International Strategic Management Assignments

F-2,Block, Amity Campus
Sec-125, Nodia (UP)
India 201303
ASSIGNMENTS
PROGRAM: MBA – IB
SEMESTER-III
Subject Name : International Strategic Management (ISM)
Study COUNTRY : The Gambia
Permanent Enrollment Number (PEN) : A40002014038
Roll Number : IB01122014-2016023
Student Name : Saikou Saidy Jeng
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT DETAILS MARKS
Assignment A Five Subjective Questions 10
Assignment B Three Subjective Questions + Case Study 10
Assignment C 40 Objective Questions 10
b) Total weightage given to these assignments is 30%. OR 30 Marks
c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due dates (specified from
time to time) and need to be submitted for evaluation by Amity University.
f) The evaluated assignment marks will be made available within six weeks.
Thereafter, these will be destroyed at the end of each semester.
g) The students have to attached a scan signature in the form.
Signature:
Date : 18-11-2015
( √ ) Tick mark in front of the assignments submitted
Assignment ‘A’ √ Assignment ‘B’ √ Assignment ‘C’ √

International Strategic Management
Assignment A
Answer the following questions:
Q1: Briefly explain strategy.
The term strategy is derived from a Greek word strategos which
means generalship. A strategy in the generic sense of the word can
be said to be a plan or course of action or a set of decision rules
making a pattern or creating a common thread.
The term strategy proliferates in discussions of business. Strategy
is a word with many meanings and all of them are relevant and
useful to those who are charged with setting strategy for their
corporations, businesses, or organizations. Some definitions of
strategy as offered by various writers are briefly reviewed below;
Alfred D. Chandler, Jr., author of Strategy and Structure (1962),
the classic study of the relationship between an organization‟s
structure and its strategy, defined strategy as “the determination of
the basic long-term goals and objectives of an enterprise, and the
adoption of courses of action and the allocation of resources for
carrying out these goals.”
Robert N. Anthony, author of Planning and Control Systems
(1965), one of the books that laid the foundation for strategic
planning, didn‟t give his own definition of strategy. Instead, he
used one presented in an unpublished paper by Harvard colleague
Kenneth R. Andrews: “the pattern of objectives, purposes or goals
and major policies and plans for achieving these goals stated in
such a way as to define what business the company is or is
to be in and the kind of company it is or is to be.” (Here we
can see the emergence of some vision of the company in the future
as an element in strategy.

Kenneth Andrews, long-time Harvard professor and editor of
the Harvard Business Review, published the first edition of The
Concept of Corporate Strategy in 1971 and updated it in 1980.
His published definition of strategy took this form in the 1980
edition: “the pattern of decisions in a company that
determines and reveals its objectives, purposes or goals, produces
the principal policies and plans for achieving those goals, and
defines the range of businesses the company is to pursue, the kind
of economic and human organization it is or intends to be, and the
nature of the economic and non -economic contribution it intends
to make to its shareholders, employees, customers, and
communities.”Andrews‟ definition of strategy is rather all-
encompassing and is perhaps best viewed as a variation on the
military notion of “grand strategy”.
George Steiner, a co-founder of the California Management
Review, and author of the 1979 “bible,” Strategic Planning:
What Every Manager Must Know, observed that there was
little agreement on terms or definitions and confined his
discussion of the definition of strategy to a lengthy footnote. But,
nowhere does he define strategy in straightforward terms.
Although there are many similarities in the definitions above,
there are also some important differences. We are left, then, with
no clear-cut, widely-accepted definition of strategy; only different
views and opinions offered by different writers working different
agendas.
Given this backdrop, we can try our own working definition and
explanation of strategy.
The words ‗strategy‘ is typically associated with issues like these:

●The long-term direction of an organization; Strategy involves
long-term decisions about what sort of company it should be, and
realizing these decisions would take plenty of time.
●The scope of an organization‘s activities; For example, should the
organization concentrate on one area of activity, or should it have
many?
●Advantage for the organization over competition; Advantage may
be achieved in different ways and may also mean different things.
For example, in the public sector, strategic advantage could be
thought of as providing better value services than other providers,
thus attracting support and funding from government.
●Strategic fit with the business environment; Organizations need
appropriate positioning in their environment, for example in terms
of the extent to which products or services meet clearly identified
market needs. This might take the form of a small business trying
to find a particular niche in a market, or a multinational
corporation seeking to buy up businesses that have already found
successful market positions.
●The organization‘s resources and competences; Following ‗the
resource-based view‘ of strategy, strategy is about exploiting the
strategic capability of an organization, in terms of its resources and
competences, to provide competitive advantage and/or yield new
opportunities. For example, an organization might try to leverage
resources such as technology skills or strong brands. Yahoo!
claims a brand ‗synonymous with the Internet‘, theoretically giving
it clear advantage in that environment.
●The values and expectations of powerful actors in and around the
organization; These actors – individuals, groups or even other
organizations – can drive fundamental issues such as whether an

organization is expansionist or more concerned with consolidation,
or where the boundaries are drawn for the organization‘s activities.
●Uncertainty is inherent in strategy, because nobody can be sure
about the future.
●Operational decisions are linked to strategy. This link between
overall strategy and operational aspects of the organization is
important for two other reasons. First, if the operational aspects of
the organization are not in line with the strategy, then, no matter
how well considered the strategy is, it will not succeed. Second, it
is at the operational level that real strategic advantage can be
achieved. Indeed, competence in particular operational activities
might determine which strategic developments might make most
sense.
●Integration is required for effective strategy. Managers have to
cross functional and operational boundaries to deal with strategic
problems and come to agreements with other managers who,
inevitably, have different interests and perhaps different priorities.
●Relationships and networks outside the organization are
important in strategy, for example with suppliers, distributors and
customers.
●Change is typically a crucial component of strategy. Change is
often difficult because of the heritage of resources and because of
organizational culture.
Overall, the most basic definition of strategy might be ‗the long-
term direction of an organization‘. However, the characteristics
described above can provide the basis for a fuller definition:
Strategy, within the context of business, is the direction and scope
of an organization over the long-term, which achieves advantage
in a changing environment through its configuration of resources

and competences with the aim of fulfilling stakeholder
expectations.
Strategy is therefore the long-term direction of the organization. It
is likely to be expressed in broad statements both about the
direction that the organization should be taking and the types of
action required to achieve objectives. For example, it may be stated
in terms of market entry, new products or services, or ways of
operating.
An organization‘ strategy can take the form of intended or
realized strategy. Henry Mintzberg introduced two terms to help
clarify the shift that often occurs between the time a strategy is
formulated and the time it is implemented. An intended strategy
(i.e., what management originally planned) may be realized just as
it was planned, in a modified form, or even in an entirely different
form. Occasionally, the strategy that management intends is
actually realized, but the intended strategy and the realized
strategy—what management actually implements—usually differ.
Hence, the original strategy may be realized with desirable or
undesirable results, or it may be modified as changes in the firm or
the environment become known.
Organizations‘ strategy can also be seen from a variety of
perspectives, as suggested by the four strategy lenses. A design
lens sees strategy in logical analytical ways. An experience lens
sees strategy as the product of individual experience and
organizational culture. The ideas lens sees strategy as emerging
from ideas within and around an organization. The discourse lens
highlights the role of strategy language in shaping understandings
within organisations, and points to the importance of being able to
talk this language effectively.

Generally, strategy is usually found on three different layers of
organizations, that is, corporate, business and functional levels
(these are dealt with later in this course work).
Differentiate strategy from strategic management.
In order to differentiate strategy from strategic management, it
behooves us to mention what each entails.
The term strategy is derived from a Greek word strategos which
means generalship. A strategy can be said to be a plan or course of
action or a set of decision rules making a pattern or creating a
common thread. Strategy is an action that managers take to attain
one or more of the organization‘s goals. Strategy can also be
defined as ―A general direction set for the company and its various
components to achieve a desired state in the future. Strategy results
from the detailed strategic planning process‖. Strategy is a well
defined roadmap of an organization. It defines the overall
mission, vision and direction of an organization. The objective of a
strategy is to maximize an organization‘s strengths and to
minimize the strengths of the competitors.
Strategy, in short, bridges the gap between ―where we are‖ and
―where we want to be‖.
Strategic Management, on the other hand, is defined as the
dynamic process of formulation, implementation, evaluation and
control of strategies to realize the strategic intent of the
organization. The strategic management process means defining
the organization‘s strategy. It is also defined as the process by
which managers make a choice of a set of strategies for the
organization that will enable it to achieve better performance.
Strategic management is a continuous process that appraises the
business and industries in which the organization is involved;
appraises it‘s competitors; and fixes goals to meet all the present
and future competitor‘s and then reassesses each strategy.
Strategic management process has following four steps:

