Strategic Management(1) The concept of StrategyIntroduction – The top management of an organization isconcerned with the selection of a course of action from amongdifferent alternatives to meet the organizational objectives. Theprocess by which objectives are formulated aand achieved isknown as strategic management and strategy acts as the means toachieve the objective. Strategy is the grand design or an overall‘plan’ which an organization chooses in order to move or reacttowards the set of objectives by using its resources. Strategies mostoften devote a general programme of action and an implieddeployed of emphasis and resources to attain comprehensiveobjectives. An organization is considered efficient andoperationally effective if it is characterized by coordinationbetween objectives and strategies. There has to be integration ofthe parts into a complete structure. Strategy helps the organizationto meet its uncertain situations with due diligence. Without astrategy, the organization is like a ship without a rudder. It is like atramp, which has no particular destination to go to. Without anappropriate strategy effectively implemented, the future is alwaysdark and hence, more are the chances of business failure.Meaning of strategy – The word ‘strategy’ has entered in thefield of management from the military services where it refers toapply the forces against an enemy to win a war. Originally, theword strategy ha s been derived from Greek, ‘strategos’ whichmeans generalship. The word as used for the first time in around
400 BC. The word strategy means the art of the general to fight inwar.The dictionary meaning of strategy is “the art of so moving ordisposing the instrument of warfare as to impose upon enemy, theplace time and conditions for fighting by one self”In management, the concept of strategy is taken in more broaderterms. According to Glueck, “Strategy is the unified,comprehensive and integrated plan that relates the strategicadvantage of the firm to the challenges of the environment andis designed to ensure that basic objectives of the enterprise areachieved through proper implementation process”This definition of strategy lays stress on the following –a) Unified comprehensive and integrated planb) Strategic advantage related to challenges of environmentc)Proper implementation ensuring achievement of basicobjectivesAnother definition of strategy is given below which also relatesstrategy to its environment. “Strategy is organization’s pattern ofresponse to its environment over a period of time to achieve itsgoals and mission”This definition lays stress on the following –a) It is organization’s pattern of response to its environmentb) The objective is to achieve its goals and missionsHowever, various experts do not agree about the precise scope ofstrategy. Lack of consensus has lead to two broad categories of
definations:strategy as action inclusive of objective setting andstrategy as action exclusive of objective setting.Strategy as action, inclusive of objective setting –In 1960’s, Chandler made an attempt to define strategy as “thedetermination of basic long term goals and objective of anenterprise and the adoption of the courses of action and theallocation of resources necessary for carrying out these goals”This definition provides for three types of actions involved instrategy :a) Determination of long term goals and objectivesb) Adoption of courses of actionc) Allocation of resourcesStrategy as action exclusive of objective setting –This is another view in which strategy has been defined. It statesthat strategy is a way in which the firm, reacting to itsenvironment, deploys its principal resources and marshalls itsefforts in pursuit of its purpose. Michael Porter has definedstrategy as “Creation of a unique and valued position involvinga different set of activities. The company that is strategicallypositioned performs different activities from rivals or performssimilar activities in different ways”The people who believe this version of the definition call strategy aunified, compreshensive and integrated plan relating to thestrategic advantages of the firm to the challenges of theenvironment
After considering bothe the views, strategy can simply be put asmanagement’s plan for achieving its objectives. It basicallyincludes determination and evaluation of alternative paths to analready established mission or objective and eventually, choice ofbest alternative to be adoptedNature of Strategy –Based on the above definations, we can understand the nature ofstrategy. A few aspects regarding nature of strategy are as follows–• Strategy is a major course of action through which anorganization relates itself to its environment particularly theexternal factors to facilitate all actions involved in meeting theobjectives of the organization• Strategy is the blend of internal and external factors. To meet theopportunities and threats provided by the external factors, internalfactors are matched with them• Strategy is the combination of actions aimed to meet a particularcondition, to solve certain problems or to achieve a desirable end.The actions are different for different situations• Due to its dependence on environmental variables, strategy mayinvolve a contradictory action. An organization may takecontradictory actions either simultaneously or with a gap of time.For example, a firm is engaged in closing down of some of itsbusiness and at the same time expanding some• Strategy is future oriented. Strategic actions are required for newsituations which have not arisen before in the past
• Strategy requires some systems and norms for its efficientadoption in any organization• Strategy provides overall framework for guiding enterprisethinking and actionThe purpose of strategy is to determine and communicate a pictureof enterprise through a system of major objectives and policies.Strategy is concerned with a unified direction and efficientallocation of an organization’s resources. A well made strategyguides managerial action and thought. It provides an integratedapproach for the organization and aids in meeting the challengesposed by environmentEssence of Strategy –Strategy, according to a survey conducted in 1974, includes thedetermination and evaluation of alternative paths to an alreadyestablished mission or objective and eventually, choice of thealternative to be adopted. Strategy is characterized by fourimportant aspects –• Long term objectives• Competitive Advantage• Vector• SynergyStrategy v/s PoliciesStrategy has often been used as a synonym of policy. However,both are different and should not be used interchangeably
1. Policy is the guideline for decisions and actions on the part of subordinates. 2. It is a general statement of understanding made for achievement of objectives. 3. Policies are statements or a commonly accepted understanding of decision making. 4. They are thought oriented. 5. Power is delegated to the subordinates for implementation of policies. 6. In general terms, policy is concerned with course of action chosen for the fulfillment of the set of objectives. 7. It is an overall guide that governs and controls managerial actions. 8. Policies may be general or specific, organizational or functional, written or implied. 9. They should be clear and consistent. 10. Policies have to be integrated so that strategy is implemented successfully and effectively. For example, when the performance of two employees is similar,the promotion policy may require the promotion of the senioremployee and hence he would be eligible for promotion.1. Strategies on the other hand are concerned with the direction in which human and physical resources are deployed and applied in order to maximize the chances of achieving organizational objectives in the face of environmental variable.
2. Strategies are specific actions suggested to achieve the objective. 3. Strategies are action oriented and everyone in the organization are empowered to implement them. 4. Strategy cannot be delegated downward because it may require last minute decisions 5. Strategies and policies both are the means towards the end. 6. In other words, both are directed towards meeting organizational objectives. 7. Strategy is a rule for making decision while policy is contingent decision. Strategy v/s Tactics Strategies are on one end of the organizational decisions spectrum while tactics lie on the other end. Carl Von Clausewitz , a Prussian army general and military scientist defines military strategy as making use of battles in the furtherance of the war and the tactics as “the use of armed forces in battle”. A few points of distinction between the two are as follows –i) Strategy determines the major plans to be undertaken while tactics is the means by which previously determined plans are executed ii)The basic goal of strategy according to military science is to break the will of the army, deprive the enemy of the means to
fight, occupy his territory, destroy or obtain control of hisresources or make him surrender. The goal of tactics is to achievesuccess in a given action and this forms one part of a group ofrelated military action Tactics decisions can be delegated to all the levels of aniii)organization while strategic decisions cannot be delegated too lowin the organization. The authority is not delegated below the levelsthan those which possess the perspective required for takingdecisions effectivelyiv)Strategy is formulated in both a continuous as well as irregularmanner. The decisions are taken on the basis of opportunities, newideas, etc. Tactics is determined on a periodic basis by variousorganizations. A fixed time table may be made for followingtactics.v) Strategy has a long term perspective and occasionally it mayhave a short term duration. Thus, the time horizon in terms ofstrategy is flexible but in case of tactics, it is short run and definite.vi)The decisions taken as part of strategy formulation andimplementation have a high element of uncertainty and are takenunder the conditions of partial ignorance. In contrast tacticaldecisions are more certain as they work upon the framework set bythe strategy. So the evaluation of strategy is difficult than theevaluation of tactics. Since an attempt is made in strategy to relate the organizationvii)with its environment, the requirement of information is more thanthat required in tactics. Tactics use information available internallyin an organizationviii) The formulaltion of strategy is affected considerably by thepersonal values of the person involved in the process but the sameis not the case in tactics implementation
Strategies are the most important factor of organization becauseix)they decide the future course of action for organization as a whole.On the other hand tactics are of less importance because they areconcerned with specific part of the organizationLevels of StrategyIt is believed that strategic decision making is the responsibility oftop management. However, it is considered useful to distinguishbetween the levels of operation of the strategy.Strategy operates at different levels vis-à-vis:• Corporate level• Business level• Functional levelThere are basically two categories of companies – one, which havedifferent businesses organized as different directions or productgroups known as profit centres or strategic business units (SBUs)and other, which consists of companies which are single productcompanies. Eg. Reliance Industries and Ashok Leyland Limited.The SBU concept was introduced by General Electric Company(GEC) of USA to manage product business. The fundamentalconcept in the SBU is the identification of dicrete independentproduct/market segments served by the organization. Because ofthe different environments served by each product, a SBU iscreated for each independent product/segment. Each and everySBU is different from another SBU due to the distinct businessareas (DBAs) it is serving.
