Strategic Management Question-answers 451415

Subject: Strategic Management Q - Define the term ‘strategy’ what is its significance for any Business Organization?

Johnson and Scholes define strategy as follows: "Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations". Strategy is when a firm expenses its intent to adopt a current & future course of action that is blueprint &roap with clarity of objectives that need to be achieved in short term and long term. In other words, strategy is about: * Where is the business trying to get to in the long-term (direction) * Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope) * How can the business perform better than the competition in those markets? (advantage)? * What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (resources)? * What external, environmental factors affect the businesses' ability to compete? (environment)? * What are the values and expectations of those who have power in and around the business? (stakeholders) Strategy at Different Levels of a Business Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it. Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement". Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of

products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc. Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

Significance: Why Strategy? 1. Survival. 2. Respond to changes in external environment. 3. The need to grow. 4. Respond to changes in customer expectations. 5. Corporate social responsibility amongst stakeholders. 6. Increase share of the market & profitability. 7. Manage competition effectively & gain business dominance in the industry. 8. Build competencies & capabilities. Technical expertise, financial capabilities 9. Customer acquisition in growing markets. Getting new customers (pursuing larger customer base) The business strategy of a company provides the big picture that shows how all the individual activities are coordinated to achieve a desired end result. It is through the strategy process that the overall direction of the business is set. This is based on the opportunities and threats in the outside world and the internal strengths and weaknesses of the business. Your Strategy As A Reaction To Environmental Changes That Have Happened Or You Expect to Happen As the external environment changes, perhaps due to changes in customers or competitors or perhaps due to the wider forces - political, economic, social, technological, and environmental or legislation based - it is important to come back and ask some fundamental questions. The more the external environment changes, then: 

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The more opportunities there are likely to be for the well prepared company; but . The more threats the unwary and the unprepared will face.

Even if the basic environment is stable, actions and intentions of competitors change and companies need to review what is happening, prepare for any real or potential competitive manoeuvres and find new insights into ways to create value for customers.

Q - Explain 5P’s for strategy that is strategy as a plan, as pattern, as position, as perspective and as purpose. Mintzberg's 5 Ps for Strategy The word "strategy" has been used implicitly in different ways even if it has traditionally been defined in only one. Explicit recognition of multiple definitions can help people to manoeuvre through this difficult field. Mintzberg provides five definitions of strategy:     

Plan Pattern Position Perspective Purpose

Plan Strategy is a plan - some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation. By this definition strategies have two essential characteristics: they are made in advance of the actions to which they apply, and they are developed consciously and purposefully. Strategy can be defined as a direction, a guide or a course of action to get from here to there.

Pattern If strategies can be intended (whether as general plans or specific ploys), they can also be realised. In other words, defining strategy as plan is not sufficient; we also need a definition that encomes the resulting behaviour: Strategy is a pattern specifically, a pattern in a stream of actions. Strategy is consistency in behaviour, whether or not intended. The definitions of strategy as plan and pattern can be quite independent of one another: plans may go unrealised, while patterns may appear without preconception. Plans are intended strategy, whereas patterns are realised strategy; from this we can distinguish deliberate strategies, where intentions that existed previously were

realised, and emergent strategies where patterns developed in the absence of intentions, or despite them. Strategic plans and ploys are both deliberate exercises. Sometimes, however, strategy emerges from past organizational behavior. Rather than being an intentional choice, a consistent and successful way of doing business can develop into a strategy. For instance, imagine a manager who makes decisions that further enhance an already highly responsive customer process. Despite not deliberately choosing to build a strategic advantage, his pattern of actions nevertheless creates one. To use this element of the 5 Ps, take note of the patterns you see in your team and organization. Then, ask yourself whether these patterns have become an implicit part of your strategy; and think about the impact these patterns should have on how you approach strategic planning.

Position Strategy is a position - specifically a means of locating an organisation in an "environment". By this definition strategy becomes the mediating force, or "match", between organisation and environment, that is, between the internal and the external context. "Position" is another way to define strategy - that is, how you decide to position yourself in the marketplace. In this way, strategy helps you explore the fit between your organization and your environment, and it helps you develop a sustainable competitive advantage. For example, your strategy might include developing a niche product to avoid competition, or choosing to position yourself amongst a variety of competitors, while looking for ways to differentiate your services. When you think about your strategic position, it helps to understand your organization's "bigger picture" in relation to external factors. To do this, use PEST Analysis, Porter's Diamond, and Porter's Five Forces to analyze your environment these tools will show where you have a strong position, and where you may have issues.

Perspective Strategy is a perspective - its content consisting not just of a chosen position, but of an ingrained way of perceiving the world. Strategy in this respect is to the organisation what personality is to the individual. What is of key importance is that strategy is a perspective shared by of an organisation, through their intentions and / or by their actions. In effect, when we talk of strategy in this context, we are entering the realm of the collective mind - individuals united by common thinking and / or behaviour. The choices an organization makes about its strategy rely heavily on its culture – just as patterns of behavior can emerge as strategy, patterns of thinking will shape an organization's perspective, and the things that it is able to do well. For instance, an organization that encourages risk-taking and innovation from employees might focus on coming up with innovative products as the main thrust behind its strategy. By contrast, an organization that emphasizes the reliable processing of data may follow a strategy of offering these services to other organizations under outsourcing arrangements. To get an insight into your organization's perspective, use cultural analysis tools like the Cultural Web, Deal and Kennedy's Cultural Model, and the Congruence Model.

Purpose

Using the 5 Ps Instead of trying to use the 5 Ps as a process to follow while developing strategy, think of them as a variety of viewpoints that you should consider while developing a robust and successful strategy. As such, there are three points in the strategic planning process where it's particularly helpful to use the 5 Ps: 1. When you're gathering information and conducting the analysis needed for strategy development, as a way of ensuring that you've considered everything relevant. 2. When you've come up with initial ideas, as a way of testing that they're realistic, practical and robust. 3. As a final check on the strategy that you've developed, to flush out inconsistencies and things that may not have been fully considered.

Using Mintzberg's 5 Ps at these points will highlight problems that would otherwise undermine the implementation of your strategy. After all, it's much better to identify these problems at the planning stage than it is to find out about them after you've spent several years – and millions of dollars – implementing a plan that was flawed from the start.

Q: Explain the process of Strategic Management in any organization. What are the various steps of Strategic Management process? Describe the significance of each step. STRATEGIC MANAGEMENT PROCESS (5 Stage Process) I) Develop a strategic vision for the company Vision – Mission statement [vision is panoramic view of where we are going & giving specifics to business plans] Vision – Identifies specifics competencies of the organisation, core competencies, states your basic strength & where you wish to be [Sense of Direction] Mission – is methodology – People, Process, Policy to get there 1. Firm exhibits strategic intent to favorably alter its market position GE’s e.g.: “We will emerge as global leaders & the preferred choice of the consumer segment we choose to serve. Using Technology & innovative services we will delight the customer & be committed to their success by stake holders creating wealth “ 2. The strategic vision should be intrinsically, closely linked with companies ethics, value, beliefsE.g.., Quality, building stakeholder relationships Customer Services CSR Economic Value add (wealth creation) Creating a great place to work Committed to the success of Internal & External stakeholders 3. The firm should communicate its strategic vision to all stake holders linked to value chain creation P – Price O – Operations C- Costs K – Knowledge E – Expenditure

T – Training S – Services E.g.: NANO Supply Chain Cost increased Loss / Costs of 1500 Crores even before producing a Car. Excellent Case of Ethics Walmart Hypermarket, sells all merchandise across categories below MRP. 70000 Merchandise 8000 stores across Model is based on- Low Cost leadership o Scale – Single longest player as a buyer of Merchandise - Whatever they save based on SCM cost it to the customer & part of it is retained to open new store Walmart’s KSF is “Price” is to give the best price to his customer Profitability is based on excellent SCM & not pricing of final goods Strategic Management Most People should have in depth knowledge of organisation Importance of Strategic Vision: Imperative to look beyond today & think strategically about the 1. 2. 3. 4. 5.

Impact of new technologies on the horizon Low customer needs and expectations are changing What will it take to overtake or outrun the competitors? Which promising market opportunities to be aggressively pursued Other external and internal factors the company needs to prepare for future

“There is no escaping the need for the strategic vision” II) Setting Objectives : The firm makes an attempt to convert strategic vision into specifics KPIs – creating results & outcome the company wishes to achieve out of strategic intent. There are principally two types of objectives namely classify Financial Objectives & Strategic Objectives 1) Financial Objectives i. Increase the EPS ii. Increase Credit ratings iii. Acceptable Return on Investment (EVA) iv. Stock Price appreciation (or MVA – Market Value Add) v. Good Cash Flow vi. Good Credit worthiness

vii. Higher Dividends viii. Growth in Earnings / Revenue ix. Higher Profit Margins State the objective that serves the Management intends not only to deliver financial performance but also to improve position of the organisation: a. Competitive Advantage b. Business Position c. Long Range Business Prospects 2) Strategic Objectives i. Increase in x% of top line and y% in bottom line this is the intent, outcome will be financial. ii. Improve cash flow eg: negotiate with creditors, create a system. iii. Increase share of market. iv. Reduce Overall cost of production. v. Rate of innovation: Increase revenue through new product introduction and capitalise on first mover advantage. vi. Adopt top bottom approach, this is also called, commander approach. vii. Create stable earning during recession; de-risk the business( Infosys gets internal customers diverse from banking products across many sectors. Monte-Carlo, winter Wear Company, now also in summer wear after saturation in core business areas. Inability to grow into current market. viii. Improve technology leapfrogging into future. Eg: Sony Walkman, Apple I-pod etc. ix. Increase share of voice ( jargon of advertising) and augment perceived brand value. x. Expand into new geographic market and new customer segments through brand and product line extensions. Eg: Dettol a) Antiseptic b) Talcum Powder c) Soap d) Band-Aid Adhesive Tape. 3) Social Objectives. i) Corporate Governance Transparency around financial health of the company, to the stake holders. CSR (Corporate Social Responsibility) i. Promise of quality and supply of product at affordable price. ii. Concern for Environment. Products and Practices of the businesses will not do damage to the environment.

iii. Philanthropy Pledging to the under- privileged of the society. iv. EVA for shareholders.

III) Outlining Corporate Strategy. i) The firm needs to identify a framework of initiatives to be used as a part of overall corporate strategy in order to establish a dominant business position, across either multiple segments in a narrow industry or across diversified businesses. Eg: ITC. Paper, Tobacco, Hotels, Apparels, FMCG Pioneer in contract farming concept of e choupal.

SCA (Sustainable Corporate Advantage) Kotlers - effectively sell what you produce - Managing and acquiring customers Porters 1. Business is marketing 2. Rise above average probability; eg – differentiation 3. Managing competition - kill competition and stay ahead

4. Marketing to create industry leadership / dominate business position and create distance from your competition 5. Achieve by serving multiple industrial segments, benefit areas, price points - Eg. HLL, multiple products, all segments, multiple price points in a narrow industry – NIRMA – bottom end segment *Most important for any business SHORT VISION + OBJECTIVE + STRATERGY = A STRATEGIC PLAN IV) Strategic Execution – “Make it happen” - The underlying essence of strategic execution comes from a price leadership - The firm undertakes the operations to shape the current and future performance of core business activities in of the objectives around the strategic intent and also taking both internal and external factors into consideration - It involves creating strategic business fit for succeeding. Important fits include strategy and operations capabilities; strategy and reward structure, strategy and internal system, strategy and organisational culture Resources o PC & MAC o Access to markets, o Finance o Technology Capabilities o Delivery - A firms ability to compete in a chosen industry Eg: TCL – A Chinese company had resources but no capabilities to deliver - Create and develop budgets to various initiatives - Facilitate strategy execution by utilising best practices in areas around process and policy - Introduce or pursue change management if required to create conducive work climate - Create good intellectual capital (role of H.R.) within the organisation, initiate performance management system and organisation development as mandatory and motivation and culture building. V) Fine Line Strategy - Identify gap indicators through performance gap analysers based on past results in periodic reviews. Improve and control for future sustainable performance. - Identifying lead indicators and commit resources in totality in order to neutralise competition - Increase strategic intent from a firm generally leads to better financial performance - Test if winning strategy – competitive advantage test, the performance test

Q: How environmental analysis helps in deciding strategies of a business organization? What are the steps involved in such analysis? Explain with a suitable illustrative example. The concept of external environment is important for every kind of business operation. External environment is an attempt to understand the outside forces of the organisational boundaries that are helping to shape of the organisation. The external environment can provide both facilitating and inhibiting influences on organizational performance. Key dimension of the external environment principally consists of a micro environment and a macro environment. External Environment Micro environment

Macro environment

Micro Environment Micro environmental factors are internal factors close to a business that have a direct impact on its strategy. These factors include: Customers Organisations survive on the basis of meeting “customer needs and wants” and providing benefits for their customers. Failure to do so will result in a failed business strategy. Employees Employing the correct staff and keeping staff motivated is an essential part of an organisation's strategic planning process. Training and development play a critical role in achieving a competitive edge; especially in service sector marketing. This is clearly apparent in the airline industry, where customer services are crucial in obtaining a competitive edge. Suppliers Suppliers provide businesses with the materials they need to carry out their business activities. A supplier's behaviour will directly impact the business it supplies. For example if a supplier provides a poor service this could increase timescales or lower product quality. An increase in raw material prices will affect an organisation's marketing mix strategy and may even force price increases. Close supplier relationships are an effective way to remain competitive and secure quality products.

Shareholders As organisations require inward investment to grow, they may decide to move from private to public ownership and list on the stock market. The introduction of public shareholders brings new pressures as public shareholders want a return from the money they have invested in the company. Shareholder pressure to increase profits will affect organisational strategy. Relationships with shareholders need to be managed carefully as rapid short term increases in profit could detrimentally affect the long term success of the business. Competitors The name of the game in marketing is differentiation. Can the organisation offer benefits that are better than those offered by competitors? Does the business have a unique selling point (USP)? Competitor analysis and monitoring is crucial if an organisation is to maintain or improve its position within the market. If a business is unaware of its competitor's activities they will find it very difficult to “beat” them. The market can move very quickly whether that is a change in trading conditions, consumer behaviour or technological developments. As a business it is important to examine competitors' responses to these changes so that you can maximise the impact of your response. Macro Environment There are many factors in the macro-environment that will effect the decisions of the managers of any organisation. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change. To help analyse these factors managers can categorise them using the PESTEL model. This classification distinguishes between: 

Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in of business ? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system.

