Strategic Management I

Bachelor of Business Administration
(BBA)
2013
Strategic Management I
BBA VII
APRIL 2013
MGT 111.3 (Credit hours 3)

BBA, Fourth Year, Seventh Semester
Course Objectives:
The course aims to introduce the students to the fundamental concepts of strategic
management. The course also aims to develop skills in students to develop a mission statement,
perform an external audit, conduct an internal assessment, and formulate strategies through
cases and experiential exercises
Course Contents:
1. Strategic Management
7 hours
Definition: Dimensions of strategic decisions, Levels of strategy, Characteristics of strategic
Management decisions, Formality in strategic management, Value of strategic management, Role of
chief executives in strategic management
2. External Environmental Analysis and Forecasting
5 hours
Components of remote environment: economic, social, political, legal (legislation and
regulations), technological (PEST analysis), Linking strategy with ethics and social responsibility.
3. Establishing Company Direction
6 hours
Developing business mission and strategic vision; communicating the strategic vision; setting
performance objectives; strategic objectives versus financial objectives. strategic intent; Strategy
making pyramid: Corporate strategy, Business strategy, Functional strategy and operational strategy.
Uniting the strategy making effort
4. Industry and Competitive Analysis
6 hours
Methods of industry and competitive analysis, five forces of competition, Driving forces,
Environmental scanning techniques, Strategic group maps, Monitoring competition, Key factors for
competitive success evaluating.
5. Evaluating Company Resources and Competitive Capabilities 8 hours
Strengths and resource capabilities, weakness and resource deficiencies, Competencies, Market
opportunities, Threats to future profitability, strategic cost analysis and value chains, benchmarking,
Competitive capabilities to competitive advantage
6. Strategic options
10 hours
Generic strategies: Low cost provider strategy, Differentiation strategy, Best-cost provider strategy,
focused strategy. Grand Strategies: Concentration, Market development, product development,
Innovation Horizontal integration, vertical integration, Joint venture, concentric diversification,
Conglomerate diversification, Retrenchment/turnaround, Divestiture, Liquidation
7. Strategic Analysis and Choice
6 hours
Evaluating and choosing strategies, Industry environment and strategy choices, Evaluating and
choosing to diversity
Test Book:
1. Pearce, John A. and Robinson, Richard B: Strategic Management, AITBS, Delhi.
2. Thomson, Arthur A. and Stickland III: Strategic Management, Tata McGraw-Hill, New Delhi
Reference Books:
1. Agrawal, G.R.: Business Strategy & Strategic Management in Nepal, M.K. Publisher
Kathmandu
Prepared By: Durga Bedari & Ganesh Khatri (2013)
National open College, Sanepa, Lalitpur
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Unit 1
Strategic management
Strategy
Business-world today is becoming more competitive. So the companies must execute
excellent strategy to strengthen their market standing. Executing strategy is a core
management function for any organization to meet their long term objectives. A companys
strategy is managements game plan for growing the business, staking out market position,
attracting and pleasing customers, competing successfully conducting operations and
achieving targeted objectives. It is a comprehensive plan prepared by the top level
management to achieve the long term objectives. In other word, a strategy is a pattern of
activities that seeks to achieve the objectives of the organization and adopt its resources,
scope and operations to the environment changes in long term. A strategy can be defined as
the comprehensive plan prepared by the top level management to achieve the long term
objectives of an organization. And the strategic management is the process of making
strategic decisions and actions by the top level management.
According to the sheron Oster: - A strategy is a commitment to undertake one set of actions
rather than another.
Strategic Management:Each and every organization is established with certain objectives. They have then one
mission statement. To achieve these objectives they perform various activities guided by
policy, plan and practices, which is called strategy. Thus a strategy is a pattern of activities
that seek to achieve the objectives of the organization and adopt its resources, scope and
operations to environment changes in long term. Hence, a strategy is a game winning plan
to achieve long term objectives. Combination of good strategy and good strategy execution
results in a good management.
According to wheelen and Hunger, Strategic management is that set of managerial
decisions and actions that determines the long term performances of a corporation.
Strategic management can be defined as a decision process that aligns the organizations
internal capacity and capability with the opportunities and threats, it faces in the
environment. It is a set of decisions and actions that results in the formulation and

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implementation of plans designed to achieved a company objective. Strategic management

helps in decision making activity. Here the decision encompasses the decisions about
products, structure, locations, personal and other resources that make an impact on the
performance of the organization. How these decisions are made and how they are
implemented is the matter of concern of strategic management.
Hence strategic management encompasses the entire enterprise and looks beyond day to
day operations and focuses on the organizations long term prospects and development.
Good Strategy
Good Strategy Execution
Good Strategic Management
Features of Good Strategic Management

i.
Uncertain: Strategic management deals with future oriented non routine

situation
ii.
Complex: Uncertainty brings complexity for strategic management
iii.
Organization wide: It has organization wide implication. It is a system approach

that involves strategic choices.
iv.
Fundamental: Strategic management is fundamental for improving the long term

performance of the organization.
v.
Long term Implication: Strategic management is not concerned with day to day
operations. It deals with Vision, Mission and Strategies.
Benefits of Strategic Management

Strategic management is a participative management, where managers at all levels of the
firms interact in planning, implementation and decision making. The various benefits of
strategic management are as follows:
i.
Problem prevention
Strategy formulation activities enhance the firms ability to prevent problem. The problems
are anticipated and addressed during strategy formulation stage. Managers also encourage
the subordinates in forecasting the problems.
ii.
Motivation
The involvement of employees in strategy formulation improves their understandings of the

productivity reward relationship in every strategic plan and thus heightens their motivation.

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iii.
Group based and better option
Group based strategic decisions are likely to be drawn from best alternatives available. The
strategic management process results in better decisions. The group interaction improves
the screening strategic option and generates better strategic decisions.
iv.
Reduces gaps and overlaps
Gaps and overlaps in activities among the individual and groups are reduced. Roles and
responsibilities are clearly defined with the help of participation.
v.
Reduces resistance to change
Strategic management helps to reduce the resistance to change among employees through
participation them in strategy formulation and decision making.
Dimension of Strategic decisions

Typically strategic issues have the following dimension:
i.
Strategic issues require top management decisions
ii. Strategic issues require large amount of firms resources

iii. Strategic issues often affect the firms long term property
iv. Strategic issues are future oriented
v. They have usually multifunctional on multi business consequences
vi. They require considering the firms External environment
i. Strategic issues require top-management decision

Strategic decisions overarch (includes) several areas of firms operations. So they require
top-management involvement. Top management must decide on the strategic issues.
Usually only top management has the perspective needed to understand the strategic
decision and have the powers to authorize the necessary resource allocation.
ii. Strategic issues require large amount of firms resources
Management requires large amount of the resources and their allocation to make strategic
decisions and for their implementation. It involves substantial allocation of people physical
assets capital or moneys that either must be redirected from internal sources or secured
from outside the firm. They also commit the firm to perform over an extended period of
time, which require substantial resources.

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iii. Strategic issues often affect the firms long term property
Strategic decisions have enduring effects on firms. They usually commit the firm for a long
time, typically 5 yrs. Such decisions last much longer and affect the firms long term
prosperity. Once a firm has committed itself to a particular strategy, its image and
competitive advantages usually get tied to that strategy. Their image, product, technology
etc all are affected.
iv. Strategic issues are future oriented
Strategic decisions are based on forecast and projections that are made. They are based on
what managers forecast, rather than on what they know. Projections are made while
making decisions that available the firm to select the most promising strategic options.
Firms require taking a proactive stance (anticipatory option) toward change.
v. They usually have multifunctional or multi-business consequences
Strategic decisions overarch various facets of the firms. They have complex implications for
most areas of the firms. Strategic decisions involve a number of the firms strategic business
units, decisions and program units. All of their areas will be influenced by the allocation of
responsibilities and resources resulting from their decisions. So, strategic decisions usually
have multifunction or multi-business consequences.
vi. They require considering the firms external environment
Firms external environment in which the firm operates its business must be considered
while making strategic decisions. All business firms exist in an open system. They affect and
are affected by external conditions that are beyond their control. Therefore, to successfully
position a firm in competitive situations, its strategic managers must consider the external
forces such as competition, customers, suppliers, creditors, labor, government etc.
Level of strategy (Strategy Making Pyramid)

The levels of strategy are categorized on the basis of product line/ business.
a) Multi business firms
The decision making whereby of a firms typically contains four levels. At the top of this
hierarchy is the corporate level, on the middle level of the decision making hierarchy is the
business level and the functional level follows the business level, at the bottom level of the
hierarchy is the operating level strategy.

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Corporate Level Strategy
SBU 1
SBU 2
SBU 3
Business 1
Business 2
Business 3
Business level
Functional level
R&D
Strategies
Financial
Strategies
Marketing
Strategies
HRM
Strategies
st
Operating level
b) Single business firms

In case of single business company, two levels of strategies i.e. corporate level strategy and
business level strategy merge into one level business strategy.
1. Corporate level strategy

Corporate level strategy is an overall strategy for the organization. It is a companywide
game plan for managing a set of business line that company has diversified into. It provides
long term direction and scope to the organization as a whole.
Corporate strategy consists of the initiatives that the company uses to establish business
positions in different industries. It involves the approaches that the company uses to boast
the combined performance of the set of businesses the company has diversified into. It
helps the company to gain the competitive advantage.
Corporate Level Strategy Usually orchestrated by CEO and other senior executives.
Corporate strategy includes strategic decisions, mission and objectives. It seek to determine
what business the firm should be in.
For instance, the corporate strategy of Chaudhary group of Nepal is to grab the maximum
profit and become leaders in the Nepalese markets.

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2. Business level strategy

Business level strategy follows from corporate strategy, which is concerned with particular
business unit. It is designed by the general managers of each of the companys different line
of business, often with advised and input from the head of functional area activities within
each business and other key people.
Business strategy is formulated for each business line that the company has diversified into.
It concerns the actions and the approaches crafted to produce successful performance in
one specific line of business. It manages the business portfolio. It focuses on:
I.
How to strengthen market position and built competitive advantages.
II.
Action to build competitive capabilities.
Hence, business strategy is concerned about how to compete and stand successfully in
particular market.
Business level strategy classifies large business organization into strategic business unit
(SBU). It aims to create competitive advantage.
In the case of single business company, these two levels of the strategy making hierarchy
merge into one level business strategy that is orchestrated by the companys CEO and other
top executives.
3. Functional level strategy

Functional level strategy follows from business level strategy is function specific. It is crafted
by the heads of major functional activities within a particular business often in collaboration
with other key people.
Functional level strategy is concerned with the actions, approaches and practices to be
employed in managing a particular function of business processes or key activity within a
business. It provides a game plan for managing a particular activity on ways that support the
overall business.
This strategy is for each functional units of the organization such as marketing, financing &
accounting, production/operation, Research & Development. A Human Resource are
designed by the functional manager. It is concerned with resources, process and people. it
aims at effective delivery of corporate and business level strategies.

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I.
Marketing Strategies: - Sales, target market, marketing mix, customer need

satisfaction, marketing organization etc.
II.
Production Strategies: - Efficiency & controlling cost, technology, plant capacity,

layout, production system, inventory, quality, process etc.
III.
Financial Strategies: - Source of finance, investment decisions, financial control,

increase shareholders wealth etc.
IV.
Human Resource Strategies: - Quality, competencies, productivity and welfare of

employee acquisition, development, utilization and maintenances of human
resource.
V.
Research and Development: - New product development, product innovation,

modification and innovation.
4. Operating level strategy

Crafted by operational manager & is relatively narrow strategies that consist of the
initiatives and approaches for managing key operating units such as distribution, sales,
packaging, designing, pricing etc.
Operating level strategy adds details and completeness to business and functional strategy.
Even though it is at the bottom of the strategy making hierarchy, its importance should not
be overlooked (dove played). A major failure in plant can undercut the achievement of
companys sales and profit objectives.
Formality in Strategic management

Formality refers to the degree to which participants responsibilities, authority and discretion
in decision making are specified. The formality of strategic management varies widely
among the companies. It is an important consideration in the study of strategic
management, because greater formality is usually positively related with the cost,
comprehensiveness, accuracy and access of planning.
There is participation of top level management, middle and operating level management in
decision making. This depends on the type of approach i.e. top down or bottom up
approach that the firm employs.
H. Mintzberg identifies three modes of formality in strategic Management, which are as
follows:
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1.
Entrepreneurial mode
2.
Planning mode &
3.
Adaptive mode
1. Entrepreneurial mode:
Some firms, especially smaller ones, follow an entrepreneurial mode. They are basically
under the control of single individual and have limited product line, in such firms, strategic
evaluation is informal, intuitive and limited with limited knowledge.
2.
Planning mode:
Very large firms that have multiple product lines with large market extension follow
planning mode. There is comprehensive and formal strategy evaluation that covers all the
areas and follows all the process for formulation. So, it follows formal planning system. The
firm can adopt mix approach of top-down and bottom-up approach or can even use
management by objectives (MBO).
3.
Adaptive mode:
Mintzberg also identified a third mode i.e. adaptive mode usually followed by medium-sized
firms in relatively stable environments. There is no dynamism in the environment. The
existing strategies are usually continued. The identification and evaluation of the strategies
are based on the existing strategies of the firms.
Determinants of formality in Strategic Management

A number of forces determine how much formality is needed in strategic management.
Some of the factors are as follows:
a) Size of the organization
b) Management styles/Philosophies
c) Complexity of environment
d) Production Process
e) Nature of Problem
f) Purpose of planning system
g) Comprehensiveness

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Roles of chief Executives officers on Strategic Management

A firms CEO plays a dominant role in planning and formulating the strategies and
implementing them into action. A companys senior executives obviously have important
strategy making roles. He/she is the chief strategy maker and chief strategy implementer for
the total enterprise. Ultimate responsibility for leading the strategy making, strategy
executing process rests with the CEO.
CEO functions as strategic visional and chief architect of strategy, although senior managers
and key employees may well assist with gathering and analyzing background data and
advising the CEO on which way to go.
The different roles of a CEO in strategic management are as follows:
a) Giving long term direction to the firm
CEO is the one who gives long term direction to the firm by the mission and vision
statement. And CEO is ultimately responsible for the firms success and success of the
strategy.
b) Formulation of Strategies and implementation
CEO plays prominent role in formulating the strategies and implementing them into actions.
She/he designs strategies, forecasts and establish business objectives. In implementing a
companys strategy, the CEO must have an appreciation for the power and responsibility of
the board as he/she is guided by the BOD.
Formulation of Strategy:The roles of CEO in strategy formulation are:
Key strategist Role: - CEO is a key strategist of a firm. He defines the vision, mission
and objectives of the organization. He conceptualizes and crafts the strategies to
achieve objectives.
Decision making role: - CEO makes strategic decisions related to strategy

formulation. He makes strategic choice from among strategic options for achieving
objectives of involves risk-taking.
Resource planning role: - CEO plans for the allocation of significant resources in the
firm. Resources can be people, money, technology, information etc.

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Negotiator role: - CEO plays the role of negotiation as well. He/she balances the
conflict interests by negotiating disputes among the stakeholders. He ensures the
acceptability to strategy by those stakeholders.
Implementation of strategies: CEO ensures that the strategies are put into action. His roles in strategy information are as
follows:
Information role: - CEO disseminates the information about strategy to the

implementers within the organization. He ever transmits the information outside the
firms. He serves as a spokesperson for strategy implementation.
Leadership role: - CEO is responsible in the overall leadership for the implementation
of strategy. He motivates and directs all the levels for the implementation of
strategy.
Organizer role: - He plays the role of organizer. He determines the structure for
strategy implementation. He assigns authority and responsibility for the people
working in the firm for strategy implementation.
Resource manager role: - CEO ensures efficient and effective mobilization, allocation
and utilization of resources for implementation strategies. He prepares the budget
for managing the resources.
Monitoring role: - CEO monitors and evaluates the performance and the results of
strategy implementation. He/she takes corrective actions to resolve the
performance problems.
c) Delegation authority for strategy formulation

d) Guiding and directing functional heads
e) Managing work team or working as a team
f) Planning
Strategic Decisions
It is concerned with the selection of strategies, mission and objectives. A decision is a choice
among alternatives. It is a course of action chosen from acceptable alternatives to achieve
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the objectives. Strategic decisions are the unique, complex and non- programmed decision
that are made by top level management. They are related to the choice of strategies,
mission, objectives, and choices. Strategies decisions are primarily concerned with matching
organizations resources with opportunities in the environment and helps in gaining
competitive advantages. It defines the scope of the firm, markets to be served, products to
be offered, resources to be committed and capabilities to be developed.
According to Johnson and Scholes, Strategic decisions are normally an effort to achieve
some advantages for organization over their competitors.
Characteristics of strategic decisions

The following are the characteristics of strategic decisions according to G.R Agrawal:
I.
Non- programmed: - strategic decisions are unique and rare. They deal with
uncertain and non- routine problem situations as they are complex in nature.
II.
Future oriented: - Strategic decisions are future oriented. They are made on the
basis of predictions and projections. They are concerned with long term direction
and scope of the organization.
III.
Dynamic: - They are dynamic in nature. They take place within a changing
environment. Changing political, economic, socio- cultural, legal and technological
forces increase complexity in strategic decisions.
IV.
Top management oriented: - Strategic management decisions are made by top

management of the firm. The values, philosophy and expectations of top
management greatly affect strategic decisions. So, the strategic decisions are top
management oriented.
V.
Competitive Advantage: - Strategic decisions help in gaining competitive advantages

in the market through searching for unique resources and care competencies.
VI.
Strategic fit: - Strategic decision match activities and resources of the organization
with the opportunities in the environment.
VII.
Commitment: - strategic decisions are long term objectives of the firm and involve
long term commitment of large amount of resources.
VIII.
Choice: - Strategic decision is about making choice from among the strategic
alternatives. It is a choice among course of action for the long term future.