1. Environmental Scanning- Environmental scanning refers to a
process of collecting, scrutinizing and providing information for
strategic purposes. It helps in analyzing the internal and external
factors influencing an organization. After executing the
environmental analysis process, management should evaluate it on
a continuous basis and strive to improve it.
2. Strategy Formulation- Strategy formulation is the process of
deciding best course of action for accomplishing organizational
objectives and hence achieving organizational purpose. After
conducting environment scanning, managers formulate corporate,
business and functional strategies.
3. Strategy Implementation- Strategy implementation implies
making the strategy work as intended or putting the organization‘s
chosen strategy into action. Strategy implementation includes
designing the organization‘s structure, distributing resources,
developing decision making process, and managing human
resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy
management process. The key strategy evaluation activities are:
appraising internal and external factors that are the root of present
strategies, measuring performance, and taking remedial / corrective
actions. Evaluation makes sure that the organizational strategy as
well as it‘s implementation meets the organizational objectives.
These components are steps that are carried, in chronological
order, when creating a new strategic management plan.
From the above explanation, we can discern that the principal
difference is that while strategy is a course of action to achieve a
certain objective, strategic management is a process, the byproduct
of which results into a strategy. Thus strategic management is the
means to obtaining strategy whilst strategy results from the
strategic management process.
Strategic management is a broader term than strategy and is a
process that includes top management‘s analysis of the

environment in which the organization operates prior to
formulating a strategy, as well as the plan for implementation and
control of the strategy. The difference between a strategy and the
strategic management process is that the latter includes considering
what must be done before a strategy is formulated through
assessing whether or not the success of an implemented strategy
was successful.
Strategic management is a body of knowledge that answers
questions about the development and implementation of good
strategies and is mainly concerned with the determinants of firm
performance. A strategy, in turn, is the central, integrated, and
externally oriented concept of how an organization will achieve its
performance objectives.
Also explain the levels of strategy formulation.
Strategy formulation, the process of planning strategies, is often
divided into three levels: corporate, business, and functional or
operational levels. In other words, strategies exist at a number of
levels in an organization.
Taking Yahoo! as an example, it is possible to distinguish at least
three different levels of strategy. The top level is corporate-level
strategy, concerned with the overall scope of an organization and
how value will be added to the different parts (business units) of
the organization. This could include issues of geographical
coverage, diversity of products/services or business units, and how
resources are to be allocated between the different parts of the
organization. For Yahoo!, whether to sell some of its existing
businesses is clearly a crucial corporate-level decision. In general,
corporate-level strategy is also likely to be concerned with the
expectations of owners – the shareholders and the stock market. It
may well take form in an explicit or implicit statement of ‗mission‘
that reflects such expectations. Being clear about corporate-level
strategy is important: determining the range of business to include

is the basis of other strategic decisions.
The second level is business-level strategy, which is about how
the various businesses included in the corporate strategy should
compete in their particular markets. For this reason, business-level
strategy is sometimes called ‗competitive strategy‘. In the public
sector, the equivalent of business-level strategy is decisions about
how units should provide best value services.
Business-level strategy typically concerns issues such as pricing
strategy, innovation or differentiation, for instance by better quality
or a distinctive distribution channel. So, whereas corporate-level
strategy involves decisions about the organization as a whole,
strategic decisions relate to particular strategic business units
(SBUs) within the overall organization. A strategic business unit is
a part of an organization for which there is a distinct external
market for goods or services that is different from another SBU.
Yahoo!‘s strategic business units include businesses such as
Yahoo! Photos and Yahoo! Music. Of course, in very simple
organizations with only one business, the corporate strategy and
the business-level strategy are nearly identical. None the less, even
here, it is useful to distinguish a corporate-level strategy, because
this provides the framework for whether and under what conditions
other business opportunities might be added or rejected. Where the
corporate strategy does include several businesses, there should be
a clear link between strategies at an SBU level and the corporate
level. In the case of Yahoo!, relationships with online advertisers
stretch across different business units, and using, protecting and
enhancing the Yahoo! brand is vital for all. The corporate strategy
with regard to the brand should support the SBUs, but at the same
time the SBUs have to make sure their business-level strategies do
not damage the corporate whole or other SBUs in the group.
Firms choose from among five business-level strategies to
establish and defend their desired strategic position against

competitors: cost leadership, differentiation, focused cost
leadership, focused differentiation, and integrated cost
leadership/differentiation. When selecting a business-level
strategy, firms evaluate two types of potential competitive
advantage: ―lower cost than rivals, or the ability to differentiate
and command a premium price that exceeds the extra cost of doing
so.‖ Having lower cost derives from the firm‘s ability to perform
activities differently than rivals; being able to differentiate
indicates the firm‘s capacity to perform different (and valuable)
activities. Thus, based on the nature and quality of its internal
resources, capabilities, and core competencies, a firm seeks to form
either a cost competitive advantage or a uniqueness competitive
advantage as the basis for implementing its business-level strategy.
We therefore can see that business- level strategy encompasses the
business‘s overall competitive theme, the way it positions itself in
the marketplace to gain a competitive advantage, and the different
positioning strategies that can be used in different industry
settings— for example, cost leadership, differentiation, focusing on
a particular niche or segment of the industry, or some
combinations of these.
The third level of strategy is at the functional or operating end of
an organization. Here there are functional or operational strategies,
which are concerned with how the component parts of an
organization deliver effectively the corporate- and business-level
strategies in terms of resources, processes and people. For
example, Yahoo! has web-page designers in each of its businesses,
for whom there are appropriate operational strategies in terms of
design, layout and renewal.
Functional strategy is therefore the approach a functional area
takes to achieve corporate and business unit objectives and
strategies by maximizing resource productivity. It is concerned
with developing and nurturing a distinctive competence to provide
a company or business unit with a competitive advantage. Just as a

multidivisional corporation has several business units, each with its
own business strategy, each business unit has its own set of
departments, each with its own functional strategy.
The orientation of a functional strategy is dictated by its parent
business unit‘s strategy. For example, a business unit following a
competitive or business level strategy of differentiation through
high quality needs a manufacturing functional strategy that
emphasizes expensive quality assurance processes over cheaper,
high-volume production; a human resource functional strategy that
emphasizes the hiring and training of a highly skilled, but costly,
workforce; and a marketing functional strategy that emphasizes
distribution channel ―pull,‖ using advertising to increase consumer
demand, over ―push,‖ using promotional allowances to retailers. If
a business unit were to follow a low-cost competitive strategy,
however, a different set of functional strategies would be needed to
support the business strategy.
To emphasize, what is being said is that functional- level strategy
is directed at improving the effectiveness of operations within a
company, such as manufacturing, marketing, materials
management, product development, and customer service. Indeed,
in most businesses, successful business strategies depend to a large
extent on decisions that are taken, or activities that occur, at the
operational level. The integration of operational decisions and
strategy is therefore of great importance.
In the context of international business, just as competitive
strategies may need to vary from one region of the world to
another, functional strategies may need to vary from region to
region.
Q2: Differentiate between International and Global Strategic
Management.
An international strategic management means managing the

internationally scattered subsidiaries which act independently and
operates as if they were local companies, with minimum
coordination from the parent company.
Global strategic management on the other hand relates to
managing a wide variety of business strategies, and a high level of
adaptation to the local business environment. The challenge here is
to develop one single strategy that can be applied throughout the
world while at the same time maintaining the flexibility to adapt
that strategy to the local business environment when necessary
(Yip G. 2002). A global strategy involves a carefully crafted single
strategy for the entire network of subsidiaries and partners,
encompassing many countries simultaneously and leveraging
synergies across many countries.
So what are the differences between these two? In other words,
what differences are there between the global strategy and
international strategy management?
There are three key differences.
The first relates to the degree of involvement and coordination
from the centre. Coordination of strategic activities is the extent to
which a firm‗s strategic activities in different country locations are
planned and executed interdependently on a global scale to exploit
the synergies that exist across different countries. International
strategy does not require strong coordination from the centre.
Global strategy, on the other hand, requires significant
coordination between the activities of the centre and those of
subsidiaries.
The second difference relates to the degree of product
standardization and responsiveness to local business environment.
Product standardization is the degree to which a product, service,
or process is standardized across countries. An international
strategy assumes that the subsidiary should respond to local
business needs unless there is a good reason for not doing so. In
contrast, the global strategy assumes that the centre should

standardize its operations and products in all the different
countries, unless there is a compelling reason for not doing so.
The third difference has to do with strategy integration and
competitive moves. Integration and competitive move refer to the
extent to which a firm‗s competitive moves in major markets are
interdependent. For example, a multinational firm subsidizes
operations or subsidiaries in countries where the market is growing
with resources gained from other subsidiaries where the market is
declining, or responds to competitive moves by rivals in one
market by counter-attacking in others. The international strategy
gives subsidiaries the independence to plan and execute
competitive moves independently— that is, competitive moves are
based solely on the analysis of local rivals. In contrast, the global
strategy plans and executes competitive battles on a global scale.
Firms adopting a global strategy, however, compete as a collection
of globally integrated single firms. International strategy treats
competition in each country on a stand-alone basis‗, while a global
strategy takes an integrated approach across different countries.
Explain different types of international strategies.
There are basically four international strategies. These are now
discussed below;
Simple export; When firms concentrate of activities for example
particularly manufacturing in one country which typically is the
country of the organization‘s origin, we say that they are utilizing a
simple export strategy. In this strategy, marketing of the exported
product is very loosely coordinated overseas, most probably
handled by independent sales agents in different markets. Pricing,
packaging, distribution and even branding policies may all be
locally determined. This strategy is typically chosen by
organizations with a strong locational advantage but where either
the organization has insufficient managerial capabilities to
coordinate marketing internationally or where coordinated
marketing would add little value, for example in agricultural or
raw material commodities.

