STRATEGIC MANAGEMENT

Strategic Management
 Why SM?
Planning is something that we do consciously all our lives from
making career moves, presentations, marriage, job changes etc.
It is possible to go about anything without planning at all , but it
includes a lot of risk & the results are most often not satisfactory.
Planning or designing a strategy involves assessment of risks,
resources, ways to counter the risks, effective utilization of
resources while trying to achieve a goal/purpose.
An organization is established with a goal in mind & this goal
defines the purpose for its existence.
All work & efforts carried out by the organization revolves around
this goal, and it has to align its internal resources & adjust with
external environment in a way that the goal is achieved in expected
time.
 Why SM?
As an organization generally has to have big financial investments,
strategizing becomes necessary for successful working internally, as
well as to get feasible returns on investment.
Strategic management at a corporate level normally incorporates
preparation for future opportunities, risks, market trends etc.
This requires the firm to analyze, examine & execute administration
in a manner that is most likely to achieve the set aim/goal.
Apart from faster & effective decision making, pursuing
opportunities & directing work, strategic management assists with
cutting costs, employee motivation, countering threats, converting
threats into opportunities, predicting market trends, & improving
overall performance.
 Why SM?
Keeping in mind the long-term benefits to an
organization; strategic planning drives the firm to focus
on internal environment, through encouraging &
setting challenges for employees, helping them achieve
personal as well as organizational goals.
At the same time, it ensures that external challenges
are taken care of, threats are analyzed, adverse
situations are tackled.
SM is useful in helping one to gain skills & know-how
to effectively develop & implement corporate
strategies.
 Understanding Vocabulary
A strategy describes a framework for charting a course
of action an approach for the company that builds on
its strengths and is a good fit with firms external
environment.
Its a guide for managers who implement it.
By explaining how the firm intends to succeed in the
context it faces, the strategy alerts the management to
the assumptions about the firms context that are
essential for the strategys success.
This information enables them to interpret contextual
changes, anticipating how these changes might affect
the firms performance.
 Understanding Vocabulary
Strategic management is a broader term than strategy
and is a process that includes top managements
analysis of the environment in which the organization
operates prior to formulating a strategy, as well as the
plan for implementation and control of the strategy.
The difference between a strategy and the strategic
management process is that strategic management
includes the analysis that must be done before a
strategy should be formulated through assessing
whether or not the strategy was successful.
 Understanding vocabulary

Strategy refers to top managements plans to develop & sustain

competitive advantage so that an organizations mission is fulfilled.(
mission statement for an orgn.)
This definition assumes that an organization has a plan, its competitive
advantage is understood, and that its management understands the
reason for its existence.
Strategic management is a broader term than strategy and is a process
that includes top managements analysis of the environment in which it
operates before formulating its strategy as well as a plan for
implementation and control of the strategy.
The difference between strategy and strategic management process is that
the latter includes the analysis that must be done before a strategy should
be formulated through assessing whether or not the strategy was
successful.
Its the study of the strategies of companies & how they are formulated,
implemented, and evaluated.
 Vocabulary
Strategy is the direction and scope of an organization over long term,
which achieves advantages for an organization through its configuration of
resources within challenging environment.
It deals with issues regarding the overall organization, its business-
needing long range perspectives- the long term strategies are broken
down in medium range tactics, short term methods and daily activities.
Corporate strategies provide directions & destinations to short term
activities.
Its about identification of strategies that managers can carry out so as to
achieve better performance & competitive advantage for their
organization.( i.e. higher profitability than the average profitability for all
companies in the industry)
Various decisions & actions which managers undertake impacts the result
of a firms performance. Hence the need to understand the general and
competitive organizational environment so as to take right decisions.
Its also about planning for predictable and unpredictable contingencies.
 Vocabulary
Strategy at different levels of business:
Corporate strategy: is concerned with overall purpose & scope of the business to
meet shareholder expectations. Corporate strategy is often stated explicitly in a
mission statement. For example, Coca-Cola has followed the growth strategy by
acquisition. It has acquired local bottling units to emerge as the market leader.
Business Unit strategy: is concerned with how a business competes successfully in
a particular market. It is about strategic decisions about a) choice of products
b)meeting needs of customers c) gaining advantage over competitors d) exploiting
or creating new opportunities( example- Apple Computers uses a differentiation
competitive strategy that emphasizes innovative product with creative design)
Operational strategy: is concerned with how each part of the business is organized
to deliver the corporate & business unit level strategic direction. It focuses on a)
resources b) processes c) people.
Financial strategy is the approach by a functional area to achieve corporate &
business unit objectives & strategies by maximizing resource productivity. Its
concerned with developing & nurturing a distinctive competence to provide a firm
with competitive advantage. Example P&G, HUL spend money on advertisements
to create consumer demand.
 Vocabulary..
The strategic management process can be summarized in six steps:
1.External analysis: Analyze the opportunities and threats and the
constraints that exist in the organizations external environment;
including industry and macro-environmental forces.
2. Internal analysis; Analyze the organizations strengths &
weaknesses in its internal environmental( orgn mission & direction)
3.Mission & direction: Reassess the organizations goals and mission
in the light of the previous two steps.
4. Strategy formulation: Formulate strategies that build and sustain
competitive advantage by matching organizations strengths &
weaknesses with the environments opportunities and threats.(
defense production after new govt).
5.Strategy implementation: Implementation the strategies that
have been developed.
 Vocabulary..

6. Strategic control: Engage in strategic control activities when the

strategies are not producing the desired results.
(The PDCA cycle)
Changes in one stage- modifications due to environmental or
organizational conditions changing-will affect other stages as well.
As these steps are interrelated, they should be treated as an integrated,
ongoing process.
Example: Strategic management process at a food chain restaurant, top
managers will assess changes in consumer taste preferences &food
preparation, analyzing competitor activities, working to overcome firm
weaknesses, implementing a strategy formulated months earlier and
formulating strategic plans for future. These processes occur
simultaneously as they are linked.
An appreciation of an organizations strategy helps all its members-top,
middle, lower level- to relate their work more closely to the direction of
the organization.
 Vocabulary..
Core competencies are the firms capabilities and collective
learning skills that are fundamental to its strategy,
performance, and long-term profitability.
Core competence is a strategic concept that defines an
organizations capabilities- what you are particularly good
at.
Each organization has some capabilities in which it excels
and the business should focus on the opportunities in that
area, letting others go or outsourcing them.
Core competencies are difficult to duplicate, as it involves
skills and coordination of people across a variety of
functional areas.
 Strategic Decisions
Strategic decision making is marked by four key distinctions.
First, it is based on a systemic, comprehensive analysis of internal
attributes and factors external to the organization.
Second, it is long-term and future orientedusually several years to
a decade or longer but built on knowledge about the past and
present.
Third, it is distinctively opportunistic, always seeking to take
advantage of favorable situations that occur outside the
organizations.
Fourthly, strategic thinking involves choices a trade off between
alternatives. ( enhancing quality or adding new features to a
product can increase the cost of production in the short run).
Because of these distinctions, strategic decision making is generally
reserved for top executives or top management team.
 Strategic Decisions

Companies must be flexible to respond quickly to competitive & market

changes.
They must benchmark continuously to achieve best practices.
They must nurture core competencies in race to stay ahead of rivals.
Rivals can quickly copy any market position, and strategy rests on unique
activities like:
-competitive strategy is about being different
-it means deliberately choosing a different set of activities to deliver a
unique mix of value
-for example, low cost airlines serve price & convenience sensitive
travelers. But, the essence of strategy is in the activities choosing to
perform activities differently or to perform different activities than rivals(
Indigo )
Otherwise, a strategy is nothing more than marketing slogan that will not
withstand competition.
 Strategic Decisions

A low cost airline tailors all its activities to deliver low-cost convenient service on
its chosen routes.
Through fast turnarounds(as in the case of Indigo by quicker cleaning & other
activities during a halt) it is able to keep planes flying longer hours than rivals &
provide frequent departures with fewer aircrafts. Such an airline will not offer free
meals on board or may not offer premium class service.
By contrast, a full service airline is configured to get passengers from any point to
any point.
To reach a large no of destinations and serve passengers with connecting flights,
full service airlines offer first class or business class service to attract customers
who desire comfort. They co-ordinate schedules & check & transfer baggage, serve
meals.
Thus, low cost airlines like Indigo has staked out a unique & strategic position
based on a tailored set of activities.
Another example is that of Ikea, the global furniture retailer based in Sweden has a
clear strategic positioning. It targets young furniture buyers who want style at
lower cost.
 Strategic Decisions

This marketing concept is converted into strategic positioning by its

tailored set of activities that make it work. It has chosen to perform
activities differently from its rivals.
Unlike conventional furniture stores, Ikea does not have a sales
person to trail customers around the showroom; uses a self-service
model based on clear, in-store displays.
Rather than rely on third party manufacturers, Ikea designs its own
low-cost, modular, ready to assemble furniture to fit its positioning.
Adjacent to their showroom is a warehouse with products in boxes.
Customers are expected to do their own pick-up & delivery.
It also offers extra services that its competitors don not offer.
In-store child care is one, extended hours is another.
Those services are aligned with the needs of customers who are
young, not very rich, & have a need to shop at hours due to their
working hours.
 Strategic Positioning
It attempts to achieve sustainable competitive advantage by
preserving what is distinctive about a company.
It means performing different activities from rivals, or performing
similar activities in different ways.
Key areas of strategic positioning are:
1. Strategy is the creation of a unique & valuable position, involving
a different set of activities. Strategic position emerges from three
sources:
--serving few needs of many customers( food chains like
McDonalds)
--serving broad needs of few customers targeting only HNWI
--Serving broad needs of many customers in a narrow market(
catering to customers in smaller towns)
 Strategic Positioning

2.Strategy requires you to make trade-offs in computing to choose what

not to do.
Some competitive activities are incompatible; thus gains in one area can
be achieved only at the expense of another area. Example a medicated
soap is positioned more as a medical product than as a cleansing agent.
Thus, a company making it will say no to sales based on volume strategy &
may sacrifice manufacturing efficiencies.
3. Strategy involves creating fit among a companys activities.
Fit has to do with ways a companys activities interact with & reinforce one
another. For example, a company aligns all its activities with a low-cost
strategy.
Fit drives both competitive advantage & sustainability. Thus when
activities mutually reinforce each other, competitors cant easily imitate
them.
The work of deciding which target group of customers & needs to serve
requires discipline, the ability to set limits, and communication clarity.
 Strategic Management Process

