Business Policy and Strategic Management

Description
Business Policy and Strategic Management

Business Policy and Strategic Management
C. P. Dusad August 2009

INTRODUCTION
Purpose of Business : 1. Profits 2. Growth 3. Perpetuity –Continuous Renewal P = SP-CP, SP depends on value for money.Cost depends on Productivity of resources Performance depends on RONW by the Indian Companies Business Policy – Standard decisions applied to given situations at different locations and future time and to different products, men, finance etc.

INTRODUCTION – Contd.
Evolution of Business Policy:The origin is traced back to 1911, when Harvard Business School introduced an integrative course in management at providing general management capability. for developing CEO perspective. Real impetus for introducing Business Policy came in 1959 when two reports – Gordon and Howell report sponsored by Ford Foundation, and the Pierson report by Carnegie Foundation were published. In 1969 the American Assembly of Collegiate Schools of Business (AACSB) made the course of Business Policy a mandatory requirement

INTRODUCTION – Contd.
Historical Perspective of BPSM has four paradigm shifts, or four overlapping phases:1. First Phase –Starting from mid 1930s – Ad hoc policy making need arose due to business expansion – Demand > Supply 2. Second Phase – starting from1940s –Planned business policy – business expansion in terms of multi products, multi group of customers. multi locations- Demand > Supply. Business required Integration of functions. 3. Third Phase – starting from 1960s – Supply > Demand – Competition started hurting the business. Concept of Strategy came into picture.( Customer needs became the focus.)

INTRODUCTION – Contd.
4. Fourth Phase – starting from 1980s Supply > Demand, competition became severe both customer needs and cost became the focus. Strategic Management ( PDCA) came into emphasis. 5. Future – For Strategy Development Rumelt posed four fundamental questions:1) How do firms behave? 2) Why are firms different? 3) What is the function or the value added by the headquarter unit? 4) What determines success or failure in international competition?

Definition of Strategic Management
Glueck defines strategic management as “ A stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives.”

Mintzberg?s 5Ps 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 • Ploy • Pattern • Position • Perspective

Mintzberg?s 5Ps for Strategy
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. Ploy As plan, a strategy can be a ploy too, really just a specific manoeuvre intended to outwit an opponent or competitor.

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 encompasses 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.

Mintzberg?s 5Ps for Strategy

Mintzberg?s 5Ps for Strategy
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.

Mintzberg?s 5Ps for Strategy
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 members 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.

Levels of Strategy
1. Corporate Level-Profitable Growth 2. Business Level ( SBU) – Profitable Growth 3. Functional Level – Functional Performance

Purpose of Business Policy
1. To integrate knowledge gained in various functional areas of management. 2. To adapt a generalist approach to problem solving. 3. To understand the complex inter-linkages operating within an organization through use of systems approach to decision making & relate them to changes taking place in external environment.

Objectives - Knowledge
1. Learn concepts – strategy, policies, plans & programs. 2. Knowledge about the environment – external & internal. 3. Determination of the mission, objectives & strategies of a firm. 4. Implementation of strategy. 5. Problem solving & decision making using generalization of approach.

Objectives - Skills
1. Skill development – apply what is learnt. 2. Development of analytical ability. 3. Identifying factors relevant in decision making. 4. Link theory with practice. 5. Case analysis leads to development of written & or oral communication skills.

Objectives - Attitude
1. Inculcation of appropriate attitudes – generalist attitude enables the learner to approach & assess a situation from all possible angles.( story of 5 blind men & elephant) 2. Generalist to function under condition of partial ignorance by using his judgment & intuition. 3. Develop liberal attitude & be receptive to new ideas, information & suggestions. 4. Go beyond & think – developing a creative & innovative attitude.

Phases in the Strategic Management Process – PDCA Cycle
Establishment of Establishment of Strategic intent Strategic intent Formulation of strategies Implementation of strategies

Strategic control

Strategic Evaluation

Elements in the Strategic Management Process
1. Establishing strategic intent
– – – – Creating & communicating a vision Designing a mission statement Defining a business Setting objectives

Elements in the Strategic Management Process -contd
2. Formulation of strategies
– – – – – – – – – Performing environmental appraisal. Doing organizational appraisal appraisal. Doing SWOT analysis Considering corporate level strategies Considering business level strategies Undertaking strategic analysis Exercising strategic choice Formulating strategies Preparing a strategic plan

Elements in the Strategic Management Process -contd
3. Implementation of strategies.
– – – – – Activating strategies Designing structures and systems. Managing behavioural implementation Managing functional implementation. Operationalising strategies

Elements in the Strategic Management Process -contd
4. Performing strategic evaluation and control.
– Performing strategic evaluation. – Exercising strategic control – Reformulating strategies

Process of Crafting and Executing Strategy
Five phase managerial process:• Developing a strategic vision of where the company needs to head and what its future product-customermarket-technology focus should be • Setting objectives and using them as yardsticks for measuring the company?s performance and progress. • Crafting a strategy to achieve the desired outcomes and move the company along the strategic course that management has charted. • Implementing and executing the chosen strategy efficiently and effectively.

Process of Crafting and Executing Strategy
5. Monitoring developments and initiating corrective adjustments in the company?s long term direction, objectives, strategy or execution in light of the company?s actual performance, changing conditions and new ideas and new opportunities.

The Strategy-Making, Strategy Executing Process
Developing a strategic vision Setting objectives Crafting a strategy to achieve the objectives and vision Implementi -ng and executing the strategy

Review as needed in light of actual performance , changing conditions, new opportunities and new ideas.

Monitoring developments evaluating performance and making corrective actions

Strategic Vision –Core concept
A strategic vision is a road map showing the route a company intends to take in developing and strengthening its business. It paints a picture of a company?s destination and provides a rational for going there. An effectively communicated vision is management?s most valuable tool for the enlisting the commitment of company personnel to actions that will make the vision a reality. Executive ability to paint a convincing and inspiring picture of a company?s journey and destination is an important element of effective strategic leadership.

Objectives
A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its full resources and competitive actions on achieving that objective. Objectives are an organization?s performance targets – the results and outcomes it wants to achieve. They function as yardsticks for tracking an organization?s performance and progress.

Setting Objectives
The purpose of setting objectives is to convert vision into specific performance targets- results and outcomes the company?s management wants to achieve –and then use these objectives as yardsticks for tracking the company?s progress and performance. Well stated objectives are quantifiable or measurable and contain a deadline for achievement. What gets measured gets done. You cannot manage what you cannot measure. Two very distinct types of performance yardsticks are required : those relating to financial performance and those relating to strategic performance.- outcomes that indicate a company is strengthening its market standing, competitive ability and future business prospects.

Financial Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9. An x% increase in annual revenue. Annual increase in after tax profit of x % Annual increase in earnings per share of x%. Annual dividend increases of x%. Profit margins of x% An x% ROCE or share holders? net worth Increased shareholders value-upward stock price Strong bond and credit rating Sufficient internal cash flows to fund new capital investment. 10. Stable earnings during periods od recession.

Strategic Objectives
1. Winning an x% market share. 2. Achieving lower overall costs than rivals. 3. Overtaking key competitors on product performance or quality or customer service 4. Deriving x% of revenues from the sale of new products introduced within three years. 5. Achieving technological leadership. 6. Having better product selection than rivals. 7. Strengthening better brand appeal than rivals 8. Stronger national & global distribution capabilities. 9. Consistently getting new or improved products to market ahead of rivals

Strategy making & executing process
Every company manager has a strategymaking, strategy-executing role. It is flawed thinking to look on the tasks of managing strategy as something only high-level managers do.

