Stategic management


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Stategic management

  1. 1. Product proliferation occurs when organizations market manyvariations of the same products. This can be done through differentcolour combinations, product sizes and different product uses. Thisproduces diversity for the firm as it is able to capture its sizableportion of the market. However, it can also be considered thatmarketing so many new products leads to economic resources beingwasted; the consumer becomes confused and mistakes are made in thepurchase of products. Crest and Colgate each have more than 35 typesof toothpaste and Head & Shoulders dandruff shampoo has 15different varieties. Moreover, product proliferation is not restricted tothe supermarket, as companies like Goodyear Tire & Rubber, Gillette,and Eastman Kodak have all recently increased the lengthof their product lines Product line proliferation is also particularlyevident in technologically dynamic industries such as personalcomputers; for example, in 1992 there were over 2,000 different PCmodels available in the market.A Cost leadership strategy: is based on the concept that you canproduce and market a good quality product or service at a lower costthan your competitors. These low costs should translate to profitmargins that are higher than the industry average. Some of theconditions that should exist to support a cost leadership strategyinclude an on-going availability of operating capital, good processengineering skills, close management of labor, products designed forease of manufacturing and low cost distribution. Cost leadership is aconcept developed by Michael Porter, The cost leadership is oftendriven by company efficiency, size, scale, scope and cumulativeexperience (learning curve).Product bundling is a marketing strategy that involves offeringseveral products for sale as one combined product. This strategy isvery common in the software business (for example: bundle a wordprocessor, a spreadsheet, and a database into a single office suite), inthe cable television industry (for example, basic cable in the UnitedStates generally offers many channels at one price), and in the fastfood industry in which multiple items are combined into a completemeal.Bundling is most successful when:
  2. 2. There are economies of scale in production, There are economies of scope in distribution, Marginal costs of bundling are low. production set-up costs are high, Customer acquisition costs are high. Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product. Consumers have heterogeneous demands and such demands for different parts of the bundle product are inversely correlated.Economies of scope are cost advantages that result when firmsprovide a variety of products rather than specializing in theproduction or delivery of a single output For example, McDonaldscan produce both hamburgers and French fries at a lower average costthan what it would cost two separate firms to produce the same goods.This is because McDonalds hamburgers and French fries share the useof food storage, preparation facilities, and so forth during production.Another example is a company such as Proctor & Gamble, whichproduces hundreds of products from razors to toothpaste. They canafford to hire expensive graphic designers and marketing experts whowill use their skills across the product lines. Because the costs arespread out, this lowers the average total cost of production for eachproduct.Methods of Achieving Economies of Scope: Flexible manufacturingsystem, related diversification,, linked supply chain. Ie: raw materialsuppliers, other vendors, manufacturers, wholesalers, distributors,retailers, and consumers often bring about economies of scope,===============================================Multidivisional (M-Form) – Structure – Composed of operatingdivisions where each division represents a separate business or profitcenter and the top corporate officer delegates responsibility for day-to-day operations and business-unit strategy to division managers.
