STRATEGIC MANAGEMENT UNIT- I STRATEGY AND PROCESS 9 Conceptual framework for strategic management, the Concept of Strategy and

the Strategy Formation Process Stakeholders in business Vision, Mission and Purpose Business definition, responsibility$case study% b!ecti"es and #oals $ Corporate #o"ernance and Social

Concept, Meaning, Definition: Strategy is the determination of the long$term goals and ob!ecti"es of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals% Strategy is management&s game plan for strengthening the organi'ation&s position, pleasing customers, and achie"ing performance targets%

Type of t!ategy Strategy can be formulated on three different le"els(

corporate le"el business unit le"el functional or departmental le"el%

Co!po!ate "e#e$ St!ategy

Corporate le"el strategy fundamentally is concerned with the selection of businesses in which the company should compete and with the de"elopment and coordination of that portfolio of businesses% Corporate le"el strategy is concerned with(

)each $ defining the issues that are corporate responsibilities* these might include identifying the o"erall goals of the corporation, the types of businesses in which the corporation should be in"ol"ed, and the way in which businesses will be integrated and managed%

Competiti"e Contact $ defining where in the corporation competition is to be locali'ed% +ake the case of insurance( ,n the mid$-../0s, 1etna as a corporation was clearly identified with its commercial and property casualty insurance products% +he conglomerate +e2tron was not% For +e2tron, competition in the insurance markets took place specifically at the business unit le"el, through its subsidiary, Paul )e"ere% 3+e2tron di"ested itself of +he Paul )e"ere Corporation in -..4%5

Managing 1cti"ities and Business ,nterrelationships $ Corporate strategy seeks to de"elop synergies by sharing and coordinating staff and other resources across business units, in"esting financial resources across business units, and using business units to complement other corporate business acti"ities% ,gor 1nsoff introduced the concept of synergy to corporate strategy%

Management Practices $ Corporations decide how business units are to be go"erned( through direct corporate inter"ention 3centrali'ation5 or through more or less autonomous go"ernment 3decentrali'ation5 that relies on persuasion and rewards%

Corporations are responsible for creating "alue through their businesses% +hey do so by managing their portfolio of businesses, ensuring that the businesses are successful o"er the long$term, de"eloping business units, and sometimes ensuring that each business is compatible with others in the portfolio% %& ine Unit "e#e$ St!ategy

1 strategic business unit may be a di"ision, product line, or other profit center that can be planned independently from the other business units of the firm% 1t the business unit le"el, the strategic issues are less about the coordination of operating units and more about de"eloping and sustaining a competiti"e ad"antage for the goods and ser"ices that are produced% 1t the business le"el, the strategy formulation phase deals with(

positioning the business against ri"als

anticipating changes in demand and technologies and ad!usting the strategy to accommodate them influencing the nature of competition through strategic actions such as "ertical integration and through political actions such as lobbying%

Michael Porter identified three generic strategies 3 cost leadership, differentiation, and focus5 that can be implemented at the business unit le"el to create a competiti"e ad"antage and defend against the ad"erse effects of the fi"e forces% '&nctiona$ "e#e$ St!ategy +he functional le"el of the organi'ation is the le"el of the operating di"isions and departments% +he strategic issues at the functional le"el are related to business processes and the "alue chain% Functional le"el strategies in marketing, finance, operations, human resources, and )67 in"ol"e the de"elopment and coordination of resources through which business unit le"el strategies can be e2ecuted efficiently and effecti"ely% Functional units of an organi'ation are in"ol"ed in higher le"el strategies by pro"iding input into the business unit le"el and corporate le"el strategy, such as pro"iding information on resources and capabilities on which the higher le"el strategies can be based% nce the higher$le"el strategy is de"eloped, the functional units translate it into discrete action$plans that each department or di"ision must accomplish for the strategy to succeed%

STRATEGIC MANAGEMENT Strategic management is defined as the art and science of formulating, implementing, and e"aluating cross$functional decisions that enable the organi'ation to achie"e its ob!ecti"es%8 #enerally, strategic management is not only related to a single speciali'ation but co"ers cross$functional or o"erall organi'ation% Strategic management is a comprehensi"e area that co"ers almost all the functional areas of the organi'ation% ,t is an umbrella concept of management that comprises all such functional areas as marketing, finance 6 account, human resource, and production 6 operation into a top le"el management discipline% +herefore, strategic management has an importance in the organi'ational success and failure than any specific functional areas%

Strategic management deals with organi'ational le"el and top le"el issues whereas functional or operational le"el management deals with the specific areas of the business%

+op$le"el managers such as Chairman, Managing 7irector, and corporate le"el planners in"ol"e more in strategic management process% Strategic management relates to setting "ision, mission, ob!ecti"es, and strategies that can be the guideline to design functional strategies in other functional areas

+herefore, it is top$le"el management that pa"es the way for other functional or operational management in an organi'ation

Definition: 9+he determination of the basic long$term goals 6 ob!ecti"es of an enterprise and the adoption of the course of action and the allocation of resources necessary for carrying out these goals:% $C(an)$e!

STRATEGIC MANAGEMENT MODE" * STRATEGIC P"ANNING PROCESS ,n today0s highly competiti"e business en"ironment, budget$oriented planning or forecast$based planning methods are insufficient for a large corporation to sur"i"e and prosper% +he firm must engage in t!ategic p$anning that clearly defines ob!ecti"es and assesses both the internal and e2ternal situation to formulate strategy, implement the strategy, e"aluate the progress, and make ad!ustments as necessary to stay on track% 1 simplified "iew of the strategic planning process is shown by the following diagram(

a+ STRATEGIC INTENT Strategic intent takes the form of a number of corporate challenges and opportunities, specified as short term pro!ects% +he strategic intent must con"ey a significant stretch for the company, a sense of direction, which can be communicated to all employees% ,t should not focus so much on today0s problems, but rather on tomorrow0s opportunities% Strategic intent should specify the competiti"e factors, the factors critical to success in the future% Strategic intent gi"es a picture about what an organi'ation must get into immediately in order to use the opportunity% Strategic intent helps management to emphasi'e and concentrate on the priorities% Strategic intent is, nothing but, the influencing of an organi'ation&s resource potential and core competencies to achie"e what at first may seem to be unachie"able goals in the competiti"e en"ironment% ,+ En#i!on-enta$ Scan +he en"ironmental scan includes the following components(

1nalysis of the firm 3,nternal en"ironment5 1nalysis of the firm0s industry 3micro or task en"ironment5

1nalysis of the ;2ternal macro en"ironment 3P;S+ analysis5

+he internal analysis can identify the firm0s strengths and weaknesses and the e2ternal analysis re"eals opportunities and threats% 1 profile of the strengths, weaknesses, opportunities, and threats is generated by means of a S< + analysis 1n industry analysis can be performed using a framework de"eloped by Michael Porter known as Porter0s fi"e forces% +his framework e"aluates entry barriers, suppliers, customers, substitute products, and industry ri"alry% c+ St!ategy 'o!-&$ation Strategy Formulation is the de"elopment of long$range plans for the effecti"e management of en"ironmental opportunities and threats, in light of corporate strengths 6 weakness% ,t includes defining the corporate mission, specifying achie"able ob!ecti"es, de"eloping strategy 6 setting policy guidelines% i5 Mission Mission is the purpose or reason for the organi'ation&s e2istence% ,t tells what the company is pro"iding to society, either a ser"ice like housekeeping or a product like automobiles% ii5 b!ecti"es b!ecti"es are the end results of planned acti"ity% +hey state what is to be accomplished by when and should be =uantified, if possible% +he achie"ement of corporate ob!ecti"es should result in the fulfillment of a corporation&s mission% iii5 Strategies Strategy is the comple2 plan for bringing the organi'ation from a gi"en posture to a desired position in a future period of time% d5 Policies 1 policy is a broad guide line for decision$making that links the formulation of strategy with its implementation% Companies use policies to make sure that employees throughout the firm make decisions 6 take actions that support the corporation&s mission, ob!ecti"es 6 strategy% )+ St!ategy I-p$e-entation ,t is the process by which strategy 6 policies are put into actions through the de"elopment of programs, budgets 6 procedures% +his process might in"ol"e changes

within the o"erall culture, structure and>or management system of the entire organi'ation% i5 Programs(

,t is a statement of the acti"ities or steps needed to accomplish a single$use plan% ,t makes the strategy action oriented% ,t may in"ol"e restructuring the corporation, changing the company&s internal culture or beginning a new research effort% ii5 Budgets( 1 budget is a statement of a corporations program in terms of dollars% ?sed in planning 6 control, a budget lists the detailed cost of each program% +he budget thus not only ser"es as a detailed plan of the new strategy in action, but also specifies through proforma financial statements the e2pected impact on the firm&s financial future iii5 Procedures( Procedures, sometimes termed Standard perating Procedures 3S P5 are a system of se=uential steps or techni=ues that describe in detail how a particular task or !ob is to be done% +hey typically detail the "arious acti"ities that must be carried out in order to complete e+ E#a$&ation . Cont!o$ 1fter the strategy is implemented it is "ital to continually measure and e"aluate progress so that changes can be made if needed to keep the o"erall plan on track% +his is known as the control phase of the strategic planning process% <hile it may be necessary to de"elop systems to allow for monitoring progress, it is well worth the effort% +his is also where performance standards should be set so that performance may be measured and leadership can make ad!ustments as needed to ensure success%

;"aluation and control consists of the following steps( i5 ii5 iii5 i"5 "5 7efine parameters to be measured 7efine target "alues for those parameters Perform measurements Compare measured results to the pre$defined standard Make necessary changes

STA/E0O"DERS IN %USINESS

1 corporate stakeholder is a party that can affect or be affected by the actions of the business as a whole% Stakeholder groups "ary both in terms of their interest in the business acti"ities and also their power to influence business decisions% @ere is the summary(

+he stake holders of a company are as follows Shareholders Creditors 7irectors and managers ;mployees Suppliers Customers Community #o"ernment

Sta1e(o$)e! S(a!e(o$)e!

Main Inte!e t Profit growth, Share

Po2e! an) inf$&ence ;lection of directors Can enforce and loan Can banking ha"e

price growth, di"idends ,nterest and principal to

C!e)ito!

be

repaid,

maintain

co"enants withdraw

credit rating Di!ecto! -anage! E-p$oyee an) Salary ,share

facilities options, Make decisions,

S&pp$ie!

C& to-e!

Co--&nity

Go#e!n-ent

!ob satisfaction, status detailed information Salaries 6 wages, !ob Staff turno"er, industrial security, !ob satisfaction action, ser"ice =uality 6 moti"ation Aong term contracts, Pricing, =uality, product prompt payment, growth a"ailability of purchasing )eliable =uality, "alue for )e"enue > repeat money, product business, <ord of mouth a"ailability, customer recommendation ser"ice ,ndirect "ia local ;n"ironment, local !obs, planning and opinion local impact leaders perate legally, ta2 )egulation, subsidies, receipts, !obs ta2ation, planning

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3ISION, MISSION AND PURPOSE 3ISION STATEMENT Vision statement pro"ides direction and inspiration for organi'ational goal setting% Vision is 2(e!e yo& ee yo&! e$f at t(e en) of t(e (o!i4on ,t is a ing$e tate-ent )!ea) milestone therein% ) aspiration% +ypically a "ision has the fla"ors of

0Being Most admired0, 01mong the top league0, 0Being known for inno"ation0, 0being largest and greatest0 and so on% +ypically 0most profitable0, 0Cheapest0 etc% don&t figure in "ision statement% ?nlike goals, "ision is not SM1)+% ,t )oe not (a#e -at(e-atic it% Vision is a y-,o$, an) a ca& e to which we want to bond the stakeholders, 3mostly employees and sometime share$holders5% 1s they say, the people work best, when they are working for a cause, than for a goal% Vision pro"ides them that cause% Vision is $ong-te!of business% Vision (o&$) ne#e! ca!!y t(e 5(o25 part % For e2ample 0 +o be the most admired brand in 1"iation ,ndustry0 is a fine "ision statement, which can be spoiled by e2tending it to0 +o be the most admired brand in the 1"iation ,ndustry by pro"iding world$class in$flight ser"ices0% +he reason for not including 0how0 is that 0how0 may keep on changing with time% C(a$$enge !e$ate) to 3i ion State-ent: Putting$up a "ision is not a challenge% +he problem is to make employees engaged with it% Many a time, terms like "ision, mission and strategy become more a sub!ect of scorn than being looked up$to% +his is primarily because leaders may not be able to make a connect between the "ision>mission and people&s e"ery day work% +oo often, employees see a gap between the "ision, mission and their goals 6 priorities% ;"en if there is a "alid>tactical reason for this mis$match, it is not e2plained% 0o!i4on of 3i ion: Vision should be the hori'on of B$-/ years% ,f it is less than that, it becomes tactical% ,f it is of a hori'on of C/D years 3say5, it becomes difficult for the strategy to relate to the "ision% 'eat&!e of a goo) #i ion tate-ent:

) timelines attached to

tate-ent an) typica$$y gene!ic . g!an) % +herefore a "ision

statement does not change unless the company is getting into a totally different kind

;asy to read and understand% Compact and Crisp to lea"e something to people&s imagination% #i"es the destination and not the road$map%

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,s meaningful and not too open ended and far$fetched% ;2cite people and make them get goose$bumps% Pro"ides a moti"ating force, e"en in hard times% ,s percei"ed as achie"able and at the same time is challenging and compelling, stretching us beyond what is comfortable%

3i ion i a )!ea-*a pi!ation, fine-t&ne) to !ea$ity: +he ;ntire process starting from Vision down to the business ob!ecti"es, is highly iterati"e% +he =uestion is from where should we start% <e strongly recommend that "ision and mission statement should be made first without being colored by constraints, capabilities and en"ironment% +his can said akin to the "ision of armed forces, that&s 0Safe and Secure country from e2ternal threats0% +his "ision is a non$ negotiable and it dri"es the organi'ation to find ways and means to achie"e their "ision, by o"ercoming constraints on capabilities and resources% Vision should be a stake in the ground, a position, a dream, which should be prudent, but should be non$ negotiable barring few rare circumstances% Mi ion State-ent

Mission of an organi'ation is the purpose for which the organi'ation is% Mission is again a single statement, and carries the statement in "erb% Mission in one way is the road to achie"e the "ision% For e6a-p$e, for a lu2ury products company, the "ision could be 0+o be among most admired lu2ury brands in the world0 and mission could be 0+o add style to the li"es0 A goo) -i

ion tate-ent 2i$$ ,e :

C$ea! an) C!i p: <hile there are different "iews, <e strongly recommend that mission should only pro"ide what, and not 0how and when0% <e would prefer the mission of 0Making People meet their career0 to 0Making people meet their career through effecti"e career counseling and education0% 1 mission statement without 0how 6 when0 element lea"es a creati"e space with the organi'ation to enable them take$up wider strategic choices%

@a"e to ha"e a #e!y #i i,$e $in1age to the business goals and strategy( For e6a-p$e you cannot ha"e a mission 3for a home furnishing company5 of 0Bringing Style to People&s li"es0 while your strategy asks for mass product and selling% ,ts better that either you start selling high$end products to high "alue customers, ) change your mission statement to 0@elp people build homes0% a-e a t(e -i ion of a competing organi'ation% ,t should

S(o&$) not ,e

touch upon how its purpose it uni=ue%

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Mi

ion fo$$o2 t(e 3i ion:

+he ;ntire process starting from Vision down to the business ob!ecti"es, is highly iterati"e% +he =uestion is from where should be start% , strongly recommend that mission should follow the "ision% +his is because the purpose of the organi'ation could change to achie"e their "ision% For e2ample, to achie"e the "ision of an ,nsurance company 0+o be the most trusted ,nsurance Company0, the mission could be first 0making people financially secure0 as their emphasis is on +raditional ,nsurance product% 1t a later stage the company can make its mission as 0Making money work for the people0 when they also include the non$traditional unit linked in"estment products% TOYOTA Vision $+oyota aims to achie"e long$term, stable growth economy, the local communities it ser"es, and its stakeholders% Mission $+oyota I%M Vision Solutions for a small planet Mission 1t ,BM, we stri"e to lead in the in"ention, de"elopment and manufacture of the industry0s most ad"anced information technologies, including computer systems, software, storage systems and microelectronics% <e translate these ad"anced technologies into "alue for our customers through our professional solutions, ser"ices and consulting businesses worldwide% seeks to create a more prosperous society through automoti"e manufacturing%

%USINESS, O%7ECTI3ES AND GOA"S 1 business 3also known as enterprise or firm5 is an organi'ation engaged in the trade of goods, ser"ices, or both to consumers% Businesses are predominant in capitalist economies, in which most of them are pri"ately owned and administered to earn profit to increase the wealth of their owners% Businesses may also be not$for$ profit or state$owned% 1 business owned by multiple indi"iduals may be referred to as a company, although that term also has a more precise meaning%

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#oals ( ,t is where the business wants to go in the future, its aim% ,t is a statement of purpose, e%g% we want to grow the business into ;urope% b!ecti"es( b!ecti"es gi"e the business a clearly defined target% Plans can then be made to achie"e these targets% +his can moti"ate the employees% ,t also enables the business to measure the progress towards to its stated aims% T(e Diffe!ence ,et2een goa$ an) o,8ecti#e #oals are broad* ob!ecti"es are narrow% #oals are general intentions* ob!ecti"es are precise% #oals are intangible* ob!ecti"es are tangible% #oals are abstract* ob!ecti"es are concrete% #oals can0t be "alidated as is* ob!ecti"es can be "alidated%

CORPORATE GO3ERNANCE

Corporate go"ernance generally refers to the set of mechanisms that influence the decisions made by managers when there is a separation of ownership and control% +he e"olution of public ownership has created a separation between ownership and management% Before the C/th century, many companies were small, family owned and family run% +oday, many are large international conglomerates that trade publicly on one or many global e2changes% ,n an attempt to create a corporation where stockholders0 interests are looked after, many firms ha"e implemented a two$tier corporate hierarchy% corporation% n the first tier is the board of directors( these indi"iduals are elected by the shareholders of the n the second tier is the upper management( these indi"iduals are hired by the board of directors%

S(a!e (o$)e!

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1 shareholder or stockholder is an indi"idual or institution 3including a corporation5 that legally owns one or more shares of stock in a public or pri"ate corporation% Shareholders own the stock, but not the corporation itself% Stockholders are granted special pri"ileges depending on the class of stock% +hese rights may include(

+he right to sell their shares, +he right to "ote on the directors nominated by the board, +he right to nominate directors 3although this is "ery difficult in practice because of minority protections5 and propose shareholder resolutions, +he right to di"idends if they are declared, +he right to purchase new shares issued by the company, and

%oa!) of Di!ecto! ;lected by the shareholders, the board of directors is made up of two types of representati"es% +he first type in"ol"es indi"iduals chosen from within the company% +his can be a C; , CF , manager or any other person who works for the company on a daily basis% +he other type of representati"e is chosen e2ternally and is considered to be independent from the company% +he role of the board is to monitor the managers of a corporation, acting as an ad"ocate for stockholders% ,n essence, the board of directors tries to make sure that shareholders0 interests are well ser"ed% Board members can be di"ided into three categories(

Chairman +echnically the leader of the corporation, the chairman of the board is responsible for running the board smoothly and effecti"ely% @is or her duties typically include maintaining strong communication with the chief e2ecuti"e officer and high$le"el e2ecuti"es, formulating the company0s business strategy, representing management and the board to the general public and shareholders, and maintaining corporate integrity% 1 chairman is elected from the board of directors%

Inside Directors +hese directors are responsible for appro"ing high$le"el budgets prepared by upper management, implementing and monitoring business strategy, and appro"ing core corporate initiati"es and pro!ects% ,nside directors are either shareholders or high$le"el management from within the company% ,nside directors help pro"ide internal perspecti"es for other board members% +hese indi"iduals are also referred to as e2ecuti"e directors if they are part of company0s management team%

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Outside Directors <hile ha"ing the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team% +he purpose of ha"ing outside directors is to pro"ide unbiased and impartial perspecti"es on issues brought to the board%

Manage-ent Tea1s the other tier of the company, the management team is directly responsible for the day$to$day operations 3and profitability5 of the company%

Chief Executive Officer (CEO) 1s the top manager, the C;

is typically

responsible for the entire operations of the corporation and reports directly to the chairman and board of directors% ,t is the C; 0s responsibility to implement board decisions and initiati"es and to maintain the smooth operation of the firm, with the assistance of senior management% directors on the board 3if not the chairman5% ften, the C; will also be designated as the company0s president and therefore also be one of the inside

Chief Operations Officer (COO) )esponsible for the corporation0s operations, the C looks after issues related to marketing, sales, production and looks after day$to$day is often referred to as a is personnel% More hands$on than the C; , the C acti"ities while pro"iding feedback to the C; % +he C senior "ice president%

Chief Finance Officer (CFO) 1lso reporting directly to the C; , the CF

responsible for analy'ing and re"iewing financial data, reporting financial performance, preparing budgets and monitoring e2penditures and costs% +he CF is re=uired to present this information to the board of directors at regular inter"als and pro"ide this information to shareholders and regulatory bodies such as the Securities and ;2change Commission 3S;C5% 1lso usually referred to as a senior "ice president, the CF health and integrity% routinely checks the corporation0s financial

Need & Significance -5 Changing ownership Structure( +he profile of corporate ownership has changed significantly% Public financial institutions are the single largest shareholder is the most of the large corporations in the pri"ate sector% ,nstitutional in"entors and mutual funds ha"e now become singly or !ointly direct challenges to management of companies% C5 Social )esponsibility(

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1 company is a legal entity without physical e2istence% +herefore, it is managed by board of directors which is accountable and responsible to share holders who pro"ide the funds% 7irectors are also re=uired to act in the interests of customers, lenders, suppliers and the local community for enhancing shareholders "alue% E5 Scams ,n recent years se"eral corporate frauds ha"e shaken the public confidence% 1 large number of companies ha"e been transferred to F group by the Bombay stock e2change% G5 Corporate ligarchy( Shareholder acti"ism and share holder democracy continue to remain myths in ,ndia% Postal ballot system is still absent% Pro2ies are not allowed to speak at the meetings% Shareholders& association, in"entor&s education and awareness ha"e not emerged as a counter"ailing force% B5 #lobali'ation 1s ,ndian companies went to o"erseas markets for capital, corporate go"ernance become a bu'' world% Fundamental Principles of Corporate Governance 9 -5 +ransparency ,t means accurate, ade=uate 6 timely disclosure of rele"ant information to the stakeholders% <ithout transparency, it is impossible to make any progress towards good go"ernance% Business heads should reali'e that transparency also creates immense shareholder "alue% C5 1ccountability Corporate #o"ernance has to be a top down approach% Chairman, Board of 7irectors 6 Chief ;2ecuti"es must fulfill their responsibilities to make corporate go"ernance a reality in ,ndian industry% 1ccountability also fa"ours the ob!ecti"e of creating shareholders "alue E5 Merit Based Management 1 strong Board of 7irectors is necessary to lead and support merit based management% +he board has to be an independent, strong and non$ partisan body where the sole moti"e should be decision$making through business prudence% Trends in Corporate Governance: Boards are getting more in"ol"ed not only in re"iewing 6 e"aluating company strategic but also in shaping%

