STRATEGIC MANAGEMENT Managerial actions and decisions that determine the long run performance of an organization. Includes environmental scanning (external.

STRATEGIC MANAGEMENT Managerial actions and decisions that

determine the long run performance of an organization.

Includes environmental scanning (external and internal), strategy formulation, strategy implementation, evaluation and control.

Emphasizes the monitoring, and evaluation of external opportunities and threats, in the light of the organization’s strengths and weaknesses.

BUSINESS POLICY Has a general management

orientation. Tends to look primarily inward, with its

concern for properly integrating the functional activities of an organization.

Strategic management incorporates the integrative aspects of business policy with a heavier emphasis on the environment and planning.

STRATEGY A comprehensive plan that states

how an organization will achieve its mission and objectives. It incorporates ; Corporate strategy : overall plans of an

organization. Business strategy : at business /

product level. Functional strategy : distinctive

competence in functional areas.

CONCEPTS OF STRATEGY Plan : systematic gathering of

information required for situational analysis, generation of feasible alternatives and the rational selection of the most appropriate strategy.

Patterns : areas of influence in a non-profit organization which are sources of revenue.

CONCEPTS OF STRATEGY Position : strategic positioning of a firm

making a trade off between different activities and creating a fit among these activities.

Perspective : consideration of resources necessary to implement a plan or follow a course of action.

Purpose : pursuing those activities that move an organization from its current state to its desired future state.

Strategic management process Strategic management consists of

four basic elements. These are : Environmental scanning :

monitoring, evaluating and disseminating information from the external and internal environment to key people in the organization in order to identify factors that will determine the future of the organization. This is done through a SWOT analysis.

Strategic management process

Strategy formulation : development of long range plans for the effective management of environmental opportunities and threats, in the light of corporate strengths and weaknesses.It includes defining the corporate mission, specifying achievable objectives developing strategies (courses of action) and setting policy guidelines.


Strategy implementation : the process by which strategies and policies are put into action through the development of programs, budgets and procedures.

Programs : statement of activities needed to accomplish a plan. This makes strategy action oriented. It may also involve restructuring, changing the company’s internal culture or new research efforts.


Budgets : a statement of a company’s program in terms of money that lists the detailed costs of each program.. It serves as a detailed plan of the new strategy and specifies its expected impact on the firm’s financial future.

Procedures : a system of sequential steps or activities that describe in detail how a particular task or job is to be done.


Evaluation and control : the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance in order to take corrective action and improve performance.

MISSION The purpose or reason for an

organization to exist. Defines the fundamental and unique

process that sets a company apart from other firms of its type and identifies the scope of the company’s operations in terms of products or services offered and markets served.

Mission, vision and objectives A mission statement describes

what the organization is now. A vision statement describes what

the organization would like to become.

Objectives are the end results of planned activity. They state what is to be accomplished by when and quantified wherever possible.

Environmental scanning The monitoring, evaluation and dissemination

of information from external as well as internal environment to key people within the organization for taking strategic decisions.

This tool is used by an organization to avoid strategic surprise and ensure its long term health.

Research has found a positive relationship between environmental scanning and profits.

External variables (societal) Indirectly influence long run decisions. Economic forces that regulate the exchange

of money, materials, energy and information.

Technological forces that generate problem solving inventions.

Politico-legal forces that allocate power and provide constraining and protecting laws and regulations.

Socio-cultural forces that regulate values, customs and traditions of society.

External task variables Include those elements or groups that

directly affect the corporation and in turn are affected by it.

Government, special interest groups. Local communities and trade

associations. Suppliers, creditors, customers,

employees and unions. Competitors.

PORTERS ANALYSIS Porter contended that a

corporation is most concerned with the intensity of competition within its industry.

The level of this intensity is determined by the following basic competitive forces : Threat of new entrants Rivalry among existing firms

PORTER’S ANALYSIS

Threat of substitute products / services. Bargaining power of buyers and

suppliers. Relative power of other stakeholders.

This is known as Porter’s five forces model.

Threat of new entrants Depends on the presence of entry

barriers and reaction that can be expected from competitors.

Some entry barriers are : Economies of scale – size differences. Product differentiation. Capital / infrastructure requirements.

Threat of new entrants

Entry barriers (continued) : Switching costs (cost of new

technology / training) Access to distribution channels. Government policies / local

regulations.

Rivalry among existing firms Factors for rivalry are :

Large number of competitors. Rate of growth of industry. Product or service characteristics. Amount of fixed costs / industry

capacity. Height of exit barriers. Diversity of rivals.

Threat of substitute products Substitutes limit the potential returns of

an industry by placing a ceiling on the price that firms in the industry can profitably charge for example tea instead of coffee.

If the price of coffee is raised beyond a certain ceiling, customers will stop buying it and switch to tea forcing the seller to revert back to lower prices for coffee.

Bargaining power of suppliers Domination by a few companies

(monopoly) example petroleum industry. Unique product or service like word

processing software. Lack of substitutes example energy sector. Integration with present customers. Degree of importance of goods and

services to the supplier.

Bargaining power of buyers Purchase of a large proportion of the

sellers product / service for example - oil filters in auto industry.

Backward integration by producing the product itself - like a newspaper chain producing its own paper.