Multidomestic; A multidomestic strategy is an international
strategy in which strategic and operating decisions are
decentralized to the strategic business unit in each country so as to
allow that unit to tailor products to the local market. A
multidomestic strategy focuses on competition within each
country. It assumes that the markets differ and therefore are
segmented by country boundaries. This strategy is similarly
loosely coordinated internationally, but involves dispersion
overseas of various activities, including manufacturing and
sometimes product development. Instead of export, therefore,
goods and services are produced locally in each national market.
Each market is treated independently, with the needs of each local
domestic market given priority – hence ‗multidomestic‘. Local
adaptations can make the overall corporate portfolio increasingly
diversified. This strategy is appropriate where there are few
economies of scale and strong benefits to adapting to local needs.
This multidomestic strategy is particularly attractive in
professional services, where local relationships are critical, but it
carries risks towards brand and reputation if national practices
become too diverse.
The use of multidomestic strategies usually expands the firm‘s
local market share because the firm can pay attention to the needs
of the local clientele.
However, the use of these strategies results in more uncertainty for
the corporation as a whole, because of the differences across
markets and thus the different strategies employed by local country
units. Moreover, multidomestic strategies do not allow the
development of economies of scale and thus can be more costly.
Complex export; This strategy still involves the location of most
activities in a single country, but builds on more coordinated
marketing. Economies of scale can still be reaped in manufacturing
and R&D, but branding and pricing opportunities are more
systematically managed. The coordination demands are really
considerably more complex than in the simple export strategy. This

is a common stage for companies from emerging economies, as
they retain some locational advantages from their home country,
but seek to build a stronger brand and network overseas with
growing organizational maturity.
Global strategy; This strategy describes the highest level of
international strategy.It involves highly coordinated activities
dispersed geographically around the world. Using international
value networks to the full, geographical location is chosen
according to the specific locational advantage for each activity, so
that product development, manufacturing, marketing and
headquarters functions might all be located in different countries.
For example, Detroit-based General Motors designed its Pontiac
Le Mans at the firm‘s German subsidiary Opel, with its high
engineering skills; developed its advertising via a British agency
with the creativity strengths of London; produced many of the
more complex components in Japan, exploiting its sophisticated
manufacturing and technological capabilities; and assembled the
car in South Korea, a location where a lower cost, yet skilled, labor
force was available.
In contrast to a multidomestic strategy, a global strategy assumes
more standardization of products across country markets. As a
result, a global strategy is centralized and controlled by the home
office. The strategic business units operating in each country are
assumed to be interdependent, and the home office attempts to
achieve integration across these businesses. The firm uses a global
strategy to offer standardized products across country markets,
with competitive strategy being dictated by the home office. Thus,
a global strategy emphasizes economies of scale and offers greater
opportunities to take innovations developed at the corporate level
or in one country and utilize them in other markets. Improvements
in global accounting and financial reporting standards are
facilitating this strategy.
Although a global strategy produces lower risk, it may cause the
firm to forgo growth opportunities in local markets, either because

those markets are less likely to be identified as opportunities or
because the opportunities require that products be adapted to the
local market. The global strategy is not as responsive to local
markets and is difficult to manage because of the need to
coordinate strategies and operating decisions across country
borders.
In practice, these four international strategies are not absolutely
distinct. Managerial coordination and geographical concentration
are matters of degree rather than sharp distinctions. Companies
may often oscillate within and between the four strategies. Their
choices, moreover, will be influenced by changes in the
internationalization drivers. Where, for example, tastes are highly
standardized, companies will tend to favor complex export or
global strategies. Where economies of scale are few, the logic is
more in favor of multidomestic strategies.
Our above idea of the different types of international strategies was
based on the exposition of Johnson et al in their Exploring
Corporate Strategy (8 Edition),2008 book. It is important to note
that some authors like Michael .A. Hitt divided the types of
international strategies along the following line;
Mustidomestic strategy (is already explained)
Global strategy (is already explained)
Transnational strategy; A transnational strategy is an international
strategy through which the firm seeks to achieve both global
efficiency and local responsiveness. Realizing these goals is
difficult: One requires close global coordination while the other
requires local flexibility. ―Flexible coordination‖—building a
shared vision and individual commitment through an integrated
network—is required to implement the transnational strategy. Such
integrated networks allow a firm to manage its connections with
customers, suppliers, partners, and other parties more efficiently
rather than using arm‘s-length transactions.

The transnational strategy is difficult to use because of its
conflicting goals. On the positive side, the effective
implementation of a transnational strategy often produces higher
performance than does the implementation of either the
multidomestic or global international corporate level strategies.
Q3: Briefly explain Value chain analysis and Mc Kinsey‟s 7s
Framework.
Value Chain Analysis
Value chain analysis (VCA) can be said to be a process where a
firm identifies its primary and support activities that add value to
its final product and then analyze these activities to reduce costs or
increase differentiation. Value chain represents the internal
activities a firm engages in when transforming inputs into outputs.
VCA is a strategy tool used to analyze internal firm activities. Its
goal is to recognize which activities are the most valuable (i.e. are
the source of cost or differentiation advantage) to the firm and
which ones could be improved to provide competitive advantage.
In other words, by looking into internal activities, the analysis
reveals where a firm‘s competitive advantages or disadvantages
are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it
competes through cost advantage, it will try to perform internal
activities at lower costs than competitors would do. When a
company is capable of producing goods at lower costs than the
market price or to provide superior products, it earns profits.
M. Porter introduced the generic value chain model in 1985. Value
chain represents all the internal activities a firm engages in to
produce goods and services. VC is formed of primary activities
that add value to the final product directly and support activities
that add value indirectly. Below you can see the Porter‘s VC
model.
Primary Activities

Support Activities
Although, primary activities add value directly to the production
process, they are not necessarily more important than support
activities. Nowadays, competitive advantage mainly derives from
technological improvements or innovations in business models or
processes. Therefore, such support activities as ‗information
systems‘, ‗R&D‘ or ‗general management‘ are usually the most
important source of differentiation advantage. On the other hand,
primary activities are usually the source of cost advantage, where
costs can be easily identified for each activity and properly
managed.
Firm‘s VC is a part of a larger industry VC. The more activities a
company undertakes compared to industry VC, the more vertically
integrated it is. Below you can find an industry value chain and its
relation to a firm level VC.

There are two different approaches on how to perform the analysis,
which depend on what type of competitive advantage a company
wants to create (cost or differentiation advantage). The table below
lists all the steps needed to achieve cost or differentiation
advantage using VCA.
Cost advantage Differentiation advantage
This approach is used when The firms that strive to create

organizations try to compete on
costs and want to understand the
sources of their cost advantage
or disadvantage and what factors
drive those costs.
superior products or services use
differentiation advantage
approach.
 Step 1. Identify the firm‘s
primary and support
activities.
 Step 2. Establish the
relative importance of each
activity in the total cost of
the product.
 Step 3. Identify cost
drivers for each activity.
 Step 4. Identify links
between activities.
 Step 5. Identify
opportunities for reducing
costs.
 Step 1. Identify the
customers‘ value-creating
activities.
 Step 2. Evaluate the
differentiation strategies
for improving customer
value.
 Step 3. Identify the best
sustainable differentiation.
To gain cost advantage a firm has to go through 5 analysis steps:
Step 1. Identify the firm’s primary and support activities. All
the activities (from receiving and storing materials to marketing,
selling and after sales support) that are undertaken to produce
goods or services have to be clearly identified and separated from
each other. This requires an adequate knowledge of company‘s
operations because value chain activities are not organized in the
same way as the company itself. The managers who identify value
chain activities have to look into how work is done to deliver
customer value.
Step 2. Establish the relative importance of each activity in the
total cost of the product. The total costs of producing a product or
service must be broken down and assigned to each activity.
Activity based costing is used to calculate costs for each process.

Activities that are the major sources of cost or done inefficiently
(when benchmarked against competitors) must be addressed first.
Step 3. Identify cost drivers for each activity. Only by
understanding what factors drive the costs, managers can focus on
improving them. Costs for labor-intensive activities will be driven
by work hours, work speed, wage rate, etc. Different activities will
have different cost drivers.
Step 4. Identify links between activities. Reduction of costs in
one activity may lead to further cost reductions in subsequent
activities. For example, fewer components in the product design
may lead to less faulty parts and lower service costs. Therefore
identifying the links between activities will lead to better
understanding how cost improvements would affect he whole
value chain. Sometimes, cost reductions in one activity lead to
higher costs for other activities.
Step 5. Identify opportunities for reducing costs. When the
company knows its inefficient activities and cost drivers, it can
plan on how to improve them. Too high wage rates can be dealt
with by increasing production speed, outsourcing jobs to low wage
countries or installing more automated processes.
VCA is done differently when a firm competes on differentiation
rather than costs. This is because the source of differentiation
advantage comes from creating superior products, adding more
features and satisfying varying customer needs, which results in
higher cost structure.
Step 1. Identify the customers’ value-creating activities. After
identifying all value chain activities, managers have to focus on
those activities that contribute the most to creating customer value.
For example, Apple products‘ success mainly comes not from
great product features (other companies have high-quality
offerings too) but from successful marketing activities.

