Strategic Management Unit - 2

Unit 2
• External Environmental: Concept of environment,

components of environment, ETOP, QUEST, SWOT (TOWS),
PEST, BCG matrix, , GE 9 cell model, Porter’s five forces
model of competition, Synergy and dysergy.
• Grand Strategies: Stability, expansion (diversification

strategies, vertical integration strategies, mergers,
acquisition and takeover strategies, strategic alliances and
collaborative partnerships), retrenchment, outsourcing
strategies.
• Tailoring Strategy to Fit Specific Industry: Life Cycle
analysis, emerging, growing, mature and declining
industries
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Concept of Environment
• Environment literally means the surroundings,
external objects, influences or circumstances
under which something or someone exists.
The environment of any organisation is the
aggregate of all conditions, events and
influences that surround and affect it. The
concept of environment can be understood by
looking at some of its characteristics.

Characteristics of Environment
• Environment is complex
• Environment is dynamic
• Environment is Multi-faceted
• Environment has a far-reaching impact.

Components of Environment
• Internal Environment refers to all factors
within an organization that impact strengths
or cause weaknesses of a strategic nature.
• External Environment includes all the factors
outside the organization which provide
opportunities or pose threats to the
organization.

•
ETOP
Environmental Threats and Opportunities Profile (ETOP)
The Environmental Threats and Opportunities Profile (ETOP) analysis provides a list of
external environmental factors that have an impact on the organization. The strategic
manager needs to assess the importance of each of the factors to the organization on
a scale of 1 to 10, where a score of 1 means that the factor is of low importance to the
organization and a score of 10 means that the factor is extremely important to the
organization. The assessment of the factors is not necessarily made arbitrarily but
rather based on the actual facts and information obtained by the manager and its
relevance to the organization. The next stage is to evaluate the impact of each of the
factors to the organization on a scale of (-5) to (+5), where a score of (-5) means that
the factor has a very negative impact on the organization, and a score of (+5) means
that the factor has a very strong positive impact on the organization.
QUEST Analysis
Quick Environmental Scanning Technique
• The Quick Environmental Scanning Technique, is a
scanning procedure designed to assist executives and
planners to keep side by side of change and its
implications for the organizational strategies and
policies. QUEST produces a broad and comprehensive
analysis of the external environment.

PEST Analysis
• PEST Analysis is a simple and widely used tool
that helps you analyze the Political, Economic,
Socio-Cultural, and Technological changes in your
business environment. This helps you understand
the "big picture" forces of change that you're
exposed to, and, from this, take advantage of the
opportunities that they present.

PEST Analysis is useful for four main
reasons:
• It helps you to spot business or personal opportunities, and it gives you
advanced warning of significant threats.
• It reveals the direction of change within your business environment. This

helps you shape what you're doing, so that you work with change, rather
than against it.
• It helps you avoid starting projects that are likely to fail, for reasons
beyond your control.
• It can help you break free of unconscious assumptions when you enter a
new country, region, or market; because it helps you develop an objective
view of this new environment.

The Matching Stage
• The Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix
helps managers develop four types of
strategies:
– SO (strengths-opportunities) Strategies
– WO (weaknesses-opportunities) Strategies
– ST (strengths-threats) Strategies
– WT (weaknesses-threats) Strategies
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6-9
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The Matching Stage
• ST Strategies • WT Strategies
– use a firm’s strengths – defensive tactics
to avoid or reduce the directed at reducing
impact of external internal weakness and
threats avoiding external
threats

6-10
The Matching Stage
• SO Strategies • WO Strategies
– use a firm’s internal – aim at improving
strengths to take internal weaknesses
advantage of external by taking advantage of
opportunities external opportunities

6-11
SWOT Matrix
1. List the firm’s key external opportunities
2. List the firm’s key external threats
3. List the firm’s key internal strengths
4. List the firm’s key internal weaknesses
5. Match internal strengths with external
opportunities

6-12
SWOT Matrix (cont.)
6. Match internal weaknesses with external
opportunities, and record the resultant WO
Strategies
7. Match internal strengths with external threats,
and record the resultant ST Strategies
8. Match internal weaknesses with external
threats, and record the resultant WT Strategies

6-13
A SWOT Matrix for a Retail
Computer Store
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The Boston Consulting Group
(BCG) Matrix
• BCG Matrix
– graphically portrays differences among
divisions in terms of relative market share
position and industry growth rate
– allows a multidivisional organization to
manage its portfolio of businesses by
examining the relative market share position
and the industry growth rate of each division
relative to all other divisions in the
organization

6-15
The BCG Matrix
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The BCG Matrix
• Question marks – Quadrant I
– Organization must decide whether to
strengthen them by pursuing an intensive
strategy (market penetration, market
development, or product development) or to
sell them
• Stars – Quadrant II
– represent the organization’s best long-run
opportunities for growth and profitability
6-17
The BCG Matrix
• Cash Cows – Quadrant III
– generate cash in excess of their needs
– should be managed to maintain their strong
position for as long as possible
• Dogs – Quadrant IV
– compete in a slow- or no-market-growth
industry
– businesses are often liquidated, divested, or
trimmed down through retrenchment
6-18
The BCG Matrix
• The major benefit of the BCG Matrix is that
it draws attention to the cash flow,
investment characteristics, and needs of
an organization’s various divisions

6-19
GE Nine Cell Matrix

GE nine cell matrix…contd…
• Another popular “Corporate Portfolio Analysis” technique is the result of
pioneering effort of General Electric Company along with McKinsey
Consultants which is known as the GE NINE CELL MATRIX.
• GE nine-box matrix is a strategy tool that offers a systematic approach for
the multi business enterprises to prioritize their investments among the
various business units. It is a framework that evaluates business portfolio
and provides further strategic implications.
• Each business is appraised in terms of two major dimensions –
Market Attractiveness and Business Strength. If one of these
factors is missing, then the business will not produce desired
results. Neither a strong company operating in an unattractive
market, nor a weak company operating in an attractive market
will do very well.

