STRATEGIC MANAGEMENT

PART 1
Contents:
Understanding strategy
Purpose of strategic management
Distinguishing strategic problem from tactical problem
Formulation of a strategic plan

A) Understanding strategy:
In understanding strategy two broad views are used, viz., strategic fit concept and strategic
stretch concept. Both are discussed in the following paragraphs. But before discussing those two concepts,
we need to discuss two factors on which these two concepts lean heavily i.e concept of external and internal
environment.
External environment lets one know the industry in which the firm is operating. It takes into
account the product and factor markets. Profitability of the firm essentially depends on these two markets.
Equilibrium conditions in these two markets determines the profitability. Strategic management monitors the
factors which influence the equilibrium.
Internal environment deals with the status of the resource base of the firm on the basis of
which the firm competes in the market. This concept is encapsulated in the concept of SWOT analysis. SWrefers to internal environment whereas OT-Refers to the external environment. The essence is that strength
and weaknesses is matched with opportunities and threat to develop strategy. Now which environment is
more important? It is in this regard that the two broad views or schools of thought differ. Strategic fit
concepts or the classical school lays the importance on the external environment whereas the strategic
stretch concept emphasizes on the internal environment of the firm. Lets discuss both of them one by one--1. Strategic Fit concept:
Michael Porter and other eminent classical strategy Gurus have the dominant figure in
shaping this framework of business strategy. According to them, the central thrust of the strategy is to gain a
sustainable competitive advantage over the competitors which results in the superior profitability of the firm.
In their opinion, the difference in profitability among the firms operating in the industry can be attributed to
the external environment and not to the internal resource base. This happens due to mobility of factors which
wipes out the heterogeneity of the resource base in the long run. Then the higher profitability is attributed to
the higher adaptive capacity of the firm in adapting to changing external environment. So monitor the
environment, find opportunities and modify the resource base. So according to this view, strategy is a set of
action plans which is used to monitor the external environment of the firm in order to adapt the firm
according to the changes of the environment aiming at gaining a sustainable competitive advantage.

2. Strategic Stretch concept:

This concept evolved out of the quest for success of Japanese firm in 1970s when they
entered the U.S market. It was attributed to the factor that not the adaptive capacity but to the quality of the
resource base that makes the difference in commercial success. So, the purpose of strategic management is
to improve the quality of the resource base. The notion of core competencies is closely related to the socalled resource based view of the firm., which is most recent model to understand the mechanism for
achieving competitive advantage. It represents a major departure from a strategic approach based on market
driven considerations. But how the firm decides which resource base to use to gain positive economic
profit? The criteria are as follows---

i) Is it easily available?
It means that the resources are traded in the market or not. For example, the raw
material or resources should not be easily available to the competitors.
ii) Inimitability:
The resource should be such that it cannot be easily copied by the competitors and
hard to copy. There are certain features of resources which makes it hard to copy:

Physical uniqueness:
It refers to acquiring assets which are not available to any other competitor. For
example: Service centres of Maruti.

Path Dependency:
A resource base is developed expending lot over a long period of time, which if
the competitor wants to copy or develop has to spend the same time and amount
i.e will have to follow the same path. This is called path dependency. For
example: Corporate image, Goodwill etc.

Causal ambiguity:
It means developing excellence in multi areas of which few can be copied but not
the all. It isdeveloping the sum total attribute of characteristics which are unique.

Scale deterrence:
It means coming out with a mammoth size plant then taking down the cost which
cannot be copied by the competitors.

iii) Durability:
Every asset depreciates with use. But to gain sustainable competitive advantage, firm
need to have assets which dont depreciate with use such as non-physical asset. For
example: Brand name of TATA.
iv) Appropriability:
Resources create value. Receiver of the values varies. As a manager, it is the duty to
take care that the value created by firm remains within the firm. A strategy that is both
unique and sustainable generates a significant economic value. The issue of
appropriability addresses the question of who will capture the resulting economic rent.
Sometimes, the owners of the business unit do not appropriate the totality of the value
created because of the gap that might exist between ownership and control. Non
owners might control complementary and specialized factors that might divert the
cash proceeds away from the business. This type of dissipation of value is called
holdup. A notorious example of holdup in recent business history has taken place in
the personal computer industry, where Microsoft and Intel have captured
manufacturing firms the meager 20 percent remaining.

The second threat for the appropriability of the economic value is referred to as slack.
It measures the extent to which the economic value realized by the business unit is
significantly lower than what potentially could have been created. Slack is often the
result of the inefficiencies or unwarranted benefits that prevent the accumulation of
economic results in the business. While holdup produces a different distribution of the
total wealth created, slack reduces the size of this wealth.
v) Substitutability:
If it can be substituted by anything else, then it cant be the source of competitive
advantage.
vi) Superiority:
Whether it is of superior value than the competiting firm or not.
vii) Opportunism and timing:
One other condition that is necessary to obtain competitive advantage occurs prior to
establishing superior resource position. It is necessary that the cost incurred in
acquiring the resources are lower than the value created by them. In other words, the
cost implicit in implementing the strategy of business unit should not offset the value
generated by it. This condition is what we aspire to capture under this requirement of
opportunism and timing in order to secure competitive advantage.

B) Purpose of strategic management:

The primary concern of strategic management is to help the firm gain a sustainable
competitive advantage in the market place. Competitive advantage is a competitive
superiority in attracting customers. It helps the firm to gain a continuous positive economic
profit. Now economic profit is defined as --Economic profit= Profit after tax (PAT) --- Cost of equity capital
It is considered as a measure of competitive advantage because it considers the productivity
of all the factor. On economic profit there is no claimant. Thus it is called free cash which can
be invested in future to meet companys non-financial goal. The cost of equity capital is
calculated using the capital asset pricing model developed by William Sharpe.
Knowledge of strategic management helps a manager in the following ways
i) Defining the boundary of the firm:
The boundary of the firm has three aspects--- corporate, horizontal and vertical
boundary.

Corporate boundary:
It is not possible for a single firm to rule over the market. Thus instead of
looking at all areas , the firm must decide what are the business areas it wants
to look for and compete. This defines the corporate boundary of the firm.

Horizontal boundary:
As a manager, a person divides the business of the firm into different product
markets. Now based on resources the firm decides on which segments it wants
to compete. This is called the horizontal boundary of the firm.

Vertical boundary:
Vertical boundary means whether the firm only produces the finished product,
or produces both the raw material, end products and distributes its end product
also.
These all determines the market place the firm is going to compete.

ii) Industry analysis:

Knowledge of strategic management helps the manager in analyzing the industry the
firm is operating in. It has been found empirically that the kind of industry the firm
operates in, determines its profitability, at least to the extent of 20-30%. So at every
point of time, the manager has to think that whether the firm should enter the industry
in particular or exit.
iii) Positioning in the market place:
Positioning means how the firm wants to present itself in the market. There are three
ways to it--

Cost leadership strategyIt means that the firm endeavors to keep the cost of
production and distribution less than any other firm in the industry.
Product differentiationIt means that the firm differentiates its product by features
as per the customer requirements.
Focus strategyIt postulates to concentrate at the niche market instead of looking at
all the market.

iv) Internal organization of the firm:

It means the administrative system which the firm can use to narrow down the goal
incongruence between the goal of the firm and goal of individuals. These are

Management control system (MCS)

Management communication and information system(MCIS)
Organisational structure (OS)
Executive compensation system(ECS)

C) Distinguishing strategic problem from tactical problem:

All organizational problem can be categorized asstrategic problem and tactical problem.
There are three characteristics based on which we can distinguish these two problems--- Range, Scope and
End orientation. Lets discuss each one of them one by one

a) Range:
When an organizational problem is solved it creates effects across the organization.
The duration of the effect is called range. The longer the range, more difficult to
reverse it. Strategic problem has a longer effect thus a longer range and tactical
problem has a shorter range.
b) Scope:
Scope of a problem denotes the area of an organization it encompasses and feels the
effect of the problem. Strategic problem has a larger scope than a tactical problem.
c) End orientation:
In order to solve some problem, the end which is going to be achieved through
solving the problem is given and in some cases has to be identified while solving the
problem.
In strategic problem, the end result is not given, rather has to be identified before
embarking on the problem. In case of tactical problem, the end result is given, e.g.
minimize the total transportations cost.

D) Formulation of a strategic plan:

The steps involved in developing a strategic plan can be plotted as follows:
Developing mission statement Analysis of internal environment Analysis of external environment
Developing broad strategies Developing long term program Developing short term program
Implementation.

A strategy project may be conducted in five phase s

Phase I

Project
Initialization

Infor mati on
collection and
issue anal ysis
Selection of team
members
Wor k pl an
Time pl anni ng

Phase II

Phase III

Situational
Context of
Strategy
Design

Market segmentation
Market attracti veness
Competition anal ysis
Synergy potential
Market position
Cost- and revenue
position
Corporate strategy /
business portfolio
Strength and weaknesses / cor e
competences

Dev elopment
and assessment of strategic options

Phase IV

Phase V

Specif ication
of chosen
strategy

Definition of strategic Description of chosen

goals
options in detail and
definition of related
Differenziati on
strategic goals
Organizational, HR
Business plan
related and fi nanci al
Detailed outline of
consequences
consequences for
Development of
organization and
strategic options
HRM
Risk / attrac tiveness
assessment of the
options
Choosing of options

Implementation
plan

Design of
implementati on plan
Timeframe and
milestones
Priorities
Responsi bilities
Resources
Project c ontrolling

TOO
L- B
OX
MA BE S trategy Consulting January 2007

Prof. Friedrich Bock

Strategic issues at different level:

Corporate strategy deals with

basic values and overall vision
portfolio of activities (Strategic Business Units - SBUs)
mission of each strategic business unit
overall allocation of resources

Business strategy deals with

competitive positioning of the business unit
choice of segments
trade-offs, specific strengths
action towards customers

Functional strategy deals with

development of functional strengths and resources
as required by businesses and the corporation

page 22

PART B
DEFINING THE BOUNDARY OF THE FIRM
Contents:
Vision of a firm
Developing the mission statement---- Process and contents

A) Vision of a firm:
A vision gives direction for the desired future scope and position of a company:
It deals with the future.
It is ambitious.
It is expressed in simple terms - understandable at all levels of the company.
It does not deal with details, but is concrete.
It does not deal with solutions.
It opens space for creative forward thinking, based on an (emotionally appealing) picture
It is not a secret plan but an open declaration.
A vision serves to create a common mind set throughout the organization.
It helps to mobilize people.
It creates momentum and initiative: Am I doing enough to increase the fit of my business with the
corporate vision?

B) Mission of a firm:
Mission of a firm is the expression of its strategic intent. Strategic intent is the fundamental
ends a firm wants to pursue. Mission statement also reveals the self-concept of the firm. Thus, the mission of
the business is a qualitative statement of overall business position that summarizes the key points with
regard to products, markets, geographic locations and unique competencies. A mission statement abstracts
the important points to guide the development of business. Besides others there are two pieces of
information that must be contained in the mission statement---Clear definition of current and future business
scope and second the unique competencies that distinguish the firm from others in the same industry.
Following is the detailed description of the contents of the mission statement--i) Core values:
It is the beliefs which guide the behaviour of the firm. This is to be encoded in the
mission statement so that the employees understand that it has to be followed at any cost.
ii) Core purpose:
It is the fundamental end for which an organization exists. It is the very reason of the
existence of the firm in the market.
iii) BHAGIt represents Big Hairy Audacious Goal. This implies, that the mission statement
should be organized in such a manner that it fires up the competitive zeal of the employees. In their
celebrated article, Garry Hamel and C.K.Pralhad state that rather than trimming ambitions to match
available resources, managers should instead leverage resources to reach seemingly unattainable goals. This
challenge is at the heart of a proper mission statement.
iv) Vivid description of future:
A mission statement is grossly incomplete without the clear definition of the
expected future business scope. This has got two dimensions---business and ethical. Business dimensions
includes------ Scope of the firm: the description of current and future market scope, product scope, geographical
reach scope and customer scope.

Positioning strategy: This explains on what basis the firm wants to compete and how the firm wants
itself to be known in the market. There are two ways to create value for money for shareholders
cost leadership strategy and product differentiation strategy.
The image of the firm will depend on this positioning strategy.
Responsibilities to the stakeholders: Here the firm has to spell out how it wants to treat its different
stakeholders.

Factors influencing the development of mission statement:

Following factors play a crucial role in developing and shaping the mission statement
are as follows:

Organisational power structure

Corporate culture
Personal values of CEO
Societal value
i) Organisational power structure:
In every organization there are two groups of people viz. Internal stakeholders and External
stakeholders which competes with each other. An organization is a dynamic powerstructure.
The group which wins decides the shape of the mission statement. One author has found out
several power structure which works toward the development of the mission statement---a) Continuous Chain or Simple mass output system: Here external stakeholders are the
people who decides the mission statement. For example: Stock exchange and Post
office.
b) Closed system: Here the external stakeholders are fragmented and internal
stakeholders are more powerful and there is no clear goal of the firm to follow.
c) Command type system: This is the typical power structure in an organization set up
by an entrepreneur or organization passing through severe crisis. Here the
entrepreneur decides the mission statement. No value system is adhered to.
d) Missionary power configuration: This is the type of organization which works for a
voluntary cause. Here the mission statement is driven by ideology.
e) Professional power configuration: This is the organizational power structure
typically found out in consulting firms like TCS, IBM, Mckinsey etc where some
outstanding professional determine the mission statement.
f) Conflictive power configuration: Here the entire organization is divided into power
groups which fight with each other and the group that wins determines the mission
statement.

ii) Corporate culture:

Corporate culture is the sum total of beliefs, values, norms, which regulate the behaviour of
an employee in the organization. Since mission gets implemented by the employees, its very
much imperative that the organizational culture is taken into account with due importance
while framing the mission statement.

iii) Personal Values of CEO:

Personal values of CEO, who is ultimately held responsible for the companys growth,
determines the mission statement and also his risk taking ability influences the mission
statement.
iv) Societal values:
Any firm is a social entity. Societal values is the timeless principle which has evolved in
society over very long period of time and the firm must obey it and comply with it.

Advantages of Mission statement:

Developing an mission statement serves several important purpose, such as.
a) It gives the guidelines as to how to treat different stakeholders: It is embedded in the
mission statement, and of course in its development, which stakeholder is more important and
how to satisfy them. So, in other words, mission statement sets a priority amongst the
stakeholder, to be served by the organization. It also determines the right of every stakeholder
on the economic value created by the stakeholders.
b) Mission statement helps to avoid strategic opportunism:

c) Mission statement is a tool for communication. It conveys the expectations of the firm
from its employees.

PART C
ANALYSIS OF INTERNAL RESOURCE BASE AND ENVIRONMENT
Contents:

Value chain analysis

Strategic group concept
Benchmarking

A) Value chain analysis:

(Describe the value chain of a firm and its significance in strategic planning2005,[4])
This very concept was propagated by Michael Porter as a tool of analyzing the firms internal
environment and resource base. It is an analytical tool that describes all activities that make
up the economic performance and capabilities of the firm, used to analyze and examine
activities that create value for a given firm. A firm can be conceived of an aggregation of
discrete activities and the competitive edge arises based on how a firm performs these
activities better than its competitors. The cluster of these activities is called the value chain.
The value chain classifies each firms activities into two broad categories: Primary activities
and Secondary activities or support activities. The following figure represents the value chain
of a firm:
S
u
p
p
o
r
t
a
c
t
i
v
i
.