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Economic factors. These include interest rates, taxation changes, economic growth, inflation and exchange rates. As you will see throughout the "Foundations of Economics" book economic change can have a major impact on a firm's behaviour. For example: - higher interest rates may deter investment because it costs more to borrow - a strong currency may make exporting more difficult because it may

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raise the price in of foreign currency - inflation may provoke higher wage demands from employees and raise costs - higher national income growth may boost demand for a firm's products Social factors. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work. In the UK, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staffs are living longer. The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines have increased whereas demand for toys is falling.

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Technological factors: new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products.

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Environmental factors: environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities.

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Legal factors: these are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).

Different categories of law include:

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consumer laws; these are designed to protect customers against unfair practices such as misleading descriptions of the product competition laws; these are aimed at protecting small firms against bullying by larger firms and ensuring customers are not exploited by firms with monopoly power employment laws; these cover areas such as redundancy, dismissal, working hours and minimum wages. They aim to protect employees against the abuse of power by managers health and safety legislation; these laws are aimed at ensuring the workplace is as safe as is reasonably practical. They cover issues such as training, reporting accidents and the appropriate provision of safety equipment

Typical PESTEL factors to consider include: Factor Political Economic Social Technological Environmental Legal

Could include: e.g. Political stability, international trade, taxation policy e.g. interest rates, exchange rates, national income, inflation, unemployment, Stock Market e.g. ageing population, attitudes to work, income distribution e.g. innovation, new product development, rate of technological obsolescence e.g. global warming, environmental issues e.g. competition law, health and safety, employment law

Environmental Analysis Process A business manager should be able to analyze the environment to grasp opportunities or face the threats. Organizations need to build strength and repair their weakness available in the business environment. Therefore, this process consists of not only a single step but a process of various steps. Environmental analysis comprises scanning, monitoring, analyzing, and forecasting the business situation. Scanning is to get the relevant information from the information overload. It is to focus on the most relevant information. Monitoring is to check the nature of the environmental factors. Analyzing requires data collection and use of different required tools and techniques. Forecasting is to find the future possibilities based on the past results and present scenario. Environmental analysis process is not static but a dynamic process. It may differ depending on the situation. However, a general process with few common steps can be identified as the process of environmental analysis these are a) Monitoring or identifying environmental factors, b) Scanning and selecting the relevant factors and grouping them, c) Defining variables for analysis,

d) Using different methods, tools, and techniques for analysis, e) Analyzing environmental factors and forecasting, f) Deg profiles, and g) Strategic positioning and writing a report. Brief discussion is made on each of the step of this environmental analysis process. Q: Strategic implementation is challenging task in business organizations dealing with a problem of organizational structure, systems, styles, culture, power and authority. Explain with an appropriate example. Formulating strategy is a difficult task. Making strategy work—executing or implementing it throughout the organization—is even more difficult. This is where most failures occur. It is not uncommon for strategic plans to be drawn up annually, and to have no impact on the organization as a whole. Some obstacles to effective execution The road to effective strategy execution is full of potholes and dangers. What are some of them? 

Planning and execution are interdependent. Strategy formulation and implementation are separate, distinguishable parts of the strategic management process. Logically, implementation follows formulation; one cannot implement something until that something exists. But formulation and implementation are also interdependent, part of an overall process of planning-executing-adapting. This interdependence suggests that overlap between planners and “doers” improves the probability of execution success. Not involving those responsible for execution in the planning process threatens knowledge transfer, commitment to sought-after outcomes, and the entire implementation process.

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Execution takes time. The successful implementation of strategy takes more time than its formulation. This can challenge managers’ attention to execution details. The longer time frame can also detract from managers’ attention to strategic goals. Controls must be set to provide and keep management abreast of external “shocks” and changes. The process of execution must be dynamic and adaptive, responding to unanticipated events. This imperative challenges managers responsible for execution.

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Execution involves many people. Strategy implementation always involves more people than strategy formulation. This presents problems. Communication down the organization or across different functions becomes a challenge. Making sure that processes throughout the organization strategy execution efforts can be problematical in a large organization. Linking strategic objectives with the day-to-day objectives at different organizational levels and locations becomes a challenging task. The larger the number of people involved, the greater the challenge to execute strategy effectively.

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Effective execution involves managers across all hierarchical levels. Another problem is that some top-level managers believe strategy implementation is “below them,” something best left to lower-level employees. This view holds that one group of managers does innovative, challenging work (planning), and then “hands off the ball” to lower-levels for execution. If things go awry, the problem is placed squarely at the feet of the “doers,” who somehow couldn’t implement a perfectly sound and viable plan.

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Managing change is difficult. Execution often involves change—in structure, incentives, controls, people, objectives, responsibilities. As we know, change can be threatening. The importance of managing change well is clearly important for effective strategy implementation. The inability to manage change and reduce resistance to new implementation decisions or actions can spell disaster for execution efforts.

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Other execution-related problems. They include responsibility and ability for execution activities and decisions that are not clear; poor knowledge sharing among key functions or divisions; dysfunctional incentives; inadequate coordination; poor or vague strategy; and not having guidelines or a model to shape execution activities and decisions. Space limitations prevent a complete discussion of how to overcome all obstacles to strategy execution.

The easy part of managing a law firm knows what to do. The hard part is having the vision and courage to get it done. Many solutions to strategic issues are deceptively simple and often appear self-evident on the surface. • For example, if your traditional markets are maturing and becoming more pricecompetitive, it is self-evident that you should diversify into new areas and/or locations.

• The challenge, of course, is not in knowing that you should diversify, but in successfully finding an acquisition that affords the right fit, getting the deal done, working tirelessly to integrate “strangers” into an existing culture, and convincing your partners that success in implementing strategy requires patience and diligent leadership. Companies that attempt strategic change without considering organizational culture risk failure. Business leaders need to be aware that culture is not just something that happens outside of a business. Companies large and small have their own cultures as well. A culture can happen spontaneously within a company, and managers can learn how to harness its power or be overpowered by it. Managers can also take an active part in shaping an organizational culture, to try to ensure that it benefits the company’s goals and its employees. Every organization has a unique structure. An organizational structure is the reflection of the company’s past history, reporting relationships and internal politics. You need to take a very close look at your organization structure and evaluate if it s your strategy. You may need to customize your organizational structure to fit your strategy.

Q: Explain how Michael Porter’s five forces model is helpful in forth coming SWOT – Analysis carried out in formulation of Business strategy. To formulate effective strategies, managers in an organization need to be aware of realities in the business environment. Strategy formulation thus begins with a scanning of the external as well as internal environment. Analysis of external environment helps to identify the possible threats and opportunities while analysis of internal environment helps to identify strengths, weaknesses and the key people within the organisation. PORTER'S FIVE FORCES MODEL: Porter argues that there are five forces that determine the profitability of an industry. They are:

Porter contends that "The collective strengths of these forces determines the ultimate profit potential in the industry, where profit potential is measured in of long run return on investment capital". If you can manage all 5 forces, you can have Sustainable Corporate Advantage (SCA). SCA is a) Industry dominance/market leader b) Above industry average profit Let us see each of them in detail: Threat of new entrants: New entrants to an industry typically brings to it new capacity and desire to gain market size and substantial sources. They are therefore threats to established corporations. Threat of entry depends on the entry barriers and the reaction that can be expected from the existing companies. An entry barrier is an obstruction that makes it difficult for a company to enter into an industry. Major entry barriers include: Economies of scale: These exist whenever large volume firms enjoy significantly lower production cost per unit than smaller volumes operator do. This discourages firms, which have less volume and high production cost from entering into the market. Cost disadvantage independent of scale: Established competitors may have cost advantage even when the new entrant has comparable economies of scale. This advantage may include proprietary product knowledge such as patents, favourable access to raw materials, favourable locations, government subsidies etc.

Product differentiation: Differences in physical or perceived characteristics must make incumbent's product unique in the eyes of customer and force customers to overcome existing brand loyalty. Capital requirement: If the amount of investment required to enter into an industry is high, the number of entrants who could afford it would be less. Switching cost: Sometimes the cost that would be incurred by the customers to switch from one supplier to another supplier makes it difficult for the new entrants to gain market share. Access to distribution channel: Existing relationship and agreements between manufacturers and key distributors in a market may also create barriers to entry. Companies aspiring to enter a market may look for unique distribution channel to provide access as well as to differentiate their products. Finally in addition to these barriers firms may also deter entrants by harsh retaliation.

Bargaining power of suppliers: Suppliers can affect the industry through their ability to raise price or to reduce the quality of the purchased product and services. Following are the conditions that make suppliers powerful: Dominance by few players and lack of substitutes: A few players might become strong enough to dominate the suppliers industry. Substitutes might not be readily available as well. These two factors limit customer's option and increase the supplier's power. Greater concentration among suppliers than among buyers: A concentrated industry is one in which only a few large firms dominate. Firms in highly concentrated industry, that supply material to highly fragmented industry, can exert power over the buyer. Relative lack of importance of the buyer to the supplier group: Some customers are more important than others because of their size of their purchase or the prestige that comes from supplying them. High differentiation by the supplier and high switching cost: A buyer could be tied to a particular supplier if other suppliers can't meet his requirements. Any switching that might be incurred by the buyer will strengthen the position of the suppliers.

Threat of forward integration: Forward integration involves a supplier moving into a later stage of the manufacturing process or distribution i.e. moving into direct competition with its customers. Bargaining power of buyers: Buyers can exert bargaining power over a supplier industry by forcing its prices down, by reducing the amount of goods they purchase from the industry or by demanding better quality for the same price. Factors that makes the buyer more powerful: Undifferentiated or standard supplies: If the product being supplied is a commodity good or service then customers can shop around for the most favourable . Credible threat of backward integration: Backward integration involves a buyer moving to an earlier stage of manufacturing or distribution, thus becoming a competitor for the supplier's business. Accurate information about the cost structure of the supplier: This allows the customers to exercise more precision in negotiating the price of the supplier. Price sensitivity: Buyers are likely to be more price-sensitive if a) Suppliers represent the significant fraction of the total cost incurred by the buyers b) The supplier product is unimportant to the overall quality or cost of the buyer's final product and c) The buyers already earn a low profit. A growing trend among small businesses is to augment their bargaining power as customers through ing or forming buying groups. Threat of substitute products: Substitute products are those products that appear to be different but can satisfy the same need as another product. The availability of substitutes places a ceiling on price limit of an industry product. When the price of the product rises above that of the substitute product customers tend to switch over to the substitutes. Deregulation and technology revolution has given rise to a lot of substitutes.

The intensity of rivalry among existing players: In most industries individual firms are mutually dependent. Competitive moves by one firm can be expected to have noticeable effects on its competitors and cause

retaliation or counter efforts. Competition can be in the form of pricing, product differentiation, product innovation etc. Factors that increase competitive rivalry are: Equally balanced competitors: The most intense competition results from well-matched rivals in a situation that doesn't allow any particular firm to dominate. Slow industry growth: In slow growth markets, growth has to come by taking market share from rivals. High fixed cost: Additional sales volume can help to offset high fixed cost. Hence competitors might be willing to fight for any possible sales. Lack of differentiation or lack of switching cost: These two factors ensure that customers can easily switch over to a rival product and to retain them is a constant struggle. Large increase in manufacturing capacity: If a manufacturer can increase capacity by a large increment, by building a new plant, it will run it at full capacity to keep the unit cost less - thus producing so much that the selling price falls throughout the industry. High strategic stakes: The market is well worth fighting for because of its profit potential or the opportunities it creates elsewhere. High exit barriers: For economic, strategic or emotional reasons, individual players might consider it difficult to leave the industry. The outcome of industry and external environment analysis results in identifying the relevant and important opportunities and threats the organisation has to face in the future.

SWOT AND ORGANISATION CAPABILITY ANALYSIS SWOT analysis is the assessment of comparative strengths and weaknesses of a firm in relation to its competitors; and environmental opportunities and threats, which a company may have to face in the future. It should be based on logic and rational thinking such that a proper strategy improves an organization’s business strength and opportunities and at the same time reduces the weaknesses and threats. Strength and weakness are internal forces and factors that are to be assessed from continuously since more and more competitive organizations with state of the art

technology and services are entering into the market and competition is getting intensified day by day.

Opportunities and threats are the external factors and forces in the business environment which are also changing day by day with the change of government policy, industrial policy, monetary policy, political situation at national and international levels, formation of various trade blocks and trade barriers including the changes in legal and social environment in the business world. Strength: Strength is the power and excellence with the resources, skills and advantages in relation to the competitors. A strength is a distinct technical superiority with best technical know-how, financial resources and skill of the people in the organization, goodwill and image in the market for the product and services, company’s access to best distribution network, the discipline, morale, attitude and mannerisms of the employees at all levels with a sense of belonging. Indian Institute of Technology Madras Weakness: Weakness is the incapability, limitation and deficiency in resources such as technical, financial, manpower, skills, brand image and distribution pattern. It refers to constraints or obstacles, which check movement in a certain direction and may also, inhibit an organization in gaining a distinct competitive advantage. Opportunities: Environmental opportunity is an alternative area for company’s action in which the particular company would enjoy a competitive advantage. An opportunity is a major favorable advantage to a company. Proper analysis of the environment and identification of new market, new and improved customer group with better product substitutes or supplier’s relationship could represent opportunities for the company. Threat: Environmental threat is the challenge posed by the unavoidable trend or development that would lead, in the absence of purposeful action to the erosion of the company’s position. Slow market growth, entry of resourceful multinational companies, increase bargaining power of the buyers or sellers because of a large number of options, quick rate of obsolescence due to major technological change and adverse situation because of change of government policy rules and regulation is disadvantageous to any company and may pose a serious threat to business operation.