Step 2. Evaluate the differentiation strategies for improving
customer value. Managers can use the following strategies to
increase product differentiation and customer value:
 Add more product features;
 Focus on customer service and responsiveness;
 Increase customization;
 Offer complementary products.
Step 3. Identify the best sustainable differentiation. Usually,
superior differentiation and customer value will be the result of
many interrelated activities and strategies used. The best
combination of them should be used to pursue sustainable
differentiation advantage.
This example is partially adopted from R. M. Grant‘s book
‗Contemporary Strategy Analysis‘ p.241. It illustrates the basic
VCA for an automobile manufacturing company that competes on
cost advantage. This analysis doesn‘t include support activities that
are essential to any firm‘s value chain, thus the analysis itself is not
complete.
Step
1
Step
2
$164 M $410 M $524 M $10 M $384 M $230 M
less important very important very important not important important less important
Step
3
Number and
frequency of
new models Order size Scale of plants
Level of
quality targets
Size of
advertising
budget
Number of
dealers
Sales per
model
Average
value of
purchases per
supplier
Capacity
utilization
Frequency
of defects
Strength of
existing
reputation
Sales per
dealer
Location of
suppliers
Location of
plants Sales Volume
Frequency
of defects
requiring
repair recalls
Step
4
1. High-quality assembling process reduces defects and costs in quality control and dealer support activities.
2. Locating plants near the cluster of suppliers or dealers reduces purchasing and distribution costs.
3. Fewer model designs reduce assembling costs.
4. Higher order sizes increase warehousing costs.

Step
5
1. Create just one model design for different regions to cut costs in designing and engineering, to increase
order sizes of the same materials, to simplify assembling and quality control processes and to lower
marketing costs.
2. Manufacture components inside the company to eliminate transaction costs of buying them in the market
and to optimize plant utilization. This would also lead to greater economies of scale.
In short, we can surmise that the value chain analysis can
help with the analysis of the strategic position of an
organization in two different ways;
●As generic descriptions of activities that can help managers
understand if there is a cluster of activities providing benefit to
customers located within particular areas of the value chain.
Perhaps a business is especially good at outbound logistics linked
to its marketing and sales operation and supported by its
technology development. It might be less good in terms of its
operations and its inbound logistics. The value chain also prompts
managers to think about the role different activities play. For
example, in a local family-run sandwich bar, is sandwich making
best thought of as ‗operations‘ or as ‗marketing and sales‘, given
that its reputation and appeal may rely on the social relations and
banter between customers and sandwich makers? Arguably it is
‗operations‘ if done badly but ‗marketing and sales‘ if done well.
●In terms of the cost and value of activities. Value chain analysis
can be used by firms as a way of identifying what they should
focus on in developing a more profitable business model.
A single organization rarely undertakes in-house all of the value
activities from design through to delivery of the final product or
service to the final consumer. There is usually specialization of
role so any one organization is part of a wider value network. The
value network is the set of inter-organizational links and
relationships that are necessary to create a product or service.
So an organization needs to be clear about what activities it ought
to undertake itself and which it should not and, perhaps, should

outsource. However, since much of the cost and value creation will
occur in the supply and distribution chains, managers need to
understand this whole process and how they can manage these
linkages and relationships to improve customer value. It is not
sufficient to look within the organization alone. For example, the
quality of a cooker or a television when it reaches the final
purchaser is influenced not only by the activities undertaken within
the manufacturing company itself, but also by the quality of
components from suppliers and the performance of the distributors.
McKinsey 7S Framework
The consulting company McKinsey and Company created
McKinsey‘s 7S Model in the early 1980s. Since then it has been
widely used by practitioners and academics alike in analyzing
hundreds of organizations. We will have an extensive look on each
of the seven components of the model and the links between them.
It also includes practical guidance and advice for the budding
managers to analyze organizations using this model.
The McKinsey 7S model was named after a consulting company,
McKinsey and Company, which has conducted applied research in
business and industry. All of the authors worked as consultants at
McKinsey and Company; in the 1980s, they used the model to
analyze over 70 large organizations. The McKinsey 7S Framework
was created as a recognizable and easily remembered model in
business. The seven variables, which the authors term "levers", all
begin with the letter "S":
These seven variables include structure, strategy, systems, skills,
style, and staff and shared values. Lets have a look at each of these.
Structure: Business needs to be organized in a specific form of
shape that is generally referred to as organizational structure.
Organizations are structured in a variety of ways, dependent on
their objectives and culture. The structure of the company often
dictates the way it operates and performs (Waterman et al., 1980).
Traditionally, the businesses have been structured in a hierarchical
way with several divisions and departments, each responsible for a

specific task such as human resources management, production or
marketing. Many layers of management controlled the operations,
with each answerable to the upper layer of management. Although
this is still the most widely used organizational structure, the
recent trend is increasingly towards a flat structure where the work
is done in teams of specialists rather than fixed departments. The
idea is to make the organization more flexible and devolve the
power by empowering the employees and eliminate the middle
management layers.
Systems: Every organization has some systems or internal
processes to support and implement the strategy and run day-to-
day affairs. For example, a company may follow a particular
process for recruitment. These processes are normally strictly
followed and are designed to achieve maximum effectiveness.
Traditionally the organizations have been following a bureaucratic-
style process model where most decisions are taken at the higher
management level and there are various and sometimes
unnecessary requirements for a specific decision (e.g. procurement
of daily use goods) to be taken. Increasingly, the organizations are
simplifying and modernizing their process by innovation and use
of new technology to make the decision-making process quicker.
Special emphasis is on the customers with the intention to make
the processes that involve customers as user friendly as possible.
Style/Culture: All organizations have their own distinct culture
and management style. It includes the dominant values, beliefs and
norms which develop over time and become relatively enduring
features of the organizational life. It also entails the way managers
interact with the employees and the way they spend their time. The
businesses have traditionally been influenced by the military style
of management and culture where strict adherence to the upper
management and procedures was expected from the lower-rank

employees. However, there have been extensive efforts in the past
couple of decades to change to culture to a more open, innovative
and friendly environment with fewer hierarchies and smaller chain
of command. Culture remains an important consideration in the
implementation of any strategy in the organization.
Staff: Organizations are made up of humans and it's the people
who make the real difference to the success of the organization in
the increasingly knowledge-based society. The importance of
human resources has thus got the central position in the strategy of
the organization, away from the traditional model of capital and
land. All leading organizations such as IBM, Microsoft, Cisco, etc
put extraordinary emphasis on hiring the best staff, providing them
with rigorous training and mentoring support, and pushing

their staff to limits in achieving professional excellence, and this
forms the basis of these organizations‘ strategy and competitive
advantage over their competitors. It is also important for the
organization to instill confidence among the employees about
their future in the organization and future career growth as an
incentive for hard work.
Shared Values/Super ordinate Goals: All members of the
organization share some common fundamental ideas or guiding
concepts around which the business is built. This may be to make
money or to achieve excellence in a particular field. These values
and common goals keep the employees working towards a
common destination as a coherent team and are important to keep
the team spirit alive. The organizations with weak values and
common goals often find their employees following their own
personal goals that may be different or even in conflict with those
of the organization or their fellow colleagues.
The shape of the model was also designed to illustrate the
interdependency of the variables.
The seven components described above are normally categorized
as soft and hard components. The hard components are the
strategy, structure and systems which are normally feasible and
easy to identify in an organization as they are normally well
documented and seen in the form of tangible objects or reports
such as strategy statements, corporate plans, organizational charts
and other documents. The remaining four Ss, however, are more
difficult to comprehend. The capabilities, values and elements of
corporate culture, for example, are continuously developing and
are altered by the people at work in the organization. It is therefore
only possible to understand these aspects by studying the
organization very closely, normally through observations and/or
through conducting interviews. Some linkages, however, can be

made between the hard and soft components. For example, it is
seen that a rigid, hierarchical organizational structure normally
leads to a bureaucratic organizational culture where the power is
centralized at the higher management level.
It is also noted that the softer components of the model are difficult
to change and are the most challenging elements of any change-
management strategy. Changing the culture and overcoming the
staff resistance to changes, especially the one that alters the power
structure in the organization and the inherent values of the
organization, is generally difficult to manage. However, if these
factors are altered, they can have a great impact on the structure,
strategies and the systems of the organization. Over the last few
years, there

has been a trend to have a more open, flexible and dynamic culture in
the organization where the employees are valued and innovation
encouraged. This is, however, not easy to achieve where the traditional
culture is been dominant for decades and therefore many organizations
are in a state of flux in managing this change. What compounds their
problems is their focus on only the hard components and neglecting the
softer issues identified in the model which is without doubt a recipe for
failure. Similarly, when analyzing an organization using the 7S model, it
is important to give more time and effort to understanding the real
dynamics of the organization‘s soft aspects as these underlying values in
reality drive the organizations by affecting the decision-making at all
levels. It is too easy to fall into the trap of only concentrating on the
hard factors as they are readily available from organizations‘ reports etc.
However, to achieve a factual result, one must analyze in depth the
cultural dimension of the structure, processes and decision made in an
organization.
Q4: Why do firms globalize?
One of the primary reasons for firms going global or implementing a
global strategy (as opposed to a strategy focused on the domestic
market) is that the global market yields potential new opportunities. New
large-scale, emerging markets, such as China and India, provide a strong
global operations incentive based on their high potential demand for
consumer products and services.
Raymond Vernon captured the classic rationale for global
diversification. He suggested that typically a firm discovers an
innovation in its home-country market, especially in an advanced
economy such as that of the United States. Often demand for the product
then develops in other countries, and exports are provided by domestic
operations. Increased demand in foreign countries justifies making