A company?s Strategy Making Hierarchy
1. Corporate Strategy –The company wide game plan for managing a set of businesses. –CEO and other senior executives 2. Business Strategy – one for each business that the company has diversified into, How to strengthen market position and build competitive capabilities. –GMs of each business heads and their functional managers, 3. Functional areas strategies within each business –add relevant details to the how of overall business strategy.Functional heads in collaboration with other key people. 4. Operating strategies within each business – add detail and completeness to business and functional strategy, manage activities with strategic significance. Operating managers

Indian Manager of new millennium
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. E-manager –intensely aware of IT Orientation towards shareholders? value Strategic perspective Lateral thinking –manage complex & chaotic situations Responsiveness Global experience People management Courage in decision making Corporate Governance Social responsibility Change leader

Business Definition – Three dimensions
1. Customer functions – 2 Customer GroupsIndividual, domestic, agriculture, institutional, industrial What customer needs are to be satisfied

3. Alternative technologies
determine the manner in which the customer functions will be performed. What products and services will be offered. Find answers to the following questions :1) What is our business? 2) What will it be? 3) What it should be?

Critical Success Factors
Key factors for success are those which are critical for organizational success. They are sometimes also referred to as strategic factors as basic business strategy for competing wisely in any industry. KSFs could be evolved from the following:• Resources-Men, materials, money, machines, methods (technologies –product, production, Information), Measurements( MCS, Mgmt Reviews to keep under control-target, time, cost, quality) • Value adding Processes • Customers

Critical Success Factors - contd
Ohmae treats CSFs as basic business strategey for competing for competing wisely in any industry or business and then to inject a concentration of resources into a particular area where the company sees an opportunity to gain significant styrategic advantages over its competitors. Resources are allocated to a particular area only when the objectives for achievement in that area have been set. A strategy based on CSFs would, therefore, require setting objectives for those CSFs also.

Vision Vision is the aspirations of the organization as to what it
would be in future in a broad time horizon.Vision being future aspirations that lead to an inspiration to be the best in one?s field of activity. Good visions are :• are inspiring and exhilarating. • Visions represent a discontinuity, a step function and a jump ahead. • Help in the creation of a common identity and a shared sense of purpose. • Competitive, original and unique. • Foster risk-taking and experimentation • Foster long term thinking. • Represent integrity, they are truly genuine and used for the benefit of the people.

Vision Examples
1. To become national leader & within top seven at global level in next 6 years by 2015.

Mission & Purpose
Organisations relate their existence to satisfying a particular need of the society. They do this in terms of their mission. Mission is a statement which defines the role that an organization plays in a society. It refers to the particular needs of the society. Mission is the essential purpose of the organization, concerning particularly why it is in existence,the nature of business(es) it is in and the customers it seeks to serve and satisfy.

Marslow?s Needs
• • • • • • Basic – Air, Water, Food Shelter Physiological Needs Psychological Needs Egoistic Needs Self-actualization Needs

Characteristics of a Mission Statement
1. 2. 3. 4. 5. 6. It should be feasible. It should be precise. It should be clear. It should be motivating. It should be distinctive. It should indicate major components of strategy. 7. It should indicate how objectives are to be accomplished.

Examples of Mission Statement
1. Eicher Consultancy – “To make India an economic Power in the lifetime, about 1015 years, of its founding senior managers” 2. Unit Trust of India – “To keep the common man in sharper focus, to encourage saving and investment habits among them” 3. Ranbaxy Laboratories – “To become a research based International Pharmaceuticals company

Indian Railways- Vision & Purpose – Draft Proposal By Dr. Rakesh Mohan
• The purpose of Indian Railways is to play a central role in India?s overall economic growth by providing customer focussed cost effective transportation solutions. We will do this through an integrated transport system which includes the Railways and other modes of transportation. Indian Railways will be run primarily on a commercial basis. This will ensure that Indian Railways at least meets/exceeds the cost of capital on an overall basis.

Indian Railways – Vision contd.
• In line with our social/developmental role, we will subsidize select freight and passenger services. This will be done only at the instance of the Government and only to the extent of funds made available by it.

Goals and Objectives
Goals denote what an organization hopes to accomplish in a future period of time. They represent a future state or an outcome of the efforts put in now. A broad category of financial and non-financial issues are addressed by the goals that a firm sets for itself. Objectives are the ends that state specifically how the goals shall be achieved. They are concrete and specific in contrast to goals which are generalized. In this manner, objectives make the goals operational.While goals are qualitative, objectives tend to be mainly quantitative in specification, In this way they are measurable and comparable.

Stakeholders
1. 2. 3. 4. 5. 6. Share holders & Investors Customers Society Employees Government Vendors/suppliers

Role of Objectives
1. Objectives define the organization?s relationship with its objectives. 2. Objectives help an organization to pursue its vision and mission. 3. Objectives provide the basis for strategic decision making 4. Objectives provide the standards for performance appraisal.

What Objectives are set?
1. Profit (return on investment, return on shareholder?s capital, net profit as a percentage of sales ) 2. Marketing (increase in sales volume, market development for existing products, new product development, reduction market cost,improving customer service) 3. Growth (output, sales turnover, investment) 4. Employees (industrial relations, welfare and HRD 5. Social responsibility (community service, rural development, auxiliary industry development, family welfare)

How Objectives are Formulated
1. The forces in the environmentconsiderations for all the stake holders. 2. Realities of enterprise.s resources and internal power relationships. 3. The Value System of top executives 4. Awareness by the Management

Characteristics of Objectives
Objectives should be • Understandable • Concrete and specific • Related to a time frame • Measurable and controllable • Challenging • Should correlate with each other • Set within constraints

Indian Oil Corporation
• Vision – Indian Oil aims to achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through quality products and services. • Mission- Maintaining national leadership in oil refining, marketing and pipe line transportation. • Objectives- Focusing on cost, quality, customer care, value addition and risk management.

Indian Oil Corporation – contd.
• Corporate Strategies- Expansion and diversification and integration through strategic alliances and joint ventures. • Business Strategies – Harnessing new business opportunities in petrochemicals, power and lube marketing. • Functional Strategies – Focusing on R & D, training and consultancy, exploration and production, LNG and fuel management in India and abroad.

ONGC - Mission
To stimulate, continue and accelerate efforts to develop and maximize the contribution of the energy sector to the economy of the country.

Environmental Appraisal Concept of Environment
1. Characteristics of environmentEnvironment is complex, dynamic, multifaceted & has far reaching impact. 2. External & Internal Environment 3. SWOT analysis 4. General vs. relevant environment

Developing a Strategy
1. Thinking strategically about a company?s external environment – OT 2. Thinking strategically about a company?s internal environment. 3. Form a strategic vision of where the company needs to head. 4. Identify promising strategic options for the company 5. Select the best strategy and business model for the company

Immediate Industry and Competitive Environment
Micro Environment 1. Suppliers 2. Substitute Products 3. Buyers 4. New Entrants 5. Rival Firms

Macro-environment
1. 2. 3. 4. 5. General economic conditions Population demographics Legislation and regulations Societal values and lifestyles Technology

Understanding of a company?s industry and competitive environment
1. What are the dominant economic features of the industry in which the company operates? 2. What kinds of competitive forces are industry members facing and how strong is each force? 3. What forces are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability? 4. What market positions do industry rivals occupy? 5. What strategic moves rivals are likely to make? 6. What are the key factors for future competitive success? 7. Outlook present attractive prospects for profitability?

Components of Environment
1. 2. 3. 4. 5. 6. 7. 8. Market Supplier Technological Economic Regulatory Political Socio-culture International

Market Environment -Factors
1. Customer Factors – needs, preferences, perceptions, attitudes, values, bargaining power, buying behavior and customer satisfaction. 2. Product Factors – demand, image, features, utility, function, design, life cycle, price, promotion, distribution, differentiation and availability of substitutes of products and services.