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,nstitutional in"estors such as pension&s funds, mutual funds, 6 insurance companies are becoming acti"e on boards, and are putting increase pressure on top management to impro"e corporate performances%

Hone affiliated outside directors are increasing their numbers and power in publicly held corporation&s as C; &s loosen their grips on boards% members are taking charge of annual C; e"aluation% utside

Boards are getting smaller, partially because of the reduction in the number of insiders but also because boards desire new directors to ha"e speciali'ed knowledge 6 e2pertise instead of general e2perience%

Boards continue to take more control of board functions by either splitting the combined chair>C; position into two separate positions or establishing a lead outside director position%

1s corporations become more global, they are increasingly looking for international e2perience in their board members%

SOCIA" RESPONSI%I"ITY Corporate social responsibility is the interaction between business and the social en"ironment in which it e2ists% Bowen argued that corporate social responsibility rests on two premises( social contract, which is an implied set of rights and obligations that are inherent to social policy and assumed by business, and moral agent, which suggests that businesses ha"e an obligation to act honorably and to reflect and enforce "alues that are consistent with those of society%

T(e T(!ee Pe! pecti#e of Socia$ Re pon i,i$ity +he three perspecti"es of corporate social responsibility are economic responsibility, public responsibility, and social responsi"eness% +he three perspecti"es represent a continuum of commitment to social responsibility issues, ranging from economic responsibility at the low end and social responsi"eness at the high end% +he economic responsibility perspecti"e argues that the only social responsibility of business is to ma2imi'e profits within the 9rules of the game%: indi"iduals can be moral agents% Moreo"er, the nly proponents of this "iewpoint argue that organi'ations cannot be moral agents%

,n contrast, the public responsibility perspecti"e Finally, the

argues that businesses should act in a way that is consistent with society&s "iew of responsible beha"ior, as well as with established laws and policy% proponents of the social responsi"eness perspecti"e argue that businesses should

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proacti"ely seek to contribute to society in a positi"e way% ethical beha"ior at an indi"idual le"el%

1ccording to this "iew,

organi'ations should de"elop an internal en"ironment that encourages and supports

Diffe!ent app!oac(e of CSR +he stockholder "iew is much narrower, and only "iews the stockholders 3i%e%, owners5 of a firm% +he stockholder "iew of the organi'ation would tend to be aligned closer to the economic responsibility "iew of social responsibility% +he stakeholder "iew of the organi'ation argues that anyone who is affected by or can affect the acti"ities of a firm has a legitimate 9stake: in the firm% population% public responsibility and social responsi"eness% Stakeholders( organi'ation% -% Primary Stakeholders( +he primary stakeholders of a firm are those who ha"e a formal, official, or contractual relationship with the organi'ation% owners 3stockholders5, employees, customers, and suppliers% C% Secondary Stakeholders( +he secondary stakeholders of a firm are other societal groups that are affected by the acti"ities of the firm% +hey include consumer groups, special interest groups, en"ironmental groups, and society at large% +hey include 1ll those who are affected by or can affect the acti"ities of an +his could include a broad range of +he stakeholder "iew can easily include actions that might be labeled

+he globali'ation of the business en"ironment has had a remarkable impact on issues of social responsibility% 1s organi'ations become in"ol"ed in the international field, 1s a they often find that their stakeholder base becomes wider and more di"erse% cultural and geographic orientations% +he four strategies for social responsibility represent a range, with the reaction strategy on one end 3i%e%, do nothing5 and the proaction strategy on the other end 3do much5% +he defense and accommodation strategies are in the middle% 3reaction, defense, accommodation, and proaction5% ;2amples of firms that ha"e pursued these strategies are as follows(

result, they must cope with social responsibility related issues across a broad range of

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 )eaction(

"er G/ years ago, the medical department of the Man"ille Corporation )ather than looking for ways to pro"ide safer working ,t

disco"ered e"idence to suggest that asbestos inhalation causes a debilitating and often fatal lung disease% conditions for company employees, the firm chose to conceal the e"idence% appears that tobacco companies ha"e done the same thing% 7efense( "er the years, rather than demonstrating social responsi"eness in terms of air pollution reductions, "ehicle safety, and gas shortages, the automobile companies did little to confront the problems head on% Currently, the high demand for pickup trucks and S?Vs encourages the problem to continue% 1ccommodation( Many financial ser"ice companies, along with meeting the minimum re=uirements of disclosure regulations, maintain a more proacti"e code for "oluntary, on$demand disclosure of bank information re=uested by customers or by any other member of the public% Proaction( Becton 7ickinson 6 Company is a medical$supply firm that has targeted its charitable contributions to pro!ects it belie"es 9will help eliminate unnecessary suffering and death from disease around the world%: benefits to partners% Similarly, Starbucks makes contributions to literacy programs and was one of the first companies to gi"e health

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UNIT : II COMPETITI3E AD3ANTAGE 9 ;2ternal ;n"ironment $ Porter&s Fi"e Forces Model$Strategic #roups Competiti"e Changes during ,ndustry ;"olution$#lobali'ation and ,ndustry Structure $ Hational Conte2t and Competiti"e ad"antage )esources$ Capabilities and competenciescore competencies$Aow cost and differentiation #eneric Building Blocks of Competiti"e 1d"antage$ study% 7istincti"e Competencies$)esources and Capabilities durability of competiti"e 1d"antage$ 1"oiding failures and sustaining competiti"e ad"antage$Case

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B?S,H;SS ;HV,) HM;H+ 1 firm&s en"ironment represents all internal or e2ternal forces, factors, or conditions that e2ert some degree of impact on the strategies, decisions and actions taken by the firm% +here are two types of en"ironment( Internal environment pertaining to the forces within the organi'ation 3;2( Functional areas of management5 and External environment pertaining to the e2ternal forces namely macro en"ironment or general en"ironment and micro en"ironment or competiti"e en"ironment 3;2( Macro en"ironment Political en"ironment and Micro en"ironment Customers5% E;TERNA" EN3IRONMENT ,t refers to the en"ironment that has an indirect influence on the business% +he factors are uncontrollable by the business% +he two types of e2ternal en"ironment are micro en"ironment and macro en"ironment% a+ MICRO EN3IRONMENTA" 'ACTORS +hese are e2ternal factors close to the company that ha"e a direct impact on the organi'ations process% +hese factors include( i+ S(a!e(o$)e! 1ny person or company that owns at least one share 3a percentage of ownership5 in a company is known as shareholder% 1 shareholder may also be referred to as a 8stockholder8% 1s organi'ation re=uires greater inward in"estment for growth they face increasing pressure to mo"e from pri"ate ownership to public% @owe"er this mo"ement unleashes the forces of shareholder pressure on the strategy of organi'ations% ii+ S&pp$ie! 1n indi"idual or an organi'ation in"ol"ed in the process of making a product or ser"ice a"ailable for use or consumption by a consumer or business user is known as supplier% ,ncrease in raw material prices will ha"e a knock on affect on the marketing mi2 strategy of an organi'ation% Prices may be forced up as a result% 1 closer supplier relationship is one way of ensuring competiti"e and =uality products for an organi'ation% iii+ Di t!i,&to!

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;ntity that buys non$competing products or product$lines, warehouses them, and resells them to retailers or direct to the end users or customers is known as distributor% Most distributors pro"ide strong manpower and cash support to the supplier or manufacturer0s promotional efforts% +hey usually also pro"ide a range of ser"ices 3such as product information, estimates, technical support, after$sales ser"ices, credit5 to their customers% ften getting products to the end customers can be a ma!or issue for firms% +he distributors used will determine the final price of the product and how it is presented to the end customer% <hen selling "ia retailers, for e2ample, the retailer has control o"er where the products are displayed, how they are priced and how much they are promoted in$store% Iou can also gain a competiti"e ad"antage by using changing distribution channels% i#+ C& to-e! 1 person, company, or other entity which buys goods and ser"ices produced by another person, company, or other entity is known as customer% rgani'ations sur"i"e on the basis of meeting the needs, wants and pro"iding benefits for their customers% Failure to do so will result in a failed business strategy% #+ Co-petito! 1 company in the same industry or a similar industry which offers a similar product or ser"ice is known as competitor% +he presence of one or more competitors can reduce the prices of goods and ser"ices as the companies attempt to gain a larger market share% Competition also re=uires companies to become more efficient in order to reduce costs% Fast$food restaurants Mc7onald0s and Burger Jing are competitors, as are Coca$Cola and Pepsi, and <al$Mart and +arget% #i+ Me)ia Positi"e or ad"erse media attention on an organisations product or ser"ice can in some cases make or break an organisation%% Consumer programmes with a wider and more direct audience can also ha"e a "ery powerful and positi"e impact, hforcing organisations to change their tactics% ,+ MACRO EN3IRONMENTA" 'ACTORS 1n organi'ation0s macro en"ironment consists of nonspecific aspects in the organi'ation0s surroundings that ha"e the potential to affect the organi'ation0s strategies% <hen compared to a firm0s task en"ironment, the impact of macro

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en"ironmental "ariables is less direct and the organi'ation has a more limited impact on these elements of the en"ironment% +he macro en"ironment consists of forces that originate outside of an organi'ation and generally cannot be altered by actions of the organi'ation% ,n other words, a firm may be influenced by changes within this element of its en"ironment, but cannot itself influence the en"ironment% Macro en"ironment includes political, economic, social and technological factors% 1 firm considers these as part of its en"ironmental scanning to better understand the threats and opportunities created by the "ariables and how strategic plans need to be ad!usted so the firm can obtain and retain competiti"e ad"antage% i+ Po$itica$ 'acto! Political factors include go"ernment regulations and legal issues and define both formal and informal rules under which the firm must operate% Some e2amples include( K ta2 policy K employment laws K en"ironmental regulations K trade restrictions and tariffs K political stability ii+ Econo-ic 'acto! ;conomic factors affect the purchasing power of potential customers and the firm0s cost of capital% +he following are e2amples of factors in the macroeconomy( K economic growth K interest rates K e2change rates K inflation rate iii+ Socia$ 'acto! Social factors include the demographic and cultural aspects of the e2ternal macro en"ironment% +hese factors affect customer needs and the si'e of potential markets% Some social factors include( K health consciousness K population growth rate K age distribution K career attitudes K emphasis on safety i#+ Tec(no$ogica$ 'acto!

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+echnological factors can lower barriers to entry, reduce minimum efficient production le"els, and influence outsourcing decisions% Some technological factors include( K )67 acti"ity K automation K technology incenti"es K rate of technological change

Mic(ae$ Po!te!< = fo!ce -o)e$ Porter&s B forces model is one of the most recogni'ed framework for the analysis of business strategy% Porter, the guru of modern day business strategy, used theoretical frameworks deri"ed from ,ndustrial rgani'ation 3, 5 economics to deri"e fi"e forces which determine the competiti"e intensity and therefore attracti"eness of a market%

25

+his theoretical framework, based on B forces, describes the attributes of an attracti"e industry and thus suggests when opportunities will be greater, and threats less, in these of industries% 1ttracti"eness in this conte2t refers to the o"erall industry profitability and also reflects upon the profitability of the firm under analysis% 1n 9unattracti"e: industry is one where the combination of forces acts to dri"e down o"erall profitability% 1 "ery unattracti"e industry would be one approaching 9pure competition:, from the perspecti"e of pure industrial economics theory%

+hese forces are defined as follows( a5 b5 c5 d5 e5 +he threat of the entry of new competitors +he intensity of competiti"e ri"alry +he threat of substitute products or ser"ices +he bargaining power of customers +he bargaining power of suppliers

26

+he model of the Fi"e Competiti"e Forces was de"eloped by Michael ;% Porter% Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organi'ations e2ternal en"ironment% ;specially, competiti"e strategy should base on and understanding of industry structures and the way they change% Porter has identified fi"e competiti"e forces that shape e"ery industry and e"ery market% +hese forces determine the intensity of competition and hence the profitability and attracti"eness of an industry% +he ob!ecti"e of corporate strategy should be to modify these competiti"e forces in a way that impro"es the position of the organi'ation% Porters model supports analysis of the dri"ing forces in an industry% Based on the information deri"ed from the Fi"e Forces 1nalysis, management can decide how to influence or to e2ploit particular characteristics of their industry% +he Fi"e Competiti"e Forces are typically described as follows(

a+

%a!gaining Po2e! of S&pp$ie! +he term 0suppliers0 comprises all sources for inputs that are needed in order to pro"ide goods or ser"ices% Supplier bargaining power is likely to be high when( +he market is dominated by a few large suppliers rather than a fragmented source of supply +here are no substitutes for the particular input +he suppliers customers are fragmented, so their bargaining power is low +he switching costs from one supplier to another are high +here is the possibility of the supplier integrating forwards in order to obtain higher prices and margins

+his threat is especially high when +he buying industry has a higher profitability than the supplying industry Forward integration pro"ides economies of scale for the supplier +he buying industry hinders the supplying industry in their de"elopment 3e%g% reluctance to accept new releases of products5 +he Buying industry has low barriers to entry%

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,n such situations, the buying industry often faces a high pressure on margins from their suppliers% +he relationship to powerful suppliers can potentially reduce strategic options for the organi'ation% ,+ %a!gaining Po2e! of C& to-e! Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and "olumes% Customers bargaining power is likely to be high when c+ +hey buy large "olumes* there is a concentration of buyers +he supplying industry comprises a large number of small operators +he supplying industry operates with high fi2ed costs +he product is undifferentiated and can be replaces by substitutes Switching to an alternati"e product is relati"ely simple and is not related to high costs Customers ha"e low margins and are pricesensiti"e Customers could produce the product themsel"es +he product is not of strategical importance for the customer +he customer knows about the production costs of the product +here is the possibility for the customer integrating backwards%

T(!eat of Ne2 Ent!ant +he competition in an industry will be the higher, the easier it is for other companies to enter this industry% ,n such a situation, new entrants could change ma!or determinants of the market en"ironment 3e%g% market shares, prices, customer loyalty5 at any time% +here is always a latent pressure for reaction and ad!ustment for e2isting players in this industry% +he threat of new entries will depend on the e2tent to which there are barriers to entry% +hese are typically ;conomies operations5, @igh initial in"estments and fi2ed costs Cost ad"antages of e2isting players due to e2perience cur"e effects of operation with fully depreciated assets Brand loyalty of customers Protected intellectual property like patents, licenses etc, of scale 3minimum si'e re=uirements for profitable

28

 )+

Scarcity of important resources, e%g% =ualified e2pert staff 1ccess to raw materials is controlled by e2isting players, L 7istribution channels are controlled by e2isting players ;2isting players ha"e close customer relations, e%g% from long$term ser"ice contracts @igh switching costs for customers Aegislation and go"ernment action

T(!eat of S&, tit&te 1 threat from substitutes e2ists if there are alternati"e products with lower prices of better performance parameters for the same purpose% +hey could potentially attract a significant proportion of market "olume and hence reduce the potential sales "olume for e2isting players% +his category also relates to complementary products% Similarly to the threat of new entrants, the treat of substitutes is determined by factors like Brand loyalty of customers Close customer relationships Switching costs for customers +he relati"e price for performance of substitutes Current trends%

e+

Co-petiti#e Ri#a$!y ,et2een E6i ting P$aye! +his force describes the intensity of competition between e2isting players 3companies5 in an industry% @igh competiti"e pressure results in pressure on prices, margins, and hence, on profitability for e"ery single company in the industry% Competition between e2isting players is likely to be high when +here are many players of about the same si'e Players ha"e similar strategies +here is not much differentiation between players and their products, hence, there is much price competition Aow market growth rates 3growth of a particular company is possible only at the e2pense of a competitor5 Barriers for e2it are high 3e%g% e2pensi"e and highly speciali'ed e=uipment5

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STRATEGIC GROUPS Strategic groups are sets of firms within an industry that share the same or highly similar competiti"e attributes% +hese attributes include pricing practices, le"el of technology in"estment and leadership, product scope and scale capabilities, and product =uality% By identifying strategic groups, analysts and managers are better able to understand the different types of strategies that multiple firms are adopting within the same industry% Strategic Group Maps useful way to analy'e strategic groups is through the creation of strategic group maps% Strategic group maps present the "arious competiti"e positions that similar firms occupy within an industry% Strategic group maps are not difficult to create* howe"er, there are a few simple guidelines managers want to use when de"eloping them% a) Identif! "e! Competitive ttri#utes$ 1s mentioned pre"iously, many firms share similar competiti"e attributes such as pricing practices and product scope% +he first step in de"eloping a strategic group map is to identify key competiti"e attributes that logically differentiate firms in a competiti"e set% +his is not always known in ad"ance of creating the map so it is important to be ready to create multiple maps using different "ariables% #) Create Map %ased &pon '(o "e! ttri#ute )aria#les$ For the "ariables selected, assign each "ariable to the M and I a2is, respecti"ely% 1lso, select a logical gradation "alue for each a2is so that differences will be readily obser"able% <hen complete, plot each firm&s location on the map for the industry being analy'ed% 1s each firm is plotted use a third "ariableNsuch as re"enueNto represent the actual plot si'e of each firm% ?sing a "ariable like re"enue helps the reader understand the relati"e performance of each firm in terms of the third "ariable% c) Identif! Strategic Groups$ nce all of the firms ha"e been plotted, enclose each group of firms that emerges in a shape that reflects the positioning on the strategic group% 1t this point, assess whether or not the differences between each group are meaningful or whether other "ariables must be selected from which another set of strategic groups can be drawn%

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+he abo"e is an e2ample of a strategic group map for the retail ,ndustry% Strategic group creation and analysis pro"ides an effecti"e way to de"elop a clearer understanding of how firms within an industry compete% Since each strategic group depicts firms with similarNif not identicalNcompetiti"e attributes within the industry, the map helps managers identify important differences among competiti"e positions% +hese differences can be sub!ect to further analysis to helps e2plain more subtle differences in performance%

COMPETITI3E C0ANGES DURING INDUSTRY E3O"UTION ,ndustry lifecycle comprises four stages including fragmentation, growth, maturity and decline% 1n understanding of the industry lifecycle can help competing companies sur"i"e during periods of transition% Se"eral "ariations of the lifecycle model ha"e been de"eloped to address the de"elopment and transition of products,

31

market and industry% +he models are similar but the number of stages and names of each may differ% Ma!or models include those de"eloped by Fo2 3-.4E5, <asson 3-.4G5, 1nderson 6 Feithaml 3-.OG5, and @ill 6 Pones 3-..O5%

a+ '!ag-entation Stage Fragmentation is the first stage of the new industry% +his is the stage when the new industry de"elops the business% 1t this stage, the new industry normally arises when an entrepreneur o"ercomes the twin problems of inno"ation and in"ention, and works out how to bring the new products or ser"ices into the market% For e2ample, air tra"el ser"ices of ma!or airlines in ;urope were sold to the target market at a high price% +herefore, the ma!ority of airlines0 customers in ;urope were those people with high incomes who could afford premium prices for faster tra"el% ,n -.OB, )yanair made a huge change in the ;uropean airline industry% )yanair was the first airline to engage low$cost airlines in ;urope% 1t that time, )yanair0s ser"ices were percei"ed as the inno"ation of the ;uropean airline industry% )yanair tickets are half the price of British 1irways% Some of its sales promotions were "ery low% +his made people think that air tra"el was not !ust made for the rich, but e"erybody% ,+ S(a1e-o&t Shake$out is the second stage of the industry lifecycle% ,t is the stage at which a new industry emerges% 7uring the shake$out stage, competitors start to reali'e business opportunities in the emerging industry% +he "alue of the industry also =uickly rises%

32

For e2ample, many people die and suffer because of cigarettes e"ery year% +hus, the ?J go"ernment decided to launch a campaign to encourage people to =uit smoking% Hicorette, one of the leading companies is producing se"eral nicotine products to help people =uit smoking% Some of its well$known products include Hicorette patches, Hicolette gums and Hicorette lo'enges% Smokers began to see an easy way to =uit smoking% +he new industry started to attract brand recognition and brand awareness among its target market during the shake$out stage% Hicorette0s products began to gain popularity among those who wanted to =uit smoking or those who wanted to reduce their daily cigarette consumption% 7uring this period, another company realised the opportunity in this market and decided to enter it by launching nicotine product ranges, including Hic Aite gum and patches% ,t recently went beyond ?J boarder after the ?J go"ernment introduced non$smoking policy in public places, including pubs and nightclubs% +his business threat created a new business opportunity in the industry for Hic Aite to launch a new nicotine$related product called Hic +ime% c+ Mat&!ity Maturity is the third stage in the industry lifecycle% Maturity is a stage at which the efficiencies of the dominant business model gi"e these organisations competiti"e ad"antage o"er competition% +he competition in the industry is rather aggressi"e because there are many competitors and product substitutes% Price, competition, and cooperation take on a comple2 form% Some companies may shift some of the production o"erseas in order to gain competiti"e ad"antage% For e2ample, +oyota is one of the world0s leading multinational companies, selling automobiles to customers worldwide% +he e2port and import ta2es mean that its cars lose competiti"eness to the local competitors, especially in the ;uropean automobile industry% 1s a result, +oyota decided to open a factory in the ?J in order to produce cars and sell them to customers in the ;uropean market% )+ Dec$ine 7ecline is the final stage of the industry lifecycle% 7ecline is a stage during which a war of slow destruction between businesses may de"elop and those with hea"y bureaucracies may fail% ,n addition, the demand in the market may be fully satisfied or suppliers may be running out% ,n the stage of decline, some companies may lea"e the industry if there is no demand for the products or ser"ices they pro"ide, or they may de"elop new products or ser"ices that meet the demand in the market% ,n such cases, this will create a new industry%

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,n recent years, the features of mobile phones ha"e been de"eloping rapidly and continually% How people can use mobiles to send multimedia messages, take pictures, check email, surf the internet, read news and listen to music% 1s mobile phone feature de"elopment has reached saturation, thus the new inno"ation of mobile phone technology has incorporated the use of computers% +he launch of personal digital assistants 3P715 is a good e2ample of the decline stage of the mobile phone industry as the features of most mobiles are similar% P71s are hand$held computers that were originally designed as a personal organiser but it become much more multi$faceted in recent years% P71s are known as pocket computers or palmtop computers% +hey ha"e many uses for both mobile phones and computers such as computer games, global positioning system, "ideo recording, typewriting and wireless wide$area network% App$ication of in)& t!y $ife cyc$e ,t is important for companies to understand the use of the industry lifecycle because it is a sur"i"al tool for businesses to compete in the industry effecti"ely and successfully% +he main aspects in terms of strategic issues of the industry lifecycle are described below( Co-peting o#e! e-e!ging in)& t!ie

