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Strategic management

unit01

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Introduction

• Strategic Management is exciting and


challenging. It makes fundamental decisions
about the future direction of a firm – its
purpose, its resources and how it interacts
with the environment in which it operates.
• Every aspect of the organization plays a role
in strategy – its people, its finances, its
production methods, and its customers and so
on.

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What Is Strategic Management?

• Strategic Management can be described as the


identification of the purpose of the organization and
the plans and actions to achieve that purpose.
• It is that set of managerial decisions and actions that
determine the long term performance of a business
enterprise.
• Strategic management involves those management
processes in organizations through which future impact
of change is determined and current decisions are
taken to reach a desired future.
• In short, strategic management is about envisioning
the future and realizing it.

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DEFINITIONS
• “ Strategic management is concerned with the
determination of the base long term goals & objective of
an enterprise and the adoption of courses of action &
allocation of resource s necessary for carrying out these
goals.” Alfred Chandler.
• “strategic management is a process of formulating
implementing & evaluating cross functional decisions
that enable an org. to achieve its objective.” Pearce &
Robinson.
• “ It includes understanding the strategic position of an
organization making strategic choices for the future &
turning strategy into action.”Johnson & Sholes
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Strategic management v/s operational management

s. Strategic management Operational management


no
1 Concern with decision taken in Related to routine / day to day
uncertain &complex conditions problems
2 Involves top management Middle& lower level
3 Issues/problems related to long Problems requires immediate
term or they are unfamiliar attention & are familiar.
4 Have wide implication Have implication at functional /
work level
5 Eg. Joint ventures , mergers, Production planning, sales
diversification. planning.
6 Related to long duration Related to short duration

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CHARACTERISTICS OF STRTEGIC MANAGEMENT
1. Concerned with long term direction.
2. Recognizes change in environment
3. It is oriented towards future i.e. it tries to anticipate events rather simply react as
they occur.
4. Takes into account several components of the external environ. & their impact.
5. It is concerned with the a scope of an org. i.e. whether org should concentrate on
one activity / number of activities.
6. It greatly affects org. success/ failure.
7. It requires investment of substantial financial resources.
8. It identifies opportunities in the business environ. &adopting resources to take
advantage of those opportunities.
9. Values & expectations of stakeholders of organization also influenced the
strategic decisions of an org.
10.It aims at achieving some advantage for the org. over others.
11. It involves both intuition &strategic analysis.

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Nature of Strategic Management
• The following are the fundamental characteristics of
strategic management. Readers may note that some of
these characteristics may overlap with the
characteristics of “strategic decisions” and “strategic
approach” as these is all related concepts.
• Long-term Direction
• Recognizes Change
• Oriented Towards the Future
• External Emphasis
• Concerned with Scope of the Organization

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Importance of Strategic Management

• It helps the firm to be more proactive than reactive in


shaping its own future.
• It provides the roadmap for the firm. It helps the firm
utilize its resources in the best possible manner.
• It allows the firm to anticipate change and be
prepared to manage it.
• It helps the firm to respond to environmental changes
in a better way.
• It minimizes the chances of mistakes and unpleasant
surprises.
• It provides clear objectives and direction for employees

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Business Policy
• A Business policy course seeks to integrate the
knowledge gained in various functional area courses like
finance, marketing, operations, human Resources etc. so
as to develop a generalist approach in management
studies.
 Business policy as a field of study was first introduced at
Harvard Business School in 1911.
 The course was designed with the main objective of
imparting general management competence among
students.
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Definition Of Business Policy
• According to Newman and Logan:
• “Business policy represents the best thinking of the company
management as to how the Objectives may be achieved in the
prevailing economic and social conditions.”
 According to RE Thomas,
• “Business policy, basically, deals with decisions regarding the
future of an ongoing enterprise. Such policy decisions are taken at
the top level after carefully evaluating the organizational
strengths and weaknesses in relation to its environment”.

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Objectives Of Business Policy

• The Business policy course has three important purposes:

1. Integrates the knowledge and methods learnt in functional


courses such as production, finance, marketing, HR etc.
2. Develops analytical skills and decision-making Capabilities
of students through extensive case studies, research reports,
industry specific studies and data.
3. Promotes positive attitudes, ethical values and healthy ways
of thinking taking a holistic view of the internal as well as
external stakeholders of an organization.

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Importance of Business policy
1. It provides an integrated view of management based
on knowledge and experience.
2. The complexities of business and the constraints of
managing business in a competitive environment are
brought home with real-life bearing.
3. It provides a broader perspective of learning because it
cuts across the narrow boundaries of functional
management.
4. The process of policy formulation can be understood
with a clear perspective of environment.
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Business Policy And Strategic
Management
• Business policy and Strategic Management is an integrated discipline
which is concerned with the policy and strategic issues of an organization.
Focus of Business Policy Focus of Strategic Management

1. Traditional name of Strategic 1. The current name of Business


management Policy
2. Focus is on integrating knowledge 2. Focus is on achieving a “fit”
gained in various functional areas between organizational capabilities
and environmental opportunities

3. Primarily looks inward 3. Primarily looks outward

4. Emphasis is on integrated approach 4. Emphasis is on management of


to solve organization wide problems strategy to achieve competitive
advantage

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Business: Vision, Mission And
Objectives

The first task in the process of strategic management is to formulate the


organization’s vision and mission statements. These statements define the
organizational purpose of a firm. Together with objectives, they form a
“hierarchy of goals.”

Hierarchy of Goals
Vision

Mission

Goals

Objectives

Plans
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Vision

 Vision can be defined as “a mental image of a possible and


desirable future state of the organization” (Bennis and Nanus). It is
“a clear descriptive image of what a company wants to become in
future”.
 “The critical point is that a vision presents a view of a realistic,
credible, attractive future for the organization, a condition that is
better in some important ways than what now exists.”
 Vision, therefore, not only serves as a backdrop for the
development of the purpose and strategy of a firm, but also
motivates the firm’s employees to achieve it.

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Definitions of Vision
• Johnson: Vision is “clear mental picture of a future
goal created jointly by a group for the benefit of other
people, which is capable of inspiring and motivating
those whose support is necessary for its
achievement”.
• Kirkpatrick et al : Vision is “an ideal that represents
or reflects the shared values to which the
organization should aspire”.
• Thornberry: Vision is “a picture or view of the
future. Something not yet real, but imagined. What
the organization could and should look like. Part
analytical and part emotional”.
• Shoemaker: Vision is “the shared understanding of
what the firm should be and
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MANAGEMENT)
Characteristics of a Good Vision

• Clear & concise


• Both stable& flexible
• Provides guidance in making decision i.e.
focused
• Should have powerful motivational effect.
• It should distinguish company from others.
• Should be realistic & achievable
• Should convey the future image of company.

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Advantages of Vision

 Good vision fosters long-term thinking.


 It creates a common identity and a shared sense of purpose.
 It is inspiring.
 It represents a discontinuity, a step function and a jump ahead so
that the company knows what it is to be.
 It promotes risk-taking and experimentation.
 A good vision is competitive, original and unique. It makes sense in
the market place.
 A good vision represents integrity. It is truly genuine and can be
used for the benefit of people.

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Vision Failure

Vision Failure

A vision may fail when it is:

 Too specific (fails to contain a degree of uncertainty)

 Too vague/not definite (fails to act as a landmark)

 Too inadequate (only partially addresses the problem)

 Too unrealistic (perceived as unachievable)

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Examples of vision
• American Express; Although American Express is known for
offering credit card services to individuals around the world, their
vision statement says that they want their company to be "the
world's most respected service brand." Through their vision
statement, American Express does not focus on being the best credit
card service provider. Instead, they focus on being respected as a
"service brand.
• The McGraw-Hill Companies; Although McGraw-Hill is known
for publishing text books for students .McGraw-Hill's vision
includes "economic growth and job creation" and "creating a
smarter, better world." They focus on how their products and
services can help individuals and the world.

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Examples of vision-continue...
• Reebok; Reebok is known for making athletic products for
men, women and children. Through their vision statement,
Rebook also wants to provide inspiration to all of their
customers by saying that "we all have the potential to do
great things" and "to help consumers, athletes and artists,
partners and employees fulfill their true potential and reach
heights they may have thought un-reachable.“
• Cooper Tire and Rubber Company;Cooper Tire and
Rubber Company is known for making tires including cars,
trucks and motorcycles. Their vision statement says
"creating superior value, for our customers, employees,
partners and shareholders." Cooper Tire and Rubber
Company wants to be known for "superior value" instead of
only for its products.

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Mission

• “A mission statement is an permanent statement of purpose”. A


clear mission statement is essential for effectively establishing
objectives and formulating strategies.

• Defining Mission

• Thompson defines mission as “The essential purpose of the


organization, concerning particularly why it is in existence, the
nature of the business it is in, and the customers it seeks to serve
and satisfy”.

• Hunger and Wheelen simply call the mission as the “purpose or


reason for the organization’s existence”.

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Importance of Mission Statement

1. It helps to ensure unanimity of purpose within the organization.


2. It provides a basis or standard for allocating organizational
resources.
3. It establishes a general tone or organizational climate.
4. It serves as a focal point for individuals to identify with the
organization’s purpose and direction.
5. It facilitates the translation of objectives into tasks assigned to
responsible people within the organization.
6. It specifies organizational purpose and then helps to translate this
purpose into objectives in such a way that cost, time and
performance parameters can be assessed and controlled.

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Examples of Mission Statements

 Reliance Industries: “To become a major player in the global chemicals


business and simultaneously grow in other growth industries like
infrastructure”.
 ONGC: “To stimulate, continue and accelerate efforts to develop and
maximize the contribution of the energy sector to the economy of the
country”.
 Hindustan Lever: “Our purpose is to meet everyday needs of people
everywhere – to anticipate the aspirations of our consumers and
customers, and to respond creatively and competitively with branded
products and services which raise the quality of life”.
 McDonald: “To offer the customer fast food prepared in the same high
quality worldwide, tasty and reasonably priced, delivered in a consistent
low key décor and friendly manner”.

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Distinction Between Vision and
Mission
Vision Mission

1. A mental image of a possible and desirable 1. Permanent statement of philosophy,


future state of the organization.
2. A dream. 2. The way to achieve that dream.
3. Broad. 3. More specific than vision
4. Answers the question “what we want to 4. Answers the question “what is our business”.
become?”

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Objectives

• Objectives are the results or outcomes an organization wants to achieve in


pursuing its basic mission. The basic purpose of setting objectives is to
convert the strategic vision and mission into specific performance targets.
• Characteristics of Objectives
 Specific
 Quantifiable
 Measurable
 Clear
 Consistent
 Reasonable
 Challenging
 Contain a deadline for achievement
 Communicated, throughout the organization

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Role of Objectives

 They provide legitimacy


 They state direction
 They aid in evaluation
 They create synergy
 They reveal priorities
 They focus coordination
 They provide basis for resource allocation
 They act as benchmarks for monitoring progress
 They provide motivation

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Goals And Objectives

Goals Objectives

1. General Specific

2. Qualitative Quantitative, measurable

3. Broad organization–wide target Narrow targets set by operating


divisions
4. Long term results Immediate, short term results

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Corporate Strategy

 Strategy formulation in a multi-business enterprise is different from


strategy formulation in a single-business enterprise.

 In a single-business enterprise, the key question is how to compete


successfully in the chosen market.

 So, there is only one-level strategy known as business-level Strategy.

 But in a multi-business enterprise, which is involved in several businesses,


there is a need to have strategies at two levels – a corporate level strategy
for the company as a whole and a business level strategy for each of the
separate businesses of the company.

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Types Of Corporate Strategies
• Stability Strategy
• Growth / Expansion Strategies
• Defensive :Strategies/Retrenchment
• Combination strategy

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Strategic Decision Making

Organizational
Decision making

strategic Tactical Operational

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Continue…………………………….

• Deals with long run future of org.


Strategic • Concern with imp. Function of top level
decision executive.
• Wider in scope.

• Deals with specific plans & how strategy is


to be implement.
Tactical
• Concern with primarily a middle level
decision manager functions.
• Narrower in scope.

• Focus on day to day , real time activities of


Operational an org.
decision • Concern with frontline manager function.

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Strategic Management Model
The strategic management process can be better understood by
using a model as shown in the figure.

Analyse
External
Environment

Develop Establish Generate, Implement Evaluate and


vision and long-term Analyze and Strategies Control
` mission objectives Select Strategies
Strategies

Analyse
Internal
Environment

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Impact of globalization on Strategic
Management
• the globalization of business has become so rapid that a
new field called "Global Strategic Management" has
now emerged. This new field is a blend of strategic
management and international business that develops
worldwide strategies for global corporations. Whereas
most studies in this field focus on ordinary business
conditions, the revolutionary events of the past few
years make it clear that the present is not ordinary. Such
epoch-shattering events as the collapse of communism,
the unification of Europe, the information revolution,
the arrival of an environmental ethic, and other
remarkable new developments signal that a new era is
emerging in global affairs.