Purchased product represents a high percentage of the buyer’s costs thus making it look around for lower priced supplies.

Bargaining power of buyers Low profits cause buyer to be

sensitive to costs and service differences.

Purchased product does not directly affect the quality or price of the buyer’s products and can be easily substituted without affecting the final product adversely.

Relative power of other stakeholders Examples of other stakeholders are :

Governments Local communities Trade associations Special interest groups Unions Shareholders and stakeholders Complementors like tyre and auto

industry

Strategic groups and types A strategic group is a set of

business units that pursue a similar strategy with similar resources.

A strategic type is a category of firms based on a common strategic orientation and a combination of structure, culture and processes consistent with that strategy.

Strategic types These were enumerated by Miles and

Snow and are as follows : Defenders – focus on improving

efficiency of existing operations. Prospectors – focus on product

improvisation and market opportunities. Analyzers – operate in at least two

product – market areas. Reactors – lack consistent strategy

culture.

Industry matrix Key success factors

Variables that affect the overall competitive positions of all companies within an industry.

Usually determined by the economic and technological characteristics of the industry and by the competitive characteristics on which the firms have built their strategies.

Industry matrix An industry matrix summarizes the

key success factors within a particular industry.

The matrix also specifies how well various competitors in the industry are responding to each factor.

Resource based approach For gaining competitive advantage,

the resource based approach to strategy analysis is as follows : Identify and classify the firm’s resources

in terms of its strengths and weaknesses. Combine the firm’s strengths into specific

capabilities. Core competencies are activities that an

Resource based approach Core competencies are activities that a

corporation can do exceedingly well. When these are superior to those of competitors they are called distinctive competencies.

Appraise the profit level of these resources. Select a strategy that best exploits the

resources and capabilities relative to external opportunities.

Identify resource gaps and upgrade weaknesses.

Portfolio analysis Involves balancing of company’s

investments in different products and business units.

Useful for highly diversified and multi-product companies operating in a limited market.

Requires balancing SBUs in relation to net cash flow, state of development and risk involved.

Portfolio analysis Portfolio analysis makes use of

display matrices to allocate resources for maximum revenue.

One of the best examples of portfolio matrix that is most widely used is the BCG growth matrix.

Internal analysis This is done in the following ways :

Identification of core competencies and distinctive competencies.

Value chain analysis Internal strategic factors :

These are critical strengths and weaknesses that are likely to determine if the firm will be able to take advantage of the opportunities and avoid threats

Resource analysis A resource is an asset,

competency, skill or knowledge controlled by the company.

It is a strength if it provides the company with a competitive advantage (CA).

It is a weakness if it is a drawback that puts its competitors ahead of it

Resource analysis VRIO framework of analysis.

Value – does it provide a competitive advantage ?

Rareness – do other competitor companies possess it ?

Imitatibility – is it easy or difficult for others to imitate / copy ?

Organization – is the firm organized to exploit the resource ?

Value chain analysis It is one of the techniques of

internal analysis used for appraisal of an organisation.

It is a method used for assessing the strengths and weaknesses of the organisation based on an understanding of the series of activities it performs.

Porter’s value chain analysis A value chain is a series of value

creating activities performed by an organization.

They are divided in case of a manufacturing organization into primary and support activities.

Primary activities are directly related to the flow of products to the customer.

Porter’s value chain analysis Primary activities include

Inbound logistics such as warehousing, material handling, inventory control and scheduling.

Outbound logistics such as order processing, physical distribution, marketing and sales and service.

Operations such as manufacturing, packaging, assembly and maintenance.

Porter’s value chain analysis Support activities are provided to

sustain primary activities. The profit margin that an organization earns depends on how effectively the value chain has been managed.

Porter’s value chain analysis These consist of :-

Infrastructure which includes organizational design and staffing

Technology development Human resource development Procurement (purchasing)

Distinctive competencies CSF – Critical success factors (CSF)

sometimes referred to as key factors or strategic factors for success are those factors that are crucial for an organization’s success in business.

Many organizations achieve strategic success by building distinctive competencies around CSFs.

Distinctive competencies When a specific ability is possessed

by a particular organization exclusively or in a relatively large measure in such a way that It is unique to the organization and The organization takes advantage of it

to achieve strategic success. It is called a distinctive competence.

Distinctive competencies Examples of Distinctive competency are:-

Superior product quality in a particular attribute like fuel efficiency.

Creation of a market niche of highly specialized products to a particular market segment.

Differential advantages based on superior R&D.

Access to low cost financial source like shareholders.

Corporate level strategies Choice of direction that a firm adopts in

order to achieve its objectives. Decisions related to allocating resources

among different businesses of a firm, transferring resources from one set of business to another and managing or nurturing a portfolio of businesses in such a way that corporate objectives are achieved.

Corporate level strategies The major corporate level

strategies are:- Stability strategies Expansion strategies Retrenchment strategies Combination strategies

Corporate level strategies Stability strategy is adopted

because It is less risky as fewer changes are

involved The environment is relatively stable Expansion may be threatening Consolidation is sought after through

stabilising after a period of rapid expansion

Corporate level strategies Types of stability strategy are:-

No change strategy Pause/proceed with caution strategy Profit strategy

Corporate level strategies Expansion strategy is adopted:-

Due to environmental demands/pressures

CEOs take pride in growth from expansion

More control over the market as compared to opponents

Advantages from experience curve and scale of operations

Corporate level strategies Types of expansion strategies are:-

Expansion through concentration Expansion through integration Expansion through diversification Expansion through co-operation Expansion through

internationalization

Corporate level strategies Concentration

Involves investment of resources in a product line for an identified market with the help of a proven technology in a manner that results in expansion.