+he game rules in industry competition can be undetermined and the resources may be constrained% +hus, it is "ital for firms to identify market segments that will allow them to secure and sustain a strong position within the industry%

+he product in the industry may not be standardised so it is necessary for companies to obtain resources needed to support new product de"elopment and rapid company e2pansion%

+he entry barriers may be low and the potential competition may be high, thus companies must adapt to shift the mobility barriers% Consumers may be uncertain in terms of demand% 1s a result, determining the time of entry to the industry can help companies to take business opportunities before their ri"als%

Co-peting )&!ing t(e t!an ition to in)& t!y -at&!ity

<hen competition in the industry increases, firms can ha"e a sustainable competiti"e ad"antage that will pro"ide a basis for competing against other companies%

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+he new products and applications are harder to come by, while buyers become more sophisticated and difficult to understand in the maturity stage of the industry lifecycle% +hus, consumer research should be carried out and this could help companies in building up new product lines%

Slower industry growth constrains capacity growth and often leads to reduced industry profitability and some consolidation% +herefore, companies can focus greater attention on costs through strategic cost analysis%

+he change in the industry is rather dynamic, and an understanding of the industry lifecycle can help companies to monitor and tackle these changes effecti"ely% Firms can de"elop organisational structures and systems that can facilitate the transition%

Some companies may seek business opportunities o"erseas when the industries reach the maturity stage because during this stage, the demand in the market starts to decline%

Co-peting in )ec$ining in)& t!ie +he characteristics of declining industries include the following(

7eclining demand for products Pruning of product lines Shrinking profit margins Falling research and de"elopment ad"ertisement e2penditure 7eclining number of ri"als as many are forced to lea"e the industry Measure the intensity of competition 1ssess the causes of decline Single out a "iable strategy for decline such as leadership, li=uidation and har"est%

For companies to sur"i"e the dynamic en"ironment, it is necessary for them to(

INDUSTRY STRUCTURE ,ndustry is a collection of firms offering goods or ser"ices that are close substitutes of each other% 1n ,ndustry consists of firms that directly compete with each other% ,ndustry structure refers to the number and si'e distribution of firms in an industry%

35

+he number of firms in an industry may run into hundreds or thousands% +he si'e distribution of the Firm is important from both business policy and public policy "iews% +he le"el of competition in an industry rises with the number of firms in the industry% i+ '!ag-ente) In)& t!y ,f all firms in an industry are small in si'e when compared with the si'e of the whole industry, then it is known as fragmented industry% ,n a fragmented industry, no Firms ha"e large market% ;ach firm ser"es only a small piece of total market in competition with others% ii+ Con o$i)ate) In)& t!y ,f small number of firms controls a large share of the industry0s output or sales, it is known as a consolidated industry%

C0ARACTERISTICS O' INDUSTRY STRUCTURE 1 final dimension of industry that is important to the performance of new firms is industry structure% +he structure of the industry refers to the nature of barriers to entry and competiti"e dynamics in the industry% Four characteristics of industry structure are particularly important to the performance of new firms in the industry( Capital ,ntensity 1d"ertising ,ntensity Concentration 1"erage firm si'e Capita$ Inten ity : measures the importance of capital as opposed to labor in the production process% Some industries, such as aerospace, in"ol"e a great deal of capital and relati"ely little labor% ther industries, such as te2tiles, in"ol"e relati"ely little capital and a great deal of labor% A)#e!ti ing Inten ity : 1d"ertising is a mechanism through which companies de"elop the reputations that help them sell their products and ser"ices% +o build brand name reputation through ad"ertising, two conditions need to be met% First, the ad"ertising has to be repeated o"er time% Second, economies of scale e2ist in ad"ertising% Concent!ation : is a measure of the market share that is held by the largest companies in an industry% For instance, some pharmaceutical industries like Merck, Pfi'er and ;li Ailly account for almost all of the market%

36

A#e!age fi!-

i4e - Hew firms perform better, when the a"erage firm si'e is small%

Hew firms tend to begin small as a way to minimi'e the risk of ;ntrepreneurial miscalculation% ,f the a"erage firm si'e is large, this may lead to ,nability to purchase in "olume, higher a"erage manufacturing and 7istribution cost% USES O' INDUSTRY STRUCTURE %& ine Po$icy an) St!ategy: By looking at the structure of an industry, one can often learn a lot about competition, ri"alry, entry barriers, and other aspects of competiti"e dynamics in that industry% P&,$ic Po$icy: Public Policy View is that, reduced competition in an industry hurts consumer&s interest and encourages dominant firms to adopt anti competiti"e trade practices% O$igopo$y: 1 key characteristic of an oligopoly 3a highly structured industry5 is that competitors are mutually interdependent* a competiti"e mo"e by one company will almost certainly affect the fortunes of other companies in the industry and they will generally respond to the mo"e$sooner or later% G"O%A"I>ATION #lobalisation is the term to describe the way countries are becoming more interconnected both economically and culturally% +his process is a combination of economic, technological, socio$cultural and political forces% AD3ANTAGES ,ncreased free trade between nations ,ncreased li=uidity of capital allowing in"estors in de"eloped nations to in"est in de"eloping nations Corporations ha"e greater fle2ibility to operate across borders #lobal mass media ties the world together% ,ncreased flow of communications allows "ital information to be shared between indi"iduals and corporations around the world #reater ease and speed of transportation for goods and people% )eduction of cultural barriers increased the global "illage effect Spread of democratic ideals to de"eloped nations% #reater interdependence of nation states% )eduction of likelihood of war between de"eloped nations ,ncreases in en"ironmental protection in de"eloped nations

37

DISAD3ANTAGES ,ncreased flow of skilled and non$skilled !obs from de"eloped to de"eloping nations as corporations seek out the cheapest labor% Spread of a materialistic lifestyle and attitude that sees consumption as the path to prosperity ,nternational bodies like the world trade organi'ation infringe on national and indi"idual #reater risk of diseased being transported unintentionally between nations% #reater chance of reactions for globali'ation being "iolent in an attempt to preser"e cultural heritage% ,ncreased likelihood of economic disruptions in one nation effecting all nations% +hreat that control of world media by a handful of corporations will limit cultural e2pression% +ake ad"antage of weak regulatory rules in de"eloping countries% ,ncrease in the chances of ci"il war within de"eloping countries and open war between de"eloping countries as they "ie for resources% 7ecrease in en"ironmental integrity as polluting corporations%

I-pact of g$o,a$i4ation on in)& t!y t!&ct&!e +he structure of an industry is affected by globali'ation% #lobali'ation ga"e rise to the following types of industries% Multidomestic ,ndustries #lobal ,ndustries M&$ti)o-e tic In)& t!ie are specific to each country or group of countries% +his

type of international industry is a collection of essentially domestic industries like retailing, insurance and banking% ,t has manufacturing facility to produce goods for sale within their country itself% G$o,a$ In)& t!ie operate world wide, with MHCs making only small ad!ustments for country$ specific circumstances% 1 global industry is one in which a MHCs acti"ities in one country are significantly affected by its acti"ities in other countries% MHCs produce products or ser"ices in "arious locations throughout the world and sell them, making only minor ad!ustments for specific country re=uirements% E6( Commercial 1ircrafts, +ele"ision sets, Semiconductors, copiers, automobiles, watches and tyres%

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NATIONA" CONTE;T AND COMPETITI3E AD3ANTAGE: 7espite the globali'ation of production 6 markets, many of the most successful companies in certain industries are still clustered in a small number of countries% Biotechnology 6 computer companies ?%S% ;lectronics Company Papan%

39

Chemical 6 ;ngineering company #ermany% +his suggests that the nation state within which a company is based may ha"e an important bearing on the competiti"e position of that company in the global market place% Companies need to understand how national factors can affect competiti"e ad"antage, for then they will able to identify% a% <here their most significant competitors are likely to come from% b% <here they might want to locate certain producti"e acti"ities% Att!i,&te to i)entify Nationa$ En#i!on-ent: -% Factor ;ndowments( 1 nation&s position in factors of production such as skilled labor or the infrastructure necessary to compete in a gi"en industry% C% E% 7emand Conditions( +he nature of home demand for the industry&s product or ser"ice% )elating 6 Supporting ,ndustries( +he presence or absence in a nation of supplier industries and related industries that is internationally competiti"e% G% Firm Strategy, Structure 6 )i"alry( +he conditions in the nation go"erning how companies are created, organi'ed and managed and the nature of domestic ri"alry%

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COMPETITI3E AD3ANTAGE: Competiti"e ad"antage leads to superior profitability% 1t the most basic le"el, how profitable a company becomes depends on three factors( -% +he amount of "alue customers place on the company&s product% C% +he price that a company charges for its products% E% +he cost of creating that "alue% Value is something that customers assign to a product% 6 after sale ser"ice% 1 company that strengthens the "alue of its product in the products in the eyes of customers gi"es it more pricing options% unit sales "olume% %15 RESOURCES: )esources are the capital or financial, physical, social or human, technological and organi'ational factor endowments that allow a company to create "alue for its customers% ,t can raise prices to reflect that "alue or hold prices lower, which induces more customers to purchase its product 6 e2pand ,t is a function of the attributes of the product, such as its performance, design, =uality, 6 point of scale

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Type : ,5 +angible resources( $1re something physical, such as land, buildings, plant, e=uipment, in"entory and money% ,,5 ,ntangible resources( $1re non$physical entities that are the creation of the company and its employees, such as brand names, the reputation of the company, the knowledge that employees ha"e gained through e2perience and the intellectual property of the company including patents, copyrights 6 trademarks% %+ CAPA%I"ITIES: $)efers to a company&s skills at coordinating its resources 6 putting them to producti"e use% +hese skills reside in an organi'ation&s rules, routines and producers% C+ COMPETENCIES: Competencies are firm specific strengths that allow a company to differentiate its products and for achie"e substantially lower cost than its ri"als and thus gain a competiti"e ad"antage% +ypes of competency i5 Core competency( ,t is an acti"ity central to a firm0s profitability and competiti"eness that is performed well by the firm% Core competencies create and sustain firm0s ability to meet the critical success factors of particular customer groups% ii5 7istincti"e competency( ,t is a competiti"ely "aluable acti"ity that a firm performs better than its competitors% +hese pro"ide the basis for competiti"e ad"antage% +hese are cornerstone of strategy% +hey pro"ide sustainable competiti"e ad"antage because these are hard to copy%

GENERIC %UI"DING %"OC/S O' COMPETITI3E AD3ANTAGE

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A) EFFICIENC

: ,n a business organi'ation, inputs such as land, capital, raw

material managerial know$how and technological know$how are transformed into outputs such as products and ser"ices% ;fficiency of operations enables a company to lower the cost of inputs to produce gi"en output and to attain competiti"e ad"antage% ;mployee producti"ity is measured in terms of output per employee% 'o! e6( Papan&s auto giants ha"e cost based competiti"e ad"antage o"er their near ri"als in ?%S% !) "#A$IT : Quality of goods and ser"ices indicates the reliability of doing the !ob, which the product is intended for% @igh =uality products create a reputation and brand name, which in turn permits the company to charge higher price for the products% @igher product =uality means employee&s time is not wasted on rework, defecti"e work or substandard work% 'o! e6( ,n consumer durable industries such as mi2ers, grinders, gas sto"es and water heaters, ,S mark is a basic imperati"e for sur"i"al% C) INN%&ATI%N ,nno"ation means new way of doing things% ,nno"ation results in new knowledge, new product de"elopment structures and strategies in a company% ,t offers something uni=ue, which the competitors may not ha"e, and allows the company to charge high price% 'o! e6( Photocopiers de"eloped by Mero2% ') C#ST%(E) )ESP%NSI&ENESS Companies are e2pected to pro"ide customers what they are e2actly in need of by understanding customer needs and desires% Customer )esponsi"eness is determined by customi'ation of products, =uick deli"ery time, =uality, design and prompt after sales ser"ice% 'o! e6( +he popularity of courier ser"ice o"er ,ndian postal ser"ice is due to the fastness of ser"ice% DISTINCTI3E COMPETENCIES

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Di tincti#e co-petence is a uni=ue strength that allows a company to achie"e superior efficiency, =uality, inno"ation and customer responsi"eness% ,t allows the firm to charge premium price and achie"e low costs compared to ri"als, which results in a profit rate abo"e the industry a"erage% E6( +oyota with world class manufacturing process% ,n order to call anything a distincti"e competency it should satisfy E conditions, namely( Value disproportionate contribution to customer percei"ed "alue* ?ni=ue uni=ue compared to competitors* ;2tendibility capable of de"eloping new products%

7istincti"e Competencies are built around all functional areas, namely( +echnology related Manufacturing related 7istribution related Marketing related Skills related rgani'ational capability ther types%

7istincti"e Competencies arise from two sources namely, )esources 1 resource in an asset, competency, process, skill or knowledge% )esources may be tangible land, buildings, P6M or intangible brand names, reputation, patens, know$how and )67% 1 resource is a strength which the co with competiti"e ad"antage and it has the potential to do well compared to its competitors% Re o&!ce are the firm$specific assets useful for creating a cost or differentiation ad"antage and that few competitors can ac=uire easily% +he following are some e2amples of such resources( Patents and trademarks Proprietary know$how ,nstalled customer base )eputation of the firm Brand e=uity% Company&s past performance

+he strengths and weaknesses of resources can be measured by,

44

Company&s key competitors and ,ndustry as a whole%

+he e2tent to which it is different from that of the competitors, it is considered as a strategic asset% E#a$&ation of 1ey !e o&!ce 1 uni=ue resource is one which is not found in any other company% 1 resource is considered to be "aluable if it helps to create strong demand for the product% Barney has e"ol"ed V), say Value does it pro"ide competiti"e ad"antageR )areness do other competitors possess itR ,mitability is it costly for others to imitateR rgani'ation does the firm e2ploit the resourceR framework of analysis to e"aluate the firm&s key resource,

Capa*ilities are skills, which bring together resource and put them to purposeful use% +he organi'ations structure and control system gi"es rise to capabilities which are intangible% 1 company should ha"e both uni=ue "aluable resources and capabilities to e2ploit resources and a uni=ue capability to manage common resources% Capa,i$itie refer to the firm0s ability to utili'e its resources effecti"ely% 1n e2ample

of a capability is the ability to bring a product to market faster than competitors% Such capabilities are embedded in the routines of the organi'ation and are not easily documented as procedures and thus are difficult for competitors to replicate% DURA%I"ITY O' COMPETITI3E AD3ANTAGE 7urability of competiti"e ad"antage refers to the rate at which the firm&s capabilities and resources depreciate or become obsolete% ,t depends on three factors( 15 Barriers to ,mitation( Barriers are factors which make it difficult for a competitor is copy a company&s distincti"e competencies% +he longer the period for the competitor to imitate the distincti"e competency, the greater the opportunity that the company has to build a strong market positioned reputation with consumers% ,mitability refers to the rate at which others duplicate a firm underlying resources and capabilities%

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+angible resources can be easily imitated but intangible resources cannot be imitated and capabilities cannot be imitated% B5 Capability of Competitors( <hen a firm is committed to a particular course of action in doing business and de"elops a specific set of resources and capabilities, such prior commitments make it difficult to imitate the C1 of successful firms% 1 ma!or determinant of the capability of competitors to imitate a company&s competiti"e ad"antage rapidly is the nature of the competitor&s prior strategic commitments 6 1bsorpti"e capacity% i5 Strategic commitment( 1 company&s commitment to a particular way of doing business that is to de"eloping a particular set of resources 6 capabilities% ii5 1bsorpti"e capacity( )efers to the ability of an enterprise to identify "alue, assimilate, and use new knowledge% C5 7ynamism of industry( 7ynamic industries are characteri'ed by high rate of inno"ation and fast changes and competiti"e ad"antage will not last for a long time% +he most dynamic industries tend to be those with a "ery high rate of product inno"ation% E6( Computer industry%

A3OIDING 'AI"URE AND SUSTAINING COMPETITI3E AD3ANTAGE

46

<hen a company loses its competiti"e ad"antage, its profitability falls% +he company does not necessarily fail, it may !ust ha"e a"erage or below$a"erage profitability and can remain in this mode for a considerable time, although its resources 6 capital base is shrinking% Rea on fo! fai$&!e: a) Inertia* +he ,nertia argument says that companies find it difficult to change their strategies 6 structures in order to adapt to changing competiti"e conditions% b5 +rior strategic commitments( 1 company&s prior strategic commitment not only limits its ability to imitate ri"als but may also cause competiti"e disad"antage% c) 'he Icarus +aradox* 1ccording to Miler, many companies become so da''led by their early success that they belie"e more of the same type of effort is the way to future success% 1s a result, they can become so speciali'ed and inner directed that they lose sight of market realities and the fundamental re=uirements for achie"ing a competiti"e ad"antage% Sooner or later, this leads to failure% Step to A#oi) 'ai$&!e( a5 Focus on the %uilding %loc,s of competitive advantage : Maintaining a competiti"e ad"antage re=uires a company to continue focusing on all four generic building blocks of competiti"e ad"antage efficiency, =uality, inno"ation, and responsi"eness to customers and to de"elop distincti"e competencies that contribute to superior performance in these areas% b5 Institute continuous Improvement - .earning( ,n such a dynamic and fast paced en"ironment, the only way that a company can maintain a competiti"e ad"antage o"ertime is to continually impro"e its efficiently, =uality inno"ation and responsi"eness to customer% +he way to do this is recogni'e the importance of learning within the organi'ation% c5 'rac, %est Industrial +ractice and use %enchmar,ing: Benchmarking is the process of measuring the company against the products, practices and ser"ices of some of its most efficient global competitors% d) Overcome Inertia* "ercoming the internal forces that are a barrier to change within an organi'ation is one of the key re=uirements for maintaining a competiti"e ad"antage%

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UNIT - III STRATEGIES ?@ +he generic strategic alternati"es Stability, ;2pansion, )etrenchment and Combination strategies $ Business le"el strategy$ Strategy in the #lobal ;n"ironment$ Corporate Strategy$ Vertical ,ntegration$7i"ersification Building and )estructuring the corporation$ Strategic ;n"ironmental +hreat and pportunity Profile 3;+ P5 $ and Strategic 1lliances$ analysis and choice $ rgani'ational Capability

Profile $ Strategic 1d"antage Profile $ Corporate Portfolio 1nalysis $ S< + 1nalysis $ #1P 1nalysis $ Mc Jinsey0s 4s Framework $ #; . Cell Model $ 7istincti"e competiti"eness $ Selection of matri2 $ Balance Score Card$case study%

0IERARC0ICA" "E3E"S O' STRATEGY Strategy can be formulated on three different le"els(

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 C )P )1+; A;V;A B?S,H;SS ?H,+ A;V;A F?HC+, H1A A;V;A

CORPORATE STRATEGY Corporate strategy tells us primarily about the choice of direction for the firm as a whole% ,n a large multi business company, howe"er, corporate strategy is also about managing "arious product lines and business units for ma2imum "alue% ;"en though each product line or business unit has its own competiti"e or cooperati"e strategy that it uses to obtain its own competiti"e ad"antage in the market place, the corporation must coordinate these difference business strategies so that the corporation as a whole succeeds% Corporate strategy includes decision regarding the flow of financial and other resources to and from a company&s product line and business units% +hrough a series of coordinating de"ices, a company transfers skills and capabilities de"eloped in one unit to other units that need such resources% 1 corporation&s l strategy is composed of three general orientations 3also called grand strategies5( A+ G!o2t( t!ategie e2pand the company&s acti"ities% %+ Sta,i$ity t!ategie make no change to the company&s current acti"ities% C+ Ret!enc(-ent t!ategie reduce the company&s le"el of acti"ities% 75 Co-,ination t!ategie is the combination of the abo"e three strategies% @a"ing chosen the general orientation a company&s managers can select from more specific corporate strategies such as concentration within one product line>industry or di"ersification into other products>industries% +hese strategies are useful both to corporations operating in only one product line and to those operating in many industries with many product lines% By far the most widely pursued corporate directional strategies are those designed to achie"e growth in sales, assets, profits or some combination% Companies that do business in e2panding industries must grow to sur"i"e% Continuing growth means increasing sales and a chance to take ad"antage of the e2perience cur"e to reduce per unit cost of products sold, thereby increasing profits% +his cost reduction becomes e2tremely important if a corporation&s industry is growing =uickly and competitors are engaging in price wars in attempts to increase their shares of the market% Firms that ha"e not reached 9critical mass: 3that is, gained the necessary economy of large scale productions5 will face large losses unless they can find and fill a small, but profitable, niche where higher prices can be offset by special product or ser"ice features% +hat is why Motorola ,nc%, continues to spend large sum on the product de"elopment of

49

cellular phones, pagers, and two$way radios, despite a serious drop in market share and profits% 1ccording to Motorola&s Chairman #eorge Fisher, 9what&s at stake here is leadership:% ;"en though the industry was changing =uickly, the company was working to a"oid the erosion of its market share by !umping into new wireless markets as =uickly as possible% Being one of the market leaders in this industry would almost guarantee Motorola enormous future returns% 1 Corporation can grow internally by e2panding its operations both globally and domestically, or it can grow e2ternally through mergers, ac=uisition and strategic alliances% 1 -e!ge! is a transaction in"ol"ing two or more corporations in which stock is e2changed, but from which only one corporation sur"i"es% Mergers usually occur between firms of somewhat similar si'e and are usually 9friendly:% +he resulting firm is likely to ha"e a name deri"ed from its composite firms% ne e2ample in the Pharma ,ndustry is the merging of #la2o and Smithkline <illiams to form #la2o Smithkline% 1n 1c=uisition is the purchase of a company that is completely absorbed as an operating subsidiary or di"ision of the ac=uiring corporation% ;2amples are Procter 6 #amble&s ac=uisition of )ichardson$Vicks, known for its #illette, known for sha"ing products% +he Corporate Directional Strategies are( 15 #rowth 3i5 Concentration @ori'ontal growth Vertical growth Forward integration Backward integration il of lay and Vicks Brands, and

3ii5 7i"ersification Concentric Conglomerate B5 Stability 3i5 Pause>Proceed with Caution 3ii5 Ho Change 3iii5 Profit C5 )etrenchment 3i5 +urnaround 3ii5 Capti"e Company 3iii5 Sell$out > 7i"estment