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Continue…….
• The following trends represent the principal driving forces
that are now moving the world in new directions. They
could be called "supertrends."
• Trend 1: A Stable Population of 10-14 Billion
• Trend 2: Industrial Output Will Increase by a Factor of 5-10
• Trend 3: Information technology (IT) is a revolutionary force
that will continue to overthrow governments, restructure
corporations, and unify the world.
• Trend 4: The High-Tech Revolution
• Trend 5: Global Integration
• Trend 6: Diversity and Complexity
• Trend 7: A Universal Standard of Freedom

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UNIT-II
Impact of Internet & E-Commerce
• E-Business is the use of Internet technologies to improve and
transform key business processes. The critical aim of companies
making a foray into e-business is to offer what the customer wants
without the expenses incurred in traditional businesses.
 Perhaps the greatest technological influence on strategic
management in the 21st century has been the widespread use
of the Internet.
 Internet is the ‘network of networks’ that allows exchange of data,
content, voice and video, as well as linking with the suppliers
through the Extranet, and various internal divisions through the
Intranet. Internet strategy aims at managing business through
relationship, information and knowledge – based coordination.
 The rise of the Internet has greatly influenced the strategic
management process.

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• What Is E-business?
• E-business means conducting business electronically. Simply speaking, business
entails buying and selling of goods and services. E-business includes buying and
selling on the internet. In a broader sense, business involves the following key
components:
 ensuring the supply and availability of stock (supply chain management)
 ensuring transport and delivery support (logistics)
 ensuring responsiveness to the customer demand (customer relationship
management); and
 ensuring payment (transactions)
• Electronic Business (e-business) strategy addresses how best these various
components of business can be managed ‘electronically’.

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• Origin of e-Business
 The origin of e-Business can be traced to electronic funds transfer,
which allowed banks and organizations to transfer funds among one
another, without the need for physical paperwork and money
activity to take place.
 Internet has become a strategic priority.
 E-business strategy requires a business model that is responsive to
the macro environment, and that supports internal resources and
collaborative external alliances.

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Forms Of Electronic Commerce
• Electronic commerce activities can be classified into four basic categories by
identifying businesses and consumers as initiators and recipients of the offer.
Businesses are commonly involved in more than one of these segments
simultaneously and/or involved in both electronic (i.e., “clicks”) and
traditional (i.e., “bricks”) forms of commerce, often referred to as “clicks and
bricks.” It is widely believed that successful retail firms of the future will likely
be the ones that adopt this combination approach.

Who is the Buyer?

B2B Business to B2C Business to


Business Consumer

Who is the Seller?


C2B Consumer C2C Consumer
to Business to Consumer

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How Does The Internet Add Value?
• The Internet has changed the way business is conducted. By
conducting business online and using digital technologies to
streamline operations, the internet is helping companies to add value.
Four value-adding activities that have been enhanced by Internet are:
 Search Activities
 Evaluation Activities
 Problem–solving Activities
 Transaction Activities
• The above four activities are supported by three different types of
content that Internet businesses use. They are:
i. Customer feedback
ii. Expertise
iii. Entertainment programming

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Cooperative Environment & Internet

• Internet links several value players: customers, suppliers, business


partners, employees and managers. Such a linkage facilitates
several value adding activities:
 e-commerce for customer relationship activities
 e-sourcing for supply chain management
 e-ventures for collaboration with other partnership
 e-working for a whole new work culture
 e-learning for knowledge management

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How Does Internet Affect Competition?

• In terms of a firm’s competitive environment, most of the changes


brought about by the Internet can be understood in the context of
Porter’s five forces model of industry analysis.

 The threat of new entrants

 The bargaining power of buyers

 The bargaining power of suppliers

 The Threat of Substitutes

 The Intensity of competitive rivalry

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Effect of Internet on Competitive Strategies

• The way companies formulate strategies and implement them is also


changing because of the impact of the Internet on many industries.
• Overall Cost Leadership
• An overall low-cost leadership strategy involves managing costs in every
activity of a firm’s value chain and offering no-frills products. Internet and
digital technologies now provide even more opportunities to manage
costs and achieve greater efficiencies.
• Some of the benefits are:
 Online bidding and order processing
 Online purchase orders
 Collaborative design efforts using Internet
 Online testing and evaluation in the hiring process
 Online training

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• Differentiation
• A differentiation strategy involves providing unique, high-quality products and
services and charging premium prices.
• Some of the techniques that firms are using to achieve successful differentiation
are:
 Internet-based knowledge management systems that link all parts of the
organization help shorten response times and accelerating organizational
learning.
 Personalized online access helps customers to process orders directly on the
supplier’s website.
 Quick online response and rapid feedback to customers.
 Online access to real-time sales and service information.
 Automated procurement and payment system.

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• Focus
• A focus strategy involves targeting a narrow market segment with
customized products and or specialized services.
• Internet provides the following avenues to the focusers:
 Chat rooms, discussion boards etc.,
 Niche portals (A niche portal is a specialized portal (website that offers a
broad array of resources and services))
 Virtual organizing and online “officing”
 Procurement technologies that match buyers and sellers

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• Internet-based companies now dominate business in many
industries. A few examples are given below:
 Automobiles: e-Bay has become the largest US used-car dealer.
 Travel: Internet-based travel service firms have become the largest
travel agencies. (e.g. Expedia).
 Computers: Dell computers dominate the business and competitors
try to imitate its Internet operations.
 Financial Services: Internet-based companies (e.g., Lending Tree)
are already dominating the business.
 Health Care: Web MD and similar firms are gaining popularity
rapidly.
 Retailing: Amazon.com, e-Bay etc. have become the top retailers in
US. Even Wal-Mart’s online tactics are crushing traditional retailers
such as Kmart.
 Education: Phoenix and other universities are growing dramatically.
Some organizations have moved training sessions to the
Internet.
 Music: Apple computer sells music downloads.
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Role of Strategic Management in Marketing, Finance, HR
and global competitiveness

• One way fit of HRM with strategy HR systems


should be in alignment of strategy
• Kesler (1995) considers this alignment as the
partnering role of HR where HR is highly
integrated with business processes.

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Two way fit of HRM with Strategy
• • HRM systems not only align to the business
strategy, but also contribute in the strategy
formulation
• • Contribute as understanding the linkages
between structure, culture, HRM and the
strategy.

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SHRM is involved in every step of
STRATEGY
Strategy formulation is influenced by–
1. presence/absence of HR representation
business
2. knowledge of the HR representative,
3. HR knowledge of the HR representative,
4. inter-personal relationship of the HR
representative with the top management
team
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Strategy implementation and HR

1. • flexibility of HRM systems,


2. • competency of HR personnel,
3. • availability of resources,
4. • execution efficiency,
5. • support of line managers

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Strategy Evaluation and HRM
• • Performance appraisal

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Strategic management and finance
• Strategic financial management is concerned
with the role of strategic management in
finance function.
• Strategic financial management helps a firm in
attracting resources , maximization of
shareholders wealth, taking appropriate
decisions, to make the firm survive and grow
in future.

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1. Continuous search for investment opportunities
2. • Selection of most profitable opportunities
3. • Determination for optimal mix of internal and
external funds to finance these opportunities .
4. A financial control system to govern acquisition
and disposition of funds
5. • Analysis of financial results as a guide to
future goals

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Strategy and Marketing
• Concerned with facing the competition in long
run
• Making a corporate image
• Formation of marketing strategies

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Strategy and GLOBAL MARKETS

• The different strategies that companies use to


compete in the global marketplace and
discuss the advantages and disadvantages of
each.
• Now we will examine the different approaches
that companies employ to enter foreign
markets-including exporting, licensing, setting
up a joint venture, and setting up a wholly
owned subsidiary.

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• UNIQUE COMPETENCIES
• LOCATION ADVANTAGES
• EXPERIENCE CURVE
• COMPULSIONS FOR COST REDUCTION
AND RESPONSIVENESS
• RESPONSIVENESS TO LOCAL NEEDS

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STRATEGIC CHOICE

• Companies use four basic strategies to enter and


compete in the international environment.
• Each of these strategies has its advantages and
disadvantages.
1. International Strategy
2. Multidomestic Strategy
3. Global Strategy
4. Transnational Strategy

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APPROACHES TO GLOBAL ENTRY

• There are five main modes of entering a foreign


market:
1. exporting,
2. licensing,
3. franchising,
4. entering into a joint venture with a host country
company,
5. setting up a wholly owned subsidiary in the host
country

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Environmental scanning
• Environmental scanning is the process of gathering information about
events and their relationships within an organization's internal and
external environments. The basic purpose of environmental scanning is
to help management determine the future direction of the
organization. The most widely accepted method for categorizing
different forms of scanning divides into the following three types:
• Irregular scanning systems: These consist largely of ad hoc
environmental studies.
• Regular Scanning systems: These systems revolve around a regular
review of the environment or significant environmental components.
This review is often made annually.
• Continuous scanning systems: These systems constantly monitor
components of the organizational environment.

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• Environmental Scanning
• The process by which organizations monitors their environment to identify
opportunities and threats affecting their business, is known as
environmental scanning.
• The following factors to be considered for environmental scanning:
1. Events: Important and specific occurrences that taking place in a certain
sector.
2. Trends: The general tendencies or courses of action along which these
events take place.
3. Issues: The current concerns that arise in response to events and trends.
4. Expectations: The demands made by interested groups in the light of
their concern for issues.

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Environmental Analysis

 Environmental analysis or scanning is the process of monitoring the


events and evaluating trends in the external environment, to identify both
present and future opportunities and threats that may influence the firm’s
ability to reach its goals.
 managers need to analyze a variety of different components of the external
environment, & identify “Key Players” within that area, and be very sure of
both threats and opportunities within the environment.
 The main purpose of environmental scanning is therefore to find out the
correct “fit” between the firm and its environment, so that managers can
formulate strategies to take advantage of the opportunities and avoid or
reduce the impact of threats.

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Opportunities and Threats

• Opportunities: An opportunity is a major favourable


situation in a firm’s environment. For example, favourable
changes in competition, technological change, a favourable law
etc………..

• Threats: A threat is a major unfavourable situation in a firm’s


environment that creates a risk or cause damage to the
organization. For example, the entrance of new competitors, slow
market growth, unfavourable technological changes etc. ……………………

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Importance Of Environmental
Analysis
 Environmental analysis helps managers:
1. To detect key trends and events in the environment.
2. To develop forecasts and scenarios.
3. To identify opportunities and threats.
4. To get information on the competitive environment.
5. To set appropriate objectives.
6. To avoid strategic surprise and to ensure long-term health.
7. To analyze and evaluate strategic alternatives.
8. To formulate winning strategies responsive to competitive forces.
9. To develop sustainable competitive advantage.
10. To work out networks and cooperative ventures

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Environmental Forecasting

 Environmental forecasting involves the development of projections about


the direction, scope, speed and intensity of environmental change or it is
one tool for analyzing trends to avoid strategic mistakes by firms

Environmental
scanning

Environmental
Forecasts
monitoring

Environmental
intelligence

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Continue…………………………….

 Environmental scanning…..
 Environmental monitoring : tracks the trends sequence
of events , difference b/w scanning &monitoring is
scanning makes aware of the trends & monitoring
enables firms to evaluate how trends are
changing…………….
 Environmental intelligence: also call competitive
intelligence help to provide critical information on
competitor’s move

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Features of Environmental Analysis

• It must includes a total view of the environment


rather then partial view of trends.
• It should be a continuous process.
• It should like to explore uncertain future i.e. to
find out alternative outcomes, probabilities
etc……………

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Components of External Environment

Mega Environment /
macro
environment/PESTEL
factors

Relevant
Environment/operating
environment

Micro Environment
/industry environment.

internal Environment

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Continue………………………….

• Political, gov, legal factors: form of govt, political stability, party, attitude towards
foreign companies, laws on various economic matters
• Economic factors: GDP, interest rate , unemployment rate, inflation, money supply
etc….
• Socio –cultural factors :
• Demographic graphic factors; size, growth rate, age group, sex composition , family
size etc…………
• Technological factors: adoption to new technique ,new products, new ways of
managing & connecting etc……can create competitive advantage or not adjusting
to modern technology can bring downfall
Eg : of new technology are: bio- technology, Robotics, Genetic engineering etc……
• Ecological factors:
• Global factors: economic conditions in host country, cultural factors, laws of host
country, political stability material &manpower in the host country.

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Operating environment
• Also know as task environment/ relevant environment of a
firm
• Includes those factors which affects firms success in getting
required resources.

