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Unit 1
Course objectives: - Our course objectives include:
1. Development and reinforcement of a general management point of view—the capacity to view the
firm from an overall perspective.
2. Development of an understanding of fundamental concepts in strategic management
3. Integration of the knowledge gained in previous courses and understanding what part of that
knowledge is useful to general managers.
4. To understand the basic difference between strategy, policy and tactics.
5. To understand the benefits of having a vision and mission statement.
6. To know about the role of general manager, the levels and components of strategy.
7. To understand the differences between Strategic, Administrative and Operational decisions.
Course outcome: - Upon completion of this unit, students will be able to complete the following key
tasks:
1. Identify the resource endowments specific to the firm and those that are homogeneous to industry
participants
2. How strategy is integrated with all spheres of business
3. What is the difference between strategy and policy
4. Overall concept of strategic management and its benefits.
5. Articulate a vision that gives meaning to all the firm’s stakeholders of the firm’s objectives;
6. Formulate a strategic plan that operationalizes the goals and objectives of the firm;
7. Specify current and desired strategic positioning in order to respond to market demands;
8. Implement a strategic plan that takes into account the functional areas of business;
9. Evaluate and revise programs and procedures in order to achieve organizational goals;
10. Consider the ethical dimensions of the strategic management process; and
11. Effectively communicate change management strategies in various forums to an array of audiences
with accuracy, clarity, specificity and professionalism.
Strategic Management - An Introduction
Strategic Management is all about identification and description of the strategies that managers can carry so
as to achieve better performance and a competitive advantage for their organization. An organization is said
to have competitive advantage if its profitability is higher than the average profitability for all companies in
its industry.
Strategic management can also be defined as a bundle of decisions and acts which a manager undertakes
and which decides the result of the firm’s performance. The manager must have a thorough knowledge and
analysis of the general and competitive organizational environment so as to take right decisions. They
should conduct a SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats), i.e., they should
make best possible utilization of strengths, minimize the organizational weaknesses, make use of arising
opportunities from the business environment and shouldn’t ignore the threats. Strategic management is
nothing but planning for both predictable as well as unfeasible contingencies. It is applicable to both small
as well as large organizations as even the smallest organization face competition and, by formulating and
implementing appropriate strategies, they can attain sustainable competitive advantage.
It is a way in which strategists set the objectives and proceed about attaining them. It deals with making and
implementing decisions about future direction of an organization. It helps us to identify the direction in
which an organization is moving.
Strategic management is a continuous process that evaluates and controls the business and the industries in
which an organization is involved; evaluates its competitors and sets goals and strategies to meet all existing
and potential competitors; and then reevaluates strategies on a regular basis to determine how it has been
implemented and whether it was successful or does it needs replacement.
Strategic Management gives a broader perspective to the employees of an organization and they can
better understand how their job fits into the entire organizational plan and how it is co-related to
other organizational members. It is nothing but the art of managing employees in a manner which
maximizes the ability of achieving business objectives. The employees become more trustworthy, more
committed and more satisfied as they can co-relate themselves very well with each organizational task. They
can understand the reaction of environmental changes on the organization and the probable response of the
organization with the help of strategic management. Thus the employees can judge the impact of such
changes on their own job and can effectively face the changes. The managers and employees must do
appropriate things in appropriate manner. They need to be both effective as well as efficient.
One of the major role of strategic management is to incorporate various functional areas of the organization
completely, as well as, to ensure these functional areas harmonize and get together well. Another role of
strategic management is to keep a continuous eye on the goals and objectives of the organization.
The word “strategy” is derived from the Greek word “stratçgos”; stratus (meaning army) and “ago”
(meaning leading/moving).
Strategy is an action that managers take to attain one or more of the organization’s goals. Strategy can also
be defined as “A general direction set for the company and its various components to achieve a desired state
in the future. Strategy results from the detailed strategic planning process”.
A strategy is all about integrating organizational activities and utilizing and allocating the scarce resources
within the organizational environment so as to meet the present objectives. While planning a strategy it is
essential to consider that decisions are not taken in a vacuum and that any act taken by a firm is likely to be
met by a reaction from those affected, competitors, customers, employees or suppliers.
Strategy can also be defined as knowledge of the goals, the uncertainty of events and the need to take into
consideration the likely or actual behavior of others. Strategy is the blueprint of decisions in an organization
that shows its objectives and goals, reduces the key policies, and plans for achieving these goals, and defines
the business the company is to carry on, the type of economic and human organization it wants to be, and
the contribution it plans to make to its shareholders, customers and society at large.
Features of Strategy
1. Strategy is Significant because it is not possible to foresee the future. Without a perfect foresight, the
firms must be ready to deal with the uncertain events which constitute the business environment.
2. Strategy deals with long term developments rather than routine operations, i.e. it deals with
probability of innovations or new products, new methods of productions, or new markets to be
developed in future.
3. Strategy is created to take into account the probable behavior of customers and competitors.
Strategies dealing with employees will predict the employee behavior.
Strategy is a well defined roadmap of an organization. It defines the overall mission, vision and direction
of an organization. The objective of a strategy is to maximize an organization’s strengths and to minimize
the strengths of the competitors.
Strategy, in short, bridges the gap between “where we are” and “where we want to be”.
Definition of Business Policy
Business Policy defines the scope or spheres within which decisions can be taken by the subordinates in an
organization. It permits the lower level management to deal with the problems and issues without consulting
top level management every time for decisions. Business policies are the guidelines developed by an
organization to govern its actions. They define the limits within which decisions must be made. Business
policy also deals with acquisition of resources with which organizational goals can be achieved. Business
policy is the study of the roles and responsibilities of top level management, the significant issues affecting
organizational success and the decisions affecting organization in long-run.
Features of Business Policy
An effective business policy must have following features1. Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become
difficult.
2. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should
be no misunderstandings in following the policy.
3. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the
subordinates.
4. Appropriate- Policy should be appropriate to the present organizational goal.
5. Simple- A policy should be simple and easily understood by all in the organization.
6. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive.
7. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should
be altered always, but it should be wide in scope so as to ensure that the line managers use them in
repetitive/routine scenarios.
8. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those
who look into it for guidance.
Difference between Policy and Strategy
The term “policy” should not be considered as synonymous to the term “strategy”. The difference between
policy and strategy can be summarized as follows1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While
strategy is concerned with those organizational decisions which have not been dealt/faced before in
same form.
2. Policy formulation is responsibility of top level management. While strategy formulation is basically
done by middle level management.
3. Policy deals with routine/daily activities essential for effective and efficient running of an
organization. While strategy deals with strategic decisions.
4. Policy is concerned with both thought and actions. While strategy is concerned mostly with action.
5. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target
as prescribed by a policy.
Corporate strategy
Developing a strategic direction, supported by the necessary reallocation of resources
and coordinated business unit plans, and designing a sustainable strategy development
process
The formulation of corporate strategy is a subject which does not lend itself to a generic approach which
can be copied and tailored to fit. The various examples on these pages are given as such, and are not put
forward as best practice. Even some of the definitions and concepts are interpreted in different ways, and
individual circumstances will dictate how a specific strategy should be developed and implemented,
depending on the circumstances of the organization in question.
Corporate strategy is based on knowing:



where your organization is today
where you want it to be
how you want to get there
The risk of not changing and improving can be as significant as the risks which may affect your plans to
develop your business - your competition is almost certainly changing and moving ahead, and you are likely
to be left behind in terms of efficiency, reputation and financial success if you do not learn lessons and
appreciate what factors may influence your likely success in delivering your business goals.
The most widespread view is that improving the competitive strategies of the operating units is the essence
of corporate strategy. The corporate office should be focused on, for example, the identification and capture
of synergies between operating units. There remains considerable debate about how best to do this. But the
underlying assumption – that corporate strategy supplements competitive strategy – goes unchallenged,
begging the question whether the corporate office can make any other kind of contribution.
This assumption blinds us to the other half of the value equation: uncertainty. It is indisputable that
generating returns is critical, and an operating division’s competitive strategy is a description of how that
unit hopes to create and capture the value required to deliver those returns. But as those familiar with
financial theory and practice will know, there can be no returns without risk. Indeed, in a very real sense,
accepting risk is the price of those returns, and the hope of more of the latter can only be purchased at the
price of more of the former.
And so we have the opportunity to see corporate strategy not as merely a supplement to competitive strategy
but also as the overlooked complement. And so a definition of corporate strategy consists of two parts: (i)
capturing inter-divisional synergies – which is the extent of current thinking; and (ii) how the organization
identifies and manages strategic uncertainty. It is this under-development of this second part that I hope to
begin to redress.
Components of a Strategy Statement
The strategy statement of a firm sets the firm’s long-term strategic direction and broad policy directions. It
gives the firm a clear sense of direction and a blueprint for the firm’s activities for the upcoming years. The
main constituents of a strategic statement are as follows:
1. Strategic Intent
An organization’s strategic intent is the purpose that it exists and why it will continue to exist,
providing it maintains a competitive advantage. Strategic intent gives a picture about what an
organization must get into immediately in order to achieve the company’s vision. It motivates the
people. It clarifies the vision of the vision of the company. Strategic intent helps management to
emphasize and concentrate on the priorities. Strategic intent is, nothing but, the influencing of an
organization’s resource potential and core competencies to achieve what at first may seem to be
unachievable goals in the competitive environment. A well expressed strategic intent should
guide/steer the development of strategic intent or the setting of goals and objectives that require that
all of organization’s competencies be controlled to maximum value.
Strategic intent includes directing organization’s attention on the need of winning; inspiring people
by telling them that the targets are valuable; encouraging individual and team participation as well as
contribution; and utilizing intent to direct allocation of resources. Strategic intent differs from
strategic fit in a way that while strategic fit deals with harmonizing available resources and
potentials to the external environment, strategic intent emphasizes on building new resources and
potentials so as to create and exploit future opportunities.
2. Mission Statement
Mission statement is the statement of the role by which an organization intends to serve it’s
stakeholders. It describes why an organization is operating and thus provides a framework within
which strategies are formulated. It describes what the organization does (i.e., present capabilities),
who all it serves (i.e., stakeholders) and what makes an organization unique (i.e., reason for
existence). A mission statement differentiates an organization from others by explaining its broad
scope of activities, its products, and technologies it uses to achieve its goals and objectives. It talks
about an organization’s present (i.e., “about where we are”). For instance, Microsoft’s mission is to
help people and businesses throughout the world to realize their full potential. Wal-Mart’s mission
is “To give ordinary folk the chance to buy the same thing as rich people.” Mission statements
always exist at top level of an organization, but may also be made for various organizational levels.
Chief executive plays a significant role in formulation of mission statement. Once the mission
statement is formulated, it serves the organization in long run, but it may become ambiguous with
organizational growth and innovations. In today’s dynamic and competitive environment, mission
may need to be redefined. However, care must be taken that the redefined mission statement should
have original fundamentals/components. Mission statement has three main components-a statement
of mission or vision of the company, a statement of the core values that shape the acts and behavior
of the employees, and a statement of the goals and objectives.
Features of a Mission
a.
b.
c.
d.
e.
f.
g.
Mission must be feasible and attainable. It should be possible to achieve it.
Mission should be clear enough so that any action can be taken.
It should be inspiring for the management, staff and society at large.
It should be precise enough, i.e., it should be neither too broad nor too narrow.
It should be unique and distinctive to leave an impact in everyone’s mind.
It should be analytical, i.e., it should analyze the key components of the strategy.
It should be credible, i.e., all stakeholders should be able to believe it.
3. Vision
A vision statement identifies where the organization wants or intends to be in future or where it
should be to best meet the needs of the stakeholders. It describes dreams and aspirations for future.
For instance, Microsoft’s vision is “to empower people through great software, any time, any place,
or any device.” Wal-Mart’s vision is to become worldwide leader in retailing. A vision is the
potential to view things ahead of themselves. It answers the question “where we want to be”. It gives
us a reminder about what we attempt to develop. A vision statement is for the organization and it’s
members, unlike the mission statement which is for the customers/clients. It contributes in effective
decision making as well as effective business planning. It incorporates a shared understanding about
the nature and aim of the organization and utilizes this understanding to direct and guide the
organization towards a better purpose. It describes that on achieving the mission, how the
organizational future would appear to be.
An effective vision statement must have following featuresa.
b.
c.
d.
e.
It must be unambiguous.
It must be clear.
It must harmonize with organization’s culture and values.
The dreams and aspirations must be rational/realistic.
Vision statements should be shorter so that they are easier to memorize.
In order to realize the vision, it must be deeply instilled in the organization, being owned and shared
by everyone involved in the organization.
4. Goals and Objectives
A goal is a desired future state or objective that an organization tries to achieve. Goals specify in
particular what must be done if an organization is to attain mission or vision. Goals make mission
more prominent and concrete. They co-ordinate and integrate various functional and departmental
areas in an organization. Well made goals have following featuresa.
b.
c.
d.
e.
These are precise and measurable.
These look after critical and significant issues.
These are realistic and challenging.
These must be achieved within a specific time frame.
These include both financial as well as non-financial components.
Objectives are defined as goals that organization wants to achieve over a period of time. These are
the foundation of planning. Policies are developed in an organization so as to achieve these
objectives. Formulation of objectives is the task of top level management. Effective objectives have
following featuresf.
g.
h.
i.
These are not single for an organization, but multiple.
Objectives should be both short-term as well as long-term.
Objectives must respond and react to changes in environment, i.e., they must be flexible.
These must be feasible, realistic and operational.
Importance of Vision and Mission Statements
One of the first things that any observer of management thought and practice asks is whether a particular
organization has a vision and mission statement. In addition, one of the first things that one learns in a
business school is the importance of vision and mission statements.
This article is intended to elucidate on the reasons why vision and mission statements are important
and the benefits that such statements provide to the organizations. It has been found in studies that
organizations that have lucid, coherent, and meaningful vision and mission statements return more than
double the numbers in shareholder benefits when compared to the organizations that do not have vision and
mission statements. Indeed, the importance of vision and mission statements is such that it is the first thing
that is discussed in management textbooks on strategy.
Some of the benefits of having a vision and mission statement are discussed below:
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
Above everything else, vision and mission statements provide unanimity of purpose to organizations
and imbue the employees with a sense of belonging and identity. Indeed, vision and mission
statements are embodiments of organizational identity and carry the organizations creed and motto.
For this purpose, they are also called as statements of creed.
Vision and mission statements spell out the context in which the organization operates and provides
the employees with a tone that is to be followed in the organizational climate. Since they define the
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
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reason for existence of the organization, they are indicators of the direction in which the organization
must move to actualize the goals in the vision and mission statements.
The vision and mission statements serve as focal points for individuals to identify themselves with
the organizational processes and to give them a sense of direction while at the same time deterring
those who do not wish to follow them from participating in the organization’s activities.
The vision and mission statements help to translate the objectives of the organization into work
structures and to assign tasks to the elements in the organization that are responsible for actualizing
them in practice.
To specify the core structure on which the organizational edifice stands and to help in the translation
of objectives into actionable cost, performance, and time related measures.
Finally, vision and mission statements provide a philosophy of existence to the employees, which is
very crucial because as humans, we need meaning from the work to do and the vision and mission
statements provide the necessary meaning for working in a particular organization.
As can be seen from the above, articulate, coherent, and meaningful vision and mission statements go a long
way in setting the base performance and actionable parameters and embody the spirit of the organization. In
other words, vision and mission statements are as important as the various identities that individuals have in
their everyday lives.
It is for this reason that organizations spend a lot of time in defining their vision and mission statements and
ensure that they come up with the statements that provide meaning instead of being mere sentences that are
devoid of any meaning
Benefits of Strategic Management
There are many benefits of strategic management and they include identification, prioritization, and
exploration of opportunities. For instance, newer products, newer markets, and newer forays into business
lines are only possible if firms indulge in strategic planning. Next, strategic management allows firms to
take an objective view of the activities being done by it and do a cost benefit analysis as to whether the firm
is profitable.
Just to differentiate, by this, we do not mean the financial benefits alone (which would be discussed below)
but also the assessment of profitability that has to do with evaluating whether the business is strategically
aligned to its goals and priorities.
The key point to be noted here is that strategic management allows a firm to orient itself to its market and
consumers and ensure that it is actualizing the right strategy.
Financial Benefits
It has been shown in many studies that firms that engage in strategic management are more profitable and
successful than those that do not have the benefit of strategic planning and strategic management. When
firms engage in forward looking planning and careful evaluation of their priorities, they have control over
the future, which is necessary in the fast changing business landscape of the 21st century. It has been
estimated that more than 100,000 businesses fail in the US every year and most of these failures are to do
with a lack of strategic focus and strategic direction. Further, high performing firms tend to make more
informed decisions because they have considered both the short term and long-term consequences and
hence, have oriented their strategies accordingly. In contrast, firms that do not engage themselves in
meaningful strategic planning are often bogged down by internal problems and lack of focus that leads to
failure.
Non-Financial Benefits
The section above discussed some of the tangible benefits of strategic management. Apart from these
benefits, firms that engage in strategic management are more aware of the external threats, an improved
understanding of competitor strengths and weaknesses and increased employee productivity. They also have
lesser resistance to change and a clear understanding of the link between performance and rewards. The key
aspect of strategic management is that the problem solving and problem preventing capabilities of the firms
are enhanced through strategic management. Strategic management is essential as it helps firms to
rationalize change and actualize change and communicate the need to change better to its employees.
Finally, strategic management helps in bringing order and discipline to the activities of the firm in its both
internal processes and external activities.
Closing Thoughts
In recent years, virtually all firms have realized the importance of strategic management. However, the key
difference between those who succeed and those who fail is that the way in which strategic management is done
and strategic planning is carried out makes the difference between success and failure. Of course, there are still
firms that do not engage in strategic planning or where the planners do not receive the support from management.
These firms ought to realize the benefits of strategic management and ensure their longer-term viability and success
in the marketplace.
Strategic Management Process - Meaning, Steps and Components
The strategic management process means defining the organization’s strategy. It is also defined as the
process by which managers make a choice of a set of strategies for the organization that will enable it to
achieve better performance. Strategic management is a continuous process that appraises the business and
industries in which the organization is involved; appraises it’s competitors; and fixes goals to meet all the
present and future competitor’s and then reassesses each strategy.
Strategic management process has following four steps:
1. Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing and
providing information for strategic purposes. It helps in analyzing the internal and external factors
influencing an organization. After executing the environmental analysis process, management should
evaluate it on a continuous basis and strive to improve it.
2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for
accomplishing organizational objectives and hence achieving organizational purpose. After
conducting environment scanning, managers formulate corporate, business and functional
strategies.
3. Strategy Implementation- Strategy implementation implies making the strategy work as intended
or putting the organization’s chosen strategy into action. Strategy implementation includes
designing the organization’s structure, distributing resources, developing decision making
process, and managing human resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The key
strategy evaluation activities are: appraising internal and external factors that are the root of
present strategies, measuring performance, and taking remedial / corrective actions. Evaluation
makes sure that the organizational strategy as well as it’s implementation meets the organizational
objectives.
These components are steps that are carried, in chronological order, when creating a new strategic management
plan. Present businesses that have already created a strategic management plan will revert to these steps as per the
situation’s requirement, so as to make essential changes.
Components of Strategic Management Process
Strategic management is an ongoing process. Therefore, it must be realized that each component interacts
with the other components and that this interaction often happens in chorus.
Strategic Decisions - Definition and Characteristics
Strategic decisions are the decisions that are concerned with whole environment in which the firm operates
the entire resources and the people who form the company and the interface between the two.
Characteristics/Features of Strategic Decisions
a. Strategic decisions have major resource propositions for an organization. These decisions may be
concerned with possessing new resources, organizing others or reallocating others.
b. Strategic decisions deal with harmonizing organizational resource capabilities with the threats and
opportunities.
c. Strategic decisions deal with the range of organizational activities. It is all about what they want the
organization to be like and to be about.
d. Strategic decisions involve a change of major kind since an organization operates in ever-changing
environment.
e. Strategic decisions are at the top most level, are uncertain as they deal with the future, and involve a lot of
risk
f. Strategic decisions are complex in nature.
g. Strategic decisions are different from administrative and operational decisions. Administrative
decisions are routine decisions which help or rather facilitate strategic decisions or operational
decisions. Operational decisions are technical decisions which help execution of strategic decisions.
To reduce cost is a strategic decision which is achieved through operational decision of reducing the
number of employees and how we carry out these reductions will be administrative decision. The
differences between Strategic, Administrative and Operational decisions can be summarized as
followsStrategic Decisions
Administrative Decisions
Operational Decisions
Strategic decisions are long-term
decisions.
Administrative decisions are
taken daily.
Operational decisions are not
frequently taken.
These are considered where The
future planning is concerned.
These are short-term based
Decisions.
These are medium-period based
decisions.
Strategic decisions are taken in
Accordance with organizational
mission and vision.
These are taken according to
strategic and operational
Decisions.
These are taken in accordance
with strategic and administrative
decision.
These are related to overall Counter
planning of all Organization.
These are related to working of
employees in an Organization.
These are related to production.
These deal with organizational
Growth.
These are in welfare of
employees working in an
organization.
These are related to production
and factory growth.
Learning Objectives
• To provide an integrative framework that will allow students to synthesize knowledge from other business
courses into a comprehensive understanding of competitive advantage.
• To provide a basic understanding of the nature and dynamics of the strategy formulation and
implementation processes as they occur in complex organizations.
• To encourage students to think critically and strategically.
• To develop the ability to identify strategic issues and design appropriate courses of action.
Unit -2
Strategic Marketing issue
The marketing manager is the company’s primary link to the customer and the competition. The manager,
therefore, must be especially concerned with the market position and marketing mix of the firm.
Market position & Segmentation
Market position deals with the question, “Who are our customer?” it refers to selection of specific areas for
marketing concentration and can be expressed in terms of market, product, and geographical locations.
Through market research, corporations are able to practice market segmentation with various products or services
so that managers can discover what niches to seek, which new types of products to develop, and how to ensure that
a company’s many products do not directly compete with one another.
Marketing Mix
The marketing mix refers to the particular combination of key variables under the corporation’s control that can be
used to affect the demand and to gain competitive advantage. And these variables are product, place, promotion
and price.
Product Life Cycle
Product life cycle is a graph showing time plotted against sales of a product as it moves from introduction to growth
and maturity to decline. This concept enables a marketing manager to examine the marketing mix of a particular
product or group of products in terms of its position in its life cycle.
Strategic financial issues
HR’s Strategic Role
If a firm’s competitiveness depends on its employees, then the business function responsible for acquiring,
training, appraising, and compensating those employees has to play a bigger role in the firm’s success. The
notion of employees as competitive advantage has therefore led to a new field of study known as strategic
human resource management, “the linking of HRM with strategic goals and objectives in order to improve
business performance and develop organizational cultures that foster innovation and flexibility.”37 Ideally,
HR and top management together craft the company’s business strategy. That strategy then provides the
framework that guides the design of specific HR activities such as recruiting and training. This should
produce the employee competencies and behaviors that in turn should help the business implement its
business strategy and realize its goals.
Human Resources Series
1.
2.
1.
2.
3.
4.
5.
6.
7.
HR’s Strategic Role
Effective Recruitment & Selection
Techniques
Benefits
Labor & Employee Relations
Compensation Fundamentals
Health, Wellness, & Disability
Management
HR Development
HR’s Strategic Role
1.
2.
1.
2.
3.
4.
5.
6.
HR’s Evolving Role
Strategic Planning & the Change
Management Process
HRIS
Organization Design
Measuring Organization Performance
Measuring Human Performance
Ethics
Roles are evolving from administrative (personnel function) to strategic partner.
– Consultative Role: Coach Managers to manage their resources within the laws & ensure maximum
potential.
– Change Management Role, systems design.
– Administrative Role, e.g. records maintenance.
Focus on Business Objectives
– Structure activities around key business objectives
Focus on the Environment
– Scenario planning on workforce issues to anticipate changes in the environment.
Focus on Core Values
– Ensure that core values are embedded in key HR elements, e.g. hiring, job requirements, rewards.
Emerging Roles Examples of Strategic Partnering
– Effectively managing & utilizing people
– Tying performance appraisal & compensation to competencies.
– Developing competencies that enhance individual & organizational performance
– Increasing the innovation, creativity & flexibility necessary to enhance competitiveness.
Strategic Roles for Finance
• Measuring the performance of critical processes so that improvement or deterioration is visible and the
underlying causes are understood and communicated
• Redeploying capital from projects and activities that are not producing an attractive rate of return to more
lucrative opportunities
• Providing actionable, relevant and time-sensitive information to business leaders so that they can make
more informed decisions
• Forecasting and communicating business changes so that leaders can position the company to either
exploit opportunity or mitigate risk
• The assumption of roles with greater value and strategic importance will position finance as an essential
and trusted advisor to business leaders.
Finance Transformation
Competitive pressures and the capabilities that finance can now command compels it to transform and
assume a greater strategic role. Transformation is an approach for the CFO who seeks to become an agent of
leadership and change. The approach of adding personnel to add capacity is no longer effective. It has high
long term costs, diminishing incremental value and only maintains the capability status quo.
Transformation must incorporate the adoption of new roles and responsibilities, software tools and programs
for finance to become a more valued partner with the operating managers of the company. Transformation
requires addressing four key areas: Process Efficiency, Business Performance management, Analytical
Support and Predictive Analysis.
Process Efficiency
Finance must eliminate labor-intensive transactions and transaction processing. This is accomplished by
implementing automation, re-engineering and outsourcing. These improvements free finance from lowvalue activities enabling a shift of focus to high-value analysis and a role as a strategic business partner.
Business Performance Management (BPM)
BPM greatly reduces the time spent on gathering and consolidating planning, budgeting, actual and
operational data by seamlessly integrating the disconnected information and activities of financial processes.
A unified BPM approach allows finance to minimize low-value compilation and reconciliation activities and
spend more time on valuable analysis to improve business performance.
Analytical Support
Once analytical tools are in place, finance must implement the kind of analysis and investigation that will be
relevant and valuable by using its inherent analytical strengths to help business leaders solve problems, gain
marketplace advantage and support new initiatives. Examples include expenditure analysis, activity based
costing and project cost/benefit analysis.
Predictive Analysis
The most valuable capability of finance is to rapidly project the impact of current events or future scenarios
and developments on each part of the business through its forecasts and analysis. Finance is then able to
provide business leaders an understanding of the factors that will impact future results so that they can
position the company to maximize the opportunity or mitigate the risk.
The Strategic Advantage of Finance
Leaders are the most valuable asset of an organization. They integrate internal business information with
market events and industry knowledge to identify new opportunities and formulate strategy. The next wave
of productivity and performance increases will come from using processes and tools to combine financial
and operational information with the market knowledge possessed by business leaders. Finance has an
opportunity to drive these performance increases with transformation. Finance organizations that transform
to focus on the future, produce superior information and communicate will empower leaders to make better
decisions. The accumulation of better operational, tactical and strategic decisions by informed leaders will
drive improved financial and operational performance and create a strategic advantage for companies with
finance leadership.
Environmental Scanning - Internal & External Analysis of Environment
Environmental scanning is the monitoring, evaluating, and disseminating of information from external and internal
environments to key people within the organization. A corporation uses this tool to avoid strategic surprise and to
ensure its long- term health. Researches establish a positive relationship between environmental scanning and
profits.
Analysis of Societal environment
Analysis of Societal environment
Economic, Socio cultural, Technological, Political- Legal Factors
Market Analysis
Competitor Analysis
Community Analysis
Community
Analysis
Supplier Analysis
Selection of Strategic
Factors
Interest Group
Analysis
Interest
Group
Analysis