investments in foreign operations, especially to fend off foreign
competitors. Vernon, therefore, observed that one reason why firms
pursue international or global diversification is to extend a product‘s life
cycle.
Another traditional motive for firms to become global is to secure
needed resources. Key supplies of raw material—especially minerals
and energy—are important in some industries. Other industries, such as
clothing, electronics, watch making, and many others, have moved
portions of their operations to foreign locations in pursuit of lower
production costs. Clearly one of the reasons for Chinese firms‘ global
expansion is to gain access to important resources.
Although these traditional motives persist, other emerging motivations
also drive global expansion. For instance, pressure has increased for a
global integration of operations, mostly driven by more universal
product demand. As nations industrialize, the demand for some products
and commodities appears to become more similar. This borderless
demand for globally branded products may be due to similarities in
lifestyle in developed nations. Increases in global communication media
also facilitate the ability of people in different countries to visualize and
model lifestyles in different cultures. IKEA, for example, has become a
global brand by selling furniture in 44 countries through almost 300
stores that it owns and operates through franchisees.
In some industries, technology drives firms to go global because the
economies of scale necessary to reduce costs to the lowest level often
require an investment greater than that needed to meet domestic market
demand. By expanding their markets, firms may be able to enjoy
economies of scale, particularly in their manufacturing operations. To
the extent that a firm can standardize its products across country borders
and use the same or similar production facilities, thereby coordinating

critical resource functions, it is more likely to achieve optimal
economies of scale.
Companies also experience pressure for cost reductions, achieved by
purchasing from the lowest-cost global suppliers. For instance, research
and development expertise for an emerging business start-up may not
exist in the domestic market.
Locational advantages may influence a firm to engage in global
operations. In many cases, the choice of foreign location generates
unique advantages, referred to as location advantages. Firms may locate
facilities in other countries to lower the basic costs of the goods or
services they provide. These facilities may provide easier access to
lower-cost labor, energy, and other natural resources. Other location
advantages include access to critical supplies and to customers. Once
positioned favorably with an attractive location, firms must manage their
facilities effectively to gain the full benefit of a location advantage..
In summary we can discern that firms may go global in order to seeks:
(1) increased market size; (2) greater returns on major capital
investments or on investments in new products and processes; (3)
greater economies of scale, scope, or learning; and (4) to reduce cost (5)
a competitive advantage through location (e.g., access to low-cost labor,
critical resources, or customers).
Explain the different phases of Global Strategy.
There are certain phases that firms usually go through before they adopt
a global strategy. These are explained below,
Single country strategy; Firms operating strictly within the confines of
their home countries use these strategies to compete in their home
countries, where they face only of set of business factors and one set of

customer. So long as the firm‘s home market keeps growing and remain
profitable, there might be no urgency to expand into foreign market. In
this case, internationalization can be considered when the firm‘s home
market becomes unprofitable or the prospect for growth started to
diminish. Some firms are better off staying at home. This is because
some firms can achieve high returns on investment without relying on
foreign markets. Secondly, if the firm has limited international
experience and has a weak position in the home market, it should first
try to improve its competitive position at home before expanding abroad.
However, the firm is putting all its eggs in one basket by only operating
at home so that adverse changes in one factor can affect its performance.
The firm in this case also runs the risk for being overtaken by a
competitor that offers better quality products and services. The firm also
has limited ability to quickly move abroad due to inexperience.
Export strategy; A firm may start exporting its goods and service outside
its home market. In most exporting firms domestic strategy remain of
prime importance. Here the exporting firm makes strategic choices to
select the countries to export to, determines the correct level of product
modifications to meet local conditions, and sets and manages export
channels. However the thrust of the strategy deals with the management
of the firm in the home country. Hence this strategy is a domestic
strategy with export strategy attached to it.
International strategy; This phase deals with the firm establishing
subsidiaries outside of its home market. Firms that manufacture and
market products and services in several countries are called
multinational firms. During this phase, each subsidiary is likely to have
its own strategy, and will analyze, develop and implement such a
strategy by adapting it to local realities. Therefore product adaptation is
the main factor considered by the firm adopting this strategy. In this

strategy, subsidiaries act independently and operate as if they are local
firms, with minimum coordination from the parent company. Thus this
approach leads to wide variety of business strategies, and a high level of
adaptation to local conditions. Firms adopting such approach are called
multi-domestic firms.
Global strategy; As firms mature and move through the three phases
described above, they become aware of the opportunities to be gained
from integrating and creating a single strategy on a global; scale. A
global strategy involves crafting a single strategy for the entire network
of subsidiaries and partners, and encompassing many countries
simultaneously and leveraging synergies across many countries. Under
this strategy, most of the activities of the different subsidiaries are
coordinated form headquarters in order to maximize global efficiency,
which allows the firm to gain economic of scale and scope that are
critical for global competiveness. The main challenge for firms adopting
global strategy is how to develop on single strategy for all subsidiaries
while at the same time maintaining the flexibility to adapt that strategy
to local business conditions.
Q5: Explain Porter‟s 5 Force Model, BCG Matrix and GE Nine Cell
Matrix.
Porter’s five forces model is an analysis tool that uses five forces to
determine the profitability of an industry and shape a firm‘s competitive
strategy. It is a framework that classifies and analyzes the most
important forces affecting the intensity of competition in an industry and
its profitability level.‖
Five forces model was created by M. Porter in 1979 to understand how
five key competitive forces are affecting an industry. The five forces
identified are: the threat of entry into an industry; the threat of
substitutes to the industry‘s products or services; the power of buyers of

the industry‘s products or services; the power of suppliers into the
industry; and the extent of rivalry between competitors in the industry.
Porter‘s essential message is that where these five forces are high, then
industries are not attractive to compete in. There will be too much
competition, and too much pressure, to allow reasonable profits.
The five forces are now explained in detail.
The threat of entry
How easy it is to enter the industry obviously influences the degree of
competition. Threat of entry depends on the extent and height of
barriers to entry. Barriers are the factors that need to be overcome by
new entrants if they are to compete successfully. High barriers to entry
are good for existing competitors, because they protect them from new
competitors coming in.
Typical barriers are as follows:

● Scale and experience. In some industries, economies of scale are
extremely important: for example, in the production of automobiles or
the advertising of fast-moving consumer goods. Once incumbents have
reached large-scale production, it will be very expensive for new
entrants to match them and until they reach a similar volume they will
have higher unit costs. This scale effect is accentuated where there are
high investment requirements for entry, for example research costs in
pharmaceuticals. Barriers to entry also come from experience curve
effects that give incumbents a cost advantage because they have learnt
how to do things more efficiently than an inexperienced new entrant
could possibly do. Until the new entrant has built up equivalent
experience over time, it will tend to produce at higher cost.
● Access to supply or distribution channels. In some industries
manufacturers have control over supply and/or distribution channels.
Sometimes this can be through direct ownership, sometimes just through
customer or supplier loyalty. In some industries this barrier can be
overcome by new entrants who can bypass retail distributors and sell
directly to consumers through e-commerce.
● Expected retaliation. If an organization considering entering an
industry believes that the retaliation of an existing firm will be so great
as to prevent entry, or mean that entry would be too costly, this is also a
barrier. Retaliation could take the form of a price war or a marketing
blitz. Just the knowledge that incumbents are prepared to retaliate is
often sufficiently discouraging to act as a barrier. In global markets this
retaliation can take place at many different ‗points‘ or locations.
● Legislation or government action. Legal restraints on new entry vary
from patent protection, to regulation of markets, through to direct
government action (for example, tariffs. Of course, organizations are
vulnerable to new entrants if governments remove such protection.
● Differentiation. Differentiation means providing a product or service
with higher perceived value than the competition; Cars are
differentiated, for example, by quality and branding. Steel, by contrast,
is by and large a commodity, undifferentiated and therefore sold by the
tonne. Steel buyers will simply buy the cheapest. Differentiation reduces
the threat of entry because it increases customer loyalty.