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Characteristics of Strategic management decisions according to John A. Pearee:

Features of strategic management decisions also vary with the level of strategic activity
considered.
I.
Corporate level Decisions: -
Strategies decisions at corporate level are more value oriented, more conceptual and less
concrete than at other levels. It is characterized by greater risk, cost and are more profit
potential. There is greater need for flexibility and have greater time horizon (5 or more
years). It includes choice of businesses, dividend policies, sources of long term financing and
priorities for growth etc.
II.
Business level decisions: -
Business level strategic management decisions bridge the decisions at corporate and
functional levels. They are less costly, risky and potentially profitable than corporate level
decisions. But they are more costly and riskier than functional level decision. Decisions at
this level can be on plant layout and location, marketing segmentation and geographic
coverage and distribution channels.
III.
Functional level decisions: -
Functional level decisions are relatively short range and less risky. They are action oriented
operational issues. They incur modest cost because they depend on available resources.
They are adoptable to ongoing activities and therefore can be implemented with minimal
co-operation. They are relatively concrete and quantifiable. For example; decisions
regarding packaging, labeling, inventory levels etc.
Strategic Management process

Strategic management is a managerial process of planning, directing, organizing and
controlling of a companys strategy related decisions and actions. It is a process of crafting
and executing strategy. It involves the formulation and implementation of the companys
strategy.
By strategy, managers mean then large scale; future oriented broad game plans for
interacting with the competitive environment to achieve company objectives. It provides
long term direction and scope to the organization and also provides a framework for
managerial decisions.
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Strategic management is defined as a set of decisions and actions that result in the
formulation and implementation of plans designed to achieve a companys objectives. It
comprises of the following processes (nine critical tasks):
1.
Define companys mission
At the very first step of the process, the companys mission is formulated. It includes broad
statements about the purpose, philosophy and goals. A mission of a company is a reason for
the existence.
2.
Analysis of Environment
An analysis of the environment inside and outside the firms is conducted. Internal analysis is
the analysis of companys internal conditions, capabilities, resources and strength and
weakness. The companys external environment includes the competitive and general
contextual factors, opportunities and threats. REST analysis and SWOT analysis can be done
for external environment analysis.
3.
Analysis of companys Strategic Option
Strategic options are strategic alternatives for making the decisions. Companys options are
carefully analyzed by matching its internal environment and resources with the external
environment.
4.
Identification of the desirable option
Once the options are analyzed, the most desirable options are identified by evaluating each
on the basis of companys mission.
5.
Setting of long term objectives
Company sets long term objectives and grand strategies that will achieve the most desirable
options selected. Options should be suitable acceptable and feasible. Options are
formulated in this stage.
6.
Develop annual objectives and short term objectives
Short term and annual objectives are developed, that are compatible with the selected set
of long term objectives and grand strategies. Here, long term objectives are cut off into
short term strategies.
7.
Implementation of the strategies choices
At this stage, the strategic choices are finally implemented into the action by means of the
budgeted resource allocation. It involves designing of structure, preparing resource plans,

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establishing management system and exercising the strategic control. It also emphasizes on
the tasks, people, technologies and reward system of the firm.
8.
Evaluation of the success of the strategy and control
Finally the success of the strategy is evaluated for the future decision making. Strategy
evaluation and control ensures that the rights things are done on the right manner and at
the right time. It is exercised by top management. It is the continuous evaluation and
control of the firms performance. It evaluates the implementation performance of a
strategy. Corrective actions are taken for the continuous improvement in the performance
of the strategy implementation.
Functions/Tasks of strategic management

I.
Strategic management helps to formulate the companys mission including broad

statements about its purpose, philosophies and goals.
II.
It conducts an analysis that reflects the companys internal conditions and

capabilities.
III.
It assesses the companys external environment including both the competitive and
general factor.
IV.
It analyzes the companys options by matching its resources with the external
environment.
V.
It identifies the most desirable options by evaluating each option in light of the
companys mission.
VI.
It selects a set of long- term objectives and grand strategies that will achieve the
most desirable option.
VII.
It develops annual objectives and short-term strategies that are, compatible with the
selected set of long term objectives and grand strategies.
VIII.
It implements the strategies choices by means of budgeted resources allocation.

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Unit 2
External Environment Analysis
Organizations are environment specific. They operate in a dynamic environment.
Environment refers to all those forces, which have a bearing on the development,
performance and outcomes and objectives of the organization. Environmental analysis is
essential to detect the emerging trends in the environmental and take decisions as per the
changes in the forces of the environment. The companys environment can be classified into
two: Internal and External environment. Internal environment composes of companys
resources, Competencies, weakness and strengths, structure and culture. The external
environment comprises of the forces outside the organizations, which are not under their
control. The firms are confronted to the opportunities and threats. An external factor
influences a firms choice of direction and action and ultimately, Its structure and the
internal processes. These factors, which constitute the external environment, can be divided
as follows:
A. Operating Environment
The operating environment also known as the competitive or task environment comprises
the factors in the competitive situation that affect a firms success in acquiring needed
resources as in the profitability marketing of goods and services. It consists of the following
forces:
Customers
Suppliers
Competitors
Intermediaries
Pressure groups and labor unions
B. Remote environment
The remote environment also known as General Environment comprises factors that
originate beyond a firms operating situations. The forces of this environment are shown in
the diagram below:

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Economic Environment
Technological
Environment
External Environment
PEST Analysis
Political-Legal
Environment
Socio-Cultural Environment
PEST analysis looks at the future impact of environmental changes on organization.
However, these impacts differ according to the nature of the specific organization. PEST
analysis is concerned with the analysis of the following external environmental forces:
1. Economic Environment
Economic environment concerns the nature and direction of the economy in which a firm
operates. Important elements of economic environment are as follows: a) Economic System
b) Economic Condition
c) Economic Policies &
d) Regional Economic Groups
Besides these other factors are as Level of Economic Development, Climate, Natural
Resources, Wages & Salary Levels, Currency Convertibility, Increase Workforce Diversity,
Increase Outsourcing and Strategic Alliances.
a) Economic System: Different countries have different economic systems and firms strategies are also
influenced by them. Basically there are three kind of economic system.
i.
Free- Planned Economy: - In free planned economic system of the nation, there is
private ownership of the factors of production with no government intervention. The
private sectors are dominant in this system and there is freedom of choice.
ii.
Centrally planned Economy: - in this system there is public ownership of the factors
of production. The economy is controlled planned, controlled and regulated by the

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government. Thus public enterprises play dominant role. There is no common

sovereignty.
iii.
Mixed Economy: - it is the combination of free market and centrally planned

economic systems, where both the public and private sector co-exist. Public sector
has ownership and central over basic industries and the private sector own
agriculture and other industries but is regulated by the state.
b) Economic Conditions: -
It is the situation of economy, in which a firm operates. The various factors of economic
conditions affecting a firms strategy and performance are as follows:
Income distribution
Stage of economic development
Employment
Inflation &
Business cycle- Prosperity, Recession & recovery..
c) Economic policies: Policies are guidelines for decision making by the firms. Key economic policies influencing
organizations are as follows:
i.
Monetary Policy: This policy is concerned with money supply, inflation rates, interest
rates and credit availability. It influences the level of operating, cost, level of demand
and the cost of capital as well.
ii.
Fiscal policy: - This policy is concerned with the taxation and governments
expenditure and revenue. Tax rates on income, expenditure and capital influence
organizational decisions. Government purchases, subsides and transfers also affect
the firms activities.
iii.
Industrial policy: - it is the policy for the industries. It is concerned with the industrial
licensing, location, incentives, technology transfer, foreign investment etc.
d) Regional Economic Groups: -
Economic groups promote cooperation and for trade the member countries. These are
established with the objectives of eliminating tariff and non-tariff barriers and other
restrictions. Examples are: SAARC, ASEAN, EU etc.

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2. Political legal Environment

Even the political and legal environments influence the firm and its activities. Any change in
these factors also affects it. It consists of:
a) Political factors
b) Legal factors
The direction and stability of political factors are a major consideration for managers on
formulating company strategy. Political factors define the legal regulatory parameters
within which firm must operate. Political constraints are placed on firms through fair-trade
decisions, antitrust laws, tax programs, minimum wage- legislation, pollution & pricing
policies and many more other actions which aims at protecting consumer, employee and
environment. And they tend to reduce the potential profit of firms. However some political
actions like patent laws, government subsides & products researches grants are design to
built and protect firms.
a) Political factors
The direction and stability of political factors are a major consideration for managers on
formulating strategy. Forces in the political environment are related to the management of
public affairs. The elements of political environment are as follows:
i.
Political system: A stable, efficient and honest political system is essential for the
growth of organization. Political system consists of ideological forces, political
parties, election procedures and power centers.
ii.
Political institution: Political institution consists of nations legislature, executives

and judiciary. Legislature involves the parliament that enacts laws in the nation. It
guides organizational activities. The executive body of political institution involves
government who implements the decisions of the legislative. It lays down policies,
regulations and procedures that influence the firms activities. Judiciary involves
consists of law that settles the disputes of conflicts.
iii.
Political philosophy: They are the political ideologies. They can be democratic,
totalitarian or a mix of both. Democracy vests power in the hands of people and
promotes greater role to private sector. Whereas, totalitarian vests power in the
hand of the state and provide greater role to the states. And a mix of both is based
on power sharing.

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b) Legal Factors
Legal tradition
Effectiveness of legal system
Treaties with foreign nations
Patent trademark laws
Laws affecting business firms
3. Socio- Cultural Environment

The social environment consists of the following factors:
a) Demographics: It is related to the composition of population on the basis of age, sex,
migration and growth of population.
b) Social Institutions: They comprise family, reference groups and social classes which
also have bearing on the firms activities.
c) Social changes: it implies the modification on the behavior pattern of society. Firms
must adapt to the social changes as the societys dynamic in nature. It involves the
change in lifestyles and social values.
d) Pressure Groups: They are special interest groups, who use the political process and
premise the government and organizations for change in the social patterns, laws,
policies and practices to protect their interests.
The cultural environment comprises following factors:
Culture is a learned behavior. It is a complex whole which includes:
Religion
Values, norms and beliefs
Language
Attitudes
Customs and traditions
Motivations
Status symbols

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4. Technological environment
The fourth set of factors in the remote environment involves technological change. To avoid
obsolescence and promote innovation, a firm must be aware of technological changes that
might influence its industry. Creative technological adaptations can suggest possibilities for
new products, for improvements in existing products, or in manufacturing and marketing
techniques.
Technology consists of skills, methods, systems and equipment. It includes inventions and
innovations. Technological environment includes following elements:
a) Level of Technology
It can be labor-based or capital based technology. Human labor is mainly used in labor
based and machinery is used for the operation in capital based technology. Automation,
robotics are used.
b) Pace of Technological Change
Pace of technological change is high. Inventions and innovations are taking place
increasingly and firms must adapt to the changing technological forces. They should also
upgrade the skills of HR to cope with the demands of technological changes.
c) Technology Transfer
This can take place through:
Globalization
Projects
Trade & FDI
For e.g.: By combining the powers of internet technologies with the capability of
downloading music in a digital format, T-Series has found a creative technological
adaptation for distributing online music to millions of consumers whenever or wherever
they might.
d) Research & Development
R & D is the essence of innovation. It includes product modification and new product
introduction. Customers expect for new product and product innovation and this calls for
increased research and development budget by organization.
Thus, the various components of external environment can be classified that presents the
opportunities and threats to the organization and affects it adversely.

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Linking Strategy with Ethics and Social Responsibility

Social Responsibility
Corporate social responsibility is a set of obligations under taken by the firms to protect and
enhance the society in which they operate. It is concerned with the responsibilities of a firm
towards its employees, stakeholders, stakeholders and society at large. It is an attempt to
conduct the business in a socially responsible manner.
Social responsibility is a cultural consideration for a companys strategy makers, since the
mission statement and the objectives must express how the company intends to contribute
to the societies. Each firm regardless of size needs to set social responsibilities and must
decide how to meet those perceived SR (Social Responsibilities).
It is very necessary to link the strategy with the ethics and social responsibilities. The
essence of this linkage is to maintain the balance the strategic actions and the social
responsibilities. Ethics and social responsibility must be considered by the manager during
the formulation and implementation of the strategies. They must ensure that all the
strategies formulated can fulfill the ethical and social responsibilities toward its employees,
customers, stakeholders and the society at large.
The ethics and social responsibility determine a firms ethical business behavior about what
they should do and should not do. Strategy should not be formulated to earn the profit and
increase the market share only. It must also fulfill the obligations, which the firm comply
with. Firm must formulate the strategies that are legally and ethically acceptable in the
society and that do not go against the morals of society. Corporate social responsibility has
been an important issue in business these days. Managers must link a companys strategy
and business conduct, to social responsibility. It is logically for the management to match
companys social responsibility strategy to its core values, business mission and overall
strategy. Some companies now are integrating ethics and social responsibility objectives
into then mission and overall performance targets to be in successful market standing, to
develop a good prestige & goodwill in society.
Firms can be economically, ethically, legally & voluntarily responsible toward then
stakeholders and society, providing goods at reasonable price, providing job opportunities
to the society and providing healthy working environment to the employees, paying tax to
the government, following the laws of the society, pollution control, disposal of solid and
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liquid wastes, conservation of natural resources etc. should be principal consideration in

strategic decision making.
Thus the strategic must be necessarily linked with the ethics and social responsibilities.
Social responsibility and its types:

Social Responsibility can be defined as:
The degree to which a company strives to employ an ethical strategy and observe ethical
principles in operating the business
A companys charitable contribution, community service activities and actions to better the
quality of life.
Actions to protect or enhance the environment.
Actions to enhance employee well-being and more the company a great place to work.
Actions to promote workforce diversity.
Advantages of Corporate Social Responsibility:

I.
Image
II.
Public Expectation
III.
Conducive Environment
IV.
Expansion of Business
V.
Less intervention of government
VI.
Rise in the living Standard of People
VII.
Application of New Technology
Social Responsibility encompasses four types of social commitment

a) Economic Responsibility
b) Legal Responsibility
c) Ethical Responsibility &
d) Discretionary Responsibilities/Voluntary Responsibilities
a) Economic Responsibility
It is the most basic social responsibilities of business. The essential economic responsibilities
is to provide goods and services to society at a reasonable and acceptable cost, to provide

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productive job for its workforce, promote fair price competition, payment of tax to its local,
state and federal government etc.
b) Legal Responsibilities
It is the firms obligations to comply with the laws that regulate business activities. Firms
must follow government sales and regulations. It includes the laws for pollution control and
consumers safety. Some of the laws are consumer product safety Act to protect the
consumers against unreasonable risks of injury in the use of consumer products. National
environment policy Act presents the ecological balance etc.
c) Ethical Responsibility
It reflects the companys proper business behavior. Ethical responsibilities are obligations
beyond only the legal requirements. Firms are expected, but not required, to behave
ethically in society. Some actions that are legal may be considered unethical as well. For
example: production and selling of cigarettes, breweries etc. This responsibility defines what
a firm should do (ethical) and should not do (Unethical) in the society.
d) Discretionary Responsibilities
Discretionary responsibilities are voluntarily assumed by a business firm. It is beyond the
only social expectations. Economic and legal responsibilities are required, ethical
responsibilities are expected and discretionary responsibilities are desired. This type of
responsibility includes public relation activities, good citizenship and full CSR. Managers
attempt to enhance the image of their company, products and services through maintaining
public relations. It involves making roads, schools, collages, temples, hospitals and clinics.

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Unit 3
Establishing Company Direction
Developing Business mission and strategic vision
Business mission
A business mission is a fundamental purpose that sets a firm apart from other its type and
identifies the scope of its operation in product and markets terms, which a firm is
developing a new business or reformulating direction for an ongoing business, the basic
goals and philosophies are, determined which is known as a mission statement. The
company mission is a broadly framed but enduring statement of s firms intent.
A Firms mission states that reason for its existence. It defines the purpose, scope and
boundaries of the present business in terms of product, market and completive advantage.
Business mission follows from vision. It reflects the long term commitment of the firm. It
projects the image of the organization. It addresses the expectation of shareholders mission
spells out vision. It defines the business and its source of competitive advantages. A
business mission embodies the business philosophy of the firms strategic decision makers.
It implies firms image, reflects the firms self-concept, and indicates the firms principal
product or service areas and the primary customer needs that the firm attempts to satisfy.
In short, mission describes the firms product, market and technological areas of emphasis.
It reflects the values and priorities of the firms strategic decision makers.
Mission addresses: why do we exist? and what is our business?

Components of a mission statement:
A mission statement addresses following components:
Purposes of existence
Philosophy
Self concept
Technology
Customer market
Product & services
Concern for survival
Concern for public image

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Corporate social responsibility (CSR)
Geographical domain
Basic assumption of Mission statement:
The product or service of the business can provide benefits at least equal to its price.
The product or service can satisfy a customer need of specific market segments that
is currently not being met adequately.
The technology that is to be used in production will provide a cost and quality
competitive product or service.
With hard work and the support of others, the business can not only survive but also
grow and be profitable.
The management philosophy of the business will result in a favorable public image
and will provide financial and psychological rewards for those who are willing to
invest their labor and money in helping the business to succeed.
The entrepreneurs self-concept of the business can be communicated to and

adopted by employees and stakeholders.
Characteristics of Mission Statement:

1.
Feasible; it should be realistic and achievable. Resources should be available.
2.
Precise; it should be neither too broad, nor too narrow. It should be stated
precisely.
3.
Clear; it should be clear for action purposes.
4.
Motivating; it should motivate employee and stakeholders. Employees should

feel worthwhile working for the organization.
5.
Distinctive; it should be distinct in the perception of stakeholders; it should be

distinct compared to competition.
6.
Strategy; Mission statement should indicate strategies to be followed and

objectives to be achieved.
Mission statement in practice:
Asian paints: Leadership through excellence.
Ford Motor co: continually improve product and services to meet customer needs,
quality is our number one jobs.
Philips: lets make things better.

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Vision statement
A vision is an aspiration of the organization. It states what the organization aspires to
become in a long term perspective. It is the strategic intent of the firm. It is the desired
future state of the firm. It shows, where we are going and why.
A strategic vision shows a concern direction to all the department and levels of the firms to
achieve its long term objective. It provides a framework for the firms destination. It acts as
a road map and shows the direction to the firm. A vision presents the firms strategic intent
that focuses on the energies and resources of the company on achieving a desirable future.
It provides leadership views to the companys stakeholders in an industry. Hence, it
expresses the aspiration of the executives leadership. It is often stated in a single sentences
that reflects an ultimate destination of the firm.
A strategic vision provides understanding of what management wants its business to look
like and provide managers with a reference point in making strategic decision and preparing
the firms for the future.
Example: Microsoft: A computer on every desk, and every home, running on Microsoft
software.
A strategic vision is different from a mission statement. A strategic vision portrays a
companys future business scope (where we are going) where as a companys mission
typically describes it presents business scope and purposes (who we are, what we do and
why we are here).
Communicating the strategic vision:
Developing a strategic vision is the very fast phase of strategy formulation. It is a roadmap
showing the route, a company intends to take, to develop and strengthen its business. It
paints a picture of a companys destination.
Developing a well-conceived vision is necessary but not sufficient.
It is required to
communicate the vision within a firm. An effective communication of the strategic vision
down the line to lower level managers and employees are very important. This lets all the
level knows about the firms vision statement and about where the firms are heading and
why. This provides all the personnels direction to work and achieve the objectives. An
effectively communicated vision is management most valuable tools for enlisting the
commitment of company personnel to actions that well make the strategic vision a reality.

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Hence, communicating the vision within the organization is a tool for converting the vision
into a reality and develops organizations plans and objectives accordingly. If the strategic
vision is not communicated, the company personnels wont know what the managements
vision is and are unlikely to commit them wholeheartedly to making the vision a reality. This
will result into a weaker performance of the firm, which may lead to a failure in market
place.
So, the top management must articulate a vivid strategic vision and communicate to all the
personnels within the firm. This evokes an excitement among the personnels, arousing a
committed effort and getting people to move in a common direction. All the levels and
departments will know the common objectives of their firm, for which they will participate
and commit to their firm and helps in gaining their competitive position in the market.
The roles of communicating the strategic vision:

1.
It helps to convert the vision into reality.
2.
It develops senior executives own views about firms long-term direction.
3.
It reduces the risk of ineffective decision-making.
4.
It is a tool for winning the support of organizational members that will help make the
vision a reality.
5.
It provides a direction for lower level managers in forming departmental missions,

setting departmental objectives and crafting functional and departmental strategies.
6.
It helps a firm prepare for the future.
The differences Between Mission Statement and Vision Statement are as follows:
Mission Statement
1.
Vision Statement
It states the reason for the existence
1.
of a firm.
It states what the organization

aspires to become in a long term
perspectives.
2.
companys
mission
typically
2.
It describes the future purposes
describes its present business and
and course of action. I.e. where
purpose i.e. who we are, what we do,
we are going.
and why we are here?

3.
It is to identify the companys

product and services and to serve

3.
It specifies a companys direction

and
future
product,
market,
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present customer and market.

4.
It lacks essential forward looking

quality.
customer, technology focus.

