MG – UNIVERSITY KOTTYAM BBA PROGRAMME (CBCS) SEMESTER – 6

SUBJECT CODE – BA6CRT29

SUBJECT – STRATEGIC MANAGEMENT

MODULE – 4 STRATEGY IMPLEMENTATION

Strategy implementation is defined as: "Strategy implementation may be said to consist of securing resources,
organizing these resources and directing the use of these resources within and outside the organization."
Strategy implementation is the process of putting organizations various strategies into action by setting annual
or short term objectives, allocating resources, developing programmes, policies, structures, functional strategies
etc. even the best strategic plans will be useless it is implemented properly.

NATURE / CHATRACTERISTICS OF STRATEGY IMPLEMENTATION

1. Action-Orientation:

Strategy implementation involves managerial actions. Managers use knowledge, skills and managerial
techniques for putting strategies into action. The intellectual and theoretical content of strategy formulation is
converted into practical or operational shape through strategy implementation.

2. Integrated Process:

The different phases of strategy implementation are not standalone tasks. They are inter-related and form an
interconnected network. Strategic plan is the hub of this network.

3. Comprehensive:

Strategy implementation comprises practically every aspect of an organization. It includes a wide range of
functions and activities. All functional areas finance, marketing, production/operations, human resources - are
involved in the implementation of corporate strategies.

4. Variety of skills:

Due to its comprehensive nature, strategy implementation requires a wide variety of skills, knowledge and
attitudes. Ability to communicate and explain strategies, ability to allocate resources judiciously ability to
design effective structure and systems, ability to develop right functional strategies, right leadership styles are
some of these skills.

5. Widespread Involvement:

Strategy implementation requires involvement of managers at all levels of authority Middle managers must
properly understand the strategies and they must get them executed through managers at the operating level.

STEPS IN STRATREGY IMPLEMENTATION

1. Institutionalization of strategy: This is the first step involved in activating the strategy. It involves two
aspects

(a) Communication of Strategy: Once the strategy formulated, it must be communicated to those people who
would implement it. Strategy communication is a process of transferring the strategy information from the
formulators to the implementers. (b) Securing acceptance of strategy: It is not enough to communicate the
strategy to the members of organizations, but it is equally important to secure their acceptance of the strategy, so
that they implement the strategy effectively.

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2. Formulation of Action plans and programmes: Once the strategy is institutionalized through its
communication and acceptance, the management proceeds to formulate action plans and programmes.

(a) Action Plans: The management has to frame actions plans in respect of several activities required to
implement a strategy. The action plan may be in respect of purchasing new machinery, appointing additional
personnel, developing a new process, etc.

(b) Programmes: The manager must also decide about the programmes in respect of the strategy. A programme
is a single use plan designed to accomplish a specific objective. It clearly indicates the steps to be taken, the
resources to be used, and the time period within which the task is to be completed.

3. Translating General Objectives into Specific Objectives: The top management frames the general
objectives. In order to make these objective operative, functional managers must set specific objectives within
the framework of the general objectives.

(a) The specific objectives must be realistic, achievable and time bound. The specific objectives must be set
in such a way that the performance can be easily measured and evaluated.

(b) The specific objective should contribute to the accomplishment of general objectives, So all the
functional department like production, marketing finance etc., should set such specific objectives which
are in line with the general objectives of the organization. Further, every individual employee should have
his own set of objectives in line with his departmental objectives.

4. Resource allocation: For successful implementation of strategy, there must be proper resource allocation to
various units and activities. The resources can be broadly classified into 3 groups; Financial resources, Physical
resources, Human resources

5. Procedural Requirements: An organization must follow various procedural requirements to implement the
strategy. The various procedural requirements may include the following, if applicable;

a) Licensing requirements

b) Import and export requirements

c) Foreign exchange Management Act, 2000 requirements

d) Monopolies and Restrictive Trade Practices Act, 1969

e) Labour legislations

f) Securities and Exchange Board of India requirements

g) Foreign Collaborations requirements etc.

6. The structural implementation: The structural implementation of strategy involves designing of the
organization structure and interlinking various units and sub units of the organization.

7. Functional implementation: Functional implementation deals with the development of policies and plans in
different areas of functions which an organization undertakes. The major functions of the organization include:
Production, Marketing, Finance, Personnel

8. Behavioural implementation: Behavioural implementation deals with those aspects of strategy

implementation that have impact on behaviour of people in the organizations. Since human resources form an
inter part of the organization, their activities and behaviour need to be directed in a certain way.

9. Monitoring and Control: Monitoring and evaluating the strategy implementation process as a whole is
essential ensure that the implemented strategy is working property .Control focuses on all the activities involved

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in strategic implementation in order to examine that all steps of the strategy implementation process are
appropriate and compatible.

