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ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION

Master of Business Administration

M.B.A. (Human Resource Management)
M.B.A. (Marketing Management)
M.B.A. (Financial Management)
Second Year

STRATEGIC MANAGEMENT
LESSONS : 1 - 24

Copyright Reserved
(For Private Circulation Only)
 Master of Business Administration
M.B.A. (Human Resource Management)
M.B.A. (Marketing Management)
M.B.A. (Financial Management)
Second Year

STRATEGIC MANAGEMENT

Editorial Board
Dr.E. Selvarajan,
Dean, Faculty of Arts,
Annamalai University,
Annamalainagar

Dr.C. Samudhra Rajakumar, Dr.C. Madhavi,

Professor & Head, Professor & Coordinator,
Department of Business Admn., Management Wing, DDE,
Annamalai University. Annamalai University.

Internals
Dr.S. Arul Kumar, Dr.V. Velmurugan,
Assistant Professor, Assistant Professor,
Management Wing, DDE Department of Business Admn.,
Annamalai University. Annamalai University.

Externals
Dr. Desti Kanniah, Dr. Mohsin Sheikh,
Professor, Professor,
James Cook University, Department of MBA,
Singapore. C.K. College of Engineering,
Pune.

Lesson Writer
Dr.C. Chinnaraja,
Assistant Professor,
Department of Business Admn.,
Annamalai University.
 i

COURSE 2.6 : STRATEGIC MANAGEMENT

Objectives
The course aims to develop the decision making ability of the student in the
turbulent environment. To enhance the awareness level of students in business-
environment and formulation of business' plans and strategies in the real world
situation.
Unit–I
Corporate Strategic planning: Mission – Vision of the firm -Difference between
operational and strategic planning -Characteristics of strategic planning - steps
involved in a strategic plan.
Strategic Management - Evolution - Nature and Importance of Management -
relationship between strategic management and management-Strategic decision
making.
Unit–II
Strategy formulation- strategy formulation process- determining strategic
thrust-strategic assessment-strategic options-corporate level-business level
strategies-global strategies-customization Vs Standardization-strategic alliances-
stability strategies-expansion strategies-retrenchment strategies-combination
strategies-tailoring strategies-focused segment strategies-building strategic
flexibility.
Unit–III
Competitive analysis - Identifying competitors-competitors strength and
weaknesses-customer analyses - segmentation- customer motivations.
Market analysis -size-growth -profitability analysis-key success factors-risk
Environmental analysis -Global environment-Dimensions-Forecasting
environmental trends and events -uncertainty.
Scenario analysis-Identifying, Developing, Estimating scenario-Regret analysis.
PEST analysis-Industry analysis-competitive strategy-competition in global
industries -alternatives.
Unit–IV
Business portfolio analysis -BCG matrix- GE Business Screen-Hofer and
Schendel's Matrix-Mckinsey system-SPACE Matrix-Directional policy matrix- Du
Pont’s control model- Balanced score card.
Shareholder value analysis-finance performance-performance measurement-
determinants of strategic options-Analysis to strategy.
Unit–V
Merger - Horizontal merger - Vertical merger - conglomerate merger – Product
extension - Market extension - Pure conglomerate extension - Acquisition - joint
Venture.
Concept of Product Diversification - Classification of diversification - Single
product diversification - Multiple product diversification - Concentric diversification
 ii

- Horizontal diversification - Conglomerate diversification - Market penetration -

Market development - product development - Diversification in selected Indian
Industries - Case study of some Indian industries – Strategic congruence –
Resource audit.
Unit–VI
Core competence – Identifying, Establishing, Building, Deploying, Protecting
and Defending core competence
Competitive Advantage – Global competitive advantage – Sustainable
competitive advantage – Bases of competitive advantage – Positioning competitive
advantage – Competitive intelligence system – Value chain Analysis.
References Books
1) Pearce and Robinson, Strategic Management (Formulation, Implementation
and Control), Sixth Edition, Irwin/McGraw-Hill (A division of the McGraw-Hill
Companies), 1997.
2) John A. Parnell, Strategic Management (Theory and Practice), Biztantra
Publications, New Delhi, 2009.
3) N.S. Gupta, Business Policy and Strategic Management, First Edition,
Himalaya Publishing House, 2013.
4) [Link] Cherunilam, Business Policy and Strategic Management – Text and
Cases, Third Edition, Himalaya Publishing House, 2010.
5) R. Nanjundaiah and S. Ramesh, Strategic Planning and Business Policy,
Himalaya Publishing House, 2003.
6) Dr.P. Subba Rao, Business Policy and Strategic Management, 9th Edition,
Himalaya Publishing House, 2008.
7) K. Aswathappa and G. Sudarsana Reddy, Business Environment for Strategic
Management, Second Edition, Himalaya Publishing House, 2011.
8) Kazmi Azar, Business Policy and Strategic Management, 2nd Edition, Tata
McGraw Hill, 2011.
9) V.S.P. Rao, Strategic Management, First Edition, Excel Books, New Delhi,
2012.
Journals and Magazines
1) Strategic Management Journal
2) International Journal of Strategic Management
3) International Strategic Management Journal
4) Journal of Technology Analysis and Strategic Management.
5) Global Strategy Journal.
Web Resources
1) [Link]/bp_wheelen_smbp_10
2) [Link]/.../Strategic-Management...Business-Policy
3) [Link]/smpp
4) [Link]/...Strategic-Management-Business-Policy
5) [Link]/.../business-policy-strategic-management-for-mba
 iii

STRATEGIC MANAGEMENT

Lesson Page
Title
No. No.
1 Corporate Strategic Planning-Vision and Mission 1
2 Strategic Planning and Operational Planning 6
3 Strategy and Strategic Management 11
4 Strategic Decision Making 20
5 Strategy Formulation 27
6 Global Strategies, Customization, Standardization, and 34
Strategic Alliances
7 Stability, Expansion and Retrenchment Strategies 41
8 Combination, Tailoring, Focused Segment Strategies, and 54
Strategic Flexibility
9 Competitive Analysis 61
10 Customer Analysis 69
11 Environmental Analysis 79
12 Regret Analysis 84
13 Business Portfolio Analysis-BCG Matrix, GE Business Screen 92
14 Business Portfolio Analysis-Hofer and Schendel’s Matrix, McKinsey 98
system
15 Space Matrix-Directional Policy Matrix 104
16 DuPont Model, Balanced Score Card, Shareholder Value Analysis 112
17 Merger 119
18 Product Diversification 129
19 Market Penetration, Market Development and Product Development 134
20 Strategic Congruence and Resource Audit 139
21 Core Competency 143
22 Competitive Advantage 148
23 Positioning Competitive Advantage and Competitive Intelligence 152
System
24 Value Chain Analysis 156
iv
 1

LESSON - 1

CORPORATE STRATEGIC PLANNING-VISION AND MISSION

1. INTRODUCTION
A plan or series of plans for achieving an aim, especially success in business
or the best way for an organization to develop in the future. A Strategy of a
corporation is a comprehensive master plan stating how the corporation will
achieve its mission and long term Objectives. Deals with strategic decisions that
decide the long term health of an enterprise. It maximizes competitive advantage
and minimizes competitive disadvantages
2. OBJECTIVES
 To know the basics of the term Strategy
 To understand the concept of corporate strategic planning
 To study the meaning of the terms Vision and Mission
3. CONTENTS
3.1 Strategy
The term ‘Strategy” is derived from the ancient Greek word ‘Strat Agos’ –which
can noted the art & science of directing military General /Forces. Strategy is, thus,
a well thought out systematic plan of action to defend one or to defeat rivals.
Strategy is formulated in anticipation of the possible positions, move actions and
reactions of the rivals.
However, in business parlance, there is no definite meaning assigned to
strategy but it is a space of knowledge, the attitude in the struggle for existence and
growth which is indeed very hard for firms, in a competitive environment.
Moreover, strategy can be defined as a Set of decisions – what business are we in,
what products and services will we offer, to whom , at what prices, on what terms,
against which competitors, on what basis will we compete.
There are so many experts pointed out their views about strategy, here are few
definitions:
 Clausewitz (1820): Strategy is “the art of the employment of battles as a
means to gain the objects of war”.
 Chandler (1962): Strategy is “a comprehensive master plan” that
determinates the long term goals of an enterprise.
 Mintzberg (1979): Strategy is a mediating force between the organization and
its environment: consistent patterns in streams of organizational decisions
to deal with the environment.
 Norman: Strategy is the art of creating value; 1993.
 Porter: Strategy deliberately choosing a different set of activities to deliver a
unique mix of value;1996.
Thus, strategy is a comprehensive master plan stating how the corporation will
achieve its mission and long term objectives by Setting the decisions – what
business are they in, what products and services they will offer, to whom, at what
prices, on what terms, against which competitors, on what basis will they compete.
 2

According to Michael Porter, the principles of good strategy are:

1. A good strategy is concerned with the structural evolution of the industry as
well as with the firm’s own unique position within that industry.
2. A good strategy makes the company different, giving the company a unique
position, involving the delivery of a particular mix of value to some array of
customers, which represents a subset of the industry.
3. If a company wants to serve a particular target customer group with a
particular definition of value, this must be inconsistent with delivering other
types of value to other customers. Therefore a good strategy proves the value
of the company in competitive environment.
3.2 Corporate Strategy
It provides clear direction for all the business units concert to meet
shareholder expectations while providing value to their customers and employees.
Corporate Strategy is concerned with how companies, create value across
different businesses. It asks how the corporation can add value over and above that
which a business unit creates by itself. This requires the corporation to invest in a
valuable set of resources, craft the business portfolio, and design the organization
structure, systems and corporate functions to share activities or transfer skills
across businesses.
3.3 Planning
Strategic planning involves the determination of where you wish to be in the
future and then how you plan to get there.
Management planning is the process of assessing an organization's goals and
creating a realistic, detailed plan of action for meeting those goals. Much like
writing a business plan, a management plan takes into consideration short-and
long-term corporate strategies.
3.4 Corporate Strategic Planning
It is a systematic process of determining goals to be achieved in the foreseeable
future. It consists of:
1. Management's fundamental assumptions about the future economic,
technological, and competitive environments.
2. Setting of goals to be achieved within a specified timeframe.
3. Performance of SWOT analysis.
4. Selecting main and alternative strategies to achieve the goals.
5. Formulating, implementing, and monitoring the operational or tactical plans
to achieve interim objectives.
3.5 Vision
A vision statement is a vivid idealized description of a desired outcome that
inspires, energizes and helps you create a mental picture of your target. It could be a
vision of a part of your life, or the outcome of a project or goal. Vision statements are
often confused with mission statements, but they serve complementary purposes.
 3

Vision Statement Guidelines The best vision statements for result areas
describe outcomes that are five to ten years away, although some look even further
out. For projects and goals, the vision statement should focus on the desired
outcome of the project/goal at its completion date. Here are some guidelines for
writing compelling and powerful vision statements.
Summarize Your Vision in a Powerful Phrase If possible, try to summarize your
vision using a powerful phrase in the first paragraph of your vision statement.
Capturing the essence of your vision using a simple memorable phrase can greatly
enhance the effectiveness of your vision statement. This phrase will serve as a
trigger to the rest of the vision in the mind of everyone that reads it.
Take for instance Microsoft's vision of "A personal computer in every home
running Microsoft software." This simple yet very powerful phrase can be used
throughout the organization (hallways, internal web pages, plaques, etc.) to remind
everyone of the vision.
Vision serves the purpose of stating what an organization wishes to achieve in
the long run.
Vision stays at the top in the major hierarchy of strategic intent. It explains
what the organization ultimately wants to achieve in the long term.
John Kotter defines vision as, “It is a statement of the organization in the
future.”
Alex Miller and Gregory Dess defined vision as, “the category of intentions that
are broad, all-inclusive and forward thinking.”
3.6 Advantages of Vision
A few benefits accruing to an organization having a vision are as follows:
 Vision fosters the idea of experiment.
 Vision promotes long-term thinking about the organization.
 Visions is one of the major factors to foster risk taking.
 Vision makes an organizations more competitive, original and unique.
 Good vision is a factor of representation of integrity.
 Vision inspires and motivates the people working in an organization.
3.7 Mission
Mission statements are responsible for the role an organization plays in the
society.
A few definitions of mission are as follows:
David Hunger and Thomas Wheelen are of the view that mission is “the
purpose or reason for the organization’s existence.”
John L. Thompson states that mission is “the essential purpose of the
organization, concerning particularly why it is in existence, the nature of the
business it is in, and the customers it seeks to serve and satisfy.”
According to David F. Harvey “A mission provides the basis of awareness of a
sense of purpose, the competitive environment, degree to which the firm’s mission
fits its capabilities and the opportunities which the government offers.”
 4

A mission statement is a statement of the company’s purpose or its

fundamental reason for existing. The statement spotlights what business a
company is presently in and the customer needs it’s presently striving to meet.
To build a solid foundation for a successful business, it’s essential to have a
written, clear, concise, and consistent mission statement. This statement should
simply explain who you are and why you exist. Mission relates an organization to
the society.
3.8 Mission Statement Creation
1. To create your mission statement, first identify your organization’s “winning
idea”.
This is the idea or approach that will make your organization stand out from
its competitors, and is the reason that customers will come to you and not
your competitors.
2. Next identify the key measures of your success. Make sure you choose the
most important measures (and not too many of them!)
3. Combine your winning idea and success measures into a tangible and
measurable goal.
4. Refine the words until you have a concise and precise statement of your
mission, which expresses your ideas, measures and desired result.
3.9 Vision Vs Mission
A Mission Statement defines the company's business, its objectives and its
approach to reach those objectives.
A Vision Statement describes the desired future position of the company.
Elements of Mission and Vision Statements are often combined to provide a
statement of the company's purposes, goals and values.
4. REVISION POINTS
Strategy is the art of creating value.
Corporate strategic planning is a systematic process of determining goals to be
achieved in the foreseeable future.
Vision serves the purpose of stating what an organization wishes to achieve in
the long run. A Mission Statement defines the company's business.
5. INTEXT QUESTIONS
1. Define the term Strategy
2. What is Vision?
3. State the aspects of Mission.
6. SUMMARY
Strategy is “a comprehensive master plan” that determinates the long term
goals of an enterprise. Elements of Mission and Vision Statements are often
combined to provide a statement of the company's purposes, goals and values.
Corporate Strategy is concerned with how companies, create value across different
businesses.
 5

7. TERMINAL EXERCISES
1. Corporate strategic planning is i Long term ii Short term iii Medium term iv
None
2. Vision is i Route ii Hope iii Capable of doing iv all the three above
8. SUPPLEMENTARY MATERIALS
 [Link]
 [Link]
 [Link]
 [Link]
 [Link]
9. ASSIGNMENTS
 Explain the process of strategic planning.
 Elaborate the contents of a good Mission statement.
 State the differences between corporate planning and operational planning
10. REFERENCE BOOKS
1. Essentials of Management, Andrew DuBrin, South western cengage learning
8th Edition.
2. Strategic Management and Business Policy
By B. Hiriyappa
3. Fundamentals of Strategic Management' 2007 Ed.
By N. Orcullo Rex Book Store Inc
4. Business Policy and Strategic Management
By G. V. Satya Sekhar I. K. International Pvt Ltd, 2009
11. LEARNING ACTIVITY
Collect a Vision and Mission Statement of a PSU and a [Link] of your
choice.
12. KEY WORDS
Strategy, Vision, Mission, Corporate Strategy.