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3i"5 Bankruptcy > Ai=uidation 15 G)%+T, ST)ATEG 1c=uisition usually occurs between firms of different si'es and can be either friendly or hostile% @ostile ac=uisitions are often called takeo"ers% 1 Strategic 1lliances is a partnership of two or more corporations or business units to achie"e strategically significant ob!ecti"es that are mutually beneficial% #rowth is a "ery attracti"e strategy for two key reasons% #rowth is based on increasing market demand may mask flaws in a company 3flaws that would be immediately e"ident in a stable or declining market% 1 growing flow of re"enue into a highly le"eraged corporation can create a large amount of organi'ation slack% 3unused resources5 that can be used to =uickly resol"e problems and conflicts between departments and di"isions% #rowth also pro"ides a big cushion for a turnaround in case a strategic error is made% Aarger firms also ha"e more bargaining power than do small firms and are more likely to obtain support from key stake holders in case of difficulty% 1 growing firm offers more opportunities for ad"ancement, promotions, and interesting !obs, growth itself is e2citing and ego enhancing for C; &s% +he marketplace and potential in"estors tend to "iew a growing corporation as a winner or on the mo"e% ;2ecuti"e compensation tends to get bigger as an organi'ation increases in si'e% Aarge firms also more difficult to ac=uire than are smaller ones* thus an e2ecuti"e&s !ob is more secure% Ai+ CONCENTRATION STRATEGY: ,f a company&s current product lines ha"e real growth potential, concentration of resources on those product lines makes sense as a strategy for growth% +he two basic concentration strategies are "ertical growth and hori'ontal growth% #rowing firms in a growing industry tend to choose these strategies before they try di"ersifications% )ertical gro(th can be achie"ed by taking o"er a function pre"iously pro"ided by a supplier or by a distributor% +he company, in effect, grows by making its own supplies and>or by distributing its own products% +his may be done in order to reduce costs, gain control o"er a scarce resource, guarantee =uality of key input, or obtain access to potential customers% Eg: @enry Ford used internal company resources to build his )i"er )ouge Plant outside 7etroit% +he manufacturing process was integrated to the

51

point that iron ore entered one end of the long plant and finished automobiles rolled out the other end into a huge parking lot% Cisco Systems, the maker of ,nternet @ardware, chose the e2ternal route to "ertical growth by purchasing )adiata, ,nc%, a maker of chips sets for wireless networks% +his ac=uisition ga"e Cisco access to technology permitting wireless communications at speeds, pre"iously possible only with wired connections% Vertical growth results in "ertical integration, the degree to which a firms operates "ertically in multiple locations on an industry&s "alue chain from e2tracting raw materials to manufacturing to retailing% More specifically, assuming a function pre"iously pro"ided by a supplier is called ,ac12a!) integ!ation 3going backward on an industry&s "alue chain5% +he purchase of Pentasia Chemicals by 1sian Paints Aimited for the chemicals re=uired for the manufacturing of paints is an e2ample of backward integration% 1ssuming a function pre"iously pro"ided by a distributor is labeled fo!2a!) integ!ation 3going forward an industry&s "alue chain5% 1r"ind mills, ;gample, used forward integration when it e2panded out of its successful fabric manufacturing business to make and market its own branded shirts and pants% /ori0ontal Gro(th can be achie"ed by e2panding the firm&s products into other geographic locations and>or by increasing the range of products and ser"ices offered to current market% ,n this case, the company e2pands sideways at the same location on the industry&s "alue chain% Eg( )anba2y Aabs followed a hori'ontal growth strategy when it e2tended its pharmaceuticals business to ;urope and to ?S; company can grow hori'ontally through internal de"elopment or e2ternally through ac=uisitions or strategic alliances with another firm in the same industry% /ori0ontal gro(th results in hori'ontal integrations the degree to which a firm operates in multiple geographic locations at the same point in an industry&s "alue chain% @ori'ontal integration for a firm may range from full to partial ownership to long term contract% Aii+ DI3ERSI'CATION STRATEGY: <hen an industry consolidates and becomes mature, most of the sur"i"ing firms ha"e reached the limits of growth using "ertical and hori'ontal growth strategies% ?nless the competitors are able to e2pand

52

internationally into less mature markets, they may ha"e no choice but to di"ersify into different industries if they want to continue growing% +he two basic di"ersification strategies are concentric and conglomerate% Concentric 'iversification (1elated) into a related industry may be a "ery appropriate corporate strategy when a firm has a strong competiti"e position but industry attracti"eness is low% By focusing on the characteristics that ha"e gi"en the company its distincti"e competence, the company uses those "ery strengths as its means of di"ersification% +he firm attempts to secure strategic fit in a new industry where the firm&s product knowledge, its manufacturing capabilities, and the marketing skills it used so effecti"ely in the original industry can be put to good use% Conglomerate 'iversification (&nrelated) takes place when management reali'es that the current industry is unattracti"e and that the firms lacks outstanding abilities or skills that it could easily transfer to related products, or ser"ices in other industries, the most likely strategy is conglomerate di"ersification di"ersifying into an industry unrelated to its current one% )ather than maintaining a common threat throughout their organi'ation, strategic managers who adopt this strategy are primarily concerned with financials considerations of cash flow or risk reductions% !) STA!I$IT ST)ATEGIES

1 corporation may choose stability o"er growth by continuing its current acti"ities without any significant change in direction% 1lthough sometimes "iewed as lack of strategy, the stability family of corporate strategies can be appropriate for a successful corporation operating in a reasonably predictable en"ironment% -i) Pause.Proceed +it/ Caution Strateg0 : ,n effect, a time out or an opportunity to rest before continuing a growth or retrenchment strategy% ,t is a "ery deliberate attempt to make only incremental impro"ements until a particular en"ironmental situation changes% ,t is typically concei"ed as a temporary strategy to be used until the en"ironmental becomes more hospitable or to enable a company to consolidate its resources after prolonged rapid growth% -ii) No C/ange Strateg0 1 ,s a decision to do nothing new 3a choice to continue current operation and policies for the foreseeable future5% )arely articulated as a definite strategy, a no change strategy&s success depends on a

53

lack of significant change in a corporation&s situation% +he relati"e stability created by the firm&s modest competiti"e position in an industry facing little of no growth encourages the company to continue on its current course% Making only small ad!ustments for inflation in the sales and profit ob!ecti"es, there are no ob"ious opportunities or threats nor much in the way of significant strengths of weaknesses% Few aggressi"e new competitors are likely to enter such an industry% -iii) Profit Strateg0 : ,s a decision to do nothing new in worsening situation but instead to act as though the company&s problems are only temporary% +he profit strategy is an attempt to artificially support profits when a company&s sales are declining by reducing in"estment and short term discretionary e2penditures% )ather than announcing the company&s poor position to shareholders and the in"estment community at large, top management may be tempted to follow this "ery seducti"e strategy% Blaming the company&s problems on a hostile en"ironment 3such as anti$business go"ernment policies5 management defers in"estments and > or buts e2penses to stabili'e profit during this period% C) )ET)ENC,(ENT ST)ATEGIES 1 company may pursue retrenchment strategies when it has a weak competiti"e position in some or all of its product lines resulting in poor performance$sales are down and profits are becoming losses% +hese strategies impose a great deal of pressure to impro"e performance% -i) Turnaround Strateg0 : ;mphasi'es the impro"ement of operational efficiency and is probably most appropriate when a corporation&s problems are per"asi"e but not yet critical% 1nalogous to a weight reduction diet, the two basic phases of a turnaround strategy are C H+)1C+, H and C HS A,71+, H% Cont!action is the initial effort to =uickly 9stop the bleeding: with a general across the board cutback in si'e and costs% Con o$i)ation, implements a program to stabili'e the now$leaner corporation% +o streamline the company, plans are de"eloped to reduce unnecessary o"erhead and to make functional acti"ities cost !ustified% +his is a crucial time for the organi'ation% ,f the consolidation phase is not conducted in a positi"e manner, many of the best people lea"e the organi'ation% -ii) Captive Strateg0 ,s the gi"ing up of independence in e2change for security% 1 company with a weak competiti"e position may not be able to engage in a full blown

54

turnaround strategy% +he industry may not be sufficiently attracti"e to !ustify such an effort from either the current management or from in"estors% He"ertheless a company in this situation faces poor sales and increasing losses unless it takes some action% Management desperately searches for an 9angel: by offering to be a capti"e company to one of its larger customers in order to guarantee the company&s continued e2istence with a long term contract% ,n this way, the corporation may be able to reduce the scope of some of its functional acti"ities, such as marketing, thus reducing costs significantly% -iii) Sell %ut . 'ivestment Strateg0 ,f a corporation with a weak competiti"e position in its industry is unable either to pull itself by its bootstraps or to find a customer to which it can become a capti"e company, it may ha"e no choice to Sell ut% +he sell out strategy makes sense if managements can still obtain a good price for its shareholders and the employees can keep their !obs by selling the entire company to another firm% -iv) !an2ruptc0. $i3uidation Strateg0 1 <hen a company finds itself in the worst possible situation with a poor competiti"e position in an industry with few prospects, management has only a few alternati"es all of them distasteful% Because no one is interested in buying a weak company in an unattracti"e industry, the firm must pursue a bankruptcy or li=uidation strategy% %an,ruptc!( ,t in"ol"es gi"ing up management of the firm to the courts in return for some settlement of the corporation&s obligations% +op management hopes that once the court decides the claims on the company, the company will be stronger and better able to compete in a more attracti"e industry% Eg: #+B 3#lobal +rust Bank5 was promoted as a pri"ate sector bank in -..E, and was running successfully and setting records% ,n C//G, it became bankrupt under the pressure of bad loans and merged with a public sector bank, Bank of Commerce% .i2uidation( ,t is the termination of the firm% Because the industry is unattracti"e and the company too weak to be sold as a going concern, management may choose to con"ert as many saleable assets as possible to cash, which is then distributed to the shareholders after all obligations are paid% Eg: Small businesses and partnership firms li=uidate when one or more partners want to withdraw from the business% Ai=uidation may be done in the following ways( Voluntary winding up% Compulsory winding up under the super"ision of the court% riental

55

Voluntary winding up under the super"ision of the court%

SHote( +he benefit of li=uidation o"er bankruptcy is that the board of directors, as representati"es of the shareholders, together with top management makes the decisions instead of turning them o"er to the court, which may choose to ignore shareholders completely%T

D+ COM%INATION STRATEGIES ,t is the combination of stability, growth 6 retrenchment strategies adopted by an organisation, either at the same time in its different businesses, or at different times in the same business with the aim of impro"ing its performance% For e2ample, it is certainly feasible for an organi'ation to follow a retrenchment strategy for a short period of time due to general economic conditions and then pursue a growth strategy once the economy strengthens% +he ob"ious combination strategies include 3a5 retrench, then stability* 3b5 retrench, then growth* 3c5 stability, then retrench* 3d5 stability, then growth* 3e5 growth then retrench, and 3f5 growth, then stability% )easons for adopting combination strategies are gi"en below K )apid ;n"ironment change K Ai=uidate one unit, de"elop another K ,n"ol"es both di"estment 6 ac=uisition 3take o"er5 ,t is commonly followed by organi'ations with multiple unit di"ersified product 6 Hational or #lobal market in which a single strategy does not fit all businesses at a particular point of time% %USINESS STRATEGY +he plans and actions that firms de"ise to compete in a gi"en product>market scope or setting and asks the =uestion 9@ow do we compete within an industryR: is a business strategy% ,t focuses on impro"ing the competiti"e position of a company&s business unit&s products or ser"ices within the specific industry or market segment that the company or business unit ser"es% ,t can be( 15 Competitive battling against all competitors for ad"antage which includes Aow$ cost leadership, 7ifferentiation and Focus strategies* and>or B5 Cooperative working with one or more competitors to gain ad"antage against other competitors which is also known as Strategic alliances%

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Eg: <et grinder companies like Shantha and Sowbhagya seeks differentiation in a targeted market segment%

A+ COMPETITI3E %USINESS STRATEGY APORTER<S GENERIC STRATEGY+ Porter0s generic strategies framework constitutes a ma!or contribution to the de"elopment of the strategic management literature% #eneric strategies were first presented in two books by Professor Michael Porter of the @ar"ard Business School 3Porter, -.O/5% Porter suggested that some of the most basic choices faced by companies are essentially the scope of the markets that the company would ser"e and how the company would compete in the selected markets% Competiti"e strategies focus on ways in which a company can achie"e the most ad"antageous position that it possibly can in its industry % +he profit of a company is essentially the difference between its re"enues and costs% +herefore high profitability can be achie"ed through achie"ing the lowest costs or the highest prices facing the competition% Porter used the terms Ucost leadership0 and Udifferentiation0, wherein the latter is the way in which companies can earn a price premium% Main a pect of Po!te!5 Gene!ic St!ategie Ana$y i 1ccording to Porter, there are three generic strategies that a company can undertake to attain competiti"e ad"antage( cost leadership, differentiation, and focus%

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i) .o(3Cost Strateg!( ,t is the ability of a company or a business unit to design, produce and market a comparable product more efficiently than its competitors% ,t is a competiti"e strategy based on the firm&s ability to pro"ide products or ser"ices at lower cost than its ri"als% ,t is formulated to ac=uire a substantial cost ad"antage o"er other competitors that can be passed on to consumers to gain a large market share% 1s a result the firm can earn a higher profit margin that result from selling products at current market prices% Eg: <hirlpool has successfully used a low$cost leadership strategy to build competiti"e ad"antage% ii) Differentiation Strateg!( ,t is the ability to pro"ide uni=ue and superior "alue to the buyer in terms of product =uality, special features or after$sale ser"ice% ,t is a competiti"e strategy based on pro"iding buyers with something special or uni=ue that makes the firm&s product or ser"ice distincti"e% +he customers are willing to pay a higher price for a product that is distinct in some special way% Superior "alue is created because the product is of higher =uality and technically superior which builds competiti"e ad"antage by making customers more loyal and less$price sensiti"e to a gi"en firm&s product or ser"ice Eg: Mercedes and BM< ha"e successfully pursued differentiation strategies%

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iii) Focus Strateg!( ,t is designed to help a firm target a specific niche within an industry% ?nlike both low$cost leadership and differentiation strategies that are designed to target a broader or industry$wide market, focus strategies aim at a specific and typically small niche% +hese niches could be a particular buyer group, a narrow segment of a gi"en product line, a geographic or regional market, or a niche with distincti"e special tastes and preferences% Eg: Solectron is a highly speciali'ed manufacturer of circuit boards used in PCs and other electronic de"ices which has adopted a well$defined focus strategy% Co-,ination ASt&c1 in t(e -i))$e+ 1ccording to Porter, a company0s failure to make a choice between cost leadership and differentiation essentially implies that the company is stuck in the middle% +here is no competiti"e ad"antage for a company that is stuck in the middle and the result is often poor financial performance% @owe"er, there is disagreement between scholars on this aspect of the analysis% Jay 3-..E5 and Miller 3-..C5 ha"e cited empirical e2amples of successful companies like +oyota and Benetton, which ha"e adopted more than one generic strategy% Both these companies used the generic strategies of differentiation and low cost simultaneously, which led to the success of the companies% %+ COOPERATI3E %USINESS STRATEGY ASTRATEGIC A""IANCE+ +he role of strategic alliances in shaping corporate and business strategy has grown significantly o"er the past decade% ,n almost e"ery industry, alliances are becoming more common as companies reali'e that they can no longer afford the costs of de"eloping new products or entering new markets on their own% 1lliances are especially pre"alent in industries or technologies that change rapidly, such as semi conductors, airlines, automobiles, pharmaceuticals, telecommunications, consumer electronics and financial ser"ices% n a broader global le"el, many ?%S and Papanese firms in the automobile and electronics industries ha"e teamed up to de"elop new technologies, e"en as they compete fiercely to sell their e2isting products and enter each other&s markets% 1 St!ategic A$$iance is a cooperati"e agreement between companies who are competitors from different companies% Strategic alliances are linkages between companies designed to achie"e an ob!ecti"e faster or more efficiently than if either firm attempted to do so on its own% +hey ser"e a "ital role in e2tending and renewing a firm&s sources of competiti"e ad"antage because they allow companies to limit certain kinds of risk when entering new terrain%

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E6( ,n the be"erage industry, Hestle works with Coca$ Cola to gain access to the other&s distribution channels% ,n the computer hardware industry, +oshiba and Samsung ha"e formed a strategic alliance for manufacturing ad"anced memory chips% 'ACTORS PROMOTING T0E RISE O' STRATEGIC A""IANCES AOR+ REASONS 'OR 'ORMING STRATEGIC A""IANCES 3i5 +o gain access to foreign markets in the pharmaceutical industry, Pharmacia and Pfi'er ha"e formed an alliance for smooth market entry to accelerate the acceptance of a new drug% 3ii5 3iii5 3i"5 3"5 3"i5 3"ii5 +o reduce financial risks ,BM, +oshiba and Siemens ha"e entered into an alliance to share the fi2ed costs of de"eloping new microprocessors% +o bring complementary skills ,ntel formed and alliance with @ewlett$ Packard 3@P5 to use @P&s capability to de"elop Pentium microprocessors% +o reduce political risks Maytag, a ?%S company entered into alliance with Chinese appliance maker )S7 to gain access to China% +o achie"e competiti"e ad"antage #M and +oyota established !oint "enture by name Hummi Corporation% +o set technological standards Philips entered into an alliance with Matsushita to manufacture and market the digital compact cassette% +o shape industry e"olution Aucent +echnologies and Motorola entered into an alliance to de"elop a new generation of 7igital signal processing chips that is designed to power ne2t$ generation cellular phones and other consumer electronics% TYPES O' STRATEGIC A""IANCES a) Mutual Service Consortia ( 1 Mutual Ser"ice Consortium is a partnership of similar companies in similar industries who pool their resources to gain a benefit that is too e2pensi"e to de"elop alone% Eg( ,BM offered +oshiba its e2pertise in chemical mechanical polishing to de"elop a new manufacturing process% #) 4oint )enture( 1 !oint "enture is a cooperati"e business acti"ity, formed by two or more separate organi'ations for strategic purposes, that creates an independent business identity and allocates ownership, operational responsibilities and financial risks and rewards to each member, while preser"ing their separate identity or autonomy%

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Eg( , C and oil tanking #mb@ formed a !oint "enture to build and operate terminating ser"ices for petroleum products% c) .icensing rrangement( 1 licensing agreement is an agreement in which the

licensing firm grants rights to another firm in another country or market to produce and> or sell a product% Eg( P6# licensed the U ld Spice& trademark and business to a #oa$ based company, Mene'es cosmetics 3P5 Atd for a period of -/ years to manufacture, sell, distribute and market in ,ndia, Sri Aanka and Bangladesh% d) )alue3Chain +artnership( +he "alue$ chain partnership is a strong and close alliance in which one company or unit forms a long$ term arrangement with a key supplier or distributor for mutual ad"antage% Eg( Value$ Chain partnership between Cisco Systems and its suppliers% 1ll forms of strategic alliances are filled with uncertainty% ne thorny issue in any strategic alliance is how to cooperate without gi"ing away the company or business unit&s core competence% +here are many other issues that need to be dealt with when the alliance is initially formed and others that emerge later% Strategic alliance success factors +he success factors of strategic alliances are($ @a"e a clear strategic purpose* Find a fitting partner with compatible goals and complementary capabilities* ,dentify likely partnering risks and deal with them when the alliance is formed* 1llocate tasks and responsibilities to each partner* Create incenti"es for cooperation to minimi'e differences in corporate culture* Minimi'e conflicts among partners by clarifying ob!ecti"es and a"oiding direct competition in market place* Comprehensi"e cross$ cultural knowledge should be ensured in an international alliance* ;2change human resources to maintain communication and trust* perate with long$ term time hori'ons* 7e"elop multiple !oint products so that any failures are counterbalanced by successes* Share information to build trust and keep pro!ects on target% Monitor customer responses and ser"ice complaints*

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Be fle2ible and willing to renegotiate the relationship of en"ironmental changes and new opportunities* 1gree upon an Ue2it strategy& when the alliance is !udged a failure%

'UNCTIONA" STRATEGY Functional strategy is the approach, a functional area takes to achie"e corporate and business unit ob!ecti"es and strategies by ma2imi'ing resource producti"ity% ,t is concerned with de"eloping and nurturing a distincti"e competence to pro"ide a company and business firm with a competiti"e ad"antage% +he orientation of the functional strategy is dictated by its parent business unit&s strategy% Eg( 1 business unit following a competiti"e strategy of differentiation through high =uality needs a manufacturing functional strategy that emphasi'es e2pensi"e =uality assurance process o"er cheaper, high$"olume production% 1 @) functional strategy that emphasi'es the hiring and training of a highly skilled but costly workforce and a marketing functional strategy that emphasi'es distribution channel 9pull: using 9ad"ertising: to increase consumer demand o"er 9push: using promotional allowances to retailers% ,f a business unit were to follow a low cost competiti"e strategy, howe"er a different set of functional strategies would be needed to support the business strategy% Functional Strategies may need to "ary from region to region% Eg( <hen Maggi Hoodles e2panded into ,ndia, it was marketed as a snack food and not as a main course meal% Since ,ndians prefer a hea"y breakfast, they preferred to eat noodles in the e"ening as a fast to cook and ready to ser"e e"ening meal, especially to children% 1ny functional strategy will be successful if it is built around core competence and distincti"e competence% <hen a firm does not ha"e distincti"e competence in any functional area, it is preferable to opt for outsourcing% A+ OUTSOURCING( is purchasing from someone else a product or ser"ice that had been pre"iously pro"ided internally% ,t is becoming an increasingly important part of strategic decision making and an important way to increase efficiency and often =uickly% Firms competing in global industries must in particular search worldwide for the most appropriate suppliers%

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Eg( 7aimler Chrysler outsourced its designing of car accessory to Ple2ion +echnologies in Bangalore% +oyota has outsourced its transmission components designing to BFA% +he key to outsourcing is to purchase from outside only those acti"ities that are not key to the company&s distincti"e competencies% therwise, the company may gi"e up the "ery capabilities that made it successful in the first place thus pro"iding itself on the road to e"entual decline% ,n determining functional strategy, the strategist must% ,dentify the company&s or business unit&s core competencies ;nsure that the competencies are continually being strengthened and Manage the competencies in such a way that best preser"es the competiti"e ad"antage they create% %+ MAR/ETING STRATEGY Marketing strategy deals with pricing, selling and distributing a product% ?sing a market de"elopment strategy, a company or business unit can( Capture a larger share of an e2isting market for current products through market saturation and market penetration or 7e"elop new market for current products% Eg: P 6 #, Colgate Palmoli"e ?sing Product de"elopment Strategy, a company or business unit can 7e"elop new products ;gisting markets or 7e"elop new products for new markets%

Eg: #CMMF 1mul products 3?sing a successful brand name to market other products is called line e2tension and is a good way to appeal to a company&s current customers5% ?sing 1d"ertising and promotion strategy, a company or business unit can use +ush Strategy Spending a large amount of money on trade promotion inorder to gain or hold shelf space in retail outlets% +ull Strategy spending a large amount of money on consumer ad"ertising designed to build awareness so that shoppers will ask for the products% ?sing 7istribution strategy, a company or business unit can choose any method of distribution, namely ?sing distributors and dealers to sell the products

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Selling directly to the consumers