4.
It precisely explains about where

the company is headed the
anticipated
changes
in
its
business or its aspirations.
Characteristics of an effectively worded strategic vision

1.
Graphic; a strategic vision should paints a picture that company is trying to create
and market positions that the company is striving to stake out.
2.
Directional; it should be forward looking.
3.
Focused; it should be specific enough to provide managers with guidance in making

decisions and allocating resources.
4.
Flexible; it is not one time but for all time statement.
5.
Feasible; it should be achievable within a due time.
6.
Desirable; it should be able to address the long term interest of stakeholders

especially of shareowners, employees and customers.
7.
Easy to communicate; it should be memorable, simple, slogan and explainable in 510 minutes.
Common shortcomings in company vision statements:
Vague or incomplete
Not forward looking
Too broad
Bland or uninspiring
Not distinctive
Too reliant on superlatives.
Setting Performance Objectives:

Objectives are an organizations performance targets. They are the desired end results and
outcomes that the firm wants to achieve. They function as yardsticks for tracking an
organization performance and progress. They provide specific target for the company. The
managerial purpose of setting objectives is to convert the strategic vision into performance
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targets. A firms objectives can be profit related, growth and survival related, cost-related,
product and service related etc.
The important features of well-stated objectives are as follows:
1.
Specific (S): Objectives should be specific and stated clearly and should be
understandable. For example- double the profit in 10 years.
2.
Measurable (M): they should be measurable or quantifiable. They should be able to

clearly state what is to be achieved and when.
3.
Acceptable (A): They should be acceptable within the firm and by all the
stakeholders.
4.
Realistic (R): They should be reasonable and achievable, not vague. They should be
flexible to changing environment.
5.
Time-bound (T): Objectives should have a time frame for achievement or deadline
for achievement. It must be suitable and feasible as well.
Strategic objectives versus financial objectives:

Strategic objectives and financial objectives are not same. However, they are related to each
other and help in achieving the firms overall objectives in combination. They both help in
promoting the business firms, strengthening their market position and gain competitive
advantages. They cannot function well in isolation. They cant be fulfilled without each
others support. So they are interrelated to each other.
financial objectives
1.
strategic objectives
They are short-term objectives i.e.
1.
can be annual or 2-3 years.

2.
They are long term in nature i.e. 5-10

years objectives.
They are limited in scope.
2.
They cover wide range areas and

have wider implication.
3.
It helps to achieve higher profit, gain
3.
and cost reduction.
It
helps
advantages,
to
gain
competitive
strengthen
market
position & resource utilizing.

4.
An X percent increase in annual
4.
income.
5.
Increase
An X percent increase in market

share.
shareholders
values
in

5.
Strengthen companys brand name
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terms of increase annual dividend.

6.
Achieving profit margins by X percent

etc.
and image.
6.
Achieving technological leadership

etc.
Strategic Intent:
A strategic intent is a strong intension or determination of a firm to gain the strategic
objectives and be market winner by overtaking other companies. It is about becoming a
dominant company in the industry, replacing the existing industry leader, delivering the best
customer service and turning a new technology into products capable of changing the way
people work and live. A company exhibits strategic intent when it relatentlessly pursue an
ambitions strategic objectives and concentrates its full resources and competitive actions on
achieving that objectives, the ultimate aim of a firms strategic intent is to be the winner of
the market.
For examples: Nikes strategic intent during the 1960s was overtaking the ADDIDAS.
Similarly canons strategic intent in copying equipment was to bit Xerox.
The strategy making Pyramid

It thus follows that a companys overall strategy is really a collection of strategic initiatives
and actions devised by managers and key employees up and down the whole organizational
hierarchy. The larger and more diverse the operations of an enterprise, the more points of
strategic initiative it has and the more managers and employees at more levels of
management that have a relevant strategy-making role. Figure also shows who is generally
responsible for devising what pieces of a companys overall strategy. In diversified multibusiness companies where the strategies of several different businesses have to be
managed, the strategy-making task involves four distinct types or levels of strategy, each of
which involves different facts of the companys overall strategy.
1. Corporate strategy consists of the kinds of initiatives the company uses to establish
business positions in different industries, the approaches corporate executives pursue to
boost the combined performance of the set of businesses the company has diversified into,
and the means of capturing cross business synergies and turning them into competitive
advantage. Senior corporate executives normally have lead responsibility for devising
corporate strategy and for choosing among whatever recommended actions bubble up
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from the organization below. Key business unit heads may also be influential, especially in
strategic decisions affecting the businesses they lead. Major strategic decisions are usually
reviewed and approved by the companys board of directors.
A Companys Strategies Making Hierarchy
Orchestrated by the CEO

and other senior executives
Corporate
Strategy
The company wide game plan for
managing a set of businesses.
Two Way Influence
Orchestrated by the general

managers of each of the
companys different lines of
business, often with advice
and input from the heads of
functional area activities
within each business and
other key people.
Business Strategy
(One of each business the
company has diversified into)
In the case of a
single-business
company, these two
levels of the
strategy making
hierarchy merge
into one levelbusiness strategythat is orchestrated
by the companys
CEO & other top
executives.
How to strengthen market position &

build competitive advantages
Action to build competitive capabilities
Two Way Influence
Crafted by the heads of

major functional activities
within a particular businessoften in collaboration with
other key people.
Functional area Strategies within

each business
Add relevant detail to the hows of overall

business strategy.
Provide a game plan for managing a particular
activity in ways that support the overall
business.
Two Way Influence
Crafted by brand manager;

the operating managers of
plants, distribution centers,
and geographic units; & the
managers of strategically
important activities like
advertising and website
operations- often key
employees are involved.
Operating Strategies within each

business.
Add detail and completeness to business and

functional strategy.
Provide a game plan for managing specific lower
echelon activities with strategic significance.

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2. Business Strategy concerns the actions and the approaches crafted to produce
successful performance in one specific line of business. The key focus here is crafting
responses to changing market circumstances and initiating actions to strengthen market
position, build competitive advantage, and responsibility of the manager in charge of the
business. The business head has at least two other strategy related roles: 1) seeing that
lower level strategies are well conceived, consistent with each other and adequately
matched to the overall business strategy, and 2) getting major business-level strategic
moves approved by corporate-level officers (and sometimes the board of directors) and
keeping them informed of market developments and emerging strategic issues. In
diversified companies, business-unit heads may have the additional obligation of making
sure business level objectives and strategy conform to corporate-level objectives and
strategy themes.
3. Functional areas strategies concern the actions, approaches and practices to be
employed in managing particular functions or business processes or key activities within a
business. A companys marketing strategy, for example, represents the managerial game
plan for running the sales and marketing part of the business. A companys new product
development strategy represents the managerial game plan for keeping the companys
product lineup fresh and in tune with what buyers are looking for. Functional area
strategies add specifies to the hows of business level strategy. Plus they aim at establishing
or strengthening a business units competencies and capabilities in performing strategy
critical activities so as to enhance the businesss market position and standing with
customers. The primary role of a functional area strategy is to support the companys
overall business strategy and competitive approach. Functional managers have to
collaborate and coordinate their strategy making efforts to avoid uncoordinated or
conflicting strategies. For the overall business strategy to have maximum impact a
businesss marketing strategy, production strategy, finance strategy, customer service
strategy, new product development strategy and human resource strategy should be
compatible and mutually reinforcing rather than serving their own narrower purposes. If
inconsistent functional area strategies are sent up the line for final approval the business
head is responsible for spotting the conflicts and getting them resolved.

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4. Operating strategies concern relatively narrow strategic initiatives and approaches for
managing key operating units (plants, distribution centers, geographic) units and specific
operating activities with strategic significance (advertising campaigns, the management of
specific brands, supply chain related activities, and web site sales and operations). A plant
manager needs a strategy for accomplishing the plants objectives, carrying out the plants
part of the companys overall manufacturing game plan, dealing with any strategy related
problem that exists at the plant. A companys advertising manager needs a strategy for
getting maximum audience exposure and sales impact from the ad budget. Operating
strategies while of limited scope, add further detail and completeness to functional area
strategies and to the overall business strategy. Lead responsibility for operating strategies
is usually delegated to frontline managers, subject to review and approval by higher
ranking managers.
In single business enterprises, the corporate and business levels of strategy making merge
into one level business strategy for the whole company involves only one distinct line of
business. Thus, a single business enterprise has only three levels of strategy: 1) business
strategy for the company as a whole, 2) functional area strategies for each main area within
the business and 3) operating strategies undertaken by lower level manager to flesh out
strategically significant aspect for the companys business and functional area strategies.
Uniting the Strategy Making Effort

Ideally the pieces and layers of a companys strategy should fit together like a jigsaw puzzle.
To achieve this unity, the strategizing process generally has proceeded from the corporate
level to the business level and then from the business level to the functional and operating
levels. Midlevel and frontline managers cannot do good strategy making without
understanding the companys long-term direction and higher-level strategies. The strategic
disarray that occurs in an organization when senior managers dont set forth a clearly
articulated companywide strategy is akin to what would happen to a football teams
offensive performance if the quarterback decided not to call a play for the team but instead
let each player pick whatever play he thought would work best at his respective position. In
business, as in sports, all the strategy makers in company are on the same team and the
many different pieces of the overall strategy crafted at various organizational levels need to

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be in sync and united. Anything less than a unified collection of strategies weakens company
performance.
Achieving unity in strategy making is partly a function of communicating the companys
basic strategy themes effectively across the whole organization and establishing clear
strategic principles and guidelines for lower level strategy making. Cohesive strategy making
down through the hierarchy becomes easier to achieve when company strategy is distilled
into pithy, east to grasp terminology that can be used to drive consistent strategic action
throughout the company. The greater the numbers of company personnel who know,
understand and buy in to the companys basic direction and strategy, the smaller the risk
that people and organization units will go off in conflicting strategic directions when
decision making is pushed down to frontline levels and many people are given a strategy
making role. Good communication of strategic themes ad guiding principles thus serves a
valuable unifying purposes.

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Unit 4
Industry and Competitive Analysis
Five forces of Competition
The essence of strategy formulation is coping with competition. Strategy aims to gain
competitive advantage over competitors. Various forces in the environment influence the
competitive advantage. These forces, driving industry competition are known as competitive
forces. Customers, suppliers, potential entrants and substitute products are all competitors
in an industry. The state of competition in an industry depends on these five forces.
The structural analysis of competitive environment can be done with the help of five forces
framework developed by Michael Porter. Porters five forces model explains on the analysis
of competition in an industry. It states that the competition is a composite of five forces.
According to Porter- The collective strength of these five forces determines the ultimate
profit potential of an industry. The stronger each of these forces is, the more companies are
limited their ability to raise prices and earn greater profits.
For an effective industry and competitive analysis, a firm must assess the importance of its
success of the following forces:
1.
Threat of new entrants
2.
Rivalry among existing firms
3.
Threat of substitute products
4.
Bargaining power of buyers and
5.
Bargaining powers of suppliers
1. Threat of New Entrants

New entrants are the challenge to an existing industry. They bring new capacity, a desire to
gain market share and often substantial resources to an industry. Therefore they are the
threats to existing firms. The new entrants face barriers to entry. An entry barrier is an
obstruction that makes it difficult for a company to enter an industry.
Some of the possible barriers to entry are as follows:
I.
Economies of Scale
II.
Production Differentiation

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III.
Capital Requirements
IV.
Switching costs
V.
Access to Distribution Channels
VI.
Government Policy &
VII.
Cost Disadvantage-independent of Size
I.
Economies of scale: potential entrants face the barriers of economic scale. The scale
economies in production and marketing of existing firms give a significant cost
advantages over the new entrants. Due to this, potential entrants require high
investment to gain cost advantage.
II.
Capital Requirements: The need to invest huge amount of financial resources in

order to compete creates a barrier to entry for the new entrants. They need high
capital in production, R& D, distribution, advertising etc.
III.
Product Diversification: The product differentiation and brand identification of the

existing firms creates strong customer loyalty in the industry, which is a threat for
the new entrants to spend heavily in advertising and promotion to overcome the
customer loyalty.
IV.
Switching Costs: it requires high cost to switch from one product to other. For
example- once a software program like Excel or Word becomes established in an
office, the manager are very reluctant to switch to other new program.
V.
Access to Distributor Channels: New entrants face the barrier of access to

distribution channel. Since the existing competitors have already an access to
established channel, such blocked access becomes a barrier to entry for new
entrants.
VI.
Government policy: Government can limit entry to an industry through licensing

requirements and by restricting access to raw materials. It also can play a major role
by affecting entry barriers through safety regulation such as air pollution control
standards.
VII.
Cost Disadvantages Independent of Size: Cost advantages independent of size can

also be a barrier for the new entrants to an industry.

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2. Competitive Rivalry among existing firms

Rivalry is the amount of direct competition in an industry. Rivalry exists among the firms
producing similar products and having same customer group. Rivalry among existing
competitors takes the familiar form of jockeying for position-using the tactics like price
competition, product introduction etc. The reasons for intense competitive rivalry are as
follows:
I.
Number of competitors
II.
Rate of industry growth
III.
Product/service attributes
IV.
Amount of fixed cost
V.
Capacity
VI.
Diversify of rivals
I.
Number of competitors: When the competitors are numerous and are roughly equal
in size and power, there is intense competition. The competitors watch each other
carefully to ensure that any more by another firm is matched by an equal
countermove.
II.
Rate of industry growth: the rate of industry growth also determines the intensity of
competition among the firms in the industry.
III.
Product or service attributes: If the product or service lacks differentiation feature

then the switching cost is low. This creates intense competition.
IV.
Amount of Fixed costs: High fixed costs create strong temptation to cut prices. Due
to the price wars, rivals try to increase sales and market share.
V.
Capacity: when the firms increase their capacity, it leads to price cutting which also
creates intense competition.
VI.
Diversity of Rivals: The rivals are diverse in strategies, origin and personalities. They
have different ideas about how to compete and challenge each others position.
3. Threats of Buyers: The bargaining power of buyers creates competition among

the firms in an industry. Buyers affect an industry through their ability to force down

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prices. Bargain for higher quality services and compels competition to fight against
each other.
Buyers powerful in following circumstances:
I.
Concentration of Buyers: Buyers are powerful when they purchase in large volumes
of sellers product.
II.
Low Switching Cost: When the cost of switching a supplier is low, the bargaining
power of buyer is stronger.
III.
Backward Integration: There is a threat of backward integration by the buyer in the

business of sellers. A buyer has the potential to integrate backward by producing the
product itself and be an important competitor for other firms in the industry.
IV.
Large number of alternative suppliers: When there are large number of suppliers
and the product is standard or undifferentiated. The buyers find alternatives
suppliers and can play one company against another.
V.
Few buyers: Buyers are powerful when they are few in numbers, so that each ones
business is important to sellers.
VI.
Industry product is unimportant: When the purchased product in unimportant to

the quality or price of a buyers products or services, then the buyers are strong.
VII.
Price sensitive: Highly profitable buyers are generally price sensitive. A buyers earns
low profit and is sensitive to costs and services differences.
4. Threats of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of
purchased goods and services. A supplier or supplier group is powerful in the following
cases:
I.
When the supplier industry is dominated by few companies and sells too many.
II.
When its products and services are unique or at least differences and high switching
costs.
III.
When the substitutes are not readily available for customers.
IV.
When the supplier are able to integrate forward and compete directly with their
customers.

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V.
When a purchasing industry buys only small portion of the supplier groups goods
and services and is thus unimportant to the suppliers.
5. Threats of Substitute Products

Substitute products also create competition in an industry. They are those products that
appear to be different but can satisfy the same need as another product. Product that can
substitute the others of similar type is known as substitute product.
For example: Tea can be a substitute for coffee. If the price of coffee goes up high enough,
coffee drinkers will switch to tea.
They bring threats to an industry when:
I.
Sales of substitutes are growing faster.
II.
Producers of substitutes are moving to add new capacity.
III.
Profits of the producers of substitutes are on the rise.
Although porter mentions only 5 forces a sixth which is other stakeholders can be also
added to reflect the power of Government, local communities, creditors, trade association,
interest groups and shareholders.
To conclude, porters model helps to:
Identify underlying key forces that drive competition.
Assess strengths and weaknesses of competitors.
Identify attractiveness of specific industries.
Develop competitive strategy.
Identify the sources of competition.
Driving Forces:
Industry conditions change because there are important factors that pressurize industry
participants (competitors, customers or suppliers) to alter their actions. Such factors causing
fundamental industry and competitive change are known as driving forces. Driving forces in
an industry are those factors that have the biggest influence on what kind of changes will
take place in the industrys structure and competitive environment. They are the major
underlying causes of changing industry and competitive condition. Some driving forces
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originate in the macro environment and some original form within a companys immediate
industry and competitive environment.
Sound analysis of an industrys driving forces is pre-requisite to sound strategy making.
Managers must have well understanding to the driving forces to craft the strategies that can
be fit to emerging conditions. Without understanding the driven forces and their impact on
industry environment and companys business managers are ill-prepared to craft a strategy.
So, it is necessary to analyze the driving forces and think strategically an out where the
industry is headed and how to get prepared for the changes that are likely to take place.
There are two steps for analyzing the driving forces and they are as follows:
1.
Identifying an industrys Driving Forces and
2.
Assessing the impacts they will have on the industry.
1. Identifying an industrys Driving Forces: Managers must identify the driving forces in
an industry; the most common driving forces are as follows:
I.
Growing use of internet and emerging new IT applications.
II.
Increasing Globalization
III.
Changes in industries growth rate
IV.
Product Innovation
V.
Manufacturing process innovation
VI.
Marketing innovation
VII.
Entry or exist of major firms
VIII.
Changes of cost efficient
IX.
Changes in who buys the product and how they use it
X.
Growing buyers preferences for differentiated products of standardized products
XI.
Changes in government policies
XII.
Reduction in undercertanity and business risk
XIII.
International law
XIV.
Increment or decrement of labor cost.
2. Assessing the impact of Driving Forces in an industry: The second phase is to

determine whether the forces are on the whole, acting to make the industry
environment more or less attractive. Following questions can be analyzed:
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I.
Are the driving forces causing demand for the industrys product to increase or
decrease?
II.
Are they acting to make competition more or less intense?
III.
Will they lead to higher or lower industry profitability?
Monitoring Competition
A company should pay attention to what competitors are doing and must know their
strength and weaknesses, competitive intelligence about rivals strategies, their latest action
and announcement and the resources strength and weakness. The efforts being made to
improve their situation, and the leadership style of the executives is valuable for predicting
the strategic moves that the competitors are likely to make next in the market place. Good
information is required to monitor the competition. It allows company to make counter
moves and craft its own strategy moves. It is also useful to exploit any strategy that arises
from competitors. Identifying competitors weakness and strength helps in knowing what
rivals are doing in the market. What their management is saying then latest announcement
and the annual reports. Competitors information can also be identified from articles in the
business media, from rivals exhibition at the tradeshow and with the conservation with
rivals, Customers, suppliers and formal employees. However, collecting information about
competitors must be ethical and legal.
Analyzing competitors strategy, strength and weakness, makes market sense for company
strategies and their assessment important. The company makes 3 assessments:
1.
Which competitor has the best and weakest strategy?
2.
Which competitors are poised to gain market shares and one seems to lose ground?
3.
Which competitors are likely to range among the industry leader 5 years from now?
Do one or more up and coming competitors have powerful strategies and sufficient
resources capability overtake current industry leader?
Strategic Group Map:

A strategic group consists of those industry members with similar competitive approaches
and positions in the market. It consists of a number of rivals firm within the same industry.