Government Analysis
Opportunities
Threats
Organizational environment consists of both external and internal factors. Environment must be scanned so
as to determine development and forecasts of factors that will influence organizational success.
Environmental scanning refers to possession and utilization of information about occasions, patterns,
trends, and relationships within an organization’s internal and external environment. It helps the
managers to decide the future path of the organization. Scanning must identify the threats and opportunities
existing in the environment. While strategy formulation, an organization must take advantage of the
opportunities and minimize the threats. A threat for one organization may be an opportunity for another.
Internal analysis of the environment is the first step of environment scanning. Organizations should
observe the internal organizational environment. This includes employee interaction with other employees,
employee interaction with management, manager interaction with other managers, and management
interaction with shareholders, access to natural resources, brand awareness, organizational structure, main
staff, operational potential, etc. Also, discussions, interviews, and surveys can be used to assess the internal
environment. Analysis of internal environment helps in identifying strengths and weaknesses of an
organization.
As business becomes more competitive, and there are rapid changes in the external environment,
information from external environment adds crucial elements to the effectiveness of long-term plans. As
environment is dynamic, it becomes essential to identify competitors’ moves and actions. Organizations
have also to update the core competencies and internal environment as per external environment.
Environmental factors are infinite, hence, organization should be agile and vigile to accept and adjust to the
environmental changes. For instance - Monitoring might indicate that an original forecast of the prices of
the raw materials that are involved in the product are no more credible, which could imply the requirement
for more focused scanning, forecasting and analysis to create a more trustworthy prediction about the input
costs. In a similar manner, there can be changes in factors such as competitor’s activities, technology,
market tastes and preferences.
While in external analysis, three correlated environment should be studied and analyzed —



immediate / industry environment
national environment
broader socio-economic environment / macro-environment
Examining the industry environment needs an appraisal of the competitive structure of the organization’s
industry, including the competitive position of a particular organization and it’s main rivals. Also, an
assessment of the nature, stage, dynamics and history of the industry is essential. It also implies evaluating
the effect of globalization on competition within the industry. Analyzing the national environment needs
an appraisal of whether the national framework helps in achieving competitive advantage in the globalized
environment. Analysis of macro-environment includes exploring macro-economic, social, government,
legal, technological and international factors that may influence the environment. The analysis of
organization’s external environment reveals opportunities and threats for an organization.
Strategic managers must not only recognize the present state of the environment and their industry but also
be able to predict its future positions.
Economic
GDP Trends
Interest rate
Money Supply
Inflation rates
Unemployment Levels
Wage/ price controls
Devaluation/
revaluation
Energy availability and
Technological
Total government
spending for R&D
Total industry spending
for R&D
Focus for technological
efforts
Patent protection
New products
New development in
technology transfer
from lab to marketplace
Productivity
improvement through
automation
Internet availability
Political- Legal
Antitrust regulation
Sociocultural
Lifestyle changes
Environmental
protection laws
Tax laws
Career expectation
Special incentives
Foreign trade
regulations
Attitude toward foreign
companies
Rate of family formation
Growth rate of population
Laws on hiring and
promotion
Regional shifts in population
Stability of government
Life expectancies
Consumer activism
Age distribution of population
cost
Disposable and
discretionary income
Telecommunication
infrastructure
Birth rates
PESTLE Analysis of the Global Aviation Industry
Introduction
When we think of airlines, we usually think of luxury and opulence as well as comfort and convenience.
However, beneath the veneer, the airlines worldwide are caught in a cycle of higher operating costs, lower
profits, and decreasing margins because of the various factors discussed in this article. Though the
passengers might not notice these aspects, it is the case that once one scratches the surface and does some
research, it is clear that the airline industry is in a mess and only, radical restructuring can help revive its
fortunes. The PESTLE methodology is a useful tool to analyze the current state of the airline industry.
Political
The political environment in which airlines operate is highly regulated and favors the passengers over the
airlines. This is because of the fact that the global aviation industry operates in an environment where
passenger safety is paramount and where, the earlier tendencies towards monopolistic behavior by the
airlines have made the political establishment weary of the airlines and hence, they have resorted to tighter
regulation of the operations of the airlines. Further, the global aviation industry is also characterized by
deregulation on the supply side meaning more competition among airlines and regulation on the demand
side meaning passengers and fliers are in a position where they can press for more amenities and low prices.
Economic
The global airline industry never really recovered from the aftermath of the 911 attacks. Added to this was
the prolonged recession in the wake of the dotcom bubble bursting. The other debilitating factor was the
fluctuations in the price of oil because of the Second Iraq War and the subsequent spike in oil prices just
before The Great Recession of 2008. This last aspect or the ongoing global economic slowdown has meant
that the already struggling airlines now have to contend with declining passenger traffic, competition from
low cost carriers, high aviation fuel prices, labor demands, and soaring maintenance and operating costs. All
these factors have made the airlines loss making and prone to bankruptcies and closure because they can no
longer afford to run their operations profitably. Of course, this has also resulted in greater consolidation
among the airlines as they seek to leverage the efficiencies from the economies of scale and the synergies
from the merger with other airlines.
Social
In the recent years, the emergence of the Millennial generation into the consumer class has meant that the
social changes of a generation used to entitlement, instant gratification, and more demanding in terms of
service has resulted in the airlines having to balance their costs with the increasing demands from this
segment. Added to this is the retiring of the Baby Boomer generation that has resulted in the airlines losing a
lucrative source of income. Next, the profile of the passengers has changed with more economically minded
passengers and less business class passengers who prefer to leverage on the improved communication
facilities to conduct meetings remotely instead of flying down to meet their business partners.
Technological
Though it is a fact that the airline industry uses technology extensively in its operations, they are limited to
the aircraft and the operations of the airlines excluding the ticketing and the distribution aspects. This has
prompted many experts to call on the airlines to make use of the advances in technology for the front office
and the customer facing functions as well. In other words, the technological changes have to be adapted to
include mobile technologies as far as ticketing, distribution, and customer service are concerned. Further,
social media has to be leveraged by the airlines to ensure that the boarder social and technological changes
do not pass by the airline industry.
Legal
In recent years, the number of lawsuits against airlines from both customers as well as workers has gone up.
Further, the regulators are being stricter with the airlines, which mean that they are now increasingly wary
of their strategies, and actualizing their strategies only after they are fully convinced that they are not
violating any laws. The “double whammy” of increased regulation and more expensive lawsuits apart from
the legal system becoming intolerant of delays, safety issues, and other aspects has only served to heighten
the fears among the airlines as each and every move of theirs is being scrutinized.
Environmental
With climate change entering the social consciousness, passengers are now counting their carbon footprint
with the result that they are now more environmentally conscious. This has resulted in the airlines being
forced to adopt “green flying” and be more responsive to the concerns of the environmentalists. Further, the
social responsibility initiatives are becoming more pronounced and more under scrutiny as consumers and
activists turn a critical eye towards the airlines and their corporate social responsibility.
Conclusion: The Airline Death Spiral
The discussion so far leads to the conclusion that the global airline industry is now in a phase where the
“Airline Death Spiral” has taken over. This has resulted in a wave of bankruptcies and closure of airlines
worldwide. Further, the regulators are not lenient with airlines when they ask for more time or ask for less
strict rules and regulations. Apart from this, the demanding fliers and competition from low cost airlines
means that full service airlines can no longer compete on price or volume. Finally, the increased costs of
doing business have dented the profitability and the viability of the global airline industry.
Industry Analysis
An industry is a group of firms producing a similar product or services, such as soft drinks or financial services.
Industry analysis refers to an in- depth examination of key factors within a corporation’s task environment.
Porter’s approach to industry analysis
Michael Porter, an authority on competitive advantage, contends that a corporation is most concerned with the
intensity of competition within its industry. The level of this intensity can be better determined by basic competitive
forces, which are depicted below:
“The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential
is measured in terms of long- run return on invested capital”.
In careful scanning its industry, the corporation must assess the importance to its success of each of the six forces:






Threat of new entrants
Rivalry among existing firms
Threat of substitute products or services
Bargaining power of buyers
Bargaining power of suppliers
Relative power of other stakeholders
Porter’s Five Forces Model of Competition
Michael Porter (Harvard Business School Management Researcher) designed various vital frameworks for
developing an organization’s strategy. One of the most renowned among managers making strategic
decisions is the five competitive forces model that determines industry structure. According to Porter, the
nature of competition in any industry is personified in the following five forces:
i.
ii.
iii.
iv.
v.
Threat of new potential entrants
Threat of substitute product/services
Bargaining power of suppliers
Bargaining power of buyers
Rivalry among current competitors
FIGURE: Porter’s Five Forces model
The five forces mentioned above are very significant from point of view of strategy formulation. The
potential of these forces differs from industry to industry. These forces jointly determine the profitability of
industry because they shape the prices which can be charged, the costs which can be borne, and the
investment required to compete in the industry. Before making strategic decisions, the managers should use
the five forces framework to determine the competitive structure of industry.
Let’s discuss the five factors of Porter’s model in detail:
1. Risk of entry by potential competitors: Potential competitors refer to the firms which are not
currently competing in the industry but have the potential to do so if given a choice. Entry of new
players increases the industry capacity, begins a competition for market share and lowers the current
costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry.
The various barriers to entry are Economies of scale
 Brand loyalty
 Government Regulation
 Customer Switching Costs
 Absolute Cost Advantage
 Ease in distribution
 Strong Capital base
2. Rivalry among current competitors: Rivalry refers to the competitive struggle for market share
between firms in an industry. Extreme rivalry among established firms poses a strong threat to
profitability. The strength of rivalry among established firms within an industry is a function of
following factors:
 Extent of exit barriers
 Amount of fixed cost
 Competitive structure of industry
 Presence of global customers
 Absence of switching costs
 Growth Rate of industry
 Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally consume the product or the
firms who distribute the industry’s product to the final consumers. Bargaining power of buyers refer
to the potential of buyers to bargain down the prices charged by the firms in the industry or to
increase the firms cost in the industry by demanding better quality and service of product. Strong
buyers can extract profits out of an industry by lowering the prices and increasing the costs. They
purchase in large quantities. They have full information about the product and the market. They
emphasize upon quality products. They pose credible threat of backward integration. In this way,
they are regarded as a threat.
4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to the industry.
Bargaining power of the suppliers refer to the potential of the suppliers to increase the prices of
inputs( labour, raw materials, services, etc) or the costs of industry in other ways. Strong suppliers
can extract profits out of an industry by increasing costs of firms in the industry. Supplier’s products
have a few substitutes. Strong suppliers’ products are unique. They have high switching cost. Their
product is an important input to buyer’s product. They pose credible threat of forward integration.
Buyers are not significant to strong suppliers. In this way, they are regarded as a threat.
5. Threat of Substitute products: Substitute products refer to the products having ability of satisfying
customer’s needs effectively. Substitutes pose a ceiling (upper limit) on the potential returns of an
industry by putting a setting a limit on the price that firms can charge for their product in an industry.
Lesser the number of close substitutes a product has, greater is the opportunity for the firms in
industry to raise their product prices and earn greater profits (other things being equal).
The power of Porter’s five forces varies from industry to industry. Whatever be the industry, these five
forces influence the profitability as they affect the prices, the costs, and the capital investment essential for
survival and competition in industry. This five forces model also help in making strategic decisions as it is
used by the managers to determine industry’s competitive structure.
Porter ignored, however, a sixth significant factor- complementary. This term refers to the reliance that
develops between the companies whose products work is in combination with each other. Strong
complimentary might have a strong positive effect on the industry. Also, the five forces model overlooks the
role of innovation as well as the significance of individual firm differences. It presents a stagnant view of
competition.
Porter’s Five Forces Analysis of Samsung
Introduction
Porter’s Five Forces methodology is used in this article to analyze the business strategies of white goods
makers like Samsung. This tool is a handy method to assess how each of the market drivers impact the
companies like Samsung and then based on the analysis, suitable business strategies can be devised. Further,
companies like Samsung are known to study the markets they want to approach thoroughly and deeply
before they make a move and it is in this perspective that this analysis is undertaken.
Industry Rivalry
This element is especially significant for Samsung as the other White Goods multinationals like LG, Nokia,
and Motorola not to mention Apple are engaged in fierce competitive rivalry. Indeed, Samsung cannot take
its position in the market for granted as all these and other domestic white goods players operate in a market
where margins are tight and the competition is intense. Apart from this, Samsung faces the equivalent of the
“Cola Wars” (the legendary fight for dominance between Coke and Pepsi) in emerging markets like India
where Samsung has to contend and compete with a multitude of players domestic and global. This has made
the impact of this dimension especially strong for Samsung.
Barriers to Entry and Exit
The White Goods industry is characterized by high barriers to entry and low barriers to exit especially
where global conglomerates like Samsung are concerned. Indeed, it is often very difficult to enter emerging
markets because a host of factors have to be taken into consideration such as setting up the distribution
network and the supply chain. However, global conglomerates can exit the emerging markets easily as all it
takes is to handover and sell the business to a domestic or a foreign player in the case of declining or falling
sales. This means that Samsung has entered many emerging markets through a step-by-step approach and
has also exited the markets that have been found to be unprofitable. This is the reason why white goods
multinationals like Samsung often do their due diligence before entering emerging markets.
Power of Buyers
The power of buyers for white goods makers like Samsung is somewhat of a mixed bag where though the
buyers have a multitude of options to choose from and at the same time have to stick with the product since
they cannot just dump the product, as it is a high value item. Further, the buyers would have to necessarily
approach the companies for after sales service and for spare parts. Of course, this does not mean that the
buyers are at the mercy of the companies. Far from that, they do have power over the companies, as most
emerging market consumers are known to be finicky when deciding on the product to buy and explore all
the options before reaching a decision. This means that both the buyers and the companies need each other
just like the suppliers and the companies, as we shall discuss next.
Power of Suppliers
In many markets in which Samsung operates, there are many suppliers who are willing to offer their
services at a discount since the ancillary sectors are very deep. However, this does not mean that the
companies can exert undue force over the suppliers as once the supply chain is established; it takes a lot to
undo it and build a new supply chain afresh. This is the reason why white goods makers like Samsung
invariably study the markets before setting up shop and also take the help of consultancies in arriving at
their decision.
Threat of Substitutes
This element is indeed high as the markets for white goods are flooded with many substitutes and given the
fact that consumer durables are often longer term purchases, companies like Samsung have to be careful in
deciding on the appropriate marketing strategy. This is also the reason why many multinationals like
Samsung often adopt differential pricing so as to attract consumers from across the income pyramid to wean
them away from cheaper substitutes. Further, this element also means that many emerging market
consumers are yet to deepen their dependence on white goods and instead, prefer to the traditional forms of
housework wherein they rely less on gadgets and appliances. However, this is rapidly changing as more
women enter the workforce in these markets making it necessary for them to use gadgets and appliances.
Stakeholders
This is an added element for analysis as the increasing concern over social and environmentally conscious
business practices means that companies like Samsung have to be careful in how they do business as well as
project themselves to the consumers. For instance, white goods makers are known to decide after due
deliberation on everything from choosing their brand ambassadors to publicizing their CSR (Corporate
Social Responsibility) initiatives.
Conclusion
As the diagram above indicates the relative strengths and the weaknesses of each element, we can now
conclude this analysis with the theme that as the global economy integrates and more emerging markets
open up, companies like Samsung are at an advantage because they have already established themselves in
many markets. However, it must also be noted that each market is unique and hence, Samsung must not
adopt a one size fits all strategy and instead, must approach each market differently. In conclusion, Samsung
can take pride from the fact that being an Asian conglomerate, it has managed to break into and hold its own
against many western multinationals that have been in this business for decades.
Competitor Analysis - Meaning, Objectives and Significance
Organizations must operate within a competitive industry environment. They do not exist in vacuum.
Analyzing organization’s competitors helps an organization to discover its weaknesses, to identify
opportunities for and threats to the organization from the industrial environment. While formulating an
organization’s strategy, managers must consider the strategies of organization’s competitors. Competitor
analysis is a driver of an organization’s strategy and effects on how firms act or react in their sectors. The
organization does a competitor analysis to measure / assess its standing amongst the competitors.
Competitor analysis begins with identifying present as well as potential competitors. It portrays an
essential appendage to conduct an industry analysis. An industry analysis gives information regarding
probable sources of competition (including all the possible strategic actions and reactions and effects on
profitability for all the organizations competing in the industry). However, a well-thought competitor
analysis permits an organization to concentrate on those organizations with which it will be in direct
competition, and it is especially important when an organization faces a few potential competitors.
Michael Porter in Porter’s Five Forces Model has assumed that the competitive environment within an
industry depends on five forces- Threat of new potential entrants, Threat of substitute product/services,
bargaining power of suppliers, bargaining power of buyers, Rivalry among current competitors. These five
forces should be used as a conceptual background for identifying an organization’s competitive strengths
and weaknesses and threats to and opportunities for the organization from it’s competitive environment.
The main objectives of doing competitor analysis can be summarized as follows:
To study the market;
To predict and forecast organization’s demand and supply;
To formulate strategy;
To increase the market share;
To study the market trend and pattern;
To develop strategy for organizational growth;
When the organization is planning for the diversification and expansion plan;
To study forthcoming trends in the industry;
Understanding the current strategy strengths and weaknesses of a competitor can suggest opportunities and
threats that will merit a response;
Insight into future competitor strategies may help in predicting upcoming threats and opportunities.
Competitors should be analyzed along various dimensions such as their size, growth and profitability,
reputation, objectives, culture, cost structure, strengths and weaknesses, business strategies, exit barriers,
etc.
Competitive intelligence
Competitive Intelligence is a formal program of gathering information on a company’s competitors the need for an
effective competitive intelligence system (CIS) is paramount. In establishing such a system, there are five principal
steps:





Setting up the system, deciding what information is needed and, very importantly, who will use the outputs
from the system and how
Collecting the data
Analyzing and evaluating the data
Disseminating the conclusions
Incorporating these conclusions into the subsequent strategy and plan, and feeding back the results so that
the information system can be developed further.
A framework for developing a CIS is given in Figure below The mechanics of an effective CIS are in many ways
straightforward and involve:
 Selecting the key competitors to evaluate. However, in deciding who these competitors should be, the
planner should never lose sight of the point that we make about the way in which, in many markets, the real
competitive threat comes not from the established players but from new and often much unexpected
players who operate with different rules.
 Being absolutely clear about what information is needed, how it will be used and by whom.
 Selecting and briefing those responsible for collecting the information.
 Allocating the appropriate level of resource to the collection and evaluation processes.
 Publishing regular tactical and strategic reports on competition.
 Ensuring that the outputs from the process are an integral part of the planning and strategy development
processes rather than a series of reports that are rarely used.
The sources of data are, as we observed at an earlier stage, likely to vary significantly from one industry to
another. However, a useful framework for data collection involves categorizing information on the basis of
whether it is recorded, observed or opportunistic.
Approaches to Competitor Analysis (Source Harbridge House)
Arket Environmental Analysis (Opportunities/threats)
Market environmental analysis (ETOP model - External Threats and Opportunities model) is carried out to
understand and give quantitative measure to opportunities and threats that are impelling on the
operational space of the company.
Example:
Key environmental factors
Relative
Impact
importance (1-10)/
(-5 <> +5)/ Rating
Weight
Score
Market demand
8
+4
+32
Cheap raw material
5
+3
+15
Regulations
3
-4
-12
Total Score
+35
After strategic managers have scanned the societal and task environment and identified a number of likely external
factors for their particular corporation. They may want to refine their analysis of these factors using a form such as:
Opportunities
 Economic integration of European community
 Demographics favor quality appliances
 Economic development of Asia
 Opening of Eastern Europe
 Trend of “Super Stores”
Threats
 Increasing government regulation
 Strong U.S. competition
 New product advances
 Japanese appliance companies
Table is one way to organize the external factors into generally accepted categories of opportunities and threats as
well as to analyze how well a company’s management (rating) is responding to these specific factors in light of the
perceived importance (weight) of these factors to the company.
To obtain the result add the individual weighted scores for all the external factors for that particular company. The
total weighted score indicates that how well a particular company responds to current and expected factors in its
external environment. The score can be used to compare that firm to other firms in its industry.
Company Capability Analysis (Strengths/ weaknesses)
Company capability analysis (OCP model) is used to assess the business's chance of success in relation to
the market opportunity identified. After the analysis the company will know whether the internal
competencies of the organization favor the proposed diversification.
Example:
Key organizational factor
Relative
Impact
importance (1-10) (-5 <> +5)
Score
Sales team
7
+4
+28
Obsolete machinery
5
-3
-15
Advance MIS
4
+3
+12
Cheap financing
2
+2
+4
+29
Unit -3
Corporate/ organizational Analysis
Scanning and analyzing the external environment for opportunities and threats is not enough to provide an
organization a competitive advantage. Analysts must also look within the corporation itself to identify internal
strategic factors- those critical strengths and weaknesses that are likely to determine if the firm will be able to take
advantage of opportunities while avoiding threats,. This internal scanning is often referred to as organizational/
corporate analysis, and is concerned with identifying and developing an organization’s resources.
A resources based approach to organizational analysis
A resource is an asset, competency, process, skill, or knowledge controlled by the corporations. A resource is
strength if it provides company with a competitive advantage, it is something the firm does or has the potential
to do particularly well relative to the abilities of existing or potential competitors. A resource is a weakness if it is
something the company does poorly or does not have the capacity to do although its competitors have that
capacity to do although its competitors have the capacity.
VRIO framework of analysis, proposes four questions to evaluate each of firm’s key resources:
1. Value: Does it provide competitive advantage?
2. Rareness: Do other competitor posses it?
3. Imitability: Is it costly for others to imitate?
4. Organization: is the firm organized to exploit the resources?
If the answer to these questions if “yes” for a particular resource, that resource is considered a strength and a
distinctive competence.
using resources to gain competitive advantage
Core Competency: Often called Core Capabilities are the things that an organization can do exceedingly well.
Distinctive Capabilities: When these capabilities/ competencies are superior to that of the competitors, are so
called.
Grant’s 5- step, resource- based approach to strategy analysis
Value Chain Approach/ Value chain analysis
Value Chain Analysis The developments within the global economic environment require that finance
professionals are not only adept at analyzing internal operations but that they are also experienced in, generating
information relating to operations outside their own organizations. So Value chain analysis has emerged as one of
the techniques that are useful in understanding and analyzing both intra-organization and inter-organization
processes in order to identify sources of competitive advantage.
Aim of value chain activities is to create value that exceeds the cost of providing product or service, thus generating
a profit margin.
A value chain is linked set of value-creating activities beginning with basic raw material coming from suppliers,
moving on to a series of value-added activities involved in producing and marketing a product or service, and ending
with distributors getting the final goods into the hands of the ultimate consumers.
The focus of value chain analysis is to examine the corporation in the context of the overall chain of value – creating
activities, of which a firm may be only a small part.
Industry Value Chain Analysis
The value chains of most industries can be split into two segments i.e. upstream and Downstream. the petroleum
industry upstream refers to oil exploration, drilling and moving the crude oil to the refinery, and downstream refers
to refining the oil plus the transporting and marketing of gasoline and refined oil to distributer and gas station
retailers.
Porter’s generic value chain
Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be
common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram
Corporate Value Chain Analysis
Generic Value Chain
MATRIX OF VALUE CREATING ACTIVITIES
Porter proposes that a manufacturing firm’s Primary activities usually begin with inbound logistics (raw materials
handling and warehousing), go through an operations process in which a product is manufactured, and continue on
to outbound logistics (warehousing and distribution), marketing and sales, and finally to services (installation, repair,
and sale of parts).
Several Support Activities, such as procurement (purchasing), technology development (R&D), human resource
management, and firm infrastructure (accounting, financing, strategic planning), ensure that the primary value chain
activities operate effectively and efficiently.
What is Competitive Advantage in the Field of Strategic Management?
What is Competitive Advantage?
It is a truism that strategic management is all about gaining and maintaining competitive advantage. The
term can be defined to mean “anything that a firm does especially well when compared with rival firms”.
Note the emphasis on comparison with rival firms as competitive advantage is all about how best to best the
rivals and stay competitive in the market.
Competitive advantage accrues to a firm when it does something that the rivals cannot do or owns
something that the rival firms desire. For instance, for some firms, competitive advantage in these
recessionary times can mean a hoard of cash where it can buy out struggling firms and increase its strategic
position. In other cases, competitive advantage can mean that a firm has lesser-fixed assets when compared
to rival firms, which is again a plus in an economic downturn.
What is Sustained Competitive Advantage?
We have defined what competitive advantage is as it relates to strategic management and the sources of
competitive advantage differing from firm to firm. However, a firm can have a source of competitive
advantage for only a certain period because the rival firms imitate and copy the successful firms’ strategies
leading to the original firm losing its source of competitive advantage over the longer term. Hence, it is
imperative for firms to develop and nurture sustained competitive advantage.
This can be done by:


Continually adapting to the changing external business landscape and matching internal strengths
and capabilities by channeling resources and competencies in a fluid manner.
By formulating, implementing, and evaluating strategies in an effective manner which make use of
the factors described above.
The fact that firms lose their sources of competitive advantage over the longer term is borne out by statistics
that show that the top three broadcast networks in the United States had over 90 percent market share in
1978 which has now come down to less than 50 percent.
The Advent of the Internet and Competitive Advantage
With the advent of the internet, competitive advantage and the gaining of it has become easier as firms
directly sell to the consumers and interlink the suppliers, customers, creditors, and other stakeholders into its
value chain. Because of the removal of intermediaries, firms can reduce costs and improve profitability.
Essentially, the internet has changed the rules of the game and hence sources of competitive advantage in
this digital era are now about how well firms utilize the digital platform and social media to gain advantage
over their rivals.
Closing Thoughts
Finally, competitive advantage has to be earned, gained, and defended as the preceding discussion shows.
Hence, those firms that are agile and responsive to changing market conditions and whose internal
capabilities are aligned with the external opportunities are those who would survive in the brutal business
landscape of the 21st century. As can be seen from the characterization of competitive advantage, it is
ethereal and subject to change and hence firms must always been on the lookout for newer sources of
competitive advantage and be alert for competitors’ moves.
Scanning functional resources
Functional resources include not only the financial, physical and human assets in each area but also the ability of the
people in each area to formulate and implement the necessary functional objective, strategies and policies the
resources include the knowledge of analytical concepts, and procedural techniques common to each area as well as
the ability of the people to use them effectively.
If these resources are properly used it serve as strengths to carry out value added activity and support strategic
decisions. In addition to business functions of marketing, finance, R&D, operations, HR and information systems, and
this is the way to begin an analysis of corporations value chain is by carefully examining its traditional areas for
potential strengths and weaknesses.
Basic organizational structures-:
Simple structure-
OWNER-MANAGER
WORKERS
Simple structure has no functional or product categories and is appropriate for a small, entrepreneur-dominated
company with 1or 2 product lines that operates in a reasonably small, easily identifiable market niche.
Functional structure-:
It is appropriate for a medium-sized firm with several related product lines in one industry. Employees tend to be
specialists in the business function important to that industry, such as manufacturing, marketing, finance and human
resources.
TOP MANAGEMENT
Manufacturing
Sales
Finance
Personnel
Divisional structure-:
It is appropriate for large corporation with many product lines in several relate industries. Employees tend to be
functional specialists organized according to product/market distinctions. e.g. General motors’ group its various auto
lines into the separate divisions of Chevrolet, Pontiac ,Saturn, Oldsmobile, brick and Cadillac.
Top Management
Strategic Business Unit ( SBU’s)
Are recent modifications to the divisional structure? Strategic business units are divisions or group of divisions
composed of independent product – market segments that are given primary responsibility and authority for the
management of their own functional areas.
An SBU may be of any size or level, but it must have;
(1)
(2)
(3)
(4)
A unique mission
Identifiable competitors
An external market focus
Control of its business function
e.g. Rather than orange products on the basis of packaging technology like frozen foods, canned foods, and bagged
foods, general foods organized its product in to SBUs n the basis of consumer oriented menu segments: Breakfast
food, beverages, main meal, desserts and pet foods.
Conglomerate Structure
It is appropriate for a large corporation with many product lines in several unrelated industries. A variant of
divisional structure, the conglomerate structure (sometimes called a holding company) is typically an assemblage of
legally independent firms (subsidiaries) operating under one corporate umbrella but controlled through the
subsidiaries board of directors.
Corporate Culture
“There are three way to do any job-the right way, the wrong way and the company way. We always do things the
company way” In the most organizations, the company way is derived from the corporation’s culture.
Corporate culture is the collection of beliefs, expectations, and values learned and shared by corporation’s members
and transmitted from one generation of employees to another. Corporate culture has two distinct attributes, i.e.
intensity and integration. Culture intensity is the degree to which members of a unit accept the norms, values or
culture content associated with the unit. This shows the culture’s depth. Culture integration is the extent to which
units throughout an organization share a common culture. This is the culture’s breadth.
(1)
(2)
(3)
(4)
Conveys a sense of identity for employees.
Helps generate employee commitment to something greater than them.
Adds to the stability of the organization as a social system.
Serves as a frame of reference for employees to use to make sense out of organizational activities and to use
as a guide for appropriate behavior.
Strategic Marketing issue
The marketing manager is the company’s primary link to the customer and the competition. The manager,
therefore, must be especially concerned with the market position and marketing mix of the firm.
Market position & Segmentation
Market position deals with the question, “Who are our customer?” it refers to selection of specific areas for
marketing concentration and can be expressed in terms of market, product, and geographical locations.
Through market research, corporations are able to practice market segmentation with various products or services
so that managers can discover what niches to seek, which new types of products to develop, and how to ensure that
a company’s many products do not directly compete with one another.
Marketing Mix
The marketing mix refers to the particular combination of key variables under the corporation’s control that can be
used to affect the demand and to gain competitive advantage. And these variables are product, place, promotion
and price.
Product Life Cycle
Product life cycle is a graph showing time plotted against sales of a product as it moves from introduction to growth
and maturity to decline. This concept enables a marketing manager to examine the marketing mix of a particular
product or group of products in terms of its position in its life cycle.
Strategic financial issues
Financial issues
The concept of financial leverage (the ratio of total debt to total assets) is helpful in describing how debt is used to
increase the earnings available to common shareholders. When the company finances its activities by sales of bonds
or notes instead of through stock, the earning per share are boosted.
High leverage may therefore, we perceived as a corporate strength in times of prosperity or as a weakness in times
of recession and falling sales. This is because the leverage acts to magnify the effect on earnings per share of an
increase or decrease in sales.
Research indicates that the greater leverage has a positive impact on performance for firms’ environments, but a
negative impact for firms in dynamic environment.
Capital Budgeting
This is the analyzing and ranking of possible investments in fixed assets such as land, building and equipment in
terms of additional outlays and additional receipts that will result from each investment. A good finance department
will be able to prepare such capital budgets and to rank them on the basis of some accepted criteria or hurdle
rate(e.g. years to pay back investments, rate of return, or time to break- even point ) for the purpose of strategic
decision making.
Strategic Research & Development (R&D) Issues
The R&D manager is responsible for suggesting and implementing a company’s technological strategy in light of
corporate objective and policies. The manager’s job, therefore, involves:
(1) Choosing among alternative new technology to use within corporation.
(2) Developing methods of embodying the new technology in new products and processes.
(3) Deploying resources so that new technology can be successfully implemented.
R&D Mix
Basic R&D is conducted by scientist in well equipped laboratories where the focus is on theoretical problem areas.
The best indicators of company’s capability in this area are its patents and research publications.
Product R&D
It concentrates on marketing and is concerned with product. The best measurements of ability in this area are the
number of successful new product introduced and the percentage of total sales and profits coming from products
introduced within the past five years.
Engineering or process R&D
It is concerned with engineering, concentrating on quality control and the development of design specifications and
improved production equipment. A company’s capabilities in this area can be measured by constant reduction in
unit manufacturing costs and the number of products defects.
Most corporations will have a mix of basic, product, and process R&D, which varies by industry, company, and
product line. The balance of these types of research is known as the R&D mix.
Strategic operations issue
The primary task of the operations (manufacturing or services) manager is to develop and operate a system that will
produce the required number of products and services, with a certain quality, at a given cost, within an allotted
time.
In very general terms, manufacturing can be intermittent or continuous.
In intermittent systems (job shops), the item is normally processed sequentially, but the work and sequence of the
process vary. E.g. A job shop usually has little automated machinery and thus a small amount of fixed costs. It has a
fairly low break-even point, but its variable cost line (composed of wages and costs of special parts) has a relatively
steep slope. Because most of the costs associated with the product are variable (many employees earn piece- rate
wages).
In contrast, continuous systems are those laid out as lines on which products can be continuously assembled or
processed. An example is an automobile assembly line. A firm using continuous systems invests heavily in fixed
investments such as automated processes and highly sophisticated machinery. Its labor force, relatively small but
highly skilled, earns salaries rather than piece rate wages. Consequently this firm has a high amount of fixed costs. It
also has a relatively high break-even point, but its variable cost line rises slowly.
Strategic Human Resource Management (HRM) Issues
The primary task of the manager of human resources is to improve the match between individuals and jobs. A good
HRM department should know how to use attitude surveys and other feedback devices to assess employees
satisfaction with their jobs and with the corporation as a whole.
HRM managers should also use job analysis to obtain job description information about what each job needs to
accomplish in terms of quality and quantity. up-to-date job descriptions are essential not only for proper employee
selection , appraisal, training and development for wage and salary administration , and for labor negotiations, but
also for summarizing the corporate wide human resources in terms of employee-skill categories.
Strategic Information Systems/Technology Issues
The primary task of the manager of information systems/technology is to design and manage the flow of
information in an organization in ways that improve productivity and decision making. Information must be
collected, stored, and synthesized in such a manner that it will answer important operating and strategic questions.
The growth of the global internet economy is forcing corporations to make significant investments in this functional
area.
An Intranet is an information network within an organization that also has access to the external worldwide
internet. Intranet typically began as ways to provide employees with company information such as lists of product,
prices, fringe benefits, and company policies.
An Extranet is an information network within an organization i.e. available to key suppliers and customers. The key
issue in building an extranet is the creation of “firewalls” to block extranet users from assessing the firm’s or other
user’s confidential data.
Strategic Audit of a corporation
(1)Current Situation;
(a)Current Performance- Performance is the end result of activity. Which measures to select to assess performance
depends on organizational unit to be appraised and the objectives to be achieved. The objectives that were
established earlier in the strategy formulation part of the strategic management process.
Type of control; controls can be established to focus on actual performance results (output), the activities that
generate the performance (behavior) , or on resources that are used in performance (input). Behavior controls
specify how something is to be done through policies, rules, standard operating procedures, and orders from a
superior. Output controls specify what is to be accomplished by focusing on the end result of the behaviors through
the use of objectives and performance targets or milestones. Input controls focus on resources, such as knowledge,
skills, abilities, value and motives of employee.
Activity-Based costing- is a new accounting method for allocating indirect and fixed costs to individual products or
product lines based on the value-added activities going into that product.
(b) Strategic Posture



Mission
Objectives
Strategies
Policies
(2) Corporate governance(a)Board of Directors




Who are the directors? Are they internal or External.
Do they own significant shares of stock?
Is the stock privately held or publicly traded? Are there different classes of stock with different voting rights.
How long have they served on the board?
(b)Top Management





What person or group constitutes top management?
Has it established a systematic approach to strategic management?
What is its level of involvement in the strategic management process?
Are strategic decisions made ethically in a socially responsible manner?
What role do stock options play in executive compensation?
(3)External Environment: Opportunities and Threats (SWOT)
(a)Societal Environment




Economic
Technological
Political legal
Socio cultural
(b)Task Environment (Industry)






Threat of new entrants
Bargaining power of buyers
Threat of substitute products and services
Bargaining Power of suppliers
Rivalry among competing firms
Relative power of unions, governments, special interest groups, etc.
(c)Summary of External Factors
Which of these forces and factors are the most important to the corporation and to the industries in which it
competes at the present time? Which will be important in the future?
(4)Internal Environment: Strength and Weaknesses (SWOT)
(a)Corporate Structure



How is the corporation structured at present?
Is the structure clearly understood by everyone in the corporation?
In what ways does this structure compare with those of similar corporations?
(b)Corporate Culture



Is there a well – defined or emerging culture composed of shared beliefs , expectations, and values?
Is the culture consistent with the current objectives, strategies, policies, and programs?
Is the culture compatible with employees diversity of backgrounds?
(c)Corporate Resources






Marketing
Finance
Research & Development(R&D)
Operations and Logistics
Human Resources Management(HRM)
Information Systems(IS)
(5)Analysis of strategic Factors (SWOT)
(a)Situational Analysis
What are the most important internal and external factors( strengths, weaknesses, opportunities, threats) that
strongly affects the corporation’s present and future performance?
(b)Review of mission and objectives



Are the current mission and objectives appropriate in light of the key strategic factors and problems?
Should the mission and objective be changed? If so, how?
If changed, what will be the effects on the firm?
(6)Strategic Alternatives and Recommended Strategy
(a) Strategic Alternatives


.Can the correct and revised objectives be met by the simple, more careful implementing of those strategies
presently in use (for example, fine tune strategies)?
What are the major feasible alternative strategies available to these corporations? What are the pros and
cons of each? Can corporate scenarios be developed and agreed upon?
(b) Recommended strategies


Specify which of the strategic alternatives you are recommending for the corporate, business, and
functional levels of the corporation. Do you recommend different business or functional strategies for
different units of the corporation?
Justify your recommendation in terms of its ability to resolve both long- and short-term problems
effectively deal with the strategic factors.
(c)What policies should be developed or received to guide effective implementation?
(7) Implementation
(a) What kind of programs (for example, restricting the corporation or instituting TQM) should be developed to
implement the recommended strategy?


Who should develop these programs?
Who should be in charge of these programs?
(b) Are the programs financially feasible? Can pro forma budgets be developed and agreed upon? Are priorities and
time tables appropriate to individual programs?
(c) Will new standard operating procedures need to be developed?
(8) Evaluation and control
(a) Is the current information system capable of providing sufficient feedback on implementation activities and
performance? Can it measure strategic factors?


Can performance results be pinpointed by area, unit, project or function?
Is the information timely?
(b) Are adequate control measures in place to ensure conformance with the recommended strategic plan?



Are appropriate standards and measures being used/
Are reward systems capable of recognizing and rewarding good performance?
Who takes correctives actions?
SWOT Analysis - Definition, Advantages and Limitations
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths
(S) and Weaknesses (W) are considered to be internal factors over which you have some measure of control.
Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors over which you
have essentially no control.
SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the
business and its environment. Its key purpose is to identify the strategies that will create a firm specific
business model that will best align an organization’s resources and capabilities to the requirements of the
environment in which the firm operates. In other words, it is the foundation for evaluating the internal
potential and limitations and the probable/likely opportunities and threats from the external environment. It
views all positive and negative factors inside and outside the firm that affect the success. A consistent study
of the environment in which the firm operates helps in forecasting/predicting the changing trends and also
helps in including them in the decision-making process of the organization.
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission.
These are the basis on which continued success can be made and continued/sustained. Strengths can
be either tangible or intangible. These are what you are well-versed in or what you have expertise in,
the traits and qualities your employees possess (individually and as a team) and the distinct features
that give your organization its consistency. Strengths are the beneficial aspects of the organization or
the capabilities of an organization, which includes human competencies, process capabilities,
financial resources, products and services, customer goodwill and brand loyalty. Examples of
organizational strengths are huge financial resources, broad product line, no debt, committed
employees, etc.
2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and
achieving our full potential. These weaknesses deteriorate influences on the organizational success
and growth. Weaknesses are the factors which do not meet the standards we feel they should meet.
Weaknesses in an organization may be depreciating machinery, insufficient research and
development facilities, narrow product range, poor decision-making, etc. Weaknesses are
controllable. They must be minimized and eliminated. For instance - to overcome obsolete
machinery, new machinery can be purchased. Other examples of organizational weaknesses are huge
debts, high employee turnover, complex decision making process, narrow product range, large
wastage of raw materials, etc.
3. Opportunities - Opportunities are presented by the environment within which our organization
operates. These arise when an organization can take benefit of conditions in its environment to plan
and execute strategies that enable it to become more profitable. Organizations can gain competitive
advantage by making use of opportunities. Organization should be careful and recognize the
opportunities and grasp them whenever they arise. Selecting the targets that will best serve the
clients while getting desired results is a difficult task. Opportunities may arise from market,
competition, industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom sector and
compete with existing firms for revenue.
4. Threats - Threats arise when conditions in external environment jeopardize the reliability and
profitability of the organization’s business. They compound the vulnerability when they relate to the
weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at
stake. Examples of threats are - unrest among employees; ever changing technology; increasing
competition leading to excess capacity, price wars and reducing industry profits; etc.
Advantages of SWOT Analysis
SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a
great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses
build on their strengths, correct their weakness and protect against internal weaknesses and external threats.
They also keep a watch on their overall business environment and recognize and exploit new opportunities
faster than its competitors.
SWOT Analysis helps in strategic planning in following mannera.
b.
c.
d.
e.
f.
g.
h.
It is a source of information for strategic planning.
Builds organization’s strengths.
Reverse its weaknesses.
Maximize its response to opportunities.
Overcome organization’s threats.
It helps in identifying core competencies of the firm.
It helps in setting of objectives for strategic planning.
It helps in knowing past, present and future so that by using past and current data, future plans can
be chalked out.
SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with
the competitive environment in which the firm operates.
SWOT ANALYSIS FRAMEWORK
Limitations of SWOT Analysis
SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very
simple because of which the organizations might overlook certain key strategic contact which may occur.
Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective
as there is great degree of uncertainty in market. SWOT Analysis does stress upon the significance of these
four aspects, but it does not tell how an organization can identify these aspects for itself.
There are certain limitations of SWOT Analysis which are not in control of management. These includea. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;
e. Searching a new market for the product which is not having overseas market due to import
restrictions; etc.
Internal limitations may includea.
b.
c.
d.
Insufficient research and development facilities;
Faulty products due to poor quality control;
Poor industrial relations;
Lack of skilled and efficient labor; etc
SWOT Analysis of Google
Google is probably the world’s best-known company for pioneering the search engine revolution and providing a
means for the internet users of the world to search and find information at the click of a mouse. Further, Google is
also known for its work in organizing information in a concise and precise manner that has been a game changer for
the internet economy and by extension, the global economy because corporations, individuals, and consumers can
search and access information about anything anywhere and anytime. Moreover, Google also goes with the motto
of “Do not be Evil” which means that its business practices are geared towards enhancing information and
actualizing best practices that would help people find and search information. Though its business practices in China
and elsewhere where the company was accused of being complicit with the authoritarian regimes in censoring
information were questionable, on balance, the company has done more good than harm in bringing together
information and organizing it.
Strengths

Market Leader in Search Engines
Perhaps the biggest strength of Google is that it is the undisputed leader in search engines, which
means that it has a domineering and lion’s share of the internet searches worldwide. Google has
more than 65% of the market share for internet searches and the competitors do not even come close
to anywhere that Google does.

Ability to Generate User Traffic
Google is a household brand in the world, its ability to drive internet user traffic is legendary, and
this has helped it become one of the most powerful brands in the world. Indeed, Google averages
more than 1.2 Billion hits a month in terms of the unique searches that users perform on the site.
This gives it an unrivaled and unparalleled edge over its competitors in the market.

Revenue from Advertising and Display
Its revenue model wherein it garners humungous profits through partnerships with third party sites
has held the company in good stead as far as its ability to mop up resources and increase both its topline as well as bottom-line is concerned. This is another key strength of the company that has helped
it scale greater heights.