Thus, SM is all about identification and description of strategies that

managers can carry to achieve a better performance and a competitive
advantage for their organization(competitive advantage is to earn higher
profits than the average profitability in its industry).
It is a series of quality strategic decisions and actions managers
undertake which decides the result of a firms performance.
The quality of decision making is high when the decision makers are in
touch with the current issues pertaining to the market and industry, as
well as business and its environment in general.( Q-Where will the
managers find this vital information?)
To gain thorough knowledge of the market situation, which is ever
changing, management must resort to thorough analysis of the
environment through SWOT analysis.
The firm tries to minimize organizational weaknesses and make use of
business opportunities available from the business environment.
SM is planning for both predictable and unforeseen contingencies.
 Process..
The constituents of a strategic statement are:
Strategic Intent: It is the purpose that it exists and why it will
continue to exist. It gives a picture about what an orgn. must get
into immediately in order to the companys vision. The objective is
to help management to concentrate on its priorities.
Mission Statement: Is the statement of the role by which an orgn.
Intends to serve its stakeholders.(who are they?). It describes what
it does(present capabilities), who it serves(stakeholders), and what
makes it unique(reason for existence).It distinguishes the
organization from others by explaining its broad scope of activities,
its products, the technologies it uses to achieve its goals.( ex.
Microsofts mission statement is to help people & business
throughout the world to realize their full potential.
 Process..
Vision: A vision statement identifies where the
organization wants or intends to be in future or
where it should be to best meet the needs of the
stakeholders. It is the potential to view things
ahead of themselves. It answers the question
where we want to be. A vision statement is for
the organization & its members, unlike the
mission statement which is for consumers/clients.
Goals & objectives: A goal is a desired future
state or objective that an organization tries to
achieve.
 Process..
Strategic management process means defining the organizations
strategy. Its the process by which managers make a choice of a set
of strategies for the orgn. That will enable it to achieve better
performance. Its a continuous process which appraises the
business & industries in which it is involvedit appraises its
competitors and fixes goals to meet all the present and future
competitors and then reassess strategy.
The strategic management process has four steps:
1) Environmental scanning: Its a process of scanning, scrutinizing
and providing information for strategic purposes. It helps in
analyzing the internal & external factors influencing the orgn.
2) Strategy formulation: It is the process of deciding the best course
of action for accomplishing organizational objectives & hence
achieving organizational purpose. This is also called strategic
planning, where strategists think, analyze, plan strategies.
 Process..
3.Strategy implementation: Implies making the strategy
work as intended or putting the strategy into action. It
includes designing the organizations structure, distributing
resources, developing decision making process and
managing human resources.
4.Strategy evaluation: Its the final step in strategy
management process. Key activities are: appraising internal
& external factors that are the root of present strategies,
measuring performance against target/objective, and
taking remedial/corrective measures.
Thus, strategic management is a continuous process that
appraises the business and its environment.
 Process..
Although it is important for managers to formulate strategies based
on realistic & thorough assessment of the firm & its environment,
things invariably change along the way. Hence, there is always a gap
between intended strategy and realized strategy, thus creating a
need for constant strategic action to remain on course.
Many factors are associated with a winning/successful strategy.
They are:
1.Managers thoroughly understand the competitive environment in
which a firm operates.( information and assessment of competing
firms, their products, strategies, pricing policies, discount structure,
major customers, competing companys financial strengths and
weaknesses, import details, govt policies, duty structure, excise and
cv duty structure, products which can be substituted for the firms
products etc)
 Process..
2)Mission and goals are simple and consistent
with the strategy.
3) Strategic managers understand the
organizations resources & how they translate
into strengths and weaknesses.
4) Plans for putting the strategy into action are
designed with specificity before implementation.
Possible future changes in the proposed strategy
are evaluated before the strategy is adopted.
 Process..

They are the net results of the strategic advantages and disadvantages
that exist for an organization and determine its ability to compete with its
rivals.
When an organization develops its competencies over a period of time
and hones them to compete with its rivals, it tends to use them
exceedingly well. This capacity to use the competencies exceedingly well
turns them into core competencies.
When a specific ability is possessed by a particular organization exclusively
or relatively in large measure, it is called a distinctive competence.
Examples: superior product quality like more fuel efficient cars, low calorie
foods, almost fail-proof appliances etc.
Creating of a marketing niche with highly specialized products for a market
segment like defense equipment.
Differential advantage due to superior/breakthrough R&D skills not
possessed by others-specialized medicines
Access to low cost finance, infrastructure-China
 Process..

The concept of distinctive competence is useful for strategy formulation

due to the unique capability it gives an organization in capitalizing upon an
opportunity, the competitive edge it may give ; and the potential for
building a distinctive competence to make it the cornerstone of strategy.
C.K.Prahalad and F. Hamel who are credited for the dynamic capabilities
approach that considers strategic management as a collective learning
process aimed at developing & the exploiting distinctive competencies by
an organization that are difficult to replicate by their rivals.
According to them, the competitive advantage can be traced to core
competencies of an orgn.
They prescribe three tests to identify core competencies:
1. It should be able to provide potential access to a wide variety of
markets
It should make significant contribution to the perceived customer benefits
of the end product
It should be difficult for competitors to imitate.
 Process..

Its a way to focus upon the latent strengths of an organization.

They cannot be taken for granted and can diminish over time as
new competitors and new technologies will figure out a way to
serve customers better, causing existing companies to loose their
strategic advantage( smart phones v/s conventional phones)
Capability: Organizational capability is the inherent capacity or
potential of an organization to use its strengths and overcome its
weaknesses in order to exploit the opportunities and face the
threats in its external environment.
Its a skill of coordinating resources and putting them to productive
use.
Its the capacity or potential of an orgn. and is the sum total of
resources and behavior, strengths and weaknesses, competencies
of an organization.
 Process..

Organizational capability factors:

These are strategic strengths and weaknesses existing in different
functional areas within an orgn. which are of crucial importance to
strategy formulation and implementation. Example: A company could be
very strong in marketing due to its competence and distribution skills or
could be competitive in operations due to its superior R&D and
infrastructure.
There are six functional areas where the capability factors exist within an
organization. They are finance, marketing, operations, personnel,
information, general management.
1) Financial capability: Relate to the availability , usages and management
of funds and all allied aspects having a direct bearing on organizations
ability to implement its strategies.
Important financial factors are sources of funds, capital structure,
procurement of capital financing pattern, working capital availability,
borrowings, reserves & surplus, credit availability, relationship with
lenders, banks and financial institutions.
 Process..

Factors related to usage of funds-capital investment, fixed asset acquisition,

current assets and liabilities, loans and advances, dividend distribution, relations
with shareholders.
Management of funds-financial accounting and budgeting, management control
system, financial health, credit, risk management, tax planning etc.
Some strengths that affect financial capabilities are- access to financial resources,
amicable relationship with financial institutions, credit-worthiness, low cost capital
compared to competitors, shareholder confidence, management control system,
tax benefits etc.
2) Marketing capability factors relate to pricing, promotion, distribution of
products & services.
Product related capability factors are variety, quality, differentiation, positioning,
packaging.
Price related factors are lower prices compared to competition, pricing policies,
high quality customer service.
Place related factors are distribution, transportation and logistics, marketing
channels, advertising and sales promotion, effective marketing information
system.
 Process..

3)Operations capability factors relate to the production of products & services,

efficient use of resources. Important factors are
Factors related to the production system like capacity utilization, location, layout,
product/service design, work system, degree of automation.
Operations and control system- production planning, material supply reliability,
inventory control, cost and quality control, maintenance systems and procedures.
R&D related work- facilities, product development, technology, collaboration and
access to new technologies.
4) Personnel capability factors relate to the existence and use of human resources
and skills, which have a bearing on organizations capacity and ability to implement
strategies as planned.
Factors related to personnel system like system for manpower planning, selection
and development, compensation, communication and appraisal. Concern for
human resources & its development.
Factors related to organizational & employee characteristics company image,
quality of managers, staff & worker perception about the company, availability of
development opportunities for employees, working conditions.
 Process..

Industrial relations factors like union-management relations, collective bargaining,

safety and welfare of employees, working conditions.
5)Information management capabilities relate to the design & management of
flow of information from outside into the organization for the purpose of decision
making.
Factors related to acquisition & retention of information like sources, quality of
information, security of information, ease of access to information sources.
Processing of information- database management, use of computerized
information system, ERP and other systems.
Retrieval and usage of informationwide coverage and networking of computer
systems, foolproof information security.
Transmission and dissemination systemsspeed, width and depth of information.
Availability of IT infrastructure, top management involvement and understanding
and support, up-gradation of facilities, state-of-the art systems and hardware.
6)General management capability relates to integration, co-ordination, and
direction of functional capabilities towards common goal.
Factors like strategic management system, strategic intent, effective corporate
planning, reward & incentive systems for top managers, forward looking culture.
Stakeholders & Organizational mission,
goals, objectives
Various stakeholders( individuals or groups) have different
perspectives on the purpose of the firm.
Stakeholders are stockholders, members of the board of
directors, managers, employees, suppliers, creditors,
customers, general public.
It is the responsibility of the top executives to establish &
communicate a vision for a firm that integrates the views of
the firms stakeholders.
The mission is the reason for a firms existence.
Organizations goals represent the desired ends towards
which efforts are directed.
Objectives are specific versions of goals which are often
quantified.
 Organizational Goals & Mission
Various stakeholders have different goals for the firm.
Examples:
Customers goal is that the firm should provide high-quality
products & services at most reasonable cost, general public
expect the firm to supply goods & services with minimum
environmental costs, increase employment opportunities,
suppliers want long-term relationships with companies,
employees expect good working conditions, equitable
compensation and advancement opportunities, creditors
want a healthy company with on-time payment,
shareholders want higher than average returns, board of
director want the current directors to be retained and
protected from legal liability, managers expect financial
advancement, growth and success with the company.
 Environment
Every organization exists within a framework of political-legal,
economic, social and technological forces.
These four elements comprise the organizations macro-
environment.
The analysis of macro-environmental factors can be called PEST, an
acronym derived from the first letter of the four forces.
The constant changes in these forces present numerous
opportunities and challenges to strategic managers.
The effects of macro-environmental forces on a firms industry are
essential to understand before strategic options are evaluated.
Some issues may be placed into one category but many others may
be related to two or more classes. Example- automobile safety has
political-legal, social, and technological dimensions.
 Environment..
1) Political-legal forces: Outcome of elections, legislation, judicial
court decisions, decisions given by various commissions and
agencies appointed by Govt., tax laws, international trade
regulations & tariffs, laws on hiring, firing, pay.
Military conflicts influence a number of industries.
Different industries are often affected by legislations and other
political events specific to their line of business. Example- FDI in
single brand outlets, defense, legislations on environment
protection affect mining, food substance laws affect products like
Maggi, defense production policies of current Govt has increased
private participation.
2) Economic forces significantly influence business operations,
including increase or decrease in GDP or in inflation, interest rates,
exchange rates and can present opportunities or threats, depending
on the industry.
 Environment-Economic forces

Gross Domestic Product refers to the value of a nations annual total

production of goods & services.
A consistent & healthy growth in the GDP generally produces a healthy
economy fueled by increased consumer spending.
GDP decline indicates lower consumer spending & decreased demand for
goods and services.
A recessionary economy will lower the profits and increase business
failures, unemployment.
In India, monsoon and agriculture situation very strongly affects the GDP
level and the state of the economy.( why?)
High inflation rates have a negative effect on most businesses. High
inflation raises costs of doing business and can lead to governmental
action to curb inflation which can slow economic growth.
The effects of recession can be seen in demand drop for new cars &
automobiles.
 Environment-Economic forces
Inflation rates: High inflation rates have a negative impact on most-
but not all businesses.
High rates increase the costs of doing business and continued
inflation constricts expansion plans of businesses and triggers
governmental action to slow economic growth.(RBI actions).
Inflation can present opportunities for some industries like oil
companies, precious metals.
Interest Rates: Short term and long term interest rates affect
demand for many products & services cars, appliances, housing
where costs are financed over an extended period of time.
Low short-term interest rates benefit retailers because lower rares
encourage consumer spending.
At corporate level, interest rates influence strategic decisions
related to financing.
 Environment-Economic forces
High rates dampen business plans to raise funds for expansion or
diversification whereas lower rates are more likely to spur capital
expenditures on expansion, modernization.
Exchange rates: When the value of a currency rises in the market,
the firms of that country find themselves at a competitive
disadvantage internationally, as their prices of goods rise.
Decisions to buy or source supplies and services from cheaper
sources are based on the currency exchange rates.
3)Social forces: They include factors such as values, trends,
traditions, religious practices which can substantially influence firm
performance.
Social trends present opportunities and threats to business. The
health & fitness trend that emerged in the 1990s has led to growth
in business for fitness equipment, healthy drinks, healthy foods and
reducing business for tobacco.
 Environment-Economic forces
Emphasis on social responsibility of business led to focus on recycling,
waste management, green building movement..
4) Technological forces: include scientific improvements & innovations
that create opportunities or threats for businesses.
Rate of technological change varies from industry to industry and can
make or break businesses because of the shifts in demand for one
product to another. ( internet, smart phones, cassettes, black & white TV).
The use of internet has had a profound impact on travel industry, hotel
industry, e-commerce, banking, airline etc.