 6

LESSON – 2

STRATEGIC PLANNING AND OPERATIONAL PLANNING

1. INTRODUCTION
Strategic Planning is the holistic process of determining the long term
objectives of an organization and the policies and strategies that govern the
acquisition, use and disposition of resources to achieve the vision and mission of
any organization. It tends to be a top management responsibility.
2. OBJECTIVES
 To know about the aspects of Planning
 To understand the fundamentals of Strategic planning
 To get the knowledge about the differences between strategic and operational
planning
3. CONTENTS
3.1 Strategic planning
Strategic planning is an organization’s process of defining its strategy, or
direction, and making decisions on allocating its resources to pursue this strategy.
Generally, strategic planning deals, on the whole business, rather than just an
isolated unit, with at least one of key questions below:
----“What do we do?”
----“For whom do we do it?”
----“How do we excel?”
Strategic planning is an organization's process of defining its strategy, or
direction, and making decisions on allocating its resources to pursue this strategy.
It may also extend to control mechanisms for guiding the implementation of the
strategy. Strategic planning became prominent in corporations during the 1960s
and remains an important aspect of strategic management. It is executed by
strategic planners or strategists, who involve many parties and research sources in
their analysis of the organization and its relationship to the environment in which it
competes.
Strategy has many definitions, but generally involves setting goals,
determining actions to achieve the goals, and mobilizing resources to execute the
actions. A strategy describes how the ends (goals) will be achieved by the means
(resources). The senior leadership of an organization is generally tasked with
determining strategy. Strategy can be planned (intended) or can be observed as a
pattern of activity (emergent) as the organization adapts to its environment or
competes.
Strategy includes processes of formulation and implementation; strategic
planning helps coordinate both. However, strategic planning is analytical in nature
(i.e., it involves "finding the dots"); strategy formation itself involves synthesis (i.e.,
"connecting the dots") via strategic thinking. As such, strategic planning occurs
around the strategy formation activity.
 7

Strategic planning is a process and thus has inputs, activities, outputs and
outcomes. This process, like all processes, has constraints. It may be formal or
informal and is typically iterative, with feedback loops throughout the process.
Some elements of the process may be continuous and others may be executed as
discrete projects with a definitive start and end during a period. Strategic planning
provides inputs for strategic thinking, which guides the actual strategy
formation. The end result is the organization's strategy, including a diagnosis of the
environment and competitive situation, a guiding policy on what the organization
intends to accomplish, and key initiatives or action plans for achieving the guiding
policy.
3.2 Operational Planning
Operational planning is the process of linking strategic goals and objectives to
tactical goals and objectives. It describes milestones, conditions for success and
explains how, or what portion of, a strategic plan will be put into operation during a
given operational period.
An operational plan answers the following questions:
----Where are we now?
----Where do we want to be?
----How do we get there?
----How do we measure our progress?
According to [Link] Operational Planning is Operational
Planning is a process. It will answer the questions: What are you aiming to
achieve? What you are going to do? When are you going to do it? How much
will it cost? How will you know you’ve achieved your objectives?
3.3 Difference between an "operational plan" and a "strategic plan"
The strategic plan is about setting a direction for the organisation, devising
goals and objectives and identifying a range of strategies to pursue so that the
organisation might achieve its goals. The strategic plan is a general guide for the
management of the organisation according to the priorities and goals of
stakeholders. The strategic plan does not stipulate the day-to-day tasks and
activities involved in running the organisation. A strategic plan is the formal
roadmap that describes how a company executes its long term strategy. A plan
outlines where an organization is going over the next year or more and how it’s
going to get there.
On the other hand the Operational Plan does present highly detailed
information specifically to direct people to perform the day-to-day tasks required in
the running the organisation. Organisation management and staff should
frequently refer to the operational plan in carrying out their everyday work.
 8

Strategic Plan Operational Plan

A general guide for the management A specific plan for the use of the
organisation's resources in pursuit of the
strategic plan.
Suggests strategies to be employed in Details specific activities and events to be
pursuit of the organisation's goals undertaken to implement strategies
Is a plan for the pursuit of Is a plan for the day-to-day management of
the organisation's mission in the longer the organisation (one year time frame)
term (3 - 5 years)
A strategic plan enables management to An operational plan should not be
formulate an operational plan. formulated without reference to a strategic
plan
The strategic plan, once formulated, tends Operational plans may differ from year to
not to be significantly changed year significantly
The development of the strategic plan is a The operational plan is produced by the
responsibility shared and involves different chief executive and staff of the
categories of stakeholders. organisation.

3.4 Steps involved in a Strategic Plan

The following are the steps involved in a strategic plan:
1. Preparation
Decide on the team who will be involved in the planning process , gather all
needed information ensuring all information is up to date and as accurate as
possible which is very important to ensure sound decisions results from this whole
process. Identify any specific issues that needs to be addressed.
2. Clarify the mission and vision statements
Identify, clarify and reach consensus on the company's mission and vision
statements, corporate values and culture, the main goal of why the company exists
and create an image of what success looks like for your company.
3. Identify your current and future market position. (Perform a SWOT analysis)
Gather up-to-date information on internal strengths and weaknesses and
external opportunities and threats so you can develop an understanding of
all critical issues. Use the SWOT tool to organize your information
4. Agree on priorites
As in any planning process, all priorities need to be set and agreed as well as
broad strategies for handling critical issues and what outcomes are to be sought. It
is important that you and your planning team agree on all major and key priorities.
5. Put the plan together
In this step you should start putting all the bits and pieces of your plan
together (in one document) to facilitate implementation and constant review.
6. Distribute tasks and assign actions
Now that your plan has been placed together in one document, its time to start
assigning specific tasks to each specific team, department or individual.
 9

7. Roll-out the plan

Now your plan needs to be communicated and circulated to everyone in your
organization to ensure alignment. Now this is very important, to ensure that
everyone is aligned and all the energy and efforts of each individual are on the same
direction, successful companies make sure their strategic plan is not only
communicated to department heads or the most obvious stakeholders but each and
every person in the company needs to be aware and buy into the plan.
8. Hold everyone accountable
The plan will not be effective without processes and metrics that ensures
everyone is doing their part. The plan needs to be constantly monitored and
performance needs to be measured through either monthly or quarterly strategy
staff meetings. to hold people accountable and making sure that the plan activities
are actually happening and corrective actions and adjustments can be taken to
rectify, tweak and effectively manage performance in light of the strategic plan.
4. REVISION POINTS
The strategic plan is about setting a direction for the organisation.
Operational plans may differ from year to year significantly. Strategy includes
processes of formulation and implementation; strategic planning helps coordinate
both.
5. INTEXT QUESTIONS
1. What is Planning?
2. What do mean by a strategic plan?
3. Write a short note on operational plan.
6. SUMMARY
Strategic plan is a general guide, but operational plan is a specific plan.
7. TERMINAL EXERCISES
1. Strategic plan is ______________guide.
2. Operational planning is the _____________of linking strategic goals and
objectives.
8. SUPPLEMENTARY MATERIALS
1. [Link].
2. [Link]
3. [Link]
4. [Link]
5. [Link]
6. [Link]
9. ASSIGNMENTS
1. State the differences between an "operational plan" and a "strategic plan".?
2. Explain the steps involved in a strategic plan?
 10

10. REFERENCE BOOKS

1. Essentials of Management, Andrew DuBrin, South western cengage learning
8th Edition.
2. Strategic Management and Business Policy
By B. Hiriyappa
3. Fundamentals of Strategic Management' 2007 Ed.
By N. Orcullo Rex Book Store Inc
4. Business Policy and Strategic Management
By G. V. Satya Sekhar I. K. International Pvt Ltd, 2009
11. LEARNING ACTIVITY
Discuss with an executive regarding any operational plan of their company.
12. KEY WORDS
Strategic plan, Operational plan.

 11

LESSON - 3

STRATEGY AND STRATEGIC MANAGEMENT

1. INTRODUCTION
A strategy is an action plan built to achieve a specific goal or set of goals
within a definite time, while operating in an organizational framework. Strategic
management is a very large, complicated, and always-evolving endeavor.
2. OBJECTIVES
 To learn the definitions of the strategic management
 To know about the process of strategic management
 To gain knowledge about the contents in formulation and implementation
3. CONTENTS
3.1 Definitions and Meaning of the term Strategic management
According to Rajiv Nag, Donald Hambrick & Ming-Jer Chen, “Strategic
management is the process of building capabilities that allow a firm to create value
for customers, shareholders, and society while operating in competitive markets.”
The process of strategic management entails:
 Specifically pointing out the firm's mission, vision, and objectives
 Developing the policies and plans to achieve the set objectives
 Allocating the resources for implementing these policies and plans
Strategic management is a process of analyzing the major initiatives that
contain resources and performance in external environments, which a firm's top
management.
3.2 The Steps in Strategic Management
Strategic management is a very large, complicated, and always-evolving
endeavor. Therefore, it is handy to group it into a set of solid steps to describe the
process of strategic management. The most common and used frameworks of
strategic management include the following steps, grouped in two general stages:
3.3 Formulation and Implementation
Formulation
Analysis − Analysis involves comprehensive market, financial and business
research on the external and competitive environments. The process includes
conducting Porter's Five Forces, SWOT, PESTEL, and value chain management
analyses and combining expertise in each industry that are part of the strategy.
Strategy Formation – After analyzing internal and external environments, the
organization arrives at a generic strategy (for instance, low-cost, differentiation, etc.)
that is based upon the value-chain implications. It is done for deriving and
maximizing core competence and prospective competitive advantages.
Goal Setting – Goal setting is the next step of strategy formation. As the
defined strategy is in hand, management now tends to find out and communicates
the goals and objectives of the company that are linked to the predicted results,
strengths, and opportunities.
 12

Implementation
Structure – The implementation phase has the basic function of structuring
the management and operational processes. As there is a strategy in place, the
business now wants to solidify the organizational structure and leadership patterns
(making many changes if required).
Feedback – Feedback is the final stage of strategic management process. In
this final stage of strategy, all of the budgetary figures are collected and
disseminated for evaluation. Financial ratios calculation and performance reviews
are delivered to relevant managers, executives and concerned departments.
Strategic Management - Introduction
Strategic management is a continuous process. It starts with defining the
vision, mission, objectives, and goals of the organization.
3.4 Evolution of Strategic Management
Strategic management is a youthful discipline. Its origins date back to the
1960s, with its roots to be found mainly in the seminal publications by Chandler
(1962), Ansoff (1965) and Andrews (1971). Since then, it has evolved significantly,
becoming an ever more mature and consolidated field within the realm of
management.
Strategic Management in the 1950’s started with business case studies and
the works and theories of Druker, Selznick, Chandler, and Ansof (and others).
Industrial economics and industrial organisation provided the basis to develop
strategic management theories in the 1950’s. Economic theory based on Industrial-
Organizational Approach dealt with issues like the competitive rivalry, resource
allocation, and economies of scale and concerned with making rational decisions
and profit maximization.
During 1950’s Druker developed the concept of Management by Objectives
(MBO). MBO is a process of defining aims within an organization so that
management and employees agree to the goals and understand what they need to
do in the organization to meet them. Druker stressed goals as important. An
organization without clear goals is like a ship without a rudder. According to
Drucker, the procedure of setting objectives and monitoring your progress towards
them should permeate the entire organization, top to bottom.
Peter Selznick was the first to model internal and external factors as a basis
for measuring strengths and weaknesses of firms. His concept has evolved into
what we now call SWOT analysis by Learned, Andrews, and others at the Harvard
Business School General Management Group. Strengths and weaknesses of the
firm are assessed in light of the opportunities and threats from the business
environment.
Alfred Chandler recognized coordinating the various aspects of management
under one all-encompassing strategy is important. Prior to this time, the various
functions of management were separate with little overall coordination or strategy.
Interactions between functions or between departments were typically handled by a
 13

boundary position, that is, there were one or two managers that relayed information
back and forth between two departments.
Chandler also stressed taking a long-term perspective when looking to the
future is important. In his 1962 groundbreaking work Strategy and Structure,
Chandler showed that a long-term coordinated strategy was necessary to give a
company structure, direction, and focus. He says it concisely, “structure follows
strategy.”
Igor Ansoff built on Chandler’s work by adding concepts and inventing a
vocabulary. He developed a grid that compared strategies for market penetration,
product development, market development and horizontal and vertical integration
and diversification. He felt that management could use the grid to systematically
prepare for the future. In his 1965 classic Corporate Strategy, he developed gap
analysis to clarify the gap between the current reality and the goals and to develop
what he called “gap reducing actions”.
In the 1950’s and 60’s stemmed from the works of earlier theorists such as
Joseph Schumpeter whose concepts on new value creation through technological
change and innovation influenced many new products, new markets, and new
sources of supply as well as the reorganization of industries. But the real basis of
1950’s and 1960’s Strategic Management stems from industrial economics and
industrial organization.
In the 1970s, much of strategic management dealt with size, growth, and
portfolio theory as it shifted away from planning toward a strategy to find ways to
increase performance and profitability. Organisations began to favor the PIMS
approach to finding the link between profitability and strategy. The PIMS(Profit
Impact of Marketing Strategies) study was a long-term study, started in the 1960s
and lasted for 19 years, that attempted to understand the Profit Impact of
Marketing Strategies, particularly the effect of market share. Started at General
Electric, moved to Harvard in the early 1970s, and then moved to the Strategic
Planning Institute in the late 1970s, it now has decades of information on the
relationship between profitability and strategy. Their initial conclusion was
unambiguous: The greater a company’s market share, the greater will be their rate
of profit. The high market share provides volume and economies of scale. It also
provides experience and learning curve advantages. The combined effect is
increased profits. The study’s conclusions continue to be drawn on by academics
and companies today: “PIMS provides compelling quantitative evidence as to which
business strategies work and don’t work”
The 1980s approach strategy built on many of the ideas and theories of the
previous five decades. The Harvard School was the think-tank which comprised the
work of many leading writers on strategy at the time. Porter, Andrews, Ghemawat,
and consultants from McKinsey and the Boston Consultancy group. The initial
output was SWOT which examined internal and external factors and built concepts
from industrial economics but a dominant model in the field of the strategy was the
 14

competitive forces approach developed by Porter (1980). This approach, rooted in

the structure-conduct-performance accepted point of view of an industrial
organization and SWOT analysis, emphasizes the actions a firm can take to create
defensible positions against competitive forces. The competitive forces approach
views the essence of competitive strategy formulation as ‘relating a company to its
environment.
The key aspect of the firm’s environment is the industry or industries in which
it competes.’ Industry structure strongly influences the competitive rules of the
game as well as the strategies potentially available to firms. In the competitive
forces model, five industry level forces-entry barriers, the threat of substitution,
bargaining power of buyers, bargaining power of suppliers, and rivalry among
industry incumbents-determine the inherent profit potential of an industry or sub-
segment of an industry. The approach helps the firm find a position in an industry
from which it can best defend itself against competitive forces or influence them in
its favor.
The Five-Forces Model is not useful for understanding the strategies of each
firm. To carry out that we look at the Value Chain Model. The Value Chain Model
looks at the value adding primary or support activities internal to a firm. This
means that competitive advantage can live within an organization and this theme
was central to the Resourced-Based View (RBV).
The 1980s also saw the widespread acceptance of positioning theory. The basic
premise is that a strategy should not be judged by internal company factors but by
the way customers see it relative to the competition. Al Ries and Jack Trout explain
the marketing truth of how the first product/person/company that occupies a
position in a consumer’s mind will hold it, potentially forever and this approach is
still relevant today.
After 1980s till today coporates look at the Resource-Based view which came
into prominence in the late 1980s and the Dynamic Capabilities approach which
came to prominence in the mid-1990s. The resource-based view (RBV) as a basis
for the competitive advantage of a firm lies primarily applies a bundle of valuable
tangible or intangible resources at the firm’s disposal.
3.5 Management Meaning, Definition, Nature and Importance
Every human being has several needs and desires. But no individual can
satisfy all his wants. Therefore, people work together to meet their mutual needs
which they cannot fulfil individually. Moreover, man is a social being as he likes to
live together with other people. It is by working and living together in organised
groups and institutions that people satisfy their economic and social needs. As a
result there are several types of groups, eg., family, school, government, army, a
business firm, a cricket team and the like. Such formal groups can achieve their
goals effectively only when the efforts of the people working in these groups are
properly coordinated and controlled. The task of getting results through others by
 15

coordinating their efforts is known as management. Just as the mind coordinates

and regulates all the activities of a person, management coordinates and regulates
the activities of various members of an organisation.
Meaning
As there is no universally accepted definition for management, it is difficult to
define it.
But a simple traditional definition, defines it as the "art of getting things done
by others". This definition brings in two elements namely accomplishment of
objectives, and direction of group activities towards the goal. The weaknesses of
this definition is that firstly it uses the word "art", whereas management is not
merely an art, but it is both art and science. Secondly, the definition does not state
the various functions of a manager clearly.
A more elaborate definition given by George R. Terry, defines management as a
process "consisting of planning, organizing, actuating and controlling, performed to
determine and accomplish the objectives by the use of people and resources."
Firstly it considers management as a "process" i.e. a systematic way of doing
things. Secondly it states four management activities: Planning, organizing,
actuating, and controlling. Planning is thinking of an actions in advance. organizing
is coordination of the human and material resources of an organization. Actuating
is motivation and direction of subordinates. Controlling means the attempt to
ensure no deviation from the norm or plan. Thirdly it states that manager uses
people and other resources. For example a manager who wants to increase the
sales, might try not only to increase the sales force, but also to increase advertising
budget. And fourthly, it states that management involves the act of achieving the
organization's objectives.
Definitions
 "Management is an art of knowing what is to be done and seeing that it is
done in the best possible manner." (planning and controlling) F.W. Taylor
 "Management is to forecast, to plan, to organize, to command, to coordinate
and control activities of others." Henri Fayol
 "Management is the process by which co-operative group directs actions
towards common goals." Joseph Massie
 "Management is that process by which managers create, direct, maintain
and operate purposive organisation through systematic, coordinated and
cooperative human efforts." McFarland
 "Management is the coordination of all resources through the process of
planning, organising, directing and controlling in order to attain stated
goals." Henry Sisk
 "Management is a social and technical process that utilises resources,
influences human action and facilitates changes in order to accomplish an
organization's goals." Tho Harmann, William Scott
 16

 "Management is a process of working with and through others to achieve

organizational objectives in a changing environment, central to this purpose
is the effective and efficient use of limited resources." Rovert Kreitner
 "Management is a responsible person's or group’s thinking processes and
administrative processes directed at achieving the purpose, needs,
aspirations and objectives of an organization, project or task through
people." Universal Management System Standard MSS 1000 - CQI
Integrated Management Special Interest Group
3.6 Nature of Management
1. Goal oriented Process: It is a goal oriented process, which is undertaken to
achieve already specified and desired objectives by proper utilization of
available resources.
2. Pervasive: Management is universal in nature. It is used in all types of
organisations whether economic, social or political irrespective of its size,
nature and location and at every level.
3. Multidimensional: It is multidimensional as it involves management of work,
people and operations.
4. Continuous: It consists of a series of function and its functions are being
performed by all managers simultaneously. The process of management
continues till an organization exists for attaining its objectives.
5. Group Activity: It is a group activity since it involves managing and
Co-ordinating activities of different people as a team to attain the desired
objectives.
6. Dynamic function: It is a dynamic function since it has to adapt according to
need, time and situation of the changing environment.
7. Intangible Force: It is intangible force as it can't be seen but its effects can
be felt in the form of results like whether the objectives are met and whether
people are motivated or not and there is orderliness and coordination in the
work environment.
3.7 Importance of Management
1. Achieving Group Goals: Management creates team work and coordination in
the group. Managers give common direction to the individual efforts in
achieving the overall goals of the organization.
2. Increases Efficiency: Management increases efficiency by using resources in
the best possible manner to reduce cost and increase productivity.
3. Creates Dynamic organization: Management helps the employees to
overcome their resistance to change and adapt as per changing situation to
ensure its survival and growth.
4. Achieving personal objectives: Management helps the individuals to achieve
their personal goals while working towards organizational objectives.
5. Development of Society: Management helps in the development of society by
producing good quality products, creating employment opportunities and
adopting new technology.
3.8 Relationship between Strategic Management and Management
No Strategy = unsuccessful management.
 17