Introduction of Android and Mobile Technologies
The last of the strengths discussed here relates to its adoption of Android and Mobile technologies,
this has resulted in it becoming a direct competitor of Apple as far as these devices, and operating
systems are concerned.
Weaknesses

Excessive Reliance on Secrecy
Google does not reveal its algorithm for searches or even its basic formula as far as internet searches
are concerned leading to many experts slamming the company for being opaque and hiding behind
the veneer of secrecy. However, in recent years, Google has taken steps to redress this by providing
a bare bones version of its unique search engine algorithm.

Falling Ad Rates
In recent years and especially in 2013, the company has been faced with declining revenues from ads
and as a result, the profitability of the company has taken a hit. This is partly due to the ongoing
global economic slowdown and partly because of competitors snapping at its heels in a more
aggressive manner. Indeed, Apple has already taken steps to garner search engine revenues in its
devices and hence, Google must be cognizant of the challenges that lie ahead.

Overdependence on Advertising
Google’s business model relies heavily on advertising and the numbers reveal that it gets more than
85% of its revenues from ads alone. This means that any potential dip in revenues would cost the
company dearly (literally as well as metaphorically). The point here is that Google has to devise a
more robust business model that embraces e-commerce and mobile commerce along with its current
business model that is based on ad revenues alone.

Lack of Compatibility with next generation devices
Another weakness for Google is that it is not compatible with many next generation computing
platforms including mobile and tablet computers and this remains an area of concern for the
company.
Opportunities

Android Operating System
Perhaps the biggest opportunity for Google lies in its pioneering effort in providing the Android OS
(Operating System) which has resulted in its becoming a direct competitor to Apple and Samsung.

Diversification into non-Ad Business Models
As discussed earlier, the company has to diversify into non-ad revenues if it has to remain profitable
and current indications are that it is adapting itself to this as can be seen from the push towards
commercial transactions using its numerous sites like Google Books, Google Maps etc.

Google Glasses and Google Play
The introduction of Google Glasses and Google Play promises to be a game changer for Google and
this is a significant opportunity that the company can exploit. Indeed, this very aspect can make the
company take the next evolutionary leap into the emerging world of nano-computing.

Cloud Computing
Cloud Computing remains a key opportunity for Google as it is already experienced in providing
storage and cloud solutions. Indeed, if not anything, it can move into the enterprise market using the
cloud-computing paradigm.
Threats

Competition from Facebook
The advent of Social Media has seriously threatened Google’s dominance in the internet world and
the company has to pull an ace to deal with the increasing features available on Facebook and
Twitter.

Mobile Computing
Another threat to Google is from the emerging area of mobile computing that threatens to pass the
company by as newer companies seize the opportunity to ramp up their mobile computing presence.
Steps in Strategy Formulation Process
Strategy formulation refers to the process of choosing the most appropriate course of action for the
realization of organizational goals and objectives and thereby achieving the organizational vision. The
process of strategy formulation basically involves six main steps. Though these steps do not follow a
rigid chronological order, however they are very rational and can be easily followed in this order.
1. Setting Organizations’ objectives - The key component of any strategy statement is to set the longterm objectives of the organization. It is known that strategy is generally a medium for realization of
organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon
the process of reaching there. Strategy includes both the fixation of objectives as well the medium to
be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of
deployment of resources so as to achieve the objectives.
While fixing the organizational objectives, it is essential that the factors which influence the
selection of objectives must be analyzed before the selection of objectives. Once the objectives and
the factors influencing strategic decisions have been determined, it is easy to take strategic decisions.
2. Evaluating the Organizational Environment - The next step is to evaluate the general economic
and industrial environment in which the organization operates. This includes a review of the
organizations competitive position. It is essential to conduct a qualitative and quantitative review of
an organizations existing product line. The purpose of such a review is to make sure that the factors
important for competitive success in the market can be discovered so that the management can
identify their own strengths and weaknesses as well as their competitors’ strengths and weaknesses.
After identifying its strengths and weaknesses, an organization must keep a track of competitors’
moves and actions so as to discover probable opportunities of threats to its market or supply sources.
3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative
target values for some of the organizational objectives. The idea behind this is to compare with long
term customers, so as to evaluate the contribution that might be made by various product zones or
operating departments.
4. Aiming in context with the divisional plans - In this step, the contributions made by each
department or division or product category within the organization is identified and accordingly
strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic
trends.
5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between
the planned or desired performance. A critical evaluation of the organizations past performance,
present condition and the desired future conditions must be done by the organization. This critical
evaluation identifies the degree of gap that persists between the actual reality and the long-term
aspirations of the organization. An attempt is made by the organization to estimate its probable
future condition if the current trends persist.
6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is
actually chosen after considering organizational goals, organizational strengths, potential and
limitations as well as the external opportunities.
TOWS Matrix
SO Strategies
•
Strategies that enable competitive advantage, external opportunities match well with internal
strengths, allows for competitive advantage to be built and maintained.
ST Strategies
•
Mitigation Strategies, firm possesses internal strengths that facilitates neutralization of external
threats, may lead to temporary advantage if competitors are impacted by environmental threats.
WO Strategies
•
Acquisition/Development Strategies, situation where strategies are formulated to acquire or
develop new resources/capabilities to take advantage of external opportunities.
WT Strategies
•
Consolidation/Exit Strategies, if firms can’t find ways to convert weaknesses to strengths via
acquisition/development, exit from market is recommended.
TOWS Strategic Alternatives Matrix
External Opportunities
(O)
External Threats
(T)
Internal Strengths
(S)
1.
2.
3.
4.
Internal Weaknesses (W)
1.
2.
3.
4.
1.
2.
3.
4.
1.
2.
3.
4.
SO
"Maxi-Maxi" Strategy
ST
"Maxi-Mini" Strategy
Strategies that use strengths to
maximize opportunities.
Strategies that use strengths to
minimize threats.
WO
"Mini-Maxi" Strategy
WT
"Mini-Mini" Strategy
Strategies that minimize
Strategies that minimize weaknesses
weaknesses by taking advantage
and avoid threats.
of opportunities.
What is Corporate Strategy?
Those strategies concerned with the broad and long-term questions of
what business(es) the organization is in or wants to be in & what it wants to do with those
businesses
Task involves
Moves to enter new businesses
Actions to boost combined performance of businesses
Ways to capture synergy among related businesses
Establishing investment priorities & steering corporate resources into most attractive units
Corporate strategy establishes the overall direction that the organization hopes to go.
Competitive & functional strategies provide the means or mechanisms for making sure the organization gets
there.
Possible Corporate Strategic Directions
(1) Moving the organization ahead -- Organizational Growth
(2) Keeping the organization where it is -- Organizational Stability
(3) Reversing the organization’s weaknesses or decline -- Organizational Renewal
ORGANIZATIONAL GROWTH
Growth strategy
Involves the attainment of specific growth objectives by increasing the level of an firm’s
operations
Typical growth objectives for businesses
Increase in sales revenues
Increase in earnings or profits
Other performance measures
Growth objectives of not-for-profit businesses
Increasing clients served or patrons attracted
Broadening the geographic area
Increasing programs offered
Types of Strategies
GRAND STRATEGIES
Grand strategies, often called master or business strategies, provide basic direction for strategic actions.
They are the basis of coordinated and sustained efforts directed toward achieving long-term business
objectives.
The 15 principal grand strategies are concentrated growth, market development, product development,
innovation, horizontal integration, vertical integration, concentric diversification, conglomerate
diversification, turnaround, divestiture, liquidation, bankruptcy, joint ventures, strategic alliances, and
consortia. Any one of these strategies could serve as the basis for achieving the major long-term objectives
of a single firm. But a firm involved with multiple industries, businesses, product lines, or customer
groups—as many firms are—usually combines several grand strategies.
Concentrated Growth
Concentrated growth is the strategy of the firm that directs its resources to the profitable growth of a single
product, in a single market, with a single dominant technology. More details about Kentucky Fried Chicken
can be found at www.triconrestaurants.com
Rationale for Superior Performance
Concentrated growth strategies lead to enhanced performance. The ability to assess market needs,
knowledge of buyer behavior, customer price sensitivity, and effectiveness of promotion are characteristics
of a concentrated growth strategy.
A major misconception about the concentrated growth strategy is that the firm practicing it will settle for
little or no growth. A firm employing concentrated growth grows by building on its competences and
achieves a competitive edge by concentrating in the product-market segment it knows best.
Four Conditions That Favor Concentrated Growth
1.
The firm’s industry is resistant to major technological advancements.
2.
The firm’s targeted markets are not product saturated.
3.
The firm’s product-markets are sufficiently distinctive to dissuade competitors in adjacent product-markets
from trying to invade the firm’s segment.
4.
The firm’s inputs are stable in price and quantity and are available in the amounts and at the times needed.
The pursuit of concentrated growth is also favored by a stable market. A firm can also grow while
concentrating, if it enjoys competitive advantages based on efficient production or distribution channels.
Finally, the success of market generalists creates conditions favorable to concentrated growth. When
generalists succeed by using universal appeals, they avoid making special appeals to particular groups of
customers. Useful website: www.landsend.com
Risk and Rewards of Concentrated Growth
Under stable conditions, concentrated growth poses lower risk than any other grand strategy, but in a
changing environment, a firm committed to concentrated growth faces high risks. The concentrating firm’s
entrenchment in a single product market makes it particularly vulnerable to changes in the economic
environment of that industry. Entrenchment in a specific product-market tends to make a concentrating firm
more adept than competitors at detecting new trends.
A firm pursuing a concentrated growth strategy is also vulnerable to the high opportunity costs that result
from remaining in a specific product-market and ignoring other options that could employ the firm’s
resources more profitably. Over commitment to a specific technology and product-market can also hinder a
firm’s ability to enter a new or growing product-market that offers more attractive cost-benefit trade-offs.
Concentrated Growth is Often the Most Viable Option
The firm that chooses a concentrated growth strategy directs its resources to the profitable growth of a
narrowly defined product and market, focusing on a dominant technology. The success of a concentration
strategy is founded on the firm’s use of superior insights into its technology, product, and customer to obtain
a sustainable competitive advantage. John Deere and Company’s home page is: www.deere.com . Exhibit 65 lists various options under concentrated growth.
Market Development
Market development consists of marketing present products, often with only cosmetic modifications, to
customers in related market areas by adding channels of distribution or by changing the content of
advertising or promotion. It also allows firms to practice a form of concentrated growth by identifying new
uses for existing products and new demographically, psychographically, or geographically defined markets.
Product Development
Product development involves the substantial modification of existing products or the creation of new but
related products that can be marketed to current customers through established channels. The product
development strategy is based on the penetration of existing markets by incorporating product modifications
into existing items or by developing new products with a clear connection to the existing product line.
Innovation
The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby
make similar existing products obsolete. Few innovative ideas prove profitable because the research,
development, and premarketing costs of converting a promising idea into a profitable product are extremely
high. Exhibit 6-6 presents the risks of new product ideas.
Horizontal Integration
When a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms
operating at the same stage of the production-marketing chain, its grand strategy is called horizontal
integration. Exhibit 6-7 describes Deutsche Telekom growth strategy of horizontal acquisition.
Vertical Integration
When a firm’s grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are a
customer for its outputs (such as warehouses for finished products), vertical integration is involved.
Backward integration is the desire to increase the dependability of the supply or quality of the raw materials
used as production inputs. Forward integration is a preferred grand strategy if great advantages accrue to
stable production.
Some increased risks are associated with both horizontal and vertical integration. For horizontally integrated
firms, the risks stem from increased commitment to one type of business. For vertically integrated firms, the
risks result from the firm’s expansion into areas requiring strategic managers to broaden the base of their
competence and to assume additional responsibilities. Exhibit 6-8 depicts both horizontal and vertical
integration strategies.
Concentric Diversification
Grand strategies involving diversification represent distinctive departures from a firm’s existing base of
operations, typically the acquisition or internal generation (spin-off) of a separate business with synergistic
possibilities counterbalancing the strengths and weaknesses of the two businesses.
Regardless of the approach taken, the motivations of the acquiring firms are the same:
 Increase the firm’s stock value. In the past, mergers have often led to increases in the stock price or the
price-earnings ratio.

Increase the growth rate of the firm.

Make an investment that represents better use of funds than plowing them into internal growth.
 Improve the stability of earnings and sales by acquiring firms whose earnings and sales complement the
firm’s peaks and valleys.

Balance or fill out the product line.

Diversify the product line when the life cycle of current products has peaked.

Acquire a needed resource quickly (e.g., high-quality technology or highly innovative management).

Achieve tax savings by purchasing a firm whose tax losses will offset current or future earnings.
 Increase efficiency and profitability, especially if there is synergy between the acquiring firm and the
acquired firm.
Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in
terms of technology, markets, or products. The ideal concentric diversification occurs when the combined
company profits increase strengths and opportunities and decrease weaknesses and exposure to risk.
Conglomerate Diversification
In conglomerate diversification, the principal concern of the acquiring firm is the profit pattern of the
venture. Unlike concentric diversification, conglomerate diversification gives little concern to creating
product-market synergy with existing businesses.
The principal deference between the two types of diversification is that concentric diversification
emphasizes some commonality in markets, products, or technology, whereas conglomerate diversification is
based principally on profit considerations.
Unfortunately, the majority of such acquisitions fail to produce the desired results for the companies
involved. Exhibit 6–9 provides seven guidelines that can improve a company’s chances of a successful
acquisition. Textron’s home page is: www.textron.com
Turnaround
A firm can find itself with declining profits for many reasons such as economic recessions, production
inefficiencies, and innovative breakthroughs by competitors. In many cases, strategic managers believe that
such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to
fortify its distinctive competencies. This grand strategy is known as turnaround. It is typically begun
through one of two forms of retrenchment—cost reduction or asset reduction—employed singly or in
combination.
Strategic management research provides evidence that firms that have used a turnaround strategy have
successfully confronted decline. The research findings have been assimilated and used as the building
blocks for a Model of the Turnaround Process shown in Exhibit 6–10.
A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient
magnitude to warrant explicit turnaround actions. Turnaround situations may be the result of years of
gradual slowdown or months of sharp decline.
The immediacy of the resulting threat to company survival posed by the turnaround situation is known as
situation severity. Severity is the governing factor in estimating the speed with which the retrenchment
response will be formulated and activated.
Turnaround responses among successful firms typically include two stages of strategic activities:
retrenchment and the recovery response. Retrenchment consists of cost cutting and asset reducing activities.
The primary objective of the retrenchment phase is to stabilize the firm’s financial condition.
The primary causes of the turnaround situation have been associated with the second phase of the
turnaround process, the recovery response. Recovery is achieved when economic measures indicate that the
firm has regained its pre-downturn levels of performance.
Divestiture
A divestiture strategy involves the sale of a firm or a major component of a firm. When retrenchment fails to
accomplish the desired turnaround or when a non-integrated business activity achieves an unusually high
market value, strategic managers often decide to sell the firm.
The reasons for divestiture vary. They often arise because of partial mismatches between the acquired firm
and the parent corporation, because of corporate financial needs, or because of government antitrust action.
Liquidation
When liquidation is the grand strategy, the firm is typically sold in parts, only occasionally as a whole, but
for its tangible asset value and not as a going concern.
Bankruptcy
Business failures are playing an increasingly important role in the American economy. In an average week,
more than 300 companies fail. More than 75 percent of these financially desperate firms file for a
“liquidation bankruptcy”—they agree to a complete distribution of their assets to creditors, most of who
receive a small fraction of the amount that they are owed.
The other 25 percent of these firms refuse to surrender until one final option is exhausted. Choosing a
strategy to recapture its viability, such a company asks the courts for a “reorganization bankruptcy.” The
firm attempts to persuade its creditors to temporarily freeze their claims while it undertakes to reorganize
and rebuild the company’s operations more profitably.
If the judgment of the owners of a business is that its decline cannot be reversed, and the business cannot be
sold as a going concern, then the alternative that is in the best interest of all may be a liquidation
bankruptcy, also known as the Chapter 7 of the Bankruptcy Code. The court appoints a trustee, who collects
the property of the company, reduces it to cash, and distributes the proceeds proportionally to creditors on a
pro rata basis as expeditiously as possible.
A proactive alternative for the endangered company is reorganization bankruptcy. Chosen for the right
reasons, and implemented in the right way, reorganization bankruptcy can provide a financially,
strategically, and ethically sound basis on which to advance the interests of all of a firm’s stakeholders.
CORPORATE COMBINATIONS
The 12 grand strategies discussed above used singly and much more often in combinations represent the
traditional alternatives used by firms in the U.S. Recently, three new grand types have gained in popularity;
all fit under the broad category of corporate combinations. These three newly popularized grand strategies
are joint ventures, strategic alliances, and consortia.
Joint Ventures
Joint ventures are commercial companies (children), created and operated for the benefit of the co-owners
(parents). The joint venture extends the supplier-consumer relationship and has strategic advantages for both
partners.
Strategic Alliances
Strategic alliances are distinguished from joint ventures because the companies involved do not take an
equity position in one another. In many instances strategic alliances are partnerships that exist for a defined
period during which partners contribute their skills and expertise to a cooperative project. In other instances,
strategic alliances are synonymous with licensing agreements. Exhibit 6-11 presents the key issues in
strategic alliance learning. Exhibit 6-12 presents the top five strategic and tactical reasons for exploiting the
benefits of outsourcing.
Consortia, Keiretsus, and Chaebols
Consortia are defined as large interlocking relationships between businesses of an industry. A Japanese
keiretsu is an undertaking involving up to 50 different firms which are joined around a large trading
company or bank and coordinated through interlocking directorates and stock exchanges. A South Korean
chaebols resembles a consortia of keiretsu except that they are typically financed through government
banking groups and are largely run by professional managers trained by participating firms expressly for the
job. Exhibit 6-13 elaborates on the keiretsu concept.
Diversification as a Viable Corporate Strategy
Diversification is one of the strategies pursued by firms wishing to grow in newer markets and by
launching newer products. Diversification usually entails the firms entering new markets in the industry in
which they are already present by launching newer products. Note the emphasis on new markets and new
products as diversification is not only about entering newer markets but also with newer products. For
instance, launching detergents and other hygiene based products by firms that already have soaps and other
personal care products is one form of diversification wherein the firms launch an entirely new product line
aimed at targeting newer market segments. Similarly, innovating and inventing newer products is another
way of diversification, which can extend beyond the existing industry in which the firms operate. The best
example of this type of diversification is launching mobile payment systems by mobile telephony companies
wherein they tap newer market segments with newer product and service lines.
Diversification Strategies
Once the decision is made to diversify, a choice must be made whether to diversify into related businesses or
unrelated businesses or some mix of both. Businesses are related when there are competitively valuable
relationships among their value chains activities.
Vertical Integration
Ÿ Full (all stages of
industry)
Ÿ Partial (selected
stages)
Single Business
Concentration
Diversify into Related
Ÿ Build shareholder
value by capturing
strategic fit benefits
Ÿ Cost sharing
Ÿ Skills transfer
Diversify into Unrelated
Ÿ Spread risks across
diverse businesses
Ÿ Build shareholder
value via superior
portfolio management
Diversify into Related
and Unrelated
Businesses
Moves to accomplish
diversification can include:
Ÿ Acquisition/merger
Ÿ Startup of new
business
Ÿ Joint ventures
Post-Diversification Strategic Move
Alternatives
Ÿ Make new acquisitions (or seek merger
partnerships)
Ÿ To build positions in new related/unrelated
industries
Ÿ To strengthen the position of business
units in industries where the firm already
has a stake
Ÿ Divest some business units
Ÿ To eliminate weak performing businesses
from portfolio
Ÿ To eliminate businesses that no longer fit
Ÿ Restructure makeup of whole portfolio if many
business units are performing poorly
Ÿ By selling selected business units
Ÿ By using cash from divertitures plus
unused debt capacity to make new
acquisitions
Ÿ Retrench/narrow the diversification base
Ÿ By pruning weak businesses
Ÿ By shedding all noncore businesses
Ÿ By divesting one or more core businesses
Ÿ Become a multinational, multi-industry
enterprise (DMNC)
Ÿ To succeed in globally competitive core
businesses against international rivals
Ÿ To capture strategic fit benefits and win a
competitive advantage via multinational
diversification
Ÿ Liquidate/close down money-losing businesses
that cannot be sold
Six diversification related strategies:
1.
Strategies for entering new industries – acquisition, start up, and joint ventures
2.
3.
4.
5.
6.
Related diversification strategies
Unrelated diversification strategies
Divestiture and liquidation strategies
Corporate turnaround, retrenchment, and restructuring strategies
Multinational diversification strategies
Concentric Diversification
The first type of diversification is concentric diversification wherein the firms ensure that there is a
technological similarity between its existing core competencies and the newer product lines. Indeed, this
type of diversification is aimed at leveraging the existing competencies and expertise and which is
aligned with its resources and capabilities. In this type of diversification, firms typically launch additions
to their product lines and at the same time target newer market segments. The idea here is to ensure that
their brand image and brand loyalty are transferred to the newer products. Further, this type of
diversification is sometimes not done strictly to target newer market segments but ensure that the untapped
market segments are targeted. Examples of this would be launching Tablet computers by companies like
Apple and Samsung, which are already present in the Smartphone market.
Horizontal Diversification
This type of diversification happens when firms tag on to the existing market segments and leverage
the existing customer base though the products that they launch are aimed at sub segments in the
current market. This type of diversification is usually followed when the firms launch newer products that
have some relation to the existing products but at the same time, the firm is entering a new business. This
new business can be related or unrelated to the current businesses in which the firm operates and the idea
here is to ensure that the existing customers transfer their loyalties to the new product lines. Lest this sounds
confusing, it needs to be noted that horizontal diversification as the name implies is all about entering newer
market segments and launching newer products on the “same plane” horizontally which means that there is
little alignment unlike vertical integration and concentric diversification.
Conglomerate Diversification
The third type of diversification or conglomerate diversification is completely different from the previously
discussed strategies as this type of diversification is a strategy where conglomerates launch entirely new
product lines that have no alignment with their existing resources and capabilities and enter completely new
markets where they do not have a presence. For instance, Reliance, which ventured into Retail and Mobile
Telephony, is an example of a conglomerate diversification. The sole intention is to leverage the positive
brand image and the existing brand loyalty in its existing market segments as this firm has launched entirely
new products unrelated to its core competencies and entered newer market segments where it has no
presence at all. This type of diversification is the most risky of the three types discussed in this article
though if the firm is successful, then it can aim for further diversification, which is indeed a profitable, and
growth oriented strategy.
Blue Ocean Strategy and its Implications for Businesses
Blue Ocean Strategy is a concept that has been pioneered by INSEAD Professors, W. Chan Kim, and Renee
Mauborgne. This strategy, which is based on extensive research of hundreds of companies spanning across
decades and including several industries, proclaims that instead of battling competitors, companies can
create new markets for themselves. In other words, as opposed to Red Oceans that are saturated markets
where differentiation or cost competition is prevalent, companies can instead create Blue Oceans or entirely
new markets for themselves through value innovation, which would create value for its entire stakeholder
chain including employees, customers, and suppliers. The key premise of the Blue Ocean strategy is that
companies must unlock new demand and make the competition irrelevant instead of going down the beaten
track and focusing on saturated markets.
Blue Ocean vs. Red Ocean
If we compare the Blue Ocean with the Red Ocean we find that whereas the former denotes all the
industries not in existence now and hence, are potential opportunities for companies to enter and unlock
demand, the latter denotes the existing industries and the known market space, which is characterized by
reduced profits and growth because of saturation. This results in the Commodification of products, which
means that the intense and cutthroat competition in the existing markets turns them bloody, or makes the
ocean red. On the other hand, Blue Oceans represent many opportunities for growth and where the
irrelevance of competition is the norm because the markets are yet to be saturated.
Further, Blue Oceans represent markets where demand is large and unmet and where growth and
profits can be actualized through value innovation, which is the simultaneous pursuit of low
differentiation and low cost. Indeed, the cornerstone of the Blue Ocean Strategy is the creation of new
playing fields and which entails opening up entirely new markets as opposed to the Red Ocean where the
existing market conditions are such that companies must pursue either differentiation or low cost strategies.
In other words, Blue Ocean strategy represents a game changing idea of creating new markets and
unlocking the inherent demand in these markets. Whereas Red Oceans are all about battling the competition,
Blue Oceans are all about making the competition irrelevant.
Examples of Blue Ocean Strategy in Practice
The authors of the Blue Ocean concept insist that their strategy is different from Porter’s Five Forces, which
they reckon is all about battling the sharks in the red oceans. Further, they point to the fact that Red Ocean
competition is characterized by merciless competition whereas Blue Ocean represents the redefinition of the
terms of competition where one can have the ocean all to oneself and therefore, the waters are blue.
For instance, the authors provide the example of the Canadian Circus Company, Cirque du Soleil which
came up with a game changing business model in the 1980s and which resulted in the altering of the
dynamics of the circus industry. The Five Forces model when applied to the circus industry predicted that it
was doomed to failure because of high power of suppliers, and the increase in the alternative forms of
entertainment that were eating into the market share of the circus industry. Further, concerns and pressure
from animal rights groups and increased awareness of the customers about the consequences of
conventional circuses were beginning to spell trouble for the circus industry. Therefore, the Five Forces
model of Porter when applied to this industry predicted a slow death for it.
However, Cirque du Soleil followed what can be called a Blue Ocean strategy wherein it replaced the
animals and reduced the importance of individual stars and created an entirely new business model based on
a combination of music, dance, and athletic shows to innovate and create value for itself. In other words,
what this means is that instead of tweaking the existing strategies, Cirque du Soleil went in for an entirely
new strategy of creating a new market altogether by redefining its core competencies and taking “Four
Actions” which would be described in the next section.
Blue Ocean Strategy Formulation and Execution
The Four Actions that Cirque du Soleil followed were the following:




Eliminating the factors that the industry takes for granted which in the case of Cirque du Soleil was
to eliminate the animals, the three separate rings, and the star performers.
Reducing the factors below the industry standard, which meant that the company ensured that much
of the danger and thrill that characterizes conventional circuses was reduced and this resulted in the
company creating a new market for itself that was different from the conventional market for
circuses.
Increasing the factors which should be raised well above the industry standard meant that Cirque du
Soleil pioneered original and unique approaches such as developing its own tents and by moving out
of the confines of existing venues which meant that it was able to create demand for its product from
scratch.
Finally, by introducing aspects of novelty such as dramatic themes, music and dance combined with
artistic renditions, and an environment that was geared to be more upscale and niche meant that
Cirque du Soleil ensured that it combined differentiation with value creation.
Conclusion
The example of the Blue Ocean strategy described above is clearly indicates that Cirque du Soleil did not try
to battle the competition but instead, created an entirely new market for itself. In short, this is the essence of
the Blue Ocean Strategy that hinges on creating value and taking it to the next level by a game changing
approach to competition. In conclusion, once a company actualizes the Blue Ocean Strategy, it usually results in
opening up new markets instead of stagnating in the existing markets.
Unit-4
Why Some Firms Do Not Do Strategic Planning
Many firms do not engage in strategic planning and some firms do strategic planning that is poor and
ill conceived. Some of the reasons for this sorry state of affairs in these firms are listed below:








The first and foremost reason for poor strategy is the lack of experience in strategic management
which is due to the paucity of managers and executives with experience and the presence of those
who do not understand strategic management.
The next reason has to do with the poor reward structure in place where success goes unrewarded
and failures are punished. Because of this “double whammy” of no recognition when things have
gone right and blame game when things go wrong, managers are reluctant to engage in strategic
management.
Because an organization is always firefighting which means that is so embroiled in its internal
problems, the top management does not have the time or the energy to engage in strategic
management. This is often the case with many firms where the lack of coherence and control in
organizational processes means that most of the time is spent on tackling problems rather than
preempting problems or solving problems.
Some firms view strategic planning and strategic management as a waste of time since they are
under the impression that they can handle the longer-term imperatives by doing things that they have
always done in a particular manner. This is the case with firms that have been in business for
generations where the new leaders often think that “if it is not broke, do not fix it”. This mindset
precludes them from approaching the future in a proactive manner instead of a reactive manner.
Continuing in the same vein, many firms, especially those that have been successful see no point in
formulating newer strategies since their position is comfortable and they are content with success.
Success breeds arrogance as the case of Nokia, which went from market leader to the bottom in a
few years time reminds us.
With experience, many managers think that they can weather any storm because they “have been
there, done that”. However, this attitude is counterproductive as planning for eventualities is
necessary and formal models of strategy have to be drawn up since experience is not always the best
guide. This is especially the case with the modern era where the advent of the digital age has
changed the rules of the game.
Perhaps one of the most important reasons why firms do not engage in strategic management is that
they fear the “unknown”. What they forget is that precisely because of the unknown and the
unpredictable; they have to plan in advance. Further, the managers might be uncertain of their
abilities to learn new skills, of their aptitude with new systems, and their ability to take on new roles.
This happens when organizational arteries are clogged because of inertia and a general sense of
laziness and ostrich like mindsets.
Finally, the other important reason why firms and the managers within them do not engage in
strategic management is the lack of consensus and differing ideas as to what a good strategy ought to
be.
Process of Strategic Planning
It is same a Model of Strategic Management.
Strategic planning is the PROCESS by which the GUIDING MEMBERS of an organization ENVISION its
future and develop the necessary PROCEDURES AND OPERATIONS to achieve that future.
The planning process can be viewed as a somewhat circular flow of topics and action steps,
where the results from one step initiate study and action in the next step. However, the
process does not necessarily always flow in one direction. Issues that arise in a particular step
may cause the planning team to go back to an earlier step to do additional work. If desired, the
order of the steps can even be altered to suit the particular needs of the planning team. The
implementation step also does not end the planning process. Analysis of results could easily
result in additional analysis or a change in strategic direction. Also, it is recommended that the
plan be reviewed on an annual basis to verify that all the base assumptions are still valid and
that the implementation plan is progressing according to expectations.
1. Situation Analysis - identification of current issues




Environmental Monitoring - External
Competition Analysis
Internal Business Culture -- [Models of Business Culture]
Knowledge Analysis
2. Plan Development




Vision [ deeper understanding ]
Mission Formulation [ deeper understanding ]
Business Modeling
Strategy Development
3. Testing


Performance Audit
Gap Analysis
4. Implementation



Commitment to Change - Influence Plan
Balanced Scorecard - document and communicate: strategy, objectives and measures
Measure results
5. Plan Maintenance

Feedback System - take corrective action as needed; loop back to pevious steps as required
Stages of corporate development
The 10 Stages of Corporate Life Cycle / stages of development:
Courtship. Would-be founders focus on ideas and future possibilities, making and talking about ambitious
plans. Courtship ends and infancy begins when the founders assume risk.
Infancy. The founders' attention shifts from ideas and possibilities to results. The need to make sales drives
this action-oriented, opportunity-driven stage. Nobody pays much attention to paperwork, controls, systems,
or procedures. Founders work 16-hour days, six to seven days a week, trying to do everything by themselves.
Go-Go. This is a rapid-growth stage. Sales are still king. The founders believe they can do no wrong.
Because they see everything as an opportunity, their arrogance leaves their businesses vulnerable to flagrant
mistakes. They organize their companies around people rather than functions; capable employees can--and
do--wear many hats, but to their staff's consternation, the founders continue to make every decision.
Adolescence. During this stage, companies take a new form. The founders hire chief operating officers but
find it difficult to hand over the reins. An attitude of us (the old-timers) versus them (the COO and his or her
supporters) hampers operations. There are so many internal conflicts; people have little time left to serve
customers. Companies suffer a temporary loss of vision.
Prime. With a renewed clarity of vision, companies establish an even balance between control and flexibility.
Everything comes together. Disciplined yet innovative, companies consistently meet their customers' needs.
New businesses sprout up within the organization, and they are decentralized to provide new life-cycle
opportunities.
Stability. Companies are still strong, but without the eagerness of their earlier stages. They welcome new
ideas but with less excitement than they did during the growing stages. The financial people begin to impose
controls for short-term results in ways that curtail long-term innovation. The emphasis on marketing and
research and development wanes.
Aristocracy. Not making waves becomes a way of life. Outward signs of respectability--dress, office decor,
and titles--take on enormous importance. Companies acquire businesses rather than incubate start-ups. Their
culture emphasizes how things are done over what's being done and why people are doing it. Company
leaders rely on the past to carry them into the future.
Recrimination. In this stage of decay, companies conduct witch-hunts to find out who did wrong rather than
try to discover what went wrong and how to fix it. Cost reductions take precedence over efforts that could
increase revenues. Backstabbing and corporate infighting rule. Executives fight to protect their turf, isolating
themselves from their fellow executives. Petty jealousies reign supreme.
Bureaucracy. If companies do not die in the previous stage--maybe they are in a regulated environment
where the critical factor for success is not how they satisfy customers but whether they are politically an
asset or a liability--they become bureaucratic. Procedure manuals thicken, paperwork abounds, and rules and
policies choke innovation and creativity. Even customers--forsaken and forgotten--find they need to devise
elaborate strategies to get anybody's attention.
Death. This final stage may creep up over several years, or it may arrive suddenly, with one massive blow.
Companies crumble when they cannot generate the cash they need; the outflow finally exhausts any inflow.
Corporate Restructuring: Mergers & Acquisitions, Strategic Alliances:
MERGERS AND ACQUISITIONS (M&A)
Mergers and acquisitions and corporate restructuring—or M&A for short—are a big part of the corporate
finance. One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key
principles behind buying a company is to Corporate Level Strategy create shareholder value over and above
that of the sum of the two companies.
Two companies together are more valuable than two separate companies—at least, that’s the reasoning
behind M&A. This idea is particularly attractive to companies when times are tough. Strong companies will
act to buy other companies to create a more competitive, cost-efficient company. The companies will come
together hoping to gain a greater market share or achieve greater efficiency. Because of these potential
benefits, target companies will often agree to be purchased when they know they cannot survive alone.
A corporate merger is essentially a combination of the assets and liabilities of two firms to form a single
business entity. Although they are used synonymously, there is a slight distinction between the terms
‘merger’ and ‘acquisition’. Strictly speaking, only a corporate combination in which one of the companies
survives as a legal entity is called a merger. In a merger of firms that are approximate equals, there is often
an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain
ratio. In other words, a merger happens when two firms, often about the same size, agree to unite as a new
single company rather than remain as separate units. This kind of action is more precisely referred to as a
“merger of equals.” Both
Companies’ stocks are surrendered, and new company stock is issued in its place. When a company takes
over another to become the new owner of the target company, the purchase is called an acquisition. From the
legal angle, the ‘target company’ ceases to exist and the buyer “gulps down” the business and stock of the
buyer continues to be traded.
In summary, “acquisition” is generally used when a larger firm absorbs a smaller firm and “merger” is used
when the combination is portrayed to be between equals. For the sake of discussion, the firm whose shares
continue to exist (possibly under a different company name) will be referred to as the acquiring firm and the
firm’s whose shares are being replaced by the acquiring firm will be referred to as the target firm.
However, a merger of equals doesn’t happen very often in practice. Frequently, a company buying another
allows the acquired firm to proclaim that it is a merger of equals, even though it is technically an acquisition.
This is done to overcome some legal restrictions on acquisitions.
Synergy is the main reason cited for many M&As. Synergy takes the form of revenue enhancement and cost
savings. By merging, the companies hope to benefit through staff reductions, economies of scale, acquisition
of technology, improved market reach and industry visibility. Having said that, achieving synergy is easier
said than done-synergy is not routinely realized once two companies merge. Obviously, when two businesses
are combined, it should results in improved economies of scale, but sometimes it works in reverse. In many
cases, one and one add up to less than two.
Excluding any synergies resulting from the merger, the total post-merger value of the two firms is equal to
the pre-merger value, if the ‘synergistic values’ of the merger activity are not measured. However, the postmerger value of each individual firm is likely to be different from the pre-merger value because the exchange
ratio of the shares will not exactly reflect the firms’ values compared to each other. The exchange ratio is
distorted because the target firm’s shareholders are paid a premium for their shares. Synergy takes the form
of revenue enhancement and cost savings. When two companies in the same industry merge, the revenue will
decline to the extent that the businesses overlap. Hence, for the merger to make sense for the acquiring firm’s
shareholders, the synergies resulting from the merger must be more than the value lost initially.
Different forms of Mergers Growth Strategies
There are a whole host of different mergers depending on the relationship between the two companies that
are merging. These are:
Horizontal Merger: Merger of two companies that are in direct competition in the same product categories
and markets.
Vertical Merger: Merger of two companies which are in different stages of the supply chain. This is also
referred to as vertical integration. A company taking over its supplier’s firm or a company taking control of
its distribution by acquiring the business of its distributors or channel partners is examples of this type of
merger.
Market-extension Merger: Merger of two companies that sell the same products in different markets.
Product-extension Merger: Merger of two companies selling different but related products in the same
market.
Conglomeration: Merger of two companies that have no common business areas.
From the finance standpoint, there are three types of mergers: pooling of interests, purchase mergers and
consolidation mergers. Each has certain implications for the companies and investors involved:
Pooling of Interests: A pooling of interests is generally accomplished by a common stock swap at a specified
ratio. This is sometimes called a tax-free merger. Such mergers are only allowed if they meet certain legal
requirements. A pooling of interests is generally accomplished by a common stock swap at a specified ratio.
Pooling of interests is less common than purchase acquisitions.
Purchase Mergers: As the name suggests, this kind of merger occurs when one company purchases another
one. The purchase is made by cash or through the issue of some kind of debt investment, and the sale is
taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit.
Acquired assets can be “written up” to the actual purchase price, and the difference between book value and
purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
Purchase acquisitions involve one company purchasing the common stock or assets of another company. In a
purchase acquisition, one company decides to acquire another, and offers to purchase the acquisition target’s
stock at a given price in cash, securities or both. This offer is called a tender offer because the acquiring
company offers to pay a certain price if the target’s shareholders will surrender or tender their shares of
stock. Typically, this tender offer is higher than the stock’s current price to encourage the shareholders to
tender the stock. The difference between the share price and the tender price is called the acquisition
premium. These premiums can sometimes be quite high.
Consolidation Mergers: In a consolidation, the existing companies are dissolved, a new company is formed
to combine the assets of the combining companies and the stock of the consolidated company is issued to the
shareholders of both companies. The tax terms are the same as those of a purchase merger. The Exxon
merger with Mobil Oil Company is technically a consolidation.
Acquisitions
As stated earlier, an acquisition is only slightly different from a merger. Like mergers, acquisitions are
actions through which companies seek economies of scale, efficiencies, and enhanced market visibility.
Unlike all mergers, all acquisitions involve one firm purchasing another—there is no exchanging of stock or
consolidating as a new company. In an acquisition, a company can buy another company with cash, stock, or
a combination of the two. In smaller deals, it is common for one company to acquire all the assets of another
company. Another type of acquisition is a reverse merger, a deal that enables a private company to get
publicly listed in a relatively short time period. A reverse merger occurs when a private company that has
strong prospects and is eager to raise finance buys a publicly listed shell company, usually one with no
business and limited assets. The private company reverse merges into the public company and together they
become an entirely new public corporation with tradable shares. Regardless of the type of combination, all
mergers and acquisitions have one thing in common: they are all meant to create synergy and the success of a
merger or acquisition hinges on how well this synergy is achieved.
MERGER AND ACQUISITION STRATEGY
There are a number of reasons that mergers and acquisitions take place. These issues generally relate to
business concerns such as competition, efficiency, marketing, product, resource and tax issues. They can also
occur because of some very personal reasons such as retirement and family concerns. Some people are of the
opinion that mergers and acquisitions also occur because of corporate greed to acquire everything. Various
reasons for M&A include:
Reduce Competition: One major reason for companies to combine is to eliminate competition. Acquiring a
competitor is an excellent way to improve a firm’s position in the marketplace. It reduces competition and
allows the acquiring firm to use the target firm’s resources and expertise. However, combining for this
purpose is as such not legal and under the Antitrust Acts it is considered a predatory practice. Therefore,
whenever a merger is proposed, firms make an effort to explain that the merger is not anti-competitive and is
being done solely to better serve the consumer. Even if the merger is not for the stated purpose of eliminating
competition, regulatory agencies may conclude that a merger is anti-competitive. However, there are a
number of acceptable reasons for combining firms.
Cost Efficiency: Due to technology and market conditions, firms may benefit from economies of scale. The
general assumption is that larger firms are more cost effective than are smaller firms. It is, however, not
always cost effective to grow. Inspite of the stated reason that merging will improve cost efficiency, larger
companies are not necessarily more efficient than smaller companies. Further, some large firms exhibit
diseconomies of scale, which means that the average cost per unit increases, as total assets grow too large.
Some industry analysts even suggest that the top management go in for mergers to increase its own prestige.
Certainly, managing a big company is more prestigious than managing a small company.
Avoid Being a Takeover Target: This is another reason that companies merge. If a firm has a large quantity
of liquid assets, it becomes an attractive takeover target because the acquiring firm can use the liquid assets
to expand the business, pay off shareholders, etc. If the targeted firm invests existing funds in a takeover, it
has the effect of discouraging other firms from targeting it because it is now larger in size, and will,
therefore, require a larger tender offer. Thus, the company has found a use for its excess liquid assets, and
made itself more difficult to acquire. Often firms will state that acquiring a company is the best investment
the company can find for its excess cash. This is the reason given for many conglomerate mergers.
Improve Earnings and Reduce Sales Variability: Improving earnings and sales stability can reduce corporate
risk. If a firm has earnings or sales instability, merging with another company may reduce or eliminate this
provided the latter company is more stable. If companies are approximately the same size and have
approximately the same revenues, then by merging, they can eliminate the seasonal instability. This is,
however, not a very inefficient way of eliminating instability in strict economic terms.
Market and Product Line Issues: Often mergers occur simply because one firm is in a market that the other
company wants to enter. All of the target firm’s experience and resources are readily available of immediate
use. This is a very common reason for acquisitions. Whatever may be the explanation offered for acquisition,
the dominant reason for a merger is always quick market entry or expansion. Product line issues also exert
powerful influence in merger decisions. A firm may wish to expand, balance, fill out or diversify its product
lines. For example, acquisition of Modern Foods by Hindustan Lever Limited is primarily related product
line.
Acquire Resources: Firms wish to purchase the resources of other firms or to combine the resources of the
two firms. These may be tangible resources such as plant and equipment, or they may be intangible resources
such as trade secrets, patents, copyrights, leases, management and technical skills of target company’s
employees, etc. This only proves that the reasons for mergers and acquisitions are quite similar to the reasons
for buying any asset: to purchase an asset for its utility. Synergy: Synergy popularly stated, as “two plus two
equals five,” is similar to the concept of economies of scope. Economies of scope would occur if two
companies combine and the combined company was more cost efficient at both activities because each
requires the same resources and competencies. Although synergy is often cited as the reason for
conglomerate mergers, cost efficiencies due to synergy are difficult to document.
Tax Savings: Although tax savings is not a primary motive for a combination, it can certainly “sweeten” the
deal. When a purchase of either the assets or common stock of a company takes place, the tender offer less
the stock’s purchase price represents a gain to the target company’s shareholders. Consequently, the target
firm’s shareholders will usually gain tax benefits. However, the acquiring company may reap tax savings
depending on the market value of the target company’s assets when compared to the purchase price. Also,
depending on the method of corporate combination, further tax savings may accrue to the owners of the
target company.
Cashing Out: For a family-owned business, when the owners wish to retire, or otherwise leave the business
and the next generation is uninterested in the business, the owners may decide to sell to another firm. For
purposes of retirement or cashing out, if the deal is structured correctly, there can be significant tax savings.
To summarize, firms take the M&A route to seize the opportunities for growth, accelerate the growth of the
firm, access capital and brands, gain complementary strengths, acquire new customers, expand into new
product- market domains, widen their portfolios and become a one-stop-shop or end-to end solution provider
of products and services.
REASONS FOR FAILURE OF MERGER AND ACQUISITION
The record of M&As world over has not been impressive. Advocates of M&As argue that they boost
revenues to justify the price premium. The notion of synergy, ‘1+1 = 3’, sounds great, but the assumptions
behind this notion are too simplistic. In real life things are not that simple and rosy. Past trends show that
roughly two thirds of all big mergers have not produced the desired results. Rationale behind mergers can be
flawed and efficiencies from economies of scale may prove elusive. Moreover, the problems associated with
trying to make merged entities work cannot be overcome easily. Reasons supporting the use of
diversification have been explained in the previous section. The potential pitfalls of this strategy are
explained in this section. The conclusion that one may draw from this discussion will be that “successful
diversification would involve a well thought strategy in selecting a target, avoiding over-paying, creating
value in the integration process.”
The potential pitfalls that a firm is likely to encounter during diversification include: Integration Difficulties:
Integrating two companies following mergers and acquisition can be quite difficult. Issues such as melding
two disparate corporate cultures, linking different financial and control systems, building effective financial
and control systems, building effective working relationships, etc., will come to the fore and they have to be
contend with.
Faulty Assumptions: A booming stock market encourages mergers, which can spell danger. Deals done with
highly rated stock as currency appear easy and cheap, but underlying assumptions behind such deals is
seriously flawed. Many top managers try to imitate others in attempting mergers, which can be disastrous for
the company. Mergers are quite often more to do with personal glory than business growth. The executive
ego plays a major in M&A decisions, which is fuelled further by bankers, lawyers and other advisers who
stand to gain from the fat fees they collect from their clients engaged in mergers. Most CEOs and top
executives also get a big bonus for merger deals, no matter what happens to the share price later.
Mergers are also driven by fear psychosis: fear of globalization, rapid technological developments, or a
quickly changing economic scenario that increases uncertainty can all create a strong stimulus for defensive
mergers. Sometimes the management feels that they have no choice but to acquire a raider before being
acquired. The idea is that only big players will survive in a competitive world.
Failure to carry out effective due-diligence: The failure to complete due-diligence often results in the
acquiring firm paying excessive premiums. Due diligence involves a thorough review by the acquirer of a
target company’s internal books and operations. Transactions are often made contingent upon the resolution
of the due diligence process. An effective due-diligence process examines a large number of items in areas as
diverse as those of financing the intended transaction, differences in cultures between the two firms, tax
concessions of the transaction, etc.
Inordinate increase in debt: To finance acquisitions, some companies significantly raise their levels of debt.
This is likely to increase the likelihood of bankruptcy leading to downgrading of firm’s credit rating. Debt
also precludes investment in areas that contribute to a firm’s success such as R&D, human resources
development and marketing.
Too much diversification: The merger route can lead to strategic competitiveness and above-average returns.
On the flip-side, firms may lose their competitive edge due to over diversification. The threshold level at
which this happens varies across companies, the reason being that different companies have different
capabilities and resources that are required to make the mergers work. Crossing these threshold limits can
result in overstretching these capabilities and resources leading to deteriorating performance. Evidence also
suggests that a large size creates efficiencies in various organizational functions when the firm is not too
large. In other words, at some level the costs required to manage the larger firm exceed the benefits of
efficiency created by economies of scale.
Problems in making M&A work: Mergers can distract them from their core business, spelling doom for the
company. The chances for success are further hampered if the corporate cultures of the companies are very
different. When a company is acquired, the decision is typically based on product or market synergies, but
cultural differences are often ignored. It’s a mistake to assume that these issues are easily overcome. A
McKinsey study on mergers concludes that companies often focus too narrowly on cutting costs following
mergers, without paying attention to revenues and profits. The exclusive cost-cutting focus can divert
attention from the day-to-day business and poor customer service. This is the main reason for the failure of
mergers to create value for shareholders.
However, not all mergers fail. Size and global reach can be advantageous and tough managers can often
squeeze greater efficiency out of poorly run acquired companies. The success of mergers, however, depends
on how realistic the managers are and how well they can integrate the two companies without losing sight of
their existing businesses. Though the acquisition strategies do not consistently produce the desired results,
some studies suggest certain decisions and actions that firms may follow which can increase the probability
of success.
The attributes leading to successful acquisition suggested by various studies are that the:

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
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Acquired firm has assets or resources that are complimentary to the acquiring firm’s core business.
Acquisition is friendly.
Acquiring firm selects target firms and conducts negotiation carefully and methodically.
Acquiring firm has adequate cash and favorable debt position.
Merged firms maintains low to moderate debt position.
Acquiring firm has experience with change and is flexible and adaptable.
Acquiring firm maintains sustained and consistent emphasis on R&D and innovation
MERGERS AND ACQUISITIONS: THE INDIAN SCENARIO
M&A activity had a slow take-off in India. Traditionally, Indian promoters have been very reluctant to sell
out their businesses since it was synonymous with failure and was never viewed as a sensible move. This
scenario changed dramatically in the 90s with the Tatas selling TOMCO and Lakme. Suddenly selling out
had become a sensible option. The second major reason for the slow take-off of M&A activity was due to the
fact that even while the companies continued to decline, the banks and financial institutions, normally the
biggest stakeholders in most Indian companies were reluctant to change the managements. Fortunately this
situation has changed for the better. Worried about the spectre burgeoning NPAs, these institutions are now
willing to force the promoters to sell out. The FIs and banks are flushed with funds and they are willing to
assist big companies in acquiring new companies.
Indian cement industry was trendsetter in M&A in India. The cement industry was ripe for consolidation in
many ways. The industry comprised of four or five dominant players in addition to a number of small players
having economically viable capacities, but with very small market shares. Rapid expansion by the bigger
players in a capital-intensive industry meant that these small players would naturally be marginalized.
Moreover, the excess capacity due to rapid expansion of big players meant that the smaller players would
lose money. This situation naturally spurred the merger activity in the cement industry.
The past few years have been record years for M&A globally with mega deals dwarfing the previous records.
M&A has also become a buzzword among Indian companies as well. HDFC-Times Bank, Gujarat AmbujaDLF and ICICI Bank- Centurion Bank mergers have all been in the news recently for this reason. The
merger wave in the country was catalyzed by economic liberalization in 1991. M&A activity is on the rise
and the Indian industry has witnessed a spate of mergers and acquisitions in the past few years. Mergers and
acquisitions are here to stay and more are expected to follow in the near future.
Mergers and acquisitions in India, just as in other parts of the world, are primarily aimed at expanding a
company’s business and profits. Acquisitions bring in more customers and business, which in turn brings in
more money for the companies thus helping in its overall expansion and growth. More and more companies
are, therefore, moving towards acquisitions for a fast-paced growth. Consolidation has become a compelling
necessity to counter the effects of increasing globalization of businesses, declining tariff barriers, price
decontrols and to please the ever demanding and discerning customers. And these pressures are expected to
intensify and relentlessly batter every business in the future. The M&A activity is helping the companies
Re structure, gain market share or access to markets, rationalize costs and acquire brands to counter these
threats. The shareholders of many companies are also supporting these moves and sharp increase in share
prices is an indication of this support.
Since size and focus are factors that matter for surviving the onslaught of competition, mergers and
acquisitions have emerged as key growth drivers of Indian business. Tax benefits were the sole reason to
justify mergers in the past but for many Indian promoters, that is no longer an incentive. Indian companies
have taken to M&A many reasons. Experts feel that Indian companies look at M&As due to the size factor,
the niche factor or for expanding their market reach. They are also of the opinion that acquisitions help in the
inorganic (and quicker) growth of the business of a company. Besides these factors, the pricing pressures and
consolidation of global companies by building offshore capabilities have made M&A relevant for Indian
enterprises.
Many Indian companies have also followed the M&A route to grow in size by adding manpower and to
facilitate overall expansion by moving into new market space. Another reason behind M&A has been to gain
new customers. For instance, v Moksha, an IT firm, saw a rise in the number of its customers due to
acquisitions as it expanded considerably in the US market and leveraged on the existing customer base.
Similarly, Emphasis added new customers in the Japanese and Chinese markets after the acquisition of
Navion. The need for skill enhancement seems to be another major reason for companies to merge and make
new acquisitions. The Polaris-OrbiTech merger helped in combining skill sets of both companies, which
consequently led to growth and expansion of the merged entity. Likewise, Wipro acquired GE Medical
Systems Information Techno-logy (India) to leverage its expertise in the health science domain.
Corporate Parenting and Functional Strategy;
BCG Matrix
Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA.
It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an
organization to examine different businesses in its portfolio on the basis of their related market share and
industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units).
In other words, it is a comparative analysis of business potential and the evaluation of environment.
According to this matrix, business could be classified as high or low according to their industry growth rate
and relative market share.
Relative Market Share = SBU Sales this year leading competitors sales this year.
Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The dimension of business strength,
relative market share, will measure comparative advantage indicated by market dominance. The key theory
underlying this is existence of an experience curve and that market share is achieved due to overall cost
leadership.
BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis
denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s are in
same industry, the average growth rate of the industry is used. While, if all the SBU’s are located in
different industries, then the mid-point is set at the growth rate for the economy.
Resources are allocated to the business units according to their situation on the grid. The four cells of this
matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a
particular type of business.
10 x
1x
0.1 x
Figure: BCG Matrix
1. Stars- Stars represent business units having large market share in a fast growing industry. They may
generate cash but because of fast growing market, stars require huge investments to maintain their
lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a
robust industry and these business units are highly competitive in the industry. If successful, a star
will become a cash cow when the industry matures.
2. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow
growing industry. Cash cows require little investment and generate cash that can be utilized for
investment in other business units. These SBU’s are the corporation’s key source of cash, and are
specifically the core business. They are the base of an organization. These businesses usually follow
stability strategies. When cash cows loose their appeal and move towards deterioration, then a
retrenchment policy may be pursued.
3. Question Marks- Question marks represent business units having low relative market share and
located in a high growth industry. They require huge amount of cash to maintain or gain market
share. They require attention to determine if the venture can be viable. Question marks are generally
new goods and services which have a good commercial prospective. There is no specific strategy
which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion
strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the
company tries to enter a high growth market in which there is already a market-share. If ignored,
then question marks may become dogs, while if huge investment is made, then they have potential of
becoming stars.
4. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither
generate cash nor require huge amount of cash. Due to low market share, these business units face
cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain
market share only at the expense of competitor’s/rival firms. These business firms have weak market
share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other
strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number
of dogs should be avoided and minimized in an organization.
Limitations of BCG Matrix
The BCG Matrix produces a framework for allocating resources among different business units and makes it
possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also.
Thus, the true nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs also involved with high
market share.
4. Growth rate and relative market share are not the only indicators of profitability. This model ignores
and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even
more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.
GE Nine Cell Matrix
In consulting engagements with General Electric in the 1970's, McKinsey & Company developed a nine-cell
portfolio matrix as a tool for screening GE's large portfolio of strategic business units (SBU). This business
screen became known as the GE/McKinsey Matrix and is shown below:
GE / McKinsey Matrix
Business Unit Strength
High
Medium
Low
High
Industry
Medium
Attractiveness
Low
The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units
on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to
improve upon the BCG matrix in the following two ways:
· The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength”
whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and
relative market share as a proxy for the strength of the business unit.
· The GE matrix has nine cells vs. four cells in the BCG matrix.
Industry attractiveness and business unit strength are calculated by first identifying criteria for each,
determining the value of each parameter in the criteria, and multiplying that value by a weighting factor.
The result is a quantitative measure of industry attractiveness and the business unit's relative performance in
that industry.
Industry Attractiveness
The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors
such as the following:
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Market growth rate
Market size
Demand variability
Industry profitability
Industry rivalry
Global opportunities
Macro environmental factors (PEST)
Each factor is assigned a weighting that is appropriate for the industry. The industry attractiveness then is
calculated as follows:
Industry attractiveness
=
factor value1 x factor weighting1
+ factor value2 x factor weighting2
.
.
.
+ factor value N x factor weighting N
Business Unit Strength
The horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can
be used to determine business unit strength include:
 Market share
 Growth in market share
 Brand equity
 Distribution channel access
 Production capacity
 Profit margins relative to competitors
The business unit strength index can be calculated by multiplying the estimated value of each factor by the
factor's weighting, as done for industry attractiveness.
Plotting the Information
Each business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as
follows:
 Market size is represented by the size of the circle.
 Market share is shown by using the circle as a pie chart.
 The expected future position of the circle is portrayed by means of an arrow.
The following is an example of such a representation:
The shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in
the upward left direction indicates that the business unit is projected to gain strength relative to competitors,
and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow
indicates the future position of the center point of the circle.
Strategic Implications
Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based
on its position on the matrix as follows:
· Grow strong business units in attractive industries, average business units in attractive industries, and
strong business units in average industries.
· Hold average businesses in average industries, strong businesses in weak industries, and weak business in
attractive industries.
· Harvest weak business units in unattractive industries, average business units in unattractive industries,
and weak business units in average industries.
There are strategy variations within these three groups. For example, within the harvest group the firm
would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might
perform a phased harvest of an average business unit in the same industry.
While the GE business screen represents an improvement over the simpler BCG growth-share matrix, it still
presents a somewhat limited view by not considering interactions among the business units and by
neglecting to address the core competencies leading to value creation. Rather than serving as the primary
tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the
strategic business units.
Porter's Five Forces: A MODEL FOR INDUSTRY ANALYSIS
The model of pure competition implies that risk-adjusted rates of return should be constant across firms and
industries. However, numerous economic studies have affirmed that different industries can sustain different
levels of profitability; part of this difference is explained by industry structure.
Michael Porter provided a framework that models an industry as being influenced by five forces. The
strategic business manager seeking to develop an edge over rival firms can use this model to better
understand the industry context in which the firm operates.
I. Rivalry
In the traditional economic model, competition among rival firms drives profits to zero. But competition is
not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive
advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic
analysts are interested in these differences.
Economists measure rivalry by indicators of industry concentration. The Concentration Ratio (CR) is one
such measure. The Bureau of Census periodically reports the CR for major Standard Industrial
Classifications (SIC's). The CR indicates the percent of market share held by the four largest firms (CR's for
the largest 8, 25, and 50 firms in an industry also are available). A high concentration ratio indicates that a
high concentration of market share is held by the largest firms - the industry is concentrated. With only a
few firms holding a large market share, the competitive landscape is less competitive (closer to a
monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of
which has a significant market share. These fragmented markets are said to be competitive. The
concentration ratio is not the only available measure; the trend is to define industries in terms that convey
more information than distribution of market share.
If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may
result from the industry's history of competition, the role of a leading firm, or informal compliance with a
generally understood code of conduct. Explicit collusion generally is illegal and not an option; in lowrivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a
competitive advantage can displace the otherwise disciplined market.
When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of
rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms'
aggressiveness in attempting to gain an advantage.
In pursuing an advantage over its rivals, a firm can choose from several competitive moves:
· Changing prices - raising or lowering prices to gain a temporary advantage.
· Improving product differentiation - improving features, implementing innovations in the
manufacturing process and in the product itself.
· Creatively using channels of distribution - using vertical integration or using a distribution channel
that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches,
Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price
watch market.
· Exploiting relationships with suppliers - for example, from the 1950's to the 1970's Sears, Roebuck
and Co. dominated the retail household appliance market. Sears set high quality standards and
required suppliers to meet its demands for product specifications and price.
The intensity of rivalry is influenced by the following industry characteristics:
1. A larger number of firms increase rivalry because more firms must compete for the same
customers and resources. The rivalry intensifies if the firms have similar market share, leading to a
struggle for market leadership.
2. Slow market growth causes firms to fight for market share. In a growing market, firms are able
to improve revenues simply because of the expanding market.
3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are
mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm
must sell this large quantity of product, high levels of production lead to a fight for market share and
results in increased rivalry.
4. High storage costs or highly perishable products cause a producer to sell goods as soon as
possible. If other producers are attempting to unload at the same time, competition for customers
intensifies.
5.
Low switching costs increases rivalry. When a customer can freely switch from one product to
another there is a greater struggle to capture customers.
6.
Low levels of product differentiation is associated with higher levels of rivalry. Brand
identification, on the other hand, tends to constrain rivalry.
7. Strategic stakes are high when a firm is losing market position or has potential for great gains.
This intensifies rivalry.
8. High exit barriers place a high cost on abandoning the product. The firm must compete. High
exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A
common exit barrier is asset specificity. When the plant and equipment required for manufacturing a
product is highly specialized, these assets cannot easily be sold to other buyers in another industry.
Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was
successful in the 1960's with its contracts to build Navy ships. But when the Vietnam war ended,
defense spending declined and Litton saw a sudden decline in its earnings. As the firm restructured,
divesting from the shipbuilding plant was not feasible since such a large and highly specialized
investment could not be sold easily, and Litton was forced to stay in a declining shipbuilding market.
9. A diversity of rivals with different cultures, histories, and philosophies make an industry
unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is
volatile and can be intense. The hospital industry, for example, is populated by hospitals that
historically are community or charitable institutions, by hospitals that are associated with religious
organizations or universities, and by hospitals that are for-profit enterprises. This mix of
philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will
get expensive diagnostic and therapeutic services. At other times, local hospitals are highly
cooperative with one another on issues such as community disaster planning.
10. Industry Shakeout. A growing market and the potential for high profits induces new firms to
enter a market and incumbent firms to increase production. A point is reached where the industry
becomes crowded with competitors, and demand cannot support the new entrants and the resulting
increased supply. The industry may become crowded if its growth rate slows and the market
becomes saturated, creating a situation of excess capacity with too many goods chasing too few
buyers. A shakeout ensues, with intense competition, price wars, and company failures.
BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable
market will not have more than three significant competitors, and the largest competitor will have no
more than four times the market share of the smallest. If this rule is true, it implies that:
o
o
o
o
o
If there is a larger number of competitors, a shakeout is inevitable
Surviving rivals will have to grow faster than the market
Eventual losers will have a negative cash flow if they attempt to grow
All except the two largest rivals will be losers
The definition of what constitutes the "market" is strategically important.
Whatever the merits of this rule for stable markets, it is clear that market stability and changes in
supply and demand affect rivalry. Cyclical demand tends to create cutthroat competition. This is true
in the disposable diaper industry in which demand fluctuates with birth rates, and in the greeting
card industry in which there are more predictable business cycles.
II. Threat of Substitutes
In Porter's model, substitute products refer to products in other industries. To the economist, a threat of
substitutes exists when a product's demand is affected by the price change of a substitute product. A
product's price elasticity is affected by substitute products - as more substitutes become available, the
demand becomes more elastic since customers have more alternatives. A close substitute product constrains
the ability of firms in an industry to raise prices.
The competition engendered by a Threat of Substitute comes from products outside the industry. The price
of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers.
These containers are substitutes, yet they are not rivals in the aluminum can industry. To the manufacturer
of automobile tires, tire retreads are a substitute. Today, new tires are not so expensive that car owners give
much consideration to retreading old tires. But in the trucking industry new tires are expensive and tires
must be replaced often. In the truck tire market, retreading remains a viable substitute industry. In the
disposable diaper industry, cloth diapers are a substitute and their prices constrain the price of disposables.
While the threat of substitutes typically impacts an industry through price competition, there can be other
concerns in assessing the threat of substitutes. Consider the substitutability of different types of TV
transmission: local station transmission to home TV antennas via the airways versus transmission via cable,
satellite, and telephone lines. The new technologies available and the changing structure of the
entertainment media are contributing to competition among these substitute means of connecting the home
to entertainment. Except in remote areas it is unlikely that cable TV could compete with free TV from an
aerial without the greater diversity of entertainment that it affords the customer.
III. Buyers' Bargaining Power
The power of buyers is the impact that customers have on a producing industry. In general, when buyer
power is strong, the relationship to the producing industry is near to what an economist terms monopsony a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the
price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing
industry and buyers. The following tables outline some factors that determine buyer power.
Buyers are Powerful if:
Example
Buyers are concentrated - there are a few buyers
with significant market share
DOD purchases from defense contractors
Buyers purchase a significant proportion of output distribution of purchases or if the product is
standardized
Circuit City and Sears' large retail market provides
power over appliance manufacturers
Buyers possess a credible backward integration
threat - can threaten to buy producing firm or rival
Large auto manufacturers' purchases of tires
Buyers are Weak if:
Example
Producers threaten forward integration - producer
can take over own distribution/retailing
Movie-producing companies have integrated forward
to acquire theaters
Significant buyer switching costs - products not
standardized and buyer cannot easily switch to
another product
IBM's 360 system strategy in the 1960's
Buyers are fragmented (many, different) - no buyer
has any particular influence on product or price
Most consumer products
Producers supply critical portions of buyers' input distribution of purchases
Intel's relationship with PC manufacturers
IV. Suppliers' Bargaining Power
A producing industry requires raw materials - labor, components, and other supplies.
This requirement leads to buyer-supplier relationships between the industry and the
firms that provide it the raw materials used to create products. Suppliers, if powerful,
can exert an influence on the producing industry, such as selling raw materials at a
high price to capture some of the industry's profits. The following tables outline some
factors that determine supplier power.
Suppliers are Powerful if:
Example
Credible forward integration threat by suppliers
Baxter International, manufacturer of hospital
supplies, acquired American Hospital Supply, a
distributor
Suppliers concentrated
Drug industry's relationship to hospitals
Significant cost to switch suppliers
Microsoft's relationship with PC manufacturers
Customers Powerful
Boycott of grocery stores selling non-union picked
grapes
Suppliers are Weak if:
Example
Many competitive suppliers - product is standardized
Tire industry relationship to automobile
manufacturers
Purchase commodity products
Grocery store brand label products
Credible backward integration threat by purchasers
Timber producers relationship to paper companies
Concentrated purchasers
Garment industry relationship to major department
stores
Customers Weak
Travel agents' relationship to airlines
V. Barriers to Entry / Threat of Entry
It is not only incumbent rivals that pose a threat to firms in an industry; the possibility
that new firms may enter the industry also affects competition. In theory, any firm
should be able to enter and exit a market, and if free entry and exit exists, then profits
always should be nominal. In reality, however, industries possess characteristics that
protect the high profit levels of firms in the market and inhibit additional rivals from
entering the market. These are barriers to entry.
Barriers to entry are more than the normal equilibrium adjustments that markets
typically make. For example, when industry profits increase, we would expect
additional firms to enter the market to take advantage of the high profit levels, over time
driving down profits for all firms in the industry. When profits decrease, we would
expect some firms to exit the market thus restoring a market equilibrium. Falling prices,
or the expectation that future prices will fall, deters rivals from entering a market. Firms
also may be reluctant to enter markets that are extremely uncertain, especially if
entering involves expensive start-up costs. These are normal accommodations to
market conditions. But if firms individually (collective action would be illegal collusion)
keep prices artificially low as a strategy to prevent potential entrants from entering the
market, such entry-deterring pricing establishes a barrier.
Barriers to entry are unique industry characteristics that define the industry. Barriers
reduce the rate of entry of new firms, thus maintaining a level of profits for those
already in the industry. From a strategic perspective, barriers can be created or
exploited to enhance a firm's competitive advantage. Barriers to entry arise from
several sources:
1.
Government creates barriers. Although the principal role of the government
in a market is to preserve competition through anti-trust actions, government also
restricts competition through the granting of monopolies and through regulation.
Industries such as utilities are considered natural monopolies because it has
been more efficient to have one electric company provide power to a locality than
to permit many electric companies to compete in a local market. To restrain
utilities from exploiting this advantage, government permits a monopoly, but
regulates the industry. Illustrative of this kind of barrier to entry is the local cable
company. The franchise to a cable provider may be granted by competitive
bidding, but once the franchise is awarded by a community a monopoly is
created. Local governments were not effective in monitoring price gouging by
cable operators, so the federal government has enacted legislation to review and
restrict prices.
The regulatory authority of the government in restricting competition is historically
evident in the banking industry. Until the 1970's, the markets that banks could
enter were limited by state governments. As a result, most banks were local
commercial and retail banking facilities. Banks competed through strategies that
emphasized simple marketing devices such as awarding toasters to new
customers for opening a checking account. When banks were deregulated,
banks were permitted to cross state boundaries and expand their markets.
Deregulation of banks intensified rivalry and created uncertainty for banks as
they attempted to maintain market share. In the late 1970's, the strategy of banks
shifted from simple marketing tactics to mergers and geographic expansion as
rivals attempted to expand markets.
2.
Patents and proprietary knowledge serve to restrict entry into an
industry. Ideas and knowledge that provide competitive advantages are treated
as private property when patented, preventing others from using the knowledge
and thus creating a barrier to entry. Edwin Land introduced the Polaroid camera
in 1947 and held a monopoly in the instant photography industry. In 1975, Kodak
attempted to enter the instant camera market and sold a comparable camera.
Polaroid sued for patent infringement and won, keeping Kodak out of the instant
camera industry.
3.
Asset specificity inhibits entry into an industry. Asset specificity is the extent
to which the firm's assets can be utilized to produce a different product. When an
industry requires highly specialized technology or plants and equipment, potential
entrants are reluctant to commit to acquiring specialized assets that cannot be
sold or converted into other uses if the venture fails. Asset specificity provides a
barrier to entry for two reasons: First, when firms already hold specialized assets
they fiercely resist efforts by others from taking their market share. New entrants
can anticipate aggressive rivalry. For example, Kodak had much capital invested
in its photographic equipment business and aggressively resisted efforts by Fuji
to intrude in its market. These assets are both large and industry specific. The
second reason is that potential entrants are reluctant to make investments in
highly specialized assets.
4.
Organizational (Internal) Economies of Scale. The most cost efficient level
of production is termed Minimum Efficient Scale (MES). This is the point at which
unit costs for production are at minimum - i.e., the most cost efficient level of
production. If MES for firms in an industry is known, then we can determine the
amount of market share necessary for low cost entry or cost parity with rivals. For
example, in long distance communications roughly 10% of the market is
necessary for MES. If sales for a long distance operator fail to reach 10% of the
market, the firm is not competitive.
The existence of such an economy of scale creates a barrier to entry. The
greater the difference between industry MES and entry unit costs, the greater the
barrier to entry. So industries with high MES deter entry of small, start-up
businesses. To operate at less than MES there must be a consideration that
permits the firm to sell at a premium price - such as product differentiation or
local monopoly.
Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a firm to
leave the market and can exacerbate rivalry - unable to leave the industry, a firm must
compete. Some of an industry's entry and exit barriers can be summarized as follows:
Easy to Enter if there is:
Difficult to Enter if there is:
·
Common technology
·
Patented or proprietary know-how
·
Little brand franchise
·
Difficulty in brand switching
·
Access to distribution channels
·
Restricted distribution channels
·
Low scale threshold
·
High scale threshold
Easy to Exit if there are:
Difficult to Exit if there are:
·
Salable assets
·
Specialized assets
·
Low exit costs
·
High exit costs
·
Independent businesses
·
Interrelated businesses
GENERIC STRATEGIES TO COUNTER THE FIVE FORCES
Strategy can be formulated on three levels:



corporate level
business unit level
functional or departmental level.
The business unit level is the primary context of industry rivalry. Michael Porter
identified three generic strategies (cost leadership, differentiation, and focus) that can be
implemented at the business unit level to create a competitive advantage. The proper
generic strategy will position the firm to leverage its strengths and defend against the
adverse effects of the five forces.
Porter's Diamond Model
The Diamond as a System