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These firms in a same strategic group have similar features and image, and have similar
competitive strategies and approaches in key areas.
According to Michael Porter: A strategic group is the group of firms in an industry following
the same or a similar strategy along the strategic dimensions.
Managers must assess and analyze an industrys competitive structure. This can be done by
a technique which is known as strategic Group Mapping. Strategic group mapping is a
method to assess the market positions of key competitors. It is a technique for displaying
the different market or competitive positions that rival firms occupy in the industry. Firms
use strategic group map to understand which companies are strongly positioned and which
are weakly positioned in an industry, strategic Group Map is the best technique for
revealing the market positions of industry competitors. This analytical tool is useful for
comparing the market positions of each firm separately.
Companies in the same strategic group share following common competitive features:
1.
They may have comparable product-line breadth.
2.
Sell in same price and quality range.
3.
Offer similar services to buyers.
4.
Have similar image and size.
5.
Use same distribution channel.
6.
Have same geographical area.
7.
Use similar technological approaches.
8.
Use same product attributes.
Steps for constructing strategic group maps:
Identify competitive characteristics and differentiate firms from one another in an

industry.
Plot the firms on a 2 variable map using at least two differentiating characteristics.
Assign the firms having common competitive feature to the same strategy group.
Draw circles around each group, making the circles to the size of the group. The size
of circle indicates market share of each group.
Each circle in map represent strategic group that includes the firm with similar
competitive characteristics. The closer group are close competitors with different
geographical coverage.

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Uses of different group map:
It can be used to understand direct competitors of an organization.
Make comparison among the rival firms in an industry.
Assess the market positions of key competitors.
Identify the basis of competition within each group and between groups.
Assess possibility of mobility from one group to another.
What can we draw from strategic group mapping?
To what extent, industry driving forces and competitive pressures favors some
strategic groups and hurt others.
To what extent the profit potential of different strategic groups varies due to the
strengths and weakness in each groups market positions.
The closer strategic groups are to each other on the map, the stronger the cross
group competitive rivalry tends to be.
Key Success Factors:

An industrys key success factors (KSFs) are those competitive factors that most affect the
industrys members ability to prosper in the market place. A companys KSFs are the
product attributes, Competencies, strategies, resources, competitive capabilities and market
achievements with the greatest impact on future competitive success in the market place.
Key success Factors spell the differences between a strong competition and weak
competition. KSFs must be identified well as per the present or existing market condition.
What is the firms most competitive fact then less competitive factor must be identified. The
most common factors must be kept ahead as the strongest factor. Correct diagnosis of KSF
will lead to the success of the firm.
KSFs are important for future competitive success. It determines how financially and
competitively a firm can be successful. It is important to identify KSF to compete
successfully in the industry. So, identifying KSF in light of prevailing and anticipated
competitive condition is the top in analyzing and strategic making consideration. A company
strategist needs to understand the industry well enough to separate the factors that are
most important and that are less important. Correctly diagnosing an industrys KSFs raises a
companys chances of crafting sound strategy. Companies that stand out or excel on a
particular KSF are likely to enjoy a stronger market position. Hence, using industrys KSFs as
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cornerstone for the companys strategy and trying to gain sustainable competitive
advantage by excelling at one particular KSF is a fruitful competitive strategy approach.
Common types of industry KSFs are as follows:
I.
Technology related KSFs.
II.
Manufacturing related KSFs.
III.
Distribution related KSFs.
IV.
Marketing related KSFs.
V.
Skills and capability related KSFs.
VI.
Others types of KSFs,
Overall low costs
Convenient locations
Patent protection
A strong balance sheet and access to financial capital
Ability to provide fast and continent after sales service.
The answers to the following questions help identify an industry KSFs:
On what basis do buyers of the industrys product choose between the competing
brands of sellers?
Given the nature of competitive rivalry and the competitive forces prevailing in the
market place, what resources and competitive capabilities does a company need to
have to be competitively successful?
What shortcomings are almost certain to put a company at significant competitive

disadvantages?
Environment Scanning Techniques

According to Azhar Kazmi,The process by which organization monitor their relevant
environment to identify opportunities and threats affecting their business is known as
environmental scanning.
Environmental scanning is a technique of acquiring information and analyzing trends
emerging in the environment. It involves monitoring changes and development in the
environment that have potential impact on the business of an organization. It is an
important part of strategic management. It helps in formulation and implementation of
firms business strategies. Both internal and external environments of a business firm are
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scanned. The top management of a firm scans the environment to develop corporate
strategy. Information can be collected from the sources like journals, reports, colleagues,
employees, meetings, conferences etc. The top management can observe the changes
taking place in the external environment through these sources. Whereas, they can
analyze/scan the internal environment through the sources like reports, committee
meetings, memoranda, subordinate managers, employees and outsiders,
Techniques for Scanning:

1. Extrapolation method: In this method, information from the past are collected to
explore the future. For example- trend analysis, forecasting, regression analysis etc.
2. Historical Analogy: Historical parallels are established between two trends. Trend is
studied by establishing historical parallels with other trend. This method assumes
that the sufficient information in available from the other trend.
3. Delphi Technique: This technique is a systematic collection of expert opinion in
varying stages. Feedback and responses from expert people are combined and
summarized.
4. Scenario Building: A scenario is a composite picture of the future. It is a technique of
constructing a time order sequence of events that have logical cause and effect
relationship. Multiple scenarios are developed.
5. Model Building: In this method, mathematical representation and econometric
models of the environment are stimulated.
6. Network Method: Contingency trees and relevance trees are developed for
environmental scanning.
7. Intuitive Reasoning: There is free thinking among the scanners in this technique.
There is rational intuition unconstrained by past experiences and personal biases. His
intuitions are the individual judgments to provide the best guess. However, this
method is unreliable since such judgment cannot be evaluated.
8. Simulations: In this method, real world is abstracted for environmental scanning.
Process of Environmental Scanning

It includes the following steps;
1. Identify relevant forces in the environment

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It is the initial phase in which information is gathered about the external forces consisting
the PEST factors and internal forces consisting of technological, human, financial resources,
organizational competencies and stakeholders expectation.
2. Determine sources of information

They are determined by top-level management. They can be:
Personal experience of managers, employees and salespersons,
External sources like banks, competitors, suppliers, customers, government. Internal

sources like files, database and document.
Special studies by experts, consultants & researchers,
Meeting, conferences, committees, speeches & interviews,
Newspapers, journals, reports, books, TV, radio, internet surfing etc,
Trade and industry publications, university and government publication,
3. Select forecasting methods

Forecasting is the systematic method of obtaining future course of actions and data. The
several methods of forecasting are executive opinion, sales force composite, surveys, Delphi
technique, time series, exponential smoothing, regression & trend analysis. The choice of
method depends on the needs in terms of quantity and quality. The availability, timeliness,
relevance and cost of information are also important.
4. Scan and respond to data

The collected data Is studied, analyzed, assessed, interpreted and understand. The crucial
developments in the environment are pin pointed to assess their impact on strategy. They
can be events, trends, issues and expectations.
Predicting competitors next moves

A company should pay attention to what its competitors are doing and should know their
strength and weakness. I must be concerned about what strategies moves are rivals likely to
make next? The essence of predicting competitors next move is to make competitor
analysis in the industry and make countermoves.
The key considerations that should be kept in mind for predicting competitors next moves
are as follows:
I.
Which rivals have a strong incentive, and resources to make major strategic changes,
perhaps moving to a different position on the strategic group map?

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II.
Which rivals are likely to follow the same basic strategy with only minor
adjustments?
III.
Which rivals are likely to enter in few geographical markets?
IV.
Which rivals are strong candidates to expand their product offering and enter new
product segments?
SWOT ANALYSIS
SWOT analysis is a historically popular technique through which managers create a quick
overview of a companys strategic situation. It is based on the assumption that an effective
strategy derives from a sound fit between a firms internal resources (strength and
weakness) and its external situation (opportunities and threats). Thus, it is done to
understand the external and internal environment s of an organization. The forces in the
internal environment provide strength and weakness, and the forces in the external
environment provide opportunities and threats.
Strength; It is a resources or capability which is controlled by a firm that gives it an

advantage relative to competitors in course of meeting the needs of the customers.
Strength arises from the resources and competencies available to the firm. It creates
strategic advantage.
Weakness; It is a limitation or deficiency of an organization in one or more resources.

Incompetency relative to the competitors in course of effectively meeting customer need,
which creates strategic disadvantages.
Opportunity; It is a most favorable situation in an organization external environment. It

provides position of superiority in relation to competitors.
Threats; It is a major unfavorable situation in an organizations external environment. It

provides position if inferiority in relation to competitors.
The essence of SWOT analysis is to match internal strength and external opportunities in
order to gain competitive & strategic advantages. Similarly, internal weakness can be
corrected and external threats can be avoided. Thus, SWOT analysis provides key
fundamental framework for analyzing firm success based on the firms internal resources
and competencies. Thus, it is a very useful tool in strategic management.

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What is look in SWOT Analysis

Potential Strength
Potential
Weakness
powerful
strategy
No
clear
Strategic
direction
strong
financial
condition
String brand
name,
Image
&
reputation
Widely
recognized
market
leader
Advance to
proprietary
technology
Cost
advantages
weak
financial
position,
excess debt
Weak
marketing
skills
Small
market
share
Potential Threats
Potential
Opportunities
Serving
additional
customer
groups
expanding to
new
geographic
areas
Expanding
product line
Entry of new
Competitors
loss of sales to
substitutes
slowing market
growth
Transferring
skills to new
products
Costly
new
regulations
obsolete
technology
Vertical
Integration
Vulnerability to
business cycle
Higher cost
Acquisition
Rivals
of
Product
innovation
skills
Internal
operating
problem
Good
customer
services
Falling
behind
R&D
Alliances
or
joint ventures
to
expand
coverage
Opening
to
exploit
new
technologies
Growing power
of customer or
suppliers
Shifts in buyers
needs
for
product
in
Demographic
changes
SWOT Matrix
SWOT Matrix provides a matching tool for developing strategies. It can be explained as:
S (strength)
W(weakness)
O(opportunity)
(Threats) T
SO
ST
WO
WT

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SO Strategies; under this strategy internal strength are used to take advantage of external
opportunities. This is the strategy desired by all organizations. It favors growth oriented
strategies.
WO Strategies; under this strategy internal weakness are overcome by taking advantage
of external opportunities. It supports turnaround strategy.
ST Strategies; under this strategy internal strength are used to avoid external threats.
WT Strategies; under this strategy, internal weakness are minimized and external threats
are avoided for survival. It supports defensive strategy.
SWOT Analysis Diagram
Numerous Environmental Opportunities (O)

Cell 3;
Support a turn-around
Oriented strategy (WO)
Critical
Internal
Weakness
(W)
Cell 4;
Support a
Defensive strategy
(WT)
Cell 1;
Support an aggressive
Strategy (SO)
Cell 2;
Support a diversification
Strategy (ST)
Substantial
internal
Strength (S
Major Environmental Threats (T)

The above matrix illustrates how SWOT analysis might take management planning
discussions into slightly more structured approaches to aid strategic analysis. The objective
of SWOT matrix is to identify one of four distinct patterns in the match between a firms
internal resources and external situation.
Cell 1(SO); Cell 1 is the most favorable situation. Here the firm faces several environmental
opportunities and has numerous strength that encourage pursuit of those opportunities.
This situation suggests growth oriented strategies to exploit the favorable match.
Cell 2(ST); In cell 2, a firm that has identified several key strength faces an unfavorable
environment. In this situation, strategies would seek to redeploy those strong resources and
competencies to build long term opportunities in more opportunistic product markets.
Cell 3(WO); A firm in cell 3 faces impressive market opportunity but is constrained by weak
internal resources. The focus of strategy for such a firm is eliminating the internal weakness,
So as to more effectively pursue the market opportunity.
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Cell 4(WT); Cell 4 is the least favorable situation with the firm facing major environmental
threats from a weak resources position. This situation clearly calls for strategies that reduce
or redirect involvement in the products or markets examined by means of SWOT analysis.
Advantages of SWOT Analysis

1.
It helps in finding of strategic fit between external opportunities and internal

resources.
2.
It aids in the correction of the weakness and to avoid the threats.
3.
It is the essence of strategy formulation; alternative strategies can also be

formulated.
4.
It can be used for finding a niche to take advantage of market opportunities.
5.
It helps organizations to adapt to the environmental changes.
6.
It provides an organized basis for insightful discussion and information sharing which
may improve the quality of choices and decision making ability of manager.
7.
It helps to craft a strategy that is well suited to the companys competitive

circumstances.
Disadvantages
1.
It generates lengthy list of opportunities, threats, strength and weakness.
2.
It does not indicate priorities.
3.
The same factor can be placed in two categories, for e.g.; student number is both a
strength and weakness for Tribhuvan University.
4.
It has to link to strategy implementation.
5.
It is a longtime, traditional approach to internal analysis among many strategies.
6.
A SWOT analysis can over emphasis internal strength and down play external
threats.
7.
It can be static and ignore changing circumstances.
8.
Strength is not necessarily a source of competitive advantages.

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Strategic Advantage Profile (SAP)

It is prepared by listing internal strength and weakness. Key factors of strengths and
weaknesses are rated on a scale where 5 is the most important and 1 is the least important.
Weights are assigned to each factors to calculate weighted score comments are also
provided about each key factor.
Environmental Threats and Opportunity Profile (ETOP)

Environmental threat and opportunity profile is a technique to structure environmental
issues. It involves:
Dividing the environment into different sectors, each sector can be sub-divided into
subsectors.
Analyzing the impact of each sector and sub-sector on the organization.
Describing the impact in the form of a statement.
Advantages:
It provides a clear picture of which sector and subsector have favorable impact on
the organization.
It helps to interpret the result of environment analysis.
The organization can assess it competitive position.
Appropriate strategies can be formulated to take advantage of opportunities and

counter the threats.
SWOT analysis is facilitated by ETOP.
Analytically evaluate the environment of a banking institution recently

established in the Nepalese market; prepare the list of strength,
weakness, opportunities and threats.
Lets take an example of Century Commercial Bank:
Strength
Strong and powerful banking strategy
Professional management
Effective marketing skills
Use of advanced technology and banking system

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Effective security system
Branch & ATM services in almost city of Nepal
Attractive interest rates & schemes
Free ABBS
Good customer service
Strong advertising
Weakness
High cost of opening accounts than other bank
Weak financial position
Small market share
Lack of proper research and development
Weak brand name & image
Opportunities
Possibility of serving additional customer groups like students & adults through
attractive schemes
Possibility of expansion to new geographical areas
Joint venture and alliances to other banks
Threats
Political uncertainties
Entry of new competitors
Slow growth rate than other banks
Unfriendly government policies
Influences of central bank
Changes in global economies

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Unit 5
Evaluating Company Resources and Competitive Capabilities
SWOT is an acronym for the internal strength and weakness of a firm and the environmental
opportunities and threats facing that firm. SWOT analysis is a widely used technique of
appraising companys resource strength and weakness and its external opportunities and
threats. It provides a good overview of a companys strategic situation of the managers and
thus provides a basis for crafting a strategy. The essence of SWOT analysis is to match
internal strength with external opportunities and gain strategic advantages. Similarly,
weakness can be corrected and external threats can be avoided. Thus it helps in assessing
the internal and external environment of a company
In nutshell, SWOT analysis is a simple but powerful tool for sizing up a companys resource
capabilities and defencies, its market opportunities and the external threats so its future
well being. It is conducted to craft strategies as per the existing environmental situation and
gain competitive advantage in market place. It provides a key, fundamental framework for
analyzing firm success based on the firms internal resources and competencies. Thus it is
very useful tool in strategic management.
The uses of SWOT analysis are listed as follows:

1.
It facilitates the finding of strategic fit between external opportunities and internal
resources.
2.
It helps in correcting the weakness and avoids the threats.
3.
It is the essence of strategy formulation. Alternative strategic can be formulated.
4.
It can be used for finding a niche to take advantages of market opportunities.
5.
It helps organizations to adapt to environmental changes.
The two most important parts of SWOT analysis are as follows:

1.
Drawing conclusions about what story the compilation of strength, weakness,

opportunities and threats tell about the companys overall situation.
2.
Acting on those conclusions, to better match the companys strength to its resources
and market opportunities, to correct the important weakness and to defend against
external threats.

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Managers conduct SWOT analysis to craft a strategy that is well suited to the companys
competitive circumstances and to identify how attractive the companys competitive
position is and why.
Companys Resource Strength and Competitive Capabilities:

Strength is something a company is good at doing or an attribute that enhance its
competitiveness. It is a resource advantage relative to competitors. It arises from the
resources and competences available to the firm. It provides the company a comparative
advantage in the market place. A companys resource strength includes competences, core
competencies, and distinctive competencies.
A firms resource strengths can be follows:

1.
A skill or important expertise
2.
Valuable physical assets
3.
Valuable human assets
4.
Valuable organizational assets
5.
Valuable intangible assets
6.
Competitive capabilities
7.
Achievement or attribute that puts the company in a position of market advantages
8.
Competitively valuable alliances or cooperative ventures
1. Skill or Important Expertise:

i.
Low-cost manufacturing capabilities
ii.
Strong e-commerce expertise
iii.
Technological know-how
iv.
Provide good customer service consistency
v.
Skills in improving production process
vi.
Excellent mass merchandising skills
vii.
Unique advertising and promotional talents
viii.
A proven track record in defect free manufacture
2. Valuable physical assets:

i.
Plants and equipment
ii.
Attractive real estate locations

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iii.
Worldwide distribution facilities
iv.
Ownership of valuable natural resource deposit
3. Valuable human assets:

i.
An experienced and capable workforce
ii.
Talented employees in key areas
iii.
Cutting-edge knowledge in keys areas
iv.
Proven managerial know how
4. Valuable organizational assets:

i.
Proven quality control system
ii.
Proprietary technology
iii.
Key patents
iv.
Mineral rights
v.
A strong balance sheet and credit rating
vi.
Sizable amounts of cash and marketable securities
vii.
Highly trained customer service representatives
5. Valuable intangible assets:

i.
A powerful brand name
ii.
A reputation for technological leadership
iii.
A strong buyer loyalty and goodwill
6. Competitive capabilities:
i.
Product innovation capabilities
ii.
Strong dealer network
iii.
Cutting-edge-supply chain management capabilities
iv.
Short development times in bringing new products to market
v.
Quick responses to changing market conditions and emerging opportunities
vi.
Business through internet
7. Achievement or attribute that puts the company in a position of market

advantage:
i.
Low overall costs leadership
ii.
Market share leadership
iii.
A super product
iv.
A wider product lines than rivals

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v.
Wide geographic coverage
vi.
A well known brand name
vii.
Superior e-commerce capabilities or
viii.
Exceptional customer service
8. Competitive valuable allowances on co-operative ventures:

i.
Fruitful partnership with suppliers that reduce costs or enhance product quality
and performance
ii.
Alliances or joint ventures that provide access to valuable technologies

competencies or geographical markets
Thus, a companys resource strengths represent competitive assets. It determines the

complement of competitively valuable resources with which the company competes in
markets place.
Company competencies:
Company competencies and competitive capabilities determine its strategic advantage over
its competitors. Competences or capability can be categorized into three, which are as
follows:
a) Competence
b) Core competence
c) Distinctive competence
a) Competence: A competence is something an organizational is good at doing. It is what an
organization does well. It resides in competences of people and functional area of the
organization. It is nearly always the product of learning and experience that builds up the
companys proficiency in performing an internal activity. Usually a company competence
originates with the efforts to develop organizational ability to do something. As the learning
ability and experience builds, such that the company gains proficiency in performing activity
consistency well and at an acceptable cost, the ability evolves into a true competence and
company capability.
Examples:
o Proficiency in merchandising and product display
o Expertise in a specific technology
o Proficiency in working with customers