Environmental scanning: It is the systematic collection and analysis of

information about relevant micro-environmental trends.
These activities offer major benefits like better strategic planning and
decision making, proper diversification and better resource allocation.
 Environment
In summary:
Forces that affect any industry are: legislations, court
judgments, environmental regulations, tax laws,
consumer protection legislation, elections and their
outcome, international trade regulations and tariffs,
laws of hiring, firing, promotion, pay, political stability.
Economic forces that affect industry are GDP,
disposable personal income, short and long term
interest rates, inflation, exchange rates, unemployment
rate, energy costs, stage of economic cycle, monetary
policy.
Industry Analysis & competitive forces
that shape strategy
In essence, a strategy is creating fit among companys activities.
The success of a strategy depends on doing many things well &
integrating among them. If there is no fit among activities, there is
no distinctive strategy & little sustainability.
The job of a strategist is to understand & cope with competition.
Competition for profits goes beyond established industry rivals to
include four other competitive forces as well: customers, suppliers,
potential entrants, and substitute products.
The extended rivalry that results from all five forces defines an
industrys structure & shapes the nature of competitive interaction
within an industry.
If the forces are intense, like in airlines, cars, almost no company
earns attractive returns on investment.
If forces are benign, many companies are profitable.(software, soft
drinks)
 Industry Analysis & comp. forces that
shape strategy
Industry structure drives competition & profitability, not whether industry
produces a product or service, is emerging or mature, high or low tech, regulated
or unregulated.
Some factors can affect industry profitability in the short run weather or business
cycleindustry structure which manifests in competitive forces, sets industry
profitability in the medium & long term.
Understanding the competitive forces, & their underlying causes, reveals the
roots of an industrys current profitability also providing a framework for
anticipating & influencing competition and profitability over time.
Defending against the competitive forces and shaping them in a companys favor
are crucial to strategy.
The configuration of five forces differs by industry.
For example, in the commercial aircraft market, fierce rivalry between dominant
producers Airbus & Boeing and the bargaining power of the airlines that place
huge orders are strong. The threat of entry , threat of substitutes, and the power
of suppliers are more benign.
The strongest competitive force or forces determine the profitability of an industry
& become the most important to strategy formulation.
 Industry analysis & comp. forces that
shape strategy
Most salient force is not always obvious.
For example, even though rivalry is fierce in
commodity industries, it may not always be a limiting
factor.
Low returns in the photographic film industry are the
result of a superior substitute product. In such a
situation, coping with substitute product becomes
number one strategic priority.
To sustain long-term profitability a company must
respond strategically to competition.
So, in addition to rivals, four additional competitive
forces can hurt a companys prospective profits.
 Industry Analysis & competitive forces
that shape strategy
An industry is a group of companies offering products or services that are close
substitutes of each other.
Close substitutes are those products or services that satisfy the same basic
consumer needs.
Industry factors play a dominant role in the performance of many companies.
Michael Porter, a leading authority on industry analysis, proposed a systemic
means of analyzing an industrys potential profitability known as Porters five
forces.
According to Porter, an industrys overall profitability depends on five basic
competitive forces.
1. The intensity of rivalry among firms/competitors
2.The threat of new competitors entering the industry
3.The threat of substitute products or services
4.The bargaining power of buyers
5.The bargaining power of suppliers.
 Industry Analysis
These five factors combine to form the industry structure and suggest profitability
prospects for firms that operate in the industry.
1. Intensity of rivalry among firms: Competition intensifies when a firm identifies
an opportunity to improve its position or senses competitive pressure from others
in the industry.
Rivalry among firms lead to price discounting, new product introductions, ad
campaigns, service improvements.
This situation can result in actions like price wars, advertising battles, new product
introductions, product modifications, increased customer service or warranties.
The intensity of competition evolves over time and depends on a number of
interacting factors as listed below:
A) Concentration of competitors: The number of companies in an industry and
their relative sizes or power levels influence an industrys intensity of rivalry.
Industries with few firms tend to be less competitive, but industries with many
firms tend to be more competitive as each one fights for dominance.( many times
even survival).
 Industry Analysis
A move on the part of one player may cause others to make countermoves
to protect themselves from the danger posed by the initial move.
Thus, the situation in an industry keeps changing with the actions &
reactions of the competitors.
When competitors are numerous, rivals find it hard to avoid poaching
business.
B) High fixed or storage costs: When firms have unused capacity, they
often cut prices in an effort to increase production & move towards full
capacity. The degree to which prices & profits can fall depends on the
firms cost structuresthose with high fixed costs are most likely to cut
prices when excess capacity exists because they must operate near
capacity to be able to spread their overhead over more units of
production.( last minute airline discounts to fill more seats).
C) Slow industry growth: In a slow growth industry, one firms increase in
market share must come at the expense of other firms share. Under such
circumstances, firms pay more attention to the actions of their rivals than
to consumer tastes when formulating strategies.
 Industry Analysis
D) Lack of differentiation or low switching costs: The more similar
the offerings among competitors, the more likely customers are to
shift from one to another. Such firms tend to resort to price
competition.
Switching costs are one-time costs that buyers incur when they
switch from one companys product/services to another. When the
switching cost is low, firms are under constant pressure to satisfy
customers as they can switch competitors any time( very low
customer loyalty). The products & services are less differentiated
and purchase decisions are based on price and service
consideration, resulting in greater competition.
To safeguard against switching, many companies offer reward
points to customers who complete certain value of transactions
within a certain time period. ( Airlines, shopping malls). The
objective is to raise the switching costs.
 Industry Analysis
E) Capacity increase in large increments: If economies of scale dictate that production be
augmented in large blocks, then capacity addition may lead to temporary overcapacity in the
industry and firms may cut prices to clear inventories.( airlines, hotels).
Diversity of competitors: Companies with diverse cultures, strategies have different objectives and
means of competition. International companies or owner-operator companies tend to be very
competitive.
F) High exist barriers: They are economic or economical factors that keep companies from leaving
an industry even though they are not profitable.(fixed assets that have no alternative uses, labor
agreements that cannot be re-negotiated, managements unwillingness to leave an industry
because of pride).
When such barriers exist, and firms choose to compete , a practice that can drive down the
profitability of competitors as well. Excess capacity remains in use, and high profitability of healthy
competitors suffers as the sick ones hang on.
State owned companies have employment generation angle, image protection, ego & personality
clashes are some of the reasons.
2.) Threat of new entrants: An industry that is perceived as being profitable attracts new entrants.
An industrys productive capacity expands when new competitors enter.
New entrants intensify the fight for market share lowering prices, and ultimately industry
profitability.
 Industry Analysis

When large, established firms control the market/industry, new entrants face retaliation.
The possibility of new entrants entering the market depends onthe entry barriers to an industry
and the expected retaliation from existing firms.
If entry barriers are low & newcomers expect little retaliation from existing firms, the threat of
entry is high & the industry profitability is moderated.
It is the threat of entry, not whether entry actually occurs, that holds down profitability.
There are eight major entry barriers. They are:
i) Economies of scale: refers to the decline in unit costs of production as the absolute volume of
production increases.
Substantial economies of scale deter new entrants by forcing them to enter an industry at a larger
scale(involving higher investment & costly equipment) or suffer from cost disadvantages associated
with a small-scale operation.(automobiles)
ii) Capital requirements: Large capital expenditure is necessary for setting up new production
facilities, advertisement & sales promotion, credit and inventories, R&D etc.
iii) Brand identity & product differentiation: Established firms enjoy brand identification & customer
loyalties that are based on actual or perceived product or service differences. The new entrant
must invest heavily in marketing, distribution set up to overcome this barrier.
 Industry Analysis

iv) Switching costs: are upfront costs that the buyer of a firms product may incur if they switch to
competitors. They are fixed costs that buyers face when they change suppliers. Buyers need to test
new product, make modifications in existing operations or negotiate new purchase contracts.
Switching costs are typically low in grocery items.
So, when switching costs are high, customers are reluctant to change.
Larger the switching costs, the harder it will be for an entrant to gain customers. Once a firm installs
ERP, the costs of moving to new vendor are very high due to embedded data, re-training needs &
critical nature of applications.
v) Access to distribution channels: Enticing existing distributors requires a new entrant to offer
price discounts, co-operative advertising allowances or sales promotion.
Existing manufacturers may have long-standing or exclusive relationships requiring new entrants to
invest time, money efforts to create their own channels.
vi) Cost advantages independent of size: Certain cost advantages developed by existing players but
not related to the firm size are patents, proprietary technology, favorable locations, superior human
resources, experience in production, marketing etc.
vii) Government policy: Government controls entry into certain industries with licensing
requirements or other regulations like restrictions on foreign investments.
Existing firms also lobby with governments to enact policies restricting new entrants.
 Industry Analysis
3. Threat of substitutes: A substitute performs the same or similar
function as an industrys product by a different means.
Video-conferencing is a substitute for travel. Plastic is a substitute for
aluminum, carbon fiber for steel etc. E-mail a substitute for express mail,
money transfer for money order, courier service for post services, etc.
Substitutes are always present, but they are easy to overlook because they
may appear to be different from industry productpurchase of a used
product rather than a new one.
When the threat of substitute is high, profitability suffers as substitute
products or service limit an industrys profit potential by placing a ceiling
on prices.
If an industry does not distance itself from substitutes through product
performance, marketing or other means, it will suffer in terms of
profitability.

 Industry Analysis
Threat of substitute is high if:
An attractive price-performance trade off is available to the
industrys product. The better the relative value of the substitute,
the higher the lid on industrys profit potential.( traditional
telephone services have suffered due to mobile, skype etc, video
rental outlets have lost out to on-line videos, you tube).
The buyers cost of switching to the substitute is low.( switching to
generic drugs from branded drugs).
Hence, strategists should be alert to changes in other industries
that make them attractive substitutes when they were not there
before.
So, technological changes in seemingly unrelated industries can
have major impact on industry profitability.( plastic as a substitute
to steel or metals)
 Industry Analysis

Rivalry among competitors: Competitive situation in the market keeps

changing with actions & reactions of the competing firms.
The desire to dominate the market by cornering maximum market share
leads to intense rivalry among firms.
The extent of rivalry-high or low- has implications for new firms planning
entry in the industry. Some of the dimensions of rivalry are:
a) Competitive structure: refers to the number of competitors, their size.
-A fragmented structure means there are a large number of small or
medium sized companies, none of them in a position to dominate
industry. This is characterized by low entry barriers, lesser differentiation,
leading to products becoming commodities. Here, competition is intense
with industry facing cycles of boom and bust, leading to frequent changes
in the industry structure.
 Industry Analysis

--A consolidated structure consists of few large companies having a closely knit
group of companies whose actions and reactions are matched, as action from one
leads to reactions from others. Intensity of competition may range from benign
tolerance to intense rivalry. In some industries, competitors may adopt a live & let
live policy while in others there might be cut-throat competition on the basis of
delivery, advertisement, after-sales service.
Demand conditions: A high or growing demand tends to moderate competition as
each has enough and need not grab others. Existing firms need to take demand
conditions in the industry into account for formulating business strategies.
High exit barriers prevent firms from leaving an industry, even though the returns
may be low or sometimes negative.
Exit barriers can be economic,( high investments committed to plant & equipment,
high fixed costs of exit like high retrenchment costs or due to labor agreements )
strategic( linkages between different businesses of a company as it can be its own
supplier & buyer for another business), or emotional (sentimental attachment to
business or channels or employees).
These three factors of competitive structure determine business strategies that a
firm is likely to adopt.
 Industry Analysis

Business strategies, are thus critically dependent on the industry environment and
the nature of business environment varies across industries and with time.
There are embryonic industries, sunrise industries, mature or stable industries or
sunset or declining industries.
Each of these industries would require a different approach to the formulation of
business strategies.
4)Bargaining power of buyers: The ability of the buyers-individually or collectively-
to force reduction in prices; demand higher quality or better service or seek more
value for their purchase any way; even playing one firm against another at the
expense of industry profitability.
Factors that raise the bargaining power of buyers are:
--when a few buyers purchase a significant percentage of total industry sale, they
wield considerable power on prices(markets for components, raw materials).
--when buyers purchase represent a significant percentage of buyers costs, prices
become more critical for buyers, who will shop for a favorable price.
--Products that buyers buy are undifferentiated or standard where buyers can play
one seller against another to initiate price wars.
-- Buyers face few switching costs & can change suppliers freely.
 Industry Analysis