Each SBU has a clearly defined product/market segment andstrategy. It develops its strategy according to its own capabilitiesand needs with overall organizations capabilities and needs. EachSBU allocates resources according to its individual requirementsfor the achievement of organizational objectives. As against themulti product organizations, the single product organizations havesingle strategic business unit. In these organizations, corporatelevel strategy serves the whole business. The strategy is implantedat the next lower level by functional strategies. In multiple productcompany, a strategy is formulated for each SBU (known asbusiness level strategy) and such strategies lie between corporateand functional level strategies.The three levels are explained as follows –Corporate level strategy –At the corporate level, strategies are formulated according toorganization wise policies. These are value oriented, conceptualand less concrete than decisions at the other two levels. These arecharacterized by greater risk, cost and profit potential as well asflexibility. Mostly, corporate level strategies are futuristic,innovative and pervasive in nature. They occupy the highest levelof strategic decision making and cover the actions dealing with theobjectives of the organization. Such decision are made by topmanagement of the firm. The examples of such strategies includeacquisition strategies, diversification, structural redesigning, etc.The board of directors and chief executive officer are the primarygroups involved in this level of strategy making. In small andfamily owned businesses, the entrepreneur is both the generalmanager and the chief strategic manager
Business Level Strategy –The strategies formulated by each SBU to make best use of itsresources given the environment it faces, come under the gamut ofbusiness level strategies. At such a level, strategy is acomprehensive plan providing objectives for SBUs, allocation ofresources among functional areas and coordination between themfor achievement of corporate level objectives. These strategiesoperate within the overall organizational strategies i.e within thebroad constraints and policies and long term objectives set by thecorporate strategy. The SBU managers are involved in this level ofstrategy. The strategies are related with a unit within theorganization. The SBU operates within the defined scope ofoperations by the corporate level strategy and is limited by theassignment of resources by the corporate level. However, corporatestrategy is not the sum total of business strategies of theorganization. Business strategy relates with the “how” and thecorporate strategy relates with the “what”. Business strategydefines the choice of product or service and market of individualbusiness within the firm. The corporate strategy has impact onbusiness strategy.Functional level StrategyThis strategy relates to single functional operation and theactivities involved therein. This level is at the operating end of theorganization. The decisions at this level within the organization are
described as tactical. The strategies are concerned with howdifferent functions of the enterprise like marketing, finance,manufacturing, etc contribute to the strategy of other levels.Functional strategy deals with a relatively restricted plan providingobjectives for specific function, allocation of resources amongdifferent operations within the functional area and coordinationbetween them for achievement of SBU and corporate levelobjectivesSometimes a fourth level of strategy also exists. This level isknown as the operating level. It comes below the functional levelstrategy and involves actions relating to various sub functions ofthe major function. For example, the functional level strategy ofmarketing function is divided into operating levels such asmarketing research, sales promotion, etcThe three levels of strategies have different characterstics as shownbelow – Dimensions Levels Corporate Business Functional Impact Significant Major Insignificant Risk High Medium Low Involved Profit High Medium Low potential Time Long Medium Low Horizon Flexibility High Medium Low
Adaptability Insignificant Medium SignificantImportance of strategy –With the increase in the pressure of external threats, companieshave to make clear strategies and implement them effectively so asto survive. There have been companies like Martin Burn, Jessops,etc that have completely become extinct and some companieswhich were not existing before they became the market leaders likeReliance, Infosys, etc. The basic factor responsible fordifferentiation has not been governmental policies, infrastructureor labour relations but the type of strategic thinking that differentcompanies have shown in conducting the businessStrategy provides various benefits to its users:• Strategy helps an organization to take decisions on long rangeforecasts• It allows the firm to deal with a new trend and meet competitionin an effective manner• With the help of strategy, the management becomes flexible tomeet unanticipated changes• Efficient strategy formulation and implementation result intofinancial benefits to the organization in the form of increasedprofits• Strategy provides focus in terms of organizational objectives andthus provides clarity of direction for achieving the objectives• Organizational effectiveness is ensured with effectiveimplementation of the strategy• Strategy contributes towards organizational effectiveness byproviding satisfaction to the personnel
• It gets managers into the habit of thinking and thus makes them,proactive and more conscious of their environment• It provides motivation to employees as it paves the way for themto shape their work in the context of shared corporate goals andultimately they work for the achievement of these goals• Strategy formulation and implementation gives an opportunityto the management to involve different levels of management inthe process• It improves corporate communication, coordination andallocation of resourcesWith all the benefits listed above, it is quite clear that strategyforms an integral part of an organization and is the means toachieve the end in an efficient and effective manner.2) Process of StrategyThe process of strategy is cyclical in nature. The elements within itinteract among themselves. The figure presents the process forsingle SBU firm and multiple SBU firm respectively. The processhas to be adjusted for multiple SBU firms because there it isconducted at corporate level as well as SBU levels as these firmsinsert SBU strategy between corporate strategy and functionalstrategy. Initially, the process of strategy was discussed in terms offour phases which are –
1) Identification phase2) Development phase3) Implementation phase4) Monitoring phaseThe process of strategy does not have the same steps as stated bydifferent authors. According to C.K.Prahalad, the processcomprises of five steps. They are –1) Strategic Intent2) Environmental Analysis3) Evaluation of strategic alternatives and choice4) Strategy implementation5) Strategy evaluation and controlFor our understanding we divide the process into the followingsteps –1) Strategic Intent2) Environmental and Organizational Analysis3) Identification of strategic alternatives4) Choice of strategy5) Implementation of strategy6) Evaluation & Control
1) Strategic Intent –Setting of organizational vision, mission and objectives is thestarting point of strategy formulation. The organizations strive forachieving the end results which are ‘vision’,‘mission’, ‘purpose’,‘objectives’, ‘goals’, ‘targets’, etcThe hierarchy of strategic intent lays the foundation for thestrategic management of any organization. The strategic intentmakes clear what an organization stands for. It is reflected throughvision, mission, business definition and objectives. Vision servesthe purpose of stating what an organization wishes to achieve inlong run. The process of assigning a part of a mission to aparticular department and then further sub dividing the assignmentamong sections and individuals creates a hierarchy of objectives.The objectives of the sub unit contribute to the objectives of thelarger unit of which it is a part. From strategy formulation point ofview, an organization must define, ‘why’, it exists, ‘how’ itjustifies that existence, and ‘when’ it justifies the reasons for thatexistence. The answers to these questions lies in the organization’smission, business definition, objectives and goals. These termsbecome the base for strategic decisions and actions.
Strategic process in a single SBU firm Defining vision, mission and business Organizat ional Analysis
EnvironmentalAnalysis Setting objectives and goals Identifying alternative strategies Choice of strategy Implementation of strategy Strategy evaluation and control
FeedbackVision and Mission – The vision of an organization is theexpectation of the owner of the organization and putting this visioninto action is mission. Mission has a societal orientation and is astatement which reveals what an organization intends to do for thesociety. It is a public statement which gives direction for differentactivities which organizations have to carry on. It motivatesemployees to work in the interest of the organization.Objectives and Goals – Organizational objectives are defined asends which the organization seeks to achieve by its existence andoperation. Objectives represent desired results which theorganization wishes to attain. An organization can have objectivesin terms of profitability and productivity. Objectives provide adirection to the organization and all the divisions work towardsthe attainment of the set objectives. Objectives and goals are theterms which are used interchangeably.It is necessary for the organization to assess the process identifyingthe objectives of each functional area. After accomplishment ofthese objectives, the overall objectives of the organization areachieved. Organization’s mission becomes the cornerstone forstrategy.
2) Environmental and Organizational Analysis –Every organization operates within an environment. Thisenvironment may be internal or external. For conducting anenvironmental analysis, the strategic intent has to be very clear.This clarity in definition of mission and objectives helps in thedetailed analysis of the environment. Environmental analysis, alsoknown as environmental scanning or appraisal, is the processthrough which an organization monitors and comprehends variousenvironmental factors and determines the opportunities and threatsthat are provided by these factors. There are two aspects involvedin environmental analysis:• Monitoring the environment i.e environmental search•Identifying opportunities and threats based on environmentalmonitoring i.e environmental diagnosisEnvironmental analysis is an exercise in which total view ofenvironment is taken. The environment is divided into differentcomponents to find out their nature, function and relationship forsearching opportunities and threats and determining where theycome from, ultimately the analysis of these components isaggregated to have a total view of the environment. Some elementsindicate opportunities while others may indicate threats.A large part of the process of environmental analysis seeks toexplore the unknown terrain, the dimensions of future. Theanalysis emphasis on what could happen and not necessarily whatwill happen. The factors which comprises firms environment are oftwo types :
• Factors which influence environment directly includingsuppliers, customers and competitors and• Factors which influence the firm indirectly including social,technological, political, legal, economic factors, etcThe environmental analysis plays a very important role in theprocess of strategy formulation. The environment has to beanalysed to determine what factors in the environment presentopportunities for greater accomplishment of organizationalobjectives and what factors present threats. Environmental analysisprovides time to anticipate the opportunities and plan to meet thechallenges. It also warns the organization about the threats. Theanalysis provides for elimination of alternatives which areinconsistent with the organization objectives. Due to the element ofuncertainty, environmental analysis provides for certain anticipatedchanges in the organization’s network. The organization equipsitself to meet the unanticipated changes and face the everincreasing competition.3) IDENTIFICATION OF STRATEGIC ALTERNATIVESAfter environmental analysis, the next step is to identify thevarious strategic alternatives. After the identification of strategicalternatives they have to be evaluated to match them with theenvironmental analysis. According to Glueck & Jauch, “strategicalternatives revolve around the question whether to continue orchange the business, the enterprise is currently improving theefficiency or effectiveness with which the firm achieves itscorporate objectives in its chosen business sector” the process may
result into large number of alternatives through which anorganization relates itself to the environment.According to Glueck, there are basically four grand strategiesalternatives:• Stability• Expansion• Retrenchment• CombinationThese are together known as stability strategies/basic strategies.Stability – In this, the company does not go beyond what it isdoing now. The company serves with same product, in samemarket and with the existing technology. This is possible whenenvironment is relatively stable. Modernization, improvedcustomer service and special facility may be adopted in stability.Expansion – This is adopted when environment demands increasein pace of activity. Company broadens its customer groups,customer functions and the technology. These may be broadenedeither singly or jointly. This kind of a strategy has a substantialimpact on internal functioning of the organizationRetrenchment – If the organization is going for this strategy, then ithas to reduce its scope in terms of customer group, customerfunctions or alternative technology. It involves partial or total
withdrawal from three things. Example – L & T getting out ofcement business.Combination – When all the three strategies are taken together, thisis known as combination strategy. This kind of strategy is possiblefor organizations with large number of portfolios.Apart from the above four grand strategies, other commonly usedstrategies are –Modernization – In this, technology is used as the strategic tool toincrease production and productivity or reduce cost. Throughmodernization, the company aims to gain competitive and strategicstrengthIntegration – The company starts producing new products andservices of its own by either creating facility or killing others.Integration can be either forward or backward in terms of verticalintegration. In forward integration, it gains ownership overdistribution or retailers, thus moving towards customers while inbackward integration the company seeks ownership over firm’ssuppliers thus moving towards raw materials. When theorganization gains ownership over competitors, it is engaged inhorizontal integration.Diversification – Diversification involves change in businessdefinition either in terms of customer functions, customer groupsor alternative technology. It is done to minimize the risk byspreading over several businesses, to capitalize organizationstrength and minimize weaknesses, to minimize threats, to avoidcurrent instability in profit & sales and to facilitate higherutilization of resources. Diversification can be either related or
