Strategic management

Strategic Management P.G.KATHIRAVAN

MANAGEMENT ACCOUNTING AND
STRATEGIC MANAGEMENT – II MFC
- P.G.KATHIRAVAN

CONTENTS
UNIT I : PLANNING ENVIRONMENT ECONOMICS 01 – 30

UNIT II: STRATEGIES 31 – 57

UNIT III: MODEL BUILDING AND MODELS 58 – 81

UNIT IV: BASIC CONCEPTS OF MARKETING 82 – 95

UNIT V: CONTROL OR APPLICATION OF MANAGEMENT
ACCOUNTING IN MARKETING 96 - 125

Semester Question paper- November 2011 126 -127
Semester Question paper- November 2010 128- 128
Answers to Semester Question paper 2010 129 – 132
Semester Question paper- November 2009 133- 133
Semester Question paper- November 2008 134 - 135
Semester Question paper- November 2007 78

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MANAGEMENT ACCOUNTING AND STRATEGIC MANAGEMENT – II MFC

Unit I:

Prepared by
Prof.P.G.Kathiravan M.com.,M.phil.,PGDCA.,MBA.,Ph.D

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FORECASTING TREND AND CHANGES
Forecasting: involves the analysis of revenues, costs and volumes for making
the projections into the future, based on the past trends and after considering
all the other factors, affecting profits and retums.

In many cases the environmental forecasting needs to make multiple
forecasts so that contingency goals and action plans can be developed.

A Forecast is a prediction of future events and their quantification for
planning purposes. It includes the assessment of environmental changes and
in this respect, forecasting assist in obtaining strategic fit.

Forecasting involves the estimation of the trend in future variables sales,
tastes or profit using both quantitative and judgment techniques whereas
extrapolation is a purely statistical exercise.

The strategic environment of the firm consists of economic, political, legal,
social and technologic factors, which influence the ability of the organization
to survive and make profits.

Examples of environmental variables with which a fit must be achieved
include the following:

The changing tastes of the customers
Developments in the market demand for a product
The likely trend of interest and exchange rates.

Forecasting can be more than Just a numerical exercise on estimated trends .
Whilst trends in price, interest rates, market growth rates and margins will
involve numbers, other forecast does not:

Value profiles are long range forecasts of consumers and social attitudes
Geographical forecasts consider changes in national economic power
and can alert the firm to new markets or potential competitive threats.

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The important role which forecasting plays in strategic planning is therefore
to forewarn managers of possible changes in environmental factors. The long-
term nature of strategic change means that effective forecasting is necessary
to give the organization time to adopt and obtain a good fit with its
environment.

Fore casting Techniques / Models
Different forecasting models are used in taking management decisions.

Forecasting models happens to be important constituents of the category of
decision support system models. These are extremely helpful in transforming
user inputs into useful information. Planning for the future is the essence of
any business. Businesses need estimates of future values of business
variables. Commodities industry needs forecasts of supply, sale and demand
for production planning, sales. marketing and financial decisions.

Some businesses need forecasts of monetary variables eg., costs or price.
Financial insertions face the need to forecast volatility in stock prices.There
are macro economic factors that have to be predicted for policy-making
decisions in Governments.The list is endless and forecasting is a key 'decision-
making practice' in most organizations.

Forecasting models are needed to develop strategic plans for long range
perspectives. Forecasting models are of 4 types as lised below:

I. Qualitative Models

a). Delphi model- Collects and analyses panel of expert opinions
b). Historic data- Develop analogies to the past data. .
c). Normal group technique-participative group process

II. Naive (Time Series) Quantitative Models

a). Simple average- Averages past data to project the future based on
that average.
b). Exponential smoothing- Weighs differently earlier forecasts and
the recent one to project the future.
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III. Causal Quantitative Models:
a). Regression analysis- defines functional relationships among
variables as to whether it is linear or non-linear.
b) Economic Modeling: offers an overall forecast for a variable like
Gross Natioal Product (GNP).
IV.Combination of monetary & physical projections
a. Marketing projections- Monetary by region, product and product
group.
b. Economic prejections- Monetary by region, industry and broad
product group
c. Historical projections- In units, monetary by product and product
group.
d. Demand forecast-In units by product and product group for
operations management and monetary for sales and financial planning (
a combinations of a, b, and c)

Various criteria used in selecting a a forecasting method:
Managers are often confronted with the problem of preparing forecasts for
which sourcing of data becomes a difficult problem and the decisions
regarding selection of the method of forecast with the available data.
Following are some of the factors that would influence the criteria for
selecting a forecasting method.
 Quantum of data : Maximum/ minimum , no. of observations, peaks and
troughs, weightages, seasonal data etc.,
 Pattern of data: stationary, trend, seasonality, complexity, cyclic etc,
 Time horizon :short, medium and long.
 Preparation time : short, medium and long.
 Type of skills required: no sophistication, moderate sophistication or
high sophistication.

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Types of forecasting:

Types of forecasting

Economic forecast Social forecast Political forecast Technological forecast

1. Political Forecasting : When it is underteken to forecast the political
changes.
2. Economical Forecasting : When it is underteken to forecast the
changes in the Economy.
3. Social Forecasting : When it is underteken to forecast the Societal
changes.
4. Technological Forecasting : When it is underteken to forecast the
technological changes.

Laws of Forecasting
1. Forecasts are Always Wrong: No forecasting approach or model can
predict the exact level of the future variable. Point estimates are almost
always off by some amount.
2. Forecasts for the near-term tend to be more accurate: Predicting
tomorrow’s gas price will likely be more accurate than predicting gas
price 6 weeks from now.
3. Forecasts for groups of products or services tend to be more
accurate: Predicting the demand for trucks will likely be more accurate
than predicting for green trucks with a 6-disk CD player.
4. Forecasts are no substitute for calculated values: When the actual
demand is known, then this will be more accurate than a forecast. For
example, A manufacturer produces widgets and his customer has placed
a purchase order of 6000 widgets. That purchase order is an actual
future value of widgets that the manufacturer needs to manufacture.
That number can be used instead of a forecast using historical data.

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ENVIRONMENTAL ANALYSIS

Business decisions, particularly strategic ones, need a clear identification
of the relevant variables and in-depth analysis of environmental forces.

There are many pieces of vital information available in respect of a number
of matters. Such information should be analysed to understand the impact
on and implications for the organization.

Basic goals of Environmental analysis

Environmental analysis has three basic goals.

(i) The analysis should provide an understanding of current and potential
changes taking place in the environment. It is important that one must be
aware of the existing environment and at the same time have a long-term
perspective too.

(ii) Environmental analysis should provide inputs for strategic decision-
making. Mere collection of data is not enough. The information collected
must be used in strategic decision-making.

(iii) Environmental analysis should facilitate and foster strategic thinking
in organization, typically, a rich source of ideas and understanding of the
context within which a firm operates. It should challenge the current
wisdom bringing fresh viewpoints into the organization.

Process of environmental analysis / Steps in environ
mental analysis /Approaches to environmental
analysis
The steps in environmental forecasting are similar to the steps in
formulating and executing a research project. The important steps in
environmental forecasting are the following.
1. Identification of relevant environmental variables
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2. Collection of information
3. Selection of forecasting technique
4. Monitoring

Monitoring

Selection of forecasting technique

Collection of information

Identification of relevant environmental variables

1. Identification of relevant environmental variables: To envision the
future environment, it is essential to identify the critical environmental
variables and to predict their future needs. Omission of any critical variable
will affect the assessment of the future environment and strategies based
on that premise. Similarly, inclusion of variables which are not adequately
relevant could have misleading effects.

2. Collection of information: It involves identification of the sources of
information, determination of the types of information to be collected,
selection of methods of data collection and collection of the information.

3. Selection of forecasting technique: The choice of forecasting technique
depends on such considerations as the nature of the forecast decision, the
amount and accuracy of available information, the accuracy required, the
time available, the importance of the forecast, the cost, and the competence
and interpersonal relationships of the managers and forecaster involved.

4. Monitoring: The characteristics of the variables or their trends may
undergo changes. Further, new variables may emerge as critical or the
relevance of certain variables may decline. It is, therefore, necessary to
monitor such changes. Sometimes the changes may be very significant so
as to call for re-forecasting.

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Importance or benefits of environmental analysis
The following are the specific benefits of environmental study:

a. It makes one aware of the environment – organization linkage.
b. It helps an organization to identify the present and future threats and
opportunities.
c. It provides a very useful picture of the important factors which
influence the business
d. It helps to understand the transformation of the industry
environment.
e. It helps to identify the risks.
f. It is a prerequisite for formulation of right strategies – corporate,
business and functional strategies.
g. It helps suitable modifications of the strategies as and when
required.
h. It keeps the managers informed, alert and often dynamic.
i. It helps to develop action plans to deal with development of
technological advancements.
j. It helps to foresee the impact of socio-economic changes at the
national and international levels on the firm’s stability.
k. It helps to analysethe competitor’s strategies and formulation of
effective counter measures,

Factors affecting environmental analysis

Availability of information
Variables relevant
Selection of forecasting techniques
Co operation of the people

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SOCIAL, POLITICAL, LEGAL AND TECHNOLOGICAL
IMPACTS
A scan of the external macro-environment in which the firm operates can be
expressed in terms of the following factors:

Political (P)
Economical (E)
Social (S)
Technological(T)

The acronym PEST for sometimes rearranged as ("STEP") is used to describe a
framework for the analysis of these macro environmental factors.

PEST Analysis or Types of forecasting

A PEST analysis into an overall environmental scan as shown in the following
diagram:
All organizations are affected by
four macro environmental
forces: political-legal, economic,
technological, and social. To
know the impact in advance , a
firm can make Political forecast,
Economical forecast, Social
forecast and technological
forecast.

I. Political

The political sector of the environment presents actual and potential
restriction on the way an organization operates. The most important
government actions are: regulation, taxation, expenditure, takeover .The
political environment might include such issues as monitoring government
policy toward income tax, relative influence of unions, and policies
concerning utilization of natural resources.

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Political activity may also have a significant impact on three additional
governmental functions influencing a firm's external environment:

Supplier function. Government decisions regarding creation and
accessibility of private businesses to government-owned natural
resources and national stockpiles of agricultural products will
profoundly affect the viability of some firm's strategies.

Customer function. Government demand for products and services
can create, sustain, enhance, or eliminate many market
opportunities.

Competitor function. The government can operate as an almost
unbeatable competitor in the marketplace, Therefore, knowledge of
government strategies can help a firm to avoid unfavorable
confrontation with government as a competitor.

II. Economical

Economic forces refer to the nature and direction of the economy in which
business operates. Economic factors have a tremendous impact on
business firms.

The general state of the economy (e.g., depression, recession, recovery, or
prosperity), interest rate, stage of the economic cycle, balance of payments,
monetary policy, fiscal policy, are key variables in corporate investment,
employment, and pricing decisions.

The impact of growth or decline in gross national product and increases or
decreases in interest rates, inflation, and the value of the dollar are
considered as prime examples of significant impact on business operations.

To assess the local situation, an organization might seek information
concerning the economic base and future of the region and the effects of
this outlook on wage rates, disposable income, unemployment, and the
transportation and commercial base. The state of world economy is most
critical for organizations operating in such areas.

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III.Social

Social forces include traditions, values, societal trends, consumer
psychology, and a society's expectations of business.

The key concerns in the social environment are:ecology (e.g., global
warming, pollution); demographics (e.g., population growth rates, aging
work force in industrialized countries, high educational requirements);
quality of life (e.g., education, safety, health care, standard of living); and
noneconomic activities (e.g., charities).

Moreover, social issues can quickly become political and even legal issues.

Social forces are often most important because of their effect on people's
behaviour. For an organization to survive, the product or service must be
wanted, thus consumer behaviour is considered as a separate
environmental behaviour.

A society's expectations of business present other opportunities and
constraints.

Determining the exact impact of social forces on an organization is difficult
at best. However, assessing the changing values, attitudes, and
demographic characteristics of an organization's customers is an essential
element in establishing organizational objectives.

IV. Technological

Technological forces influence organizations in several ways. A
technological innovation can have a sudden and dramatic effect on the
environment of a firm.

First, technological developments can significantly alter the demand for an
organization's or industry's products or services.

Technological change can decimate existing businesses and even entire
industries, since its shifts demand from one product to another.

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Moreover, changes in technology can affect a firm's operations as well its
products and services.These changes might affect processing methods, raw
materials, and service delivery.

In international business, one country's use of new technological
developments can make another country's products overpriced and
noncompetitive.

The rate of technological change varies considerably from one industry to
another. In electronics, for example change is rapid and constant, but in
furniture manufacturing, change is slower and more gradual.

"The key concerns in the technological environment involve building the
organizational capability to (1) forecast and identify relevant
developments - both within and beyond the industry, (2) assess the impact
of these developments on existing operations, and (3) define
opportunities" (Mark C. Baetz and Paul W. Beamish).

External Opportunities and Threats

The PEST factors combined with external micro environmental factors can
be classified as opportunities and threats in a SWOT analysis. i.e.,

Analysis of macro environmental (external) factors = PEST analysis
Analysis of both macro and micro environmental factors = SWOT analysis

DISTRIBUTION CHANNELS
A distribution channel links the manufacturer of a product with the end users
i.e. the consumers. Decisions regarding distribution channels are of great
significance to the manufacturers.

1. Strategic Issues in Distribution

Organizations can have strategic distribution systems that help them to
examine the current distribution system and decide on the distribution
system that can be useful in the future. They are

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 Issues Related to Marketing Decisions
 Product Issues
 Issues Related to Channel Relations

2. Steps involved in designing a distribution channel for an organization

In designing a distribution channel for an organization, there are mainly three
steps –

 identifying the functions to be performed by the distribution system,
 designing the channel, and
 Putting the structure into operation.

3. Types of Distribution Channels

There are different types of distribution channels depending on the number of
levels that exist between the producer and the consumer. The distribution
channel may be

 Reverse Channel of Distribution
 Flexible Distribution Channels

4. Considerations in Distribution Channels

In deciding on the kind of distribution strategy to be used, there are various
considerations to be kept in mind. They are:

 Middlemen Considerations: The middlemen should have the necessary
financial capacity to carry out the task effectively.
 Customer Considerations: Customers should be able to get the products
conveniently.
 Product Considerations: Product features to be considered include
durability, toughness etc.
 Price Considerations: The price of the product also requires
consideration in deciding the distribution strategies.

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5. Distribution Intensity

Distribution intensity can be referred to in terms of the number of retail
stores carrying a product in a geographical location. It may be

 intensive distribution
 exclusive distribution
 selected distribution

a) In intensive distribution, the manufacturer distributes the products
through the maximum number of outlets.
b) In exclusive distribution, the number of distribution channels will be
very limited.
c) In selected distribution, the number of retail outlets in a location will be
greater than in the case of exclusive distribution and fewer than in the
case of intensive distribution.

6. Conflict and Control in Distribution Channels

 Identifying Channel Conflict: Channel conflicts should be identified.
 Avoidance of a Channel Collapse: Channel collapse should be avoided.

7. Managing the Channel

 Distribution management is of strategic importance to any organization
as distribution plays a crucial role in the success of the product in the
market. Distribution management also helps to maximize profits.
 In managing the distribution channels, maintaining a mutually
beneficial relationship between the manufacturer and distributor is
necessary.

8. International Channels

 International distribution is gaining importance with the increase in the
number of multinational companies.
 There are certain factors to be considered in international distribution.
The distributors should be chosen carefully with a long-term focus. It is
better to build a long-term relationship with the local distributors.
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 They should be provided with all the necessary support in expanding
their operations. The marketing strategy for the product should be
controlled solely by the MNC.
 Information plays an important role in distribution and the MNC has to
ensure that the local distributors provide them with the required
information which will help them to increase sales and expand their
business.

COMPETITIVE FORCES (BY PORTER)

Introduction
The model of the Five Competitive Forces was developed by Michael E. Porter
in his book “Competitive Strategy: Techniques for Analyzing Industries and
Competitors’’ in 1980. Since that time it has become an important tool for
analyzing an organizations industry structure in strategic processes.

Porters’ model is based on the insight that a corporate strategy should meet
the opportunities and threats in the organizations external environment.
Especially, competitive strategy should base on and understanding of industry
structures and the way they change.

Porter has identified five competitive forces that shape every industry and
every market. They are:

(i) Bargaining Power of Suppliers
(ii) Bargaining Power of Customers
(iii) Threat of New Entrants
(iv) Threat of Substitutes
(v) Competitive Rivalry between Existing Players

These forces determine the intensity of competition and hence the
profitability and attractiveness of an industry.

The objective of corporate strategy should be to modify these competitive
forces in a way that improves the position of the organization.

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Porters’ model supports analysis of the driving forces in an industry. Based on
the information derived from the Five Forces Analysis, management can
decide how to influence or to exploit particular characteristics of their
industry.

The Five Competitive Forces
The Five Competitive Forces are typically described as follows:

(i)Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order
to provide goods or services.

Supplier bargaining power is likely to be high when:
 The market is dominated by a few large suppliers rather than a
fragmented source of supply,
 There are no substitutes for the particular input,
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 The suppliers’ customers are fragmented, so their bargaining power is
low,
 The switching costs from one supplier to another are high,
 There is the possibility of the supplier integrating forwards in order to
obtain higher prices and margins. This threat is especially high when

 The buying industry has a higher profitability than the
supplying industry,
 Forward integration provides economies of scale for the
supplier,
 The buying industry hinders the supplying industry in their
development (e.g. reluctance to accept new releases of
products),
 The buying industry has low barriers to entry.
 In such situations, the buying industry often faces a high
pressure on margins from their suppliers. The relationship to
powerful suppliers can potentially reduce strategic options for
the organization.