Advantages – Minimal organizational changes Fewer problems when dealing with known

situations High level of predictability hence less strain in

decision making.

Corporate level strategies Concentration

Limitations:- Putting all eggs in one basket Heavily dependent on industry Constraints for expansion in a matured industry Product obsolescence Less challenging/stimulating Organizational inertia Potential for growth, attractiveness and maturity

are variable factors

Corporate level strategies Diversification strategies Involve all dimensions of strategic

alternatives that is internal, external, related, unrelated, horizontal, vertical, active, passive, singly or collectively

Corporate level strategies Diversification strategies Types of diversification strategies

Concentric diversification Market related Technology related Marketing and technology related

Conglomerate diversification

Corporate level strategies Concentric diversification When an organization takes up an

activity in such a manner that it is related to the existing business definition of one or more of a firm’s business in terms of customer groups, customer functions or alternative technologies it is called concentric diversification.

Corporate level strategies Concentric diversification Types are

Marketing related- similar type of product offered with the help of unrelated technology

Technology related- new type of product or service offered with the help of related technology

Marketing and technology related- when a similar type of product or service is provided with the help of a related technology

Corporate level strategies Conglomerate diversification Taking up those activities that are

unrelated to the existing business definition of one or more of the company’s businesses either in terms of customer groups, customer functions or alternative technologies

Corporate level strategies Reasons for diversification

strategies Minimize risk by spreading it over

several businesses To capitalize on organizational

strengths and minimize weaknesses The only way out if growth in existing

business is blocked due to environmental or regulatory factors

Corporate level strategies Concentric diversification

Advantages Synergy by exchange of resources and

skills To avail economies of scale and tax

benefits Disadvantages

Risk and commitment of resources Reduction of flexibility

Corporate level strategies Conglomerate diversification

Advantages Better management and allocation of cash flows

realising in a higher return on investment (ROI) Reduction of risk by spreading investment in

different businesses and industries Disadvantages

Diversion of resources and attention to other areas leading to lack of concentration

Risks of managing an entirely new and unrelated business

Expansion through cooperation While many strategy experts feel that

firms compete in the market for a limited market share, others feel that competition can exist with cooperation

Co-opetition signifies simultaneous competition and co-operation for mutual benefit

Complementarity among interests of rival firms is the central theme.

Expansion through cooperation

Types of co-operative strategies : Mergers Takeovers (acquisitions) Joint ventures Strategic alliances

Mergers A combination of two or more

organizations in which one acquires the assets and liabilities of the other(s) in exchange for shares or cash .

The existing organizations may be dissolved, the assets and liabilities combined and new stock issued.

Mergers For the organization that acquires another,

it is an acquisition. For the firm that is acquired, it is a merger. If both firms dissolve their identity to create

a new organization, it is a consolidation. Examples are TVS whirlpool with Whirlpool

of India, Sandoz (india) with Hindustan Ciba Geigy.

Important issues in mergers Strategic issues : commonality of

strategic interests between buyer and seller firms. Strategic advantages and distinctive competencies of firms to be analyzed for synergy

Financial issues : valuation of firm being bought and sources of financing for mergers. EPS to be positive or neutral (non-negative).

Important issues in mergers Managerial issues : problems of

managing the firm after merger has taken place. Compensation for staff laid off and corporate culture issues.

Legal issues : provisions made by law for the purpose of mergers Chapter V of Companies Act 1956 (Sections 390, 394A, 395, 396 and 396A)

Types of mergers Horizontal : combination of two or more

organizations in the same business or engaged in similar aspects of production or marketing.

Vertical mergers : combination of two organizations, not necessarily in the same business but which create complementarity either in terms of supply of materials or marketing of goods and services.

Types of mergers Concentric mergers : when there is a

combination of two or more firms related to each other in terms of customer functions, customer groups or alternative technologies used.

Conglomerate mergers : combination of two or more firms, unrelated in terms of customer functions, customer groups or alternative technologies used.

Reasons for merger - buyer To increase stock value To increase growth rate and make a

good investment. To improve stability of earning and sales. To balance, complete or diversify

product line. To acquire resources quickly To avail of tax concession benefits. To take advantage of synergy.

Reasons for merger - seller To increase stock value and make

a good investment. To increase growth rate. To acquire resources. To stabilise operations To benefit from tax legislation. To deal with top management

succession problems.

Take over strategies Post liberalisation period has seen

an increasing use of takeover strategies as a means of rapid growth.

Issues Define motivation for takeover Arranging for financing Expression of interest

Take over strategies Initiation by trusted intermediaries Negotiations keeping in view factors

such as valuation of assets,business goodwill, market opportunities, growth potential.

Final arrangement by fixing of price for share transfer.

Advantages-Takeovers Management accountability is ensured. Offers easy growth opportunities. Creates mobility of resources. Avoids gestation periods and hurdles

involved in new projects. Offers a chance for sick units to survive

(turnaround strategy) Opens up opportunities for selective

divestment.