  3. 3. Advantages of Multidivisional Structures The multidivisional structure, with its clear division of labour between the corporate managers and the managers of each product division, should increase the overall effectiveness of the of the company. Division managers can be given sufficient autonomy and freedom to manage the day-to-day operations of their business and create their own organizational structure to suit their specific products and markets. At the same time, corporate managers can avoid getting into the details of divisional operations and can focus on long-term planning for the entire company and determining how each of the divisions fit into the company’s overall strategic goals and objectives. Since corporate managers are not involved in the day-to-day operations of the product divisions . Corporate managers have higher level of control and create processes and systems for objectively tracking and evaluating the profitability and overall performance of the product divisions ,determine how additional capital should be invested and provide remedial measures for performance problems and inefficiencies. Since each product division in a multidivisional structure will be its own profit center, and thus can be easily evaluated to determine profitability and performance against objective budgetary goals given by the corporate management team. since the divisions in a multidivisional structure are essentially self-contained business units it becomes much easier to identify how the activities of individual managers and employees impact “bottom line” performance and this tends to improve morale and increase enthusiasm within the workforce Disadvantages of Multidivisional Structures Too much centralization deprives division managers of the flexibility and independence can damage the performance of
  4. 4. the divisions that corporate managers not directly involved with a particular issue or problem. the resulting competition between the divisions can be healthy up to a point, there is a real possibility that rivalries will eventually become so intense that divisions cease to cooperate with one another by sharing resources and transferring information regarding innovations in technology and business processes. Another potential problem associated with transfer of technology, products and components between the product divisions is establishing a fair “transfer price”. The “seller” will want to maximize its return on investment by obtaining the highest price possible; however, this approach often unfairly penalizes another division.“ The corporate managers may be assigned the task of setting and enforcing transfer pricing based on objectively verifiable costs plus a fixed and predetermined profit margin. A multidivisional structure can be quite costly to establish and operate. There is entirely new layer of management personnel and staff at the corporate headquarters level that must be funded. In addition, the need to duplicate functional resources within each division creates a serious risk of inefficiency and redundancy . While one of the main responsibilities of the corporate managers in the multidivisional structure is overseeing the activities of the product divisions, there will inevitably be communications problems caused by the very tall hierarchical structure. Bottlenecks may arise when decisions are required from corporate headquarters and delays in getting approvals back to the divisions.The Value Chain concept by Michael Porter1985Porter defined value as the amount buyers are willing to pay for whata firmprovides.
  5. 5. Creating value is ultimately what organizations are all about inbusiness.We measure value by a number of metrics each of which is used inthe right context.1.Financial measures (revenues/profits)2.Stock price -Shareholders value3.Innovation - number of new patents4.Balance score card(Nolan & Norton)5.EVA Economic Value Added by (Stern & Stewart)The interdependent processes/network of activities connected bylinkages that generate value, and the resulting demand and fundsflows that are created.When the system is managed carefully, the linkages can be a vitalsource of competitive advantageThe value chain analysis essentially entails the linkage of two areas.Firstly, the organisations‟ activities with its main functional parts.Then the assessment of the contribution of each part in the overalladded value of the businessIn order to conduct the value chain analysis, the company is split intoprimary and support activities.Primary activities or primary value adding activities are those thatare related with production,while support activities or overhead activities are those that providethe background necessary for the effectiveness and efficiency of the
  6. 6. firm.such as human resource management.Primary activitiesInclude:Inbound logisticsThese are the activities concerned with receiving the materials fromsuppliers, storing these externally sourced materials, and handlingthem within the firm.OperationsThese are the activities related to the production of products andservices.This area can be split into more departments in certain companies. Forexample, the operations in case of a hotel would include reception,room service etc.
  7. 7. Outbound logisticsThese are all the activities concerned with distributing the finalproduct and/or service to the customers.For example, in case of a hotel this activity would entail the ways ofbringing customers to the hotel.Marketing and salesThis functional area essentially analyses the needs and wants ofcustomers and their awareness of the company‟s products andservices. Marketing tools are advertising, sales promotions etc.ServiceThere is often a need to provide services like pre-installation or after-sales service before or after the sale of the product or service.Support activitiesThe support activities of a company include the following:ProcurementThis function is responsible for purchasing the materials that arenecessary for the company‟s operations,to obtain the highest quality goods at the lowest prices.Human Resource ManagementThis is a function concerned with recruiting, training, motivating andrewarding the workforce of the company. Human resources arebecoming an important way of attaining sustainable competitiveadvantage.
