strategic management q-a

8/11/2019 Strategic Management Q-A

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Subject: Strategic Management

Q - Define the term strategy what is its significance for any Business Organization?

Johnson and Scholes define strategy as follows:

"Strategy is the direction and scopeof an organisation over the long-term:whichachieves advantage for the organisation through its configuration of resourceswithin a challenging environment, to meet the needs of markets and to fulfillstakeholderexpectations".

Strategy is when a firm expenses its intent to adopt a current & future course ofaction that is blueprint &roadmap with clarity of objectives that need to be achievedin short term and long term.

n other words, strategy is about:

! here is the business trying to get to in the long#term $irection!

! hich mar%ets should a business compete in and what %ind of activities areinvolved in such mar%ets $mar"ets' sco#e(

! )ow can the business perform better than the competition in those mar%ets$a$antage(

! hat resources $s%ills, assets, finance, relationships, technical competence,facilities( are re*uired in order to be able to compete $resources(

! hat external, environmental factors affect the businesses+ ability to compete$en$ironment(

! hat are the values and expectations of those who have power in and around thebusiness $sta"eho%ers!

Strategy at ifferent -evels of a usiness

Strategies exist at several levels in any organisation # ranging from the overallbusiness $or group of businesses( through to individuals wor%ing in it.

Corporate Strategy # is concerned with the overall purpose and scope of thebusiness to meet sta%eholder expectations. /his is a crucial level since it is heavilyinfluenced by investors in the business and acts to guide strategic decision#ma%ingthroughout the business. 0orporate strategy is often stated explicitly in a "missionstatement".

Business Unit Strategy # is concerned more with how a business competessuccessfully in a particular mar%et. t concerns strategic decisions about choice of


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products, meeting needs of customers, gaining advantage over competitors,exploiting or creating new opportunities etc.

Operational Strategy # is concerned with how each part of the business isorganised to deliver the corporate and business#unit level strategic direction.

1perational strategy therefore focuses on issues of resources, processes, peopleetc.

Significance:

hy Strategy

2. Survival.3. 4espond to changes in external environment.

5. /he need to grow.6. 4espond to changes in customer expectations.7. 0orporate social responsibility amongst sta%eholders.8. ncrease share of the mar%et & profitability.9. anage competition effectively & gain business dominance in the industry.;. uild competencies & capabilities. /echnical expertise, financial capabilitiess the external environment changes, perhaps due to changes in customers orcompetitors or perhaps due to the wider forces # political, economic, social,technological, and environmental or legislation based # it is important to come bac%

and as% some fundamental *uestions.

/he more the external environment changes, then:

/he more opportunities there are li%ely to be for the well prepared company'but.

/he more threats the unwary and the unprepared will face.


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?ven if the basic environment is stable, actions and intentions of competitors changeand companies need to review what is happening, prepare for any real or potentialcompetitive manoeuvres and find new insights into ways to create value forcustomers.

Q - *#%ain ./s for strategy that is strategy as a #%an0 as #attern0 as #osition0 as#ers#ecti$e an as #ur#ose1

Mintzberg2s . /s for Strategy

/he word "strategy" has been used implicitly in different ways even if it hastraditionally been defined in only one. ?xplicit recognition of multiple definitions canhelp people to manoeuvre through this difficult field. int@berg provides fivedefinitions of strategy:

Alan Aattern Aosition Aerspective Aurpose

/%an

Strategy is a plan # some sort of consciously intended course of action, a guideline

$or set of guidelines( to deal with a situation. y this definition strategies have twoessential characteristics: they are made in advance of the actions to which theyapply, and they are developed consciously and purposefully.

Strategy can be defined as a direction, a guide or a course of action to get from hereto there.

/attern

f strategies can be intended $whether as general plans or specific ploys(, they canalso be realised. n other words, defining strategy as plan is not sufficient' we also

need a definition that encompasses the resulting behaviour: Strategy is a pattern #specifically, a pattern in a stream of actions. Strategy is consistency in behaviour,whether or not intended. /he definitions of strategy as plan and pattern can be *uiteindependent of one another: plans may go unrealised, while patterns may appearwithout preconception.

Alans are intended strategy, whereas patterns are realised strategy' from this wecan distinguish deliberate strategies, where intentions that existed previously were


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realised, and emergent strategies where patterns developed in the absence ofintentions, or despite them.

Strategic plans and ploys are both deliberate exercises. Sometimes, however,strategy emerges from past organi@ational behavior. 4ather than being an intentional

choice, a consistent and successful way of doing business can develop into astrategy.

Bor instance, imagine a manager who ma%es decisions that further enhance analready highly responsive customer support process. espite not deliberatelychoosing to build a strategic advantage, his pattern of actions nevertheless createsone.

/o use this element of the 7 As, ta%e note of the patterns you see in your team andorgani@ation. /hen, as% yourself whether these patterns have become an implicitpart of your strategy' and thin% about the impact these patterns should have on how

you approach strategic planning.

/osition

Strategy is a position # specifically a means of locating an organisation in an"environment". y this definition strategy becomes the mediating force, or "match",between organisation and environment, that is, between the internal and the externalcontext.

"Aosition" is another way to define strategy # that is, how you decide to positionyourself in the mar%etplace. n this way, strategy helps you explore the fit betweenyour organi@ation and your environment, and it helps you develop a sustainablecompetitive advantage.

Bor example, your strategy might include developing a niche product to avoidcompetition, or choosing to position yourself amongst a variety of competitors, whileloo%ing for ways to differentiate your services.

hen you thin% about your strategic position, it helps to understand yourorgani@ation+s "bigger picture" in relation to external factors. /o do this, use A?S/

>nalysis, Aorter+s iamond, and Aorter+s Bive Borces to analy@e your environment #these tools will show where you have a strong position, and where you may haveissues.


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/ers#ecti$e

Strategy is a perspective # its content consisting not just of a chosen position, but ofan ingrained way of perceiving the world. Strategy in this respect is to theorganisation what personality is to the individual. hat is of %ey importance is that

strategy is a perspective shared by members of an organisation, through theirintentions and C or by their actions. n effect, when we tal% of strategy in this context,we are entering the realm of the collective mind # individuals united by commonthin%ing and C or behaviour.

/he choices an organi@ation ma%es about its strategy rely heavily on its culture Djust as patterns of behavior can emerge as strategy, patterns of thin%ing will shapean organi@ation+s perspective, and the things that it is able to do well.

Bor instance, an organi@ation that encourages ris%#ta%ing and innovation fromemployees might focus on coming up with innovative products as the main thrust

behind its strategy. y contrast, an organi@ation that emphasi@es the reliableprocessing of data may follow a strategy of offering these services to otherorgani@ations under outsourcing arrangements.

/o get an insight into your organi@ation+s perspective, use cultural analysis tools li%ethe 0ultural eb, eal and Eennedy+s 0ultural odel, and the 0ongruence odel.

/ur#ose

3sing the . /s

nstead of trying to use the 7 As as a process to follow while developing strategy,thin% of them as a variety of viewpoints that you should consider while developing arobust and successful strategy.

>s such, there are three points in the strategic planning process where it+sparticularly helpful to use the 7 As:

2. hen you+re gathering information and conducting the analysis needed forstrategy development, as a way of ensuring that you+ve considered everythingrelevant.

3. hen you+ve come up with initial ideas, as a way of testing that they+rerealistic, practical and robust.

5. >s a final chec% on the strategy that you+ve developed, to flush outinconsistencies and things that may not have been fully considered.


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Fsing int@berg+s 7 As at these points will highlight problems that would otherwiseundermine the implementation of your strategy.

>fter all, it+s much better to identify these problems at the planning stage than it is tofind out about them after you+ve spent several years D and millions of dollars D

implementing a plan that was flawed from the start.