(ii)Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much
customers can impose pressure on margins and volumes.

Customers bargaining power is likely to be high when
 They buy large volumes; there is a concentration of buyers,
 The supplying industry comprises a large number of small operators
 The supplying industry operates with high fixed costs,
 The product is undifferentiated and can be replaces by substitutes,
 Switching to an alternative product is relatively simple and is not
related to high costs,
 Customers have low margins and are price-sensitive,
 Customers could produce the product themselves,
 The product is not of strategical importance for the customer,
 The customer knows about the production costs of the product
 There is the possibility for the customer integrating backwards.

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(iii)Threat of New Entrants

The competition in an industry will be the higher; the easier it is for other
companies to enter this industry. In such a situation, new entrants could
change major determinants of the market environment (e.g. market shares,
prices, customer loyalty) at any time. There is always a latent pressure for
reaction and adjustment for existing players in this industry.

The threat of new entries will depend on the extent to which there are
barriers to entry. These are typically

 Economies of scale (minimum size requirements for profitable
operations),
 High initial investments and fixed costs,
 Cost advantages of existing players due to experience curve effects of
operation with fully depreciated assets,
 Brand loyalty of customers
 Protected intellectual property like patents, licenses etc,
 Scarcity of important resources, e.g. qualified expert staff
 Access to raw materials is controlled by existing players,
 Distribution channels are controlled by existing players,
 Existing players have close customer relations, e.g. from long-term
service contracts,
 High switching costs for customers
 Legislation and government action

(iv)Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower
prices of better performance parameters for the same purpose. They could
potentially attract a significant proportion of market volume and hence
reduce the potential sales volume for existing players. This category also
relates to complementary products.

Similarly to the threat of new entrants, the threat of substitutes is determined
by factors like

 Brand loyalty of customers,
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 Close customer relationships,
 Switching costs for customers,
 The relative price for performance of substitutes,
 Current trends.

(v) Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players
(companies) in an industry.

High competitive pressure results in pressure on prices, margins, and hence,
on profitability for every single company in the industry.

Competition between existing players is likely to be high when
 There are many players of about the same size,
 Players have similar strategies
 There is not much differentiation between players and their products,
hence, there is much price competition
 Low market growth rates (growth of a particular company is possible
only at the expense of a competitor),
 Barriers for exit are high (e.g. expensive and highly specialized
equipment).

Summary of entry and exit barriers

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GOVERNMENT POLICIES
The following are the (various) policies of the government enunciated in
various sectors of the economy.

Government Policies

Real sector Fiscal policy External sector Monetary Financial sector
Policies Policies Policies Policies

I) Real sector policies.

a) Agriculture and allied activities:
National Rain Fed Area Authority (NRAA) has been created in
November 2006, to support up gradation and management of dry
land and rain fed agriculture.
The National Agricultural Insurance Scheme (NAIS) and the
National Rural Employment Guarantee Scheme (NREGS) are two
Important schemes Implemented recently.

b) Manufacturing & Infrastructure policies
Formulated Policies to upgrade the infrastructure facilities in the
country.
Following have been identified as areas which need growth in
future.
- Up gradation of human skills
- Work on golden quadrilateral
- Introduction of public-private partnership model.
- Increase in the power production capacity.

Government takes efforts to find alternatives to fuel.
Wind energy is encouraged to reduce the utilization of coal
reserves.

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Micro, small and medium enterprises development Act 2006 has
been passed and micro, small and medium enterprises were
defined.
Definition of micro enterprises : Investment in plant &
machinery does not exceed 25 Lakhs / 10 Lakhs in case of
Sector.

Definition of small enterprises : Investment in plant &
machinery does not exceed 25 Lakhs / 10 Lakhs 5
crores/2crores

Definition of medium enterprise: Investment in plant &
machinery does not exceed 25 Lakhs / 10 Lakhs 10
crores/5c

To strengthen the drug regulatory system, and patent office , a
new national pharmaceutical policy has been announced in 2006.
Concept of SEZ (Special Economic zone) has been introduced.
To regulate IT applications, security practices, and procedures
relating to such applications, “The IT amendment bill 2006” was
announced.

2) Fiscal Policy:

Government realized the (importance) / necessity of reducing
fiscal deficit by introducing fiscal corrections.
The tax base is being broadened to include more and more new
services in the tax net to encourage savings and increase
disposable incomes.
Personal taxation is being reduced.
VAT was introduced to maintain price stability and increase
earnings.

3) External Sector Policies:
Foreign trade policy of 2004- 2009 was modified in 2007 for
increasing the incentives provided for focused products and
market.
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Recommendations of committee of fuller capital account
convertibility were considered
- To simplify and liberalise the external payments
- To encourage foreign exchange market.
Policy Initiatives undertaken by Govt., of India:
- Increasing the overseas investment limits for joint ventures.
- Increasing the overseas investment limits for wholly owned
subsidiaries abroad by Indian companies.
- Fixing higher portfolio Invt., limits for Indian companies /
domestic mutual funds.
- Fixing higher ceilings for invts by foreign institutional
investors in government securities.
- Enhancing repayment limits for external commercial
borrowings.

4) Monetary Policies:
Through the monetary policy, Government tries to balance the
growth of economy with containing inflationary pressures.
RBI has taken its stance on the monetary policy to continue to
reinforce the emphasis on price stability and financial stability by
using (Reverse Repo and Repo rates). (The rate at which RBI
lends money to commercial banks.)
Rates of inflation are keenly monitored and interest rates are
being modified whenever necessary.

5) Financial sector policies:
RBI have
- Tightened provisioning norms and risks weights to ensure
asset quality.
- Strengthened the accounting and disclosure norms for greater
transparency and discipline.
Final guidelines for the implementations of the new capital
adequacy frame work have been issued.
RBI continues to take measures for
- Protecting customer’s rights and
- Enhancing the quality of customer’s service.

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GOVERNMENT EXPENDITURE
GDP = Money value of Goods and services produced by an economy
during a year.
Aggregate expenditure
i) Aggregate expenditure as a % of
GDP in 2006- 07 = 14.1 %
(-) Aggregate expenditure as a % of
GDP in 2007- 08 = 13.8%
________
Reduction = 0.3%
This was done by reducing non – planned expenditures particularly
Interest payments and
Subsidies.

Planned expenditure
ii) Planned expenditure to GDP ratio in 2006-07 = 20.9%
Planned expenditure to GDP ratio in 2007-08 = 22.5%
_________
Increase 1.6%
Planned expenditure was increased to support central plan
Capital expenditure
Capital expenditure as a % of GDP in 2006-07 = 1.8%
Capital expenditure as a % of GDP in 2007-08 = 1.8%
remain Unchanged

Education expenditure
Education expenditure as a
Proportion to total exp. in 2006-07 = 3.7%
Education expenditure as
Proportion to total exp. in 2007-08 = 4.1%
_______
Increase 0.4%.

Health expenditure
Health expenditure as a proportion to total
Expenditure in 2006-07 = 1.8%
Health expenditure as a proportion to total

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Expenditure in 2007-08 = 2.1%
_________
Increase. 0.3%
The share of expenditure for
agriculture and Rural department = same level at around 10%.

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PUBLIC AND PRIVATE SECTOR INVESTMENT
Public-Private Partnership (PPP or P3) involves a long-term contractual
agreement between a public sector authority and a private party.

PPP model is a concept of collective approach mooted by Government of India
involving government and private agencies / institutions in order to bridge
the deficit in infrastructure like railways, road transport and highways, ports,
civil aviation, power infrastructure considered to be vital for economic
growth.

According to the Viability Gap Funding (VGF) scheme and guidelines for the
India Infrastructure Development Fund, issued by the Ministry of Finance, GoI,
a public-private partnership occurs when government agencies share
resources and revenue with a non-government company.

These partnership arrangements are used to meet specific niche requirements
and are legally binding.

According to the Asian Development Bank, PPP is a range of possible
relationship between public entity and the private party in the context of
infrastructure and core services. This partnership is a mutually beneficial
long-term relationship between the public and private sectors, which are an
effective way to bridge gaps between demand and available resources, quality
and accessibility, and risk and benefit.

The concept of Public- Private Partnership (PPP) has been a comparatively
new one in our national economic development scenario. It has been observed
that the growth of infrastnucture has lagged behind and may assume serious
proportions impeding our economic growth. To overcome this, Govemment of
India has been actively pursuing PPP to bridge the gap in the infrastructure.

Under the overall guidance of the committee of infrastructure, headed by the
Prime Minister the PPP programme formulation and implementation are
being closely monitored by the relevant ministry/departments. An appraisal
mechanism has been given a mandate and guidelines for drawing up time-
frame for according approvals to proposals in a speedy manner.

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PPP projects normally involve long term contracts between the Government
and the private parties detailing the rights and obligations of both the
contracting parties. Government has decided to develop standardized frame-
works, based on due diligence and agreements will follow international
practices. They will also create a framework with a right matrix of risk
allocation, obligations and returns.

Planning Commission has also issued Model Concession Agreement (MCA) for
ports, state highways and operation maintenance agreements for highways.To
promote PPP programmer all state governments and central ministries are
setting up PPP cell with a senior level officer as a nodal officer. Technical
assistance has been obtained from Asian Development Bank (ADD) including
hiring of consultants and training of personnel.

ROLE OF GOVERNMENT IN CONTROLLING INFLATION

Inflation: a general increase in prices and fall in the purchasing value of
money.

Inflation can be controlled by
1) By checking on supply of money.
2) By reducing deficit financing
3) By increasing Agricultural production.
4) By increasing industrial production.
5) By enforcing national wage policy
6) By making proper use of fiscal policy
7) By distributing through fair price shops.
8) By checking black money.
9) By controlling over population.
10) By using appropriate monetary policy.
11) BY banning export of essential consumption goods.
12) BY reducing administered prices.

1) By checking on supply of money.
To check rise in price, supply of money shouldn’t be allowed to expand,
it should be freezed.
2) By reducing deficit financing
27


Deficit financing can be reduced
 by levying taxes on agriculture.
 by reducing unessential expenditure.
 by withdrawing of subsidies.

3) By increasing Agricultural production.
Inflation can be controlled by increasing agricultural production.
Agricultural production can be increased

o By using improved seeds.
o By producing not only food grains but also oil seeds, pulses,
sugarcanes& Jutes.
o By using good quality fertilizers.
o By providing better irrigation facilities.

4) By increasing industrial production at low cost:
The ways to increase industrial production at low costs are:
 In the short run => Fuller utilization of production
capacity in industrial units.
 In the long run =>
By setting up of new industries
By using domestic resources than
imports.
By developing small scale and cottage
industries.
By using modern technology.

5) By enforcing national wage policy:
Inflation can be controlled by enforcing national wage policy. This can
be done
 By linking wages with productivity : more wages for more
productivity and Less wages for less productivity
 By banning strikes and lock out through the co-operation of
labourers.

6) By making proper use of fiscal policy
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Both Central and State governments should make use of fiscal policy
properly to control inflation.

 Role of state govt : -By introducing unnecessary public exp.
- By tapping new sources of revenue.
 Role of central govt -By cutting down the non departmental
Expenditure.
-By encouraging savings and investments
Savings, investments, productions, prices.

7) By distributing through fair price shops.
Hoarding of essential goods creates artificial demand and inflation. This
can be controlled
 By opening more fair price shops ( ration shops) at
village and in backward regions
 By distributing the essential goods among the poor at
low price through fair price shops.

8) By checking black money.
Black money is one of the major reasons for inflation. Black money can
be checked by applying the following two ways:

 Way1 : Suggesting demonetization of the currency ( like
Germany)
 Way 2: Giving long term bonds to the amount of black money
declared by the persons who possess.

9) By controlling over population.
 Population is incasing day by day. The increasing population
needs hue amount of essential goods. When the supply of
essential goods is not equal to the demand, it increases the prices
and creates inflation.
 In order to control the inflation, the population should be
controlled.
 The growth in population can be controlled by making extensive
publicity of family planning (welfare) program.
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10) By using appropriate monetary policy.
Inflation can be controlled
-By reducing supply of money.
-By increasing rate of interest on savings.
-By contracting credit.

11) By banning export of essential consumption goods.
In order to control inflation, export of essential consumption goods
like
 onions
 vegetables
 cement
 Sugar.
Should be banned and they should be channelized for domestic
consumption.

12) By increasing the growth of power and transport:
By increasing the supply of electricity, coal and the other sources of
power, industries will get appropriate raw material at the appropriate
time.

30


MANAGEMENT ACCOUNTING AND STRATEGIC MANAGEMENT

Unit II:

Prepared by

STRATEGY
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A strategy can be thought of in either of two ways:
 as a pattern that emerges in a sequence of decisions over time, or
 as an organizational plan of action that is intended to move a company
toward the achievement of its shorter - term goals and, ultimately, its
fundamental purposes.

Strategy should be both deliberate and emergent, and firms should both adapt
to and enact their environments, with the situation determining which option
to choose.

FACTORS THAT SHAPE A COMPANY'S STRATEGIES
Organizations do not exist in a vacuum. Many factors enter into the forming
of a company's strategy. Each exists within a complex network of
environmental forces.
These forces, conditions, situations, events, and relationships over which
the organization has little control are referred to collectively as the
organization's environment.
In general terms, environment can be broken down into three areas:
Environment

Macro environment Operating environment Internal environment

I. Macroenvironment, or general environment (remote
environment) - that is, economic, social, political and legal
systems in the country;

II. Operating environment - that is, competitors, markets, customers,
regulatory agencies, and stakeholders; and

III. Internal environment - that is, employees, managers, union, and
board of directors.

STRATEGIC PLANNING

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Strategic planning is about matching the strengths of a business to available
market opportunities.

Strategic planning means, defining clearly the objectives and assessing both
the internal and external situation to
 formulate strategy,
 implement the strategy,
 evaluate the progress and
 make adjustments as necessary to stay on track.

The major assumption in strategic planning is that an organization must be
responsive to a dynamic, changing environment.

The emphasis in strategic planning is on understanding how the environment
is changing and will change, and in developing organizational decisions which
are responsive to these changes.

In short, strategic planning is a disciplined effort to produce fundamental
decisions and actions that shape and guide
 What an organization is,
 What it does, and
 Why does it, with a focus on the future

Long range Planning : It becomes the basis for the strategies to be
pursued to drive an organization towards its mission. It is a long-term view of
what an organization is planning to become in future, indicating the basic
thrust of the firm, including its products, business and markets. It focuses on
forecasting the future by using economic and technical tools.

Corporate Planning : From a company’s perspective, corporate planning
involves formulating long term business goals so that strategic planning of
an enterprise may be developed and acted upon. The corporate planning term
that was popular in the 1960s has since been referred to as strategic
management.

STRATEGIC MANAGEMENT
33


Strategic management can be defined as the art and science of formulating,
implementing and evaluating cross-functional decisions that enable an
organization to achieve its objectives.

Strategic Management is the means by which the management establishes
purpose and pursues the purpose through co-alignment of organizational
resources with environment, opportunities and constraints.

Strategic Management deals with decision making and actions which
determine an enterprise’s ability to excel , survive or due by making the best
use of a firm’s resources in a dynamic environment.

The Strategic Management Process
The four basic processes associated with strategic management are:

1. Situation analysis
2. Establishment of strategic direction
3. Strategy formulation
4. Strategy implementation

1. Situation analysis

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All of the stakeholders inside and outside of the firm, as well as the major
external forces, should be analyzed at both the domestic and international
levels.

The external environment includes groups, individuals, and forces outside of
the traditional boundaries of the organization that are significantly influenced
by or have a major impact on the organization.

External stakeholders, part of a company’s operating environment, include
competitors, customers, suppliers, financial intermediaries, local
communities, unions, activist groups, and local and national government
agencies and administrators.

The broad environment forms the context in which the company and its
operating environment exist, and includes socio-cultural, economic,
technological, political, and legal influences, both domestically and abroad.

One organization, acting independently, may have very little influence on the
forces in the broad environment; however, the forces in this environment can
have a tremendous impact on the organization.

The internal organization includes all of the stakeholders, resources,
knowledge, and processes that exist within the boundaries of the firm.

SWOT analysis is also “situation analysis “

2. Establishment of strategic direction

Strategic direction pertains to the longer - term goals and objectives of the
organization.

At a more fundamental level, strategic direction defines the purposes for
which a company exists and operates. This direction is often contained in
mission and vision statements.

An organization’s mission is its current purpose and scope of operation, while
its vision is a forward – looking statement of what it wants to be in the future.
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Unlike shorter - term goals and strategies, mission and vision statements are
an enduring part of planning processes within the company. They are often
written in terms of what the organization will do for its key stakeholders.

3. Strategy formulation

Strategy formulation, the process of planning strategies, is often divided into
three levels: corporate, business, and functional i.e.,

a) Corporate level strategy (“ where to compete, ” )
b) Business level strategy or Competitive strategies (“ how to compete in
those areas, ” )
c) Functional- level strategies (“the functional details of how resources will
be managed so that business - level strategies will be accomplished.”)

(a) Corporate level strategy is to define a company’s domain of activity
through selection of business areas in which the company will compete.

(b) Business level strategy formulation pertains to domain direction and
navigation, or how businesses should compete in the areas they have selected.
Sometimes business - level strategies are also referred to as competitive
strategies.

(c) Functional - level strategies contain the details of how functional
resource areas, such as marketing, operations, and finance, should be used to
implement business - level strategies and achieve competitive advantage.
Basically, functional - level strategies are for acquiring, developing, and
managing organizational resources.