  8. 8. Technology DevelopmentThis is an area that is concerned with technological innovation,training and knowledge that is crucial for most companies today inorder to survive.Firm InfrastructureThis includes planning and control systems, such as finance,accounting, and corporate strategy etc.Supply chain management1.(SCM) is the process of optimizing the shipment of goods andservices from supplier to customer.2.Today‟s supply chains for mid and large companies span the globe,with suppliers and partners in multiple countries and multiple timezones.3.As such, the use of quality supply chain management software iscritical to success.4. All organizations have supply chains of varying degrees, dependingupon the size of the organization and the type of productmanufactured.5. Managing the chain of events in this process is what is known assupply chain management. 6.The first step is obtaining a customer order, followed byproduction, storage and distribution of products and supplies to thecustomer site.6.Customer satisfaction is paramount.
  9. 9. 7.Included in supply chain process are customer orders, orderprocessing, inventory, scheduling, transportation, storage, andcustomer service.8. A necessity in coordinating all these activities is the informationservice network.9.Key to the success of a supply chain is the speed in which theseactivities can be accomplished10. The realization that customer needs and customer satisfaction arethe very reasons for the network.11.The decisions associated with supply chain management coverboth the long-term and short-term.12.Strategic decisions deal with corporate policies, and look at overalldesign and supply chain structure.13.Operational decisions are those dealing with every day activitiesand problems of an organization. These decisions must take intoaccount the strategic decisions already in place.14.Therefore, an organization must structure the supply chain throughlong-term analysis and at the same time focus on the day-to-dayactivities.1.Reduced inventories,2. lower operating costs,3. product availability and customer satisfaction are all benefits whichgrow out of effective supply chain management.There are six key elements to a supply chain: Production Supply Inventory Location
  10. 10. Transportation, and Information Strategic leadershipA strategy is a set of related actions that managers take to increasetheir company‟s performance.It is an integrated and coordinated set of commitments and actionsdesigned to exploit core competencies and gain competitiveadvantage .For most companies achieving superior performance relative to theircompetitors is the ultimate challenge.There is competitive advantage when a company‟s profitability isgreater than the average profitability of all other companies in theindustry and who are competing for the same customers.Competitive advantage is when a company implements a strategycompetitors are unable to duplicate or find too costly to try to imitate.A company has sustainable competitive advantage when its products/services are Valuable, rare, costly to imitate, and non substitutable.Average returns: are returns in excess of what an investor expects toearn from other investments with a similar amount of risk.Risk: is an investor‟s uncertainty about economic gains or losses thatwill result from a particular investment.Strategic leadership is about how effectively to manage a company‟sstrategy making process to create a competitive advantage .Strategic making process is process by which managers select andthen implement a set of strategies that aim to achieve competitiveadvantage.
  11. 11. Strategic leadership is concerned with managing the strategic makingprocess to increase the performance of a company and therebyincreasing the value of the enterprise to its owners and shareholders .Maximizing shareholders value;Is the ultimate goal :reasons.1.Share holders provide risk capital that can not be recovered if thecompany goes bankrupt.2. Shareholders are the legal owners of the company and thereforetheir share represent and generate profit.Share holders value comes from two sources; capital appreciation andDividend paymentTo maximize shareholder‟s value managers must formulate andimplement strategies that enable their comapnny to outperform theirrivals.Higher the profitability greater the competitive advantage.Managers pursue strategies to make a company unique and differentfrom other companies.Business model Manager‟s conception of how a set of strategies theircompany can pursue and mesh together into a congruent whole andenable the company to achieve competitive advantage.They areCharacteristics of strategic leaders:1.The vision eloquence and consistency:The key difference between a leader and a strategic leader is that thestrategic leader has a well-defined vision for the future.He has a clear picture of what the company will be like in five years? Some call it a vision, others call it a strategic positioning statement,but whatever you call it, a strategic leader knows where his people aregoing.Bill gates :His vision –a windows based PC on every desk. Windowsbased software will be found on every computing device.Jack Welch GE should be first or second on every business.Jawaharlal Nehru : An enlightened modern India
  12. 12. Martin Luther King: I have a dreamA strategic leader needs to be able to communicate their vision inorder for others to sign up for the journey and understand their rolein it. That also means that the vision needs to be motivational withclear responsibilities and expectations set for all involved.2. Articulation of their business model.Their mental model. How various strategies fit together into acongruent whole.Sam Walton of their business model. Walmart Discount Store,Walmart Super centre, Sam club, Walmart Neighbourhood Market,Walmex, Wal-Mart International.3. Commitment:Walt Disney By words and action sincere to his workers.Died 14 daysbefore the Disney land opened.4. Well informed:Develop network of formal and informal sources.Ray Kroc of McDonald had the unconventional way of collectinginformation. Visited restaurants incognito, obtained firsthandinformation on the needs of customers and from every source.5. Willling to delegate power:As overloaded with responsibilities. And to empower subordinates.But had control key decisions.6. Astute use of power(discerning, intelligent, clever, cunning, shrewd, crafty)According to Edward Wrapp Effective leaders are very astute in theiruse of power.They play power game with skill, and attempt to build consensus.