Q: *#%ain the #rocess of Strategic Management in any organization14hat are the $arious ste#s of Strategic Management #rocess? Describe thesignificance of each ste#1

S/4>/?=0 >G>=??G/ A410?SS $7 Stage Arocess(

5! De$e%o# a strategic $ision for the com#any

Hision D ission statement Ivision is panoramic view of where we are going & givingspecifics to business plans

Hision D dentifies specifics competencies of the organisation, core competencies, statesyour basic strength & where you wish to be ISense of irection

ission D is methodology D Aeople, Arocess, Aolicy to get there

2. Birm exhibits strategic intent to favorably alter its mar%et position=?Ks e.g.: Le will emerge as global leaders & the preferred choice of the consumer

segment we choose to serve. Fsing /echnology & innovative services we will delight thecustomer & be committed to their success by sta%e holders creating wealth L

3. /he strategic vision should be intrinsically, closely lin%ed with companies ethics, value,beliefs#?.g.., Muality, building sta%eholder relationships0ustomer Services0S4?conomic Halue add $wealth creation(0reating a great place to wor%0ommitted to the success of nternal & ?xternal sta%eholders

5. /he firm should communicate its strategic vision to all sta%e holders lin%ed to valuechain creationA D Arice1 D 1perations0# 0ostsE D Enowledge? D ?xpenditure


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/ D /rainingS D Services

?.g.: G>G1 Supply 0hain 0ost increased -oss C 0osts of 27NN 0rores even beforeproducing a 0ar. ?xcellent 0ase of ?thics

almart

)ypermar%et, sells all merchandise across categories below 4A. 9NNNNerchandise ;NNN stores acrossodel is based on# -ow 0ost leadership

o Scale D Single longest player as a buyer of erchandise# hatever they save based on S0 cost pass it to the customer & part of it is retained toopen new store almartKs ESB is LAriceO is to give the best price to his customer

Arofitability is based on excellent S0 & not pricing of final goods Strategic anagement

ost Aeople should have in depth %nowledge of organisation

mportance of Strategic Hision: mperative to loo% beyond today & thin% strategically aboutthe

2. mpact of new technologies on the hori@on3. -ow customer needs and expectations are changing5. hat will it ta%e to overta%e or outrun the competitors6. hich promising mar%et opportunities to be aggressively pursued7. 1ther external and internal factors the company needs to prepare for future

L/here is no escaping the need for the strategic visionO

55! Setting Objecti$es :

/he firm ma%es an attempt to convert strategic vision into specifics EAs D creating results& outcome the company wishes to achieve out of strategic intent. /here are principally twotypes of objectives namely classify Binancial 1bjectives & Strategic 1bjectives

2( Binancial 1bjectives

i. ncrease the ?ASii. ncrease 0redit ratingsiii. >cceptable 4eturn on nvestment $?H>(iv. Stoc% Arice appreciation $or H> D ar%et Halue >dd(v. =ood 0ash Blowvi. =ood 0redit worthiness


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vii. )igher ividendsviii. =rowth in ?arnings C 4evenueix. )igher Arofit argins

State the objective that serves the anagement intends not only to deliver financial

performance but also to improve position of the organisation:

a. 0ompetitive >dvantageb. usiness Aositionc. -ong 4ange usiness Arospects

3( Strategic 1bjectives

i. ncrease in xP of top line and yP in bottom line this is the intent, outcome will befinancial.

ii. mprove cash flow eg: negotiate with creditors, create a system.iii. ncrease share of mar%et.iv. 4educe 1verall cost of production.v. 4ate of innovation: ncrease revenue through new product introduction and capitalise onfirst mover advantage.vi. >dopt top bottom approach, this is also called, commander approach.vii. 0reate stable earning during recession' de#ris% the business$ nfosys gets internalcustomers diverse from ban%ing products across many sectors. onte#0arlo, winter ear0ompany, now also in summer wear after saturation in core business areas. nability togrow into current mar%et.viii. mprove technology leapfrogging into future. ?g: Sony al%man, >pple #pod etc.ix. ncrease share of voice $ jargon of advertising( and augment perceived brand value.x. ?xpand into new geographic mar%et and new customer segments through brand andproduct line extensions.

?g: ettola( >ntisepticb( /alcum Aowderc( Soapd( and#>id >dhesive /ape.

5( Social 1bjectives.

i( 0orporate =overnance/ransparency around financial health of the company, to the sta%e holders.

0S4 $0orporate Social 4esponsibility(i. Aromise of *uality and supply of product at affordable price.ii. 0oncern for ?nvironment.Aroducts and Aractices of the businesses will not do damage to the environment.


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iii. AhilanthropyAledging to the under# privileged members of the society.iv. ?H> for shareholders.

555! Out%ining +or#orate Strategy1

i( /he firm needs to identify a framewor% of initiatives to be used as a part of overallcorporate strategy in order to establish a dominant business position, across either multiplesegments in a narrow industry or across diversified businesses.?g: /0.Aaper, /obacco, )otels, >pparels, B0=Aioneer in contract farming concept of e choupal.

S0> $Sustainable 0orporate >dvantage(

Eotlers# effectively sell what you produce# anaging and ac*uiring customers

Aorters2. usiness is mar%eting3. 4ise above average probability' eg D differentiation5. anaging competition # %ill competition and stay ahead


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Q: ,ow en$ironmenta% ana%ysis he%#s in eciing strategies of a businessorganization? 4hat are the ste#s in$o%$e in such ana%ysis? *#%ain with a suitab%ei%%ustrati$e eam#%e1

/he concept of external environment is important for every %ind of business operation.

?xternal environment is an attempt to understand the outside forces of the organisationalboundaries that are helping to shape of the organisation. /he external environment canprovide both facilitating and inhibiting influences on organi@ational performance. Eeydimension of the external environment principally consists of a micro environment and amacro environment.

?xternal ?nvironment

icro environment acro environment

Micro *n$ironment

icro environmental factors are internal factors close to a business that have adirect impact on its strategy. /hese factors include:

+ustomers

1rganisations survive on the basis of meeting Lcustomer needs and wantsO andproviding benefits for their customers. Bailure to do so will result in a failed businessstrategy.

*m#%oyees

?mploying the correct staff and %eeping staff motivated is an essential part of anorganisation+s strategic planning process. /raining and development play a criticalrole in achieving a competitive edge' especially in service sector mar%eting. /his isclearly apparent in the airline industry, where customer services are crucial inobtaining a competitive edge.

Su##%iers

Suppliers provide businesses with the materials they need to carry out their businessactivities. > supplier+s behaviour will directly impact the business it supplies. Borexample if a supplier provides a poor service this could increase timescales or lowerproduct *uality. >n increase in raw material prices will affect an organisation+smar%eting mix strategy and may even force price increases. 0lose supplierrelationships are an effective way to remain competitive and secure *ualityproducts.


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Shareho%ers

>s organisations re*uire inward investment to grow, they may decide to move fromprivate to public ownership and list on the stoc% mar%et. /he introduction of publicshareholders brings new pressures as public shareholders want a return from the

money they have invested in the company. Shareholder pressure to increase profitswill affect organisational strategy. 4elationships with shareholders need to bemanaged carefully as rapid short term increases in profit could detrimentally affectthe long term success of the business.

+om#etitors

/he name of the game in mar%eting is differentiation. 0an the organisation offerbenefits that are better than those offered by competitors oes the business have auni*ue selling point $FSA( 0ompetitor analysis and monitoring is crucial if anorganisation is to maintain or improve its position within the mar%et. f a business is

unaware of its competitor+s activities they will find it very difficult to LbeatO them. /hemar%et can move very *uic%ly whether that is a change in trading conditions,consumer behaviour or technological developments. >s a business it is important toexamine competitors+ responses to these changes so that you can maximise theimpact of your response.

Macro *n$ironment

/here are many factors in the macro#environment that will effect the decisions of themanagers of any organisation. /ax changes, new laws, trade barriers, demographic

change and government policy changes are all examples of macro change. /o helpanalyse these factors managers can categorise them using the A?S/?- model. /hisclassification distinguishes between:

Political factors. /hese refer to government policy such as the degree ofintervention in the economy. hat goods and services does a governmentwant to provide /o what extent does it believe in subsidising firms hat areits priorities in terms of business support Aolitical decisions can impact onmany vital areas for business such as the education of the wor%force, thehealth of the nation and the *uality of the infrastructure of the economy suchas the road and rail system.

Economic factors./hese include interest rates, taxation changes, economicgrowth, inflation and exchange rates. >s you will see throughout the"Boundations of ?conomics" boo% economic change can have a major impacton a firm+s behaviour. Bor example:

# higher interest rates may deter investment because it costs more toborrow

# a strong currency may ma%e exporting more difficult because it may


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raise the price in terms of foreign currency# inflation may provo%e higher wage demands from employees and raise

costs# higher national income growth may boost demand for a firm+s products

Social factors.0hanges in social trends can impact on the demand for a firm+s

products and the availability and willingness of individuals to wor%. n the FE,for example, the population has been ageing. /his has increased the costs forfirms who are committed to pension payments for their employees becausetheir staffs are living longer. /he ageing population also has impact ondemand: for example, demand for sheltered accommodation and medicineshave increased whereas demand for toys is falling.

Technological factors:new technologies create new products and newprocesses. A5 players, computer games, online gambling and highdefinition /Hs are all new mar%ets created by technological advances. 1nlineshopping, bar coding and computer aided design are all improvements to the

way we do business as a result of better technology. /echnology can reducecosts, improve *uality and lead to innovation. /hese developments canbenefit consumers as well as the organisations providing the products.