• The vertical axis denotes industry attractiveness, which is a
weighted composite rating based on eight different factors.
They are:
• Market size and growth rate
• Industry profit margins
• Intensity of Competition
• Seasonality
• Product Life Cycle Changes
• Economies of scale
• Technology
• Social, Environmental, Legal and Human Impacts

Contd…GE Nine cell matrix…
• Horizontal analysis indicates business strength or in
other words competitive position, which is again a
weighted composite rating based on seven factors as
listed below:
• Relative market share
• Profit margins
• Ability to compete on price and quality
• Knowledge of customer and market
• Competitive strength and weakness
• Technological capability
• Caliber of management

• The two composite values for industry attractiveness and competitive position are plotted for each strategic
business unit (SBU) in a COMPANY’S PORTFOLIO. The PIE chart (circles) denotes the proportional size
of the industry and the dark segments denote the company’s respective market share.
• The nine cells of the GE matrix are grouped on the basis of low to high industry attractiveness, and weak to
strong business strength. Three zones of three cells each are made, indicating different combinations
represented by green, yellow and red colors. So it is also called ‘Stoplight Strategy Matrix’, similar to the
traffic signal.
• The green zone suggests you to ‘go ahead’, to grow and build, pushing you through expansion strategies.
Businesses in the green zone attract major investment.
• Yellow cautions you to ‘wait and see’ indicating hold and maintain type of strategies aimed at stability.
• Red indicates that you have to adopt turnover strategies of divestment and liquidation or rebuilding
approach.
• This matrix offers some advantages over BCG matrix in that, it offers intermediate classification of medium
and average ratings. It also integrates a larger variety of strategic variables like the market share and
industry size.

• Advantages
• Helps to prioritize the limited resources in order to achieve the best
returns.
• The performance of products or business units becomes evident.
• It’s more sophisticated business portfolio framework than the BCG
matrix.
• Determines the strategic steps the company needs to adopt to
improve the performance of its business portfolio.
• Disadvantages
• Needs a consultant or an expert to determine industry’s
attractiveness and business unit strength as accurately as possible.
• It is expensive to conduct.
• It doesn’t take into account the harmony that could exist between
two or more business units.

Porter’s five forces model

• Porter’s five forces analysis-draws upon industrial
organization (IO) economics to derive five forces that
determine the competitive intensityand therefore
attractiveness of a market.
• True to Darwin’s theory “Survival of the fittest”, only
competitive firms survive in the business market,
provided, they have made the right strategic choice by
comprehensively analyzing their position in the industry.
• Every organization is part of the industry and almost all
of them face competition. Thus, industry and competition
are the vital considerations for making a strategic choice.
• All the firms in a particular industry vie for the same set
of customers by offering identical or similar products
with minor variations. The analysis of the external
environment in relation to the context of industry
attractiveness thus becomes essential.

• Industrial Analysis:
• Industry analysis helps a firm to also fix long range plans, by gauging long term growth opportunities
present if any. Strategic choice is nothing but, to screen all possible strategic alternatives followed by
narrowing down the choice to the best suited and feasible alternatives and ultimately choosing an
optimum strategy.
• To explain it in more clear terms, let us look at this example. Say, if there are three big players of car
manufacturers in an automobile industry. Each follows their own strategic style to capture the market.
What are the threat factors?
• Threat can be in the form of four-wheeler manufacturers like trucks and jeeps, but these cannot be
competitively priced.
• Threat can be in the form of suppliers who dominate the industry by having a grip on the supply of
components, sub-assemblies and accessories.
• Threat in the form of new entrants, but the growth might be restricted due to government regulations.
• A thorough analysis of the automobile industry thus made can make things clear to the firm, as to where
they stand in terms of market share, what are their strengths and weaknesses, who pose a threat, what
are the potential opportunities for growth and to tap market segments whose needs are unidentified. Still,
it will be a seller’s market where the buyers have no bargaining power.
• On the other hand, if the weather does not favor its growth, the firm has to immediately decide on its next
course of action, calling for diversification. The possible threats for a firm can come from five directions as
mentioned below:
• Potential threat from new firms entering the market
• Threat from substitutes available in the market
• Threat from competitors
• Bargaining power of the suppliers
• Bargaining power of the buyers
• The structure and dynamics of an industry has to be analyzed in order to determine the intensity of
competition and profitability.
• As the market is very dynamic, it becomes mandatory for firms to evolve strategies embracing a modern
approach, with emphasis on reappraisal of existing strategy in the light of changing external conditions
and formulation of alternative strategies.
Grand Strategies
Stability, Expansion (diversification strategies,
vertical integration strategies, mergers,
acquisition and takeover strategies, strategic
alliances and collaborative partnerships),
Retrenchment, outsourcing strategies.