Market Environment –Factors – contd.
3. Marketing intermediary factors – levels & quality of customer service, middlemen, distribution channels, logistics, costs, delivery systems & financial intermediaries. 4. Competitor related factors – different types of competitors, entry & exit of major competitors, nature of competition and relative strategic position of major competitors.

Supplier Environment
1. Cost, availability and continuity of supply of raw materials, sub-assemblies, parts & components. 2. Finance for implementing plans/projects. 3. Energy used in production. 4. Human resources. 5. Supply of plants & machinery, spare parts, and after sales service. 6. Infrastructural support & ease of availability of different factors of production, bargaining power of suppliers and existence of substitutes.

Technological Environment
1. Sources of technology- internal, external, foreign, cost of acquisition, collaboration, transfer of technology. 2. Technological development – stages, change & rate of change of, R&D. 3. Impact of human beings, manmachine system, environmental effects. 4. Communication & Infrastructural technology & technology in management.

Economic Environment
1. Economic stages existing at a given time in the country. 2. Economic structure adopted such as capitalistic, socialistic or mixed economy. 3. Economic planning – Five year plans, annual budgets. 4. Economic policies – Industrial, monetary & fiscal policies.

Economic Environment -contd
5. Economic Indices – national income, distribution of income, rate & growth of GNP, per capita income, disposable personal income, rate of savings and investments, value of exports and imports, the balance of payments etc. 6. Infrastructure factors such as financial institutions, banks, modes of transportation, communication facilities, energy sources, etc.

Regulatory Environment Important Factors
1. Constitutional frame work, directive principles, fundamental rights and division of legislative powers between central & state Governments. 2. Policies related to licensing, monopolies, foreign investment and financing of industries. 3. Policies related to distribution and pricing and control. 4. Policies relating to Exports & Imports. 5. Other policies related to the public sector, small scale industries, sick industries, development of backward areas, control of environmental pollution and consumer protection.

Regulatory Environment Important Controls
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Industrial policies & licensing. Monopolies and restrictive trade-practices. Legislation related to company operations. Capital issues control & stock exchange. Import, export & foreign exchange. Foreign Investment & collaboration. Development & regulation of industries. Distribution and pricing of commodities. Consumer protection. Environmental pollution.

Political Environment
1. Political System, ideological forces, political parties and centres of power. 2. Political structure, its goals and stability. 3. Political processes – operation of party system, elections, funding, legislation w.r.t. economic and industrial promotion & regulation. 4. Political Philosophy, Government?s role in business, its policies and interventions in economic and business development.

Social Environment
1. Demographic characteristics- Population, density, distribution, growth rate, age composition, interstate migration, rural-urban composition & mobility & income distribution. 2. Social Concerns – Role of business in society, environmental pollution, corruption, use of mass media & consumerism. 3. Social attitudes & values-expectations of society, social customs, beliefs, rituals, practices, changing lifestyle patterns & materialism.

Social Environment – contd
4. Family structure – changes in it, attitude towards & within the family, family values. 5. Role of women in society position of children & adolescents in family & society. 6. Educational levels, awareness & consciousness of rights & work ethics of members of society.

International Environment
1. Globalization, its process, content and direction. 2. Global economic forces, organization, blocs and forums. 3. Global trade and commerce, its process and trends. 4. Global financial system, sources of financing and accounting standards. 5. Geopolitical situation, equation, alliances and strategic interests of nations. 6. Global demographic patterns and shifts.

International Environment - contd
7. Global human resource- institutions, availability, nature and quality of skills and expertise, mobility of labour and other skilled personnel. 8. Global information systems, communication networks and media. 9. Global technological and quality sustems and standards. 10. Global markets and competitiveness. 11. Global legal system,adjudication and arbitration mechanism. 12. Globalization of management and allied disciplines and diffusion of management techniques in industry.

International Environment - contd
13. Post liberalization challenges 14. WTO guidelines 1) Trade without discrimination 2) Predictable and growing market access. 3) Promotion of fair competition. 4) Encouragement of development and economic reform.

Porter?s five forces model of Industry Competition
Potential threats from entry of new firms Supplier?s bargaining power Forces of competition created by rivalry among existing firms Buyer?s bargaining power

Potential threats from firms which make substitute products or services

Intensity of rivalry amongst existing competitors
1. 2. 3. 4. 5. 6. 7. 8. Numerous or equally balanced competitors Slow industry growth High fixed or storage costs. Lack of differentiation or switching costs Capacity augmented in large increments. Diverse competitors. High strategic stakes High exit barriers

Pressure from substitute products
1. Those products improving their price performance tradeoff with the industry product – watch the price trend. 2. Products produced by industries by earning high profits.

Bargaining Power of Buyers
1. Buyers purchasing large volumes relative to supplier?s sales. 2. The products it purchases from suppliers represent a significant fraction of buyer?s costs or purchases. 3. The products it purchases from suppliers are standard or undifferentiated. 4. Buyers facing few switching costs. 5. Buyers earning low profits. 6. Buyers pose a credible threat of backward integration. 7. The suppliers? product is unimportant to the quality of the buyer?s products or services. 8. The buyer has full information.

Bargaining Power of Suppliers
1. Dominated by few companies and more concentrated than the industry it sells to. 2. Not obliged to contend with other substitute products for sale to the industry 3. The industry is not an important customer of the supplier group? 4. The suppliers? product is an important input to the buyer?s business. 5. The supplier group?s products are differentiated or it has built up switching costs. 6. The suppliers group poses a credible threat of forward integration. 7. Government as a force in Industry Competition.

Threat to Entry
1. 2. 3. 4. 5. 6. Economies of scale. Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale. Proprietary product technology, Favourable access to raw material, Favourable locations, Govt. subsidies, Learning/experience curves.

Barriers and Profitability
Low

Low, Stable Returns Entry Barriers High, Stable Returns
High Low

Low, Risky Returns

High Risky Returns

Exit Barriers

High

Environmental Scanning
1. Events- important & specific occurrences. 2. Trends – tracking movements of various factors. 3. Issues- current concerns 4. Expectations – demands by interested groups

Approaches to Environmental Scanning
1. Systematic Approach – information systematically collected on all factors of environment. 2. Ad hoc approach- info collected as & when needed. 3. Processed form approach –information in a processed form

Sources of Information for environmental scanning
1. Documentary or secondary sources of information –publications, newspapers,magazines, journals, books, trade and indudtry association news letters, annual reports, Government publications. 2. Mass media – Radio & Television. 3. Internal sources – Company files/documents, MIS, company employees.

Sources of Information -contd
4. External agencies – customers, marketing intermediaries, suppliers, trade associations, government agencies. 5. Formal studies – by employees, market research agencies, consultants and educational institutions. 6. Spying and surveillance – ex-employees of competitors, industrial espionage agencies, planning moles in competitor companies.

QUEST - Quick Environmental Scanning Technique
1. Strategists make observation about the major events and trends in their industry. 2. Then they speculate on a wide range of important issues that might affect the future of the organizations by scanning the environment broadly and comprehensively. 3. The QUEST director prepares the report on major issues and their implications and three to five scenarios covering the major themes. 4. The report is reviewed by a group of strategists who identify feasible strategic options to deal with the evolving environment. The options are ranked anf the teams are designated to develop strategies.

ETOP for a Bicycle Company
Emvironment Nature Impact of each sector al Sector of Impact Market Industry growthgrowth rate at 7-8% pa,for sports cycle growth rate is 30% largely unsaturated demand. Technological Technological up-gradation of industry in progress, import of machinery simple. Supplier Mostly ancillaries and associated companies supply parts and components: imported raw materials easily available.

ETOP for a Bicycle Company-contd
Emvironmen Nature Impact of each sector tal Sector of Impact Economic Growing affluence among urban consumers, exports potential promising Regulatory Bycycle industry a thrust area for export Political Sociocultural No significant factor Customer preference for sports cycles , which are easy to ride and durable.