SWOT analysis can be used in conjunction with other tools for audit and analysis, such as Porter’s Five-Force analysis. Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organization. Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs. As part of the development of strategies and plans to enable the organization to achieve its objectives, then that organization will use a systematic/rigorous process known as corporate planning. SWOT can be used as a basis for the analysis of business and environmental factors. Michael Porter developed the 5 Five Forces Analysis model to better identify factors that shape the character of competition, to assess the structural attractiveness and business value of any industry and to pinpoint strengths and weaknesses in a company. In addition to and in combination with the SWOT analysis, the Five Forces model by Michael Porter provides another analysis tool to identify opportunities and risks when entering untapped territory in any industry or market. Porter’s Five Forces model when used with SWOT analysis provides clear action and thus does not rely solely on subjective judgment. If the actions that derived from the Five Forces model are

synchronized with business requirements and goals it can become a substantial business driver in the competitive environment and helps in formulating business strategy. Q: Michael Porter’s Five forces model of Industry attractiveness enables any company to outperform their competitors. Illustrate your answer by analyzing any Industry of your choice Theory – as per previous question: Illustration – Pharma industry Industry competition Pharma industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6% market share, and the top five players together have about 18% market share. Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for new players to enter in the industry. Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharma industry are very low. The fixed cost requirement is low but the need for working capital is high. The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller companies, it would be even higher. Many smaller players that are focused on a particular region, have a better hang of the distribution channel, making it easier to succeed, albeit in a limited way. An important fact is that pharma is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India )Though volume growth has been consistent over a period of time, value growth has not followed in tandem. The product differentiation is one key factor, which gives competitive advantage to the firms in any industry. However, in pharma industry product differentiation is not possible since India has followed process patents till date, with laws favouring imitators. Consequently, product differentiation is not the driver, cost competitiveness is. However, companies like Pfizer and Glaxo have created big brands in over the

years, which act as product differentiation tools. This will enhance over the long term, as product patents come into play from 2005. Bargaining power of buyers The unique feature of pharma industry is that the end of the product is different from the influencer (read doctor). The consumer has no choice but to buy what doctor says. However, when we look at the buyer's power, we look at the influence they have on the prices of the product. In pharma industry, the buyers are scattered and they as such does not wield much power in the pricing of the products. However, government with its policies, plays an important role in regulating pricing through the NPPA (National Pharmaceutical Pricing Authority). Bargaining power of suppliers The pharma industry depends upon several organic chemicals. The chemical industry is again very competitive and fragmented. The chemicals used in the pharma industry are largely a commodity. The suppliers have very low bargaining power and the companies in the pharma industry can switch from their suppliers without incurring a very high cost. However, what can happen is that the supplier can go for forward integration to become a pharma company. Companies like Orchid Chemicals and Sashun Chemicals were basically chemical companies, who turned themselves into pharmaceutical companies. Barriers to entry Pharma industry is one of the most easily accessible industries for an entrepreneur in India. The capital requirement for the industry is very low, creating a regional distribution network is easy, since the point of sales is restricted in this industry in India. However, creating brand awareness and franchisee amongst doctors is the key for long-term survival. Also, quality regulations by the government may put some hindrance for establishing new manufacturing operations. Going forward, the impending new patent regime will raise the barriers to entry. But it is unlikely to discourage new entrants, as market for generics will be as huge. Threat of substitutes This is one of the great advantages of the pharma industry. Whatever happens, demand for pharma products continues and the industry thrives. One of the key reasons for high competitiveness in the industry is that as an on going concern, pharma industry seems to have an infinite future.

However, in recent times, the advances made in the field of biotechnology, can prove to be a threat to the synthetic pharma industry. Conclusion This model gives a fair idea about the industry in which a company operates and the various external forces that influence it. However, it must be noted that any industry is not static in nature. It's dynamic and over a period of time the model, which have used to analyse the pharma industry may itself evolve. Going forward, we foresee increasing competition in the industry but the form of competition will be different. It will be between large players (with economies of scale) and it may be possible that some kind of oligopoly or cartels come into play. This is owing to the fact that the industry will move towards consolidation. The larger players in the industry will survive with their proprietary products and strong franchisee. In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players. Though consolidation within the current big names is not ruled out. Smaller fringe players, who have no differentiating strengths, are likely to either be acquired or cease to exist. The barriers to entry will increase going forward. The change in the patent regime, will see new proprietary products coming up, making imitation difficult. The players with huge capacity will be able to influence substantial power on the fringe players by their aggressive pricing which will create hindrance for the smaller players. Economies of scale will play an important part too. Last but not the least, in a vast country of India's size, government too will have bigger role to play.

Q: - Define the – (i) Mission (ii) Vision and (iii) Objective of a business Organization Write the mission, vision and objective statements for a ‘B’ school. How do these statements help in strategy formulation highlighting Corporate Philosophy & Corporate Governance? - What are the role, scope and significance of vision, mission, corporate philosophy and corporate governance in strategic management of a business organization?

Strategic Management process begins after the Vision and Mission statement have been set. Vision and Mission statement actually indicate the direction of strategic management process.  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 behaviour of the employees, and a statement of the goals and objectives. Features of a Mission a. Mission must be feasible and attainable. It should be possible to achieve it. b. Mission should be clear enough so that any action can be taken. c. It should be inspiring for the management, staff and society at large. d. It should be precise enough, i.e., it should be neither too broad nor too narrow. e. It should be unique and distinctive to leave an impact in everyone’s mind. f. It should be analytical,i.e., it should analyze the key components of the strategy. g. It should be credible, i.e., all stakeholders should be able to believe it.

 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 , 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.  Objectives An organization’s mission gives a framework or direction to a firm. The next step in planning is focusing on establishing progressively more specific organizational direction by setting objectives. An organizational objective is a target toward which the organization directs its efforts. 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. These are precise and measurable. b. These look after critical and significant issues. c. These are realistic and challenging.

d. These must be achieved within a specific time frame. e. 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 featuresa. These are not single for an organization, but multiple. b. Objectives should be both short-term as well as long-term. c. Objectives must respond and react to changes in environment, i.e., they must be flexible. d. These must be feasible, realistic and operational.

Hierarchy of objectives

Vision, Mission & Objectives of a business school.

Vision:

Quality Training with focused job assistance: To excel in providing professional education through innovative education system create desired work culture capable of meeting global challenges to fulfil integrating industrial requirements. Mission: To train our young professionals by giving them a solid foothold in management theories along with real industrial experience to meet the challenges with superior competence, imagination and zeal which take the students seamlessly to an advanced level.

Objectives:   

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To provide a platform to the aspiring students community to link their education to employment in pharmaceutical and health care industry. To increase the uptake of management development and education through Institute programmes and qualifications. To increase awareness of the Institute, and achieve recognition for its contribution to better management practice in pharmaceutical and health care industry. To cater the knowledge seeker and shape up their career in the pharmaceutical and health care professional world through Quality Education, Research based practical know-how, Innovative and advance teaching methodologies and Global Exposure. To build a strong network with the pharmaceutical and health care industries to fulfil their need of future professionals. To design, implement and establish industry integrated professional education programs in association with leading Universities of India & abroad. To develop the Institute's structure, systems, intellectual capital and financial strength to enable the organisation to fulfil its mission.

Strategy formulation is the process of determining appropriate courses of action for achieving organizational objectives and thereby accomplishing organizational purpose. The purpose of a Strategic Formulation is to describe the future of the organization through the definition of the organization’s Vision, Mission, Goals, and Objectives. 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 years.

In the globalized business, companies require strategic thinking and only by evolving good corporate strategies can they become strategically competitive. A strategy of a business organization is a comprehensive master plan stating how the organization will achieve its mission and objectives. Strategy is significant because it is universal. It helps corporate to keep pace with changing environs, provides better understanding of external environment, minimizes competitive disadvantage by forcing to think clearly about mission, vision and objectives of enterprise. It improves motivation of employees and strengthens decision-making. It forms the basis for implementing actions. Strategy making is an on-going process involving activities like defining vision, mission and goals, analyzing organization and environment and matching them to decide suitable actions and objectives, and implementing with a review system. Vision, mission & objective statements create clarity and form a basis for making both strategic and tactical decisions - all of which help a company thrive instead of survive. Q: Explain the concept of Business Objectives and what are the main ingredients of the same. Business Objectives are the end result of planned activity. They state what is to be accomplished by when and should be quantified if possible. The achievement of corporate objective should result in the fulfillment of a corporate mission. The areas in which a company might establish its goals and objective are profitability, growth, shareholder's wealth, utilization of resources etc. Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful. When setting business objectives, one must make sure that they are:  

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Quantitative: The business objectives should be expressed in of numbers. It should not be expressed vaguely like, “Our sales should go up!” Time-frame specific: Time frames should be specified in the business objectives. This helps you to understand where you stand with respect to the completion of the current objective. Flexible: It is very important that your business objectives are adaptable to change. If the situation in which the business is working changes, the business objectives should change to reflect these changes.

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Understandable: The business objectives should be made in an understandable way. This helps in communicating your objectives to your investors, employees, partners etc. Without this communication of business objectives, it becomes very difficult to reach them. Realistic: It is important that the business objectives are realistic, or you may end up disappointing your investors and yourself.

There are principally two types of objectives namely classify Financial Objectives & Strategic Objectives 1) Financial Objectives i. Increase the EPS ii. Increase Credit ratings iii. Acceptable Return on Investment (EVA) iv. Stock Price appreciation (or MVA – Market Value Add) v. Good Cash Flow vi. Good Credit worthiness vii. Higher Dividends viii. Growth in Earnings / Revenue ix. Higher Profit Margins State the objectives that serve the Management intend not only to deliver financial performance but also to improve position of the organisation: a. Competitive Advantage b. Business Position c. Long Range Business Prospects 2) Strategic Objectives i. Increase in x% of top line and y% in bottom line this is the intent, outcome will be financial. ii. Improve cash flow eg: negotiate with creditors, create a system. iii. Increase share of market. iv. Reduce Overall cost of production. v. Rate of innovation: Increase revenue through new product introduction and capitalise on first mover advantage. vi. Adopt top bottom approach, this is also called, commander approach. vii. Create stable earning during recession; de-risk the business ( Infosys gets internal customers diverse from banking products across many sectors. MonteCarlo, winter Wear Company, now also in summer wear after saturation in core business areas. Inability to grow into current market. viii. Improve technology leapfrogging into future. Eg: Sony Walkman, Apple I-pod etc.

ix. Increase share of voice ( jargon of advertising) and augment perceived brand value. x. Expand into new geographic market and new customer segments through brand and product line extensions.

Eg: Dettol a) Antiseptic b) Talcum Powder c) Soap d) Band-Aid Adhesive Tape. 3) Social Objectives. i) Corporate Governance Transparency around financial health of the company, to the stake holders. CSR( Corporate Social Responsibility ) i. Promise of quality and supply of product at affordable price. ii. Concern for Environment. Products and Practices of the businesses will not do damage to the environment. iii. Philanthropy Pledging to the under- privileged

Q: How does the mission and vision get developed? What does the hierarchy of strategy intent mean? Vision Statements Vision statements and mission statements are very different. A vision statement for a firm spells out goals at a high level and should coincide with the founder's goals for the business. Simply put, the vision should state what the founder ultimately envisions the business to be, in of growth, values, employees, contributions to society, and the like; therefore, self-reflection by the founder is a vital activity if a meaningful vision is to be developed. As a founder, once you have defined your vision, you can begin to develop strategies for moving the organization toward that vision. Part of this includes the development of a company mission.  

Describe an ideal future. Reflect the essence of an organization’s mission and values.

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Answer the question; what impact do we want to have on society?

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Unite an organization in a common, coherent strategic direction.

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Convey a larger sense of organizational purpose, so that employees see themselves as “building a cathedral” rather than “laying stones”.

Mission Statements The mission statement should be a concise statement of business strategy and developed from the customer's perspective and it should fit with the vision for the business. The mission should answer three questions: 1. What do we do? 2. How do we do it? 3. For whom do we do it? What do we do? This question should not be answered in of what is physically delivered to customers, but by the real and/or psychological needs that are fulfilled when customers buy your products or services. Customers make purchase decisions for many reasons, including economical, logistical, and emotional factors. An excellent illustration of this is a business in the Twin Cities that imports handmade jewelry from east Africa. When asked what her business does, the owner replied, "We import and market east African jewelry." But when asked why customers buy her jewelry, she explained that, "They're buying a story in where the jewelry came from." This is an important distinction and answering this question from the need-fulfilled perspective will help you answer the other two questions effectively. How do we do it? This question captures the more technical elements of the business. Your answer should encom the physical product or service and how it is sold and delivered to customers and it should fit with the need that the customer fulfills with its purchase. In the example above, the business owner had originally defined her business as selling east African jewelry and was attempting to sell it on shelves of boutique retail stores with little success. After modifying the answer to the first question, she realized that she needed to deliver the story to her customers along with the product. She began organizing wine parties that included a slide show of east Africa, stories of personal experiences there, and pictures and descriptions of the villagers who make the jewelry. This method of delivery has been very successful for her business. For whom do we do it? The answer to this question is also vital, as it will help you focus your marketing efforts. Though many small business owners would like to believe otherwise, not everyone is a potential customer, as customers will almost always have both demographic and geographic limitations. When starting out, it is generally a good idea to define the demographic characteristics (age, income, etc.) of customers who are likely to buy and then define a geographic area in which your

business can gain a presence. As you grow, you can add new customer groups and expand your geographic focus. An additional consideration with mission statements is that most businesses will have multiple customer groups that purchase for different reasons. In these cases, one mission statement can be written to answer each of the three questions for each customer group or multiple mission statements can be developed. Also, as a final thought, that your vision and mission statements are meant to help guide the business, not to lock you into a particular direction. As your company grows and as the competitive environment changes, your mission may require change to include additional or different needs fulfilled, delivery systems, or customer groups. With this in mind, your vision and mission should be revisited periodically to determine whether modifications are desirable. Strategic intent refers to an obsession with achieving an objective that stretches the company and requires it to build new resources and capabilities. This strategic intent usually incorporates stretch targets, which force companies to compete in innovative ways. Strategies are involved in the formulation, implementation and evaluation of strategy. The hierarchy of strategic intent lays the foundation for strategic management process. The process of establishing the hierarchy of strategic intent is very complex. The hierarchy of strategic intent covers the vision, mission, business definition, business model and the goals and objectives. In this hierarchy, the vision, mission, business definition and objectives are established. Formulation of strategies is possible only when strategic intent is clearly set up. This step is mostly philosophical in nature. It will have long term impact on the organization. Vision is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become. Mission is the “essential purpose of the organization, concerning particularly why it is in existence, the nature of the business it is in, and the customers it seeks to serve and satisfy." The mission statements stage the role that organization plays in society. Business definition explains the business of an organization in of customer needs, customer groups and alternative technologies. Objectives refer to the ultimate end results which are to be accomplished by the overall plan over a specified period of time. The vision, mission and business definition determine the business philosophy to be adopted in the long run. The goals and objectives are set to achieve them.