--Buyers earn low profits, creating pressure for them to reduce their purchasing
prices.
--When buyers have the ability to engage in backward integration by becoming
their own suppliers by self-manufacture
--When the final product quality is unimportant, as against when the quality of
buyers products is greatly affected by what they purchase( where buyers are less
likely to have power over suppliers)
--Buyers have complete information regarding demand, actual market prices,
supplier cost structure
5)Bargaining power of suppliers: where suppliers are powerful
--Supplying industry is dominated by one or few companies
--There are no substitute products
--If a particular industry does not represent a significant percentage of suppliers
sales
--when suppliers pose credible threat of forward integration by becoming their
own customers
--The suppliers products are highly differentiated or have high switching costs
 Competitor Analysis

Competitor analysis focuses on each company with which a firm

competes directly.
The purpose of competitor analysis is:
-- to determine each competitors probable reaction to the industry
and environment changes.
--to anticipate the response from each competitor to the likely
strategic moves by other firms
--to develop a profile of the nature and success of the possible
strategic changes each competitor might undertake
Components of competitor analysis:
The four basic components are future goals of competitor; his current
strategy; key assumptions the competitor makes about himself and
about industry; its capabilities in terms of strengths and
weaknesses.
 Competitor Analysis

Future goals of competitor deals with questions like our goals as compared to
competitors goals, his attitude towards risk
Current strategy of competitors deals with questions like how we are currently
competing
Key assumptions made by competitors deal with questions like do we assume
future will be volatile? What assumptions do our competitors hold about the
industry and about themselves?
Capabilities of competitor deal with issues like our strengths & weaknesses, how
do we rate ourselves compared to our competition in terms of customer
satisfaction, quality, delivery, price, service.
Based on above analysis a response profile can be prepared for each competitor
that can help a company to predict their strategic moves-either offensive or
defensive.
To prepare response profile, a firm needs to ask following questions like:
--What will competitors do in the near future?
--What advantages do we hold over competition & how long can we hold them?
--Strengths, weaknesses of competitors and the firms response.
 Competitor Analysis
A few sources for collecting information on competition are:
Institutional publications published by market research agencies like
Centre of Monitoring Indian Economy, NCAER, FICCI, ASSOCHAM,
various industry associations, annual company reports, industry
magazines, news papers, Government publications like Census
reports, economic surveys, annual survey of industries, annual
report of concerned ministries, various policies and changes,
internet, international publications pertaining to an industry, in-
house market research department, industrial espionage agencies
etc.
It is absolutely essential for companies to take results of competitor
analysis into account while exercising strategic choice.
 Strategic Groups

Each business strategy is unique. Strategies can be classified into generic strategies
based on their similarities.
Generic strategies emphasize the commonalities among different business
strategies.
Strategic groups are clusters of competitors that share similar strategies and
compete more directly with one another than with other firms in the same
industry.
They are conceptually formed as they are not formally identified groups.
They are identified on the basis of a set of strategic dimensions like technological
leadership, the degree of product quality, pricing policies, distribution channels,
degree & type of customer service.
These strategic dimensions define a firms business strategy in an industry.
So, in an industry, competitors can be grouped according to similarities of
strategies, thus forming a distinct group.
Within an industry, firms will pursue similar competitive strategies with similar
performance results.
First, managers must determine whether the unit focus is on identifiable subset of
industry or serve the entire market as a whole.
 Strategic Groups

For example, specialty clothing stores concentrate their efforts on limited product
lines intended for small market niche. While some stores seek to serve the mass
market.
Second, managers must decide whether the business unit should compete by
minimizing its costs relative to its competitors or offer unique products & services
(differentiation strategy).
Depending on the way managers address the first or second strategy, different
options are possible.
1. Low cost strategy or cost leadership strategy. Such businesses produce basic, no-
frills products & services for mass markets made up of price sensitive customers.
Here, to keep the overall costs as low as possible they offer low average prices.(
mega retailer like Wal-Mart)
To keep their operating costs to minimum, such businesses offer the lowest prices
within a basic quality standard to suppliers.
Such units are likely to outsource a number of its production activities to reduce
costs, even if some quality is lost in the process.
Successful low-cost businesses do not go after cost minimization to the extent it
can result in excessive decline in quality & service.
 Strategic Choice

Cost leadership offers a margin of flexibility to the organization to lower the price if
competition becomes stiff and yet earn profits.
Several actions are required for cost leadership like
--Accurate demand forecasting and high capacity utilization.
--High level of standardization of products and .
Cost leadership strategies work best when the product/service features are such
that buyers are price sensitive and base their purchase on price.
Cost leadership strategy is for markets where price-based competition is intense
making costs an important factor.
The product/service is standardized and differentiation is superfluous.
Buyers are large in number and possess bargaining power to negotiate price
reduction.
Lesser customer loyalty.
Cost leadership may not remain for long as competitors can initiate cost
reductions.
Technological changes will induce changes in an industry thereby shifting the basic
structure or ground rules.
 Strategic Choice

Differentiation strategy( no focus):

--Those who employ differentiation strategy produce and market to the industry
products /services that can be readily distinguished from competition.
--Differentiated businesses often create new products and market opportunities
and have access to latest technologies & scientific breakthrough.
--Here, technology and flexibility are key factors as the firms need to keep pace
with new developments in industry.
--Differentiation to some extent is physical characteristics.
--Intangible differentiation extends beyond the physical features and covers
everything associated with the value perceived by customers.
Due to these perceived differences, customers are willing to pay higher prices.
The bases for differentiation are features of the product including the differences
in product attributes. ( details, quality, feelperceived quality)
Timing is a factor as first movers are more able to establish themselves in the
market than followers( faster delivery for pizza ).
Other factors are partnerships with other firms, reputation for service quality.
 Strategic Choice

--When customers are less price-sensitive, companies can emphasize quality as a

differentiating factor and continue to use it in areas like advertisement, with
suppliers of raw material.
--Differentiated business is vulnerable to low-cost competitors offering similar
products at lower price.
Focus differentiation strategy:
--Such firms produce highly differentiated products or services for the specialized
needs of market niche.
--Here, the strategy is to consciously limit the set of customers it seeks to target.
It targets customers for whom high price is acceptable and who look for high
performance, prestige, safety, security.
Focus differentiation is most effective when market demand is inelastic.
Low cost-differentiation strategy(no focus):
--Pursing low-cost and differentiation strategies simultaneously.
This may not be advisable as differentiating a product generally costs a
considerable money, which would erode firms cost leadership basis.
This may hamper quality due to cost cutting efforts, hence both are not feasible.
 Strategic Choice
However, the best example of a business that has successfully combined the two
approaches is McDnnalds.
Its sheer market leadership in fast food market has enabled it to buy raw materials
at the lowest prices, yet maintaining differentiation due its policy of friendly
service, clean environment, and quality consistency.
Low cost airlines with highly differentiated service performance on the basis of
punctuality , service and reliability like Indigo.
A business can simultaneously follow the low-cost differentiation strategy through
means like commitment to quality, differentiation on low prices, process
innovations, product innovations and structural innovations.
Commitment to quality throughout the organization not only improves output but
also reduces costs involved in scrap, rework, warranty, service due to faulty
workmanship after sale etc.
Building better quality into a product need not always increase costs because of
the reduction in rework costs, scrap costs, servicing costs and in the long run
improve customer satisfaction and company image or brand.
 Strategic Choice

Firms with low production costs do not always translate these into low
prices.
However, many firms that achieve low-cost positions also lower their
prices because their competitors may not be able to afford to match their
price level.
These firms combine low-cost with differentiation.
Process innovations increase efficiency of operations and distribution.
For example, by eliminating processes that do not add value to the end
product not only eliminates costs but can increase production and delivery
speed(e-commerce?), which is a key form of differentiation.
Product innovations are expected to enhance differentiation and lower
costs.
Structural innovationsmodifying the structure of organization or the
business model can improve competitiveness.
Approaches to structural innovations include outsourcing, ideas like e-
commerce in different fields etc.
 Strategic Choice

2.Knowledge as a source of competitive advantage: Companies who see

their employees as expenses tend to minimize their costs, while those
who see employees as investments, tend to maximize employee value by
managing them strategically.
As per knowledge management perspective, human capitalpeople &
their skills represent the only resource that cannot be reproduced by
competitors.
Executing knowledge-based strategy is nurturing people with knowledge.
Companies must develop cultures conducive to learning, sharing &
personal growth to realize the collective knowledge of its people to its
competitive advantage.
3. Assess competitor strategies: Important to understand how rivals
compete, what they are attempting to accomplish, what unique strengths
& weaknesses they possess relative to others in industry. Understanding
them helps management to forecast any competitive responses that rivals
might make to a change.
 Strategic Choice

4. Global strategies: Businesses operating globally, need to think

globally, but act locally.
This means while serving multiple markets globally, it must
formulate a distinct competitive strategy for each specific market
that is tailored to its unique situation.
Differentiation strategies:
When competitive advantage for a company lies in adding special
features/services as demanded by customers even though the price
is higher.
Differentiation as a strategy is employed when the market is too
large to be catered by a few organizations offering a standard
product, customer needs and preferences are diversified, it can
charge a price premium for such a product/service, brand loyalty is
possible.
 Strategic Capabilities

It is not just environment or other factors that distinguishes a firms

performance but their internal strategic capabilities.
In fact, under similar circumstances, firms have different financial
performance.
There are three basic concepts of strategic capabilities:
--First, organizations are not identical, but have different capabilities. They
are heterogeneous in this respect.
-- Second, it can be difficult for one organization to obtain or copy the
capabilities of another(like location, managerial experience).
Third, if an organization is to achieve competitive advantage, it will do so
on the basis of capabilities that its rivals do not have or have difficulty in
obtaining.
This explains why some organizations are able to achieve superior
performance compared with others.
They have capabilities that permit them to produce at lower costs or
generate a superior product or service in comparison to others.
 Strategic Capabilities

This is also known as resource based view of strategy i.e. the competitive
advantage and superior performance of an organization is explained by
the distinctiveness of its capabilities.
Thus, strategic capability can be defined as the resources and
competencies of an organization needed for it to survive and prosper.
Resources & competencies:
Tangible resources are physical assets an organization possesses like plant,
labor, finance and intangible resources are non-physical like information,
reputation, knowledge.
A firms resources are classified into four categories:
1.Physical resources: machines, buildings etc. The nature of these
resources such as age , condition, capacity and location of these
resources will determine usefulness of such resources.
2. financial resources: capital, cash, debtors, creditors and suppliers of
money( share holders, bankers).
 Strategic Capabilities

3. Human resources: skills and knowledge of employees in an organization.

4. Intellectual capital: patents, brands business systems, customer data bases etc.(
goodwill of a company).
How an organization employs and deploys these resources matters as much as its
resources.
The effectiveness and usefulness of such resources depends on not just their
existence but how they are managed. The cooperation between people,
departments, their innovative capacity, their relationships with customers &
suppliers is equally valuable.
The term competencies means the skills & abilities by which resources are
deployed effectively through an organizations activities and processes.
To be successful in a highly competitive environment, a firm must have strategic
capability & this capacity is dependent on the resources and competencies it has.
To achieve competitive advantage, a firm must have strategic capabilities that its
competitors find difficult to imitate(core competencies).
Management of costs is a key strategic capability as customers benefit from cost
effectiveness in terms of lower prices or more product features for the same price.
 Resource Analysis