Environmental factors:environmental factors include the weather and climatechange. 0hanges in temperature can impact on many industries includingfarming, tourism and insurance. ith major climate changes occurring due toglobal warming and with greater environmental awareness this external factoris becoming a significant issue for firms to consider. /he growing desire toprotect the environment is having an impact on many industries such as thetravel and transportation industries $for example, more taxes being placed on

air travel and the success of hybrid cars( and the general move towards moreenvironmentally friendly products and processes is affecting demand patternsand creating business opportunities.

Legal factors:these are related to the legal environment in which firmsoperate. n recent years in the FE there have been many significant legalchanges that have affected firms+ behaviour. /he introduction of agediscrimination and disability discrimination legislation, an increase in theminimum wage and greater re*uirements for firms to recycle are examples ofrelatively recent laws that affect an organisation+s actions. -egal changes canaffect a firm+s costs $e.g. if new systems and procedures have to be

developed( and demand $e.g. if the law affects the li%elihood of customersbuying the good or using the service(.

ifferent categories of law include:


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consumer laws' these are designed to protect customers against unfairpractices such as misleading descriptions of the product

competition laws' these are aimed at protecting small firms against bullying bylarger firms and ensuring customers are not exploited by firms with monopolypower

employment laws' these cover areas such as redundancy, dismissal, wor%inghours and minimum wages. /hey aim to protect employees against the abuseof power by managers

health and safety legislation' these laws are aimed at ensuring the wor%placeis as safe as is reasonably practical. /hey cover issues such as training,reporting accidents and the appropriate provision of safety e*uipment

Typical PESTEL factors to consider include:

actor +ou% inc%ue:

Aolitical e.g. Aolitical stability, international trade, taxation policy

?conomic e.g. interest rates, exchange rates, national income, inflation,unemployment, Stoc% ar%et

Social e.g. ageing population, attitudes to wor%, income distribution

/echnological e.g. innovation, new product development, rate of technologicalobsolescence

?nvironmental e.g. global warming, environmental issues

-egal e.g. competition law, health and safety, employment law

*n$ironmenta% 'na%ysis /rocess

> business manager should be able to analy@e the environment to graspopportunities or face the threats. 1rgani@ations need to build strength and repairtheir wea%ness available in the business environment. /herefore, this process consistsof not only a single step but a process of various steps.

?nvironmental analysis comprises scanning, monitoring, analy@ing, and forecasting thebusiness situation. Scanning is to get the relevant information from the informationoverload. t is to focus on the most relevant information. onitoring is to chec% the natureof the environmental factors. >naly@ing re*uires data collection and use of differentre*uired tools and techni*ues. Borecasting is to find the future possibilities based onthe past results and present scenario.

?nvironmental analysis process is not static but a dynamic process. t may differdepending on the situation. )owever, a general process with few common steps can beidentified as the process of environmental analysis these are

a( onitoring or identifying environmental factors,b( Scanning and selecting the relevant factors and grouping them,c( efining variables for analysis,


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d( Fsing different methods, tools, and techni*ues for analysis,e( >naly@ing environmental factors and forecasting,f( esigning profiles, and

g( Strategic positioning and writing a report. rief discussion is made on each of the step ofthis environmental analysis process.

Q: Strategic im#%ementation is cha%%enging tas" in business organizationsea%ing with a #rob%em of organizationa% structure0 systems0 sty%es0 cu%ture0#ower an authority1 *#%ain with an a##ro#riate eam#%e1

Bormulating strategy is a difficult tas%. a%ing strategy wor%Texecuting orimplementing it throughout the organi@ationTis even more difficult. /his is wheremost failures occur. t is not uncommon for strategic plans to be drawn up annually,and to have no impact on the organi@ation as a whole.

Some obstac%es to effecti$e eecution

/he road to effective strategy execution is full of potholes and dangers. hat aresome of them

/%anning an eecution are intere#enent1Strategy formulation and implementation are separate, distinguishable partsof the strategic management process. -ogically, implementation followsformulation' one cannot implement something until that something exists. utformulation and implementation are also interdependent, part of an overallprocess of planning#executing#adapting. /his interdependence suggests that

overlap between planners and doersimproves the probability of executionsuccess. Got involving those responsible for execution in the planningprocess threatens %nowledge transfer, commitment to sought#after outcomes,and the entire implementation process.

*ecution ta"es time1/he successful implementation of strategy ta%es more time than itsformulation. /his can challenge managersK attention to execution details. /helonger time frame can also detract from managersK attention to strategic

goals. 0ontrols must be set to provide feedbac% and %eep managementabreast of external Lshoc%sO and changes. /he process of execution must bedynamic and adaptive, responding to unanticipated events. /his imperativechallenges managers responsible for execution.


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*ecution in$o%$es many #eo#%e1Strategy implementation always involves more people than strategyformulation. /his presents problems. 0ommunication down the organi@ationor across different functions becomes a challenge. a%ing sure thatprocesses throughout the organi@ation support strategy execution efforts can

be problematical in a large organi@ation. -in%ing strategic objectives with theday#to#day objectives at different organi@ational levels and locations becomesa challenging tas%. /he larger the number of people involved, the greater thechallenge to execute strategy effectively.

*ffecti$e eecution in$o%$es managers across a%% hierarchica% %e$e%s1 >nother problem is that some top#level managers believe strategyimplementation is Lbelow them,O something best left to lower#level employees./his view holds that one group of managers does innovative, challenging

wor% $planning(, and then Lhands off the ballO to lower#levels for execution. fthings go awry, the problem is placed s*uarely at the feet of the Ldoers,O whosomehow couldnKt implement a perfectly sound and viable plan.

Managing change is ifficu%t1?xecution often involves changeTin structure, incentives, controls, people,objectives, responsibilities. >s we %now, change can be threatening. /heimportance of managing change well is clearly important for effective strategyimplementation. /he inability to manage change and reduce resistance tonew implementation decisions or actions can spell disaster for executionefforts.

Other eecution-re%ate #rob%ems1/hey include responsibility and accountabilityfor execution activities anddecisions that are not clear'poor nowledge sharingamong %ey functions ordivisions' dysfunctional incentives' inade!uate coordination'poor or vaguestrategy' and not having guidelines or a modelto shape execution activitiesand decisions. Space limitations prevent a complete discussion of how toovercome all obstacles to strategy execution.

/he easy part of managing a law firm %nows what to do. /he hard part is havingthe vision and courage to get it done. any solutions to strategic issues aredeceptively simple and often appear self#evident on the surface.

U Bor example, if your traditional mar%ets are maturing and becoming more price#competitive, it is self#evident that you should diversify into new areas andCorlocations.


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U /he challenge, of course, is not in %nowing that you should diversify, but insuccessfully finding an ac*uisition that affords the right fit, getting the deal done,wor%ing tirelessly to integrate LstrangersO into an existing culture, and convincingyour partners that success in implementing strategy re*uires patience anddiligent leadership.

0ompanies that attempt strategic change without considering organizationa%cu%ture ris% failure. usiness leaders need to be aware that culture is not justsomething that happens outside of a business. 0ompanies large and small havetheir own cultures as well. > culture can happen spontaneously within a company,and managers can learn how to harness its power or be overpowered by it.anagers can also ta%e an active part in shaping an organi@ational culture, to try toensure that it benefits the companyKs goals and its employees.

?very organi@ation has a uni*ue structure. >n organizationa% structure is thereflection of the companyKs past history, reporting relationships and internal politics.

Rou need to ta%e a very close loo% at your organi@ation structure and evaluate if itsupports your strategy. Rou may need to customi@e your organi@ational structure tofit your strategy.

Q: *#%ain how Michae% /orters fi$e forces moe% is he%#fu% in forth comingS4O) 7 'na%ysis carrie out in formu%ation of Business strategy1

/o formulate effective strategies, managers in an organi@ation need to be aware ofrealities in the business environment. Strategy formulation thus begins with ascanning of the external as well as internal environment. >nalysis of externalenvironment helps to identify the possible threats and opportunities while analysis ofinternal environment helps to identify strengths, wea%nesses and the %ey peoplewithin the organisation.

A14/?4+S BH? B140?S 1?-:

Aorter argues that there are five forces that determine the profitability of an industry./hey are:


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Aorter contends that "/he collective strengths of these forces determines theultimate profit potential in the industry, where profit potential is measured in terms oflong run return on investment capital".

f you can manage all 7 forces, you can have Sustainable 0orporate >dvantage$S0>(. S0> isa( ndustry dominanceCmar%et leaderb( >bove industry average profit

-et us see each of them in detail:

)hreat of new entrants:

Gew entrants to an industry typically brings to it new capacity and desire to gainmar%et si@e and substantial sources. /hey are therefore threats to establishedcorporations. /hreat of entry depends on the entry barriers and the reaction that canbe expected from the existing companies. >n entry barrier is an obstruction thatma%es it difficult for a company to enter into an industry. ajor entry barriers include:

*conomies of sca%e:

/hese exist whenever large volume firms enjoy significantly lower production costper unit than smaller volumes operator do. /his discourages firms, which have lessvolume and high production cost from entering into the mar%et.+ost isa$antage ine#enent of sca%e:?stablished competitors may have cost advantage even when the new entrant hascomparable economies of scale. /his advantage may include proprietary product%nowledge such as patents, favourable access to raw materials, favourablelocations, government subsidies etc.