4. Strategy Implementation

Strategy formulation results in a plan of action for the company and its
various levels, whereas strategy implementation represents a pattern of
decisions and actions that are intended to carry out the plan.

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Strategy implementation involves managing stakeholder relationships and
organizational resources in a manner that moves the business toward the
successful execution of its strategies, consistent with its strategic direction.

Implementation activities also involve creating an organizational design and
organizational control systems to keep the company on the right course.

Organizational control refers to the processes that lead to adjustments in
strategic direction, strategies, or the implementation plan, when necessary.

Thus, managers may collect information that leads them to believe that the
organizational mission is no longer appropriate or that its strategies are not
leading to the desired outcomes.

A strategic - control system may conversely tell managers that the mission
and strategies are appropriate, but that they have not been well executed. In
such cases, adjustments should be made to the implementation process.

PROCESS OF DEVELOPING A STRATEGIC PLAN
37


TThe process of developing a strategic plan is explained below:

I. Mission and Objectives

The mission statement describes the company's business
vision, including the unchanging values and purpose of
the firm and forward-looking visionary goals that guide
the pursuit of future opportunities.

Guided by the business vision, the firm's leaders can
define measurable financial and strategic objectives.
Financial objectives involve measures such as sales
targets and earnings growth. Strategic objectives are
related to the firm's business position and may include
measures such as market share and reputation.

II. Environmental Scan

The environmental scan includes the following components:

internal analysis of the firm
Analysis of the firm's industry (Task environment)
External macro environment (PEST analysis)
The internal analysis can identify the firm's strengths and weaknesses and the
external analysis reveals opportunities and threats. A profile of the strengths,
weaknesses, opportunities, and threats is generated by means of a SWOT
analysis

An industry analysis can be performed using a framework developed by
Michael Porter known as Porter's five forces. This framework evaluates entry
barriers, suppliers, customers, substitute products, and industry rivalry.

III. Strategy Formulation

Given the information from the environmental scan, the firm should match its
strength to the opportunities that it has identified, while addressing its
weaknesses and external threats.

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To attain superior profitability, the firm seeks to develop a competitive
advantage over its rivals. A competitive advantage can be based on cost or
differentiation. Michael Porter identified three industry-independent generic
strategies from which the firm can choose.

IV. Strategy implementation

The selected strategy is implemented by means of programs, budgets, and
procedures. Implementation involves organization of the firm's resources and
motivation of the staff to achieve objectives.

The way in which the strategy is implemented can have a significant impact
on whether it will be successful. In a large company, those who implement the
strategy likely will be different people from those who formulated it. For this
reason, care must be taken to communicate the strategy and the reasoning
behind it. Otherwise, the implementation might not succeed if the strategy is
misunderstood or if lower-level managers resist its implementation because
they do not understand why the particular strategy was selected.

V. Evaluation & Control

The implementation of the strategy must be monitored and adjustments made
as needed.Evaluation and control consists of the following steps:
1. Define parameters to be measured 2. Define target values for those
parameters 3. Perform measurements 4. Compare measured results to the
pre-defined standard 5. Make necessary changes .

SWOT ANALYSIS
The traditional process for developing strategy consists of analyzing the
internal and external environments of the company to arrive at organizational
strengths, weaknesses, opportunities, and threats (SWOT).

Analyzing the environment and the company can assist the company in all of
the other tasks of strategic management. For example, a firm’s managers
should formulate strategic direction and specific strategies based on

39


organizational strengths and weaknesses and in the context of the
opportunities and threats found in its environment.

A scan of the internal and external environment is an important part of the
strategic planning process. Environmental factors internal to the firm usually
can be classified as strengths (S) or weaknesses (W), and those external to the
firm can be classified
as opportunities (O) or
threats (T). Such an
analysis of the
strategic environment
is referred to as a
SWOT analysis.

The SWOT analysis
provides information
that is helpful in
matching the firm's
resources and capabilities to the competitive environment in which it
operates. As such, it is instrumental in strategy formulation and selection. The
given diagram shows how a SWOT analysis fits into an environmental scan.

Thus , SWOT analysis is a tool, strategists use it to evaluate Strengths,
Weaknesses, Opportunities, and Threats.

 Strengths: A firm's strengths are its resources and capabilities that can
be used as a basis for developing a competitive advantage. Examples of
such strengths include:
patents exclusive access to high
strong brand names grade natural resources
good reputation among favorable access to
customers distribution networks
cost advantages from
proprietary know-how

 Weaknesses are resources and capabilities that a company does not
possess, to the extent that their absence places the firm at a competitive
disadvantage. The absence of certain strengths may be viewed as a
40


weakness. For example, ear of the following may be considered
weaknesses:

Lack of patent high cost structure
protection Lack of access to the
a weak brand name best natural resources
poor reputation among Lack of access to key
customers distribution channels

In some cases, a weakness may be the flip side of a strength. Take the
case in which a firm has a large amount of manufacturing capacity.
While this capacity may be considered a strength that competitors do
not share, it also may be considered as weakness if the large investment
in manufacturing capacity prevents the firm from reacting quickly to the
changes in the strategic environment.

 Opportunities : The external environmental analysis may reveal
certain new opportunities for pit and growth. Some examples of such
opportunities include:
an unfulfilled customer need
arrival of newtechnologies
Loosening of regulations
Removal of International trade barriers

 Threats : Changes in the external environmental also may present
threats to the firm. Some examples of such threats include:
shifts in consumer tastes away from the firm's products
emergence of substitute products
new regulations
increased trade barriers

Features of SWOT Analysis

Ω Systematic analysis : SWOT analysis involves a systematic analysis of
the internal strengths and weaknesses of a firm (financial,
technological, managerial) and of the external opportunities and threats

41


in the firm's environment (changes in the markets, laws, technology and
the actions of the competitors.)

Ω Exposing the strengths and weaknesses : It is an internal appraisal of
a firm. The purpose of SWOT analysis will be to expose the strengths
and weaknesses of the firm.

Ω Identifying profit-making opportunities and threats : An analysis of
Opportunities and Threats is concerned with identifying profit-making
opportunities in the business environment and for identifying threats-
eg., falling demand, new competition, government legislation etc., It is
thus an external appraisal, strengths and weaknesses analysis.

Ω Basis for evaluation and identification: This will provide a basis for
evaluating the extent to which the firm is likely to achieve its various
objectives and for identifying new products and market opportunity.

Ω Defining the strategic approach : SWOT Analysis will help in defining
the strategic approach to be formulated that will fit in admirably with
the environment.

Ω Preventing the company from poor results : Identification of
shortcomings in skills or resources could lead to a planned acquisition
programme or staff recruitment and training. Thus SWOT analysis helps
in highlighting areas within the company, which are strong and which
might be exploited more fully and weaknesses, where some defensive
planning might be required to prevent the company from poor results .

MAJOR OUTCOMES OF SWOT ANALYSIS:
Ω Matching the company strengths to take advantage of the opportunities
in the market place like say, converting a fast food stands into a full-
fledged restaurant.
Ω Converting threat or weakness into an advantage.
Ω Eliminating the weaknesses that expose a company to external threats.
Ω Exposure of shortcomings in the company's present skills and resources

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Ω Strengths, which the firm should seek to exploit.

SWOT Analysis thus assesses the firm's internal strengths and weaknesses in
relation to the opportunities and threats, offered by the environment.

THE SWOT MATRIX

A firm should not necessarily pursue the more lucrative opportunities. Rather,
it may have a better chance at developing a competitive advantage by
identifying a fit between the firm's strengths and upcoming opportunities. In
some cases, the firm can overcome a weakness in order to prepare itself to
pursue a compelling opportunity

To develop strategies that take into account the SWOT profile, a matrix of
these factors can be constructed. The SWOT matrix also known as a TOWS
Matrix is shown below:

S-O strategies pursue opportunities that are a good fit to the company's
strengths.

W-O strategies overcome weaknesses to pursue opportunities.

S-T strategies identify ways that the firm can use its strengths to reduce
its vulnerability to external threats.

W-T strategies establish a defensive plan to prevent the firm's
weaknesses from makino it hiohlv suscenhble to external threats .

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STRATEGIES FOR GROWTH THROUGH EXPANSION
VERSUS DIVERSIFICATION

Growth strategy
Organizations pursing a grown strategy do not necessarily grow faster than
the economy as a whole but do grow faster than the markets in which their
products are sold; tend to have larger than average profit margins; attempt to
postpone or even eliminate the danger of price competition in their industry
regularly develop new products, new markets, new processes, and new uses
for old products and tend to adapt the outside world to themselves by
creating something or a demand for something that did not exist before.

Expansion strategy: It is followed when an organization aims at high
growth by substantially broadening the scope of one or more of its businesses
in terms of their respective customer group , customer functions. It is followed
to improve its overall performance.

Diversification strategy: It involves a simultaneous departure from
current business . Firms choose diversification when the growth objectives
are very high and it could not be achieved with in the existing product market
scope.

Classification of diversification
Various types are given below:

1. Concentric diversification :Concentric diversification is a growth strategy
that involves adding new products or services that are similar to the
organization’s present products or services

2. Vertical integration :Vertical integration is a growth strategy that involves
extending an organization’s present business in two possible directions.

Forward integration moves the organization into distributing its own
products or services.

44


Backward integration moves it into supplying some or all of the
products or services that are used in producing its present products or
services.

3. Horizontal diversification : Horizontal diversification is a growth strategy
in which an organization buys one of its competitors.

4. Conglomerate diversification : Conglomerate diversification is a
growth strategy that involves adding new products or services that are
significantly different from the organization’s present products or services.

ACQUISITION AND MERGER STRATEGIES
Mergers and acquisition are two frequently used methods for implementing
diversification strategies.

A merger takes place when two companies combine their operations,
creating, in effect, a third company.

An acquisition is a situation in which one company buys, and, controls,
another company.

DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS
Though the two words mergers and acquisitions are often spoken in the same
breath and are also used in such a way as if they are synonymous, however,
there are certain differences between mergers and acquisitions.

MERGER ACQUISITION

The case when two companies (often The case when one company takes
of same size) decide to move forward over another and establishes itself as
as a single new company instead of the new owner of the business.
operating business separately.
The stocks of both the companies are The buyer company “swallows” the
surrendered, while new stocks are business of the target company, which
45


issued afresh. ceases to exist.

For example, Glaxo Wellcome and Dr. Reddy's Labs acquired Betapharm
SmithKline Beehcam ceased to exist through an agreement amounting
and merged to become a new $597 million.
company, known as Glaxo SmithKline.

A buyout agreement can also be known as a merger when both owners
mutually decide to combine their business in the best interest of their firms.
But when the agreement is hostile, or when the target firm is unwilling to be
bought, it is considered as an acquisition.

M&A DEALS IN INDIA.

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel,
construction, etc, have proved their worth in the international scenario and
the rising participation of Indian firms in signing M&A deals has further
triggered the acquisition activities in India.

In spite of the massive downturn in 2009, the future of M&A deals in India
looks promising. Indian telecom major Bharti Airtel is all set to merge with its
South African counterpart MTN, with a deal worth USD 23 billion. According
to the agreement Bharti Airtel would obtain 49% of stake in MTN and the
South African telecom major would acquire 36% of stake in Bharti Airtel.

Classification of Mergers or Acquisitions
a. Horizontal Mergers or Acquisitions
b. Concentric Mergers or Acquisitions
c. Vertical Mergers or Acquisitions
d. Conglomerate Mergers or Acquisitions

a) Horizontal Mergers or Acquisitions are the combining of two or more
organizations that are direct competitors.

b) Concentric Mergers or Acquisitions are the combining of two or more
organizations that have similar products or services in terms of technology,
product line, distribution channels, or customer base.
46


c) Vertical Mergers or Acquisitions are the combining of two or more
organizations to extend an organization into either supplying products or
services required in producing its present products or services or into
distributing or selling its own products or services.

d) Conglomerate Mergers or Acquisitions involve the combining of two or
more organizations that are producing products or services that are
significantly different from each other.

Reasons for mergers and Acquisitions
The following are the reasons for mergers and acquisitions.

Major reason

 Getting the potential benefit that can accrue to the stockholders of both
companies.

Other reasons
 Providing a better utilization of existing manufacturing facilities
 Selling in the same channels as existing channels to make the existing
sales organization more productive.
 Getting the services of proven management team to strengthen or
succeed the existing staff.
 Smoothing out cyclical/ seasonal trends in present products or services.
 Providing new volume to replace static or shrinking volume in present
products or services.
 Providing new products or services and better margins of profit in order
to supplement older products or services still selling in good demand
but at increasingly competitive levels.
 Entering a new and growing field
 Securing or protecting sources of raw materials or components used in
its manufacturing process ( vertical integration)
 Effective savings in income and excess profits taxes.
 Broadening the opportunities for using the managerial ability of the
acquiring organization’s personnel or its resources.
 Providing an avenue for the selling of the organization’s stock.
 Providing resources for expanding the organization.
47


 Reducing tax obligations ( income tax, estate and inheritance taxes)
 Providing for management succession and the perpetuation or
continuation of the business.

Merger and Acquisition Strategies
Merger and Acquisition Strategies are extremely important in order to derive
the maximum benefit out of a merger or acquisition deal.

It is quite difficult to decide on the strategies of merger and acquisition,
especially for those companies who are going to make a merger or acquisition
deal for the first time. In this case, they take lessons from the past mergers
and acquisitions that took place in the market between other companies and
proved to be successful.

Strategies for Successful Merger or Acquisition Deal
Through market survey and market analysis of different mergers and
acquisitions, it has been found out that there are some golden rules which can
be treated as the Strategies for Successful Merger or Acquisition Deal.

Before entering in to any merger or acquisition deal, the target
company's market performance and market position is required to be
examined thoroughly so that the optimal target company can be chosen
and the deal can be finalized at a right price.
Identification of future market opportunities, recent market trends and
customer's reaction to the company's products are also very important
in order to assess the growth potential of the company.
After finalizing the merger or acquisition deal, the integration process
of the companies should be started in time. Before the closing of the
deal, when the negotiation process is on, from that time, the
management of both the companies requires to work on a proper
integration strategy. This is to ensure that no potential problem crop up
after the closing of the deal.
If the company which intends to acquire the target firm plans
restructuring of the target company, then this plan should be declared
and implemented within the period of acquisition to avoid
uncertainties.
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It is also very important to consider the working environment and
culture of the workforce of the target company, at the time of drawing
up Merger and Acquisition Strategies, so that the laborers of the target
company do not feel left out and become demoralized.

Reasons for failure of mergers
Ω Overoptimistic appraisal
Ω Overbidding
Ω Overestimation of synergies
Ω Poor post acquisition integration

MERGER AND ACQUISITION STRATEGY PROCESS
The merger and acquisition strategies may differ from company to company
and also depend a lot on the policy of the respective organization. However,
merger and acquisition strategies have got some distinct process, based on
which, the strategies are devised. They are:

1) Determining Business Plan Drivers

2) Determining Acquisition Financing Constraints

3) Developing Acquisition Candidate List

4) Building Preliminary Valuation Models

5) Rating/Ranking Acquisition Candidates

6) Reviewing and Approving the Strategy

1) Determining Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic
business plan of the organization. So, in merger and acquisition
strategies, the first need is to find out the way to accelerate the strategic
business plan through the M&A. The strategic business plan is to be
transformed into a set of drivers, which merger and acquisition
strategies would address.
49


While chalking out strategies, an organization needs to consider the
points like

 the markets of its intended business,
 the market share that it is eyeing for in each market,
 the products and technologies that it would require,
 the geographic locations where it would operate its business in,
 the skills and resources that it would require,
 the financial targets and the risk amount etc.

2) Determining Acquisition Financing Constraints

Now, the organization needs to find out if there are any financial
constraints for supporting the acquisition.

Funds for acquisitions may come through various ways like cash, debt,
public and private equities, PIPEs, minority investments, earn outs etc.

The organization needs to consider a few facts like
 the availability of untapped credit facilities,
 surplus cash, or untapped equity,
 the amount of new equity and new debt that it can raise etc.

The organization also needs to calculate the amount of returns that it
must achieve.

3) Developing Acquisition Candidate List

Now the organization has to identify the specific companies (private
and public) that it is eyeing for acquisition.

It can identify those by market research, public stock research, referrals
from board members, investment bankers, investors and attorneys, and
even recommendations from its employees. It also needs to develop
summary profile for every company.

4) Building Preliminary Valuation Models

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This stage is to calculate the initial estimated acquisition cost, the
estimated returns etc. Many organizations have their own formats for
presenting preliminary valuation.

5) Rating/Ranking Acquisition Candidates

The next step is rating or ranking the acquisition candidates according
to their impact on business and feasibility of closing the deal. This
process will help the organization in understanding the relative impacts
of the acquisitions.

6) Reviewing and Approving the Strategy

In this stage, merger and acquisition strategies are reviewed and
approved. The organization needs to find out whether all the critical
stakeholders like board members, investors etc. agree with it or not. If
everyone gives their nods on the strategies, it can go ahead with the
merger or acquisition.

JOINT VENTURES
Meaning

Joint ventures are equity arrangements between two or more independent
firms. They are usually temporary partnerships in which two or more
business entities (proprietorship, partnership, corporation, or other) join for
the purpose of conducting a specific project.

Joint ventures are used frequently in the construction business.

The joint venture is treated as a separate entity from the other business of the
partners, and it keeps a separate set of accounts.

When the project is completed, the joint venture is terminated, with all profits
distributed to its members (or loses covered by them).