Drawbacks-Takeovers Professionalism gets replaced by money

power. Does not create any real asset for society. Detrimental to national economy. Interest of minority shareholders not

protected. Undue stress and strain created in

companies exposed to threat of takeover.

Joint venture strategies Combination of two or more companies

into one in two ways Absorption: When a company acquires

another (acquisition/takeover) Consolidation: Two or more companies

combine to form a new company. JVs are a special case of consolidation where two or more companies form a temporary partnership for a specified purpose. This partnership is also referred to as a consortium

Joint venture strategies JVs are useful to gain access to new

business When an activity is uneconomical for an

organization to do it alone When the risk of business has to be shared and

can therefore be reduced by participating firms. When the distinctive competencies of two or

more companies can be brought together To bypass hurdles such as import quotas such as

tariffs, political interests or cultural road blocks

Joint venture strategies Advantages

Minimising risk Reducing individual company’s investment Access to foreign technology Broad based equity participation Access to government and political agencies Entering new fields of business Synergistic advantages

Joint venture strategies Disadvantages

Problems in equity participation Foreign exchange regulations Lack of proper co-ordination among

participating firms. Cultural and behavioral differences Possibility of conflict among partners

Strategic alliances Necessary and sufficient characteristics

(Yoshino and Rangan) Two or more firms unite to set up on agreed

upon goals but remain independent even after formulation of the alliance.

Partner firms share the benefits of the alliance and control over the performance of assigned tasks.

Partner firms contribute on a continuing basis in one or more key strategic areas like technology or marketing

Strategic alliances Types of strategic alliances:

Pro-competitive alliance (low interaction/low conflict)- inter-industry, vertical value chain relationships between manufacturers and suppliers/distributors.

Non-competitive alliance (high interaction/low conflict)- intra-industry partnership between non-competitive firms that operate in the same industry but do not see each other as rivals as areas of activity are distinct.

Strategic alliances Competitive alliances (high

interaction/high conflict) Partnerships that bring two rivals

in a co-operative arrangement where intense interaction is necessary

Can be inter or intra-industry

Strategic alliances Pre-competitive alliances (low

interaction/high conflict) Firms from different unrelated industries

working on well defined activities such as technology development, new product development or creating awareness about new products

Joint R&D and mass awareness campaigns are examples

Reasons for strategic alliances Entering new markets (MNCs) Reducing manufacturing costs

(pooling resources) Developing and diffusing technology Leveraging the expertise of two or

more firms Accelerating new product

introduction Overcoming legal and trade barriers

Principles for managing alliances Define strategy clearly and assign

responsibilities Phase in the relationship between

partners Blend the cultures of partners Provide for an exit strategy

Internationalization strategy Global integration, intensification of

economic linkages among nations, internationalization of markets, trade, finance, technology, labour, communication, transportation and economic institutions are some of the reasons for internationalization as a strategy

Characteristics-globally competitive firms Factor conditions- inputs of production such

as natural resources, raw materials and labour

Demand conditions- nature and size of buyer’s needs in the domestic market

Related and supporting industries-existence of these in relation to those in which the nation excels

Firm strategy structure and rivalry-how firms are created, organized and managed and the nature of domestic competition

Types of international strategies International strategy

Value is created by transferring products and services in foreign markets where these products/services are not available

Standardized products and services with little or no differentiation

Examples are Coca Cola, IBM, Kellogg, P&G, Microsoft

Types of international strategies Multi domestic strategy

When firms try to achieve a high level of local responsiveness by matching their products and services to the country they operate in

Customizing products and services according to local conditions

Leads to high cost structure as functions such as R&D, production and marketing have to be developed

Types of international strategies Global strategy

Applied when firms rely on a low cost approach based on reaping the benefits of the experience curve, location economies and offer standardized products and services across different countries

Focuses on low cost structure by leveraging expertise, providing specific products and services and concentrating production of these at a few favourable locations around the world

Types of international strategies Trans-national strategy

Where a combined approach of low cost and high local responsiveness is adopted simultaneously for products and services

As the two are contradictory, it calls for a creative approach to managing the production and marketing of these products

Bartlett and Ghoshal feel that through a process termed global learning a trans-national firm should transfer expertise from foreign subsidiaries to head quarters and from one foreign subsidiary to another

Entry modes Export entry- firm produces in the

home country and exports to markets overseas. Types of export entry are:- Direct exports- through direct

agents/distributors; no intermediary Indirect exports- through home

country intermediarie

Entry modes Contractual entry- these are of the

following types:- Licensing- transfer of knowledge,

technology, patent, etc. for a period of time in return for payment of royalty

Franchising- Right to use a business format, usually a brand name in the overseas market for some sort of payment

Entry modes Other agreements such as technology

agreements (technology transfers), service contracts for technical support or expertise provision, contract manufacturing, production sharing, turnkey operations, build-operate-transfer (BOT) arrangements

Entry modes Investment entry mode- ownership of

production unit in the overseas market based on direct/equity investment

JV/strategic alliances involving a co-operative partnership with financial interests as the basis of co-operation

Independent ventures or wholly owned subsidiaries in which the parent international company holds hundred percent equity. This is known as ‘Greenfield Venture’