Difference between Strategy Formulation and Strategy Implementation

Strategy Formulation Strategy Implementation

Strategy Formulation includes planning and decision- Strategy Implementation involves all those means
making involved in developing organization's strategic related to executing the strategic plans.
goals and plans.
In short, Strategy Formulation is placing the Forces In short, Strategy Implementation is managing forces
before the action. during the action.
Strategy Formulation is an Entrepreneurial activity Strategic Implementation is mainly an Administrative
based on strategic decision-making. Task based on strategic and operational decisions.
Strategy Formulation emphasizes on effectiveness. Strategy efficiency on Implementation emphasizes.
Strategy Formulation is a rational process. Strategy Implementation is basically an operational
process.
Strategy Formulation requires co-ordination among Strategy Implementation requires co-ordination among
few individuals. many individuals
Strategy Formulation requires a great deal of Strategy Implementation requires specific
Initiative and logical skills. Motivational and leader ship traits.
Strategic Formulation precedes Strategy Strategy Implementation follows Strategy
Implementation. Formulation.

Barriers to Strategy Implementation

1. Vague or Poor Strategy:

In some cases, the chosen strategy cannot be implemented because it is vague or defective. The strategy has to
be clear and concrete. Vaguely formulated strategies are difficult to implement.

2. Lack of Commitment:

When the employees are not fully committed to the chosen strategy, it cannot be implemented successfully.

3. Ineffective Management:

Inadequate leadership, incompetent administration, ill-defined tasks, inability to manage change are all signs of
poor management Managers are often trained to plan and not to execute the plans. Strategy implementation is a
time-consuming process and requires the involvement of all. Top managers are often lack the patience and
aptitude needed for execution of strategies.

4. Resistance to Change:

A new or modified strategy usually requires major changes in the organization. In case the changes are resisted
by the employees, implementation of strategies is likely to be unsuccessful.

5. Poor Communication:

Strategies need to be communicated and explained so that those who are to implement understand and accept
them. Poor or inadequate information sharing, unclear responsibilities, poor comprehension of roles are the
major hurdles in successful implementation.

6. Poor Resources:

Lack of financial and physical resources is an important problem in implementation of strategies. Quantity,
quality and timely availability of the resources are essential for the successful implementation of strategies

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7. Other Threats:

Internal and external factors may work against the organisation's power structure. These factors or elements may
have vested interests in making strategies unsuccessful.

Organizational Structure

An organizational structure is a system that outlines how certain activities are directed in order to achieve the
goals of an organization. These activities can include rules, roles, and responsibilities. The organizational
structure also determines how information flows between levels within the company.

A successful organizational structure defines each employee's job and how it fits within the overall system. Put
simply, the organizational structure lays out who does what so the company can meet its objectives. This
structuring provides a company with a visual representation of how it is shaped and how it can best move
forward in achieving its goals. Organizational structures are normally illustrated in some sort of chart or diagram
like a pyramid, where the most powerful members of the organization sit at the top, while those with the least
amount of power are at the bottom.

INTERRELATIONSHIP BETWEEN STRATEGY AND STRUCTURE

There is a close interdependence between strategy and structure. This interdependence is both forward and
backward.

1. Forward Relationship: Effective implementation of strategy requires a suitable organizational structure

According to Chandler "structure follows strategy “.Growth strategy requires a different structure than stability
strategy. Organizational structure is not an end itself but a means for strategy implementation. Therefore, an
organisation's structure should be such that it enables effective implementation of the chosen strategy. When
there is a significant change in the strategy, the structure has to be redesigned.

2. Backward Relationship: Structure also influences strategy. Structural considerations affect the
implementation of present strategy and the formulation of future strategies.

Change in Strategy Require Change in Structure

Structure should be designed to facilitate the strategic pursuit of the firm. Hence, structure follows strategy.
When a firm changes its strategy, the existing organizational structure may become ineffective in terms of too
many management levels, too large a span of control, less focus on achievement of objectives, new focus on
meetings and paper work and too much attention directed towards solving inter-departmental conflicts. Changes
in strategy often require changes in structure due to the following reasons:

1. Planning: Structures largely dictate how objectives and policies will been established. Thus changes in
strategy often require changes in structure.

2. Resource Allocation: Structure dictates how resources will be allocated if an organization's structure is based
on customer groups, then resources will be allocated in that manner. If an organization's structure indicates.
Functional business lines, then resources are allocated according to functional areas.

3. Match: A competitive advantage is created when there is a proper match between strategy and structure.
Ineffective strategy/ structure matches may result in company failure.

4. Efficiency: Companies must be flexible, innovative and creative if they are to develop their core
competencies. Companies must maintain a certain degree of stability in their structures so that day- to-day tasks
can be completed efficiently.

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5. Decision Making: Useful information contributes to the formation and use of effective structures and
controls, which provides improved decision making to implement and manage the formulated strategies. Thus,
there is a two-way reciprocal relationship between strategy and structure. Structural implementation is in fact an
on-going process of matching the structure of an organisation with its strategy. Whenever there is a mismatch
between the two, changes in structure have to be made. Otherwise strategy implementation becomes difficult
and performance suffers.

Benefits of a Good Organizational Structure

The following are some of the beneficial outcomes of optimally designed organizational structure

1. A good organizational structure facilitates attainment of objectives through proper co-ordination of all
activities. It has a built-in system of 'checks and balances', so that the progress towards attainment of objectives
is evaluated along the way and any required adjustments can be made and any new decisions can be taken.