Q: Explain the concept of Diversification. The important aspects that companies must consider before diversifying and measures to judge the success of diversification. Does it dilute the Business risk resulting in a pathway for success? Give illustrations. Diversification is a Risk Reduction devise and a pathway for success. Diversification is inevitable to remain in business. Companies have adopted different forms of diversification to achieve their objectives. What parameters can be used to judge the quality of diversification? What are the important aspects that companies must consider before they embark on using diversification as a major growth engine? Organizations usually seek growth in sales, profits, market share, or some other measure as a primary objective. The different grand strategies in this category are:     

Concentration Integration Diversification Mergers and acquisitions t Ventures

Diversification Diversification is one of the grand strategies, which basically is a growth strategy. Basically diversification involves a substantial change the business definition in of product range, customers or alternative technologies. Diversification strategies have been adopted a number of business groups and individual companies both in the public and private sectors. This strategy involves growth through the acquisition of firms in other industries or lines of business as explained below. 1. Organizations in slow-growth industries may purchase firms in faster-growing industries to increase their overall growth rate. 2. Organizations with excess cash often find investment in another industry (particularly a fast-growing one) a profitable strategy. 3. Organizations may diversify in order to spread their risks across several industries. 4. The acquiring organization may have management talent, financial and technical resources, or marketing skills that it can apply to a weak firm in another industry in the hope of making it highly profitable. Diversification may be of different types. Related or concentric diversification when the acquired firm has production technology, products, channels of distribution, and /or markets similar to those of the firm purchasing it, the strategy is called concentric diversification.. This strategy is useful when the organization can acquire greater efficiency or market impact through the use of shared resources. A case of related or concentric diversification is Mahindra & Mahindra selling Cars, Tractors and two wheelers. Unrelated or conglomerate diversification when the acquired firm is in a completely different line of business, the strategy is called unrelated or conglomerate diversification An example of unrelated conglomerate diversification is Marico’s venture into cooking oil segment. Why diversify? Organizations diversify due to the following reasons. Some of the common reasons are as follows. Synergy: Synergy is cited in the most common cause of diversification. Synergy occurs when two or more activities produce their combined effect greater than the sum of its parts i.e., 2 + 2 = More than 4. o Related diversification produces synergies rooted in production technology. With the additional technical facilities, a by-product or t product may be produced.

o Both related and unrelated enable the companies to sell the products with same distribution network and ment facilities. The ment of one product spontaneously s other products with enhanced brand loyalty. This is marketing synergy. o Synergetic effect can also be noticed in financial operations, when the positive cash flow of one business utilized in other business helps to generate more positive cash flows. Spreading of Risk. Diversification helps to avoid over dependence on one product/market. It spreads the risk associated with one product line or few products. Better opportunities. With diversification, company can exploit the better opportunities in new product line. Every product has its own product life cycle. To gain better market share, company has to either differentiate or diversify. Better utilization of Resources. With diversification, company can better use hitherto unexploited resources like finance, market channels, production facilities, technological capabilities, managerial knowledge, etc. The idle retained earnings could be utilized to produce new products. Their marketing may not be a problem because the same dealers will sell the new products. Same production facilities and technology can be utilized sometimes adding more capacity to it. Competitive Strategy. Diversification is a good competitive strategy. A company may enter new product lines of business to gain a competitive edge over the competitors or discourage them by entering before their arrival. Market Dominance. Diversification take place to exploit tremendous market opportunities in home as well as in foreign countries with the objective of gaining market dominance.

Types of diversification There are three general types of diversification strategies: concentric horizontal, and conglomerate. Concentric Diversification Under concentric diversification new products and services are added to the line with the condition that these products and services are related to their existing products/services carried by the organization. For concentric diversification it becomes necessary that the products or services that are added must be within the framework of the know how and experience in technology, product line, distribution channels or customer base of the organization.

When the industry grows, the organization will get strength where concentric diversification becomes an important strategy for its survival and growth. A study of 460 corporations ing for two/thirds of the US corporate industrial assets concluded, “That diversification that has led to relatively rapid rates of corporate growth has been to markets that are related to the entering organization’s original market. Concentric diversification has been successfully practiced by a large number of organizations in India. For instance “Amul” has diversified in chocolates, Ice creams, Butter, Ghee etc. On the same pattern, “Milk Food” has diversified. Similarly, Honda has diversified into to Motor Cycles, Cars etc. In conclusion, it may be stated that concentric diversification has been quite successful in the past; it is expected to be successful in future also. Horizontal Diversification Where an organization adds unrelated products and services for existing customers, this is called horizontal diversification. The strategy is comparatively less risky because the customers are known. The organization is fully acquainted with their consumers’ preference and their expectations about the quality and price of the goods and services. Horizontal diversification can be accomplished by acquiring the shareholding of the competitor, by the purchase of the assets or by pooling of the interests of two organizations. Horizontal diversification seeks to eliminate competitors. In our country a T.V. manufacturing company Uptron has created a new division for spreading computer education in the country.It is a combination of hardware and software. Conglomerate Diversification Conglomerate diversification is a growth strategy in which new products and services are added which are significantly different from the organization’s present product and services. Conglomerate diversification is effected in the hope that the addition of new products and services may bring about some turnaround by way of conversion of losses into profits. Mechanics for adopting conglomerate diversification has been summarized as follows: 1. ing some divisions with cash flow from other divisions during the period of development or temporary difficulty. 2. Using the profits of one division to cover the expenses of another division without payment of taxes from the first division. 3. Encouraging growth for its own sake or to satisfy the values and ambitions of management or the owners. 4. Taking advantage of unusually attractive growth opportunities. 5. Distributing risk by serving several different markets.

6. Improving overall profitability and flexibility of the organization by moving into industries that have better economic prospects than those of the acquiring organizations. 7. Gaining better access to capital markets and better stability or growth in the earnings. 8. Increasing the price of an origination’s stock 9. Reaping the benefits of synergy. Synergy results from “a conglomerate merger when the combined organization is more profitable than the two organizations operating independently. The scheme of Conglomerate Diversification should be implemented with caution and patience. It will create big business and will bring in turn, the problems of management associated with big businesses. Big businesses involve greater risk in the event of abnormal economic situation like recession or stagflation. In the light of the above, the success of the conglomerate diversification will depend on the following factors: 1. A clear definition of organizational objectives. 2. A determination of the organization’s ability to diversify, which includes an analysis of its present operations (internal organizational analysis) and resources available for diversification. 3. Establishment of specific criteria for purchasing other organizations 4. A comprehensive search for organizations and their evaluation against the criteria. Examples of companies that have diversified into related business concentric diversification GILLETTE: o Blades and razors o Toiletries (Right Guard, Foamy, Dry Idea, Soft & Dry , White Rain) o Oral-B toothbrushes o Braun shavers, coffeemakers, alarm clocks, mixers, hair dryers, and electric toothbrushes JOHNSON & JOHNSON o Baby products (powder, shampoo, oil, lotion) o Band-Aids and other first-aid products o Women’s health and personal care products (Stay free, Carefree, Sure & Natural) o Neutrogena and Aveeno skin care products o Nonprescription drugs (Tylenol, Motrin, pepcid AC, Mylanta, Monistat) o Prescription drugs o Prosthetic and other medical devices o Surgical and hospital products o Accuvue lenses

Examples of companies that have diversified into unrelated business. THE WALT DISNEY COMPANY o Theme parks o Disney Cruise Line o Resort properties o Move, video, and theatrical productions (for both children and adults) o Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports, Network, EPSN and EPSN2, E!, Lifetime, and A&E networks) o Radio broadcasting (Disney Radio) o Musical recordings and sales of animation art THE TVS GROUP o Auto & auto parts o Coach body building o Transport o Fasteners o Brake linings & clutch facings o A citation systems for commercial vehicles o Hire purchase o Wheel structure & parts o Foundation brakes o Two wheelers o Automobile electrical parts o Tyres & tubes. When to diversify Diversification merits strong consideration whenever a single-business company is faced with diminishing market opportunities and stagnating sales in its principal business. But there are four other instances that signal for diversifying: When it can expand into industries whose technologies and products complement its present business. o When it can leverage existing competencies and capabilities by expanding into businesses where these same resource strengths are valuable competitive assets. o When diversifying into closely related businesses open new avenues for reducing costs. o When it has a powerful and well-known brand name that can be transferred to the products of other businesses.

When not diversify? All the organizations cannot think of diversification as a strategy. Organizations do not diversify under the following conditions. o When they are small and cannot afford to try o When they have no power to sustain o When they anticipate some pitfalls o When they are the first to bell the cat in that area. o When on checking they find their functional skills are insufficient to diversify o When they don’t want to gamble with public investments o When they do not have attractive tax benefits after diversification Parameters to Judge Diversification Whether diversification is warranted or not is done by the following methods: 1) Industry attractiveness test: Using 5 forces model where in sole criterion should be that the chosen industry must yield good ROI. 2) Cost of entry test: The entry barriers of the cost to entry for the target industry must not be exorbitant or protective to make it in attractive. Since the larger the gestation time to achieve breakeven, larger is the risk and hence threat potential to erode profitability. However, structurally attractive industries have been known to be expensive to get into & buying an existing company with strong market entry costs. Hence the cost of entry test can help the firm understand the prospects of profitability and company’s ability to deliver shareholder value. 3) “Better OFF “ Test: Company diversifying into new business must offer potential for firms existing business + the new business in order to perform better. Diversifying firms need to test whether cross strategic fits will enhance the company’s competitive ability in reducing costs, transferring skills and technologies & leveraging combined resource into competitive advantage. Business diversification is a risk reduction strategy that involves adding products, services, location, customers and markets to a company’s portfolio. Many small companies started as one-track, betting their entire futures on a single product, service, location or even a single customer. There is nothing wrong with this start as a narrow start enabled them to focus and concentrate on doing one thing extremely well.

But, as a company grows larger, it found opportunities to add products, services, locations, customers and markets. Diversifying in this way has helped many businesses weather tough times by providing alternate sources of revenue in the event that it is original market dry up, stops growing or hit by new competition. It was noted that most companies that survive for long periods of time find that they have to develop new sources of revenue as tastes change and opportunities evolve.

Diversification helps to avoid over dependence on one product/market. It spreads the risk associated with one product line or few products. Diversification to pool risks. The benefits of risk pooling are said to come from merging imperfectly correlated income streams to create a more stable income stream. According to the advocates of risk pooling, the more stable income stream reduces the risk of bankruptcy and is in the best interests of the company's stockholders.

Q: Generic strategy is a combination of competitive strategy and competitive scope in Broad and Narrow segments. Explain the salient features of the same. When should a company employ ‘STUCK IN THE MIDDLE’ strategy? In development of competitive business strategy, it is necessary to recognize customer needs, product differentiation, customer groups, and market segmentation. Comment. Explain the cost based strategies and niche based strategies. If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:

Porter's Generic Strategies

Advantage Target Scope Low Cost

Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (low cost)

Focus Strategy (differentiation)

Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership. Firms that succeed in cost leadership often have the following internal strengths: 



Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome. Skill in deg products for efficient manufacturing, for example, having a small component count to shorten the assembly process.

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High level of expertise in manufacturing process engineering.

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Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share. Differentiation Strategy A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to along the costs to its customers who cannot find substitute products easily. Firms that succeed in a differentiation strategy often have the following internal strengths:  

Access to leading scientific research. Highly skilled and creative product development team.

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Strong sales team with the ability to successfully communicate the perceived strengths of the product.

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Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. Focus Strategy The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to higher costs on to customers since close substitute products do not exist. Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well. Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focs may be able to carve out subsegments that they can serve even better. Porter used the car industry as an example of generic strategies in practice. Toyota is (or was at the time) the low cost producer in the industry. Toyota achieves its cost leadership strategy by adopting lean production, careful choice and control of suppliers, efficient distribution, and low servicing costs from a quality product. Note how the cost leadership must be in all aspects of the business (or value chain). BMW is an example of a differentiation strategy. BMW still serves a relatively wide range of the total market but its cars are differentiated in the eyes of the customer who is prepared to pay a higher price for a BMW than for a Toyota, for instance, of similar specification. Morgan is an example of a Focus strategy. It only addresses a very small part of the market—(i.e. those who enjoy getting wet and like the sound of an engine more than conversation!). Each of these three companies has been successful by pushing a particularly generic strategy successfully. A Combination of Generic Strategies - Stuck in the Middle? The firm can get “stuck in the middle” between low cost providers and differentiated cost leaders and hence firms of this kind should pursue a hybrid strategy. E.g.: Pi; Nike cheapest shoe starts at 599 up to 3999 Typically a firm can obtain a competitive advantage by two ways : Either a cost advantage ( meaning selling a product at a lower cost) or by a differentiation strategy (meaning having features and capabilities that are unique and can therefore be charged at a slightly higher price) . A firm stuck in the middle is one that tries to implement both strategies i.e a low cost and a unique feature. An organisation can elect not to have a deliberate competitive strategy by employing none of the three generic strategies outlined by Michael Porter. Porter’s three

generic strategies are; cost leadership strategy, differentiation strategy and the focus strategy. Instead of employing any of Porter three generic strategies a firm can elect to be stuck in the middle. An organisation employing a “stuck in the middle” strategy is neither deliberately pursuing a cost leadership strategy nor a differentiation strategy nor a focus strategy? The airline industry is an example of an industry where most of its players employ the “stuck in the middle” strategy. These firms do not pursue a deliberate cost leadership strategy or a differentiation strategy but they simultaneously employ the cost leadership strategy and a differentiation strategy. This is evidenced by their implied twin objectives of wanting to be perceived as charging the lowest fares than competition and also at the same time wanting to be viewed as offering superior quality service than their competitors. This argument is further strengthened by the fact that most of the long haul airlines offer economy class service, business class service and first class service simultaneously in the same plane during the same journey and this can neither be described as employing a cost leadership or differentiation strategy. This is in contrast to a strategy employed by Ryanair and Easyjet. Porter argued that being stuck in the middle does not usually lead to achievement of competitive advantage because firms employing a stuck in the middle strategy will struggle to compete with companies in the same industry which employ one of his three generic strategies. This is because very few firms have the ability to be the best in all areas. In other words a jack of all trades will struggle to compete when competing with a master in a specific trade. In concluding it is also worth mention that Porter also argued that being struck in the middle may work sometimes especially when a firm is lucky enough to be competing with competitors employing the stuck in the middle strategy. This could be one of the reason why the stuck in the middle strategy seems to be working for firms in the long haul airline business because all airlines seem to be using the same business model.