MARGIN

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

Inbound
Logistics

Operations

Outbound
logistics

Marketing
and
sales

Service
MARGIN

Primary activities: The sequence of activities through which raw materials are transformed
into benefits enjoyed by the customer is called primary activities.These activities relate
directly to the actual creation,
development, manufacture, distribution, sales and servicing of
<-----------------PRIMARY
ACTIVITIES---------------------->
the product or the service to a customer. Five major activities are involved in this sequence:
inbound logistics, operations, outbound logistics, marketing and sales and service. Working
together, these activities determine the key operational tasks surrounding the product or
services.

Inbound logistics: As the word implies, inbound logistics deal with the handling of
raw materials and inventory received from the firms suppliers. Detail activities
include Receiving, storing, materials handling, warehousing, inventory control,
vehicles scheduling and returns to suppliers.
Operations: Operations are the activities and procedures that transform raw materials,
components and other inputs into finished end products. Detail activities include
machining, packaging, assembly, equipment maintenance, testing, printing, facility
operations.
Outbound logistics: Outbound logistics refers to the transfer of finished product to the
distribution channel members. The focus of outbound logistics is on managing the
flow and distribution of products to the firms immediate customers such as
wholesalers and retailers. Activities and procedures associated with outbound logistics
include inventory control, warehousing, order processing, delivery schedule
maintenance etc.
Marketing and sales: Marketing and sales include advertising, promotion, product mix
pricing, specifying distribution channel members, maintaining channel relations etc in
order to induce and facilitate buyers to purchase the product.
Service: Customer service is a central value adding activity that a firm can seek to
improve over time. It includes installation, repair, training, parts supply and product
adjustment in order to maintain or enhance the value of the product after sales.

Secondary or support activities:

The remaining activities of the value chain are undertaken to support primary
activities. They are therefore referred to as the secondary or support activities.
Support activities help the firm improve co-ordinations across and achieve efficiency
within the firms primary value adding activities. Support activities are located across
the first four rows of the diagram. This includes, procurement, technology
development, human resource management and firm level infrastructure.

Procurement: Securing inputs (such as raw materials, supplies, and other consumable
items and assets) for primary activities.
Technology development: Methods of performing primary activities are improved
(Such as know-how, procedures, technological inputs needed)
Human resource management: Employees who will carry out the primary activities
are recruited, trained, motivated and supervised.
Firm infrastructure: Activities such as accounting, finance, legal affairs, and
regulatory compliance are carried out to provide ancillary support for primary
activities.

How value chain analysis matters in strategic planning:

As already stated, the competitive edge arises based on how better the firm performs
the activities involved in the value chain compared to its competitor. For this purpose,
each activity is broken up in some activities for comparison with the competitors, and
three basic questions are tried to be answered?
i) How can the firm keep the benefits provided to the customers intact keeping the cost
constant?
ii) How can the firm increase the benefits provided to the customers keeping the cost
constant?
iii) How can the firm increase the benefits provided to the customer while lowering the cost?

For creating competitive advantage through the value chain analysis while answering these
questions, Porter has suggested the following measures---

Reconfigure the value chain differently from those of the competitors.

Perform the activities more efficiently than the competitors.
Outsource the non-core activities:
While outsourcing the following points are needed to be judged judiciously--i) There might be a risk of non-performance by the supplier, To avoid this,
ways of keeping alternative suppliers, Tapered integration and part
outsourcing can be adopted.
ii) There might be a risk of disproportionate value appropriation
iii) There can be a high risk of elimination by suppliers.

Internal integration of value chain activities:

Internal integration of value chain activity gives the following benefits
i) Improvement of quality
ii) Shorten new product development cycle.
iii) By integrating the firm with its external suppliers and buyers it can reduce
inventory holding costs, enhance the ability to customize the product and
become more responsive to customers demand.

The point to be noted that throughout the whole analysis every measures are to be taken on the basis
of comparison with suppliers.

B) Strategic group concept:

Strategic group is a group of firms within an industry which face the same environmental forces,
have same resources and follow similar strategy in response to the environmental forces. To carry on
the value chain analysis it is very important that the firm identifies the strategic group to which it
belongs. Porter suggests the following dimensions to identify differences in firm strategies within an
industry: i)specialization, ii) brand identification, iii) a push versus pull marketing strategy, iv)
vertical integration, v)channel selection, vi) product quality, vii) technological leadership, viii) cost
position, ix)service, x) price policy, xi) financial and operating leverage, xii) relationship with parent
company, xiii) relationships with home and host government. We should try to locate in the same
group all firms with comparable characteristics and following a similar competitive strategy.
Essentially the concept of strategic grouping is a very pragmatic approach aimed at cataloguing firms
within an industry in accordance with the way they have chosen to seek competitive advantage. This
segmentation is useful when one faces a high diversity of competitive positions in a fairly complex
and heterogeneous industry. Typical examples of this situation are global industries with a wide
variety of players, some being totally international and some purely local.
A useful tool that can guide the separation of strategic group in an industry is the so called strategic
mapping. This is a two dimensional display that helps to explain the different strategies of the firm.
These two dimensions should not be interdependent because otherwise the map would show an
inherent correlation. Most important, managers must choose those dimensions that are most salient
and relevant to their own particular industry.
Though according to Porter, move from one strategic group to another is very difficult, because
every strategic group creates its own image in the market place, the following points should be kept
in mind:

Strategic groups can shift over time as the needs of the customers or different
technologies evolve in the marketplace. Therefore managers should not assume that

membership in a particular strategic group permanently locks the firm into a fixed
strategy. With sufficient resources and focus, firms can enter or exit strategic groups over
time.
Entire strategic groups and the firms that compose them can emerge and disappear over
time. Thus as the environment changes, the competitive conditions that define a strategic
group may work against the entire collection of the firms, resulting in the groups long
term decline if competitive conditions intensify.
In recent years one of the more enduring trends that have defined a growing number of
industries is the hastening pace of consolidation. Competitors are now seeking to buy or
merge with their rivals to limit the effects of fierce price wars that negatively impact
profitability. Thus consolidation within and among industries can also markedly redefine
the underlying stability and membership of strategic group.

C) Benchmarking:
It is the process of continuously measuring and comparing the business processes against
comparable process of the leading organization to obtain the information that will help the
organization to identify and implement improvement programs. The essence of
benchmarking is to contrast the firms performance against some challenging yardsticks. It is
a multistep process in which the firm doing the benchmarking seeks to learn and incorporate
process refinements, even if the model firm is different from its own. The steps in
benchmarking (compared to industry) are as follows:
Step1: The firm identifies those processes within its own organization that need improvement or
attention,
Step 2: Managers try to locate other firms that are particularly distinctive or excellent in performing
or managing those processes.
Step 3: The benchmarking firm contacts the managers of the model firm to learn from their
experiences, problems and solutions.
Step 4: The bench marking firm tries to duplicate the successful practices or processes that seem to
performance and better quality.
Benefits of Benchmarking:
The benefits of benchmarking are as follows:

It sparks the creativity of internal people.

The firm can be the frontrunner of implementing practices which was never conceived
of in the industry. For example: The BARCODE invented by the American
agricultural food products association.
Targeting the best, so the firm keeps itself ahead of the other competitors.

Types of Bench marking:

There are four types of benchmarking:
1. Historical benchmarking: It refers to evaluating the firms current performance with the
firms past performance. The problem here is that the past performance may not be

impressive. Secondly, There can be an illusion of big performance. Thirdly, It may encourage
more of a bad thing. For example, if rejection rate is high, SQC is put in place and as a result
rejection goes down, But this is not a progress. The question is why should rejection happen
at all? Fourthly, Competitor performance is not considered in this way.
2. Industry Bench marking: It refers to evaluating one own performance with industry data.
The major problem here isgetting stuck in the middle. Second, unequal bases of
comparison, like comparing apple with orange.
3. Functional benchmarking: It refers to finding one activity and finding out the best practice
in that in any strategic group or in any industry and upgrade the process to that.

PART D
ANALYSIS OF EXTERNAL ENVIRONMENT
Analysis of external environment of a firm is necessary while formulating strategy because----i) It affects the business potential of the firm and therefore its profitability.
ii) It influences resource allocation among businesses in a multibusiness firm.
When we consider the external environment of the firm, we get two layers:
i) Operating environment.
ii) Remote environment or macro environment.
We will discuss the model used to analyze those environment one by one:

i) Macro environment:
Macro environment includes all those environmental forces and conditions that have an
impact on every firm and organization within the economy. The main differences between
operating environment and remote environment are ----a) Forces consisting of macro environment affects all the firm directly or indirectly
across the industry.
b) The environmental forces comprising the external macro environment are given A
firm cannot do anything or do very little to influence it.
For analyzing the macro environment we use two models, PEST (Political, Economic, Social,
Technological) and STEEP (Social, Technological, Economic, Ecological, Political)
However without adhering to any particular model, we will describe the general
environments included in macro environment and their effect on strategy decisions.

Economic environment:
The variables included in this environment are GNP,GDP, Distribution of GDP and
GNP, Inflation, Balance of payments(BOP), Size of external debt. Lets discuss them
one by one..
i) GDP and GNP:
GDP includes the market value of the goods and services produced within the
country by domestic and foreign factors of production whereas GNP includes
the value of goods and services newly produced by domestic factors of
production at home and abroad. When a firm is multinational, GDP and GNP
gives the level of wealth in aparticular country and thus the economic vigour
of the country.
ii) Distribution of GDP and GNP:
How GDP and GNP is distributed across various industry and area is also
important because it denotes which industry and which location are important.

iii) Inflation:
Inflation also poses a big problem because it increases the price of factors of
production and thus to survive the firm has to change the price very often.
Inflation also affects the firm in the following way.
Inflation> Rise in bank interest rate.> Rise in prime lending rate.>
Investment slows down for being costly>Slow economic growth rate.
iv) Balance of payments:
BOP also influences the economic environment. Adverse BOP affects in the
following way.
Adverse BOP

Import restriction
Interest rate hike

Cost of foreign
raw material goes
up

Foreign companys cant

remit dividend in
foreign currency

Business loans get less

attractive

v) Size of external debt:

Slow economic
growth
Size of external debt is also very crucial because this affects in the following
way
High external debt..>Import restriction.>Foreign currency gets dearer.

Social environment:
Analyzing the social environment is also very important in formulating
appropriate competitive strategy. The main variables included in this
environment are as follows..

i) Demographics:

Demographics is the statistical variables used to define a population. It

influences the firm by dominating the nature of demand, size of working
population etc.
ii) Social stratification:
Social stratification means how the society is divided in different castes,
tribes, starta etc. This is very important in case of market segmentation and
targeting and desigining the product offering according to that.
iii) Importance of work and result.
iv) Employment as a profession---How people view the work under someone.
v) Trust on people--- How much is the mutual trust among people.
vi) Individualism versus collectivism
vii) Consumer buying processwhether it is simple or complex.
viii) Educational levelIf it high then tendency to white collar jobs increases.
Analyzing social environment is particularly essential because it helps to solve the following
problem
1. Mobility of labour. 2. How much important is material reward. 3. How to meet the social
needs in the firm.

Political and legal environment:

The variables included in this environment which influence the strategic
decision are--i) Number of political parties and their ideologies.
ii) Form of legal system (Common law, civil law and theocratic law)
iii) Laws related to business issues. (Health and safety, employment practice,
environmental practice, laws related to export import, group treaties and international
business forums)

Technological environment:
Status of fundamental research, development research and technology are the
main variables here. It is important to analyze because it depicts the scope of
innovation and infrastructural facilities that a firm can avail.

Ecological environment:
The main variable included here are the---1. Status of natural wealth 2. Flora and fauna 3. Laws relating to utilization and
exploitation of ecological resources. This is very much important because it
determines to which extent and how a firm can use the natural environment of a
country to its own benefits.

ii) Analyzing the operating environmentPorters five forces model:

Operating environment of a firm refers to the industry to which a firm belongs.
According to Michael E. Porter an industry can be defined as The group of firms
producing products that are close substitute to each other. The intensity of
competition in an industry is neither a matter of coincidence or bad luck, rather
competition in an industry is rooted in its underlying economic structure and goes
well beyond the behaviour of the current competitors. According to Porter, the state of
competition in an industry depends on five basic competitive forces (which is
presented in the diagram below). It is imperative to analyze this forces in order to
formulate competitive strategy because the collective strength of those forces
determines the ultimate profit potential in the industry, where profit potential is
measured in terms of long run return on invested capital. Also knowledge of these
underlying sources of competitive pressure highlights the critical strengths and
weaknesses of the company, animates its positioning in its industry, clarifies the areas
where strategic changes may greatest payoffs and highlights the areas where industry
trends promise to hold the greatest significance as either opportunities or threats.
Following is a diagrammatic representations of the basic five forces underlying the
competitiveness of the industry:

POTENTIAL ENTRANTS

Threat of new entrants

INDUSTRY COMPETITORS
SUPPLIERS

BUYERS
Bargaining power of
suppliers

Rivalry among existing firms

Bargaining power of
buyers

Threat of substitute product or

Lets now discuss each of these forces one by one-----services
1. THREAT OF NEW ENTRANTS:
SUBSTITUTES
New entrants to an industry bring new capacity, thy desire to gain market share and
often substantial resources. Prices can be bid down or incumbents costs inflated as a
result, reducing profitability. The threat of entry into an industry depends on A) the
barriers to entry that are present, coupled with B) reaction from existing competitors
that the entrant can expect. These are discussed below:

A. Barriers to entry:
There are major seven sources of barriers to entry which are as follows:

i) Economies of scale:
Economies of scale refer to declines in unit costs of a product (or operation or
function that goes into producing a product) as the absolute volume per period
increases. Economies of scale deter entry by forcing the entrant to come in at
large scale and risk strong reaction from existing firms or come in at a small
scale and accept a cost disadvantage, both undesirable options.

ii) Product differentiation:

Product differentiation means that established firms have identification and
customers loyalties, which stem from past advertising, customer service,
product differences, or simply being first in the industry. Differentiation
creates barrier to entry by forcing entrants to spend heavily to overcome
customer loyalties. This effort usually involves start up losses and often takes
an extended period of time. Such investments in building a brand name are
particularly risky since they have no salvage value if entry fails.
iii) Capital requirements:
The need to invest large financial resources in order to compete creates barrier
to entry, particularly if the capital is required for risky or unrecoverable upfront advertising or research and development.
iv) Switching costs:
A barrier to entry is created by the presence of switching costs, that is, one
time costs facing the buyer who switches over from one suppliers product to
anothers.
v) Access to distribution channel:
A barrier to entry can be created by the new entrants need to secure its
product. To the extent that logisticcal distribution channels for the product
have already been served by established firms, the new firm must persuade the
channels to accept its product through price breaks, cooperative advertising
allowances and the like, which reduce profits.
vi) Cost disadvantages independent of scale:
Established firms may have cost advantages not replicable by potential
entrants no matter what their size and attained economies of scale. The most
critical advantages are the factors such as the following:
a) Proprietary product technology or patent
b) Favourable access to raw materials
c) Favourable locations.
d) Government subsidies
e) Learning or experience curve effect.

B) Expected retaliation ( Contrived deterrence)

The potential entrants expectations about the reaction of existing competitors also
influence the threat of entry. If existing competitors are expected to respond forcefully
to make the entrants stay in the industry an unpleasant one, then the entry may well
be deterred.