The points on the diamond constitute a system and are self-reinforcing.
Domestic rivalry for final goods stimulates the emergence of an industry that
provides specialized intermediate goods. Keen domestic competition leads to
more sophisticated consumers who come to expect upgrading and innovation.
The diamond promotes clustering.
Porter provides a somewhat detailed example to illustrate the system. The
example is the ceramic tile industry in Italy.
Porter emphasizes the role of chance in the model. Random events can either
benefit or harm a firm’s competitive position. These can be anything like major
technological breakthroughs or inventions, acts of war and destruction, or
dramatic shifts in exchange rates.
1. When there is a large industry presence in an area, it will increase the supply of
specific factors (ie: workers with industry-specific training) since they will tend to
get higher returns and less risk of losing employment.
2. At the same time, upstream firms (ie: those who supply intermediate inputs) will
invest in the area. They will also wish to save on transport costs, tariffs, inter-firm
communication costs, inventories, etc.
3. At the same time, downstream firms (ie: those use our industry’s product as an
input) will also invest in the area. This causes additional savings of the type listed
before.
4. Finally, attracted by the good set of specific factors, upstream and downstream
firms, producers in related industries (ie: those who use similar inputs or whose
goods are purchased by the same set of customers) will also invest. This will
trigger subsequent rounds of investment.
The Diamond - Four Determinants of National Competitive Advantage
1. Factor Conditions



Factor conditions refers to inputs used as factors of production - such as labour,
land, natural resources, capital and infrastructure. This sounds similar to
standard economic theory, but Porter argues that the "key" factors of production
(or specialized factors) are created, not inherited. Specialized factors of
production are skilled labour, capital and infrastructure.
"Non-key" factors or general use factors, such as unskilled labour and raw
materials, can be obtained by any company and, hence, do not generate
sustained competitive advantage. However, specialized factors involve heavy,
sustained investment. They are more difficult to duplicate. This leads to a
competitive advantage, because if other firms cannot easily duplicate these
factors, they are valuable.
Porter argues that a lack of resources often actually helps countries to become
competitive (call it selected factor disadvantage). Abundance generates waste
and scarcity generates an innovative mindset. Such countries are forced to
innovate to overcome their problem of scarce resources. How true is this?
1. Switzerland was the first country to experience labour shortages. They
abandoned labour-intensive watches and concentrated on innovative/highend watches.
2. Japan has high priced land and so its factory space is at a premium. This
lead to just-in-time inventory techniques (Japanese firms can’t have a lot of
stock taking up space, so to cope with the potential of not have goods
around when they need it, they innovated traditional inventory techniques).
3. Sweden has a short building season and high construction costs. These
two things combined created a need for pre-fabricated houses.
b. Demand Conditions

Porter argues that a sophisticated domestic market is an important element to
producing competitiveness. Firms that face a sophisticated domestic market are


likely to sell superior products because the market demands high quality and a
close proximity to such consumers enables the firm to better understand the
needs and desires of the customers
If the nation’s discriminating values spread to other countries, then the local firms
will be competitive in the global market.
One example is the French wine industry. The French are sophisticated wine
consumers. These consumers force and help French wineries to produce high
quality wines.
c. Related and Supporting Industries


Porter also argues that a set of strong related and supporting industries is
important to the competitiveness of firms. This includes suppliers and related
industries. This usually occurs at a regional level as opposed to a national level.
Examples include Silicon valley in the U.S., Detroit (for the auto industry) and
Italy (leather-shoes-other leather goods industry).
The phenomenon of competitors (and upstream and/or downstream industries)
locating in the same area is known as clustering or agglomeration. What are the
advantages and disadvantages of locating within a cluster? Some advantages to
locating close to your rivals may be
1. potential technology knowledge spillovers,
2. an association of a region on the part of consumers with a product and
high quality and therefore some market power, or
3. an association of a region on the part of applicable labour force.

Some disadvantages to locating close to your rivals are
1. potential poaching of your employees by rival companies and
2. obvious increase in competition possibly decreasing mark-ups.
d. Firm Strategy, Structure and Rivalry
1. Strategy
(a) Capital Markets
o
Domestic capital markets affect the strategy of firms. Some countries’
capital markets have a long-run outlook, while others have a short-run
outlook. Industries vary in how long the long-run is. Countries with a shortrun outlook (like the U.S.) will tend to be more competitive in industries
where investment is short-term (like the computer industry). Countries with
a long run outlook (like Switzerland) will tend to be more competitive in
industries where investment is long term (like the pharmaceutical industry).
(b) Individuals’ Career Choices
o
Individuals base their career decisions on opportunities and prestige. A
country will be competitive in an industry whose key personnel hold
positions that are considered prestigious.
Structure


Porter argues that the best management styles vary among industries. Some
countries may be oriented toward a particular style of management. Those
countries will tend to be more competitive in industries for which that style of
management is suited.
For example, Germany tends to have hierarchical management structures
composed of managers with strong technical backgrounds and Italy has smaller,
family-run firms.
Rivalry


Porter argues that intense competition spurs innovation. Competition is
particularly fierce in Japan, where many companies compete vigorously in most
industries.
International competition is not as intense and motivating. With international
competition, there are enough differences between companies and their
environments to provide handy excuses to managers who were outperformed by
their competitors.
Implications for Governments


The government plays an important role in Porter’s diamond model. Like
everybody else, Porter argues that there are some things that governments do
that they shouldn't, and other things that they do not do but should. He says,
"Government’s proper role is as a catalyst and challenger; it is to encourage - or
even push - companies to raise their aspirations and move to higher levels of
competitive performance …"
Governments can influence all four of Porter’s determinants through a variety of
actions such as
1. Subsidies to firms, either directly (money) or indirectly (through
infrastructure).
2. Tax codes applicable to corporation, business or property ownership.
3. Educational policies that affect the skill level of workers.
4. They should focus on specialized factor creation. (How can they do this?)
5. They should enforce tough standards. (This prescription may seem
counterintuitive. What is his rationale? Maybe to establish high technical
and product standards including environmental regulations.)

The problem, of course, is through these actions, it becomes clear which
industries they are choosing to help innovate. What methods do they use to
choose? What happens if they pick the wrong industries?
Criticisms
Although Porter theory is renowned, it has a number of critics.
1. Porter developed this paper based on case studies and these tend to only apply
to developed economies.
2. Porter argues that only outward-FDI is valuable in creating competitive
advantage, and inbound-FDI does not increase domestic competition significantly
because the domestic firms lack the capability to defend their own markets and
face a process of market-share erosion and decline. However, there seems to be
little empirical evidence to support that claim.
3. The Porter model does not adequately address the role of MNCs. There seems
to be ample evidence that the diamond is influenced by factors outside the home
country.
Strategic Choice
Managers can formulate and choose appropriate organizational strategies only when they have a clear
understanding of where the company wants to go, where the organization is actually going, and what the
environment in which the organization operates is and is likely to be.
Corporate Strategies

Growth Strategy
ØSeeking to increase the organization’s business by expansion into new products and markets.

Types of Growth Strategies
ØConcentration
ØVertical integration
ØHorizontal integration
ØDiversification
ØConcentration
ØFocusing on a primary line of business and increasing the number of products offered or markets served.
ØVertical Integration
ØBackward vertical integration: attempting to gain control of inputs (become a self-supplier).
ØForward vertical integration: attempting to gain control of output through control of the distribution
channel or provide customer service activities (eliminating intermediaries).

Horizontal Integration
ØCombining operations with another competitor in the same industry to increase competitive strengths and
lower competition among industry rivals.

Related Diversification
ØExpanding by combining with firms in different, but related industries that are “strategic fits.”

Unrelated Diversification
ØGrowing by combining with firms in unrelated industries where higher financial returns are possible.

Stability Strategy
ØA strategy that seeks to maintain the status quo to deal with the uncertainty of a dynamic environment,
when the industry is experiencing slow- or no-growth conditions, or if the owners of the firm elect not to
grow for personal reasons.
ØRenewal Strategies
ØDeveloping strategies to counter organization weaknesses that are leading to performance declines.
ØRetrenchment: focusing of eliminating non-critical weaknesses and restoring strengths to overcome
current performance problems.
ØTurnaround: addressing critical long-term performance problems through the use of strong cost
elimination measures and large-scale organizational restructuring solutions.
Ansoff Matrix
The famous management expert, Igor Ansoff provided a roadmap for firms to grow depending on
whether they are launching new products or entering new markets or a combination of these options.
This roadmap has been presented in the form of a Matrix that has four quadrants with the axes of products
and markets being the determinants of the strategies.
As can be seen from the figure accompanying this section, the combinations of the two axes provide the
firms with options that they can pursue in search of market share.
The four quadrants (which are described in detail subsequently) pertain to increasing market share through
market penetration, venturing into new markets with the existing products or market development, and
launching new products in existing markets with product development, and finally, diversification when
firms seek to enter new markets with new products.
Market Penetration
As can be seen from the figure above, market penetration happens when the existing products are marketed
in a way to increase the market share of the firm. This is a minimal risk strategy as all that a firm has to do is
to increase its marketing efforts and improve on its market share. In other words, the firm has to ensure that
it leverages the current capabilities, resources, and gears towards a growth-oriented strategy. However,
market penetration has its limitations and this manifest when the market is saturated and hence, growth
diminishes for the products. Examples of market penetration would include the Television Channels and
Media Houses trying to maintain their existing features in the existing markets and ensuring that they grow
because of the growth in the size of the market or because they have provided a value proposition that is
better than their competitors are.
Market Development
When firms seek to expand into new markets with their existing products, market development happens.
This is suitable for firms that have the capabilities and the resources to enter new markets in pursuit of
growth. Further, the firm’s core competencies must be aligned with the products rather than the markets and
wherein the firm senses an opportunity in the new markets for its existing products. Market development is
more risky than market penetration as the firm is entering uncharted waters and therefore, it is in the
interests of the firms to do their due diligence before entering new markets. Examples of market
development would be the mobile telephony companies like Vodafone and Nokia entering African markets
where these markets are yet to be tapped and where these firms can leverage their existing expertise to enter
these markets.
Product Development
When firms seek to launch new products in existing markets, product development happens. This strategy
can be successful when the firms have already established themselves in the existing markets and all that
they need to do is to launch new products, which leverage the brand image and the brand value and meet the
expectations of the customers in the existing markets. For instance, whenever consumer giants like Unilever
and Proctor and Gamble (P&G) launch new products in existing markets, they have the advantage of a
strong brand value and top of the mind recall among the customers about them, which would help them to
garner market share. When compared to the previous two strategies, this strategy is more risky as it is not
sure whether the transfer of customers from the existing products to the new products would happen as
seamlessly as the firms strategists believe.
Diversification
When firms launch new products in new markets, diversification happens which entails both new products
to be developed and new markets to be tapped. This is the most risky of the four quadrant strategies in the
Ansoff Matrix as essentially the firms are not only testing the waters in uncharted territory but they are also
launching new products that may or may not be well received by the customers. Indeed, diversification is a
high-risk strategy and is only justified when there are chances of high returns for the firms. Examples of
diversification would include companies like Reliance venturing into mobile telephony and retail segments
where they not only have to move away from their core competencies but also have to launch new products
targeted at the new customer segment. Management experts recommend diversification only when the firms
are sitting on enough cash and other resources, as the firms need to have deep pockets to stay the course
until the time profits are realized. Further, they also recommend firms with existing customer loyalty and
customer base as the cross migration from one segment to the other happens only when the customers are
assured of receiving value for their money. For instance, the TATA group in India is perceived as delivering
good value and this helped them to garner market share when they diversified into new markets and new
products.
Conclusion
As can be seen from the preceding discussion, it is imperative for firms to grow as otherwise their resources
would not generate the returns needed for the firms to make profits as well as deliver value to their
shareholders. Moreover, firms need to continually look for ways and means to increase their market share,
which would help them create value for their stakeholders. This is the reason why the Ansoff Matrix has
become so popular because it charts the strategies that the firms must follow in each option, which again is a
combination of the firms’ current capabilities, and the possibility of new market led growth. In conclusion,
the Ansoff Matrix is very relevant in these recessionary times as it can be applied by any firm wishing to
either expand into newer markets or leverage its existing capabilities.
Unit-5
Strategy Implementation - Meaning and Steps in Implementing a Strategy
Strategy implementation is the translation of chosen strategy into organizational action so as to
achieve strategic goals and objectives. Strategy implementation is also defined as the manner in which an
organization should develop, utilize, and amalgamate organizational structure, control systems, and culture
to follow strategies that lead to competitive advantage and a better performance. Organizational structure
allocates special value developing tasks and roles to the employees and states how these tasks and roles can
be correlated so as maximize efficiency, quality, and customer satisfaction-the pillars of competitive
advantage. But, organizational structure is not sufficient in itself to motivate the employees.
An organizational control system is also required. This control system equips managers with motivational
incentives for employees as well as feedback on employees and organizational performance. Organizational
culture refers to the specialized collection of values, attitudes, norms and beliefs shared by organizational
members and groups.
Following are the main steps in implementing a strategy:
Developing an organization having potential of carrying out strategy successfully.
Disbursement of abundant resources to strategy-essential activities.
Creating strategy-encouraging policies.
Employing best policies and programs for constant improvement.
Linking reward structure to accomplishment of results.
Making use of strategic leadership.
Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential to note
that strategy implementation is not possible unless there is stability between strategy and each
organizational dimension such as organizational structure, reward structure, resource-allocation process, etc.
Strategy implementation poses a threat to many managers and employees in an organization. New power
relationships are predicted and achieved. New groups (formal as well as informal) are formed whose values,
attitudes, beliefs and concerns may not be known. With the change in power and status roles, the managers
and employees may employ confrontation behavior.
Strategy Formulation vs. Strategy Implementation
Following are the main differences between Strategy Formulation and Strategy ImplementationStrategy Formulation
Strategy Implementation
Strategy Formulation includes planning and
decision-making involved in developing
organization’s strategic goals and plans.
Strategy Implementation involves all those means
related to executing the strategic plans.
In short, Strategy Formulation is placing the Forces
before the action.
In short, Strategy Implementation is managing
forces during the action.
Strategy Formulation is an Entrepreneurial
Activity based on strategic decision-making.
Strategic Implementation is mainly an
Administrative Task based on strategic and
operational decisions.
Strategy Formulation emphasizes on effectiveness.
Strategy Implementation emphasizes on efficiency.
Strategy Formulation is a rational process.
Strategy Implementation is basically an operational
process.
Strategy Formulation requires co-ordination among
few individuals.
Strategy Implementation requires co-ordination
among many individuals.
Strategy Formulation requires a great deal of
initiative and logical skills.
Strategy Implementation requires specific
motivational and leadership traits.
Strategic Formulation precedes Strategy
Implementation.
STrategy Implementation follows Strategy
Formulation.
Strategy Evaluation Process and its Significance
Strategy Evaluation is as significant as strategy formulation because it throws light on the efficiency and
effectiveness of the comprehensive plans in achieving the desired results. The managers can also assess the
appropriateness of the current strategy in todays dynamic world with socio-economic, political and
technological innovations. Strategic Evaluation is the final phase of strategic management.
The significance of strategy evaluation lies in its capacity to co-ordinate the task performed by
managers, groups, departments etc, through control of performance. Strategic Evaluation is significant
because of various factors such as - developing inputs for new strategic planning, the urge for feedback,
appraisal and reward, development of the strategic management process, judging the validity of strategic
choice etc.
The process of Strategy Evaluation consists of following steps1. Fixing benchmark of performance - While fixing the benchmark, strategists encounter questions
such as - what benchmarks to set, how to set them and how to express them. In order to determine
the benchmark performance to be set, it is essential to discover the special requirements for
performing the main task. The performance indicator that best identify and express the special
requirements might then be determined to be used for evaluation. The organization can use both
quantitative and qualitative criteria for comprehensive assessment of performance. Quantitative
criteria include determination of net profit, ROI, earning per share, cost of production, rate of
employee turnover etc. Among the Qualitative factors are subjective evaluation of factors such as skills and competencies, risk taking potential, flexibility etc.
2. Measurement of performance - The standard performance is a bench mark with which the actual
performance is to be compared. The reporting and communication system help in measuring the
performance. If appropriate means are available for measuring the performance and if the standards
are set in the right manner, strategy evaluation becomes easier. But various factors such as managers
contribution are difficult to measure. Similarly divisional performance is sometimes difficult to
measure as compared to individual performance. Thus, variable objectives must be created against
which measurement of performance can be done. The measurement must be done at right time else
evaluation will not meet its purpose. For measuring the performance, financial statements like balance sheet, profit and loss account must be prepared on an annual basis.
3. Analyzing Variance - While measuring the actual performance and comparing it with standard
performance there may be variances which must be analyzed. The strategists must mention the
degree of tolerance limits between which the variance between actual and standard performance may
be accepted. The positive deviation indicates a better performance but it is quite unusual exceeding
the target always. The negative deviation is an issue of concern because it indicates a shortfall in
performance. Thus in this case the strategists must discover the causes of deviation and must take
corrective action to overcome it.
4. Taking Corrective Action - Once the deviation in performance is identified, it is essential to plan
for a corrective action. If the performance is consistently less than the desired performance, the
strategists must carry a detailed analysis of the factors responsible for such performance. If the
strategists discover that the organizational potential does not match with the performance
requirements, then the standards must be lowered. Another rare and drastic corrective action is
reformulating the strategy which requires going back to the process of strategic management,
reframing of plans according to new resource allocation trend and consequent means going to the
beginning point of strategic management process.
Strategic Implementation
Strategy implementation Approaches



· Commander approach
· Organizational change approach
· Collaborative approach


· Cultural approach
· Crescive approach
Commander approach
· Manager determines “best” strategy
· Manager uses power to see strategy implemented
Three conditions must be met
· Manager must have power
· Accurate and timely information is available
· No personal biases should be present
Limitations
· Can reduce employee motivation and innovation
Advantages
· Managers focus on strategy formulation
· Works well for younger managers
· Focuses on objective rather than subjective
Commander approach – the manager will determine the “best” strategy either alone
or with the help of a group of experts. Once the desired strategy is formulated, the
manager passes it along to subordinates who are instructed to execute the strategy. In
this scenario, the manager does not take an active role in implementing the strategy,
but rather uses explicit or implied power to see that the strategy is implemented. There
are three conditions that must be met in order for the new strategy to be implemented.
First, the manager must have enough power to command the implementation of the
strategy. It should be recognized that implementation under this approach is resisted if
the new strategy threatens the position of employees. Second, accurate and timely
information regarding the strategy must be available, and the environment in which the
company operates should be reasonably stable. If the environment is changing so that
information becomes dated before it can be assimilated, effective implementation
under the approach is unlikely. Finally, the manager formulating the strategy should be
insulated from personal biases and political influences that might affect the outcome of
the strategy.
One drawback to this approach is that it can reduce employee motivation and
employees who feel that they have no say in strategy formulation are unlikely to be
very innovative. However the approach can work in smaller companies within stable
industries.
Advocates of this approach say that managers who utilize it can gain a valuable
perspective from the company and the approach allows these managers to focus their
energies on strategy formulation. Second, young managers in particular seem to prefer
this approach since it allows them to focus on the quantitative, objective aspects of a
situation rather than on the qualitative, subjective elements of behavioral interactions.
Many young managers are better trained to deal with the objective rather than the
subjective. Finally, such an approach may make some ambitious managers feel
powerful in that their thinking and decision making affects the activities of the workforce
(people).
Organizational change approach
· Focuses on the organization
· Behavioral tools are used
· Includes focusing on the organization’s staffing and structure
· Often more effective than Commander
· Used to implement difficult strategies
Limitations
· Managers don’t stay informed of changes occuring within the environment
· Doesn’t take politics and personal agendas into account
· Imposes strategies in a “top-down” format
· Can backfire in rapidly changing industries
The Organizational Change approach focuses on how to get an organization to
implement a strategy. Managers who implement this approach assume that a good
strategy has been formulated and view their task as getting the company moving
toward new goals. The tools used to accomplish this approach are largely behavioral
and include such things as changing the organizational structure and staffing to focus
attention on the organization’s new priorities, revising planning and control systems,
and invoking other orgainzational change techniques. Because these behavorial tools
are used, this approach is often more effective than the Commander Approach and can
be used to implement more difficult strategies.
However, it does have several limitations that may limit its use to smaller companies in
stable industries. It doesn’t help managers stay abreast of rapid changes in the
environment. It doesn’t deal with situations where politics and personal agendas
discourage objectivity among strategists. And since it imposes strategy in a top down
fashion, it is subject to the same motivational problems as the Commander approach.
Finally, it can backfire in rapidly changing industries since the manager sacrifices
strategic flexibility by manipulating organizational systems and structures that may take
a long time to implement.
Collaborative approach
· Enlarges the Organizational Change Approach
· Manager is a coordinator
· Management team members provide input
· Group wisdom is the goal
Advantages
· Increased quality and timeliness of information
· Improved chances of effective implementation
Limitations
· Contributing managers have different points of view and goals
· Management retains control over the process
Collaborative Approach – The manager in charge of the strategy calls in the rest of
the managemetn team to brainstrom strategy formulation and implementation. The role
of the manager is that of a coordinator. Other members of the organization’s
management team are encouraged to contribute their points of view in order to extract
whatever group wisdom may be present. This approach overcomes two key limitations
present in the previous two approaches. First, by capturing information contributed by
managers close to operations, it can increase the quality and timeliness of the
information incorporated in the strategy. Also, it improves the chances of efficient
implementation to the degree that participation enhances strategy commitment.
This approach overcomes two key limitations present in the previous two approaches.
First, by capturing information contributed by managers close to operations, it can
increase the quality and timeliness of the information incorporated in the strategy. Also,
it improves the chances of efficient implementation to the degree that participation
enhances strategy commitment.
However, it may result in a poorer strategy since the strategy is negotiated among
managers with different points of view and possibly different goals. This may reduce
the chances of management’s ability to formulate and implement the “best” strategy.
Furthermore, it is not really collective decision making from an organizational viewpoint
since management retains centralized control over the strategy. This can lead to
political problems within the organization that may impede rapid and efficient strategy
formulation and implementation.
Cultural approach
· Includes lower levels of the company
· Breaks down barriers between manage-ment and workers
· Everyone has input into the formulation and implementation of strategies
· Works best in high resource firms
Advantage
· More enthusiastic implementation
Limitations
· Workers should be informed, intelligent
· Consumes large amounts of time
· Strong company identity becomes handicap
· Can discourage change and innovation
Cultural Approach – This approach enlarges the Collaborative Approach by including
lower levels of the company. It partially breaks down the barriers between management
and workers since each member fo the organization can be involved to some degree in
both the formulation and implementation of the strategy. It seems to work best in
organizations that have sufficient resources to absorb the cost of building and
maintaining a supportive value system. Often these are high-growth firms in hightechnology industries.
It has the advantage of more enthusiastic implementation of strategies by all members
of the company. Limitations include: 1. It seems to only work in organizations
composed primarily of informed, intelligent people; 2. It consumes enormous amounts
of time; 3. It can promote such a strong sense of organizational identity that it becomes
a handicap (for example, bringing in managers from outside the organization can be
difficult because they aren’t accepted by the other members of the organization since
they didn’t “grow up” with the organization); 4. It can promote a strong organizational
culture to an extent that change and innovation becomes difficult.
Crescive approach
· Addresses formulation and implemen-tation simultaneously
· Subordinates develop, champion, and implement strategies on their own
· “Bottoms-up” approach
· Ultimate strategy is sum of all “success-ful” approaches
Advantages
· Encourages middle management to participate
· Strategies are more operationally sound
Limitations
· Resources must be available
· Tolerance must be extended
Crescive Approach – This approach address strategy formulation and implementation
simultaneously (crescive means “increasing” or “growing”). The manager does not
focus on performing the formulation and implementation tasks himself, but encourages
subordinates to develop, champion, and implement sound strategies on their own. This
approach is a “bottom-up” approach rather than a “top-down” approach since it moves
upword from the workforce to management. Second, the strategy becomes the sum of
all the individual proposals that are “successfully” proposed throughout the planning
period. Third, the manager in charge of the strategy shapes the employees’ notions of
what are acceptable strategies and acts as a judge evaluating the proposals rather
than a master strategist.
Advantages to this approach include: 1. It encourages middle managers to formulate
several effective strategies and gives them the opportunity to carry out the
implementation phase. This autonomy increases their motivation to make the strategy
succeed.
2. Strategies developed by those closest to the firm’s operational and marketing
functions are more likely to be operationally sound more effectively implemented.
Limitations include:
1. Resources be available for for individuals to develop good ideas.
2. Tolerance be extended in the cases where failure occurs despite a worthy effort
having been made.
Strategic control
Typically consists of three steps
· Monitoring performance
· Comparing performance to standards
· Taking corrective action where needed
Strategic control simply means monitoring the strategic management process,
comparing its performance to specified standards, and then taking action where
needed to to ensure that the planned events outlined in the stratgic formulation process
actually occur.
Strategy Implementation: Through Structure
The Major tasks for ensuring proper strategic implementation
through organization structure are as follows:

Designing Structure suiting to ensure proper implementation
Flat
Functional
Line and Staff
Matrix
Structure and Strategy Execution

Deciding Levels of Management
Cross unit / Dept / Levels interaction





Span or Locus of control
Centralization Vs Decentralization
Arrangement of needed resources
Establishing bench marks and finding the best practices
Designing and Installing MIS, procedures and Decision support systems.
and Finally….