Q: In today’s competitive world the survival as well as will to excel depends upon effective combination of Supply Chain Management, Value Chain Concepts, Strategic Cost Management and Customer Relationship Management. Explain all the four strategies through Value Chain and Product Life Cycle Concept.

Explain how is value chain analysis, which is an internal analysis, useful in identification of distinctive competencies in a business organization in formulating various business strategies?

Value chain Concept The resources audit provides an understanding of an organization’s capabilities. The next step is to identify how the organizational activities contribute to the value - the price the customers are willing to pay for the goods and services of the organization. If this value exceeds the costs of performing those activities, company is said to be profitable, otherwise it is a loss making company. Therefore to achieve the long run objective of maximization of wealth and short –run goals of generating reasonable profits, it is imperative that the company should gain a competitive edge over its competitors. Charles W.L. Hill and Gareth R. Jones maintain: “To gain a competitive advantage, a company must either perform value – creation functions at a lower cost than its rivals or perform them in a way that leads to differentiation and a price. To do either, it must have a distinctive competence in one or more of its value – creation functions. If it has significant weaknesses in any of these functions, it will be at a competitive disadvantage” Michael Porter suggested the concept of “value – chain” that sequences the activities related with creation of value. These activities can be divided between (a) Primary activities, and (b) activities.

Secondary Activities

Primary Activities

The primary activities are concerned with physical creation of the product, its marketing and delivery to buyers and after-sales service. The activities provide the inputs and infrastructure for the primary activities. Primary Activities Some authors classify primary activities into five categories – (a) Inbounded logistics (activities concerned with receiving, storing and distributing the material, inventory control, warehousing, etc.) (b) Operations (activities concerned with transformation of inputs into final product or service: for example, matching, packing, assembly testing etc. (c) Out bounded logistics (activities concerned with collection, storage and physical distribution of finished goods to the consumers) (d) Marketing and sales (activities concerned with advertising, selling, istration of sales personnel, etc.) (e) Service (activities that enhance or maintain the value of a product / service, such as installation, repair, training, etc.) Some others classify primary activities into two main functions (a) Manufacturing (physical creation of the product) (b) Marketing (concerned with marketing, delivery and after sales service) Activities The activities that provide inputs and infrastructure for primary activities of manufacturing and marketing are classified as follows: (a) Material management activities (b) Research and Development activities

(c) Human Resources activities (d) Information systems activities (e) Company infrastructure activities Material Management activities are concerned with procurement, storage and issuance of material to the production departments. The inventory control that aims at keeping uninterrupted supply of material at minimum associated costs is undertaken under this function. Research and Development activities permeate manufacturing as well as marketing activities. It aims at developing new products or process technology that provide additional benefits to customers, improve quality, lower the cost of manufacturing and ultimately contribute to the creation of value. The human resource activities aim at meeting the personnel requirement of manufacturing and marketing departments by proper selection of staff, their training and development. The information system activities ensure efficient and expeditious flow of needed information to the concerned managers for taking decisions and actions. The infrastructure activities embrace all other activities like finance, legal, public relations, etc which are essential for the company. Corporate Value Chain Analysis It involves the following steps. - Examine each product lines value chain in of various activities involved in producing a product or service. Examine the S&W - Identify the linkages in product lines value chain Ex: quality control, check 100% instead of 10% to avoid repairs and returns - Examine the synergies among value chains of different product lines or SBUS. Ex: Cost of advertising, production etc tly will be cheaper After identifying the resources and relating them to strategic purpose through value chain analysis, the next step is identification of company’s core competence. The core competence refers to unique strength of the company that competitors cannot easily match or imitate. To Gary Hamel and C.K. Prahalad, “A core- competence is a bundle of skills and technologies that enables a company to provide a particular benefit to customers”. Following are the examples of core-competence at global level:

Company Sony Federal Express Wal-Mart Motorola

Benefit to customer Pocketability on –time Delivery Choice, availability, Unlettered’ communication.

Core – competence Miniaturization Logistics Management value Logistics Management Wireless communication

“The diversified corporation is a large tree. The trunk and major limbs are core products, the smaller branches are business units; the leaves, flowers and fruit are end products. The root system that provided nourishment, sustenance, and stability is the core competence. You can miss the strength of competition by looking only at their end products in the same way you miss the strength of a tree if you look only at its leaves.” Core competence provides strategic advantage to the company. In the short run, a company can achieve competitiveness from its price / Performance attributes; but in the long run core competence will provide profitability. With its core – competence, company can produce at lower cost and more speedily than competitors and can differentiate. Thus the real strategic advantage to a company comes from its core competence. Thus core- competence is the bedrock of a company’s strategy.

Product Life Cycle Concept A new product progresses through a sequence of stages from introduction to growth, maturity, and decline. This sequence is known as the product life cycle and is associated with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix. The product revenue and profits can be plotted as a function of the life-cycle stages as shown in the graph below:

Introduction Stage In the introduction stage, the firm seeks to build product awareness and develop a market for the product. The impact on the marketing mix is as follows:  

Product branding and quality level is established, and intellectual property protection such as patents and trademarks are obtained. Pricing may be low penetration pricing to build market share rapidly, or high skim pricing to recover development costs.



Distribution is selective until consumers show acceptance of the product.



Promotion is aimed at innovators and early adopters. Marketing communications seeks to build product awareness and to educate potential consumers about the product.

Growth Stage In the growth stage, the firm seeks to build brand preference and increase market share.  

Product quality is maintained and additional features and services may be added. Pricing is maintained as the firm enjoys increasing demand with little competition.



Distribution channels are added as demand increases and customers accept the product.



Promotion is aimed at a broader audience.

Maturity Stage At maturity, the strong growth in sales diminishes. Competition may appear with similar products. The primary objective at this point is to defend market share while maximizing profit.  

Product features may be enhanced to differentiate the product from that of competitors. Pricing may be lower because of the new competition.



Distribution becomes more intensive and incentives may be offered to encourage preference over competing products.



Promotion emphasizes product differentiation.

Decline Stage As sales decline, the firm has several options:  



Maintain the product, possibly rejuvenating it by adding new features and finding new uses. Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche segment. Discontinue the product, liquidating remaining inventory or selling it to another firm that is willing to continue the product.

The marketing mix decisions in the decline phase will depend on the selected strategy. For example, the product may be changed if it is being rejuvenated, or left unchanged if it is being harvested or liquidated. The price may be maintained if the product is harvested, or reduced drastically if liquidated.

Supply Chain Management

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm. Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved. Supply Chain Decisions We classify the decisions for supply chain management into two broad categories -strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. There are four major decision areas in supply chain management: 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas. Location Decisions The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production

limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although location decisions are primarily strategic, they also have implications on an operational level. Production Decisions The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities--and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility. Inventory Decisions These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw material, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels. Transportation Decisions The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy. Strategic Cost Management

In the contemporary business environment, cost management has become a critical survival skill for many organizations. But it is not sufficient to simply reduce costs; instead, costs must be managed strategically Highly competitive markets are characterized by low profit margins, low customer loyalty and low first move advantages. Not only customers ask for cost management, also the intense competition between well-matched competitors increases the strategic importance of cost management. Strategic cost management is "the application of cost management techniques so that they simultaneously improve the strategic position of a firm and reduce costs". Strategic cost management needs to include all aspects of production and delivering the product; the supply of purchased parts, the design of products and the manufacturing of these products. So, strategic cost management should be inherent to each stage of a product's life cycle, i.e. during the development, manufacturing, distribution and during the service lifetime of a product. Hence, the term strategic cost management has a broad focus, it is not confined to the continuous reduction of costs and controlling of costs and it is far more concerned with management's use of cost information for decision-making.

There are various strategic cost management tools used like Activity based costing, Target costing, Value Engineering, Balance score card etc.

Customer Relationship Management. It is a process or methodology used to learn more about customers' needs and behaviors in order to develop stronger relationships with them. Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes— principally sales activities, but also those for marketing, customer service, and technical . The overall goals are to find, attract, and win new clients, nurture and retain those the company already has, entice former clients back into the fold, and reduce the costs of marketing and client service. Customer relationship management describes a company-wide business strategy including customerinterface departments as well as other departments. Measuring and valuing customer relationships is critical to implementing this strategy. A CRM system may be chosen because it is thought to provide the following advantages:      

Quality and efficiency Decrease in overall costs Decision Enterprise ability Customer Attention Increase profitability

Strategy For larger-scale enterprises, a complete and detailed plan is required to obtain the funding, resources, and company-wide that can make the initiative of choosing and implementing a system successfully. Benefits must be defined, risks assessed, and cost quantified in three general areas: 

Processes: Though these systems have many technological components, business processes lie at its core. It can be seen as a more client-centric way of doing business, enabled by technology that consolidates and intelligently distributes pertinent information about clients, sales, marketing effectiveness, responsiveness, and market trends. Therefore, a company must analyze its business workflows and processes before choosing a technology platform; some will likely need re-engineering to better serve the overall goal of winning and satisfying clients. Moreover, planners need to determine the types of client information that are most relevant, and how best to employ them



People: For an initiative to be effective, an organization must convince its staff that the new technology and workflows will benefit employees as well as clients. Senior executives need to be strong and visible advocates who can

clearly state and the case for change. Collaboration, teamwork, and two-way communication should be encouraged across hierarchical boundaries, especially with respect to process improvement. 

Technology: In evaluating technology, key factors include alignment with the company’s business process strategy and goals, including the ability to deliver the right data to the right employees and sufficient ease of adoption and use. Platform selection is best undertaken by a carefully chosen group of executives who understand the business processes to be automated as well as the software issues. Depending upon the size of the company and the breadth of data, choosing an application can take anywhere from a few weeks to a year or more

Q: Mergers and Acquisition process required a detailed SWOT Analysis. Explain in details Mergers and Acquisition process. What could be the probable reason for companies to use the Mergers and acquisition Route? Please lace your answers with examples from the corporate world. Growth strategies: Organizations usually seek growth in sales, profits, market share, or some other measure as a primary objective. The different grand strategies in this category are:     

Concentration Integration Diversification Mergers and acquisitions t Ventures

M & A are an attractive strategy for strengthening a firms competitive position . This is particularly relevant in case of organisation heading towards global market leadership , frequently acquire companies to build market pressure in such countries whenever they donot compete. Similarly domestic companies trying to establish attractive positions in the industry of the future , merge or make acquisition in order to  Fill resource gap or correct competitive deficiencies.  Combine operations resulting in lower cost.  Access to improved technology with better product & services in wider geographic area No company can afford to ignore the strategic & competitive benefits of acquiring & merging with another company to strengthen its market position & open up avenues of new opportunity. Merger is pooling of organizations having similar resource strengths ing hands to form a new company, often with a new name with varying degrees of ownership depending on stake holding. E.g.. Sandoz and Ciba – now called Novartis across the world Daimler – Chrysler Brook Bond and Lipton merged to become Brooke bond India later taken over by HUL Acquisition is when a strong firm, down out player in the industry becomes the acquiring firm which outright purchases the operations of the weak firm i.e. the acquired firm. Principally, though mergers & acquisitions are a parallel process, it may differ in of engagement, ownership levels, management control and financials. However, the objective remains the same i.e. the quest to fill a resource vulnerability gap and in turn attain SCA. Defn : A merger is a combination & pooling of two equally strong companies with a new craeted company taking on a new name. Defn : A acquisition when one company namely the acquisition purchases & absorbs the operation of another that is the acquired. Mergers and Acquisitions are defined by the following Strategic Objectives:

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: 

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













Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage s. Or, a manufacturer can acquire and sell complementary products. Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts. Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below). Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and

consumer surplus. A merger that creates a vertically integrated firm can be profitable. 

Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.

Types of Mergers 1. Horizontal Mergers 2. Vertical Mergers 3. Conglomerate Mergers Horizontal Mergers This type of merger involves two firms that operate and compete in a similar kind of business. The merger is based on the assumption that it will provide economies of scale from the larger combined unit. Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. megamerger The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. The merger created a company valued at $182.4 billion and with a 7.3 per cent share of the global pharmaceutical market. The merged company expected $1.6 billion in pretax cost savings after three years. The two companies have complementary drug portfolios, and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force. Vertical Mergers Vertical mergers take place between firms in different stages of production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communicating and coordinating production. Both production and inventory can be improved on of efficient information flow within the organisation. Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process and capitalise on the demand for the product. Forward integration take place when a raw material supplier

finds a regular procurer of its products while backward integration takes place when a manufacturer finds a cheap source of raw material supplier. Example: Merger of Usha Martin and Usha Beltron Usha Martin and Usha Beltron merged their businesses to enhance shareholder value, through business synergies. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies. Conglomerate Mergers Conglomerate mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing and so on. This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic locations also proceed with these types of mergers. Conglomerate mergers have been sub-divided into:   

Financial Conglomerates Managerial Conglomerates Concentric Companies

Financial Conglomerates These conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers. They not only assume financial responsibility and control but also play a chief role in operating decisions. They also:     

Improve risk-return ratio Reduce risk Improve the quality of general and functional managerial performance Provide effective competitive process Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance.