  13. 13. Act as members of the coalition, appear democratic and get thingsdone through intelligent use of power.Power comes from controlling resources that are important to theorganization. Like knowledge, position, budgets, moneyTo use astute of power one need not to be a CEO.He can be in anylevel in the organization.7. Emotional intelligent: (Emotional intelligence is the innate potential to feel, use,communicate, recognize, remember, describe, identify, learn from,manage, understand and explain emotions)By Daniel GolemanA bundle of psychological attributes likeSelf awareness, Self regulation, Motivation, Empathy Identificationwith and understanding of anothers situation, feelings, andmotive)Social skills.EQ" represents a relative measure of a persons healthy or unhealthydevelopment of their innate emotional intelligence.8. They balance the present with the futureIn making resource and operational decisions, especially whenplanning investments in capital, including technology andmanagement (or “getting the right seats on the bus,” as Collins says)at every level.9. Works to influence not dominate:Another key point to remember is that strategic leadership works bestwhen the leader is able to use influence, not dominance, to rally thetroops. If no one wants to follow, perhaps the vision needs some re-examination. Jack Welsh wrote that “engaging people‟s hearts andminds is the key to everything.”10. To manage through tough times as well as good times.
  14. 14. In fact, Herb Kelleher, one of Southwest‟s founders has been quotedas saying, “Manage in good times, so the company can do well in badtimes.” So far at least, they are the only airline that hasn‟t had toresort to charging for checked baggage.11.Their ability to anticipate and manage through chaos,which is becoming the norm. Many say, “Why plan, when everythingchanges?” The key to a good plan is that you know where you aregoing long-term, but you can change the road that gets you there inthe short-term, if necessary. (Not unlike a detour during the oh-so-common summer road construction!)================================================ “Strategic decision making”Strategic decisions are1.Rare:2.Broad scale3.Consequential:4. Directive:5.Surrounded by uncertainties6.Set the standard.Barriers to Strategic decisions:1.Rate of environment , its change volatility
  15. 15. 2.Unpredictability3.Intricacy, complexity4.Vagueness of current situation and potential outcomesMintzberg‘s model (three approaches.)Entrepreneurial mode: Made by by one powerful individual. Focus is on opportunities,problems are secondary. Strategy is guided by the founder‟s ownvision of direction. Examples. AOL- Steve Case was the driving forcebehind „America Online‟ and a leading business pioneer of theInternet boom of the 1990s. Case worked briefly for both Proctor &Gamble and PepsiCo With Case at the helm, AOL became one of thebiggest success stories of the dot-com era, introducing millions ofAmericans to the Internet through its non-technical, user-friendlyinterface. (AOLs audio greeting of "Youve got mail!" was so popularthat it became the title of a 1998 movie starring Tom Hanks and MegRyan.) AOLs stock price doubled again and again, turning thecompany into a new media giant and making Case both famous andwealthy. He masterminded AOLs merger with media giant TimeWarner in 2001 in a deal valued at over $160 billion.Mukesh Ambani helped the company in recent years when it wasscaling up rapidly in energy, retail, petrochemicals or specialeconomic zones. Now, there is a realisation that the group must movepartially from the “ entrepreneurial mode” to the “planning mode”where practices are institutionalised. on a day-to-day basis. This“mission mode” helped the company in recent years when it wasscaling up rapidly in energy, retail, petrochemicals or specialeconomic zones.