unrelated, horizontal or vertical, active or passive, internal orexternal.It is of the following types –• Concentric diversification• Conglormerate diversification• Horizontal diversificationJoint ventures – In joint ventures, two or more companies form atemporary partnership (consortium). Companies opt for jointventure for synergistic advantages to share risk, to diversify andexpand, to bring distinctive competences, to manage political andcultural difficulty, to take technological advantage and to exploreunexplored marketStrategic Alliance – When two or more companies unite to pursuea set of agreed upon goals but remain independent it is known asstrategic alliance. The firms share the benefits of the alliance andcontrol the performance of assigned tasks. The pooling ofresources, investment and risks occur for mutual gainMergers – It is an external approach to expansion involving two ormore than two organizations. Companies go for merger to becomelarger, to gain competitive advantage, to overcome weaknesses andsometimes to get tax benefits. Merger takes place with mutualconsent and common goalsAcquisition – For the organization which acquires another, it isacquisition and for organization which is acquired, it is mergerTakeovers – In takeovers, there is a strong motive to acquire othersfor quick growth and diversification
Divestment – In divestment, the company which is divesting hasno ownership and control in that business and is engaged incomplete selling of a unit. It is referred to the disposing off a partof the business.Turnaround Strategy – When the company is sick and continuouslymaking losses, it goes for turnaround strategy. It is the efforts inreversing a negative trend and it is the efforts to keep anorganization alive.All these alternatives are available to an organization andaccording to its objectives, it can decide on the one which is mostsuitable .4) Choice of strategyAfter evaluation of strategic alternatives is choice of the mostsuitable alternative. For a business group, it may be possible tochoose all strategic alternatives but for a single company it is quitedifferent. The strategic alternatives has to be matched with theproblem. While making a choice, two types of factors have to beconsidered –• Objective factors• Subjective factorsObjective factors are the ones which can be quantified whilesubjective factors are the ones which cannot be quantified and arebased on experience and opinion of people. Strategic choice is likea decision making process. There are three objective ways to makea choice –• Corporate portfolio analysis
• Competitor analysis• Industry analysisCorporate Portfolio AnalysisWhen the company is in more than one business, it can select morethan one strategic alternative depending upon demand of thesituation prevailing in the different portfolios. It is necessary toanalyze the position of different business of the business housewhich is done by corporate portfolio analysis.Portfolio analysis is an analytical tool which views a corporation asa basket or portfolio of products or business units to be managedfor thebest possible returns.When an organization has a number of products in its portfolio, itis quite likely that they will be in different stages of development.Some will be relatively new and some much older. Manyorganizations will not wish to risk having all their products at thesame stage of development. It is useful to have some products withlimited growth but producing profits steadily, and some productswith real growth potential but may still be in the introductorystage. Indeed, the products that are earning steadily may be used tofund the development of those that will provide the growth andprofits in the future.So the key strategy is to produce a balanced portfolio of products,some with low risk but dull growth and some with high risk but
great potential for growth and profits. This is what we call asportfolio analysis.The aim of portfolio analysis is1) to analyze its current business portfolio and decide whichbusinesses should receive more or less investment2) to develop growth strategies, for adding new businesses tothe portfolio3) to decide which business should not longer be retainedBalancing the portfolio –Balancing the portfolio means that the different products orbusinesses in the portfolio have to be balanced with respect to fourbasic aspects –1) Profitability2) Cash flow3) Growth4) RiskThis analysis can be done by any of the following technologies –1. Experience curve2. PLC concept3. BCG matix4. GE nine cell matrix
5. Space diagram6. Hofer’s product market evaluation matrix7. Directional Policy matrixBCG MATRIX – the bcg matrix was developed by BostonConsulting group in 1970s. It is also called as the growth sharematrix. This is the most popular and most simplest matrix todescribe the corporation’s portfolio of businesses or products.The BCG matrix helps to determine priorities in a productportfolio. Its basic purpose is to invest where there is growth fromwhich the firm can benefit, and divest those businesses that havelow market share and low growth prospects.Each of the products or business units is plotted on a twodimensional matrix consisting ofa) relative market share – is the ratio of the market share of theconcerned product or business unit in the industry divided by theshare of the market leaderb) market growth rate – is the percentage of market growth, bywhich sales of a particular product or business unit has increased
Analysis of the BCG matrix – the matrix reflects the contributionof the products or business units to its cash flow. Based on thisanalysis, the products or business units are classified as – Stars Cash cows Question marks DogsStars – high growth, high market shareStars are products that enjoy a relatively high market share in astrongly growing market. They are potentially profitable and maygrow further to become an important product or category for thecompany. The firm should focus on and invest in these products orbusiness units. The general features of stars are -
• High growth rate means they need heavyinvestment• High market share means they haveeconomies of scale and generate large amount of cash• But they need more cash than they generateThe high growth rate will mean that they will need heavyinvestment and will therefore be cash users. Overall, the generalstrategy is to take cash from the cash cows to fund stars. Cash mayalso be invested selectively in some problem children (questionmarks) to turn them into stars. The other problem children may bemilked or even sold to provide funds elsewhere.Over the time, all growth may slow down and the stars mayeventually become cash cows. If they cannot hold market share,they may even become dogs.Cash Cows – Low growth, high market shareThese are the product areas that have high relative market sharesbut exist in low-growth markets. The business is mature and it isassumed that lower levels of investment will be required. On thisbasis, it is therefore likely that they will be able to generate bothcash and profits. Such profits could then be transferred to supportthe stars. The general features of cash cows are –• They generate both cash and profits• The business is mature and needs lower levels of investment
• Profits are transferred to support stars/question marks• The danger is that cash cows may become under-supported andbegin to lose their marketAlthough the market is no longer growing, the cash cows may havea relatively high market share and bring in healthy profits. Noefforts or investments are necessary to maintain the status quo.Cash cows may however ultimately become dogs if they lose themarket share.Question Marks – high growth, low market shareQuestion marks are also called problem children or wild cats.These are products with low relative market shares in high growthmarkets. The high market growth means that considerableinvestment may still be required and the low market share willmean that such products will have difficulty in generatingsubstantial cash. These businesses are called question marksbecause the organization must decide whether to strengthen themor to sell them.The general features of question marks are –• Their cash needs are high• But their cash generation is low• Organization must decide whether to strengthen them or sellthem
Although their market share is relatively small, the market forquestion marks is growing rapidly. Investments to create growthmay yield big results in the future, though this is far from certain.Further investigation into how and where to invest is advised.Dogs – Low growth, low market shareThese are products that have low market shares in low growthbusinesses. These products will need low investment but they areunlikely to be major profit earners. In practice, they may actuallyabsorb cash required to hold their position. They are often regardedas unattractive for the long term and recommended for disposal.The general features of dogs are –• They are not profit earners• They absorb cash• They are unattractive and are often recommended for disposal.Turnaround can be one of the strategies to pursue because manydogs have bounced back and become viable and profitable afterasset and cost reduction. The suggested strategy is to drop or divestthe dogs when they are not profitable. If profitable, do not invest,but make the best out of its current value. This may even meanselling the division’s operations.Advantages –1) it is easy to use
2) it is quantifiable3) it draws attention to the cash flows4) it draws attention to the investment needsLimitations –1) it is too simplistic2) link between market share and profitability is not strong3) growth rate is only one aspect of industry attractiveness4) it is not always clear how markets should be defined5) market share is considered as the only aspect of overallcompetitive position6) many products or business units fall right in the middle of thematrix, and cannot easily be classified.BCG matrix is thus a snapshot of an organization at a given pointof time and does not reflect businesses growing over time.GE Nine-cell matrix
This matrix was developed in 1970s by the General ElectricCompany with the assistance of the consulting firm, McKinsey &Co, USA. This is also called GE multifactor portfolio matrix.The GE matrix has been developed to overcome the obviouslimitations of BCG matrix. This matrix consists of nine cells (3X3)based on two key variables:i) business strengthii) industry attractivenessThe horizontal axis represents business strength and the verticalaxis represent industry attractivenessThe business strength is measured by considering such factors as:• relative market share• profit margins• ability to compete on price and quality• knowledge of customer and market
• competitive strengths and weaknesses• technological capacity• caliber of managementIndustry attractiveness is measured considering such factors as :• market size and growth rate• industry profit margin• competitive intensity• economies of scale• technology• social, environmental, legal and human aspectsThe industry product-lines or business units are plotted as circles.The area of each circle is proportionate to industry sales. The piewithin the circles represents the market share of the product line orbusiness unit.The nine cells of the GE matrix represent various degrees ofindustry attractiveness (high, medium or low) and businessstrength (strong, average and weak). After plotting each productline or business unit on the nine cell matrix, strategic choices aremade depending on their position in the matrix.Spotlight StrategyGE matrix is also called “Stoplight” strategy matrix because thethree zones are like green, yellow and red of traffic lights.
1)Green indicates invest/expand – if the product falls in greenzone, the business strength is strong and industry is at leastmedium in attractiveness, the strategic decision should be toexpand, to invest and to grow.2)Yellow indicates select/earn – if the product falls in yellowzone, thebusiness strength is low but industry attractiveness is high, it needscaution and managerial discretion for making the strategic choice3) Red indicates harvest/divest – if the product falls in the red zone,the business strength is average or weak and attractiveness is alsolow or medium, the appropriate strategy should be divestment.Comparision GE versus BCG -Thus products or business units in the green zone are almostequivalent to stars or cashcows, yellow zone are like questionmarks and red zone are similar to dogs in the BCG matrix.Difference between BCG and GE matrices –BCG Matrix GE Matrix1. BCG matrix consists of 1. GE matrix consists of ninefour cells cells2. The business unit is rated 2. The business unit is ratedagainst relative market share against business strength andand industry growth rate industry attractiveness3. The matrix uses single 3. The matrix used multiplemeasure to assess growth measures to assess businessand market share strength and industry
attractiveness4. The matrix uses two types 4. The matrix uses threeof classification i.e high and types of classification i.elow high/medium/low and strong/average/weak5. Has many limitations 5. Overcomes many limitations of BCG and is an improvement over itAdvantages –1) It used 9 cells instead of 4 cells of BCG2) It considers many variables and does not lead to simplisticconclusions3) High/medium/low and strong/average/low classification enablesa finer distinction among business portfolio4) It uses multiple factors to assess industry attractiveness andbusiness strength, which allow users to select criteria appropriateto their situationLimitations –1) It can get quite complicated and cumbersome with the increasein businesses2) Though industry attractiveness and business strength appear tobe objective, they are in reality subjective judgements that mayvary from one person to another
3) It cannot effectively depict the position of new business units indeveloping industry4) It only provides broad strategic prescriptions rather thanspecifics of business policyCompetitor Analysis – Analysis is done on what the competitor hasand what he does not have. The difference between SWOTanalysis and competitor analysis is that in competitor analysis weare concerned with only one component of the environment i.ecompetitor while in SWOT analysis focus is on all the factors ofthe environmentIndustry Analysis – Here all the competitors belonging to theparticular industry with which the organization is associated islooked at. In competitive analysis, only the major competitors areassessed while in industry analysis all the competitors belonging tothe industry are looked at.The strategic choice is a decision making process having thefollowing steps –1. Focussing on strategic alternatives2. Evaluating strategic alternatives3. Considering decision factors – objective and subjective4. Finally, making the strategic choice
5) Implementation of StrategySteps involved –1. Project implementation2. Procedural implementation3. Resource implementation4. Structural implementation5. Functional implementation6. Behavioural implementationProject implementation is a comprehensive plan of action fromacquiring land to the installation of machinery within a time frame.Procedural implementation takes place by following the “Law ofthe Land” i.e the rules and regulation in terms of wastage cost,utility, etc. It involves completing all procedures and formalities asprescribed by the governments both state and central. The stepsvary from industry to industry. There may also be frequent changesin policies.Resource allocation involves allocation of resources to both insidethe company and outside the company. It has to make decisionsregarding short term and long term allocation.The structural implementation involves designing of theorganization structure and interlinking various units and sub unitsof the organization.