2. INTENSITY OF RIVALRY AMONG EXISTING COMPETITORS:

Rivalry occurs because one or more competitors either feels the pressure or
sees the opportunity to improve position. Intense rivalry is the result of a
number of interacting structural forces:
i) Numerous or equally balanced competitors:
When firms are numerous, the likelihood of mavericks is great and some firms
may habitually believe they can make moves without being noticed. Even
when there are relatively few firms, if they are relatively balanced in terms of
size and perceived resources, it creates instability because they may be prone
to fight each other and have the resources for sustained and vigorous
retaliation.
ii) Slow industry growth:
Slow industry growth turns competition into a market share game for firms
seeking expansion. Market share competition is a great deal more volatile than
is the situation in which rapid industry growth insures that firms can improve
results just by keeping up with the industry and where all their financial and
managerial resources may be consumed by expanding with the industry.

iii) High fixed or storage costs:

High fixed costs create strong pressures for all firms to fill capacity which
often lead to rapidly escalating price cutting when excess capacity is present.
iv) Lack of differentiation or switching costs:
Where the product or service is perceived as a commodity or near commodity,
price and service competition result.
v) Capacity augmented in large increments:
Where economies of scale dictate that capacity must be added in large
increments, capacity additions can be chronically disruptive to the industry
supply/ demand balance particularly where there is a risk of bunching capacity
additions.
vi) Diverse competitors:
Competitors diverse in strategies, origins, personalities, and relationships to
their parent companies have differing goals and differing strategies for how to
compete and may continually run head on to each other in the process.
vii) High strategic stakes:

choice by the buyer is largely based on price and service, and pressure for
intenseRivalry in an industry becomes even more volatile if a number of firms
have high stakes in achieving success there.

viii) High exit barriers:

Exit barriers are economic, strategic and emotional factors that keep
companies competing in business even though they may be earning low or
even negative returns on investment. The major sources of exit barriers are
specialized assets, fixed cost of exit, strategic interrelationships, emotional
barriers and government and social reactions.

3. THREAT OF THE BUYERS:

Buyers compete with industry by forcing down the price, bargaining for higher
quality or more services and playing competitors against each other-all at the expense
of industry profitability. A buyer group is powerful if the following circumstances
hold true:
i) It is concentrated or purchases large volumes relative to seller sales:
If a large portion of sales is purchased by a given buyer this raises the importance of
the buyers business in results. Large volume buyers are particularly potent forces if
heavy fixed costs characterize the industry.
ii) The products it purchases from the industry represents a significant fraction of the
buyers cost or purchases:
Here buyers are prone to expend the resources necessary to shop for a favourable
price and purchases selectively. When the product sold by the industry in question is a
small fraction of buyers cost, buyers are usually much less price sensitive.
iii) The product it purchases from the industry are standard or undifferentiated:
Buyers, sure that they can always find alternative supplies, may play one company
against another.
EX: Laptop
iv) It faces few switching costs:
Switching costs lock the buyer to particular sellers. Conversely the buyers power is
enhanced if the seller faces switching costs.
Ex:Assembly lines
v) It earns low profits:
Low profits create great incentive to lower purchasing costs. Highly profitable buyers,
however, are generally less price sensitive and may take a long term view toward
preserving the health of their suppliers.
vi) Buyers pose a credible threat of backward integration:

If buyers either are partially integrated or pose a credible threat of backward

integration, they are in a position to demand bargaining concessions.
vii) The industrys product is unimportant to the quality of the buyers product or services:
When the quality of the buyers product is very much affected by the industrys
product, buyers are less price sensitive. For example: medical equipment.
Ex Less Sensitive: Screw for Laptops assembly

viii) The buyer has full information:

Where the buyer has full information about demand, actual prices, and even supplier
costs, this usually yields the buyer greater bargaining leverage than when information
is poor.

4. THREAT OF THE SUPPLIERS: (Bargaining power of the suppliers)

Suppliers can exert bargaining power over participants in an industry by threatening
to raise prices or reduce the quality of purchased goods and services. Powerful
suppliers can thereby squeeze profitability out of an industry unable to recover cost
increases in its own prices. A supplier group is powerful if the following apply:
i) It is dominated by a few companies and is more concentrated than the industry it sells to:
Suppliers selling to more fragmented buyers will usually be able to exert considerable
influence in prices, quality and terms.
ii) It is not obliged to contend with other substitute products for sale to the industry:
The power of even large, powerful suppliers can be checked if they compete with
substitutes.
iii) The industry is not an important customer of the supplier group:
When suppliers sell to a number of industries and a particular industry does not
represent a significant fractions of sales, suppliers are much more prone to exert
powers. If the industry is an important customer, suppliers fortunes will be tied up to
the industry and they will want to protect it through reasonable pricing and assistance
in activities like R&D and lobbying.
iv) The suppliers product is an important input to the buyers business:
Such an input is important to the success of the buyers manufacturing process or
product quality. This raises the supplier power. This is particularly true when the
input is not storable, thus enabling the buyer to build up stocks of inventory.
v) The supplier groups products are differentiated or it has built up switching costs:
Differentiation or switching costs facing the buyers cut off their options to play one
supplier against another. If the supplier faces the switching costs the effect is the
reverse.
vi) The supplier group poses a credible threat of forward integration:

This provides a check against the industrys ability to improve the terms on which it
purchases.

5. THREAT OF SUBSTITUTES:
It becomes high when---i) Existing products have a lower price performance ratio than the new product.
ii) Number of substitutes are very high
iii) Switching costs for the buyers are very low.
The point to be noted here, that here we have to take into account the indirect
substitutes such as product for product (Fax vs. E-mail), Substitution of needs,
Generic substitutes and doing away with the product itself (Tobacco).

PART E
FORMULATING THE STRATEGIES AND POSITIONING THE FIRM IN THE MARKET
Contents:
A) Three generic strategiesCost leadership, Differentiation, Focus.
Having analysed the operating environment through Porters five forces model, a firm
needs to decide on the strategies it will adopt. For deciding on the strategies a firm needs to consider its
goal. A firms goal is to gain competitive advantage which is measured by positive economic profit, which
is in turn measured by economic value. Now,
Economic value(EV)= B C
Where, B= Perceived utility of a firms product. It is measured by the maximum willingness to pay.
This i.e. maximum willingness to pay is measured by auctioning the new product.
C= Opportunity cost of input resources that are used up to produce and distribute the product.
Now to gain competitive advantage a firm must have
(B-C) > (B` -- C`)
where B` and C` are same as B and C but for competitors. Now as the gap between (B-C) and (B`--C`)
increases, organization has more liberty. Now we can write,
B-C = (B-P)+(P-C)
(B-P) is the consumer surplus and (P-C) is the producers surplus. Given this the firms aim is to give
more to consumer at a lesser cost i.e to maximize the gap between (B-C).
Now having the aim as mentioned above, M.E.Porter suggests three generic strategies--i) Product differentiation strategy.
ii) Cost leadership strategy.
iii) Focus strategy.
Porters proposition is to focus on either B or C., because the first two set of strategies are mutually
exclusive. Cost leadership strategy focuses on C and product differentiation strategy focuses on B.
Now we will discuss these three strategies one by one

1. COST LEADERSHIP STRATEGY:

It aims at achieving lowest economic costs with benefits same as the competitors or bit less.
Result is (B-C) greater than equal to (B`-C`). Lets discuss the sources of cost leadership--A. Sources of cost leadership strategy:
The sources of cost leadership strategy are as follows:

i) Economies of scale in production:

Economies of scale refer to declines in unit costs of a product (or operation or
function that goes into producing a product) as the absolute volume per period
increases. Now if we plot the U shaped average cost curve, we get to see---

AC
AC

Economies of scale

Diseconomies of scale

MES at which average cost is minimum

Production
The volume of production
is called the minimum
efficient scale. The sources of economies of scale are as follows:

Volume of production
Specialized equipment.
Employee specialization
Cost of the plant (The rule states that if a plant increases by double in size, the cost
will increase by 2 where = 0.66 to 0.80
Lower fixed cost.

ii) Learning curve effect:

Learning curve effect states that direct labour cost of production goes down by a
certain percentage each time accumulated volume of production gets doubled. For example: if it takes 10
hours to produce 1st unit and 9 hrs to produce second unit, so learning curve effect is 9/10X100=90%. So for
the fourth unit the time will be 9 X 0.9=8.1 hrs. But getting the time amount for the third unit is not possible
in this way. So it is expressed as mathematical relationship which is depicted by the following diagram--[ The mathematical relationship is given by the equation y=ax- where.
x= no of units produced
a= time taken to produce first unit
y= Average time to produce y unit
= The coefficient related to learning curve.

Direct
labour
cost

y=ax-

Production
Graphical representation of Learning curve effect

The implication is that the existing producer has the accumulated experience in production for which
the cost of production will be lower than a new entrant who does not have any experience.
Example: Following are the data given:
Time to produce first unit= 45 minutes
Time to produce second unit=27 minutes
Estimate the learning curve coefficients and average and total time to produce 6 units.
Solution: Here average time to produce two units (y)= (45+27)/2 minutes= 36 minutes
So in the equation, y=ax
36=45 (2)
Solving we get,

, putting a=45, x=2, y=36, we get

= 0.3219

Now we want to find out the average and total time to produce 6 units, which are as follows:
Average time(y)= 45(6)-0.3219 minutes
Total time={45(6)-0.3219}X 6 minutes.
This learning curve effect was found first in aircraft manufacturing industry during world war II and
applicable in case of direct labour cost. Bruce Henderson, founder of Boston consulting group, this
effect is not only applicable to labour cost but also to all value added costs. Value added costs are
defined as the difference between the total cost of the product and cost of raw materials. He has
given a new name to it, called Experience curve effect.

iii) Access to low cost factors of production:

Achieving a low overall cost position often requires a high relative market share or other
advantages, such as favorable access to raw materials. High market share in turn allow
economies in purchasing which lower costs even further.
iv) Cost advantages independent of scale:
Established firms may have cost advantages not replicable by potential entrants no matter what
their size and attained economies of scale. The most critical advantages are the factors such as
the following:
a) Proprietary product technology or patent
b) Favourable access to raw materials
c) Favourable locations.
d) Government subsidies
e) Learning or experience curve effect.
B. Specific functional strategy under cost leadership generic strategy:
Following are the different strategies under cost leadership---i) Economies of scale:
This implies producing larger volume in automated structure. This helps reducing the
costs thus contributing to the competitive advantage.
ii) Automate parts of manual process:
Automating different parts of a manual process helps reducing costs which helps
make process less expensive. This can also be done by employing high skilled
workers.
iii) Redefine product:
This strategy tells to redefine the product in such a way that cost advantage is far
better than benefit disadvantage. For example: Indian postal service and DHL.
Other initiatives that are required to achieve the cost leadership strategy are--

Construction of efficient scale activities.

Vigorous pursuit of cost reductions from experience.
Tight costs and overhead control.
Avoidance of marginal customer accounts.
Cost minimization in areas like R&D, service, sales force, advertising and so
on.

C. Commonly required skills and resources and common organizational structure to

implement cost leadership strategy:

i) Commonly required skills and Resources:

Substantial capital investment and access to capital.

Process engineering skills.
Intense supervision of labor.
Product designed for ease in manufacture.
Low cost distribution system.

ii) Common organizational requirements:

Tight cost control.

Frequent, detailed control reports.
Structured organization and responsibilities.
Incentives based on meeting strict quantitative targets.

D. Risks of Cost leadership strategy:

Cost leadership imposes severe burdens on the firm to keep up its position, which means
reinvesting in modern equipment, ruthlessly scrapping obsolete assets, avoiding product line
proliferation and being alert for technological improvements. Cost declines with cumulative volume
are by no means automatic, nor are reaping all available economies of scale achievable without
significant attention.
Cost leadership is vulnerable to the same risks as on relying on scale or experience as entry
barriers. Some of the risks are---

Technological change that nullifies past investment or learning.

Low cost learning by industry newcomers or followers. Through imitation or through
their ability to invest in state of the art facilities.
Inability to see required product or marketing change because of the attention placed
on cost.
Inflation in costs that narrow the firms ability to maintain enough of price differential
to offset competitors brand images or other approaches to differentiation.

The classic example of the risks of cost leadership is the Ford motor company of the 1920s. Ford had
achieved unchallenged cost leadership through limitation of models and varieties, aggressive
backward integration, highly automated facilities, and aggressive pursuit of lower costs through
learning. Learning was facilitated by the lack of model changes. Yet as incomes rose and many
buyers had already purchased a car and were considering their second, the market began to place
more of a premium on styling, model changes, comfort and closed rather than open cars. Customers
were willing to pay a price premium to get such features. General Motors stood ready to capitalized
on this development with a full line of models. Ford faced enormous costs of strategic readjustment
given the rigidity created by heavy investments in costs minimization of an obsolete model.

2. PRODUCT DIFFERENTIATION STRATEGY:

This generic strategy implies generating more perceived value of the product (B) than its
competitors at the same costs of the competitor or bit higher, such that (B-C) greater than
equal to (B`- C`). The essence of this strategy is creating something that is perceived industry
wide as being unique.
A. Approaches to differentiation:
A firm can differentiate along several dimensions such as--

Design or brand image (Titan)

Technology (Sony, Philips)
Features (Nokia)
Customer service (Maruti)
Dealer network (Philips, Hero Honda)

B. Specific strategies under product differentiation strategy:

The different specific strategies under product differentiation generic strategy are as
follows:
i) Product features:
Increase of product features implies increase of the perceived value of the
product (B) which in turn involves increase in costs which forces the price to
go up. But the firm has to ensure that increase in the perceived value of the
product is greater than the increase in the cost, thus creating a positive
economic value.
ii) Timing:
Timing of introduction of the new product is also very crucial to gain
competitive advantage. Because the first entrant always has an advantage of
locking in the customers and creating switching costs.
iii) Location:
Competitive advantage is also determined by the location of factories,
warehouses, after sales service points. All these affects the early availability
which helps to gain competitive advantage.
iv) Reputation:
Reputation of company, brand also helps to increase the perceived value of the
product, contributing to the competitive advantage. For example, recent
marketing of VOLTAS air conditioner as a TATA PRODUCT.
v) Cross functional features:
Incorporating cross functional features in the product also contributes towards
the competitive advantage by increasing the perceived value of the product.
Example: Camera and video recording features in mobile phone.
vi) Linkage with other firms:

Here we have to remember that horizontal integration is not same as the

horizontal marketing. Two firms coming together to produce a product, to
market a product etc, contributes to the competitive advantage by enhancing
the perceived value of the product.

C. Commonly required skills and resources and common organizational requirements for
product differentiation strategy:
i) Commonly required skills and resources:
Strong marketing abilities.
Product engineering.
Creative flair.
Strong capabilities in basic research.
Corporate reputation for quality or technological leadership.
Long tradition in the industry or unique combination of skills drawn from
other businesses.
Strong cooperation from channels.
ii) Common organizational requirements:

Strong coordination among functions in R&D, product development and

marketing.
Subjective measurement and incentives instead of quantitative measures.
Amenities to attract highly skilled labor, scientists and creative people.

D. Risks of product differentiation strategy:

Differentiation involves a series of risks such as

The cost differential between low cost competitors and the differentiated firm
becomes too great for differentiation to hold brand loyalty. Buyers thus
sacrifice some of the features, services, or image possessed by the
differentiated firm for large costs savings.
Buyers need for the differentiating factor falls. This can occur as buyers
become more sophisticated.
Imitation narrows perceived differentiation, a common occurrence as
industries mature.

E. Successful implementation of product differentiation strategy:

This will depend on several factors which are depicted below in the diagram.

High quality
service
Timely
distribution of
products through
distribution
channel

Successful
implementation

Annual customer
survey

Economic profit

ROI

Dollar
investment of
A string of new
No of patents
the product in
products
The factors in warehouse
the first box after the circle
in each direction is called the critical success factors and the
following box is the measurement criteria of that critical success factors. Now all these factors are given
weight to be measured.