  16. 16. Adaptive mode; Some times referred to as “muddling through ”Thisdecision making is characterised by reactive solutions to existingproblems rather than a proactive search for ne opportunities.Wipro Infotech introduced the customised Personal computers inresponse to Dell computers entering Indian market.Planning mode: This decision making mode involves systematicgathering of appropriate information of situation and analysis,generation of feasible alternatives and rational selection of rightstrategy.Entry of MNCs made Maruthi Suzuki to come up with new modelsand discard/slow own production of old models.CEO Carly Florina of (HP) Hewlett-Packard carefully studiedcomputer communication industries and decided to become movefrom instrumentation and computer hard-ware business to a customerfocused and integrated provider of information appliances,highlyreliable information technologyinfrastructure and electroniccommerce service.Logical incrementalism fourth mode by Quinn.Viewed as a sysnthesis of the planning, adaptive and a lesser extentthe entrepreneurial modes.Offensive /Defensive Strategies - considering strategic options froma competitor rather than customer orientation is referred to ascompetitive marketing strategy. Kotler and Singh identified fiveoffensive and six defensive strategies – these are named after militarystrategies.Offensive warfare1. Frontal attack – This is the direct, head on attack meetingcompetitors with the same product line, price, promotion, etc.Because attack is on the enemy‟s strengths rather than weakness it isconsidered the most risky and least advised strategy.2. Flanking attack – The aim here is to engage competitors in those
  17. 17. products markets where they are weak or have no presence at all. Itsoverreaching goal is to build a position from which to launch, anattack on the battlefield later.3. Encirclement attack – Multi pronged attack aimed at diluting thedefenders ability to retaliate in strength. The attacker stands ready toblock the competitor no matter which way he turns the productmarket. Product proliferation supplying different types of the sameproduct to the market. Market encirclement consists of expanding theproducts into all segments and distribution channels.4. Bypass attack – This is the most indirect form of competitivestrategy as it avoids confrontation by moving into new and as yetuncontested fields. Three type of bypass are possible; develop newproducts, diversify into unrelated products or diversify into newgeographical markets.5. Guerilla warfare – Less ambitious in scope, this involves makingsmall attacks in different locations whilst remaining mobile. Suchattacks take several forms. The aim is to destabilize the competitor bysmall attacks. Defensive warfare1. Position defence – static defence of a current position, retainingcurrent product markets by consolidating resources within existingareas. Exclusive reliance on a position defence effectively means thata business is a sitting target for competition.2. Mobile defence – A high degree of mobility prevents the attackerschances of localizing the defence and accumulating its forces for adecisive battle. A business should seek market development, productdevelopment and diversification to create a stronger base.3. Pre-emptive defence – Attack is the best form of defence. Pre-emptive defence is launched in a segment where an attack isanticipated instead of moving into related or new segments.4. Flank position defence – This is used to occupy a position ofpotential future importance in order to deny that position to anopponent. Leaders need to develop and hold secondary markets toprevent competitors from using them as a spring board into theprimary market.5. Counter offensive defence – This is attacking where the company
  18. 18. is being attacked. This requires immediate response to any competitorentering a segment or initiating new moves.6. Strategic withdrawal.Withdrawal It might be the right decision to cease producing aproduct and/ or to pull out of a market completely. This is a harddecision for managers to take if they have invested or if the decisioninvolves redundancies.Exit barriers make this difficult.a. Cost barriersinclude redundancy costs, the difficulty of selling assets.b. Managers might fail to grasp the principles of opportunity costingc. Political barriers includes government attitudesd. Marketing considerations may delay withdrawale. Psychology – managers hate to admit failureReasons for exit a The company‟s business may be buying firmsturning them around and selling them at a profit.b. Resource limitations mean that less profitable businesses have to beabandoned. A business might be sold to a competitor or occasionallyto management.c. A company may be forced to close because of insolvency.d. Change of competitive strategy.e. Decline in attractiveness of the market.f. Funds can earn more elsewhere.Horizontal Integration: are those mergers where the companiesmanufacturing similar kinds of commodities or running similar typeof businesses merge with each other.The principal objective :is to achieve economies of scale in theproduction procedure through carrying off duplication of installations,services and functions, widening the line of products, decrease inworking capital and fixed assets investment, getting rid ofcompetition, minimizing the advertising expenses, enhancing themarket capability and to get more dominance on the market.Examples of horizontal mergers:1.The formation of Brook Bond Lipton India Ltd. through the mergerof Lipton India and Brook Bond .2 .Bank of Mathura with ICICI (Industrial Credit and Investment corporation of India) Bank.