"General management" is a term that refers to

-- The overall management activities in an organization,
-- The people who is responsible for it (General Managers and their staff) and
-- An academic or professional focus on broad management activities
"Strategic management" is
An evolution of the strategic planning term that refers to a new approach to
management which privileges a strategic approach to enterprise problem solving.
So, for strategists, strategic management is the desired approach for general
management.
Strategic management and management are very connected, as the
management must have strategy or it will fail. There cannot be any administration
to carry out their work and to achieve its goals without the development of strategic
plans based on the organization's vision and mission in the light of the external and
internal environment of the organization analysis behold, based on work and traffic
strategies according to guarantee success. There is a symbiotic relationship
between management and strategy.
Strategy refers to how management intends to or achieves its goal.
Management must make decisions as to the "how" and implement the strategy
required. Of course, inherent in the how, is the fact that the "what" must be
accurately defined and understood. Management must first of all have clear
understanding of the problem or issue needing a solution. If this understanding is
lacking, then the strategy will be wrong and the problem will not be solve.
Management`s tool for achieving results is really the correct strategy applied to an
issue, situation or problem the organization faces.
Decisions could be at the strategic level, or the operational or tactical level. In
that case, the strategy must accurately match the goal.
A strategy is a means of accomplishing or achieving organisational objectives.
It is a unified, comphrensive & integrated plan that relates the strategic advantages
of a firm to the challanges in the environment.
Management involves planning, organising, controlling, leading, coordinating
& monitoring of operations to ensure successs of a business. Management requires
a competitive & sustainable Strategy and it has to implement it in order to arrive at
the desired goals and objectives of its organisation thus without a Strategy or
Strategies, management can't realisze its desired goals & objectives.
3.9 Benefits of Strategic Management
There are many benefits of strategic management and they include
identification, prioritization, and exploration of opportunities. For instance, newer
products, newer markets, and newer forays into business lines are only possible if
firms indulge in strategic planning. Next, strategic management allows firms to take
an objective view of the activities being done by it and do a cost benefit analysis as
to whether the firm is profitable.
 18

Just to differentiate, by this, do not mean the financial benefits alone but also
the assessment of profitability that has to do with evaluating whether the business
is strategically aligned to its goals and priorities.
The key point to be noted here is that strategic management allows a firm to
orient itself to its market and consumers and ensure that it is actualizing the right
strategy.
Financial Benefits
It has been shown in many studies that firms that engage in strategic
management are more profitable and successful than those that do not have the
benefit of strategic planning and strategic management.
When firms engage in forward looking planning and careful evaluation of their
priorities, they have control over the future, which is necessary in the fast changing
business landscape of the 21st century.
It has been estimated that more than 100,000 businesses fail in the US every
year and most of these failures are to do with a lack of strategic focus and strategic
direction. Further, high performing firms tend to make more informed decisions
because they have considered both the short term and long-term consequences and
hence, have oriented their strategies accordingly. In contrast, firms that do not
engage themselves in meaningful strategic planning are often bogged down by
internal problems and lack of focus that leads to failure.
Non-Financial Benefits
The section above discussed some of the tangible benefits of strategic
management. Apart from these benefits, firms that engage in strategic management
are more aware of the external threats, an improved understanding of competitor
strengths and weaknesses and increased employee productivity. They also have
lesser resistance to change and a clear understanding of the link between
performance and rewards.
The key aspect of strategic management is that the problem solving and
problem preventing capabilities of the firms are enhanced through strategic
management. Strategic management is essential as it helps firms to rationalize
change and actualize change and communicate the need to change better to its
employees. Finally, strategic management helps in bringing order and discipline to
the activities of the firm in its both internal processes and external activities.
Closing Thoughts
In recent years, virtually all firms have realized the importance of strategic
management. However, the key difference between those who succeed and those
who fail is that the way in which strategic management is done and strategic
planning is carried out makes the difference between success and failure. Of
course, there are still firms that do not engage in strategic planning or where the
planners do not receive the support from management. These firms ought to realize
the benefits of strategic management and ensure their longer-term viability and
success in the marketplace.
 19

4. REVISION POINTS
Strategic management is a process of analyzing the major initiatives that
contain resources and performance in external environments, which a firm's top
management. There are many benefits of strategic management and they include
identification, prioritization, and exploration of opportunities.
5. INTEXT QUESTIONS
1. Brief the relationship between strategic management and management.
2. State the Nature of Management
3. List out the steps in in strategic management.
6. SUMMARY
No Strategy = unsuccessful management. There are many benefits of strategic
management and they include identification, prioritization, and exploration of
opportunities. Strategic management is a continuous process.
7. TERMINAL EXERCISES
1. Strategic management is a ________________discipline.
2. Strategic management is a i) Process ii) Technique iii) Case iv) Management
style.
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Trace the Evolution of Strategic Management
2. List out the benefits of Strategic Management.
3. Describe the nature and importance of management.
10. REFERENCE BOOKS
1. Essentials of Management, Andrew DuBrin, South western cengage learning
8th Edition.
2. Strategic Management and Business Policy
By B. Hiriyappa
3. Fundamentals of Strategic Management' 2007 Ed.
By N. Orcullo Rex Book Store Inc
4. Business Policy and Strategic Management
By G. V. Satya Sekhar I. K. International Pvt Ltd, 2009
11. LEARNING ACTIVITY
Discuss with a strategist regarding formulation and implementation.
12. KEY WORDS
Strategic management, Management, Formulation, Implementation.

 20

LESSON - 4

STRATEGIC DECISION MAKING

1. INTRODUCTION
The decision making process helps managers and other business professionals
solve problems by examining alternative choices and deciding on the best route to
take. Using a step-by-step approach is an efficient way to make thoughtful,
informed decisions that have a positive impact on your organization’s short- and
long-term goals. Strategic decisions are the decisions that are concerned with whole
environment in which the firm operates, the entire resources and the people who
form the company and the interface between the two.
2. OBJECTIVES
 To know about the fundamentals of the terms decision making and strategic
decision making
 To learn about the process of decision making
 To study the definitions of the term decision making
3. CONTENTS
3.1 Definitions of Decision-Making:
Some of the important definitions of decision-making are:
Decision-making is the selection based on some criteria from two or more
possible alternatives —George [Link]
A decision can be defined as a course of action consciously chosen from
available alternatives for the purpose of desired result —J.L. Massie
A decision is an act of choice, wherein an executive forms a conclusion about
what must be done in a given situation. A decision represents a course of behaviour
chosen from a number of possible alternatives. -—D.E. Mc. Farland
From these definitions, it is clear that decision-making is concerned with
selecting a course of action from among alternatives to achieve a predetermined
objective.
Following elements can be derived from the above mentioned definitions:
1. Decision–making is a selection process and is concerned with selecting the
best type of alternative.
3. The decision taken is aimed at achieving the organisational goals.
4. It is concerned with the detailed study of the available alternatives for
finding the best possible alternative.
5. Decision making is a mental process. It is the outline of constant thoughtful
consideration.
6. It leads to commitment. The commitment depends upon the nature of the
decision whether short term or long term.
 21

What is Decision Making?

It is the process of selecting the best solution among alternatives in order to
solve a problem.
3.2 Features or Characteristics of Decision-Making:
From definitions and elements we can draw the following important features of
managerial decisions:
1. Rational Thinking
It is invariably based on rational thinking. Since the human brain with its
ability to learn, remember and relate many complex factors, makes the rationality
possible.
2. Process
It is the process followed by deliberations and reasoning.
3. Selective
It is selective, i.e. it is the choice of the best course among alternatives. In
other words, decision involves selection of the best course from among the available
alternative courses that are identified by the decision-maker.
4. Purposive
It is usually purposive i.e. it relates to the end. The solution to a problem
provides an effective means to the desired goal or end.
5. Positive
Although every decision is usually positive sometimes certain decisions may be
negative and may just be a decision not to decide. For instance, the manufacturers
of Volkswagen car once decided not to change the model (body style) and size of the
car although the other rival enterprise (i.e. the Ford Corporation) was planning to
introduce a new model every year, in the USA.
That a negative decision and is equally important was stressed by Chester I.
Bernard-one of the pioneers in Management Thought-who observed, “The fine art of
executive decision consists in not deciding questions that are not now pertinent, in
not deciding prematurely, in not making decisions that cannot be made effective,
and in not making decisions that other should make.”
6. Commitment
Every decision is based on the concept of commitment. In other words, the
Management is committed to every decision it takes for two reasons- viz., (/) it
promotes the stability of the concern and (ii) every decision taken becomes a part of
the expectations of the people involved in the organisation.
Decisions are usually so much inter-related to the organisational life of an
enterprise that any change in one area of activity may change the other areas too.
As such, the Manager is committed to decisions not only from the time that they
are taken but upto their successfully implementation.
7. Evaluation
Decision-making involves evaluation in two ways, viz., (i) the executive must
evaluate the alternatives, and (ii) he should evaluate the results of the decisions
 22

taken by him. The business decision making process is commonly divided into the
steps given below:
Managers generally utilize many of these steps without realizing it, but gaining
a clearer understanding of these practices will improve the effectiveness of their
decisions.
3.3 Steps in the Decision Making Process
The following are the key steps of the decision making process.
 Identify the decision. The first step in making the right decision is
recognizing the problem or opportunity and deciding to address it.
Determine why this decision will make a difference to the customers or
employees.
 Gather information. Next, it’s time to gather information so that managers
can make a decision based on facts and data. This requires making a value
judgment, determining what information is relevant to the decision at hand,
along with how they can get it. Managers may ask themselfes what they
need to know in order to make the right decision, then actively seek out
anyone who needs to be involved.
 Identify alternatives. Once a clear understanding of the issue, it’s time to
identify the various solutions at the disposal. It’s likely that managers have
many different options when it comes to making the decision, so it is
important to come up with a range of options. This helps decision makers
determine which course of action is the best way to achieve their objective.
 Weigh the evidence. In this step, manger need to “evaluate for feasibility,
acceptability and desirability” to know which alternative is best. According to
management experts Phil Higson and Anthony Sturgess, managers need to
be able to weigh pros and cons, then select the option that has the highest
chances of success. It may be helpful to seek out a trusted second opinion to
gain a new perspective on the issue at hand.
 Choose among alternatives. When it’s time to make decision, to be sure that
to understand the risks involved with the chosen route. Mangers may also
choose a combination of alternatives now that they fully grasp all relevant
information and potential risks.
 Take action. Need to create a plan for implementation. This involves
identifying what resources are required and gaining support from employees
and stakeholders. Getting others onboard with the decision is a key
component of executing the plan effectively, so be prepared to address any
questions or concerns that may arise.
 Reviewing the decision. An often-overlooked but important step in the
decision making process is evaluating the decision for effectiveness. Decision
maker should ask them self what they did well and what can be improved
next time.
3.3.1 Challenges of Decision Making
Although following the steps outlined above will help you make more effective
decisions, there are some pitfalls to look out for. Here are common challenges you
may face, along with best practices to help you avoid them.
 23

 Having too much or not enough information. Gathering relevant information

is key when approaching the decision making process, but it’s important to
identify how much background information is truly required. “An overload of
information can leave you confused and misguided, and prevents you from
following your intuition,” according to Corporate Wellness Magazine.
 In addition, relying on one single source of information can lead to bias and
misinformation, which can have disastrous effects down the line.
 Misidentifying the problem. In many cases, the issues surrounding your
decision will be obvious. However, there will be times when the decision is
complex and you aren’t sure where the main issue lies. Conduct thorough
research and speak with internal experts who experience the problem
firsthand in order to mitigate this. It will save you time and resources in the
long run, Corporate Wellness Magazine says.
 Overconfidence in the outcome. Even if you follow the steps of the decision
making process, there is still a chance that the outcome won’t be exactly
what you had in mind. That’s why it’s so important to identify a valid option
that is plausible and achievable. Being overconfident in an unlikely outcome
can lead to adverse results.
Decision making is a vital skill in the business workplace, particularly for
managers and those in leadership positions. Following a logical procedure like the
one outlined here, along with being aware of common challenges, can help ensure
both thoughtful decision making and positive results.
3.4 Strategic Decision Making -Characteristics/Features of Strategic Decisions
Strategic decisions have major resource propositions for an organization.
These decisions may be concerned with possessing new resources, organizing
others or reallocating others. Strategic decisions deal with harmonizing
organizational resource capabilities with the threats and opportunities.
Strategic decisions deal with the range of organizational activities. It is all
about what they want the organization to be like and to be about.
Strategic decisions involve a change of major kind since an organization
operates in ever-changing environment. Strategic decisions are complex in nature.
Strategic decisions are at the top most level, are uncertain as they deal with the
future, and involve a lot of risk.
Strategic decisions are different from administrative and operational decisions.
Administrative decisions are routine decisions which help or rather facilitate
strategic decisions or operational decisions. Operational decisions are technical
decisions which help execution of strategic decisions. To reduce cost is a strategic
decision which is achieved through operational decision of reducing the number of
employees and how we carry out these reductions will be administrative decision.
Strategic management involves management as well as employees. One of the
essential parts of creating and running a business is creating a mission or vision
for the business and a set of goals the company aims to achieve. Strategic decision
making, or strategic planning, describes the process of creating a company's
 24

mission and objectives and deciding upon the courses of action a company should
pursue to achieve those goals.
Strategic decision making is an ongoing process that involves creating
strategies to achieve goals and altering strategies based on observed outcomes.
For example, the managers of a restaurant might have the objective of
increasing sales and decide to implement a strategy of offering lower prices on
certain products during off hours to attract more customers. After a month of
pursuing the new strategy, managers can look at sales data for the month and
evaluate whether the strategy resulted in increasing sales and then choose to keep
the new price scheme or alter their strategy.
Strategic decision making, or strategic planning, involves in the process of
creating an organization's mission, values, goals and objectives. Deciding upon a
particular action plan a company also involves in altering strategies based on
observed outcomes. Strategic decision making can transform companies into large
groups and industries.
Strategic decisions are long term, complex decisions made by senior
management. These decisions will affect the entire direction of the firm. An example
may be to become the market leader in their field.
Some entrepreneurs have the ability to make strategic decisions quickly,
sometimes with limited information. While taking a calculated risk, you must set a
threshold to qualify your decisions. Just for instance, a major client drops out
when you are about to execute a big marketing plan, what do you do? You agree on
the minimum feasible outcome you want. The impact, strategic management and
leadership styles can have on strategic decision making can result in profitable
consequences.
For instance, the manager of a hotel wants to increase sales. He decides to
implement a strategy of offering lower prices during off hours to attract more
customers. After few weeks of pursuing the new strategy, the managers looks at
data for monthly sales and evaluate whether the strategy resulted in increasing
sales .He can then choose to keep the new price scheme or alter his strategy
accordingly.
Usually it happens that entrepreneurs may have an idea for their chosen
industry and can be also professional in it, but they are unable to manage the
business. They often seek outside help to advise in the strategic decision making
process. These mentors turn out to be a vital source of advice for them. Some
business owners hire professional consultants to help them make strategic
decisions.
Any person, corporation, or industry should know their current affairs, where
they are and what they want. The process of strategic planning utilizes metrics that
provide a realistic picture of the corporation, creating the necessary motivation for
the development of a strategic plan. According to a survey taken as of now the
 25

process of strategic decision making can be executed in a few steps and the selected
strategy must be sufficiently robust to enable the firm to perform activities
differently from its rivals or to perform similar activities in a more efficient manner.
Flaws in strategic decision making can affect individual economic decisions; it
affects corporate strategic planning as well. Hence look for feedback and monitor
the results.
It is always a good habit to see what practices other companies are using to
execute successful strategic decisions. Strategic decision making and planning is
ultimately about resource allocation and would not be relevant if resources were
unlimited. Financial goals and financial performance can play a more central role in
the strategic planning and decision-making process, particularly in the
implementation stage.
3.5 Differences between Strategic, Administrative and Operational decisions
These can be summarized as:
Strategic Decisions Administrative Decisions Operational Decisions
Long-term decisions. Administrative decisions Operational decisions are
are taken daily. not frequently taken.
These are considered where Short-term based Medium-period based
The future planning is Decisions. decisions.
concerned.
Accordance with According to strategic and Accordance with strategic
organizational mission and operational Decisions. and administrative
vision. decision.
Related to overall Counter Related to working of Related to production.
planning employees
Deal with organizational Welfare of employees Related to production and
Growth. working factory growth.