Designing and establishing controlling and monitoring system.
through Human Resource Management
The Major Issues in Strategic Implementation and HRM are:







Man Power Planning and Employee profiling
Recruiting and Retaining Talented Employees
Strategic Reward, punishment and compensation system
Leadership issues
Training and Development issues and system
Operation excellence through – TQM / Six sigma.
Employee empowerment, promotion, motivation, info sharing systems.
Finally…

Performance targets / job enrichment.
Through values and ethics
Managing Values and Ethics while Strategy Implementation,
include:

Fitting strategy to organization values

Shaping work environment
and
culture
1. Find facets
weak
2. Find problems
adoptive
3. Talk openly
strong
4. Take actions to mold
unhealthy

Role of stories and inspirational talks.

Value statements, Such as:
Customer satisfaction
Creativity
Cooperation etc.
Value, Ethics and Strategy Execution

Ethical code of conduct, Such as:
Honesty
No to bribe
No passing of info to competitors
Avoiding personal use of company’s assets.
McKinsey’s 7S Model
The 7-S framework of McKinsey is a Value Based Management (VBM) model that describes
how one can holistically and effectively organize a company. Together these factors determine the
way in which acorporation operates.
Shared Value
The interconnecting center of McKinsey's model is: Shared Values. What does the organization
stands for and what it believes in. Central beliefs and attitudes.
Strategy
Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment, competition,
customers.
Structure
The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized
(the trend in larger organizations); matrix, network, holding, etc.
System
The procedures, processes and routines that characterize how important work is to be done: financial systems;
hiring, promotion and performance appraisal systems; information systems.
Staff
Numbers and types of personnel within the organization.
Style
Cultural style of the organization and how key managers behave in achieving the organization’s
goals: Management Styles.
Skill
Distinctive capabilities of personnel or of the organization as a whole: Core Competences.
The Detailed Description of 7 Ss
Strategy: Strategy is the plan of action an organisation prepares in response to, or anticipation of, changes in its
external environment. Strategy is differentiated by tactics or operational actions by its nature of being
premeditated, well thought through and often practically rehearsed. It deals with essentially three questions (as
shown in figure 2): 1) where the organisation is at this moment in time, 2) where the organisation wants to be in a
particular length of time and 3) how to get there. Thus, strategy is designed to transform the firm from the present
position to the new position described by objectives, subject to constraints of the capabilities or the potential
(Ansoff, 1965).
Structure: Business needs to be organised in a specific form of shape that is generally referred to as
organisational structure. Organisations are structured in a variety of ways, dependent on their objectives and
culture. The structure of the company often dictates the way it operates and performs (Waterman et al., 1980).
Traditionally, the businesses have been structured in a hierarchical way with several divisions and departments,
each responsible for a specific task such as human resources management, production or marketing. Many
layers of management controlled the operations, with each answerable to the upper layer of management.
Although this is still the most widely used organisational structure, the recent trend is increasingly towards a flat
structure where the work is done in teams of specialists rather than fixed departments. The idea is to make the
organisation more flexible and devolve the power by empowering the employees and eliminate the middle
management layers (Boyle, 2007).
Systems: Every organisation has some systems or internal processes to support and implement the strategy
and run day-to-day affairs. For example, a company may follow a particular process for recruitment. These
processes are normally strictly followed and are designed to achieve maximum effectiveness. Traditionally the
organisations have been following a bureaucratic-style process model where most decisions are taken at the
higher management level and there are various and sometimes unnecessary requirements for a specific
decision (e.g. procurement of daily use goods) to be taken. Increasingly, the organisations are simplifying and
modernising their process by innovation and use of new technology to make the decision-making process
quicker. Special emphasis is on the customers with the intention to make the processes that involve customers
as user friendly as possible (Lynch, 2005).
Style/Culture: All organisations have their own distinct culture and management style. It includes the dominant
values, beliefs and norms which develop over time and become relatively enduring features of the organisational
life. It also entails the way managers interact with the employees and the way they spend their time. The
businesses have traditionally been influenced by the military style of management and culture where strict
adherence to the upper management and procedures was expected from the lower-rank employees. However,
there have been extensive efforts in the past couple of decades to change to culture to a more open, innovative
and friendly environment with fewer hierarchies and smaller chain of command. Culture remains an important
consideration in the implementation of any strategy in the organisation (Martins and Terblanche, 2003).
Staff: Organisations are made up of humans and it's the people who make the real difference to the success of
the organisation in the increasingly knowledge-based society. The importance of human resources has thus got
the central position in the strategy of the organisation, away from the traditional model of capital and land. All
leading organisations such as IBM, Microsoft, Cisco, etc put extraordinary emphasis on hiring the best staff,
providing them with rigorous training and mentoring support, and pushing their staff to limits in achieving
professional excellence, and this forms the basis of these organisations' strategy and competitive
advantage over their competitors. It is also important for the organisation to instil confidence among the
employees about their future in the organisation and future career growth as an incentive for hard work (Purcell
and Boxal, 2003).
Shared Values/Superordinate Goals: All members of the organisation share some common fundamental
ideas or guiding concepts around which the business is built. This may be to make money or to achieve
excellence in a particular field. These values and common goals keep the employees working towards a
common destination as a coherent team and are important to keep the team spirit alive. The organisations with
weak values and common goals often find their employees following their own personal goals that may be
different or even in conflict with those of the organisation or their fellow colleagues (Martins and Terblanche,
2003).
Using
the
7S
Model
to
Analyse
an
Organisation
A detailed case study or comprehensive material on the organisation under study is required to analyse it using
the 7S model. This is because the model covers almost all aspects of the business and all major parts of the
organisation. It is therefore highly important to gather as much information about the organisation as possible
from all available sources such as organisational reports, news and press releases although primary research,
e.g. using interviews along with literature review is more suited. The researcher also needs to consider a variety
of facts about the 7S model. Some of these are detailed in the paragraphs to follow.
The seven components described above are normally categorised as soft and hard components. The hard
components are the strategy, structure and systems which are normally feasible and easy to identify in an
organisation as they are normally well documented and seen in the form of tangible objects or reports such as
strategy statements, corporate plans, organisational charts and other documents. The remaining four Ss,
however, are more difficult to comprehend. The capabilities, values and elements of corporate culture, for
example, are continuously developing and are altered by the people at work in the organisation. It is therefore
only possible to understand these aspects by studying the organisation very closely, normally through
observations and/or through conducting interviews. Some linkages, however, can be made between the hard
and soft components. For example, it is seen that a rigid, hierarchical organisational structure normally leads to a
bureaucratic organisational culture where the power is centralised at the higher management level.
It is also noted that the softer components of the model are difficult to change and are the most challenging
elements of any change-management strategy. Changing the culture and overcoming the staff resistance to
changes, especially the one that alters the power structure in the organisation and the inherent values of the
organisation, is generally difficult to manage. However, if these factors are altered, they can have a great impact
on the structure, strategies and the systems of the organisation. Over the last few years, there has been a trend
to have a more open, flexible and dynamic culture in the organisation where the employees are valued and
innovation encouraged. This is, however, not easy to achieve where the traditional culture is been dominant for
decades and therefore many organisations are in a state of flux in managing this change. What compounds their
problems is their focus on only the hard components and neglecting the softer issues identified in the model
which is without doubt a recipe for failure. Similarly, when analysing an organisation using the 7S model, it is
important for the researcher to give more time and effort to understanding the real dynamics of the organisation's
soft aspects as these underlying values in reality drive the organisations by affecting the decision-making at all
levels. It is too easy to fall into the trap of only concentrating on the hard factors as they are readily available from
organisations' reports etc. However, to achieve higher marks, students must analyse in depth the cultural
dimension of the structure, processes and decision made in an organisation.
For even advanced analysis, the student should not just write about these components individually but also
highlight how they interact and affect each other. Or in other words, how one component is affected by changes
in the other. Especially the "cause and effect" analyses of soft and hard components often yield a very interesting
analysis and provides readers with an in-depth understanding of what caused the change.
Sources
for
Data
on
McKinsey's
7S
Model
The main source of academic work on the 7S model has to be the writings of Waterman et al. (1980; 1982), and
Pascale and Athos (1981) who came up with the idea and applied it to analyse over 70 large organisations.
Since then, it has been used by hundreds of organisations and academics for analytical purposes. Many such
case studies can be obtained from the academic journals and the books written on the topic. A few case studies,
for example the analyses of Coca-Cola and energy giant Centrica (Owner of British Gas), are also available at
this website.
If you found this article useful please have a look at the other articles we have written:Ansoff analysis, Porter's 5
Forces
analysis, SWOT
analysis, BCG
Growth-Share
Matrix,Porter's
Generic
Strategies, Scenario
Planning, Value chain analysis, Pest Analysis,Balanced Scorecard, Competitor Analysis, Critical Success
Factors, Industry Lifecycle,Marketing Mix and Product Life Cycle.
Organization Life Cycle
Stage I: Leader:
The head of the organization makes all the decisions, which are then implemented by
the employees. These decisions are normally taken in isolation and follow a top-down
approach. There is likely to be no visibility into the ideas by the rest of the organization.
This stage is best suited for small organizations and start-ups, where quick decisions
are required.
Stage II: Management Team
Decisions here are made by the management team, which represents a small
percentage of the entire organization. The team discusses the strategic issues, making
decisions by consensus that are then implemented top-down. There is a limited
visibility of ideas, which is localized within immediate sub-units. This means that each
member of the management team would have visibility of the ideas of his immediate
subordinates. This stage is best suited for organizations in their early growth phase,
where the business is relatively small.
Stage III: Consultants
The management team takes the final decisions, but it invites inputs from consultants.
Such consultants, who are experts in the field, could be either internal or external. The
ideas suggested would require some level of validation to ascertain their relevance to
the goals of the organization. This stage is best suited for organizations in their growth
phase, where the company would require a new perspective to achieve a paradigm
shift.
Stage IV: Employees
Here, inputs required for decision making are invited from the entire employee base of
the organization. Further, the ideas are filtered, validated and then the final decision is
taken by the management team. Thus, the management would have full visibility about
the ideas that exist within the company, and by a formal process can capture and
nurture them. This stage is best suited for large organizations heading towards their
maturity phase and there is a compelling need for a paradigm shift.
Stage V: Stakeholders
In this stage, inputs are invited not only from the employee base, but also from other
strategic stakeholders. All of them can contribute to the growth and direction of the
organization. In addition to filtering and validating the ideas, the organization also
needs to align or alter the suggestions to fit to its vision. This stage is suited for fully
mature global organizations with stable processes, which have the capacity to channel
ideas from such a large population.
As a company progresses from one stage to another, the reach of the ideamanagement system increases. More people are involved in the decision-making
process. As the number of ideas to scan and filter increases, the need for a proper
process in place also increases. Thus, the robustness of the process needs to increase
from one stage to another.
Evaluation and Control
The basic premise of strategic management is that the chosen strategy will achieve the organization's
mission and objectives.
A firm's successive strategies are greatly affected by its past history and often take shape through
experimentation and ad hoc refinement of current plans, a process James Quinn has termed "logical
incrementalism". Therefore, the reexamination of past assumptions, the comparison of actual results with
earlier hypotheses have become common features of strategic management.
http://www.strategic-control.24xls.com/en100
Nature Of Control
Management control refers to the process by which an organization influences its subunits and members to
behave in ways that lead to the attainment of organizational objectives (Arrow, 1974; Flamholtz, Das, &
Tsui, 1985; Ouchi, 1977)
What Is Control?
Robert J. Mockler's definition of control points out the essential elements of the control process:
Management control is a systematic effort to set performance standards with planning objectives, to design
information feedback systems, to compare actual performance with these predetermined standards, to
determine whether there are any deviations and to measure their significance, and to take any action
required to assure that all corporate resources are being used in the most effective and efficient way possible
in achieving corporate objectives.
Types Of Control
Management can implement controls before an activity commences, while the activity is going on, or after
the activity has been completed. The three respective types of control based on timing are feedforward,
concurrent, and feedback.
Managerial Approaches To Implementing Controls
Regardless of whether the organization focuses control on inputs, production, or outputs, another choice must be
made between different approaches tor control. There are three control approaches regarding the mechanisms
managers will use to implement controls: market control, bureaucratic control, and clan control.
Market Control
Market control involves the use of price competition to evaluate output. Managers compare profits and
prices to determine the efficiency of their organization. In order to use market control, there must be a
reasonable level of competition in the goods or service area and it must be possible to specify requirements
clearly.
Market control is non appropriate in controlling functional departments, unless the price for services is set
through competition and its representative of the true value of provided services.
Bureaucratic Control
Bureaucratic control is the use of rules, policies, hierarchy of authority, written documentation, reward
systems, and other formal mechanisms to influence employee behavior and assess performance.
Bureaucratic control can be used when behavior can be controlled with market or price mechanisms.
Clan Control
Clan control represents cultural values almost the opposite of bureaucratic control. Clan control relies on
values, beliefs, corporate culture, shared norms, and informal relationships to regulate employee behaviors
and facilitate the reaching of organizational goals.
Organization that use clan control require trust among their employees. Given minimal direction and
standards, employees are assumed to perform well - indeed, they participate in setting standards and
designing the control systems.
Strategic Control: A New Perspective
Most commentators would agree with the definition of strategic control offered by Schendel and Hofer:
"Strategic control focuses on the dual questions of whether: (1) the strategy is being implemented as
planned; and (2) the results produced by the strategy are those intended."
This definition refers to the traditional review and feedback stages which constitutes the last step in the
strategic management process. Normative models of the strategic management process have depicted it as
including there primary stages: strategy formulation, strategy implementation, and strategy evaluation
(control).
Strategy evaluations concerned primarily with traditional controls processes which involves the review and
feedback of performance to determine if plans, strategies, and objectives are being achieved, with the
resulting information being used to solve problems or take corrective actions.
Recent conceptual contributors to the strategic control literature have argued for anticipatory feedforward
controls, that recognize a rapidly changing and uncertain external environment.
Schreyogg and Steinmann (1987) have made a preliminary effort, in developing new system to operate on a
continuous basis, checking and critically evaluating assumptions, strategies and results. They refer to
strategic control as "the critical evaluation of plans, activities, and results, thereby providing
information for the future action".
Schreyogg and Steinmann based on the shortcomings of feedback-control. Two central characteristics if this
feedback control is highly questionable for control purposes in strategic management: (a) feedback control
is post-action control and (b) standards are taken for granted.
Schreyogg and Steinmann proposed an alternative to the classical feedback model of control: a 3-step model
of strategic control which includes premise control, implementation control, and strategic surveillance.
Pearce and Robinson extended this model and added a component "special alert control" to deal
specifically with low probability, high impact threatening events.
The nature of these four strategic controls is summarized in Figure 6-4. Time (t ) marks the point where strategy
formulation starts. Premise control is established at the point in time of initial premising (t ). From here on promise
control accompanies all further selective steps of premising in planning and implementing the strategy. The strategic
surveillance of emerging events parallels the strategic management process and runs continuously from time (t )
through (t ). When strategy implementation begins (t ), the third control device, implementation control is put into
action and run through the end of the planning cycle (t ). Special alert controls are conducted over the entire
planning cycle.
Strategic Control Process
Although control systems must be tailored to specific situations, such systems generally follow the same
basic process.
Regardless of the type or levels of control systems an organization needs, control may be depicted as a sixstep feedback model):
1.
2.
3.
4.
Determine what to control. What are the objectives the organization hopes to accomplish?
Set control standards. What are the targets and tolerances?
Measure performance. What are the actual standards?
Compare the performance the performance to the standards. How well does the actual match
the plan?
5. Determine the reasons for the deviations. Are the deviations due to internal shortcomings or due
to external changes beyond the control of the organization?
6. Take corrective action. Are corrections needed in internal activities to correct organizational
shortcomings, or are changes needed in objectives due to external events?
Feedback from evaluating the effectiveness of the strategy may influence many of other phases on the
strategic management process.
A well-designed control system will usually include feedback of control information to the individual or
group performing the controlled activity.
Simple feedback systems measure outputs of a process and feed into the system or the inputs of a system
corrective actions to obtain desired outputs. The consequence of utilizing the feedback control systems is
that the unsatisfactory performance continues until the malfunction is discovered. One technique for
reducing the problems associated with feedback control systems is feedforward control. Feedforward
systems monitor inputs into a process to ascertain whether the inputs are as planned; if they are not, the
inputs, or perhaps the process, are changed in order to obtain desired results.
Strategy Audits
In order to better understand what strategic control performance measures are and how a manager can take such
measurements, we need to introduce two important topics: (1) strategic audits and (2) strategic audit
measurement methods.
Strategic Audits
A 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.
Activity Based Costing
What?
Why?
How?
Requirement of Cost Systems
Valuation of inventory and measurement of the cost of goods sold for financial reporting.
Estimation of the costs of activities, products, services, and customers.
Providing economic feedback to managers and operators about process efficiency.
Conventional Costing
•
Total Cost = Material + Labour+ Overheads
•
Overheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units
produced
•
Will this not distort the costing in the new environment?
ABC provides an Alternative
Conventional Costing
Expenses
AB Costing
Economic
Element
Resources
Activities
Work
Performed
Cost Objects
Product or
service
Cost Objects
Basics of A B C
•
Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product.
•
Products do not consume costs directly
•
Money is spent on activities
•
Activities are consumed by product/services
•
ABC assigns Costs to Products by tracing expenses to “activities”. Each Product is charged based on the
extent to which it used an activity
•
The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business
•
Provides ways of assigning the costs of indirect support resources to activities, business processes,
customers, products.
•
It recognises that many organisational resources are required not for physical production of units of
product but to provide a broad array of support activities.
•
•
•
•
ABC systems addresses the following Questions:
What activities are being performed by the organisational resources?
How much does it cost to perform activities?
Why does the oranisation need to perform those activities?
How much of each activity is required for the organisation’s products, services, and customers?
Basics of A B C : How?
Steps:
1. Form cost pools
2. Identify activities
3. Map resource costs to activities
4. Define activity cost drivers
Calculate cost
Identify Activities
In developing an ABC system, the
organisation identifies the activities being
performed:
Activity Dictionary
•Respond to customers
•Improve products
•Introduce new products
•Explore new markets
•Move material
•Schedule production
•Purchase material
•Inspect items
•
•
Map resource costs to activities
Financial accounting categorizes expenses by spending code; salaries, fringe benefits, utilities, travel,
communication, computing, depreciation etc
ABC collects expenses from this financial system and drive them to the activities performed.
Mapping
Accounting Records
Salaries
313,000
Activities
ABC Records
Salaries DepreciationElectricity Supplies Travel
5000
Total
Business Development
20,000
25000
5000
55,000
80,000
60000
50000
5000
10000 205,000
125,000
50000
20000
20000
60000 275,000
Depreciation
155,000
Maintianing Present Business
Electricity
132,000
Purhcasing Material
Supplies
25,000
Set up Machines
25,000
10000
2000
37,000
Travel
100,000
Running Machines
50,000
10000
50000
110,000
Total
725,000
Resolve Quality Problems
13,000
Total
Activities: Types
•
Unit level: Performed each time a unit is produced
•
Batch level: Performed each time a batch is produced
313,000
5000
155000
132000
25000
25000
43,000
100000 725,000
•
Product level: Performed to support production of different type of product
•
Customer Level: Performed to support servicing customers
•
Facility level: Residuary head
•
•
•
Define activity drivers
The linkage between activities and cost objects, such as products, customers,, is accomplished by using
activity drivers.
An activity driver is a quantitative measure of the output of an activity.
The selection of an activity driver reflects a subjective trade-off between accuracy and cost of measurement.
Activitie s
Drive rs
Unit Le ve l
Acquire and Use material for containers
No. of Containers
Acquire and Use material for baby-care products
No. of products
Ba tch Le ve l
Set up manually controlled machines
Set up computer controlled machines
No. of batches of containers
No. of batches of B. Produst
Product Le ve l
Design and manufacture moulds
Use manually controlled machines
Use conputer controlled machines
No.of moulds required
Product type (containers)
Product type (B.Products)
Custome r Le ve l
Consult customers
Provide warehousing for customers
No. of consultations
No. of cubit feet
Fa ciltiy Le ve l
Manage workers
Salaries
Building an ABC Model
Identify
Resources
Identify
Activities
Define
Resource
Drivers
Define
Activity
Drivers
Enter
Resource
Costs
•
•
•
•
•
Enter
Resource
Driver Qty.
Identify
Cost Objects
Enter
Activity
Driver Qty.
Calculate
Costs
ABC: Where to Use?
High Overheads
Product Diversity or Multiple Products
Customer Diversity
Service Diversity
Stiff Competition
Strategic Information System
A Strategic Information System (SIS) is a system to manage information and assist in
strategic decision making. A strategic information system has been defined as, "The
information system to support or change enterprise's strategy."
A SIS is a type of Information System that is aligned with business strategy and
structure. The alignment increases the capability to respond faster to environmental
changes and thus creates a competitive advantage. An early example was the
favorable position afforded American and United Airlines by their reservation
systems, Sabre and Apollo. For many years these two systems ensured that the two
carriers' flights appeared on the first screens observed by travel agents, thus increasing
their bookings relative to competitors. A major source of controversy surrounding SIS is
their sustainability.
SISs are different from other comparable systems as:




they change the way the firm competes.
they have an external (outward looking) focus.
they are associated with higher project risk.
they are innovative (and not easily copied).
Developments of information systems
1.
Data Processing (DP) [efficiency] — Improved efficiency by means of
automating back office data processing functions.
Management Information Systems (MIS) [effectiveness] — Improved
information flows and transfers.
2. Strategic Information System (SIS) [competitiveness] — Enhance
competitiveness of the organization through the application of IT tobusiness
processes. Davenport’s point of view is that "Information is power and people are
unlikely to give it away"
1.
https://sites.google.com/site/tribhuvansite/sm/sm201
http://www.mba-tutorials.com/strategy/1160-porter-supply-chain-model.html