Characteristics

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 Two partners coming together to create a common undertaking
contributing money, effort, knowledge, skill, or any other asset.
 The subject matter of a joint venture is interest in joint property.
 Right of management or mutual control of the enterprise.
 Presence of “adventure” to anticipate profit.
 Normal limitations to the objective of a single undertaking or ad hoc
enterprise

Motives for joint venture:
 Lack of funds
 Learning experience
 Sharing risk and resources
 Regulating authorities are flexible in regard to joint ventures

STRATEGY OF JOINT VENTURE IN INDIA
Three basic strategies have been proposed for use in joint ventures. They are:

1. Spider’s web
2. Go together-split
3. Successive integration
The spider’s web strategy : In ‘Spider Web Strategy', a small firm establishes
a series of joint ventures, so that it can survive and not absorbed by its large
competitors.

Go together- split is a strategy in which two or more organizations co
operate for an extended time and then separate. This strategy is particularly
appropriate on projects that have a definite life span, such as construction
projects.

Successive integration starts with a weak joint venture relationship between
the organizations, becomes stronger and results in a merger.

STRATEGY OF JOINT VENTURE IN ABROAD
A foreign company can commence operations in India by incorporating a
company under the Companies Act, 1956 through

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Joint Ventures; or
Wholly Owned Subsidiaries

Joint venture with an Indian Partner
Foreign Companies can set up their operations in India by forging
strategic alliances with Indian partners.

In Joint venture, the domestic company and a foreign company enter into
50:50 agreement in which both of them take 50% of ownership stake and
operating control is shared between team of managers drawn from both
companies.

It involves technology collaboration, so the company may lose control
over its proprietory technology.

Joint Venture may entail the following advantages for a foreign investor:
a. Established distribution/ marketing set up of the Indian partner
b. Available financial resource of the Indian partners
c. Established contacts of the Indian partners which help smoothen the
process of setting up of operations

Reasons for failure of joint venture

a. The research and development for a new technology never materialized
b. Preparation and planning for a joint venture might have been
inadequate
c. Conflicts in regard to the basic objectives of the joint venture cropping
up after the formation.
d. Revealing the secrecy of the partner
e. Difficulties faced in sharing managerial control between the partners
made into a dead lock.

MARKETING STRATEGY
Marketing strategy:

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The marketing concept of building an organization around the profitable
satisfaction of customer needs has helped firms to achieve success in high-
growth, moderately competitive markets. However, to be successful in
markets in which economic growth has leveled and in which there exist many
competitors who follow the marketing concept, a well-developed marketing
strategy is required. Such a strategy considers a portfolio of products and
takes into account the anticipated moves of competitors in the market.

In short, marketing strategy means, the marketing logic by which the business
unit hopes to achieve its marketing objectives.

Process of Marketing Strategy:
a) Scanning the marketing environment.
b) Internal scanning- Process of assessing the firm’s strengths and
weakness and identifying its core competencies and competitive
advantages.
c) Setting marketing objectives – to provide clear cut direction to the
business regarding its future course of action.
d) Formulating marketing strategy
e) Developing the function plans – elaborating the marketing strategy
into detailed plans and programmes.

Marketing strategy as a part of corporate strategy:
A marketing strategy for a company needs to be an integral part of a corporate
strategy, which is the umbrella. The business strategy of a company shapes
the marketing strategy, which has to be developed and implemented through
functional level strategy involving superior efficiency, quality, innovation and
customer responsiveness.

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According to David Aakar, the marketing strategy involves laying down
strategic specifications as follows.

1. Scope of the product market in which the company desires to compete
has to be laid down.

2. The level of investment required taking into consideration the timing,
nature and phase of the market will have to be determined.

3. Identifying the functional strategies required for implementation.

4. The strategic assets like brand name, loyal customer base, talent
inventories required for building sustainable competitive advantage
will have to be built.

5. In case of multiple businesses need for proper allocation of resources
both financial and non financial becomes important.

6. Synergy among the various market activities for the different
businesses of the same company will have to be developed.

RESOURCE ANALYSIS AND EVALUATION

Various resources of an organisation:
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The following diagram shows the various sources of an organisation.

Evaluation of Resources
The resource - based view of the firm explains that an organization is a bundle
of resources, which means that the most important role of a manager is that of
acquiring,developing, managing, and discarding resources. According to this
view, firms can gain competitive advantage through possessing superior
resources. Superior resources are those that have value in the market, are
possessed by only a small number of firms,and are not easy to substitute.
Most of the resources that a firm can acquire or develop are directly linked to
an organization’s stakeholders, which are groups and individuals who can
signifi cantly affect or are signifi cantly affected by an organization’s activities.
A stakeholder approach depicts the complicated nature of the management
task.
Diversification of product mix, technology, customer base, capital structure
for further growth, as a defensive move or for improved resource utilization.

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Unit III:

Prepared by

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STRATEGIES IN THE DEVELOPMENT OF MODELS
Models are a group of tools, which help comprehension of problems and help
assist in taking decisions.
A typical modeling process starts with the identification of a problem and
analysis of the requirements of the situation.
This analysis will include the scope of the problem, internal or external forces
acting as part of the problem and the dynamics of the situation. While such an
analysis is attempted, the need to identify variables and their relationship is
very essential.
Whenever a model is built, assumptions are made. These assumptions usually
are untested beliefs or predictions and as such they will have to be tested for
their relevance to the model. As otherwise the results of the model may not be
realistic
Analysis

Static analysis Dynamic analysis

Static analysis:
It means that all occurrences take place in a single interval whose duration
can be either short or long.
For example, “make or buy decisions “belong to static analysis.

Dynamic analysis:
It is applied to situations which are subject to change over a period.
A simple example would be a financial projection either of profitability or
funds over five year period. The input data such as investments, costs, prices
and quantities are likely to change from year to year.

The various models used are given below:
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I. DELPHI MODEL
 This method, developed by the RAND Corporation in the 1950s,
estimates the future based on experts’ evaluation.

 It asks an anonymous panel of experts to estimate individually the
probability of certain events occurring in the future.

 After scoring or weighting their estimates, the panel members are given
several chances to revise their answers, and receive feedback on the
distribution of the panel’s evaluation.

 The goal of this technique is to have participants converge on future
views by comparing their answers with those of others.

 Although this technique provides an opportunity to explore each
expert’s perspective and opinions in depth, it has been criticized for
problems such as peer pressure and the lack of dialectical conversations
among decision-making participants

Delphi study proceeds
 A questionnaire designed by a monitor team is sent to a select group of
experts.

 After the responses are summarized, the results are sent back to the
respondents to re-evaluate their original answers, based upon the
responses of the group.

 By incorporating a second and sometimes third round of
questionnaires, the respondents have the opportunity to defend their
original answers or change their position to agree with the majority of
respondents.

 The Delphi technique, therefore, is a method of obtaining what could be
considered an intuitive consensus of group expert opinions.

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II. ECONOMETRIC MODEL
Econometric Model is the model that studies the different economic
variables and their inter-relationships and used for forecasting.

Econometric modeling is one of the most sophisticated methods of
forecasting. In general, econometric models attempt to mathematically
model an entire economy

Econometric model is designed as numerical interpretations of real
world systems (e.g. national economies, ecologies, production systems)

Most econometric models are based on numerous regression equations
that attempt to describe the relationships between the different sectors
of the economy.

Here the analyst changes assumptions or estimations with in the model
to generate varying outcomes.

By varying the income variables in the model, the analyst examines this
impact on whatever mobility variables the model contains, thus
assessing their sensitivity to income changes.

For example, in a dynamic population forecasting model, one might
wish to assess the impact of changes in personal income on population
mobility.

In doing so the analyst is able to evaluate the model itself, as well as gain
some understanding of contingency outcomes.

A particular advantage of this technique is the ability to perform
sensitivity analyses. Econometric modeling is very expensive and
complex and is therefore, primarily used by very large organizations.

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III. MATHEMATICAL PROGRAMMING
Mathematical programming (MP) refers to a class of analytical (algebraic)
methods that prescribe the best way to achieve a given objective while
complying with a set of constraints.

MP models determine the optimal allocation of economic resources among
competing alternatives within an operational system.

MP constitutes a pivotal(crucial or central importance) element in the study of
rational decision making.

The term programming as used here means systematic planning. Thus MP
stands for “planning a decision mathematically.”

MP provides a sound theoretical basis for properly understanding the broader
implications inherent to managerial decision making in general.

Certain MP models depict the consequences of alternative courses of action by
quantifying the opportunity costs of scarce system resources.

Managers are thus made aware of the value forgone by not making optimal
decisions.

MP offers a way to avoid the pitfalls associated with the satisficing criterion by
providing a comprehensive view of the decision problem that can assist
managers in attaining and sustaining a solid competitive advantage.

MP comprises a variety of paradigms (theoretical frameworks) tailored to
different kinds of problems. The most widely used variant is linear
programming (LP), a form of MP where the objective and all constraints are
expressed as linear functions.

Other variants include integer programming (IP), for problems requiring
integer solutions; nonlinear programming (NLP), where the objective
and/or one or more constraints are nonlinear functions; and goal
programming (GP), for problems with multiple objectives.

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Advances in computer technology have brought MP to the forefront of the
managerial stage. Any personal computer with a full-featured spreadsheet
program, such as Excel or Lotus 1-2-3 is quite capable of solving sophisticated
constrained optimization problems.

STAGES OF FORMULATION, SOLUTION, AND IMPLEMENTATION OF
MATHEMATICAL PROGRAMMING

The various stages in the mathematical programming are given below:

A. Formulating the model.
B. Gathering the data.
C. Obtaining an optimal solution.
D. Applying sensitivity analysis.
E. Testing and implementing the solution.

A) Formulating the Model

The first step to be taken in a practical application is the development of the
model. The following are elements that define the model structure:

a) Selection of a Time Horizon / planning horizon/ cutoff date

 The time horizon indicates how long we have to look into the future to
account for all the significant factors of the decision under study.

 It might cover ten to twenty years in a major capital-investment
decision, one year in an aggregate production-planning problem, or just
a few weeks in a detailed scheduling issue.

 Sometimes it is necessary to divide the time horizon into several time
periods. This is done in order to identify the dynamic changes that take
place throughout the time horizon.

 For example, in a production planning problem it is customary to divide
the one-year time horizon into time periods of one month’s duration to
reflect fluctuations in the demand pattern due to product seasonalities.

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b) Selection of Decision Variables and Parameters

 The next step in formulating the mathematical-programming model is
to identify the decision variables, which are those factors under the
control of the decision-maker, and the parameters, which are beyond
the control of the decision-maker and are imposed by the external
environment.

 If we are dealing with production planning models, some relevant
decision variables might be the amount to be manufactured of each
product at each time period, the amount of inventory to accumulate at
each time period, and the allotment of man-hours of regular and
overtime labor at each time period.

 The parameters represent those factors which affect the decision but
are not controllable directly (such as prices, costs, demand, and so
forth).

 In deterministic mathematical-programming models, all the parameters
are assumed to take fixed, known values, where estimates are provided
via point forecasts. The impact of this assumption can be tested by
means of sensitivity analysis.

 Examples of some of the parameters associated with a production-
planning problem are: product demands, finished product prices and
costs, productivity of the manufacturing process, and manpower
availability.

 The distinction made between parameters and decision variables is
somewhat arbitrary and one could argue that, for a certain price, most
parameters can be controlled to some degree by the decision-maker.

c) Definition of the Constraints

 The constraint set reflects relationships among decision variables and
parameters that are imposed by the characteristics of the problem
under study (e.g., the nature of the production process, the resources

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available to the firm, and financial, marketing, economical, political, and
institutional considerations).

 These relationships should be expressed in a precise, quantitative way.
The nature of the constraints will, to a great extent, determine the
computational difficulty of solving the model.

 It is quite common, in the initial representation of the problem, to
overlook some vital constraints or to introduce some errors into the
model description, which will lead to unacceptable solutions.

 However, the mathematical programming solution of the ill-defined
model provides enough information to assist in the detection of these
errors and their prompt correction. The problem has to be reformulated
and a new cycle has to be initiated.

d) Selection of the Objective Function

 Once the decision variables are established, it is possible to determine
the objective function to be minimized or maximized, provided that a
measure of performance (or effectiveness) has been established and can
be associated with the values that the decision variables can assume.

 This measure of performance provides a selection criterion for
evaluating the various courses of action that are available in the
situation being investigated.

 Objective functions could become more relevant in some instances.
Examples of alternative objectives are:
Maximize total production, in units.
Minimize production time.
Maximize share of market for all or some products.
Maximize total sales, in dollars or units.
Minimize changes of production pattern.
Minimize the use of a particular scarce (or expensive)
commodity.

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B) Gathering the Data

After defining the model, the data required to define the parameters of the
problem is collected.

The data involves the objective-function coefficients, the constraint
coefficients (also called the matrix coefficients) and the right hand side of the
mathematical-programming model.

This stage usually represents one of the most time-consuming and costly
efforts required by the mathematical-programming approach.

C) Obtaining an Optimal Solution

Lengthy calculations are required to obtain the optimal solution of a
mathematical-programming model.

A digital computer (with highly efficient codes to solve linear-programming
models) is invariably used in this stage of model implementation.

When dealing with large models, it is useful, in utilizing computer programs,
to input the required data automatically. These programs, often called matrix
generators, are designed to cover specific applications.

Similarly, computer programs often are written to translate the linear-
programming output, (usually too technical in nature) into meaningful
managerial reports ready to be used by middle and top managers.

D) Applying Sensitivity Analysis

One of the most useful characteristics of linear-programming codes is their
capability to perform sensitivity analysis on the optimal solutions obtained for
the problem originally formulated. These post optimum analyses are
important for several reasons:

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a) Data Uncertainty

 Much of the information that is used in formulating the linear program
is uncertain.

 Future production capacities and product demand, product
specifications and requirements, cost and profit data, among other
information, usually are evaluated through projections and average
patterns, which are far from being known with complete accuracy.

 Therefore, it is often significant to determine how sensitive the optimal
solution is to changes in those quantities, and how the optimal solution
varies when actual experience deviates from the values used in the
original model.

b) Dynamic Considerations

 Instead of getting merely a static solution to the problem, it is usually
desirable to obtain at least some appreciation for a dynamic situation.

c) Input Errors

 An inquiry is made to test how errors have been committed in the
original formulation of the problem that may affect the optimal solution.

 It is sometimes necessary to evaluate the impact on the objective
function of introducing new variables or new constraints into the
problem.

 Good linear-programming codes provide several means of obtaining
pertinent information about the impact of these changes with a
minimum of extra computational work.

E) Testing and implementing the Solution

The solution should be tested fully to ensure that the model clearly represents
the real situation.

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When testing is complete, the model can be implemented.

Implementation usually means solving the model with real data to arrive at a
decision or set of decisions.

SENSITIVITY ANALYSIS
 A sensitivity analysis guides an analyst through the varying impacts of
the particular component or variable on the model or the plan or the
budget
 Whenever the plan is formulated or a model constructed or a budget
document is prepared, many assumptions underlie such activity. These
activities are time bound and also involve time consuming exercises.
They are prepared normally ahead of a particular deadline for
implementation.
 So, it is possible that some of the key assumptions may undergo a
change to near efflux of time. So, it is always prudent to quantify the
impact of such assumptions or variables due to their deviations from
the original quantifications.
 Sensitivity analysis is often attempted by varying one sensitive factor at
a time, other factor remaining the same and quantifies the impact on the
model or budget or plan.
 For instance, price and capacity utilization are two common factors that
are taken for sensitivity analysis. If the price of the product were to go
up, sales fall due to lowering demand. But how exactly the increments of
price per unit affect the demand or the sale will be borne out in the
sensitivity analysis.
 It becomes very important for the models as the variables can be many
and interdependencies will have to be fully understood for a meaningful
exercise. Towards this sensitivity analysis helps.

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Characteristics of Sensitivity analysis
 Sensitivity analysis is performed on the optimal solutions obtained for
the problem originally formulated by mathematical modeling.
 It is applied to analyse the sensitive factors like price and capacity
utilization.
 It is applied to quantify the impact of assumptions.
 It identifies the varying impacts of the particular component or variable
on the model

SIMULATION TECHNIQUES
A simulation model is a mathematical model that calculates the impact of
uncertain inputs and decisions. Such a model can be created by writing code
in a programming language, statements in a simulation modeling language, or
formulas in a Microsoft Excel spreadsheet
Modeler: Translates information about market dynamics (whether verbal or
otherwise) into mathematical representations that produce consistent with
what one would expect in the real world

Some examples of situations:
Modeling and simulation can be put to work in different type of situations.
Following are some examples:
 Industrial processes. How many machines, and what capabilities
should they have to complete a manufacturing process in a given
time?
 Service processes. How many employees should be allocated to
serve the customers at peak hour, if the owner wishes to provide
a service time that does not exceed one minute?
 Computer networks and the way people interact with them.
The users and procedures associated with the overall business
process in your organization can be tied in within the same model
as the computers and computer networks in place.

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 Medical disease, symptoms, and treatments. What symptoms
are characteristic of a particular illness, and how are those
symptoms linked to the severity of the disease? How well will a
particular treatment work, and when will it be most effective?

Types of simulation

There are several types of simulation as given below:

Simulation

Probabilistic simulation Discrete simulation Visual simulation

Ω Probabilistic simulation, where one or more independent variables is
conceptualized as a probability distribution of values.

Ω Discrete simulation, where it becomes important to know when an
event exactly occurs.

Ω Visual simulation is a graphical representation of computerized
results. Software for this method is one of the recent developments in
computer-human intraction and problem solving.