Stability Strategies
• Stability Strategies results from attempts by an organization
at incremental improvement of functional performance.
The corporate strategy can be relevant for an organization
operating in a reasonably certain and predictable
environment. Stability strategies can be useful in the short
run when such organizations are satisfied with their current
performance. Stability strategies can be of three types,
each of which is discussed below:

• No Change Strategy:
• This stability strategy is a conscious decision to do nothing new, i.e.
to continue with the present business definition. This is so because
the organization does not find it worthwhile to alter the present
situation by changing its strategy. There are no significant
opportunities or threats operating in external and industry
environments.
• Used by small and medium –sized firms operating in a familiar

market-more often a niche market that is limited in scope

• Profit Strategy:
• Sometimes things change in such a way that the firm has to adopt changes in its working.
There may be unfavorable external factors such as increase in competition, recession in the
industry, government attitude, industry down turn etc. Under these situations it becomes
difficult to sustain profitability. A supposition is that the changed situation will be a
temporary phase and old situation will again return. The firm will try to sustain profitability
by controlling expenses, reducing investments, raise prices, cut costs, increase productivity
etc. These measures will help the firm in sustaining current profitability in the short run.
• With the opening of markets, Indian industry is facing lot of problems with the presence of
multinationals and reduction in tariff on imports. The firms will have to adjust their policies
to the changing environment otherwise they will find it difficult to stay in the market.
• Profit strategy will be successful for a short period only. In case things do not improve to the
advantage of the firms then this strategy will only deteriorate their position. This strategy can
work only if problems are temporary.

• (ii) Proceed-With Caution Strategy:
• Proceed with caution strategy is employed by firms that wish to test

the ground before moving ahead with full-fledged grand strategy or
by those firms which had a rapid pace of expansion and now wish
to rest for a while before moving ahead. The pause is sometimes
essential because intervening period will allow consolidation before
embracing on further expansion strategies. The main object is to let
the strategic changes seep down the organizational levels, allow
structural changes to take place and let the system adopt to new
strategies.

Diversification Strategies
• Diversification strategies are used to extend the company’s product lines and
operate in several different markets. The general strategies include concentric,
horizontal and conglomerate diversification.
• Each strategy focuses on a specific method of diversification. The concentric

strategy is used when a firm wants to increase its products portfolio to include like
products produced within the same company, the horizontal strategy is used when
the company wants to produce new products in a similar market, and the
conglomerate diversification strategy is used when a company starts operating in
two or more unrelated industries.
• Diversification strategies help to increase flexibility and maintain profit during

sluggish economic periods.

• Concentric Diversification
• A concentric diversification strategy lets a firm to add similar
products to an already established business. For example, when a
computer company producing personal computers using towers
starts to produce laptops, it uses concentric strategies. The
technical knowledge for new venture comes from its current field of
skilled employees.
• Concentric diversification strategies are rampant in the food

production industry. For example, a ketchup manufacturer starts
producing salsa, using its current production facilities.

Types of concentric diversification
• Marketing related concentric diversification
• Technology related concentric diversification
• Marketing and technology related concentric
diversification

• Horizontal Diversification
• Horizontal diversification allow a firm to start exploring other zones in
terms of product manufacturing. Companies depend on current market
share of loyal customers in this strategy. When a television manufacturer
starts producing refrigerators, freezers and washers or dryers, it uses
horizontal diversification.
• A downside is the company’s dependence on one group of consumers.

The company has to leverage on the brand loyalty associated with current
products. This is dangerous since new products may not garner the same
favor as the company’s other products.

• Conglomerate Diversification
• In conglomerate diversification strategies, companies
will look to enter a previously untapped market. This is
often done using mergers and acquisitions.
• Moving into a new industry is highly dangerous, due to
unfamiliarity with the new industry. Brand loyalty may
also be reduced when quality is not managed.
However, this strategy offers increasing flexibility in
reaching new economic markets.
• For example, a company into automotive repair parts
may enter the toy production industry. Each company
allows for a broader base of customers. There is an
opportunity of income when one industry's sales falter.

Integration Strategies
• Vertical integration and horizontal integration are business
strategies that companies use to consolidate their position among
competitors.
• Vertical integration is a competitive strategy by which a company
takes complete control over one or more stages in the production
or distribution of a product.
• A company opts for vertical integration to ensure full control over
the supply of the raw materials to manufacture its products. It may
also employ vertical integration to take over the reins of
distribution of its products.
• A classic example is that of the Carnegie Steel Company, which not
only bought iron mines to ensure the supply of the raw material but
also took over railroads to strengthen the distribution of the final
product. The strategy helped Carnegie produce cheaper steel, and
empowered it in the marketplace.

Types of Vertical Integration
• As we have seen, vertical integration integrates a company with the
units supplying raw materials to it (backward integration), or with
the distribution channels that carry its products to the end-
consumers (forward integration).
• For example, a supermarket may acquire control of farms to ensure
supply of fresh vegetables (backward integration) or may buy
vehicles to smoothen the distribution of its products (forward
integration).
• A car manufacturer may acquire tyre and electrical-component
factories (backward integration) or open its own showrooms to sell
its vehicle models or provide after-sales service (forward
integration).
• There is a third type of vertical integration, called balanced
integration, which is a judicious mix of backward and forward
integration strategies.

When is vertical integration attractive for a business?
• Several factors affect the decision-making that goes into
backward and forward integration. A company may go in
for these strategies in the following scenarios:
• The current suppliers of the company’s raw materials or
components, or the distributors of its end products, are
unreliable
• The prices of raw materials are unstable or the distributors
charge high fees
• The suppliers or distributors earn big margins
• The company has the resources to manage the new
business that is currently being taken care of by the
suppliers or distributors
• The industry is expected to grow significantly

•
Advantages of vertical integration
What are the benefits of vertical integration? Let us take
the example of a car manufacturer implementing this
strategy. This company can
• smoothen its supply chain (by ensuring ready supply of
tyres and electrical components in the exact specifications
that it requires)
• make its distribution and after-sales service more efficient
(by opening its own showrooms)
• absorb for itself upstream and downstream profits (profits
that would have gone to the tyre and electrical companies
and showrooms owned by others)
• increase entry barriers for new entrants (by being able to
reduce costs through its own suppliers and distributors)
• invest in specific functions such as tyre-making and develop
its core competencies

Disadvantages of vertical integration
• Disadvantages of vertical integration
• But what is the downside? What are the drawbacks of vertical
integration? Let us see the main disadvantages.
• The quality of goods supplied earlier by external sources may fall
because of a lack of competition.
• Flexibility to increase or decrease production of raw materials or
components may be lost as the company may need to sustain a
level of production in pursuit of economies of scale.
• It may be difficult for the company to sustain core competencies as
it focuses on the integration of the new units.
• However, there are alternatives to vertical integration, such as
purchases from the market (of tyres, for example) and short- and
long-term contracts (for showrooms and with service stations, for
example).

