
mergers and acquisitions. Some companies may have their core cells, which concentrate on mergers
and acquisitions. Merger and acquisition strategies are devised in accordance with the policy of the
organization. Some may prefer to diversify or to expand in a specific field of business, while some
others may wish to strengthen their research facilities etc.

Merger and Acquisition Strategy Process

The merger and acquisition strategies may differ from company to company and also depend a lot on
the policy of the respective organization. However, merger and acquisition strategies have got some
distinct process, based on which, the strategies are devised.

(i) Determine Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic business plan of the organization. So,
in merger and acquisition strategies, you firstly need to find out the way to accelerate your strategic
business plan through the M&A. You need to transform the strategic business plan of your
organization into a set of drivers, which your merger and acquisition strategies would address.

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While chalking out strategies, you need to consider the points like the markets of your intended
business, the market share that you are eyeing for in each market, the products and technologies that
you would require, the geographic locations where you would operate your business in, the skills and
resources that you would require, the financial targets, and the risk amount etc.

(ii) Determine Acquisition Financing Constraints

Now, you need to find out if there are any financial constraints for supporting the acquisition. Funds
for acquisitions may come through various ways like cash, debt, public and private equities, PIPEs,
minority investments, earn outs etc. You need to consider a few facts like the availability of untapped
credit facilities, surplus cash, or untapped equity, the amount of new equity and new debt that your
organization can raise etc. You also need to calculate the amount of returns that you must achieve.

(iii) Develop Acquisition Candidate List

Now you have to identify the specific companies (private and public) that you are eyeing for
acquisition. You can identify those by market research, public stock research, referrals from board
members, investment bankers, investors and attorneys, and even recommendations from your
employees. You also need to develop summary profile for every company.

(iv) Build Preliminary Valuation Models

This stage is to calculate the initial estimated acquisition cost, the estimated returns etc. Many
organizations have their own formats for presenting preliminary valuation.

(v) Rate/Rank Acquisition Candidates

Rate or rank the acquisition candidates according to their impact on business and feasibility of closing
the deal. This process will help you in understanding the relative impacts of the acquisitions.

(vi) Review and Approve the Strategy

This is the time to review and approve your merger and acquisition strategies. You need to find out
whether all the critical stakeholders like board members, investors etc. agree with it or not. If
everyone gives their nods on the strategies, you can go ahead with the merger or acquisition.

SM/U3 Topic 9 Joint Venture

Joint Venture (JV) is a cooperative enterprise entered into by two or more business entities for the
purpose of a specific project or other business activity. The reason for a joint venture is usually some
specific project.

Joint ventures can be informal (a handshake) or formal, and they can be short term or long term. Often
the joint venture creates a separate business entity, to which the owners contribute assets, have equity,
and agree on how this entity may be managed. The new entity may be a corporation, limited liability
company, or partnership.

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 In other cases, the individual entities retain their individuality and they operate under a joint venture
agreement. In any case, the parties in the JV share in the management, profits, and losses, according
to a joint venture agreement (contract).

Joint ventures are often entered into for a single purpose – a production or research activity. But they
may also be formed for a continuing purpose.

Why Form a Joint Venture?

• To combine resources. A bigger entity may have more clout in an industry or more resources to
ensure the success of a venture.
• To combine expertise. In technical businesses, one company might have expertise in one part of a
venture while the second company might have expertise in another part. For example, Company A
might be good at creating software, while Company B has experience creating the hardware that’s
needed for a venture.
• To save money. Two companies might consider a joint venture to save money on advertising, maybe
at a trade show or in a trade publication.

Examples of Joint Ventures

Joint ventures can combine large and small companies on big and little projects. Here are some
examples:

MillerCoors is a joint venture between SABMiller and Molson Coors Brewing Company to see all
their beer brands in the U.S. and Puerto Rico.

In 2011, Ford and Toyota agreed to work together to develop hybrid trucks.

Mining and drilling are expensive propositions, and often two companies in these industries will
combine as a joint venture to mine or drill in a particular area.

How a Joint Venture Pays Taxes?

When a joint venture is formed, the most common structure is to set up a separate business entity.
Then the parties each own a specific percentage of the entity. If the joint venture is a corporation, for
example, and two businesses have equal shares in the business, they structure the company so each
partner entity has an equal number of shares of company stock and equal management and board of
directors members.

The joint venture isn’t recognized as a taxing entity by the IRS. So the business form that the joint
venture company takes determines how taxes are paid.

If the joint venture is a separate business entity, it pays income taxes and all other taxes like that
business form. For example, if the new joint venture company is an LLC, it pays taxes as an LLC.

Because the two parties have decided on how to split profits and losses, they will use that split to
decide how each party receives profits, handles losses, and contributes to paying any taxes that are
due.

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If the joint venture is simply a contractual relationship with an agreement between two independent
companies, the terms of the agreement will determine how the joint venture is taxed and how the tax
is apportioned between the two entities.

What a Joint Venture is NOT?

A joint venture may have some similarity to a partnership, but it’s not. A partnership is a single
business entity formed by two or more people. A joint venture joins several different business entities
(each of which may be any type of legal entity) into a new entity, which may or may not be a
partnership. Partnership income taxes are paid by the owners individually.

Don’t confuse a JV with a ‘qualified joint venture,’ – a specific taxation form for husbands and wives
in partnerships.

You may have heard the term “consortium” used to explain a joint venture. A consortium is a looser
arrangement between several different and distinct business entities. A consortium doesn’t create a
new entity. In the travel industry, for example, a consortium of travel agencies allow memberships
with benefits. The consortium negotiates on behalf of its members for special rates from hotels,
resorts, and cruise lines.

The Benefits of Joint Ventures

Any two businesses of any size can work together on a joint project, while still maintaining the rest of
their business apart from each other. Some related articles that might give you additional ideas for
possible joint ventures.

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