2. In a good organizational structure, the conflicts between individuals are kept to a minimum. Sine each person
is assigned a particular job to perform, the responsibility of performing that job rests solely with him.

3. It eliminates overlapping and duplication of work. Sine a good organizational structure requires that the duties
be clearly defined and assigned, the duplication of work is eliminated.

4. It facilitates promotion of personnel. Since the organizational chart in a well structured organization clearly
pinpoints the positions of the individuals relative to one another, it is easier to know as to which level a person
has reached at any given time in the organization hierarchy. Furthermore, since each job is well described in
terms of qualifications, skills and duties, the promotional stages can be more clearly established.

5. Communication is easier at all levels of hierarchy. Since the lines of communication and flow of authority are
clearly identified on the organizational chart, the inter communication is clearer and easier to understand and
hence, it eliminates ambiguity.

6. A well structured organization provides a sound basis for effective planning. Since the goals are clearly
established and resources are clearly identified, both short term as well as strategic planning becomes more
focused and realistic.

7. It results in increased co-operation and a sense of pride among members of the organization. Since the
authority and the extent of exercise of such authority is known, it develops a sense of independence among
employees which in turn is highly morale boosting.

Matching Structure with Strategy

The steps that can be taken to match organisation structure with the strategy are given below:

1. Identify Key Activities: The functions and tasks essential for execution of strategy are pinpointed. For
example, strict cost control is a key task in case of cost leadership strategy.

2. Understanding Interrelationship Among Activities: The strategic relationship among the critical,
supportive and routine activities should be analysed. Activities may be related through the flow of material,
production process, type of customers served etc. Geographical location may help in grouping or regrouping of
activities during organizational redesigning.

3. Grouping Activities into Units: The critical activities should be used as the main building blocks in
structuring the organization. The role and power of key groups should be duly recognized. Adequate resources
should be allocated to critical activities.

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4. Deciding Degree of Authority: Strategies are implemented by managers at different levels. Enough authority
should be delegated to them. But activities and organizational units with a crucial role in strategy
implementation process should not be subordinate to routine and non-key activities.

5. Coordination among Units: Coordination among different organizational units is essential to ensure that
these do not work at cross purposes but supplement efforts of one another.

Steps to Build the Organisations Structure

Every organisation is to some extent unique - the result of its past, its resources and its situation. In addition, the
key factors for success and the major strategies chosen by whatever process will depend on the situation at that
time. It is difficult to specify clear and unambiguous rules to translate strategy into organizational structures and
people processes. Thomson and Strickland recommend five useful steps that will assist this process but they
caution against certainty:

1. Identify the tasks and people that are crucial to strategy implementation.

2. Consider how such tasks and people relate to the existing activities and routines of the organisation.

3. Use key factors for success to identify the chief areas around which the organisation needs to be built.

4. Assess the levels of authority needed to implement the identified strategies.

5. Agree the levels of co-ordination between the units in the organisation necessary to achieve the strategy.

TYPES OF ORGANIZATIONAL STRUCTURES

There are seven basic types of organizational structures:

1. Simple structure

2. Functional structure

3. Divisional structure

4. SBU structure

5. Matrix structure

6. Network structure

7. Virtual structure

1. Simple Organizational Structure

In this structure, the owner-manager controls all activities and makes all the decisions. This structure may be
appropriate for small and young organizations. Coordination of tasks is done through direct supervision. The
responsibility of strategy formation is solely with the owner – manager and the success is contingent upon the
calibre he possesses

Advantages of Simple organizational structure:

1) Since there is only one decision maker, the decisions are taken faster.

2) Quick and timely on the spot decisions are taken depending on the environmental changes and competition

3) These firms are very simple in nature.

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Disadvantages of Simple organizational structure:

1) Since the owner has to do nearly everything including taking decisions his time can be demanded by almost
everyone. He concentrates so much on day-to-day activities that major expansion decisions are left pending

2) When the owner is on holiday or such the firms’ operations usually fall due to lack of supervision. Excessive
reliance on the owner.

3) Future expansion only depends on the owner's ability to invest money.

2. Functional Organizational Structure

The organizational structure is functional type divided into various departments such as finance, marketing,
personnel and production. There can be further departmentalization such as area wise, process wise product
wise, etc. depending upon the size and business operations. The strategies is adopted may range from stability to
expansion. The functional structure is commonly found in small companies and also in large companies with
single product line or narrow product ranges.

Advantages of Functional Organizational Structure:

1) The day to routine work is delegated to people, thus the owner/chief executive can concentrate on strategic
business decisions.

2) Efficient distribution of work through specialization. Hence work is done faster.

Disadvantages of Functional Organizational Structure:

1) Co-ordination between different departments is difficult.

2) Line and staff departments usually conflicts.

3) It is likely that the senior managers, confined mostly to their own functions, may neglect strategic issues.

[Link] Organizational Structure

Under this structure, divisions are formed on the basis of products, markets, distribution channels or
geographical areas. All divisions are independent of each other and have their products or markets different
from each other. Each division has its own functional personnel organized into departments. Divisions formulate
the implement strategies on their own consultation with the CEO. This structure is more suitable for firms that
have unrelated products and markets.