Horizontal Integration
• Horizontal integration, as we have seen, is a company’s
acquisition of a similar or a competitive business—it
may acquire, but it may also merge with or takeover,
another company to strengthen itself—to grow in size
or capacity, to achieve economies of scale or product
uniqueness, to reduce competition and risks, to
increase markets, or to enter new markets.
• Quick examples of horizontal expansion are Standard
Oil’s acquisition of about 40 other refineries and the
acquisition of Arcelor by Mittal Steel and that of
Compaq by HP.

When is horizontal integration attractive for a
business?
• A company can think of acquisitions and mergers
for horizontal integration in the following
situations:
• When the industry is growing
• When rivals lack the expertise that the company
has already achieved
• When economies of scale can be achieved
• When the company can manage the operations
of the bigger organisation efficiently, after the
integration

Advantages of horizontal integration
• The advantages of horizontal integration are economies of scale,
increased differentiation (more features that distinguish it from its
competitors), increased market power, and the ability to capture
new markets.
• Economies of scale: The bigger, horizontally integrated company
can achieve a higher production than the companies merged, at a
lower cost.
• Increased differentiation: The company will be able to offer more
product features to customers.
• Increased market power: The new company, because of the merger
of companies, will become a bigger customer for its old suppliers. It
will command a bigger end-product market and will have greater
power over distributors.
• Ability to enter new markets: If the merger is with an organisation
abroad, the new company will have an additional foreign market.

Disadvantages of horizontal integration
strategy
• As touched upon earlier, the management of a company should be able to handle
the bigger organisation efficiently if the advantages of horizontal integration are to
be realised.
• The legal ramifications will have to be studied as there are strict anti-monopoly
laws in many countries: if the merged entity threatens to oust competitors from
the market, these laws will be used against it.
• Standard Oil, which was seen as a powerful conglomerate brooking no
competition, was split up into over 30 competing companies in an anti-trust case.
• As a company grows bigger with horizontal integration, it might become too rigid,
and its procedures and practices may become unfriendly to change. This could
prove dangerous to it.
• Moreover, synergies between companies that may have been predicted may prove
elusive or non-existent (for example, the failed horizontal integration of hardware
and software companies merged in the expectation of “synergies” between their
products).
• The decision whether to employ vertical or horizontal integration has a long-term
influence on the business strategy of a company.
• Each company will have to choose the option more suitable to it, based on its
unique place in the market and its customer value propositions. A deep analysis of
its strengths and resources will help it make the right choice.
Merger & Acquisition Strategies
• Mergers and acquisitions (M&A) are defined as consolidation of
companies. Differentiating the two terms, Mergers is the combination of
two companies to form one, while Acquisitions is one company taken over
by the other. M&A is one of the major aspects of corporate finance world.
The reasoning behind M&A generally given is that two separate
companies together create more value compared to being on an individual
stand. With the objective of wealth maximization, companies keep
evaluating different opportunities through the route of merger or
acquisition.

• In a merger the boards of directors for two companies approve the combination and
seek shareholders' approval. After the merger, the acquired company ceases to exist and
becomes part of the acquiring company. For example, in 2007 a merger deal occurred
between Digital Computers and Compaq whereby Compaq absorbed Digital Computers.
• Acquisition: In a simple acquisition, the acquiring company obtains the majority stake in
the acquired firm, which does not change its name or legal structure. An example of this
transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock
Financial Services, where both companies preserved their names and organizational
structures.
• Mergers & Acquisitions can take place:
• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares

Reasons for Mergers and Acquisitions:
• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate
growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader
market access
• Strategic realignment and technological change
• Tax considerations
• Under valued target
• • Diversification of risk

Stages involved in any M&A:
• Phase 1: Pre-acquisition review: this would include self assessment of the acquiring company with
regards to the need for M&A, ascertain the valuation (undervalued is the key) and chalk out the
growth plan through the target.
• Phase 2: Search and screen targets: This would include searching for the possible apt takeover
candidates. This process is mainly to scan for a good strategic fit for the acquiring company.
• Phase 3: Investigate and valuation of the target: Once the appropriate company is shortlisted
through primary screening, detailed analysis of the target company has to be done. This is also
referred to as due diligence.
• Phase 4: Acquire the target through negotiations: Once the target company is selected, the next
step is to start negotiations to come to consensus for a negotiated merger or a bear hug. This brings
both the companies to agree mutually to the deal for the long term working of the M&A.
• Phase 5:Post merger integration: If all the above steps fall in place, there is a formal
announcement of the agreement of merger by both the participating companies.

Types of Mergers and Acquisitions:
• Merger or amalgamation may take two forms: merger through absorption
or merger through consolidation.
• Mergers can also be classified into three types from an economic

perspective depending on the business combinations, whether in the
same industry or not, into horizontal ( two firms are in the same industry),
vertical (at different production stages or value chain) and conglomerate
(unrelated industries). From a legal perspective, there are different types
of mergers like short form merger, statutory merger, subsidiary merger
and merger of equals.