  19. 19. 3. The merger of BSES (Bombay Suburban Electric Supply) Ltd. withOrissa Power Supply Company4. The merger of ACC (erstwhile Associated Cement CompaniesLtd.) with Damodar Cement5. Blue star with Iris logic,6. Mahindra&Mahindra and Trade & Financial of Arab emirites,Advantages of Horizontal Merger: 1.Reducing costs by economiesof scale : large scale integration allows to spread Fixed cost over largevolume . Therefore, the merged company can derive the benefits ofeconomies of scale. The maximum use of plant facilities can be doneby the merged company, which will lead to a decrease in the averageexpenses of the production.2. Increasing value of products by differentiation: by productbundling offering a bundle of products. Air tel: Mobile service,telemedia service, land lines phone, Enterprise services, provider ofSMs service, voice mail, Miss all alerts, Black berry 8800 smartphone on the , launch of iphone, IBM to offer end to end managedservice, Tie up wit Wipro, TCS for telecom service, Virtela globalservice provider, Eg.World Com in 1983-2001 customers switchedover to World com. Eg. Sord perfect world No.1 in word processingcategory Microsoft was 2 or 3 , Lotus was the best selling spreadsheet, Harvard graphics was best selling presentation programMicrosoft in 1990 offered different software programs, Wordprocessor, spread sheet , presentation software all in one achievedsuperior value. Single provider. 3. Cross selling: A company tries to leverage its relationship withcustomers by acquiring additional product categories. Eg.Financialservice Customers prefer single providers. Checking accounts,mortgage, insurance policies , investment services as Banks likeIDBI, ICICI , HDFC are doing4.Managing rivalry: helps eliminate excess capacity which leads toprice war instead tacit coordination ( but without communication it isillegal. Dell tried to gain market share. Compaq when was taken overby HP
  20. 20. 5. increasing bargaining power over suppliers. And if other thingsare equal the price can be increased.Limitations of Horizontal interation:Due to cuture differencesGovt restrictions.Vertical Integration: Nineteenth century steel tycoon AndrewCarnegie introduced the idea of vertical integration. The Indianpetrochemical giant Reliance Industries is a great example of verticalintegration in modern business. Reliances backward integration fromtextiles into polyester fibres and further into petrochemicals wasstarted by Mukesh Ambani. Reliance has entered the oil and naturalgas sector, along with retail sector. Reliance now has a completevertical product portfolio from oil and gas production, refining,petrochemicals, synthetic garments and retail outlets.Vertical integration is integration along a supply chain. For example,if a retailer starts manufacturing the products it sells, it is increasingits level of vertical integration. Vertical integration may be backwardor forward. For example, a car company that is expanding into tiremanufacturing. A company such as this is often referred to asvertically integrated. vertical integration is the consolidation ofupstream (suppliers) and/or downstream (customers) components ofthe value chain into a common ownership structure. Costs, marketdifferentiation, and other business issues are impacted by the extent ofvertical integration. Vertical integration focused on expandingdownstream activity is called forward integration. Vertical integrationfocused on expanding upstream activity is called backwardintegration.The advantages of vertical integration1.Lower transaction cost:this comes due to inter transactions between subsidiary companieswho usually have a central management and a central communicationsystem which is cheaper to use.2. High certainty of Quality:this comes about since the subsidiary companies have a common
