2. Objectives
Objectives of this lecture is to understand how the profitability difference between two firms
could be explained based on difference in characteristics of their product markets and what
business policies a firm could adopt to maintain its advantageous positions in its product
market.
DR. BHUMIKA ACHHNANI 2
3. Two approach to business strategy
Market Driven Strategy:
Resource Driven Strategy:
◦ Fundamental Difference between the two - What explains the high difference in profitability between
two companies ?
DR. BHUMIKA ACHHNANI 3
4. DR. BHUMIKA ACHHNANI 4
Business Strategy: Two options
Factor market Product market
Company
5. Market Driven Strategy
The main reasons for difference in profitability is due to their doing business in two different
industries.
Product market characteristics are the principal driver for profit.
The principal contention here is that in the long run all organizations operating in an industry
will have very similar production and marketing infrastructure and they are going to earn long
run profitability corresponding to that industry. This long run profitability of an industry
depend on a few characteristics of the industry.
DR. BHUMIKA ACHHNANI 5
6. Long run conditions of Factor and
Product Markets
Homogeneous Heterogeneous
DR. BHUMIKA ACHHNANI 6
Factor market Product market
Company
7. Formulation of Market Driven Strategy
The framing of a company strategy may involve the following five critical steps:
1. Understanding company vision, mission and objectives.
2. Analyzing the environmental factors.
3. Identifying company competitive positions.
4. Assessing company capabilities.
5. Examining the strategic option available.
DR. BHUMIKA ACHHNANI 7
8. Understanding Company Vision, Mission,
and Objectives
Organisational vision expresses the company’s long-term goal.
The company’s mission statement provides the purpose for which it exists and what it would
like to do in the future. The mission statement gives a broad parameter within which the
company would like to restrict its activities.
A company’s statement of objectives sets a general guideline to its managers and other
employees as to how they should work and what they should work for to reach its long-term
destination as described in its vision statement.
DR. BHUMIKA ACHHNANI 8
9. Analyzing the Environmental Factors
Due to lack of control over the evolution of environmental forces, one may accept them as it
is and look for opportunities and threats posed by them to take up an advantageous position.
This environmental scanning could be done at different stages. These are explained as
follows:
◦ Auditing of environmental influences
◦ Identifying the Dynamism of Environmental Forces
◦ Mapping the structure of the industry.
DR. BHUMIKA ACHHNANI 9
10. Industry Profitability
Because of certain industry specific characteristics some industries are more profitable than
others;
Porter’s five forces:
Entry barrier;
Power of suppliers;
Power of buyers;
Scope of substitutions;
Rivalry among existing players.
DR. BHUMIKA ACHHNANI 10
11. Entry Barrier
How easy is it for a new player to enter my business space?
• This barrier could be due to:
◦ Requirement of large financial capital,
◦ Large land area;
◦ Proprietary right over mineral deposits; technology
◦ Restrictions by Government
DR. BHUMIKA ACHHNANI 11
12. Examples of breached entry barriers:
◦ Electric fan industry was a part of large-scale manufacturing in 1960’s and 1970’s.
Now, it is part of small-scale business.
◦ Utility companies providing electricity to metro cities.
DR. BHUMIKA ACHHNANI 12
13. Power of Suppliers
When a manufacturer buys a lot of its manufacturing requirements from a single supplier it can
be vulnerable to supplier’s strategic moves or failures.
Example: In 2006, Steel Authority of India (SAIL) went for acquiring coal mines overseas because
it wanted to insulate itself from the irregular coal supply from Coal India.
DR. BHUMIKA ACHHNANI 13
14. Power of Buyer
When a large part of a company’s output is sold to only one or a few buyers,
it can be vulnerable to strategic intents of the buyers.
Examples: NTPC sells a lot of its power outputs to State Electricity Boards
(SEB). But most SEB’s are poor pay masters. SEB’s sickness was affecting the
health of NTPC quite badly.