Strategic capability of an organization is determined by the adequacy &

suitability of its resources & competencies.
These qualities enable it to survive & prosper.
The resources analysis is a systematic planning tool which considers a) the
resources required to support particular strategies, and those needed to
gain competitive advantage b) the required competencies to effectively
use those resources.
The resources that an organization has are as important as its ability to
effectively use and manage those resources.
The categories of resources are:
A) Physical: buildings plant & machinery, the relative age of plant will
determine its usefulness & adequacy.
B) financial: funds, adequacy of working capital
C) Human resources: includes the number and skills of employees
D) Intellectual capital: brand names, patents, reputation, client data bases,
business systems.
 Resource Analysis
A resource analysis needs to consider how resources are managed ,
deployed, and utilized.( There is no merit in an organization having a good
reputation and brand if it is not exploited effectively)
Capabilities are viewed at two levels- the threshold level capabilities and
competitive advantage level.
The threshold level is the survival requirement. Competitive advantage is
indicative of an organizations USPs like being a market leader etc.
Resources are those that are required to operate at a level, competencies
are those requisite skills , experiences, and abilities to use those
resources.
Organizations that want to not just survive but excel in what they do, must
have strategic capabilities that competitors find it difficult to emulate or
copy or get hold of.
These strategic capabilities consist of unique resources or an
organizations core competencies.
 Strategic Choice
Organizations continually face challenge of exercising choices among alternatives.
The level of a choice is called strategic choice
It is called strategic because a) it is a long term decision b)involving a long term
commitment and affects c)a lot of analysis goes into making a strategic choice.
The decision-making process consists of objectives, generating alternatives,
choosing one or more that will help the organization achieve its objectives.
An organization has to look carefully inwards (its internal strengths, systems, goals,
policies, technology level etc.) outwards ( environment, competition, industry,
market, government policies etc.) before taking a leap in the unknown.
Once it goes on a new course, many things happen which were not foreseen.
So, it has to be prepared with contingency strategies.
Process of decision making:
The process of strategic choice is a decision- making process.
It consists of setting objectives, generating alternatives, choosing one or more
alternatives, implementing the chosen alternative.
For making a choice from among alternatives, decision makers have to have a set
of criteria on which to accept or reject any alternatives.
 Strategic Choice
These criteria act as selection factors.
Four steps involved in the process of strategic choice:
1. Focusing on strategic alternatives:
--The objective of focusing on few strategic alternatives is to narrow down
the choice of manageable number of feasible strategies.
--Considering too many alternatives would make the process unwieldy and
unproductive; but if only a few alternatives are considered, the decision
maker may ignore which should have been considered.
--To resolve this dilemma, a decision maker has to focus on a reasonable
number of alternatives.
--Focusing on alternatives could be done by visualizing the future state
and then working backwards.
--This can be done through gap analysis.
--Here, a company may set objectives for a future period of time, say five
years, and work backwards to find out where it can reach through the
present level of efforts.
 Strategic Choice
--The gap can be found by analyzing the difference between the projected and
desired performance.
--How wide or narrow the gap is, its importance and the possibility of it being
reduced, influence the focus on alternatives.
--At corporate level, there are four alternatives: expansion, stability, retrenchment
and combination.
--Where the gap is narrow, stability strategies would be a feasible alternative.
--Where there is a large gap, say due to expected environmental opportunities,
expansion strategies are more likely.
--If the gap is large due to past or expected bad performance, retrenchment
strategies will be more likely.
--In a complex scenario where multiple reasons are responsible for the gap,
combination strategies are more likely.
--As a business strategy, organizations must think of alternative ways of competing.
--While deciding on competitive strategies, the choice is between positioning a
business as a low cost one, differentiated or focused.
 Strategic Choice
--Hence, it is essential for organizations to understand the conditions in the
industry and then weigh carefully the risks or benefits of each competitive
positioning before making a choice.
--Once a choice is made on taking a particular competitive position, it will
essentially lead to a situation of dynamic competitive positioning where low cost
or differentiation will have to be a position to be followed continuously.
-- The three major dimensions of a business are customer groups, customer
functions, and alternative technologies.
--These three dimensions enable decision makers to work on each of them and
generate a number of alternatives.
--A company could generate alternatives by working forward from a present
position to a future position it wishes to be in. Example: a company in a food
processing segment can cover customer groups in health food segment, snack
food segment or even soft drink segment or milk processing. Customer functions it
can cover are flavor, freshness or taste. It can look at alternative technologies like
different raw material processing, different packaging material( tetrapack,
pouches, bottles), usage of different flavoring agents and additives for health food
etc, processing of various agricultural raw materials etc.
 Strategic Choice
--In this way it can explore several alternatives within the same industry.
2.Analysing strategic alternatives:
--By narrowing down the strategic choices should lead to a few feasible
alternatives.
--These alternatives must be thoroughly analyzed based on certain factors
known as selection factors, which determine the criteria on the basis of
which evaluation of strategic alternatives can be made.
--The selection factors are: objective and subjective factors.
--Objective factors are hard facts and data to facilitate a strategic choice
percentage market share in an industry.( They are also known as rational,
prescriptive factors).
--Subjective factors are based on ones personal judgment, descriptive
factor like perception of top management regarding prospect of a business
in next three years.
--The alternatives that are generated during the first step have to be
subjected to analysis on the basis of these factors.
 Strategic Choice
3.Evaluating strategic alternatives:
--Narrowing the choices leads to a few alternatives, each of which needs to be
evaluated for its capability.
--It involves bringing together the analysis done on the basis of objective and
subjective factors.
--Examples are diversification or new product/market addition by a company.
4.Choosing from among the strategic alternatives:
--The evaluation of strategic choice should lead to a clear assessment of which
alternative is the most suitable under the existing conditions.
--Finally, one or more strategies must be chosen for implementation.
--A blueprint or a strategic plan or perspective plan is a detailed document which
provides information regarding different elements of strategic management and
how to put the strategies in action.
--It also considers contingency strategies.
--A strategic plan could contain information like:
 Strategic Choice

* A statement of strategic intent covering vision, mission, goals,

objectives.
*Results of environmental appraisal, opportunities and threats and other
critical success factors.
*Results of organizational appraisal, major strengths, weaknesses, core
competencies.
*Strategies chosen and assumptions under which those strategies would
be relevant.
*Contingent strategies to be used under different conditions.
*Strategic budget and resource allocation for strategy implementation and
its schedule.
*Proposed organizational structure and systems for strategy
implementation including top functionaries and their role and
responsibilities.
*Performance appraisal assessment measures and assess the success of
strategy implementation.
 Strategic Analysis

It is the investigation of objective factors being considered in the process of

strategic choice.
Issues like which industries to enter, which ones to exit, which businesses to enter
or to acquire, which products to manufacture and which ones to market(even if
the firm does not manufacture such products but gets them manufactured), are
considered.
Strategic analysis is meant to answer these and many more questions.
Tools and techniques of strategic analysis:
Due to internationalization, digitalization and use of soft- wares, the availability of
new tools and techniques is spreading fast.
Strategic analysis can be done at two levelscorporate and business levels.
Corporate level analysis focuses on techniques for analyzing businesses under
same corporate umbrella.
Corporate level strategic analysis treats a corporate entity as constituting a
portfolio of businesses under a corporate umbrella.
The analysis focuses on what a corporate entity should do regarding the several
businesses in a portfolio.
 Strategic Analysis

The strategic alternatives available are the corporate strategies like stability,
expansion, retrenchment and combination strategies.
Corporate level strategic analysis is relevant for a diversified corporation having
several businesses.
The main focus of business level strategic analysis is competition.
The area of focus, therefore, is the markets and industries where organizations
compete.
Analysis here focuses on the question of what means the organization should
adopt with regard to the business it does.
These means are the strategic alternatives of cost leadership, differentiation and
focus.
Business level analysis focuses on individual businesses under the corporate
umbrella from the perspective of the industry to which each of those businesses
belong and on the unique competitive situations they face in their respective
industries.
1.Corporate portfolio analysis: Is a set of techniques that help strategists in taking
decisions with regard to individual products or businesses in a firms portfolio.
 Strategic Analysis

--Its used for competitive analysis and strategic planning in multi-product, multi-
business firms.
--The main advantages are that resources could be targeted at the corporate level
to those businesses that possess the greatest potential for creating competitive
advantage, which will hold a promise of faster growth.
GE-Nine-cell Matrix: Based on efforts from GE and McKinsey.
Briefly, vertical axis represents industry attractiveness, which is a weighted
composite rating based on eight different factors.
These factors are- market size and growth rate, industry profit margin, competitive
intensity, seasonability, cyclicity, economies of scale, technology and social,
environmental, legal, human impacts.
The horizontal axis represents business strength competitive position, which is a
weighted composite rating based on seven factors-relative market share, profit
margins, ability to compete on price and quality, knowledge of customer & market
competitive strengths & weaknesses, technological capability & caliber of
management.
Here, a good use has been made of the industry, competitor and SWOT analysis
information for determining the weight age and rating to assign to each factor.
 Strategic Analysis

Strategic managers have difficulty coordinating activities of multiple business units , particularly
when they are not related at all.
Another type of corporate portfolio management framework have been developed to provide
guidelines for strategies.
BCG growth share matrix: Developed in 1967 by Boston Consulting Group.
Its a framework that categorizes a firms business units by market share they hold & the growth
rate of respective markets.
The markets rate of growth is indicated on the vertical axis, & the firms share of the market on
horizontal axis.
Management & consultants can categorize each business unit as a star, question mark, cash cow or
dog, depending on each ones relative market share and the growth rate in the market.
A star business unit has a large share of high-growth market, generally 10% or higher.
Generally, stars are profitable but often necessitate considerable cash to continue their growth & to
fight off many competitors that are attracted to the fast growing markets.
Question marks are business units with low shares of rapidly growing markets, may be new
businesses entering the market.
 Strategic Analysis

If they are able to grow & develop into market leaders, they evolve into stars; if
not they are likely to be divested or liquidated.
A cash cow is a business unit that has a large share of a slow growth market,
generally less than 10%.
Cash cows are normally highly profitable because they often dominate the market
that does not attract a large number of new entrants.
Because they are well established, they need not spend vast resources on product
promotions, advertisements, customer rebates.
The firm can invest its excess cash that they generate in stars or question marks.
Dogs are business units that have small market shares in slow-growth or declining
industries.
Dogs are generally marginal businesses that incur either losses or small profits,
and are often liquidated.
Ideally, a well-balanced corporation should have mostly stars and cash cows, few
question marks ( they may be future of the corporation), and few or none dogs.
To attain this ideal corporate level , managers have four options.
 Strategic Analysis

First, managers can build market share with stars and question marks.
The key to question marks is to identify and support the promising ones so that they can be
transformed into stars.
Building market share may involve significant price reductions, which may result in losses or
marginal profitability in the short run.
Second, management can hold market share with cash cows, thereby generating more cash than
building market share does.
Hence, the cash contributed by the cash cows can be used to support stars and those question
marks deemed to be most promising.
Third, management may harvest or milk as much short-term cash from a (dog) business as
possible, usually while allowing its market share to decline.
The cash gained from this strategy can be used to support stars and selected question marks.
The businesses harvested usually include dogs, question marks that demonstrate little growth
potential, and some weak cash cows.
Finally, management may divest a business to provide cash to the corporation and stop the
outflow of cash that would have been spent on the business in the future.
As dogs & less promising question marks are divested, the cash thus provided is reallocated to
stars and more promising question marks.
 Strategic Analysis

A healthy multi-business unit firms should maintain a balance of business units that generate
cash & those that require funds for growth.
As per the diagram, business units below the dotted line are revenue generators whereas
business units above the dotted line are revenue users.