3. FOCUS STRATEGY:
This strategy postulates selecting or focusing on a particular market, buyer group,
segment of the product line, geographical market etc, then reconfigure the value chain to satisfy the needs of
the customers. This is practiced by organizations with limited resources or with a very risky product.
Although the low cost and differentiation strategies are aimed at achieving their objectives industrywide, the
entire focus strategy is built around serving a particular target very well and each functional policy is
developed with this in mind. The strategy rests on the premise that the firm is thus able to serve its narrow
strategic target more efficiently and effectively than competitors who are competing more broadly. As a
result, the firm achieves either differentiation from better meeting the needs of the particular target or lower
costs in serving the target or both. Even though the focus strategy doesnot achieve low cost or differentiation
from the perspective of the market as a whole, it does achieve one or both of these positions vis--vis its
narrow market target. Here to achieve competitive advantage the firm has to do two things

i) Create economic value:

(Discussed earlier)
ii) Capture economic value:
This concept is related with price elasticity of demand. Depending upon that, two
strategies are adopted
a) Margin strategy:
This strategy tells to increase the profitability by concentrating on the increase
of unit product margin.
b) Share strategy:
This strategy concentrates on increasing the market share resulting in the sales volume as well as
profit.

Now we shall compare this strategy with cost leadership and product differentiation strategy..

Price Elasticity of demand

Ep>1

Ep< 1

Cost Leadership
Small fall in price=>Large
increase in sales => Share strategy
i.e. decrease price marginally than
competitors and exploit benefit
from increasing market share.

Differentiation
Small increase in price=>Large
fall in sales=> Share strategy i.e.
maintain price parity with the
competitors and exploit benefit of
higher market share by giving
more perceived value.
Big fall in price=>Little increase Margin strategy: Provide more
in sales=> Margin strategy i.e. benefit at higher price.
maintain price parity and lower
cost drives the higher profit
margin.

4. Selection of cost leadership and differentiation strategy:

i) Cost leadership strategy is ideal for commodity market where consumers are price sensitive.
When it is a search product, then also cost leadership strategy is adopted.
ii) Product differentiation strategy is adopted in case of experience product, non commodity and
non-price sensitive product.

5. How to implement the generic strategies:

There are four levers to implement this strategy. They are as following:
i) Management communication and information system. (MCIS)
ii) Management control system. (MCS)
iii) Organisation structure (OS)
iv) Executive compensation system (ECS)
Now lets take a look at the comparison of these levers under two generic strategies:
Levers

ORGANISATION
STRUCTURE
(OS)

MANAGEMENT
CONTROL SYSTEMS
(MCS)
EXECUTIVE
COMPENSATION

Cost leadership strategy

1. Few layers in organization
structure.
2.Simple, U type reporting
relationships.
3. Small corporate staff
4. Focus on narrow range of
business.

Product differentiation strategy

1.
Cross
divisional/cross
functional product development
team.
2. Semi permanent organization
structure to exploit new business
opportunities.
3. Isolated pockets of intensive
creative efforts.
1. Tight cost control.
1. Broad decision making guide
2. Quantitative cost goal.
lines.
3. Close supervision of raw 2. Managerial freedom within
materials, labour, inventory and guidelines.
overhead.
3. Policy of experimentation.
4. A cost leadership philosophy.
1. Reward for cost reduction.
1. Reward for taking risk.
2. Incentive for all employees 2. Reward for creative flair.
involved in cost reduction.
3. Multidimensional performance

SYSTEM (ECS)
MANAGEMENT
COMMUNICATION
AND INFORMATION
SYSTEM. (MCIS)

measurement system.
1. Strategic plan (Vision, Mission etc.)
2. Budget
3. Company newsletter.
4. Theme of the year.

PART F
FUNCTIONAL STRATEGIES
Contents:
1. Economies of scope
2. Strategic gap analysis and Growth strategies (Ansoff growth strategies)
3. Different growth form- strategic alliance, joint venture,Diversification, Merger and acquisition.
1. ECONOMIES OF SCOPE:
Economies of scope implies When more than one item is produced at a plant, it is cheaper than
producing the items separately in different plants S, if we produce X and Y, an the cost function
of X and Y are Q(X) and Q(Y) and if the cost function for producing the items jointly in one plant
is Q(X,Y) then..
Q(X,Y)<Q(X,0) + Q(0,Y)
Economies of scope can be observed in other functions other than production such as purchase,
distribution etc. But for economies of scope, the products X and Y has to be related, preferably to
the core competency of the organization.
2. STRATEGIC GAP ANALYSIS AND ANSOFF GROWTH STRATEGIES:
So far we have discussed the generic strategies and what are the sources of the. Basically generic
strategies set a broad guiding principles as to how would the firm operate in the market place. But
to tackle competitors under different market conditions requires different set of strategies which
helps the firm to grow in the market. These are called growth strategies. In deciding upon the
growth strategies two steps are involved: i) Strategic gap analysis ii) Deciding on the particular
growth strategies. We will discuss tham one by one:
i) Strategic gap analysis:
Gap analysis is basically done to measure the gap between the current situation and future expected
situation. It reveals the gap that has to be fulfilled in futures on different fonts.
Gap analysis is a very useful tool for helping marketing managers to decide upon marketing
strategies and tactics. Again, the simple tools are the most effective. There's a straightforward
structure to follow. The first step is to decide upon how you are going to judge the gap over
time. For example, by market share, by profit, by sales and so on.
This will help you to write SMART objectives. Then you simply ask two questions - where are we
now? and where do we want to be? The difference between the two is the GAP - this is how you
are going to get there. Take a look at the diagram below. The lower line is where you'll be if you
do nothing. The upper line is where you want to be.

What is Gap Analysis?

Your next step is to close the gap. Firstly decide whether you view from a strategic or an
operational/tactical perspective. If you are writing strategy, you will go on to write tactics - see the
lesson on marketing plans. The diagram below uses Ansoff's matrix to bridge the gap using
strategies:

Strategic Gap Analysis.

ii) Deciding on particular growth strategies---Ansoff Groqth Matrix:

The Product/Market Grid of Ansoff is a model that has proven to be very useful in business unit strategy processes to determine
business growth opportunities. The Product/Market Grid has two dimensions: products and markets.
Over these 2 dimensions, four growth strategies can be formed.

(Please refer to next page)

FOUR GROWTH STRATEGIES IN THE PRODUCT/MARKET GRID

1.
Market Penetration. Sell more of the same products or services in current markets. These
strategies normally try to change incidental clients to regular clients, and regular client into heavy
clients. Typical systems are volume discounts, bonus cards and Customer Relationship

Management. Strategy is often to achieve economies of scale through more efficient manufacturing,
more efficient distribution, more purchasing power, overhead sharing. Main target is ..i) Increase
the amount and frequency of use.
2.
Market Development. Sell more of the same products or services in new markets. These
strategies often try to lure clients away from competitors or introduce existing products in foreign
markets or introduce new brand names in a market. New markets can be geographic or functional,
such as when we sell the same product for another purpose. Small modifications may be necessary.
Beware of cultural differences. The main target is..i) Convert the non-users to users and ii)
Expand geographically.
3.
Product Development. Sell new products or services in current markets. These strategies
often try to sell other products to (regular) clients. These can be accessories, add-ons, or completely
new products. Cross-selling. Often, existing communication channels are used.
4.
Diversification. Sell new products or services in new markets. These strategies are the most
risky type of strategies. Often there is a credibility focus in the communication to explain why the
company enters new markets with new products. On the other hand diversification strategies also
can decrease risk, because a large corporation can spread certain risks if it operates on more than
one market. Diversification can be done in four ways:
o
Horizontal diversification. This occurs when the company acquires or develops new
products that could appeal to its current customer groups even though those new products
may be technologically unrelated to the existing product lines.
o
Vertical diversification. The company moves into the business of its suppliers or into
the business of its customers.
o
Concentric diversification. This results in new product lines or services that have
technological and/or marketing synergies with existing product lines, even though the
products may appeal to a new customer group.
o
Conglomerate diversification. This occurs when there is neither technological nor
marketing synergy and this requires reaching new customer groups. Sometimes used by
large companies seeking ways to balance a cyclical portfolio with a non-cyclical one.
Now while adopting these strategies a firm can decide to perform in all the segments of the value
chain or decide to outsource some of them depending on the margin being contributed by the activity.Here
comes the question of transactions. Whether the firm will depend on internal transactions or external market
transactions to accomplish the growth objective Here comes the question of vertical integration, strategic
alliance, tapered integration, Franchisee, Joint venture. We will discuss them one by one.
A) VERTICAL INTEGRATION:
Vertical integration gives the stages at which the firm operates in the value chain. According to Porter
vertical integration is the combination of technologically distinct production, distribution, selling and/or
other economic processes within the confines of a single firm. As such it represents a decision by the firm
to utilize internal or administrative transactions rather than market transactions to accomplish its economic
purpose. For example, a firm with its own sales force instead could have contracted, through the market, an
independent selling organization to supply the selling services it requires.
When a firm owns and controls the customers subject to the moves closer to the end users of
product/service, it is said to be forwardly vertically integrated. In other words when the firms owns and
controls the downstream activities in a value chain i.e. outbound logistics, marketing/sales and service it is
said to be forward vertical integration.

When a firm owns and controls the input resources subject to it moves closer to the raw materials resources
the firm is said to move closer to the backward vertical integration. In other words when the firms owns and
controls the upstream activities of its value chain i.e the inbound logistics and raw material resources it is
said the backward vertical interagration.
Now, we will discuss the when and why of vertical integration:

When to go in for vertical integration:

The firm should go in for vertical integration when the following situations are there..

i) When there are low no of suppliers and distributors.

ii) When the value of an investment in a transaction is much higher than its value in
alternate channel.
iii) Uncertainty and complexity of contract.

Benefits of (sources of competitive advantage) vertical integration:

The benefits of vertical integration depend, first of all, on the volume of products or services
the firm purchases from or sells to the adjacent stage relative to the size of efficient production
facility in that stage. Following are the benefits of vertical integration:
A) Economies of integration:
If the volume of the throughput is sufficient to reap available economies of scale, the most
commonly cited benefit of vertical integration is the achievement of the economies, or cost
savings, in joint production, sales, purchasing, control and other areas. Following economies
can be achieved:

i) Economies of combined operation:

By putting technologically distinct operations together, the firm can sometimes gain
efficiencies. In manufacturing, this move, for example, can reduce the number of
steps in the production process, reduce handling costs, and utilize the slack capacity
which arises from indivisibilities in one stage.
ii) Economies of Internal control and coordination:
The costs of scheduling, coordinating operations and responding to emergencies may
be lower if the firm is integrated. Adjacent location of the integrated units facilitates
coordination and control.
iii) Economies of information:
Integrated operations may reduce the need for collecting some types of information
about the market, or more likely, may reduce the overall costs of gaining information.
The fixed costs of monitoring the market and predicting supply, demand and prices
can be spread over all parts of the integrated firm, whereas they would have to be
borne by each entity in an uninegrated firm.

iv) Economies of avoiding the market:

By integrating, the firm can potentially save on some of the selling, price shopping,
negotiating, and transactions costs of the market transactions.
v) Economies of stable relationships:
Both upstream and downstream stages, knowing that their purchasing and selling
relationship is stable, may be able to develop more efficient, specialized procedures
for dealing with each other that would not be feasible with an independent supplier or
customer---where both the buyer and the seller in the transaction face the competitive
risk of being dropped or squeezed by the other party.
B) Tap into technology:
Another important benefit of vertical integration is a tap into technology. In some
circumstances it can provide close familiarity with technology in upstream and
downstream businesses that is crucial to the succees of the base business, a form of
economy of information so important as to deserve separate treatment.
C) Assured supply and demand:
Vertical integration assures the firm that it will receive available supplies in tight
periods or that or that it will have an outlet for its products in periods of low overall
demand to the extent that the downstream unit can absorb the output of the upstream
unit.
D) Enhanced ability to differentiate:
Vertical integration can improve the ability of the firm to differentiate itself from
others by offering a wider slice of value added under the control of the management.
This aspect, for example,allow better control of channels of distribution in order to
offer superior service or provide opportunities for differentiation through in house
manufacture of proprietary components.
E) Offset bargaining power and input cost distortion:
If a firm dealing with suppliers or customers who wield significant bargaining power
and reap returns on investment in excess of the opportunity cost of capital, it pays for
the firm to integrate even if there are no other savings from integration. Offsetting
bargaining power through integration may not only lower costs of supply (by
backward integration) or raise price realization (by forward integration) but also allow
the firm to operate more efficiently by eliminating otherwise valueless practices used
to cope with the powerful suppliers or customers.
F) Elevate entry or mobility barriers:
If vertical integration achieve any of these benefits, it can raise mobility barriers. The
benefits give the integrated firm, in the form of higher prices, lower costs or lower
risks.
G) Enter a higher return business:

A firm may sometimes increase its overall return on investment by vertically

integrating. If the stages of production into which integration is being contemplated
has a structure that offers a return on investment greater than the opportunity cost of
capital for th firm, then it is possible to integrate even if there is no economies of
integration per se.
H) Defend against foreclosure:
Even if there are no positive benefits of integration, it may be necessary to defend
against foreclosure of access to suppliers or customers if competitors are integrated.

Costs or disadvantages of vertical integration:

The strategic costs of vertical integration basically involve entry cost,flexibility,
balance, ability to manage the integrated firm, and the use of internal organizational
versus market incentives.

A) Cost of overcoming mobility barriers:

Vertical integration obviously requires the firm to overcome the mobility barriers to
compete in the upstream or downstream business. Integration is after all a special case
(though a common one) of the general strategic option of entry into a new business.
B) Increased operating leverage:
Vertical integration increases the proportion of a firms costs that are fixed. If the
market, for example, all the costs of that input on the spot market, for example, all
the costs of that input would be variable.
C) Elevate and entry and mobility barriers:
Vertical integration implies that the fortunes of a business unit are at least partly tied
to the ability of its in-house supplier or customer (who might be its distribution
channel) to compete successfully. Vertical integration raises costs of changeover to
another supplier or customer relative to contracting with independent entities.
D) Higher overall exit barriers:
Integration that further increases the specialization of assets, strategic
interrelationships, or emotional ties to a business may raise overall exit barriers.
E) Capital investment requirements:
Vertical integration consumes capital resources, which have an opportunity cost
within the firm, whereas dealing with an independent entity uses investment capital or
outsiders. Vertical integration must yield a return higher than the to the firms
opportunity cost of capital.

F) Foreclosure of access to suppliers or consumer research and/or know how:

By integrating the firm may cut itself off from the flow of technology from its
suppliers and customers. Integration usually means that a company must accept

responsibility for developing its own technological capability rather than

piggybacking on others.
G) Maintaining balance:
The productive capacities of the upstream and downstream units in the firm must be
held in balance or potential problem arise. The stage of the vertical chain with excess
capacity (or excess demand) must sell some of its output(or purchase some of its
inputs) on the open market or sacrifice the market position.
H) Dulled incentives:
Vertical integration means that buying and selling will occur through a captive
relationship. The incentives for the upstream business to perform may be dulled
because it sells in-house instead of competing for the business.
I) Differing managerial requirements:
Business can be different in structure, technology, and management despite having a
vertical relationship. Since vertically linked business transact business with each
other, however, there is a subtle tendency to view them as similar business from a
managerial point of view.