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/rouct ifferentiation:ifferences in physical or perceived characteristics must ma%e incumbent+s productuni*ue in the eyes of customer and force customers to overcome existing brandloyalty.+a#ita% re


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)hreat of forwar integration:Borward integration involves a supplier moving into a later stage of themanufacturing process or distribution i.e. moving into direct competition with itscustomers.

Bargaining #ower of buyers:uyers can exert bargaining power over a supplier industry by forcing its pricesdown, by reducing the amount of goods they purchase from the industry or bydemanding better *uality for the same price.

Bactors that ma%es the buyer more powerful:

3nifferentiate or stanar su##%ies:f the product being supplied is a commodity good or service then customers canshop around for the most favourable terms.

+reib%e threat of bac"war integration:ac%ward integration involves a buyer moving to an earlier stage of manufacturingor distribution, thus becoming a competitor for the supplier+s business.'ccurate information about the cost structure of the su##%ier:/his allows the customers to exercise more precision in negotiating the price of thesupplier./rice sensiti$ity:uyers are li%ely to be more price#sensitive if a( Suppliers represent the significantfraction of the total cost incurred by the buyers b( /he supplier product isunimportant to the overall *uality or cost of the buyer+s final product and c( /hebuyers already earn a low profit.

> growing trend among small businesses is to augment their bargaining power ascustomers through joining or forming buying groups.

)hreat of substitute #roucts:Substitute products are those products that appear to be different but can satisfy thesame need as another product. /he availability of substitutes places a ceiling onprice limit of an industry product. hen the price of the product rises above that ofthe substitute product customers tend to switch over to the substitutes. eregulationand technology revolution has given rise to a lot of substitutes.

)he intensity of ri$a%ry among eisting #%ayers:

n most industries individual firms are mutually dependent. 0ompetitive moves byone firm can be expected to have noticeable effects on its competitors and cause


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retaliation or counter efforts. 0ompetition can be in the form of pricing, productdifferentiation, product innovation etc.

Bactors that increase competitive rivalry are:

*dditional sales volume can help to offset high fixed cost. )ence competitors mightbe willing to fight for any possible sales.;ac" of ifferentiation or %ac" of switching cost:/hese two factors ensure that customers can easily switch over to a rival product

and to retain them is a constant struggle.;arge increase in manufacturing ca#acity:f a manufacturer can increase capacity by a large increment, by building a newplant, it will run it at full capacity to %eep the unit cost less # thus producing so muchthat the selling price falls throughout the industry.,igh strategic sta"es:/he mar%et is well worth fighting for because of its profit potential or theopportunities it creates elsewhere.,igh eit barriers:Bor economic, strategic or emotional reasons, individual players might consider itdifficult to leave the industry./he outcome of industry and external environment analysis results in identifying therelevant and important opportunities and threats the organisation has to face in thefuture.

S4O) '>D O(='>5S')5O> +'/'B5;5)& '>';&S5S

S1/ analysis is the assessment of comparative strengths and wea%nesses of afirm in relation to its competitors' and environmental opportunities and threats, whicha company may have to face in the future. t should be based on logic and rationalthin%ing such that a proper strategy improves an organi@ationKs business strengthand opportunities and at the same time reduces the wea%nesses and threats.

Strength and wea%ness are internal forces and factors that are to be assessed fromcontinuously since more and more competitive organi@ations with state of the art


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technology and services are entering into the mar%et and competition is gettingintensified day by day.

1pportunities and threats are the external factors and forces in the businessenvironment which are also changing day by day with the change of governmentpolicy, industrial policy, monetary policy, political situation at national andinternational levels, formation of various trade bloc%s and trade barriers including thechanges in legal and social environment in the business world.

Strength:Strength is the power and excellence with the resources, s%ills and advantages inrelation to the competitors. > strength is a distinct technical superiority with besttechnical %now#how, financial resources and s%ill of the people in the organi@ation,

goodwill and image in the mar%et for the product and services, companyKs access tobest distribution networ%, the discipline, morale, attitude and mannerisms of theemployees at all levels with a sense of belonging.ndian nstitute of /echnology adras

Weakness:ea%ness is the incapability, limitation and deficiency in resources such astechnical, financial, manpower, s%ills, brand image and distribution pattern. t refersto constraints or obstacles, which chec% movement in a certain direction and mayalso, inhibit an organi@ation in gaining a distinct competitive advantage.

Opportunities:?nvironmental opportunity is an alternative area for companyKs action in which theparticular company would enjoy a competitive advantage. >n opportunity is a majorfavorable advantage to a company. Aroper analysis of the environment andidentification of new mar%et, new and improved customer group with better productsubstitutes or supplierKs relationship could represent opportunities for the company.

Threat:?nvironmental threat is the challenge posed by the unavoidable trend ordevelopment that would lead, in the absence of purposeful action to the erosion ofthe companyKs position. Slow mar%et growth, entry of resourceful multinationalcompanies, increase bargaining power of the buyers or sellers because of a largenumber of options, *uic% rate of obsolescence due to major technological changeand adverse situation because of change of government policy rules and regulationis disadvantageous to any company and may pose a serious threat to businessoperation.


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S1/ analysis can be used in conjunction with other tools for audit and analysis,such as AorterKs Bive#Borce analysis.

Setting the objective should be done after the S1/ analysis has been performed.

/his would allow achievable goals or objectives to be set for the [email protected] of S1/s is essential because subse*uent steps in the process ofplanning for achievement of the selected objective may be derived from the S1/s.

>s part of the development of strategies and plans to enable the organi@ation toachieve its objectives, then that organi@ation will use a systematicCrigorous process%nown as corporate planning. S1/ can be used as a basis for the analysis ofbusiness and environmental factors.

ichael Aorter developed the 7 Bive Borces >nalysis model to better identify factorsthat shape the character of competition, to assess the structuralattractiveness and business value of any industry and to pinpoint strengthsand wea%nesses in a company.

n addition to and in combination with the S1/ analysis, the Bive Borces model byichael Aorter provides another analysis tool to identify opportunities and ris%s whenentering untapped territory in any industry or mar%et. AorterKs Bive Borces modelwhen used with S1/ analysis provides clear action and thus does not rely solelyon subjective judgment. f the actions that derived from the Bive Borces model are


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synchroni@ed with business re*uirements and goals it can become a substantialbusiness driver in the competitive environment and helps in formulating businessstrategy.

Q:Michae% /orters i$e forces moe% of 5nustry attracti$eness enab%es anycom#any to out#erform their com#etitors1 5%%ustrate your answer by ana%yzingany 5nustry of your choice

)heory 7 as #er #re$ious nother major factor that adds to the industry rivalry is the fact that the entry barriersto pharma industry are very low. /he fixed cost re*uirement is low but the need forwor%ing capital is high.

/he fixed asset turnover, which is one of the gauges of fixed cost re*uirements, tells

us that in bigger companies this ratio is in the range of 5.7 to 6 times. Bor smallercompanies, it would be even higher.

any smaller players that are focused on a particular region, have a better hang ofthe distribution channel, ma%ing it easier to succeed, albeit in a limited way.

>n important fact is that pharma is a stable mar%et and its growth rate generallytrac%s the economic growth of the country with some multiple $2.3 times average inndia (/hough volume growth has been consistent over a period of time, valuegrowth has not followed in tandem.

/he product differentiation is one %ey factor, which gives competitive advantage tothe firms in any industry. )owever, in pharma industry product differentiation is notpossible since ndia has followed process patents till date, with laws favouringimitators.

0onse*uently, product differentiation is not the driver, cost competitiveness is.)owever, companies li%e Afi@er and =laxo have created big brands in over the


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years, which act as product differentiation tools. /his will enhance over the longterm, as product patents come into play from 3NN7.

Bargaining #ower of buyers/he uni*ue feature of pharma industry is that the end user of the product is different

from the influencer $read doctor(. /he consumer has no choice but to buy whatdoctor says. )owever, when we loo% at the buyer+s power, we loo% at the influencethey have on the prices of the product.

n pharma industry, the buyers are scattered and they as such does not wield muchpower in the pricing of the products. )owever, government with its policies, plays animportant role in regulating pricing through the GAA> $Gational AharmaceuticalAricing >uthority(.

Bargaining #ower of su##%iers/he pharma industry depends upon several organic chemicals. /he chemical

industry is again very competitive and fragmented. /he chemicals used in thepharma industry are largely a commodity.