  21. 21. quality control system as such they produce standard products as suchthe companies are sure of their products quality.3. Ability to monopolise the market:This type of situation will start from the production of raw materialsall the way to production, then distribution. This will assist thecompany to control all the lines of business4.Improves supply chain coordination.5. Provide more opportunities to differentiate by means of morecontrol.6. Capture upstream , downstream profit margins.7. Increase entry barriers to potential competitors if the firm can gainaccess to scarce raw materials8. Gain access to down stream distribution channels that wouldotherwise be inaccessible.9. Lead to expansion of core competencies.Disadvantages:1. Higher Monetory and Organisational Costs.This can be brought about by a company having a big organisationalstructure which leads to higher cost for managing such a structure.2.Lacks Capacity balancing issues. For example –the firm may needto build excess upstream capacity to ensure that its down streamoperations have sufficient supply of under all demand conditions.3. Potentially higher costs due to low efficiencies resulting from lackof suppliers competition.4. Developing new core Competencies may compromise existingcompetencies.5. Increased bureaucratic costs.6. In addition to the new activity places the firm in competition withanother player with whom it needs to cooperate. The firm may beviewed as competitor.7. If supply of components is greater than that required by the parentcompany then either production will have to be reduced(redundancies, industrial action etc) or the surplus will have to be soldto rival firms.
  22. 22. 8.Customer choice may be restricted if the parent company insists ononly its products being offered for sale (brewery - note current affairson the Monopolys Commission investigation into breweries.)==========================================Synergy: Basically it means that the whole is greater than the sum ofits parts. If synergy is where the sum of the parts is greater than thewhole, then negative synergy would be where the sum of the parts isless than the sum of the parts. .1. Operating synergy when two firms combine their resources andefforts, they will be able to produce better results than they wereproducing as separate entities because of savings various types ofoperating costs. In a vertical merger, a firm may either combine withits supplier of input (backward integration) and/or with its customers(forward integration). Such merger facilitates better coordination andadministration of the different stages of business stages of businessoperations-purchasing, manufacturing and marketing –eliminates theneed for bargaining (with suppliers and/or customers), An example ofa merger resulting in operating economies is the merger of SundaramClayton Ltd. (SCL) with TVS-Suzuki Ltd. (TSL).By this merger, TSLbecame the second largest producer of two –wheelers after Bajaj. Themain objective motivation for the takeover was TSL‟s need to tideover its different market situation through increased volume ofproduction. It needed a large manufacturing bas to reduce itsproduction costs. Large amount of funds would have been requiredfor creating additional production capacity. SCL also needed toupgrade its technology and increase its production. SCL‟s and TCL‟splants were closely located which added to their advantages. Thecombined company has also been enabled to share the common R&Dfacilities. Advantages: Economies of scale, Economies of vertical integration,complementary resources and elimination of inefficiency.2. Financial synergy Financial synergy refers to increase in the valueof the firm that accrues to the combined firm from financial factors.