Functional implementation deals with the development of policiesand plans in different areas of functions which and organizationundertakes.Behavioural implementation deals with those aspects of strategyimplementation that have impact on behavior of people in theorganization.Since human resources form an integral part of theorganization, their activities and behavior need to be directed in acertain way. Any departure may lead to the failure of strategy.6) Evaluation and Control –Last step of the strategy making process. This is an ongoingprocess and evaluation and control have to be done for futurecourse of action as well. To get successful results and to achieveorganizational objectives, there has to be continuous monitoring ofthe implementation of strategy. The evaluation and control ofstrategy may result in various actions that the organization mayhave to take for successful well being, such actions may involveany kind of corrective measures concerned with any of the stepsconcerned with any of the steps involved in the whole process be itchoice for setting mission or objectives.When evaluation and control is carried out efficiently, itcontributes in three basic areas –1. Measurement of organizational process2. Feedback for future actions and3. Linking performance and rewards
The board of directors, the chief executive and other managers allplay a very important role in strategy evaluation and on control.Control can be of three types –1. Control of inputs that are required in an action, known as feedforward control2. Control of different stages of action process, known asconcurrent control3. Past action control based on feedback from completed actionknown as feedback controlControl is exercised by managers in the form of four steps –1. Setting performance standards2. Measuring actual performance3. Analyzing variance4. Taking corrective actionsAfter evaluation and control, the strategy process continues in anefficient manner. The effectiveness could be assessed only whenthe strategy helps in the fulfillment of organizational objectives3) Strategic Framework –Introduction – Strategies are involved in the formulation,implementation and evaluation of process. The hierarchy ofstrategic intent lays the foundation for strategic managementprocess. The process of establishing the hierarchy of strategicintent is very complex. In this hierarchy, the vision, the mission,
business definition and objectives are established. Formulation ofstrategies is possible only when strategic intent is clearly set up.Strategic Intent – The foundation for the strategic management islaid by the hierarchy of strategic intent. The concept of strateticintent makes clear what an organization stands for. Hamed andPrahalad coined the term strategic intent. Characterstics ofstrategic intent –• It is an obsession with an organization• This obsession may even be out of proportion to their resourcesand capabilitiesInvolves the following –• Creating and communicating a vision• Designing a mission statement• Defining the business• Setting objectivesVision –Defination by Kotler “description of something (an organization,corporate culture, a business, a technology, an activity) in thefuture”Defination by Miller and Dess “category of intentions that arebroad, all inclusive and forward thinking”Advantages of having a vision –• They foster experimentation
• Vision promotes long term thinking• Visions foster risk taking• They can be used for the benefit of people• They make organizations competitive, original and unique• Good vision represent integrity• They are inspiring and motivating to people working in anorganizationMission –Defination by Hynger and Wheelen – “purpose or reason for theorganization’s existence”Defination by David F.Harvey – “A mission provides the basis ofawareness of a sense of purpose, the competitive environment ,degree to which the firm’s mission fits its capabalities and theopportunities which the government offers”Defination by Thompson “essential purpose of the organization,concerning particularly why it is in existence, the nature of thebusiness it is in, and the customers it seeks to serve and satisfy”Examples of mission statement –India Today – The complete new magazineBajaj Auto – Value for money for yearsHCL – To be a world class competitorHMT – Timekeepers of the nationMission vs Purpose –
A few major points of distinction –1. Mission is the societal reasoning while the purpose is the overallreason2.Mission is external reasoning and relates to externalenvironment. Purpose is internal reasoning and relates to internalenvironment3. Mission is for outsiders while purpose is for its own employeesObjectives and Goals –Objectives refer to the ultimate end results which are to beaccomplished by the overall plan over a specified period of time.Meaning –• Objective are open ended attributes denoting a future state oroutcome and are stated in general terms• When the objectives are stated in specific terms, they becomegoals to be attained• Goals denote a broad category of financial and non-financialissues that a firm sets for itself• Objectives are the ends that state specifically how the goals shallbe achieved• It is to be noted that objectives are the manifestation of goalswhether specifically stated or notDifference between objectives and goals –• The goals are broad while objectives are specific• The goals are set for a relatively longer period of time
• Goals are more influenced by external environment• Goals are not quantified while objectives are quantifiedThe difference between the two is simply a matter of degree and itmay vary widelyImportance of establishing objectives –1. Objectives provide yardstick to measure performance of adepartment or SBU or organization2. Objectives serve as a motivating force. All people work toachieve the objectives3. Objectives help the organization to pursue its vision and mission4. Objectives define the relationship of organization with internaland external environment5. Objectives provide a basis for decision-making.Areas for setting objectives –1. Profit objective – or performance objectives2. Market objective - increase in market share3. Productivity objective – cost per unit of production4.Product objective – product development, productdiversification, branding, etc5. Social objective – tree plantation, provision for drinking water,setting up of community center, etc
6.Financial objective – relates to cash flow, debt equity ratio,working capital, new issues, debt instruments, etc7. Human resource objective – described in terms of absenteeism,turnover, number of grievances, strikes and lockouts, etcStrategic Analysis – Strategic Management comprises of threebroad activities, namely, strategic analysis, strategic formulationand strategic implementation. All the three are interrelated.Strategic analysis is the foundation for formulating strategies andbasically comprises of the study of business environment as awhole.Strategic Analysis comprises of the following –1. Environmental analysis2. Competitive forces3. Internal analysisEnvironmental Analysis –Strategic analysis is basically concerned with the structuring of therelationship between a business and its environment. Theenvironment in which business operates has a great influence ontheir success or failures. There is a strong linkage between thechanging environment, the strategic response of the business tosuch changes and the performance. It is therefore important tounderstand the forces of external environment the way theyinfluence this linkage. The external environment which is dynamicand changing holds both opportunities and threats for the
organizations. The organizations while attempting at strategicrealignments, try to capture these opportunities and avoid theemerging threats. At the same time the changes in the environmentaffect the attractiveness or risk levels of various investments of theorganizations or the investors.The macro environment in which all organizations operate broadlyconsist of the economic environment, the political and legalenvironment, the socio cultural aspects and the environmentrelated issues like pollution, sustainability,etc. The technologicaltemper and its progress has been the key driver behind the majorchanges witnessed in the external environment making itincreasingly complex.Pestel framework and the Mckinsey’s 7S framework are mostpopularly used for such analysis.PESTEL Framework –External forces are classified into 6 broad categories – political,economic, social, technological, environmental and legal forces.The framework primarily involves the following two areas –1. The environmental factors affecting the organization2. The important factors relevant in the present context and in theyears to comePolitcal Factors – Government stability, Political values and beliefsshaping policies,Regulations towards trade and global business, Taxation policies,Priorities in social sector
Economic Factors – GNP trends, Interest rates/savings rate, Moneysupply,Inflation rate, Unemployment, Disposable income, Businesscycles, Trade deficit/surplusSocio-cultural Factors – Population demographics, Social mobility,Lifestyle changes,Attitudes to work and leisure, Education, Health and fitnessawareness,Multiple income familiesTechnological factors – Biotechnology, Process innovation, Digitalrevolution,Government spending on research, Government and industry focuson technological effects, New discoveries/development, Speed oftechnology transfer, Rates of obsolescenceLegal – Monopolies legislation, Employment law, Health andsafety,Product safetyMckinsey’s 7S Framework – The framework suggests that thereis a multiplicity of factors that influence an organization’s abilityto change and its proper mode of change. Because of theinterconnectedness of the variables, it would be difficult to makesignificant progress in one area without making progress in theothers as well. There is no starting point or implied hierarchy in theshape of the diagram, and it is not obvious which of the sevenfactors would be the driving force in changing a particularorganization at a certain point of time. The critical variables would
be different across organizations and in the same organizations atdifferent points of time.The 7 S –Superordinate goals – are the fundamental ideas around which abusiness is builtStructure – salient features of the units’s organizational chart andinter connections within the officeSystems – procedures and routine processes, including howinformation moves around the unitStaff – personnel categories within the unit and the use to whichstaff are put, skill base, etcStyle – characterization of how key managers behave in order toachieve the unit’s goalsShared values strategy – the significant meanings or guidingconcepts that the unit imbues on its membersSkills – distinctive capabilities of key personnel and the unit as awholeThe 7 S model can be used in two ways –1. Considering the links between each of the S’s one can identifystrengths and weaknesses of an organization. No S is strength or aweakness in its own right, it is only its degree of support, orotherwise, for the other S’s which is relevant. Any S’s that
harmonises with all the other S’s can be thought of as strength andweaknesses2. The model highlights how a change made in any one of the S’swill have an impact on all the others. Thus if a planned change isto be effective, then changes in one S must be accompanied bycomplementary changes in the others. Structur e Strate Syste gy ms Super ordinate goals Skills Style Staff The Mckinsey 7-S FrameworkThe competitive forces – The competitive environment refers tothe situation which organisation’s face within its specific area ofoperation, and this is understood at an industry level or withrespect to smaller groups called strategic groups. Generallyunderstood, the industry in the economy is recognized as a groupof firms producing the same principal product or more broadly thegroup of firms producing products that are close substitutes foreach other and in a given industry different organizations have
different intermediate basis of understanding its relative positionwith respect to other organizations in the industry.Porter’s Five Forces Framework –The five forces framework developed by Michael Porter is themost widely known tool for analyzing the competitive environmentwhich helps in explaining how forces in the competitiveenvironment shape strategies and affect performance.The competitive forces are as follows –1. The rivalry among competitors in the industry2. The potential entrants3. The substitute products4. The bargaining power of suppliers5. The bargaining power of buyersHowever, these five forces are not independent of each other.Pressures from one direction can trigger off changes in anotherwhich is capable of shifting sources of competition.1) Threat of New Entrants – Entry of a firm in and operating in amarket is seen as a threat to the established firms in that market.The competitive position of the established firms is affectedbecause the entrants may add new production capacity or it mayaffect their market shares. They may also bring additionalresources with them which may force the existing firms to investmore than what was not required before. Altogether the situationbecomes difficult for the existing firms if not threatening alwaysand therefore they resort to raising barriers to entry. These barriers
are intended to discourage new entrants and this may be done byorganizations, be in any one or more ways as follows –• Economies of scale• Learning or experience effect• Cost disadvantage independent of scale• Brand benefits• Capital requirements• Switching costs• Access to distribution channels• Anticipated growth2) Bargaining power of suppliers – Business organizations have alarge dependency on suppliers and the latter influence their profitpotential significantly. Supplier’s decisions on prices, quality ofgoods and services and other terms and conditions of delivery andpayments have significant impact on the profit trends of anindustry. However, supplier’s ability to do all these depends on thebargaining power over buyers.Supplier bargaining power would normally depend on –• Importance of the buyer to the supplier group• Importance of the supplier’s product to the buyers• Greater concentration among suppliers than buyers• High switching costs for buyers
• Credible threat of forward integration by suppliers3) Bargaining power of customers – Customers with strongerbargaining power relative to their suppliers may force supplyprices down or demand better quality for the same price and maydemand more favourable terms of business. Eg.there will alwaysbe a difference in the bargaining power between an individualbuying different construction material like cement, steel, bricks,etc and a real estate builder buying them for the number ofproperties he may have been building over so many years.Following factors attach greater power to buyers –• Undifferentiated or standard suppliers• Customer’s price sensitivity• Accurate information about the cost structure of suppliers• Greater concentration in buyer’s industry than in supplier’sindustry and relatively large volume purchase• Credible threat of backward integration by buyers4) Threat of substitutes –Often firms in an industry face competition from outside industryproducts, which may be close substitutes of each other. Forexample, with the new technologies in place now the electronicpublishings are the direct substitutes of the texts published in print.