The threat of substitutes
Substitutes are products or services that offer a similar benefit to an
industry‘s products or services, but by a different process. For example,
aluminium is a substitute for steel in automobiles; trains are a substitute
for cars; films and theatre are substitutes for each other. Managers often
focus on their competitors in their own industry, and neglect the threat
posed by substitutes. Substitutes can reduce demand for a particular
class of products as customers switch to alternatives – even to the extent
that this class of products or services becomes obsolete. However, there
does not have to be much actual switching for the substitute threat to
have an effect. The simple risk of substitution puts a cap on the prices
that can be charged in an industry.
There are two important points to bear in mind about substitutes:
● The price/performance ratio is critical to substitution threats. A
substitute is still an effective threat even if more expensive, so long as it
offers performance advantages that customers value. Thus aluminium is
more expensive than steel, but its relative lightness and its resistance to
corrosion give it an advantage in some automobile manufacturing
applications. It is the ratio of price to performance that matters, rather
than simple price.
● Extra-industry effects are the core of the substitution concept.
Substitutes come from outside the incumbents‘ industry and should not
be confused with competitors‘ threats from within the industry. The
value of the substitution concept is to force managers to look outside
their own industry to consider more distant threats and constraints. The
more threats of substitution there are, the less attractive the industry is
likely to be.
The power of buyers
Buyers are essential for the survival of any business. But sometimes
buyers can have such high bargaining power that their suppliers are hard

pressed to make any profits at all. Buyer power is likely to be high when
some of the following conditions prevail:
● Concentrated buyers. Where a few large customers account for the
majority of sales, buyer power is increased. If a product or service
accounts for a high percentage of the buyers‘ total purchases their power
is also likely to increase as they are more likely to ‗window shop‘ to get
the best price and therefore squeeze suppliers than they would for more
trivial purchases.
● Low switching costs. Where buyers can easily switch between one
supplier and another, they have a strong negotiating position and can
squeeze suppliers who are desperate for their business. Switching costs
are typically low for weakly differentiated commodities such as steel.
● Buyer competition threat. If the buyer has some facilities to supply
itself, or if it has the possibility of acquiring such facilities, it tends to be
powerful. In negotiation with its suppliers, it can raise the threat of doing
the suppliers‘ job themselves. This is called backward vertical
integration, moving back to sources of supply, and might occur if
satisfactory prices or quality from suppliers cannot be obtained.
The power of suppliers
Suppliers are those who supply the organization with what it needs to
produce the product or service. As well as fuel, raw materials and
equipment, this can include labor and sources of finance. The factors
increasing supplier power are the converse to those for buyer power.
Thus supplier power is likely to be high where there are:
● Concentrated suppliers. Where just a few producers dominate supply,
suppliers have more power over buyers. The iron ore industry is now
concentrated in the hands of three main producers, leaving the steel
companies, relatively fragmented, in a very weak negotiating position
for this essential raw material.
● High switching cost. If it is expensive or disruptive to move from one
supplier to another, then the buyer becomes relatively dependent and
correspondingly weak. Microsoft, for example, is said to be a powerful
supplier because of the high switching costs of moving from one

operating system to another. Buyers are prepared to pay a premium to
avoid the trouble, and Microsoft knows it.
● Supplier competition threat. Suppliers have increased power where
they are able to cut out buyers who are acting as intermediaries. Thus
airlines are now able to negotiate tough contracts with travel agencies as
the rise of online booking has allowed them to create a direct route to
customers. This is called forward vertical integration, moving up closer
to the ultimate customer.
Most organizations have many suppliers, so it is necessary to
concentrate the analysis on the most important ones or types. If their
power is high, suppliers can capture all their buyers‘ own potential
profits simply by raising their prices. Star football players have
succeeded in raising their rewards to astronomical levels, while even the
leading football clubs – their ‗buyers‘ – struggle to make money.
Industry (Competitive) rivalry
These wider industry or competitive forces all impinge on the direct
competitive rivalry between an organization and its most immediate
rivals. Thus low barriers to entry increase the number of rivals; powerful
buyers with low switching costs force their suppliers to high rivalry in
order to offer the best deals. The more competitive rivalry there is, the
worse it is for incumbents within the industry.
Industry rivals are organizations with similar products and services
aimed at the same customer group (that is, not substitutes). In the
European transport industry, Air France and British Airways are rivals;
trains are a substitute. As well as the influence of the four previous
forces, there are a number of additional factors directly affecting the
degree of rivalry in an industry or sector:
● Competitor balance. Where competitors are of roughly equal size
there is the danger of intense competition as one competitor attempts to
gain dominance over others. Conversely, less rivalrous industries tend to
have one or two dominant organizations, with the smaller players
reluctant to challenge the larger ones directly for example, by focusing
on niches to avoid the attention of the dominant companies.

● Industry growth rate. In situations of strong growth, an organization
can grow with the market, but in situations of low growth or decline, any
growth is likely to be at the expense of a rival, and meet with fierce
resistance. Low-growth markets are therefore often associated with price
competition and low profitability. The industry life cycle influences
growth rates, and hence competitive conditions.
● High fixed costs. Industries with high fixed costs, perhaps because
they require high investments in capital equipment or initial research,
tend to be highly rivalrous. Companies will seek to reduce unit costs by
increasing their volumes: to do so, they typically cut their prices,
prompting competitors to do the same and thereby triggering price wars
in which everyone in the industry suffers. Similarly, if extra capacity can
only be added in large increments, the competitor making such an
addition is likely to create short-term overcapacity in the industry,
leading to increased competition to use capacity.
● High exit barriers. The existence of high barriers to exit – in other
words, closure or disinvestment – tends to increase rivalry, especially in
declining industries. Excess capacity persists and consequently
incumbents fight to maintain market share. Exit barriers might be high
for a variety of reasons: for example, high redundancy costs or high
investment in specific assets such as plant and equipment that others
would not buy.
● Low differentiation. In a commodity market, where products or
services are poorly differentiated, rivalry is increased because there is
little to stop customers switching between competitors and the only way
to compete is on price.
The five forces framework provides useful insights into the forces at
work in the industry or sector environment of an organization. It is
important, however, to use the framework for more than simply listing
the forces. The bottom line is an assessment of the attractiveness of the
industry. The analysis should conclude with a judgement about whether
the industry is a good one to compete in or not.
The analysis should next prompt investigation of the implications of
these forces.

Firstly, the fundamental purpose of the five forces model is to identify
the relative attractiveness of different industries: industries are attractive
when the forces are weak. Managers should invest in industries where
the five forces work in their favor and avoid or disinvest from markets
where they are strongly against.
Secondly, industry structures are not necessarily fixed, but can be
influenced by deliberate managerial strategies. For example,
organizations can build barriers to entry by increasing advertising spend
to improve customer loyalty. They can buy up competitors to reduce
rivalry and increase power over suppliers or buyers. Influencing industry
structure involves many issues relating to competitive strategy.
Thirdly, not all competitors will be affected equally by changes in
industry structure, deliberate or spontaneous. If barriers are rising
because of increased R&D or advertising spending, smaller players in
the industry may not be able to keep up with the larger players, and be
squeezed out. Similarly, growing buyer power is likely to hurt small
competitors most. Strategic group analysis is helpful. Although
originating in the private sector, five forces analysis can have important
implications for organizations in the public sector too. For example, the
forces can be used to adjust the service offer or focus on key issues.
Thus it might be worth switching managerial initiative from an arena
with many crowded and overlapping services (for example, social work,
probation services and education) to one that is less rivalrous and where
the organization can do something more distinctive. Similarly, strategies
could be launched to reduce dependence on particularly powerful and
expensive suppliers, for example energy sources or high-shortage skills.
The five forces framework has to be used carefully and is not necessarily
complete, even at the industry level. When using this framework, it is
important to bear the following three issues in mind:
● Defining the „right‟ industry. Most industries can be analyzed at
different levels. For example, the airline industry has several different
segments such as domestic and long haul and different customer groups
such as leisure, business and freight. The competitive forces are likely to
be to be different for each of these segments and can be analyzed

separately. It is often useful to conduct industry analysis at a
disaggregated level, for each distinct segment. The overall picture for
the industry as a whole can then be assembled.
● Converging industries. Industry definition is often difficult too
because industry boundaries are continuously changing. For example,
many industries, especially in high-tech arenas, are undergoing
convergence, where previously separate industries begin to overlap or
merge in terms of activities, technologies, products and
customers.Technological change has brought convergence between the
telephone and photographic industries, for example, as mobile phones
increasingly include camera and video functions. For a camera company
like Kodak, phones are increasingly a substitute and the prospect of
facing Nokia or Samsung as direct competitors is not remote.
● Complementary products. Some analysts argue for a ‗sixth force‘,
organizations supplying complementary products or services. These
complementors are players from whom customers buy complementary
products that are worth more together than separately. Complementors
raise two issues. The first is that complementors have opportunities for
cooperation. This implies a significant shift in perspective. While
Porter‘s five forces sees organizations as battling against each other for
share of industry value, complementors may cooperate to increase the
value of the whole cake. The second issue, however, is the potential for
some complementors to demand a high share of the available value for
themselves.The potential for cooperation or antagonism with such a
complementary ‗sixth force‘ needs to be included in industry analyses.
BCG Matrix
One of the most common and long-standing ways of conceiving of the
balance of a portfolio of businesses is the Boston Consulting Group
(BCG) matrix . Here market share and market growth are critical
variables for determining attractiveness and balance. High market share
and high growth are, of course, attractive. However, the BCG matrix
also warns that high growth demands heavy investment, for instance to

expand capacity or develop brands.
There needs to be a balance within the portfolio, so that there are some
low growth businesses that are making sufficient surplus to fund the
investment needs of higher growth businesses.
The diagram below gives a pictorial portrayal of the BCG Matrix.
From the above diagram, we can see that the growth/share axes of the
BCG matrix define four sorts of business:
●A star is a business unit which has a high market share in a growing
market. The business unit may be spending heavily to keep up with
growth, but high market share should yield sufficient profits to make it
more or less self sufficient in terms of investment needs. Strategic
options for stars include:
Integration – forward, backward and horizontal
Market penetration
Market development
Product development
Joint ventures
●A question mark (or problem child) is a business unit in a growing
market, but not yet with high market share. Developing question marks
into stars, with high market share, takes heavy investment. Many
question marks fail to develop, so the BCG advises corporate parents to
nurture several at a time. It is important to make sure that some question