STAR QUESTION MARK

Percentage High
market/
Industry
growth rate CASH COW DOG
Low

High Low
Relative market share
 Strategic Analysis
The balance of business on both sides of the line can be a key factor in
decisions to acquire new business units or divest old ones.
Generally, the BCG matrix heavily emphasizes the importance of market
share leadership as a precursor to profitability.
Some question marks are cultivated to become leaders but less promising
question marks or dogs are usually targeted for harvesting or divesture.
The BCG matrix provides managers with a systematic means of
considering the relationships among business units in a portfolio.
The drawbacks of the model are: It assumes that strategic managers are
free to make portfolio decisions like transferring capital from cash cows to
question marks, without challenges from shareholders. It also assumes
that success is directly linked to high performance , a relationship which
may not always exist in a corporation.
However, the model is an excellent starting point for discussion on critical
strategy issues and should not be interpreted literally.
 Corporate strategies

The next step in the strategic management process is to evaluate the firms current
strategic direction.
Strategies exist at three levels in any organization: the corporate or firm level, the
business unit level, and the functional level.
Corporate level strategy is the strategy top management formulates for the overall
corporation.
In general, corporate level strategies precede the competitive and the tactical
issues related to business and functional strategies.
Most firms start as single business companies and continue to grow in one
industry.( McDonalds, Wal-Mart).
By competing in only one industry, a firm can benefit from the specialized
knowledge it develops by concentrating its efforts on a single business area.
This knowledge can help a firm improve product or service quality to become
more efficient in its operations.
McDonalds can maintain its low per-unit cost of operations by concentrating on
fast food industry.
Wal-Mart benefits from expertise derived from concentration in retailing industry.
 Corporate Strategies

Firms operating in single industry are more susceptible to sharp downturns in

business cycles, hence many diversify & compete in different industries.
Firms may choose to diversify into related or unrelated industries.
Related diversification involves diversification into similar businesses that may
complement the primary business and can reduce the risk associated with
operating in a single industry.
Unrelated diversification is driven by the desire to capitalize on profit
opportunities in a given industry and involves the corporation in businesses that
are dissimilar.
Key to successful related diversification is the development of synergy among
related business units.
First step is to identify the potential for a strong fit among the business units.
Three basic strategic alternatives exist at corporate level: growth, stability and
retrenchment.
Growth strategies include internal growth, horizontal integration, horizontal
related diversification, unrelated(conglomerate) diversification, vertical
integration, mergers, strategic alliances.
 Corporate Strategies
Internal growth: A corporate level strategy for growth in which a firm expands by internally
increasing its size and sales rather than by acquiring other companies.
It seeks to significantly increase its revenues or market share.
Internal growth is accomplished when a firm increases revenues, production capacity, its
workforce.
Internal growth can occur by growing an existing business or creating new ones.
External growth is accomplished when other firms are acquired.
Horizontal (related ) integration: When a firm acquires other companies in the same line of
business in a process called horizontal integration.
It allows the firm operating in a single industry to grow rapidly without moving into other
industries.
Hence the primary impetus for this strategy is to increase the market share which can create
economies of scale, increase its negotiating power with suppliers.
Horizontal related diversification: When it acquires a business outside its present scope of
operations, but with similar or related core competencies.( key capabilities & collective skills it
possesses that are fundamental to its synergy, performance, long-term profitability)
The purpose is to create synergy by transferring/sharing the capabilities among various units--
consolidating their business to gain economies of scale.
 Corporate Strategies

When a firm lacks one or more key competencies and acquires a business unit
that possesses them, these two firms have complementary core competencies.
Example when a traditional retailer with reputation for quality acquires e-tailer
with strong internet presence to combine their capabilities so that the new firm
can enjoy the best of two competencies.
Synergy occurs when the combination of two organizations results in higher
efficiency and effectiveness than would otherwise be generated by them
separately.
Synergy happens when there are similarities in product or service lines,
relationships in distribution channels, technical expertise across business units.
Conglomerate(unrelated) diversification: When a corporation acquires an
unrelated industry.
This may reduce cyclical fluctuations in business and cash flow or revenues.
Diversifying in related industry is for strategic reasons, unrelated diversification is
mainly financial driven.
Managers need to develop required expertise to manage unrelated businesses.
 Corporate Strategies

Vertical integration: Refers to merging of various stages of business activities in

the distribution channel.
Full integration occurs when a firm performs all activities ranging from
procurement of raw materials to production of final products.
Firms that engage in some but not all of these activities are only partially
integrated.
When a firm acquires its suppliers (expanding upstream), it is engaging in
backward integration.
When it acquires its buyers( downstream expansion) is engaging in forward
integration.
Vertically integrated firms enjoy benefits of integration like reduced transportation
costs, provide more opportunities to differentiate products because of the
increased control over inputs, and provide access to distribution channels that
would not be otherwise accessible to the firm.
Transactions costs between suppliers and buyers can be reduced when the same
firm owns both entities.
Proprietary technology can be more easily secured when information is shared
among businesses owned by the same parent firm.
 Corporate Strategies

By coordinating distribution activities among the business units, it is easy

to reduce the costs.
It also helps to develop and maintain high quality when a single firm
controls all businesses associated with the production of a good or
service.
Disadvantages of vertical integration are: it can reduce operational
flexibility because the firm has heavily invested in upstream and
downstream.
It can increase costs of production and reduce efficiency due to lack of
supplier competition.
Overhead costs may increase due to the need and ability to coordinate
activities among business units increase.
Because producers within a vertically integrated group are committed to
working with suppliers owned by the same firm, it will be forced to pay
higher input prices if the suppliers are not pricewise, technologically
competitive.
 Corporate Strategies

Mergers: A merger occurs when two or more firms (usually of similar sizes)
combine into one through an exchange of stock. Other terms used are
amalgamation, consolidation, integration.
One firm acquires the assets and liabilities of the other in exchange for shares or
cash or both .
The organizations are dissolved and assets and liabilities are combined & new
stock is issued.
For the organization which acquires another, it is an acquisition.
For an organization which is acquired, it is a merger.
Firms with large, successful businesses often acquire smaller competitors with
different or complementary product or service lines.
If both organizations dissolve their identities to create a new organization, it is
consolidation.
Mergers are generally undertaken to share or transfer resources and/or improve
competitiveness by developing synergy.
Post liberalization period has seen an increasing use of takeover strategies as a
means of rapid growth.
 Corporate Strategies

The SEBI has notified a comprehensive code for regulating takeovers in India to
ensure that the acquisition process is transparent and fair.
Some of the major reasons for M&A are legal reforms, economic reforms,
economic downturns and slowdown, changes in shareholder attitude specially of
financial institutional investors, increasing MNC involvement.
There are different types of mergers and acquisitions:
1.Horizontal mergers take place when there is combination of two or more
organizations in the same business ( a pharmaceutical company combining its
business with another)
Vertical mergers take place when there is a combination of two or more firms but
not necessarily in the same business.
This creates complementarities either in terms of supply of materials(inputs) or
marketing of goods & services(outputs).( a footwear company combining with a
tannery).
Concentric mergers take place when there is a combination of two or more
organizations related to each other either in terms of customer functions,
customer groups.
 Corporate Strategies

Example: A footwear company combining with a hosiery company making socks or

with another leather goods company making leather purses, handbags, belts.
Conglomerate mergers take place when there is a combination of two or more
organizations unrelated to each other, either in terms of customer functions,
customer groups. Example is when a footwear company combining with a
pharmaceutical company.
Reverse mergers are known as demergers or spin-offs.
Demerger involves spinning off an unrelated business or a division in a diversified
company into a stand alone company, along with a free distribution of its shares to
the existing shareholders.( Reliance).
Reasons for M&A: The buyer organization and the seller organization have reasons
to merge. The reasons for a buyer are:
i) To increase the value of organizations stock
Ii)to increase the growth rate and make a good investment
Iii) to improve stability of its earnings & sales
Iv) diversify its product line
V) to reduce competition
 Corporate Strategies

Vi) to acquire a needed resource quickly

Vii) to avail tax concession and benefits
Viii) take advantage of synergy
Reasons for a seller to merge are:
i) to increase the value of owners stock
ii) to increase growth rate
iii) to acquire resources for growth and stabilization
iv) tax benefits
V) to deal with management succession problems
Issues in M&A: There are different issues involved from both organizations like
accounting issues, finance, legal matters which require expert handling from
consultancy and legal firms.
A) There are strategic issues like commonality of strategic issues between the
buyer and seller firms.
A-1) To obtain positive synergic effects, the strategic advantages & distinctive
competencies of the merging firms have to be analyzed.
 Corporate Strategies

A-2) A merger should lead to the generation of strengths that would help the post
merger entity to achieve its objectives in a better manner.
B) Financial issues like valuation of the business and shares of the target firm,
sources of financing for mergers and taxation matters after merger.
Valuation of the business of the target firms is a detailed and comprehensive
process that takes into account tangible and intangible assets, industry profile of
the firm and its prospects, future earnings, prospects of the target firm.
Valuation of the shares takes into account factors like stock exchange price of the
target firm, dividends record, growth prospects of the firm, value of assets, quality
of top management, industry & competitive conditions, opportunity cost
assessment by computing yields on comparable investments.
B) The second issue is of financing for acquiring firms.
There are sources of funds like companys own funds or borrowed funds, ( bonds,
deposits, external commercial borrowings, loans etc).
The third issue of taxation matters is dealt with under the relevant provisions of
the Income Tax Act ( relating to issues like carrying forward losses, unabsorbed
depreciation, capital gains tax etc)
 Corporate Strategies

C) Managerial issues in M&A relate to problems of managing firms after the

merger.
The perception of how management will take place post the merger also matters
& affects the merger itself.
Usually, mergers are followed by changes at the top.
If a merger is threatening to the concerned affected management, it results in
opposition from that section of management & can foil the attempt.
It can affect the morale of the team adversely resulting in the exodus of
employees.
D) Legal issues in M&A relate to provisions of law.
The implementation of merger requires a thorough understanding of the
provisions of the law.
Steps in M&A;
-spell out the objective
-indicate how the objectives would be achieved
-assess managerial quality
Check compatibility of business styles
 Corporate Strategies

-anticipate & resolve the problems early

-treat people with dignity & concern
First the motivation for the takeover is defined.
There can be many reasons like quick growth, diversification, reducing
competition, increasing market share or goodwill.
There are leveraged buy-outs which involve raising funds by pledging assets of the
firm to be taken over.
After finances are arranged, negotiations are made keeping in view factors like
valuation of assets, business goodwill, market opportunities, growth potential etc
& a final arrangement is made by fixing the price to be paid for share transfer.
In this way a friendly takeover is made.(Tata steel & Corus).
Hostile takeovers-where a takeover is resisted by existing management or
professionals-happen when shares are picked up from the open market and
controlling interests obtained.
With tacit help from majority shareholders, a bid is made to enter a companys
board to acquire control.
 Corporate Strategies

Resistance is offered by existing management by refusing to register transfer of

shares or through court orders.
In India, political support matters a lot in such takeovers.
There are some shortcomings in the process.
In an acquisition, the acquiring firm must pay a premium( an amount greater than
the current share price) to acquire a firm. This leads to increased debt and legal
fees.
Top management in the acquired firm often depart the firm.
Other arguments against merger is that takeovers do not create real assets for
society, interest of minority shareholders is not protected, takeovers reduce
competition and facilitate monopolies/oligopolies, increase prices, lead to job
losses.
There are difficulties in the cultural integration of the merging firms.
Many believe they are necessary because they ensure management accountability,
offer growth opportunities, offer sick units a chance to survive, increase sales
revenues, enlarge product & brand portfolios, increase market share.
 Corporate Strategies

There can be valid reasons like making it a part of the investment portfolio, to
consolidate capacities, taking assistance in diversification and integration and
creating synergistic effects, offer best opportunities for value-creating
propositions.
Successful companies use mergers as an integral part of expansion strategies.
Strategic Alliances also called partnerships, occur when two or more firms agree
to share the costs, risks, and benefits associated with pursuing new business
opportunities.
Such arrangements include joint ventures, franchise/license agreements, joint
venture operations, joint long-term supplier agreements, marketing agreements,
and consortiums.
Strategic alliances can be temporary, disbanding after the project is finished, or
can involve multiple projects over an extended period of time.
Strategic alliances can be pursued as an alternative to diversification.
Here, a firm may opt to work closely with other firms to pursue various business
opportunities instead of attempting to purchase the firms outright.
Another reason is to generate greater customer value through synergy.
 Corporate Strategies