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o The capability to create attractive and easy-to-use websites

o A proven capability to select good locations for outlets,
b) Core Competences: A core competence is a competitively important activity that a company
performs better than other internal activity. it is s proficiency performed internal activity
that is control to companys strategy and competitiveness. Core competencies are
competitively more important and valuable resource strength than simple competencies
because they add power to the companys strategy and contribute to the companys success
in the market place.
A company may have more it is knowledge based, residing in people and in a companys
intellectual capital and not in the assets on the balance sheet. It is more likely to be
grounded in cross-department combinations of knowledge and expertise rather than being
the product of a single department of work group. Competences thus become core
competence when the well-performed activity is central to the organizations strategy,
competitiveness and profitability.
A core competence can relate to any of several aspects of a companys business:
o An Expertise in integrating multiple technologies to manufacture high quality
products,
o Know-how in creating and operating a cost-efficient supply chain
o After sale service capabilities
o Low cost structure
o Capabilities to fill customer orders accurately and swiftly
o The capability to speed new or next generation products to markets
c) Distinctive Competences: Internal competence may not be sufficient to compete in the
competitive market but distinctive competence in the industry is what matters in this
connection. It is the distinctive competence that leads to competitive advantage in market
place. When competencies are superior to those of the competitors, they are called
distinctive competencies. A distinctive competence is a comparatively valuable activity that
a company performs better than its rivals. A distinctive competence thus represents
competitively superior resource strength. A core competence simply cannot be translated in
to a distinctive competence, unless the company enjoys competitive superiority in
performing the activities. Thus, a core competence becomes a basis for competitive
advantage only when it rises to the level of a distinctive competence.
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It becomes easier to build competitive advantage when a firm has distinctive competence in
performing an activity that can lead to market success, when it is costly and time consuming
for rivals to imitate the competence and when those rival companies do not have off setting
competencies. A distinctive competence is thus potentially the mainspring of a company
success unless more powerful resources of rivals trump it. It is the cornerstone of strategy
that gives competitively valuable capability to the company.
Example: Most retailers believe that they have came competences in product selection and
in store merchandising, but some time they run into trouble in market when they encounter
rivals, whose core competencies are stronger than theirs.
The distinctive competences of Toyota and Honda in low cost and quality manufacturing
have proven to be competitive advantage in the global market.
When is resource strength competitively powerful?
What is most telling about a companys strengths, individually and collectively is how
powerful they are in the market place. Resource strength of a firm is competitively powerful
when:
o The resource strength is hard to copy by rivals.
o The resource strength is durable or has staying power in the market place.
o The resource strength is really competitively superior
o The resource strength cant be trumped (defeat) by the rival companies.
What are the major indicators to identify the company strengths company
capabilities? (2006 fall)
a) A powerful strategy
b) Core competencies and distinctive competencies
c) Cost advantage over rivals
d) A strong financial condition
e) A strong brand name/image/reputation
f) Strong advertising and promotion
g) Good supply chain management capabilities
h) Product customer service capabilities
i) Product innovation skills
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j) Good customer service and better product quality

k) Wide geography coverage/strong global distribution capability
l) Alliances and sort ventures
m) Proprietary technological
n) Economies of scale etc
Company resource weakness and competitive defencies:

A weakness or competitive deficiency is something a company lacks or does poorly in
comparison to other that puts it at a disadvantage in the market place. It is a limitation or
deficiency in one or more resources or competencies that hinders a firms effective
performance. It is a shortcoming in a companys complement of resource and represents
competitive liability. Such shortcomings are to be offset by companys resource strengths.
A companys weakness can relate to:
i.
Inferior or unproven skills, expertise, or intellectual capital in competitively

important areas of the business,
ii.
Defencies in competitively important physical, organizational or intangible assets or
iii.
Mission or competitively inferior capabilities in key areas
Potential resource weakness and competitive defencies:

a) No clear strategic direction
b) No well-developed core competencies
c) Weak financial position, balance sheet: too much debt
d) Weak brand name or reputation
e) Higher overall unit costs relative to key competitors
f) Weak or unproven product innovation capabilities
g) Lack of global distribution capability
h) Weak marketing skills
i) Too narrow product line
j) In the wrong strategic group
k) Small market share
l) Internal operating problems
m) Resources that are not well matched with industry KSFs

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Companys market opportunities:

An opportunity is a major favorable situation in firms external environment. Identifying
market opportunity is a big factor in shaping a companys strategy. Without identifying the
opportunities in market place, Managers cannot properly tailor (adopt) strategy to the
companys situation. Depending on the prevailing circumstances, a companys opportunity
can be plentiful or scare and can range from widely attractive to marginally interesting to
unsuitable. The market opportunities most relevant to a company are those that match up
well with the companys financial and organizational resources capabilities; offer the best
growth and profitability and present the most potential for competitive advantages.
Potential market opportunities areas are follows:
a) Expanding into new geographic markets,
b) Expanding companys product line,
c) Online sales,
d) Integrating forward or backward,
e) Falling trade barriers,
f) Entering into alliances or joint ventures,
g) Openings to exploit emerging new technologies
h) Openings to win market shares from rivals
i) Serving additional customer groups or market segments,
j) Rising buyers demand for industrys product,
k) Acquiring rival firms with attractive technological expertise,
l) Utilizing company skills or technological know-how to enter new product lines,
Potential external threats to a companys well being:

A threat is a major unfavorable situation in firms external environment. Threats are key
impediment (Obstruction) to the firms current or desired position. They are the certain
factors in a companys external environment that pose threats to its profitability and
competitive well-being. All the firms confront some threatening elements in the course of
doing business. Managers must identify the threats to the companys future profitability and
to evaluate what strategies actions are acquired to avoid those threats.
Potential external threats to a companys future profitability are as follows:
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a) Entry of new competitors,

b) Rivals introduction of new products,
c) Increasing intensity of competition among the rivals,
d) Slowdown in market growth,
e) Growing bargaining power of customers or suppliers,
f) Changes in buyers needs and preferences,
g) Loss of sales to substitutes products,
h) Adverse demographic changes,
i) Changes in interest rates and foreign exchange rates
j) Shift in buyer needs away from industrial product,
k) Costly new regulatory requirements,
l) Restrictive trade policies,
m) Entry of lower cost foreign competitors,
n) Frequent political changes (Government Policies),
Benchmarking
Benchmarking is a tool for learning which companies are best at performing particular
activities and then using their techniques or best practices to improve the cost and
effectiveness of a companys own internal activities. This is a systematic and continuous
process of measuring and comparing an organization business processed and practices
against those of the rivals (best 0rganization). Such benchmarking can be made on methods
and processes, services, performance, strategies and techniques. This comparison provides
information to the firm to take corrective actions to improve its performance and quality.
Many companies today are comparing their costs of performing a given activity against
competitors costs and the performance in market place. This technique of continuously
comparing a firms performance against the performance of the competitive firm in similar
business condition to determine what should be improved in known as Benchmarking.
Benchmarking allows a company to determine whether the manner in which it performs
particular functions and activities represents industry best practices when both the cost
and effectiveness are taken into account. It thus helps in identifying which competitors are
the best performs of an activity.

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In choosing a strategy, managers should compare the firms key internal capabilities with
those of the rivals. Thus comparing with key competitors can prove useful in ascertain
whether firms internal capabilities certain factors are strength or weaknesses, Significant
favorable difference from competitors in potential cornerstone of a firms strategy.
The main objectives of Bench marking are as follows:

i.
To identify the best practices in performing an activity.
ii.
To learn how other companies have actually achieved lower costs or better results in
performing benchmarked activities.
iii.
To take action to improve a companys competitiveness.
iv.
To identify how efficient the firm is than its rival.
v.
To make comparison with competitors on the basis of costs, processes, practices and
methods.
vi.
To identify which firm is performing best in the industry.
Benchmarking is necessary for comparing how different companies perform

various value chain activities like:
i.
How materials are purchased.
ii.
How supplies are paid.
iii.
How inventories are managed.
iv.
How products are assembled.
v.
How the quality control function is performed.
vi.
How the customers orders are filled and shipped.
vii.
How employees are trained.
viii.
How payrolls are processed.
ix.
How maintenance is performed.
Benchmarking can be accomplished by collecting information from the following sources:

i.
Published reports.
ii.
Trade groups.
iii.
Industry research firms.
iv.
Customers and suppliers and other stakeholders.
v.
Industry analysis.

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Some important problems encountered in benchmarking process are as follows:

i.
Benchmarking involves competitively sensitive cost information and so close rivals

may not be completely open to give the information.
ii.
Making cost comparison is difficult due to the use of different cost accounting
systems.
iii.
Ethical problems in collecting information.
iv.
Problems of accuracy, dependability and consistency.
Value chain analysis:

A value chain is a set of interlinked value creating activities performed by an organization. A
companys value chain identifies the primary activities that create customer value and the
related activities. It describes a way of looking at a business as a chain of activities that
transfer inputs into output and create customer value. These activities begin with inputs go
through processing and continue up to outputs marketed to customers.
Basically, customer value chain derives from three basic sources. They are: Activities that
differentiate the product, Activities that lower its costs, and activities that meet the
customers need quickly.
An Analysis that attempts to understand how a business creates customer value by
examining the contributions of different activities within the business to that value is known
Value Chain Analysis (VCA).
A fundamental objective of every enterprise is to create and deliver a value to buyers that
yield an attractive profit. Customer value derives from three basic sources.
a) Activities that differentiate the product.
b) Activities that lower the cost.
c) Activities that meet customers needs quickly.
Value chain analysis helps in identifying and determines where low cost advantages or cost
disadvantages exist. It allows managers to better identify their firms strength and weakness
by looking at the business as a process a chain of activities.
Value chain analysis is a tool to analyze cost competitiveness and value creation. It helps in
understanding how the value is created. It attempts to understand how a business creates
customer value by examining the contribution of different activities within the business.
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It analyses the attributes of each of the activities to determine in what ways each activity
that occurs between purchasing inputs and after-sales service helps to differentiate their
products and services. Value chain analysis divides the business into two sets of activities
that occur within the business, starting with the inputs a firm receives and finishing with the
firms products and after-sales service to customers.
The two broad categories of activities are as follows:
1.
Primary activities
2.
Support activities
1. Primary activities (Line Function): Primary activities are foremost in creating value
for customers. They are the activities in the creation or delivery of the product.
These activities are involved in the physical creation of the product, marketing and
transfer to the customer and after-sales service activities. These activities are as
follows;
a) Supply chain Activities (inbound logistics)
b) Operation Activities
c) Distribution Activities (Outbound logistics)
d) Marketing and sales activities
e) Service (after sales service)
2. Support activities (Staff or overhead function): Supporting activities assist the firm
as a whole by providing infrastructure or inputs that allow the primary activities to
take place. On an ongoing basis, these activities support, facilitate and enhance the
performance of primary activities. They are as follows:
a) Procurement activities (Process for purchasing inputs)
b) Research and Development
c) Human Resource Development
d) Administration
e) Firm infrastructure
f) Financial and accounting activates
g) System Development Activities
Both the primary and support activities are interlinked in such a manner that the
accomplishment of one activity can affect the costs of performing other activities. The
combined costs of all the various activities in a companys value chain define the companys
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internal cost structure. The tasks of value chain analysis are to develop the data for
companys costs activity against the costs of key rivals and to learn where the internal
activities are a source of cost advantage and disadvantages.
The following steps in conducting value chain analysis are:
1.
Identify Activities.
2.
Allocate costs.
3.
Recognize the difficulty in activity-based cost accounting
4.
Identify the activities that differentiate the firm.
5.
Examine the value chain.
1. Identify Activities: The initial step in value chain analysis is to divide a companys
operations into specific activities or business processes. Usually they are grouped as
primary and support activities.
2. Allocate Costs: In next step, an attempt is made to attach costs to each discrete
activity. Each activity in the value chain incurs costs and ties up time and assets.
Value chain analysis requires managers to assign costs and assets to each activity by
providing a very different way of viewing costs.
3. Identify the Activities that Differentiate the Firm: Simply a firms value chain may
not only reveal cost advantages or disadvantages, but it may also bring attention to
several sources of differentiation advantage relative to competitors.
4. Examine the Value Chain: Once, the value chain has been documented, managers
need to identify the activities that are critical to buyer satisfaction and market
success. It is those activities that deserve major attention in an internal analysis.

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Unit 6
STRATEGIC OPTIONS
Strategic options refer to strategic alternatives. They are the basis for making the choice of a
strategy. The source of strategic options is SWOT analysis. This analysis identifies future
opportunities of strategic advantage and matches them with the resources. Strength of such
matching generates strategic options.
Strategic options are identified at corporate level, business level and functional level. The
role of the chief executive officer and sub level managers is important in generating and
analyzing strategic options. Strategic options help to identify the direction and method for
strategy development.
There are two types of strategic options. They are as follows:
a.
Generic Strategies:
A generic strategy is a core idea about how a firm can best compete in the marketplace. It
is also known as long term strategy. They are dependent on corporate strategy and are prerequisites for the long term development. Generic strategies are basic competitive
strategic options or strategic alternatives. They are the managements game plan for
competing successfully and achieving a competitive edge over the rivals in the market by
providing superior value to the customers.
Generic strategies help companies plan to achieve the foremost position in the market
place, to please customers and win their favor, to improve their competitive strength and
establish the competitive advantage over their rivals. These strategies aim at:
1. Attracting customer and satisfying their needs.
2. Withstanding competitive pressure and
3. Strengthening market position by increasing market value
There are five generic competitive strategies advocated by Michael Porter, to gain
competitive advantage. They are based on cost, differentiation and focus (market niche).
They are as follows:
1.
2.
3.
4.
Low cost provider strategy

Broad differentiation strategy
Best cost provider strategy
Focused (market niche) strategy
i.
Focused Low cost strategy
ii.
Focused differentiation strategy

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1. Low Cost Provider Strategy: Low cost leadership strategy focuses on cost. It
aims at achieving lower overall costs than the competitors. Firms strive for overall
low cost leadership in the industry by reducing the costs.
A company achieves low cost leadership when it becomes the industrys lowest cost
provider. A low cost leaders basis for competitive advantage is lower overall costs
than the rivals. Successful low cost providers are exceptionally good at finding ways
to drive costs out of their business.
A low cost leader is able to use its cost advantages to enjoy higher profit margins by
charging lower prices. By doing so, the firm effectively can defend itself in price wars,
attack competitors on price to gain market share & to be dominant in the industry.
In striving for a cost advantage over rivals, managers must take care to include
features and services that the buyer consider essential.
For maximum effectiveness, companies employing this strategy need to achieve
their cost advantage in such a way that the strategies are difficult for rivals to copy
or match. This strategy appeals to a broad segment of price sensitive buyers and
offer standardized products.
A company has two options for translating a low cost advantage over rivals into
attractive profit performance. They are:
a. Use the lower cost edge to under prize the competitors and attract sensitive
buyers in large numbers to increase total profit.
b. Maintain the product price and present market share.
The two major ways for reducing cost and achieving cost advantage are as follows:
i. Controlling cost drivers
ii. Revamp (Restore) value chain
i.
Controlling Cost Drivers:
The cost can be reduced by controlling the factors that drive the roots of value chain
activities. There are 9 major cost drivers that determine a companys costs in each activity
segment of the value chain. They are as follows:
Economies of Scale:
The costs of a particular value chain activity are often subjected to economies
diseconomies of scale. Costs can be driven down by gaining economies of scale. It arises

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whenever the activities can be performed more cheaply at large volumes than smaller
volumes. Fixed costs are spread out over greater volume.
Learning Curve Effect
Learning and experience helps in reducing the cost of performing activities. As the
experience and knowledge of company personnels builds, the cost of performing
activity declines overtime.
Cost of Acquiring Key Resources:
The cost of acquiring key resources input is also a big driver of cost. Input costs on the
following factors can be reduced:
a. Union vs. Non-Union Labor: Avoiding the use of union and non-union labour
helps to keep labor inputs cost low.
b. Bargaining Power with Suppliers: Having strong bargaining power with suppliers
(of key resources) in purchasing large volumes can reduce the cost.
c. Location Variables: Input cost is also a function of location variables. Costs can
be reduced by relocating plants, field offices, warehouses or headquarters
operations. It can reduce the wages, tax rates, energy costs, inbound and
outbound shipping and freight costs etc.
d. Supply Chain Management Expertise: Having more efficient supply chain
expertise than rivals helps in reducing the costs.
Links with other activity in the company or industry value chain:

The cost of one activity can be affected by how other activities are performed in the
company value chain. So costs can be reduced by performing the linked activities in cooperative and co-ordinate ways.
Sharing opportunities with other organization or business units within the enterprise:
Costs can also be reduced by sharing of resources across units within a firm. Different
product lines or business units within the firm can often share the same order
processing and customer billing system, common sales force, common warehouse and
distribution facilities etc.
Vertical Integration and outsourcing:
Vertical integration, forward or backward integration helps in costs saving. It allows a
firm to bypass suppliers or buyers with considerable bargaining power. It is also cheaper
to outsource or hire outside specialists to perform certain functions and activities.

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First Mover Advantage:

Being first mover in introducing a new product can help to establish and maintain brand
name at a lower cost than the late arrivals. EBay, Yahoo, Amazon.com are some of the
first mover companies.
Percentage of Capacity Utilization:
Capacity utilization is a big cost driver in value chain associated with fixed cost. Higher
rate of capacity utilization allows depreciation and fixed cost to be spread over larger
units and thereby reduces the cost.
Strategic Choice and Operation Decision:
Proper strategic choice and operation decision can also help in reducing the cost.
ii.
Revamp Value Chain:
Costs can be driven down by eliminating cost producing value chain activities. It includes
following ways:
a.
b.
c.
d.
e.
f.
g.
Making Greater Use of Internal Technology Applications

Direct Marketing Approaches
Simplifying Product Design
Stripping Away the Extras
By-passing the Use of High Cost Materials
Re-allocating Facilities
Shifting to a Simpler, Capital Intensive or Flexible Technological Process
CONDITIONS FOR THE SUCCESS OF LOW COST STRATEGY:

A. Vigorous Price Competition
Low cost strategy works best in the condition when the price competition among the
rival seller is especially high and uses the appeal of lower price to grab sales.
B. Identical Product and Sufficient Supplies:
When the products of rival seller are essentially identical and supplies are readily
available from any of several eager suppliers, the strategy works best.