Burn Standard and Company Ltd, Braithwaite and Co Ltd and Jessop
Construction Ltd were faithful suppliers of wagons to Indian Railway for
many years. After economic liberalization, Indian Railway went for more
diversified suppliers that led to sickness of those loyal wagon suppliers of
1960’s and 1970’s!
DR. BHUMIKA ACHHNANI 14
15. Threat of Substitutes
How easy is it for an existing competitor to come out with a substitute product that you have
just launched as an innovation?
Example: During the later part of last century Indian pharmaceutical industry had lots of
medicinal formulations with very similar therapeutic values. This affected serious investment in
development of drugs in India.
DR. BHUMIKA ACHHNANI 15
16. Rivalry Among Existing Players
How many players are operating in the industry and how keenly are they watching each other?
High rivalry among the players will make them to go for excessive expenditure on product
promotion and customer relations raising to their annual operating cost which ultimately is likely
to cut into their actual profits
E.g.: Coke and Pepsi
DR. BHUMIKA ACHHNANI 16
17. Identifying Company Competitive
Positions
Environmental analysis is a static analysis which specifies the market position of the existing
players in a particular industry.
One can analyze the market position of a company from two angles:
i. How the total market size of a product and related product is changing with time and
ii. Which group of products it belongs to.
DR. BHUMIKA ACHHNANI 17
18. The second set of analysis called strategic group analysis is focused on
identifying the real competitors.
Even if an industry’s structural analysis indicates good entry barrier and high
profitability yet due to slow market growth, a new player may run out of
working capital due to slow rate of income.
DR. BHUMIKA ACHHNANI 18
19. Assessing Company Capabilities
How successful a company would be in exploiting the opportunities provided by a growing
demand of the product and increasing size of its customers base would solely depend on its
internal capabilities, functional strengths, and weaknesses.
Organisational capability analysis is the assessment of this internal resource strengths of a
company.
The analysis is of three types:
1. Resource Positions
2. Company Internal Value Chain
3. Efficiency in Resource Allocation
DR. BHUMIKA ACHHNANI 19
20. Resource Positions
Organisational resources could be classified into two broad categories:
◦ tangible resources, e.g., physical infrastructure assets, inventories of raw material and unsold goods,
financial assets etc.
◦ Intangible resources, e.g., human resource competencies, reputation, good will, patent rights, social
relations with important economic agents etc.
DR. BHUMIKA ACHHNANI 20
21. Company Internal Value Chain
The idea of the value chain is based on the process view of organizations, the idea of seeing a
manufacturing (or service) organization as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve
the acquisition and consumption of resources - money, labor, materials, equipment, buildings,
land, administration and management. How value chain activities are carried out determines
costs and affects profits.
DR. BHUMIKA ACHHNANI 21
22. Most organizations engage in hundreds, even thousands, of activities in the process of
converting inputs to outputs. These activities can be classified generally as either primary or
support activities that all businesses must undertake in some form.
According to Porter (1985), the primary activities are:
◦ Inbound Logistics - involve relationships with suppliers and include all the activities required to
receive, store, and disseminate inputs.
◦ Operations - are all the activities required to transform inputs into outputs (products and services).
DR. BHUMIKA ACHHNANI 22
23. ◦ Outbound Logistics - include all the activities required to collect, store, and distribute the output.
◦ Marketing and Sales - activities inform buyers about products and services, induce buyers to purchase
them, and facilitate their purchase.
◦ Service - includes all the activities required to keep the product or service working effectively for the
buyer after it is sold and delivered.
DR. BHUMIKA ACHHNANI 23
24. Secondary activities are:
◦ Procurement - is the acquisition of inputs, or resources, for the firm.
◦ Human Resource management - consists of all activities involved in recruiting, hiring, training,
developing, compensating and (if necessary) dismissing or laying off personnel.
◦ Technological Development - pertains to the equipment, hardware, software, procedures and technical
knowledge brought to bear in the firm's transformation of inputs into outputs.
◦ Infrastructure - serves the company's needs and ties its various parts together, it consists of functions
or departments such as accounting, legal, finance, planning, public affairs, government relations,
quality assurance and general management.