A particular project may be so large that it would strain a single companys

resources or require complex technology that no single firm possesses.
Here firms with complementary technologies can combine forces or one
firm can contribute its technological expertise while the other contributes
its management, finances and other abilities.( BramHos development
where India contributed capital and manpower & Russia its technology)
Strategic alliances have two basic advantages first they minimize
increases in bureaucratic, developmental and coordination costs as
compared with mergers and acquisitions.
Second, each company can share in the benefits of the alliance without
bearing all the costs and risks.
Major disadvantage is that one partner in the alliance may offer less value
to the project than the other but may gain disproportionate amount of
critical know-how from the cooperation with the other.
 Corporate Strategies
A joint venture could be an entity resulting from a long-term contractual agreement between
parties to undertake mutually beneficial economic activities, exercise joint control and contribute
equity & share in the profits or losses of the equity.
Mergers are a combination of two or more companies into one company and is done by absorption
and consolidation.
Absorption takes place in mergers & acquisitions where the company acquires another company.
Consolidation takes place when two or more companies combine to form a new company.
Joint ventures are a special case of consolidation.
Conditions for joint ventures to gain access to a new business are:
-when an activity is uneconomical for a firm to do alone
-when the risk of business has to be shared in order to reduce it
-when distinctive competence of two or more organizations can be brought together
-when setting up new company requires surmounting hurdles like import quotas, tariffs political or
cultural roadblocks etc.
Thus, joint ventures are an effective strategy when development costs have to be shared, risk
spread, and expertise combined to make effective use of resources.
Major triggers for joint ventures are technology (foreign partner), geography(foreign partner has to
be present in India as well as other countries like insurance), regulation(when a highly regulated
sector opens up like defense), sharing risk & capital(capital intensive sectors like oil exploration,
capital goods), intellectual exchange( legal business).
 Corporate Strategies

Joint ventures can be formed between two Indian companies, between an Indian
and a foreign company in India or in the country of the foreign partner or in a third
country.
Joint ventures offer the advantages of achieving objectives mutually by the
participating firms, eliminate or reduce competition, increasing market share, for
diversification, getting critical technologies.
Advantages are minimization of risks, reducing individual companys investment,
access to foreign technology, broad-based equity participation, access to
governmental and political support, creating synergistic advantages.
Disadvantages are problems in equity participation, foreign exchange regulations,
lack of proper coordination among participating partners, disagreements between
partners.
Strategic Alliances: Two or more firms unite to pursue agreed goals, but remain
independent subsequent to the formation of alliance, partner firms share the
benefits of alliance and control over the performance of assigned tasks, partner
firms contribute on a continuing basis in key areas like technology, product etc.
Here, a common strategy is developed in unison & adopt win-win attitude.
 Corporate Strategies

The relation is reciprocal, with each partner willing to share specific strengths with
each other.
Pooling of resources, investment & risks for mutual gain.
Reasons for strategic alliances are for entering new markets, reducing
manufacturing costs by pooling in resources to gain economies of scale), to
develop technological capabilities by leveraging technical expertise of two or more
firms, to accelerate product introduction.
Liberalization has led to growth opportunities for Indian companies.
To capitalize on opportunities, firms can either depend on their own resources or
look for cooperative partnerships outside.
Since developing own resources is a time consuming process, firms often look for
outside help.
Strategic alliances offer a growth route in which merging ones entity, acquiring or
being acquired or creating a joint venture may not be required.
Globalization has spurred the growth of strategic alliances.
Indian firms having shortcomings that can be offset by relying on strategic
alliances.
 Corporate Strategies

Global partners can help local firms by developing

global quality consciousness, creating adherence
to international standards, providing access to
the state-of-the art technology, gaining entry to
world wide mass markets and making available
funds for expansions.
Other reasons for strategic alliances are
availability of professional management
expertise, international reputation, global brand
name and brand equity and confidence to gain a
foothold in international markets.
 Strategy Formulation, Evaluation

Having analyzed the firms internal & external environments, it is necessary to review the firms
stated mission & goals to ensure that they are compatible with firms internal characteristics &
external environment.
Reconsidering the firms current strategic initiatives is the first step in evaluating its activities &
thinking about what the firm should be doing.
The first step in the process, a SWOT analysis, can enable it to position itself to take advantage of
opportunities in the environment while minimizing environmental threats.
Matching information about the environment with knowledge of its capabilities enables the
management to formulate realistic strategies for attaining its goals.
The SWOT analysis is intended to match firms S &W with the O & Ts posed by environment.
The value chain is a useful tool for analyzing a firms s & w and understanding how they might
translate into competitive advantages or disadvantages.
The value chain describes the activities that comprise economic performance and capabilities of a
firm.
It identifies primary( those directly related to its product & service) activities and support
activities(those that assist the primary activities) that create value for customers.
By considering all the processes of the firm---from procurement of raw material to delivery of the
final product/service, the strategic managers can identify all activities performed along the way that
may add exceptional value to the end product or detract from it.
 Strategy Formulation

A firms resources constitute its s & w which include factors in three basic
categories.
They are Human resources, which is experience, capabilities, knowledge, skills,
judgment of all firms employees.
Organizational resources are the firms systems & processes, including its strategies
at various levels, structure, and culture.
Physical resources like plant & machinery, geographic locations, access to raw
materials, distribution network, technology.
A firms sustained competitive advantage is dependent on its resources that are
long lasting and not easily acquired by rivals. When its resources can be readily
acquired by its rivals, that success is temporary.
A consideration of a firms s & w is a means of objectively assessing its resource
base.
Human resources can be examined at three levels the board of directors, top
management, middle management, supervisors & employees/workers.
Organizational Resources:
The alignment between organizational resources and business strategy is critical
for long term success.
 Strategy Formulation

The term dynamic capabilities refer to set of specific processes like product
development, strategic decision making.
Here key issues to be noted are consistency among corporate, business, and
functional strategies, consistency between organizational strategies & its mission &
goals, its position in industry, product & service quality, reputation of the firm.
Physical resources
They differ among close competitors.
Important issues are currency of technology, quality & sophistication of
distribution network, production capacity, reliable access to cost-effective sources
of supplies, favorable location.
Leveraging these synergies into sustained competitive advantage is a key task of
top management.
SWOT MATRIX: After SWOT analysis alternative courses of action can be analyzed
by creating a SWOT matrix.
The matrix extends the SWOT analysis by using it as a tool to generate alternative
courses of action for the firm.
A matrix is created by vertically listing strengths & weaknesses on the left hand
side & opportunities T threats listed across the top.
 Strategy formulation

Alternatives emerge from the combination of one or more strengths/weaknesses

from left side of the matrix with one or more opportunities /threats from the top.
For example, a company that can develop & produce high quality electronic
products in a short period of time(a strength) could take advantage of an increased
consumer interest in LED TVs(an opportunity) by developing & marketing one( a
strategic alternative).
This does not mean the company must do this but the alternative is worth
considering.
The SWOT matrix is a systematic means of developing strategic alternatives
available to an organization. This also requires brainstorming and creative skills as
well.
The matrix helps top management to leverage its strengths while minimizing the
detrimental effects of its weaknesses.
In general, four categories of alternatives emerge from the matrix, each
representing the combination of one or more strengths or weaknesses with one
or more opportunities or threats.
A large number of alternatives can be developed in a particular category.
 Opportunities Threats
1.Growth in developing 1.Possible increase in min
countries wages
2.Health consciousness in 2.Popularity of easy to
people make grocery items
Strengths Launch new locations in new countries
1.Financial stability
2.Brand name recognition
3.Consistency of products Develop & emphasize more healthy foods
& services

Weaknesses Introduce McDonalds frozen foods in grocery outlets

1.Declining market share
2.Dependence on fried
foods
 Strategy Formulation

Three possible courses of action could be identified for further

consideration.
First, McDonalds could emphasize its financial & brand strengths & seize
an emerging market like India, China, Mexico.
Second, it could address its weaknesses of declining market share &
dependence on fast foods & capitalize on a greater health awareness in
people by developing & emphasizing more healthy foods.
Third, it could emphasize its brand name & consistency strengths &
address the threat of increased popularity of easy-to-prepare grocery
items by introducing its own line of grocery products.
This example considers a few hypothetical items in each of SWOT
categories, but does not suggest it should necessarily adopt any of these
alternatives.
Selecting a no change option in its current policy need not be a low risk
option because resisting change may expose a firm to dangers.
 Strategy Formulation

1.Strength-opportunity alternatives utilizing an organizational strength to address an opportunity.

2.Weakness-threat alternatives involve taking some corrective action to eliminate or minimize a
weakness so as to minimize the effect of threat.
Strength-threat alternatives involve utilizing a strength to eliminate or minimize the effect of a
threat .
Weakness-opportunity alternatives involve shoring up a weakness so that the organization can take
advantage of an opportunity
Strategic Evaluation:
Strategic evaluation and control is a process of determining the effectiveness of a given strategy in
achieving the organizational objectives and taking corrective action wherever required.
Through the process of strategic evaluation two important questions are answered:
1.Are the assumptions made during strategy formulation proving to be correct?
Is the strategy guiding the organization towards its intended objectives? Is there a need to
reformulate the strategy?
2.How is the organization performing? Are the resources utilized properly? Are the time schedules
being met?
The importance of strategic evaluation lies in its ability to coordinate the tasks performed by
individual managers as well as groups, division or SBUs-through control of performance.
There is a great need for a regular feedback, appraisal & reward so that appraisal can be done and
good performance rewarded or poor performance corrected.

 Strategic Evaluation

Strategic evaluation helps to keep a check on the validity of a strategic choice. An

ongoing evaluation will provide feedback on the continued relevance of the
strategic choice made earlier during the formulation phase.
Congruence between decisions and intended strategy. Evaluation helps to assess
whether taken by different managers during strategy implementation are in line
with the strategy requirements.
Successful culmination of the strategic management process
Creating inputs for new strategic planning: Strategic evaluation provides a
considerable amount of information & experience to strategists that can be useful
for new strategic planning.
Effective evaluation: When strategy drives the control system, evaluation is likely
to be effective.
For example, an organization implementing a cost leadership strategy needs to
emphasize tight cost control.
It will follow a system whereby frequent & comprehensive reports to monitor costs
are generated and use incentives based on clear financial targets.
On the other hand, implementation of a differentiation business strategy will
emphasize activities that help in the firm to stand out in the market place.
 Strategic Evaluation

Here, evaluation should be focused on quality control, if quality is the differentiating feature.
The basic issue in all evaluation is that control should be dictated by strategy.
Strategy Implementation
The best conceived plans can fail due to lack of poor implementation.
Effective strategy implementation requires managers to consider a number of issues like how the
organization should be structured, how its prevailing approach to leadership can help or hinder the
process.
Managing strategic change is difficult.
Techniques to institutionalize change must be developed.
Barriers & resistance to change should be recognized so that strategies can be developed to
overcome them.
When environment changes rapidly, progressive firms take steps to capitalize on new opportunities
.
Change can happen due to increased competition, improved quality, service or technology,
reduction in costs.
Strategic change can transform a firm when it changes its product line, markets, distribution
channels.
Strategic change can be operational when a firm overhauls its production system to improve quality
and lower the cost of operations.
Shifting strategic intent may require structural changes in the organization, can result in capital
invstments.
 Strategy Implementation

As organizations grow in size and operations, management must evaluate the

effectiveness of the evolving system of coordinating the tasks and consider
modifying it to implement its strategy.
Organizational structure exists to provide control and coordination for the
organization.
It designates formal reporting relationships and defines the number of levels in the
hierarchy.
Work can be organized logically along the function so that employees can work
only in their areas of specialty, by product, so that decisions about product can be
made in an integrated fashion, along geographical lines so decisions can be
tailored to specific needs of each region.
Many companies change structures when environment changes.
The growth of an organization expands its structure.
A vertical growth refers to an increase in the length of the organizations hierarchy
.
A tall organization is composed of many hierarchical levels & narrow spans of
control, where as flat organization has few levels with a wide span of control.

 Strategy Implementation

Tall organizations have a narrow span of control where managers exercise a high degree of control
and authority is centralized.
Strategically, tall organizations foster more effective coordination & communication of the
businesss missions & goals.
Planning & execution is relatively easy because all employees are centrally directed.
Hence, tall structures may be suitable for businesses that are relatively stable and predictable.
In flat structures, costs tend to be lesser because of fewer hierarchical levels, which need fewer
managers.
Decentralized decision making gives managers more authority.
Hence, flat structures may be more suitable for dynamic environments where freedom in decision
making encourages innovation.
Horizontal growth leads to an increase in the breadth of organizations structure.
With growth, each function expands so that no one individual is involved in all company functions,
the structure of the organization is broadened to accommodate more specialized functions.
A large firm may become less efficient and less capable of meeting needs & expectations of
customers.
A horizontal structure is one with fewer hierarchies .
As layers are reduced, decision making becomes more decentralized.
 Strategy Implementation

Growth of an organization requires that it be organized along functional areas.