  23. 23. There are many ways in which a merger can result into financialsynergy and benefit. A merger may help in: Eliminating financial constraint Deployment surplus cash Enhancing debt capacity Lowering the financial costs Better credit worthinessRP Goenka‟s ceat tyres sold off its type cord division to ShriramFibers Ltd. in 1996 and also transfer‟s its fiber glass division to FGLLtd., another group company to achieve financial synergies.3. Managerial synergy is possible when a new business venture facesstrategic, organizational or operating problems which are similar toproblems that the management has dealt with in the past. One of thepotential gains of merger is an increase in managerial effectiveness.This may occur if the existing management team, which is performingpoorly, is replaced by a more effective management team. Often afirm, plagued with managerial inadequacies, can gain immenselyfrom the superior management that is likely to emerge as a sequel tothe merger. Another allied benefit of a merger may be in the form ofgreater congruence between the interests of the managers and theshareholders.A common argument for creating a favorable environment formergers is that it imposes a certain discipline on the management. Iflackluster performance renders a firm more vulnerable to potentialacquisition, existing managers will strive continually to improve theirperformance. 4 .Sales synergy which occurs when different products use commondistribution channels, common sales administration, or commonwarehousing. These synergies occurs when merged organization canbenefit from common distribution channels, sales administration,advertising, sales promotion and warehousing.The Industrial Credit and Investment Corporation of India Ltd.(ICICI) acquired Tobaco Company, ITC. Classic and Anagram
  24. 24. Finance to obtain quick access to a well dispersed distributionnetworkMichael porter. “sharing has the potential to reduce cost if the cost ofa value activity is driven by economies of scale, learning or thepattern of capacity utilization”.GE-MC KANSY 9 CELL MATRIXGE-Mc Kansy 9 Cell MatrixDescription of the ModelThe General Electric Company, with the aid of theBoston Consulting Group and McKinsey and Company,pioneered the nine cell strategic business screenillustrated here. The circle on the matrix representsyour enterprise. Both axes are divided into threesegments, yielding nine cells. The nine cells aregrouped into three zones:The Green Zone consists of the three cells in the upperleft corner. If your enterprise falls in this zone you are
  25. 25. in a favourable position with relatively attractivegrowth opportunities. This indicates a "green light" toinvest in this product/service. The yellowzoneYellow Zone consists of the three diagonal cellsfrom the lower left to the upper right. A position in theyellow zone is viewed as having mediumattractiveness. Management must therefore exercisecaution when making additional investments in thisproduct/service. The suggested strategy is to seek tomaintain share rather than growing or reducing share.The Red Zone consists of the three cells in the lowerright corner. A position in the red zone is notattractive. The suggested strategy is that managementshould begin to make plans to exit the industry.Characterize Your EnterpriseThe vertical axis represents the industry attractiveness.The expert system will position your enterprise on thechart based upon your description of: bargaining power of the buyers bargaining power of the suppliers internal rivalry the threat of new entrants the threat of substitutes
  26. 26. The horizontal axis represents the firms competitivestrength or ability to compete in the industry. It includesan analysis of: the value and quality of the offering market share staying power experienceYou can trace through the supporting analysis and itsconclusions, adjusting your input until you are satisfiedyour description accurately characterizes yourenterprise.Transfer pricing :Charges, prices made by one business unitto another business unit of the same company or relatedcompanies for services or for supplying raw material or goodsor use of properties This is a significant and problematictransaction since:1. It may cause conflict in fixing a fair price.2. It could be a source of bureaucratic cost.3.The concerned units have to settle various taxes to thegovernment.4. Each division /unit intends to increase price of its resourcesand skills and thereby their profitability.Govt of India has introduced introduced law of transferpricing in 2001 through sections 92A to 92F of the IndianIncome tax Act, 1961 which guides computation of thetransfer price and suggests detailed documentationprocedures.Strategic control: is different from traditional organizationalcontrol which seeks only to compare the actual results againsta standard expected targets and that is after some years.
  27. 27. But strategic control is tracking strategy as a form of steeringcontrol, as it is implemented, in guiding efforts to see 1. Arewe moving in the proper direction? 2. How are weperforming? There are four types of strategic controls.Premise control: is designed to check systematically andcontinuous whether or not the premises set during theplanning and implementation process are still validImplementation control: is designed to assess whether theoverall strategy result associated with incremental steps andactions that implement overall strategy.Strategic surveillance: It is designed to monitor a broad rangeof events inside and outside the company to threaten thecourse of firms strategy.Special alert control: is the need to thoroughly and oftenrapidly reconsider the firms basic strategy based on a suddenunexpected event.