Advantages-international strategies Lower costs Increased sales Higher profits Ample opportunities for economies

of scale and learning Option for expansion strategies and

a promise of above average returns

Disadvantages-international strategies Costs of failure are great Risks of uncertainty in economic

and political environments of host countries

Difficulty in managing cultural diversities

Cost of co-ordination, communication and distribution

Reasons- international strategy for expansion Global integration Strengthening of international

economic order Primacy of economic considerations

over political in international relations

Emergence of regional trade blocks

Reasons- international strategy for expansion Emergence of internet as a

communication platform Higher levels of cultural diffusion Establishment of bilateral and

multilateral institutions such as WTO to regulate and manage trade relations

Retrenchment strategies Followed when an organization reduces

its scope of activities substantially This is done through an attempt to find

out the problem areas and diagnose causes of these problems

Next, steps are taken to solve the problems. These steps result in the different kinds of retrenchment strategies

Symptoms of decline Diminishing profitability Dwindling cash flows Falling sales Shrinking market share Increasing debt

Recovery situation Realistically non-recoverable situation – terminal

decline Temporary recovery situation – initially successful

retrenchment but no sustained turnaround Sustained survival situation – turnaround is

achievable but little potential for future growth Sustained recovery situation – genuine or

successful turnaround is possible owing to new product development and/or market repositioning if the industry is still attractive enough.

Managing turnaround Advisory support of an external

consultant under the existing team Existing team withdraws temporarily

and a turnaround specialist is employed to do the job

Replacement of the existing team specially CEO or merging the sick organization with a healthy team – this is most often used

Workable action plan Analysis of product, market,

production processes, competition and market positioning

Clear thinking about the market place and market logic

Implementation of plans by target setting, feedback and remedial action

Elements that contribute to a turnaround Changes in top management Initial credibility building actions Neutralizing external pressures Initial control Identifying quick pay-off activities Quick cost reductions

Elements that contribute to a turnaround Revenue generation Asset liquidation for generation of

cash Mobilization of resources Improved motivation and morale Better internal co-ordination

Divestment strategies Involves sale or liquidation of a portion of the

business, a major division, profit center or SBU Divestment is usually a part of a rehabilitation

or restructuring plan Adopted when a turnaround has been

attempted but proved unsuccessful Harvesting strategies, a variant of the

divestment strategy involves a process of gradually letting a company or business wither away

Reasons for divestment A business acquired proves a mismatch

or a project that proves to be unviable Persistent negative cash flows from a

particular business that create financial problems for the firm

Severity of competition and inability of the firm to cope

Oversize and resultant inability to manage the business

Reasons for divestment Technological upgradation required is

difficult to achieve in terms of effort, finances and time

The firm is in a better position to do its remaining businesses

Better alternatives available for investment

To avoid attracting the provisions of MRTP Act

Liquidation strategies Most extreme and unattractive

retrenchment strategy Involves closing down a firm and

selling of its assets Termination of business Causes serious problems like lay-

off of workers, termination of opportunities and stigma of failure

Liquidation strategies Liquidation according to Companies

Act of 1956 may be done in three ways Compulsory winding up under an order

of the court Voluntary winding up Voluntary winding up under the

supervision of the court

Combination strategies A mixture of stability, expansion or

retrenchment strategies Applied either simultaneously (at

the same time in different businesses ) or sequentially (at different times in the same business )

Combination strategies The complexity of business demands

that different strategies be adopted to suit the situational demands made upon the organization

Multi business organizations, as most large and medium companies are today – have to follow multiple strategies either sequentially or simultaneously

Examples of combination strategies TI (Murugappa Group) – strategic

alliances in tubes cycles and steel strips

Peerless General Finance and Investment Company – hotels, housing, hospitals, retailing – Peerless Technologies and Peerless Shipping divested – main business – non-banking financial institution

Examples of combination strategies ITC Ltd. – turnaround strategy for

speciality paper business (Triveni Tissues) – Financial services and Agri business to be divested

Pidilite Industries – expansion across adhesives and sealants, construction, paints and chemicals and art materials – divested its speciality chemical business and has acquired M-Seal product from Mahindras

Business level strategies Corporations operate through their

business groups / units Strategies at the corporate level provide

overall direction to the organization Most competitive interaction, though

occurs at the level of individual businesses

Business level strategies are therefore an important level at which companies set their strategies

Business level strategies They are

Cost leadership strategy Differentiation strategy Focus (niche) strategy

Cost leadership CA of firm lies in lowering costs of

products / services relative to what competitors have to offer

Can afford to cut costs without affecting quality owing to economies of scale or certain other unique advantage over other competitors

Achieving cost leadership Accurate demand forecasting and

maximum capacity utilization Attaining economies of scale

(lower per unit cost of product / service)

High level of standardization of products using mass production techniques

Achieving cost leadership Aiming at the average customer

(generalized set of utilities in product / service)

Investing in cost saving technologies thus making the product / service competitive in the market

Withholding differentiation till it becomes absolutely necessary

Cost leadership is used when Markets operate in such a way that

price-base competition is vigorous making cost an important factor

Product / service is standardized making differentiation superfluous

Buyers are numerous and possess significant bargaining power

Buyer loyalty is low as switching costs from one seller to another are insignificant