Managerial Conglomerates Managerial conglomerates provide managerial counsel and interaction on decisions thereby, increasing potential for improving performance. When two firms of unequal

managerial competence combine, the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits. Concentric Companies The primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions. The Merger & Acquisition Process can be broken down into five phases:

Phase 1 - Pre Acquisition Review: The first step is to assess your own situation and determine if a merger and acquisition strategy should be implemented. If a company expects difficulty in the future when it comes to maintaining core competencies, market share, return on capital, or other key performance drivers, then a merger and acquisition (M & A) program may be necessary. It is also useful to ascertain if the company is undervalued. If a company fails to protect its valuation, it may find itself the target of a merger. Therefore, the preacquisition phase will often include a valuation of the company - Are we undervalued? Would an M & A Program improve our valuations? The primary focus within the Pre Acquisition Review is to determine if growth targets (such as 10% market growth over the next 3 years) can be achieved internally. If not, an M & A Team should be formed to establish a set of criteria whereby the company can grow through acquisition. A complete rough plan should be developed on how growth will occur through M & A, including responsibilities within the company, how information will be gathered, etc. Phase 2 - Search & Screen Targets: The second phase within the M & A Process is to search for possible takeover candidates. Target companies must fulfill a set of criteria so that the Target Company is a good strategic fit with the acquiring company. For example, the target's drivers of performance should compliment the acquiring company. Compatibility and fit should be assessed across a range of criteria - relative size, type of business, capital structure, organizational strengths, core competencies, market channels, etc. It is worth noting that the search and screening process is performed in-house by the Acquiring Company. Reliance on outside investment firms is kept to a minimum since the preliminary stages of M & A must be highly guarded and independent. Phase 3 - Investigate & Value the Target: The third phase of M & A is to perform a more detail analysis of the target company. You want to confirm that the Target Company is truly a good fit with the acquiring company. This will require a more thorough review of operations, strategies, financials, and other aspects of the Target

Company. This detail review is called "due diligence." Specifically, Phase I Due Diligence is initiated once a target company has been selected. The main objective is to identify various synergy values that can be realized through an M & A of the Target Company. Investment Bankers now enter into the M & A process to assist with this evaluation. A key part of due diligence is the valuation of the target company. In the preliminary phases of M & A, we will calculate a total value for the combined company. We have already calculated a value for our company (acquiring company). We now want to calculate a value for the target as well as all other costs associated with the M & A. The calculation can be summarized as follows: Value of Our Company (Acquiring Company) Value of Target Company Value of Synergies per Phase I Due Diligence Less M & A Costs (Legal, Investment Bank, etc.) Total Value of Combined Company

$ 560 176 38 ( 9) $ 765

Phase 4 - Acquire through Negotiation: Now that we have selected our target company, it's time to start the process of negotiating a M & A. We need to develop a negotiation plan based on several key questions:    

How much resistance will we encounter from the Target Company? What are the benefits of the M & A for the Target Company? What will be our bidding strategy? How much do we offer in the first round of bidding?

The most common approach to acquiring another company is for both companies to reach agreement concerning the M & A; i.e. a negotiated merger will take place. This negotiated arrangement is sometimes called a "bear hug." The negotiated merger or bear hug is the preferred approach to a M & A since having both sides agree to the deal will go a long way to making the M & A work. In cases where resistance is expected from the target, the acquiring firm will acquire a partial interest in the target; sometimes referred to as a "toehold position." This toehold position puts pressure on the target to negotiate without sending the target into panic mode. In cases where the target is expected to strongly fight a takeover attempt, the acquiring company will make a tender offer directly to the shareholders of the target, bying the target's management. Tender offers are characterized by the following:    

The price offered is above the target's prevailing market price. The offer applies to a substantial, if not all, outstanding shares of stock. The offer is open for a limited period of time. The offer is made to the public shareholders of the target.

A few important points worth noting:

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Generally, tender offers are more expensive than negotiated M & A's due to the resistance of target management and the fact that the target is now "in play" and may attract other bidders.

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Partial offers as well as toehold positions are not as effective as a 100% acquisition of "any and all" outstanding shares. When an acquiring firm makes a 100% offer for the outstanding stock of the target, it is very difficult to turn this type of offer down.

Another important element when two companies merge is Phase II Due Diligence. As you may recall, Phase I Due Diligence started when we selected our target company. Once we start the negotiation process with the target company, a much more intense level of due diligence (Phase II) will begin. Both companies, assuming we have a negotiated merger, will launch a very detail review to determine if the proposed merger will work. This requires a very detail review of the target company financials, operations, corporate culture, strategic issues, etc. Phase 5 - Post Merger Integration: If all goes well, the two companies will announce an agreement to merge the two companies. The deal is finalized in a formal merger and acquisition agreement. This leads us to the fifth and final phase within the M & A Process, the integration of the two companies.

Some of the reasons behind failed mergers are:  Poor strategic fit - The two companies have strategies and objectives that are too different and they conflict with one another.  Cultural and Social Differences - It has been said that most problems can be traced to "people problems." If the two companies have wide differences in cultures, then synergy values can be very elusive.  Incomplete and Inadequate Due Diligence - Due diligence is the "watchdog" within the M & A Process. If you fail to let the watchdog do his job, you are in for some serious problems within the M & A Process.  Poorly Managed Integration - The integration of two companies requires a very high level of quality management. In the words of one CEO, "give me some people who know the drill." Integration is often poorly managed with little planning and design. As a result, implementation fails.

 Paying too Much - In today's merger frenzy world, it is not unusual for the acquiring company to pay a for the Target Company. s are paid based on expectations of synergies. However, if synergies are not realized, then the paid to acquire the target is never recouped.  Overly Optimistic - If the acquiring company is too optimistic in its projections about the Target Company, then bad decisions will be made within the M & A Process. An overly optimistic forecast or conclusion about a critical issue can lead to a failed merger.

Q: Dr.G, the management consultant said that all strategies are evaluated only on the basis of the following two parameters viz. a. Sustainable Competitive Advantage b. Risk V/s. Return Analysis ----As a strategic planner, please explain the above evaluation to the core group of managers of your company.

Sustainable Competitive Advantage When a firm sustains profits that exceed the average for its industry, the firm is said to possess a Sustainable competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Michael Porter identified two basic types of competitive advantage:  

cost advantage differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage: A Model of Competitive Advantage Resources

Distinctive Competencies

Cost Advantage or Differentiation Advantage

Value Creation

Capabilities

Resources and Capabilities According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear. Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:     

Patents and trademarks Proprietary know-how Installed customer base Reputation of the firm Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such

capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate. The firm's resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage. Cost Advantage and Differentiation Advantage Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm's competitive strategy. Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage. Value Creation The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel . To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation). Strategic Options to achieve Competitive Advantage 1.) Strategy based on critical success factors (CSF) CSF are competitive factors which affect industry ability to prosper in the market place. CSF ↓ Core Competencies (SBF resource capability) (inherent strength) ↓ Brand Promise ↓ Differentiation/ Positioning ↓

Core Value Proposition E.g.. Of CSF 1. Economies of Scales – Reliance 2. Cost Leadership - Least cost ITC HUL a. Cost low – sell low L superia b. Cost low – sell VFM M Vivel Sunsilk c. Cost low - Sell ↑ H FOW Dove In all these products principal Raw material is the same which constitutes 90% of the products. Scale brings down cost/ unit. 3. Pricing – Supply Chain Efficiencies. E.g. WalMart – They too have the scale 4. Technology & Innovation: - Sony 5. Product line Base: Firm that serves broad industry categories in multiple benefit areas with a variety of price points along with brand line extensions. 6. Related Skills & Capability – skilled talented workforce. 7. Overall Low Cost. Positioning : Mother brand ( Brand Equity) Extend the brand into other Areas E.g. Dettol , Bandaids, Handwash, Soaps, Antiseptic lotion. With core value proposition remaining same. Change the form of the Product E.G. Liril – Soaps, Talcum Powder, Deos E.g. . Colgate- Complete Oral Solution care form. Line is vertical extension , Brand is Horizontal. Any Company having various price points, multiple products for multiple segments. A firm needs to identify the Key Success Factors from any of the above points & concentrate all resources behind the same to create a SCA ( Sustainable Competitive Advantage) Use KFS’s as cornerstones of Company’s Strategies and gain SCA by excelling in 1 KSF

2.) Strategy based on Relative Superiority To create a distinctive competency from within internal value chain activities & use it to exploit relative weakness of other industry competitors. E.g. Haldirams – Ethnic Snacks. Impulse purchase Category E.g. Lays came up with Kurkure. Guerilla Players- Plays war in his strength play within a certain geographic location. E.g. Balaji, Wagh Bakri Chai Garden Fresh snacks.

3.) Strategy based on Aggressive Initiatives E.g. New Honda Model arrow v/s S x 4 of Maruti Fantastic Model An initiative that is undertaken to dislodge established player in the industry by challenging the current strategic business fit. This would include product design, technology, cost inputs & at times unique advertising measures. 4) Employ strategic degrees of freedom Ansoff’s share growth matrix refers to strategic options for growth that is available with the firm

Risk V/s. Return Analysis

Q: Explain the rationale for a company to take over another company. Acquisition / Takeover Strategies: Why do companies feel compelled to acquire other businesses? After all, the typical buyer knows its own market niche quite well, and can safely increase its revenues over time by continual, careful attention to internal organic growth. Nonetheless, thousands of acquisitions occur every year. Here are some reasons for doing so: 

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Business model. The target’s business model may be different from that of the buyer, and so generates more profits. For example, a target may operate without labor unions, or have a substantially less burdensome benefits plan. The buyer may not be able to re-create this business model in-house without suffering significant unrest, but can readily buy into it through an acquisition. Cyclicality reduction. A buyer may be trapped in a cyclical or seasonal industry, where profitability fluctuates on a recurring basis. It may deliberately acquire a company outside this industry with the goal of offsetting the business cycle to yield more consistent financial results.

Defensive. Some acquisitions take place because the buyer is itself the target of another company, and simply wants to make itself less attractive through an acquisition. This is particularly effective when the buyer already has a large market share, and buying another entity in the same market gives it such a large share that it cannot be bought by anyone else within the industry without anti-trust charges being brought. Executive compensation. A buyer’s management team may be in favor of an acquisition for the simple reason that a larger company generally pays higher salaries. The greater heft of the resulting organization is frequently viewed as being valid grounds for a significant pay boost among the surviving management team. This is not a good reason for an acquisition, but it is a common one. Intellectual property. This is a defensible knowledge base that gives a company a competitive advantage, and is one of the best reasons to acquire a company. Intellectual property can include patents, trademarks, production processes, databases that are difficult to re-create, and research & development labs with a history of successful product development. Internal development alternative. A company may have an extremely difficult time creating new products, and so looks elsewhere to find

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replacement products. This issue is especially likely to trigger an acquisition if a company has just decided to cancel an in-house development project, and needs a replacement immediately. Local market expertise. In some industries, effective entry into a local market requires the gradual accumulation of reputation through a long process of building s and correct business practices. A company can follow this path through internal expansion, and gain success over a long period of time – or do it at once through an acquisition. Local market expertise is especially valuable in international situations, where a buyer has minimal knowledge of local customs, not to mention the inevitable obstacles posed by a different language. Market growth. No matter how hard a buyer may push itself, it simply cannot grow revenues very fast in a slow-growth market, because there are so few sales to be made. Conversely, a target company may be situated in a market that is growing much faster than that of the buyer, so the buyer sees an avenue to more rapid growth. Market share. Companies generally strive toward a high market share, because this generally allows them to enjoy a cost advantage over their competitors, who must spread their overhead costs over smaller production volumes. The acquisition of a large competitor is a reasonable way to quickly attain significant market share. Production capacity. Though not a common acquisition justification, the buyer may have excess production capacity available, from which it can readily manufacture the target’s products. Usually, tooling differences between the companies make this a difficult endeavor. Products. The target may have an excellent product that the buyer can use to fill a hole in its own product line. This is an especially important reason when the market is expanding rapidly, and the buyer does not have sufficient time to develop the product internally before other competing products take over the market. Also, acquired products tend to have fewer bugs than ones just emerging from in-house development, since they have been through more field testing, and possibly through several build cycles. However, considerable additional effort may be needed to integrate the acquired products into the buyer’s product line, so factor this issue into the purchase decision. Regulatory environment. The buyer may be burdened by a suffocating regulatory environment, such as is imposed on utilities, airlines, and government contractors. If a target operates in an area subject to less regulation, the buyer may be more inclined to buy into that environment. Sales channels. A target may have an unusually effective sales channel that the buyer thinks it can use to distribute its own products. Examples of such sales channels are as varied as door-to-door sales, electronic s, telemarketing, or a well-trained in-house sales staff. Also, the target’s sales staff might be especially effective – in some industries, sales is considered the bottleneck operation, and so may be the prime reason for an acquisition offer.

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Vertical integration. To use a military term, a company may want to “secure its supply lines” by acquiring selected suppliers. This is especially important if there is considerable demand for key supplies, and a supplier has control over a large proportion of them. This is especially important when other suppliers are located in politically volatile areas, leaving few reliable suppliers. In addition to this “backward integration,” a company can also engage in “forward integration” by acquiring a distributor or customer. This most commonly occurs with distributors, especially if they have unusually excellent relationships with the ultimate set of customers. A company can also use its ownership of a distributor from a defensive perspective, so that competitors must shift their sales to other distributors.

Targeted Options 1. Look for company for net operating losses but have strong turnaround prospects. 2. Seek a cashless company, which has not exploited its market potential or has undervalued licensed. 3. Seek an under capitalized company where promoter’s stake low and mount a hostile takeover initiative. 4. Watch out for family run business with no proven successor. Steps involved in Takeover Process 1. Estimate the degree of over subscription of the stock of the company that you intend to acquire in consultation with primary market brokers. 2. On the basis of this information, apply for a quantum of shares whose allotment exceeds the promoter’s stake. 3. Purchase further shares from the market to increase the holding in the company. 4. Offer shares to be bought out from financial institutions that are looking to exit. 5. Buyout foreign investors and minority NRI stakeholders with an offer of marginal . 6. Make an open offer to Indian stakeholders or their portfolio managers by offering suitable . 7. Initiate all out stock market purchase on all stock exchanges with maximum publicity.

Q: “The world is suffering from recession today” said Dr. JG, the turnaround strategist. Take any company of your choice and assume that this company is suffering from the effects of recession. Please explain as to what steps this company should take to ride over this recessionary trend in the market.

A Turnaround Strategy is used for converting a Failed company or a Sick Company into a successful company. You have been appointed as a consultant to turnaround a Failed Company or a Sick Company. Please prepare an action plan to turn around a failed or a sick company. (Take any company of your choice). Turn around strategies for critically sick companies / crises ridden co’s When an organization’s survival is threatened and it is not competing effectively, retrenchment strategies are often needed. The three basic types of retrenchment are   

Turnaround, Divestment, and Liquidation.

Turnaround strategy is used when an organization is performing poorly but has not yet reached a critical stage. It usually involves getting rid of unprofitable products, pruning the work force, trimming distribution outlets, and seeking other methods of making the organization more efficient. If the turnaround is successful, the organization may then focus on growth strategies.