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Operating Environment &The MICRO ENVIRONMENT

Markets:
Marketing Types and
Competition
Intermediaries Demand

Suppliers
E-commerce

THE MICROENVIRONMENT

Skill Level of
Workforce
Industrial
Financial Regulatory Relations
Institutions Provisions Climate
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1. Suppliers: imp to have good relation with suppliers and firm should find is
suppliers price reasonable, what discount is supplier giving, shipping
charges, dependence of supplier etc……
2. Customers: to know & fulfill consumer need is main concern of org. , to
evaluated market trend, make profile of past& present customers
3. Competitors: skills, facilities, managerial talent, image etc…..
4. Creditors: what creditor thinks, terms of credit
5. Labour market: presence of skilled labour, image of company
6. Distributors& retailers: they ensure firm product reaches to end user
7. Legal environment; at local state national level ……………..

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industry analysis
• The basic purpose of industry analysis is to
assess the strengths and weaknesses of a firm
relative to its competitors in the industry. It
tries to highlight the structural realities of
particular industry and the extent of
competition within that industry. Through
industry analysis, an organization can find
whether the chosen field is attractive or not
and assess its own position within the
industry.
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• importance of industry analysis can thus be summarized as follows.
1. Industry – related factors have a more direct impact on the firm than the
general environment.
2. An industry’s dominant economic characteristics are important because
of their implication for crafting strategy.
3. Industry analysis reveals industry attractiveness and its prospects for
growth.
4. It helps the firm to identify such aspects as:
i. Current size of the industry
ii. Product offerings
iii. Relative volumes
iv. Performance of the industry in recent years
v. Forces that determine competition in the industry.
5. It focuses attention on the firm’s competitors.
6. It helps to determine key success factors.
7. A thorough understanding of the industry provides a basis for thinking
about appropriate strategies that are open to the firm.

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Framework For Industry Analysis

• Industry analysis covers two important


components:

1. Industry environment

2. Competitive environment

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Industry environment

Industry
features

Industry
Industry
prospects for
boundaries
future

Industry Industry Industry


attractiveness structure
Analysis

Industry Industry
practices environment

Industry
performance

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Competitive Analysis

• Competitive analysis basically addresses two questions:

1. Which firms are our competitors ?

2. What factors shape competition in industry ?

Competition means rivalry between two or more parties to


achieve a similar goal. In business, competition generally
refers to the fight for market share which serves the same basic
customer needs.

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Analytical Models

The analytical techniques that managers generally use to assess their competitive
environment are:
• Porter’s Five-forces Model The Five Forces model developed by Michnal E. Porter
has been the most commonly used analytical tool for examining competitive
environment. According to this model, the intensity of competition in an industry
depends on five basic forces. These five forces are:
1. Threat of new entrants
2. Intensity of rivalry among industry competitors
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products and services.

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Forces that Shape Competition

• 1- The Threat of New Entrants


• The first of Porter’s Five Forces model is the threat of new entrants. New entrants
bring new capacity and often substantial resources to an industry with a desire to
gain market share and established companies always discourage new entry
• Barriers to entry
• Entry barriers depend on the advantages that existing companies have relative to
new entrants. There are seven major sources:
i. Economies of scale
ii. Product differentiation
iii. Capital requirements
iv. Switching costs
v. Access to distribution channels
vi. Cost disadvantages independent of size
vii. Government policy

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Continue……………….

• Economics of scale: these are cost advantage related with large scale production ,
cost of product per unit decreases as the production increases, this discourage
new entry.
• Product differentiation; loyalty of customer towards established company.
• Capital requirement; large scale investment can act barrier for new entry mainly
when capital is needed for some unrecoverable purpose
• Switching cost; are one time cost that consumer has to bear to switch from one
product to another product higher the switching cost more the barriers.
• Access to the distribution channel; new entry need to secure distribution channel
such as retailer/whole sale
• Cost disadvantages independent of size i.e. some existing companies may have
some adv other than economics of scale like; easy access to raw material, govt
subsidies . Favorable geog, conditions, estab. Brand identities etc.
• Govt policy; it can allow or put restrictions /disallow like in Indian eco. Before LPG

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Expected Retaliation

• New entrants are likely to fear expected retaliation if:


 Existing companies have previously responded vigorously to new
entrants
 Existing companies possess substantial resources to fight back
 Existing companies seem likely to cut prices to protect their
market share
 Industry growth is slow, so newcomers can gain volume only by
taking the market share from existing companies.

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2- Intensity of Rivalry among Competitors

• Rivalry means the competitive struggle between companies in


an industry to gain market share from each other.
• The intensity of rivalry is greatest under the following
conditions:
i. Numerous competitors or equally powerful competitors
ii. Slow industry growth
iii. High fixed but low marginal costs
iv. Lack of differentiation or switching costs
v. High exit barriers

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Continue…………………….

• Numerous competitors or equally powerful competitors; if competitors are more


or powerful intensity of rivalry will be more any action by one will be match by
other.
• Slow industry growth; it turns competition into fight
• High fixed but low marginal costs; it creates intense pressure for competitors to
cut prices below average cost.
• Low switching cost; this encourage competitors to cut price to win customers like
airline industry.
• High exit barriers; can be economical, strategic, emotional etc…. If it is high firm
will remain locked even if indus. Not earning profit.

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Common exit barriers

1. Investment in specialized assets like plant and machinery are of little or no value,
and cannot be put to alternative use. So, they have to be continued.
2. High costs of exit such as retrenchment benefits, etc. that have to be paid to
the redundant workers when a company ceases to operate.
3. Emotional attachment to an industry keep owners or employees unwilling to
exit from an industry for sentimental reasons.
4. Economic dependence on the industry when the firm depends on a single
industry for revenue and profit.
5. Government and social pressures discourage exit of industries out of
concern for job loss.
6. Strategic interrelationships between business units and others prevent exit
because of shared facilities, image………………………

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3- Bargaining power of buyers

• Bargaining power of buyers refers to the ability of buyers to bring down prices
charged by firms in the industry or increase the costs of the firm by demanding
better product quality and service.
• According to Porter, buyers are most powerful under the following conditions:
i. There are few buyers
ii. The products are standard or undifferentiated, he can find alternative source of
supply
iii. The buyer faces low switching costs
iv. The buyer earns low profits, if he is under pressure to reduce its purchasing costs
then he bargains more
v. The quality of buyer’s products if it is little affected by industry product buyers
are more price sensitive.

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4- Bargaining power of suppliers

• Suppliers are companies that supply raw materials, components,


equipment, machinery and associated products.
• A supplier’s bargaining power will be high under the following
conditions:
i. Few suppliers
ii. Product is differentiated, unique it removes firms option to play one
supplier against others
iii. Dependence of supplier group on the firm, when does not depend
heavily on industry for revenues or supply material to other industries.
iv. Importance of the product of the firm
v. Lack of substitutes

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5- Threat of Substitute Products

• The fifth of Porter’s Five Forces model is the threat of substitute


products. A substitute performs the same or a similar function as an
industry’s product. Video conferences are a substitute for travel.
Plastic is a substitute for aluminum. E-mail is a substitute for a mail. All
firms within an industry compete with industries producing substitute
products.
 The existence of close substitutes is a strong competitive threat because
this limits the price that companies in one industry can charge for their
product. If the price of coffee rises too much relative to that of tea or soft
drink, coffee drinkers may switch to those substitutes.
 The more attractive is the price/performance ratio of substitute
products, the more likely they affect an industry’s profits

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Porter’s Five Forces Model
Potential
entrants

Threat of
new entrants

Bargaining power
Industry
of suppliers Bargaining power
competitors
of buyers
Suppliers
Buyers

Rivalry among
existing firms

Threat of
substitute products
or services

Substitutes

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• Industry Life Cycle Analysis

• A useful tool for analyzing competitive forces is the industry life


cycle model.

• Like firms, industries develop and evolve over time. Not only the
group of competitors within a firm’s industry might change
constantly, but also the nature and structure of the industry can
also change as it matures and its markets become better defined.
An industry’s developmental stage influences the nature of
competition and profitability among competitors (Hofer, 1975).

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• In theory, each industry passes through four distinct phases of an
industry life cycle. (See Exhibit )
1. Embryonic
2. Growth/Shakeout
3. Mature
4. Decline
• The ‘shakeout’ stage
is generally considered a part of growth stage.

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Environmental Threat and Opportunity Profile
(ETOP)
• An environmental threat and opportunity profile is a
description of the structure of external factors.
• Multiple Reasons for an ETOP
1. It helps the organization to identify opportunities and
threats
2. Consolidates and strengthens an organization’s position
3. Provides strategists information on which sectors have a
favorable impact on the organization
4. The organization gains knowledge of its standing with
respect to its environment
5. Helps formulate strategies.

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Steps in an ETOP
1. Identify major Environmental factors such as:
economic, political, social, technological,
competitive, geographical, etc.
2. Environmental factors are then sub-divided into
subsectors of each factor.
3. These factors are then analyzed to determine
major weaknesses and strengths in each of the
subsectors.
4. The impact of each factor is then accessed as
being either favorable, unfavorable, or neutral.
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ORGANIZATIONAL APPRAISAL
Organizational Capability Profile (OCP) - Weakness(-5),
Normal(0), Strength(5)
Financial Capability Profile
(a) Sources of funds
(b) Usage of funds
(c) Management of funds
Marketing Capability Profile
(a) Product related
(b) Price related
(c) Promotion related
(d) Integrative & Systematic

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ORGANIZATIONAL APPRAISAL

Operations Capability Factor


(a) Production system
(b) Operation & Control system
(c) R&D system
Personnel Capability Factor
(a) Personnel system
(b) Organization & employee characteristics
(c) Industrial Relations
General Management Capability
(a) General Management Systems
(b) External Relations (c) Organization climate
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EXAMPLES OF ORGANIZATIONAL
CAPABILITY PROFILE
Financial Capability
Bajaj - Cash Management
LIC - Centralized payment, decentralized collection
Reliance - high investor confidence
Escorts - Amicable relation with Fis
Marketing Capability
Hindustan Lever - Distribution Channel
IDBI/ICICI Bank - Wide variety of products
Tata - Company / Product Image

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EXAMPLES OF ORGANIZATIONAL
CAPABILITY PROFILE
Operations Capability
Lakshmi machine works - absorb imported technology
Balmer & Lawrie - R&D - New specialty chemicals

Personnel Capability
Apollo tyres - Industrial relations problem

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EXAMPLES OF ORGANIZATIONAL
CAPABILITY PROFILE
General management capability
Malayalam Manaroma - largest selling newspaper
Unchallenged leadership - Unified, stable
Best edited & most professionally produced

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Strategic advantage profile
• Strategic advantage profile is known as SAP. It shows strength
and weakness of an organization. Preparation of SAP is very
similar process to the ETOP. There are generally five
functional areas in most of the organizations. These areas are
Ø Production or Operation
Ø Finance or Accounting
Ø Marketing or Distribution
Ø Human Resource & Corporate Planning
Ø Research & Development
These functional areas are listed to identify their relative
strength and weakness in SAP. Each functional area is very
broad having many components inside.

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• Examples: The Strategist should look to see if
the firm is stronger in these factors than its
competitors. When a firm is strong in the
market, it has a strategic advantage in
launching new products or services and
increasing market share of present products
and services.

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Strategic Advantage Factors: Marketing and
Distribution

1. Competitive structure and market share: To what extent has the firm
established a strong mark share in the total market or its key sub
markets?
2. Efficient and effective market research system
3. The product&service mix: quality of products and services.
4. Product-service line: completeness of product-service line and
product-service mix; phase of life-cycle the main products
and services are in.
6. Patent protection (or equivalent legal protection for services)
7. Positive feelings about the firm and its products and services on the
part of the ultimate consumer.
8. Efficient and effective packaging of products (or the equivalent for
services).

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9. Effective pricing strategy for products and services.
10. Efficient and effective sales force: close ties with key
customers. How vulnerable are we in terms of concentrating
on sales to a few customers?
11. Effective advertising: Has it established the company's
product or brand image to develop loyal customers?
12. Efficient and effective marketing promotion activities
other than advertising.
13. Efficient and effective service after purchase.
14. Efficient and effective channels of distribution and
geographic coverage, including internal efforts

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R & D (Research and Development) and Engineering function can be a
strategic advantage for two reasons:
1. It can lead to new or improved products for marketing
2. It can lead to the development of improved manufacturing or material
processes to gain cost advantages through efficiency.
Strategic Advantage Factors: R&D and Engineering
1. Basic research capabilities within the firm
2. Development capability for product engineering
3. Excellence in product design
4. Excellence in process design and improvements
5. Superior packaging developments being created
6. Improvements in the use of old or new materials
7. Ability to meet design goals and customer requirements
8. Well-equipped laboratories and testing facilities

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9.Trained and experienced technicians and scientists
10.Work environment suited to creativity & innovation
11. Managers who can explain goals to researchers and
research results to higher managers
12. Ability of unit to perform effective technological
forecasting.