Similarly, newspaper find their closest substitutes in their onlineversions, though it may be a smart strategic move to position themas complementary products.However, the competitive pressure, which any industry may face,depends primarily on three factors –• Whether the substitutes available are attractively priced• Whether buyers view substitutes available as satisfactory interms of their quality and performance• How easily buyers can switch to substitutes5) Competitive rivalry –The level of rivalry is minimum in a perfectly competitive marketwhere there are large number of buyers and sellers and the productis uniform with everyone. Same is true for monopoly market wherethere is only one player and the type of product is also one. Thefollowing factors determine the level of rivalry –• The stability of environment• The life expectancy of competitive advantage• Characteristics of the strategies pursued by competitorsStrategic groups – they are conceptual clusters in the sense thatthey are grouped together for purposes of improving analysis andunderstanding competition within their industry. They donot
necessarily belong to any formal group such as an industry, trade,association or any strategic alliances and they donot necessarilydiffer in their average profitability.Competitive intelligence – It is the information which is relevantto strategy formulation regarding the environmental context withinwhich a firm competes. Such intelligence has several uses –a) Providing description of the competitive environment thatinform strategist and guide strategy formulationb)Challenge common assumption about the competitiveenvironmentc) Forecasting future development in the competitive environmentd)Identifying and compensating for exposed competitiveweaknessese) Determining when a strategy is no longer viable or sustainablef)Indicating when and how strategy should be adjusted tochanging competitive environmentScenario planning –Scenarios are tools for ordering one’s perception about alternativefuture environment in which today’s decision might be framed. Inpractice, scenarios resemble a set of stories, written or spoken,built around carefully constructed plots. These stories can expressmultiple perspectives on complex events, scenarios give meaningto these events. Scenarios are powerful planning tools precisely
because the future is unpredictable. Unlike traditional forecastingor market research, scenarios present alternative images instead ofextrapolating current trends from the present.Scenarios also embrace qualitative perspectives and the potentialfor sharp discontinuities that econometric models exclude.Consequently, creating scenarios requires decision-makers toquestion their broadest assumptions about the way the world worksso that they can foresee decisions that might be missed or denied.Without an organization, scenarios provide a common vocabularyand an effective basis for communicating complex – sometimesparadoxical – conditions and options. Good scenarios are plausibleand surprising, they have the power to break old stereotypes, andtheir creators assume ownership and put them to work. Usingscenarios is rehearsing the future. By recognizing the warningsignals, the threats and opportunities that is unfolding, one canavoid surprises, adapt and act effectively.Decisions which have been pre-tested against a range of what mayoffer are more likely to stand the test of time, produce robust andresilient strategies, and create distinct competitive advantage.Ultimately, the result of scenario planning is not a more accuratepicture of tomorrow but better thinking and an ongoing strategicconversation about the future.Implementation of scenario planning –A company wide involvement in scenario planning leads to betteresults in a firm. A cross-functional team is instituted for theidentification and monitoring of issues. Employees are encouragedto participate by an incentive based process.
Steps involved – 1) Identification of issues – understand the effects of external factors on business – technology driven, political, economic, competitive positioning 2) Classification of issues – support the issue identified with reports/propositions, determine the uncertainty and kind of impact of the issue 3) Analyzing and problem solving Critical success factors (CSF) – critical success factors are those which contribute to organization’s success in a competitive environment and therefore the organization needs to improve on them since poor results may lead to declining performance. Organizations depending on the environment they operate in and their own internal conditions can identify relevant csf’s. It is based on the following 2 characteristics –i. Industry characterstic – industry specific csf are factors critical for the performance of the industy. Eg. For a hospitality industry excellent and customized service, wide presence and excellent booking and reservation system is critical, while for an airline industry fuel efficiency, load factors, etc are criticalii. Competitive position – csf for a firm may also be determined by its relative position with respect to its competitors. For example, for a pathological laboratory center, earlier csf was authentic, hygienic and scientific testing facilities until few big players added service features like door to door sample collection or home
delivery of reports. Very soon approachability and ease became theadditional csf’s for the playersThe value chain framework –This is another framework most commonly used to guide analysisof any firm’s strength and weaknesses. In this framework, anybusiness is seen as a number of linked activities, each producingvalue for the customer. By creating additional value, the firm maycharge more or is able to deliver same value at a lower cost, eitherof this leading to a higher profit margin. This ultimately adds to theorganization’s financial performance. Firm’s infrastructureHuman Resource Management Technology development ProcurementInbound Operations Outbound Marketing ServiceLogistics Logistics & Sales The value chain framework (M.E.Porter 1980)
There are two types of activities – primary activities and support activities Primary activities constitute the following – a)Inbound logistics are activities concerned with receiving, storing and distributing the inputs to the product or service. They include materials handling, stock control, transport, etc b) Operations transform these various inputs into the final products or services –machining, packaging, assembly testing, etc c)Outbound logistics collect, store and distribute the product to customers. d) Marketing and sales makes consumers aware of the product or service so that they are able to purchase it. e) Services activities helps improving the effectiveness or efficiency of primary activities Support activities are as follows – a) Procurement – process for acquiring the various resource inputs to the primary activities and this is present in many parts of the organization b)Technology development – there are key technologies attached to different activities which may be directly linked with the product or with processes or with resource inputs c)Human Resource Management- area involved in recruiting, managing, training, developing and rewarding people within the organization.Top Management – Role & Functions
Management in all business and human organization activity issimply the act of getting people together to accomplish desiredgoals and objectives. Management comprises planning, organizing,staffing, leading or directing, and controlling an organization (agroup of one or more people or entities) or effort for the purpose ofaccomplishing a goal. Resourcing encompasses the deploymentand manipulation of human resources, financial resources,technological resources, and natural resources.Management can also refer to the person or people who performthe act(s) of management.Henri Fayol considers management to consist of seven functions:1. planning2. organizing3. leading4. coordinating5. controlling6. staffing7. motivatingSome people, however, find this definition, while useful, far toonarrow. The phrase "management is what managers do" occurswidely, suggesting the difficulty of defining management, theshifting nature of definitions, and the connection of managerialpractices with the existence of a managerial cadre or class.One habit of thought regards management as equivalent to"business administration" and thus excludes management in placesoutside commerce, as for example in charities and in the publicsector. More realistically, however, every organization mustmanage its work, people, processes, technology, etc. in order tomaximize its effectiveness. Nonetheless, many people refer touniversity departments which teach management as "businessschools." Some institutions (such as the Harvard Business School)
use that name while others (such as the Yale School ofManagement) employ the more inclusive term "management."Basic functions of managementManagement operates through various functions, often classified asplanning, organizing, leading/motivating, and controlling.• Planning: Deciding what needs to happen in the future (today,next week, next month, next year, over the next 5 years, etc.) andgenerating plans for action.• Organizing: (Implementation) making optimum use of theresources required to enable the successful carrying out of plans.• Staffing: Job Analyzing, recruitment, and hiring individuals forappropriate jobs.• Leading: Determining what needs to be done in a situation andgetting people to do it.• Controlling: Monitoring, checking progress against plans,which may need modification based on feedback.• Motivating: the process of stimulating an individual to takeaction that will accomplish a desired goal.. Formation of the business policy• The mission of the business is its most obvious purpose -- whichmay be, for example, to make soap.• The vision of the business reflects its aspirations and specifiesits intended direction or future destination.• The objectives of the business refers to the ends or activity atwhich a certain task is aimed.• The businesss policy is a guide that stipulates rules, regulationsand objectives, and may be used in the managers decision-making.It must be flexible and easily interpreted and understood by allemployees.• The businesss strategy refers to the coordinated plan of actionthat it is going to take, as well as the resources that it will use, to
realize its vision and long-term objectives. It is a guideline tomanagers, stipulating how they ought to allocate and utilize thefactors of production to the businesss advantage. Initially, it couldhelp the managers decide on what type of business they want toform. How to implement policies and strategies• All policies and strategies must be discussed with all managerialpersonnel and staff.• Managers must understand where and how they can implementtheir policies and strategies.• A plan of action must be devised for each department.• Policies and strategies must be reviewed regularly.• Contingency plans must be devised in case the environmentchanges.• Assessments of progress ought to be carried out regularly bytop-level managers.• A good environment and team spirit is required within thebusiness.• The missions, objectives, strengths and weaknesses of eachdepartment must be analysed to determine their roles in achievingthe businesss mission.• The forecasting method develops a reliable picture of thebusinesss future environment.• A planning unit must be created to ensure that all plans areconsistent and that policies and strategies are aimed at achievingthe same mission and objectives.• Contingency plans must be developed, just in case.All policies must be discussed with all managerial personnel andstaff that is required in the execution of any departmental policy.• Organizational change is strategically achieved through theimplementation of the eight-step plan of action established by JohnP. Kotter: Increase urgency, get the vision right, communicate the
buy-in, empower action, create short-term wins, dont let up, andmake change stick. Where policies and strategies fit into the planning process• They give mid- and lower-level managers a good idea of thefuture plans for each department.• A framework is created whereby plans and decisions are made.• Mid- and lower-level management may add their own plans tothe businesss strategic ones.Multi-divisional management hierarchy The management of a large organization may have three levels:1. Senior management (or "top management" or "uppermanagement")2. Middle management3. Low-level management, such as supervisors or team-leaders4. Foreman5. Rank and File Top-level management• Require an extensive knowledge of management roles and skills.• They have to be very aware of external factors such as markets.• Their decisions are generally of a long-term nature• Their decisions are made using analytic, directive, conceptualand/or behavioral/participative processes• They are responsible for strategic decisions.• They have to chalk out the plan and see that plan may beeffective in the future.