Recent Mergers and Acquisitions

Takeover Strategies
• Takeovers, generally mean a company taking over the
management of another company. It is a form of
acquisition of a company rather than a
merger. Takeovers are always a reality in the competing
world of business. Merger and acquisition transactions
depend a lot on the approval of a target company. It is
not rare to find companies merging together with each
other’s consent.

There are several different types of
takeover. The main types are:
• 'Friendly Takeover' - the company bidding will approach the directors of the other company to
discuss and agree an offer before proposing it to the shareholders of that company. The bidding
company will also have an opportunity to look at the accounts of the business they want to buy - a
process known as due diligence.
• 'Hostile Takeover' - the company bidding has their offer rejected or does not approach the board of
the company they wish to buy before making an offer to shareholders. This also means they will not
have access to private information about the company - increasing the risk of the takeover. Banks
are usually more cautious about lending money for hostile takeovers.
• 'Reverse Takeover' - the final common type of takeover is the reverse takeover. This happens when
a private (not traded on the stock market) company buys a publicly-traded company as a means of
acquiring public status without having to list itself.

Strategic Alliances
• A strategic alliance is an agreement between two or more parties
to pursue a set of agreed upon objectives needed while remaining
independent organizations. A strategic alliance will usually fall short
of a legal partnership entity, agency, or corporate affiliate
relationship. Typically, two companies form a strategic alliance
when each possesses one or more business assets or have expertise
that will help the other by enhancing their businesses. Strategic
alliances can develop in outsourcing relationships where the parties
desire to achieve long-term win-win benefits and innovation based
on mutually desired outcomes.

Reasons for Strategic Alliances
Reasons for developing strategic alliances
include the following:
• Forming economies of scale
• Enhancing competitiveness
• Dividing risks
• Setting new standards for technology
• Entering new markets
• Overcoming the competition in a market

Types of Strategic Alliances
• There are three types of strategic alliances: Joint Venture, Equity Strategic Alliance, and Non-equity Strategic
Alliance.
#1 Joint Venture
• A joint venture is established when the parent companies establish a new child company. For example, Company A
and Company B (parent companies) can form a joint venture by creating Company C (child company).
• In addition, if Company A and Company B each own 50% of the child company, it is defined as a 50-50 Joint
Venture. If Company A owns 70% and Company B owns 30%, the joint venture is classified as a Majority-owned
Venture.
• #2 Equity Strategic Alliance
• An equity strategic alliance is created when one company purchases a certain equity percentage of the other
company. If Company A purchases 40% of the equity in Company B, an equity strategic alliance would be formed.
• #3 Non-equity Strategic Alliance
• A non-equity strategic alliance is created when two or more companies sign a contractual relationship to pool
their resources and capabilities together.

Value Creation in Strategic
Alliances
• Strategic alliances create value by:
• Improving current operations
• Changing the competitive environment
• Ease of entry and exit
1. Current operations are improved due to:
• Economies of scale from successful strategic alliances
• The ability to learn from the other partner(s)
• Risk and cost being shared between partner(s)
2. Changing the competitive environment through:
• Creating technology standards (for example, Sony and Panasonic announced to
work together to produce a new-generation TV). This would help set a new
standard in the competitive environment.
• Creating tacit collusion.
3. Easing entry and exit of companies through:
• A low-cost entry into new industries (A company can form a strategic partnership
to easily enter into a new industry).
• A Low-cost exit from industries (A new entrant can form a strategic alliance with a
company already in the industry and slowly take over that company, allowing the
company that is already in the industry to exit).

Collaborative partnership
• Collaborative partnerships are agreements and actions
made by consenting organizations to share resources to
accomplish a mutual goal. Collaborative partnerships rely
on participation by at least two parties who agree to share
resources, such as finances, knowledge, and people.
Organizations in a collaborative partnership share common
goals. The essence of collaborative partnership is for all
parties to mutually benefit from working together.

Four main types of collaborative
partnership are (Alliances, Portfolios,
Innovation Networks, and Ecosystems)
• The most basic and longstanding type of collaboration for innovation is the
strategic alliance. Strategic alliances are agreements between two (dyads)
or more (triads, for example) independent firms, which temporarily
combine resources and efforts to reach their strategic goals.
• Alliances made headlines in the 1970s and 1980s as multinationals in IT

(IBM, Microsoft, Apple), semiconductors (Intel) and biotechnology (Roche,
Genentech, Eli Lilly) were experiencing the limitations of their own
internal resources. As a result, they began tapping into externally available
assets to increase competitiveness and reach ever complex goals.

Portfolio Collaboration
• The second type of collaborative arrangement, still often used today, is the
portfolio. Having understood the benefits of creating alliances, firms were now
interested in sustaining their benefits for longer. As such, alliances began to be
centrally managed and the practice of building portfolios gained ground.
• In effect, portfolio management was all about extracting best practices from
alliance experiences and then spreading these internally. In this process a firm (or
focal firm) established agreements with independent companies but then
managed the knowledge flows through specific functions.
• Traditionally, large pharmaceutical companies have been excellent portfolio
builders. In the industry’s beginnings, these firms would often collaborate with
small biotechnological firms to assimilate knowledge and patents in the most
efficient and effective manner. While conflicts were frequent at the start – small
bio techs often felt ‘robbed’ of their key resources – collaboration moved on.
Effective portfolio management models were the key to this success.
• All in all, the growing popularity of portfolio management translated into a new
attitude towards collaborators. This attitude would later become the “co-creation”
view, which we will come to in a bit.