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DIFFERENT APPROACHES TO DEVELOP AN
COMPETITIVE ADVANTAGE:
1.The first approach is to compete based on existing strengths.
This approach is called KFS, abbreviated from Key Success
Factors. The firm can gain strategic advantage if it focuses
resources on one crucial point.
2.The second approach is still based on existing strengths but
avoids head-on competition. The firm must look at its own
strengths which are different or superior to that of the
competition and exploit this relative superiority to the
fullest.

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For example, the strategist either
• (a) makes use of the technology, sales network, and so on,
of those of its products which are not directly competing
with the products of competitors or
• (b) makes use of other differences in the composition of
assets. This avoids head-on competition.

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3.The third approach is used for example to compete directly with a competitor
in a well-established, stagnant industry. Here an unconventional approach
may be needed to up set the key factors for success that the competitor has
used to build an advantage. The starting point is to challenge accepted
assumptions about the way business is done and gain a novel advantage by
creating new success factors
4.Finally, a competitive advantage may be obtained by means of innovations
which open new markets or result in new products. This approach avoids
head-on competition but requires the firm to find new and creative
strengths. Innovation often involves market segmentation and finding new
ways of satisfying the customer's utility function.
5.In each of these approaches the principal point is to avoid doing the same
thing as the competition on the same battleground. So the analyst needs to
decide which of these approaches might be pursued to develop a
sustainable distinctive competence.

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Corporate Analysis
• It describes the strength & weakness of a company.
• It covers all aspects of company including finances, profit margins
,organizational structure & growth opportunities.
• The main purpose behind this analysis is that investor & industry
analysts can review company’s position
• In short can use to plan both short & long term investments in
company.
• Company conducts its on a usual basis, may be annually or twice a
year depending upon company’s structure.

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The Value Chain Analysis

 The concept of value chain analysis was introduced by Michael


Porter in 1985 in his book “Competitive Advantage”.
 This concept is derived from an established accounting practice
that calculates the value added to a product by individual stages in
a manufacturing or service process.
 Porter has applied this idea to the activities of an organization as a
whole, arguing that it is necessary to examine activities separately
in order to identify sources of competitive advantage

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What Is A Value Chain ?

 Every organization consists of a chain of activities that link together to


develop the value of the business. They are basically purchasing of raw
materials, manufacturing, distribution, and marketing of goods and
services. These activities taken together form its value chain.
 The value chain identifies where the value is added in the process and
links it with the main functional parts of the organization. It is used for
developing competitive advantage because such chains tend to be
unique to an organization.
According to Porter, customer value is derived from three basic sources.
i. Activities that differentiate the product
ii. Activities that lower its costs
iii. Activities that meet the customer’s need quickly.

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• Value Chain Analysis
• According to Porter, value chain activities are divided into two broad
categories, as shown in the figure.

1. Primary activities contribute to the physical creation of the product or


service, its sale and transfer to the buyer and its service after the sale.

2. Support activities include such activities as procurement, HR etc. which


either add value by themselves or add value through primary activities
and other support activities.

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• Primary Activities
 Inbound Logistics: WARE HOUSING, MATERIAL HANDLING ETC….
 Operations: activities that convert inputs into final product like
packaging, assembly, testing equipment maintenance.
 Outbound Logistics : related to distribution of final product to
customers …..finished goods warehousing, vehicle operation ….
 Marketing and sales: includes activity related to purchase of finished
goods by customers …,.advertising, promotion, sales force….
 Services related to increasing & maintaining the value : repair, parts
supply………………

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Support Activities

 Procurement: providing raw material or consumable items like


machinery office equipment……….

 Technology Development : software development, design


improvement ,R&D Process

 Human Resource Management: labour relations, hiring


training …………..

 Firm Infrastructure general management, strategic planning, quality


control system

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Value Chain Analysis

Firm infrastructure
HRM
Technology Development
Procurement

Inbound Operations Outbound Market and services


logistics logistics sales

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Conducting A Value Chain Analysis
• Value chain analysis involves the following steps.
 Identify activities
 Allocate costs
 Identify the activities that differentiate the firm
 Examine the value chain i.e. activities that are imp. For buyersatisfaction
• In assessing the value chains there are two levels that must be addressed.
1. Interrelationships among the activities within the firm.
2. Relationships among the activities within the firm and with other
organizations that are a part of the firm’s expanded value chain.

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Usefulness Of The Value Chain
Analysis
• The value chain analysis is useful to recognize that individual activities in the
overall production process play an important role in determining the cost, quality
and image of the end- product or service.
• Analyzing the separate activities in the value chain helps management to
address the following issues:
i. Which activities are the most critical in reducing cost or adding value? If quality
is a key consumer value, then ensuring quality of supplies would be a
critical success factor.
ii. What are the key cost or value drivers in the value chain?
iii. What linkages help to reduce cost, enhance value or discourage imitation?
iv. How do these linkages relate to the cost and value drivers?

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Porter identified the following as the
most important cost and value drivers
 Economies of scale
 Pattern of capacity utilization (including the efficiency of production
processes and labour productivity)
 Linkages between activities (for example, timing of deliveries affect
storage costs, just-in time system minimizes inventory costs)
 Interrelationships (for example, joint purchasing by two units reduces
input costs)
 Geographical location (for example, proximity to supplies reduces input
costs)
 Policy choices (such as the choices on the product mix, the number of
suppliers used, wage costs, skills requirements and other human
resource policies affect costs)
 Institutional factors (which include political and legal factors, each of
which can have a significant impact on costs).
• Continue…………………………..

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Value Drivers

• Value drivers are similar to cost drivers, but they relate to other
features (other than low price) valued by buyers. Identifying value
derivers comes from understanding customer requirements, which
may include:

i. Policy choices (choices such as product features, quality of input


materials, provision of customer services and skills and
experience of staff).

ii. Linkages between activities (for example, between suppliers and


buyers; sales and after-sales staff).

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Conclusion

• Since Porter introduced his value chain in the mid-1980s, strategic


planners and consultants used it extensively to map out a company’s
strengths and shortcomings.
 In analyzing strategic alliances and merger and acquisition deals, the
value chain is often used to get a quick overview of the possible match:
one company is strong in logistics, the other in sales and service,
together they would make an agile, highly commercial enterprise.
 Measuring or rating competitive strengths is difficult. Especially when
trying to map the entire value chain and apply quantitative measurements
or ratings, many companies usually employ a large number of strategic
analysts, planners and consultants.

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Conducting A Value Chain Analysis
• Value chain analysis involves the following steps.
 Identify activities
 Allocate costs
 Identify the activities that differentiate the firm
 Examine the value chain i.e. activities that are imp. For buyersatisfaction
• In assessing the value chains there are two levels that must be addressed.
1. Interrelationships among the activities within the firm.
2. Relationships among the activities within the firm and with other
organizations that are a part of the firm’s expanded value chain.

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Usefulness Of The Value Chain
Analysis
• The value chain analysis is useful to recognize that individual activities in the
overall production process play an important role in determining the cost, quality
and image of the end- product or service.
• Analyzing the separate activities in the value chain helps management to
address the following issues:
i. Which activities are the most critical in reducing cost or adding value? If quality
is a key consumer value, then ensuring quality of supplies would be a
critical success factor.
ii. What are the key cost or value drivers in the value chain?
iii. What linkages help to reduce cost, enhance value or discourage imitation?
iv. How do these linkages relate to the cost and value drivers?

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Resource Based Approach
Resources are the important input which helps to execute business operations .
• It is a tool used to find out the strategic resources available to a company.
• It defines the ability of a company to deliver sustainable competitive
advantage.
Following are some criteria fulfilled by resources:
1. It must help company to employ a useful strategy, by either performing
better than its competitors or reducing its weakness.
2. If resource are controlled by only one company it could be source of
competitive advantage and this advantage can be sustained if competitors
are not able to copy your resource and its outcome.
3. A resource must not have any substitute

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Strategic Budget
• Planning a budget helps organizations to allocate their resources evaluate
,performance and formulate strategies.
• The process of planning the financial operations of a business is called
budgeting, this process involves determining business fixed & variable
costs on a monthly basis and deciding on an allocation of funds to
reflect the business goals.
Key components of budget
• Determining & establishing the priorities
• Collaborative and consultative decisions
• Clear & concise performance expectations
• Continuous & effective communication
• Precise information

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Corporate Budgeting –Concept
• It is a process which helps to identify how much
revenue organization can possibly make in next
one to five years and how much funds the
organization requires to earn that revenue.
• It is not only a process to establish a plan on how
you are going to achieve your profit for the next
one year, but it is also a time for you to review
how you have done in the past one year

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Types of budget
• Sales budget
• Production budget
• Cash budget
• Sale/marketing/administrative expense budget

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Strategic Audit
• Strategic audit is an examination and evaluation of areas affected by the
operation of a strategic management process within an organization. A
strategy audit may be needed under the following conditions:
• Performance indicators show that a strategy is not working or is producing
negative side effects.
• High-priority items in the strategic plan are not being accomplished.
• A shift or change occurs in the external environment.
• Management wishes:
(1) to fine-tune a successful strategy and
(2) to ensure that a strategy that has worked in the past continues to be in
tune with subtle internal or external changes that may have occurred.
• To aid in control, firms will occasionally perform audits to ensure that
certain aspects of their operations are in order. Such audit may include
operational audits (assessing the firm's operating health) and strategic
audits (assessing the firm's strategic health).

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• There are several generally accepted methods for
measuring organizational performance.
• One way for categorizing these methods divides
into the distinct types: qualitative and
quantitative..
• There is no universally endorsed list of critical
questions designed to reflect important facets of
organizational operations. However, several that
might be useful to the practicing managers are
presented below.
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Quantitative measurements
• Quantitative measurements provide information and insight as to how
well an organization is accomplishing its goods and objectives. In
attempting to evaluate the effectiveness of corporate strategy
quantitatively, we can see how the firm has done compared wit its own
history, or compared with its competitors.
• Many quantitative measures may be developed to determine performance
results. These standards expressed in quantitative terms include:
• Sales (growth of sales)
• Net profit
• Dividend returns
• Return on equity
• Return on investment
• Return on capital
• Marker share
• Earnings per share

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Qualitative measurements methods
• Qualitative measurements methods can be
very useful, but their application involves
significant amounts of human judgment. Thus,
conclusions based on such methods must be
drawn carefully.

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Sample Questions to be asked for Qualitative
Organizational Measurement
• Are the financial policies with respect to investment… dividends and financing consistent with
opportunities likely to be available?
• Has the company defined the market segments in which it intends to operate sufficiently specifically
with respect to both product lines and market segments? Has it clearly defined the key capabilities
needed for success?
• Does the company have a viable plan for developing a significant and defensible superiority over
competition with respect to these capabilities?
• Will the business segments in which the company operates provide adequate opportunities for
achieving corporate objectives? Do they appear as attractive as to make it likely that an excessive
amount of investment will be drawn to the market from other companies? Is adequate provision
being made to develop attractive new investment opportunities?
• Are the management, financial, technical and other resources of the company really adequate to
justify an expectation of maintaining superiority over competition in the key areas of capability?
• Does the company have operations in which it is not reasonable to expect to be more capable than
competition? If so, can the board expect them to generate adequate returns on invested capital? Is
there any justification for investing further in such operations, even just to maintain them?
• Has the company selected business that can reinforce each other by contributing jointly to the
development of key capabilities? Or are there competitors that have combinations of operations
which provide them with an opportunity to gain superiority in the key resource areas? Can the
company's scope of operations be revised so as to improve its position vis-à-vis competition?
• To the extent that operations are diversified, has the company recognized and provided for the
special management and control systems required?

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SWOT Analysis
• SWOT stands for strengths, weaknesses, opportunities and
threats. It is a widely used to summaries a company’s
situation or current position.
• Environmental and industry analyses provide information
needed to identify opportunities and threats, while internal
analysis provides information needed to identify strengths
and weaknesses. These are the fundamental areas of focus
in SWOT analysis.

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Carrying Out SWOT Analysis
The first thing that a SWOT analysis does is to evaluate the strengths and
weaknesses in terms of skills, resources and competencies.