Advantages of Divisional Organizational Structure:

1) This structure encourages the grouping of various functions which are required for the performance of
activities with respect to a particular division.

2) Here the top management can concentrate on strategic business policies and decisions while the day-to-day
operations are conducted by those in the lower rung of the ladder.

3) This structure generates quick response environmental changes affecting the businesses of different divisions.

Disadvantages of Divisional Organizational Structure:

1) Company overheads increase duplication of work in each unit is also there.

2) Policy inconsistencies between the different divisions.

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4. Strategic Business Unit (SBU) Organizational Structure

Under this structure, divisions that have some commonality between them in terms of products or markets or
manufacturing or selling are placed in one group called strategic business unit. Such divisions usually have
similar opportunities and threats and may foster strategy formulation and implementation. A new position is
created to oversee the management of the strategic business units at a level higher than the divisional managers
and reporting to the CEO.

The advantages of SBU are:

1) Establishes co-ordination between divisions having common strategic interests.

2) Facilitates strategic management and control of large, diverse organizations.

3) Fixes accountability at very distinct business units.

The Disadvantages are:

1) There are too many different SBU s to handle affectively in a large diverse organization.

2) Difficulty in assigning responsibility and defining autonomy for SBU heads.

3) By adding another layer of management it means it takes longer to take a corporate decision

5. Matrix Organizational Structure

The matrix structure, which is a combination of structures, has, therefore, become popular. Matrix organization
provides for dual channels of authority (vertical from the functional managers and horizontal from the project
managers), performance responsibility, evaluation and control. Under this structure the departmental heads have
functional responsibility for all projects or programmes while the project managers have project responsibility
for implementing strategy.

The structure is suitable for firms that have various projects or programs to be pursued simultaneously.

Advantages

1) Individual specialists are assigned where their talent is needed most.

2) Fosters creativity because of pooling of diverse talents.

3) Provides good exposure to specialists in general management.

Disadvantage

1) Dual accountability creates confusion and thus difficulty to individual team members.

2) This system is costly and conflictual.

3) There are questions about where authority and responsibility should reside. Shared authority creates
communication problem.

4) Requires a high level of vertical and horizontal co-ordination.

6. Network Structure

A network organisation outsources or subcontracts man of its major functions to separate companies and
coordinates their activities from a small headquarters. Rather than being housed under one roof, activities like
design, manufacturing, marketing, distribution etc. are outsourced to separate organisations that are connected

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electronically to the central dice. For example, Athletic shoe companies like Nike and Reebok have outsourced
manufacturing of their shoes to countries such as China and Indonesia, where labour costs are low. What Nike
or Reebok does is the design and marketing of shoes.

Advantages

1) Network structure is truly global. It can draw on resources worldwide to achieve the best quality and price.

2) It has work force flexibility and challenge.

3) Reduced administrative overhead.

Disadvantages

1) No hands-on control. managers have to rely on contracts, coordination, and electronics linkage to hold thing
together

2) If a subcontractor fails to deliver or goes out of business, the headquarters organisation will be temporarily
out of business

3) Employee loyalty can weaken, because they may feel they can be replaced by contract services.

7. Virtual Organisation

This is an extension of the network structure. In this approach, independent organisations form temporary
alliances to exploit specific opportunities, and then disband when their objectives are met. The term virtual
means "being in effect but not actually so". The virtual organisations consist of a network of independent
companies – suppliers, customers or even competitors linked together to share skills, costs markets and rewards.
The members of a virtual organisation pool and share the knowledge and expertise of each other.

Advantages

1) It can draw on expertise worldwide.

2) It is highly flexible and responsive.

3) It reduces overhead costs.

Disadvantages

1) Lack of control because the boundaries of a virtual organisation are weak and ambiguous.

2) Virtual teams place new demands on managers, who have to work with new people, new ideas and new
problems.

3) Virtual organisation poses communication difficulties, and managers may lose motivation.

CORPORATE CULTURE

Every company has a culture which exercises considerable influence on the behaviour of its managers and
employees. According to Charles O'Reilly, "organizational culture is the set of assumptions, beliefs, values
and norms that are shared by an organisation's members."

A company's culture is manifested in the values and business principles that management preaches and
practices. An organisation culture is similar to an individual's personality. Just as an individual's personality
influences the behaviour of an individual, the shared assumptions (beliefs and assumptions) among a firm's
members influence the opinions and actions within the firm.

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TYPES OF CULTURES

Strong vs Weak Cultures

Some cultures are strongly embedded, while others are weak or fragmented cultures. Strong culture companies
have a well-defined corporate character, values and behavioral norms which are so deeply rooted in them that it
is hard to change them.

In contrast to strong culture companies, weak culture companies are fragmented in the sense that no one set of
values is consistently preached or widely shares. They typically lack any deeply felt sense of identity or
corporate character.

Unhealthy vs Adaptive Cultures

Unhealthy cultures are characterized by self -serving politics, resistance to change, and inward focus. They are
often precursors to declining company performance.