/he suppliers have very low bargaining power and the companies in the pharmaindustry can switch from their suppliers without incurring a very high cost.

)owever, what can happen is that the supplier can go for forward integration tobecome a pharma company. 0ompanies li%e 1rchid 0hemicals and Sashun0hemicals were basically chemical companies, who turned themselves intopharmaceutical companies.

Barriers to entryAharma industry is one of the most easily accessible industries for an entrepreneurin ndia. /he capital re*uirement for the industry is very low, creating a regionaldistribution networ% is easy, since the point of sales is restricted in this industry inndia.

)owever, creating brand awareness and franchisee amongst doctors is the %ey forlong#term survival. >lso, *uality regulations by the government may put somehindrance for establishing new manufacturing operations.

=oing forward, the impending new patent regime will raise the barriers to entry. ut it

is unli%ely to discourage new entrants, as mar%et for generics will be as huge.

)hreat of substitutes/his is one of the great advantages of the pharma industry. hatever happens,demand for pharma products continues and the industry thrives. 1ne of the %eyreasons for high competitiveness in the industry is that as an on going concern,pharma industry seems to have an infinite future.


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Strategic anagement process begins after the Hision and ission statement havebeen set. Hision and ission statement actually indicate the direction of strategicmanagement process.

Mission Statement

ission statement is the statement of the role by which an organi@ation intends toserve itKs sta%eholders. t describes why an organi@ation is operating and thusprovides a framewor% within which strategies are formulated. t describes what theorgani@ation does $i.e., present capabilities(, who all it serves $i.e., sta%eholders( andwhat ma%es an organi@ation uni*ue $i.e., reason for existence(. > mission statementdifferentiates an organi@ation from others by explaining its broad scope of activities,its products, and technologies it uses to achieve its goals and objectives. t tal%sabout an organi@ationKs present $i.e., Labout where we areO(. Bor instance,Microsofts mission is to help people and businesses throughout the world toreali@e their full potential. 4a%-Marts missionis L/o give ordinary fol% the chance tobuy the same thing as rich people.O ission statements always exist at top level ofan organi@ation, but may also be made for various organi@ational levels. 0hiefexecutive plays a significant role in formulation of mission statement. 1nce themission statement is formulated, it serves the organi@ation in long run, but it maybecome ambiguous with organi@ational growth and innovations. n todayKs dynamicand competitive environment, mission may need to be redefined. )owever, caremust be ta%en that the redefined mission statement should have originalfundamentalsCcomponents. ission statement has three main components#astatement of mission or vision of the company, a statement of the core values thatshape the acts and behaviour of the employees, and a statement of the goals andobjectives.

Features o a Mission

a. ission must be feasib%eand attainable. t should be possible to achieve it.b. ission should be c%earenough so that any action can be ta%en.c. t should be ins#iringfor the management, staff and society at large.d. t should be #recise enough, i.e., it should be neither too broad nor too

narrow.e. t should be uni


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!ision

> vision statement identifies where the organi@ation wants or intends to be in future

or where it should be to best meet the needs of the sta%eholders. t describesdreams and aspirations for future. Bor instance, Microsofts $isionis Lto empowerpeople through great software, any time, any place, or any device.O 4a%-Marts$isionis to become worldwide leader in retailing. > vision is the potential to viewthings ahead of themselves. t answers the *uestion Lwhere we want to beO. t givesus a reminder about what we attempt to develop. > vision statement is for theorgani@ation and itKs members, unli%e the mission statement which is for thecustomersCclients. t contributes in effective decision ma%ing as well as effectivebusiness planning. t incorporates a shared understanding about the nature and aimof the organi@ation and utili@es this understanding to direct and guide theorgani@ation towards a better purpose. t describes that on achieving the mission,

how the organi@ational future would appear to be.

>n effective vision statement must have following features#

a. t must be unambiguous.b. t must be c%ear.c. t must harmonizewith organi@ationKs culture and values.d. /he dreams and aspirations must be rationa%Area%istic.e. Hision statements should be shorterso that they are easier to memori@e.

n order to reali@e the vision, it must be deeply instilled in the organi@ation, beingowned and shared by everyone involved in the organi@ation.

O"#ectives

>n organi@ationKs mission gives a framewor% or direction to a firm. /he next step inplanning is focusing on establishing progressively more specific organi@ationaldirection by setting objectives. >n organi@ational objective is a target toward whichthe organi@ation directs its efforts.

> goal is a desired future state or objective that an organi@ation tries to achieve.

=oals specify in particular what must be done if an organi@ation is to attain missionor vision. =oals ma%e mission more prominent and concrete. /hey co#ordinate andintegrate various functional and departmental areas in an organi@ation. ell madegoals have following features#

a. /hese are #recise an measurab%e.b. /hese loo% after critica% an significantissues.c. /hese are rea%isticand challenging.


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d. /hese must be achieved within a s#ecific timeframe.e. /hese include both financia% as we%% as non-financia% com#onents.

1bjectives are defined as goals that organi@ation wants to achieve over a period oftime. /hese are the foundation of planning. Aolicies are developed in an

organi@ation so as to achieve these objectives. Bormulation of objectives is the tas%of top level management. ?ffective objectives have following features#

a. /hese are not single for an organi@ation, but mu%ti#%e.b. 1bjectives should be both short-term as we%% as %ong-term.c. 1bjectives must respond and react to changes in environment, i.e., they must

be f%eib%e.d. /hese must be feasible, rea%istic an o#erationa%.

,ierarchy of objecti$es

6ision0 Mission @ Objecti$es of a business schoo%1

6ision:


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Muality /raining with focused job assistance: /o excel in providing professionaleducation through innovative education system create desired wor% culture capableof meeting global challenges to fulfil integrating industrial re*uirements.

Mission:

/o train our young professionals by giving them a solid foothold in managementtheories along with real industrial experience to meet the challenges with superiorcompetence, imagination and @eal which ta%e the students seamlessly to anadvanced level.

Objecti$es:

/o provide a platform to the aspiring students community to lin% their

education to employment in pharmaceutical and health care industry. /o increase the upta%e of management development and education through

nstitute programmes and *ualifications. /o increase awareness of the nstitute, and achieve recognition for its

contribution to better management practice in pharmaceutical and health careindustry.

/o cater the %nowledge see%er and shape up their career in thepharmaceutical and health care professional world through Muality ?ducation,4esearch based practical %now#how, nnovative and advance teachingmethodologies and =lobal ?xposure.

/o build a strong networ% with the pharmaceutical and health care industries

to fulfil their need of future professionals. /o design, implement and establish industry integrated professional

education programs in association with leading Fniversities of ndia & abroad. /o develop the nstitute+s structure, systems, intellectual capital and financial

strength to enable the organisation to fulfil its mission.

Strategy formulation is the process of determining appropriate courses of action forachieving organi@ational objectives and thereby accomplishing organi@ationalpurpose.

/he purpose of a Strategic Bormulation is to describe the future of the organi@ationthrough the definition of the organi@ationKs Hision, ission, =oals, and 1bjectives.

/he strategy statement of a firm sets the firmKs long#term strategic direction andbroad policy directions. t gives the firm a clear sense of direction and a blueprint forthe firmKs activities for the upcoming years.


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n the globali@ed business, companies re*uire strategic thin%ing and only by evolvinggood corporate strategies can they become strategically competitive. > strategy of abusiness organi@ation is a comprehensive master plan stating how the organi@ationwill achieve its mission and objectives. Strategy is significant because it is universal.t helps corporate to %eep pace with changing environs, provides better

understanding of external environment, minimi@es competitive disadvantage byforcing to thin% clearly about mission, vision and objectives of enterprise. t improvesmotivation of employees and strengthens decision#ma%ing. t forms the basis forimplementing actions.

Strategy ma%ing is an on#going process involving activities li%e defining vision,mission and goals, analy@ing organi@ation and environment and matching them todecide suitable actions and objectives, and implementing with a review system.

Hision, mission & objective statements create clarity and form a basis for ma%ingboth strategic and tactical decisions # all of which help a company thrive instead of

survive.

Q: *#%ain the conce#t of Business Objecti$es an what are the mainingreients of the same1

usiness 1bjectives are the end result of planned activity. /hey state what is to beaccomplished by when and should be *uantified if possible. /he achievement ofcorporate objective should result in the fulfillment of a corporate mission. /he areasin which a company might establish its goals and objective are profitability, growth,shareholder+s wealth, utili@ation of resources etc.

usiness objectives are important to give direction to a business. f you are runninga business without any business objectives, you shall not be able to growsuccessfully in any direction. )aving business objectives, gives you a much betterunderstanding of where you stand, how to improve and what changes in your currentmethod of wor%ing will be re*uired to reach your objectives. Got having businessobjectives leads to an un#coordinated business that has a very low probability ofbeing successful.

hen setting business objectives, one must ma%e sure that they are:

Muantitative: /he business objectives should be expressed in terms ofnumbers. t should not be expressed vaguely li%e, L1ur sales should go upVO

/ime#frame specific: /ime frames should be specified in the businessobjectives. /his helps you to understand where you stand with respect to thecompletion of the current objective.