Advantages of Simulation Models:

Decision support systems have been increasingly using simulation models for
the following reasons
a. Simulation theory is relatively easy to comprehend.
b. Simulation can offer solutions to “what-if” type questions
c. Decision support system analysts work closely with managers who seek
solution.
d. The simulation model is built for one particular problem
e. Simulation models allow inclusion of real life complexities and no
simplifications are necessary

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Disadvantages of Simulation Models:

a. An optimal or the best solution is not always guaranteed.
b. Building simulation model is a slow and costly process.
c. Solutions and inferences from a specific simulation model cannot be
transferred for other problems.

LIMITATIONS IN MODEL BUILDING
The following are the limitations of model building.

a) Data Uncertainty
b) Input Errors
c) Need of computers with codes
d) Need of computer programmes
LIFE CYCLE MODEL
The profitability and sales of a product , in general, change over time. The
Product Life Cycle (PLC) is an attempt to recognize distinct stages in a
product's sales history. Just like human beings have different phases in his life
cycle, products too go through an. identical phase in its Product Life
Gycle(PLC).The product is first introduced in the market, Grows at a steady
rate , reaches a saturation point, then declines and finally dies out.

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I. Introduction Phase: In this phase, the product just makes its maiden
appearance with an expectation of high profitability. At this stage, the firm has
a low growth rate and low market share. It would require more capital
investment to grow at rapid rate and for capturing a higher market share.

II. Growth Phase: At this stage, the firm starts growing. The product tries to
get itself entrenched and begin to grow. The sales start picking up as early
adopters enter the market and repeat purchases also start taking place.

III. Maturity Phase: This is the longest period in the life of the product. This is
the stage, when the sales volume will be its highest level. In this stage, the
sales reach their peak level and thereafter try to stabize.

IV. Decline: This is the stage, where the sales will start declining steeply and
slowly and the product would die out. In this stage, only those firms, which
have substantial resources or a larger market share, will remain in the market.
Strategy to be adopted at different stages of Product Life Cycle :

PORTERS GENERIC STRATEGIC MODEL
Michael Porter was originally an engineer, then an economist before he
specialized in strategy.

Michael Porter has described a category scheme consisting of three general
types of strategies that are commonly used by businesses to achieve and
maintain competitive advantage.

These three generic strategies are defined along two dimensions: strategic
scope and strategic strength.

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Strategic scope is a demand-side dimension and looks at the size and
composition of the market the firm intends to target.

Strategic strength is a supply-side dimension and looks at the strength or core
competency of the firm.

In particular Porter identified two competencies that he felt were most
important: i) product differentiation and ii) product cost (efficiency).

He originally ranked each of the three dimensions (level of differentiation,
relative product cost, and scope of target market) as either low, medium, or
high, and placeed them in a three dimensional matrix. That is, the category
scheme was displayed as a 3 by 3 by 3 cube. But most of the 27 combinations
were not viable.

In his 1980 classic Competitive Strategy: Techniques for Analysing Industries
and Competitors, Porter simplifies the scheme by reducing it down to the three
best strategies. They are

1. cost leadership,
2. differentiation, and
3. Market segmentation (or focus).

Market segmentation is narrow in scope while both cost leadership and
differentiation are relatively broad in market scope.
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1. Cost Leadership Strategy (with high margins and low volumes)

This strategy involves the firm winning market share by appealing to cost-
conscious or price-sensitive customers.

This is achieved by having the lowest prices in the target market segment, or
at least the lowest price to value ratio (price compared to what customers
receive).

To succeed at offering the lowest price while still achieving profitability and a
high return on investment, the firm must be able to operate at a lower cost
than its rivals. There are three main ways to achieve this.

Way 1: Achieving a high asset turnover by spreading fixed costs over a
larger number of units of the product or service, resulting in a lower
unit cost

Way 2 : Achieving low direct and indirect operating costs by offering
high volumes of standardized products, offering basic no-frills products
and limiting customization and personalization of service.

Way 3: control over the supply/procurement chain to ensure low costs.
This could be achieved by bulk buying to enjoy quantity discounts,
squeezing suppliers on price, instituting competitive bidding for
contracts, working with vendors to keep inventories low using methods.

A cost leadership strategy may have the disadvantage of lower customer
loyalty, as price-sensitive customers will switch once a lower-priced
substitute is available. A reputation as a cost leader may also result in a
reputation for low quality, which may make it difficult for a firm to rebrand
itself or its products if it chooses to shift to a differentiation strategy in future.

2. Differentiation Strategy (with low margins and high volumes)

Differentiation is a viable strategy for earning above average returns in a
specific business by creating brand loyalty among the customers.

Brand loyalty is created by the creation of a product or services that is
perceived throughout its industry as unique.
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This specialty can be associated with design, brand image, technology,
features, dealers, network, or customers’ service.

The company or business unit may then charge a premium for its product.

Increased costs can usually be passed on to the buyers.

Buyers loyalty can also serve as an entry barrier-new firms must develop
their own distinctive competence to differentiate their products in some way
in order to compete successfully.

Examples of the successful use of a differentiation strategy are Hero Honda,
Asian Paints, HLL, Nike athletic shoes, Perstorp Bio Products, Apple Computer,
and Mercedes-Benz automobiles.

A differentiation strategy is appropriate where
 the target customer segment is not price-sensitive,
 the market is competitive or saturated,
 customers have very specific needs which are possibly under-
served, and
 the firm has unique resources and capabilities which enable it
to satisfy these needs in ways that are difficult to copy.
(Including patents or other Intellectual Property (IP), unique
technical expertise, talented personnel or innovative
processes.)

Some research does suggest that a differentiation strategy is more likely to
generate higher profits than is a low cost strategy because differentiation
creates a better entry barrier.

Disadvantages of Differentiation strategies :
higher prices will also likely result in lower sales volumes and lower
asset turnovers.

3. Focus or Strategic Scope

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It describes the scope over which the company should compete based on cost
leadership or differentiation.

The firm can choose to compete in the mass market with a broad scope, or in
a defined, focused market segment with a narrow scope. In either case, the
basis of competition will still be either cost leadership or differentiation.

In adopting a narrow focus, the company ideally focuses on a few target
markets (also called a segmentation strategy or niche strategy). These should
be distinct groups with specialized needs.

The choice of offering low prices or differentiated products/services should
depend on the needs of the selected segment and the resources and
capabilities of the firm.

A focused strategy should target market segments that are less vulnerable to
substitutes or where a competition is weakest to earn above-average return
on investment.

Examples of firm using a focus strategy include Southwest Airlines, which
provides short-haul point-to-point flights in contrast to the hub-and-spoke
model of mainstream carriers, and Family Dollar.

In adopting a broad focus scope, the principle is the same: the firm must
ascertain the needs and wants of the mass market, and compete either on
price (low cost) or differentiation (quality, brand and customization)
depending on its resources and capabilities.

Apple targets the mass market with its iPhone and iPod products, but
combines this broad scope with a differentiation strategy based on design,
branding and user experience that enables it to charge a price premium due to
the perceived unavailability of close substitutes.

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Porter’s explanation is that firms with high market share were successful
because they pursued a cost leadership strategy and firms with low market
share were successful because they used market segmentation to focus on a
small but profitable market niche. Firms in the middle were less profitable
because they did not have a viable generic strategy.

Combining a market segmentation strategy with a product differentiation
strategy is an effective way of matching a firm’s product strategy (supply side)
to the characteristics of its target market segments (demand side).

BCG MATRIX
Boston Classification: The Boston Consulting Group (BCG) have developed a
matrix, based on empirical research, which analyses products and businesses
by market share and market growth.This growth/ share matrix for the
classification of products into cash cows, Dog, rising stars and question marks
is known as the Boston Classification.

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BCG Matrix: It was developed by Boston Consulting Group .Its objective is
to help top management to identify the cash flow requirements of different
businesses in their portfolio .
3 steps involved:
 Dividing the company into SBU
 Comparing with each other by
means of matrix
 Developing strategic objectives

This matrix provides a scheme for
broadly classifying a company's
businesses according to their strategic
needs (including cash requirements).
The horizontal axis shows the relative
market share held by the various SBUs (Strategic Business Units), expressed
as a ratio of each SBU's share held by the leading competitor in its particular
market. The vertical axis depicts the growth rate of the various markets in
which the businesses compete.

Market Share

A firm, at any given time, may be comprised of several SBU's that fit into each
of the four categories shown in the above matrix. Resources are allocated to
business units according to where they are situated on the grid as follows:

Ω STARS are products or business units with a high share of a high
growth market. In short term, these require capital expenditure,
possibly in excess of the cash they generate, in order to maintain their
market position but promise high returns in the future.

Ω In due course, however, stars will become CASH COWS, with a high
share of a low-growth market. Cash Cows need very little capital
expenditure and generate high levels of cash income. .The important
strategic feature of CASH COWS are that they are generating high cash
returns, which can be used to finance the STARS (other business units).
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Ω A QUESTION MARK (sometimes called Problem Child) is a product or a
business unit in a high growth market but has a low market share. A
decision needs to be taken about whether the product justifies
considerable expenditure in the hope of increasing its market share, or
whether it should be allowed to die quietly as it was squeezed out of the
expanding market by rival products. Because, considerable expenditure
would be needed to turn a Question mark into a STAR by building up
market share, QUESTION MARKS will usually be poor cash generators
and show a negative cash flow.

Ω DOGS are products with a low share of a low growth market. They may
be ex-CASH COWS that have now fallen on hard times. DOGS should be
allowed to die or should be killed off. Although they will show only a
modest net cash flow or even a modest cash- inflow, they are cash traps,
which tie up funds and provide a poor return on investment and not
enough to achieve to organization's target rate of return.
There are also INFANTS (i.e., products in an early stage of development ) and
WAR-HORSE (i.e., products that have been CASH COWS in the past and are still
making acceptable sales and profits even now) and DODOS ( low share,
negative growth and negative cash flow).

Since the STARS are growing rapidly and have the advantage of already
having achieved a high share of the market, they provide the firm's best profit
and growth opportunities.

The BCG believes that the only two viable strategies exist for QUESTION
MARK SBUs-either growing the SBUs into a STAR or divesting.

Since DOGS hold little promise for the future and may not even pay their own
way, they are the prime candidates for divestiture.

In contrast, because of their high share positions in a low growth area, CASH
COWS are ideal for providing the funds needed to pay dividends and debts,
recover overheads and supply the funds for investment in other growth areas.

Limitations of BCG Matrix:

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The BCG matrix provides a framework for allocating resources among
different business units and allows one to compare many business units at a
glance. Howev the approach has received some negative criticism for the
following reasons: (addressed by the GE / McKinsey Matrix)

 The link between market share and profitability is questionable since
increasing market share can be very expensive.

 The approach may overemphasize high growth, since it ignores the
potential of declining markets.

 The model considers market growth rate to be a given. In practice the
firm me be able to grow the market.

E-MARKETING
E-marketing is the result of information technology applied to traditional
marketing. It evolves from the company’s overall E-business strategies and
selected business models. It’s application of a broad range of information
technologies in marketing functions, to achieve the following:

(i) Transform marketing strategies to create more customer value.
ii) More efficient planning and execution of conception, distribution,
promotion, and pricing of goods/services.
iii) Create exchanges that satisfy individual consumer and business
customer’s needs and wants.
Judy Sreauss and Raymond Frost’s E-marketing model defines E-business as a
continuous optimization of a firm’s business through digital technology.

EB = EC+BI+CRM+SCM+ERP
Where, EB is electronic business, EC is electronic commerce (to enable
buying/selling through digital technology), BI is business intelligence (for
collecting primary/secondary data or information), CRM is customer
relationship manager (to satisfy customers and build long lasting
relationship), SCM is supply chain management (to delivery of
products/services efficiently and effectively) and ERP is enterprise resource
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planning (optimization of business process and lowering costs, application of
EDI, i.e. electronic data interface).
Types of E-marketing

E-marketing is normally carried out in the following types:

i) B2B–This involves business-to-business marketing of inter-company
business done online.
ii) B2C–This involves business-to-consumer marketing, where
goods/services are directly marketed by business organizations
directly to the ultimate consumers using the Internet.
iii) C2C–This involves consumer-to-consumer marketing, where consumers
directly sell the goods/services to other consumers, using the
Internet system.

Among these types, the maximum E-marketing activities take place, and the
maximum online marketing opportunities lie in B2C where marketers sell
directly to ultimate consumers.

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Unit IV:

Prepared by

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PRODUCTION ORIENTATION Vs
MARKET ORIENTATION
I. Production Orientation:

A Production oriented business produces exciting and interesting products
and seeks to demand-supply for goods/services.

Firm focusing on a production orientation specializes in producing as much as
possible of a given product/servke. Thus this signifies a firm exploiting
economies of scale, until the minimum efficient scale is reached. It is an
approach to a business that centres its activities on producing goods most
efficiently and with cost effectiveness. Production Orientation approach may
be deployed when a high demand for a product/service exists,coupled with a
good certainty that consumer tastes do not rapidly alter. Thus, Production
Orientation is a management philosophy that emphasizes production
techniques and unit cost reduction rather than the needs and wants of the
market.

Simply stated, a Production Oriented business is said to be mainly concerned
with making as many units as possible. Here the business develops products
based on what it is good at making/ doing rather than what a customer wants.
By concentrating on producing maximum volumes, such a business aims to
maximize profitability, by exploiting the economies of scale.

II. Marketing Orientation

A Marketing Oriented approach means a business reacts to what its customer
wants . The decisions taken are based around information about customers
needs and wants.

The Marketing Orientation is perhaps the most common orientation that is
used in contemporary marketing. It involves a firm essentially basing its
marketing plans around the marketing concept and thus supplies products to
suit new consumer tastes. As an example, a firm would employ Market
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Research to gauge consumer desires, use R&D to develop a product attuned to
the revealed information and then utilize promotion techniques to ensure
persons know the product exists. A Market Oriented company is one that
organizes its activities, products and services around the needs and
requirements of its customers.

Summing up

To sum up, Production Orientation for a Product to be put on to the market is
based on the concept that customers prefer products, which are available
freely and at low cost. Put this orientation has given way with customer
driven strategy coming to the fore. Thus the market orientation stems out of
the concept that the company should be more effective than the competitors
in creating, delivering and communicating superior customer value to the
target markets.

This change in the orientation has come about mainly due to the globalization
of the market and the liberalization of economies all over the world. This has
resulted in multiple options being available to the customer and other things
being equal, the customer now articulates his own option to create a new
proctuct, as he, has become “the boss”.

Market Orientation Product Orientation
1. Demand is known first and Goods are produced first and demand
goods are produced next is created next.
2. The firm has to act according to There is no such need. It can follow
the taste and preferences of its own production plan.
consumers.
3. New products are rarely New products are frequently
introduced, when customer introduced and consumers are
wants induced through advertisement to
buy the products.
4. Competition will be high as it s a Competition will be low as it is a new
demanded product. product.
5. More effectiveness is needed. No such effectiveness is needed.
6. “ Produce what you can sell” “ Sell what you can produce”

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MARKETING OBJECTIVES
The main objectives of marketing are as follows-
1. Creation of demand : A business firm can sell goods and services only
when there is customer willing to buy them. Marketing finds out the
needs and preferences of customers. Then advertising, personal selling,
sales promotion and other methods are used to create demand and
persuade customer to buy.
2. Customer satisfaction: Modern marketing is customer oriented. All
marketing activities begin with and end with customers. The focus is on
selling satisfaction rather than selling one particular product or service.
3. Market share: Every business firm seeks to have a reasonable share of
the total demand. In a competitive market, aggressive selling efforts are
necessary to make products and services popular. Good quality goods
are offered at reasonable prices to capture a large share in the market.
4. Profitability and Growth: Marketing seeks to achieve long term goals
of profitability and growth by satisfying the wants of customers. In
order to survive and grow, a good business must create and satisfy
customers. If the customers are not satisfied, business will fail to earn
and survive. Therefore modern marketing begins and ends with
customers.
5. Goodwill: Marketing aims at building the reputation of the enterprise
over a time. The enterprise attempts to earn a name for itself and build
its position in the market by selling quality products at reasonable
prices, and through efficient after sales services. An enterprise with
good goodwill can easily survive in a competitive market so Goodwill is
one of the important objectives of marketing which can never be
neglected.
6. Standard of Living: Modern marketing aims at improving the living
standards of people by providing a wide variety of products and
services. Marketing improves the standard of living of common man by

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supplying new and better quality products. Marketing benefits the
society by creating employment opportunities.

MARKETING MIX
"Marketing Mix” refers to the apportionment of effort, the combination,
designing and integration of the elements of marketing into a programme or
mix which, on the basis of an appraisal of the market forces will best achieve
the objectives of an enterprise at a given time.

Kotler defines the marketing mix as the set of controllable variables and their
levels that the firm uses to influence the target market. Such variables are:

Product Price and
Place /distribution Promotion.

Under the 4 P's obviously quality, features, opinions, style and sizes will be
important characteristics for the product. Packaging will be irrelevant.
The P - 'Place' may be important for service back-up while promotion will
depend on trade advertising ,technical publicity and reports, service back-up
and the personal selling.
The P-'Price' will again be important, although more in the context of value for
money. Discounts and allowances will be important.
In addition, for service-there are four more P's. They are;

People
Processes and
Physical evidence.
A manufacturer of heavy commercial vehicles like say, Ashok Leyland or
Bharat Earth Movers produce for the industrial market. Here the purchase is
made by a professional buyer, who buys for use and not for personal
satisfaction.