In adaptive cultures, work climate is receptive to new ideas experimentation, innovation, new strategies, and
practices. An adaptive culture is an advantage, especially in fast changing business environment, because
employees are receptive to risk taking, experimentation, innovation, etc.

Dominant vs Sub-cultures

In seeking to understand the relationship between culture and strategy, it may be possible to identify some
aspects of culture that pervade the whole organisation which we call the dominant culture. However, there may
also be important sub cultures within the organisations. For example, there may be sub-cultures in different
geographical divisions of a multi-national company or in different functional groups such as finance, marketing
and operations.

IMPACT OF CULTURE

Corporate culture provides the framework within which the behaviour of people takes place. It influences
strategy implementation in several ways:

1. Decision-making:

Culture affects the way managers take decisions about the company's relationship with its environment and
strategy.

2. Resistance to Change:

A strong culture facilitates smooth implementation of strategy by reducing resistance to change

3. Communication and Control:

Strong corporate culture facilitates communication and control in the organization.

4. Co-operation and Commitment:

In a strong culture, members of the organization have a high sense of identity, and a high degree of loyalty and
commitment.

5. Innovation:

Organisations with a strong culture are relatively creative and entrepreneurial

6. Work Ethics:

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Culture determines the ethical standards of an organization and its members. In a healthy culture employees
consider work as worship' and work hard.

7. Motivation Level: Culture determines the attitudes of people to their jobs and life. In achievement-oriented
culture, people are self-motivated.

Cultural Barriers to Strategy Implementation

Culture acts as a barrier to implementation when it does not match the organisation's strategy. For example, an
organisation with low-performing culture finds it very difficult to implement a strategy that requires high
performing culture

1. Low-Performing Culture: Rigid rules and policies, resistance to change, centralized decision- making are
the main characteristics of a low-performing culture. Organisations which operate for long in a stable
environment and captive markets tend to become complacent. When they have to change their strategies due to
significant changes in environment, they face cultural barrier. For example, telecommunications and automobile
firms operated in a competition-free market before 1985. They became complacent about product quality and
delivery schedule. After economic liberalization they suffered badly due to low-performing culture. Culture in
any organization doesn't change easily. It is formed over a mummer of years from the actions and behavior of
management and employees.

2. Cultural Diversity: When two or more companies join together, cultural diversity becomes a barrier in
strategy implementation. In case of strategic alliance and joint ventures, differences in the cultures of the
partners create problems in objective setting and in choosing the method of achieving objectives. Since
liberalization and globalization, takeovers and mergers have become very common. When the cultures of the
acquirer and acquired

Developing sound corporate Culture

In this era of cut throat competition and global business, companies need a high-performing culture. The
following guidelines are helpful in developing such culture:

1. Preserve core ideologies while allowing for change.

2. Stimulate progress through challenging objectives, purposeful evaluation, and continuous self- improvement.

3. Encourage experimentation and accept mistakes.

4. Create alignment by translating core values into goals, strategies and practices.

5. Grow new managers internally by promotion from within.

MERGERS AND ACQUISITIONS

Merger: Merger is a strategy for external growth of the organisation. A merger means an amalgamation or
integration of two or more firms. The combining firms lose their separate identities and form a new and bigger
firm. For example, ACC was created through a merger of eleven cement companies.

Benefits of Merger

1. A loss-making firm can liquidate itself through merge

2. A company whose management cannot revive it can grow by merging with a highly efficient firm.

3. A firm which has acquired a distinctive competence may not be able to manage growth beyond a certain size
may merge with another firm to sustain its growth.

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4. A firm faced with management crisis may find it beneficial to merge with another one.

Different Forms of Mergers

1. Horizontal Merger: Merger of two or more companies that are in direct competition in the same product
categories and markets. ACC is an example of horizontal integration.

2. Vertical Merger: Merger of two companies which are in different stages of the supply chain. This is also
referred to as vertical integration. For example, a footwear company combines with a leather tannery or a chain
of retail stores selling footwear.

3. Market-extension Merger: Merger of two companies that sell the same products in different markets.

4. Product-extension Merger: Merger of two companies selling different but related products in the same
market.

5. Conglomeration: It in the merger of arms that are involved in totally unrelated business activities for
example, a footwear firm may combine with an automobile firm.

Acquisitions: An acquisition is a purchase of one organization by another. When a company takes over another
to become the new owner of the target company, the purchase is called an acquisition. Unlike all mergers, all
acquisitions involve one firm purchasing another there is no exchanging of stock or consolidating as a new
company. In an acquisition, a company can buy another company with cash, stock, or a combination of the two.
In summary, "acquisition" in generally used when a larger firm absorbs a smaller firm and "merger" is used
when the combination is portrayed to be between equals.

Kinds of Acquisitions

1. Amalgamations:

The indenting companies will voluntarily go into liquidation form a new company that will take over agreed
assets and liabilities of the both at an agreed purchase consideration.

2. Takeovers:

It is a case where one company acquires another company's total or controlling interest. Subsequently, the
acquired company operates as a separate division or subsidiary. Here no firm dies but will be under the full
control of acquiring company.

3. Sale of Assets:

A company can sell its assets to another company and cease to exist. If company A sells its assets to B
Company, it is acquired and A company goes out of existence.