4. REVISION POINTS
Strategic decisions are Long-term decisions. Administrative decisions are
taken daily.
5. INTEXT QUESTIONS
1. Brief the steps in decision making process.
2. Define the term Decision Making.
6. SUMMARY
The decision making process helps managers. Decision-making is concerned
with selecting a course of action from among alternatives to achieve a
predetermined objective. Strategic decisions are long term, complex decisions made
by senior management.
7. TERMINAL EXERCISES
1. Decision making process helps i Managers ii Stakeholders iii Employee iv
Government
2. Decision making is selecting i the alternative ii the objective iii fixing the goal
iv an executive
 26

8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Explain the differences between Strategic, Administrative and Operational
decisions
2. Explain the Characteristics of Strategic Decisions
10. REFERENCE BOOKS
1. Essentials of Management, Andrew DuBrin, South western cengage learning
8th Edition.
2. Strategic Management and Business Policy
By B. Hiriyappa
3. Fundamentals of Strategic Management' 2007 Ed.
By N. Orcullo Rex Book Store Inc
4. Business Policy and Strategic Management
By G. V. Satya Sekhar I. K. International Pvt Ltd, 2009
11. LEARNING ACTIVITY
Visit a factory or a company and list few administrative decisions taken on
that particular day or week of your choice.
12. KEY WORDS
Decision Making, Strategic Decision Making

 27

LESSON - 5

STRATEGY FORMULATION
1. INTRODUCTION
Strategy formulation requires a series of steps performed in sequential order.
The steps must be taken in order because they build upon one another. However,
there are two processes that are continually performed throughout the strategy
formulation: environmental scanning and continuous implementation.
Environmental scanning is simply the process of paying attention to the
external environment for factors that may affect your organization's performance,
which will need to be addressed in the strategy formulation process. For example,
you will pay attention to what your competition is doing and make adjustments to
your strategic plan as necessary throughout the process. Continuous
implementation is simply implementing parts of the strategy that must take place
in order for the next step of the strategy formulation process to be undertaken. The
rest of the strategy formulation must be taken in order.
2. OBJECTIVES
 To know about the aspects of strategy formulation
 To learn the contents in the process of strategy formulation
 To gain knowledge about the phases of strategic assessment.
3. CONTENTS
3.1 What is Strategy Formulation?
Strategy formulation is the process of establishing the organization's
mission, objectives, and choosing among alternative strategies. Sometimes strategy
formulation is called "strategic planning."
A strategy is a broad plan developed by an organization to take it from where it
is to where it wants to be. A well-designed strategy will help an organization reach
its maximum level of effectiveness in reaching its goals while constantly allowing it
to monitor its environment to adapt the strategy as necessary. Strategy formulation
is the process of developing the strategy.
Strategy formulation is the process by which an organization chooses the
most. appropriate courses of action to achieve its defined goals. This process is.
essential to an organization’s success.
Strategy formulation refers to the process of choosing the most appropriate
course of action for the realization of organizational goals and objectives and
thereby achieving the organizational vision.
3.2 Steps in strategy formulation
There are several ways strategy formulation can be done for a company.
However some methods are better than the others. Here are the steps which guide
you in deciding the strategy of your company.
 28

Steps 1 to 5 mainly involve internal or external research as well as very long

term strategy making (Strategies made in the first 5 steps affect the whole life cycle
of the company)
1. Write a Vision Statement – A vision statement (crisp and to the point) is a
must for developing a strategy. Exploring and deciding on the vision of the
company gives you clarity on the main objectives of the company.
2. Mission Statement – Decide a Mission statement for the company. This
mission statement would actually determine the methodology of the
company in reaching its vision, its purposes and its philosophy behind its
goals.
3. Define the company profile – The company profile needs to be comprehensive
which further clears the goals of the organization. What would be the
strengths of the company, capabilities, management. In essence mention
everything you can about the company. This helps in transparency while
deciding the strategy.
4. Study the External environment – No strategy can be complete without
taking into consideration the effect that external environment has on
businesses. Thus an in depth study on external environment is necessary
and the same should be mentioned in the strategy report.
5. The 5th step involves matching all three – Mission statement, Company
profile and the external environment such that they are in sync to achieve
the vision of the company.
From here on, Step 6 to 10 involve decision making based on the research
as well as the decisions taken for the company in the previous steps. The
last steps are more inclined towards implementation.
6. Deciding the actions for accomplishing the mission of the organization
7. Selecting long term strategies which will be most effective
8. Deciding on short term strategies arising from the long term ones such that
these short term strategies too are in sync with the mission and vision
statement
9. Deciding the budget and resource allocation according to the short term
strategy
10. Implementation of the strategies along with pre decided review system along
with measures to maintain control and a fallback short term plan.
Following these steps of deciding on a strategy, you get – A vision statement, a
mission statement, long term strategies, short term strategies, budget and resource
allocation and finally implementation along with review plans.
3.3 Strategic thrust
Strategic thrusts are high-level initiatives arising from the strategic vision and
serve to guide the action plans towards some over-arching goals.
Strategic thrust will come after strategic direction, as it sets out what you need
to do or execute in order to secure eventual competitive advantage; in a nut shell,
it's your cluster of bold initiatives to be undertaken, in both strategic and tactical
terms.
 29

3.4 How do you create objectives?(THRUST)

Once the organization has decided that it does wish to develop objectives, how
do you go about doing so? Let's look at the process that will help you to define and
refine objectives for your organization.
Define or reaffirm your vision and mission statements
The first thing you will need to do is review the vision and mission statements
your organization has developed. Before you determine your objectives, you should
have a "big picture" that they fit into.
Determine the changes to be made
The crux of writing realistic objectives is learning what changes need to
happen in order to fulfill your mission.
There are many ways to do this, including:
 Research what experts in your field believe to be the best ways to solve the
problem. For many community issues, researchers have developed useful
ideas of what needs to occur to see real progress. This information may be
available through local libraries, the Internet, state and national agencies,
national nonprofit groups, and university research groups.
 Discuss with local experts what needs to occur. Some of the people with
whom you may wish to talk include:
o Other members of your organization
o Local experts, such as members of other, similar organizations who
have a great deal of experience with the issue you are trying to
change
o Your agents of change, or the people in a position to contribute to the
solution. Agents of change might include teachers, business leaders,
church leaders, local politicians, community members, and members
of the media.
o Your targets of change, the people who experience the problem or
issue on a day-to-day basis and those people whose actions
contribute to the problem. Changing their behavior will become the
heart of your objectives.
 Discuss the logistical requirements of your own organization to successfully
address community needs. At the same time your organization is looking at
what needs to happen in the community to solve the issue important to you,
you should also consider what your organization requires to get that done.
Do you need an action plan? Additional funding? More staff, or more
training for additional staff? This information is necessary to develop the
process objectives we talked about earlier in this section.

At this point in the planning process, you don't need hard and fast answers to
the above questions. What you should develop as part of this step is a general list of
what needs to occur to make the changes you want to see.
 30

3.5 The Strategic Assessment has four phases

Phase 1: Where are we?
The first step is to determine our mission. The second step is to identify the
leader's responsibilities, leadership style and values. The third and final step in
Phase 1 is to analyze the environments in which an organization exists, internally
and externally.
Phase 2: Where do we want to go?
Step 4 is development of the organizational vision and values. Step 5 is to
identify your key processes and systems. Step 6 is to determine the gaps in
performance in our key systems and processes. Step 7, the final step in Phase 2, is
where we establish strategic and operational objectives that once obtained, will
close the gaps in performance in our key systems and processes
Phase 3: How are we going to get there?
This phase, which has a single step, requires the development of an
implementation plan and systems for monitoring performance.
Phase 4: Are we getting there?
Step 9, therefore, is where we determine how we will measure objective/goal
accomplishment and identify other means for progress feedback. Step 10 is review
and evaluation.
3.6 Strategic options
Strategic thrust will come after strategic direction situation that an
organisation (or group of organisations) faces. Strategic options take. advantage of
facts and actors, trends, opportunities and threat of the outside world. After the
scenario analysis and the analysis of the competitive position of the firm and its
competitors, managers can identify and evaluate the set of strategic options the
firm has at its disposal to modify its business model in order to get its desirable
goals. After the evaluation of the set of potential strategic options a firm has to
choose the one / the ones that better fit with its strategic vision and move on with
the implementation.
Implementing the strategic options in order to realize the strategic vision
means act on the business model of the firm, and on its different aspects. Due to
the relevance of the relation between strategic options and business model it could
be useful to get a little more deeply in the concept of business model.
3.7 Corporate Level Strategy
Strategy may operate at different levels of an organization – corporate level,
business level, and functional level. The strategy changes based on the levels of
strategy.
Corporate strategy is a process used by companies to plan and execute their
business goals. It involves deciding how to market themselves and create a
profitable company.
Corporate level strategy occupies the highest level of strategic decision making
and covers actions dealing with the objective of the firm, acquisition and allocation
 31

of resources and coordination of strategies of various SBUs for optimal

performance.
Top management of the organization makes such decisions. The nature of
strategic decisions tends to be value-oriented, conceptual and less concrete than
decisions at the business or functional level. Corporate level strategy is concerned
with the strategic decisions a business makes that affect the entire organization.
3.8 Business-Level Strategy.
Business-level strategy is an ideal that promotes providing excellent and
proactive customer service in order to generate better financial returns. This
method of operation focuses on monetary needs and creating superior returns on
investment. Maximizing employee performances and reducing waste create the
most profitable corporate landscape
Business level strategy is – applicable in those organizations, which have
different businesses-and each business is treated as strategic business unit (SBU).
The fundamental concept in SBU is to identify the discrete independent product /
market segments served by an organization.
Since each product/market segment has a distinct environment, a SBU is
created for each such segment. For example, Reliance Industries Limited operates
in textile fabrics, yarns, fibers, and a variety of petrochemical products. For each
product group, the nature of market in terms of customers, competition, and
marketing channel differs.
Therefore, it requires different strategies for its different product groups. Thus,
where SBU concept is applied, each SBU sets its own strategies to make the best
use of its resources (its strategic advantages) given the environment it faces. At
such a level, strategy is a comprehensive plan providing objectives for SBUs,
allocation of resources among functional areas and coordination between them for
making optimal contribution to the achievement of corporate-level objectives.
Such strategies operate within the overall strategies of the organization. The
corporate strategy sets the long-term objectives of the firm and the broad
constraints and policies within which a SBU operates. The corporate level will help
the SBU define its scope of operations and also limit or enhance the SBUs
operations by the resources the corporate level assigns to it. There is a difference
between corporate-level and business-level strategies.
For example, Andrews says that in an organization of any size or diversity,
corporate strategy usually applies to the whole enterprise, while business strategy,
less comprehensive, defines the choice of product or service and market of
individual business within the firm. In other words, business strategy relates to the
‘how’ and corporate strategy to the ‘what’. Corporate strategy defines the business
in which a company will compete preferably in a way that focuses resources to
convert distinctive competence into competitive advantage.’
 32

Corporate strategy is not the sum total of business strategies of the

corporation but it deals with different subject matter. While the corporation is
concerned with and has impact on business strategy, the former is concerned with
the shape and balancing of growth and renewal rather than in market execution.
Business-level strategy puts the consumer first and makes shoppers the
centerpiece of all corporate endeavors. This is done so as to enhance client
relationships and entice consumers to maintain long-term associations with
specific businesses. By luring clients back time and again, firms are able to count
on this dedicated slice of the market and enhance operational stability based on the
reliability of funding from long-standing customers.
These strategies also entail employee training and investment that support
such endeavors. Generating a more positive and proactive workforce that is
dedicated to shopper satisfaction is important. Offering educational opportunities
that promote this method of thinking and acting helps support business-level
strategy.
3.9 Functional-Level Strategy
Functional strategy, as is suggested by the title, relates to a single functional
operation and the activities involved therein. Decisions at this level within the
organization are often described as tactical. Such decisions are guided and
constrained by some overall strategic considerations.
Functional strategy deals with relatively restricted plan providing objectives for
specific function, allocation of resources among different operations within that
functional area and coordi-nation between them for optimal contribution to the
achievement of the SBU and corporate-level objectives.
Below the functional-level strategy, there may be operations level strategies as
each function may be dividend into several sub functions. For example, marketing
strategy, a functional strategy, can be subdivided into promotion, sales,
distribution, pricing strategies with each sub function strategy contributing to
functional strategy.
4. REVISION POINTS
Strategic thrust will come after strategic direction. Functional strategy, relates
to a single functional operation and the activities involved therein.
5. INTEXT QUESTIONS
1. What is strategic thrust?
2. Write a short note on strategic options.
3. State the importance of strategic assessment.
6. SUMMARY
Corporate level strategy is concerned with the strategic decisions a business
makes that affect the entire organization. Business strategy deals with how a
company’s or SBUs product or service should compete in the market. Functional
strategy deals with relatively restricted plan providing objectives for specific function.
 33

7. TERMINAL EXERCISES
1. Strategic thrust is (i) objectives (ii) cost (iii) effort (iv) time
2. Strategic thrust will come _________ strategic direction
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Elaborate the phases of strategic assessment.
2. Write a detailed note on corporate strategy and business strategy.
10. REFERENCE BOOKS
1. Strategic Management and Business Policy
By B. Hiriyappa
2. Fundamentals of Strategic Management' 2007 Ed.
By N. Orcullo Rex Book Store Inc
3. Business Policy and Strategic Management
By G. V. Satya Sekhar I. K. International Pvt Ltd, 2009
11. LEARNING ACTIVITY
Collect and write three business level strategies followed by a company of your
choice.
12. KEY WORDS
Business level strategy, Functional level strategy, strategic thrust, strategic
options, strategic assessment.

 34

LESSON - 6

GLOBAL STRATEGIES, CUSTOMIZATION,

STANDARDIZATION AND STRATEGIC ALLIANCES
1. INTRODUCTION
‘Global Strategy’ is a shortened term that covers three areas: global,
multinational and international strategies. Essentially, these three areas refer to
those strategies designed to enable an organisation to achieve its objective of
international expansion.
In developing ‘global strategy’, it is useful to distinguish between three forms of
international expansion that arise from a company’s resources, capabilities and
current international position. If the company is still mainly focused on its home
markets, then its strategies outside its home markets can be seen as international.
For example, a dairy company might sell some of its excess milk and cheese
supplies outside its home country. But its main strategic focus is still directed to
the home market.d to enable an organisation to achieve its objective of
international expansion.
2. OBJECTIVES
 To know the meaning of the term global strategy
 To gain knowledge about cutomization and standardization
 To learn about the importance of strategic alliances
3. CONTENTS
3.1 What is global strategy?
Global strategy as defined in business terms is an organization's strategic
guide to globalization. Such a connected world, allows a business’s revenue to not
be to be confined by borders. A business can employ a global business strategy to
reap the rewards of trading in a worldwide market.
Implications of the three definitions within global strategy:
 International strategy: the organisation’s objectives relate primarily to the
home market. However, we have some objectives with regard to overseas
activity and therefore need an international strategy. Importantly, the
competitive advantage – important in strategy development – is developed
mainly for the home market.
 Multinational strategy: the organisation is involved in a number of markets
beyond its home country. But it needs distinctive strategies for each of these
markets because customer demand and, perhaps competition, are different
in each country. Importantly, competitive advantage is determined
separately for each country.
 Global strategy: the organisation treats the world as largely one market and
one source of supply with little local variation. Importantly, competitive
advantage is developed largely on a global basis.
 35

3.2 Customize
To modify or build according to individual or personal specifications or
preference.
3.2.1Product customization - definition
The process of delivering wide-market goods and services that are modified to
satisfy a specific customer need. Mass customization is a marketing and
manufacturing technique that combines the flexibility and personalization of
"custom-made" with the low unit costs associated with mass production.
Mass customization, in marketing, manufacturing, call centres and
management, is the use of flexible computer-aided manufacturing systems to
produce custom output. Those systems combine the low unit costs of mass
production processes with the flexibility of individual customization.
3.3 Customization
3.3.1 Definition
Providing the products/providing the services intune with the customer/
consumer/ clint needs than the companies wishes/conventional procedures.
Acting/moving/learning/decision making/implementing strategies/modifying
procedures/ modifying process/ modifying policies with respect to the changing
needs in the market/industry/society unlike adopting the unique conventional
approaches.
To be precise, acting intune with the changing needs.
3.4 Standardization
Standardizatioin is the process of developing and implementing technical
standards. Standardization can help to maximize compatibility, interoperability,
safety, repeatability, or quality. It can also facilitate commoditization of formerly
custom processes.
3.4.1 Importance and Advantages of Standardization
Standardization plays an important role in marketing. It makes selling and
buying functions easy and more effective. Mostly, buying and selling of products is
done on the basis of grade or mark. If quantity, size, quality of goods is already
known, only price remains to be negotiated.
The goods which are not standardized, should be bought and sold by
inspection. It limits the scope of market. If the goods are standardized and graded,
the customers even living far from the seller or distributor can buy goods only by
seeing sample, standard name. If the goods are not standardized, there remains
possibility for the customers to be cheated on the one hand and seller cannot earn
goodwill on the other.
We can examine the role, importance and advantages of standardization in
marketing from the viewpoint of seller, customer and society.
 36