Particular benefits in forward vertical integration:

i) Improve ability to differentiate the product:
Forward integration can often allow the firm to differentiate its product more
successfully because the firm can control more elements of the production
process or the way the product is sold. For example: forward integration in
retailing sometimes allow the firm to control the salespersons and other
elements of the retailing selling function that help to differentiate the product.

ii) Access to distribution channels:

Forward integration solves the problem of access to distribution channels and
removes any bargaining power the channels have.
iii) Better access to market information:
In a vertical chain the underlying demand for the product (and the decision
maker who actually makes the choices among competing brands) often are
located in a forward stage. This stage determines both the size and the
composition of demand of the upstream stages of production. This is called the
demand leading stage. Forward integration into demand leading stage can
provide the firm with critical market information, which allows the entire
vertical chain to function more effectively.
iv) Higher price realization:

In some cases forward integration can allow the firm to realize the higher
overall prices by making it possible to set different prices for different
customers for essentially the same product. If the firm integrates into
businesses that should be charged with lower price because its demand is more
elastic, it may realize higher prices on sales to other customers. However other
firms selling the product must also be integrated or the firms product must be
differentiated so that customers will not accept competitors products as
perfect substitutes.

Particular benefits with backward vertical integration:

As with forward integration, there are some particular issues that must be
examined in considering backward vertical integration:
i) Proprietary knowledge:
By producing needs internally, the firm can avoid sharing proprietary data
with its suppliers, who need it to manufacture component parts or raw
materials. Often the exact specifications for component parts reveal the key
characteristics of the final products design or manufacture to the supplier.
ii) Differentiation:
Backward integration can allow the firm to enhance differentiation, though the
circumstances are somewhat different than those of forward integration. BY
gaining control over the production of key inputs, the firm actually may be
able to differentiate its product better or say credibly that it can.

Tapered integration:
Tapered integration is partial integration backward forward, the firm
purchasing the rest of its needs on the open market. It requires that the firm be
able more than support an efficiently sized in-house operation and still have
additional requirements which are met through the market place.

* Benefits of Tapered integration:

1. It allows a firm to increase its sales without substantial financial outlay.
2. It can use the internal cost data for negotiation with independent suppliers
and customers. Similarly, it can use the market data to increase the efficiency
of the inhouse production facility.
3. It helps the firm to protect itself against the holdup problem created by the
external suppliers.
4. Tapered integration results in less elevation in fixed costs than full
integration.
5. The degree of taper can be adjusted to reflect the degree of risk in the
market. Independent suppliers can be utilized to bear the risk of the
fluctuations, while in house suppliers maintain steady production rates.
* Disadvantages of tapered integration:

1. Due to shared production it may happen both the external production facility and
outside supplier may fail to achieve economies of production.
2. Shared production may create problem of co ordination between internal supply
and external supply in terms of product specification and delivery.
3. By mistake the firm may use the cost data of an inefficient internal production
system for negotiation with external suppliers.
4. It may happen that managers may like to retain an inefficient internal production
system due to emotional bondage.

B) STRATEGIC ALLIANCE:
It takes place when two or more firms agree to collaborate a project, share information or
share production resources. Strategic alliance may be horizontal and vertical. When the
two firms operate in the same stage of the value chain or belong to the same industry, we
get horizontal strategic alliance. When two firms belong to the different stages of value
chain we get vertical strategic alliance.

Types of strategic alliance:

Strategic alliances fall into four categories:
i) Product or service alliances:
One company licenses another to produce its product, or two companies jointly
market their complementary products or a new product.
ii) Promotional alliances:
One company agrees to carry a promotion for another companys product or service.
iii) Logistics alliance:
One company offers logistical services for another companys product.
iv) Pricing alliances:
One or more companies join in a special pricing collaboration. It is common for hotel
and rental car companies to offer mutual price discounts.

When strategic alliance is good:

1. To avoid barriers to entry. Some government insists that a foreign company can do
business in that country provided it takes a local national company as partner.
2. To reduce risk when the transaction involves transaction specific investment in
order to avoid cheating by one party. It is required that both the parties are involved in
that transaction specific investment.
3. To undertake a project that is too big for either party either due to indivisibility of
upfront cost or due to presence of experience curve effects.

Conditions for successful strategic alliance:

1. Goal compatibility: Both parties must have the same goal.

2. Synergy: There must be a case that this transaction will create more positive
economic value.
3. Value adding: Both must bring some value to the alliance and both must agree on a
fair appropriation of value.
4. Balancing contribution: It is required that one party doesnt dominate the other to
have the alliance long live.
C) JOINT VENTURE:
When two or firms joins hand to form a third independent company, its a joint venture. The new
company is not under the corporate governance of any of the parent company. For example, in
India, AVIVA life insurance is a joint venture between Dabur India and Aviva group of U.K.
D) FRANCHISING:
Franchising is a contract between a franchiser and franchisee. Franchiser develops a brand, owns
it and has developed a system to make or sell a good or service. A franchisee is a party which
gives the right to use the brand name and the system developed by the franchiser for a fee. Its
basically a quasi vertical integration.
E) DIVERSIFICATION:
When a firm operates in multiple businesses we call it the firm has diversified. Technically
speaking, No single businesss revenue is more than 70% of the groups revenue and all the
businesses are under the same corporate governance.

Reasons for diversification:

The reasons for a company to diversify are as follows:

i) Operational efficiency of scope:

Opeartional efficiency of scope is generated through diversification in the following
way..
* Shared activities and cost reduction
* Shared activities and revenue enhancement
* Core competency.
The collective learning in an organization about how to co ordinate diverse production skill
and integrate multiple things or technologies. It is basically intangible in nature and refers to
managerial and technical know-how, experience and wisdom.
Example: a) Birla 3M company: It has developed core competencies in substrates, adhesive
coatings production and now produces Post and notes, magnetic tapes, photographic film,
press sensitive notes and coated adhesives all of which relate to the core competencies thus
enjoying the economies of scope.
b) Honda motor company: It has developed core competency in the production of engine and
power transmission chain which now it leverages in producing motor cycle, automobiles,
power tillers, lawn mowers.

ii) Financial economies of scope:

This is realized through..
* Internal market for capital.
* Risk reduction
* Tax advantage
When a diversified firm has got individual businesses whose cash flows are perfectly
and negatively corerelated, the standard deviation of cash flows for the diversifies
firm will always be the lower than the sum of S.Ds of cash flows of individual
businesses. Also the debt capacity of the firm goes up because revenue goes up. Also
under tax law the profit from some business can be set off against losses other
businesses within the same group. As a result the overall tax liability goes down.
iii) Anti-competitive economies scope:
This is realized through two ways:
First. Suppose there are two companies, A and B, which operate in more than two
businesses, business 1 and business2, but B is stronger in business1 and A is stronger
in business2. Now if B wants to create a price war with A in business1, than A can
retaliate by creating price war in business 2. So sometimes companies acquire firm or
form a tacit collusion with competitor to prevent this kind of price war.
Second, Expanding market power. Sometimes a near monopolist firm acquire a firm
in a loosing business based on the profit it earns in the existing business, I initiates
predatory pricing in the newly acquired business to drive out competitor to create a
monopolistic situation after sometime to reap profit in future.
iv) Employees and stakeholders incentives for diversification:
It realizes this through the following ways:
* Diversify human capital.
* Maximizing managerial compensation.
* Diversifying the stake of non employees stakeholders.
[ N.B: Related diversification: It helps to create more economic value as compared to that in case of
unrelated diversification]

Conditions for diversification:

1. Structural attractiveness of the market i.e. some industries are inherently more profitable
than others. Thus diversification, if any, should be only attractive industries.
2. Cost of entry: If cost of entry is higher than the scope for generation of positive
economic value, do not venture into it. The best method is to identify an undervalued firm
and try to acquire it. But in today age, when information is very difficult to identify an
undervalued organization without others noticing it.
3. Structural linkage between new and existing firm i.e. linked in terms of any part of the
value chain.

Management of diversified company:

A diversified firm is characterized by varied products, markets, geographical areas,
technology etc. Thus it is very difficult to get people competent to handle all such
organization. The organizational structure of a typical diversified company consists of
three layers as follows:

Corporate Headquarter

Division 1

Division 3

Division 2

SBU 1
SBU 1

SBU 2

SBU 2

SBU 2

SBU3

SBU 1
SBU2
First level is the corporate headquarters which plans at strategic level.
Second level consists of the divisions which handles the related businesses.
Third level consists of Strategic business units (SBUs).

SBU 3

When the businesses are thinly related, the corporate office is small, then divisions vanishes and the
SBUs comes directly under corporate supervision.
When the businesses are related i.e. there is a chance of deriving economies of scope due to presence of
certain common activities in the value chain, a division has to be put up to co ordinate activities of
related SBUs.
Activities of corporate head quarters: (Mainly strategic)
i) Monitor the performance of divisions/SBU.
ii) Allocation of financial resources.
iii) Allocation of human talent.
iv) Makes further investment/divestment decisions.
Activities of the division: (Strategic + Tactical)
i) Co ordination of manufacturing, marketing and production development activities.
Activities of SBUs:
Before discussing the function of SBUs lets understand the concept of SBU.

Concept of SBU:
It has got the following features:

a) It must serve an external market. It should not be for internal purpose.

b) It must have a set of external set of competitors which it is trying to compete with
or surpass.
c) The SBU manager must be the boss of the destiny of the SBU. Complete freedom
regarding choice of suppliers and choice of time and position of the market.
d) The performance of an SBU can be measured in terms of its financial status i.e. it
should be a true profit and loss centre.
F) CONGLOMERATE:
Group of unrelated business is called conglomerate. The above definition of SBU is only
applicable to a conglomerate. But if the SBUs are related a cost linkage approach has to be
taken for defining SBUs. Identify the companies sharing the resources and club them together
under a division or as SBUs.
G) MERGER AND ACQUISITION:
Motives for and forms of merger: same as diversification. This a means of acquiring business. The word
merger is replaced by amalgamation in Indian context. The companies merging together is called
amalgamating companies and the new company is called the amalgamated company. This is divided nto
two groups:
i) Absorption: The company being absorbed looses its legal entity and its assets gets transferred to
to absorbing company.
ii) Consolidation: When two or more companies merge together where only one company retains
its legal identity and others loose their identity it is called consolidation.
Example: Hindustan computer Ltd, Hindustan investment Ltd, Hindustan software company ltd
and Hindustan retrographics ltd merge together to form Hindustan computer ltd (HCL).
In consolidation shareholders holding not less than 90% share value of the amalgamating
company must become shareholders of the newly amalgamated company.
Types of merger: There are three types of merger:
a) Horizontal merger: Amalgamating companies compete with each other.
b) Vertical merger: Amalgamating companies operate at the different stages of
production and distribution of a product or service.
c) Conglomerate merger: Amalgamating companies operate in unrelated products.
Legalities of Merger: In amalgamation, the management of amalgamating companies operate together. In
acquisition it involves management control of one company by another company. After acquisition both the
company retains their legal entity. According to Sec.372 of companies act of India,1956,i) acquiring
company must hold not less than 10% of the paid-up equity shares of the acquired company. Ii) This
acquisition must be approved in the AGM of the acquiring company.
When an acquisition is hostile in nature, it is called takeover.

Financial aspects of merger: When an amalgamation takes place, the acquiring company pays cash or
shares of acquiring company to the members of the acquired company. This is called purchase
consideration. The financial logic of merger to be successful is that, if A acquires B, NPV(A+B)> NPV(A)+
NPV(B). In accounting concept,
Economic advantage (EA)= NPV(A+B) [NPV(A) + NPV (B)]
Cost of margin= (Cash to be paid)- NPV(B)
Net economic advantage= EA- cost of margin.
However while calculating the value of NPV(A+B), we follow three methods--i) Supra normal growth ii) Above normal growth iii) Normal growth.
In this way, the whole planning horizon, i.e. the economic life merger is divided into three levels.
Value of each firm is calculated separately by market capitalisaion.
Problem: Let P acquires Q. Following information is available is available:
i) P has 12 lakh shares @ Rs.50 each
ii) Q has 5 lakh shares @ Rs.60 each
iii) NPV(P+Q)=25 core
iv) Cash to be paid to Q = 4.5 core.
Find out Economic advantage, net economic advantage, cost of margin.
Solution: Economic advantage= NPV(P+Q) [ NPV(P)+ NPV(Q)]
= 25,00,00,000 [ (150X12,00,000)+(60X5,00,000)]
= 25,00,00,000-21,00,00,000 = 4,00,00,000
Cost of margin = {Cash to be paid to Q NPV(Q)}
= (4,50,00,000-3,00,00,000)
= Rs. 1,50,00,000
Net economic advantage= Economic advantage cost of margin
= 4,00,00,0000 1,50,00,000
= Rs. 2,50,00,000
Now if shares had been paid instead of cash, then no.of shares to be issued= 4,50,00,000/150
= 3,00,000
Total no of shareholders of the new company= 12,00,000+3,00,000=15,00,000
Share value of the new company= {NPV(P+Q)/ 15,00,000}= Rs.166.67.

PART F
PORTFOLIO MANAGEMENT MODELS
Contents:
1. BCG matrix
2. GE-Mackinsey matrix
3. ADL matrix.
Portfolio management models are used, in case of a diversified company, to judge the
performance of the different businesses or SBUs and to allocate resources among different SBUs and to
decide on strategy to be adopted on them. Different models are used for this purpose using different criteria
and dimensions. The main ones are : BCG matrix, GE-Mackinsey matrix and Arthur D Little matrix(ADL).
All these models were developed during the chairman ship of Fred Borch of G.E. At that point of time, G.E
had 60 unrelated businesses and was facing tremendous pressure from the Japanese and European firms. The
models were developed by BCG, Mckinsey and Arthur D.Little separately for the reconstruction of G.E.
All these models are known as strategic fit models. According to this concept, the source of
competitive advantage lies in the external environment and the firms ability to adapt itself to the
environment. Thus for formulation of strategy the external environment is more important than the resource
base. Thus these two dimensional models are easy to visualize and understand. One dimensions of these
models shows the structural attractiveness of the industry while the other dimension refers to the relative
competitive position of the firm within the industry. These models can be applied not only at the business
level but also at the product market level within the business. The common features of these models are that
all of them provide certain prescriptions about managing the strategic business units. These three generic
decisions are invest, withdraw/divest, hold.

Assumptions underlying the models:

1. the market has been defined properly to account for the important shared
experience and other interdependences with other markets. This is often a subtle problem requiring a great
deal of analysis.
2. The structure of the industry and within the industry are such that relative market
share is a good proxy for competitive position and relative costs. This is often not true.
3. Market growth is a good proxy for required cash investment. Yet profits(and cash
flows) depend on a lot of other things.