Benefits – cost leadership Cost advantage is the best insurance

against industry competition Firms that possess cost advantage are

less affected by bargaining power of powerful suppliers as they can absorb price increase to some extent

Cost advantage can act as an effective entry barrier for potential entrants

Risks - cost leadership Imitation of cost reduction techniques is

easy, hence the advantage is temporary Not a market friendly approach as it can

dilute customer focus and limit experimentation with product attributes

Scope for product / service gets reduced when competitors move out of the business

Technological advancement can change the ground rules and cost advantage enjoyed

Differentiation strategy When the CA of a firm lies in offering

special features incorporated into the business / service

These features are demanded by customers who are willing to pay a premium for them

The firm outperforms its competitors who are not able or willing to offer the special features that it can

Differentiation Achieved by incorporating features

that match the taste and requirements of

customers raise the performance of the product increase buyer satisfaction in tangible /

intangible ways Enable customers to claim

distinctiveness from others and enhance their status / prestige among buyers

Differentiation

Also achieved by Offering full range of products /

services that customers require for need satisfaction

Differentiation is used when Market is too large to be catered by a

few firms offering a standardized product or service

Customer needs/preferences are too large and diversified to be satisfied by a single product

The customer is prepared to pay a premium for a product/service valued by him

Differentiation is used when The nature of the product or

service is such that brand loyalty can be sustained that is it has a unique feature

There is ample scope for increasing sales of the product or service in terms of differentiated services and premium pricing

Advantages - differentiation Reduces competition rivalry due to

customer brand loyalty It is a market and customer focused

strategy Acts as an entry barrier due to high

prices Substitute product or services are a

negligible threat due to brand loyalty

Risks - differentiation Long term perceived uniqueness of

product or service is difficult to sustain Distinctiveness of differentiation is

gradually weakened and lost Over-differentiation (unnecessary

features) can have a negative impact Price premiums have a limit due to cost

benefit analysis Failure on the part of firm to communicate

benefits adequately to consumer

Focus business strategy Relies on cost leadership or differentiation

but caters to a narrow segment of the market

Focus strategies are niche strategies Basis for identification of customer groups

are demographic characteristics like age, gender, income, occupation, etc. Geographic segmentation (urban/rural or north/south) or life-style (traditional/modern)

Conditions - Focus Specialized features and attributes exist

in the product Specialized requirements that common

customers cannot be expected to fulfill Niche market is large enough for a

focused firm The firm has the necessary skills and

expertise to serve the niche segment adequately

Benefits - Focus Competitive advantage of focused firms

that are able to provide specialized products or services to loyal customers

Focused firms buy in small quantities hence powerful suppliers may not evince much interest

Specialization and competence that focused firms are able to achieve act as a powerful barrier to new entrants or substitute products

Risks – Focus strategy Niche markets require the

development of distinctive competencies to serve them. This is difficult to achieve.

Being focused means being committed to a narrow market segment.

Costs for a focused firm are higher as markets are limited and volume of production as well as sales are low.

Risks – Focus strategy Niches are transient; they may

disappear owing to technology or market forces

Niches may become attractive enough for the bigger players to shift attention to them

Rivals may devise ways to serve the niche markets better

Strategy implementation Strategies lead to plans. Plans lead to different kinds of

specific programs. A program is a broad term that

includes goals, policies, procedures, rules and steps that are to be taken to put a plan into action.

Strategy implementation Programs are usually supported by funds

allocated for new product development; example- an R&D program for new product development.

Programs lead to the formulation of projects.

A project is a highly specific program for which time schedule and costs are predetermined. It requires allocation of funds based on Capital budgeting.

Strategy implementation Projects create the needed

infrastructure for day to day operations They may be used for setting up of new

or additional plants, modernizing existing facilities or similar such activities required for implementation strategies

Example – Production of different models of motorcycles or scooters

Activities in implementation Project implementation Procedural implementation Resource allocation Structural implementation Behavioral implementation Functional and operational

implementation

Project implementation A project is a time bound, goal

directed major undertaking requiring the commitment of skills and resources

The goals or objectives of a project are derived from the plans and programs which are based on the strategies adopted

Phases of a project Conception phase – generation of ideas

which form the core for procedures in the project

Definition phase – analysis of various aspects like technical, financial and structural documented in the form of a project feasibility report. This can consist of Generation of information regarding the

organization and industry Information regarding project promoters

Phases of a project Project details such as capacity,

processes, technical arrangements, management, location, land and buildings, plant and machinery, raw materials, utilities, effluents, labour, housing for labour and schedule of implementation

Overall cost of project Means of financing

Phases of a project Profitability and cash flow Economic considerations such as price

fixing, benefits for the country and region

Competing products Environmental considerations Government consents such as Letter of

intent, industrial license, import license, etc.