• They are executive in nature. Middle management• Mid-level managers have a specialized understanding of certainmanagerial tasks.• They are responsible for carrying out the decisions made by top-level management. Lower management• This level of management ensures that the decisions and planstaken by the other two are carried out.• Lower-level managers decisions are generally short-term ones. Foreman / lead hand• They are people who have direct supervision over the workingforce in office factory, sales field or other workgroup or areas ofactivity. Rank and File• The responsibilities of the persons belonging to this group areeven more restricted and more specific than those of the foreman.Benchmarking – Benchmarking compares an organization’sperformance against ‘best in class’ performance wherever that isfound. Managers seek out the best examples of a particular practicein other companies as part of an effort to improve thecorresponding practice in their own firm.When the search for best practices is limited to competitors, theprocess is called competitive benchmarking. Other times managersmay seek out the best practices regardless of what industry they are
in, called functional benchmarking. Benchmarking provides themotivation and the means many firms need to seriously rethinkhow their organizations perform certain tasks.A comprehensive internal analysis of an organization’s strengthsand weaknesses must however utilize all three types of comparisonstandards. For instance, an organization can study industry normsto access where it stands in terms of number of complaintsgenerated regarding defects during guarantee period of the product.Then it could benchmark the organization that is best at controllingthe defects. Based on the benchmarking results it could implementmajor new programmes and track improvements in theseprogrammes over time using, historical comparisons.Value Chain – it shows that differentiation occurs out of thefirm’s value chain. The value activity determines the uniqueness ofthe product. The value chain consists of a set of value activitiesresulting in the production of a specified product. The valueactivities of each differentiated product differs depending on thenature of the product. The steps of value activity range fromprocurement of raw material to the sale of product. Eachdifferentiated product has its own value activities.SWOT Analysis –SWOT stands for Strenths, Weakness, Opportunties and Threats. ASWOT analysis summarizes the key issues from the externalenvironment and the internal capabilities of an organization thosewhich become critical for strategy development. The aim throughthis is to identify the extent to which the strength and weakness arerelevant to and capable to dealing with changes in the businessenvironment. It also reflects whether there are opportunities toexploit further the competencies of the organization.
Strength – Positive internal factors – technological skills, leadingbrands, distribution channels, customer loyalty, production quality,managementWeakness – Negative internal factors – absence of important skills,weak brands, low customer retention, unreliable product orservice, poor managementOpportunties – Positive external factors – changing customertastes, liberalization of geographic markets, technologicaladvances, changes in government policies, lower personal taxes,change in population age-structure, new distribution channelsThreats – Negative external factors – changing customer tastes,closing of geographic markets, technological advances, changes ingovernment policies, tax increase, change in population agestructure, new distribution channels.BUSINESS LEVEL STRATEGYBusiness level strategies are popularly known as generic orcompetitive strategies. Michael Porter classified these strategiesinto overall cost leadership, differentiation and focus. The first twostrategies are broader in concept as their competitive scope is wideenough whereas the third strategy i.e the focus strategy has anarrower competitive scope.The experience curve – Cost has been correlated with theaccumulated experience by the experience curve. Let us take theexample of production –The underlying principle behind the experience curve is that astotal quantity of production of a standardized item is increased, itsunit manufacturing cost decreases in a systematic manner. The
concept of the experience curve was presented by BCG in 1966and since then it has been accepted as an important phenomenon.Causes of experience curve effect –• Improved productivity of labour• Increased specialization• Innovation in production methods• Value engineering and fine tuning• Balancing production line• Methods and system rationalizationThe experience curve relationship provides a good framework formanagerial considerations for predicting industrial scenario withrespect to future costs, profit margins, and corresponding cashflows for the manager’s own as well as his/her competitor’soperations.Competitive strategies like the below mentioned can be developedbased on experience curve –1. Selling product at most competitive price2. Maximising profits by selling at the highest price the market canafford3. Selling at a higher price initially but crashing the prices later tokeep the competition out. Best Cost Leadership Differentiation cost Provide
Cost Focus Focussed differentiationCompetitive strategies by Michael Porter1) Low cost provider strategy -The firms operating in this highly competitive environment arealways on the move to become successful. To strive in thiscompetitive environment the firms should have an edge over thecompetitors. To develop competitive advantage, the firms shouldproduce good quality products at minimum costs, etc. This meansthat the firms should provide high quality at low cost so that thecustomer gets the best value for the product he/she is buying. Onesuch competitive strategy is overal l cost leadership, which aims atproducing and delivering the product or service at a low costrelative to its competitors at the same time maintaining the quality.According to Porter, following are the prerequisites of costleadership –1. Aggressive construction of efficient scale facilities2. Vigorous pursuit of cost reduction from experience3. Tight cost and overhead control4. Avoidance of marginal customer accounts5. Cost minimization
To sustain the cost leadership throughout, the firm must be clearabout its accomplishment through different elements of the valuechain.Though low cost can be one of the most important competitiveadvantages enjoyed by firms all over the globe it does have its owndrawback. Some are• Initiation by the competitive firms• Threat of competitive firms from other countries• Firm losing cost leadership due to fast technological changes,which require high capital investment• Threat by competitors to capture still lower cost segments• Competition based on other than cost.2) Differentiation Strategy – Every individual customer is uniquein itself so is his/her preferences regarding tastes, preferences,attitudes, etc. These needs of the customers are fulfilled by thefirms by producing differentiated products. In our day-to-day lifewe see many such examples of differentiated products. Most of thefast moving consumer goods like biscuits, soaps, toothpastes, oils,etc come under the category of differentiated products. To satisfythe diverse needs of the customers, it becomes essential for thefirms to adopt a differentiation strategy. To make this strategysuccessful, it is necessary for the firms to do extensive research tostudy the different needs of the customers. A firm is able todifferentiate from its competitors if it is able to position itselfuniquely at something that is valuable to buyers. Differentiationcan lead to differentiatial advantage in which the firm gets thepremium in the market, which is more than the cost of providingdifferentiation. The extent to which the differentiation occursdepends on the overall strategy of the firm. Previouslydifferentiation was viewed narrowly by the firms, but in the
present scenario it has become one of the essential components ofthe firm’s strategy. Reliance Infocomm, offers varied products likedifferent facilities to its customers in the CDMA telephones. Thisis differentiation.There are a number of factors which result in differentiation. Someof them are –• To compete against the rivals• To create entry barriers for newcomers by building a uniqueproduct• To reduce the threats arising from the substitutes• To develop a differentiation advantageDifferent areas of differentiation –Purchasing – quality of components and material acquiredDesign – aesthetic appealManufacturing – minimization of defectsDelivery – speed in fulfilling customer orders, reliability inmeeting promised delivery itemsHRM – improved training and motivation increases customerservice capabilityTechnology management – permits responsiveness to the needs ofspecific customersFinancial management – improves stability of the firmMarketing – building of product and company reputation throughadvertisingCustomer service – providing pre-sales information to customers
Sources of differentiation – Its not only the low price at whichdifferent products are offered, which creates differentiation,instead the firm can differentiate from its competitors by providingsomething unique, which is valuable to the customers of thatproduct. Differentiation occurs from the specific activities a firmperforms and how they affect the buyer.Some examples of differentiation –• Ability to serve customers needs anywhere• Simplified maintenance for the customers• Single point at which the buyer can purchase• Superior compatibility among products• Uniqueness Factors/Drivers for differentiation –• Policy choice – every firm decides its own policies regarding theactivities to be performed and the activities to be ignored. Thepolicy choices are basically related to the type of services to beprovided to the customers, the credit policy, to what extent aparticular activity be adopted, the content of activity, skill andexperience required by the employees, etc• Links – the uniqueness of a product depends to a large extent onthe links within the value chain with suppliers and distributionchannels, the firm deals with. If the firm has a good link withsuppliers and has a sound distribution channel, then it becomeseasy for the firm to produce and supply the product to the endusers
• Timing – the firms can achieve uniqueness by encashing theopportunities at the right time. If the timing is perfect then asuccessful differentiation strategy can be adopted.• Location – this is one of the important factors for the firms tohave uniqueness. For example a bank may have its branch which isaccessible to the customers, then the bank will gain an edgetowards other banks.• Interrelationships – a better service can be offered to thecustomers by sharing certain activities e.g sales force with thefirm’s sister concerns.• Learning – To peform better and better, continuousimprovement is necessary and this comes through continouslearning• Integration – The firm can be termed as unique, if its level ofintegration is high. The integration level means the coordinationlevel of value activities• Scale – Larger the scale, more will be the uniqueness. If smallvolumes of products are produced , then the uniqueness of theproduct will be lost over a longer period of time. A very goodexample can be home-delivery services. The type of scale leadingto differentiation varies depending on the individual firm’sactivities• Institutional factors – This factor sometimes play a role inmaking a firm unique, like relationship of management withemployeesDifferentiation is governed by value activities in a value chain andthese activities in turn are governed by certain driving factorswhich make the form unique
Cost of differentiation –Differentiation generally involves costs. The differentiation addscosts as it involves added features to cater to the needs of thecustomers. Usually the cost is incurred in the following cases:• Increased expenditure on training• Increased advertising spend to promote the product• Cost of hiring highly skilled salesforce• Use of more expensive material to improve the quality of theproduct, etcAdvantages of differentiation –• Premium price for the firm• Increase in number of units sold• Increase in brand loyalty by the customers• Sustaining competitive advantageDisadvantage of differentiation –• Uniqueness of the product not valued by buyers• Excess amount of differentiation• Loss due to differentiation3) Focus Strategy –
The third business level strategy is focus. Focus is different fromother business strategies as it is segment based and has narrowcompetitive scope. This strategy involves the selection of a marketsegment, or group of segments, in the industry and meeting theneeds of that preferred segment (or niche) better than other marketcompetitors. This is also known as niche strategy.In focus strategy, the competitive advantage can be achieved byoptimizing strategy for the target segments.Focus strategy has two variants. They are –a) Cost focus - Cost focus is where a firm seeks a cost advantagein the target segment. This is basically a niche-low cost strategywhereby a cost advantage is achieved in focuser’s target segment.According to Porter, cost focus exploits differences in behavior insome segments. In this the focuser concentrates on a narrow buyersegment and out-competes rivals on the basis of lower cost.b) Differentiation focus - Differentiation focus is where a firmseeks differentiation in the target segment. In this, the firm offersniche buyers something different from rivals. Firm seeksdifferentiation in its target segment. Differentiation focus exploitsthe specific needs of buyers in specified segments. Eg. MayBachluxury car which is targeted to segment where customers canafford to pay a sum as large as Rs.5.4 crores.Following are the situations where a focus strategy is efficient –• Market segment large enough to be profitable
• Market segment has good growth potential• Market segment is not significant to the success of majorcompetitors• Focuser has efficient resources• Focuser is able to defend against challenges• High costs are difficult to the competitors to meet thespecialized need of the niche• Focuser is able to choose from different segmentsAdvantages of focus strategy –• Focuser can defend against Porters competitive forces• Focuser can reduce competition from new firms by creating aniche of its own• Threat from producers producing substitute products is reduced• The bargaining power of the powerful customers is reduced• Focus strategy, if combined with low-cost and differentiationstrategy, would increase market share and profitabilityRisks of focus strategy –• Market segment may not be large enough to generate profits• Segment’s need may become less distinct from the main market• Competition may take over the target-segmentCorporate Strategy
Corporate strategy is primarily about the choice of direction for thecorporation as a whole. The basic purpose of a corporate strategyis to add value to the individual businesses in it. A corporatestrategy involves decisions relating to the choice of businesses,allocation of resources among, different businesses, transferringskills and capabilities in such a way as to obtain synergies amongproduct lines and business units, so that the corporate whole isgreater than the sum of its individual business units.Types of Corporte StrategiesThere are four types of strategic alternatives available at corporatelevel. They are1) Stability strategy –Stability strategy implies continuing the current activities of thefirm without any significant change in direction. If theenvironment is unstable and the firm is doing well, then it maybelieve that it is better to make no changes. A firm is said to befollowing a stability strategy if it is satisfied with the sameconsumer groups and maintaining the same market share, satisfiedwith incremental improvements of functional performance and themanagement does not want to take any risks that might beassociated with expansion or growth.Stability strategy is most likely to be pursued by small businessesor firms in a mature stage of development.