ETOP for a Bicycle Company-contd
Emvironmen Nature Impact of each sector tal Sector of Impact International Emerging threat from cheat imports from china

BHEL - ETOP
Environmental Impact (+) opportunity Sector (-) threat 1 Socio(+) Continued emphasis on infrastructural economic development which includes power supply for industry, transport and domestic consumption (-) Severe resource constraints 2 (+) High growth envisagedd in industrial Technological production and technology upgradation. (-) Sources of technology will become 3 Supplier scarce due to formation of technology cartels

BHEL - ETOP (contd.)
Environmental Impact (+) opportunity Sector (-) threat 4 Government (+) Liberalisattion ob technology import policy. 5 Competition (-) customers will become more discerning in their requirements due to an increasing role of power plant consultants (-) Public sector will find it increasingly difficult to retain specialists and highly qualified personnel.

ETOP
Environmental Severity Impact on specific areas Sectors Impact Market Supplier Technological Economic Regulatory Political Social International

Organizational Appraisal
The purpose of organizational appraisal is to determine the organizational capability in terms of strengths and weaknesses that lie in the different functional areas. This is necessary since the strengths and weaknesses have to be matched with the environmental opportunity and threats for strategy formulation to take place.

1. How well is the company?s present strategy working ? 2. What are the company?s resource strengths and weaknesses and external opportunities and threats? 3. Is the company competitively stronger or weaker than key rivals? 4. What strategic issues and problems merit frontburner managerial attention? Four Tools to be used -SWOT, Value Chain, Benchmarking, and Competitive Strength

Company?s Resources and Competitive Position

Framework for development of SAP by anAdvantage organization Strategic
Organizational Capability
Competencies Synergistic Effects Strengths and weaknesses

Organizational resources + Organizational behaviour

Strengths & Weaknesses
Organizational resources and behaviour do not exist in isolation. They combine to create strengths and weaknesses within the internal environment of an organization. A strength is an inherent capability which an organization can use to gain strategic advantage. A weakness, on the other hand, is an inherent limitation or constraint which creates a strategic disadvantage for an organization. Example of weaknesses- in appropriate plant location resulting in higher cost of operations, obsolete plant & equipment, financial constraints, uneconomical operations. Examples of strengths – av. Of sources of finance, efficient use of funds, wide marketing network , up-to-date products and R&D work.

Synergistic Effects
Strengths or weaknesses do not exist in isolation. They combine within functional area and also across different functional areas to create Synergistic effects. Two strong point in a particular functional area add up to more than double the strength. Like wise two weaknesses acting in tandem result in more than double the damage. Example – In marketing when product, price, distribution, and promotion aspects support each other, resulting in high level of marketing synergy. At a higher level marketing and production areas may support each other leading to operational synergy resulting into very high performance.

Competencies
Organizational resources and behaviour lead to strengths & weaknesses which lead to synergistic effects which then lead to organizational competencies. Competencies are special qualities possessed by an organization which that make them withstand pressures of competition in the market place. In other words, the net results of strategic advantages and disadvantages that exist in an organization determine its ability to compete with its rivals. Other terms used are core capabilities, invisible assets, embedded knowledge, etc.

Many organizations achieve strategic success by building distinctive competencies around the CSFs. CSFs are those factors whch are crucial for organizational success. A few examples of distinctive competencies :•Superior product quality, more fuel/energy efficient. •Creation of a market niche by supplying highly specialized products. •Differential advantages based on the superior R & D skills •Access to low cost financial resources which is not available to its competitors.

Competencies - contd

Core Competence
C. K Prahalad and Gary Hamel initiated the concept of dynamic capabilities approach that considers strategic management as a collective learning process aimed at developing and then exploiting distinctive competencies by an organization which are difficult to replicate by their rivals. Take the analogy of a tree as corporation. leaves, flowers and fruits are end products and services. Branches are business units. The trunk and major limbs are core Products. The root system that provides nourishment, substance and stability is the core competence such as collective learning in the organization especially how to coordinate diverse production skills, integrate multiple streams of technologies.

Core Competence – contd.
To identify core competence three tests are prescribed :•It should provide potential access to wide variety of markets. •Make a significant contribution to the perceived customer benefits of the end product. •Difficult for the competitors to imitate. Examples :3Ms in stick tape, Sony?s Miniaturization, Honda?s in Engines, Toyota in Quality.

Organizational Capability Factors
Organizational capability factors are the strategic strengths and weaknesses existing in different functional areas within the organization. They are:• Financial Capability • Marketing Capability • Operations Capability • Personnel Capability • Information Management Capability • General Management Capability

Financial Capability
1. Factors relating to sources of funds- capital structure, procurement of capital, financing patterns, working capital availability, borrowings, deposits. 2. Cost of capital – should be the lowest, lower than the competition 3. Factors relating to usage of funds- Fixed assets acquisition, current assets, Loans and advances,, dividend distribution. 4. Factors relating to the management of funds – Creating profit & growth of net worth, PAT/NW, tax management financial accounting systems, MIS

Typical Strengths that support Financial Capability
1. 2. 3. 4. 5. 6. 7. 8. Access to financial resources Amicable relationship with financial institutions High level of credit-worthiness. Efficient capital budgeting system Low cost of capital as compared to competitors. High level of shareholder?s confidence. Effective management control system, Tax benefits due to various government policies

Financial Analysis
1. Liquidity – CA/CL 2. Operations & Efficiency – SLS/TCE, Contribution/SLS 3. Profitability of CE – optg. Profit/CE, optg leverage contribution/optg. Profit. 4. Profitability of capital owned – NP/NW, financial leverage PBIT/PBT 5. Management of earnings – Dividends/Share capital, retained earnings/PAT 6. Market appraisal – Price to EPS ratio

Marketing Capability
1. Product related factors- variety, differentiation, mix quality, positioning, packaging and others. 2. Price related factors- pricing objectives, policies, changes, protection, advantages 3. Place related factors – Distribution, transportation and logistics, marketing channels, marketing intermediaries, 4. Promotion related factors – Promotional tools, sales promotion, advertising, public relations, 5. Integrative and systemic factors – Marketing mix, market standing, company image, marketing organization, marketing system, marketing MIS.

Typical strengths that support Marketing Capability
1. 2. 3. 4. Wide variety of products Better quality of products Sharply- focused positioning Low prices as compared to those of similar products in the market Price protection due to government policy High quality consumer service Effective distribution system Effective sales promotion High-profile advertising Favorable company and product image Effective marketing management information system

5. 6. 7. 8. 9. 10. 11.

Marketing Examples
1. LG Electronics – won the A&M best marketing company award, focused promotional campaign based on health as USP. 2. Maggie „two-minute? noodles has been astrong Nestle brand, leading in a highly competitive fast food market in India. 3. Philips CTV higher price market being eroded by Videocon, BPL as customer has not been able to differentiate better quality 4. A focus on franchise outlets has provided a unique distribution strength adding to the marketing capability of Archies, Greetings, Gifts, Ltd., Barista Coffee shops

Operations Capability
1. Factors related to the production system – Capacity, location, layout, product or service design, work systems, degree of automation, extent of vertical integration etc 2. Factors related to operations and control system – Aggregate production planning, material supply, inventory, cost and quality control, maintenance systems and procedures 3. Factors related to the R&D system – Personnel, facilities, product development, patent rights, level of technology used, technical collaboration and support etc.