Tatas Nano-do not claim to be the cheapest but they emphasis on quality,
reliability and long-term Credit terms may be important, although this may be
dealt with separately.
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DISTRIBUTION COSTS ANALYSIS AND CONTROL
Meaning of Distribution cost:

The term 'distribution' is widely used in relation to the whole operation of
getting goods into the hands of the consumer, and thus covers the two
functions of sales promotion and delivery. The expression 'distribution costs',
however, may be considered as relating only to delivery.

Distribution Cost:

That portion of marketing cost is indicated by distribution cost,
which is incurred for warehousing of the saleable products &
products delivery to the customers.

The cost of the process which begins with making the packed
product available for dispatch and ends with making the
reconditioned returned empty package available for re-uses.

A large part of the delivery charges are variable costs, the totals of these costs
closely following movements up or down in volume of deliveries.

Sales of 1,000 units at Rs. 10 each 10,000

Deduct:

Manufacturing Variable costs at Rs. 4 each Rs. 4,000
Distribution Variable costs at Re. 1 each Rs. 1,000
5,000
Contribution at Rs. 5 each 5,000

Deduct:

Manufacturing Fixed Cost Rs. 2,000
Distribution Fixed Costs Rs. 200 2,200
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Balance 2,800
Deduct:

Selling Cost 1,000

Profit 1,800

The major objectives of management are threefold. Management must (a)
produce and sell goods and services which are satisfactory to their customers;
(b) try to earn optimum profits and (c) try to ensure the company’s long-term
prosperity by building a strong management team, and by establishing the
best possible relation ships with customers. In considering how best to meet
these objectives, management will usually have to pay greater attention to
selling costs and distribution costs.

The relationship of distribution costs to levels of turnover is less complex. An
established business can tell within close limits what distribution costs will be
incurred in selling the usual -goods in the usual markets.

Controlling Distribution costs

For many businesses the biggest single cost of selling and distribution is that
on salaries and wages. This will include warehousemen, transport drivers,
salesmen and administrative and clerical staff. Here the primary task will be
to assess the proper number of employees required for each function, to
determine their remuneration, making allowance particularly in seasonal
trades for temporary staff and overtime.

MARKETING RESEARCH

Meaning : Marketing research is a systematic objective and exhaustive
search for and study of the facts relevant to any problem in the
field of marketing.

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It is systematic gathering, recording and analysing of data about
problems relating to the marketing of goods and services under
essentially non-recurring conditions.
Marketing Research is systematic problem analysis, model
building and fact finding for the purpose of important decision
making and control in the marketing of goods and services.

Marketing Research plays a very significant role in identifying the
needs of customers and meeting them in best possible way.

Marketing Research is essential for strategic market planning and
decision making. It helps a firm in identifying what are the market
opportunities and constraints, in developing and implementing
market strategies, and in evaluating the effectiveness of
marketing plans.

Features of Marketing Research

Salient Features or Characteristics of Marketing Research are as follows :-

1.Wide and Comprehensive Scope : Marketing research has a very
widescope. It includes product research, packaging research,
pricing research, market research, sales research, etc. It is used to
solve marketing problems and to take marketing decisions. It is
used to make marketing policies. It is also used to introduce new
products in the market and to identify new markets. Marketing
research is used to select channels of distribution, in advertising
strategy, for sales promotion measures, etc.
2.Systematic and Scientific : Marketing research is conducted in a step-by-
step manner. It is conducted in an orderly fashion. Therefore, it is
systematic. Marketing research uses scientific methods. Thus, it is
also scientific.
3.Science and Art : A Science collects knowledge (data) while an Art uses this
knowledge for solving problems. Marketing research first collects
data. It then uses this data for solving marketing problems.
Therefore, it is both, a Science and an Art.

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4.Collects and Analyses Data : Marketing research gathers data accurately
and objectively. It first collects reliable data and then analyses it
systematically and critically.
5.Continuous and Dynamic Process : The company faces marketing
problems throughout the year. So, Marketing research is
conducted continuously. It continuously collects up-to-date data
for solving the marketing problems. Large companies have their
own marketing research departments. They conduct Marketing
research continuously throughout the year. Therefore, Marketing
research is a continuous process. It is a dynamic process because
it goes on changing. It does not remain static (the same). It uses
new methods and techniques for collecting, recording and
analysing the data.
6.Tool for Decision-Making : The marketing manager has to take many
decisions. For this, he requires a lot of data. Marketing research
provides correct and up-to-date data to the marketing manager.
This helps him to take quick and correct decisions. Therefore,
Marketing research is an important tool for decision-making.
7.Benefits Company and Consumers : Marketing research is useful to the
company in many ways. It increases the sales and profits of the
company. It helps the company to fight competition and boost its
goodwill in the market. It reduces the marketing risks. In short,
Marketing research brings success to the company. It also brings
the company closer to the consumers. It gives convenience and
satisfaction to the consumers.
8.Similar to Military Intelligence : Marketing research is a commercial
intelligence-gathering activity. It works similar to military
intelligence. Marketing intelligence first makes a systematic study
and only then takes a business action. Marketing research collects
reliable data about the consumers, the competitors, the market,
etc. This data is then organised and used for planning, decision-
making and problem solving. This data is also further used for
introducing new products and services in the market.
9.Applied Research : Applied research is used for solving problems.
Marketing research is used for solving marketing problems.
Therefore, we can say that, Marketing research is also an applied
research. It has a practical value because it is used for solving
present and future problems.
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10.Connected With Marketing Information Syatem (MIS) : Marketing
research is a component of MIS. Marketing research and MIS are
interrelated. Both are used to solve marketing problems and to
take marketing decisions.
11.Reduces Gap between Producers and Consumers : Marketing research
informs producers about the needs and wants of the consumers.
The producers produce goods according to the needs and
demands of the consumers. This brings satisfaction to the
consumers and in return producers make good profits. So,
Marketing research reduces the gap between the producers and
the consumers.
12.Uses Different Methods : Marketing research uses three methods for
collecting data, viz., Survey Method, Experiment Method and
ObservationMethod. All three methods are scientific. The
researcher has to use a suitable method for collecting a reliable
data.
13.Has Few Limitations : Marketing research has few limitations too. It is not
an exact science. So, it does not give accurate results. It provides
suggestions and not solutions. It is also a costly and time-
consuming process.
14.Accurate Data Collection and Critical Analysis : Marketing research
gives much importance to accurate data collection and its critical
analysis. Thus, in a Marketing research, the data must be first
collected accurately. That is, collected data or gathered
information must be accurate, reliable and relevant. Later, this
information must be systematically and critically examined before
making any decisions.

USES OF MARKETING RESEARCH

I.Uses to the Producers
a. To know about his product potential in the market vis-à-vis the
total product;
b. New Products;
c. Various brands;
d. Pricing;
e. Market Structures and selection of product strategy, etc.

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II .Uses to the Business and Government

Marketing Research helps businesses and government in focusing attention
on the complex nature of problems faced by them. For example:

a. Determination of Gross National Product; Price indices, and per
capita income;
b. Expenditure levels and budgeting;
c. Agricultural Pricing;
d. The economic policies of Government; and
e. Operational and planning problems of business and industry.

III.Uses to theMarket Research Agencies

Marketing Research is being used extensively by professionals to help
conducting various studies in Marketing Research. Most prominent agencies
being:-

a. Linta India Ltd;
b. British Market Research Bureau (BMRB);
c. Hindustan Thompson Associate Ltd;
d. eSurveysPro.com;
e. MARG

IV. Managers : Marketing Research is useful to the managers for taking
managerial decisions.

Evaluation of Marketing Research:
Evaluation is one type of applied research. It is made for assessing the
effectiveness of social and economic programmes implemented.
Types of evaluation:
a) Concurrent evaluation c) Terminal evaluation
b) Periodic evaluation
Criteria:
i) Different from basic research- knowledge for its own sake.
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ii) Difficult to measure.
iii) Less control over research work.
iv) Problems of reliability, validity
Operationalization and Research Method are common to evaluation.
MARKETING PLANNING
Marketing planning is a logical sequence and a series of activities leading to
the setting of marketing objectives and the formulation of plans for achieving
them. It is a management process.

Need for Marketing planning
The need for marketing planning is based on three issues:
 the mix of market types;
 the mix of margins and sales; and
 the managerial reasons for a marketing plan.

Components of a marketing plan

From the diagram, the main components of a marketing plan can be
summarised as:

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Component of the plan Description

Mission statement A meaningful statement of the purpose and direction of the
business

Corporate objectives The overall business objectives that shape the marketing plan

Marketing audit The way the information for marketing planning is organised.
Assesses the situation of marketing in the business – the
products, resources, distribution methods, market shares,
competitors etc

Market analysis The markets the business is in (and targeting) – size , structure,
growth etc

SWOT analysis An assessment of the firm’s current position, showing the
strengths & weaknesses (internal factors) and opportunities
and threats (external factors)

Marketing objectives What the marketing function wants to achieve (consistent with
and strategies corporate objectives) and how it intends to do it (e.g. Ansoff,
Porter)

Marketing budget Usually a detailed budget for the next year and an outline
budget for the next 2-3 years

Action plan The detailed implementation plan

There are two outputs from the process of marketing planning: the strategic
marketing plan; and the tactical marketing plan.

Strategic and tactical marketing planning.

A distinction can be made between strategic and tactical planning: strategy is
about doing the right things; tactics are about doing things in the right way.
Survival and success, it has been realised, can only come from patient and
meticulous planning and market preparation, especially as the environment is
much more competitive, complex, fast moving, and abrasive than it ever has
been. Now, more than ever there is a need for the use of both an effective
strategy and efficient tactics.

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LINKAGE BETWEEN STRATEGIC PLANNING AND
MARKETING STRATEGY
Strategic planning: It Establishes the hierarchy of strategic intent
Creating and communicating Defining a business
vision Adopting a business mode
Designing a mission Settingobjectives
statement

Strategic planning is a broad process that can address the entire business, or a
portion of the business such as marketing. Marketing strategies derive from
strategic plans.

Marketing Strategy: It means the marketing logic by which the business
unit hopes to achieve its marketing objectives. Its processes are:
b) Internal scanning- assessing the firm’s strengths and weakness
c) Setting marketing objectives
e) Developing the function plans – elaborating the marketing strategy into
detailed plans and programmes.
LINKAGE BETWEEN STRATEGIC PLANNING AND MARKETING STRATEGY

a) Forward Linkage: A marketing strategy for a company needs to be an
integral part of a corporate strategy . The business strategy of a company
shapes the marketing strategy, which has to be developed and implemented
through functional level strategy involving superior efficiency, quality,
innovation and customer responsiveness.

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b) Backward Linkage: Data about tastes and preferences of customers are
collected through marketing activities and on the basis of collected data ,
strategies of business are planned.

UNIT V:

Prepared by
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APPLICATION OF MANAGEMENT ACCOUNTING IN
MARKETING
Marketing uses the following tools of Management Accounting to get better
results.
1. Cost volume Profit Analysis
2. Break even analysis
3. Budgetary control
They are briefly explained below:
1.Cost-Volume-Profit Analysis
Cost-Volume-Profit Analysis(CVP analysis) takes into consideration price,
sales, expenses incurred and determines the profitability of a product.

2. Break even analysis
Break even analysis - Using break even analysis a comapny analyses the sales,
expenses and profits to determine at what point the project it has invested
will start making profit.
The Break Even Calculation: The break even analysis involves identifying fixed
and variable costs and then using the product’s sell price to determine the
break even point. The calculation is

3.Budgetary Control:
It is a tool which is used to monitor and control the deviation from actual
( variance) by preparing budgets. When the actual is more than the planned ,
the variance is called Favourable. When the actual is less than the planned , it
is called Adverse.

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Remedial action will be be taken asper the results of budgetary control to
overcome the variance.

MARKETING COST ANALYSIS
Marketing Cost: Cost which is incurred for the purpose of publicizing &
presenting the product of the undertaking to the customers at an acceptable
prices & suitably attractive forms, along with all relevant research work’s
costs, the securing of order, & usually, delivery of the goods to the customers
are represented by marketing cost.
Cost of after-sale service & /or processing of order, may also be included in
certain cases.
Marketing Cost

Selling Cost Publicity Cost Distribution Cost

Selling Cost: That portion of marketing cost is indicated by selling cost,
which is incurred for the purpose of securing orders.
Publicity Cost: That portion of marketing cost is indicated by publicity
cost, which, as aids to the sale of goods or services, is incurred for the
purpose of advertising & sales promotion.
Distribution Cost: That portion of marketing cost is indicated by
distribution cost, which is incurred for warehousing of the saleable
products & products delivery to the customers.

Marketing Cost Analysis helps the business to identify costs in its marketing
mix. This analysis will determine ROI on each marketing activity, giving the
business an estimate of its efficiency in marketing activities.

Spending Smart in Marketing is the basic idea of Marketing Cost Analysis.
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PRICING POLICIES AND STRATEGIES
 Pricing policy refers how a company sets the prices of its products and
services based on costs, value, demand, and competition.

 Pricing strategy refers to how a company uses pricing to achieve its
strategic goals, such as offering lower prices to increase sales volume or
higher prices to decrease backlog.

Pricing objectives
Pricing objectives are goals that a business hopes to achieve when deciding on
the cost of its products or services.

In order to be effective, the pricing process must be connected to the overall
marketing mix. A marketing mix is known as the 4 Ps: product, price,
place/distribution and promotion. All of the decisions made on the price
points, or costs of goods or services to buyers, has to fit in with the marketing
strategy or plan that relates to the value of the product — as well as
distribution and promotion expenses.

The company has to make a profit, or a profitable return on investment (ROI),
to stay in business, yet its pricing objectives must also be competitive to
attract customers.

One type of pricing objective is to create a "buzz" (continuous humming or
murmuring sound ). For example, supplying quality grain products at low
prices to help people during an economic recession gives the new consumers
a hard-to-resist reason for buying that particular brand over competitors'
offerings. This is known as a unique selling proposition (USP).

Other more common pricing objectives involve matching techniques.Price
matching objectives must be based on a strong knowledge of competitors'
pricing, as well as the cost and overhead to the company to ensure that a good
ROI will still be made.
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I . PRICING POLICY
Pricing policy refers how a
company sets the prices of its
products and services based on
costs, value, demand, and
competition

I. COST-BASED PRICING

The traditional pricing
policy can be summarized
by the formula:

Cost + Fixed profit percentage = Selling price.

Cost-based pricing involves the determination of all fixed and variable
costs associated with a product or service.

After the total costs attributable to the product or service have been
determined, managers add a desired profit margin to each unit such as a
5 or 10 percent markup.

The goal of the cost-oriented approach is to cover all costs incurred in
producing or delivering products or services and to achieve a targeted
level of profit.

Managers study financial and accounting records to determine prices.

It does not involve examining the market or considering the
competition and other factors that might have an impact on pricing.

One problem with the cost-plus strategy is that determining a unit's cost
before its price is difficult in many industries because unit costs may
vary depending on volume.

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II. VALUE-BASED PRICING

The value of a product or service is derived from customer needs,
preferences, expectations, and financial resources as well as from
competitors' offerings.

This approach calls for managers to query customers and research the
market to determine how much they value a product or service.

In addition, managers must compare their products or services with
those of their competitors to identify their value advantages and
disadvantages.

It depends heavily on strong advertising, especially for new products or
services, in order to communicate the value of products or services to
customers and to motivate customers to pay more if necessary for the
value provided by these products or services.

III. DEMAND-BASED PRICING

Demand-oriented pricing focuses on the level of demand for a product
or service, not on the cost of materials, labor, and so forth.

According to this pricing policy, managers try to determine the amount
of products or services they can sell at different prices.

Using demand schedules, managers can figure out which production and
sales levels would be the most profitable. To determine the most
profitable production and sales levels, managers examine production
and marketing costs estimates at different sales levels.

The prices are determined by considering the cost estimates at different
sales levels and expected revenues from sales volumes associated with
projected prices.

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The success of this strategy depends on the reliability of demand
estimates.
IV. COMPETITION-BASED PRICING

With a competition-based pricing policy, a company sets its prices by
determining what other companies competing in the market charge.

A company sets it prices higher than, lower than, or on par with the
competitors based on the advantages and disadvantages of a company's
product or service as well as on the expected response by competitors
to the set price.

This pricing policy allows companies to set prices quickly with relatively
little effort, since it does not require as accurate market data as the
demand pricing.

Competitive pricing also makes distributors more receptive to a
company's products.

This pricing policy enables companies to select from a variety of
different pricing strategies to achieve their strategic goals.

If one competitor lowers its price, the others will most likely lower
theirs as well.

II.PRICING STRATEGIES
Pricing strategy refers to how a company uses pricing to achieve its strategic
goals, such as offering lower prices to increase sales volume or higher prices
to decrease backlog.

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The following are the most common pricing strategies

1) Pioneer pricing - setting the base price for a new product is a
necessary part of formulating a marketing strategy. The base price is
easily adjusted (in the absence of government price controls) and its
establishment is one of the most fundamental decisions in the
marketing mix. The base price can be set high to recover development
costs quickly or to provide a reference point for developing discount
prices to different market segments.

2) Skimming Price. –setting the highest initial price that customers really
desiring the product are willing to pay. A firm introducing a new or
innovative product can use skimming pricing, prices are lowered in a
series of steps. Demand tends to be inelastic in the introductory stage of
the product life cycle (for example, the DVD player, mobile phones).

3) Penetration Price. A penetration price is a price below the prices of
competing brands and is designed to penetrate a market and produce a
larger unit sales volume. When introducing a product, a marketer
sometimes uses a penetration price to gain a large market share quickly.