Blexible: t is very important that your business objectives are adaptable tochange. f the situation in which the business is wor%ing changes, thebusiness objectives should change to reflect these changes.


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Fnderstandable: /he business objectives should be made in anunderstandable way. /his helps in communicating your objectives to yourinvestors, employees, partners etc. ithout this communication of businessobjectives, it becomes very difficult to reach them.

4ealistic: t is important that the business objectives are realistic, or you may

end up disappointing your investors and yourself.

/here are principally two types of objectives namely classify Binancial 1bjectives &Strategic 1bjectives

! inancia% Objecti$es

i. ncrease the ?ASii. ncrease 0redit ratings

iii. >cceptable 4eturn on nvestment $?H>(iv. Stoc% Arice appreciation $or H> D ar%et Halue >dd(v. =ood 0ash Blowvi. =ood 0redit worthinessvii. )igher ividendsviii. =rowth in ?arnings C 4evenueix. )igher Arofit argins

State the objectives that serve the anagement intend not only to deliver financialperformance but also to improve position of the organisation:

a. 0ompetitive >dvantageb. usiness Aositionc. -ong 4ange usiness Arospects

C! Strategic Objecti$es

i. ncrease in xP of top line and yP in bottom line this is the intent, outcome will befinancial.ii. mprove cash flow eg: negotiate with creditors, create a system.iii. ncrease share of mar%et.iv. 4educe 1verall cost of production.

v. 4ate of innovation: ncrease revenue through new product introduction andcapitalise on first mover advantage.vi. >dopt top bottom approach, this is also called, commander approach.vii. 0reate stable earning during recession' de#ris% the business $ nfosys getsinternal customers diverse from ban%ing products across many sectors. onte#0arlo, winter ear 0ompany, now also in summer wear after saturation in corebusiness areas. nability to grow into current mar%et.viii. mprove technology leapfrogging into future. ?g: Sony al%man, >pple #pod etc.


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>nswer the *uestion' what impact do we want to have on society

Fnite an organi@ation in a common, coherent strategic direction.

0onvey a larger sense of organi@ational purpose, so that employees see

themselves as Lbuilding a cathedralO rather than Llaying stonesO.

Mission Statements

/he mission statement should be a concise statement of business strategy anddeveloped from the customer"s perspectiveand it should fit with the vision for thebusiness. /he mission should answer three *uestions:

2. hat do we do

3. )ow do we do it5. Bor whom do we do it

#hat do we do$/his *uestion should not be answered in terms of what is physicallydelivered to customers, but by the real andCor psychological needs that are fulfilledwhen customers buy your products or services. 0ustomers ma%e purchasedecisions for many reasons, including economical, logistical, and emotional factors.

>n excellent illustration of this is a business in the /win 0ities that imports hand#made jewelry from east >frica. hen as%ed what her business does, the ownerreplied, "e import and mar%et east >frican jewelry." ut when as%ed whycustomers buy her jewelry, she explained that, "/hey+re buying a story in where the

jewelry came from." /his is an important distinction and answering this *uestion fromthe need#fulfilled perspective will help you answer the other two *uestions effectively.

%ow do we do it$ /his *uestion captures the more technical elements of thebusiness. Rour answer should encompass the physical product or service and how itis sold and delivered to customers and it should fit with the need that the customerfulfills with its purchase. n the example above, the business owner had originallydefined her business as selling east >frican jewelry and was attempting to sell it onshelves of bouti*ue retail stores with little success. >fter modifying the answer to thefirst *uestion, she reali@ed that she needed to deliver the story to her customersalong with the product. She began organi@ing wine parties that included a slide show

of east >frica, stories of personal experiences there, and pictures and descriptions ofthe villagers who ma%e the jewelry. /his method of delivery has been verysuccessful for her business.

&or whom do we do it$/he answer to this *uestion is also vital, as it will help youfocus your mar%eting efforts. /hough many small business owners would li%e tobelieve otherwise, not everyone is a potential customer, as customers will almostalways have both demographic and geographic limitations. hen starting out, it is


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generally a good idea to define the demographic characteristics $age, income, etc.(of customers who are li%ely to buy and then define a geographic area in which yourbusiness can gain a presence. >s you grow, you can add new customer groups andexpand your geographic focus.

>n additional consideration with mission statements is that most businesses willhave multiple customer groups that purchase for different reasons. n these cases,one mission statement can be written to answer each of the three *uestions for eachcustomer group or multiple mission statements can be developed. >lso, as a finalthought, remember that your vision and mission statements are meant to help guidethe business, not to loc% you into a particular direction. >s your company grows andas the competitive environment changes, your mission may re*uire change toinclude additional or different needs fulfilled, delivery systems, or customer groups.ith this in mind, your vision and mission should be revisited periodically todetermine whether modifications are desirable.

Strategic intentrefers to an obsession with achieving an objective that stretchesthe company and re*uires it to build new resources and capabilities. /his strategicintent usually incorporates stretch targets, which force companies to compete ininnovative ways.

Strategies are involved in the formulation, implementation and evaluation of strategy./he hierarchy of strategic intent lays the foundation for strategic managementprocess. /he process of establishing the hierarchy of strategic intent is verycomplex. /he hierarchy of strategic intent covers the vision, mission, businessdefinition, business model and the goals and objectives. n this hierarchy, the vision,mission, business definition and objectives are established. Bormulation of strategies

is possible only when strategic intent is clearly set up. /his step is mostlyphilosophical in nature. t will have long term impact on the organi@ation.

Hision is at the top in the hierarchy of strategic intent. t is what the firm wouldultimately li%e to become.ission is the Lessential purpose of the organi@ation, concerning particularly why it isin existence, the nature of the business it is in, and the customers it see%s to serveand satisfy." /he mission statements stage the role that organi@ation plays in society.usiness definition explains the business of an organi@ation in terms of customerneeds, customer groups and alternative technologies.1bjectives refer to the ultimate end results which are to be accomplished by theoverall plan over a specified period of time. /he vision, mission and businessdefinition determine the business philosophy to be adopted in the long run. /hegoals and objectives are set to achieve them.


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Q: *#%ain the conce#t of Di$ersification1

)he im#ortant as#ects that com#anies must consier before i$ersifying anmeasures to juge the success of i$ersification1

Does it i%ute the Business ris" resu%ting in a #athway for success? =i$ei%%ustrations1Di$ersification is a (is" (euction e$ise an a #athway for success1

Di$ersification is ine$itab%e to remain in business1 +om#anies ha$e ao#teifferent forms of i$ersification to achie$e their objecti$es1 4hat #arameters can

be use to juge the


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Di$ersification

iversification is one of the grand strategies, which basically is a growth strategy.asically diversification involves a substantial change the business definition in

terms of product range, customers or alternative technologies. iversificationstrategies have been adopted a number of business groups and individualcompanies both in the public and private sectors.

/his strategy involves growth through the ac*uisition of firms in other industries orlines of business as explained below.2. 1rgani@ations in slow#growth industries may purchase firms in faster#growingindustries to increase their overall growth rate.3. 1rgani@ations with excess cash often find investment in another industry$particularly a fast#growing one( a profitable strategy.5. 1rgani@ations may diversify in order to spread their ris%s across several

industries.6. /he ac*uiring organi@ation may have management talent, financial and technicalresources, or mar%eting s%ills that it can apply to a wea% firm in another industry inthe hope of ma%ing it highly profitable.

iversification may be of different types.

4elated or concentric diversification when the ac*uired firm has productiontechnology, products, channels of distribution, and Cor mar%ets similar to those of thefirm purchasing it, the strategy is called concentric diversification.. /his strategy isuseful when the organi@ation can ac*uire greater efficiency or mar%et impact throughthe use of shared resources.

> case of related or concentric diversification is ahindra & ahindra selling 0ars,/ractors and two wheelers.

Fnrelated or conglomerate diversification when the ac*uired firm is in a completelydifferent line of business, the strategy is called unrelated or conglomeratediversification >n example of unrelated conglomerate diversification is aricoKsventure into coo%ing oil segment.

4hy i$ersify?

1rgani@ations diversify due to the following reasons. Some of the common reasonsare as follows.

Synergy: Synergy is cited in the most common cause of diversification. Synergyoccurs when two or more activities produce their combined effect greater than thesum of its parts i.e., 3 Q 3 ore than 6.o 4elated diversification produces synergies rooted in production technology. iththe additional technical facilities, a by#product or joint product may be produced.