1. Importance and Advantages of Standardization from Consumers' Viewpoint

The importance and advantages of standardization of consumers' point of view
can be mentioned as follows:
i. Buying Facility
Customers can buy standardized goods easily. The customers need to inspect
all the goods which are not standardized or graded. The customers can buy
standardized goods without looking, inspecting or by looking sample or from
description.
ii. Using Facility
Using method, instruction and composition of standardized goods are given;
this makes the consumers feel easy to use. Necessary repair facility also is provided
for some goods.
iii. Protection
Customers do not have to suffer cheating from seller with standardized goods.
They can remain protected from adulteration and exploitation from seller. As
quality of the goods is already known, standardization minimizes quality related
risk.
iv. Fair Price
Since quality, measure, size of the product are known, the customers can buy
goods with fair price after studying the market price.
v. Market Information
Customers can get short description and information about standardized
goods through advertisements, other buyers and different sources. The customers
become able to take proper buying decisions as they can get information about
prices, relative advantages, durability etc. of standardized goods.
2. Importance and Advantages of Standardization from Seller's View Point
The importance and advantages of standardization from seller's point of view
can be mentioned as follows:
i. Selling Facility
The goods which are standardized become very easy for sellers to sell. No
inspection is needed to sell such goods; they can be sold out only by looking sample
or description. The sellers do not have to bother about showing sample or giving
description if they are graded.
ii. Wider Market
Determining standard of products, and grading them is the foundation of an
organized, open and wider market. This develops and expands market of any
products. As the products are not needed to be inspected, the customers even of
far-off places send purchase order on the basis of standard, grade, size,
measurement etc.
iii. Loan Facility
As the standardized goods have ready-market and fluctuation of price may be
exceptional, banks easily accept such goods as security to provide loans.
 37

iv. Increase in Goodwill

As standardized goods have certain quality, quantity and price; goodwill of the
sellers of such goods increases. They can earn more profit from selling high quality
goods.
3. Importance and Advantages of Standardization from Society's Viewpoint
Society can also get different benefits from standardized goods. The
importance and advantages of standardization from the point of view of society can
be mentioned as follows:
i. Mass Production
The society can get standard quality goods at lower price from mass
production of the same standard and same grade goods.
ii. Market Information
As the producers and trade associations publish information and messages
about standardized goods in business bulletins, newspapers etc. conscious society
know everything about the quality, standard, measurement, using method of the
goods etc.
iii. Protection
There does not remain any risk for the society to be cheated by the sellers in
buying standardized goods. Every buyer knows the quality, standard and price of
the goods. The society remains protected from any adulteration in the
standardization goods.
iv. Employment Creation
When demand for standardized goods increases, the firm should to intensify
the process of production and distribution. For doing so more manpower is needed.
The unemployed of the society can get employment in the firm. Hence the society
can increase income and make their living standard better from employment.
3.5 Customized v/s Standardized Marketing Strategy
In recent years, there has been an urgency amongst local organizations to
diversify their operations in the international market to enhance their revenues,
competitiveness and global market share.
Globalization has led to an increased integration of economies and trade
amongst several nations across the globe. These factors have made it essential for
organizations to adopt international marketing strategies to guard them against
foreign competition. However, there have been certain controversies regarding
which international marketing strategy should be implemented in order to
maximize an organizations goals and objectives. Also, the design of the
international marketing strategies involves evaluation of external environmental
factors, which vary from country to country.
Customized Strategy
Customized strategy is based on the ideology that 'due to cultural and other
difference amongst countries, marketing strategies should be tailor made for each
country’. This strategy is influenced by three distinct differences amongst countries:
a) Buyer behavior characteristics b) Socioeconomic condition c) Competitive
environment.
 38

Standardized Strategy
The Standardized strategy is in complete contrast to the customized strategy.
It is argued that due to globalization, several economies have been integrated and
hence leading to organizations to create homogeneous products. Standardization
strategy helps Multinational corporations increase their competitive advantage by
achieving cost competency and benefits from economies of scale.
Standardized strategy reduces costs for organizations through elimination of
Research and Development in foreign countries. For instance, Gillette Razor uses
the same technology to manufacture the Mach 3 all over the world across various
countries. It also helps reducing costs that are required for product design and
packaging in foreign subsidiaries. For example, Sony uses the same packaging
across several countries for its Playstation product. Also, the Standardized strategy
helps Multinational corporations to achieve a common global image for its products
across the universe and eventually aid them in increasing its global sales. For
instance, an individual loyal to a product in one country will buy the same product
in another country due to brand loyalty. It has been proven that products
successful in one country will achieve success in another country with similar
market and competitive conditions.
There have been cases of successful implementation of standardized strategies
by Multinational Corporations. For instance, amongst consumer durable- the
strategy used by Mercedes Benz to sell its cars all across the globe. Amongst non-
durable goods, Coca-Cola has prevailed successful in the global market while for
industrial Boeing jets are sold using common marketing strategies across the globe.
3.6 Meaning of Strategic Alliance
A strategic alliance in business is a relationship between two or more
businesses that enables each to achieve certain strategic objectives neither would
be able to achieve on their own. The strategic partners maintain their status as
independent and separate entities, share the benefits and control over the
partnership, and continue to make contributions to the alliance until it is
terminated. Strategic alliances are often formed in the global marketplace between
businesses that are based in different regions of the world.
3.7 Advantages of Strategic Alliances
Strategic alliances usually are only formed if they provide an advantage to all
the parties in the alliance. These advantages can be broken down to four broad
categories.
The first category is organizational advantages. You may wish to form a strategic
alliance to learn necessary skills and obtain certain capabilities from your strategic
partner. Strategic partners may also help you enhance your productive capacity,
provide a distribution system, or extend your supply chain. Your strategic partner
may provide a good or service that complements a good or service you provide,
thereby creating a synergy. If you are relatively new or untried in a certain industry,
having a strategic partner who is well-known and respected will help add legitimacy
and creditability to your venture.
 39

A second category is economic advantage. You can reduce costs and risks by
distributing them across the members of the alliance. You can also obtain greater
economies of scale in an alliance, as production volume can increase, causing the
cost per unit to decline. Finally, you and your partners can take advantage of co-
specialization, where you bundle your specializations together, creating additional
value, such as when a leading computer manufacturer bundles its desktop with a
leading monitor manufacturer's monitor.
Another category includes strategic advantages. You may join with your rivals to
cooperate instead of compete. You can also create alliances to create vertical
integration where your partners are part of your supply chain. Strategic alliances
may also be useful to create a competitive advantage by the pooling of resources and
skills. This may also help with future business opportunities and the development of
new products and technologies. Strategic alliances may also be used to get access to
new technologies or to pursue joint research and development.
Lastly is the category of political advantages. Sometimes you need to form a
strategic alliance with a local foreign business to gain entry into a foreign market
either because of local prejudices or legal barriers to entry. Forming strategic
alliances with politically-influential partners may also help improve your own
influence and position.
A strategic alliance is a strategic cooperation between two or more organizations,
with the aim to achieve a result one of the parties cannot achieve alone.
 A strategic alliance is a “partnership” between two organizations where both
parties are able to derive value from the engagement (vs a relationship –
where only 1 party sees value). You would start a strategic alliance when you
are unable to achieve results on your own, or when the strategic alliance will
dramatically improve the time to results.
 A strategic alliance is a positive relationship between two companies that
increase revenue, industry reach, and internal knowledge.
 A strategic alliance is a long-term value-creating relationship.
 What is strategic? This is a much-overused word by those trying to imply
importance. In my view strategy is about the allocation of the scarce
resource to achieve the corporate mission and therefore the little word “or” is
important: build or buy or partner, direct sales or channel or alliance, etc.
These decisions include calculation of opportunity cost by the finance or
strategy director. Crucially strategic implies approval and regular review by
the CEO or direct report. Alliance decisions lower down are tactical and
often fail because of lack of CEO support, no matter how well they are
aligned to (assumed) strategy.
 A collaborative relationship which leads to success for both parties.
 An opportunity for each member of the relationship to achieve their goals,
but assisting the other party to achieve theirs.
 A ‘together we are stronger’ relationship.
 40

 A strategic alliance is a (formal) agreement based on mutual trust to

cooperate intensively in order to achieve a goal that partners cannot achieve
(easily) independently.
 A strategic alliance means creating value beyond an individual company can
do. The equation is “1+1>2″.
4. REVISION POINTS
Providing the products/services in tune with the customer.
Standardized strategy reduces costs for organizations through elimination of
Research and Development
A strategic alliance is a strategic cooperation between two or more
organizations.
5. INTEXT QUESTIONS
1. Define Standardization.
2. What do you mean by strategic alliance.
3. Why customization strategy?
6. SUMMARY
Standardization is the process of developing and implementing technical
standards. Standardization can help to maximize compatibility, interoperability,
safety, repeatability, or quality. It can also facilitate commoditization of formerly
custom processes. A strategic alliance means creating value beyond an individual
company can do.
7. TERMINAL EXERCISES
1. Strategic alliance is to create i. value ii. gain more profit iii. brand value
iv. all the three
2. Standardization is developing i. technical standard ii. fixing same price
iii. quality certification iv. brand standard
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Narrate the advantages of Standardization
2. Elaborate the reasons behind the customization of a product or service.
10. REFERENCE BOOKS
1. Strategic Management and Business Policy
By B. Hiriyappa
2. Fundamentals of Strategic Management' 2007 Ed.
By N. Orcullo Rex Book Store Inc
3. Business Policy and Strategic Management
By G. V. Satya Sekhar I. K. International Pvt Ltd, 2009
11. LEARNING ACTIVITY
Select and note down a standardized product of your choice.
12. KEY WORDS
Strategic Alliance, Standardization, Customization.

 41

LESSON - 7

STABILITY, EXPANSION AND RETRENCHMENT STRATEGIES

1. INTRODUCTION
A firm following stability strategy maintains its current business and product
portfolios; maintains the existing level of effort; and is satisfied with incremental
growth.
A stable strategy arises out of a basic perception by the management that the
firm should concentrate on using its present resources for developing its
competitive strength in particular market areas. In simple words, stability strategy
refers to the company’s policy of continuing the same business and with the same
objectives.
2. OBJECTIVES
 To know about stability, expansion and retrenchment strategies
 To learn the need for stability strategy
 To gain knowledge about the advantages of stability strategy
3. CONTENTS
3.1 The Concept of Stability Strategy
A corporation may choose stability over growth by continuing its current
position.
3.2 The Need for Stability Strategy
It continues to serve the customers in the same product or service, market and
functional sectors.
Its main strategic decisions focus on incremental improvement of functional
performance.’
The focus is on maintaining and developing competitive advantages consistent
with the present resources and market requirements.
3.3 Advantages of Stability Strategy
 The firm is successfully run and the objectives are achieved and there is
satisfactory performance. Therefore, the management may want to continue
with the same activities.
 A stability strategy is less risky. Unless the conditions are really bad, a firm
need not take any additional risks.
 The management doesn’t foresee any change in the environment or
opportunity in the market or any threat.
 When pursuing this strategy, there is no disruption in routine work.
3.4 Nature of Stability or Consolidation Strategy
It focuses on fine-tuning its business operations and improving functional
efficiencies through better deployment of resources. In other words, a firm is said to
follow stability/ consolidation strategy if:
 42

1. It decides to serve the same markets with the same products;

2. It continues to pursue the same objectives with a strategic thrust on
incremental improvement of functional performances; and
3. It concentrates its resources in a narrow product-market sphere for
developing a meaningful competitive advantage.
Adopting a stability strategy does not mean that a firm lacks concern for
business growth. It only means that their growth targets are modest and that they
wish to maintain a status quo. Since products, markets and functions remain
unchanged, stability strategy is basically a defensive strategy. A stability strategy is
ideal in stable business environments where an organization can devote its efforts
to improving its efficiency while not being threatened with external change. In some
cases, organizations are constrained by regulations or the expectations of key
stakeholders and hence they have no option except to follow stability strategy.
Generally large firms with a sizeable portfolio of businesses do not usually
depend on the stability strategy as a main route, though they may use it under
certain special circumstances. They normally use it in combination with the other
generic strategies, adopting stability for some businesses while pursuing expansion
for the others. However, small firms find this a very useful approach since they can
reduce their risk and defend their positions by adopting this strategy. Niche players
also prefer this strategy for the same reasons.
Conditions Favouring Stability Strategy
Stability strategy does entail changing the way the business is run, however,
the range of products offered and the markets served remain unchanged or
narrowly focused. Hence, the stability strategy is perceived as a non-growth
strategy. As a matter of fact, stability strategy does provide room for growth, though
to a limited extent, in the existing product-market area to achieve current business
objectives. Implementing stability strategy does not imply stagnation since the basic
thrust is on maintaining the current level of performance with incremental growth
in ensuing periods. An organization’s strategists might choose stability when:
1. The industry or the economy is in turmoil or the environment is volatile.
Uncertain conditions might convince strategists to be conservative until they
became more certain.
2. Environmental turbulence is minimal and the firm does not foresee any
major threat to itself and the industry concerned as a whole.
3. The organization just finished a period of rapid growth and needs to
consolidate its gains before pursuing more growth.
4. The firm’s growth ambitions are very modest and it is content with
incremental growth.
5. The industry is in a mature stage with few or no growth prospects and the
firm is currently in a comfortable position in the industry
Rationale for Using Stability Strategy
There are a number of circumstances in which the most appropriate growth
stance for a company is stability rather than growth. Stability strategy is normally
 43

followed for a brief period to consolidate the gains of its expansion and needs a
breathing spell before embarking on the next round of expansion. Organizations
need to ‘cool off’ for a while after an aggressive phase of expansion and must
stabilize for a while or they will become inefficient and unmanageable. India
Cements went through a rapid expansion by acquiring other cement companies
before stabilizing and consolidating its operations. Videocon and BPL had first
diversified into new businesses and then started consolidating once faced with stiff
competition.
Managers pursue stability strategy when they feel that the enterprise has been
performing well and wish to maintain the same trend in subsequent years. They
would prefer to adopt the existing product-market posture and avoid departing from
it. Sometimes, the management is content with the status quo because the
company enjoys a distinct competitive advantage and hence does not perceive an
immediate threat.
Stability strategy is also adopted in a number of organizations because the
management is not interested in taking risks by venturing into unknown terrain. In
fact they do not consider any other option as long as the pursuit of existing
business activity produces the desired results. Conservative managers believe
product development, market development or new ways of doing business entail
great risk and therefore, avoid taking decisions, which can endanger the company.
A number of managers also pursue consolidation strategy involuntarily. In fact,
they do not react to environmental changes and avoid drastic changes in the
current strategy unless warranted by extraordinary circumstances.
Sometimes environmental forces compel an organization to follow the strategy
of status quo. This is particularly true for bigger organizations, which have acquired
dominant market share. Such organizations are usually not permitted by the
government to expand because it may lead to monopolistic and restrictive trade
practices detrimental to public interest.
3.5 Approaches to Stability Strategy
There are various approaches to developing stability/consolidation strategy.
The Management has to select the one that best suits the corporate objective. Some
of these approaches are discussed below. In all these approaches, the fundamental
course of action remains the same, but the circumstances in which the firms
choose various options differ.
Holding Strategy
This alternative may be appropriate in two situations: (a) the need for an
opportunity to rest, digest, and consolidate after growth or some turbulent events -
before continuing a growth strategy, or (b) an uncertain or hostile environment in
which it is prudent to stay in a “holding pattern” until there is change in or more
clarity about the future in the environment. With a holding strategy the company
continues at its present rate of development. The aim is to retain current market
share. Although growth is not pursued as such, this will occur if the size of the
 44

market grows. The current level of resource input and managerial effort will not be
increased, which means that the functional strategies will continue at previous
levels. This approach suits a firm, which does not have requisite resources to
pursue increased growth for a longer period of time. At times, environmental
changes prohibit a continuation in growth.
Stable Growth: This alternative essentially involves avoiding change,
representing indecision or timidity in making a choice for change. Alternatively, it
may be a comfortable, even long-term strategy in a mature, rather stable
environment, e.g., a small business in a small town with few competitors. It simply
means that the firm’s strategy does not include any bold initiatives. It will just seek
to do what it already does, but a little better. In this approach, the firm
concentrates on one product or service line. It grows slowly but surely, increasingly
its market penetration by steadily adding new products or services and carefully
expanding its market.
Harvesting Strategy: Where a firm has the dominant market share, it may seek
to take advantage of this position and generate cash for future business expansion.
This is termed has harvesting strategy and is usually associated, with cost cutting
and price increases to generate extra profits. This approach is most suitable to a
firm whose main objective is to generate cash. Even market share may be sacrificed
to earn profits and generate funds. A number of ways can be used to accomplish
the objective of making profits and generating funds. Some of these are selective
price increases and reducing costs without reducing price. In this approach,
selected products are milked rather than nourished and defended. Hindustan
Lever’s Lifebuoy soap is an example in point. It yielded large profits under careful
management.
Profit or Endgame Strategy: A profit strategy is one that capitalizes on a
situation in which old and obsolete product or technology is being replaced by a
new one. This type of strategy does not require new investment, so it is not a
growth strategy. Firms adopting this strategy decide to follow the same technology,
at least partially, while transiting into new technological domains. Strategists in
these firms reason that the huge number of product based on older technologies on
the market would create an aftermarket for spare parts that would last for years.
Sylvania, RCA, and GE are among the firms that followed this strategy. They
decided to stay in the vacuum tube market until the “end of the game.” As with
most business decisions, timing is critical. All competitors eventually must shelve
the old assets at some point of time and move to the new product or technology.
The critical question is, “Can we make more money by using these assets or by
selling them?” The answer to that question changes as time passes.
3.6 Expansion Strategies
Seven Ways to Expand: From Local to Global
1. Increase your sales and products in existing markets. This is obviously the
easiest and most risk-free way to expand. This tactic may require a bigger
 45