BCG Growth Share Matrix The BCG growth share matrix was developed by Henderson of the BCG
group in 1970s. The matrix classifies businesses / SBUs by
1) Relative Market Share The market share of the business / SBU / Product in the market as compared
to its competitors and overall product / category.
2) Market growth rate The growth rate of the industry as a whole is taken into consideration from which
the growth rate of the product is extrapolated. This growth rate is then pitched on the graph.
Thus by having 2 basic but at the same time very important factors on X axis and Y axis, the BCG matrix
makes sure that the classifications are concrete. Calculating the Market growth rate comprises of both
industry growth and product growth rate thereby giving a fair knowledge of where the product / SBU stands
in comparison to the Industry. The market share on the other hand comprises of the competition and the
product potential in the market. Thus when we consider growth rate and market share together, it

automatically gives us an overview of the competition and the industry standards as well as an idea of what
the future might bring for the product.
Once the businesses have been classified, they are placed into four different quadrants of the matrix. The
quadrants of the matrix are divided into
1) Cash Cows High market share but low growth rate (most profitable).
2) Stars High market share and High growth rate (high competition)
3) Question marks Low market share and high growth rate (uncertainty)
4) Dogs Low market share and low growth rate (less profitable or may even be negative profitability)
On the basis of this classification, strategies are decided for each SBU / Product. Lets discuss the
characteristics and strategies of each quadrant in detail.
1) Cash Cows The cornerstone of any multi product business, cash cows are products which are having a
high market share in a low growing market. As the market is not growing, that cash cow gains the maximum
advantage by generating maximum revenue due to its high market share. Thus for any company, the cash
cows are the ones which require least investment but at the same time give higher returns. These higher
returns enhance the overall profitability of the firm because this excess revenue can be used in other
businesses which are Stars, Dogs or Question marks.
Strategies for cash cow The cash cows are the most stable for any business and hence the strategy
generally includes retention of the market share. As the market is not growing, acquisition is less and
retention is high. Thus customer satisfaction programs, loyalty programs and other such promotional
methods form the core of the marketing plan for a cash cow product / SBU.
2) Stars The best product which comes in mind when thinking of Stars is the telecom products. If you
look at any top 5 telecom company, the market share is good but the growth rate too is good. Thus because
these two factors are high, the telecom companies are always in competitive mode and they have to juggle
between investment and harvesting vis investing money and taking out money time to time. Unlike cash
cows, Stars cannot be complacent when they are top on because they can immediately be overtaken by
another company which capitalizes on the market growth rate. However, if the strategies are successful, a
Star can become a cash cow in the long run.
Strategies for Stars All types of marketing, sales promotion and advertising strategies are used for Stars.
This is because in cash cow, already these strategies have been used and they have resulted in the formation
of a cash cow. Similarly in Stars, because of the high competition and rising market share, the concentration
and investment needs to be high in marketing activities so as to increase and retain market share.
3) Question Marks Several times, a company might come up with an innovative product which
immediately gains good growth rate. However the market share of such a product is unknown. The product
might lose customer interest and might not be bought anymore in which case it will not gain market share,
the growth rate will go down and it will ultimately become a Dog. On the other hand, the product might
increase customer interest and more and more people might buy the product thus making the product a high
market share product. From here the product can move on to be a Cash Cow as it has lower competition and
high market share. Thus Question marks are products which may give high returns but at the same time may
also flop and may have to be taken out of the market. This uncertainty gives the quadrant the name
Question Mark. The major problem associated with having Question marks is the amount of investment
which it might need and whether the investment will give returns in the end or whether it will be completely
wasted.

Strategies for Question marks As they are new entry products with high growth rate, the growth rate needs
to be capitalized in such a manner that question marks turn into high market share products. New Customer
acquisition strategies are the best strategies for converting Question marks to Stars or Cash cows.
Furthermore, time to time market research also helps in determining consumer psychology for the product as
well as the possible future of the product and a hard decision might have to be taken if the product goes into
negative profitability.
4) Dogs Products are classified as dogs when they have low market share and low growth rate. Thus these
products neither generate high amount of cash nor require higher investments. However, they are considered
as negative profitability products mainly because the money already invested in the product can be used
somewhere else. Thus over here businesses have to take a decision whether they should divest these
products or they can revamp them and thereby make them saleable again which will subsequently increase
the market share of the product.
Strategies for Dogs Depending on the amount of cash which is already invested in this quadrant, the
company can either divest the product altogether or it can revamp the product through rebranding /
innovation / adding features etc. However, moving a dog towards a star or a cash cow is very difficult. It can
be moved only to the question mark region where again the future of the product is unknown. Thus in cases
of Dog products, divestment strategy is used.
Sequences in BCG Matrix

Success Sequence in BCG Matrix The Success sequence of BCG matrix happens when a question mark
becomes a Star and finally it becomes a cash cow. This is the best sequence which really give a boost to the
companies profits and growth. The success sequence unlike the disaster sequence is entirely dependent on
the right decision making.
Disaster sequence in BCG Matrix Disaster sequence of BCG matrix happens when a product which is a
cash cow, due to competitive pressure might be moved to a star. It fails out from the competition and it is
moved to a question mark and finally it may have to be divested because of its low market share and low
growth rate. Thus the disaster sequence might happen because of wrong decision making. This sequence
affects the company as a lot of investments are lost to the divested product. Along with this the money
coming in from the cash cow which is used for other products too is lost.

Strategies based on the BCG Matrix.

There are four strategies possible for any product / SBU and these are the strategies which are used after the
BCG analysis. These strategies are
1) Build By increasing investment, the product is given an impetus such that the product increases its
market share. Example Pushing a Question mark into a Star and finally a cash cow (Success sequence)
2) Hold The company cannot invest or it has other investment commitments due to which it holds the
product in the same quadrant. Example Holding a star there itself as higher investment to move a star into
cash cow is currently not possible.
3) Harvest Best observed in the Cash cow scenario, wherein the company reduces the amount of
investment and tries to take out maximum cash flow from the said product which increases the overall
profitability.
4) Divest Best observed in case of Dog quadrant products which are generally divested to release the
amount of money already stuck in the business.
Thus the BCG matrix is the best way for a business portfolio analysis. The strategies recommended after
BCG analysis help the firm decide on the right line of action and help them implement the same.

Constraints of BCG matrix:

i) It sees the different businesses in the conglomerate as completely unrelated. So that at any point of time
any company can be divested without affecting the groups performance. Its not practicable at all point of
time.
ii) It assumes capital allocation through internal route is efficient than external market capital allocation. But
according to BCG, it has to be cash neutral to achieve a high growth.
iii) Many people object the name it gives.
iv) Relationship between high accumulated production experience and high profitability is not justified.
Because the amount of investment it requires to achieve high sales is very costly to the profitability of the
market.
v) This is called transactional model. This gives the picture of the last year. Decision taken on which may
not be right.
2. GE-MCKINSEYS COMPANY POSITION/INDUSTRY ATTRACTIVENESS MATRIX:
Another technique is the three by three matrix variously attributed to General electric, Mckinsey and
company and Shell. One representative variation of this technique is shown in the following figure:

The two axes in this approach are the attractiveness of the industry and the strength or competitive position,
of the business unit. Where a particular business unit fall along this axes is determined by an analysis of that
particular unit and its industry, using the following criteria:
A) For business strength:
i) Size ii) Growth iii) Share iv) Position v) Profitability vi) Margins vii) Technological positions
viii) Strengths/weaknesses ix) Image x) Pollution xi) people.
B) Industry attractiveness:
i) Size ii) Market growth/pricing iii) Market diversity iv) Competitive structure v) Industry
profitability vi) technical role vii) Social viii) Environmental ix) Legal x) Human.
Depending on where a unit falls in the matrix, its broad strategic mandate is either to invest capital to build
position, to hold by balancing cash generation and selective cash use or to harvest or divest. Expected shifts
in industry attractiveness or company positions lead to the need to reassess the strategy.
3. ARTHUR D.LITTLES LIFE CYCLE MATRIX:
Refer to SKB notes.

The McKinsey Model (7ss Model)

In McKinsey model, the seven areas of organization are divided into the soft and hard areas. Strategy,
structure and systems are hard elements that are much easier to identify and manage when compared to soft
elements. On the other hand, soft areas, although harder to manage, are the foundation of the organization
and are more likely to create the sustained competitive advantage.
Hard S Soft S
Strategy Style
Structure Staff
Systems Skills
Shared Values
Strategy is a plan developed by a firm to achieve sustained competitive advantage and successfully compete
in the market. What does a well-aligned strategy mean in 7s McKinsey model? In general, a sound strategy
is the one thats clearly articulated, is long-term, helps to achieve competitive advantage and is reinforced by
strong vision, mission and values. But its hard to tell if such strategy is well-aligned with other elements
when analyzed alone. So the key in 7s model is not to look at your company to find the great strategy,
structure, systems and etc. but to look if its aligned with other elements. For example, short-term strategy is
usually a poor choice for a company but if its aligned with other 6 elements, then it may provide strong
results.
Structure represents the way business divisions and units are organized and includes the information of
who is accountable to whom. In other words, structure is the organizational chart of the firm. It is also one of
the most visible and easy to change elements of the framework.
Systems are the processes and procedures of the company, which reveal business daily activities and how
decisions are made. Systems are the area of the firm that determines how business is done and it should be
the main focus for managers during organizational change.

Skills are the abilities that firms employees perform very well. They also include capabilities and
competences. During organizational change, the question often arises of what skills the company will really
need to reinforce its new strategy or new structure.
Staff element is concerned with what type and how many employees an organization will need and how
they will be recruited, trained, motivated and rewarded.
Style represents the way the company is managed by top-level managers, how they interact, what actions do
they take and their symbolic value. In other words, it is the management style of companys leaders.
Shared Values are at the core of McKinsey 7s model. They are the norms and standards that guide
employee behavior and company actions and thus, are the foundation of every organization.
EXAMPLE
Current position #1
Well start with a small startup, which offers services online. The companys main strategy is to grow its
share in the market. The company is new, so its structure is simple and made of a very few managers and
bottom level workers, who undertake specific tasks. There are a very few formal systems, mainly because
the company doesnt need many at this time.
Alignment
So far the 7 factors are aligned properly. The company is small and theres no need for complex matrix
structure and comprehensive business systems, which are very expensive to develop.

Strategic Management Process

Mission and Goals
Defining the mission and main goals of the organization is the first step in strategic management process.
The mission tells clearly why the organization exists and what it would be doing. Organizations set goals,
which they hope to achieve in the medium to longterm basis. Normally organizations work with a hierarchy
of goals such as sizeable market share, maximizing shareholders' wealth, profit and so on.

External Analysis
The next step in strategic management process is external environmental analysis, which aims to understand
the opportunities and threats in the environment. In this stage, examination of three environments normally
takes place, the industry environment in which the organization operates, the national environment and the
macro environmental forces such as social, economical, government and legal, international and
technological factors, which affect the organization. The competitive structure of the industry, competing
firms and the competitive positions are analyzed during this phase.
8 Strategic Management
Internal Analysis
Identifying strengths and weaknesses of the organization involves identification of quantity and quality of
resources and distinctive competencies that help in building competitive advantage to achieve superior
efficiency, quality, innovation and customer loyalty.

Strategic Choice
Strategic cho'ice involves generating a series of alternatives in the light of internal strengths and weaknesses
and external opportunities and threats, which is known as SWOT analysis. The purpose of strategic choice is
to build organizations' strengths to exploit opportunities and set right weaknesses and to minimize threat.
Finally, strategies are evolved at functional level, business level, corporate level and global level.
Functional strategies are directed to improve the effectiveness of functional operations of the firm such as
manufacturing, finance, R&D, marketing and human resources.
Business level strategies lay emphasis on the way the firm positions itself in the market place to gain
competitive advantage. The three generic business level strategies are 1). Cost leadership, 2) Differentiation
and 3) Focus strategy.
Corporate level strategies enable organizations to maximize the long run profitability of the organization.
Vertical integration (backward and forward integration), diversification, strategic alliances, acquisitions and
joint ventures are examples of corporate level strategies.
Global level strategies are pursued by organisations while they expand their operations in international
business so as to increase their profitability. International strategy, multidomestic strategy, global strategies
and transnational strategy are some of the choices before strategists.
Strategy Implementation
Strategy implementation consists of four steps namely
Designing appropriate organizational structure
Designing control systems

 Matching strategy, structure and controls and

Managing conflicts, politics and change
Structure
Structure involves allocation of duties, responsibilities and decision-making authority and integration among
the ranks and files of organization. It is widely believed that structure follows strategy. Some of the options
available in this regard are tall structure, flat structure,
The Strategic Management Process 9
centralized decision making authority, decentralized decision making authority, autonomous units and semi
autonomous units and different mechanisms for integration of subunits.
Control,"
The purpose of strategic control is to determine whether the given strategy is effective in achieving
organizational objective and moving on the right track. The organizational control may be classified as
market control, output control, and bureaucratic control. Control system requires development of perceptible
organizational culture. Besides, the type of reward and incentive systems also needs to be decided and
established towards this end.

Mission statement embodies an organization's purpose of existence. When strategists raise certain
fundamental questions related to business such as:
What is our business?
Why are we in the business? and
What wi II it be after 5 years?
the need for mission statement arises. The survival of an organization mainly depends on its ability to satisfy
specific needs of the society. Mission statement defines the role that an organization plays in a society. For
example BSNL satisfies the communication needs of the society. Mission statement describes what the
company stands for, its purpose, image and character to different stakeholders. A survey by Bain and
Company indicates that planning and developing mission and vision statements are the popular management
tools of strategic management.
A mission statement is full of enthusiasm.
A mission statement is marked by grandeur.
It is unique and personal.
It is not time bound because the future envisioned in a mission statement cannot be achieved in a day.
Ranbaxy: "To become a $ 1 bi II ion research based global pharmaceutical company".

Characteristics of a Mission Statement

A mission statement incorporates the basic business purpose and the reason for its existence by rendering
some valuable functions for the society. An effective mission statement should possess the following
characteristics.
1) Feasible: The mission should be realistic and achievable. For instance, UTI declared its mission as "to
encourage saving and investment habits among common man". By providing tax relief under Sec 88c, the
investment upto 1 lakh in UTI is exempted from income tax. Hereby common man's savings habit is
encouraged by UTI.
2) Precise: A mission statement should not be narrow or too broad.
3) Clear: A mission statement should lead to action. B5NL'5 mission of 'connecting India' leads it to a
variety of service with varied tariff structure so as to cater to the preferences of mobile phone users.

4) Motivating: The mission should be motivating for the employees to be inspired for action. For example
India Post's mission is to 'exceed the expectations of the customer' with dedication, devotion and enthusiasm.
So customer s~rvice has become a value and it is inspiring and motivating the postal employees.
5) Distinctive: A mission statement wi II indicate the major components of the strategy to be adopted. The
mission should be unique. When HCL defines its mission as 'to be a world class competitor', it creates a
unique place in the minds of Indian personal computer users who come across personal computers of MNCs
on most of the occasions.
Mission contributes to strategic management in many ways.
1) It provides direction to corporate planning.
2) It clarifies the firm's aspirations.
3) It communicates to employees at various levels the direction in which they should move.
4) It focuses on business purpose and long-term objective of the firm.
Objectives and Goals
Objective and goals are used interchangeably in management literature but the recent strategic management
literature shows a subtle distinction between these two terms. Objective is the end, which the organization
tries to achieve through its operations. 'Goal' is an openended statement, which does not quantify what needs
to be achieved, and the time frame for completion. So 'growth' is a goal whereas an objective is to 'increase
groWth by 10% in terms of market share and sales over last year'. Usually the long-term goals and shortterm objectives are derived from mission.
Significance of Objectives
Objectives are formulated from mission statements. Objectives form the basis for all other functional
decisions such as finance, manufacturing, marketing and human resource. Objectives are split into business
wise objectives and functional targets and performance targets. While setting objectives, the organization
encounters the environment and determines the locus it will devise to attain in the environment such as a
dominant player, a meek player or one among the herd. Objectives and strategy put together, explain the
firm's concept of business. Objectives indicate the organizational performance to be realized and expected
over a period of time
Consider the objectives of some organizations.
1) Canara Bank: "The bank's stated objectives are 'growth, innovativeness, high profits as a barometer of
efficiency, highly involved employees distinctively charged with pride".
2) Maruti: "We don't just sell more cars than No.2. We sell more cars than the entire competition put
together."
Objectives are important for strategic management for the following reasons:
1) Objectives help to relate the organization in the environmental context. It helps to attract people with
identitical frame of mind.
2) Objectives help to coordinate decisions. All employees are aware of the objectives and stated objectives
prove to be a means of coordination.
3) Objectives serve as standards of appraising organizational performance. They serve as a basis for
evaluating success or failure of organization.
Characteristics of Objectives
Objective setting is a complex process. Well-formulated objectives possess certain characteristics.
Specific: Instead of stating objective as growth in assets, sales and profits, it is preferable to state 12%
increase in sales, 10% increase in profits and 10% increase in assets. Such a specific statement will lead and
motivate employees.