Turnaround defined Turnaround derives its name from the action involved that is reversing a negative trend. Turnaround management refers to the measures, which reverse the negative trends in the performance indicators of the company. In other words, turnaround management refers to the management measures which turn a sick-company back to a be healthy one or those measures which reverse the deteriorating trends of the performance indicators such as falling market share, sales (in constant rupees), and profitability and worsening debt-equity ratio. Examples of turn around During 1970-80 IBM dominated the computer industry world wide particularly the PCS. During early 1990s computer sales were falling. HP, Dell, Compaq, Gateway etc entered the market PC clones in IBM style were offered cheaply by them. Industry experts called IBM “bureaucratic dinosaur” and profits kept on falling in 1992-93. The BOD hired a new CEO, Louis Gerstner to lead a ‘Corporate turn around’ who leads the ‘BIG BLUE’ strategy following the rigid

dress code. The work force was reduced to 40%. Emphasis was on quicker decision making and strong customer orientation. The CEO spoke to at least one customer a day. A new mainframe was released once in a year. PC business increased its market share to 8.9% in 1996. Stock price moved from $ 40 in 1990 to $ 140 in 1996. Revenue increased by 40% and profits rose by 3.6%. IBM is still in the process of turning around. Features of crisis ridden co’s 1) It happens when firms compete in an industry with generic commodity products, low levels of differentiation thus the PLC and as the industry matures they at the best achieve an also ran “me too” status. 2) Such firms manage below average industry profitability and do not posses required resources and capabilities to compete effectively in the industry 3) They are financially weak and have deployed an inefficient competitive strategy often with poor execution capabilities. In a weak economy/ recession and fast changing consumer preferences can further weaken the business position for such firms. 4) All above factors can lead to financial debt due to high cost and low price realization further burdened by excess capacity and inventory. 5) Often such firms adopt overtly aggressive pricing in the quest for scale and market share ignoring profitability at times. They yet get beaten by more focused rival and lack of innovation and in-house R&D is the reason for lack of any kind of credible response.

Strategic Options: 1) Offensive turn around strategy a) Pump in financial resources (CDR – Corporate Dept Restructuring); revamp product line either on a low cost focus or a high differentiated focus in order to appeal to consumers. 2) Fortify and defend: Use variation and alternatives pursued by rival to capture market share form the chosen rival 3) Strategy revision in following acres: i) Revamp all internal operations and revisit cost across the value chain ii) Revisit all functional area strategies iii) Merge or acquire small, weak regional players that compliment the firm’s strategic business fit. iv) Compete on a narrow front as close as possible to core competences in product line and geographics.

4) Boost Revenues a) Revenue building options include price cuts, value for money products extending he line giving value added services & increase level of promotions. This will be adopted if the firm pursues focused cost leadership. b) Pursue a focused differentiation strategy improve quality and brand image and serve the quality conscious segment at higher prices 5) Sell off all non-performing assets, non-viable plants, reduce workforce and employ content labour, eliminate wastages & unnecessary frills from the product design that consumer’s don’t perceive as values (Bring in cash) 6) Combination efforts of many of the above point’s turnaround strategies are fraught with danger and high risk & more often than not fail due to lack of financial resources. Conclusion: In case if the turnaround strategies don’t work as part of the end game firm may pursue liquidation as the last resort. Liquidation strategy may be: a) A quick exit by selling off to a stronger rival b) A slow exit after harvesting short term cash flows.

Q: What could be the probable contents of a competitor profile? Take any company (please specify the name of the company) of your choice and identify its main competitor and compare the strengths and weakness of this company with that of its competitor. Prepare a competitor profile for any organization of your choice. Competitor analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats. Profiling coalesces all of the relevant sources of competitor analysis into one framework in the of efficient and effective strategy formulation, implementation, monitoring and adjustment. Competitor analysis is an essential component of corporate strategy. It is argued that most firms do not conduct this type of analysis systematically enough. Instead, many enterprises operate on what is called “informal impressions, conjectures, and

intuition gained through the tidbits of information about competitors every manager continually receives.” As a result, traditional environmental scanning places many firms at risk of dangerous competitive blind spots due to a lack of robust competitor analysis. Competitor profiling The strategic rationale of competitor profiling is powerfully simple. Superior knowledge of rivals offers a legitimate source of competitive advantage. The raw material of competitive advantage consists of offering superior customer value in the firm’s chosen market. The definitive characteristic of customer value is the adjective, superior. Customer value is defined relative to rival offerings making competitor knowledge an intrinsic component of corporate strategy. Profiling facilitates this strategic objective in three important ways. First, profiling can reveal strategic weaknesses in rivals that the firm may exploit. Second, the proactive stance of competitor profiling will allow the firm to anticipate the strategic response of their rivals to the firm’s planned strategies, the strategies of other competing firms, and changes in the environment. Third, this proactive knowledge will give the firms strategic agility. Offensive strategy can be implemented more quickly in order to exploit opportunities and capitalize on strengths. Similarly, defensive strategy can be employed more deftly in order to counter the threat of rival firms from exploiting the firm’s own weaknesses. Clearly, those firms practicing systematic and advanced competitor profiling have a significant advantage. As such, a comprehensive profiling capability is rapidly becoming a core competence required for successful competition. An appropriate analogy is to consider this advantage as akin to having a good idea of the next move that your opponent in a chess match will make. By staying one move ahead, checkmate is one step closer. Indeed, as in chess, a good offense is the best defence in the game of business as well. A common technique is to create detailed profiles on each of your major competitors. These profiles give an in-depth description of the competitor's background, finances, products, markets, facilities, personnel, and strategies. This involves: 

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Background o location of offices, plants, and online presences o history - key personalities, dates, events, and trends o ownership, corporate governance, and organizational structure Financials o P-E ratios, dividend policy, and profitability o various financial ratios, liquidity, and cash flow o Profit growth profile; method of growth (organic or acquisitive) Products o products offered, depth and breadth of product line, and product portfolio balance

new products developed, new product success rate, and R&D strengths o brands, strength of brand portfolio, brand loyalty and brand awareness o patents and licenses o quality control conformance o reverse engineering Marketing o segments served, market shares, customer base, growth rate, and customer loyalty o promotional mix, promotional budgets, advertising themes, ad agency used, sales force success rate, online promotional strategy o distribution channels used (direct & indirect), exclusivity agreements, alliances, and geographical coverage o pricing, discounts, and allowances Facilities o plant capacity, capacity utilization rate, age of plant, plant efficiency, capital investment o location, shipping logistics, and product mix by plant Personnel o number of employees, key employees, and skill sets o strength of management, and management style o compensation, benefits, and employee morale & retention rates Corporate and marketing strategies o objectives, mission statement, growth plans, acquisitions, and divestitures o marketing strategies o

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New competitors In addition to analysing current competitors, it is necessary to estimate future competitive threats. The most common sources of new competitors are:     

Companies competing in a related product/market Companies using related technologies Companies already targeting your prime market segment but with unrelated products Companies from other geographical areas and with similar products New start-up companies organized by former employees and/or managers of existing companies

The entrance of new competitors is likely when:    

There are high profit margins in the industry There is unmet demand (insufficient supply) in the industry There are no major barriers to entry There is future growth potential

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Competitive rivalry is not intense Gaining a competitive advantage over existing firms is feasible

Q: Corporate Strategy should take into the diverse interests of all the stakeholders of an organization. Explain.

“Our stakeholders are our business.” Standard Bank • 2005 annual report Companies have always had relationships with their stakeholders, which include shareowners, customers, suppliers, employees, regulators, and local communities. In fact, it would be difficult for a company to stay in business if it did not operate with the interests of these key groups in mind. When engaging with its stakeholders, a business is acknowledging that it is an interdependent entity, which is impacted by and has an impact on many different groups. For many companies, however, finding the right approach to stakeholder engagement and tapping the wider benefits it offers to their business is still uncharted territory. Recent improvements in global wealth, welfare, and opportunity most likely to be sustained in the 21st century by an economic system that operates on market

principles and provides ample opportunity for creation of new enterprises, as well as the growth of established firms. And the long-term success of the corporate system requires greater and systematic managerial attention to the interests and concerns of the diverse individuals and groups who are voluntarily or involuntarily affected by corporate activity. Taking stakeholder concerns and interests into can improve relationships, which may make it easier for a company to operate, lead to ideas for products or services that will address stakeholder needs, and allow the company to reduce costs and maximize value. Researchers have also found correlations between stakeholder performance indicators and conventional measures of corporate profitability and growth. The reasons may vary. For instance, companies that take a stakeholder view may have a more responsible approach to risk-taking, which can deliver higher returns by not unreasonably pursuing competitive advantage. Stakeholder-oriented companies are also welcomed more readily into new markets, as existing companies embedded in those markets perceive them as less hostile to local values and ways of operating. Overall, stakeholder- responsive corporate governance results in a more comprehensive understanding of corporate risk and opportunity while contributing to a strong reputation over time. Stakeholders can have economic, technological, political, social or even managerial effects on a company and engagement is therefore an important part of anticipating business opportunities and risks, which, in turn, is fundamental to proactive, strategic management. Over time, as economies, labor markets, and supply chains have become increasingly globalized, the number and variety of stakeholders impacted by individual companies has grown and the need for stakeholder engagement has become an essential part of doing business. Companies can capture and respond to stakeholder concerns in three ways:   

The corporation makes business decisions that take into its understanding of stakeholder interests. The corporation engages with stakeholders to get their input on what decisions should be made and then makes the decisions itself. The corporation involves stakeholders in the decision making process.

Regardless of process, one also needs to consider the principles behind the decision making process. Will the corporation take stakeholder interests into only when they have a direct influence on existing business performance? Will the corporation take stakeholder interests into when the actions of the corporation affects stakeholders but a change will either not improve performance or make performance worse?

Understanding stakeholder needs, interests and concerns is a fundamental part of managing indirect or nonfinancial risks. In fact, nonfinancial risks often have their own associated costs — whether social, environmental, or economic — and will likely in time affect the company’s financial bottom line. Engaging with stakeholders, and using information from stakeholder engagements in decision-making, is fundamental to understanding nonfinanical risks and managing an enterprise responsibly. For this reason, social investment indices, such as the Dow Jones Sustainability Index, give more weight to stakeholder engagement than to any other social impact measure.

Q : Consider any organization in an industry of your choice. Prepare a SWOT analysis for that organization and then suggest on the basis of this analysis what should be its future course of action. SWOT Analysis SWOT is an acronym for the internal Strengths and Weaknesses of a business and environmental Opportunities and Threats facing that business. SWOT analysis is a systematic identification of these factors and the strategy that reflects the best match between them. It is based on the logic that an effective strategy maximizes a business’s strengths and opportunities but at the same time minimizes its weaknesses and threats. This simple assumption, if accurately applied, has powerful implications for successfully choosing and deg an effective strategy.

Opportunities: An opportunity is a major favorable situation in the firm’s environment. Key trends represent one source of opportunity. Identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm. Threats A threat is a major unfavorable situation in the firm’s environment. It is a key impediment to the firm’s current and / or desired future position. The entrance of a new competitor, slow market growth, increased bargaining power of key buyers or supplier, major technologies change, and changing regulations could represent major threats to a firm’s future success.

Consumer acceptance of home computers was a major opportunity for IBM. The second fundamental focus in SWOT analysis is identifying key strengths and weakness based on examination of the company profile. Strengths and weaknesses can be defined as follows: Strengths Strength is a resource, skill, or other advantage relative to competitors and the needs of markets a firm serves or anticipates serving. a strength is a distinctive competence that gives the firm a comparative advantage in the marketplace. Financial resources, image, market leadership, and buyer / supplier relations are examples. Weaknesses A weakness is a limitation (or) deficiency in resources, skills, and capabilities that seriously impedes effective performance. Facilities, financial resources, management capabilities, marketing skills, and brand image could be sources of weaknesses. Sheer size and level of customer acceptance proved to be key strengths around which IBM built its successful strategy in the personal computer market. How is it useful? Understanding the key strengths and weaknesses of the firm further aids in narrowing the choice of alternatives and selecting a strategy. Distinct competence and critical weakness are identified in relation to key determinants of success for different market segments; this provides a useful framework for making the best strategic choice. SWOT analysis can be used in at least three in strategic choice decisions. The most common application provides a logical framework guiding systematic discussions of the business’s situation, alternative strategies, and ultimately, the choice of strategy. What one manager sees as an opportunity, another may see as a potential threat. SWOT analysis of Cadburys Strength 1. Cadbury is a company, which is reputed internationally as the topmost chocolate provider in the world. 2. The brand is well known to people & they can easily identify it from others. 3. Cadbury the world leaders in chocolate, is a well-known force in marketing and distribution. 4. s have a positive perception about the qualities of the brand.

5. Cadbury main strength is Dairy milk. Dairy milk is the most consumed chocolate in India. 6. By using popular models like Cyrus Brocha, Preety Zinta and others Cadburys has managed to portray a young and sporty image, which has resulted in converting buyers of other brands to become its staunch loyalists. 7. Cadbury has well adjusted itself to Indian custom. 8. It has properly repositioned itself in India whenever required i.e. from children to adults, togetherness bar to energizing bar for young ones etc. Weakness: 1. There is lack of penetration in the rural market where people tend to dismiss it as a high end product. It is mainly found in urban and semi-urban areas. 2. It has been relatively high priced brand, which is turning the price conscious customer away. 3. People avoid having their chocolate thinking about the egg ingredients.

Opportunities: 1. The chocolate market has seen one of the greatest increases in the recent times (almost @ 30%) 2. There is a lot of potential for growth and a huge population who do not eat chocolates even today that can be converted as new s.

Threat: 1. There exists no brand loyalty in the chocolate market and consumers frequently shift their brands. 2. New brands are coming and existing brands are introducing new variants to add up to an already overcrowded market.

Q: Managing Change is the hallmark of any successful leader. How do you tackle the process of change management?

A great leader not only manages change well, he is an agent of change himself when the need arises. He is able to affect change, prepare and manage the stress that the team has to go through during times of change. He understands the implications of change well and hence is prepared to face the results that change may bring. Research shows that the success rate for implementing major organizational change is quite low, for several reasons. First, asking organizations to change the way they conduct their business is similar to asking individuals to change their lifestyle. It can be done but only with the greatest determination, discipline, persistence, commitment and a clear plan for implementing the change. Second, resistance to change is a natural human phenomenon. All people resist change, some more than others. Managing that resistance is an essential part of the process. Third, change creates uncertainty. Organizations generally achieve fairly predictable results with their existing business model. Their outcomes may not be the desired results, but they are predictable. Change is unpredictable. The results may be far better – but they may also be far worse. And success often looks and feels like failure until the change is very nearly completed. Staying the course of implementing a change – which is essential for its success – meets with continuing human and organizational resistance and pressure to pull the plug before the process is completed.