4) Prestige Pricing. In prestige pricing, prices are set at an artificially
high level to provide a prestige or quality image. Prestige pricing is
used especially when buyers associate a higher price with higher
quality. Typical product categories in which selected products are
prestige priced include perfumes, cars, alcoholic beverages, jewellery
and electrical appliances.

5) Psychological Pricing Psychological pricing encourages purchases
based on emotional rather than rational responses. It is used most often
at the retail level. Psychological pricing has limited use for industrial
products.

6) Odd-Even Pricing. By odd-even pricing – ending the price with certain
numbers (odd or even) it is generally thought that marketers are trying
to influence buyers’ perceptions of the price or the product.

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7) Price Lining Often a firm that is selling not just a single product but a
line of products may price them at a number of different specific pricing
points, which is called price lining. The basic assumption in price lining
is that the demand is inelastic for various groups or sets of products. If
the prices are attractive, customers will concentrate their purchases
without responding to slight changes in price.

8) Customary Pricing. In customary pricing, certain goods are priced
primarily on the basis of tradition.

9) Bundle Pricing A frequently used demand-oriented pricing practice is
bundle pricing – the marketing of two or more products in a single
“package” price.

10) Professional Pricing Professional pricing is used by people who have
great skill or experience in a particular field or activity (medical
services)

11) Promotional Pricing Price is an ingredient in the marketing mix, and it
is often coordinated with promotion. The two variables sometimes are
so interrelated that the pricing policy is promotion orientated.
Examples of promotional pricing include price leaders, special-event
pricing, and experience-curve pricing.

12) Cost-Plus Pricing. In cost-plus pricing, the seller’s costs are determined
(usually during a project or after a project is completed) and then a
specified amount or percentage of the cost is added to the seller’s cost to
set the price.

STRATEGIES FOR NEW AND ESTABLISHED PRODUCTS

Product pricing strategies frequently depend on the stage a product or service
is in its life cycle; that is, new products often require different pricing
strategies than established products or mature products.

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A. NEW PRODUCT PRICING STRATEGY.

Entrants often rely on pricing strategies that allow them to capture market
share quickly. When there are several competitors in a market, entrants
usually use lower pricing to change consumer spending habits and acquire
market share. To appeal to customers effectively, entrants generally
implement a simple or transparent pricing structure, which enables
customers to compare prices easily and understand that the entrants have
lower prices than established incumbent companies.

Complex pricing arrangements, however, prevent lower pricing from being a
successful strategy in that customers cannot readily compare prices with
hidden and contingent costs. The long-distance telephone market illustrates
this point; large corporations have lengthy telephone bills that include
numerous contingent costs, which depend on location, use, and service
features. Consequently, competitors in the corporate long-distance telephone
service market do not use lower pricing as the primary pricing strategy, as
they do in the consumer and small-business markets, where telephone billing
is much simpler.

B. ESTABLISHED PRODUCT PRICING STRATEGY.

Sometimes established companies need not adjust their prices at all in
response to entrants and their lower prices, because customers frequently are
willing to pay more for the products or services of an established company to
avoid perceived risks associated with switching products or services.

However, when established companies do not have this advantage, they must
implement other pricing strategies to preserve their market share and profits.
When entrants are involved, established companies sometimes attempt to
hide their actual prices by embedding them in complex prices. This tactic
makes it difficult for customers to compare prices, which is advantageous to
established companies competing with entrants that have lower prices. In
addition, established companies also may use a more complex pricing plan,
such as a two-part pricing tactic. This tactic especially benefits companies
with significant market power. Local telephone companies, for example, use
this strategy, charging both fixed and per-minute charges.
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BUDGETARY CONTROL IN MARKETING
Budget:

A Budget is a financial plan of action normally covering a specific time
period, say six months or one year.

A budget will describe expected levels of expenditure and revenues of a
business.

Large businesses will prepare budgets on a departmental basis or in
relation to business functions.

A business will have an overall budget based upon the budgets of
departments such as marketing, purchasing, personnel, and capital
expenditure etc.

All budgets should be objective driven.

Marketing budget
Ω Marketing Budget is one of the 3 main functional budgets of business (
the other two are : Production budget and Financial Budget) and each is
dependent upon the objectives of the business.

Ω In Marketing Budget, both revenues and costs are combined. Revenues
from sales predicted and costs from operating the firms marketing
strategy.

The Budgeting Process
Budgeting and monitoring of budgets is an ongoing procedure in large
businesses.
i) Setting of goals.
ii) Measurement of actual.

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iii) Comparing the standard with the actual.
iv) Taking the difference or variance if any
v) Remedial action may be taken in future.
vi) Using the knowledge and experience for next budget

Benefits of Budgeting
The budgeting process has important benefits for a business. These benefits
include:

Improves management control of the organisation. Managers know who
is spending what, and why they are spending the money

Improves financial control of the organisation. Part of the budgeting
process is monitoring of expenditure and revenues. Any changes from
(variances from) budgeted amounts need to be explained and reacted
too.

Allows managers to be aware of their responsibilities.

Budgeting ensures, or should ensure, that limited resources are used
where most effective to help achieve the firms objectives.

Budgeting can motivate managers. When managers at all levels are
involved in the budgeting process they will have a commitment to
ensuring that budgets are met.

Budgeting can improve communication systems within organisation
both up and down the hierarchy .

Problems with Setting Budgets.
The budgeting process can cause problems. These include.

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Those excluded from the budgeting process, may not be committed to
the budgets and may feel demotivated.

If budgets are inflexible then changes in the market or other conditions
may not be met by appropriate changes in the budget, e.g. if a
competitor starts a major new advertising campaign, and the marketing
budget does not allow for a response to this, sales are likely to be lost.

Also an effective budget can only be based on good quality information.
Many managers overstate their budgetary needs to protect their
departments; this leads to lack of control and poor allocation of
resources.

Budgetary Control.
The basis of budgetary control is variance analysis. A variance is any
unplanned change from the budgeted figure.

Variances can be Favourable (F) or Adverse (A). A favourable variance occurs
when expenditure is less than expected or revenues are higher than expected.
An adverse variance occurs when expenditures are higher than expected, or
revenues are lower than expected.

Budgets must be monitored for variances, so that they can be reacted to.
Because each budget has a budget holder (the person responsible for the
budget), then responsibility for variances can be traced to the right person,
and that person should be able to explain why the variance has occurred.

There can be valid reasons for variances, such as price increases of raw
materials, or increased sales.

Calculation of Variances.
Calculation of variances is relatively simple. The actual figure must be
compared with the budgeted figure and the difference shown as either
Favourable (F), or Adverse (A). These variances should then be totalled, to
gain an overall Favourable (F) or Adverse (A) figure.

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Budgeted Actual Variance

Sales Revenue 1,63,000 179,000 16,000 (F)
Raw Materials 73,000 81,000 8,000 (A)
Labour 41,000 43,000 2,000 (A)
Total Variance 6,000 (F)

ESSENTIALS OF A SOUND BUDGETARY CONTROL:

1. Budgeting, or the process of preparing the budget, should be the
starting point for budgetary control.
2. Budgets pertaining to each function to all the relevant sections with in
the organization should be distributed
3. Actual data pertaining to all budgeted activitiesshould be collected.
4. Continuous comparison of actual performance with budgeted
performance to be made.
5. Analysis of variances in actual performance and budgetedperformance
to be made.
6. Initiation of corrective action to ensure that actual performance is in
line with budgeted performance to be taken.
7. Revision of budgeted to be done if it is felt that the budgets prepared are
nolonger relevant on account of unforeseen developments.

EVALUATION AND CONTROL OF SALES ACTIVITIES
Sales activities are made for selling the product or for the purpose of securing
orders.

Sales activities include
1. Advertising
2. Sales Promotion.

ADVERTISING
Advertising is within the scope of promotion which is one element in
the marketing mix .

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Advertising is the art of influencing human action and awakening of a
desire to possess products and services. It is a mass persuasion activity
duly sponsored by the manufacturer, retailer, or dealer for whom the
advertising is done.

Features of Advertising

Advertising has certain basic features. The important ones are:

i). Paid form: Advertising is always a paid form of communication and hence
commercial in nature..

ii). Non-personal presentation: Advertising is a non-personal in nature and
it is always directed to a mass audience rather than to any individual.
iii). Promoting and selling ideas, goods and services: The scope of
advertising is wide and it is designed to sell not only goods but services (
banking, insurance)and ideas also.

iv). Identified sponsor: Advertising always has an identified sponsor. In
other words, advertising discloses or identifies the source of the opinions and
ideas it presents.

v). Inform and persuade: Advertising usually informs the potential
consumer about products and services, their benefits and utilities. It also
persuades the consumers to purchase such products and services.

vi). Target oriented : This selection of a specific market is called target
market. Advertising becomes effective and result oriented when it is target
oriented. The waste in advertising can be minimized through such target
oriented advertising

Objectives / preposes of Advertising

The following are the basic objectives of advertising
To give information
To attract attention
To create awareness
To influence the buying behavior of consumers.
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Advantages of Advertising
The advantages of advertising can be divided into two main groups. One
group denotes benefits to manufactures and other group denotes benefit to
consumers.

I. Benefits of Advertising to Manufacturers

EnsuresLarge scale production and marketing
Helps to Introduce new products
Creates new demand
Supports and supplements personal selling.
Builds brand image
Reduces cost of production.
Helps to face competition
Facilitates background for Sales
Builds Goodwill

II. Benefits of Advertising to Consumers

Gives information and guidance
Acts as reminder
Announces offers of producers
Raises living
Ensures effective product use
Removes misunderstanding about certain products/ services.

Advertising Strategy
While undertaking advertising campaign or while organising an advertising
programme for products concerned company has to take certain decisions
and adjust the advertising activity accordingly. Such advertising decision-
making is a five-step process consisting of mission, money, message, media
and measurement. They are called Five Ms of Advertising . An advertiser has
to take decisions on these following 5 Ms:

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1) Mission : This refers to the purpose/objective behind advertising.
They include sales promotion, information and guidance to consumers,
developing brand loyalty, market goodwill, facing market competition
effectively, making the products popular/successful and introduction of
a new product. Decision in regard to mission is a basic one as other
decisions are to be adjusted as per the mission or objective or purpose
of advertising decided.

2) Money : It means the budget allocation made by the company for
advertising. Effectiveness of advertising, media used, coverage of
advertising, etc. are related to the funds provided for advertising
purpose. Advertising should be always within the limits of funds
provided. Naturally, decisions on advertising package should be
adjusted as per the budget allocation for advertising.

3) Message : The message is given through written words, pictures,
slogans and so on. The message is for the information, guidance and
motivation of prospective buyers. Attractive and meaningful messages
give positive results and the advertising becomes result-oriented.

4) Media : The advertiser has to take decision about the media to be used
for advertising purpose. Media differ as regards cost, coverage,
effectiveness and so on. The selection of media depends on the budget
provided, products to be advertised, and features of prospective buyers
and so on. Wrong decision on media may make advertising ineffective

5) Measure : Measure relates to the effectiveness of advertising. An
advertiser has to measure the effectiveness of his advertisement
programme/ campaign and take suitable decisions. Such testing
facilitates introduction of suitable remedial measures, if required.

Selecting advertising media

Advertising media have their special features, merits, limitations and
suitability. An advertiser has to consider his advertising budget and select the
most appropriate advertising media and use them for advertising purpose.The
major steps in media selection are:
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i. Deciding on reach, frequency, and impact;
ii. Choosing among major media types;
iii. Selecting specific media vehicles;
iv. Deciding on media timing

Evaluation of Advertising
The advertising program should evaluate both the communication effects and
the sales effects of advertising regularly.

Measuring the communication effects of an advertisement copy testing tells
whether the advertisement is communicating well.
Copy testing can be done before or after an advertisement is printed or
broadcast. Beforethe advertisement is placed, the advertiser can show it to
consumers, ask how they like it, and measure recall orattitude changes
resulting from it. After the advertisement is run, the advertiser can measure
how the advertisement affected consumer recall or product awareness,
knowledge, and preference.
The sales effects of advertising are often harder to measure than the
communication effects. Sales are affected by many factors besides advertising
such as product features, price, and availability.

Advertising agencies

Most large advertising agencies have the staff and resources to handle all
phases of an advertising campaign for their clients, from creating a marketing
plan to developing advertisement campaigns and preparing, placing, and
evaluating advertisements.
Agencies usually have four departments:
a) Creative department, whichdevelops and produces advertisements;
b) Media department, which selects media and places advertisements;
c) Research department, which studies audience characteristics and
wants; and
d) Business department, which handles the agency's business activities.

Each account is supervised by an account executive, and people in each
department are usually assigned to work on one or more accounts.

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SALES PROMOTION
Sales promotion consists of short-term incentives to encourage the
purchase or sale of a productor service.

Sales promotions offer the customer extra value in return for purchases

Advertising and personal selling offer reasons to buy a product or
service, but sales promotion offers reasons to buy now.

Sales promotions are usually used together with advertising or personal
selling.

Salespromotion plays an important role in the total promotion mix and
it is viewed as an effective short-run sales tool.

Contributing factors to the rapid growth of sales promotion

Internal factor : Product managers face greater pressures to increase their
current sales.
External factors : Thecompany faces more competition and competing brands
are less differentiated. Increasingly,competitors are using
sales promotion to help differentiate their offers.

Advertising efficiency has declined because of rising costs,
media clutter, and legal restraints.

Consumers have become more deal oriented and retailers
are demanding more deals from manufacturers.

Process of Sales Promotion:
The following are the steps involved in sales promotion.
Defining the sales promotion objectives,
Selecting the best tools,
Designing the sales promotion program,
Implementing the program, and
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Evaluating the results.
Evaluating

Implementing the program

Designing the sales promotion program

Selecting the best tools
Defining the sales promotion objectives,

Objectives of Sales Promotion

Ω Increasing short-term sales
Ω building long-term market share.
Ω Getting retailers to carry new items and more inventories,
Ω Getting retailers to advertise the product
Ω Getting the retailers to buy ahead.
Ω Getting more sales force support for current or new products
Ω Getting sales people to sign up new accounts.

Sales Promotion Tools
The following tools can be used to accomplish sales promotion objectives.

sales promotion tools

Consumer promotion trade promotion business promotion
tools tools tools

a) Consumer Promotion Tools: The main consumer promotion tools
include samples, coupons, cash refunds ( getting refund by sending
proof of purchase), price packs ( rduction in regular price), premiums
(goods offered either free or at low cost), advertising specialties (useful
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articles imprinted with an advertiser's name given as gifts to
consumers), patronage rewards (awards offered for the regular use),
point-of-purchase displays (displays, signs, and posters) and
demonstrations, contests, sweepstakes (calls for consumers to submit
their names for a drawing), and games.

b) Trade promotion tools: These tools can persuade resellers to carry a
brand, give it shelf space, promote it inadvertising, and push it to
consumers. Manufacturers offer price-offs, allowances, buy-back
guarantees, or free goods to retailers and wholesalers. Many of the tools
used for consumer promotions (contests, premiums, displays ) can also
be used as trade promotions. Manufacturers may give retailers free
specialty advertising items that carry the company's name, such as pens,
pencils, calendars,paperweights, matchbooks, memo pads, and
yardsticks

c) Business Promotion Tools : Business promotion includes many of the
same tools used for consumer or trade promotions. In addition, there
are two major business promotion tools (i) conventions and trade
shows ( to reach many prospects not reached through sales forces ) and
(ii) sales contests for sales people or dealers

Evaluation of Sales Promotion

1) Evaluation through Comparison:

Manufacturers can use one of many evaluation methods.The most
common method is to compare sales before, during, and after a
promotion.

Suppose a company has a 6 percent market share before the promotion,
which jumps to 10 percent during the promotion, falls to 5 percent right
after, and rises to 7 percent later on. The promotion seems to have
attracted new triers and more buying from current customers.

After the promotion, sales fell as consumers used up their inventories.
The long-run rise to 7 percent means that the company gained some
new users. If the brand's share had returned to the old level, then the
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promotion would have changed only the timing of demand rather than
the total demand.

2).Evaluation through consumer research:

Consumer research would also show the kinds of people who responded
to the promotion and what they did after it ended.

3).Evaluation through surveys

Surveys can provide information on how many consumers recall the
promotion, what they thought of it, how many took advantage of it, and
how it affected their buying.

4).Evaluation through experiments:

Sales promotions also can be evaluated through experiments that vary
factors such as incentive value, length, and distribution method.

Uses of Sales Promotion
Sales promotion tools are effective for the organizations in different aspects .
It
Introduces new products
Makins existing customers to buy more
Attracst new customers
Combats (to reduce or prevent) competition
Maintains sales in off season
Increases retail inventories
Ties in advertising and personal selling
Enhances personal selling efforts.

Limitations of sales promotion
Sales promotions have certain limitations as well .

It cannot reverse declining sales trend
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It cannot overcome inferior product
It may encourage competitive retaliation
It may hurt profit.

Differences between Advertising and Sales Promotion:
ADVERTISING SALES PROMOTION
Offer it offers reasons to buy a offers incentive to the consumers to
product or service. buy the product or service now
Time Time-frame is long term Time frame is short term.
frame
Primary to create an enduring brand To get sales quickly or to induce
objective image. trial.
Type of Indirect approach towards Direct approach to induce
approach persuading customers to consumers to buy a product or
buy a product or service. service immediately by temporarily
changing the existing price-value
relationship of the product or
service

CONTRIBUTION ANALYSIS
The profit contribution involves taking the product’s sell price and deducting
variable costs (Contribution = Selling Price – Varibale Cost ). The profit
contribution is important because it determines the cumulative profit of each
additional unit sold. In essence, each unit’s profit contribution is added to the
previous contribution total, until the company reaches break even.
The profit contribution is an important part of the break even analysis.
Because, Companies use the analysis in order to define the conditions for
profit and Loss on a Product Line. Break even analysis will focus on a
product’s profit contribution, sometimes called its “unit contribution”.
Break even analysis - Using break even analysis a comapny analyses the sales,
expenses and profits to determine at what point the project it has invested
will start making profit.