Typical Strengths that support Operations Capability
1. 2. 3. 4. 5. 6. 7. 8. High level of capacity utilization Favorable plant location High degree of vertical integration Reliable sources of supply Effective control of operational costs Existence of good inventory control system Availability of high caliber R&D personnel Technical collaboration with reputed firm abroad

Examples of Operational Capability
1. Although JK Tyres pioneered radial tyres in India, it is Bridgestone who have access to latest tread patterns has proved to perform better. JK Tyres faces strategic disadvantage owing to its lower operations capability 2. In case of Amar Raja Batteries technology provided the boost to operations capability. The company introduced valve regulated lead acid technology and emerged as market leader in the industrialo batteries segment. 3. Videocon took over uptron CTVtube units in oreder to develop operations capability through vertical integration for manufacturing CTVS. 4. LMW – capability to absorb imported technology for manufacturing the largest range of textile machinery

Personnel Capability
Factors related to • Personnel system – manpower planning system, selection, development, compensation, communication, appraisal, position of personnel department withiin the organization, procedures and standards. • Organizational & employees characteristics – Corporate image, quality of managers, staff & workers, developmental opportunities, working conditions, • Industrial Relations – union/management relations, collective bargaining, safety, welfare and security, employee satisfaction and morale

Typical Strengths supporting Development of Personnel capability
1. Genuine concern for human resources management and development 2. Efficient and effective personnel systems 3. The organization perceived as a fair and model employer 4. Excellent training opportunities and facilities 5. Congenial working environment 6. Highly satisfied and motivated workforce 7. High level of organizational loyalty 8. Low level of absenteeism 9. Safe and salutary working conditions.

Information Management Capability
Factors related to • Acquisition and retention of information – sources, quantity, quality and timeliness of information, retention capacity, security • Processing and synthesis of information – Database management, computer system, software capability, and ability to synthesise informatiom • Retrieval and usage of information – • Transmission and dissemination – speed, scope, width and depth of coverage of information and willingness to accept information • Integrative, systemic and supporting factors – availability of IT infrastructure and computer professionals, willingness to invest in state of the art systems, top management support.

Typical Strengths that Support Information Management Capability
1. Ease and convenience of access to information sources 2. Widespread use of computerized information sys. 3. Availability and operability of high –tech equipmts 4. Positive attitude to sharing and disseminating info. 5. Wide coverage and networking of computer sys. 6. Presence of full proof information security systems 7. Presence of buyers and suppliers conversent with IT applications. 8. Top management?s understanding of and support to IT and its application within the organization.

General Management Capability
Factors related to 1. General Management System - Strategic mgmt. system,processes related to strategy intent, formulation, implementation machinery, strategu evaluation system, MIS, Corporate planning system, rewards and incentive system for top managers. 2. General Managers – orientation, risk-propensity, values, norms, personal goals, competence, capacity for work, track record, balance of functional experience etc.

General Management Capability
3. External relationships – Influence on and rapport with the Government, regulatory agencies and financial institutions; public relations, sence of social responsibility, philanthropy, public image as corporate citizen. 4. Organizational Climate – Organizational culture, use of power, political processes, balance of vested interests, introduction acceptance and management of change, nature of organizational structure and control.

Typical Strengths that support General Management Capability
1. Effective system for corporate planning 2. Control, reward, incentive system for top managers geared to achievement Of objectives 3. Entrepreneurial orientation & high propensity for risk taking. 4. Good rapport with Govt. and bureaucracy. 5. Favorable corporate image. 6. Company perceived as good orgn to work for. 7. Development oriented organization culture. 8. Consensus building decision making for orgnl. Interest 9. Effective management of organizational change.

Examples of Gen. Mgmt. Capability
1. Hindustan Unilever – provided many CEOs to Indian corporate sector indicating general management capability. 2. Thermax Ltd – respected for its top management which is considered progressive, liberal, forward looking, and conscious of its social obligation. 3. Sundaram Clayton is the only company in India to have won Japanese Deming Prize. Behind this success lies the solid general management capability provided by top management led by Venu Srinivasan. 4. Oswal Group between 1989 - 1999 sold out or shit down many of its divisns. because of lack of gen.mgmt.capability of not earning adequate returns.

Methods & Techniques used for Organizational Appraisal
The methods & techniques used for organizational appraisal can be identical to those used for the performance evaluation of an organization. In evaluating performance the emphasis is on assessing the current behaviour of the organization w.r.t. its efficiency and effectiveness as such the assessment is of short term nature. On the other hand, organizational appraisal is of a comprehensive and long term nature and the emphasis is not just on current behaviour but also on what the organization needs to do in order to gain the capability to compete in the market, take advantages of available opportunities and overcome the threats operating in the relevant environment.

Methods & Techniques used for Organizational Appraisal – contd.
Methods & techniques can be classified in three parts as below :1. Internal Analysis
A. Value Chain Analysis B. Quantitative analysis i. Financial analysis ii. Non-financial quantitative analysis

C. Qualitative analysis

2. Comparative analysis
A. Historical analysis B. Industry norms C. Benchmarking

Methods & Techniques used for Organizational Appraisal – contd.
3. Comprehensive analysis
A. Balanced scorecard B. Key factor rating.

Internal Analysis : deals with an investigation into its strengths and weaknesses by focusing on factors specific to it.

Porter?s Generic Value Chain-This is a method for assessing strengths and weaknesses of series of activities the org. performs. Primary Activities

Inbound Logistics

Operations

Outbound logistics

Marketing &
Sales

Services

Supported by

Procurement
Purchasing Physical

HRD

Technology

Infrastructure Organizational

resources

Recruiting Development Rewarding Equipment developing Retrenchment Assimilation

Design
Staff function

1.

2.

3.

4.

4.

Inbound Logistics (1) Warehousing, (2) Materials Handling, (3) Inventory control, (4) Scheduling Operations (1) Manufacturing, (2) Packaging, (3) Assembly (4) Maintenance Outbound Logistics (1) Warehousing, (2) Transportation, (3) Order processing, (4) Scheduling Marketing and Sales (1) Pricing, (2) Distribution – Channel , Management, Promotion Service – (1) After sales service, (2) Training

Value Chain Analysis –contd.

A. Ratio Analysis –

Quantitative Analysis -Financial

1) Liquidity – CA/CL 2) Operations & Efficiency – SLS/TCE, Contribution/SLS 3) Profitability of CE – optg. Profit/CE, optg leverage contribution/optg. Profit. 4) Profitability of capital owned – NP/NW, financial leverage PBIT/PBT 5) Management of earnings – Dividends/Share capital, retained earnings/PAT 6) Market appraisal – Price to EPS ratio

B. Economic Value- added Analysis (EVA) – Profitability in terms of returns on capital above the cost of servicing the capital employed. EVA creates wealth for the organization. C. Activity Based Costing

Qualitative Analysis
Many of the strengths and weaknesses of the organization cannot be expressed in quantitative terms. For example – corporate culture, the ability to absorb and assimilate knowledge, the level of morale among the employees. These qualitative factors are called „soft factors? as against „hard factors? subjected to quantitative analysis.

Comparative Analysis
A. Historical Analysis –Comparison of performance strengths and weaknesses of the organization over a period of time. B. Industry Norms – Comparison with competitors within the industry

C. Benchmarking –
A benchmark is a reference point for the purpose of measuring. The process of benchmarking is aimed at finding the best practices within and outside the industry to which the organization belongs. The purpose of benchmarking is to find the best performers in an area so that one could match one?s own organizations. Benchmarking can be of performance, processes, and functions.

Comprehensive Analysis
A. Balanced Scorecard –identifies four key performance measures as follows:1. Customer perspective – How do customers see us? 2. Internal business perspective –What must we excel at? 3. Innovation and learning perspective – Can we continue to improve and create value? 4. Financial perspective–How do we look at shareholders?