marks develop into stars, as existing stars eventually become cash cows
and cash cows may decline into dogs. Strategic options for question
marks include:
Market penetration
Market development Product development
●A cash cow is a business unit with a high market share in a mature
market. However, because growth is low, investment needs are less,
while high market share means that the business unit should be
profitable. The cash cow should then be a cash provider, helping to fund
investments in question marks and/ other three quadrants of the matrix.
It is desirable to maintain the strong position as long as possible and
strategic options include:
Product development
●Dogs are business units with a low share in static or declining markets
and are thus the worst of all combinations. They may be a cash drain and
use up a disproportionate amount of company time and resources. The
BCG usually recommends divestment or closure. Strategic options
would include.
Retrenchment
Liquidation
Divestment
The BCG matrix has several advantages. It provides a good way of
visualizing the different needs and potential of all the diverse businesses
within the corporate portfolio. It warns corporate parents of the financial
demands of what might otherwise look like a desirable portfolio of high-
growth businesses. It also reminds corporate parents that stars are likely
eventually to wane. Finally, it provides a useful discipline to business
unit managers, underlining the fact that the corporate parent ultimately
owns the surplus resources they generate and can allocate them
according to what is best for the corporate whole. Cash cows should not
hoard their profits. Incidentally, surplus resources may not only be
investment funds: the corporate parent can also reallocate business unit

managers who are not fully utilized by low-growth cash cows or dogs.
However, there are at least three potential problems with the BCG
matrix:
●Definitional vagueness; It can be hard to decide what high and low
growth or share mean in particular situations. Managers are often keen
to define themselves as ‗high share‘ by defining their market in a
particularly narrow way (for example, ignoring relevant international
markets).
●Capital market assumptions; The notion that a corporate parent needs a
balanced portfolio to finance investment from internal sources (cash
cows) assumes that capital cannot be raised in external markets, for
instance by issuing shares or raising loans. The notion of a balanced
portfolio may be more relevant in countries where capital markets are
underdeveloped or in private companies that wish to minimize
dependence on external shareholders or banks.
●Unkind to animals; Both cash cows and dogs receive ungenerous
treatment, the first being simply milked, the second terminated or cast
out of the corporate home. This treatment can cause motivation
problems, as managers in these units see little point in working hard for
the sake of other businesses. There is also the danger of the self-
fulfilling prophecy. Cash cows will become dogs even more quickly
than the model expects if they are simply milked and denied adequate
investment. Finally, the notion that a dog can be simply sold or closed
down also assumes that there are no ties to other business units in the
portfolio, whose performance might depend in part on keeping the dog
alive.
This portfolio approach to dogs works better for conglomerate strategies,
where divestments or closures are unlikely to have knock-on effects on
other parts of the portfolio.
GE Nine Cell Matrix
GE-McKinsey nine-box matrix is a strategy tool that offers a systematic
approach for the multi business corporation to prioritize its investments
among its business units. It is a framework that evaluates business

portfolio, provides further strategic implications and helps to prioritize the
investment needed for each business unit (BU).
In the business world, much like anywhere else, the problem of resource
scarcity is affecting the decisions the companies make. With limited
resources, but many opportunities of using them, the businesses need to
choose how to use their cash best. The fight for investments takes place
in every level of the company: between teams, functional departments,
divisions or business units. The question of where and how much to
invest is an ever going headache for those who allocate the resources.
How does this affect the diversified businesses? Multi business
companies manage complex business portfolios, often, with as much as
50, 60 or 100 products and services. The products or business units
differ in what they do, how well they perform or in their future
prospects. This makes it very hard to make a decision in which products
the company should invest. At least, it was hard until the BCG matrix
and its improved version GE-McKinsey matrix came to help. These
tools solved the problem by comparing the business units and assigning
them to the groups that are worth investing in or the groups that should
be harvested or divested.

In 1970s, General Electric was managing a huge and complex portfolio
of unrelated products and was unsatisfied about the returns from its
investments in the products. At the time, companies usually relied on
projections of future cash flows, future market growth or some other
future projections to make investment decisions, which was an
unreliable method to allocate the resources. Therefore, GE consulted the
McKinsey & Company and as a result the nine-box framework was
designed. The nine-box matrix plots the BUs on its 9 cells that indicate
whether the company should invest in a product, harvest/divest it or do a
further research on the product and invest in it if there‘re still some
resources left. The BUs are evaluated on two axes: industry
attractiveness and a competitive strength of a unit.
Industry Attractiveness
Industry attractiveness indicates how hard or easy it will be for a
company to compete in the market and earn profits. The more profitable

the industry is the more attractive it becomes. When evaluating the
industry attractiveness, analysts should look how an industry will change
in the long run rather than in the near future, because the investments
needed for the product usually require long lasting commitment.
Industry attractiveness consists of many factors that collectively
determine the competition level in it. There‘s no definite list of which
factors should be included to determine industry attractiveness, but the
following are the most common: [1]
 Long run growth rate
 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power,
buyer power, threat of substitutes and available complements (use
Porter‘s Five Forces analysis to determine this)
 Industry structure (use Structure-Conduct-Performance framework
to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation
Competitive strength of a business unit or a product
Along the X axis, the matrix measures how strong, in terms of
competition, a particular business unit is against its rivals. In other
words, managers try to determine whether a business unit has a
sustainable competitive advantage (or at least temporary competitive
advantage) or not. If the company has a sustainable competitive
advantage, the next question is: ―For how long it will be sustained?‖
The following factors determine the competitive strength of a business
unit:

 Total market share
 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine
this)
 Your business unit strength in meeting industry‘s critical success
factors (use Competitive Profile Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and
Benchmarking to determine this)
 Level of product differentiation
 Production flexibility
The Advantages of GE Matrix include;
 Helps to prioritize the limited resources in order to achieve the best
returns.
 Managers become more aware of how their products or business
units perform.
 It‘s more sophisticated business portfolio framework than the BCG
matrix.
 Identifies the strategic steps the company needs to make to
improve the performance of its business portfolio.
Some of its Disadvantages are;
 Requires a consultant or a highly experienced person to determine
industry‘s attractiveness and business unit strength as accurately as
possible.
 It is costly to conduct.
 It doesn‘t take into account the synergies that could exist between
two or more business units.

GE McKinsey matrix is a very similar portfolio evaluation framework to
BCG matrix. Both matrices are used to analyze company‘s product or
business unit portfolio and facilitate the investment decisions.
The main differences:
 Visual difference. BCG is only a four cell matrix, while GE
McKinsey is a nine cell matrix. Nine cells provide better visual
portrait of where business units stand in the matrix. It also
separates the invest/grow cells from harvest/divest cells that are
much closer to each other in the BCG matrix and may confuse
others of what investment decisions to make.
 Comprehensiveness. The reason why the GE McKinsey framework
was developed is that BCG portfolio tool wasn‘t sophisticated
enough for the guys from General Electric. In BCG matrix,
competitive strength of a business unit is equal to relative market
share, which assumes that the larger the market share a business
has the better it is positioned to compete in the market. This is true,
but it‘s too simplistic to assume that it‘s the only factor affecting
the competition in the market. The same is with industry
attractiveness that is measured only as the market growth rate in
BCG. It comes to no surprise that GE with its complex business
portfolio needed something more comprehensive than that.
There are no established processes or models that managers could use
when performing the analysis. Therefore, we can design the following
steps as a way of example:
Step 1. Determine industry attractiveness of each business unit
 Make a list of factors. The first thing you‘ll need to do is to
identify, which factors to include when measuring industry
attractiveness. We‘ve provided the list of the most common
factors, but you should include the factors that are the most
appropriate to your industries.

 Assign weights. Weights indicate how important a factor is to
industry‘s attractiveness. A number from 0.01 (not important) to
1.0 (very important) should be assigned to each factor. The sum of
all weights should equal to 1.0.
 Rate the factors. The next thing you need to do is to rate each
factor for each of your product or business unit. Choose the values
between ‗1-5‘ or ‗1-10‘, where ‗1‘ indicates the low industry
attractiveness and ‗5‘ or ‗10‘ high industry attractiveness.
 Calculate the total scores. Total score is the sum of all weighted
scores for each business unit. Weighted scores are calculated by
multiplying weights and ratings. Total scores allow comparing
industry attractiveness for each business unit.
Industry attractiveness
factor
Business Unit 1 Business Unit 2
Weight Rating
Weighted
Score
Rating
Weighted
Score
Industry growth rate 0.25 3 0.75 4 1
Industry size 0.22 3 0.66 3 0.66
Industry profitability 0.18 5 0.90 1 0.18
Industry structure 0.17 4 0.68 4 0.68
Trend of prices 0.09 3 0.27 3 0.27
Market segmentation 0.09 1 0.09 3 0.27
Total score 1.00 3.35 3.06
Industry attractiveness
factor

Weight Rating
Weighted
Score
Rating
Weighted
Score
Industry growth rate 0.25 3 0.75 2 0.50
Industry size 0.22 2 0.44 5 1.10
Industry profitability 0.18 1 0.18 5 0.90
Industry structure 0.17 2 0.34 4 0.68
Trend of prices 0.09 2 0.18 3 0.27
Market segmentation 0.09 2 0.18 3 0.27
Total score 1.00 2.07 3.72
This is a tough task and one that usually requires involving a consultant
who is an expert of the industries in question. The consultant will help
you to determine the weights and to rate them properly so the analysis is
as accurate as possible.
Step 2. Determine the competitive strength of each business unit
‗Step 2‘ is the same as ‗Step 1‘ only this time, instead of industry
attractiveness, the competitive strength of a business unit is evaluated.
 Make a list of factors. Choose the competitive strength factors
from our list or add your own factors.
 Assign weights. Weights indicate how important a factor is in
achieving sustainable competitive advantage. A number from 0.01
(not important) to 1.0 (very important) should be assigned to each
factor. The sum of all weights should equal to 1.0.