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The Break Even Calculation: The break even analysis involves identifying fixed
and variable costs and then using the product’s sell price to determine the
break even point. The calculation is

All companies must understand their product’s profit contribution. It helps to
distinguish those parameters that lead to profit and helps a company
determine whether a given product line has a long-term future.

PROFITABILITY ANALYSIS
An analysis of cost and revenue of the firm which determines whether or not
the firm is profiting is known as profitability analysis.
Profitability analysis leads to the firm discovering the areas where it is
profitable and where it is not.
Profitability analysis, helps to identify cost effective product mix, refine
pricing strategies to improve profits.
Cost-Volume-Profit Analysis(CVP analysis) takes into consideration price,
sales, expenses incurred and determines the profitability of a product.
It can help the firm decide where it can lower the cost and where it can
increase value.
The motive of a business is to earn profits and profitability analysis helps the
firm achieve the same aim.

Criteria of Profitability analysis
Profitability analysis mainly has a focus on three criteria
1) Customer profitability analysis (CPA) – Which calculates revenue
coming from customers less all costs
2) Customer product profitability analysis – This equation helps calculate
the profitability per product and per customer.
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3) Increasing company profitability – which increases the competitive
advantage of a company
4) Implementing TQM – which increases the total quality. Because,
Profitability of the firm also depends on its ability to continuously
improve its products and processes

PRODUCT RATIONALIZATION
Product line rationalization is a powerful technique to improve profits, free
valuable resources, and simplify operations and supply chains.
It does this by rationalizing existing product lines to eliminate or outsource
products and product variations that are problem prone, don’t "fit" into a
flexible environment, have low sales, have excessive overhead demands, are
not really appreciated by customers, have limited future potential, may really
be losing money.
Product line rationalization encourages companies to focus on their best
products by eliminating or outsourcing the marginal products. The resources
that were being wasted on the low-leverage products can then be focused on
growing the "cash cows."

Example:

All companies experience some Pareto effect, typically with 80% of profits or
sales coming from the best 20% of the products. If a company kept the 20% of
the product line that was making 80% of the profits, and dropped the other
80% of the product line, it would result in only a 20% drop in revenue.

However, dropping 80% of the worst products would eliminate 80% or more
of overhead and distribution costs . If overhead and distribution costs are half
of total cost (as is quite common), eliminating 80% of those costs will cut total
costs in half. If profits were originally 10%, dropping revenue by 20% and
cutting costs in half would result in over three times the profit.

The Rationalization Procedure

The actual procedure divides the product line in to four zones:
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Zone I: The least profitable products would be dropped.
Zone II: Products that need to be in the catalog would be outsourced, thus
simplifying the supply chain and manufacturing operations.
Zone III: The cash-cows would remain and
Zone IV: the balance would be improved with a better focus in product
development, operations, and marketing. Because these products
no longer need to subsidize the "losers," they can now sell for less.

The combination of better focus and lower overhead changes will soon
restore the "lost" revenue from the dropped products.

Benefits of Product Rationalization:
Increases profits by avoiding the manufacture of products that have low
profit

Improves operational flexibility .

Simplifies Supply Chain Management by eliminating the products with
unusual parts and materials.

Frees up valuable resources to improve operations and quality,

Implements better product development practices.

Improves quality

Focuses on most profitable products. Focusing on the most profitable
products can increase growth

Protects most profitable products from "cherry picking" (launching a
competitive attack on the most profitable products).

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PRODUCT REVAMPING
Product Revamping means ‘giving a new and improved form, structure, or
appearance to an existing product ‘.

Small companies revamp their products all the time by means of new
packaging, different features and updated designs and functions.

Revamping is done to appeal to a new audience or to put an updated look on a
mature product. Major revamps should be done only when there is a
compelling reason for change that results in a tangible benefit for the
company.

Objectives of product Revamping:
Product Revamping may be done for the following reasons.

to add or update benefits or features
to demonstrate to consumers the company’s willingness to fix known
problems.
To eliminate a Poor Image about the product and reposition the product
in the minds of consumers.
to justify a higher price tag
to appeal to the consumer’s cost-saving nature.

PRODUCT ELIMINATION
Ω The decision of a business firm to phase out or to drop a weak product
is called product elimination.
Ω To maintain an effective product mix, a firm sometimes has to get rid of
some products.
Ω A weak product costs the firm financially. In addition, too much of a
marketer's time and resources are spent trying to revive it. This, in turn,
reduces the time and resources available for modifying other products
or developing new ones.
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Ω When a weak product generates unfavorable images among customers,
the negative ideas may rub off onto some of the firm's other products.
Ω When a product reaches the stage where continued support can no
longer be justified because its performance falls short of expectations, it
is desirable to pull the product out.
Reasons for poor performance of a product are notorious and may be any of
the following:
(1) Low profitability
(2) Stagnant or declining sales volume or market share which would be
too costly to build up
(3) Risks of technological obsolescence
(4) Entry into a mature or declining phase of the product life cycle
(5) Poor fit with the company's strengths or declared mission.

Approaches availbale for Product Elimination:
Basically there are 3 approaches availbale for deleting a product. They are :
1. Phase-out approach
2. Run out Policy
3. Immediate Drop decision.
1) Phase-out approach : A phase-out approach lets the product decline
without changing the marketing strategy. No attempt is made to give the
product new life.
2) Run out Policy : A runout policy exploits any strengths left in the
product. By increasing marketing efforts in core markets or by
eliminating some marketing expenditures such as advertising, the
product may provide a sudden spurt of profits. This approach is often
used for technologically obsolete products. Often the price is reduced to
get a sales spurt before the product inventory is depleted.
3) Immediate Drop decision: An immediate drop decision results in
sudden termination of an unprofitable product. This strategy is
appropriate when losses are too great to prolong the life of a product.

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Product-elimination strategy
The two alternatives in the product-elimination strategy are
1. Line simplification and
2. Total-line divestment.
1) Line-simplification strategy refers to a situation where a product line
is trimmed to a manageable size by pruning (reducing) the number and
variety of products or services being offered. This is a defensive strategy
which is adopted to keep the falling line stable. It is hoped that the
simplification effort will help in restoring the health of the line. This
strategy becomes especially relevant during times of rising costs and
resource shortages.
Benefits of Line simplification: It can lead to a variety of benefits:
potential cost savings from longer production runs; reduced
inventories; and a more forceful concentration of marketing, research
and development (R & D), and other efforts behind a shorter list of
products. A company with an extensive line could trim costs and add to
revenues by cutting a specified percentage of the varieties being offered.
A well-implemented program of product simplification can lead to both
growth and profitability. It may, however, be done at the cost of market
share.
2) Divestment is a situation of reverse acquisition. It is the action or
process of selling off subsidiary business interests or investments
Divestment means negative growth in sales and assets, which runs
counter to the business ethic of expansion.
Divestment can improve the return on investment and growth rate both
by ridding the company of units which are growing more slowly than
the basic business and by providing cash for investment in faster-
growing, higher-return operations.

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EVALUATION OF RESEARCH INFORMATION
Evaluating sources of information is an important step in any research
activity. Because all research information are not valid, useful, or accurate. In
order to evaluate the research information, certain techniques are used.
The important one among these techniques is Bayes theorem.

BAYES' THEOREM
Bayes' Theorem is a theorem of probability theory originally stated by the
Reverend Thomas Bayes.
It can be seen as a way of understanding how the probability that a theory is
true is affected by a new piece of evidence.
It has been used in a wide variety of contexts, ranging from marine biology to
the development of "Bayesian" spam blockers for email systems.
The notation of the theorem and terminology involved are given below:

In this formula, T stands for a theory or hypothesis that we are interested in
testing, and E represents a new piece of evidence that seems to confirm or
disconfirm the theory.
P(T|E) represents the probability assigned to T after taking into account the
new piece of evidence, E. To calculate this we need, in addition to the prior
probability P(T), two further conditional probabilities indicating how
probable our piece of evidence is depending on whether our theory is or is not
true. We can represent these as P(E|T) and P(E|~T), where ~T is the negation
of T, i.e. the proposition that T is false.

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No.of Page(s): 1 Exam .No. of
the Candidates
S3PK3
THIAGARAJAR COLLEGE (AUTONOMOUS), MADURAI-9
M.F.C.Degreee Examinatin, NOVEMBAER 2011
III SEMESTER SUMMATIVE EXAMINATIONS
Time: 3 Hours. Maximum: 75 Marks

SECTION- A ( 5 X 5 = 25 Marks)
Answer ALL questions

1. a) Explain the concept of environment.
(OR)
b) What is private sector investments?

2. a) What is corporate planning?
(OR)
b) What is profit growth strategy?

3. a) Briefly describe Delphi model
(OR)
b) Explain simulation techniques.

4. a) Write short note on pricing
(OR)
b) Comment on advertisement.

5. a) Give an account of product line.
(OR)
b) What is Marketing Research information?

SECTION – B ( 5 X 10 = 50 Marks)
Answer any FIVE questions.

6. Explain social, political ,legal and technological impact of planning environment.
7. Explain in detail “ SWOT” analysis
8. Give the effect of life cycle in the business strategy.
9. Discuss the various forms of merger and acquisition.
10. Describe sensitivity analysis.
11. Explain the frame work and management of marketing mix.
12. Illustrate the pricing strategies followed in marketing.
13. Determine the objectives and strategies of sales promotion.

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the Candidates
S3PK3
M.F.C. Degree Examination, NOVEMBER 2010


1. a) Describe Strategic Management
(OR)
b) What is public sector investment?

2. a) Envisage: Business Policy.
(OR)
b) What is strategic Planning? .

3. a) Enumerate Diversification Strategy.
(OR)
b) What is “ Expansion Strategy?”

4. a) List out the limitations of model building.
(OR)
b) Describe BCG matrix.

5. a) What is meant by sales promotion? Is it different from Advertisement?
(OR)
b) What is Marketing Research?


6. Explain the role of government in controlling inflation
7. Point out the strategy of Joint venture
8. Explain in detail “ SWOT” analysis
9. Bring out the details of marketing strategy
10. Briefly point out the strategies in the development of models.
11. Give a detailed account of the basic objectives of marketing.
12. How will you evaluate the marketing research?
13. Explain the Budgetary control in marketing.

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MANAGEMENT ACCOUNTING AND STRATEGIC
MANAGEMENT – II MFC
SCHEME OF VALUATION
November 2010
----------------------------------------------------------------------------------------------------
Section A ( 5 x 5 =25 marks)
----------------------------------------------------------------------------------------------------

1) a) Strategic Management deals with decision making and actions
which determine an enterprise’s ability to excel , survive or due by
making the best use of a firm’s resources in a dynamic environment.

1) b) Public sector investment: Any investment in government
securities i.e., bonds, assets, debentures, shares, it is called public sector
investment ( purely safety, gilt-edged securities )

2)a) Business Policy : Strategic management is generally considered as
the process of formulating, implementing and evaluating strategies for a
organization, business policy is usually considered
o as a academic field of study
o as area of specialization
o as specifically named course related to strategic management.

2)b) Strategic planning: Establishing the hierarchy of strategic intent
a. Creating and communicating vision
b. Designing a mission statement
c. Defining a business
d. Adopting a business mode
e. Setting objectives
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3)a) Diversification strategy: It involves a simultaneous departure from
current business . Firms choose diversification when the growth
objectives are very high and it could not be achieved with in the existing
product market scope.

3)b) Expansion strategy: It is followed when an organization aims at
high growth by substantially broadening the scope of one or more of its
businesses in terms of their respective customer group , customer
functions. It is followed to improve its overall performance.
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4)a) Limitations of Model building: any five points ,five marks.

4)b) BCG Matrix: It was developed by Boston Consulting Group .Its
objective is to help top management to identify the cash flow
requirements of different businesses in their portfolio .
3 steps:
o Dividing the company into SBU
o Comparing with each other by means of matrix
o Developing strategic objectives
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5)a) Sales promotion: It means marketing activities other than personal
selling , advertising and publicity that stimulate consumer purchasing
and dealer effectiveness such as display shows, expositions,
demonstrations and various non-recurrent selling efforts not in the
ordinary routine.

5)b) Marketing Research: Marketing research is a systematic objective
and exhaustive search for and study of the facts relevant to any problem
in the field of marketing.
It is systematic gathering, recording and analysing of data about
problems relating to the marketing of goods and services under
essentially non-recurring conditions.

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Section B ( 5 x 10 =50 marks)
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6) Role of government in controlling inflation:
Inflation – 2 marks, Causes - 2 marks
Preventive or controlling measures – 6 marks
a) Limit the money supply
b) Fixation of fair price
c) Implements of various rules and laws to control money supply.

7) Strategy of Joint venture:
In Joint venture, the domestic company and a foreign company enter
into 50:50 agreement in which both of them take 50% of ownership
stake and operating control is shared between team of managers drawn
from both companies.
It involves technology collaboration, so the company may lose control
over its proprietory technology.

8) SWOT Analysis:
It comes under situation analysis. SWOT means Strengths, Weakness,
Opportunities and Threats. It results in identification of Competitive
distinctive Competencies.
Opportunities that are not exploited fully due to shortage of resources.
An opportunity may not have any value, unless the firm has a capacity to
exploit the opportunity.

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9) Marketing Strategy:
It means the marketing logic by which the business unit hopes to
achieve its marketing objectives.
b) Internal scanning- Process of assessing the firm’s strengths and
weakness and identifying its core competencies and competitive
advantages.
c) Setting marketing objectives – to provide clear cut direction to the
business regarding its future course of action.
e) Developing the function plans – elaborating the marketing strategy
into detailed plans and programmes.

10) Strategies in the development of Models:
Models – meaning (2 marks)
a) Delphi Model
b) Econometric model
c) Mathematical programming, Budgeting and heuristic model
d) BCG Matrix. - (Brief of all points, give 7 marks).

11) Basic objectives of marketing:
From economic point of view, marketing is that part of economics which
deals with the creation of time, place and the possession utilities.
Intelligent and Capable application of modern marketing policies.
To develop the marketing field.

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To develop guiding policies and their implementation for a good
result.
To suggest solutions by studying the problems relating to
marketing.
To revive marketing functions
To take appropriate actions in the course of action.

12) Evaluation of Marketing Research:
Evaluation is one type of applied research. It is made for assessing the
effectiveness of social and economic programmes implemented.
Types of evaluation:

a) Concurrent evaluation

b) Periodic evaluation

c) Terminal evaluation

Criteria:

i) Different from basic research- knowledge for its own sake.

ii) Difficult to measure.

iii) Less control over research work.

iv) Problems of reliability, validity
Operationalization and Research Method are common to evaluation.

13) Budgetory control in marketing:
i) Setting of goals.
ii) Measurement of actual.
iii) Compare the standard with the actual.
iv) Take the difference or variance if any
v) Remedial action may be taken in future.

132


the Candidates
S3PK3


1. a) Enumerate the factors affecting environmental appraisal
(OR)
b) Explain the techniques of forecasting.

2. a) Enlist the limitations of strategic management.
(OR)
b) Explain the different types of expansion strategies?.

3. a) Briefly describe the Michael E.Porter’s Five force model.
(OR)
b) Explain the stages in the development of Kaizen-feian approach

4. a) Evaluate the features of marketing planning.
(OR)
b) Explain in detail the limitations of marketing research.

5. a) How can main goals in pricing be classified?
(OR)
b) Explain the features of advertising.


6. Describe the process of using environmental analysis.
7. Discuss the role of strategic management.
8. Critically evaluate the strategies followed by an MNC familiar to you.
9. Explain the strategic management model.
10. Discuss the marketing planning process.
11. Explain in detail the objectives of marketing research.
12. Dsecribe the essentials for a sound system of budgetary control.
13. Discuss different kinds of sales promotion.

133


the Candidates
S3PK3


1. a) What aspects does environmental appraisal deal with?
(OR)
b) Explain the importance of Environmental change.

2. a) Why the Diversification Strategies adopted?
(OR)
b) Point out the reasons for Merger.

3. a) Describe the charecteristics of Sensitivity analysis.
(OR)
b) What are the factors influencing portflio strategy.

4. a) Distinguish between product orientation and market orientation
(OR)
b) Describe the forces affecting the marketing mix.

5. a) How does a pricing strategy differ from pricing policy?
(OR)
b) Evaluate the importance of management accounting in markting.


Answer ALL questions.

6. a) Discuss the socio-cultural environment to be studied in the process of planning
environment economics.
(OR)
b) Analyse the role of Government in controlling inflation.

7. a) How can a SWOT analysis help in shortlisting strategic alternatives?
(OR)

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b) Highlight the role of planning system in strategy implementation.

8. a) Describe the variuos cells discussed in BCG Matrix
(OR)
b) Evaluate the different model building and models.

9. a) Describe briefly the different methods of marketing research. What factors determine
the choice of a suitable method of marketing resarch?
(OR)
b) What do you mean by marketing strategy ? Explain the factors to be considered while
formulating overall marketing strategy.

10. a) “ Advertising is unethical as it tends to dominate the buyer in exercising his own
judgement about product utility” – comment.
(OR)
b) Explain the scientific process of deceloping a new product. What are the reasons that
contribute to the failure of a new product?

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135

Strategic management

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