?sing Pricing strategy, a company or business unit can choose, Skim pricing means high price, when the product is no"el and competitors are few or Penetration pricing is aimed at gaining high market share with a low price%

C+ 'INANCIA" STRATEGY Financial Strategy e2amines the financial implications of corporate and business le"el strategies options and identifies the best financial course of action% ,t attempts usually to ma2imi'e the financial strategies adopted by a company or a business unit% +he Financial strategies may be( 1chie"ing the desired debt to e=uity ratio and relying on internal long term financing 3"ia5 cash flow, 3;=uity financing is preferred for related di"ersification and debt financing for unrelated di"ersification5 Ae"eraged buy out 3AB 5 a company is ac=uired in a transaction, which is namely financed by funds arranged from a third party such as a bank of financial institutions% +his firm declines because of inflated e2pectation , utili'ation of all stock, management burn out and a lack of strategic management and Management of di"idends to shareholders% ;stablishing a tracking stock followed by large established corporations% 1 tracking stock is a type of common stock tied to one portion of a corporations business% ,t is actually an e=uity interest, in the parent company% Eg: 1t 6 +% D+ RESEARC0 . DE3E"OPMENT STRATEGY )6 7 Strategy deals with product and process inno"ation and impro"ement% ,t also deals with appropriate mi2 of different types of ) 6 7 3Basic, product, or process5 and with the =uestion of how new technology should be accessed by internal de"elopment, e2ternal ac=uisition or through strategic alliances% +he ) 6 7 choices may be( +echnology leadership in which one pioneers an inno"ation, Eg: Hike ,nc% or +echnological followership in which one imitates the products of competitors% Eg: 7ean Foods Co%

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E+ OPERATIONS STRATEGY peration Strategy determines how and where a product or ser"ice is to be manufactured, the le"el of "ertical integration in the production process and the deployment of physical resources% ,t should also deal with the optimum le"el of technology the firm should use in its operation processes% +he strategies are( 1d"ances manufacturing +echnology 31M+5 is re"olutioni'ing operations worldwide and should continue to ha"e a ma!or impact as corporations stri"e to integrate di"erse business acti"ities using Computer integrated design and manufacturing 3C17 > C1M5 Manufacturing strategy of a firm is affected by a product&s life cycle% 1 firm can opt for either production system 3a5 Pob shop operations through connected line batch flow or 3b5 Fle2ible manufacturing systems and dedicated transfer lines> Continuous impro"ement strategy Mass customi'ation Modular product designs

'+ PURC0ASING STRATEGY Purchasing Strategy deals with obtaining the raw materials, parts and suppliers needed to perform the operations functions% +he basic purchasing choices are Multiple Sourcing is superior to other purchasing approaches because 3a5 ,t forces suppliers to compete for the business of an important buyer, thus reducing purchasing costs and 3b5 ,f one supplier could not deli"er, another usually could, thus guaranteeing that parts and supplied would always be on hand when needed% Sole Sourcing relies on only one supplier for a particular part% ,t is the only manageable way to obtain high superior =uality% ,t can simplify the purchasing company&s production process by using P,+ rather than keeping in"entories% ,t reduces transaction costs and builds =uality by ha"ing purchaser and supplier work together as partners rather than as ad"ersaries% +arallel Sourcing +wo suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other&s parts% ,f one "endor cannot supply all of its part on time, the other "endor would be able to make up the difference%

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G+ "OGISTICS STRATEGY Aogistics strategy deals with the flow of products into and out of the manufacturing process% +hree trends are e"ident, namely( Centrali0ation )efers to the centrali'ed logistics group usually contains specialists with e2pertise in different transportation modes such as rail or trucking or Outsourcing of logistics reduces cost and impro"es deli"ery time or &se of internet simplifies logistical system and created an online system for its retailers and suppliers% Aess chance for loose cases to be lost in deli"ery and paperwork doesn&t ha"e to be done% 0+ 0RM STRATEGY @)M Strategy addresses the issue whether a company or business unit should try to( @ire a large no% of low skilled employees who recei"es low pay, perform repetiti"e !obs, and most likely =uit after a short time 3Eg: Mc7onald5 @ire skilled employees who recei"ed relati"ely high pay and are cross trained to participate in self management work teams 3Eg: MHC&s5 Business firms are e2perimenting with different category of workers 3a5 Part time workers 3b5 +emporary workers 3c5 Aeasing of employees 7i"erse workforce constitutes a competiti"e ad"antage% Companies with a high degree of racial di"ersity follow a growth strategy it tends to ha"e higher producti"ity than others% I+ IN'ORMATION SYSTEM STRATEGY Corporations are turning to ,S strategies to pro"ide business units with competiti"e ad"antage% +he ,S strategies are( ?se of sophisticated intranet for the use of employees where pro!ect team members li"ing in one country can pass their work to team members in another country in which the work day is !ust beginning* ,S to form closer relationship with both their customers and suppliers* and ,S enables workers to ha"e online communication with co$workers in other countries who use, a different language%

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STRATEGIES TO A3OID Se"eral strategies, which could be considered corporate, business or functional, are "ery dangerous% Managers who made a poor analysis or lack creati"ity may be trapped into considering some of the following strategies to a"oid, namely( Follo( the .eader ,mitating a leading competitor&s strategy might seems to be a good idea, but it ignores a firm&s particular strengthens and weakness and the possibility that the leader may be wrong% Eg: Fu!itsu Atd, Cnd largest computer maker, was dri"en sine the -.V/&s with the ambition of catching up with ,BM% ,t competed as a mainframe computer$maker but failed to notice that the mainframe business had reached maturity by -../% /it nother /ome 1un ,f a company is successful because it pioneered an e2tremely successful product, it tends to search for another super product that will ensure growth and prosperity% Eg: Palaroid spent a lot of money in de"eloping and 9instant: mo"ie camera, but the public ignored it in fa"our f the camcorder% rms race ;ntering into a spirited battle with another firm for increased market share might increase sales re"enue, but that increase will probably be more then offset by increases in ad"ertising, promotion, )67, and manufacturing cost% Eg: Since the deregulation of airlines, price wars and special rates ha"e contributed to the low profit margins or bankruptcy of many ma!or airlines such as ;astern and Continental% Do Ever!thing <hen faced with se"eral interesting opportunities, management of a corporation might ha"e enough resources to de"elop each idea into a pro!ect, but money, time and energy are soon e2hausted as the many pro!ects demand large infusions of resource% Eg: <alt 7isney Company&s e2pertise in the entertainment industry led it to ac=uire the 1BC Hetwork, as the company progressed, it spent W4B/ M to build new theme parks and buy a cruise line% By C///, e"en though corporate sales continued to increase, net income was falling% .easing /ands 1 corporation might ha"e in"ested so much in a particular strategy that top management is unwilling to accept its failure% Belie"ing that it has too much in"ested to =uit, the corporation continues to throw 9good money after bad:% Eg: P1H 1merican 1irlines close to sell its profitable P1H 1M Building and intercontinental @otels to keep its money losing airline flying% ,t continued to suffer losses, until it had sold off e"erything and went bankrupt%

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%UI"DING AND RE-STRUCTURING T0E CORPORATION +here are "arious methods for the firms to enter into a new business and restructure the e2isting one% Firms use following methods for building( Sta!t-&p !o&te: ,n this route, the business is started from the scratch by building facilities, purchasing e=uipments, recruiting employees, opening up distribution outlet and so on% AcB&i ition: 1c=uisition in"ol"es purchasing an established company, complete with all facilities, e=uipment and personnel% 7oint 3ent&!e: Point "enture in"ol"es starting a new "enture with the help of a partner% Me!ge!: Merger in"ol"es fusion of two or more companies into one company% Ta1eo#e!: 1 company which is in financial distress can undergo the process of takeo"er% 1 takeo"er can be "oluntary when the company re=uests another company to take o"er the assets and liabilities and sa"e it from becoming bankrupt% Re- t!&ct&!ing: )e$structuring in"ol"es strategies for reducing the scope of the firm by e2iting from unprofitable business% )estructuring is a popular strategy during post liberali'ation era where di"ersified organi'ations di"ested to concentrate on core business% Re- t!&ct&!ing t!ategie : Ret!enc(-ent( )etrenchment strategies are adopted when the firm s performance is poor and its competiti"e position is weak% Di#e t-ent St!ategy( 7i"estment strategy re=uires dropping of some of the businesses or part of the business of the firm, which arises from conscious corporate !udgement in order to re"erse a negati"e trend% Spin-off: Selling of a business unit to independent in"estors is known as spin$ off% ,t is the best way to reco"er the initial in"estment as much as possible% +he highest bidder gets the di"ested unit% Manage-ent-,&yo&t( selling off the di"ested unit to its management is known as management buyout% 0a!#e t t!ategy: 1 har"est strategy in"ol"es halting in"estment in a unit in order to ma2imi'e short$ to$ medium term cash flow from that unit before li=uidating it% "iB&i)ation: Ai=uidation is considered to be an unattracti"e strategy because the industry is unattracti"e and the firm is in a weak competiti"e position% ,t is pursued as a last step because the employees lose !obs and it is considered to be a sign of failure of the top management%

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STRATEGIES ANA"YSIS AND C0OICE Choice of a strategy in"ol"es an understanding of choice mechanism and issues in"ol"ed in it% Strategies Choice is the e"aluation of alternati"e strategies and selection of the best alternati"e% Choice in"ol"es decision$ making process and it includes the following steps($ Focusing on strategic alternati"es ;"aluating strategic alternati"es Considering decision factors sub!ecti"e factors ob!ecti"e factors

Strategic choice STRATEGIC C0OICE PROCESS

Focusing on strategic alternati"es( ,t in"ol"es identification of all alternati"es% +he strategist e2amines what the organi'ation wants to achie"e 3desired performance5 and what it has really achie"ed 3actual performance5% +he gap between the two positions constitutes the background for "arious alternati"es and diagnosis% +his is gap analysis% +he gap between what is desired and what is achie"ed widens as the time passes if no strategy is adopted%

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;"aluating strategic alternati"es( +he ne2t step is to assess the pros and cons of "arious alternati"es and their suitability% +he tools which may be used are portfolio analysis, #; business screen and corporate Parenting% S7escribe each of theseT Considering decision factors( 3i5 b!ecti"e factors($ ;n"ironmental factors $ $ $ $ $ $ Volatility of en"ironment ,nput supply from en"ironment Powerful stakeholders rgani'ation&s mission Strategic intent Business definition Strengths and weaknesses Strategies adopted in the pre"ious period* Personal preferences of decision$ makers* Management&s attitude toward risk* Pressure from stakeholders* Pressure from corporate culture* and Heeds and desires of key managers%

rgani'ational factors

3ii5 Sub!ecti"e factors($

Constructing Corporate scenario( Corporate scenario consists of proforma balance sheets and income statement which forecasts the strategic alternati"e&s impact on "arious di"isions% First( E sets of estimated figures for optimistic, pessimistic and most likely conditions are manipulated for all economic factors and key e2ternal strategic factors% Second( Common si'e financial statements with pro!ections are drawn% 'hird( Based on historical data from pre"ious years balance sheet pro!ection for ne2t B years for ptimistic 3 5, Pessimistic 3P5, and Most likely 3M5 are de"eloped% Corporate scenario is constructed for e"ery strategic alternati"e considering both en"ironmental factors and market conditions% ,t pro"ides sufficient information for a strategist to make final decision% Process of Strategic Choice( +wo techni=ues are used in the process of selection of a strategy, namely(

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3i5

Devil5s

dvocate in strategic decision$ making is responsible for identifying

potential pitfalls and problems in a proposed strategic alternati"e by making a formal presentation% 3ii5 Dialectical in2uir! in"ol"es making two proposals with contrasting assumptions for each strategic alternati"e% +he merits and demerits of the proposal will be argued by ad"ocates before the key decision$makers% Finally one alternati"e will emerge "iable for implementation% EN3IRONMENT T0REAT AND OPPORTUNITY PRO'I"E AETOP+ Meaning of En#i!on-enta$ Scanning: ;n"ironmental scanning can be defined as the process by which organi'ations monitor their rele"ant en"ironment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions% App!ai ing t(e En#i!on-ent: ,n order to draw a clear picture of what opportunities and threats are faced by the organi'ation at a gi"en time% ,t is necessary to appraise the en"ironment% +his is done by being aware of the factors that affect en"ironmental appraisal identifying the en"ironmental factors and structuring the results of this en"ironmental appraisal% St!&ct&!ing En#i!on-enta$ App!ai a$( +he identification of en"ironmental issues is helpful in structuring the en"ironmental appraisal so that the strategists ha"e a good idea of where the en"ironmental opportunities and threats lie% +here are many techni=ues to structure the en"ironmental appraisal% ne such techni=ue suggested by #luek is that preparing an ;+ P for an organi'ation% +he preparation of an ;+ P in"ol"es di"iding the en"ironment into different sectors and then analy'ing the impact of each sector on the organi'ation% En#i!on-ent t(!eat an) oppo!t&nity p!ofi$e AETOP+ fo! a ,icyc$e co-pany

S%Ho C E

En#i!on-enta$ ecto! ;conomic Market ,nternational

Nat&!e of I-pact ?p 1rrow @ori'ontal 1rrow 7own 1rrow

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 ?p 1rrow indicates Fa"orable ,mpact 7own 1rrow indicates unfa"orable ,mpact @ori'ontal 1rrow indicates Heutral ,mpact +he preparation of an ;+ P pro"ides a clear picture to the strategists about which sectors and the different factors in each sector ha"e a fa"orable impact on the organi'ation% By the means of an ;+ P, the organi'ation knows where it stands with respect to its en"ironment% b"iously, such an understanding can be of a great help to an organi'ation in formulating appropriate strategies to take ad"antage of the opportunities and counter the threats in its en"ironment% 1d"antage of ;+ P ,t pro"ides a clear of which sector and sub sectors ha"e fa"orable impact on the organi'ation% ,t helps interpret the result of en"ironment analysis% +he organi'ation can assess its competiti"e position% 1ppropriate strategies can be formulated to take ad"antage of opportunities and counter the threat% STRATEGIC AD3ANTAGE PRO'I"E ASAP+ ;"ery firm has strategic ad"antages and disad"antages% For e2ample, large firms ha"e financial strength but they tend to mo"e slowly, compared to smaller firms, and often cannot react to changes =uickly% Ho firm is e=ually strong in all its functions% ,n other words, e"ery firm has strengths as well as weaknesses% Strategists must be aware of the strategic ad"antages or strengths of the firm to be able to choose the best opportunity for the firm% en"ironmental threats effecti"ely ;2amples( +he Strategist should look to see if the firm is stronger in these factors than its competitors% <hen a firm is strong in the market, it has a strategic ad"antage in launching new products or ser"ices and increasing market share of present products and ser"ices% Strategic 1d"antage Profile for a bicycle company S9No Capa,i$ity 'acto! Finance Nat&!e I-pact 7own 1rrow of Co-petiti#e 2ea1ne and e surplus position t!engt( o! n the other hand they must regularly analyse their strategic disad"antages or weaknesses in order to face

@igh cost of capital, reser"es unsatisfactory

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Marketing

@ori'ontal 1rrow

Fierce competition in industry0s 1d"anced information system Management

,nformation

?p 1rrow

?p 1rrow indicates Strength 7own 1rrow indicates <eaknesses @ori'ontal 1rrow indicates Heutral ORGANI>ATIONA" CAPA%I"ITY PRO'I"E AOCP+ +he organi'ational capability profile is drawn in the form of a chart% +he strategists are re=uired to systematically assess the "arious functional areas and sub!ecti"ely assign "alues to the different functional capability factors and sub factors along a scale ranging from "alues of $B to DB Capa,i$ity 'acto! 'inancia$ Tec(nica$ 0&-an Re o&!ce Ma!1eting R.D Cea1ne A-=+ $B $B B / St!engt( AD=+

No!-a$ A@+ /

MC/INSEY<S ES 'RAMECOR/

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+he framework suggests that there is a multiplicity of factors that influence an organi'ation&s ability to change and its proper mode of change% Because of the interconnectedness of the "ariables, it would be difficult to make significant progress in one area without making progress in the others as well% +here is no starting point or implied hierarchy in the shape of the diagram, and it is not ob"ious which of the se"en factors would be the dri"ing force in changing a particular organi'ation at a certain point of time% +he critical "ariables would be different across organi'ations and in the same organi'ations at different points of time%

T(e E S : a5 Superordinate goals are the fundamental ideas around which a business is built b5 Structure salient features of the units&s organi'ational chart and inter connections within the office c5 Systems procedures and routine processes, including how information mo"es around the unit d5 Staff personnel categories within the unit and the use to which staff are put, skill base, etc e5 Style characteri'ation of how key managers beha"e in order to achie"e the unit&s goals

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f5 Shared "alues strategy the significant meanings or guiding concepts that the unit imbues on its members g5 Skills distincti"e capabilities of key personnel and the unit as a whole +he 4 S model can be used in two ways -% Considering the links between each of the S&s one can identify strengths and weaknesses of an organi'ation% Ho S is strength or a weakness in its own right, it is only its degree of support, or otherwise, for the other S&s which is rele"ant% 1ny S&s that harmonises with all the other S&s can be thought of as strength and weaknesses C% +he model highlights how a change made in any one of the S&s will ha"e an impact on all the others% +hus if a planned change is to be effecti"e, then changes in one S must be accompanied by complementary changes in the others% CORPORATE PORT'O"IO ANA"YSIS <hen the company is in more than one business, it can select more than one strategic alternati"e depending upon demand of the situation pre"ailing in the different portfolios% ,t is necessary to analy'e the position of different business of the business house which is done by corporate portfolio analysis% Portfolio analysis is an analytical tool which "iews a corporation as a basket or portfolio of products or business units to be managed for thebest possible returns% <hen an organi'ation has a number of products in its portfolio, it is =uite likely that they will be in different stages of de"elopment% Some will be relati"ely new and some much older% Many organi'ations will not wish to risk ha"ing all their products at the same stage of de"elopment% ,t is useful to ha"e some products with limited growth but producing profits steadily, and some products with real growth potential but may still be in the introductory stage% ,ndeed, the products that are earning steadily may be used to fund the de"elopment of those that will pro"ide the growth and profits in the future% So the key strategy is to produce a balanced portfolio of products, some with low risk but dull growth and some with high risk but great potential for growth and profits% +his is what we call as portfolio analysis% +he aim of portfolio analysis is -5 to analy'e its current business portfolio and decide which businesses should recei"e more or less in"estment C5 to de"elop growth strategies, for adding new businesses to the portfolio E5 to decide which business should not longer be retained Balancing the portfolio

75

Balancing the portfolio means that the different products or businesses in the portfolio ha"e to be balanced with respect to four basic aspects Profitability Cash flow #rowth )isk

+his analysis can be done by any of the following technologies 15 BC# mati2 B5 #; nine cell matri2 A+ %CG MATRI; the bcg matri2 was de"eloped by Boston Consulting group in

-.4/s% ,t is also called as the growth share matri2% +his is the most popular and most simplest matri2 to describe the corporation&s portfolio of businesses or products% +he BC# matri2 helps to determine priorities in a product portfolio% ,ts basic purpose is to in"est where there is growth from which the firm can benefit, and di"est those businesses that ha"e low market share and low growth prospects% ;ach of the products or business units is plotted on a two dimensional matri2 consisting of a5 relati"e market share is the ratio of the market share of the concerned product or business unit in the industry di"ided by the share of the market leader b5 market growth rate is the percentage of market growth, by which sales of a particular product or business unit has increased

76

1nalysis of the BC# matri2 the matri2 reflects the contribution of the products or business units to its cash flow% Based on this analysis, the products or business units are classified as i5 Stars ii5 Cash cows iii5 Question marks i"5 7ogs i5 Stars high growth, high market share Stars are products that en!oy a relati"ely high market share in a strongly growing market% +hey are potentially profitable and may grow further to become an important product or category for the company% +he firm should focus on and in"est in these products or business units% +he general features of stars are $ @igh growth rate means they need hea"y in"estment @igh market share means they ha"e economies of scale and generate large amount of cash

77

But they need more cash than they generate

+he high growth rate will mean that they will need hea"y in"estment and will therefore be cash users% "erall, the general strategy is to take cash from the cash cows to fund stars% Cash may also be in"ested selecti"ely in some problem children 3=uestion marks5 to turn them into stars% +he other problem children may be milked or e"en sold to pro"ide funds elsewhere% "er the time, all growth may slow down and the stars may e"entually become cash cows% ,f they cannot hold market share, they may e"en become dogs% ii5 Cash Cows Aow growth, high market share +hese are the product areas that ha"e high relati"e market shares but e2ist in low$ growth markets% +he business is mature and it is assumed that lower le"els of in"estment will be re=uired% n this basis, it is therefore likely that they will be able to generate both cash and profits% Such profits could then be transferred to support the stars% +he general features of cash cows are +hey generate both cash and profits +he business is mature and needs lower le"els of in"estment Profits are transferred to support stars>=uestion marks +he danger is that cash cows may become under$supported and begin to lose their market 1lthough the market is no longer growing, the cash cows may ha"e a relati"ely high market share and bring in healthy profits% Ho efforts or in"estments are necessary to maintain the status =uo% Cash cows may howe"er ultimately become dogs if they lose the market share% iii5 Question Marks high growth, low market share Question marks are also called problem children or wild cats% +hese are products with low relati"e market shares in high growth markets% +he high market growth means that considerable in"estment may still be re=uired and the low market share will mean that such products will ha"e difficulty in generating substantial cash% +hese businesses are called =uestion marks because the organi'ation must decide whether to strengthen them or to sell them% +he general features of =uestion marks are +heir cash needs are high But their cash generation is low rgani'ation must decide whether to strengthen them or sell them

78

1lthough their market share is relati"ely small, the market for =uestion marks is growing rapidly% ,n"estments to create growth may yield big results in the future, though this is far from certain% Further in"estigation into how and where to in"est is ad"ised% i"5 7ogs Aow growth, low market share +hese are products that ha"e low market shares in low growth businesses% +hese products will need low in"estment but they are unlikely to be ma!or profit earners% ,n practice, they may actually absorb cash re=uired to hold their position% +hey are often regarded as unattracti"e for the long term and recommended for disposal% +he general features of dogs are +hey are not profit earners +hey absorb cash +hey are unattracti"e and are often recommended for disposal%

+urnaround can be one of the strategies to pursue because many dogs ha"e bounced back and become "iable and profitable after asset and cost reduction% +he suggested strategy is to drop or di"est the dogs when they are not profitable% ,f profitable, do not in"est, but make the best out of its current "alue% +his may e"en mean selling the di"ision&s operations% 1d"antages it is easy to use it is =uantifiable it draws attention to the cash flows it draws attention to the in"estment needs