 Rate the factors. Rate each factor for each of your product or
business unit. Choose the values between ‗1-5‘ or ‗1-10‘, where ‗1‘
indicates the weak strength and ‗5‘ or ‗10‘ powerful strength.
 Calculate the total scores. See ‗Step 1‘.
Competitive strength
factor
Weight Rating
Weighted
Score
Rating
Weighted
Score
Market share 0.22 2 0.44 2 0.44
Relative growth rate 0.18 3 0.48 2 0.38
Company‘s
profitability
0.14 3 0.42 1 0.14
Brand value 0.10 1 0.10 2 0.20
VRIO resources 0.20 1 0.20 4 0.80
CPM Score 0.16 2 0.32 5 0.80
Total score 1.00 1.96 2.74
Weight Rating
Weighted
Score
Rating
Weighted
Score
Market share 0.22 4 0.88 4 0.88
Relative growth rate 0.18 4 0.64 2 0.36

Company‘s
profitability
0.14 3 0.42 3 0.42
Brand value 0.10 3 0.30 3 0.30
VRIO resources 0.20 4 0.80 4 0.80
CPM Score 0.16 5 0.80 5 0.80
Total score 1.00 3.92 3.56
Step 3. Plot the business units on a matrix
With all the evaluations and scores in place, we can plot the business
units on the matrix. Each business unit is represented as a circle. The
size of the circle should correspond to the proportion of the business
revenue generated by that business unit. For example, ‗Business unit 1‘
generates 20% revenue and ‗Business unit 2‘ generates 40% revenue for

the company. The size of a circle for ‗Business unit 1‘ will be half the
size of a circle for ‗Business unit 2‘.
Step 4. Analyze the information
There are different investment implications you should follow,
depending on which boxes your business units have been plotted. There
are 3 groups of boxes: investment/grow, selectivity/earnings and
harvest/divest boxes. Each group of boxes indicates what you should do
with your investments.
Invest/Grow Selectivity/Earnings Harvest/Divest
Invest
or not?
Definitely
invest
Invest if there‘s money left
and the situation of business
unit could be improved
Invest just enough to
keep the business unit
operating or divest
Invest/Grow box. Companies should invest into the business units that
fall into these boxes as they promise the highest returns in the future.
These business units will require a lot of cash because they‘ll be
operating in growing industries and will have to maintain or grow their
market share. It is essential to provide as much resources as possible for
BUs so there would be no constraints for them to grow. The investments
should be provided for R&D, advertising, acquisitions and to increase
the production capacity to meet the demand in the future.
Selectivity/Earnings box. You should invest into these BUs only if you
have the money left over the investments in invest/grow business units
group and if you believe that BUs will generate cash in the future. These
business units are often considered last as there‘s a lot of uncertainty
with them. The general rule should be to invest in business units which
operate in huge markets and there are not many dominant players in the
market, so the investments would help to easily win larger market share.

Harvest/Divest box. The business units that are operating in unattractive
industries, don‘t have sustainable competitive advantages or are
incapable of achieving it and are performing relatively poorly fall into
harvest/divest boxes. What should companies do with these business
units?
First, if the business unit generates surplus cash, companies should treat
them the same as the business units that fall into ‗cash cows‘ box in the
BCG matrix. This means that the companies should invest into these
business units just enough to keep them operating and collect all the
cash generated by it. In other words, it‘s worth to invest into such
business as long as investments into it doesn‘t exceed the cash generated
from it.
Second, the business units that only make losses should be divested. If
that‘s impossible and there‘s no way to turn the losses into profits, the
company should liquidate the business unit.
Step 5. Identify the future direction of each business unit
The GE McKinsey matrix only provides the current picture of industry
attractiveness and the competitive strength of a business unit and doesn‘t
consider how they may change in the future. Further analysis may reveal
that investments into some of the business units can considerably
improve their competitive positions or that the industry may experience
major growth in the future. This affects the decisions we make about our
investments into one or another business unit.
For example, our previous evaluations show that the ‗Business Unit 1‘
belongs to invest/grow box, but further analysis of an industry reveals
that it‘s going to shrink substantially in the near future. Therefore, in the
near future, the business unit will be in harvest/divest group rather than
invest/grow box. Would you still invest as much in ‗Business Unit 1‘ as
you would have invested initially? The answer is no and the matrix
should take that into consideration.

How to do that? Well, the company should consult with the industry
analysts to determine whether the industry attractiveness will grow, stay
the same or decrease in the future. You should also discuss with your
managers whether your business unit competitive strength will likely
increase or decrease in the near future. When all the information is
collected you should include it to your existing matrix, by adding the
arrows to the circles. The arrows should point to the future position of a
business unit.
The following table shows how industry attractiveness and business unit
competitive strength will change in 2 years.
Business
Unit 1
Business
Unit 2
Business
Unit 3
Business
Unit 4
Industry attractiveness Decrease
Stay the
same
Stay the
same
Increase
Business unit
competitive strength
Decrease Increase Increase Decrease

Step 6. Prioritize your investments
The last step is to decide where and how to invest the company‘s money.
While the matrix makes it easier by evaluating the business units and
identifying the best ones to invest in, it still doesn‘t answer some very
important questions:
 Is it really worth investing into some business units?
 How much exactly to invest in?
 Where to invest into business units (more to R&D, marketing,
value chain?) to improve their performance?
Doing the GE McKinsey matrix and answering all the questions takes
time, effort and money, but it‘s still one of the most important product
portfolio management tools that significantly facilitate investment
decisions.
Reference:

1. Ms. Areej Aftab, International Strategic Management, Pan
African e-Networking Learning, 2012, Amity Centre for e-
Learning.
2. Thompson, Arthur A & Strickland III, A.J; Strategic
Management: Concepts and Cases 12th
ed., McGraw-Hill, 2001
Boston, USA.
3. http://www.strategicmanagementinsight.com
4. Gerry Johnson et al; Exploring Corporate Strategy, Eight Ed,
Pearson Education,2008.
5. Hitt et al: Strategic Management; Competitiveness and
Globalisation( Concepts and Cases,) Eight Edition, Cengage
Learning, 2009.
Assignment B
The Business Operations of Robin Hood and the Merrymen
Robin and the Merrymen are in business to steal from the rich and give
to the poor. The organization had begun as a personal interest to Robin,
and has grown with allies and new recruits to become a very large
organization. Robin is the head of all operations with few delegates who
have their own specific duties.
The Merrymen‘s dilemma is that they must overcome their largest
competitor, the Sheriff, who is growing stronger and becoming better
organized. The Sheriff has gained the money and men and is beginning
to cause problems for the Merrymen, looking for their weaknesses. The

Merrymen have several strategy options in order to triumph over the
Sheriff. There are three approaches we will focus on to find a strategy to
overcome the Sheriff and his band. First, Robin and the Merrymen can
find ways to improve their internal operations in order to compete. By
finding internal strengths and weaknesses the Merrymen can capitalize
on their strengths and improve their weaknesses. Second, the Merrymen
can focus externally on market opportunities, competitive advantages,
consumer expectations, competitor‘s actions, and technological
advances. Third, Robin could chose to mix internal and external focus
and perform a SWOT analysis to find the complete standing of the
Merrymen compared with their competitors.
Focusing internally, the Merrymen could change their business strategy
in order to end competition with the Sheriff before they are completely
defeated. Secondly, with an external focus, Robin could kill the Sheriff.
But, Robin believes this would not completely solve the problem. Third,
they could join an alliance by helping the barons in their goal to free
King Richard the Lionheart. This would save the Merrymen from the
Sheriff‘s increasing power, but is also a risky choice.
There are several issues that the Merrymen must consider while striving
to compete with the Sheriff. The size of the band of Merrymen is
becoming too large for the economic resources available. Robin is
feeling like he is not in touch with his employees because of the
increasing size of the band. Vigilance is in decline and discipline is
becoming hard to enforce. Robin needs to decide whether or not to
change the business strategy of the band from confiscation of goods
from the rich to a fixed transit tax.
In the beginning, Robin Hood takes on a leadership role by ruling
supreme and making all-important decisions. He delegated specific tasks
to followers who worked towards a vision that Robin Hood, the leader,

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