Time bound: BPL set the objective of 25% increase of return on net worth by 2002. When an objective is
related to a time frame the managers are forced to act within the duration.
Measurable: Objective should be amenable to measurement. Employee's attraction towards a company is an
objective, which can be measured by the following aspects.
The number of applications received
The quality of applications received
The staff turnover
Average salary offered.
The objective of employee's attraction for a company can be measured and compared with best companies in
the industry.
Challenging: Objectives should be attainable and realistic but challenging for employees. Too high sales
target and too low sales targets are dangerous and misleading the employees and result in frustration and sub
optimal performance.

Any casual tour of business or organization Web sites will expose you to the range of forms that
mission and vision statements can take.
Mission statements are longer than vision statements, often because they convey the organizations
core values.
Mission statements answer the questions of Who are we? and What does our organization
value?
Vision statements typically take the form of relatively brief, future-oriented statementsvision
statements answer the question Where is this organization going?
Increasingly, organizations also add a values statement which either reaffirms or states outright the
organizations values that might not be evident in the mission or vision statements.

Competitive Changes During Industry Evolution

Industries pass through various stages such as growth, maturity and decline. The competit,ive forces act
upon these stages and give rise to opportunities and threats for an industry. A strategist should be aware of
these developments during strategy formulation and anticipate them in advance.
The industry life cycle model is used for analyzing the effects of industry evolution on competitive forces.
Based on the industry life cycle model, the industry environment could be identified as follows:

 Embryonic industry environment

Growth industry environment
Shakeout environment
Mature industry environment and
Declining industry environment
Industry Life Cycle
Embryonic Industries
An embryonic industry is one which is just beginning to develop. Personal computer in 1980 is a good
example. Growth is very slow at this stage. Buyers are unfamiliar with the product. Prices are high since
economies of scales are not achieved yet. Distribution channels are not developed fully.
Entry barrier is mainly based on access to technological know-how. Rivalry is based on the firms' ability to
educate the customers, to develop distribution channels and to improve product design rather than price.
Embryonic industry may evolve due to a company's innovative efforts (eg) Apple Computer, Xerox. Such
companies capitalize on the opportunities due to abse'nce of rivalry.
Growth Industries
From embryonic stage, the industry moves on to growth stage. In a growth industry, consumers are familiar
with the product. New customers enter the market and demand expands rapidly. Prices fall due to experience
curve effect and scale of economy. Distribution channels grow. Entry barriers are low. Threat from potential
competitor is the highest at this stage. But new entrants are absorbed into an industry without much
competitive pressure. High demand enables companies to generate adequate revenue and surplus without
eroding the market share.
Industry Shakeout
Growth stage is not sustained continuously and the shakeout stage follows necessarily. In the shakeout stage,
demand is saturated and demand is not from first time buyers but from replacement demand. During this
stage, rivalry between companies is very intense and
Porter's Five Forces Model and Strategic Group 81
capacity is added to the level of excess capacity. Price-cutting and price war emanates from excess capacity.
In semi conductor industry, capacity was doubled in DRAMS (dynamic random access memory) and the
excess capacity that was built led to price-cutting and price war.
Mature Industries
The industry enters the mature stage once the shakeout stage comes to an end. In this stage, the market is
saturated and demand is confined to replacement demand. Growth is very little or nothing. In maturity stage,
barriers to entry increases and the threat of entry from potential competitors decreases. In their fight for
market share, companies reduce price and their focus is on cost minimization and building brand loyalty.
The surviving firms in mature industry are left with brand loyalty and cost minimization. These two factors
serve as barriers to, entry in mature industries and they provide opportunities for the existing players to
increase price. Many industries in mature stage tend to consolidate and become oligopolies. For example the
U.S. Airline industry has entered the maturity stage.
Declining Industries
Industry enter into declining stage after the maturity stage. During this stage, negative growth is registered
due to technological substitutions (fast and reliable courier service affects postal service), social changes
(health consciousness has affected tobacco industry), international competition (Chinese goods being
dumped into India) and demographic factors (the rising number of people below poverty line). Rivalry
among firms will be keen in declining stage. Demand for products will be very low. The excess capacity

built in the industry forces the players to adopt price-cutting and price war. The strong exit barriers also
prove to be a hindrance in reducing capacity during this stage.
The Industry life cycle model is only a generalization. They do not follow the pattern as explained in Fig.
5.5. In some industries embryonic stage may be skipped (personal computer industry). Some industries may
be recovered from declining stage through innovation as it happened in bicycle industry. The growing
awareness of air pollution all over the world has brought back bicycle industry to life. The time duration of
different stages will vary from one industry to another. In some industries some stage may be skipped. The
electronic industry due to the innovation of transistor (replaced vacuum tubes) is said to be in growth stage
for a considerable period. The industry life cycle model should be studied as a general framework.

SWOT Analysis
SWOT is an acronym for explaining strengths, weaknesses, opportunities and threats for any specific
organization. SWOT is a popular analytical technique used in strategic management and considered to be an
enduring analytical technique for many years. SWOT analysis results in identification of competitive
distinctive competencies, opportunities that are not exploited fully due to shortage of resources. An
opportunity may not have any value unless the firm has a capacity to exploit the opportunity.
Wheelan and Hunger view that the "essence of strategy is opportunity divided by capacity". The crucial
question before a strategist is
Is it worthy enough to invest in our strength to make it stronger?
Is it desirable to invest in weakness so that the company will redefine it as competitive?
However, the discretionary power of strategist prevails ultimately.
SWOT analysis is criticized for the follOWing reasons.
1) SWOT analysis consists of a long list of factors.
2) SWOT analysis does not consider priorities among factors
114 Strategic Management
3) The description of factors is imprecise.
4) Considering any factor as strength or weakness is mainly based on the opinion and perception of decision
makers.
5) Analysis of factors are not counterchecked at different levels with data.
6) The logical link between strategy implementation and SWOT analysis is missing.
An illustration of SWOT analysis is given at the end of the chapter-8. "Farmer's Market (Uzhavar Santhai)
in Tamilnadu. A SWOT analysis".
Strategic Factor Analysis Summary (SFAS) Matrix
The SFAS matrix incorporates the important factors gathered from environmental scanning and provides
necessary information for strategy formulation. The EFAS, IFAS tables and SFAS matrix are developed as a
powerful set of analytical tools for strategic analysis. The SFAS matrix summarizes an organization's
strategic factors by combining the e,xternal factors from EFAS table and with the internal factors from IFAS
table. The EFAS table and IFAS table given in the previous chapters listed a total of 18 internal and external
factors. These factors are condensed and 8 factors are selected for SFAS matrix from among the 18 strategic
factors. Each factor is thoroughly examined before being included in the SFAS matrix. The highest weighted
EFAS and IFAS factors are finally considered for SFAS matrix.
TOWS Matrix
TOWS matrix is another way of writing SWOT. The TOWS matrix is a conceptual framework for a
systematic analysis for matching opportunities and threats that are external with strengths and weaknesses,
which are internal for the organization. When opportunities, strengths, threats and weaknesses combine, they
result in four sets of different strategic alternatives. TOWS matrix is one way of generating strategic
alternatives. In TOWS matrix 'T' stands for Threats 'a' stands for Opportunities '5' stands for Strengths and
'W' stands for Weaknesses

1) WT strategy tries to minimize weaknesses and threats. Retrenchment, joint ventures and liquidation are
preferred strategies.
2) WO strategy tries to take advantage of opportunities by overcoming weaknesses. A firm with weaknesses
in some areas may develop those areas in the company or acquire needed competencies from outside,
making it possible to take advantage of opportunities in the external environment.
3) ST strategy attempts to consider a company's strength to avoid threats in the environment. The aim is to
maximize the former while minimizing the latter. A company may use its technological, financial,
managerial 9r marketing strengths to cope with the threats of a new product introduced by competitors.
4) SO strategy is devised to use its strengths to take advantage of opportunities. It is the aim of enterprises to
move from other positions in the matrix to this one. If they have weaknesses they will strive to overcome
them, making them strengths. If they face threats, they will cope up with them so that they can focus on
opportunities,
TOWS matrix is used to generate several strategic alternatives. The aim of the firms is to move from one
position to another desirable position. TOWS matrix is prepared for the whole corporation or for specific
business unit within a corporation. TOWS matrix is prepared for a given point of time because the external
and internal environments are dynamic. Some factors change over time while other change little. Since the
environment keeps changing, the strategists usually prepare several TOWS matrix for different points of
time. Thus one may have to start with a TOWS matrix of the past, TOWS matrix of the present and TOWS
matrix of future in different time periods T1 and T2.

In strategy formulation, environmental analysis and organizational appraisal are followed by choice of
strategy with appropriate orientation. Corporate strategy provides overall direction for the firm irrespective
of its size whether it is small or big. Corporate level strategy means the strategy that top management
formulates for the overall company. The orientation towards growth can be decided by asking the three basic
questions.
Should we continue with the same business with similar efforts?
Should we expand into new business areas by adding new functions, products and markets?
Should we get out of this business or a part of the business?
Based on the above questions three general orientations, known as Grand Strategies are evolved.
Stability strategies consist of no change in the company's current activities.
Growth strategies, involve expansion of a firm's activities.
Retrenchment strategies that reduce the level of company's activities.
Stability Strategy
Stability strategy involves continuing the current activities without any significant change in direction.
Stability strategy is pursued by a successful enterprise in a relatively stable and predictable environment.
Stability strategy focuses on incremental improvement in functional performance. A stability strategy is less
risky. It may be suitable in the short run, but will be dangerous if pursued for a long period of time. Some of
the types of stability strategies are:
Pause / proceed with caution strategy
No Change Strategy
The Profit Strategy
Pause I Proceed with Caution Strategy

Companies adopt this strategy after a prolonged period of rapid growth in order to consolidate resources and
results. It is a deliberate and conscious attempt to postpone strategic shift. It is an opportunity to rest before
shift in strategy. This strategy is a conscious attempt to make incremental improvement till the environment
changes. It is a temporary strategy.
HLL in 2000 sold limited number of shoe uppers to watch the market absorption before it goes ful! swing. It
is an example for strategy of Pause/Proceed with caution.
Dell Computer relied on on-line selling of personal computers. It followed pause/ proceed strategy in 1993
after it experienced a growth of 285% in two years with 5600 employees in 95 countries. It continued with
the same strategy till it hired new managers, built new facilities and improve structure. Thereafter it resumed
growth strategy.
No Change Strategy: No Change strategy is pursued by small business when the future is predicted to be the
continuation of the present. The company enjoys relatively stable competitive position in the industry and it
has not much opportunities or threats. The success of no change strategy depends on a lack of significant
change in a corporation's situation and the company will make a few marginal adjustments for inflation in its
sales and profit aims. Small town businesses follow this strategy.
Profit Strategy: Profit strategy assumes that the difficulties faced by the firm are temporary. When the
company sales are declining, the profit strategy tries to project a picture of a profit making organization by
taking measures such as reducing investment and blaming the company's problems on negative environment
such as government policy changes, competitor's sudden mo\es and so on. It is a secretive and seductive
strategy and cannot be continued for a long time. It will result in deterioration of organization's position.
Growth Strategy
Growth strategy is a corporate level strategy, designed to achieve increase in sales, assets and profits.
Companies that do business in expanding industries must grow in order to survive. Continuing growth
means increasing sales, reducing per unit cost and thereby increasing profits. So, the most widely pursued
corporate strategy is growth strategy. It is an attractive strategy for two reasons.
Growth based on increasing market demand will cover up the company's flaws and strategic errors. It
provides a cushion for a turnaround in case of big mistakes.
A growing firm provides a lot of opportunities in terms of new jobs, career advancement and promotion
Motorola spent huge sum on product development such as cellular phones, pagers, two way radios and so
on.
Growth strategies may be classified as follows:
Concentration
Diversification'
Concentration: It is a form of growth strategy, which results in concentration of resources on those product
lines, which have growth potential. Concentration strategy is adopted in growing industry by growing firms.
There are two basic concentration strategies namely,
Vertical growth and
Horizontal growth
Vertical growth occurs when one function previously carried over by a supplier or a distributor is being
taken over by the company in order to reduce costs, to maintain quality of input and to gain control over
scarce resources. Vertical growth results in vertical integration.
Horizontal Integration: A firm is said to follow horizontal integration if it acquires another firm that
produces the same type of products with similar production process / marketing practices. This strategy is
adopted to acquire competitor's business or to acquire market share or to reduce competition or to gain
economy of scale of operation. Spartek acquired Neycer and became the largest'fceramic tile manufacturer
in the country. Both are in the sanitary ware and tile production.
Ranbaxy Labs followed a horizontal growth strategy by extending its pharma business to Europe. Jet
Airways has alliance with British Airways, KLM Royal Dutch Airlines and Northwest Airlines so as to offer
a complete range of flight operations directly from the destinations outside India for domestic travellers.

Horizontal integration is a form of acquisition wherein a firm expands by acquiring other companies in its
same line of business.
Vertical Integration: Vertical integration means the degree to which a firm operates vertically in multiple
locations on an industry's value chain from extracting raw materials to manufacturing and retailing. Vertical
integration occurs when a company produces its own inputs or disposes of its own outputs. Vertical
integration may be either backward integration or forward integration. Backward integration refers to
performing a function previously provided by a supplier. Forward integration means performing a function
previously provided by a retailer. This is done to reduce costs, gain control over scarce resource, guarantee
quality of a key input and obtain access to potential customers. Forward integration involves a firm's
acquisition of one or more of its buyers.
Backward integration involves moving into intermediate manufacturing and raw material production and
forward integration means movement into distribution. A textile mill, which opens its own retail show room,
is an example of forward integration. When the textile mill starts its ginning and spinning mill, it is an
example of backward integration. At each stage in the chain, value is added to the product.
IBM and Digital Equipment are vertically integrated enterprises.
A company is said to have achieved full integration if it produces all input needed for its processes or if it
sells its output through its own operations. In taper integration, a firm produces less than half of its own
requirements and buys the rest from individual suppliers and company owned suppliers. It disposes of its
output through outside outlets or company owned outlets. In quasi-integration, the firm does not make any
of its key supplies but purchases most of its requirements from outside suppliers who are under partial
control.
Reliance Industries has adopted vertically integrated diversification in the synthetic fibre intermediate
petrochemical business. It moved backward in the business of fibre intermediaries (PSF) and produced PTA.
It was originally a manufacturer of synthetic textiles. Each product in the value chain is vertically linked and
become a new business. Production of polyester yarn, polyester bottle chips, ethylene and naphtha have
become separate businesses. Reliance Industries Ltd. has an agreement with Jamnagar refinery Complex of
Reliance Petroleum for the supply of naphtha.
Advantages of Vertical Integration
It helps company to exercise control over critical sources of supply.
It limits competition in the concerned industry, thereby enables the company to charge a high price for and
make greater profits than before.
It helps to make investments in specialized assets. These specialized assets are designed to perform a
specific task, which will reduce the cost of value creation and differentiate the product and charge premium
pricing.
Thus specialized asset may be a basis for achieving a competitive advantage at the business level. Vertical
integration by protecting product quality enables a company to be a differentiated player. The example of
McDonald is worth mentioning. When it expanded its operations to Russia, it set up its own dairy farms,
cattle farms, vegetable cultivation and food processing plants in Soviet Union since the Russian grown
potatoes and meat was of poor quality. In organizations, which are vertically integrated, strategic advantages
arise from better planning, coordination and scheduling of adjacent processes.
Disadvantages of Vertical Integration
Cost disadvantages sometimes occur when the firm is committed to purchase from company owned
sources when low cost external sources of supply is available but could not be exploited.
Vertical integration proves to be a disadvantage when technology is changing fast and the firm is tied to
obsolete technology.
The radio manufacturers went for backward integration and manufactured vacuum tubes. When the
technology shifted from vacuum tubes to transistor, they were put in a disadvantageous position, which
resulted in competitive disadvantage.
Vertical integration proves to be a risky business if unstable or unpredictable . demand conditions prevail.