Aimitations it is too simplistic link between market share and profitability is not strong growth rate is only one aspect of industry attracti"eness it is not always clear how markets should be defined market share is considered as the only aspect of o"erall competiti"e position many products or business units fall right in the middle of the matri2, and cannot easily be classified% BC# matri2 is thus a snapshot of an organi'ation at a gi"en point of time and does not reflect businesses growing o"er time%

79

%+ GE Nine-ce$$ -at!i6

+his matri2

was de"eloped in -.4/s by the #eneral ;lectric Company with the

assistance of the consulting firm, McJinsey 6 Co, ?S1% +his is also called #; multifactor portfolio matri2% +he #; matri2 has been de"eloped to o"ercome the ob"ious limitations of BC# matri2% +his matri2 consists of nine cells 3EME5 based on two key "ariables( i5 ii5 business strength industry attracti"eness

+he hori'ontal a2is represents business strength and the "ertical a2is represent industry attracti"eness +he business strength is measured by considering such factors as( relati"e market share profit margins ability to compete on price and =uality knowledge of customer and market

80

competiti"e strengths and weaknesses technological capacity caliber of management

,ndustry attracti"eness is measured considering such factors as ( market si'e and growth rate industry profit margin competiti"e intensity economies of scale technology social, en"ironmental, legal and human aspects

+he industry product$lines or business units are plotted as circles% +he area of each circle is proportionate to industry sales% +he pie within the circles represents the market share of the product line or business unit% +he nine cells of the #; matri2 represent "arious degrees of industry attracti"eness 3high, medium or low5 and business strength 3strong, a"erage and weak5% 1fter plotting each product line or business unit on the nine cell matri2, strategic choices are made depending on their position in the matri2% Spotlight Strategy #; matri2 is also called 9Stoplight: strategy matri2 because the three 'ones are like green, yellow and red of traffic lights% -5 #reen indicates in"est>e2pand if the product falls in green 'one, the business strength is strong and industry is at least medium in attracti"eness, the strategic decision should be to e2pand, to in"est and to grow% C5 Iellow indicates select>earn if the product falls in yellow 'one, the business strength is low but industry attracti"eness is high, it needs caution and managerial discretion for making the strategic choice E5 )ed indicates har"est>di"est if the product falls in the red 'one, the business strength is a"erage or weak and attracti"eness is also low or medium, the appropriate strategy should be di"estment% 1d"antages -5 ,t used . cells instead of G cells of BC# C5 ,t considers many "ariables and does not lead to simplistic conclusions E5 @igh>medium>low and strong>a"erage>low classification enables a finer distinction among business portfolio G5 ,t uses multiple factors to assess industry attracti"eness and business strength, which allow users to select criteria appropriate to their situation

81

Aimitations -5 ,t can get =uite complicated and cumbersome with the increase in businesses C5 +hough industry attracti"eness and business strength appear to be ob!ecti"e, they are in reality sub!ecti"e !udgements that may "ary from one person to another E5 ,t cannot effecti"ely depict the position of new business units in de"eloping industry G5 ,t only pro"ides broad strategic prescriptions rather than specifics of business policy Comparision #; "ersus BC# $ +hus products or business units in the green 'one are almost e=ui"alent to stars or cashcows, yellow 'one are like =uestion marks and red 'one are similar to dogs in the BC# matri2% 7ifference between BC# and #; matrices BC# Matri2 -% BC# matri2 consists of four cells C% +he business unit is rated against relati"e market share and industry growth rate E% +he matri2 uses single measure to assess growth and market share G% +he matri2 uses two types of classification i%e high and low B% @as many limitations #; Matri2 -% #; matri2 consists of nine cells C% +he business unit is rated against business strength and industry attracti"eness E% +he matri2 used multiple measures to assess business strength and industry attracti"eness G% +he matri2 uses three types of classification i%e high>medium>low and strong>a"erage>weak B% "ercomes many limitations of BC# and is an impro"ement o"er it %A"ANCED SCORE CARD Balanced Score Card has been proposed and populari'ed by )obert% S% Japlan and 7a"id% P% Horton% ,t is a performance tool which 9Pro"ides e2ecuti"es with a comprehensi"e framework that translates a company&s strategic ob!ecti"es into a coherent set of performance measures:% +he scorecard consists of G different perspecti"es such as( Financial Customer ,nternal business

82

 ,nno"ation and Aearning 3i5 Financial +erspective )eturn$on$capital employed Cash flow Pro!ect profitability Profit forecast reliability Sales backlog

3ii5 Customer perspective Pricing inde2 Customer ranking sur"ey Customer satisfaction inde2 Market share 3iii5 Internal %usiness +erspective @ours with customers on tender success rate )ework Safety incident inde2 Pro!ect performance inde2 Pro!ect closeout cycle

83

3i"5 Innovation - .earning +erspective X re"enue from new ser"ices )ate of impro"ement inde2 Staff 1ttitude sur"ey ;mployee suggestions )e"enue per employee%

Di tincti#e Co-petiti#ene

Meaning: 7istincti"e Competence is a set of uni=ue

capabilities that certain firms possess allowing them to make inroads into desired markets and to gain ad"antage o"er the competition* generally, it is an acti"ity that a firm performs better than its competition% +o define a firm s distincti"e competence, management must complete an assessment of both internal and e2ternal corporate en"ironments% <hen management finds an internal strength and both meets market needs and gi"es the firm a comparati"e ad"antage in the market place, that strength is the firms distincti"e competence% Defining an) %&i$)ing Di tincti#e Co-petence: +o define a companys distincti"e competence, managers often follow a particular process% C -% +hey identify the strengths and weaknesses in the gi"en marketplace% C% +hey analy'e specific market needs and look for comparati"e ad"antages that they ha"e o"er the competition%

Gap Ana$y i

84

#ap analysis is a "ery useful tool for helping marketing managers to decide upon marketing strategies and tactics% 1gain, the simple tools are the most effecti"e% +here0s a straightforward structure to follow% +he first step is to decide upon how you are going to !udge the gap o"er time% For e2ample, by market share, by profit, by sales and so on% +his will help you to write SM1)+ ob!ecti"es% +hen you simply ask two =uestions $ (here are (e no(6 and (here do (e (ant to #e6 +he difference between the two is the GAP $ this is how you are going to get there% +ake a look at the diagram below% +he lower line is where you0ll be if you do nothing% +he upper line is where you want to be%

SCOT ANA"YSIS

85

1 scan of the internal and e2ternal en"ironment is an important part of the strategic planning process% ;n"ironmental factors internal to the firm usually can be classified as strengths 3S5 or weaknesses 3C5, and those e2ternal to the firm can be classified as opportunities 3O5 or threats 3T5% Such an analysis of the strategic en"ironment is referred to as a SCOT ana$y i % +he S< + analysis pro"ides information that is helpful in matching the firm0s resources and capabilities to the competiti"e en"ironment in which it operates% 1s such, it is instrumental in strategy formulation and selection% +he following diagram shows how a S< + analysis fits into an en"ironmental scan(

St!engt( 1 firm0s strengths are its resources and capabilities that can be used as a basis for de"eloping a competiti"e ad"antage% ;2amples of such strengths include(

patents strong brand names good reputation among customers cost ad"antages from proprietary know$how e2clusi"e access to high grade natural resources fa"orable access to distribution networks e

Cea1ne

+he absence of certain strengths may be "iewed as a weakness% For e2ample, each of the following may be considered weaknesses(

lack of patent protection a weak brand name

86

poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels

,n some cases, a weakness may be the flip side of a strength% +ake the case in which a firm has a large amount of manufacturing capacity% <hile this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large in"estment in manufacturing capacity pre"ents the firm from reacting =uickly to changes in the strategic en"ironment% Oppo!t&nitie +he e2ternal en"ironmental analysis may re"eal certain new opportunities for profit and growth% Some e2amples of such opportunities include(

an unfulfilled customer need arri"al of new technologies loosening of regulations remo"al of international trade barriers

T(!eat Changes in the e2ternal en"ironmental also may present threats to the firm% Some e2amples of such threats include(

shifts in consumer tastes away from the firm0s products emergence of substitute products new regulations increased trade barriers

T(e SCOT Mat!i6 1 firm should not necessarily pursue the more lucrati"e opportunities% )ather, it may ha"e a better chance at de"eloping a competiti"e ad"antage by identifying a fit between the firm0s strengths and upcoming opportunities% ,n some cases, the firm can o"ercome a weakness in order to prepare itself to pursue a compelling opportunity% +o de"elop strategies that take into account the S< + profile, a matri2 of these factors can be constructed% +he S< + matri2 3also known as a TOCS Mat!i65 is shown below( SCOT * TOCS Mat!i6

87

INTERNA" ;HV,) HM;H+1A F1C+ )S St!engt( E;TERNA" Oppo!t&nitie T(!eat S$ strategies Cea1ne <$ e

strategies

S$+ strategies

<$+ strategies

S-O

t!ategie

pursue opportunities that are a good fit to the company0s

strengths% C-O t!ategie o"ercome weaknesses to pursue opportunities% S-T C-T t!ategie t!ategie identify ways that the firm can use its strengths to reduce its establish a defensi"e plan to pre"ent the firm0s weaknesses "ulnerability to e2ternal threats% from making it highly susceptible to e2ternal threats%

88

UNIT : I3 STRATEGY IMP"EMENTATION . E3A"UATION 9 +he implementation process, )esource allocation, 7esigning organisational structure$ 7esigning Strategic Control Systems$ Matching structure and control to strategy$ ,mplementing Strategic change$Politics$Power and Conflict$+echni=ues of strategic e"aluation 6 control$case study%

STRATEGY IMP"EMENTATION

89

+he

implementation process

of

organi'ation to obtain

strategy

in"ol"es results%

the

application

of

the

management

the

desired

Particularly,

strategy

implementation includes designing the organi'ation0s structure, allocating resources, de"eloping strategic control systems% Strategy implementation is 8the process of allocating resources to support the chosen strategies8% +his process includes the "arious management acti"ities that are necessary to put strategy in motion, institute strategic controls that monitor progress, and ultimately achie"e organi'ational goals%

T(e Re$ation ,et2een St!ategy 'o!-&$ation an) St!ategy I-p$e-entation Successful strategy formulation does not guarantee successful strategy

implementation% Strategy implementation is fundamentally different from strategy formulation% Strategy formulation and implementation can be contrasted in the following ways(

STRATEGY 'ORMU"ATION Strategy formulation is positioning forces before the action%

STRATEGY IMP"EMENTATION Strategy implementation is

managing forces during the action%

Strategy formulation effecti"eness%

focuses

on

Strategy

implementation

focuses

on efficiency%

Strategy formulation is primarily an intellectual process%

Strategy

implementation

is

primarily an operational process%

Strategy formulation re=uires good intuiti"e and analytical skills%

Strategy implementation re=uires special moti"ation and leadership skills

90

Strategy coordination indi"iduals

formulation among

re=uires a

Strategy implementation re=uires among many indi"iduals%

few combination

P"ANS, PROGRAMMES, AND PRO7ECTS +he strategic plan de"ised by the organi'ation proposes the manner in which the strategies could be put into action% Strategies, by themsel"es, do not lead to action% +hey are, in a sense, a statement of intent( implementation tasks are meant to reali'e the intent% Strategies, therefore, ha"e to be acti"ated through implementation% Strategies should lead to plans% For instance, if stability strategies ha"e been formulated, they may lead to the formulation of "arious plans% ne such plan could be a moderni'ation plan% Plans result in different kinds of programmes% 1 programme is a broad term, which includes goals, policies, procedures, rules, and steps to be taken in putting a plan into action% Programmes are usually supported by funds allocated for plan implementation% 1n e2ample of a programme is a research and de"elopment programme for the de"elopment of a new product% Programmes lead to the formulation of pro!ects% 1 pro!ect is a highly specific programme for which the time schedule and costs are predetermined% ,t re=uires allocation of funds based on capital budgeting by organi'ations% +hus, research and de"elopment programmes may consist of se"eral pro!ects, each of which is intended to achie"e a specific and limited ob!ecti"e, re=uires separate allocation of funds, and is to be completed within a set time schedule% ,mplementation of strategies is not limited to formulation of plans, programmes, and pro!ects% Pro!ects would also re=uire resources% 1fter that is pro"ided, it would be essential to see that a proper organi'ational structure is designed, systems are installed, functional policies are de"ised, and "arious beha"ioural inputs are pro"ided so that plans may work%

St!ategic I-p$e-entation P!oce S$Certo and 4$ +eter proposed a fi"e$stage model of the strategy implementation process(

91

a5 7etermining how much the organi'ation will ha"e to change in order to implement the strategy under consideration, under consideration% b5 1naly'ing the formal and informal structures of the organi'ation% c5 1naly'ing the 8culture8 of the organi'ation% d5 Selecting an appropriate approach to implementing the strategy% e5 ,mplementing the strategy and e"aluating the results%

#albraith suggests that se"eral ma!or internal aspects of the organi'ation may need to be synchroni'ed to put a chosen strategy into action% Ma!or factors are technology, human resources, reward systems, decision process and structure% +his factors tend to be interconnected, so a change in one may necessitate change in one or more others% @ambrick and Cannella described fi"e steps for effecti"e strategy implementation( a5 ,nput from a wide range of sources is re=uired in the strategy formulation stage 3i%e%, the mission, en"ironment, resources, and strategic options component5% b5 +he obstacles to implementation, both those internal and e2ternal to the organi'ation, should be carefully assessed% c5 Strategists should be use implementation le"ers or management tasks to initiate this component of the strategic management process% Such le"ers may come from the way resources are committed, the approach used to structure the organi'ation, the selection of managers, and the method of rewarding employees% d5 +he ne2t step is to sell the implementation% Selling upward entails con"incing boards of directors and seniors management of the merits and "iability of the strategy% Selling downward in"ol"es con"incing lower le"el management and employees of the appropriateness of the strategy% Selling across in"ol"es coordinating implementation across the "arious units of an organi'ation, while selling outward entails communicating the strategy to e2ternal stakeholders% e5 +he process is on$going and a continuous fine tuning, ad!usting, and responding is needed as circumstance change%

RESOURCE A""OCATION +he resources may be e2isting with a company or many be ac=uired through capital allocation% )esources include physical ,financial and human resources essential for implementing plans% )esources are broadly of four categories%

92

i5 Money ii5 Facilities and e=uipments iii5 Materials, supplies and ser"ices i"5 Personnel 7ecisions in"ol"ed in allocation of resources ha"e "ital significance in strategy implementation% ,n single product firms it may in"ol"e assessment of the resource needs of different functional departments% ,n the multi di"isional organi'ation it implies assessing the resource needs of different SB?s or product di"isions )edeployment or reallocation of resources becomes necessary when changes take place% +he redeployment of resources is =uite critical when there are ma!or changes and shifts in strategic posture of company% )edeployment of resources may arise due to strategies of a company to grow in certain areas and withdraw from the other% Met(o) of Re o&!ce a$$ocation 3i5 Based on percentages( ?sually, companies ha"e been following system of allocation of resources by percentages% ,t may not ser"e much purpose these days% +hey may be of help only in making some comparisons% +he allocation of resources should not be based on their a"ailability or scarcity as it may pro"e to be counterproducti"e% +he resource allocation should be made with regard to strategies of a company for its future competiti"e position and growth% +he decisions of resource allocation are also closely connected with the ob!ecti"es of a company% 3ii5 Based on modern methods ther methods include $+ortfolio models7 product life3c!cle charts7 #alance sheets7 profit and loss statements income statements$ <hen retrenchment or turnaround strategies are implemented 0ero3#ased #udgeting is used% 7uring mergers, ac=uisitions and e2pansion, capital #udgeting techni=ues are suggested% )esource allocation is not purely a rational techni=ue but is based on se"eral beha"ioral and political considerations% +he other analytical conceptual models used for strategic choice are gro(th share matrix7 8stop light57 and Directional +olic! Matrix used in multi di"isional firms% 1 more comprehensi"e approach to management decisions on resource allocation is pro"ided by the #udgeting s!stem carefully geared to the chosen strategy% P!o,$e- in !e o&!ce a$$ocation +here are se"eral difficulties in resource allocation% +he following are some of the identified problems% i5 Scarcity of resources%

93

Financial, physical, and human resources are hard to find% Firms will usually face difficulties in procuring finance% ;"en if fiancY is a"ailable, the cost of capital is a constraint% +hose firms that en!oy in"estor confidence and high credit worthiness possess a competiti"e ad"antage as it increases their resource$generation capability% Physical resources would consist of assets, such as, lard machinery, and e=uipment% ,n a de"eloping country like ,ndia, many capital goods ha"e to be imported% +he go"ernment may no longer impose many conditions but it does place a burden on the firm&s finances and this places a restriction on firms wishing to procure physical resources% @uman resources are seemingly in abundance in ,ndia but the problem arises due to the non$a"ailability of skills that are specially re=uired% ,nformation technology and computer professionals, ad"ertising personnel, and telecom, power and insurance e2perts are scarce in ,ndia% +his places se"ere restrictions on firms wishing to attract and retain personnel% ,n sum, the a"ailability resources are a "ery real problem% ii5 )estrictions on generating resources ,n the usual budgeting process these are se"eral restrictions for generating resources due to the SB? concept especially for new di"isions and departments% iii5 "erstatement of needs "er statement of needs is another fre=uent problem in a bottom$up approach to resource allocation% +he budgeting and corporate planning departments may ha"e to face the ire of those e2ecuti"es who do not get resources according to their e2pectations% Such negati"e reactions may hamper the process of strategic planning itself%

DESIGNING ORGANI>ATION STRUCTURE 1n organi'ational structure is the pattern or arrangement of !obs and groups of !obs within an organi'ation% rgani'ational 7esign is the process of creating or reshaping an organi'ational structure optimi'ed to support strategic decisions% +he elements of organi'ation structure and design are

94

a5 7i"ision of labor b5 7epartmentali'ation c5 7elegation of authority d5 Span of control

A+ DI3ISION O' "A%OR: ,t is the process of di"iding work into relati"ely speciali'ed !obs to achie"e ad"antages of speciali'ation 7i"ision of Aabor ccurs in +hree 7ifferent <ays(

i5 Personal specialties e%g%, accountants, software engineers, graphic designers, scientists, etc% ii5 Hatural se=uence of work e%g%, di"iding work in a manufacturing plant into fabricating and assembly 3hori0ontal speciali0ation5 iii5 Vertical plane e%g%, hierarchy of authority from lowest$le"el manager to highest$le"el manager

%+ DEPARTMENTA"I>ATION: 7epartmentali'ation is the process of grouping of work acti"ities into departments, di"isions, and other homogenous units% ,t takes place in "arious patterns like departmentali'ation by functions, products, customers, geographic location, process, and its combinations%

i+ '&nctiona$ Depa!t-enta$i4ation

95

Functional 7epartmentali'ation is the process of grouping acti"ities by functions performed% 1cti"ities can be grouped according to function 3work being done5 to pursue economies of scale by placing employees with shared skills and knowledge into departments for e2ample human resources, finance, production, and marketing% Functional 7epartmentali'ation can be used in all types of organi'ations% A)#antage : 1d"antage of speciali'ation ;asy control o"er functions Pinpointing training needs of manager ,t is "ery simple process of grouping acti"ities% Aack of responsibility for the end result "erspeciali'ation or lack of general management ,t leads to increase conflicts and coordination problems among departments%

Di a)#antage (

ii+ P!o)&ct Depa!t-enta$i4ation

96

Product 7epartmentali'ation is the process of grouping acti"ities by product line% +asks can also be grouped according to a specific product or ser"ice, thus placing all acti"ities related to the product or the ser"ice under one manager% ;ach ma!or product area in the corporation is under the authority of a senior manager who is specialist in, and is responsible for, e"erything related to the product line% 7abur ,ndia Aimited is the ,ndia&s largest 1yur"edic medicine manufacturer is an e2ample of company that uses product 7epartmentali'ation% ,ts structure is based on its "aried product lines which include @ome care, @ealth care, Personal care and Foods% A)#antage ,t ensures better customer ser"ice ?nprofitable products may be easily determined ,t assists in de"elopment of all around managerial talent Makes control effecti"e ,t is fle2ible and new product line can be added easily% ,t is e2pensi"e as duplication of ser"ice functions occurs in "arious product di"isions Customers and dealers ha"e to deal with different persons for complaint and information of different products%

Di a)#antage

iii+ C& to-e! Depa!t-enta$i4ation

97

Customer 7epartmentali'ation is the process of grouping acti"ities on the basis of common customers or types of customers% Pobs may be grouped according to the type of customer ser"ed by the organi'ation% +he assumption is that customers in each department ha"e a common set of problems and needs that can best be met by specialists% ?C is the one of the largest commercial banks of ,ndia is an e2ample of company that uses customer 7epartmentali'ation% ,ts structure is based on "arious ser"ices which includes @ome loans, Business loans, Vehicle loans and ;ducational loans% A)#antage ,t focused on customers who are ultimate suppliers of money Better ser"ice to customer ha"ing different needs and tastes 7e"elopment in general managerial skills Sales being the e2clusi"e field of its application, co$ordination may appear difficult between sales function and other enterprise functions% Speciali'ed sales staff may become idle with the downward mo"ement of sales to any specified group of customers%

Di a)#antage

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i#+ Geog!ap(ic Depa!t-enta$i4ation

#eographic 7epartmentali'ation is the process of grouping acti"ities on the basis of territory% ,f an organi'ation0s customers are geographically dispersed, it can group !obs based on geography% For e2ample, the organi'ation structure of Coca$Cola Atd has reflected the company&s operation in "arious geographic areas such as Central Horth 1merican group, <estern Horth 1merican group, ;astern Horth 1merican group and ;uropean group A)#antage @elp to cater to the needs of local people more satisfactorily% ,t facilitates effecti"e control 1ssists in de"elopment of all$round managerial skills Communication problem between head office and regional office due to lack of means of communication at some location Coordination between "arious di"isions may become difficult% 7istance between policy framers and e2ecutors ,t leads to duplication of acti"ities which may cost higher%

Di a)#antage

99

#+ P!oce

Depa!t-enta$i4ation

#eographic 7epartmentali'ation is the process of grouping acti"ities on the basis of product or ser"ice or customer flow% Because each process re=uires different skills, process 7epartmentali'ation allows homogenous acti"ities to be categori'ed% For e2ample, Bowater +hunder Bay, a Canadian company that har"ests trees and processes wood into newsprint and pulp% Bowater has three di"isions namely tree cutting, chemical processing, and finishing 3which makes newsprint5% A)#antage K riented towards end result% K Professional identification is maintained% K Pinpoints product$profit responsibility% Di a)#antage K Conflict in organi'ation authority e2ists% K Possibility of disunity of command% K )e=uires managers effecti"e in human relation

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#i+ Mat!i6 Depa!t-enta$i4ation