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C. Product Differentiation and Price Sensitiveness:

When the product differentiation do not value much to buyers, and buyers are always
very sensitive to price differences and prefer to buy in best price, in such conditions low
cost strategy works best.
D. Low Switching Cost:
Firms use this strategy when buyers incur low costs in switching their purchases from
one seller to another. Low switching cost gives the flexibility to shift purchases to lower
priced seller, who sells equally good products in lower price. A low cost leader uses this
strategy so that the customers wont switch to rival brands or substitutes.
E. Most Buyers Use the Products in the Same Way:
With common uses requirements, a standardized product can satisfy the needs of
buyers, in which case lower selling price becomes the dominant factor in causing buyers
to choose one sellers product over anothers.
F. Bargaining Power of Buyers:
This strategy is attractive when there are large numbers of buyers and has strong
bargaining power to lower the price of the product.
G. Industry New Comers use Introductory Low Prices:
The low cost leader uses this strategy when any industry new rival comes with
introductory low prices to win customers. This also acts as a barrier for new entrants.
PITFALLS OF LOW COST LEADERSHIP STRATEGY:

a. Aggressive price cutting can lead to lower profitability. So, the prices must be cut by
less than the size of the cost advantage.
b. Becoming too fixed only on cost reduction by ignoring the product features may lead
to lose the market ground if buyers start searching for more upscale products.
c. The ultimate focus on cost and ignorance of other product features may lead to
loose of market share.
d. When the firm doesnt emphasize on the ways of keeping cost advantage, then the
strategy can be disadvantageous.
e. Cost advantage may not be sustainable if rivals can copy low cost strategy.
f. It is riskier if suppliers are prone to increase the cost of inputs.
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2. Broad Differentiation Strategy: Broad differentiation strategy aims to establish

uniqueness of brand relative to competing brands in the perception of customers.
Companies opt for differentiation strategy to make their product different from
competitors products. It incorporates differentiating product features that are
valued by customers.
The essence of a broad differentiation strategy is to be unique in ways that are
valuable to a wide range of customers. This strategy is attractive whenever buyers
needs and preferences are to be fully satisfied by a standard product or by seller
with identical capabilities. This strategy focuses on differentiating product features
than the cost. Customers are lesser price sensitive and are willing to pay higher
prices.
A company attempting to succeed through differentiation must understand buyers
needs and behaviors. This helps in incorporating buyers desired attributes into its
product or service offering that will clearly set it apart from rivals. Firm attempts to
build customers loyalty by stressing their product attribute above other product
qualities. Such loyalty translates into a firms ability to charge a premium price for its
products.
DIFFERENTIATIING ATTRIBUTES/DRIVERS:
a)
b)
c)
d)
e)
f)
Supply Chain Activities

Product Research & Development Activities
Technology Related Activities
Manufacturing Activities
Outbound Logistics & Distribution Activities
Marketing, Sales & Customer Service Industries
Approaches to achieve a differentiation based competitive advantage are as

follows:
a) 1st approach is to incorporate product attributes & use features that lower the
buyers overall costs of using companys product.
b) 2nd approach is to incorporate features that raise product performance.
c) 3rd approach is to incorporate feature that enhance buyers satisfaction in noneconomic or intangible ways.
d) 4th approach is to differentiate on the basis of capabilities to deliver value to
customers via competitive capabilities that rivals dont have or cannot afford to
match.
Broad Differentiation Strategy Works Best:

a) Many ways to differentiate
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b) Diverse buyers needs and use

c) Few rivals are following similar differentiation approach
d) Buyers are less sensitive to price
Successful Differentiation Allows a Firm to:

a) Command a premium price for its product
b) Increase sales units
c) Gain buyers loyalty to its brand because some buyers are strongly attached to the
differentiating feature of the product
Companies Can Pursue Differentiation From Following Angles:

a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
A unique taste
Unique product parameters ; size, shape, design & quality
Multiple Feature
Wide selection of one stop shopping
Superior service
Engineering design & performance
Prestige & distinctiveness
Product reliability
Quality manufacture
Technological leadership
Full range of service
Managers require keen understanding of the sources of differentiation & the activities
that drive uniqueness to devise a sound differentiation strategy. Easy to copy
differentiating feature cannot produce sustainable competitive advantage. This strategy
must be linked to core competencies, unique capabilities & superior management of
value chain activities that competitors cannot readily watch. Differentiation is not
created in marketing & advertising department. But it exists in activities all along a
companys value chain.
Q. When does broad differentiation strategy work best?
Broad differentiation strategy works best in the following conditions:
a) Buyers needs & uses of the product are diverse: When the buyer needs are
diversified then it offers a bigger window of opportunity for the firm. For instance,
the diversity of consumer preferences for menu selection, pricing & customer
services gives restaurants exceptionally wide opportunity in creating a differential
product offering.

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b) Many ways to differentiate: It works best when there are many ways to
differentiate the product or service & many buyers perceive these differentiations
as having value.
c) Few rivals are following similar differentiation approach: There is less competition
when differentiating rivals go separate ways in pursuing uniqueness & try to appeal
buyers on different combination of attributes.
d) Fast technological change: When there is fast technological change & competition is
centered on rapidly evolving product feature, the strategy works best.
e) Buyers are less sensitive to price: Differentiation strategy works best in the situation
when the buyers are willing to pay higher price for differentiated product, since they
emphasize more on product feature.
PITFALLS OF BROAD DIFFERENTIATION STRATEGY:

a. Differentiation strategy will not produce meaningful competitive advantage if
buyers dont value the brands uniqueness.
b. Companys differentiation strategy fails when its competitors are able to copy
the strategy easily.
c. Strategy fails to work if the company differentiates on wrong features without
any consideration to customers needs.
d. It will be disadvantageous if company tries to charge price premium & customers
may switch to other products.
3. Best-Cost Provider Strategy: Best cost provider strategy is a hybrid strategy

balancing a strategic emphasis on low cost with product differentiation. The target
market is value conscious buyers who prefer product differentiation as well. It strives
to have the lowest cost with good quality relative to rival.
Best cost provider strategies aim at giving customers more value for the money. The
objective is to deliver superior value to buyers by satisfying their expectations on key
quality/service/feature/performance attributes at low cost. A company achieves
best cost status from its ability to incorporate attractive attributes at a lower cost
than that of the rivals. Best cost provider has resources & competencies to offer the
product at a lower cost with attractive features than its rivals. Hence, it aims at
providing better product at low cost.

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Best cost provider strategies pursue a low cost advantage & a differentiation
advantage & between appealing to the broad market as a whole & a narrow market
niche. The competitive advantage of best cost provider is lower costs than rivals in
incorporating good-to-excellent attributes, putting the company in a position to
under price rivals whose products have similar appealing attributes.
A best-cost provider strategy can be quite powerful in markets where buyers prefer
product differentiation & are also sensitive to price &value. But unless a company
has the resources, technical know-how, & capabilities to incorporate upscale product
or service attributes at a lower cost than rivals, this strategy is ill-advised. The bestcost provider strategy is suitable when the consumers are both price & brand
sensitive.
PITFALLS OF BEST-COST PROVIDER STRATEGY

Firms using best cost provider strategy will get squeezed between the strategies of firm
using low cost and differentiation strategies. Low cost leader may attract the customers
with an appeal of a lower price & high-end differentiation may be able to steal customers
away with the appeal of better attributes of product.
So to be successful, a best cost provider must offer buyers significantly better product
attributes in order to justify a price above what low cost leaders are charging. Likewise, it
has to achieve significantly lower costs in providing upscale features so that it can outplace
high end differentiations on the basis of an attractive lower price.
4. Focused (Market Niche) Strategies: What sets focused strategies apart from low
cost leadership or broad differentiation strategies is that it is concentrated on a
narrow piece of the total market. It focuses on a well defined market niche, including
small number of buyers. This strategy attempts to attend to the need of a particular
market segment. The niche or target market can be defined on the basis of
geographic uniqueness, special product attributes, and specialized requirement or by
demographic features.
A firm pursuing focused strategies is willing to service isolated geographic areas &
satisfy the demands needs of the small to medium sized customers. Microbreweries,
local bakeries & retail boutique are the examples of enterprises that serve narrow or
local customer segments.
Focused strategy is categorized into two types. They are as follows:
I.
Focused Low-Cost Strategy

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II.
Focused Differentiation Strategy
I.
Focused Low-Cost Strategy: A focused low cost strategy aims at securing
competitive advantage by serving buyer in the target market niche at a lower cost & lower
price than rival competitors. Firms sought for cost advantage by limiting its customer to a
well defined buyer segment. The avenues to achieving a cost advantage over rivals are the
same as for low-cost leadership. The only difference is that the firms employing this strategy
focus on market niche. They also control the factors that drive costs & revamp the firms
value chain that yield cost advantage over rivals.
Firms can achieve low costs in product development, marketing, distribution & advertising
activities. This strategy works best when there is tough competition & focuses basically on
the retail market.
ii.
Focused Differentiation Strategy: A focused differentiation strategy aims at securing
a competitive advantage by offering niche members a product with differentiated attributes
& to satisfy their unique taste & preferences. Firms use this strategy when most market
contains a buyer segment willing to pay a good price premium for the very finest product
available. Hence this strategy targets upscale buyers.
Successful use of a focused differentiation strategy depends on the existence of buyer
segment that is looking for special product attributes or seller capabilities. It also depends
on the firms ability to stand apart from rivals competing in the same market niche.
When the market niche members are quality & value sensitive, then this strategy can be
employed to gain competitive advantage over the rivals. Rolex Company has also employed
successful differentiation based on focused strategies targeted at upscale buyers wanting
products & services with world-class attributes.
WHEN DOES A FOCUSED LOW-COST or FOCUSED DIFFERENTIATION STRATEGY WORKS

BEST OR IS ATTRACTIVE?
A focused strategy aimed at securing a competitive edge based either on low cost or
differentiation becomes increasingly attractive when:
a) The target market niche is big enough to be profitable & offer good growth
potentials.
b) Major competitors do not see the presence of niche as crucial to their own success.

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c) The customers are based in terms of unique tastes & preferences & specialized
requirements.
d) The industry has many different niches & segments that can be suited to the
resources & competencies of the focuses.
e) The customers are willing to pay higher price or are upscale buyers.
ADVANTAGES:
i.
ii.
iii.
iv.
It is protected from competitors.

There is strong loyalty on customers.
It serves as a barrier to new entrants.
Distinctive competencies are developed & specialization is achieved.
PITFALLS:
i.
ii.
iii.
Competitors may come up with better appealing products.

The needs & preferences of niche customers may shift over time.
Cost tends to be higher.
b.
Grand Strategies:
Grand strategies are master strategies at corporate level (master of business). They provide
basic direction for strategic actions. They are the basis of coordinated & sustained efforts,
directed toward achieving long-term business objectives. Thus, a grand strategy can be
defined as a comprehensive general approach that guides a firms major actions. The
purposes of grand strategies are as follows:
1) To list, describe & discuss the major principal of grand strategies that strategic
managers should consider.
2) To present approaches to the selection of an optimal grand strategy from the
available alternatives.
Major Principals of Grand Strategies are as follows:

1.
2.
3.
4.
5.
6.
7.
Concentration Growth
Market Development
Product Development
Innovation
Horizontal Integration
Vertical Integration
Joint Venture

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8. Concentric Diversification
9. Conglomerate Diversification
10. Retrenchment/Turnaround
11. Divestiture
12. Liquidation
1. Concentration Growth: Concentrated growth is the strategy of the firm that
directs its resources to the profitable growth of a single product, in a single market
with a single dominant technology. This is also called as market penetration or
concentration strategy. It also develops & exploits its expertise in a delimited
competitive arena. It is that grand strategy which focuses on a single product with
growth opportunities, single market & single dominant technology.
The characteristics of concentrated strategy are as follows:
a. the ability to assess market needs
b. knowledge of buyer behavior
c. customer price stability
d. effectiveness of promotion
A firm employing this strategy aims for the growth that result from increased productivity,
better coverage of its actual product-market segmentation & more efficient use of
technology. The high success rates of new products avoid situations that require
undeveloped skills, such as serving new customers & markets, acquiring technology,
building new channels, developing new promotional activities, & facing new competition.
CONDITIONS THAT FAVOUR CONCENTRATED GROWTH:

1. The firms industry is resistant to major technological advancements.
2. The firms targeted markets are not product saturated.
3. The firms product markets sufficiently distinctive to dissuade competitors in
adjacent product markets from trying to invade the firms segment.
4. The firms inputs are stable in price & quality & easily available in the amounts and at
the times needed.
5. The firms enjoying competitive advantages based on efficient production or
distribution channels.
6. The firms market generalists using universal appeals, avoiding the use of special
appeals to particular groups of customers.

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ADVANTAGES OF CONCENTRATION GROWTH STRATEGY:

1) It requires limited additional resources to implement concentration growth. Thus,
this strategy is desirable for a firm with limited funds.
2) It involves limited risk than any other grand strategy.
3) A firm can direct its resources to the profitable product & market by focusing on a
dominant technology.
4) By implementing this strategy, the firm can attempt to capture a large market share
by increasing the usage rates of present customers by attracting the competitors
customers, or by selling to non-users.
a. increasing present customers rate of use through:
Increasing the rate of product obsolescence

increasing the size of purchase
Advertising other uses
Giving price incentives for increased use

b. attracting non-users to buy the products by :
- Inducing trial use through sampling, price incentives, and etc.

- Pricing up or down
- Advertising new users
c. Attracting competitors customers by:
- Establishing sharper brand differentiation

- Increasing promotional effort
- Initiating price cuts
PITFALLS OF CONCENTRATION GROWTH STRATEGY:

1) In a changing environment a firm committed to concentrated growth faces high risk.
2) A firm adopting concentration growth is far behind than competitors at detecting
new trends in environment and industry.
3) Failure of concentrating firm to properly forecast major changes in its industry can
result in extraordinary losses.
4) A firm pursuing a concentrated growth strategy is vulnerable to incur high
opportunity cost that results from remaining in a specific product market & ignoring
other options that could employ the firms resources more profitably.
2. Market Development: Market development is the least costly & least risky of all
principal of grand strategies. It consists of marketing present products, often with
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only cosmetic modification to customers in related market areas by adding channels

of distribution or by changing the content of advertising or promotion.
Market development approaches are as follows:
Opening Additional Geographic Markets:
a. Regional Expansion
b. National Expansion
c. International Expansion
Attracting Other Market Segments
a. Developing Product Versions to Appeal to Other Segments
b. Entering Other Channels of Distribution
c. Advertising in Other Media
3. Product Development: Product development involves the substantial modification

of existing products or the creation of new but related products that can be
marketed to current customers through established channels. The product
development strategy is adopted either to prolong the life cycle of current product
or to take advantage of a favorite reputation or brand name. Its main aim is to satisfy
customers to new products, for example (a).New edition of a college book, (b). A
new car style, (c). A new formula of shampoo for oily hair etc.
Thus product development means improving present products or developing new
products for present market.
Options for product development are as follows:
Developing New Product Features
a.
b.
c.
d.
e.
f.
g.
h.
adapt (to other ideas, development)

modify (change color, motion, sound, odor, form, shape)
magnify (stronger, longer, thicker, extra value)
substitute (other ingredients, process, power)
minify (smaller, shorter, lighter)
rearranges (other patterns, layout, sequence, components)
reverses (inside out)
combines (blend, alloy, appeals, and ideas)
Developing Quality Variations
Developing Additional Models & Sizes (Product Proliferation)
4. Innovation: Innovation is the periodic changes & improvements in the products

offered by both consumers & industrial markets. A firm seeks to reap the initially
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high profits associated with customer acceptance of a new or greatly improved

product. Innovation is a search for other original or novel ideas. Rationales of
innovation are (a) to create a new product life cycle and (b) to make similar existing
products obsolete.
Thus, this strategy differs from the product development strategy of extending an
existing products life cycle. Few innovative ideas prove profitable because the
research, development & pre-marketing costs of converting a promising idea into a
profitable product are extremely high. Most growth oriented-firms appreciate the
need to be innovative occasionally; a few firms use it as their fundament way of
relating to their markets.
For example- Intel, a leader in the semi conductor industry, pursues expansion
through a strategic emphasis on innovation. Its Pentium microprocessor gives a
desktop computer the capability of a mainframe.
5. Horizontal Integration: The acquisition of similar firms to provide access to new

markets & to eliminate competition is called horizontal integration. It is the
integration into activities which are competitive or complementary with present
activities.
Textile Producer
Textile Producer
Shirt Manufacturer
Shirt Manufacturer
Clothing Store
Clothing Store
Thus, horizontal integration refers to the growth through the acquisition of one or
more similar firms operating at the same stage of the production-marketing chain. It
is one of the forms of related diversification.
ADVATAGES:
1)
2)
3)
4)
Helps in achieving greater market share.

Improves economies of scale
Increases the efficiency of capital use
There is moderate level of risk.
6. Vertical Integration: It is the acquisition of the firms that supply the acquired firm
with inputs or new customers for its output. In other words, firms that supplies it
with inputs (such as raw materials) or customers for its outputs is known as vertical
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integration. For example, if a shirt manufacturer acquires a textile producer by

purchasing its common stock, buying its assets, or exchanging ownership interests,
then this integration is called vertical integration.
Thus, vertical integration is backward and forward integration. It is backward vertical
integration when a firm operates at an earlier stage of the production-marketing
process. It is forward vertical integration when a firm is merged with a nearer firm
that is to ultimate consumer.
Textile Producer
Backward Integration
Shirt
Manufacturer
Forward Integration
Clothing Store
The figure above explains that the organization produces its own inputs through backward
integration. It distributes its outputs through forward integration. For example: McDonald
grows its potatoes & owns restaurants.
ADVANTAGES OF VERTICAL INTEGRATION

1)
2)
3)
4)
5)
Backward & forward integration enhances & lead to greater competitiveness.

It separates the role of intermediaries & suppliers.
It provides better access to end users & better market visibility.
It controls cost.
It improves profit margin.
DISADVATAGES OF VERTICAL INTEGRATION:

1)
2)
3)
4)
5)
6)
It offers less flexibility & outer access

It poses all kinds of capacity matching problems.
It often calls for radical changes in skills & business capabilities
Increases risk through added capital investment, locking up of resources etc.
Over dependence on in-house supply
Monopoly laws may be violated

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7. Joint Venture: A joint venture is a separate entity that involves a partnership

between two or more active participants. If two or more companies form a new
venture then it is called joint venture. Business organization like industry & public
sector companies often go under joint venture. For e.g., Toyota and Hero Honda.
Firms created & operated for the benefits of co-owners is joint venture. It is a cooperative arrangement involving equity investment. Joint ventures often limit the
discretion, control & profit potential of partners, while demanding managerial
attention & other resources that might be directed towards the firms mainstream
activities. It extends the supplier-consumer relationship & has strategic advantages
for both partners. This is a most used strategy for a company to enter into any
foreign country. For example, in Nepal there are many banks operating under
technical agreements with foreign banks as joint ventures.
ADVANTAGES:
1)
2)
3)
4)
5)
6)
Shared fixed cost

Achieves economies of scale
Share of risk o failure
Greater access to market
Joint resources & research & development
Easy to introduce new products
8. Concentric Diversification: Diversification is a corporate level strategy. It takes the

organization away from its existing markets & products. It exploits core
competencies in business.
Concentric diversification is the acquisition of firms that are related in terms of
technology, markets or products to achieve synergy for the acquiring firm. It is the
counterbalancing of strength & weakness between two businesses.
The various approaches of concentric diversification are as follows:
1) Increase the firms stock value
2) Increase the growth rate of the firm
3) Balance or fill out the product line
4) Achieve tax saving by purchasing a firm whose tax losses will offset current or
future earnings.
5) Make an investment that represent better use of funds than plowing them
into internal growth.
6) Diversify the product line when the life cycle of current products has peaked.
7) Increase efficiency & profitability, especially if there is synergy between the
acquiring firm & the acquired firm.