• Strengths • Weaknesses
• Strong brand image • Weak distribution network
• High quality products • Narrow product lines
• Latest technology • Rising costs
• High intellectual capital • Poor marketing plan
• Cordial industrial relations
• Opportunities • Threats
• New markets • Increase in competition
• Profitable new acquisitions • Barriers to entry
• R&D skills in new areas • Change in consumer tastes
• New businesses • New or substitute products
• Threat of takeover

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Steps In SWOT Analysis

• The three important steps in SWOT analysis are:


1. Identification:
 Identify company resource strengths and competitive capabilities
 Identify company resource weaknesses and competitive deficiencies
 Identify company’s opportunities
 Identify external threats
2. Conclusion:
 Draw conclusions about the company’s overall situation.
3. Translation:
• Translate the conclusions into strategic actions by acting on them:
 Match the company’s strategy to its strengths and opportunities
 Correct important weaknesses
 Defend against external threats

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• In devising a SWOT analysis, there are several factors that will enhance the
quality of the material:
 Keep it brief, pages of analysis are usually not required.
 Relate strengths and weaknesses, wherever possible, to industry key factors for
success.
 Strengths and weaknesses should also be stated in competitive terms, that
is, in comparison with competitors.
 Statements should be specific
 Analysis should reflect the gap, that is, where the company wishes to be and
where it is now.
 It is important to be realistic about the strengths and weaknesses of one’s
own and competitive organizations.

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Critical Assessment Of SWOT Analysis
Advantages

1. It is simple.

2. It portrays the essence of strategy formulation: matching a firm’s internal


strengths and weaknesses with its external opportunities and threats.

3. SWOT analysis improves the quality of internal analysis.


Limitations
1 it does not show the dynamics of competitive environment.
2 SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and
ignores other factors needed for competitive success.
3 A firm’s strengths do not necessarily help the firm create value or competitive
advantage.
4 SWOT’s focus on the external environment is too narrow.

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TOWS Matrix
• TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats,
opportunities, weaknesses and strengths. This matrix was proposed by Heinz
Weihrich as a strategy formulation – matching tool.

Internal factors/ Strengths (S) Weaknesses (W)


External factors

Opportunities (O) SO strategies: WO strategies:


strategies that use strategies that
strengths to take take advantage of
advantage of opportunities by
opportunities. over -coming
weaknesses

Threats (T) ST strategies: WT strategies:


strategies that use strategies that
strengths to avoid minimize
threats. weaknesses and
avoid threats.
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Steps of TOWS matrix
1. List external opportunities available in the company’s current and future
environment, in the ‘opportunities block’ on the left side of the matrix.
2. List external threats facing the company now and in future in the “threats
block” on the left side of the matrix.
3. List the specific areas of current and future strengths for the company, in
the “strengths block” across the top of the matrix.
4. List the specific areas of current and future weaknesses for the company
in the “weaknesses box” across the top of the matrix.
5. Generate a series of possible alternative strategies for the company
based on particular combinations of the four sets of factors.

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Corporate Strategy

 Strategy formulation in a multi-business enterprise is different from


strategy formulation in a single-business enterprise.

 In a single-business enterprise, the key question is how to compete


successfully in the chosen market.

 So, there is only one-level strategy known as business-level Strategy.

 But in a multi-business enterprise, which is involved in several businesses,


there is a need to have strategies at two levels – a corporate level strategy
for the company as a whole and a business level strategy for each of the
separate businesses of the company.

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Types Of Corporate Strategies
• Stability Strategy
• Growth / Expansion Strategies
• Defensive :Strategies/Retrenchment
• Combination strategy

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Types Of Corporate Strategies
• There are four types of strategic alternatives
available at corporate level. They are:
1. Stability Strategy
 Stability strategy implies continuing the current
activities of the firm without any significant change in
direction.
 Stability strategy is most likely to be pursued by small
businesses or firms in a mature stage of development.
 No major functional changes are made in the
product-line, markets or functions.
 Improve efficiency in current positions

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Why do companies pursue a
stability strategy?
• The firm is doing well or perceives itself
as successful.
i. It is less risky.
ii. It is easier and more comfortable.
iii. The environment is relatively
unstable.
iv. Too much expansion can lead to
inefficiencies.

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Types of Stability Strategies

• Some of the popular stability strategies are:

1. Pause/proceed with caution strategy(i.e. for


temporary period mainly to consolidate its position)

2. No change strategy i.e. doing nothing new if no major threat,


opportunities., strength, weakness

3. Profit strategy i.e. is an attempt to artificially maintain profit by


reducing investment/ short term expenditure .it is good for short period not
for long .

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2- Growth / Expansion Strategies

• Growth strategies are the most widely


pursued corporate strategies. A company can
grow internally by expanding its operations or
it can grow externally through mergers,
acquisitions, joint ventures or strategic
alliances.

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Reasons for pursuing growth
strategies:
• Firms generally pursue growth strategies for the
following reasons:
i. To obtain economies of scale
ii. To attract merit
iii. To increase profits
iv. To become a market leader
v. To fulfill natural desire to have growth.
vi. To ensure survival

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• Growth strategies can be divided into three broad categories:

A)Intensive strategies:

1. Market penetration

2. Market development

3. Product development

B ) Diversification strategies:

1. Concentric diversification

2. Conglomerate Diversification

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Market penetration

• Is a strategy to increase market share for


existing products (increasing advt. expenditure, reducing prices,
improving distribution)
• Divided into two more category:
1) Consolidation : protecting/ maintain market share in existing
market (mature & growing market)
2) Withdrawal : when competition is intense & org. unable to
match the rivals.

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Market
Penetration
• In an era in which Indian Textile manufacturers
had no brand pull at the consumer end, Reliance
– an original retail textile trader introduced
the then powerful brand with an equally
powerful slogan:
ONLY VIMAL
• Thousands of Vimal showrooms
• opened along the
length & breadth of India
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• Classic Examples
1. Brush Before bed [Potential to double usage]
2. Thrice-a-day moisturizer
3. Chaar boond [Ujala], Sirf aadha chamach
[Eastern] [By highlighting on small quantity / use,
subtle push for increasing usage regularity
4. Coupon System for loyalty
5. Milkmaid’s FREE cookery booklet [Increases
occasions for usage]

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Market development

• This strategy seeks new market for existing


products.
• by entering geographical areas, targeting new groups of customers,
developing new uses for a product
• Hindustan lever introduced low price detergent “wheel” to compete
Nirma
• Global specialists – Coca Cola, Pepsi, Mc Donald's, KFC, Nike, Visa cards,
DELL

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• The key focus of this strategy is setting up of
Distribution Channels
• Indian IT industry’s foray into Non-US / Non-
Europe markets is an attempt to replicate existing
success with exist product portfolios into new
markets [Japan, SE Asia etc]
• “Why should boys have all the pleasure” – an ad
plan that is specifically targeting a demographic
market [Ladies] for 2 wheeler sale
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Product development
• It involves development of new products or
altering the existing product according to new
market trend.
Examples
• Pepsi bringing in Pepsi Gold
• Any new mutual funs offer – Mid cap {tomorrow’s
jumbos] types
• Soap operas from Ektaa Kapoor / Balaji Tele films
• Microsoft's latest Version [forced upgrades with
little value at the lower user end]

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Diversification.

• It is a strategy where both the product & market


are new to corporation.
• Diversification itself includes various options:
1) Horizontal diversification: occurs when new products are
introduced to current market
2) Vertical diversification: occurs when org decides to move into its
suppliers(invest in producing raw material)/ customers business(retailer)
3) Concentric diversification: occurs when new product closely
related to current products are introduced into new market
4) Conglomerate :occurs when completely new tech. unrelated
product are introduced to new market

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Examples of Concentric Diversification

• Amul moving from Milk to all milk based products


to non-milk based drinks
• All FMCG moves [Synergies of Brand, S&D]
• All Consumer Durables moves [Synergies in Brand,
Technology, R&D]
• AVV moving from Engg to B School to Medical
School to Journalism School

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Examples of Conglomerate
Diversification
• Essar & Telecom [They are a basic shipping, steel
& heavy engg company]
• All efforts of ITC [Moving out of the shadows of
tobacco]

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Sl. No Concentric Conglomerate
Diversification Diversification
1 The company diversifies into The company diversifies into
businesses related to the existing businesses that are unrelated to the
businesses. existing businesses.
2 There is commonality in No commonality in markets, products
markets, products or technology. or technology.

3 The main objective is to increase The main objective is to increase


shareholder value through shareholder value through profit
“synergy”, which is achieved maximization.
through sharing of skills,
resources and capabilities.
4 Less risky. More risky.

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C. Integration strategies
1. Vertical integration : mean gaining ownership or
increased control over suppliers / distributors
i. Backward integration: involves gaining ownership or increased control of a
firms suppliers
e.g. Mc Donald’s has its own diaries [milk & beef], poultries [chicken & eggs] and farmlands [wheat &
potatoes] – full control on raw material quantity, quality & pricing [Similarly Starbucks & Coffee
plantations in Venezuela]
ii. Forward integration: involves or increased control over distributors /retailers
e.g. Brands [who are essentially manufacturers] setting up their own retail showrooms
for direct sale to end customer – Nike, Arrow, Peter England, Adidas – All
originally manufacturers who have enter into retail

2. Horizontal integration : is a strategy of seeking


ownership or increased control over’s firms
competitors e.g. acquisition of Arcelor by Mittal steel
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Defensive Strategies

These strategies are also called retrenchment strategies. They are the last resort
strategies.

A company may pursue retrenchment strategies when it has a weak competitive


position in some or all of its product lines resulting in poor performance – sales are
down and profits are decreasing. In an attempt to eliminate the weaknesses that are
dragging the company down, management may follow one or more of the following
retrenchment strategies.

i. Turnaround

ii. Divestment

iii. Bankruptcy

iv. Liquidation
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• Turnaround: process of recovering the firm from severe cash problem is
called recovery it includes three phases:
 diagnosis of problem.
 Involves analyzing the cause of sickness
 Implementation of change process & its monitoring.
• Divestment: part of org. is sell to raise capital for further investment for
unprofitable business ,requiring too much of capital, does not suit with
other activities o f org.
 Bankruptcy :filing a petition in court for legal protection in case firm not
in a position to repay its debt

 Liquidation : when entire company is dissolved & its assets are sold it is
a last option
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Combination Strategy

A company can pursue a combination of two


or more corporate strategies simultaneously.
But a combination strategy can be
exceptionally risky if carried too far.
• Priorities must be established.
 In large diversified companies, a combination
strategy is commonly employed when different
divisions pursue different strategies.

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Corporate parenting
• The manner in which corporate office
manages & develops the individual business in
multi business company is known as
Corporate parenting
• Corporate parenting views the corporation in
terms of resources and capabilities that can be
used to build business units’ value as well as
generate synergies across business units.

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Developing a Corporate Parenting
Strategy

• Every diversified corporation must address two


crucial questions:

a) What businesses should this company own and why?

b) What organizational structure, management


processes, and philosophy will leads to superior
performance from the company’s business units?

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• Campbell, Goold and Alexander recommend that the
search for appropriate corporate strategy involves three
analytical steps:
 First examine each business unit in terms of its strategic
factors.
 Second, examine each business unit in terms of areas in
which performance can be improved.
 Third, analyze how the parenting corporation fits well with
the business unit

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• Campbell, Goold and Alexander recommend that the
search for appropriate corporate strategy involves three
analytical steps:
 First examine each business unit in terms of its strategic
factors.
 Second, examine each business unit in terms of areas in
which performance can be improved.
 Third, analyze how the parenting corporation fits well with
the business unit.

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Parenting-Fix Matrix

• Campbell, Goold and Alexander further recommend the use of a


parenting-fit matrix, which emphasizes the fit of the business units
with the corporate parent.

 This matrix has two dimensions: the positive contribution (fit


between parenting opportunities and parenting characteristics) and
the negative effect (misfit between strategic factors and parenting
characteristics).

 The combination of these two dimensions creates five different


positions, each with its own implications for corporate strategy.
Parenting-Fit Matrix
Low

Heartland

Ballast
Edge of
Heartland

Alien
Territory

Value Trap
High
Low High

FIT between parenting opportunities


and parenting characteristics
1.Heartland Business

Heartland businesses have opportunities for improvement by the


parent, and parent understands their strategic factors well.
Their business should have priority for all corporate activities

2.Edge-of Heartland
Some parenting characteristics fit the business, but others do not
Parent may not really understand all of the strategic factors
Such business units are likely to consume much of the parent’s
attention
Parents need to know when to interfere in business unit
activities and strategies and when to keep at arm’s
3.Ballast business

Fit very well with the parent corporation but


contains very few opportunities to be improved by the
parent
Units that have been with the corporation for many
years and have been very successful
Parents may have added value in the past, but it can
no longer find opportunities
Like cash cows they may be important sources of
stability and earnings
They can also be a drag on the corporations as a
whole by slowing growth and distracting present from
more productive activities
4.Alien Territory Businesses
Have little opportunity to be improved by the
corporate parent
 A misfit exists between the parenting characteristics
and unit’s strategic factors
Little opportunity for value creation but high potential
for value destruction on the part of parent
5.Value Trap Businesses
Fit well with the parenting opportunities, but are
misfits with the parent’s understanding of unit’s strategic
factors
Corporate head quarters mistakes what it sees as an
opportunity for ways to improve the S.B.U.’s profitability
or competitive position
What is Strategic Planning?
• Strategic planning is an organizations process
of defining its strategy, or direction, and
making decisions on allocating its resources to
pursue this strategy.
• What do want to do?
• How do we best excel?
• Where do we want the company to be?