Comprehensive Analysis –contd.
B. Key factor rating – A comprehensive method which can be used in association with financial analysis is that of key factor rating. The capability factors (strengths and weaknesses ) are analyzed in the following areas:1. 2. 3. 4. 5. Financial capability factors Marketing capability factors Operations capability factors Information management capability factors General management capability factors

Summarized Form of Organizational Capability Profile
Capability factors are evaluated in terms of • Weakness (-0 to –10) • Normal (0) • Strength (+0 to +10) 1. Financial capability factors W N
a) Sources of funds b) Usage of funds c) Management of funds

S

Summarized Form of Organizational Capability Profile –contd.
2. Marketing capability factors
a) b) c) d) Product related Price related Promotion related Integrative and systematic

3. Operations capability factors
a) Production system b) Operation and control system c) R & D System

Summarized Form of Organizational Capability Profile –contd.
4. Personnel capability factors
a) Personnel system b) Organizational and employee characteristics c) Industrial relations

5. Information management capability factors
a) b) c) d) e) Acquisition and retention of information Processing and synthesis of information Retrieval and usage of information Transmission and dissemination of information Integrative, systemic and supportive

Summarized Form of Organizational Capability Profile –contd.
6. General management capability factors
a) General management system b) External relations c) Organizational climate

After the completion of the chart, the strategists are in a position to assess the relative strengths and weaknesses of an organization in each of the six functional areas and identify the gaps that need to be filled or the opportunities that could be used.

Strategic Advantage Profile (SAP) for a Bicycle Company
Capability factor
1. Finance

Rating Strengths and weaknesses
High cost of capital, reserves and surplus position unsatisfactory Fierce competition in industry, company?s position secure at present. Plant and machinery in excellent condition , captive sources for parts and components available.

2 Marketing

3. Operations

Strategic Advantage Profile (SAP) for a Bicycle Company
Capability factor
4. Personnel

Rating Strengths and weaknesses
Quality of managers and workers comparable with that in competitor companies. Computerized management information system in the process of development, traditional functions such as payroll and accounting computerised.

5. Information

Strategic Advantage Profile (SAP) for a Bicycle Company
Capability factor
6. General Management

Rating Strengths and weaknesses
High quality and experienced top management generally adopts a proactive stance with regard to decision making.

SWOT Analysis : Corporate–level Strategies
Numerous Environmental Opportunities Stability Strategies Aggressive Growth-oriented Strategies Diversification Strategies

Critical Internal Weaknesses

Defensive/ Retrenchment Strategies

Substantial Internal Strengths

Major Environmental Threats

Major Types of Strategies
1. Stability Strategies
a) b) c) d) No Change Strategies Pause/Proceed with caution strategies Profit Improvement strategies Weakness removal Strategies

2. Expansion Strategies
a) Expansion through concentration – Existing Products and functions b) Expansion through integration – Vertical up/down , Horizontal integration ( Value Chain ) c) Expansion through diversification- Related or concentric diversification – Customers/Market, Technology/Products; Conglomerate Diversification d) Expansion through cooperation- Mergers, Takeovers, JVs, Strategic alliances e) Expansion through internationalization

Major Types of Strategies – contd.
3. Retrenchment Strategies
a) Turnaround Strategies b) Divestment Strategies c) Liquidation Strategies

4. Combination Strategies
a) Simultaneous Strategies b) Sequential Combination c) Combination of simultaneous and sequential strategies

Mergers and Takeovers
Merger Strategies – A merger is a combination of two or more organizations in which two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organizations are dissolved and assets and liabilities are combined and a new stock is issued.Examples – Pololeyfin industries with Nocil, TVS Whirlpool Ltd with Whirlpool of India Ltd., ASEA with Brown Boveri to form ABB.

Types Of Mergers
1. Horizontal Mergers –Combination of two or more firms in the same business. 2. Vertical Mergers – Backward or forward 3. Concentric Mergers – Two or more firms related to each other either in terms of Customer functions, Customer groups, or the alternative technologies.Thus a footwear company combining with a hosiery firm making socks or another specialty footwear company. 4. Conglomerate mergers – Two or more firms are unrelated to each other.

Reasons for Mergers
1 To increase the value of the organization?s stock 2 To increase a growth rate and make a good investment. 3 To improve stability of earning and sale. 4 To balance,complete or diversify product line. 5 To reduce competition 6 To acquire needed resources quickly. 7 To avail tax concession and benefits. 8 To take advantages of synergy.

Why the seller wishes to merge?
1. To increase the value of the owner? stock and investments. 2. To increase the growth rate 3. To acquire resources to stabilize operations 4. To benefit from tax legislation 5. To deal with top management succession problem.

1. Strategic Issues –A merger should ideally lead to the generation of strengths that would help the post-merger organization to achieve the objectives in a better manner. It is important to consider the extent to which a merger may lead to positive synergistic effects. For this the strategic advantages and distinctive competencies of the merging firms have to be analyzed. 2. Financial Issues – Valuation of the seller firm, sources of financing for merger.Various valuation methods CF method, net tangible asset value method, profit earning capacity value, fair value based on combination of these three methods 3. Managerial Issues – Post merger problems/issues in managing – Organization, Manning, Culture 4. Legal issues in mergers – Chapter V ob Companies Act

Important issues in Mergers

Takeovers
Takeover Strategies – Post liberalization has seen an increasing use of takeover strategies as a means of rapid growth. How takeovers take place –A six step procedure 1. Spell out the objective 2. Indicate how the objective would be achieved 3. Assess managerial quality 4. Check the compatibility of business styles 5. Anticipate and solve problems early 6. Treat people with dignity and concern

C O M P E T I T I V E
S C O P E

Business Level Strategies
Broad Market Target

Cost Leadership

Differentiation

Best cost provider strategy

Narrow Market Target

Focussed Cost leadership
Low-cost Products/services

Focussed Differentiation
Differentiated Products/services

COMPETITIVE ADVANTAGE

Cost Leadership Business Strategy
Achieving Cost leadership
• • •
•

•
•

Accurate demand forecasting and high capacity utilization Attaining economies of scale leads to lower per unit cost. High level of standardization of products and offering uniform service packages using mass production techniques yields lower per unit cost. Aiming at average customer makes it possible to offer a generalized set of products/services to cover a greater number of customers. Investments in cost saving technologies to squeeze every extra paisa out of the cost, making the products/services competitive in the market. Withholding differentiation till it becomes absolutely necessary is another way to realize cost based competitiveness.

Conditions under which cost leadership is used • The markets operate in such a way that price based competition is vigorous making costs an important factor. • The product/service is standardized and its consumption takes place in such a manner that differentiation is superfluous. • The buyers may be numerous and posses a significant bargaining power to negotiate price reduction. • There is a lesser customer loyalty and the cost of switching from one seller to another is low e.g highly standardized products. • There might be very few ways available for differentiation to take place. Alternatively differentiation does not matter much to the customers.

Cost Leadership Business Strategy

Benefits associated with cost leadership • Cost advantage is possibly the best insurance against industry competition. • Powerful suppliers possess a higher bargaining power to negotiate price increases for inputs. Firms possessing cost advantage can Absorb the price increases to some extent. • Powerful buyers possess a higher bargaining power to effect price reduction. Firms that possess cost advantage can offer price reduction to some extent. • The threat of cheater substitutes can be offset to some extent by lowering prices. • Cost advantage acts as an effective entry barrier for potential entrants who cannot offer product/service at a lower price.

Cost Leadership Business Strategy

RISKS FACED UNDER COST-LEADERSHIP • Cost advantage is temporary, it vanishes as soon as competitors imitates the cost reduction techniques. • Cost leadership is not a market friendly approach. Often severe cost reduction can dilute customer focus and limit experimentation with product attributes. Thus interests of customers are ignored. • Depending on the industry structure less efficient producers may not choose to remain in the market owing to the competitive dominance of the cost-leader. This may reduce the scope for product/service affecting the cost-leader adversely. • Technological shifts are a great threat to the cost-leader as these may change the ground rules on which the industry operates.