location, different pricing strategies, new/improved marketing techniques -

but it will be in a customer group with whom you already have a
relationship. If you get off track, your present customers will let you know!
2. Introduce a New Product. You have a successful product/service that you
have been offering for some time and have been collecting data, customer
feedback and doing the tinkering on your newest product. This is a normal
evolution in business, not just an expansion tactic. When positioned as
adding value and being responsive to customer needs, this can be a
relatively risk-free way to expand.
3. Develop a New Market Segment or Move into New Geography. Both of these
areas require cost outlays and uncertainty. Moving your products into new
categories or demographic segments requires market research, beta testing
and new marketing strategies, i.e. a message for a 16-year old will differ that
one for a 60-year old. Management of new remote locations may absorb
significant time and attention. While the risks are more, the payoffs are large
- and for most businesses looking to expand, these two methods of
expansion are inevitable.
4. Start a Chain restaurant, retail or service business that's easily reproduced
and can be run from a distance is all you need to launch a chain. But, you
must be cognizant of what made the first location a success - was it location,
your staff or you? If it is just you, then duplication is only possible through
detailed operations plans and sharing staff between locations. You will need
to duplicate the plan of your first location while meeting increased customer
demands. Starting a chain gives your current staff a crack at "management"
duties, training opportunities and an opportunity to expand their horizons.
5. Franchise or License. While it's a quick way to grow, a franchise agreement
can cost more to prepare. You will need to be a good teacher, be able to
prepare the training manuals (preferably in more than one language), be
very organized and willing to travel. Licensing can carry less risk, but
demands giving up a certain amount of control. Licensing a patent,
trademark or industrial design means that you sell manufacturing,
distribution or production rights.
6. Join Forces / Strategic Alliance. A merger or acquisition combines the best
of two companies, expands your customer base, increases intellectual
capital and delivers operational efficiencies. The trick is finding the right
partner. These partners may be new distributors, but be forewarned large
retailers exact heavy performance expectations. Can you perform to the
letter of your promise? Can you meet high standards of quality (ISO, or the
like) and adapt your procedures to meet just-in-time delivery? Due diligence
and strong contractual arrangements are essential here.
7. Go Global. You can decide to go global in a number of ways. Growing
markets, rising consumer spending, improved business climate--sometimes
the only place to find these things is overseas. Doing business
internationally can take the form of exporting, licensing, a joint venture or
 46

manufacturing, but whatever form you choose, the basic business rules
apply: assess customer demand, gain legal and accounting assistance,
protect intellectual property and obey regulations.
Expansion Strategies
Every enterprise seeks growth as its long-term goal to avoid annihilation in a
relentless and ruthless competitive environment. Growth offers ample opportunities
to everyone in the organization and is crucial for the survival of the enterprise.
However, this is possible only when fundamental conditions of expansion have been
met. Expansion strategies are designed to allow enterprises to maintain their
competitive position in rapidly growing national and international markets. Hence
to successfully compete, survive and flourish, an enterprise has to pursue an
expansion strategy. Expansion strategy is an important strategic option, which
enterprises follow to fulfil their long-term growth objectives. They pursue it to gain
significant growth as opposed to incremental growth envisaged in stability strategy.
Expansion strategy is adopted to accelerate the rate of growth of sales, profits and
market share faster by entering new markets, acquiring new resources, developing
new technologies and creating new managerial capabilities.
Expansion strategy provides a blueprint for business enterprises to achieve
their long term growth objectives. It allows them to maintain their competitive
advantage even in the advanced stages of product and market evolution. Growth
offers economies of scale and scope to an organization, which reduce operating
costs and improve earnings. Apart from these advantages the organization gains a
greater control over the immediate environment because of its size. This influence is
crucial for survival in mature markets where competitors aggressively defend their
market shares.
3.7 Conditions for Opting for Expansion Strategy
Firms opt for expansion strategy under the following circumstances:
1. When the firm has lofty growth objectives and desires fast and continuous
growth in assets, income and profits. Expansion through diversification
would be especially useful to firms that are eager to achieve large and rapid
growth since it involves exploiting new opportunities outside the domain of
current operations.
2. When enormous new opportunities are emerging in the environment and
the firm is ready and willing to expand its business scope
3. Firms find expansion irresistible since sheer size translates into superior
clout. When a firm is a leader in its industry and wants to protect its
dominant position.
4. Expansion strategy is opted in volatile situations. Substantive growth
would act as a cushion in such conditions.
5. When the firm has surplus resources, it may find it sensible to grow by
levering on its strengths and resources.
6. When the environment, especially the regulatory scenario, blocks the
growth of the firm in its existing businesses, it may resort to diversification
to meets its growth objectives.
 47

7. When the firm enjoys synergy that ensues by tapping certain opportunities
in the environment, it opts for expansion strategies. Economies of scale and
scope and competitive advantage may accrue through such synergistic
operations. Over the last decade, in response to economic liberalisation,
some companies in India expanded the scale of existing businesses as well
as diversified into many new businesses.
Growth of a business enterprise entails realignment of its strategies in
product-market environment. This is achieved through the basic growth
approaches of intensive expansion, integration (horizontal and vertical integration),
diversification and international operations. Firms following intensification strategy
concentrate on their primary line of business and look for ways to meet their
growth objectives by increasing their size of operations in this primary business. A
company may expand externally by integrating with other companies. An
organization expands its operations by moving into a different industry by pursuing
diversification strategies. An organization can grow by “going international”, i.e., by
crossing domestic borders by employing any of the expansion strategies discussed
so far.
Expansion through Intensification
Intensification involves expansion within the existing line of business.
Intensive expansion strategy involves safeguarding the present position and
expanding in the current product-market space to achieve growth targets. Such an
approach is very useful for enterprises that have not fully exploited the
opportunities existing in their current products-market domain. A firm selecting an
intensification strategy, concentrates on its primary line of business and looks for
ways to meet its growth objectives by increasing its size of operations in its primary
business. Intensive expansion of a firm can be accomplished in three ways, namely,
market penetration, market development and product development first suggested
in Ansoff’s model. Intensification strategy is followed when adequate growth
opportunities exist in the firm’s current products-market space. However, while
going in for internal expansion, the management should consider the following
factors.
1. While there are a number of expansion options, the one with the highest net
present value should be the first choice.
2. Competitive behaviour should be predicted in order to determine how and
when the competitors would respond to the firm’s actions. The firm must
also assess its strengths and weaknesses against its competitors to
ascertain its competitive advantages.
3. The conditions prevailing in the environment should be carefully examined
to determine the demand for the product and the price customers are
willing to pay.
4. The firm must have adequate financial, technological and managerial
capabilities to expand the way it chooses.
 48

5. Technological, social and demographic trends should be carefully monitored

before implementing product or market development strategies. This is very
crucial, especially, in a volatile business environment.
3.8 Ansoff’s Product-Market Expansion Grid
The product/market grid first presented by Igor Ansoff (1968), has proven to
be very useful in discovering growth opportunities. This grid best illustrates the
various intensification options available to a firm. The product/market grid has two
dimensions, namely, products and markets. Combinations of these two dimensions
result in four growth strategies. According to Ansoff’s Grid, three distinct strategies
are possible for achieving growth through the intensification route. These are:
1. Market Penetration: The firm seeks to achieve growth with existing products
in their current market segments, aiming to increase its markets share.
2. Market Development: The firm seeks growth by targeting its existing
products to new market segments.
3. Product Development: The firm develops new products targeted to its
existing market segments.
4. Diversification: The firm grows by diversifying into new businesses by
developing new products for new markets.
3.9 Retrenchment Strategies
Definition: The Retrenchment Strategy is adopted when an organization aims
at reducing its one or more business operations with the view to cut expenses and
reach to a more stable financial position.
Retrenchment is a short-run renewal strategy designed to overcome
organizational weaknesses that are contributing to deteriorating performance. It is
meant to replenish and revitalize the organizational resources and capabilities so
that the organization can regain its competitiveness. Retrenchment may be thought
as a minor surgery to correct a problem. Managers often try a minimal treatment
first-cost cutting or a small layoff-hoping that nothing more painful will be needed
to turn the firm around. When performance measures reveal a more serious
situation, more drastic action must be taken to restore performance.
Retrenchment strategies call for two primary actions:
Cost cutting and Restructuring
One or both of these tools will be employed more extensively in turnaround
situations, because the problems are deeper there than in retrenchment situations.
A cost cutting program should be preceded by careful thought and analysis. Rarely
is it wise to use a simplistic “across-the-board” cost cutting program. Some
departments or projects may need additional funding, while others need modest
cuts, and still others need drastic cuts or need to be eliminated altogether. If cost
cutting is a part of the strategy implementation, then the plan of implementation
should clearly specify how it will be applied across the organization and why is it
being proposed.
Retrenchment strategy alternatives include shrinking selectively, extracting
cash for investment in other businesses, and divestment. While these strategies
 49

result in generating cash, they differ in terms of their intentions. Divestment of the
whole business is an “end game” strategy and it may be done via selling or
liquidation of business. Under the strategy of extraction of cash for investment in
other business, cash is generated from the troubled business mainly via budget
and cost contraction. In both strategies, the intention of management is to quit the
troubled business.
In the shrinking selectively strategy (SSS), cash is generated via downsizing
(contraction of size or divesting some operations. The strategy of shrinking
selectively involves retrieving the value of investments in some parts of the market
while reinvesting in others because in some niches’ demand will continue to be
grow while in others the demand shrivels. The objective is to capture the desirable
niches. A firm, which chooses the shrink selectively strategy, should have some
internal competitive advantages, which it hopes to preserve. Thus, it may prefer to
retain some part of its former businesses by shrinking rather than divesting,
because of the possible advantages it had built up through the years.
Shrinking selectively as a repositioning strategy (i.e., matching market niche
with distinctive competence) often results in renewed strength. For example, the
TATA group continued concentrating on its various business including steel,
automobile manufacturing, etc while selling Tomco, which did not share a
synergistic relationship with its current portfolio of businesses. Similarly, the LTV
steel company’s decision (after filing in 1986) to concentrate on “flat rolled” steel
products, while divesting other steel operations, reflects the intent to maintain a
leadership position in production of high-quality, value-added steel for critical
engineering application.
In essence, restructuring involves an organization refocusing on its primary
business. During the 1970s, many firms diversified into businesses they knew little
about. Management teams thought this conglomerate diversification would spread
their firms’ risks. If the fortunes of one business declined, the others in its business
portfolio would protect earnings. Quite often, companies struggled to compete well
in the business lines they knew little about. Many of the mergers of the 1980s
occurred because these firms restructured their businesses by trying to sell off
these businesses and refocus their efforts in their original lines.
Variants of Retrenchment Strategy:
The three major variants of retrenchment strategy are -
1. Turnaround strategy,
2. Survival strategy and
3. Liquidation strategy.
Turnaround Strategy
Turnaround is a strategy adopted by firms to arrest the decline and revive
their growth. A turnaround situation exists when a firm encounters multiple years
of declining Financial performance subsequent to a period of prosperity (Bibeault,
1982; Hambrick & Schecter, 1983; Schendel et al., 1976; Zammuto & Cameron,
 50

1985). Turnaround situations are caused by combinations of external and internal

factors (Finkin, 1985; Heany, 1985; Schendel et al., 1976) and may be the result of
years of gradual slowdown or months of precipitous financial decline. The strategic
causes of performance downturns include increased competition, raw material
shortages, and decreased profit margins, while operating problems include strikes
and labour problems, excess plant capacity and depressed price levels. The
immediacy of the resulting threat to company survival posed by the turnaround
situation is known as situation severity (Altman, 1983; Bibeault, 1982; Hofer,
1980). Low levels of severity are indicated by declines in sales or income margins,
while extremely high severity would be signaled by imminent bankruptcy. The
recognition of a relationship between cause and response is imperative for a
turnaround process and hence, the importance of properly assessing the cause of
the turnaround situation so that it could be the focus of the recovery response is
very important.
Turnaround Process
The Turnaround Process begins with a depiction of external and internal
factors as causes of a firm’s performance downturn. If these factors continue to
detrimentally impact the firm, its financial health is threatened. Unchecked
financial decline places the firm in a turnaround situation. A turnaround situation
represents absolute and relative-to-industry declining performance of a sufficient
magnitude to warrant explicit turnaround actions. A turnaround is typically
accomplished through a two stage process. The initial stage is focused on the
primary objectives of survival and achievement of a positive cash flow. The means
to achieve this objective involves an emergency plan to halt the firm’s financial
haemorrhage and a stabilization plan to streamline and improve core operations. In
other words, it involves the classic retrenchment activities: liquidation, divestment,
product elimination, and downsizing the workforce. Retrenchment strategies are
also characterized by the revenue generating, product/market refocusing or cost
cutting and asset reduction activities. While cost cutting, asset reduction and
product/market refocusing are easy to visualize, the idea of revenue-generating is
best captured by a strategy that is characterized by increased capacity utilization,
and increased employee productivity.
Retrenchment is an integral component of turnaround strategy. The critical
role of retrenchment in providing a stable base from which to launch a recovery
phase of the turnaround process is well established.. Many firms that have
achieved a reversal of financial or competitive decline inevitably refer to the
presence of retrenchment as a precursor or prelude to the implementation of a
successful recovery strategy. The question remains, however, as to why
retrenchment is so frequently an appropriate first step in an overall turnaround
process. One possible explanation is that economic decline diminishes the firm’s
resource slack. Cost retrenchment helps to preserve the residual resources.
Resource flexibility provides additional slack and is achieved through asset
redeployment Resource flexibility must be substituted for slack that has been
largely depleted, or when the heightened requirements of strategic redirection place
 51

additional demands on the firm for resources. These heightened requirements stem
from concurrent demands on the firm to overcome the destructive momentum of
the established strategy and to cover the high start-up costs of implementing the
new strategic initiatives. Consequently, retrenchment may be necessary to stabilize
the situation by securing or providing slack regardless of the subsequent recovery
strategy that is chosen.
The second phase involves a return-to-growth or recovery stage and the
turnaround process shifts away from retrenchment and move towards growth and
development and growth in market share. The means employed for achieving these
objectives are acquisitions, new products, new markets, and increased market
penetration. The importance of the second stage in the turnaround situation is
underscored by the fact that primary causes of the turnaround situation have been
associated with this phase of the turnaround process- the recovery response. For
firms that declined primarily as a result of external problems, turnaround has most
often been achieved through strategies based on an revenue driven reconfiguration
of business assets. For firms that declined primarily as a result of internal
problems, turnaround has been most frequently achieved through recovery
responses that were heavily weighted toward efficiency maintenance strategies.
Recovery is said to have been achieved when economic measures indicate that the
firm has regained its pre-downturn levels of performance.
Between these two stages, a clear strategy is needed for a firm. As the financial
decline stops, the firm must decide whether it will pursue recovery in its
retrenchment reduced form through a scaled-back version of its pre-existing
strategy, or whether it will shift to a return-to-growth stage. It is at this point that
the ultimate direction of the turnaround strategy becomes clear. Essentially, the
firm must choose either to continue to pursue retrenchment as its dominant
strategy or to couple the retrenchment stage with a new recovery strategy that
emphasizes growth. The degree and duration of the retrenchment phase should be
based on the firm’s financial health.
Turnaround Situations: Severity and Speed of Strategic Response
The nature, extent and speed of the appropriate strategic response depends
primarily on two dimensions of the turnaround situation: severity and causality.
Severity of the turnaround situation is a measure of the firm’s financial health; it
gauges the magnitude of the threat to company survival. Since the immediate
concern to the firm is the extent to which the decline is a threat to its short-term
survival, severity is the governing factor in estimating the speed with which the
retrenchment response will be formulated and activated. Of course, performance
that declines relative to that of competitors, but not absolutely, may necessitate
almost no retrenchment. Rather, a reconsideration of strategy with a probable
reconfiguration of assets would usually be deemed appropriate.
When severity is low, a firm has some financial cushion. Stability may be
achieved through cost retrenchment alone. When the turnaround situation severity
is high, a firm must immediately stabilize the decline or bankruptcy is imminent.
Cost reductions must be supplemented with more drastic asset reduction
 52

measures. Assets targeted for divestiture are those determined to be

underproductive. In contrast, more productive resources are protected from cuts or
reconfigured as critical elements of the future core business plan of the company,
i.e., the intended recovery response.
In addition, Robbins and Pearce found that the severity of the turnaround
situation was the best indicator of the type and extent of retrenchment that was
needed, although an immediate cost cutting response to financial decline (absolute
and relative to the industry) was consistently found to be of value. The researchers
also presented a model of turnaround based on evidence that business firm
turnaround characteristically involved a multi-stage process in which retrenchment
could serve as either a grand or operating strategy. HOFER conceptualized a link
between severity of the downturn and the degree of cost and asset reductions that a
firm should include in its recovery response. He referred to cost and asset reduction
activities as operating turnaround strategies. Operating strategies designed for cost
reduction were recommended for firms in less severe turnaround situations. Drastic
cost reductions coupled with asset reductions were recommended for firms in more
severe turnaround situations i.e., more severe problems require more drastic
solutions. Usually, asset reduction is more drastic than cost reduction.
As the importance of external environmental factors assume importance
relative to the internal factors, effective and innovative activities are more
appropriate in the recovery phase of the turnaround process. If the reverse is true,
efficiency maintenance activities are more appropriate. In either case, the recovery
phase of the turnaround process is likely to be more successful in accomplishing
turnaround when it is preceded by proactively structured retrenchment which
results in the achievement of near-term financial stabilization. Innovative
turnaround strategies involve doing things differently whereas efficiency
turnaround strategies entail doing the same things on a smaller or more efficient
scale. Revenue generating through product reintroduction, increased advertising
and selling efforts, and lower prices represent modifications in existing strategy and
can, therefore, be classified as innovative turnaround strategies In other words,
innovative turnaround strategies involve product or market based activities while
efficiency strategies focus on the production and management systems within the
firm.
Survival Strategy
When the company is on the verge of extinction, it can follow several routes for
renewing the fortunes of the company.
Liquidation Strategy
This is the ultimate stage in the process of renewing company. Sometimes a
business unit or a whole company becomes so weak that the owners cannot find an
interested buyer. A simple shutdown will prevent owners from throwing good money
after bad once it is clear that there is no future for the business. In such a
situation, liquidation is the best option.
 53

4. REVISION POINTS
A stability strategy is less risky. Liquidation is the final resort for a declining
company. There are various approaches to developing stability/consolidation
strategy.
5. INTEXT QUESTIONS
1. Define Stability strategy
2. Brief the advantages of stability strategies
6. SUMMARY
Turnaround is a strategy adopted by firms to arrest the decline and revive
their growth. The Retrenchment Strategy is adopted when an organization aims at
reducing its one or more business operations with the view to cut expenses and
reach to a more stable financial position.
7. TERMINAL EXERCISES
1. Liquidation strategy is the part of i Growth ii Retrenchment strategy iii
Pause iv none of these.
2. ___________ strategy provides a blueprint for business enterprises to achieve
their long term growth objectives.
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Elaborate the three variant strategies of retrenchment strategy.
2. Explain the approaches to stability strategy.
3. Narrate the conditions for adopting expansion strategy.
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management [Link] Sekhar,
[Link] Pvt Ltd, 2009 -
3. Strategic Management: concepts, skills and practices
R.M. Srivastava, shubhra verma phi Learning Pvt. Ltd.,
11. LEARNING ACTIVITY
Write down any five names of companies which followed stability strategies.
12. KEY WORDS
Stability, expansion, retrenchment, liquidation.