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main process for strategic planning.

• Phase1 -reference the mission


• Phase2- take stock outside and inside the system
• Phase3- analyze the situation –internal & external
• Phase 4- establish goals
• Phase5- establish strategies to reach goals
• Phase6- establish objectives along the way to achieve goals
• Phase7-give timeline & responsibilities with each objectives
• Phase8- write & communicate a plan documents
• Phase9- acknowledge completion and celebrate success

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corporate restructuring
• The process involved in changing the organization of a
business. Corporate restructuring can involve making
dramatic changes to a business by cutting out or merging
departments that often has the effect of displacing staff
members.
OR
Corporate restructuring is the process of redesigning one or
more aspects of a company. The process of reorganizing a
company may be implemented due to a number of
different factors, such as positioning the company to be
more competitive, survive a currently adverse economic
climate, or poise the corporation to move in an entirely
new direction.

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Restructuring
• A strategy through which a firm changes its
set of businesses or financial structure
– Failure of an acquisition strategy often precedes a
restructuring strategy
– Restructuring may occur because of changes in the
external or internal environments
• Restructuring strategies:
– Downsizing
– Downscoping
– Leveraged buyouts

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Types
• Expansion: Mergers, Acquisitions, Takeovers,
Tender offer, Joint Venture
• Contraction: Sell offs, Spin offs, Split offs, Split
ups, Divestitures, Equity Carve outs
• Corporate Control: Takeover Defenses, Share
Repurchases, Exchange Offers, Proxy Contests
• Changes in Ownership: Leveraged Buyout,
Going Private

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Types of Restructuring: Downsizing

• A reduction in the number of a firm’s


employees and sometimes in the number of
its operating units
– May or may not change the composition of
businesses in the company’s portfolio
• Typical reasons for downsizing:
– Expectation of improved profitability from cost
reductions
– Desire or necessity for more efficient operations

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Types of Restructuring: Downscoping

• A divestiture, spin-off or other means of


eliminating businesses unrelated to a firm’s
core businesses
• A set of actions that causes a firm to
strategically refocus on its core businesses
– May be accompanied by downsizing, but not eliminating
key employees from its primary businesses
– Firm can be more effectively managed by the top
management team

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Restructuring: Leveraged Buyouts

• A restructuring strategy whereby a party buys


all of a firm’s assets in order to take the firm
private
– Significant amounts of debt are usually incurred to finance
the buyout
• Can correct for managerial mistakes
– Managers making decisions that serve their own interests
rather than those of shareholders
• Can facilitate entrepreneurial efforts and
strategic growth
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Mergers
and Acquisitions
 Merger
A merger occurs when two or more organizations of about equal
size combine to become one through an exchange of stock or cash
or both. Mergers can take place in different ways.
 Acquisition
An acquisition occurs when a large organization purchases a
smaller firm, or vice-versa.
 Consolidation
If both firms dissolve their identity to create a new firm, it is called
consolidation or amalgamation.
 Friendly Merger
When both firms desire a merger or acquisition, it is termed as a
friendly merger.

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Reasons for Mergers and
Acquisitions
To quickly acquire valuable resources
To reduce risks and borrowing costs
To achieve growth
To gain additional capacity
To obtain taxation or investment incentives
To gain managerial expertise
To acquire market supremacy
To bypass legal hurdles
To take over sick units

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Types Of Mergers

Horizontal mergers: producing same product

Vertical mergers: joining two or more companies


involved in different stage of production or
distribution of the same product or service

Lateral or allied mergers: when firms producing


different products which are related in some way

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Conglomerate mergers :two or more companies producing
unrelated product

Concentric mergers: take place when there is


combination of two or more organizations related to
each other in terms of alternative technology etc….

Circular merger: firms belonging to different industries


& different product come under central agency.

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The Merger Process

• Identify Industries
• Select Sectors
• Choose Companies
• Evaluate Cost of Acquisition and Returns
• Rank the Candidates
• Identify good candidates
• Decide the extent of acquisition/retention
• Merger implementation
• Post-Merger Integration

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Assessing The Suitability Of A
Proposal
 Availability of Funds

 Likely Positive Synergies

 Negative Synergies

 Is Timing Appropriate?

 Is the required Management Style Available?


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The Merger Failure
• Howe (1986) has identified five main reasons, for merger
failure:

1. Little thought towards the contribution of an acquisition to the


acquiring firm’s objectives.

2. Failure to compare acquisitions with alternative means of


achieving corporate objectives.

3. Insufficient attention to the financial details of mergers.

4. Insufficient familiarity with the business of target firms.

5. Insufficient attention to post-merger planning.

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What is meant by Strategic Alliance?
Definition 1:

An agreement between two or more individuals or entities


stating that the involved parties will act in a certain way in
order to achieve a common goal. Strategic alliance usually
make sense when the parties involved have
Complementary strengths.

Definition 2:

Strategic alliances are innovative and interesting forms of


relationships between organizations. Organizations create
alliances in their quest to compete against fast & nimble
competitors.
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What is Meant by Strategic Alliance? cont’d

Definition 3:

Strategic alliances are agreements


between companies (partners) to reach
objectives of a common interest. Alliances
are among the various options which
companies can use to achieve their goals.
They are based on cooperation between
companies.

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Purposes of Strategic Alliances
• Competition is shifting from a "firm versus firm perspective"
to a "supply chain versus supply chain perspective."
Therefore, firms seeking competitive advantage are
participating in cooperative supply chain arrangements, such
as strategic alliances, which combine their individual
strengths & unique resources.

• Enabling a firm to focus resources on its core skills &


competencies while acquiring other components or
capabilities it lacks from the marketplace.

• Alliances can often improve market power of a firm because


either the alliance partner is a customer for the product or
because the distribution channels & buying power of the
partners can be combined

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Purposes of Strategic Alliances cont’d

• Alliances enable buying & supplying firms to combine their


individual strengths & work together to reduce non-value-
adding activities & facilitate improved performance.

• In order for both parties to remain committed to this form of


relationship, mutual benefit must exist (i.e. a "win-win"
relationship)

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Success Factors
• Selection:

– Strategically evaluate which upstream & downstream members


should be included in the supply chain to create a highly
competitive & efficient supply network.
– Selecting strategic partner should be based on company’s goals,
objectives & values system.
– Select partners who have competencies in collaboration & those
who already have a proven ability to work in a collaborative
environment.

• Intention:

Both partners should acknowledge their mutual dependence &


their willingness to work for the survival & prosperity of the
relationship.

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Success Factors cont’d
• Trust:

– Existence of trust in a relationship reduces perception of risk


associated with opportunistic behavior as this generates greater
profits & serve customers better

• Communication:

– Communication is critical for building successful relationships to


achieve the benefits of collaboration as it allows partners to
understand alliance goals, roles, responsibilities & helps with the
sharing & dissemination of individual experiences

• Conflict Resolution:

– Firms should be motivated to engage in joint problem solving as they


are, by definition, linked together to manage an environment that
was more uncertain & turbulent than each one could control.

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Success Factors cont’d
• Developing a focused winning strategy for the alliance:

– Based on distinctive competencies and competitive advantages of the partners


in the selected target market (s).
– To be able to manage the company cultural challenges that may arise between
the alliance partners.

• Progressive learning & value capturing:

– Learning involves significant transfer of tacit, specialized & complex knowledge.


Learning requires close collaboration of both firms to overcome transfer
challenges as knowledge, values, culture and organizational forms.

NMBA041 (STRATEGIC MANAGEMENT) 189


Success Factors cont’d
• Respect and protect the brand of each partner.

• Determine and align decision rights:

– To define what decisions are important to the alliance, which partner


should make them and how the decisions will be made and monitored.

• Exit Strategy:

– Agree upon an exit strategy for the alliance. It Is important to have


agreement in advance on how the alliance will be concluded if and
when it may fail and/or when it has fulfilled its mission and achieved its
goals and objectives

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Mistakes Leading to Failure

• Alliance business is viewed internally by one


partner.
• One of the partners is too dependant on the
other’s capabilities.
• Problems and dilemmas of mistrust.
• Cultural & language barriers.
• Collaboration in competitively sensitive areas
can be difficult.
• A clash of egos might occur.
NMBA041 (STRATEGIC MANAGEMENT) 191
Types of Strategic Alliances
• Joint Venture: an agreement by two or more parties to form
a single entity to undertake a certain project. Each of the
businesses has an equity stake in the individual business and
share revenues, expenses & profits.

• Outsourcing

• Global Strategic Alliances: working partnerships between


companies (often more than 2) across national boundaries &
increasingly across industries. Sometimes formed between
company & a foreign government, or among companies &
governments

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Types of Strategic Alliances cont’d

• Equity strategic alliance: an alliance in which 2 or


more firms own different percentages of the
company they have formed by combining some of
their resources & capabilities to create a competitive
advantage.

• Non- equity strategic alliance: an alliance in which 2


or more firms develop a contractual-relationship to
share some of their unique resources & capabilities
to create a competitive advantage.

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Types of Strategic Alliances cont’d

• Distributors: Recruiingt distributors, where each one has its own geographical
area or type of product. This ensures that each distributor’s success can be
easily measured against other distributors.

• Distribution Relationships: This is perhaps the most common form of alliance.


Strategic alliances are usually formed because the businesses involved want
more customers. The result is that cross-promotion agreements are
established.

• Product Licensing: This is similar to technology licensing except that the


license provided is only to manufacture and sell a certain product. Usually
each licensee will be given an exclusive geographic area to which they can sell
to. It’s a lower-risk way of expanding the reach of your product compared to
building your manufacturing base and distribution reach.

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Types of Strategic Alliances cont’d

• R&D: Strategic alliances based around R&D tend to fall into


the joint venture category, where two or more businesses
decide to embark on a research venture through forming a
new entity.

• Franchising: is an excellent way of quickly rolling out a


successful concept nationwide. Franchisees pay a set-up
fee & agree to ongoing payments so the process is
financially risk-free for the company. However, downsides
do exist, particularly with the loss of control over how
franchisees run their franchise.

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Examples of Alliances
• Nokia and Microsoft in alliance to make Zune phone
• Star Alliance – Airlines alliances.
• Philips and Sony jointly launched the mini-CD.
• Nestlé and Fonterra Sign Agreement on Dairy Alliance for the
America
• McDonald’s with Disney, Coca-Cola & Walmart
• Online grocer Webvan Group forms alliances with foodmakers:
Kellogg, Nestle, Pillsbury, Quaker

• .

NMBA041 (STRATEGIC MANAGEMENT) 196


Examples of Alliances cont’d
• Motorola-Toshiba: In 1987- Toshiba to produce microprocessors &
contribute access to the distribution network.

• Boeing, General Dynamics & Lockeed in the early 90’s, these


companies united to win a bid put forth by the Pentagon for the
construction of a tactical combat destroyer.

• Alcatel –Fujistsu made a joint venture to develop the equipment for


the third generation of cellular telephone

• Samsung & Sun Microsystems cooperated in solution business and


next generation business computing system.

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Portfolio Analysis

• Portfolio analysis is an analytical tool which views a corporation as a basket or portfolio of products
or business units to be managed for the best possible returns.

• The aim of portfolio analysis is:

i. To analyze its current business portfolio and decide which business should receive more or less
investment.

ii. To develop growth strategies for adding new businesses to the portfolio.

iii. To decide which business should no longer be retained.


• Balancing the portfolio
• Balancing the portfolio means that the different products or businesses in the portfolio have to be
balanced with respect to four basic aspects:
1. Profitability
2. Cash flow
3. Growth
4. Risk

NMBA041 (STRATEGIC MANAGEMENT) 198


The BCG Matrix

 The BCG matrix was developed by the Boston Consultancy


group in 1970s. It is also called the “Growth share matrix”.
 BCG matrix is based on the assumption that majority of
the companies carry out multiple business activities in a
number of different product-market segments.
 To ensure long-term success, a company’s business
portfolio should consist of both high-growth products in
need of cash inputs and low-growth products that generate
excess cash.
• Its basic purpose is to invest where there is growth from which the firm can
benefit, and divest those businesses that have low market share and low
growth prospects.
• Each of the products or business units is plotted on a two-dimensional
matrix consisting of:
The BCG Matrix
a) Relative market share/ competitive position
(it is defined as ratio of its market share in relation to Question
Stars
its largest competitor with in the industry. High market Marks
A business unit that have market growth rate

share more than 1.0 is leader. )


Low market Cash Cows
Dogs
b) Its industry growth rate.(if growth rate
Industry is growing faster than Economy
it is a high growth industry else vice versa) High relative Low relative
market share market share
Analysis Of BCG Matrix

• The BCG matrix reflects the contribution of the products or business units to its
cash flow. Based on this analysis, the products or business units are classified as:

 Stars (high growth, high market share) represent most favorable growth &
investment opportunities. As such resources should be allocated to them

 Cash cows (low growth/ mature industries, high market share) need less in terms
of resource allocation

 Question Marks (High Growth, Low Market Share) also known as problem child,
increase market share / disinvest.