DR. BHUMIKA ACHHNANI 24
26. Efficiency in Resource Allocation or Product
Portfolio Analysis
By company value chain analysis, an organization knows the various functions
and activities by which it is ahead of its competitors.
A product portfolio analysis tries to relate the resource deployment in different
products and services, and the business results over a period.
When a company is producing a range of products, it is necessary to ascertain
the revenue earning potential of each product, for this one must look at the life
cycle phase of each product.
DR. BHUMIKA ACHHNANI 26
27. BCG suggested that both current market share of a company product or services and the
revenue growth rate on account of the same product be used as tools to analyze an
organisation’s efficiency in terms of resource allocation.
DR. BHUMIKA ACHHNANI 27
28. THE BCG GROWTH-SHARE MATRIX
It is a portfolio planning model which is based on the observation that a
company’s business units can be classified in to four categories:
Stars
Question marks
Cash cows
Dogs
It is based on the combination of market growth and market share relative to the
next best competitor.
DR. BHUMIKA ACHHNANI 28
30. STARS
High growth, High market share
Stars are leaders in business.
They also require heavy investment, to maintain its large market share.
It leads to large amount of cash consumption and cash generation.
DR. BHUMIKA ACHHNANI 30
31. CASH COWS
Low growth , High market share
They are foundation of the company and often the stars of yesterday.
They generate more cash than required.
They extract the profits by investing as little cash as possible
They are located in an industry that is mature, not growing or declining.
DR. BHUMIKA ACHHNANI 31
32. DOGS
Low growth, Low market share
Dogs are the cash traps.
Dogs do not have potential to bring in much cash.
Number of dogs in the company should be minimized.
Business is situated at a declining stage.
DR. BHUMIKA ACHHNANI 32
33. QUESTION MARKS
High growth , Low market share
Most businesses start of as question marks.
They will absorb great amounts of cash if the market share remains unchanged, (low).
Why question marks?
Question marks have potential to become star and eventually cash cow but can also
become a dog.
Investments should be high for question marks.
DR. BHUMIKA ACHHNANI 33
34. Strategic Options: Generic Strategies
Cost Leadership: When product from all manufacturers appear same to the customers, then
every manufacturer will try to capture the market by selling at the lowest cost.
Example: primary education, basic banking or health care service for common citizens. In
2006, there was craze among Indian Cement manufacturers for captive power plant because
power from state grid cost Rs 3.5 to Rs 4.5 per KWH while that from captive power plant the
cost is Rs 2.75 to Rs3.5 per kwh.
DR. BHUMIKA ACHHNANI 34
35. Differentiation: When the product has many special characteristics, a
manufacturer may try to do business with those customers who like those
characteristics more than other characteristics.
Example: Maruti, Indica and Honda City are all cars, but Maruti is known for
its fuel efficiency, Indica was known for its suspension and Honda City is
known for its looks! And there are different people who prefer these
characteristics of a car.
DR. BHUMIKA ACHHNANI 35
36. Focus: Instead of segmenting the total market based on product characteristics, this
strategy is based on segmentation of the product market based on geography location,
customer income, education, industry etc. A manufacturer will do business in one of the
other market.
Example: Newspapers in Kolkata. There are English papers The Telegraph, The Statesman,
the Times of India and a few others;
Then there are Bengali newspapers e.g., Anandabazar Patrika, Barthaman, Satyayug then
there are Hindi news papers e.g., Sanmarg.
Do you think all of them give the same headline for their respective papers? Most likely not.
They are different because they are catering to the news appetite of different markets.
DR. BHUMIKA ACHHNANI 36
37. Key learning
Product markets are heterogeneous. Different companies choose to do their businesses in
different product markets.
Different product markets can be broadly classified into different industries.
Profitability of an industry depend on presence of entry barrier, power of suppliers, power of
buyers, threat of substitutes and rivalry among the existing players.
A business organizations may choose to adopt any one of the three generic strategies viz. cost
leadership, differentiation and focus.
DR. BHUMIKA ACHHNANI 37