Stability strategies are implemented by ‘steady as it goes’approaches to decisions. No major functional changes are made inthe product line, markets or functions.However, stability strategy is not a ‘do nothing’ approach nor doesit mean that goals such as profit growth are abandoned. Thestability strategy can be designed to increase profits through suchapproaches as improving efficiency in current operations.Why do companies pursue a stability strategy?1) the firm is doing well or perceives itself as successful2) it is less risky3) it is easier and more comfortable4) the environment is relatively unstable5) too much expansion can lead to inefficienciesSituations where a stability strategy is more advisable than thegrowth strategy:a) if the external environment is highly dynamic andunpredictableb) strategic managers may feel that the cost of growth may behigher than the potential benefitsc) excessive expansion may result in violation of anti trustlawsTypes of stability strategies –
1) Pause/Process with caution strategy – some organizationspursue stability strategy for a temporary period of time until theparticular environmental situation changes, especially if they havebeen growing too fast in the previous period. Stability strategiesenable a company to consolidate its resources after prolonged rapidgrowth. Sometimes, firms that wish to test the ground beforemoving ahead with a full-fledged grand strategy employ stabilitystrategy first.2) No change strategy – a no change strategy is a decision to donothing new i.e continue current operations and policies for theforeseeable future. If there are no significant opportunities orthreats operating in the environment, or if there are no major newstrengths and weaknesses within the organization or if there are nonew competitors or threat of substitutes, the firm may decide not todo anything new.3) Profit strategy – the profit strategy is an attempt toartificially maintain profits by reducing investments and short-termexpenditures. Rather than announcing the company’s poor positionto shareholders and other investors at large, top management maybe tempted to follow this strategy. Obviously, the profit strategy isuseful to get over a temporary difficulty, but if continued for long,it will lead to a serious deterioration in the company’s position.The profit strategy is thus usually the top management’s short termand often self serving response to the situation.In general, stability strategies can be very useful in the short run,but they can be dangerous if followed for too long.2) Growth/Expansion Strategies –
Growth strategies are the most widely pursued corporate strategies.Companies that do business in expanding industries must grow tosurvive. A company can grow internally by expanding itsoperations or it can grow externally through mergers, acquisitions,joint ventures or strategic alliances.Reasons for pursuing growth strategies –1) to obtain economies of scale2) to attract merit3) to increase profits4) to become a market leader5) to fulfill natural urge6) to ensure survivalGrowth strategies can be divided into three broad categories:a) Intensive strategiesb) Integration strategiesc) Diversification strategiesa) Intensive strategies – without moving outside theorganization’s current range of products or services, it may bepossible to attract customers by intensive advertising, and byrealigning the product and the market options available to theorganization. These strategies are generally referred to asintensification strategies.
There are three important intensive strategies –• Market penetration – seeks to increase market share forexisting products in the existing markets through greater marketingefforts. This includes activities like increasing the sales force,increasing promotional effort, giving incentives, etc. Marketingpenetration is generally achieved through the following approaches–- increasing sales to the current customers by increasingthe size of purchase, advertising other uses, giving price incentivesfor increased use- attracting the competitor’s customers by increasingpromotional efforts, establishing sharper brand differentiation,offering price cuts- attracting non users to buy the product by inducing trailuse through sampling, advertising new usersThis strategy is effective when currents markets are not saturated,usage rate of present customers is low, economies of scale canbring down the costs and when market shares of major competitorsare declining while total sales are increasing.Market development – seeks to increase market share by sellingthe present products in new markets. This can be achieved throughthe following approaches –- by entering new geographic market through regionalexpansions, national expansion and international expansion- by entering new market segments by developing productversions to appeal to other segments, entering other channels ofdistribution and through advertising in other media.
This strategy is effective when new untapped or unsaturatedmarket exists, new channels of distribution are available, the firmhas excess production capacity, the firm’s industry is becomingrapidly global and when the firm has resources for expandedoperations.• Product development – seeks to increase market share bydeveloping new or improved products for present markets. Can beachieved through developing new product features, developingquality variations and by developing additional models and sizes(product proliferation)This strategy is effective when the firm’s products are in maturitystage, the firm witnesses rapid technological developments in theindustry, the firm is in a high growth industry, competitors bringout improved quality products from time to time and the firm hasstrong R & D capabilitiesb) Integration Strategies – integration basically meanscombining activities relating to the present activity of a firm. Sucha combination can be done on the basis of the industry value chain.A company performs a number of activities to transform an inputto output. These activities include right from the procurement ofraw materials to the production of finished goods and theirmarketing and distribution to the ultimate customers. These
activities are also called value chain activities. The firm that adoptsintegration may move forward or backward the industry valuechainExpanding the firm’s range of activities backward into the soucesof supply and/or forward into the distribution channel is called‘vertical integration’. Thus, if a manufacturer invests in facilities toproduce raw materials or component parts that it formerlypurchased from outside suppliers, it remains in the same industry,but its scope of operations extend to two stages of the industryvalue chain. Similarly, if a manufacturer opens a chain of retailoutlets to market its products directly to consumers, it remains inthe same industry, but its scope of operations extend frommanufacturing to retailing. Vertical integration can be fullintegration, participating in all stages of the industry value chain orpartial integration, participating in selected stages of the industryvalue chain. A firm can pursue vertical integration by starting its ownoperations or by acquiring a company already performing theactivities it wants to brings inhouse. Thus, integration is basicallyof two types – Vertical integration Horizontal integration Vertical Integration – involves gaining ownership orincreased control over suppliers or distributors. Vertical integrationis of two types –
1) Backward integration – involves gaining ownership of firm’ssuppliers. For example, a manufacture of finished products maytake over the business of a supplier who manufactures rawmaterials, component parts and other inputs. It decreases thedependability of the supply and quality of raw materials used asproduction inputs. This strategy is generally adopted when- present suppliers are unreliable, too costly or cannot meetfirm’s needs- the firm’s industry is growing rapidly- Number of suppliers is small, but the number of competitorsis large- Stable prices are important to stabilize cost of raw materials- Present suppliers are getting high margins- The firm has both capital and hr to manage the new business2) Forward integration – involves gaining ownership orincreased controlOver distributors or retailers. This strategy is generally adoptedwhen- the present distributors are expansive, unreliable orincapable of meeting the firm’s needs- the availability of quality distributors is limited- the firm’s industry is growing and will continue to grow- the advantages of stable production are high- present distributors or retailers have high profit margins- the firm has both capital and hr to manage new business Advantages of vertical integration –1) a secure supply of raw materials or distribution channels
2) control over raw materials and other inputs required forproduction or distribution channels3) access to new business opportunities and technologies4) elimination of need to deal with a wide variety of suppliersand distribution Disadvantages of vertical integration –1) increased costs, expenses and capital requirements2) loss of flexibility in investments3) problems associated with unbalanced facilities or unfulfilleddemand4) additional administrative costs associated with managing amore complex set of activities Horizontal Integration – is a strategy seeking ownership orincreased control over a firm’s competitors. Advantages are- it eliminates or reduces competition- it yields access to new markets- it provides economies of scale- it allows transfer of resources and capabilitiesc) Diversification Strategies – is the process of adding newbusinesses to existing businesses of the company. In other words,diversification adds new products or markets in the existing ones.A diversified company is one that has two or more distinctbusinesses. The diversification strategy is concerned with
achieving a greater market from a greater range of products inorder to maximize profits. From the risk point of view, companiesattempt to spread their risk by diversifying into several products orindustries.Diversification can be achieved through a variety of ways:1) through mergers and acquisitions2) through joint ventures and strategic alliances3) through starting up a new unit Reasons for diversification –1) saturation or decline of the current business2) better opportunities3) sharing of resources and strengths4) new avenues for reducing costs5) obtain technologies and products6) use of brand name7) risk minimization Types of diversification –a) concentric diversificationb) conglomerate diversificationa) Concentric diversification – adding to new, but relatedbusiness is called Concentric diversification. It involves acquisition
of businesses that are related to the acquiring firm in terms oftechnology, markets or products. The selected new business hascompatibility with the firm’s current business.Advantages –- businesses sharing tangible and intangible resources- increasing the firm’s stock value- increases the growth rate of the firm- better use of funds than ploughing them back into internalgrowth- improves the stability of earning and sales- balances the product line when the life cycle of the currentproducts have peaked- helps to acquire a needed resource quickly- achieves tax savings- increases efficiency and profitability through synergy- reduces riskb) Conglomerate diversification – adding to new, but unrelatedbusinesses Is called conglomerate diversification. The newbusinesses will have no relationship to the company’s technology,products or markets.Advantages –- business risk is scattered over diverse industries- financial resources are invested in industries that offer thebest profit prospects- buying distressed businesses at a low price can enhanceshareholder wealth- company profitability can be more stable in economicupswings and downswings Disadvantages –- it is difficult to manage different businesses effectively
- the new businesses may not provide any competitive advantage if it has no strategic fits Differences between concentric and conglomerate diversification Sl.No Concentric Conglomerate Diversification Diversification 1 Diversifying into Diversifying into businesses related to businesses unrelated the existing business to the existing business 2 There is No commonality in commonality in markets, products or markets, products or technology technology 3 Main objective is to Main objective is to increase shareholder increase shareholder value through value through profit ‘synergy’ by sharing maximization skills, resources and capabilities 4 Less risky More risky Means to achieve diversification – i. Mergers & Acquisitionsii. Joint ventures
iii. Strategic alliancesiv. Internal development i) Mergers & Acquistions – a merger occurs when two or more organizations of about equal size combine to become one through an exchange of stock or cash or both. Mergers can take place in different ways Acquisition occurs when a large organization purchases a smaller firm, or vice versa. Consolidation is when both firms dissolve their identity to create a new firm. It is also known as amalgamation. Friendly merger – when both firms desire a merger or acquisition, it is termed as friendly merger Takeover – a surprise attempt by one company to acquire control of another Company against the will of the current management is called a takeover or hostile takeover. It is usually done through the purchase of controlling share of voting stock in a publicly traded company. In the case of takeover, the acquiring firms retains its identity whereas the target firm loses its identity after restructuring. Demerger – or split or division of a company is the opposite of mergers and acquisition. This happens when a part of the undertaking is transferred to a newly formed company or to an existing company. The size of the company after demerger would reduce.