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It involves the acquisition of businesses that are related to the acquiring firm in terms of
technology, markets or products. The selected new business possesses a high degree of
compatibility with the firms current businesses.
9. Conglomerate Diversification: Acquisition of firm representing most promising

investment opportunity is known as conglomerate diversification. It gives little
concern to creating product-market synergy with existing businesses. It refers to a
complete change of direction on the part of the firms, a move from the known to
the unknown product & market. It is also known as unrelated diversification.
There are three types of conglomerate diversification:
a. Exploiting: By exploiting competencies a firm can diversify its business activities
with new products & in new markets. Conglomerates are good examples of
diversification strategy which are required & managed using the parent companys
formula.
b. Creation: With such strategy the firm creates a genuinely new market for its new
products or services using its existing competencies.
c. New Competencies: With such strategy new competencies are to be developed to
take new market opportunities.
10. Retrenchment/Turnaround: Regrouping through cost & asset reduction to reverse
declining sales or unit is known as retrenchment.
Two firms of retrenchment are as follows:
1) Cost-Reduction: Examples include decreasing the work-force through
employee attrition, leasing rather than purchasing equipment, extending the
life of machinery, eliminating elaborative promotional activities, laying-off
employees, dropping items from a production line and discontinuing lowmargin customers.
2) Assets Reduction: Examples include the sale of land, buildings & equipments
not essential to the basic activity of the firm & the elimination of the perks
such as company airlines & executive cars.
The primary objective of the retrenchment phase is to stabilize the firms financial
condition. Situation severity has been associated with retrenchment responses among
successful turnaround firm. It is the closeness of the resulting threat to companys survival
posed by the turnaround situation. It is the growing factor in estimating the speed with
which the retrenchment response will be formulated and activated. Retrenchment strategy
is hard to pursue and it implies failure.

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When a turnaround situation severity is high, a firm must immediately stabilize the decline
or bankruptcy. Cost reduction must be supplemented with more drastic assets reduction
measures.
11. Divestiture: A divestiture strategy involves the sale of a firm or major components
of a firm. For example, Sara Lee Corp (SLE) provides a good example which sells
everything from clothing & Kiwi shoe polish to Endust furniture polish & clock full
ONeets coffee.
Thus, a divestiture is a sale of a major division or part of a firm. The reason for
divestiture vary firstly because they often arise a partial mismatches between the
acquired firm & the parent corporation, secondly the cash flow of financial stability
of the corporation as a whole can be greatly improved if businesses with high market
value can be sacrificed, thirdly less frequent reason for divestiture is government
antitrust action when a firm is believed to monopolize or unfairly dominate a
particular market. The firms that pursued this type of grand strategy includeEsmark, which divested swift & company, White Motors which divested white farm.
12. Liquidation: Liquidation is a grand strategy that involves the sale of the assets of
the business for their salvage value. The firm typically is sold in parts, only
occasionally as whole but for its tangible asset value and not as a going concern is
liquidation. The owners and strategic managers of a firm are admitting failure and
recognize that this action is likely to result in great hardships to themselves and their
employees.
As a long term strategy, it minimizes the losses of all the firms stockholders. Thus,
planned liquidation is worthless.
For example- Columbia Corporation, a $130 million diversified firm, liquidated its
assets for more cash per share than the market value of its stock.

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Difference between Differentiations vs. Cost Leadership Strategy (PU 2010 fall)
Cost Leadership Strategy

Aim
This strategy aims to achieve low costs
relative to competitors.
Assumption
This strategy assumes that consumers are
more prices sensitive.
Focus
Its primary focus is cost minimization.
Differentiation Strategy
It aims to establish uniqueness of a brand
relative to competing brands.
It assumes that consumers are brand
sensitive rather than prices.
Its focus is product differentiation in terms
of image, quality, promotion, services etc.
Consideration
it doesnt considers the consumer needs & It considers the needs & behavior of the
customers.
behavior or give lower priority.
Objective
Its major objective is to grab maximum Its objective is to attain higher profit
through customer satisfaction & brand
profit margin by charging lower price.
loyalty.
Customer Loyalty
It helps to build & maintain customer
It doesnt aid to build customers loyalty.
loyalty through better products & services.
Stability
This strategy is suitable when there is This strategy best works when the
consumers have diverse needs & uses,
higher price competition, consumer are
there is fast technological change & buyers
price sensitive & have higher bargaining are fewer prices sensitive.
power.
Outcome/Result
This strategy fails to produce desirable This strategy may fail when the buyer
doesnt value the brand uniqueness or
result when rivals can copy low cost
company differentiates on wrong features
strategy & supplier increases their price of without regard to customers need.
inputs.

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Difference between Horizontal & Vertical Integration

Definition
It is the acquisition of one or more similar firms
which are at the same stage of the productionmarketing chain.
Aim
It aims to provide access to the new market &
eliminate competition.
Source of Supply
A firm adopting this integration obtains its
inputs from established suppliers.
Distribution
A firm using this strategy uses marketing
intermediaries for the distribution of goods &
services.
Suitability
This strategy is suitable when firms are
incurring losses & have insufficient resources.
It is the acquisition of firms that supply the
acquiring firms with inputs or new customers
for its outputs.
It aims to control cost & improve the profit
margin through expanded productionmarketing system.
A firm adopting this integration has its own
source firm to supply inputs.
A firm using this strategy has own established
distribution channels to distribute outputs.
This strategy is suitable when the number of

suppliers is small & the number of competitors
is large in the market.
Flexibility
It is less flexible.
It is more flexible.
Source of Risk
Horizontally integrated firms have the risk from Vertically integrated firms face the risks from
increased commitment to one type of business. the firms expansion into several areas which
require strategic managers to assume
additional responsibilities & competencies
Example
Nikes acquisition in the dress & shoes McDonald grows its potatoes & own
restaurants.
business.
Figure
Textile producer
Textile Producer
Shirt
Manufacturer
Shirt
Manufacturer
Textile Producer
Backward Integration
Shirt Manufacturer
Forward Integration
Clothing Store
Clothing Store

Clothing Store
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Difference between Product Development & Innovation

Product Development
Definition
It is the strategy that involves either
modification of existing product or the
creation of new related product that can be
marketed to current market.
Area of Concern
It is concerned with extending an existing
products life cycle.
Objective
Its major objective is to satisfy customers
through new products.
R&D Expenses
It makes low research & development
expenses.
Level of Risk
The risk of failure is high.
Cost
The overall cost of this strategy is very high.
Growth Potential
The potential foe exceptional growth is
low.
Example
For instance, Pepsis new product
includes a version of Mountain Dew,
7-up etc.
Revised edition of a college text
book.

Innovation
It is the periodic changes & improvement in
the products offered by both consumers &
industrial market.
It is concerned with the creation of a new

product life cycle.
Its major objective is to search noble or
original ideas regarding products that may
prove profitable.
It makes high research & development
expenses.
The risk of failure is comparatively low.
The overall cost of this strategy is low.
The potential for exceptional growth is
comparatively high.
For instance, Intel a leader in the
semiconductor industry pursues
expansion through a strategic
emphasis on innovation.
Launch of new models of cell phones
by Samsung.
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Difference between Concentric & Conglomerate Diversification

Concentric Diversification
Conglomerate Diversification
Definition
It is the acquisition of firms that are related It is the acquisition of firms which
in terms of technology, market or product. represents most promising investment
opportunity.
Other Name
It is also known as the related It is also known as unrelated diversification.
diversification.
Emphasis
It gives higher emphasis to build product- It gives little concern to creation of
market synergy.
product-market synergy with existing
business.
Basis/Based On
It is based on commonality in markets, It is principally based on profit
products or technology.
considerations.
Level of Diversification
Business risks are not well diversified Under this strategy, financial & business
through this strategy because its product, risks are well diversified because its
investment are spread & market,
market & technology are highly related.
technology & value chain activities are
highly disconnected.
Competitive Advantage
It offers competitive advantage to each It offers no potential for competitive
advantage beyond what each individual
individual business.
business can generate on its own.
Cross Business Strategies
There are cross-business strategies fits for There are no any cross-business strategy
reducing costs, transferring skills & fits in this diversification.
technology & leveraging the use of a
powerful brand name.
Managing
It has the difficulties of competently
It is comparatively easy to manage.
managing many different businesses.
Level of Risk
The risk of failure is high.
The risk of failure is low.
Example
Chaudhary Group, Reliance Company etc.
Johnson & Johnson
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Unit 7
STRATEGIC ANALYSIS & CHOICE
CONCEPT OF STRATEGIC ANALYSIS/EVALUATION
Strategic analysis & choice is the continuous phase of the strategic management process by
which the strategic managers examine & choose a business strategy that aids to create &
maintain sustainable competitive advantage for their business. The major objective of
strategic analysis is to evaluate & determine which competitive advantage provides the
basis for distinguishing the firm in the mind of the customers from other reasonable
alternatives.
Review
Assumptions
Measure
Performance
Adjust Strategy
Fig. Process of Strategy Evaluation & Control
Factors needed to be considered while choosing the strategy
[Why strategists need to analyze different alternatives? (P.U. 2010 fall)]

The following factors are needed to be critically evaluated while choosing different
strategies:
1) Suitability: The strategy should be suitable to the environmental circumstances of
the organization. It should fit with the future trends & changes to the environment.
It should be suitable to exploit opportunities, minimize threats, capitalize strengths,
eliminate weakness & address stakeholders expectations.
2) Acceptability: The strategy should be acceptable in terms of risk, return and
stakeholders expectations. It is concerned with the expected performance outcome
of strategic options.
3) Feasibility: The option should be feasible in terms of resources and competencies of
the organization. It determines an option implement ability & workability in practice.
4) Consistency: The strategy should have the consistent objectives. It must avoid
conflict & sub-optimization.
5) Differentiation: Those strategies are suitable which offer differentiation in terms of

promotion, product quality, image, customer service, delivery & distribution.

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6) Competitive Advantage: A strategy must provide competitive advantage. It results

from superiority in resources, skills or position. Skill or position can provide
positional advantage. The nature of positional advantage in relation to competitors
should be examined for evaluating a strategy.
7) Resource Capabilities: The strategy should be evaluated in terms of resources

availability & capability that truly differentiates from the competitors & lower costs.
8) Value Chain Activities: The challenge for todays business managers is to evaluate
& choose business strategies based on core competencies & value chain activities
that sustain competitive advantage.
9) Consonance: It refers to sets of trends or individual trend that needs examination

to evaluate strategy. The strategy should be adaptive to critical changes in the
external as well as internal environment.
Process of Strategy Formulation/Analysis Choice & Selection (P.U. 2006, 2006 Fall)
A strategy is a broad game plan to achieve objectives. It provides the direction & scope to
the organization over the long term.
The process of strategy formulation consists of the following steps:
Review Strategic
Elements
External
Analysis
Conduct SWOT
Analysis
Internal
Analysis
Identify Strategic
Options
Evaluate strategic
Options
Make Strategic Choice
Corporate Level
Strategy
SBU Level
Strategy

Functional Level
Strategy
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1) Review Strategic Elements: A strategy formulation process always begins with a

review of strategic elements. They are vision, mission, objectives and strategies.
2) Conduct SWOT Analysis: It is done to analyze the external & the internal
environment. The external environment consists of PEST forces. It provides
opportunity and threats to the organization whereas internal environment consists
of resources & competencies of the organization. Internal environment defines
strength and weakness. Strategic Advantage Profile (SAP) is prepared from the
analysis of internal environment and Environment Threat & Opportunity Profile
(ETOP) is prepared from the analysis of external environment.
Strategies should be based on opportunities of competitive advantage & internal
strengths. The strategies must make fit between internal resources and
competencies.
3) Identify Strategic Options: Strategic options are strategic alternatives. They are
carefully identified & reviewed. It includes strategies, directions & methods.
Strategies: Grand strategies, Market Oriented Strategies
Directions: Product Development, Market Development Diversification
Methods: Internal Dev., Mergers & Acquisition, Joint Venture, Strategic Alliance
4) Evaluate Strategic Options: Strategic evaluation provides early warning about the
performance of the strategy. It is long-term oriented & focus on external
environment. It is conducted by top management.
The evaluation of strategic options is based on suitability, acceptability, feasibility.
The evaluated strategic options are ranked in terms of their potential strategic
advantage for objective achievement.
5. Make Strategic Choice: One or more best strategic options are chosen as strategy.
They result in corporate, business & functional strategies.
Strategy Implementation (P.U. 2006 fall)

Strategy is a road map for future direction & scope. Strategy implementation is the process
of translating strategy into action. Strategy formulation is followed by implementation. A
strategy becomes meaningful when it is implemented & working in practice.
Characteristics of Strategy Implementation

1.
2.
3.
4.
5.
Implementation is putting strategy into action.

It is an operational process.
It focuses on both efficiency & effectiveness.
It is a managerial job which requires both managerial skills & leadership.
It requires co-ordination among all business units & functions.

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6. It involves strategic controls.

7. It involves management of change.
Process of Strategy Implementation

The process of strategy implementation involves following steps:
Preparing
Resource Plan
Designing
Structure
Establishing
Management
System
Exercising
Strategic
Control
Fig: Process of Strategy Implementation

1. Designing Structure: Structure is a means to implement strategy. It defines
activities, levels, roles & reporting relationships. It facilitates resource allocation.
Dimension of the structure are:
Job Design
Job Grouping
Relationships
Modern structures reflex external focus, flexible interaction, interdependency &

bottom up approach. Globalization, internet & complexity have greatly affected
structures.
2. Preparing Resource Plans: Resources are important for strategy implementation.
Resource plans are prepared to predetermine future resource needs. They serve as a
framework for mobilizing & allocating resources to activities. Resource plans are
prepared for corporate level, business level & functional level. They identify resource
gap indicated by difference between needed resources & available resources. Action
plans for resources are also prepared.
3. Establishing Management System: A management system is established for the
strategy implementation. A strong management team is put together. Team
members can be from the inside or outside the organization. The management team
should have the mix of skills with potential to develop. The management team
performs the functions like- human resource management, information
management & leadership.
4. Exercising Strategic Control: Strategic control ensures right things in right manner
at the right time. It continually assesses the changes in the environment. It provides
feedback & early warning about the events that affect the course of strategy
implementation.
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Evaluating & Choosing Strategies:

Business managers evaluate & choose strategies to make their business successful.
Businesses become successful because they possess some advantage relative to their
competitors. The two most prominent sources of competitive advantage are as follows:
1) Cost Structure:
For Example Wal-Mart offers retrial customers the lowest prices on popular
consumer items because they have created a low-cost structure resulting in a
competitive advantage over most competitors.
2) Its ability to differentiate the business from competitors:
Disney-World in Orlando offers theme park patrons several unique features that
differentiate it from other entertainment options.
Businesses that create competitive advantage form one or both of the above sources usually
experience above-average profitability within their industry. Business that lacks a cost or
differentiation advantage usually experience average or below-average profitability while
business that possesses both forms of competitive advantage enjoys the highest level of
profitability within their industry.
Thus firms are engaged to become either a differentiation-oriented company or low-cost
oriented company, which are as follows:
1. Value chain activities that can be achieved at cost substantially below what
competitors are able to match on a sustainable basis.
2. .
A. Evaluating Cost Leadership Opportunities:

1) Skills & Resources that Foster Cost Leadership:
Sustained capital investment & access to capital
Process engineering skills
Intense supervision of labour or core technical operations.
Products or services designed for ease of manufacture or delivery
Low-cost distribution system
2) Organizational Requirements to Support & Sustain Cost Leadership Activities:
Tight cost control
Frequent, detailed control reports.
Continuous improvements & benchmarking orientation
Structured organization & responsibilities
Incentive based on meeting strict, usually quantitative targets.

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Advantage of Low-Cost Leadership Opportunity

The advantages of low cost leadership opportunity are as follows:
1. Low-Cost Advantages that Reduce the Likelihood of Pricing Pressure from

Buyers: When key competitors cannot match prices from the low-cost leader,
2.
3.
4.
5.
customers pressuring the leader risk establishing a price level that drives alternate
source out of a business.
Truly sustained low-cost advantages push rivals into other areas, lessening price
competitors.
New entrants competing on price must face an entrenched cost leader without the
experience to replicate every cost advantage.
Low-cost advantage lessens the attractiveness of substitute products.
High margins allow low-cost producers to withstand suppliers cost increment &
often gain suppliers loyalty over time.
Various Risk of Low-Cost Leadership Opportunities:

The risk associated with low-cost leadership opportunities are as follows:
1. Many Cost-Saving Activities are Easily Duplicated:
Computerizing certain order entry functions among hazardous waste companies
gave early adopters lower sales costs & better customer service for a brief time. Thus
rivals quickly adapt, adding similar capabilities with similar impacts on their costs.
2. Exclusive Cost Leadership can Become a Trap: Firms that emphasize lowest price
& can offer it via cost advantages where product differentiation is increasingly not
considered, must truly be convinced of the sustainability of those advantages.
Particularly with commodity-type products, the low-cost leader seeking to sustain a
margin superior to lesser rivals encountering increase in customer pressure for lower
price with great damage to both leader & lesser players.
3. Cost Differences of Decline Over Time: As buyers become more knowledgeable,
competitors learn how to match cost advantages, absolute sales volume sold
declines, market channels & suppliers mature with time.
Once business managers evaluate the cost structure of their value chain, determine
activities that provide competitive advantages and consider their inherent risks, they
then start choosing the business strategy.
B. Evaluating Differentiation Opportunities:

Differentiation requires that the business have sustainable advantages that allow it to
provide buyers with something uniquely valuable to them.
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A successful differentiation strategy allows the business to provide a product or services of

higher perceived value to the buyers at a differentiation cost below the value premium
to the buyers. In other words, the buyer feels the additional cost to buy the product or
services is well below what the product or service is worth compared to other available
alternatives.
Evaluation of a Businesss Differentiation Opportunities:

1. Skills & Resources that Foster Differentiation
Strong marketing abilities

Product engineering
Creative talent & flair
Strong capabilities in basic research
Corporate reputation for quality or technical leadership
Long tradition in an industry or unique combination of skills drawn from other
businesses.
Strong cooperation from channels
Strong cooperation from suppliers of major components of the product or service
2. Organizational Requirements to Support & Sustain Differentiation Activities
Strong coordination among functions in R&D, product development & marketing

Subjective measurement & incentives instead of quantitative measures
Services to attract highly skilled labor, scientists & creative people
Tradition to closeness to key customers
Some personnel skilled in sales & operation- technical & marketing
Opportunities Relative to Key Industry Forces are:

1.
2.
3.
4.
Rivalry is reduced when a business successfully differentiates itself

Buyers are less sensitive to prices for effectively differentiated products
Brand loyalty is hard for new entrants to overcome
Technological changes that nullify past investment or learning
C. Evaluating Speed as a Competitive Advantage

Speed involves the availability of a rapid response to a customer by providing current
products quicker, accelerating new product development or improvement, quickly adjusting
production processes, and making decisions quickly.