Cost Leadership Business Strategy

Differentiation Business Strategy
Achieving Differentiation –
To create value for the customer that is unmatched by by the competitors at the price at which the differentiator firm offers its products/services. 1. Incorporate features that offer utility for the customers and match their tastes and preferences. 2. Incorporate features that lower the overall cost for the buyers in using the product/service. 3. Features that raise performance of the product. 4. Features that increase the buyer satisfaction in tangible or nontangible ways. 5. Features that can offer promise of high quality of product. 6. Features that claim distinctiveness from other customers and enhance their status and prestige. 7. Offer full range of products/services that customers require.

Conditions under which Differentiation is used A differentiation business strategy is suitable for special conditions, primarily related to the markets and customers. • The market is too large to be catered to by a few firms offering a standardizes product/service. • The customer needs and preferences are too diversified to be satisfied by a standardized product/service. • It is possible for the firm to charge a premium price for differentiation that is valued by the customer. • The nature of the product/service is such that brand loyalty is possible to generate and sustain. • There is ample scope for increasing sales for the product/ service on the basis of differentiated features and premium pricing.

Differentiation Business Strategy

Benefits associated with differentiated strategy 1. Differentiation lessens competitive rivalry. Customer brand loyalty also acts as a safeguard against competitors.Brand loyal customers are less price sensitive. 2. Powerful suppliers cann negotiate price increases that the firm can absorb to some extent. 3. Powerful buyers do not usually negotiate price because decrease as there are fewer options with regard to suppliers. 4. Differentiation is an expensive proposition. Newer entrants are not normally in a position to offer. 5. Substitute products/service suppliers too pose a negligible threat to established differentiator firms.

Differentiation Business Strategy

Risks faced under differentiation strategy 1. In a growing market, products tend to become commodities.Uniqueness difficult to sustain on long term. 2. In case of several differentiators adopting similar differentiation strategies, the distinctiveness is gradually lessened and lost. 3. Differentiation fails to work if the customer does not value the same. 4. Price premium too has a limit.Too much price will distract the customers from availing the benefit. 5. Failure to communicate to customer the differentiation features may lead to failure of the strategy.

Differentiation Business Strategy

Focus Business Strategy
Focus business strategy essentially rely on either cost leadership or differentiation but cater to a narrow segment of the total market.These are niche strategies. Conditions under which focus strategies are used

Focus Business Strategy
Conditions under which focus strategies are used
1. There is some type of uniqueness in the segment geographical,demographic, based on lifestyle etc. There are specialized requirements for using the products/services that the common customers cannot be expected to fulfill. The niche market is big enough to be profitable for the focussed firm. There is a promising potential for growth in the niche segment. The major players are not interested in the niche. The focussing firm has necessary skill and expertise The focussing firm can guard its turf from other predator firms on the on the basis of customer relations and loyalty and its superiority in serving the niche segment.

2.
3. 4. 5. 6. 7.

Focus Business Strategy
Benefits associated with focus strategies 1. A focussed firm is protected from competition from firms having broder market target as they do not possess competitive ability to cater to niche markets? 2. Focussed firms buy in small quantities, they do not show evince much interest. The higher prices of materials are passed on to the loyal customers. 3. Powerful buyers are less likely to shift loyalty as they may not others willing to cater to niche markets as the focussed firms do. 4. The specialization that focussed firms are able to achieve in serving a niche market acts as a power ful barrier to substitute products/dervices. 5. Competence of the focussed firms act as an effective entry barrier to potential entrants in to the niche markets.

Focus Business Strategy
Risks associated with focus strategies 1. Serving niche markets require distinctive competencies, their development may be long drawn difficult process. 2. Being focussed means committed to a narrow market segment. Once committed it is difficult to move to other market segments. 3. Major risk is the cost basis which is generally higher becaus4e of small volumes. 4. Niches are often transient. They may disappear due to technology or market factors (shift in customer needs). 5. Niches may sometimes become very attractive to bigger players bringing in cost competition. 6. Rivals may devise ways to serve the niche markets in a better manner thus driving you out of business.

Corporate Portfolio Analysis
The main advantages in adopting a portfolio approach in a multi-product business firm is that , resources could be channelised at the corporate level to those product businesses that possess the greatest potential. A diversified company may decide to divert resources from its cash rich product businesses to the more prospective ones which hold the promise of a faster growth so that the company can achieve its corporate level objectives in an optimal manner.

Corporate Portfolio Analysis
S A L E S
V O L U M E

Product Life Cycle –
decline

maturity
growth

YEARS

BCG Matrix
high Industry Growth rate

QUESTION MARKS

STARS

DOGS
low
low

CASH COWS

Relative market share

high

GE Nine-cell Matrix
Factors for Industry Attractiveness 1. Market size and growth rate 2. Industry profit margin 3. Competitive intensity 4. Seasonality 5. Cyclicality 6. Economies of scale 7. Technology 8. Social,environmental,legal and human aspects

GE Nine-cell Matrix
Factors for Business Strength Competitive Position 1. Relative market share 2. Profit margins 3. Ability to compete on price and quality 4. Knowledge of customer and market 5. Competitive strengths and weaknesses 6. Technological capability 7. Calibre of management

GE Nine-cell Matrix
high Industry Attractiveness

medium
low

Invest/expand
Select/earn Harvest/divest Strong average weak Competitive position/Business strength

The Directional Policy Matrix
Phased Weak Divestment Withdrawal Cash Company?s generation Competitive Phased/withdra Maintain Expansion/ Abilities wal/merger position/market product penetration Average differentiation Diversification/ Growth/market Market Strong cash generation segmentation Leadership/ innovation
unattractive attractive average Business Sector Prospects

Imitation Phased withdrawal

Pyramid of Strategy Implementation

Strategies Plans Programs Projects Budgets ---------------------Policies,Procedures, rules and regulations

Operational Control
No Attribute . 1 2 3 4 5 6 7 Strategic control Operational control

Tailoring Strategy to fit Industry and Company Situations
Companies competing in • emerging industries • in turbulent, high-velocity markets • In mature, slow-growth industries • In stagnant or declining industries • In fragmented industries • Companies pursuing rapid growth • Companies in industry leadership positions • Companies in runner-up positions • Companies in competitively weak positions or plagued by crisis conditions

Strategies for competing in emerging industries
1. New market, unproved product, uncertainty on how fast it will grow or how big it will get difficult to make sales and profit positions. Much of the technology is propp=rietary and protected and patented. There may be more than one technology for a product. No consensus regarding which technology will ein Entry barriers tend to be relatively low. Strong learning and experience curve effects Since all buyers are first time users, the marketing task is to induce initial purchase Many potential buyers expect first generation products will be rapidly improved therefore they wait.

2.

3. 4. 5. 6. 7.

Strategies for competing in emerging industries
1.

2. 3. 4.
5. 6. 7.

Try to win early race for industry leadership with risk taking entrepreneurship. Push to perfect the technology As technology uncertainty clears and dominant technology emerges adopt it quickly.R&D is costly Form strategic alliances with key suppliers to gain access to specialized skills technological capability Acquire or form alliances with companies that have related expertise to outperform rivals Capture first –mover advantages Pursue new customer groups, new user applications, new geographical areas using strategic partnerships or joint ventures if financially constrained.

Strategies for competing in Turbulent High Velocity Markets
Strategic postures for coping with rapid change :• It can react to change – introduce better products in response to new offerings from rivals.Response to unexpected changes in buyer needs and preferences. Adjust to new Government policies • It can Anticipate Change –analyze prospects for market globalization, Research buyer needs, preferences, monitor new technological developments to predict future plans • It can lead change -Pioneer new and better technologies, Introduce innovative products to open new markets and to spur creation of new industries, seek to set new industry standards.