 54

LESSON - 8

COMBINATION, TAILORING, FOCUSED SEGMENT

STRATEGIES AND STRATEGIC FLEXIBILITY
1. INTRODUCTION
A combination strategy is a resource used by corporations or businesses to
further their identified business goals at the same time. Usually, businesses pursue
goals like growth, consolidation or other interests that include stability, with the
aim of improving their overall performance. A focus strategy is usually employed
where the company knows its segment and has products to competitively satisfy its
needs. Focus strategy is one of three generic marketing strategies.
Strategic flexibility is explained by management scholars as the capability of
firms to respond and successively adjust to environmental change. The phase has
also been applied to strategic decision making, as it is the extent to which new and
alternative options in strategic decision making are generated and considered.
2. OBJECTIVES
 To know about the reasons behind adopting combination strategy
 To gain knowledge about Tailoring strategies and their advantages
 To learn about the term strategic flexibility
3. CONTENTS
3.1 Combination strategy
Definition:
A strategy in which a put and call with different strike prices and the same
expiration are either both bought or both [Link]
What is COMBINATION STRATEGY?
Reaching two or more goals planned as corporate objectives, such as a
collective of consolidation, growth, stability, all at the same time.
It is the combination of stability, growth & retrenchment strategies adopted by
an organisation, either at the same time in its different businesses, or at different
times in the same business with the aim of improving its performance.
Combination strategy is not an independent classification but it is a
combination of different strategies.
3.1.1 Reason for Adopting a Combination Strategy
 Rapid Environment change
 Liquidate one unit, develop another
 Involves both divestment & acquisition (take over)
It is commonly followed by organisations with multiple unit diversified product
& National or Global market in which a single strategy does not fit all businesses at
a particular point of time.
The Combination Strategy means making the use of other grand strategies
(stability, expansion or retrenchment) simultaneously. Simply, the combination of
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any grand strategy used by an organization in different businesses at the same time
or in the same business at different times with an aim to improve its efficiency is
called as a combination strategy.
Such strategy is followed when an organization is large and complex and
consists of several businesses that lie in different industries, serving different
purposes. Go through the following example to have a better understanding of the
combination strategy:
A baby diaper manufacturing company augments its offering of diapers for the
babies to have a wide range of its products (Stability) and at the same time, it also
manufactures the diapers for old age people, thereby covering the other market
segment (Expansion). In order to focus more on the diapers division, the company
plans to shut down its baby wipes division and allocate its resources to the most
profitable division (Retrenchment).
In the above example, the company is following all the three grand strategies
with the objective of improving its performance. The strategist has to be very careful
while selecting the combination strategy because it includes the scrutiny of the
environment and the challenges each business operation faces. The Combination
strategy can be followed either simultaneously or in the sequence.
3.2 Tailoring Strategies
The success of every business depends on the ability of the business to not
only maintain a niche market presence, but also continually keep up with industry
changes. Businesses must not only correctly identify their target demographics, but
also tailor their marketing strategy for their specific industry. For example, Old
Spice is a popular male grooming product brand owned by Procter & Gamble. They
determined that their products were primarily purchased by females for their male
counterparts.
As a result, they launched the “Smell like a Man, Man” marketing campaign
with commercials directed at women. As a result, sales doubled and the
commercials went viral on YouTube. Even critics admitted that the campaign was a
success. Correctly identifying and tailoring your market strategy to your customers
is the key to business success. Below explains four reasons why you should
customize your marketing strategy to your industry.
Industry Trends
Correctly identifying and following industry trends can ensure marketing
success. However, this is a continual process of market research, re-analyzing
customer buying habits and even re-identifying the actual customer base. Always
keep your eye on your competition because they are a free source of marketing dos
and don’ts. Be flexible and stay prepared to take advantage of new market trends
that offer exciting potential.
At the same time, avoid blindly following market trends without thorough
strategic risk planning. For example, many companies went bankrupt during the
dot-com bubble in 1997-2000. Certain companies, such as [Link], went
 56

completely bankrupt because they focused too much on unstable, potential market
trends. The Small Business Association (SBA) offers business data and statistics to
help your marketing efforts.
Niche Industry Markets
Niche markets are a key to success in any highly competitive market that is
saturated with eager new companies and resilient old companies. Industry niches
are often either customer- or operational-based. That is, the niche either focuses on
a specific customer group or specific products and services.
Marketing strategies should focus on meeting the needs of the niche market.
This is because broad marketing campaigns are expensive, cumbersome and may
not even reach the desired target. Niche markets are an excellent way to establish a
strong customer base. [Link] offers advice on how to define your niche
market.
Customized Direct Mail
Direct mail is one of the easiest and simplest ways to tailor your marketing
message to your target demographics. This is because direct mail allows you to
create a customized design and message that appeal directly to your customers. In
fact, credit reporting giant Experian has found that direct mail works great because
you can directly target existing customers while also reaching new potential
customers.
You can find businesses like [Link] that specialize in
marketing to specific niches, making your campaign simple and focused. A direct
mail marketing campaign is also cost effective while allowing the business to
flexibly spend according to budget limitations. Learn more about the benefits of
direct mail from the CMO Council.
Unique Marketing
Many companies face stiff competition from both newcomers and well-
established companies alike. [Link] defines a Unique Selling
Proposition (USP) as something that sets your product or service as being better
than your competition. That is, a USP is the reason why a customer buys your
product and not the competitors’. A customized marketing strategy with USP is
necessary to present the special benefits of your product or service. A USP can be
defined through seeing your company through your customers’ eyes and
understanding their motivation and buying-decision logic.
For example, Cintas is a well-established company that provides services and
supplies uniforms and other corporate products. Their marketing strategy uses a
SWOT analysis and recognizes that while they have an excellent reputation, they
are dependent on the manufacturing industry. Therefore, they are able to correctly
understand their current market position, what their customers need and how to
adjust their marketing strategy accordingly.
In conclusion, companies can tailor their marketing strategy through
accurately following market trends, finding their niche market, utilizing direct mail
and providing a unique marketing strategy.
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3.3 Focus strategies

A focus strategy is usually employed where the comopany knows its segment
and has products to competitively satisfy its needs. Focus strategy is one of three
generic marketing strategies. See differentiation strategy and low cost strategy for
the other two.
This dimension is not a separate strategy for big companies due to small
market conditions. Big companies which chose applying differentiation strategies
may also choose to apply in conjunction with focus strategies (either cost or
differentiation). On the other hand, this is definitely an appropriate strategy for
small companies especially for those wanting to avoid competition with big one.
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 specialised 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. It is hoped that by focusing
your marketing efforts on one or two narrow market segments and tailoring your
marketing mix to these specialized markets, you can better meet the needs of that
target market. The firm typically looks to gain a competitive advantage through
product innovation and/or brand marketing rather than efficiency. 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, United, and American Airlines.
Focus Strategy
 Strategic plan under which a firm concentrates its resources on entering or
expanding in a narrowly defined market segment.
 The firm focuses on a narrow niche market in which to build a strong
competitive advantage.
 It is usually employed where the firm knows its segment and has products
to competitively satisfy its needs
 Focus allows businesses to compete on the basis of low cost, differentiation,
and rapid response against much larger businesses with larger resources.
 The objective of the firm is to do a better job at serving the buyers in the
target market than the rivals.
3.4 Definition: Strategic Flexibility
The strategic flexibility of a firm is its capability to adapt to changes in the
external environment. The organization has to identify major changes in the
environment, quickly change commitment of resources to new courses of action to
counter the change, and to identify markers in order to restore to previous
commitments when the external environment is back to the initial state.
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Strategic flexibility is the capability of an organization to respond to major

changes that take place in its external environment by committing the resources
necessary to respond to those changes.
Strategic flexibility enable a firm to gain unique competitive advantage,
because the capabilities to generate decision making options, and different forms of
strategic flexibility to deal with dynamic and changing environments, is perhaps
difficult for competitors to reproduce. Successful adaptation through strategic
flexibility is likely generate superior performance, exacerbating the imitation
problem for rivals. Subsequently, it is important for decision makers to possess the
capabilities for strategic flexibility in its various forms. Nevertheless, currently,
there is no passable theoretical framework to study the capabilities for strategic
flexibility.
The notion of strategic flexibility can be used at two levels. First, at the level of
the firm, where it is used to denote the ability of firms to respond and successively
adapt to environmental change. Second, at the level of decision makers, where it is
the extent to which new and alternative options in strategic decision making are
created and deliberated. These two applications are not conjointly exclusive,
because the creation of different options by decision makers is a requirement for
firms adjusting to environment change. It can be assumed that for strategic
flexibility to exist at the level of the firm, decision makers themselves must possess
capabilities for strategic flexibility.
In theoretical literature, it has been demonstrated that Strategic flexibility is a
possessions that allows contemporary organizations to prepare for changes in their
environment. Raynor stated that the concept involves an interaction of many
elements which includes actions taken in relation to analytical studies, aimed at
anticipating multiple scenarios, formulation of strategies for each scenario,
acquisition of resources and skills required to execute those strategies,
implementation of the most likely strategy and preparing for the task of rapidly
accepting substitute strategy if needed. According to Aaker and Mascarenhas,
flexibility signifies the "ability of the organization to adapt to substantial, uncertain
and fast occurring (relative to the required reaction time) environmental changes
that have a meaningful impact on the organization's performance". Many scholars
affirmed that the ability to manage with unpredictable environment and strategic
flexibility requires ambiguity management skills, understanding of inconsistencies,
broadening the viewpoints of current analyses and focus on activities that enable
fast reaction to changes.
Strategic flexibility is composed of three elements:
1. Attention
2. Assessment
3. Action
It is well established in studies that strategic flexibility is the ability to
recognize external changes, to quickly commit resources and identify when
strategic decisions are not working.
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Suggestions for developing strategic flexibility:

 Know what's happening with strategies currently being used by monitoring
and measuring results.
 Encourage employees to be open about disclosing and sharing negative
information
 Get new ideas and perspectives from outside the organisation.
 Have multiple alternatives when making strategic decisions.
 Learn from mistakes.
Strategic flexibility is indubitably associated with planning, formulation and
implementation. It is found in empirical research that dynamic and prosperous
companies consider the effects of external factors, even if they espouse routine
planning processes. In such cases, planning strategies typically include the so-
called flex points, i.e. elements that change depending on external circumstances.
These companies symbolise a cohesive approach to strategy formulation and
selection, while their concept of development is focused on risks and hazards,
which are interpreted as potential sources of competitive advantage. Experiential
researches revealed that strategic flexibility is interrelated with the company's
results, particularly in times of turbulent changes brought about by the present
economic crunch. This correlation is especially important for companies operating
on highly competitive markets, as opposed to markets characterized by high
ambiguity of demand or technological growth, where strong market orientation at
the cost of flexibility is the favoured approach. The inconsistency of strategic
flexibility lies in the fact that strategy formulation needs careful analyses, and these
are not possible, since forecasts of market development and environmental changes
are burdened with high-level ambiguity.
Role of strategic flexibility: To overcome organizational lethargy, strategic
flexibility is needed for firms to break down the institutional procedures and
withstand their explorative innovations. Because strategic flexibility underlines the
flexible use of resources and reconfiguration of processes, it reflects one type of
dynamic capability that enables firms to attain a competitive advantage in
tempestuous markets. Several management professionals stresses on the fact that
it is important to develop flexibility in organizational forms, resource management,
and manufacturing processes. This will create an organizational culture that
supports explorative innovation. Since strategic flexibility serves as an organizing
norm for structuring and synchronising various resources and functional units, it
may not affect a firm's improvement output by itself. Rather, it may enhance the
value of existing technological capabilities in innovations. Many scholars posit that
strategic flexibility augments the positive effect of technological competence on
exploration. That is, when strategic flexibility is high, strong technological
capability leads to more explorative activities.
Strategic flexibility is a set of capabilities used to respond to various demands
and opportunities existing in dynamic and uncertain competitive environment.
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Therefore it involves coping with uncertainty and associated with risks. Companies
develop strategic flexibilities in all areas of operations.
4. REVISION POINTS
Strategic flexibility is the capability of firms to respond and successively adjust
to environmental change. Combination strategy is not an independent classification
but it is a combination of different strategies. The strategic flexibility of a firm is its
capability to adapt to changes in the external environment.
5. INTEXT QUESTIONS
1. Write short note on Combination strategies.
2. What is Tailoring strategies?
3. Define Focus segment
4. What do you mean by strategic flexibility.
6. SUMMARY
Strategic flexibility is a set of capabilities used to respond to various demands
and opportunities existing in dynamic and uncertain competitive environment.
Therefore it involves coping with uncertainty and associated with risks.
7. TERMINAL EXERCISES
1. Strategic flexibility is the ______ of the firms
2. Focus strategy is one of the a generic strategy b growth strategy c cost
strategy d global strategy
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Write down the suggestions for developing strategic flexibility
2. State and explain the reasons for adopting a Combination Strategy
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
[Link] Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices [Link],
Shubhra Verma PHI Learning Pvt. Ltd.
11. LEARNING ACTIVITY
Write down briefly the focus strategy adopted by a company or a concern of
your choice after discussing with its executives.
12. KEY WORDS
Combination, Tailoring Strategies, Focused Segment, Strategic Flexibility.