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o oth related and unrelated enable the companies to sell the products with samedistribution networ% and advertisement facilities. /he advertisement of one productspontaneously advertises other products with enhanced brand loyalty. /his ismar%eting synergy.o Synergetic effect can also be noticed in financial operations, when the positive

cash flow of one business utili@ed in other business helps to generate more positivecash flows.

S#reaing of (is"1 iversification helps to avoid over dependence on oneproductCmar%et. t spreads the ris% associated with one product line or few products.

Better o##ortunities1 ith diversification, company can exploit the betteropportunities in new product line. ?very product has its own product life cycle. /ogain better mar%et share, company has to either differentiate or diversify.

Better uti%ization of (esources1 ith diversification, company can better use

hitherto unexploited resources li%e finance, mar%et channels, production facilities,technological capabilities, managerial %nowledge, etc. /he idle retained earningscould be utili@ed to produce new products. /heir mar%eting may not be a problembecause the same dealers will sell the new products. Same production facilities andtechnology can be utili@ed sometimes adding more capacity to it.

+om#etiti$e Strategy1 iversification is a good competitive strategy. > companymay enter new product lines of business to gain a competitive edge over thecompetitors or discourage them by entering before their arrival.

Mar"et Dominance. iversification ta%e place to exploit tremendous mar%etopportunities in home as well as in foreign countries with the objective of gainingmar%et dominance.

)y#es of i$ersification/here are three general types of diversification strategies: concentric hori@ontal, andconglomerate.

+oncentric Di$ersificationFnder concentric diversification new products and services are added to the line withthe condition that these products and services are related to their existingproductsCservices carried by the organi@ation. Bor concentric diversification itbecomes necessary that the products or services that are added must be within theframewor% of the %now how and experience in technology, product line, distributionchannels or customer base of the organi@ation.


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hen the industry grows, the organi@ation will get strength where concentricdiversification becomes an important strategy for its survival and growth. > study of68N corporations accounting for twoCthirds of the FS corporate industrial assetsconcluded, L/hat diversification that has led to relatively rapid rates of corporategrowth has been to mar%ets that are related to the entering organi@ationKs original

mar%et. 0oncentric diversification has been successfully practiced by a large numberof organi@ations in ndia. Bor instance L>mulO has diversified in chocolates, cecreams, utter, =hee etc. 1n the same pattern, Lil% BoodO has diversified.Similarly, )onda has diversified into to otor 0ycles, 0ars etc.

n conclusion, it may be stated that concentric diversification has been *uitesuccessful in the past' it is expected to be successful in future also.

,orizonta% Di$ersificationhere an organi@ation adds unrelated products and services for existing customers,this is called hori@ontal diversification. /he strategy is comparatively less ris%y

because the customers are %nown. /he organi@ation is fully ac*uainted with theirconsumersK preference and their expectations about the *uality and price of thegoods and services.)ori@ontal diversification can be accomplished by ac*uiring the shareholding of thecompetitor, by the purchase of the assets or by pooling of the interests of twoorgani@ations. )ori@ontal diversification see%s to eliminate competitors. n ourcountry a /.H. manufacturing company Fptron has created a new division forspreading computer education in the country.t is a combination of hardware andsoftware.

+ong%omerate Di$ersification0onglomerate diversification is a growth strategy in which new products andservices are added which are significantly different from the organi@ationKs presentproduct and services.0onglomerate diversification is effected in the hope that the addition of new productsand services may bring about some turnaround by way of conversion of losses intoprofits.echanics for adopting conglomerate diversification has been summari@ed asfollows:

2. Supporting some divisions with cash flow from other divisions during the period ofdevelopment or temporary difficulty.3. Fsing the profits of one division to cover the expenses of another division withoutpayment of taxes from the first division.

5. ?ncouraging growth for its own sa%e or to satisfy the values and ambitions ofmanagement or the owners.6. /a%ing advantage of unusually attractive growth opportunities.7. istributing ris% by serving several different mar%ets.


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8. mproving overall profitability and flexibility of the organi@ation by moving intoindustries that have better economic prospects than those of the ac*[email protected]. =aining better access to capital mar%ets and better stability or growth in theearnings.

;. ncreasing the price of an originationKs stoc% clear definition of organi@ational objectives.3. > determination of the organi@ationKs ability to diversify, which includes an analysisof its present operations $internal organi@ational analysis( and resources availablefor diversification.5. ?stablishment of specific criteria for purchasing other organi@ations6. > comprehensive search for organi@ations and their evaluation against the criteria.

?xamples of companies that have diversified into related business concentricdiversification

=5;;*))*:o lades and ra@orso /oiletries $4ight =uard, Boamy, ry dea, Soft & ry , hite 4ain(o 1ral# toothbrusheso raun shavers, coffeema%ers, alarm cloc%s, mixers, hair dryers, and electrictoothbrushes

EO,>SO> @ EO,>SO>o aby products $powder, shampoo, oil, lotion(o and#>ids and other first#aid productso omenKs health and personal care products $Stay free, 0arefree, Sure & Gatural(o Geutrogena and >veeno s%in care productso Gonprescription drugs $/ylenol, otrin, pepcid >0, ylanta, onistat(o Arescription drugso Arosthetic and other medical deviceso Surgical and hospital productso >ccuvue contact lenses


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?xamples of companies that have diversified into unrelated business.

),* 4';) D5S>*& +OM/'>&o /heme par%s

o isney 0ruise -ineo 4esort propertieso ove, video, and theatrical productions $for both children and adults(o /elevision broadcasting $>0, isney 0hannel, /oon isney, 0lassic Sports,Getwor%, ?ASG and ?ASG3, ?V, -ifetime, and >&? networ%s(o 4adio broadcasting $isney 4adio(o usical recordings and sales of animation art

),* )6S =(O3/o >uto & auto partso 0oach body building

o /ransporto Bastenerso ra%e linings & clutch facingso > citation systems for commercial vehicleso )ire purchaseo heel structure & partso Boundation bra%eso /wo wheelerso >utomobile electrical partso /yres & tubes.

4hen to i$ersifyiversification merits strong consideration whenever a single#business company isfaced with diminishing mar%et opportunities and stagnating sales in its principalbusiness. ut there are four other instances that signal for diversifying:

hen it can expand into industries whose technologies and products complement itspresent business.

o hen it can leverage existing competencies and capabilities by expanding intobusinesses where these same resource strengths are valuable competitive assets.o hen diversifying into closely related businesses open new avenues for reducingcosts.o hen it has a powerful and well#%nown brand name that can be transferred to theproducts of other businesses.


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4hen not i$ersify?

>ll the organi@ations cannot thin% of diversification as a strategy. 1rgani@ations donot diversify under the following conditions.o hen they are small and cannot afford to try

o hen they have no power to sustaino hen they anticipate some pitfallso hen they are the first to bell the cat in that area.o hen on chec%ing they find their functional s%ills are insufficient to diversifyo hen they donKt want to gamble with public investmentso hen they do not have attractive tax benefits after diversification

/arameters to Euge Di$ersification

hether diversification is warranted or not is done by the following methods:

! 5nustry attracti$eness test:Fsing 7 forces model where in sole criterion should be that the chosen industry mustyield good 41.

C! +ost of entry test:/he entry barriers of the cost to entry for the target industry must not be exorbitant orprotective to ma%e it in attractive. Since the larger the gestation time to achievebrea%even, larger is the ris% and hence threat potential to erode profitability.)owever, structurally attractive industries have been %nown to be expensive to getinto & buying an existing company with strong mar%et entry costs. )ence the cost ofentry test can help the firm understand the prospects of profitability and companyKsability to delivershareholder value.

! 8Better O 8 )est:0ompany diversifying into new business must offer potential for firms existingbusiness Q the new business in order to perform better. iversifying firms need totest whether cross strategic fits will enhance the companyKs competitive ability inreducing costs, transferring s%ills and technologies & leveraging combined resourceinto competitive advantage.

Business i$ersification is a ris" reuction strategy that involves addingproducts, services, location, customers and mar%ets to a companyKs portfolio. anysmall companies started as one#trac%, betting their entire futures on a single product,service, location or even a single customer. /here is nothing wrong with this start asa narrow start enabled them to focus and concentrate on doing one thing extremelywell.


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ut, as a company grows larger, it found opportunities to add products, services,locations, customers and mar%ets. iversifying in this way has helped manybusinesses weather tough times by providing alternate sources of revenue in theevent that it is original mar%et dry up, stops growing or hit by new competition.

t was noted that most companies that survive for long periods of time find that theyhave to develop new sources of revenue as tastes change and opportunities evolve.

iversification helps to avoid over dependence on one productCmar%et. t spreadsthe ris% associated with one product line or few products.

iversification to pool ris%s. /he benefits of ris% pooling are said to come frommerging imperfectly correlated income streams to create a more stable incomestream. >ccording to the advocates of ris% pooling, the more stable income stream

reduces the ris% of ban%ruptcy and is in the best interests of the company+sstoc%holders.