In functional structure, each subunit of the organization engages in firm-wide activities related to a
particular function, like marketing, HR, finance or production.
Managers are grouped according to their expertise and the resources they use in their jobs.
A functional structure has strategic advantages as it can improve specialization & productivity by
grouping together people who perform similar tasks.
When functional specialists interact frequently, improvements and innovations for their functional
areas may evolve that may not have otherwise occurred.
Product divisional structure is a form of organizational structure whereby the organizations
activities are divided into self-contained entities, each responsible for producing, distribution, and
selling its own products.
Example- a software developer may organize along three product lines business, productivity, and
educational applications.
Each division will have its own functional areas, like R&D, marketing, finance.
The product divisional structure is used both in manufacturing & service organizations.
The emphasis on product lines results in a clear focus on each product category & a greater
orientation toward customer service.
Pinpointing responsibilities for profits or losses is easier because of profit center concept.
Its ideal for training & developing managers as each product manager is running his own business.
 Strategy Implementation

When a firms activities are dispersed at various geographic locations, it can

employ geographic divisional structure.
Its a form in which jobs & activities are grouped on the basis of geographic
locations.
It can be used on a local, national or international level.
Here, products & services may be tailored more effectively to the legal, social,
climatic differences of specific regions.
Matrix structure is a combination of functional and product divisional structure.
Personnel within matrix have two supervisors or bosses.
In a project, the project manager may pull together some members of the
organizations functional departments.
After the project is completed, personnel in the project return to their functional
departments.
Hence, some individuals may be assigned to more than one team at a time.
Such structure is used in organizations operating in industries with high rate of
technological change such as software development, management consulting,
telecommunicatios.
 Strategy Implementation

Matrix structure has some advantages.

First by combining the functional & product divisional structures, a firm can enjoy advantages of
both.
Secondly, matrix organization is flexible.
It permits lower level functional employees to become heavily involved in projects & gain
experience.
Assessment of organizational structure
Top managers can consider some basic issues to help determine whether the organizational
structure is appropriate for the present /proposed strategic direction.
1.Compatiability of existing structure with corporate profile, strategy: The product divisional
structure may be more appropriate than functional structure for firms operating in multiple
industries.
In addition, if the corporation intends to grow, a product divisional or geographic divisional
structure may not be suitable.
2.Number of hierarchical levels in the organization: Flatter organizations with fewer levels & wider
span of control tend to work more efficiently in dynamic environments where as taller
organizations may operate more efficiently in stable environments.
Not all of firms business units need to adopt the same structure.
3.Extent to which the structure permits the appropriate grouping of activities: The extent to which
organizational activities are appropriately grouped affects how well strategy is implemented.
 Strategy Implementation

For example, customers may be confused when they are contacted by multiple
sales people for the same company, each representing a different product line.
4. The extent to which the structure promotes effective coordination: Firms with
multiple related businesses require greater coordination than those operating in
single business.
As organizations become more complex, coordinating activities become more
difficult.
5. Extent to which structure allows for appropriate centralization/de-centralization
of authority: The extent to which decision making should be decentralized
depends on factor like organizational size.
Very large organizations tend to be more decentralized than smaller ones.
Firms with large numbers of unrelated businesses tend to be relatively
decentralized, whereby corporate level management determines overall corporate
mission, goals, strategy and lower level managers take actual operating decisions.
Finally, in a dynamic environment, organizations must be relatively decentralized
so that decisions can be made quickly.
 Strategic Control

Strategic control consists of determining the extent to which the organizational

strategies are successful in attaining its goals & objectives.
The implementation process is tracked & adjustments to the strategy are made as
required.
It is during the process of strategic control that gaps between the intended &
realized strategies are identified & addressed.
Though strategic control is the final step in strategic management process, it
should be on going process.
Like a steering wheel, strategic managers can steer an organization by initiating
modifications or make drastic changes.
Without strategic control, there are no clear benchmarks & reliable measurements
of how the company is doing.
Due to environmental uncertainty, strategic managers are not always able to
accurately forecast the future.
Strategic control serves as a means of accounting last minute changes during the
implementation process.
Strategic control is largely a function performed by the top management team.
 Strategic Control

Strategic control process has following steps:

1.Top management determines the focus of control by identifying internal factors
that can serve as effective measures for the success or failure of a strategy, as well
as outside factors that could trigger responses from the organization.
2.standards/benchmarks are established for internal factors with which the actual
performance of the organization can be compared after the strategy is
implemented.
3.Management measures or evaluates the companys actual performance, both
quantitatively and qualitatively.
4.Performance evaluations are compared with the previously established
standards.
5.If performance meets or exceeds the standards, corrective action s usually not
necessary. If performance falls below the standard, then management must take
remedial action.
1a. Focus of strategic control is both internal & external it is top managements
role to align the internal operations of the enterprise with its external
environment.
 Strategic Control

The focus on macro-environmental & industry forces must be continuously

monitored to determine whether the assumptions on which the strategy is based
remain valid.
In this context, strategic control consists of modifying the companys operations to
more effectively defend itself against threats that may arise.
Considering internal operations, top management must assess the strategy
effectiveness in accomplishing the firms missions & goals.
For example, if the firm is a low cost operator, its managers must compare its
production efficiency with those of competitors & determine the extent to which
the firm is attaining its goal.
Performance can be evaluated in a number of ways compare current operating
results with the last quarter or year, ROI, ROA, comparison.
2a.Profitability is the most utilized performance measure for gauging the
performance to exert strategic control.
The focus for benchmarking should not be always past performance as it ignores
important external variables.
Often, control standards are based on competitive benchmarking.
 Strategic Control

Best practicesprocesses or activities that have been successful in other firmsare adopted as a
means of improving performance.
3a.Other parameters like product/service quality, relative market share, are also used for
comparison.
4a.Control through performance occurs by comparing the companys profitability or market share
growth to others in the marketplace.
4a.Because individual measures of performance can provide a limited snapshot of the firm, many
companies use a balanced scorecard approach to measuring performance, whereby measurement
is not based on a single quantitative factor, but on an array of factors like return on assets, market
share, customer loyalty & satisfaction, speed, innovation.
5a. Control through formal & informal organizations: formal organization is the official structure of
relationships & procedures. The informal organization refers to norms, behaviors, expectations that
evolve when individuals & groups come into contact with one another.
Informal relationships can promote or impede strategy implementation.
6a.Crisis management refers to the process of planning for implementing the response to a wide
range of negative events that could severely affect an organization. (terrorist attacks, floods,)

 Managing Strategic
Change
As discussed so far, strategic management deals with dynamic situations within &
outside organizations.
Both, external & internal environment is dynamic.
Hence, an organization requites capabilities to continually adjust to changing
situations.
It is essential for an organization to be proactive to anticipate changes , externally.
Strategy implementation performs the task of keeping the organization internally
fit to be responsive to the external environment.
Strategy implementation necessitates change, therefore managing change is an
essential prerequisite of success of strategy implementation.
As agents of change, managers are expected to carry through the process of
management of change( example, when a company goes for ISO implementation,
there are many changes in the procedures, functions, ways of working required to
be made).
The process of change is triggered by either within or outside an organization.
The managers diagnose the organizational problems or proactively anticipate the
future challenges & opportunities & plan for change.
 Strategic Change

They identify the need for change, prepare the organization for implementing the
change, need to take steps to manage resistance to change & then start the actual
process.
The next step is to monitor the system to check whether the planned changes are
actually taking place.
A corrective action may be required if the change process is deviating from its set
course.
Innovation & learning are a parts of the change process.
Innovation is to find new ways of doing new things.
Learning from mistakes & not repeating the same mistakes are is an essential part
of the change process.
The process of change offers a unique learning opportunity to managers.
Changes are classified as radical or incremental/transformational the difference
being in the degree of change that occurs.
Radical changes are big changes involving major transformation within an
organization redesigning of organizational structure, changing the top
management team,or putting in place enterprise-wide resource planning system.
 Strategic Change

Incremental changes are small, slow moving, and routine that take place
over a long time period and are limited in their scope.
Examples of incremental changes are applying continual quality
improvements, rewriting or changing sales & distribution policies, or
implementing attitudinal change training programs for managers.
Timing of change focuses on the question of when to change?
The choice is either as a reaction to a crisis within or a major happing
outside, a reactive change.
When organizations foresee change & prepare to face it, it is anticipatory
change.
Planned strategy implementation will deal with radical, anticipatory
change example: launching of e-business initiative to reach out to
customers & suppliers, setting up joint venture with global players to
internationalize operations, or to embark on culture change program to
create customer oriented company for improving competitiveness.
 Strategic Change

Corporate Governance:
Broadly, it means the extent to which companies are run in an open & honest
manner.
Definition by the National Foundation For Corporate Governance states corporate
governance involves a set of relationships amongst companys management , its
board of directors, shareholders and other stakeholders. These relationships,
which involve various rules & incentives, provide the structure through which the
objectives of the company are set and the means of attaining those objectives and
monitoring performance are determined.
The key aspects of good governance are:
1. Transparency of corporate structures & operations
2. The accountability of managers & the board to the shareholders
3. Corporate responsibility towards employees, creditors, suppliers, local
communities where the corporation operates.
There are some organizational mechanisms for good corporate governance, such
as:
Having an effective board of directors
 Strategic Change

Fostering transparency through disclosure of information related to

organizations financial and operational performance
Framing a code of governance & committing the organization to its
implementation
Designing sound internal control systems
Instituting effective auditing & evaluation systems within the
organization
Having proper risk management procedures in place
Encouraging whistle-blowing policies within the organization
Designing fair compensation policies for managers
Corporate governance is not just an organizational matter.
Other stakeholders, apart from managers & employees too have a role
to play
 Globalization
Major factors that led to globalization are technological developments leading to
reduction in transportation costs, vast improvement in communication technology,
trade policy liberalization resulting in lower barriers to international trade &
investments.
In India, lowering of trade & investment barriers and easing of government
regulations in trade & investment has led to intensification of globalization of
production & markets.
The increased linkages among nations, internationalization of markets, trade,
finance, technology, labor, transportation, communication, and finance and
financial institutions has helped in the growth of international trade.
Globalization of production, outsourcing of skills and other inputs, has led to a fast
growth I international trade.
Porter has developed a model for competitive advantage of nations by extending
the idea of competitive advantage of firms.
In his view, four national characteristics create an environment that is conducive to
creating globally competitive firms in particular industries.
 Globalization

The four factors are called the diamond determinants.

1. Factor conditions: The special factors or inputs of production
such as natural resources, raw materials, labor, etc., that a is nation
is especially endowed with.
2.Demand conditions: The nature & the size of buyers needs in the
domestic market.
Related & supporting industries: The existence of related &
supporting industries to the ones in which a nation excels.
Firm strategy, structure and rivalry: The conditions in the nation
determining how firms are created, organized and managed and
the nature of domestic competition.
Based on the four factors, a country can determine the industries in
which a cluster of companies that are globally competitive can be
developed.
Governments play a very decisive role.
 Globalization

International strategies
1.Cost pressures denote the demand on a firm to minimize its unit costs.
By doing so, it tries to derive full benefits from economies of scale and location
economies.
The firm seeks to produce at a single or multiple global locations standardized
products & marketing them the world over to achieve economies of scale.
Pressures for local responsiveness make a firm tailor its strategies to national level
differences in variables like customer preferences, tastes, government policies, or
business practices.
By doing so, a firm customizes its products & services to the requirements of the
individual country-market it is serving.
Firms adopt a global strategy when they rely on low cost approach based on
reaping the benefits of experience, location economies, and offering standardized
products & services across various countries.
These products & services are offered in an undifferentiated manner in all
countries the global firm operates in, at competitive prices.