Strategic Moves for FastChanging Markets
1. Invest aggressively in R&D to stay on the leading edge of technological know-how.fully capture learning curve effects. 2. Develop quick response capability-shifting resources internally so as to react quickly. 3. Rely on strategic partnerships with outside suppliers and with companies making tie-in products. 4. Initiate fresh actions every few months, not just when a competitive response is needed. 5. Keep the company?s products and services fresh and exciting enough to stand out in the midst of the changes that is taking place in the market. 6. Cutting edge know how and first to market are valuable.

Strategies for Competing in Maturing Industries
Industry changes :• Slowing growth in buyer demand generates more head to head competition for market share. • Buyers become more sophisticated often driving a harder bargain on repeat purchases. • Competition produces emphasis on cost, service • Firms have a topping out problem in adding new facilities. • Product innovation and new applications slowdn • International competition increases. • Industry profitability falls temporarily or permanently. • Stiffening competition induces mergers or takeovers.

Strategic moves in Maturing Industries
1. Pruning Marginal Products and Models 2. More emphasis on value chain innovation – lower costs, better product or service quality, greater capability, turn out multiple or customised product versions, shorter design to market cycles. 3. Trimming Costs 4. Increasing sales to present customers 5. Acquiring rival firms at bargain prices. 6. Expanding Internationally. 7. Building new or more flexible capabilities One of the greatest strategic mistakes is pursuing a compromise strategy that leaves it stuck in the middle.

Strategies for Firms in Stagnant or Declining Industries
1. Pursue a focused strategy aimed at the fastest growing market segments in the total market 2. Stress differentiation based on quality improvement and product innovation. 3. Strive to down the cost down and become the industry?s low cost leader.

Strategies for Competing in Fragmented Industries
Reasons for supply side fragmentation:• When market demand is very large, extensive and diverse, large no. of firms exist • Low entry barriers allow small firms to enter quickly and cheaply. • An absence of economy of scale • Buyers require small quantities of customised products e.g. interior design, kitchen cabinets, advertising etc. • The market becoming more global e.g. Apparel manufacturers • Many technologies exploding –one has to specialise • The industry is young e.g. Retailing through Internet

Strategy Options for a Fragmented Industry
1. 2. 3. 4. 5. Constructing and operating formula for scalability Becoming a low cost operator Specialization by product type Specializing by customer type Focusing on a limited geographical area.

In fragmented industry wide strategic latitude exists. • To either compete widely or focus • To pursue a low cost differentiation based or best cost competitive advantage

Strategies for Sustaining Rapid Company Growth
1. Horizon 1 “short jump” strategic initiatives to strengthen position in existing businesses.Immediate gains in revenues and profits 2. Horizon 2 – “Medium jump” strategic initiatives to leverage existing resources and capabilities by entering new businesses with promising growth potential.Moderate gains in revenue and profit now but foundations laid for sizable over next 2-5 years 3. Horizon 3 – “Long jump” strategic initiatives to plant the seeds for ventures in businesses that do not yet exist. Minimal gains now and likely losses,but potential for significant contributions to revenues and profits in 5-10 yrs Risks in following multiple horizons –stretching resources too thin hence likely to fail.

Strategies for Industry Leaders
1. Stay on the offensive strategy – keep rivals in reactive mode, grow faster than rivals and snatch market share. 2. Fortify and aggressively defend strategy – they include:• • • • • • • • Increased spending for advert, customer service, R&D Introduce more product versions and brands – fill space Add personalised services, other extras, boost loyalty Keeping prices reasonable and quality attractive. Build capacity ahead of market demand Investing enough to remain cost competitive & techno. Patenting the feasible alternative technologies Signing exclusive contracts with best suppliers and dealer distributors.

Strategies for Runner-up Firms
1. Offensive Strategies to build market share – rarely can a runner-up firm successfully challenge leader with a copy cat strategy
– – – Pioneering a leapfrog technological breakthrough. Getting new or better products – product leadership Being more agile and innovative and more responsive than leaders in adapting evolving markets and customer expectations Forging attractive alliances with key distributors Innovative ways to drive down costs & then prices

– –

Strategies for Industry Leaders
3. Muscle flexing Strategy – Dominant leader plays competitive hardball in an ethical and legal manner. Uses arms twisting tactics to customers not to use products of rivals.

Strategies for Industry Leaders
1. Stay on the offensive strategy 2. Fortify and defend strategy
– – – To raise standards & expenses for challengers and new entrants by advertising, levels of customer service, R&D More product versions and brands Add personalized services and other activities to boost customer loyalty Keep prices reasonable and quality attractive Build new capacity ahead of market Investing enough to remain cost competitive and technologically progressive exclusive contracts with best suppliers and dealer distributors

– – – -

3. Muscle flexing Strategy

Obstacles for firms with small market shares • Less access to economies of scale in prod. & mktg. • Difficulty in getting customer recognition. • Weaker ability to use mass media advertising • Difficulty in funding capital requirements strategic option is to gain sales and market share so as to approach economies of scale or withdraw from business gradually or quickly • Use low prices to win customers • Merging with or acquiring rival firms • Investing in new cost saving facilities & equipments • Pursuing technological innovations or radical value chain revamping. It is erroneous to view runner-up firms as less profitable.

Strategies for Runner-up Firms

Strategies for Runner-up Firms
1. Offensive strategies to build market share
• • • • • •

Pioneering a leapfrog technological breakthrough Getting new or better products ahead of rivals Being more agile & innovative to customer expectations than slow to change market leaders. Forging attractive strategic alliances with key distributors, Finding ways to drive down costs and reduce prices to win customers Crafting an attractive differentiation strategy based on premium quality , outstanding customer services.

2. Growth via acquisition Strrategy 3. Vacant Niche Strategy 4. Specialist Strategy

Strategies for Runner-up Firms
5. Superior Product Strategy 6. Distinctive Image strategy 7. Content follower strategy – avoid initiating trend setting strategic moves and attempts to steal customers away from leaders inviting aggressive retaliation from leaders.

Strategies for weak and Crisis driven Business
1. Turn around Strategies for businesses in crisis
– – – – – Selling off assets to raise cash and save the remaing pert of business. Revising the existing strategy Launching efforts to boost revenues Pursuing cost reduction Using a combination of these efforts

2. Divest the business 3. Liquidation the strategy of last resort.

10 commandments for crafting successful business strategies
1. Place top priority on crafting and executing strategic moves that enhance the company?s competitive position for the long term. 2. Be prompt in adopting to changing market conditions, unmet customer needs, buyer wishes for something better, emerging technological alternatives and new initiatives of competitors. 3. Invest in creating a sustainable competitive advantage. 4. Avoid strategies capable of suceeding only in optimistic circumstances. 5. Don?t underestimate the reactions and the commitment of the rival firms

10 commandments for crafting successful business strategies
6. Consider attacking competitive weakness is usually more profitable and less risky than attacking strength. 7. Be judicious in cutting prices without an established cost advantage. 8. Strive to open up very meaningful gaps in quality or service or performance features when pursuing a differentiation policy. 9. Avoid stuck in the middle strategies that represent compromises between lower costs and differentiation and between broad and narrow market appeal. 10. Be aware that aggressive moves to wrest market share away from rivals often provoke retaliation in the form of a price war to the detriment of everyone?s profit.

Sample format for a strategic Action Plan
1. 2. Strategic Vision & Mission Strategic Objectives • Short term • Long term 3. Financial Objectives • Short term • Long term 4. Overall Business Strategy 5. Supporting Functional Strategies • Production • Marketing/sales • Finance • Personnel / human res. • Other. 6. Recommended actions to improve Company Performance • Immediate • Long term



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