,n actual practice, no single pattern of grouping acti"ities is applied in the organi'ation structure with all its le"els% 7ifferent bases are used in different segments of the enterprise% Composite or hybrid method forms the common basis for classifying acti"ities rather than one particular method,% of ne of the mi2ed forms of organi'ation is referred to as matri2 or grid organi'ation&s 1ccording to the situations, the patterns rgani'ing "aries from case to case% +he form of structure must reflect the tasks, goals and technology if the originations the type of people employed and the en"ironmental conditions that it faces% ,t is not unusual to see firms that utili'e the function and pro!ect organi'ation combination% +he same is true for process and pro!ect as well as other combinations% For instance, a large hospital could ha"e an accounting department, surgery department, marketing department, and a satellite center pro!ect team that make up its organi'ational structure% A)#antage ;fficiently manage large, comple2 tasks ;ffecti"ely carry out large, comple2 tasks )e=uires high le"els of coordination Conflict between bosses )e=uires high le"els of management skills

Di a)#antage

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C+ DE"EGATION O' AUT0ORITY 7elegation of authority can be defined as subdi"ision and sub$allocation of powers to the subordinates in order to achie"e effecti"e results% Centrali'ation and 7ecentrali'ation are two opposite ways to delegate authority and to change the organi'ational structure of organi'ations accordingly% i+ Cent!a$i4ation: It i the process of transferring and assigning decision$making authority to higher le"els of an organi'ational hierarchy% +he span of control of top managers is relati"ely broad, and there are relati"ely many tiers in the organi'ation% 1d"antages Pro"ide Power and prestige for manager Promote uniformity of policies, practices and decisions Minimal e2tensi"e controlling procedures and practices Minimi'e duplication of function 7isad"antages Heglected functions for mid% Ae"el, and less moti"ated beside personnel% Hursing super"isor functions as a link officer between nursing director and first$ line management% ii+ Decent!a$i4ation: ,t is the process of transferring and assigning decision$making authority to lower le"els of an organi'ational hierarchy% +he span of control of top managers is relati"ely small, and there are relati"ely few tears in the organi'ation, because there is more autonomy in the lower ranks%

1d"antages )aise morale and promote interpersonal relationships )elie"e from the daily administration Bring decision$making close to action 7e"elop Second$line managers Promote employee&s enthusiasm and coordination Facilitate actions by lower$le"el managers 7isad"antages

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 +op$le"el administration may feel it would decrease their status Managers may not permit full and ma2imum utili'ation of highly =ualified personnel ,ncreased costs% ,t re=uires more managers and large staff ,t may lead to o"erlapping and duplication of effort +here must be a good balance between centrali'ation and decentrali'ation of authority and power% ;2treme centrali'ation and decentrali'ation must be a"oided% D+ SPAN O' CONTRO" Span of Control means the number of subordinates that can be managed efficiently and effecti"ely by a superior in an organi'ation% ,t suggests how the relations are designed between a superior and a subordinate in an organi'ation%

Factors Affecting Span of (anagement: a5 Capacity of Superior( 7ifferent ability and capacity of leadership, communication affect management of subordinates% b5 Capacity of Subordinates( ;fficient and trained subordinates affects the degree of span of management% c5 Hature of <ork( 7ifferent types of work re=uire different patterns of management% d5 7egree of Centrali'ation or 7ecentrali'ation( 7egree of centrali'ation or decentrali'ation affects the span of management by affecting the degree of in"ol"ement of the superior in decision making% e5 7egree of Planning( Plans which can pro"ide rules, procedures in doing the work higher would be the degree of span of management% f5 Communication +echni=ues( Pattern of communication, its means, and media affect the time re=uirement in managing subordinates and conse=uently span of management% g5 ?se of Staff 1ssistance( ?se of Staff assistance in reducing the work load of managers enables them to manage more number of subordinates% h5 Super"ision of others(

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,f subordinate recei"es super"ision form se"eral other personnel besides his direct super"isor% ,n such a case, the work load of direct superior is reduced and he can super"ise more number of persons% Span of cont!o$ i of t2o type : i+ Na!!o2 pan of cont!o$: Harrow Span of control means a single manager or super"isor o"ersees few subordinates% +his gi"es rise to a tall organi'ational structure%

1d"antages( Close super"ision Close control of subordinates Fast communication +oo much control Many le"els of management @igh costs ;2cessi"e distance between lowest le"el and highest le"el pan of cont!o$: <ide span of control means a single manager or

7isad"antages(

ii+ Ci)e

super"isor o"ersees a large number of subordinates% +his gi"es rise to a flat organi'ational structure%

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1d"antages( More 7elegation of 1uthority 7e"elopment of Managers Clear policies "erloaded super"isors 7anger of superiors loss of control )e=uirement of highly trained managerial personnel Block in decision making

7isad"antages(

DESIGNING STRATEGIC CONTRO" SYSTEMS Strategic control systems pro"ide managers with re=uired information to find out whether strategy and structure mo"e in the same direction% ,t includes target setting, monitoring, e"aluation and feedback system%

+he importance of strategic control 1chie"ing operational efficiency Maintaining focus on =uality Fostering inno"ation ,nsuring responsi"eness to customers

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St!ategic cont!o$ p!oce

+he basic control process in"ol"es mainly these steps as shown in Figure a+ T(e E ta,$i (-ent of Stan)a!) : Because plans are the standards against which controls must be re"ised, it follows logically that the first step in the control process would be to accomplish plans% Plans can be considered as the criterion or the standards against which we compare the actual performance in order to figure out the de"iations% ;2amples for the standards Profitability standards( ,n general, these standards indicate how much the company would like to make as profit o"er a gi"en time period$ that is, its return on in"estment%

106

Market position standards( +hese standards indicate the share of total sales in a particular market that the company would like to ha"e relati"e to its competitors%

Producti"ity standards( @ow much that "arious segments of the organi'ation should produce is the focus of these standards% Product leadership standards( +hese indicate what must be done to attain such a position% ;mployee attitude standards( +hese standards indicate what types of attitudes the company managers should stri"e to indicate in the company&s employees% Social responsibility standards( Such as making contribution to the society% Standards reflecting the relati"e balance between short and long range goals%

,+ Mea &!e-ent of Pe!fo!-ance: +he measurement of performance against standards should be on a forward looking basis so that de"iations may be detected in ad"ance by appropriate actions% +he degree of difficulty in measuring "arious types of organi'ational performance, of course, is determined primarily by the acti"ity being measured% For e2ample, it is far more difficult to measure the performance of highway maintenance worker than to measure the performance of a student enrolled in a college le"el management course% c+ Co-pa!ing Mea &!e) Pe!fo!-ance to State) Stan)a!) : <hen managers ha"e taken a measure of organi'ational performance, their ne2t step in controlling is to compare this measure against some standard% 1 standard is the le"el of acti"ity established to ser"e as a model for e"aluating organi'ational performance% +he performance e"aluated can be for the organi'ation as a whole or for some indi"iduals working within the organi'ation% ,n essence, standards are the yardsticks that determine whether organi'ational performance is ade=uate or inade=uate% )+ Ta1ing Co!!ecti#e Action : 1fter actual performance has been measured compared with established performance standards, the ne2t step in the controlling process is to take correcti"e action, if necessary% Correcti"e action is managerial acti"ity aimed at bringing organi'ational performance up to the le"el of performance standards% ,n other words, correcti"e action focuses on correcting organi'ational mistakes that hinder organi'ational performance% Before taking any correcti"e action, howe"er, managers should make sure that the standards they are using were properly established and that their

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measurements of organi'ational performance are "alid and reliable% 1t first glance, it seems a fairly simple proposition that managers should take correcti"e action to eliminate problems $ the factors within an organi'ation that are barriers to organi'ational goal attainment% ,n practice, howe"er, it is often difficult to pinpoint the problem causing some undesirable organi'ational effect%

"e#e$ of t!ategic cont!o$

+he "arious le"els of strategic control are a5 Corporate le"el control( +he corporate le"el control is done by the top le"el management% +hey set controls which pro"ide conte2t for the di"isional le"el managers% b5 7i"isional le"el control(

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+he di"isional le"el control is done by the managers of the di"ision% +hey set controls which pro"ide conte2t for the functional managers% c5 Functional le"el control( +he functional le"el control is done by the managers of each department% +hey set controls which pro"ide conte2t for the first le"el managers% d5 First le"el control( +he first le"el control is done by the first line managers% +hey set controls which pro"ide conte2t for the workers%

Type of cont!o$ y te+he "arious types of the control systems are a5 Financial Controls Since one of the primary purposes of e"ery business firm is to earn a profit, managers need financial controls% +wo specific financial controls include budgets and financial ratio analysis% i5 Budgets act as a planning tool and control tools as well% +hey pro"ide managers with =uantitati"e standards against which to measure and compare resource consumption% ii5 Financial ratios are calculated by taking numbers from the

organi'ation0s primary financial statements the income statement and the balance sheet% b5 perations Controls perations control techni=ues are designed to assess how efficiently and effecti"ely an organi'ation0s transformation processes are working% Many of these techni=ues were co"ered in Chapter -. as we discussed operations management% @owe"er, two operations control tools deser"e elaboration( +QM control charts and ; Q model% i5 Control charts show results of measurements o"er a period of time with statistically determined upper and lower limits% +hey

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pro"ide a "isual means of determining whether a specific process is staying within predefined limits ii5 +he ; Q model helps managers know how much in"entory to order and how often to order% +he ; Q model seeks to balance four costs associated with ordering and carrying in"entory% c5 Beha"ioral Controls Managers accomplish organi'ational goals by working with other people% ,t0s important for managers to ensure that employees are performing as they0re supposed to% <e0ll be looking at three e2plicit ways that managers control employee beha"ior( direct super"ision, performance appraisals, and discipline% i5 7irect super"ision is the daily o"erseeing of employees0 work performance and correcting problems as they occur% ,t is also known as MB<1 3management by walking around5%

ii5 Performance appraisal is the e"aluation of an indi"idual0s work performance in order to arri"e at ob!ecti"e personnel decisions%

iii5 7iscipline includes actions taken by a manager to enforce the organi'ation0s standards and regulations% +he most common types of discipline problems in"ol"e attendance, on$the$!ob beha"iors, dishonesty, and outside acti"ities%

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IMP"EMENTING STRATEGIC C0ANGE "e#e$ of c(ange Change occurs at three le"els i5 ,ndi"idual le"el ii5 #roup le"el and iii5 rgani'ation le"el 1t the indi"idual le"el change is reflected in such de"elopments as changes in a !ob assignment, physical mo"e to a different location, or the change in maturity of a person which occurs o"ertime% ,t is said that changes at the indi"idual le"el will seldom ha"e significant implications for the total organi'ation% Most organi'ational changes ha"e their ma!or effects at the group le"el% +his is because most acti"ities in organi'ations are organi'ed on a group basis% +he groups could be departments, or informal work groups% Changes at the group le"el can affect work flows, !ob design, social organi'ation, influence and status systems, and communications patterns% Changes at the organi'ation le"el in"ol"e ma!or programmes that affect both indi"iduals and groups% 7ecisions regarding these changes are generally made by senior management and are seldom implemented by only a single manager% Fre=uently, they occur o"er long periods of time and re=uire considerable planning for implementation% ;2ample of these changes would be reorgani'ation of the organi'ational structure and responsibilities, re"amping of employee remuneration system, or ma!or shifts in an organi'ation&s ob!ecti"es% rgani'ations that seek to create and sustain competiti"e ad"antage should be ready to change and implement the proposed changes% +he ma!or forces for change are( technical obsolescence and technical impro"ements* political, economic, and social e"ents* globali'ation* increase in organi'ational si'e, comple2ity, and speciali'ation* greater strategic awareness and skills of managers and employees* and competiti"e dynamics% +he le"el of change could be at "alues, culture, or styles of management* ob!ecti"es, corporate strategy, or organi'ation structure* competiti"e strategies, systems, and management roles* and functional strategies or organi'ation of tasks% ,t is crucial to clarify the le"el of change and tackle needs and problems appropriately%

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+he ma!or types of strategic change are re$engineering, restructuring, and inno"ation%

a5 )e$engineering( ,t is also known as Business Process )eengineering% ,t is fundamental rethinking and radical redesign of business process to achie"e dramatic impro"ements in critical, contemporary measures of performance such as cost, =uality, ser"ice and speed% +he strategist must completely think how the organi'ation goes about its business% ,nstead of focusing on company&s functions strategic managers make business process the focus of attention% b5 )estructuring( ,t is the second form of change to impro"e the firm&s performance% +here are two basic steps to restructuring% First, an organi'ation reduces its le"el of differentiation and integration by eliminating di"isions, departments or le"els in the hierarchy% Second, an organi'ation downsi'es by reducing the number of its employees to reduce operating cost% c5 ,nno"ation( ,t is the process by which organi'ations use their skills and resources to create new technologies or goods and ser"ices so they can change

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and better respond to the needs of their customer% ,nno"ation can be done with the help of research and de"elopment department%

Stages in the Change Process

S+1#;S ,H +@; S+)1+;#,C C@1H#; P) C;SS i5 7etermine the need for change( ,n this step the strategic managers must recogni'e a gap between actual performance and desired performance, use a S< + analysis to define the company&s present state and then determine its desired future state% ii5 7etermine the obstacles to change( bstacles may pre"ent a company from reaching its desired future state% Conflict is also ma!or setback to change and managers must seek ways to resol"e the conflict to implement strategic change successfully% iii5 ,mplement change( Strategic managers play organi'ational politics to o"ercome obstacles to change, resol"e conflicts and bring about strategic change, resol"e conflicts and bring about strategic change% +o play politics, managers must ha"e power% i"5 ;"aluate change( Strategic managers need to e"aluate the results of each change process and use this analysis to define the organi'ation&s present condition so that they can start the ne2t change process%

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POCER PO"ITICS AND CON'"ICT POCER Power is the capacity to influence the beha"ior of others% +here are different sources of power% +hey are broadly di"ided into 3a5 interpersonal sources and 3b5 structural sources% Aa+ Inte!pe! ona$ o&!ce of po2e! i5 ii5 iii5 i"5 "5 Re2a!) po2e!: ,t is indi"idual&s ability to influence others& beha"iors by rewarding their desirable beha"iors% Coe!ci#e po2e!: ,t is an indi"idual&s ability to influence others& beha"iors by punishing their undesirable beha"iors% "egiti-ate Po2e!: ,t is power which comes from the position in the organi'ation% E6pe!t po2e!: It is an indi"idual&s ability to influence others& beha"iors because of recogni'ed competencies, talents, or speciali'ed knowledge% Refe!ent Po2e!: It is an indi"idual&s ability to influence others& beha"iors as a result of being respected, admired, or liked% A,+ St!&ct&!a$ o&!ce of po2e! Structural sources of power are related to the di"ision of labor and position in different teams and departments work assignments, locations and roles% +he positions in hierarchy naturally result in a "ariety of situations in which there is une=ual access to information, resources, and decision making% 1ny of the situational factors could be a source of power in an organi'ation, which include knowledge, resources, decision$ making and networks% i5 ii5 /no2$e)ge po2e! +his power is from knowledge$information and know$how that e2ists in an organi'ation% Re o&!ce sur"i"e% iii5 Deci ion--a1ing po2e! 7ecisions in organi'ations often are made se=uentially, with indi"iduals, groups, or teams participating% po2e! rgani'ations need a "ariety of resources, including human resources, money, e=uipment, materials, supplies, and customers, to

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i"5

Net2o!1 po2e! Managers and departments that ha"e connecting links with other indi"iduals and departments in the organi'ation will be more powerful than those who don&t%

PO"ITICS Politics is the art of ac=uiring and enhancing power% ;mployees ha"e a certain role to play% +herefore, their e2ercise of power is limited to a large e2tent by the role obligations% Political beha"ior is of two types% "egiti-ate $ ,t includes normal e"ery day&s politics% ,t includes( Complaining to one&s superiors By passing the chain of command Forming coalitions bstructing organi'ational policies through e2cessi"e adherence to rules 7e"eloping contacts outside through professional acti"ities

I$$egiti-ate ,t includes influences that are e2treme and "iolate the implied 9rules of the game%: Such acti"ities include disruption, <histle blowing, Symbolic protest such as wearing unorthodo2 dress and #roups of employees cumulati"ely calling in sick%

,t may be stated that the "ast ma!ority of political actions are of the legitimate "ariety% +he reasons are pragmatic the e2treme and illegitimate forms of political beha"ior pose a "ery real risk of loss of organi'ational membership, or e2treme sanctions against those who use them and then fall short in ha"ing enough power to insure that they work% 'acto! ca& ing po$itica$ ,e(a#io! )esearch has indicated a number of factors, which can contribute to political beha"ior% Some of these factors are indi"idual and deri"ed from the uni=ue =ualities of the employees in the organi'ation and others are deri"ed from the organi'ation&s internal culture or en"ironment% a) Individual factors 1 few prominent indi"idual factors are e2amined here%

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i5

Heed for power and high e2pectations of success $ Some managers who are status and ego dri"en often resort to politics to gain access to power corridors% +hey use the power for their personal growth and pleasures% Some managers, who are in$charge of teams or units, may also engage in politics to safeguard their positions and ha"e more benefits for their units%

ii5

Machia"ellianism

Machia"ellians

are

people

who

use

dishonesty

and

opportunism in interpersonal relations and manipulate others for their own purpose% Such Machia"ellists also ha"e a skeptical "iew of the nature of other people and do not care for con"entional morality% iii5 Aocus of control $ "oc& of cont!o$ refers to the e2tent to which indi"iduals belie"e that they can control e"ents that affect them% ,ndi"iduals with a high internal locus of control belie"e that e"ents result primarily from their own beha"ior and actions% +hose with a high e2ternal locus of control belie"e that powerful others, fate, or chance primarily determine e"ents% +hose with a high internal locus of control ha"e better control of their beha"ior, tend to e2hibit more political beha"iors, and are more likely to attempt to influence other people than those with a high e2ternal 3or low internal respecti"ely5 locus of control% +hose with a high internal locus of control are more likely to assume that their efforts will be successful% +hey are more acti"e in seeking information and knowledge concerning their situation% -*) %rgani4ational factors rgani'ational factors also influence the politicing in organi'ations% +hese are as follows% i5 ii5 iii5 i"5 "5 1eallocation of resources when organi'ations downsi'e the changes many stimulate conflict and politicking to ha"e ad"antage in allocation% dvancement or promotion people resort to politics for =uickly getting ad"ancement or promotion in their careers .o( trust 1 low trust within the organi'ation can increase political beha"ior, which can become illegitimate also% 1ole am#iguit! <hen there is confusion in the scope and functions, employees resort to politicking to ha"e a fa"orable situation%

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CON'"ICT Conflict is defined as a situation when the goal directed beha"ior of one group blocks the goal$directed beha"ior of another% Conflict is necessary for organi'ational change as it strikes at the root of the sources of organi'ation inertia% Sources of rgani'ational Conflict

+he sources of conflict are( a5 7ifferentiation $7ifferences in subunit orientations b5 +ask relationships $ "erlapping authority $+ask interdependencies $,ncompatible e"aluation systems c5 Scarcity of resources $7istributing sources Stages in the Conflict Process +he sources of conflict are inherent of the organi'ation&s mode of operations% +he stages in the conflict process are( Aatent conflict Percei"ed conflict Felt conflict Manifest conflict Conflict aftermath

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Conflict is a dynamic process that does not usually appear suddenly% ,n fact, conflict generally passes through se"eral stages( -% Aatent conflict $ 1t this stage, the basic conditions for conflict e2ist but ha"e not been recogni'ed by the in"ol"ed parties% C% Percei"ed conflict $ +he basic conditions for conflict are recogni'ed by one or both of the parties% E% Felt conflict $ ,nternal tensions begin to build in the in"ol"ed parties, but the conflict is still not out in the open% G% Manifest conflict $ +he conflict is out in the open and the e2istence of the conflict becomes ob"ious to other parties who are not in"ol"ed% B% Conflict aftermath $ +he conflict is stopped by some method% @ow the conflict is stopped established new conditions that lead either to a new conflict or to more effecti"e cooperation between the in"ol"ed parties% 1 particular conflict situation does not necessarily pass through all of the stages% ,n addition, the parties who are in"ol"ed in the conflict may not be at the same stage at the same time% For e2ample, it is entirely possible for one party to be at the manifest stage, while one party is at the percei"ed stage%

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CON'"ICT RESO"UTION STRATEGIES ?sing authority when the function, which has e=ual power and authority, cannot sol"e the conflict themsel"es, the C; Changing controls Changing task relationship ,mplementing strategic change Changing the strategy Ssuccessful turnaroundT or corporate office interferes and imposes a solution%

TEC0NIFUES O' STRATEGIC E3A"UATION AND CONTRO" +he importance of strategic e"aluation lies in its ability to coordinate the tasks performed by indi"idual managers, and also groups, di"ision or SB?s, through the control of performance% ,n the absence of coordinating and controlling mechanisms, indi"idual managers may pursue goals, which are inconsistent with the o"erall ob!ecti"es of the department, di"ision, SB? or the whole organi'ation% <e will now discuss e"aluation and control in detailed way% St!ategic e#a$&ation an) cont!o$ p!oce +he process of e"aluation basically deals with four steps( -% Setting standards of performance$Standards refer to performance e2pectations% C% Measurement of performance$Measurement of actual performance or results re=uires appraisal based on standards% E% 1naly'ing "ariances$ +he comparison between standards and results gi"es "ariances% G% +aking correcti"e action$+he identifications of undesirable "ariances prompt managers to think about ways of correcti"e them% TEC0NIFUES +he different types of strategic controls are discussed in brief here% a5 Premise control 1 company may base its strategy on important assumptions related to en"ironmental factors 3e%g%, go"ernment policies5, industrial factors 3e%g% nature of competition5, and organi'ational factors 3e%g% breakthrough in )675% Premise control continually "erifies whether such assumptions are right or wrong% ,f they are not "alid correcti"e action is initiated and strategy is made right% +he responsibility for premise control can be assigned to the corporate

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planning staff who can identify for assumptions and keep a regular check on their "alidity% b5 Implementation control ,mplementation control can be done using milestone re"iew% +his is similar to the identification$albeit on a smaller scale$of e"ents and acti"ities in P;)+>CPM networks% 1fter the identification of milestones, a comprehensi"e re"iew of implementation is made to reassess its continued rele"ance to the achie"ement of ob!ecti"es% c5 St!ategic S&!#ei$$ance 'his is aimed at a more generali0ed and overarching control$ Strategic surveillance can #e done through a #road#ased7 general monitoring on the #asis of selected information sources to uncover events that are li,el! to affect the strateg! of an organi0ation$ d5 Specia$ A$e!t Cont!o$ 'his is #ased on a trigger mechanism for rapid response and immediate reassessment of strateg! in the light of sudden and unexpected events$ Special alert control can #e exercised through the formulation of contingenc! strategies and assigning the responsi#ilit! of handling unforeseen events to crisis management teams$ Examples of such events can #e the sudden fall of a government at the central or state level7 instant change in a competitor5s catastrophe$ e5 Strategic momentum control +hese types of e"aluation techni=ues are aimed at finding out what needs to be done in order to allow the organi'ation to maintain its e2isting strategic momentum% f5 Strategic leap control <here the en"ironment is relati"ely unstable, posture7 an unfortunate industrial disaster7 or a natural

organi'ations are re=uired to make strategic leaps in order to make significant changes% Strategic leap control can assist such organi'ations by helping to define the new strategic re=uirements and to cope with emerging en"ironmental realities%