Q: =eneric strategy is a combination of com#etiti$e strategy an com#etiti$esco#e in Broa an >arrow segments1 *#%ain the sa%ient features of thesame1 4hen shou% a com#any em#%oy S)3+F 5> ),* M5DD;* strategy?

5n e$e%o#ment of com#etiti$e business strategy0 it is necessary to recognize

customer nees0 #rouct ifferentiation0 customer grou#s0 an mar"etsegmentation1 +omment1

*#%ain the terms cost base strategies an niche base strategies1

f the primary determinant of a firm+s profitability is the attractiveness of the industryin which it operates, an important secondary determinant is its position within thatindustry. ?ven though an industry may have below#average profitability, a firm that isoptimally positioned can generate superior returns.

> firm positions itself by leveraging its strengths. ichael Aorter has argued that afirm+s strengths ultimately fall into one of two headings: cost advantage anddifferentiation. y applying these strengths in either a broad or narrow scope, threegeneric strategies result: cost leadership, differentiation, and focus. /hese strategiesare applied at the business unit level. /hey are called generic strategies becausethey are not firm or industry dependent. /he following table illustrates Aorter+sgeneric strategies:


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Porter's Generic Strategies

Target Scope

$dvantage

;ow +ost /rouct 3niarrowMar"et Segment!

ocus

Strategy$low cost(

ocus

Strategy$differentiation(

+ost ;eaershi# Strategy

/his generic strategy calls for being the low cost producer in an industry for a givenlevel of *uality. /he firm sells its products either at average industry prices to earn a

profit higher than that of rivals, or below the average industry prices to gain mar%etshare. n the event of a price war, the firm can maintain some profitability while thecompetition suffers losses. ?ven without a price war, as the industry matures andprices decline, the firms that can produce more cheaply will remain profitable for alonger period of time. /he cost leadership strategy usually targets a broad mar%et.

Some of the ways that firms ac*uire cost advantages are by improving processefficiencies, gaining uni*ue access to a large source of lower cost materials, ma%ingoptimal outsourcing and vertical integration decisions, or avoiding some costsaltogether. f competing firms are unable to lower their costs by a similar amount, thefirm may be able to sustain a competitive advantage based on cost leadership.

Birms that succeed in cost leadership often have the following internal strengths:

>ccess to the capital re*uired to ma%e a significant investment in productionassets' this investment represents a barrier to entry that many firms may notovercome.

S%ill in designing products for efficient manufacturing, for example, having asmall component count to shorten the assembly process.


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)igh level of expertise in manufacturing process engineering.

?fficient distribution channels.

?ach generic strategy has its ris%s, including the low#cost strategy. Bor example,

other firms may be able to lower their costs as well. >s technology improves, thecompetition may be able to leapfrog the production capabilities, thus eliminating thecompetitive advantage. >dditionally, several firms following a focus strategy andtargeting various narrow mar%ets may be able to achieve an even lower cost withintheir segments and as a group gain significant mar%et share.

Differentiation Strategy

> differentiation strategy calls for the development of a product or service that offersuni*ue attributes that are valued by customers and that customers perceive to be

better than or different from the products of the competition. /he value added by theuni*ueness of the product may allow the firm to charge a premium price for it. /hefirm hopes that the higher price will more than cover the extra costs incurred inoffering the uni*ue product. ecause of the product+s uni*ue attributes, if suppliersincrease their prices the firm may be able to pass along the costs to its customerswho cannot find substitute products easily.

Birms that succeed in a differentiation strategy often have the following internalstrengths:

>ccess to leading scientific research.

)ighly s%illed and creative product development team.

Strong sales team with the ability to successfully communicate the perceivedstrengths of the product.

0orporate reputation for *uality and innovation.

/he ris%s associated with a differentiation strategy include imitation by competitorsand changes in customer tastes. >dditionally, various firms pursuing focus strategiesmay be able to achieve even greater differentiation in their mar%et segments.

ocus Strategy

/he focus strategy concentrates on a narrow segment and within that segmentattempts to achieve either a cost advantage or differentiation. /he premise is that theneeds of the group can be better serviced by focusing entirely on it. > firm using afocus strategy often enjoys a high degree of customer loyalty, and this entrenchedloyalty discourages other firms from competing directly.


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ecause of their narrow mar%et focus, firms pursuing a focus strategy have lowervolumes and therefore less bargaining power with their suppliers. )owever, firmspursuing a differentiation#focused strategy may be able to pass higher costs on tocustomers since close substitute products do not exist.

Birms that succeed in a focus strategy are able to tailor a broad range of productdevelopment strengths to a relatively narrow mar%et segment that they %now verywell.

Some ris%s of focus strategies include imitation and changes in the target segments.Burthermore, it may be fairly easy for a broad#mar%et cost leader to adapt its productin order to compete directly. Binally, other focusers may be able to carve out sub#segments that they can serve even better.

Aorter used the car industry as an example of generic strategies in practice.

/oyota is $or was at the time( the low cost producer in the industry. /oyota achievesits cost leadership strategy by adopting lean production, careful choice and control ofsuppliers, efficient distribution, and low servicing costs from a *uality product. Gotehow the cost leadership must be in all aspects of the business $or value chain(.

is an example of a differentiation strategy. still serves a relatively widerange of the total mar%et but its cars are differentiated in the eyes of the customerwho is prepared to pay a higher price for a than for a /oyota, for instance, ofsimilar specification.

organ is an example of a Bocus strategy. t only addresses a very small part of the

mar%etT$i.e. those who enjoy getting wet and li%e the sound of an engine more thanconversationV(. ?ach of these three companies has been successful by pushing aparticularly generic strategy successfully.

' +ombination of =eneric Strategies - Stuc" in the Mi%e?

/he firm can get Lstuc% in the middleO between low cost providers and differentiatedcost leaders and hence firms of this %ind should pursue a hybrid strategy. ?.g.:Aremium Aadmini' Gi%e cheapest shoe starts at 7


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generic strategies are' cost leadership strategy, differentiation strategy and the focusstrategy.

nstead of employing any of Aorter three generic strategies a firm can elect to bestuc% in the middle. >n organisation employing a Lstuc% in the middleO strategy is

neither deliberately pursuing a cost leadership strategy nor a differentiation strategynor a focus strategy

/he airline industry is an example of an industry where most of its players employthe Lstuc% in the middleO strategy. /hese firms do not pursue a deliberate costleadership strategy or a differentiation strategy but they simultaneously employ thecost leadership strategy and a differentiation strategy. /his is evidenced by theirimplied twin objectives of wanting to be perceived as charging the lowest fares thancompetition and also at the same time wanting to be viewed as offering superior*uality service than their competitors.

/his argument is further strengthened by the fact that most of the long haul airlinesoffer economy class service, business class service and first class servicesimultaneously in the same plane during the same journey and this can neither bedescribed as employing a cost leadership or differentiation strategy. /his is incontrast to a strategy employed by 4yanair and ?asyjet.

Aorter argued that being stuc% in the middle does not usually lead to achievement ofcompetitive advantage because firms employing a stuc% in the middle strategy willstruggle to compete with companies in the same industry which employ one of histhree generic strategies. /his is because very few firms have the ability to be thebest in all areas. n other words a jac% of all trades will struggle to compete when

competing with a master in a specific trade.

n concluding it is also worth mention that Aorter also argued that being struc% in themiddle may wor% sometimes especially when a firm is luc%y enough to be competingwith competitors employing the stuc% in the middle strategy. /his could be one of thereason why the stuc% in the middle strategy seems to be wor%ing for firms in the longhaul airline business because all airlines seem to be using the same businessmodel.

Q: 5n toays com#etiti$e wor% the sur$i$a% as we%% as wi%% to ece% e#ensu#on effecti$e combination of Su##%y +hain Management0 6a%ue +hain+once#ts0 Strategic +ost Management an +ustomer (e%ationshi#Management1*#%ain a%% the four strategies through 6a%ue +hain an /rouct ;ife +yc%e+once#t1


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*#%ain how is $a%ue chain ana%ysis0 which is an interna% ana%ysis0 usefu% inientification of istincti$e com#etencies in a business organization informu%ating $arious business strategies?

6a%ue chain +once#t

/he resources audit provides an understanding of an organi@ationKs capabilities. /henext step is to identify how the organi@ational activities contribute to the value # theprice the customers are willing to pay for the goods and services of the [email protected] this value exceeds the costs of performing those activities, company is said to beprofitable, otherwise it is

strategic management q-a

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