 Dogs (Low Growth, Low Market Share) so less resources should be allocated
option is to disinvest.
• so, main strategy should be to maintain the position of cows. The cash
from cows can be used to consolidate the position the position of stars .
• Any surplus remaining then can be used to question marks
S.No. Business Type Cash Source Cash Use Net Cash
Balance
1 Cow More Less Funds
available, so
milk and
deploy

2 Star More More Build


competitive
position and
grow

3 Dog Less Less Divest or


redeploy
proceeds
4 Question Mark Less More Funds needed
to invest
selectively to
improve
competitive
position
Critical Assessment Of BCG Matrix

• Merits:
1. It is easy to use
2. It is quantifiable
3. It draws attention to the cash flows
4. It draws attention to the investment needs
Demerits:
1. It is too simplistic.
2. Link between market share and profitability is not strong.
3. Growth rate is only one aspect of industry attractiveness.
4. It is not always clear how markets should be defined.
5. Market share is considered as the only aspect of overall competitive
position.
6. Many products or business units fall right in the middle of the matrix,
and cannot easily be classified
GE’s nine cell matrix
This matrix was developed in
Business strength
1970s by the General Electric Strong Average Weak
Company with the assistance
of the consulting firm,
McKinsey & Co., USA. This is High
A C
also called GE Multifactor

attractiveness
Portfolio matrix. Industry
Medium B D

Low
• This matrix based on two variables
-business strength
-industry attractiveness
• business strength based on relative market share, profit margins,
knowledge of market & customer, technological capacity, strength of
management
• Industry attractiveness based on market size, profit margin of industry,
technology, social, environmental aspects
STOPLIGHT STRATEGY
• Zone
• Green business strength is strong& industry

is strong .Decision is invest/expand.

business strength is low, industry

• Yellow attractiveness is high. Decision is

earn /select

business strength Is weak/average & attractiveness is

• Red low/medium , Decision - divestment


Strong Medium Weak
[More Comprehensive than Market Growth]

High Protect Position Build Selectively


Invest to Build
Industry Attractiveness

Manage for
Build Selectively Harvest
Medium Earnings

Protect &
Harvest Divest
Low Refocus

Competitive Strength
[More Comprehensive than RMS]
GE 9 Cell Matrix for PepsiCo
High
Competitive Strengths Low

High
Snack Foods
Attractiveness

Soft Drinks

Low
Difference between BCG and GE
matrices
BCG Matrix GE Matrix
1. BCG matrix consists of four cells 1. GE matrix consists of nine cells

2. The business unit is rated against the 2. The business unit is rated against the
following two criteria following criteria
i. relative market share i. business strength
ii. industry growth rate. ii. industry attractiveness.

3. The matrix uses single measures to 3. The matrix uses multiple measures to
assess growth and market share. assess business strength and
industry attractiveness

4. The matrix uses two types of 4. The matrix uses three types of
classification i.e. high and low classification (high/medium/low and
strong /average /weak).

5. Has many limitations 5. GE matrix overcomes many


limitations of BCG and is an
improvement over it.
Diamond Theory of Competitive
Advantage of Nations
• Michael Porter’s “diamond’’ theory of international competitive advantage
identifies a ‘diamond’ of four interrelated areas within a nation that assist
that country to be more competitive in international markets. The four
factors are:

i. Factor conditions

ii. Demand conditions

iii. Related and supporting industries

iv. Firm’s strategy, structure and rivalry


Firm Strategy,
Structure & 4
Rivalry

1 2
Factor Demand
Conditions Conditions

3
Related &
Supporting
Industries
• the good old factors of production in economics – land,
labor, capital
Firm & natural resources
Strategy,
• A nation which &
Structure is richly endowed with one or more
factors obviously
Rivalry gains a competitive advantage
• America & Agricultural Produce
1 • India & Spices, Brazil & Coffee
• South Africa & Diamonds
• But Sustained Growth is not achieved by depending
Factor only on inherited factor endowments. Demand
Cultivated
Conditions Resources / Capabilities are equally important.
Conditions
• Only cultivated theory can explain growth of countries
like Singapore, Hong Kong, Taiwan and even JAPAN.
• Human Resources [English speaking skills for
BPO, tech skills for IT, hands on skills for
fabrication]
• Knowledge Resources [Academic & Tacit]
• Related &
Infrastructure [Professional / Social, Quality
Supporting
Vs. Cost]
• Add toIndustries
all this factors like time commonality/difference,
cultural adaptability etc – The Factor part is complete
• The second broad determinant of national competitive
advantage in an industry isFirm
“Home Demand
Strategy,
Conditions” for the industry’s product /&service.
Structure
• Home demand can be split into two – Quantity &
Quality
Rivalry
• The quantity of home demand ensures economies of
scale and critical mass production
2
• But it is the quality of home demand that establishes
global competitive advantage
• sophisticated
Factor domestic customers will drive both quality Demand
and innovation
Conditions Conditions
• Japanese passion for recording events / travels – Hence
Camera
• British are renowned for their gardens / gardening –
hence Lawnmowers
• Italy & its passion for fashion – Hence High End
Apparels
Related &
• Porter Diamond concurs that Supporting
this home demand will
slowly get internationalized Industries
• Competitive advantage for nations occurs when RELATED AND
SUPPORTING INDUSTRIES start emerging around the key industry –
Firm Strategy,
particularly in “industry clusters”
Structure &
• These supplier industries - who by themselves are internationally
competitive sub-industries – Rivalry
eventually create a national advantage for the
Original “Downstream” industry.

• USA leads the world in Computer manufacturing because all key supplier
industries are again US [Semiconductor – Intel, O/S – Microsoft, Apple,
Factor
Applications – Oracle etc] Demand
• Conditions Conditions
Italy is successful in footwear because it is equally & independently strong
in Leather Processing
• Back home, Chennai is developing as the Detroit of India with Hyundai,
Ford, Chrysler & Mahindra setting up shop because it is equally strong as
an auto ancillary vendor. TVS group, Rane Group, Visteon, MRF etc are
strong auto ancillary vendors – all operating mainly out of Chennai

Related &
Supporting 3
Industries
Firm Strategy,
4 Structure &
Rivalry

• The relevance of industry rivalry in Porter Diamond is slightly different than


that in Porter 5 force theory
• In 5 force theory, Rivalry is a threat – a force that eats into the existing pie.
(i.e. More the rivalry, less healthier the industry)
Factor Demand
• But in the diamond model, intense domestic rivalry drives innovation and
Conditions Conditions
upgrading. The pattern of rivalry at home has a profound impact in its
ultimate international success
• At the same time, highly fragmented domestic competition can be wasteful
since it leads to duplication of efforts & prevents reaching economies of Scale.
Hence M&A.
• Sony, Sanyo, Panasonic, Aiwa, – Japan & Consumer Electronics rivalry
• Infosys, TCS, HCL, Satyam, Related
Wipro, CTS,
& Polaris - India & IT rivalry
• In each of these cases, rivalry has promoted the industry at the national level
Supporting
Industries
Strategic choice
 Strategic choice is essentially a decision-making process. This
involves generating feasible alternatives, evaluating those
alternatives and choosing a specific course of action that could
best enable the firm to achieve its mission and objectives.
 Alternative strategies do not come from a vacuum. They are
derived from the firm’s present strategies keeping in view
the vision, mission, objectives and also the information
gathered from external and internal analysis. They are consistent
with or built on past strategies that have worked well.

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Nature Of Strategic Choice
• According to Glueck and Jauch, “strategic choice is the decision to
select from among the alternatives considered, the strategy which
will best meet the enterprise objectives.”

• This decision-making process consists of four distinct steps:

1. Focusing on a few alternatives.

2. Considering the selection factors.

3. Evaluating the alternatives.

4. Making the actual choice.

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What Is A Functional Strategy?
• Functional Strategy is the approach taken by a functional area to achieve
corporate and business unit objectives and strategies by maximizing
resource productivity.
 It is concerned with developing and nurturing a distinctive competence
to provide a company or business unit with a competitive advantage.
 Just as a multi-divisional corporation has several business units, each
with its own business strategy, each business unit has its own set of
departments, each with its own functional strategy.
 The functional strategies delineate the activities to be undertaken in
each part of the business and usually include them as a core part of their
action plan.
 Functional strategies are, thus, detailed statements of the “means’’ or
activities that will be used to achieve short-term objectives and establish
competitive advantage.
 A functional strategy is also defined as a short-term “game plane” for a
key functional area.

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The functional strategies required in key
functional areas are outlined below:
1. Financial Strategy
2. Marketing Strategy
3. Hr Strategy
4. Production Strategy
5. R&D Strategy

NMBA041 (STRATEGIC MANAGEMENT) 221


Need For Functional Strategy
• Functional strategies are developed to ensure that:
1. The strategic decisions are implemented by all the parts of an
organization.
2. There is a basis available for controlling activities in different functional
areas of a business.
3. The time spent by functional managers on decision-making may be
reduced.
4. Similar situations occurring in different functional areas are handled by
the functional managers in a consistent manner.
5. Coordination across different functions takes place where necessary.

NMBA041 (STRATEGIC MANAGEMENT) 222


Difference Between Functional
Strategy And Business Strategy
Functional Strategy Business Strategy

1. Time horizon Functional strategies focus Business strategies focus on


on short-term goals (one year) the firm’s long-term
competitive posture (3 to 5
years)
2. Specificity Functional strategies provide Business strategies provide
more specific direction to general direction
functional managers by.
 helping them to know
what needs to be done
and focus on results.
 facilitating coordination
among functional units by
clarifying areas of
interdependence and
potential conflict.
3. Participants  Functional strategy is the Business strategy is the
responsibility of the responsibility of the head of
operating managers of the business unit..
the functional area.
Strategy implementation
 Strategy implementation is the process of putting organization’s
various strategies into action by setting annual or short-term
objectives, allocating resources, developing programmes,
policies, structures, functional strategies etc. Even the best
strategic plan will be useless unless it is implemented
properly.

 The strategy implementation is, therefore, the most difficult


element of the strategic management process. This is so
because there has to be a “fit” between the strategy and the
organization.

NMBA041 (STRATEGIC MANAGEMENT) 224


Strategy formulation Strategy implementation
1.Positioning forces before the 1.Managing forces during the
action. action.
2.Focuses on effectiveness. 2.Focuses on efficiency.
3.Primarily an intellectual process. 3.Primarily an operational process.
4.Requires good intuitive and 4.Requires motivation and
analytical skills. leadership skills.
5.Requires coordination among 5. Requires coordination among
few individuals many individuals.
Importance Of Strategy
Implementation
• The notion of strategy implementation might at first seem quite simple and
straightforward; the strategy is formulated and then it is implemented. However,
transforming strategies into action is a far more complex and difficult task.
• However, strategy implementation has attracted much less attention in strategic
management than strategy formulation. Alexander (1991) suggests several
reasons for this:
 Strategy implementation is less glamorous than strategy formulation
 People overlook it because of a belief that everyone can do it
 People are not exactly sure where it begins and where it ends
 Furthermore, there are only limited number of models of strategy
implementation.