Reasons for mergers & acquisitions – To gain economies of scale To achieve diversification of the portfolio To quickly acquire valuable resources To reduce risks and borrowing costs To achieve growth To gain additional capacity To obtain taxation or investment incentive To gain managerial expertise To acquire market supremacy To bypass legal hurdles To take over sick units Types of mergers –a) horizontal merger – companies producing the same productor doing same business join together.b) Vertical merger – joining of two or more companiesinvolved in different stages of production or distribution of thesame product or service.c) Lateral or allied merger – when the firms producing differentproducts which are related in some way come togetherd) Conglomerate merger – the merger of two or morecompanies producing unrelated products.e) Concentric merger – if the activities of the segments broughttogether are so related that there is carryover of specificmanagement functions or complimentarity in relative strengthsamong them
f) Circular merger – when firms belonging to the differentindustries and producing altogether different products combinetogether under the banner of central agency. The merger process –1) Identify industries2) Select sectors3) Choose companies4) Evaluate cost of acquisition and returns5) Rank the candidates – strategic fit, financial fit, cultural fit6) Identify good candidates7) Decide the extent of acquisition/retention8) Merger implementation9) Post-merger integration Demerits of M & A1) sometimes expensive premiums are paid to acquire abusiness2) a number of difficulties are faced in integrating the activitiesand resources of the acquired firm into the operations of theacquiring firm3) synergies can be quickly imitated by the competitors4) cultural clashes create a major challenge, which may doomthe induced benefits ii) Joint Ventures – joint ventures are assuming anincreasingly prominent role in the strategy of leading firms.A joint venture occurs when two or more companies join togetherto form a separate legal entity, where each of the partners own
equal or near equal stake. These ventures are formed to capitalizeon each other’s distinctive competencies. The most common formsof a joint venture include those between an international firm witha domestic firm.Types of joint ventures –1) International joint ventures: in this type of joint ventures, theinternational partner intends to benefit from the domestic partner’slocal knowledge of industry conditions of a specific industry. Thisstrategy will help the international firm to hedge its risks ofproduct development costs specific to that market. Further, somecountries make it mandatory for international firms to only enterthe country through a joint venture with the local partner, ratherthan on their own. The primary disadvantage in this type of jointventure is that the international firm might lose control of itstechnology to its joint venture partner. Also, such joint ventureswill not give the firm enough control over its joint venture, so thatit could compete globally against its competitors.2) Diversification joint venture – a firm may diversify into newproducts or markets through a joint venture. In such joint ventures,the specific benefits arise from transfer of technical, managerialand financial expertise from one business to another3) Market entry joint ventures – in this type of joint ventures,two or more firms in different businesses enter a new businesswhere they could capitalize on their combined capabilities iii) Strategic Alliances – In strategic alliances, two ormore firms jointly Cooperate for mutual gain. Each partner bringsknowledge or Resources to the partnership. For example, one
partner provides Manufacturing capabilities while the otherpartner provides marketing Marketing expertise. In the long run, partners canlearn from each other and develp new corecompetencies. Advantages of strategic alliances – improvement of efficiency,access to knowledge,Overcoming local government regulations, overcomingrestrictions in competitionIssues involved – assess and value partner knowledge, determineknowledge accessibility, Evaluate case of knowledge transfer, establish knowledgeconnections between the partners, Ensure that cultures are in alignment 3) Defensive strategies – These strategies are alsocalled retrenchment strategies. A company may pursueretrenchment strategies when it has a weak competitiveposition in some or all of the product lines resulting in poorperformance – sales are down and profits are dwindling. In an attempt to eliminate the weaknesses that aredragging the company down, management may follow one ormore of the following retrenchment strategies – a) Turnaround
b) divestment c) bankruptcy d) liquidationa) Turnaround - a firm is said to be sick when it faces a severecash crunch or a consistent downtrend in its operating profits. Suchfirms become insolvent unless appropriate internal and externalactions are taken to change the financial picture of the firm. Thisprocess of recovery is called turnaround strategy.The three phases of turnaround –1) First phase – is the diagnosis of impending trouble. Many authorsand research studies have indicated distinct early warning signals ofcorporate sickness2) Second phase – involves analyzing the causes of sickness torestore the firm on its profit track. Thse measures are of both short-term and long-term nature3) The third and final phase – involves implementation of changeprocess and its monitoringWhen turnaround becomes necessary –• Decreasing market share• Decreasing constant rupee sales• Decreasing profitability• Increasing dependence on debt• Restricted dividend policies• Failure to reinvest sufficiently in the business
• Diversification at the expense of the core business• Lack of planning• Inflexible chief executive• Management succession problems• Unquestioning boards of directors• A management team unwilling to learn from its competitorsTypes of turnaround strategies –a) strategic turnaroundb) operating turnaround – revenue increasing strategies, costcutting strategies, asset reduction strategies, combination strategiesTurnaround Processi) revival of a sick unit requires the formulation and implementation of a new strategyii) localizing problems and sequencing the corrective actions helps in the revival of the sick unitiii) the successful implementation of the turnaround strategy requires appropriate organization structure, a participative type of decision making environment, effective administrative and budgetary controls, training, performance evaluation, career progression and rewards.iv) The turnaround strategy must focus on profit generation and profits must be regarded as a legitimate goalv) The acceptance and commitment of managers and employees of the organization towards revival measures
vi) Openness in the change process leads to confidence in the top management and its strategyvii) Understanding of technical processes and problem solving attitude in overcoming technical snags is essential for turning around of sick companiesviii) The vital role of consultantsix) Active support given to the chief executivex) Focused leadershipb) Divestiture – selling a division or part of an organization iscalled divestiture.Generally used in the following circumstances –- when the business cannot be turned around- when the business needs more resources than thecompany can provide- when a business is responsible for a firm’s overall poorperformance- when a business is a misfit with the rest of theorganization- when a large amount of cash is required quickly- when government’s legal actions threaten the existence ofa businessTypes –1) Spin-off – a new company comes into existence. Theshareholders of the parent company become the shareholders of thenew company spun off. It is a kind of demerger when an existingparent company distributes on a pro-rata basis the shares of the newcompany to the shareholders of the parent company free of cost.There is no money transaction, subsidiary’s assets are not revalued,and transaction is treated as stock dividend. Both the companies
exist and carry on their businesses independently after spin-off. Eg.ITC has spun off hotel business from the company and formed ITCHotels LtdInvoluntary spin-off – when faced with an adverse regulatoryruling, a firm may be forced to spin-off to comply with the legalformalities.Defensive spin-off – defensive spin-off is a takeover defence.Company may choose to spin-off divisions to make it less attractiveto the bidderTax consequences of spin-off : Shares allotted to the shareholdersduring spin-off is not taxed as capital gain or as dividend2) Sell-off – it is a form of restructuring, where a firm sells adivision to another company. When the business unit is sold,payment is received generally in the form of cash or securities3) Voluntary corporate liquidation or bust-ups – it is also knownas complete sell-off. The companies normally go for voluntaryliquidation because they create value to the shareholders. Here thefirm sells its assets/divisions to multiple parties which may result ina higher value being realized than if they had to be sold as a whole.Through a series of spin-offs or sell-offs a company may goultimately for liquidation4) Equity carveouts – it is a different type of divestiture anddifferent form of spin-off and sell-off. The parent company maysell a 100% interest in subsidiary company or it may choose toremain in the subsidiary’s line of business by selling only a partialinterest (shares) and keeping the remaining percentage ofownership.5) Leveraged buyouts (LBO’s) – a leveraged buyout is anacquisition of a company in which the acquisition is substantially
financed through debt. Much of the debt may be secured by theassets of the company.c) Bankruptcy – this is a form of defensive strategy. It allowsorganizations to file a petition in the court for legal protection to thefirm, in case the firm is not in a position to pay its debt. The courtdecides the claims on the company and settles the corporation’sobligations.d) Liquidation – occurs when an entire company is dissolved andits assets are sold. It is a strategy of the last resort. When there areno buyers for a business which wants to be sold, the company maybe wound up and its assets may be sold to satisfy debt obligations.Liquidation becomes inevitable under the following circumstances–1) when an organization has pursued both turnaround strategyand divestiture strategy, but failed2) when an organization’s only alternative is bankruptcy.3) When the shareholders of a company can minimize their lossesby selling the assets of a businessCombination strategy – a company can pursue a combination oftwo or more corporate strategies simultaneously. But a combinationstrategy can be exceptionally risky if carried too far. Noorganization can afford to pursue all the strategies that mightbenefit the firm. Difficult decisions must be made. Priorities mustbe established. Organizations like individuals have limited
resources, so organizations must choose among alternativestrategies