Innovation Networks
• The third type of collaboration for innovation is the network. Networks include groups of firms that
share R&D goals related to products, services, processes or business models. Some examples
include CITER – the Centre for Textile Information in Emilia Romagna, Italy founded in 1980, KLM
and Northwest Airlines (now Delta) initiated in 1989, and The Human Genome Project, an initiative
that made waves in 1990 with its first published study/article.
• Dense network structures are natural progressions of alliances and portfolios. As collaboration tools
and practices spread from high-tech to medium and low-tech sectors, new ways of structuring the
innovation activity emerged. The key difference: all firms were now interconnected, orchestration
became less strict, and low-medium competition replaced the fierce battles for survival.
• In time, networks started competing against each other, whereas suppliers, complementors,
competitors, and even the customer could now contribute to the innovation process in new and
surprising ways. Also, firms were no longer concerned with managing individual collaborations and
ties. They were now managing their position in the network.

Ecosystems
• Ecosystems are “loosely interconnected networks of companies and
other entities that coevolves capabilities around a shared set of
technologies, knowledge, or skills, and work cooperatively and
competitively to develop new products and services”.
• Ecosystems are governed by certain rules and norms that influence
the relationships between members. In ecosystems value is
uniquely determined by the collaborator(s) or customer(s). Hence,
innovation is no longer in service of the focal firm. Innovation is
now a jointly orchestrated activity.

Ecosystems are typically characterized by:
• The absence of a formal authority,
• Strong dependencies among members,
• A common set of goals and objectives, and
• A shared set of (complementary) knowledge and
skills.
• Shared vision, shared enterprise, serving each
other, helping each other create value,
committing to each other, and pursuing jointly
formulated strategies and goals hence becomes
the norm.

• Before starting to collaborate ask yourself:
• What are your goals? What do your customers need?
• Can you achieve your objectives alone?
• Would collaboration help you compensate for your
weaknesses and enhance your strengths? How?
• What happens if you do nothing and maintain the
current course? (“Go-It-Alone Strategy”)
•
If collaboration is indeed necessary, move on to:
• What is my value as a partner in collaboration? What
do I bring to the table?
• What do I expect of my partner(s)? What is on my wish
list?

• As you select your partner think about:
• Strategic fit: Shared vision and mission, little possibility of
becoming direct competitors, potential synergies (1+1>3), similar
plans for the future etc.
• Operational fit: Geographic coverage, visibility, approaches to
decision-making, performance measures/incentive schemes,
workforce etc.
• Chemistry fit: Compatible work ethics, long-term commitment to
the industry, community, company, and people, Stability of
personnel, flexibility and innovation, predictable, consistent
behaviour (in a crisis) etc.

Retrenchment Strategies
• A strategy used by corporations to reduce the diversity or the overall size
of the operations of the company. This strategy is often used in order to
cut expenses with the goal of becoming a more financial stable business.
Typically the strategy involves withdrawing from certain markets or the
discontinuation of selling certain products or service in order to make a
beneficial turnaround.
• In other words, the strategy followed, when a firm decides to eliminate its
activities through a considerable reduction in its business operations, in
the perspective of customer groups, customer functions and technology
alternatives, either individually or collectively is called as Retrenchment
Strategy.

Types
• Turnaround
• Divestment
• Liquidation

1. Turnaround Strategies
• Turnaround strategy means backing out, withdrawing or retreating
from a decision wrongly taken earlier in order to reverse the
process of decline. There are certain conditions or indicators which
point out that a turnaround is needed if the organization has to
survive. These danger signs are as follows: a) Persistent negative
cash flow b) Continuous losses c) Declining market share d)
Deterioration in physical facilities e) Over-manpower, high turnover
of employees, and low morale f) Uncompetitive products or
services g) Mismanagement

Divestment Strategies
• Divestment strategy involves the sale or liquidation of a portion of business, or a major division,
profit centre or SBU. Divestment is usually a restructuring plan and is adopted when a turnaround
has been attempted but has proved to be unsuccessful or it was ignored. A divestment strategy
may be adopted due to the following reasons:
• a)A business cannot be integrated within the company.
• b) Persistent negative cash flows from a particular business create financial problems for the whole
company.
• c) Firm is unable to face competition
• d) Technological up gradation is required if the business is to survive which company cannot afford.
e)A better alternative may be available for investment

Liquidation Strategy
• Liquidation strategy means closing down the entire firm and selling
its assets. It is considered the most extreme and the last resort
because it leads to serious consequences such as loss of
employment for employees, termination of opportunities where a
firm could pursue any future activities, and the stigma of failure.
• Liquidation strategy may be difficult as buyers for the business
may be difficult to find. Moreover, the firm cannot expect adequate
compensation as most assets, being unusable, are considered as
scrap.

Reasons for Liquidation include:
• (i) Business becoming unprofitable

• (ii) Obsolescence of product/process
• (iii) High competition
• (iv) Industry overcapacity
• (v) Failure of strategy

Other Retrenchment Strategies
• i. DOWNSIZING
• ii. VOLUNTARY RETIREMENT SCHEMES
• iii. HR OUTSOURCING
• iv. EARLY RETIREMENT PLANS
• v. PROJECT BASED EMPLOYMENT

Organizational Downsizing
• When the management of an organization determines that their organization is not
operating at peak efficiency, they typically look for ways to make the organization more
productive. This is frequently accomplished via organizational downsizing, which is a
reduction in organizational size and operating costs implemented by management in
order to improve organizational efficiency, productivity and/or the competitiveness of
the organization.
• Organizational downsizing affects the work processes of an organization since the end
result of the downsizing is typically fewer people performing the same workload that
existed before the downsizing took place. The act of downsizing results in two categories
of people:
• 1. Victims, the people who involuntarily lose their jobs due to organizational downsizing,
• 2. Survivors, the employees who remain after organizational downsizing takes place.