NMBA041 (STRATEGIC MANAGEMENT) 226


difficulties in implementing strategies
• Some of problems are:
 Weak management roles in implementation
 Lack of communication
 Lack of commitment to the strategy
 Unawareness or misunderstanding of strategy
 Unaligned organizational systems and structure
 Poor coordination and sharing of responsibilities
 Inadequate resources and capabilities
 Uncontrollable environmental factors
 Problematic and unhealthy culture
Mc Kinsey’s 7-S model
• It is good at capturing the importance of all these elements in the implementation

of strategy .
Structure

Strategy Systems

Super -
Ordinate
Goals
Style
Skills

Staff
Mc Kinsey’s 7-S model
1. Super Ordinate Goals; means the goals of a higher order which
express the values vision and mission that senior management
brings to organization
2. Structure means ;the organizational structure of the company
3. Systems ;means the procedures that make the organization works
4. Style; means the company conducts its business .Top managers in
organization can use style to bring about change
5. Staff: refers to those people who need to be developed challenged
and encouraged
6. skills ;it is most important capability of an organization
7. Strategy: direction ,scope of organization or the route company
chosen to achieve competitive success

229
Strategic Information Systems

The strategic role of IS involves using IT to


develop products, services, and capabilities that
give company major advantages over the
competitive forces it faces in the global
marketplace.
Porter’s Competitive Forces Model
• The five major forces can be generalized as
follows:
1. The bargaining power of customers
2. The bargaining power of suppliers
3. The threat of new entrants to firm’s market
4. The threat of substitute products and services
5. The rivalry for competitors within the firm's
industry
Porter’s Competitive Forces Model
(cont’d)
• Competitive strategies:
1. Cost leadership strategy: Producing
products/services at the lowest cost in
the industry. Ex: Wal-Mart.
2. Differentiation strategy: Distinguish
the products and services from those of
its competitors. Ex: Dell.
3. Innovation strategy: Finding new ways
of doing business. Ex: Amazon.com.
Competitive strategies (cont’d):

4. Growth strategies: Managing regional and


global business expansion. Ex: Wal-Mart.
5. Alliances: Working with business partners. Ex:
Drugstore.com (online pharmacy) and General
Nutrition Centers (GNC) (distributor of
vitamins and health foods) formed a
partnership that gave Drugstore.com the
exclusive rights to sell GNC-branded products.
Value Chain Model
• According to Porter’s Value chain model, the activities
conducted in any manufacturing organizations can be
divided into two parts: Primary activities and support
activities.
• This model highlights the primary or support activities
that add a margin of value to a firm’s products and
services where IT can best be applied to achieve a
competitive advantage.
Value Chain Model
• Primary activities are most directly related to
the production and distribution of the firm’s
products and services that create value for the
customer. Inbound logistics, operations,
outbound logistics, marketing and sales, and
customer service.
• Support activities include procurement of
resources, technology development, human
resources management, and administrative
coordination.
The value chain of a firm
Using IT for Strategic Advantage

• IT can be used
- to build a customer focused business
- to reengineer business processes
- to improve quality
- to become an agile company
- to form a virtual company
- To build a knowledge-creating company
Customer focused business
• Develop a focus on the customer
– Customer value
• Best value
• Understand customer preferences
• Track market trends
• Supply products, services, & information anytime,
anywhere
• Tailored customer service
Reengineering the processes
• Business Process Reengineering (BPR)
– Rethinking & redesign of business processes
– Combines innovation and process improvement
– There are risks involved.
Improving quality
• Total Quality Management (TQM)
– Quality from customer’s perspective
– Meeting or exceeding customer expectations
– Commitment to:
• Higher quality
• Quicker response
• Greater flexibility
• Lower cost
• IT can help firms to achieve quality goals by helping
them simplify products or processes, make improvements
based on customer demands, reduce cycle time and
increase the quality of design and production.
Agile company
• Old businesses: Low cost, low price, mass
production, economy of scale.
• New businesses: Global competition, sophisticated
customers, customized production.
• An agile company can offer customized production,
product variety, bring products to market rapidly and
cost effectively. Ex: Dell Computers is an agile
competitor.
• It heavily depends on IT. Ex: Flexible
Manufacturing Systems (FMS) help companies
become an agile competitor.
• A business can use IT to become an agile company.
Virtual company
• IT makes the virtual corporation possible.
• A virtual company is an organization that uses IT to link
people, assets, and ideas to create and distribute products and
services without being limited to physical locations or
traditional boundaries.
Virtual company
• Major attributes of VC:
• Each partner brings its core competency so an-
all star winning team is created.
• No single company can match what the VC
can achieve.
• Resources of the business partners can be put
to use more profitably.
• It is difficult to identify the boundaries of a
VC.
Turnstone
Subcontracted Third-party
sells its products
Carriers ship Company designs
through catalogs
the products to and prints catalogs
customers

Excel Logistics located in Ohio Send the orders


operates warehouses.
Excel’s computers handle all order
processing, shipment tracking, etc.
Virtual company

Tele-marketing company takes


the orders (Denver, CO) and
transmits the order data to
computers at the warehouses
Building a Knowledge-creating company
• Knowledge management enable companies to learn faster than
their competitors giving them a sustainable competitive
advantage.
• The goal of knowledge management systems is to help
organizations create, organize and make available important
business knowledge whenever and wherever it’s needed in an
organization.
• KMSs collect all relevant knowledge and experience in the
firm and make it available whenever and wherever it is needed
to support management decisions and business processes.
Activity-Based Costing
• In contrast to traditional/absorption costing
system, ABC system first accumulates
overheads costs for each organizational
activity, and then assigns the costs of the
activities to the products, services, or
customers (cost objects) causing that activity.
Activity-Based Costing System

NMBA041 (STRATEGIC MANAGEMENT) 246


Advantages
&
Disadvantages
Of Activity-Based Costing(ABC)
• Advantages Of Activity-Based Costing(ABC):

1. Product cost determination under activity-based costing is more accurate and reliable
because it focuses on the cause and effect linkage of costs and activities in the context of
producing goods.
2. Fixation of selling price for multi-products under activity-based costing is fair and correct
because overheads are allocated on the basis of relevant cost drivers.
3. Control of overheads consisting of fixed and variable becomes possible by controlling and
monitoring activities. Linkage between cost and activities are clearly identified in activity-
based costing and thus provides opportunities to control overhead costs.
4. Sufficient information can be obtained to make decisions about the profitability of different
product lines.
5. Fair allocation of overheads occupy a considerable portion in the total cost components.

Disadvantages Or Limitations Of Activity-Based Costing(ABC)


1. Difficult to identify the overall activities that influence costs.
2. Not easy to select the most suitable cost drive.
3. Difficult to evaluate cost on the basis of activities.
4. Not suitable for small manufacturing concern
NMBA041 (STRATEGIC MANAGEMENT) 247
Organizational Life Cycles

Prof. Stephen Block


Phase 1
• Evolutionary Stage: Growth Through Creativity

• Revolutionary Stage: Crisis of Leadership


Phase 1
• Growth Through Creativity - This stage is dominated
by the founders of the organization, and the
emphasis is on creating both a market and product.
These founders are usually technically or
entrepreneurially oriented. Management activities
are avoided. But as the organization grows,
management problems cannot be handled through
informal communication. This leads to:
• Revolutionary Stage: Crisis of Leadership
Phase 1
• Revolutionary Stage: Crisis of Leadership
The question of who is going to lead the
organization out of its state of confusion and solve
management problems? The solution is to find a
strong manager. This crisis leads to the next
evolutionary period:

• Growth Through Direction


Phase 2
• Evolutionary Stage: Growth Through Direction

• Revolutionary Stage: Crisis of Autonomy


Phase 2
• Evolutionary Stage: Growth Through Direction
During this stage, the new manager and key staff
take the responsibility for establishing direction, while
lower level supervisors are treated as functional
specialists than autonomous decision-makers.
The demands of lower-level managers for more
autonomy eventually leads to the next revolutionary
period:
• Revolutionary Stage: Crisis of Autonomy
Phase 2
• Revolutionary Stage: Crisis of Autonomy
The solution to this crisis is usually greater
delegation.
Phase 3

• Evolutionary Stage: Growth Through Delegation

• Revolutionary Stage: Crisis of Control


Phase 3
• Evolutionary Stage: Growth Through Delegation
When an organization gets to the growth stage of
delegation, it usually begins to develop a
decentralized organizational structure, which
heightens motivation at lower levels of the
organization. Eventually top managers sense they are
losing control over a diversified field operation. This
leads to:
• Revolutionary Stage: Crisis of Control
Phase 3

• Revolutionary Stage: Crisis of Control


The crisis of control leads to a return to
centralization. This creates resentment among those
individuals who feel that their organizational
freedoms are being constrained.
Searching for an alternative usually leads to:
• Evolutionary Stage: Growth Through Coordination
Phase 4

• Evolutionary Stage: Growth Through Coordination

• Revolutionary Stage: Crisis of Red Tape


Phase 4

• Evolutionary Stage: Growth Through Coordination


This period is characterized by the use of formal
systems for achieving greater coordination with
top management as the organizational watchdogs.
Most coordination systems get carried away and it
leads to:

• Revolutionary Stage: Crisis of Red Tape


Phase 4

• Revolutionary Stage: Crisis of Red Tape


This crisis most often occurs when the
organization has become too large and complex to
be managed through formal programs and rigid
systems. To overcome the Red Tape mentality, the
organization moves to the next stage:

• Evolutionary Stage: Growth Through Collaboration


Phase 5

• Evolutionary Stage: Growth Through Collaboration

• Revolutionary Stage: Crisis of ?


Phase 5

• Evolutionary Stage: Growth Through Collaboration


This stage emphasizes greater spontaneity in
management action through teams and the skillful
confrontation of interpersonal differences. Social
control and self-discipline take over from formal
control. The next “revolutionary stage” was not
identified by Griener:
• Revolutionary Stage: Crisis of ?
Phase 5

• Revolutionary Stage: Crisis of ?


Griener suggests that the next crisis will center
on the psychological saturation of employees who
have grown emotionally and physically exhausted by
the intensity of teamwork and the heavy pressure for
innovative solutions.
• Introduction
 Strategic evaluation and control is the final phase in the process of strategic
management.
 Its basic purpose is to ensure that the strategy is achieving the goals and
objectives set for the strategy.
 It compares performance with the desired results and provides the feedback
necessary for management to take corrective action.
 According to Fred R. David1 strategy evaluation includes three basic
activities (1) examining the underlying bases of a firm’s strategy, (2)
comparing expected results with actual results, and (3) taking corrective action
to ensure that performance conforms to plans.

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Types of General Control Systems
Basically, there are three types of general control systems:
 Output control (i.e. control on actual performance results)
 Behaviour control (i.e. control on activities that generate
the performance)
 Input control (i.e. control on resources that are used in
performance)

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• Characteristics Of Effective Control System
1. Simple
2. Economical
3. Meaningful
4. Timely
5. Truthful
6. Selective
7. Flexible
8. Suitable
9. Reasonable
10. Objective
11. Acceptable
12. Foster Understanding And Trust
13. Fix Responsibility For Failure

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• Benefits of Strategic Evaluation and Control
• There are many benefits of strategic evaluation and control:
1. It gives feedback
2. It alerts on potential problems
3. It helps refine and improve strategy
4. It helps to change strategy
5. It helps to identify rewarding behaviour
6. It helps to fix responsibility
7. It helps in future planning

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• Criteria For Strategic Control
• Criteria are the standards in terms of which strategies are evaluated.
Broadly, there are two types of criteria:
1. Quantitative Criteria
• Traditional Financial Measures
• Financial Ratios
• Some key financial ratios that are particularly useful as criteria for
strategic control are as follows:
i. Return on investment (ROI)
ii. Return on equity (ROE)
iii. Earnings per share (EPS)
iv. Profit margin
v. Market share
vi. Debt-equity
vii. Sales growth
viii. Asset growth etc.

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2. Qualitative Criteria
• A number of criteria have been suggested by different analysts to evaluate
strategies, which are qualitative measures of how well the strategy is being
implemented. One set of such criteria suggested by Seymour Tiles is as follows:

i. Internal consistency
ii. Consistency with the environment
iii. Appropriateness of the strategy in the light of available resources
iv. Acceptability of the degree of risk involved in the strategy
v. Appropriateness of the time horizon of the strategy
vi. Workability of the strategy.

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• Strategic Controls
• According to Pearce and Robinson, there are two broad types of control systems
or mechanisms. They are:

• Strategic Controls

• There are four types of strategic controls:

1. Premise control

2. Strategic surveillance

3. Special alert control

4. Implementation control

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 Ethics is defined as “the discipline dealing with what is good and bad, and right
and wrong, or with moral duty and obligation.”

 Ethics refers to the moral principles and values that govern the behaviour of
a person or group. Ethics helps us in deciding what is good or bad, moral or
immoral, fair or unfair in conduct and decision-making. In other words, ethics
serve as a “moral compass” to guide our actions.

 There are many sources for an individual’s ethics. These include family
background, religious beliefs, community standards and expectations.

 Business ethics is the application of general ethical principles and standards to


business behaviour. Fred R. David defines business ethics as “principles of conduct
within organizations that guide decision-making behaviour.” Business actions are
judged by the general ethical standards of society, not by a special set of its own
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rules made by a business.
• Importance Of Ethics
 An ethical organization is driven by ethical values and integrity. Such values
shape the search for opportunities, the design of systems and the decision- making
processes of the organization.
 The potential benefits of an ethical organization are many. A strong ethical
orientation can have a positive effect on employee commitment and
motivation to excel. This is particularly important in today’s knowledge-
intensive organizations, where human capital is critical in creating value and
competitive advantage.
 The ethical orientation of a leader is generally considered to be a key factor
in promoting ethical behaviour among employees.
 Unethical business practices reflect the values, attitudes and behavioural patterns
that define an organization’s operating culture. Thus ethics plays a critical
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role in organizations.