4. Holding Company Acquisition:

It is a quasi form of merger. It involves the acquisition of either the total o the majority of firm's share capital by
a company. The purpose is to control and manage another company.

Reasons for Merger and Acquisition

1. Reduce Competition:

One major reason for companies to combine is to eliminate competition. Acquiring a competitor is an excellent
way to improve a firm's position in the marketplace. It reduces competition and allows the acquiring firm to use
the target firm's resources and expertise.

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2. Cost Efficiency:

Due to technology and market conditions, firms may benefit from economies of scale. The general assumption
is that larger firms are more cost effective than are smaller firms.

3. Avoid Being a Takeover Target:

This is another reason that companies merge. If a firm has a large quantity of liquid assets, it becomes an
attractive takeover target because the acquiring firm can use the liquid assets to expand the business, pay off
shareholders, etc. If the targeted firm invests existing funds in a takeover, it has the effect of discouraging other
firms from targeting because it is now larger in size, and will, therefore, require a larger tender offer.

4. Improve Earnings and Reduce Sales Variability:

Improving earnings and sales stability can reduce corporate risk. If a firm has earnings or sales instability,
merging with another company may reduce or eliminate this provided the latter company is more stable. If
companies are approximately the same size and have approximately the same revenues, then by merging, they
can eliminate the seasonal instability.

5. Market and Product Line Issues:

Often mergers occur simply because one firm is in a market that the other company wants to enter. All of the
target firm's experience and resources are readily available of immediate use. This is a very common reason for
acquisitions.

6. Acquire Resources:

Firms wish to purchase the resources of other firms or to combine the resources of the two firms. These may be
tangible resources such as plant an equipment, or they may be intangible resources such as trade secrets, patents,
copy rights, leases, management and technical skills etc.

7. Cashing Out:

For a family-owned business, when the owners wish to retire, or otherwise leave the business and the next
generation is uninterested in the business, the owners may decide to sell to another firm. For purposes of
retirement or cashing out, if the deal is structured correctly, there can be significant tax savings.

8. Synergy:

Synergy popularly stated as 2 + 2 = 5 is similar to the concept of economies of scope. Economies of scope
would occur if two companies combine and the combines company was more cost efficient at both activities
because each requires the same resources and competency.

REASONS FOR FAILURE OF ACQUISITION AND MERGER

1. Integration Difficulties:

Integrating two companies following mergers and acquisition can be quite difficult Issues such as melding two
disparate corporate cultures, linking different financial and control systems, building effective financial and
control systems, building effective working relationships, etc., will come to the fore and they have to be contend
with.

2. Faulty Assumptions:

A booming stock market encourages mergers, which can spell danger. Deals done with highly rated stock as
currency appear easy and cheap, but underlying assumptions behind such deals is seriously flawed. Many top
managers try to imitate others in attempting mergers, which can be disastrous for the company.

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3. Failure to carry out effective due-diligence:

The failure to complete due-diligence often results in the acquiring firm paying excessive premiums. Due
diligence involves a thorough review by the acquirer of a target company's internal books and operations.
Transactions are often made contingent upon the resolution of the due diligence process. An effective due-
diligence process examines a large number of items in areas as diverse as those of financing the intended
transaction, differences in cultures between the two firms, tax concessions of the transaction, etc.

4. Inordinate increase in debt:

To finance acquisitions, some companies significantly raise their levels of debt. This is likely to increase the
likelihood of bankruptcy leading to downgrading of firm's credit rating.

5. Too much diversification:

The merger route can lead to strategic competitiveness and above-average returns. On the flip-side, firm's may
lose their competitive edge due to over diversification. The threshold level at which this happens varies across
companies, the reason being that different companies have different capabilities and resources that are required
to make the mergers work. Crossing these threshold limits can result in overstretching these capabilities and
resources leading to deteriorating performance.

6. Problems in making M&A work:

A McKinsey study on mergers concludes that companies often focus too narrowly on cutting costs following
mergers, without paying attention to revenues and profits. The exclusive cost- cutting focus can divert attention
from the day-to day business and poor customer service. This is the main reason for the failure of mergers to
create value for shareholders.

However, not all mergers fail. Size and global reach can be advantageous and tough managers can often squeeze
greater efficiency out of poorly run acquired companies. The success of mergers, however, depends on how
realistic the managers are and how well they can integrate the two companies without losing sight of their
existing businesses.

PORTFOLIO STRATEGY

Many companies offer more than one product, and serve more than one customer. They have a portfolio (i.e. a
basket) of products. This is a good strategy because a firm which is dependent on one product or customer runs
immense risk. Decisions on strategy, therefore, generally involve a range of products in a range of markets.
Portfolio analysis is an analytical tool which views a corporation as a basket or portfolio of products or business
units to be managed for the best possible returns. The key strategy is to produce a balanced portfolio product,
some with low risk but dull growth and some with high risk but great potential for growth and profits. This is
what we call portfolio analysis.

The aim of portfolio analysis is:

1) To analyse its current business portfolio and decide which business should receive more or less investment.