VOULANTARY RETIREMENT
SCHEMES
• What Is the Meaning of "Voluntary Retirement Scheme"? A voluntary
retirement scheme (VRS) package is offered to employees as an incentive
to retire earlier than their normal retirement age. The VRS package usually
contains generous retirement benefits for certain employees. Purpose The
purpose of a VRS is to downsize the number of employees on payroll to
adapt to a changing business environment. VRS plans cut costs and reduce
layoffs .
• Targeted Employees : Employees of middle age or those closer to actual
retirement age and who have been employed with a company for at least
10 years are usually the first to be offered a VRS package.

Outsourcing Strategies
• • Defined as the complete transfer of a business

process that has been traditionally operated and
managed internally to an independently-owned
external service provider.
• – A complete transfer of all associated internal
business process activities – Once outsourced,
the people, facilities, equipment, technology and
other assets are no longer maintained internally

Elements of Strategic
Outsourcing
1. STRATEGIC EVALUATION
• Outsourcing is the act of reversing a previous
decision to “make” or perform a particular
function internally.
• The first step is to understand the strategic
importance (value) of the activity or system.
• Standardized processes, commoditized products,
etc.: extremely low strategic value.
• Buying firms must make decisions as part of a
comprehensive sourcing strategy.

2. FINANCIAL EVALUATION
• Outsourcing decisions are required to make

short and long-term financial sense.
• However outsourcing benefits are not
mutually exclusive and independent
constructs, but rather significantly
interrelated.

• 3. SUPPLIER SELECTION AND CONTRACT
DEVELOPMENT
• • Supplier Selection – Supplier profiles
– • Key management contacts, a company overview
– • SWOT analysis, Porter’s five key financial figures
– • Information on current contracts, “owners” of
the relationship within the firm, and an
organizational chart.
– • Functional evaluation of the content
• – Establish expectations, scope of work,
pricing

Contract Development – a minimum
for an enforceable contract include:
1. A clearly defined scope of work and elements of the
processes to be supplied
2. An agreed upon approximate price for each aspect of
what is being supplied.
3. An understanding of an acceptable level of operating
flexibility as circumstances and requirements change.
4. Consider a short term contract with provisions for
extensions and renegotiations
5. Ground rules that encourage relationship and alliance
maintenance
6. Determination of a means for measuring performance
for each aspect of the agreement

• 4. TRANSITION TO EXTERNAL SOURCING MODEL
• Begins with the contract execution to the
transfer of the agreed upon activities and
resources
– • The buying and selling organizations must both
follow the specific roles outlined in the contract
– • The buying organization must also appoint a
relationship manager
– • The relationship manager and the supplier must
merge their independent plans into one consensus
plan

TYPES OF OUTSOURCING
• Global Delivery or Blended Outsourcing Model> This kind
of model allows the service provider to provide its
outsourcing services globally. This is the preferred choice
for large companies.
• Hybrid Delivery Model>This can also be said to be a dual
core model, because the model functions by combining
offshore and onshore services together.
• Global Shared Services Center> This is a model that
combines onshore shared services and offshore captive
centers. The global center can be run separately with its
own budget and responsibilities.
• Offshore Multi-Sourcing Model> This is the practice of
using several outsourcing firms and service providers. The
advantage of this model is that it is more flexible and
provides a solution for business continuity plans.

• Classic Outsourcing> The traditional structure of a classic outsourcing
consists of an agreement for the service provider to provide services
(based on an agreed scope and an agreed level of services) in return
for an agreed pricing structure.
• Joint Venture (between organisation customer and service provider)
• Group Captive (among multiple organisation customers for their own
captive)
• Licensing> In some cases, the organisation customer wants to set up a
new service delivery center, service architecture, or infrastructure. It
may enlist the assistance of a service provider in the design of the
operations; procurement of the necessary equipment, real estate and
technology; and in the recruitment, hiring and training of the
personnel for the new service delivery center. Strategic sourcing can
be achieved through a licensing model. The organization customer
may own a membership list, a trademark, or other intellectual
property that can be commercialized for profit.

• The main strategies that lead companies to analyze the possibility of
outsourcing some of their activities are:
• Cost Reduction: This is undoubtedly the reason why most companies justify
their interest in outsourcing. Companies are looking for a specialized
supplier or service provider in a particular area or process, which is
therefore able to perform certain activities more efficiently, especially those
with lower added value (eg maintenance, cleaning, restaurant);
• Focus on the core business: The professionals of the contracting companies
should focus and focus their efforts on performing the key business
activities;
• Lack of knowledge: It occurs predominantly in small enterprises that do not
have the resources to hire or develop internally specialization in the area
of high-level technology (eg computing, information technology);
• Limitation on innovation capacity: A situation that occurs when companies
need to supply limited internal capacity in the area of product innovation;
• Capacity increase: When a company wants to increase its production or
operational capacity without increasing its staff or installed park of
equipment or dependencies;
• Agility of response to the market: In this case, fit the companies that intend
to expand their business to new geographic markets.