Phases of a project Planning and organizing phase

Includes planning related to aspects such as infrastructure, engineering designs, schedules and budgets

A project structure which will deal with the organization and manpower systems as well as procedures are to be created to help in implementation

Phases of a project Implementation

Detailed activities of implementation of the project leading to testing, trial and commissioning of the plant

Clean-up phase The final phase in project

implementation which deals with disbanding the project infrastructure and handing over the commissioned plant to operating personnel

Procedural implementation Procedural framework by which plans,

programs and projects have to be approved by regulatory authorities at central, state and local levels

Consist of a number of legislative enactments and administrative orders besides Policy guidelines issued by the Government of India from time to time

Regulatory elements Formation of a company is governed by the

provisions of the Companies’ Act,1956 and consists of promotion, registration and floatation Promotion – preliminary steps to create

awareness Registration – registering the Memorandum of

Association, Articles of Association and Agreements with the Registrar of Companies who issues a Certificate of Incorporation

Floatation – raising of Capital to commence business

Licensing procedures Industrial policy resolution – 1956 Industries Development and Regulation

Act – 1951(IDRA) Post-1991 period – Liberalisation led to

abolishing of industrial licensing irrespective of the level of investment for all industries except a few (those pertaining to security, defence or environment)

Licensing procedures Securities and Exchange Board of India

(SEBI) Act of 1992 which replaced the Capital Issues Control Act of 1956 and deals with regulation of the securities market

Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 deals with prevention of monopolies and restrictive trade practices in business. It is implemented by the MRTP Commission. Examples:- Collusion/Cartel formation by companies, price discrimination among different groups of customers, etc.

Licensing procedures Foreign collaboration procedures –

FCCB, RBI, FIPB and Project Approval Board are major regulatory agencies for concluding JVs with companies abroad

FEMA (in June 2000) has replaced FERA (1973) for dealing in Foreign Exchange in export businesses

Export-Import requirements are governed by EXIM policy

Licensing procedures Patenting and trademark

requirements – These are governed by Indian Patents Act of 1970 Indian Patents (Amendments) Act of

1995 Trade and Merchandise Marks Act of

1958 Copyright Act of 1957

Licensing procedures Labour legislation requirements Environmental protection and pollution

control requirements Environmental pollution Act of 1956 Water (protection and conservation) Act of

1974 Air (protection and conservation) Act of 1981 Forest conservation Act of 1980 Wildlife protection Act of 1972

Licensing procedures Consumer protection requirements

Essential commodities Act Standard weights and measures Act MRTP Act Consumer protection Act of 1986 Consumer protection (Amendment)

Ordinance of 1993

Resource allocation Deals with the procurement and

commitment of financial, physical, human resources to strategic tasks for the achievement of organisational objectives

Finances are of two types Long term – capital assets Short term – working capital

Resource allocation Sources of finance

Internal sources Retained earnings Depreciation provisions Taxation provisions Other resources such as development

rebate, investment allowance, reserves

Resource allocation Sources of finance

External sources Capital market sources such as equity

and debt Money market sources such as bank

credit, hire purchase, trade credit, installment debit and fixed deposits

Approaches to resource allocation Top down approach – from CEO to

operating levels: This approach is usually adopted in the entrepreneurial mode of strategy implementation

Bottom up approach – allocation after aggregation from the operating levels

Mix of above – involves iterative strategic decision making between different levels of the management. This is also known as strategic budgeting

Factors – resource allocation Objectives of the organisation – priorities

of tasks/objectives Preference of dominant strategists (CEO) Internal politics – resources are a source of

power and are therefore affected by internal politics

External influences – government policy, shareholders, financial institutions, legal requirements and social requirements

Strategy in fragmented industries Examples of fragmented industries

Services Retailing Agricultural products steel

Strategy in fragmented industries Reasons for fragmentation

Low overall entry barriers Absence of economies of scale or

experience curve High transportation costs High inventory costs and fluctuating

sales Diverse market needs High product differentiation

Strategy in fragmented industries Strategies to overcome fragmentation

Create economies of scale or experience curve

Standardize diverse market needs Neutralize or split off aspects most

responsible for fragmentation Make acquisitions for a critical mass Recognize industry trends well in advance

Strategy in emerging industries Newly formed or reformed industries

that have been created by technological innovation, shifts in relative cost relationships, emergence of new customer needs or any other economic or sociological changes that elevate a new product or service to the level of a potentially viable business opportunity

Strategy in emerging industries Characteristics of emerging

industry Technological uncertainty Strategic uncertainty High initial costs Short time horizons

Strategy in emerging industries Mobility barriers

Proprietary technology Access to distribution channels Access to raw materials and other

inputs of appropriate costs and quality Cost advantages due to experience Risk, which raises effective

opportunity cost of capital and thereby effective capital barriers

Strategy in emerging industries Strategic choices

Shaping industry structure Balance between industry and pursuing

narrow self interest Shift in orientation of suppliers and

distribution channels Shifting mobility barriers Timing of entry into market Coping with competitors

Strategic choices in mature industries Maturity involves

Slowing down of growth which means more competition for market share

Competition shifts towards greater emphasis on cost and service

Managing change Increasing competition Falling profits Falling margins

Strategic choices in mature industries Strategic choices

Making the strategic choice between cost leadership and differentiation

Process innovation Correct pricing Increasing scope of purchase Selection of buyers

Strategy in declining industries Causes

Technology Demographics Shifts in needs

Conditions Uncertainty Decline in unit sales over a sustained period Falling profits

Strategy in declining industries Strategic exit barriers

Inter-relatedness Access to financial markets Vertical integration Informational barriers Managerial or emotional barriers Government or social barriers