How to tackle the process of change management? 1. Accept that change is a process First, recognize that change is a process and to move from crisis to control, we must follow the process. We must engage everyone in the change. It is not complex but it is a journey.There were a number of sub-committees identified: 2. Move forward step by step When companies strive to restructure or gain greater efficiency, experts warn that moving too quickly or failing to carefully implement changes can be detrimental to the process and ultimate result. But in the words of John Kotter, “Skipping steps creates only the illusion of speed and never produces satisfactory results” and

“Making critical mistakes in any of the phases can have a devastating impact, slowing momentum and negating hard-won gains. 3. Assess potential risks and generate motivation First, executives or other players in the organization need to assess potential risks and stir up a sense of urgency among workers and stakeholders in order to generate the motivation to spur change within the firm. However, this sense of urgency has to be strong enough and perpetuated by outside analysts, consumers, and other voices in order to propel change forward. 4. Form a powerful guiding coalition Once change is identified as the best solution to market share, profit losses, or other catalysts, leaders throughout the organization have to band together to guide the transformation process, and these leaders can include board , consumers, union leaders, executives, chairmen, and others. 5. Create a shared vision for corporate change The group then coalesces to create a shared vision for corporate change, and this vision should go beyond the normal five-year forward looking plan generated at most firms annually and be easily communicated and clear. A clear vision should also include transformation steps that are coordinated and propel the organization toward the overall goal, and these visions should be communicated in not only words and speeches, but also actions of managers, supervisors, and executives. The transformation of a company should also include short-term goals that can be tracked to show executives and workers that progress is being made toward the ultimate vision and that the long journey will be worth it, even in spite of short-term job cuts for instance. Experts warn, however, that transformations can take between five and 10 years to complete, and should not be declared as complete until the company culture has transformed to meet the vision. Leaders will know to tackle other processes and structures reflecting the old culture of the firm and to engrain the new behaviors and procedures into workers in order to make the change complete. 6. Communicate that vision Leadership should estimate how much of the vision is needed, and then multiply that effort by a factor of ten. A transformation effort will fail unless most of the organization understand, appreciate, commit and try to make the effort happen. The guiding principle is simple: use every existing communication channel and opportunity. 7. Empower others to act on the vision

Remove obstacles there may be to getting on with change. This entails several actions. Allocate budget money to the new initiative and free up key people from existing responsibilities so they can concentrate on the new effort. Allow people to start living the new ways and make changes in their areas of involvement. Nothing is more frustrating than believing in the change but then not having the time, money, help or needed to effect it. 8. Plan for and create short-term wins Real transformation takes time therefore; the loss of momentum and the onset of disappointment are real factors. Actively plan to achieve short-term gains which people will be able to see and celebrate. This will provide proof that efforts are working and adds to the motivation to keep going.Once change is identified as the best solution to market share, profit losses, or other catalysts, leaders throughout the organization have to band together to guide the transformation process, and these leaders can include board , consumers, union leaders, executives, chairmen, and others. 9. Consolidate improvement and keep the momentum for change moving A premature declaration of victory can kill momentum, allowing the powerful forces of tradition to regain ground. Keep in mind that new approaches are fragile and subject to regression. Use the feeling of victory as the motivation to delve more deeply into the organization: to explore changes in the basic culture, expose the systems relationships of the organization that need tuning, and to move people committed to the new ways into key roles.

10. Institutionalize the new approaches At the end of the day, change sticks when it seeps into the bloodstream of the corporate body and becomes “the way we do things around here.” This requires a conscious attempt to: show people how the new approaches, behaviours and attitudes have helped improve the organization and when the next generation of leaders believe in and embody the new ways.

Q: Distinguish between following concepts with suitable examples: A

Vision and Mission statements

Vision What is the future you want to create for the community you wish to address? Mission What do we do? For whom do we do it? What is the impact? Vision - The Future The way in which one sees or conceives something; a mental image; An overall statement of the goal of the organization. Mission - The Present An assignment one is sent to carry out; a self-imposed duty. A mission statement identifies the reason for the existence of the organization. The statement should be linked to the overall operations and business of the organization. Vision (Destination) What’s the destination of the organization? Visualize what the organization would look like in 5 and 10 years. Describe the detail: who are your customers, what do your products or services look like, who is your market, what is your revenue, how many employees do you have, etc. this is the future.

Mission (Vehicle) What is the focus of your organization? How are you structured to achieve your organization’s goal or objectives? What are your organization’s values and core competencies? this is your present operation, you may identify changes needed to your vehicle in order to reach your destination. McDonalds Example: Vision: “To be the world’s best quick service restaurant experience.” (The destination or the future)

Mission: “Being the best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile.” (The vehicle to reach the destination or the present operation)

B

Growth Markets and High Velocity Markets

Growth Markets:  

Frequent launches of new competitive moves Contains survivors



Firms are more established



Less variety of strategies



Strategic groups begin to form



Profits take off



Customers more sophisticated



Entry barriers emerge

Strategic Options:  

Must try to grow faster than the market Drive down costs



Pursue rapid product innovation



Gain access to distribution channels and sales outlets



Expand geographic coverage



Expand product line

High Velocity Markets

     

Rapid technological change Short product life-cycles Entry of important new rivals Lots of competitive maneuvering by rivals Fast evolving customer requirements and expectations Swirling market conditions

Possible Strategies      

C

Need to figure out how to deal with change Invest aggressively in R&D to stay on the leading edge of technological know-how Keep the companies products and services fresh and exciting enough to stand out in the midst of all the change that is taking place Develop quick-response capability Rely on strategic partnerships with outside suppliers and with companies making tie-in products Initiate fresh actions every few months

Entry barriers and Exit barriers

Barriers to entry Barriers to entry are designed to block potential entrants from entering a market profitably. They seek to protect the monopoly power of existing (incumbent) firms in an industry and therefore maintain supernormal (monopoly) profits in the long run. Barriers to entry have the effect of making a market less contestable The economist Joseph Stigler defined an entry barrier as "A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry" This emphasises the asymmetry in costs between the incumbent firm (already inside the market) and the potential entrant. If the existing businesses have managed to exploit some of the economies of scale that are available to firms in a particular industry, they have developed a cost advantage over potential entrants. They might use this advantage to cut prices if and when new suppliers enter the market, moving away from short run profit maximisation objectives - but designed to inflict losses on new firms and protect their market position in the long run.

EXAMPLES OF BARRIERS TO ENTRY Patents Giving the firm the legal protection to produce a patented product for a number of years (see below)

Limit Pricing Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss Cost advantages Lower costs, perhaps through experience of being in the market for some time, allows the existing monopolist to cut prices and win price wars Advertising and marketing Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. This is particularly important in markets such as cosmetics, confectionery and the motor car industry. Research and Development expenditure Heavy spending on research and development can act as a strong deterrent to potential entrants to an industry. Clearly much R&D spending goes on developing new products (see patents above) but there are also important spill-over effects which allow firms to improve their production processes and reduce unit costs. This makes the existing firms more competitive in the market and gives them a structural advantage over potential rival firms. Presence of sunk costs Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. This acts as a disincentive to enter the industry.

International trade restrictions Trade restrictions such as tariffs and quotas should also be considered as a barrier to the entry of international competition in protected domestic markets.

Sunk Costs Sunk Costs are costs that cannot be recovered if a businesses decides to leave an industry Examples include: " Capital inputs that are specific to a particular industry and which have little or no resale value " Money spent on advertising / marketing / research which cannot be carried forward into another market or industry When sunk costs are high, a market becomes less contestable. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk making huge losses if they decide to leave a market).

Barriers to exit For many businesses there are also barriers to exit which increase the intensity of competition in an industry because existing firms have little choice but to “stay and fight” when market conditions have deteriorated. There are several costs associated with exiting an industry. (1) Asset-write-offs – e.g. the expense associated with writing-off items of plant and machinery, stocks and the goodwill of a brand (2) Closure costs including redundancy costs, contract contingencies with suppliers and the penalty costs from ending leasing arrangements for property (3) The loss of business reputation and consumer goodwill - a decision to leave a market can seriously affect goodwill among previous customers, not least those who have bought a product which is then withdrawn and for which replacement parts become difficult or impossible to obtain. (4) A market downturn may be perceived as temporary and could be overcome when the economic or business cycle turns and conditions become more favourable

D

Strategic Alliance and t Ventures

Strategic alliances or t ventures allow you to partner with an existing business to share the risks and opportunities in a new market. t venture is a union of two or more parties, who contractually agree to contribute to a specific task for specified time period. Under JV two firms and form a separate legal entity and operate ar per partnership Act. The JV can be between individuals or corporations. While Stategic Alliance is mutual Coordination of strategic planning and management in order to achieve long term objectives between two organisations. Under this, each organisation will work independently and no separate entity is formed. SA is considered as less risky due to less legality. A strategic alliance is a form of collaboration between two or more companies which can take on many forms such as:    

technology transfer purchasing and distribution agreements marketing and promotional collaboration t product development.

Each partner in the alliance usually retains their independence while contributing towards a mutual shared goal. A t venture involves a potentially long term investment of funds, facilities and resources by two or more companies to a combined venture, which benefits all companies. All involved will have an equity stake in the new venture. A t venture may be formed to:   

run production facilities in another country establish a marketing and distribution presence use complementary technologies held by each participant.

t ventures can also be used to get around country trade barriers. In some cases a t venture with a local company may be required to enter some overseas markets. Short Notes: 1. Global Strategy:

During the last half of the twentieth century, many barriers to international trade fell and a wave of firms began pursuing global strategies to gain a competitive advantage. However, some industries benefit more from globalization than do others, and some nations have a comparative advantage over other nations in certain industries. To create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition.

Sources of Competitive Advantage from a Global Strategy A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources: 

Efficiency o Economies of scale from access to more customers and markets o Exploit another country's resources - labor, raw materials o Extend the product life cycle - older products can be sold in lesser developed countries o Operational flexibility - shift production as costs, exchange rates, etc. change over time



Strategic o First mover advantage and only provider of a product to a market o Cross subsidization between countries o Transfer price



Risk o o

Diversify macroeconomic risks (business cycles not perfectly correlated among countries) Diversify operational risks (labor problems, earthquakes, wars)



Learning o Broaden learning opportunities due to diversity of operating environments



Reputation o Crossover customers between markets - reputation and brand identification

2. Vertical and Horizontal Integration Integration may take two forms: vertical and horizontal integration. Vertical integration Vertical integration strategy involves growth through acquisition of other organizations in a channel of distribution. When an organization purchases other companies that supply it, it engages in backward integration. The organization that purchases other firms those are closer to the end s of the product (such as wholesalers and retailers) engages in forward integration. Vertical integration is used to obtain greater control over a line of business and to increase profits through greater efficiency or better selling efforts. The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration. The concept of vertical integration can be visualized using the value chain. Consider a firm whose products are made via an assembly process. Such a firm may consider backward integrating into intermediate manufacturing or forward integrating into distribution, as illustrated below:

Horizontal integration This strategy involves growth through the acquisition of competing firms in the same line of business. It is adopted in an effort to increase the size, sales, profits, and potential market share of an organization. This strategy is sometimes used by smaller firms in an industry dominated by one or a few large competitors, such as the soft drink and computer industries. The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external

expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses. Some examples of horizontal integration include:  

The Standard Oil Company's acquisition of 40 refineries. An automobile manufacturer's acquisition of a sport utility vehicle manufacturer.



A media company's ownership of radio, television, newspapers, books, and magazines.

3. Strategic Audit It is an operational framework designed to access whether the firm’s corporate strategy is delivering the desired results. Any strategy that is formulated is generally speculative & the critical risks or success often lies with the external environment which is non controllable. Hence, firms resort to periodic appraisals of the KPI’s & to access performance gaps and their solution as part of the audit outcome. Some organizations do strategic audits as a matter of periodic routine while some forms conduct it when they see negative operating signals. What are the KPIs? 1. Qualitative and Quantitative performance indicators namely a. Market Share b. Net Realisation c. Profit Margins 2. Stock Price & Earning per share 3. Market penetration, launching of new product ideas and the success there of. 4. Extent of value delivery, brand image & perception by consumers. 5. Are the policies & action plans as per the strategy approach appropriate? 6. Does the strategy build company’s strength and resource capabilities adequate enough to gain competitive advantage? 7. Whether the company’s strategy is workable for the future. Implementation of the audit

It aims in understanding whether the strategy employed has helped the company to meet its benchmarked KPI’s. Following Questions need to be asked as the part of the audit. 1. Whether strategy is consistent with the firm’s culture, capabilities, values & ethics. 2. Whether the strategy is structured to achieving stated marketing business objectives. 3. Whether the information systems in the company monitor strategic implementation and provides for real time, business intelligence that helps the firm to fine tune strategy. 4. Whether there is a consensus within the company’s strategic formulation and implementation. 5. Whether there is weight balance in the company’s efforts in monitoring the present & preparing for the future. 6. Whether the strategy deployed is consistent with the actual business priorities of the firm. Conclusion: It is the best way to address & access a wide array of complex and independent issues that need to be analysed to reap growth and profits fro strategic planning. Firm also need to periodically visit core value chain activities to ensure that technology & processes are contemporary & their costs are an industry benchmark.

4. Global and Multi Company Operations Global Operations: Nike and Reebok, for example, manufacture their athletic shoes in various countries thorough out Asia for sale on every continent. Instead of using one international division to manage everything outside the home country, large corporations are now using matrix structures in which product units are interwoven with country or regional units. International assignments are now considered key for anyone interested in reaching top management.

As more industries become global, strategic management is becoming an increasingly important way to keep track of international developments and position the company for long-term competitive advantage. Multi Company Operations: The correlation between company size and operating in multiple businesses is not an accident. After all, most firms that stay in a single business reach a saturation point in that business sooner or later, and have to make a choice. They can accept the fact that they are now mature companies and settle into that status, or they can aspire for more growth, usually by entering new businesses and new markets. While not every large firm is a General Electric or Siemens, most large firms have expanded beyond their original markets (both in of products and geography).