2) To develop growth strategies for adding new business to the portfolio

3) To decide which business should no longer retained

Advantages of Portfolio Analysis

1. It helps top management to evaluate the firm's businesses individually and allocate resources appropriately.

2. It raises the issue of cash flow availability for use in expansion and growth.

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3. It uses externally oriented data to supplement management's judgment.

4. The graphic aids help in better understanding and communication.

Limitations of Portfolio Analysis

1. It is not easy to define product/market segments.

2. It suggests only standard strategies that might miss opportunities or some of them can be impractical.

3. It is not always clear about what makes an industry attractive or where a product is in its life cycle.

4. It may reduce profits if they are used inappropriately.

Tools / Models of Portfolio Analysis:

Several models have been developed for the evaluation of business portfolio. These are:

1. Boston Consultancy Group Model

2. Mckinsey Portfolio Model (G E Nine Cell Matrix)

3. Profit Impact Market Strategy Model

4. Hofer's Product/Market Evolution Matrix

5. Arthur D. Little Company matrix.

BOSTON CONSULTANCY GROUP MODEL (BCG)

It is the most renowned corporate portfolio analysis tool. This model was developed by Boston Consulting
Group and hence its name is given to the model. BCG Matrix is a four celled matrix (a 2* 2 matrix). The model
consists of two axes: Market growth rate on the Y-axis and Relative market share on the X-axis.

Market growth rate is the rate of growth in primary demand for a product. Relative market share of a firm is the
ratio of the market share of the firm to that of the market leader.

According to this matrix, business could be classified as high or low according to their market growth rate and
relative market share. The market growth rate is an indicator of the attractiveness of the industry and the relative
market share is an indicator of the strength of the firm in that industry relative to its competitors.

BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis
denoting market growth rate. The four cells of this matrix have been called as stars, cash cows, question marks
and dogs. Each of these cells represents a particular type of business.

1. Stars - High Growth Rate, High Market Share: Products in this cell are called stars. They are promising
products because they have a relatively high market share and the market is growing fast. The firm should focus
on and invest in these products or business units.

The general features of stars are:

1) High growth rate means they need heavy investment

2) High market share means they have economies of scale and generate large amounts of cash

3) But they need more cash than they generate.

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The high growth rate will mean that they will need heavy investment and will therefore be cash users. Overall,
the general strategy is to take cash from the cash cows to fund stars.

2. Cash Cows - Low Growth Rate, High Market Share: As the market matures or when the market growth
rate becomes low the stars would become cash cows. Cash cows are thus, high market share businesses in slow
growth industries.

The general features of cash cows are:

1) They generate both cash and profits

2) The business is mature and needs lower levels of investment

3) Profits are transferred to support stars/question marks

4) The danger is that cash cows may become under supported and begin to lose their market. Although the
market is no longer growing, the cash cows may have a relatively high market share and bring in healthy profits.
No efforts or investments are necessary to maintain the status quo. Cash cows may however ultimately become
dogs if they lose the market share.

3. Question Marks - High Growth Rate, Low Market Share. Products in this cell are in fast growing markets but
their relative market shares are low. They are, therefore, aptly described as question marks - the company
confronts the critical question of whether to make further investments in these businesses to build up market
share or to divest and get out.

The general features of question marks are:

1) Their cash needs are high

2) But their cash generation is low

3) Organisation must decide whether to strengthen them or sell them Although their market share is relatively
small, the market for question marks is growing rapidly. Investments to create growth may yield big results in
the future, though this is far from certain.

Further investigation into how and where to invest is advised.

4. Dogs Low Growth Rate, Low Market Share, Businesses with low market share in low growth industries are
described as dogs. Dogs may produce low profits or loss. They neither generate cash nor require huge amount of
cash. Due to low market share, these business units face cost disadvantages. These business firms have weak
market share because of high costs, poor quality, ineffective marketing, etc.

The general features of dogs are:

1) They are not profit earners

2) They absorb cash

3) They are unattractive and often recommended for disposal.

Advantages of BCG Model

1. Ease of Use: This model is very easy to understand and apply. It does not involve complex calculations.

2. Need Minimal Data Collection: The data on market growth rate may be collected from sources such as
reports of planning commission, reports of agencies like Confederation of Indian Industries (CIT), publications
of Indian Statistical Office (ISO), etc. The market share of the competitors may be available from some of the

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publications stated above and a firm's own marketing intelligence. The firm's own market share is readily
available with it.

Limitations of BCG Matrix:

The BCG Matrix produces a framework for allocating resources among different business units and makes it
possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as

1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the
true nature of business may not be reflected.

2. Market is not clearly defined in this model.

3. High market share does not always leads to high profits. There are high costs also involved with high market
share.

4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and
overlooks other indicators of profitability.

5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than
cash cows sometimes.

6. This four-celled approach is considered as to be too simplistic.

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GE NINE-CELL MATRIX

In the early 1970s, the management consultant McKinsey & Co in conjunction with General Electric in the USA
developed a comprehensive portfolio planning tool. This portfolio matrix is known by alternative names such as
Spot-light Strategy Model or Business Planning Matrix.