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Speed is the driving force that everyone is after faster products; faster product cycles to
market, better response time to customer, satisfying customers, getting faster
communication, moving with more agility, all these characteristics one needs in a fastmoving global environment.
Speed Based Competitive Advantage are Created Under Several Activities:

Faster Customer Responsiveness: All consumers have encountered hassles, delays
and frustration dealing with various businesses from time to time. The same holds
true when dealing business to business. Quick answers, information and solutions
with response can become the basis for competitive advantage and building
customer loyalty quickly.
Lower Product Development Cycle: Japanese car makers have focused intensely
on the time it takes to create a new model because they have experienced
disappointing sales growth in the last decade in Europe and North America while
competing against new vehicles like Fords Explorer and Renaults Megane. Likewise
3M corporation, which is best successful at speedy product development that onefourth of its sales and profits each year is form products that didnt existed 5 years
earlier.
Product or Service Improvements: Companies that can rapidly adapt their
product or services, benefits their customers or create new customers can gain a
major competitive advantage over rivals.
Speed in Delivery or Distribution: Firms that can get us, what we need, and when
we need it, even when that is tomorrow, realize that buyers have come to expect
that level of responsiveness.
Information Sharing & Technology: Speed in sharing information becomes the
basis for decisions, actions, or other important activities taken by a customer,
suppliers, or partner which has become a major source of competitive advantage for
many businesses.
Telecommunication, internet and various other networks are the vast infrastructure
that is being used by knowledgeable managers to rebuild or create value chain in
their business via information sharing.
Key Skills & Organizational Requirements of Speed Opportunities are:

1. Skills & Resources that Foster Speed:
Process engineering skills

Excellent inbound and outbound logistics
Technical people in sales and customer service
High levels of automation
Flexible manufacturing capabilities
Strong downstream partners

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Strong cooperation from superiors of major components of the product

or service
2. Organizational Requirements to Support & Sustain Rapid Response

Activities:
Strong coordination among functions in R&D, product development and
marketing
Major emphasis on customer satisfaction in incentive plan

Strong delegation to operating personnel
Some skilled personnel in sales and operations- marketing & technical
Empowered customer service personnel
D. Evaluating Market Focuses as a Way to Competitive Advantages

Market focus strategies concentrate on a niche of the market, which identifies a market
segment into sub segments dividends. It consists of fairly small groups of customers whose
needs have not been well served. They require special attention. Thus, focused strategies
aim to serve buyers better than the competitors.
Focus allows some business to compete on the basis of low cost, differentiation and rapid
response against much large businesses with greater resources. Focus lets a business learn
its target customers need; special considerations they want to accommodate, and establish
personal relationships in ways that differentiates the smaller firm or make it more valued to
the target customer.
Risks of focused strategies is that competitors may come up with better appealing products.
The needs and preferences of niche customers may shift over time, cost tends to be higher,
and niches can become attractive to competitors.
Benefits of market focus is that, focused strategies are protected form competition, there is
a strong loyalty in customer. It serves as a barrier to new entrants. Distinctive competencies
are developed and specializations are practiced.
INDUSTRY ENVIRONMENT & STRATEGIC CHOICES

There are five typical industry settings and opportunities for generating competitive
advantages. They are described as follow:
a) Competitive Advantage in Emerging Industries: Emerged industries are newly
formed or reformed industries
that are created by technological innovation,
emerging customer needs or other economic or sociological changes.

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For example:- Internet browser, Fiber optics, solar heating, cellular telephone and
on-line service industries.
The essential characteristics of an emerging industry are:
There is no rules of the game because the absence of rules presents both a risk and
an opportunity
Technologies that are mostly proprietary to the pioneering firms and technological
uncertainty about product standardization will unfold.
There is competitor uncertainty because of inadequate information about
characteristics of competitors, buyers and the timing of demand
Free entry barriers, which often spur the formation of many new firms
Inability to obtain raw materials and components until suppliers gear up to meet the
industrys needs.
Need for high-risk capital because of the industrys uncertainty prospects
Business Strategies Require One or More of These Features:

i.
The ability to shape the industrys structure based on the timing of entry, reputation,
success in related industries or technologies and role in industry associations.
ii.
The ability to rapidly improve product quality and performance features.
iii.
Advantageous relationships with key suppliers and promising distributions channels.
iv.
The ability to establish the firms technology as the dominant one before
technological uncertainty decreases.
v.
The early acquisition of a core group of loyal customers and then the expansion of
that customer base through model changes, alternative pricing and advertising.
vi.
The ability to forecast future competitors and the strategies they are likely to
employ.
b) Competitive Advantage in the Transition to Industry Maturity: Transition of

maturity is accomplished by several changes in its competitive environment. As an
industry evolves, its growth rate eventually declines because of various reasons or
changes which are as follows:
Competition for market share becomes more intense as firms in the industry
are forced to achieve sale growth at one anothers expense.
Firms in the industry sell increasingly to experienced repetitive buyers that are
now making choices among known alternatives.

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Competition becomes more oriented to cost and service as knowledgeable

buyers expect similar price and product features
Industry capacity tops out as sales growth ceases to cover up poorly planned
expansions.
New products and new applications are hard to come by
International competition increases as cost pressures lead to overseas
production advantages.
Strategic Elements of Successful Firms in Maturity Industries Include:

Trim the product line by dropping unprofitable product models, sizes and options
form the firms product mix.
Emphasis on process innovation that permits low-cost product design,

manufacturing methods and distribution synergy.
Emphasis on cost reduction by exerting pressure on suppliers for lower prices,

switching to cheaper components, introducing operational efficiencies and lowering
administration and sales overhead.
Careful buyers selection to focus on buyers that are less aggressive, more closely tied
to the firm and able to buy more from the firm.
Horizontal integration to acquire rival firms while weakness can be used to gain a
bargain price and are correctable by the acquiring firm.
International expansion to markets where attractive growth and limited competition

still exist and the opportunity for lower-cost manufacturing can influence both
domestic as well as international market.
Business Strategist in Maturing Industries Must Avoid Several Pitfalls

Firstly, they must make a clear choice among the generic strategies and avoid a middleground approach, which would confuse both knowledgeable buyers and the firms
personnel.
Secondly, they must avoid sacrificing market share too quickly for short-term profit.
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Thirdly, they must avoid waiting too long to respond to price reductions, retaining
unnecessary excess capacity, engaging in irrational efforts to boost sales, and placing their
hopes on new products rather than aggressively selling existing products.
c) Competitive Advantage in Mature and Declining Industries:
Declining
industries are those industries that make products or services for which demand is
growing slower than demand in the economy as a whole or is actually declining.
This slow growth or decline in demand is caused by:

Technological Substitution such as substitution of electronic calculators for
slide rules.
Demographic Shifts such as the increase in the number of older people and
the decrease in the number of children.
Shifts in Customer Needs such as decrease in the needs for red meat.
Firms in a Declining Industry Choose Strategies that Emphasizes One or More of the
Following:
1. Focus on attractive market segments within the industry that offers a chance for
higher growth or higher return.
2. Emphasis on product innovation and quality improvement, where this can be done
with cost effectiveness to differentiate the firm from rivals and to stimulate the
growth.
3. Emphasis on production and distribution efficiency by streamlining production,
closing marginal production facilities and adding effective facilities and outlets.
4. Gradually harvesting the business by generating cash through by cutting down on
maintenance, reducing models and shrinking channels and making no new
investment.
d) Competitive Advantage in Fragmented Industries: A fragmented industry is one

in which no firms has a significant market share and can strongly influence industry
outcomes.
Fragmented industries are found in many areas of the economy and are common in
areas such as professional services, retailing, distribution, wood and metal
fabrication and agricultural products. The funeral industry is an example of a highly
fragmented industry.

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Business Strategists in Fragmented Industries Pursue Low-cost, Differentiation of

Focus Competitive Advantage through One of the Following Five Ways:
1. Tightly Managed Decentralization : Fragmented industries are characterized by the
need for intense local coordination, a local management orientation, high personal service
and local autonomy. However, a successful firm in such industries has introduced a high
degree of professionalism into the operation of local mangers.
2. Formula Facilities: This alternative related to the previous one introduces standardized,
efficient, low-cost facilities at multiple locations. Thus the firm gradually builds a low-cost
advantage over localized competitors. Fast-food and motel chains have applied this
approach with considerable success.
3. Increased Value-Added: The products or services of some fragmented industries are
difficult to differentiate. In this case an effective strategy may be to add value by providing
more service with the sale or by engaging in some product assembly that is of additional
value to the customer.
4. Specialization: Specialization can be pursued by:
Product Type: The firm builds expertise focusing on a narrow range of product or
services.
Customer Type: The firm becomes intimately familiar with and serves the needs of a
narrow customer segment.
Type of Order: The firm handles only certain kinds of orders, such as small orders,
custom orders or quick turnaround orders.
Geographic Area: The firm blankets or concentrates on a single area.
5. Bare Bones/No Frills: With the intense competition and low margins in fragmented
industries, bare bones posture-low overhead minimum wage employees, tight cost control
may build a sustainable cost advantage in such industries.
E) Competitive Advantage in Global Industries: A global industry is one that comprises

firm whose competitive position is major geographic or national markets are fundamentally
affected by their overall global competitive position. To avoid strategic disadvantages, firms
in global industries are virtually required to compete on a worldwide basis. For example: oil,
steel, automobiles, apparel, motorcycles, televisions and computer etc.
Global Industries Have Four Unique Strategy-Shaping features, which are as

follows:
1. Differences in prices and costs from country to country due to currency exchange
fluctuations, differences in wage and inflation rates, and other economic factors.
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2. Differences in buyers need across different countries.

3. Difference in competitors and ways of competing from country to country.
4. Differences in trade rules and government regulations across different countries.
Three Basic Options Used to Pursue Global Market Coverage are:
1. License foreign firms to produce and distribute the firms products.
2. Maintain a domestic production base and export products to foreign markets.
3. Establish foreign-based plants and distribution to compete directly in the markets of
one or more foreign countries. Example; Exporting, Licensing, Franchising etc.
Four Generic Global Competition Strategies are:

1. Broad-Line Global Competition:
Directed at competing worldwide in the full

product line of the industry, often with plants in many countries to achieve
differentiation or an overall low-cost position.
2. Global Focus Strategy:
Targeting a particular segment of the industry for
competition on a world-wide basis.
3. National Focus Strategy: Taking advantage of differences in national markets that
give the firm an edge over global competitors on a nation-by-nation basis.
4. Product Niche Strategy: Seeking out countries in which governmental restraints
exclude or inhibit global competitors or allow concessions or both, that is
advantageous to localized firms.
Competing in global industries is an increasing reality for many U.S. firms. Strategists
must carefully watch their skills and resources with global industry structure and
conditions in selecting the most appropriate strategy option.
The analysis and choice of business strategy involves three basic considerations. Firstly,
strategists must recognize that overall choice revolves around three sources of
competitive advantage that requires total, consistent commitment.
Secondly, Strategists must carefully weight the skills, resources, organizational
requirements and risks associated with each source of competitive advantage.
Thirdly, strategist must consider the unique influence that the generic industry
environment most similar to the firms situation will have on the set of value chain
activities they choose to build competitive advantage.
Evaluating & Choosing to Diversify to Build Value:

Many dominant product businesses face the question as their core business proves
successful:
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What grand strategies are best suited to continue to build value?

Under what circumstances should they choose and expanded focus
(diversification, vertical-integration)?
Steady continued focus (concentration, market or product development)
Narrowed focus (turnaround or divestiture)
Two ways to analyze a dominant product company situation and choose among 12 grand
strategies:-
A. Grand Strategy Selection Matrix

The basic idea underlying the matrix is that two variables are of central concern in the
selection process:
1. The principal purpose of the grand strategy.
2. The choice of an internal and external emphasis for growth or profitability.
Overcome Weakness
Turnaround
Retrenchment
Divestiture
II
Internal
External
Concentrated Growth
III
IV
Market Development
Product Development
Joint Venture
Innovation
Maximize Strength

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Explain the Strategy Selection Matrix based on Internal versus External Growth
with a Desire to Overcome Weaknesses or Maximize Strength. [P.U. 2008 fall]
Most experts agree that strategy is better guided by the condition of the planning period by
the company strength and weaknesses. To maximize the strength and overcome
weaknesses internal versus external growth are the early approach to strategy selection.
Considerations led to the development o the grand strategy selection matrix are as follows:
1. Quadrant I: A firm in quadrant I with all its eggs is one basket often views itself as
over-committed to a particular business with limited growth opportunities or high
risks. The possible solutions are vertical integration and conglomerate diversification.
One reasonable solution is vertical integration, which enables the firm to
reduce risk by reducing uncertainty about inputs or access to customers.
Another reasonable solution is conglomerate diversification, which provides a
profitable investment alternative with diverting management attention from
the original business.
Thus strategic managers considering these approaches must guard against exchanging one
set of weaknesses for another.
2. Quadrant II: Most conservative approaches to overcome weaknesses are shown in

the figure of quadrant II. This approach maintains the firms commitment to its basic
mission, reward success and enables further development of proven competitive
advantages. The approaches are as follows:
Retrenchment: Pruning the current activities of a business. If the weaknesses
of the business arose form inefficiencies , retrenchment can actually serve as
a turnaround strategythat is the business gains new strength from the
streamlining of its business (operations and eliminations of waste)
Divestiture: It offers the best possibility for recouping the firms investment.
Liquidation: It is an attractive option if the alternatives are bankrupt or an
unwarranted drain on the firms resources.
3. Quadrant III: Growth and survival of business depends on the ability to capture a
market share that is large enough for essential economies of scale. The approaches
are:
Concentrated Growth:
The firm that selects this strategy is strongly
committed to its current products and markets. It strives to solidify its
position by reinvesting resources to fortify its strength.

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Market Development: Firm attempts to broaden its operations. Market

development is chosen if the firms strategic managers feel that its existing
products would be well received by new customer groups.
Product Development: Firm chooses this approach if they feel that their
firms existing customers are interested in products related to its current
lines. This approach is based o technological or other competitive
advantages.
Innovation: When a firms strength is in creative product design or unique
production technologies, sales can be stimulated by accelerating perceived
obsolescence. This is the principal underlying the innovative grand strategy.
4. Quadrant IV:
It is concerned with maximizing a firms strengths by aggressively

expanding its base of operations which usually requires an external emphasis. It has
two main approaches which are as follows:
Horizontal Integration: It is attractive because it makes possible for a quick
increase in output capability. The skills of the managers of the original
business often are critical in converting newly acquired facilities into
profitable contributions to the present firm. This expands a fundamental
competitive advantage of the firm in its management.
Concentric Diversification: It is good choice of maximizing a firms strength

because the original and newly acquired businesses are related. The
distinctive competencies of the diversifying firm are likely to facilitate a
smooth, synergistic and profitable expansion.
Joint Venture:
The final alternative choice for increasing resources

capability through external emphasis. This alternative allows a firm to extend
its strengths into competitive areas that it would be hesitant to enter alone.
Production, technological, financial or marketing capabilities can reduce the
firms financial investment significantly and increase its profitability and
success.
Model of Grand Strategy Clusters:

It is a second guide to selecting a promising grand strategy which explains the growth rate of
the general market and the firms competitive position in the market.
A business can be broadly classified in one of four quadrants. They are:
1. Strong Competitive Position in a Rapidly Growing Market.
2. Weak Position in a Rapidly Growing Market.
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3. Weak Position in a Slowly Growing Market.

4. Strong Position in a Slowly Growing Market.
Each of these quadrants suggests a set of promising possibilities for the selection of a grand
strategy.
Explain the Strategy Selection Matrix Based on Growth Rate of the General
Market and the Firms Competitive Position in the Market. [P.U. 2008 fall]
Rapid Market Growth
Concentrated Growth
Reformation of Concentrated Growth
Divestiture
Liquidation
Strong
Competitive
Position
II
IV
III
Weak
Competitive
Position
Turnaround or Retrenchment
Joint Venture
Divestiture
Liquidation
Slow Market Growth
1. Quadrant I:
Firms in quadrant-I are in an excellent strategic position because

consumers seem satisfied with the firms current strategy. McDonalds Corporation
has followed this approach for 25 years.
However if the firm has resources that exceed the demands of a concentrated
growth strategy, it should consider vertical integration. Either forward or backward

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integration which helps a firm to protect its profit margins and market share by
ensuring better access to consume or material inputs.
2. Quadrant II: Firms in quadrant-II must seriously evaluate their present approach
to the market place. If a firm has competed long enough to accurately assess the
merits of its current grand strategy, it must determine: Why that strategy is ineffective?
Whether it is capable of competing efficiently?
The answers to these questions are the choice of one of the four strategies:
Reformation or Concentrated Growth

Divestiture
Liquidation
In a rapidly growing market, even a small or relatively weak business often is able to
find a profitable niche. Thus, formulation and reformulation of a concentrated
growth strategy is usually the first option that is considered. However, if the firm
lacks either a critical competitive element or sufficient economies of scale to achieve
competitive cost efficiencies, then a grand strategy that directs its efforts toward
horizontal integration is often a desirable alternative.
A multiproduct firm may conclude that it is most likely to achieve the goals of its
mission if the business is dropped through divestiture. The decision to liquidate is an
unavoidable admission of failure by a firms strategic management and thus often is
delayed to the further damage of the firm.
3. Quadrant III: Strategic managers who have a business in quadrant-III and expect a
continuation of slow market growth and a relatively weak competitive position will
usually attempt to decrease their resources commitment to that business.
Minimal withdrawal is accomplished through retrenchment. This strategy has the
side benefits of making resources available for other investments and of motivating
employees to increase their operating efficiency.
An alternative approach to divert resources for expansion is through investment in
other business. This approach typically involves either concentric or conglomerate
diversification because the firm usually wants to enter more promising arenas of
competition than integration or concentrated growth strategies would allow.
The final option for quadrant-III businesses are divestiture, if an optimistic buyer can
be found and liquidation.
4. Quadrant IV: Businesses have a basis of strength from which to diversify into more
promising growth areas. These businesses have high cash flow level and limited
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internal growth needs. Thus, they are in an excellent position for concentric
divestiture into ventures that utilizes their proven expertise.
Second option is conglomerate diversification which spreads investment risk and
does not divert managerial attention form the present business.
The final option is joint venture which is especially attractive to multinational firms.

Page 110

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Strategic Management I

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Bachelor of Business Administration

MGT 111.3 (Credit hours 3)

Prepared By: Durga Bedari & Ganesh Khatri (2013)

implementation of plans designed to achieved a company objective. Strategic management

Good Strategy Execution

Good Strategic Management

Features of Good Strategic Management

Uncertain: Strategic management deals with future oriented non routine

Complex: Uncertainty brings complexity for strategic management

Organization wide: It has organization wide implication. It is a system approach

Fundamental: Strategic management is fundamental for improving the long term

Benefits of Strategic Management

The involvement of employees in strategy formulation improves their understandings of the

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Group based and better option

Reduces gaps and overlaps

Reduces resistance to change

Dimension of Strategic decisions

Strategic issues require top management decisions

ii. Strategic issues require large amount of firms resources

i. Strategic issues require top-management decision

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Level of strategy (Strategy Making Pyramid)

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Corporate Level Strategy

b) Single business firms

1. Corporate level strategy

Prepared By: Durga Bedari & Ganesh Khatri (2013)

2. Business level strategy

How to strengthen market position and built competitive advantages.

Action to build competitive capabilities.

3. Functional level strategy

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Marketing Strategies: - Sales, target market, marketing mix, customer need

Production Strategies: - Efficiency & controlling cost, technology, plant capacity,

Financial Strategies: - Source of finance, investment decisions, financial control,

Human Resource Strategies: - Quality, competencies, productivity and welfare of

Research and Development: - New product development, product innovation,

4. Operating level strategy

Formality in Strategic management

Planning mode &

Determinants of formality in Strategic Management

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Roles of chief Executives officers on Strategic Management

Decision making role: - CEO makes strategic decisions related to strategy

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Information role: - CEO disseminates the information about strategy to the

c) Delegation authority for strategy formulation

Characteristics of strategic decisions

Top management oriented: - Strategic management decisions are made by top

Competitive Advantage: - Strategic decisions help in gaining competitive advantages

Prepared By: Durga Bedari & Ganesh Khatri (2013)

Characteristics of Strategic management decisions according to John A. Pearee:

Corporate level Decisions: -

Business level decisions: -

Functional level decisions: -

Strategic Management process

Define companys mission

Analysis of companys Strategic Option

Identification of the desirable option

Setting of long term objectives

Develop annual objectives and short term objectives

Implementation of the strategies choices

Prepared By: Durga Bedari & Ganesh Khatri (2013)