UNIT : 3 OT0ER STRATEGIC ISSUES G

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Managing +echnology and ,nno"ation$ Strategic issues for Hon Profit organisations% Hew Business Models and strategies for ,nternet ;conomy$case study

STRATEGIC ISSUES IN MANAGING TEC0NO"OGY AND INNO3ATION

,n this age of hyper competition and inno"ation, management of technology plays a crucial role% ,nno"ation is the ma!or dri"er of companies for creation of "alue% a+ T(e Ro$e of Manage-ent 7ue to increased competition and accelerated product de"elopment cycles, inno"ation and the management of technology are becoming crucial to corporate success% Hew product de"elopment is positi"ely associated with corporate performance% 1ppro2imately half the profits of all ?%S% companies come from products launched in the pre"ious -/ years% <hat is less ob"ious is how a company can generate a significant return from in"estment in )67 as well as an o"erall sense of enthusiasm for inno"ati"e beha"ior and risk$taking% corporation&s mission statement% Eg9 Inte$: 97elight our customers, employees, and shareholders by relentlessly deli"ering the platform and technology ad"ancements that become essential to the way we work and li"e%: 1nother way is by establishing policies that support the inno"ati"e process% ,f top management and the board are not interested in these topics, managers below them tend to echo their lack of interest% ,+ En#i!on-enta$ Scanning ,ssues A-= Ai+ E6te!na$ Scanning Corporations need to continually scan their e2ternal societal and tack en"ironment for new de"elopment in technology that may ha"e some application to their current or potential products% +his is e2ternal scanning% I-pact of Sta1e(o$)e! on Inno#ation 1 company should look to its stakeholders, especially its customers, suppliers, and distributors, for sources of product and ser"ice impro"ements% in inno"ation and technology influence both e2ternal and internal en"ironmental scanning% ne way is to include inno"ation in the

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+hese groups of people ha"e the most to gain from inno"ati"e new products or ser"ices% ?nder certain circumstances, they may propose new directions for product de"elopment% Some of the methods of gathering information from key stakeholders are using lead users, market research, and new product e2perimentation% Tec(no$ogica$ De#e$op-ent 1 company&s focusing its scanning efforts too closely on its current product line is dangerous% Most new de"elopments that threaten e2isting business practices and technologies do not come from e2isting competitors or e"en from within traditional industries% 1 new technology that can substitute for an e2isting technology at a lower cost and pro"ide higher =uality can change the "ery basis for competition in an industry% Managers therefore need to acti"ely scan the periphery for new product ideas because this is where breakthrough inno"ations will be found%

Aii+ Inte!na$ Scanning Strategists should assess how well company resources are internally allocated and e"aluate the organi'ation&s ability to de"elop and transfer new technology in a timely manner to generate inno"ati"e products and ser"ices% 1esearch allocation issues +he company must make a"ailable the resources necessary for research and de"elopment% 'ime to mar,et issues ,n addition to money another impro"ement consideration in the effecti"e management of )67 is time to market% ,t is an important issue because V/X of patented inno"ations are generally imitated with in G years at VBX of the cost of inno"ation% c+ St!ategy 'o!-&$ation )67 strategy deals not only with the decision to be a leader or a follower in terms of technology and market entry but also with the source of the technology% (i) 'echnolog! sourcing a make or buy decision can be important in a firm&s )67 strategy% +here are two methods for ac=uiring technology, namely in house )67 is an important source of technical knowledge% Firms that are unable to finance alone the huge cost of de"eloping a new technology may coronate their )67 with other firms through a strategic )67 alliance%

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(ii) 'echnolog! competence )67 creates a capacity in a firm to assimilate and e2ploit new knowledge% +his is absorpti"e capacity% +echnology competence is to make good use of the inno"ati"e technology purchased by a firm% )+ St!ategy i-p$e-entation ,f a corporate decides to de"elop inno"ations internally, it must make sure that its corporate system and culture are suitable for such a strategy% ,t must establish procedures to support all si2 stages of new product de"elopment Sidea generation, concept e"aluation, preliminary design, prototype build and test final design and pilot production, new business de"elopment% +op management must de"elop an entrepreneurial culture one that is open to the transfer of new technology into company must be fle2ible and accepting change% e+ E#a$&ation an) Cont!o$ For inno"ations to succeed, appropriate e"aluation and control techni=ues must be used to ensure that the end product is what was originally planned% Some of these techni=ues are the stage gate process and the house of =uality% 1ppropriate measures are also needed to e"aluate the effecti"eness of the )67 process% 3i5 +he them tage-gate p!oce to better estimate is used by companies such as ,BM, EM, #eneral the potential payback of any pro!ect under

Motors, Corning, and P6#% Corning&s managers belie"e that the process enables consideration% +hey report that the stage$gate process reduces de"elopment time, allows identification of =uestionable pro!ects, and increases the ratio of internally generated products that result in commercially successful products% 3ii5 +he (o& e of B&a$ity is another method of managing new product

de"elopment%

riginally de"eloped at Mitsubishi&s Jobe shipyards, it is a tool to

help pro!ect teams make important design decisions by getting them to think about what users want and how to get it to them most effecti"ely% ,t enhances communication and coordination among engineering, marketing, and manufacturing and ensures better product>customer fit% @ouse of =uality is a matri2 that maps customer re=uirements against product attributes%

1 study of -B multinational companies with successful )67 operations focused on three measures of )67 success(

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3-5 ,mpro"ing technology transfer from )67 to business units, 3C5 1ccelerating time to market for new products and processes, and 3E5 ,nstitutionali'ing cross$functional participation in )67% +he companies participated in basic, applied, and de"elopmental research acti"ities% +he study re"ealed -E ,e t p!actice that all the companies followed% TA%"E A:H +hirteen 9Best Practices: for ,mpro"ing )67 Corporate and business unit strategies are well defined and clearly communicated% Core technologies are defined and communicated to )67% ,n"estments are made in de"eloping multinational )67 capabilities to tap ideas throughout the world% Funding for basic research comes from corporate sources to ensure a long$term focus* funding for de"elopment comes from business units to ensure accountability% Basic and applied researches are performed either at a central facility or at a small number of labs, each focused on a particular discipline of science or technology% 7e"elopment work is usually performed at business unit sites% Formal, cross$functional teams are created for basic, applied, and de"elopmental pro!ects% Formal mechanisms e2ist for regular interaction among scientists, and between )67 and other functions% 1nalytical tools are used for selecting pro!ects as well as for ongoing pro!ect e"aluation% +he transfer of technology to business units is the most important measure of )67 performance% ;ffecti"e measures of career de"elopment are in place at all le"els of )67% )ecruiting of new people is from di"erse uni"ersities and from other companies when specific e2perience or skills are re=uired that would take a long time to de"elop internally% Some basic research is performed internally, but there are also many uni"ersity and third party relationships% Formal mechanisms are used for monitoring e2ternal technological de"elopments% STRATEGIC ISSUES IN NOT:'OR-PRO'IT ORGANI>ATIONS

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Hot$for$profit organi'ation may be Pri"ate HFP etc and Public go"ernment agencies such as libraries, uni"ersities, and museums% such as pri"ate hospitals, pri"ate educational institution, charities,

Nat&!e of N'PO Self help groups and H# S recei"e a lot benefits from society HFP S depend hea"ily on donations from members and from sponsoring agency ,n HFP S, the beneficiaries don&t pay fully for the ser"ice they recei"e, hence the need for outside sponsors%

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App$ication of t!ategic -anage-ent concept S< + analysis Mission statements Stakeholders analysis Corporate go"ernment ,ndustry analysis Competitor analysis

Con t!aint on t!ategic -anage-ent Ser"ice is intangible and difficult is measure

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Beneficiary&s influence may be weak Sponsors and contributors 3go"ernment5 may interfere with internal management Strong employers are more committed to their profession rather than -B the organi'ation )eward$punishment system is under se"ere restraints%

&e in t!ategy fo!-&$ation #oal conflict interferes with rational planning Shift from results is resources #oal displacement and internet politics is Professionalism Vs rigidity

&e in t!ategy i-p$e-entation 7ecentrali'ation is complicated Ainking pins for e2ternal internal integration become important Pot enlargement and e2ecuti"e de"elopment can be restrained by professionalism%

&e in e#a$&ation an) cont!o$ )ewards and penalties ha"e little or no relation to performance ,nputs rather than outputs arGe controlled <astage of money on administrati"e costs and e2penses

Pop&$a! t!ategie of N'POS Strategic pigg!#ac,ing Hew found generation acti"ity undertaken by the HFP , which is aimed at reducing the gap between e2penses and re"enue E6( ;ducational institution running some courses and commercial @ospitals running a meditation class and fitness programme Merger HFP S prefer merger in the light of reduced resources to light down their cost of operation% Strategic alliance ,s pursued by HFP S to increase their capacity and to get more resources and to ser"e the clients letter% E6: ,ndian school of business was started with the support from state #o"t% of 1%P%

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NEC %USINESS MODE"S AND STRATEGIES 'OR T0E INTERNET ECONOMY INTERNET ECONOMY( +he ,nternet ;conomy refers to conducting business through markets whose infrastructure is based on the internet and world$wide web% 1n internet economy differs from a traditional economy in a number of ways, including communication, market segmentation, distribution costs and price% In)& t!y co-petition in t(e inte!net econo-y +he ,mpact on Competiti"e )i"alry ?se of ,nternet widens a firms geographic market reach )i"alry is often increased by freshly launched e$commerce initiati"es of e2isting ri"als )i"alry is often increased by entry of enterprising dot$com ri"als with sell$direct strategies )i"alry is often increased when an industry consists of online sellers against pure brick$and mortar sellers against combination brick$and$click sellers +he ,mpact on Barriers to ;ntry ;ntry barriers into e$commerce are often relati"ely low Can be easy for new dot$coms to gain entry into some businesses Can be easy for many e2isting firms to e2pand into new geographic markets "ia online sales +he ,mpact on Buyer Bargaining Power ?se of ,nternet allows buyers to gather e2tensi"e information about competing products and brands Buyers can readily use the ,nternet to 9shop the market: for the best deal Buyer efforts to seek out the best deal spurs competition among ri"al sellers to pro"ide the best deal ,nternet makes it easier for buyers to !oin buying groups and store their purchases to negotiate better terms and conditions

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,mpact on Supplier Bargaining Power @elps companies e2tend geographic reach for the best suppliers Sometimes "ia online marketplaces or 9emarkets: @elps companies collaborate closely with suppliers across a wide frontNfosters long$term partnerships with key suppliers ,mpact on threat on substitution of products ,nternet fosters the )67 acti"ity which in turn increases the threat of product substitutions% INTERNET %USINESS MODE"S +he business model spells$out how a company makes money by specifying where it is positioned in the "alue chain% +he basic categories of business models discussed in the table below include( a5 Brokerage b5 1d"ertising c5 ,nfomediary d5 Merchant e5 Manufacturer 37irect5 f5 1ffiliate g5 Community h5 Subscription i5 ?tility a+ %!o1e!age -o)e$ Brokers are market$makers, they bring buyers and sellers together and facilitate transactions% Brokers play a fre=uent role in business$to$business 3BCB5, business$to$ consumer 3BCC5, or consumer$to$consumer 3CCC5 markets% ?sually a broker charges a fee or commission for each transaction it enables% +he formula for fees can "ary% Brokerage models include( i5 Marketplace ;2change( offers a full range of ser"ices co"ering the transaction process, from market assessment to negotiation and fulfillment% ;2changes operate independently or are backed by an industry consortium% S rbit', ChemConnectT ii5 Buy>Sell Fulfillment( takes customer orders to buy or sell a product or ser"ice, including terms like price and deli"ery% SCars7irect, )espond%comT

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iii5 7emand Collection System( the patented 8name$your$price8 model pioneered by Priceline%com% Prospecti"e buyer makes a final 3binding5 bid for a specified good or ser"ice, and the broker arranges fulfillment% SPriceline%comT i"5 1uction Broker( conducts auctions for sellers 3indi"iduals or merchants5% Broker charges the seller a listing fee and commission scaled with the "alue of the transaction% 1uctions "ary widely in terms of the offering and bidding rules% SeBayT "5 +ransaction Broker( pro"ides a third$party payment mechanism for buyers and sellers to settle a transaction% SPayPal, ;scrow%comT "i5 7istributor( is a catalog operation that connects a large number of product manufacturers with "olume and retail buyers% Broker facilitates business transactions between franchised distributors and their trading partners% "ii5 Search 1gent( a software agent or 8robot8 used to search$out the price and a"ailability for a good or ser"ice specified by the buyer, or to locate hard to find information%

viii) Virtual Marketplace( or "irtual mall, a hosting ser"ice for online merchants that
charges setup, monthly listing, and>or transaction fees% May also pro"ide automated transaction and relationship marketing ser"ices% S'Shops and Merchant Ser"ices at 1ma'on%comT ,+ A)#e!ti ing -o)e$ +he web ad"ertising model is an e2tension of the traditional media broadcast model% +he broadcaster, in this case, a web site, pro"ides content 3usually, but not necessarily, for free5 and ser"ices 3like email, ,M, blogs5 mi2ed with ad"ertising messages in the form of banner ads% +he banner ads may be the ma!or or sole source of re"enue for the broadcaster% +he broadcaster may be a content creator or a distributor of content created elsewhere% +he ad"ertising model works best when the "olume of "iewer traffic is large or highly speciali'ed% i5 Portal( usually a search engine that may include "aried content or ser"ices% 1 high "olume of user traffic makes ad"ertising profitable and permits further di"ersification of site ser"ices% 1 personali'ed portal allows customi'ation of the interface and content to the user% 1 niche portal culti"ates a well$defined user demographic% SIahooZT ii5 iii5 Classifieds( list items for sale or wanted for purchase% Aisting fees are common, but there also may be a membership fee% SMonster%com, CraigslistT ?ser )egistration( content$based sites that are free to access but re=uire users to register and pro"ide demographic data% )egistration allows inter$session

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tracking of user surfing habits and thereby generates data of potential "alue in targeted ad"ertising campaigns% SHI+imesT i"5 Query$based Paid Placement( sells fa"orable link positioning 3i%e%, sponsored links5 or ad"ertising keyed to particular search terms in a user =uery, such as "erture0s trademark 8pay$for$performance8 model% S#oogle, "5 "ertureT Conte2tual 1d"ertising > Beha"ioral Marketing( freeware de"elopers who bundle adware with their product% For e2ample, a browser e2tension that automates authentication and form fill$ins, also deli"ers ad"ertising links or pop$ups as the user surfs the web% Conte2tual ad"ertisers can sell targeted ad"ertising based on an indi"idual user0s surfing acti"ity% "i5 Content$+argeted 1d"ertising( pioneered by #oogle, it e2tends the precision of search ad"ertising to the rest of the web% #oogle identifies the meaning of a web page and then automatically deli"ers rele"ant ads when a user "isits that page% S#oogleT "ii5 "iii5 ,ntromercials( animated full$screen ads placed at the entry of a site before a user reaches the intended content% SCBS Market<atchT ?ltramercials( interacti"e online ads that re=uire the user to respond intermittently in order to wade through the message before reaching the intended content% SSalon in cooperation with Mercedes$Ben'T c+ Info-e)ia!y -o)e$ 7ata about consumers and their consumption habits are "aluable, especially when that information is carefully analy'ed and used to target marketing campaigns% ,ndependently collected data about producers and their products are useful to consumers when considering a purchase% Some firms function as infomediaries 3information intermediaries5 assisting buyers and>or sellers understand a gi"en market% i5 1d"ertising Hetworks( feed banner ads to a network of member sites, thereby enabling ad"ertisers to deploy large marketing campaigns% 1d networks collect data about web users that can be used to analy'e marketing effecti"eness% S7oubleClickT ii5 iii5 1udience Measurement Ser"ices( online audience market research agencies% SHielsen>>HetratingsT ,ncenti"e Marketing( customer loyalty program that pro"ides incenti"es to customers such as redeemable points or coupons for making purchases from associated retailers% 7ata collected about users is sold for targeted ad"ertising% SCoolsa"ingsT

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iv)

Metamediary( facilitates transactions between buyer and sellers by pro"iding comprehensi"e information and ancillary ser"ices, without being in"ol"ed in the actual e2change of goods or ser"ices between the parties% S;dmundsT )+ Me!c(ant -o)e$ <holesalers and retailers of goods and ser"ices% Sales may be made based on list prices or through auction% i5 ii5 iii5 i"5 Virtual Merchant $$or e$tailer, is a retail merchant that operates solely o"er the web% S1ma'on%comT Catalog Merchant( mail$order business with a web$based catalog% Combines mail, telephone and online ordering% SAands0 ;ndT Click and Mortar( traditional brick$and$mortar retail establishment with web storefront% SBarnes 6 HobleT Bit Vendor( a merchant that deals strictly in digital products and ser"ices and, in its purest form, conducts both sales and distribution o"er the web% S1pple i+unes Music StoreT e+ Man&fact&!e! ADi!ect+ -o)e$ +he manufacturer or 8direct model8, it is predicated on the power of the web to allow a manufacturer 3i%e%, a company that creates a product or ser"ice5 to reach buyers directly and thereby compress the distribution channel% +he manufacturer model can be based on efficiency, impro"ed customer ser"ice, and a better understanding of customer preferences% S7ell ComputerT i5 ii5 Purchase( the sale of a product in which the right of ownership is transferred to the buyer% Aease( in e2change for a rental fee, the buyer recei"es the right to use the product under a 9terms of use: agreement% +he product is returned to the seller upon e2piration or default of the lease agreement% iii5 ne type of agreement may include a right of purchase upon e2piration of the lease% Aicense( the sale of a product that in"ol"es only the transfer of usage rights to the buyer, in accordance with a 9terms of use: agreement% remain with the manufacturer 3e%g%, with software licensing5% i"5 Brand ,ntegrated Content( in contrast to the sponsored$content approach 3i%e%, the ad"ertising model5, brand$integrated content is created by the manufacturer itself for the sole basis of product placement% wnership rights

f+ Affi$iate -o)e$

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,n contrast to the generali'ed portal, which seeks to dri"e a high "olume of traffic to one site, the affiliate model, pro"ides purchase opportunities where"er people may be surfing% ,t does this by offering financial incenti"es 3in the form of a percentage of re"enue5 to affiliated partner sites% +he affiliates pro"ide purchase$point click$through to the merchant% ,t is a pay$for$performance model( if an affiliate does not generate sales, it represents no cost to the merchant% +he affiliate model is inherently well$ suited to the web, which e2plains its popularity% Variations include, banner e2change, pay$per$click, and re"enue sharing programs% SBarnes 6 Hoble, 1ma'on%comT i5 ii5 iii5 Banner ;2change( trades banner placement among a network of affiliated sites% Pay$per$click( site that pays affiliates for a user click$through% )e"enue Sharing( offers a percent$of$sale commission based on a user click$ through in which the user subse=uently purchases a product% g+ Co--&nity -o)e$ +he "iability of the community model is based on user loyalty% ?sers ha"e a high in"estment in both time and emotion% )e"enue can be based on the sale of ancillary products and ser"ices or "oluntary contributions* or re"enue may be tied to conte2tual ad"ertising and subscriptions for premium ser"ices% +he ,nternet is inherently suited to community business models and today this is one of the more fertile areas of de"elopment, as seen in rise of social networking% i5 pen Source( software de"eloped collaborati"ely by a global community of programmers who share code openly% ,nstead of licensing code for a fee, open source relies on re"enue generated from related ser"ices like systems integration, product support, tutorials and user documentation% S)ed @atT ii5 iii5 pen Content( openly accessible content de"eloped collaborati"ely by a global community of contributors who work "oluntarily% S<ikipediaT Public Broadcasting( user$supported model used by not$for$profit radio and tele"ision broadcasting e2tended to the web% 1 community of users support the site through "oluntary donations% S+he Classical Station 3<CP;%org5T i"5 Social Hetworking Ser"ices( sites that pro"ide indi"iduals with the ability to connect to other indi"iduals along a defined common interest 3professional, hobby, romance5% Social networking ser"ices can pro"ide opportunities for conte2tual Friendster, ad"ertising rkutT and subscriptions for premium ser"ices% SFlickr,

(+ S&, c!iption -o)e$ ?sers are charged a periodic( daily, monthly or annual( fee to subscribe to a ser"ice% ,t is not uncommon for sites to combine free content with 8premium8 3i%e%, subscriber$

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or member$only5 content% Subscription fees are incurred irrespecti"e of actual usage rates% Subscription and ad"ertising models are fre=uently combined% i5 ii5 Content Ser"ices( pro"ide te2t, audio, or "ideo content to users who subscribe for a fee to gain access to the ser"ice% SAisten%com, Hetfli2T Person$to$Person Hetworking Ser"ices( are conduits for the distribution of user$ submitted information, such as indi"iduals searching for former schoolmates% SClassmatesT iii5 +rust Ser"ices( come in the form of membership associations that abide by an e2plicit code of conduct, and in which members pay a subscription fee% S+rusteT ,nternet Ser"ices Pro"iders( offer network connecti"ity and related ser"ices on a monthly subscription% S1merica i+ Uti$ity -o)e$ +he utility or 8on$demand8 model is based on metering usage, or a 8pay as you go8 approach% ?nlike subscriber ser"ices, metered ser"ices are based on actual usage rates% +raditionally, metering has been used for essential ser"ices 3e%g%, electricity water, long$distance telephone ser"ices5% ,nternet ser"ice pro"iders 3,SPs5 in some parts of the world operate as utilities, charging customers for connection minutes, as opposed to the subscriber model common in the ?%S% i5 Metered ?sage( measures and bills users based on actual usage of a ser"ice% Metered Subscriptions( allows subscribers to purchase access to content in metered portions 3e%g%, numbers of pages "iewed5% SSlashdotT nlineT

iv)

ii)

+he models are implemented in a "ariety of ways, as described below with e2amples% Moreo"er, a firm may combine se"eral different models as part of its o"erall ,nternet business strategy% For e2ample, it is not uncommon for content dri"en businesses to blend ad"ertising with a subscription model% Business models ha"e taken on greater importance recently as a form of intellectual property that can be protected with a patent% ,ndeed, business models 3or more broadly speaking, 8business methods85 ha"e fallen increasingly within the realm of patent law% 1 number of business method patents rele"ant to e$commerce ha"e been granted% But what is new and no"el as a business model is not always clear% Some of the more noteworthy patents may be challenged in the courts%

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