The General Electric (GE) model was inspired by the need to develop a method of evaluating the plans of GE
different business units in order to fund the plans with the greatest potential for success and also by the need to
overcome the limitations of the BCG model.

It is plotted on a two-dimensional grid. But unlike the BCG, which classifies a business unit on only two criteria
(relative market share and market growth rate); the GE model employs composite measures in classification of
business units. SBUs are plotted against two dimensions: industry attractiveness on the Y axis and business
strength on the X axis.

Factors determining Industry Attractiveness: Industry attractiveness includes those factors that make an
industry attractive or unattractive for firms to enter. It includes:

1) Size of market

2) Rate of growth of sales and cyclic nature of business

3) Nature of competition including vulnerability to foreign competition

4) Susceptibility to technological obsolescence and new products

5) Entry conditions and social factors

6) Profitability

Factors determining Competitive Position or Business Strength: Business strength represents all those
factors that render a firm strong or weak. It includes:

1) Market Share and Capacity

2) Growth Rate

3) Location and Distribution

4) Management Skill

5) Workforce Harmony

6) Technical Excellence including Product and Process

7) Company Image

The Industry Attractiveness Index is then plotted along the Y axis and divided into low, medium and high
sectors. Correspondingly, the Competitive Position is plotted along the X axis divided into Strong, Average and
Weak segments.

The size of the circles represents the size of the relevant markets. The company's market share in each of the
business is represented by the shaded area. The position of the business in the matrix would suggest the
appropriate strategy for the business.

• Unit A with high industry attractiveness and strong competitive position is a winner.

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• Unit D with moderate industry attractiveness and strong competitive position is also a winner.

• Unit G with low industry attractiveness is comparatively profitable due to its strong competitive strength.

• Unit B can also be considered as a winner due to its average strength in high attractive industry.

• Unit E is an average business.

• Unit H with average strength and unit I with weak competitive position in the least attractive industry are
losers as is unit F with weak competitive position in an industry of medium attraction.

• Unit C is a question mark with a weak position in a highly attractive industry.

Advantages of GE Model

1. It is more comprehensive. It is more comprehensive as it avoids over- simplified assumptions.

2. It is more flexible. It is more flexible as it incorporates different industrial features and key success factors.

3. It is more relevant. It is more relevant because of its coverage of greater range. It is multi point matrix.

DEMERITS:

1. It is more subjective. It is not objective as it calls for giving weightage to factors where personal bias plays
upper hand.

2. It ignores future. It concentrates more on current position than looking at planned future.

3. It ignores the stages of development. It fails to analyze the position with regard to the stages of industrial
development.

A B C

D E F

G H I

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PROFIT IMPACT MARKET STRATEGY (PIMS)

A programme for the Profit Impact of Market Strategy (PIMS) was started at General Electric, and was later
used b the Strategic Planning Institute (SPI). The PIMS programme analyses data provided by member
companies to discover general laws which determine the business strategy in different competitive environments
producing different profit results.

Unlike the earlier approaches using judgment for multidimensional factors, the SPI uses multidimensional cross-
sectional regression studies of the profitability of more than 2,200 businesses. The data got from each
participating company consists of nearly one hundred items including descriptive features of the market
environment, the state of competition, the strategy followed by the business and the operating results obtained.
Each company is expected to supply its assumptions about the most likely future rates of changes in sales,
prices, material costs, wage rates and equipment costs as part of its profile.

4. HOFER'S PRODUCT/MARKET EVOLUTION MATRIX

Charles Hofer has proposed a three-by-five matrix or 15 cell matrix. Accordingly, the businesses units are
classified according to two parameters namely, the product/market evolution of the units and their competitive
positions. The product/market evolution of industry development are plotted on vertical axis of the matrix and
divided into five segments namely, embryonic, emerging, shake out, maturity and decline. The competitive
position is plotted on the horizontal axis is three segments namely, good, medium and poor. The matrix projects
the position of different SBUs which are in different stages of life cycle. A business in the Development or
Growth stage has a potential to be a Star. If the market share is large in these growth-oriented stages, more
resources must be invested to develop competitive position. But if market share is low, a strategy to improve the
same must be developed. If the industry is relatively small and market share is low despite high growth stage,
management must consider divesting and redeploying resources in other more competitive businesses. A
business in the Shake-out or Maturity stage has a potential to be a Cash Cow. Investments could be made to
maintain high market share. A business in Decline stage with a low market share would be a Dog business.
Though in the short run it may generate cash, in the long run, however, it should be considered for divestment or
liquidation.

5. ARTHUR D. LITTLE COMPANY MATRIX

This is the matrix suggested by Arthur D. Little Company for port-folio analysis which is twenty sectors or four
by five matrix which aims at linking stage of the product life cycle with the competitive strength of businesses.
The SBUS are classified according to their business strength. The SBUs are plotted on the vertical axis which is
divided into five segments namely, weak, tenable, favorable strong and dominant. The stages of the life cycle
are of the products are plotted on the horizontal axis in four segments namely, embryonic, growth, maturity and
decline.

The strategic approach differs according to the position of the business in terms of business strength and the
stage of the product life cycle

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