Concentration is a high risk strategy as the firm may be victim of the slow down of economy (Ashok
Leyland, TELCO etc.).
Strategy Formulation: Corporate Strategy 127
Diversification .
Diversification is considered to be a complex one because it involves a simultaneous departure from current
business, familiar products and familiar markets. Diversification makes addition to the portfolio of
businesses. Firms choose diversification when the growth objectives are very high and it could not be
achieved within the existing product/market scope. Firl'!"s consider diversification as a long-term solution to
the vulnerability inherent in a single, limited number of business propositions. Usually firms with one
business find themselves vulnerable under changing environmental conditions. If the firm wants to
counteract vulnerability, it opts for diversification. The main attraction for diversification arises from new
and fresh opportunities, which hold promise of high profitability
With diversification, firms are committed to risks associated with unfamiliar business and it requires
meticulous preparations. It is a resource intensive strategy and requires managerial competence to make it a
success. Diversification proposals are usually screened and pretested for industry attractiveness, strength of
entry barriers and corporate balance. Getting intc a new business involves heavy investments.
Diversification strategy can be successful if the firm possesses right kind of leadership, dynamic executives,
and venture loving workforce, efficient structure and systems. The chosen industry should be attractive. The
cost of entry barrier should be reasonable. After the new addition, the company should be better off. It
requires a cautious approach.
Diversification strategy can be classified into
Related Diversification and
Unrelated Diversification
Related Diversification
In related diversification, the firm enters into a new business activity, which is linked, to a company' existing
business activity by commonality between one or more components of each activity's value chain.
The linkages are based on manufacturing, marketing and technological commonalities. The risk is
considered to be less when the diversification is related to the current business. There is much scope for
sharing the skills, resources and competencies among the business. Each business derives synergy from the
rest. The diversified companies create value in the following ways:
By transferring competencies among businesses and
By realizing economies of scope.
Firms, which depend on transferring competencies for their diversification strategy, try out new businesses
related to their existing business and draw on the distinctive skills in some of the functions.
IBM operates in 20 fields all related to each other and such diversifications have greater probabi I ity of
success due to interl inkages and shared competitive advantages and competencies .
. Economy of scope arises when one or more business units share common resources such as manufacturing
facilities, distribution channels, advertising campaigns, R&D and so on.
GE's advertising, sales and service activities in appliances are low mainly because they are spread over a
wide range of products. It is possible to realize economies of scope and competency transfers if there are
commonalities between the value creation functions of existing and new activities
Eicher which was engaged in manufacturing and marketing of tractor in 1990s, has grown to be a
diversified company with interests in trucks, motorcycles, financial services and management consultancy.
Horizontal related diversification takes place wherein a firm acquires a business outside its present scope of
operation but with similar or related core competencies. Syriergy occurs when combination of two firms
results in higher efficiency which would not be possible separately.

Limitations
Diversified companies fail due to the following reasons:
Too many businesses are in a company's portfolio.

 The extent of coordination required between different businesses is very high.

When the number of businesses is too many, it is difficult for the corporate management to be informed
about the complexities of each business. The information overload might result in superficial resource
allocation decisions. A promising business may not get adequate resources at times. Substantial
inefficiencies may be noticed such as sub optimal allocation of resources and failure to encourage and
reward profit-making behavior of business level managers. Moreover, the lack of familiarity with day today
operational problems on the part of corporate level managers lead to business level managers deceiving
them. For this reason, GE was restructured. Jack Welch, CEO of GE reduced 40 businesses into 16 main
units among three major sectors.
In related diversification, transfer of competencies and economies of scope between businesses require
coordination and involve bureaucratic costs. Firms try to create value by sharing manufacturing, marketing,
R&D and different functions. The problem of coordination, bureaucratic costs, accountability, loss of
control, poor resource allocation and inefficiency are part of bureaucratic costs. It will make sense, if the
value created by such a strategy exceeds bureaucratic costs associated with diversification and additional
business activities.
Sometimes diversification fails as it is adopted for wrong reasons such as (i) to pool ri~ks and (ii) to achieve
greater growth.
Studies have pointed out that corporate diversification is not an effective way to pool risks. Different
businesses have different business cycles and fluctuations in their fortunes cannot be avoided completely
with economic downturn. Pooling the risk is impossibility.
Diversification for growth is not a meaningful proposition, as growth does not create value. Growth should
be a byproduct not an objective in itself.
Related diversification can adversely affect other businesses mainly because of its linkages. If the linkages
are strong, it would affect other businesses in times of crisis and adversity.
Unrelated Diversification I Conglomerate Diversification
In unrelated diversification, the firm enters into a new business area that has no obvious connection with any
ofthe existing business. It is suitable, ifthe company's core functional skills are highly specialized and have
few applications outside the company's core business. If the top management is good enough in turning
around sick business, unrelated diversification may be suitable. The new businesses / products are unrelated
to process / technology / function of existing business.
In conglomerate diversification a firm acquires business to reduce cyclical fluctuations in cash flows or
revenues.
Ponds India, basically a cosmetic company with talcum powder, Vaseline and Rexona, has diversified into
manufacturing of items such as leather products, thermometer and mushrooms. Diversified products have
been aimed at export market.
BPL, basically a consumer electronic company has diversified to computer software. It sets up wholly
owned subsidiary in U.S.
Godrej entered into poultry business.
The Escorts group has entered into edible oil business by setting up plants in Alwar.
Titan has diversified into watches, jewellary and sunglasses. It is changing from a watch company to a life
style company.
ITC has diversified into hotel business, agro products due to constant threat to its cigarette business.
Concentric Diversification
Concentric diversification is similar to related diversification as there are benefits of synergy when the new
business is related to existing business through process, technology and marketing. The new product is a
spin off from the existing facilities, products and processes. It is a departure from existing value chain, as the
new product does not fall within the current product-process chain.
Philips is a strong player in lighting and electronics and it has recently entered into personal
communications systems, telecommunication equipment, cable television and multimedia. It makes products
such as cellular phones, computers and electronics components. These businesses are related to Philip's

existing business of lights and electronics at some point or other. However it does not form a vertically
integrated chain.
Fertilizers and Chemicals Travancore Ltd (FACT) is involved in chemical fertilizer business and
manufactures products like ammonia, sulphurdioxide and oleum. It has diversified into caprolactum. It is an
example of concentric diversification since the' new business is related to existing business in process,
technology and inputs at several points concentrically.
Eureka Forbes which is noted for its innovative marketing practices, has diversified into related products. It
has entered into strategic alliance with Morphy Richards, Kenwood and Nilfisk for electric iron and food
processors. They were test marketed at Bangalore. It is an instance of market related concentric
diversification.
Usha International has diversified into home appliances like, juicer, mixer, geyser, water heaters, vacuum
cleaners, and washing machines and exhaust fans and tries to exploit its distribution network of over 3,500
dealers to sell its new products. It is an instance of technology/market related concentric diversification.
Sanghi Polyester's diversification into cement proved to be suicidal. It later launched Telugu daily Vaartha
which also proved to be a blunder.
Strategic alliance eg: Hindustan Lever and Videocon formed an alliance and promoted HU's detergent Surf with Videocon
washing machines.
Oberoi Hotels, Lufthansa Airlines, Hongkong Bank and Mercury Travels formed an alliance.
Joint Ventures
In Joint venture the domestic company and a foreign company enter into 50:50 agreement in which both of
them take 50% of ownership stake and operating control is shared between team of managers drawn from
both companies. If the joint venture permits 51 :49 equity participation, the dominant partner will exercise
tight control. Joint ventures have a number of advantages. The local company's knowledge about the market,
political pressures, customer preference, culture, language and competitive forces will be useful. Moreover
the development costs and risk involved in developing a venture is shared between the two partners. In
certain countries like Japan, the political considerations make joint venture is the only mode of entry.
If the joint venture agreement involves technology collaboration, the company may lose control over its
proprietary technology. So companies pursuing such strategy opt for major shareholding and become
dominant partners. It is difficult to find a foreign partner with minority ownership position. Another
drawback with regard to joint venture is the company cannot take advantage of experience curve effects and
location economies to compete with global rivals. It does not have tight control over its subsidiaries.
lac and Oiltanking GmbH formed a joint venture in 1996 with the name Indian Oil Tanking Limited for
building and operating terminal services.
Visa 5teellndia, an emerging integrated special and stainless steel player has entered into a joint venture with
Baosteel Trading Co. of China and Visa Comrade AG Switzerland, for setting up a one lakh tonne per
annum ferro chrome plant in Orissa.
adv
Sharing of developmental costs Sharing of marketing risks Political acceptability Access to marketand market information of partners
Disadv
Control over technology Global coordination difficult Location economies difficult Experience curve
economies difficult.
Acquisition
Acquisition is a form of merger whereby one company purchases another, often with a combination of cash
and stock.
Acquisition involves purchasing an established company, complete with all facilities, equipment and
personnel. Acquisition facilitates quick expansion. It is a preferred strategy among MNCs like Nestle, P &
G, Unilever and Eloctrolux to enter into a new country and new markets. Buying popular brands is another
variation of acquisition strategy. Building a brand is time consuming and expensive and hence firms buy

ongoing brands, which provide advantages like no gestation period and entry into a ready market.
Acquisition will be a preferred strategy under certain conditions:
Acquisition is a suitable entry mode.
When barriers to entry arising from brand loyalty, economies of scale and absolute cost advantage are very
intense and strong.
When the firm enters into an unrelated new business to its current business in which it has no expertise,
acquisition is the preferred mode. .
Companies, which are particular about gaining market presence in a short period, acquisition is the
preferred method.
Acquisition reduces uncertainty with respect to profitability, known revenues and known market share.
In mature industry environment acquisition is the favoured mode as industry life cycle has a major impact
on factors influencing entry mode.
Vodofone acquired 67% equity of Hutchinson Essar ($10.9 billion)
Vedanta group acquired 51% equity of Sesa Goa ($.981 billion)
Essar Global acquired 100% equity of Algoma Steel Inc. ($1.636m).
Academic research undertaken by Mckinsey and Company suggests that many acquisition failed to create
value and destroyed finally. The reasons for fai lure are as follows:
1. With acquisition, the acquired company is integrated into the organization. Integration involves adoption
of common management and financial control system and establishment of linkages to share information
and people. Many problems occur at this stage due to differences in culture and high employee turnover in
many firms.
2. Companies overestimate the economic benefits arising from acquisitions and pay more for the target
company than its worth.
3. Acquisition is usually expensive if it is a public listed company
4) Studies have pointed out that acquisition fails because of inadequate preacquisition screening
Merger
Merger involves fusion of two or more companies into one company. In merger, two different firms from
the same group combine to form a new entity or two different fi'rms from totally outside come together to
form a new entity. It is a corporate level growth strategy in which a firm combines with another firm through
an exchange of stock.
Advantages
Merger helps to pool the resources and improve operational efficiencies. It enjoys economies of scale in
production, marketing, R&D and other functions. It enhances competitive advantage of a firm. Merger may
help to develop new products by using the combined synergy of two companies.
1. Production Related: Economy of scale through large size and integrated facilities.
2. Market Related: Marketing economies and diminished competition
3. Finance Related: Stability of cash flows, raise more fund from stock market.
4. Turnaround strategy: Revival of sick units. Poorly managed units merged with her:lthy units.
IPeL merged with Reliance Industries.
R.P Goenka group companies namely SAE (India) Ltd. and KEC International got merged. The two
companies retained 70% of power transmission equipment market in India. Their major activities included
manufacturing towers and structurals. KEC was a major exporter of transmission equipment. The main
purpose of merger was that both companies should not compete with each other and they should create
synergies.
Indian Airlines merged with Air India.
Merger should have clear: purpose. HLL - TOMeO merger had the purpose of counteracting P & G Godrej tie - up.
Merger should benefit both parties
Merger is much more than mere merging of stocks, it involves human beings. The employee's anxiety and
apprehensions should be overcome with proper c~~munication to relieve employees at all levels. The

environments of merging firms will differ and identifying the unique features of each unit and integrating
them is a challenging task.
Merger has become a popular strategy in India in the wake of liberalization. Indian companies have
recognized that economy of scale of production and marketing are vital for attaining competitive advantage.
Unilever Group companies in India have taken this route to achieve expansion of capacities.

Restructuring
Restructuring involves strategies for reducing the scope of the firm by exiting from unprofitable business.
Restructuring is a popular strategy during post liberalization era where diversified organizations divested to
concentrate on core businesses.
Tata Group's restructuring resulted in reducing the companies from 107 operating in 25 businesses to less
than 30 operating in just 12 businesses. It divested Lakme, TISCO's Cement division and Goodlass Nerolac
while strengthening core businesses.
SAIL divested non-core businesses like stainless steel and alloy steel.
Reasons for Restructuring:
1. The main reason for restructuring is over diversification in previous decade. The performance ofthese
units declined because ofthe bureaucratic costs and inefficiencies involved in expanding the scope of the
business was greater than the additional value created by such a move.
2. The diversified companies found that new competitors attacked their core business ar'.!as. The companies
were forced to concentrate on troubled core businesses and drop the diversified businesses, which were
considered to be distraction.
3. The innovation in management processes and strategy has reduced the advantages of vertical integration
and diversification. Long term contracting with suppliers is considered to be a superior strategy compared to
diversification and vertical integration.
Retrenchment
Retrenchment strategies are adopted when the firm's performance is poor and its competitive position is
weak. Retrenchment strategy is pursued by organizations when they reduce their activities substantially.
Retrenchment strategy maybe classified as:
Divestment strategy
Harvest strategy
Liquidation strategy
Capture company strategy

Turnaround Strategy
Turnaround strategy involves reversing negative trend. It involves development of a strategy for turning
around the company's core business areas. The corporate decline is attributable to seven reasons.
Poor Management
Over diversification
Inadequate financial controls
High costs
New competitors
Declining demand for the product
Organizational inertia
Poor Management: Studies have poi nted out that some of the common Iy found management defects in
declining companies are:
lack of balanced expertise at the top.
Lack of strong middle management
Failure to provide for management succession and
Failure to monitor strategic decisions

Over expansion: Over diversification leads to loss of control and an inability to cope with recessionary
conditions. The over diversified firms go for debt financing and get into financial crisis during adverse
economic conditions. '
Inadequate Financial Controls: The responsibility for profit is not assigned to key decision makers in sick
organizations, which results in inadequate financial controls. Lack of responsibility for financial
performance leads to excess staff and lavish spending and escalation of costs.
High Costs: High costs may arise due to low labour productivity, union directed restrictive labor practices,
high wage rates, low market share and non-realization of economies of scale.
New Competition: With liberalization of Indian economy, competition overwhelms Indian industry.
Consequently there is continuous emergence of new companies championing new ways of doing business.
No industry and no business firm is spared of competitive challenges of new competition. Many established
companies fail to understand the seriousness of new competitors and their ability to the balance the
competitive forces.
Unforeseen demand shifts: Changes in technology, economic and social conditions often affect demand
patterns and such demand shifts open up market opportunities for new products and threaten the existing
players. The oil crisis of 1974 pressurized the countries all over the world to look for alternative fuel and
encouraged research in renewable sources of energy.
Organizational Inertia: In addition to changing demand patterns and new competition, the slow response to
environmental changes and demands is a major reason for corporate decline.
Main aspects of Turnaround: In successful turnarounds, a number of common factors are present.
Changing the Leadership
Redefining Strategic Focus
Assets Sales and Closures
Improving Profitability
Acquisitions