• Tailoring Strategy to Fit Specific Industry: Life
Cycle analysis, emerging, growing, mature and
declining industries

Industry Life Cycle Analysis
• The strength and nature of the five forces
change as an industry evolves through its
life cycle
• Managers must anticipate how the forces
will changes as the industry evolves and
formulate appropriate strategies

Stages in the Industry Life Cycle

Shakeout: Growth in Demand and
Capacity

Strategies for:
• Competing in Emerging Industries
• Competing in Turbulent, High Velocity Markets
• Competing in Maturing Industries
• Firms in Stagnant or Declining Industries
• Competing in Fragmented Industries
• Sustaining Rapid Company Growth
• Industry Leaders
• Runner-up Firms
• Weak and Crisis-Ridden Businesses
• 10 Commandments for crafting Successful
Business Strategies
Matching Strategy to a Co’s
Situation
Nature of industry
and competitive
Most important conditions
drivers shaping a
firm’s strategic
Firm’s
options fall into
competitive
two categories
capabilities,
market position,
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Features of an Emerging
Industry
• New and unproven market
• Proprietary technology
• Lack of consensus regarding which
competing technology will win out
• Low entry barriers
• Experience curve effects- cost
reductions as volume builds

Emerging Industry (contd)
• First-time users; inducing initial
purchase & overcoming customer
concerns
• First-generation products - buyers delay
purchase until technology matures
• Possible difficulties in securing RM
• Firms struggle to fund R&D,
operations and build resource
capabilities for rapid growth

Strategy Options in Emerging
Industries
• Win early industry leadership by
employing a bold, creative strategy
• Push to perfect technology, improve
product quality, and develop attractive
performance features
• Move quickly when a dominant
technology emerges
• Form strategic alliances with
– Key suppliers or
– Cos having related technological expertise
Strategy options in Emerging
Industries
(contd)
• Capture potential first-mover advantages
• Pursue
– New customers and user applications

– Entry into new geographical areas
• Focus advertising emphasis on
– Increasing frequency of use

– Creating brand loyalty
• Use price cuts to attract price-sensitive buyers

2. Features of High-Velocity Markets
• Rapid-fire technological change
• Short product life-cycles
• Entry of important new rivals
• Frequent launches of new competitive moves
• Rapidly evolving customer expectations

Strategy Options in High-Velocity Markets
• Invest aggressively in R&D
• Develop quick response capabilities
– Shift resources
– Adapt competencies
– Create new competitive capabilities
– Speed new products to market
• Use strategic partnerships to develop
specialized expertise and capabilities
• Initiate fresh actions every few months
• Keep products/services fresh and exciting
Key Success Factors in High Velocity
Markets
• Cutting-edge expertise
• Speed in responding to new developments
• Collaboration with others
• Agility
• Innovativeness
• Opportunism
• Resource flexibility
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3.Industry Maturity: Standout
Features
• Slowing demand  stiffer competition
• More sophisticated buyers  bargains
• Greater emphasis on cost and service
• No addition in production capacity
• Product innovation & new end uses -rare
• International competition increases
• Industry profitability falls
• Mergers & acquisitions reduce no of rivals
Strategy Options in a Mature Industry
• Prune marginal products and models
• Emphasize innovation in the value chain
• Strong focus on cost reduction
• Increase sales to present customers
• Purchase rivals at bargain prices
• Expand internationally
• Build new flexible competitive capabilities

Strategic Pitfalls in Maturing Industry
• Concentrating on short-term profits rather than

strengthening long-term competitiveness
• Being slow to adapt competencies to changing
customer expectations
• Being slow to respond to price-cutting
• Having too much excess capacity
• Overspending on marketing
• Failing to pursue cost reductions aggressively

Stagnant/declining industries: Standout
Features
• Demand grows more slowly than economy as
whole (or even declines)
• Competitive pressures intensify – rivals battle for market

share
• To grow and prosper, firm must take market share from

rivals
• Industry consolidates to a smaller number of key

players via mergers and acquisitions

Strategy Options inStagnant/Declining
Industry
• Pursue focus strategy aimed at fastest growing market
segments
• Stress differentiation based on quality improvement or
product innovation
• Work diligently to drive costs down
– Cut marginal activities from value chain
– Use outsourcing
– Redesign internal processes to exploit e-commerce
– Consolidate under-utilized production facilities
– Add more distribution channels
– Close low-volume, high-cost distribution outlets
– Prune marginal products
Stagnant Industry: Strategic
Mistakes
• Getting embroiled in a profitless battle
for market share with stubborn rivals
• Diverting resources out of business too

quickly
• Being overly optimistic about industry’s

future (believing things will get better)

Limitations of Models for
Industry Analysis
• Life cycle issues
– The embryonic stage can sometimes be
skipped
– Industry growth can be revitalized
– The time span of the stages can vary
• Innovation and change
– Innovation can unfreeze and reshape industry
structure
– An industry may be hypercompetitive, with
permanent and ongoing change

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Unit 2

• External Environmental: Concept of environment,

• Grand Strategies: Stability, expansion (diversification

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• It reveals the direction of change within your business environment. This

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Copyright ©2013 Pearson Education, Inc.

Copyright ©2013 Pearson Education, Inc.

Copyright ©2013 Pearson Education, Inc.

Copyright ©2013 Pearson Education, Inc.

Copyright ©2013 Pearson Education, Inc.

Copyright ©2013 Pearson

Copyright ©2013 Pearson Education, Inc.

Copyright ©2013 Pearson

Copyright ©2013 Pearson Education, Inc.

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Businesses in the green zone attract major investment.

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• Used by small and medium –sized firms operating in a familiar

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• Proceed with caution strategy is employed by firms that wish to test

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• Each strategy focuses on a specific method of diversification. The concentric

• Diversification strategies help to increase flexibility and maintain profit during

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• Concentric diversification strategies are rampant in the food

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• A downside is the company’s dependence on one group of consumers.

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• Mergers can also be classified into three types from an economic

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