Strategy in declining industries Strategic alternatives

Leadership – seek a leadership position in terms of market share

Niche – create or defend a strong position in a particular segment

Harvest – manage a control divestment taking advantage of strengths

Divest – liquidate the investment as quickly as possible in the decline phase

Strategic audit Provides a check-list of questions by area

or ratio that enables a systematic analysis of various corporate functions and activities required to be made

Extremely useful as a diagnostic tool to pinpoint problem areas and highlight organisational strengths and weaknesses

Can find causes to a problem and help generate solutions to the problem

Strategic audit Steps - Corporate strategic audit

Evaluate current performance results Review corporate governance Scan and assess external environment Scan and assess internal environment Analyse strategic factors using SWOT Generate and evaluate strategic alternatives Implement strategies Evaluate and control

Strategic audit Current performance

Strategic posture Mission Objectives Strategies Policies

Strategic audit Corporate governance

Board of Directors External or internal Share of stock Contribution in terms of knowledge, skills,

background and connections International experience How long on the board Level of involvement in strategic

management

Strategic audit Top management

Constitution Knowledge, skills, background and

style International experience Contribution to corporation’s

performance How long in the management

Strategic audit Top management

Whether management has established systematic approach to strategy

Interaction with lower level management and board of Directors

Ethics and social responsibility Stock options and executive

compensation Skills to deal with future challenges

Strategic audit External environment

(opportunities/threats) Societal environment – general

environment forces affecting the corporation and industries it competes with(economic, technological, politico-legal,socio-cultural)

Strategic audit External environment

(opportunities/threats) Task environment (Industry)

Key forces in immediate environment affecting corporation – customers, competitors, creditors, suppliers, labour unions, governments, trade associations, interest groups, local communities

Porter’s five forces Summary of external factors – important

forces and factors at present and in the future

Strategic audit Internal environment (strengths and

weaknesses) Corporate structure

Present structure Decision making authority

(centralised/decentralised) Organised on what basis Is present structure consistent with current

corporate objectives, strategies, policies and programs as well as the firm’s international operations


weaknesses) Corporate culture

Well defined or emerging Consistent with firm’s objectives, strategies,

policies and programs Position on issues facing the corporation like

productivity, performance variables and adaptability to change

Values of nation’s culture in which the firm operates

Strategic audit Internal environment (strengths

and weaknesses) Corporate resources

Marketing – current marketing objectives, strategies, policies and programs; whether clearly stated or implied from programs/budgets

Whether consistent with the core mission, objectives, strategies, policies and with internal and external environments



Marketing performance Concepts and techniques to improve product

performance Adjusting to countries of operation Role of marketing manager in the strategic

management process


weaknesses) Corporate resources

Finance Whether financial objectives, strategies, policies

and programs are clearly stated Performance in terms of financial analysis –

trends, impact on past and future performance, comparison with competing firms; CA ?

Role of financial manager



R & D Compare R & D strategy, policy and programs

with that of company for consistency. Role of technology in corporate performance Does R & D provide the company with a CA Role of the R & D Manager in the strategic

management process



Operations and logistics Capabilities of the corporation whether being

handled appropriately Check facilities for both product oriented and

service oriented systems Does operations provide the company with CA Role of the Operations manager in the

strategic management process



Human resources Current HRM objectives, strategies, policies and

programs, whether consistent with those of company

Analysis of HRM to see how it improves the fit between individual employee and the job

Does HRM provide a CA Role of HRM manager in the strategic

management process



Information Systems Current IS objectives, strategies policies and

programs Whether consistent with objectives of the company Performance in terms of providing database, internet

access, performing routine office operations and assisting managers in making routine decisions

Concepts and techniques to improve corporate performance

Does it provide CA Role of the IS manager in he strategic management

process


and weaknesses) Summary of internal factors

Which factors are core competencies Which of these are most important to the

corporation and to the industry in which I competes

Which of these will be important in the future

Analysis of strategic factors Situational Analysis

What are the most important internal and external factors (SWOT) that strongly affect the corporations present and future performance (list 10 strategic factors)

Review of mission and objectives Are the current mission and objectives

appropriate in the light of key strategic factors Should the mission and objectives be change;

if yes, what will be its effect on the firm

Strategic alternatives Can the current or revised objectives be

met by fine tuning the strategies in use What are the major alternate feasible

strategies available; what are the pros and cons of each can corporate scenarios be developed and agreed upon

Alternatives must fit societal environment, industry and company for the next 3-5 years.

Recommended strategy Specify the strategic alternatives

recommended at corporate, business and functional levels

Justify recommendations in terms of their ability to resolve both long and short term problems

State policies to be developed or revised to guide effective implementation

Impact of recommended strategy on company’s core and distinctive competencies

Implementation Programs required to be developed (such

as restructuring or implementing TQM) to implement he recommended strategy Who should develop these programs Are these programs financially viable? Can

proforma budgets be developed and agreed upon

Are priorities and time tables appropriate to individual programs

Will new standard operating procedures need o be developed

Evaluation and control 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?

Evaluation and control Are adequate control measures in

place in order 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 is responsible for taking corrective action?

STRATEGIC MANAGEMENT Managerial actions and decisions that determine the long run performance of an organization. Includes environmental scanning (external.

Documents

business strategy

strategy action

functional strategy

corporate strategy

new strategy

appropriate strategy

concepts of strategy

concepts of strategy