 61

LESSON - 9

COMPETITIVE ANALYSIS
1. INTRODUCTION
Competitive analysis has become an essential part of business marketing
activity and has made it possible to perform qualitative strategic planning. While
analyzing your competitors, you should know what you are looking for and how it
can help your business.
It is not about stealing your competitor’s ideas; it’s about revealing their
strengths and weaknesses, and finding your own company’s competitive
advantages. Only unique brand positioning will eventually bring your company
customer loyalty and business success.
If you’ve wondered what your competitors are up to, that shows you’re
thinking strategically and want to have confidence in your own company’s
approach. There are plenty of ways to check on your competition that are totally
above-board.
2. OBJECTIVES
 To know about the basics of competitive analysis
 To learn why a company should do competitor analysis
3. CONTENTS
3.1 Competitive analysis - Meaning
Competitive analysis usually contains information obtained regarding a
company's important competitors that will be used to predict the competitor
behaviour. By gathering and analyzing information about competitors, it will be
useful in the strategy development process. When you know well about your
competitors, you can think like that competitors to formulate the firm's strategies
by considering the competitors' likely actions and responses. It will be easy to
understand the situation the way the competitors see it and analyze it to know the
actions that they will take to maximize the outcomes by calculating the actual
financial and personal outcomes of their strategic choice.
Competitive analysis is a broad term for the practice of researching, analyzing,
and comparing competitors in relation to yourself. Companies do it for a wide
variety of reasons.
3.2 Competitor analysis
One common and useful technique is constructing a competitor array. The
steps include:
 Define the industry – scope and nature of the industry.
 Determine who the competitors are.
 Determine who the customers are and what benefits they expect.
 Determine the key strengths – for example price, service, convenience,
inventory, etc.
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 Rank the key success factors by giving each one a weighting – The sum of all
the weightings must add up to one.
 Rate each competitor on each of the key success factors.
 Multiply each cell in the matrix by the factor weighting.
We can group competitors in three categories:
Direct competitors
These companies are the ones you need to find out the most about because
they’re your fiercest competitors. When customers are making purchasing
decisions, their products or services always end up on the short list. With this
group, you’re vying for the same customer dollar. More than likely, you have three
or four companies that fall into this category.
Indirect competitors
These companies offer alternative products and services than what you offer.
Usually, you don’t worry about these companies too much, but you should keep
tabs on what they’re up to. Sometimes an indirect competitor can become a direct
competitor.
Substitutes or new entrants
While conducting your competitive analysis, determine whether any substitute
products or potential new entrants exit. A substitute product is anything that
delivers the same set of benefits to your customers as you do but isn’t a competing
product.
For example, DVD rental is a substitute service to cable TV. New companies
coming on the scene may change your industry completely, such as FM radio has
done to the radio industry. Don’t restrict your thinking only to companies similar to
your own. Consider firms outside of the realm of possibility, such as those who
compete in the industry from a corporate strategic viewpoint. When contemplating
the future, you need to envision any number of possibilities.
3.3 Understand your competitors
Knowing who your competitors are, and what they are offering, can help you to
make your products, services and marketing stand out. It will enable you to set
your prices competitively and help you to respond to rival marketing campaigns
with your own initiatives.
You can use this knowledge to create marketing strategies that take advantage
of your competitors' weaknesses, and improve your own business performance. You
can also assess any threats posed by both new entrants to your market and current
competitors. This knowledge will help you to be realistic about how successful you
can be.
This guide explains how to analyse who your competitors are, how to research
what they're doing and how to act on the information you gain.
 Who are your competitors?
 What you need to know about your competitors
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 Learning about your competitors

 Hearing about your competitors
 How to act on the competitor information you get
3.4 Who are your competitors?
All businesses face competition. Even if you're the only restaurant in town you
must compete with cinemas, bars and other businesses where your customers will
spend their money instead of with you. With increased use of the Internet to buy
goods and services and to find places to go, you are no longer just competing with
your immediate neighbours. Indeed, you could find yourself competing with
businesses from other countries.
Your competitor could be a new business offering a substitute or similar
product that makes your own redundant.
Competition is not just another business that might take money away from
you. It can be another product or service that's being developed and which you
ought to be selling or looking to license before somebody else takes it up.
And don't just research what's already out there. You also need to be
constantly on the lookout for possible new competition.
You can get clues to the existence of competitors from:
 local business directories
 your local Chamber of Commerce
 advertising
 press reports
 exhibitions and trade fairs
 questionnaires
 searching on the Internet for similar products or services
 information provided by customers
 flyers and marketing literature that have been sent to you - quite common if
you're on a bought-in marketing list
 searching for existing patented products that are similar to yours
 planning applications and building work in progress
3.5 What you need to know about your competitors
Monitor the way your competitors do business. Look at:
 the products or services they provide and how they market them to
customers
 the prices they charge
 how they distribute and deliver
 the devices they employ to enhance customer loyalty and what back-up
service they offer
 their brand and design values
 whether they innovate - business methods as well as products
 64

 their staff numbers and the calibre of staff that they attract
 how they use IT - for example, if they're technology-aware and offer a website
and email
 who owns the business and what sort of person they are
 their annual report - if they're a public company
 their media activities - check their website as well as local newspapers,
radio, television and any outdoor advertising
3.6 How they treat their customers
Find out as much as possible about your competitors' customers, such as:
 who they are
 what products or services different customers buy from them
 what customers see as your competitors' strengths and weaknesses
 whether there are any long-standing customers
 if they've had an influx of customers recently
What they're planning to do
Try to go beyond what's happening now by investigating your competitors'
business strategy, for example:
 what types of customer they're targeting
 what new products they're developing
 what financial resources they have
3.7 Learning about your competitors
Read about your competitors. Look for articles or ads in the trade press or
mainstream publications. Read their marketing literature. Check their entries in
directories and phone books. If they are an online business, ask for a trial of their
service.
Are they getting more publicity than you, perhaps through networking or
sponsoring events?
If your competitor is a public company, read a copy of their annual report.
Go to exhibitions
At exhibitions and trade fairs check which of your competitors are also
exhibiting. Look at their stands and promotional activities. Note how busy they are
and who visits them.
Go online
Look at competitors' websites. Find out how they compare to yours. Check any
interactive parts of the site to see if you could improve on it for your own website. Is
the information free of charge? Is it easy to find?
Business websites often give much information that businesses haven't
traditionally revealed - from the history of the company to biographies of the staff.
Use a search engine to track down similar products. Find out who else offers
them and how they go about it.
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Websites can give you good tips on what businesses around the globe are
doing in your industry sector.
Organisations and reference sources
 Your trade or professional association, if applicable.
 The local Chamber of Commerce.
 Directories and survey reports in any business reference library.
3.8 Hearing about your competitors
Speak to your competitors. Phone them to ask for a copy of their brochure or
get one of your staff or a friend to drop by and pick up their marketing literature.
You could ask for a price list or enquire what an off-the-shelf item might cost
and if there's a discount for volume. This will give you an idea at which point a
competitor will discount and at what volume.
Phone and face-to-face contacts will also give you an idea of the style of the
company, the quality of their literature and the initial impressions they make on
customers.
It's also likely you'll meet competitors at social and business events. Talk to
them. Be friendly - they're competitors not enemies. You'll get a better idea of them
- and you might need each other one day, for example in collaborating to grow a
new market for a new product.
3.9 Listen to your customers and suppliers
Make the most of contacts with your customers. Don't just ask how well you're
performing - ask which of your competitors they buy from and how you compare.
Use meetings with your suppliers to ask what their other customers are doing.
They may not tell you everything you want to know, but it's a useful start.
Use your judgement with any information they volunteer. For instance, when
customers say your prices are higher than the competition they may just be trying
to negotiate a better deal.
3.10 How to act on the competitor information you get
Evaluate the information you find about your competitors. This should tell you
whether there are gaps in the market you can exploit. It should also indicate
whether there is a saturation of suppliers in certain areas of your market, which
might lead you to focus on less competitive areas.
Draw up a list of everything that you've found out about your competitors,
however small.
Put the information into three categories:
 what you can learn from and do better
 what they're doing worse than you
 what they're doing the same as you
3.11 What you can learn from and do better
If you're sure your competitors are doing something better than you, you need
to respond and make some changes. It could be anything from improving customer
 66

service, assessing your prices and updating your products, to changing the way you
market yourself, redesigning your literature and website and changing your
suppliers.
Try to innovate not imitate. Now you've got the idea, can you do it even better,
add more value?
Your competitors might not have rights over their actual ideas, but remember
the rules on patents, copyright and design rights. For more information, consult the
Intellectual Property Toolkit.
3.12 What they're doing worse than you
Exploit the gaps you've identified. These may be in their product range or
service, marketing or distribution, even the way they recruit and retain employees.
Customer service reputation can often provide the difference between
businesses that operate in a very competitive market. Renew your efforts in these
areas to exploit the deficiencies you've discovered in your competitors.
But don't be complacent about your current strengths. Your current offerings
may still need improving and your competitors may also be assessing you. They
may adopt and enhance your good ideas.
3.13 What they're doing the same as you
Why are they doing the same as you, particularly if you're not impressed by
other things they do? Perhaps you both need to make some changes.
Analyse these common areas and see whether you've got it right. And even if
you have, your competitor may be planning an improvement.
3.14 Competitive Analysis-SWOT analysis
The strength of the competition is key to finding your competitive advantage.
Defining your key industrial competitive pressures provides a framework for
developing strategies to your growth. Analyzing the primary competitor and
identifying their Strengths, Weaknesses, Opportunities, and Threats (SWOT
Analysis) help determine target markets, marketing plan, customer service, sales
forecasting and sales planning.
Examining the following will assist in the competitive analysis:
Identify the level of rivalry among competing sellers in the industry
Review strategies of companies to encourage customers to switch from a
competitor Analyze ease of entry for new competitors
Determine bargaining power for suppliers of key materials and components
Determine bargaining power for buyers of the product
Discover options for product/service distribution
Competitor’s strengths and weaknesses
It also forms an important input into the process of identifying and selecting
strategic alternatives. One approach is to attempt to exploit a competitor’s
weakness in an area where the firm has an existing or developing strength. The
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desired pattern is to develop a strategy that will pit ‘our’ strength against a
competitor s weakness. Conversely, acknowledging ‘their’ strength is important so it
can be bypassed or neutralized.
Strengths of your Primary Competitor
What is your primary competitor’s competitive advantage?
Does the competition have a unique area of specialty or expertise?
Who is the competition's target market?
What are their promotional strategies?
What do their customers really like about them?
How do they communicate to their customers? (Marketing methods used)
Do they have specific strengths in personnel, delivery, customer service,
technology, promotional materials, or product delivery that will be difficult
challenges to overcome?
What new products are they developing?
Weaknesses of Your Primary Competitor
What target markets are they missing or under serving?
What is one thing their customers would change? What do their customers
dislike? Is their message appropriate for the target market? Does it identify benefits
for using their company or only features?
Are they using the right media to contact their target market?
What are areas of weakness that you can use as attack points?
Can you have a competitive advantage in product delivery time, customer
service, placement/access to the product/service, providing information, saving
space for storage, use of personnel energy/time to save money?
4. REVISION POINTS
Competitive analysis usually contains information obtained regarding a
company's important [Link] of a competitor’s strengths and
weaknesses provides insight into the firm’s ability to pursue various strategies.
5. INTEXT QUESTION
1. How to group the competitors?
2. What do you mean by SWOT analysis?
6. SUMMARY
Competition is not just another business that might take money away from
you. It can be another product or service that's being developed and which you
ought to be selling or looking to license before somebody else takes it up. The
strength of the competition is key to finding your competitive advantage.
7. TERMINAL EXERCISES
Companies that offer alternate products are__________competitors.
 68

8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Explain the contents of SWOT Analysis.
2. Elaborate the need for competitor’s analysis.
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
[Link] Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices
R.M. Srivastava, Shubhra Verma PHI Learning Pvt. Ltd.,
11. LEARNING ACTIVITY
Choose a company and note down the names of their competitors and list out
the any one competitor’s strength and weakness.
12. KEY WORDS
Competitor, Competitive analysis, Strength, Weakness

 69

LESSON - 10

CUSTOMER ANALYSIS
1. INTRODUCTION
The Customer Analysis section of the business plan assesses the customer
segments that the company serves. Customer Analysis is to define exactly which
customers the company is serving.
2. OBJECTIVES
 To understand the concept of customer analysis
 To know the basics of segmentation
 To gain knowledge about market analysis
 To learn about the concept of motivation
3. CONTENTS
3.1 Definition-1
The process of identifying and evaluating the distinguishing characteristics of
a base of customers in order better understand their needs, purchasing behavior,
value orientation and motivations for purposes of segmentation and target
marketing. Customer data is continuously gathered through transaction data,
customer feedback, focus groups, and product testing.
Definition-2
Collecting and evaluation of data associated with customer needs and market
trends, through customer focus groups, customer satisfaction measurement, field
testing, etc.
3.2 Analyzing Customers in your Business Plan
In it, the company must
1. Identify its target customers
2. Convey the needs of these customers
3. Show how its products and services satisfy these needs
The first step of the Customer Analysis is to define exactly which customers
the company is serving. This requires specificity. It is not adequate to say the
company is targeting small businesses, for example, because there are several
million of these types of customers. Rather, an expert business plan writer must
identify precisely the customers it is serving, such as small businesses with 10 to
50 employees based in large metropolitan cities.
Once the plan has clearly identified and defined the company's target
customers, it is necessary to explain the demographics of these customers.
Questions to be answered include:
1. How many potential customers fit the given definition and is this customer
base growing or decreasing?
2. What is the average revenues/income of these customers?
3. Where are these customers geographically based?
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After explaining customer demographics, the business plan must detail the
needs of these customers. Conveying customer needs could take the form of past
actions (X% have purchased a similar product in the past), future projections (when
interviewed, X% said that they would purchase product/service Y) and/or
implications (because X% use a product/service which our product/service
enhances/replaces, then X% need our product/service).
The business plan must also detail the drivers of customer decision-making.
Sample questions to answer include:
1. Do customers find price to be more important than the quality of the
product or service?
2. Are customers looking for the highest level of reliability, or will they have
their own support and just seek a basic level of service?
There is one last critical step in the Customer Analysis -- showing an
understanding of the actual decision-making process. Examples of questions to be
answered here include:
1. Will the customer consult others in their organization/family before making
a decision?
2. Will the customer seek multiple bids?
3. Will the product/service require significant operational changes (e.g., will the
customer have to invest time to learn new technologies and will the
product/service cause other members within the organization to lose their
jobs? etc.)
It is essential to truly understand customers to develop a successful business
and marketing strategy. As such, sophisticated investors require comprehensive
profiles of a company's target customers. By spending the time to research and
analyze your target customers, you will develop both enhance your business
strategy and funding success.
The initial focus is on the target customers. A product or service, if in the
specialized domain, is directed to a band of customers, depending on few marked
elements such as age brackets and economic status. It helps the concerned firm to
pin-point the spectrum of customers which it wants to attract under its umbrella of
deliverables.
The purchasing power of the target band of customers is one of the main
statistical data that is seriously considered by a customer analyst. It is the playing
factor for buying goods and services.
The role of survey is indispensable in any genre of customer analysis.
Gathering of primary data or collecting genuine secondary data is one of the
activities necessary to make a solid foundation of any customer analysis.
The various facets of customer analysis help the service provider to design its
products. A detailed analysis of the customers makes it possible to plan the exact
features of the products.
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A tidy customer analysis also assists a great deal in marketing the products
and services. It presents with a highlighted platform that gives ideas/hints of
pockets that have the potential to be explored via strategic marketing. The
marketing department of a business firm diligently coordinates with the section
involved in performing customer analysis and integrates the recommendations
within its framework of marketing policies.
In order to be very clear about the subtle preference maps of the customers, it
is very essential for the business entities to resort to extensive customer analysis.
Customer analysis is a critical component of any business plan in all stages of
growth. When you analyze your customers, you define who your target market is,
and decide how you'll reach them. A recent article in Forbes stated that 81% of
enterprises rely on analytics to improve their understanding of customers. Where
will you start?
Customer analysis is vital to any effective business strategy. If a business
doesn't know who its customers are or what its customers want, it can't meet
customers' needs. A customer analysis will do three main things:
 Identify the target customer
 Understand the needs of the customer
 Show how the company's product or service meets the customers' needs or
wants
3.3 Segmentation
Segmentation strategy is the concept of dissembling your clients and choosing
to base your marketing efforts on a specific target group. In some cases you may
target your efforts on more than one group, but the basic goal is to directly target
each group on an individual basis so that you can maximize your sales profits.
There are many different ways that you can cluster your clients, but most
businesses either choose to dissect their client base either by purchasing groups
based on factors such as income, region, or socio-economic factors or cluster their
target audience by their typical buying and spending habits.
Segmentation strategy relies extensively on consumer research and behavioral
analysis alongside extensive data collection techniques. Due to the fact that it
encompasses many areas of a business clientèle often it is a group effort on the
part of the company and may require that a company rework its management and
marketing team and strategies. The payoff is that when a marketing project is
launched it is a proactive project aimed to reach those who are most likely to buy
instead of focusing on a general market with an offer or deal that they may or may
not be interested in.
An excellent example of segmentation strategy is international car industries
such as Toyota, Honda, or Audi. In order to meet the needs of their regionalized
clients these companies often produce different versions of successful cars that
meet the needs of their residents. For example, certain countries such as Britain
and Japan are focused heavily on the small compact electric vehicles that are on
 72

the market currently. Therefore, Toyota will market a small streamlined engine and
compact vehicle here. However, in America where large and stylish is still the
desired norm the same vehicle will in effect be built up to attract sales.
The effectiveness of segmentation strategy largely depends on the efforts that a
company puts into it. In the online world designing different websites and emails
for segmented clients is an excellent approach to reap the benefits of the market
targeting strategy. Consultants are often a great place to start when initializing
segmentation strategy as they already hold a large degree of the knowledge needed
to make segmentation strategy work to its fullest degree. Supplementing a
consultant’s knowledge with company data is an excellent way to cluster your
clients and start to reap the benefits in profits of a carefully managed target
audience.
There are many ways in which a market can be segmented. A marketer will
need to decide which strategy is best for a given product or service. Sometimes the
best option arises from using different strategies in conjunction. Approaches to
segmentation result from answers to the following questions: where, who, why and
how?
Five major segmentation strategies are (1) behavior segmentation, (2) benefit
segmentation, (3) demographic segmentation, (4) geographic segmentation, and (5)
psychographic segmentation.
The important question for a firm is "Who are our customers?"
 Existing
 Potential
Hence, the first logical step in strategic market planning is to analyse the
customer, i.e., to understand customer motivation, their unmet needs and how they
can be segmented.
Customer Segmentation
 Who are the biggest customers?
 Who are the most profitable customers?
 Who are the potential customers?
 How could we segment the customers into unique strategic business
groups?
Customer Motivation
 What benefit offered by the product/service do customers value most?
 What are the customer's actual buying objectives, i.e., what needs do they
want to satisfy?
 What are the customer's motivational priorities?
 What changes are taking place in the customer's taste and preferences?
Why?
Customer motivation analysis starts with the task of identifying motivations
for a given segment and then to determine the relative importance of the
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motivations. Ultimately we have to identify the motivations that will play a role in
defining the strategy of the business.
Price Sensitivity of Customers
There is a well-defined breakdown between those customers who are first
concerned about price and others who are willing to pay extra for higher quality,
better features and superior performance. Automobiles span the spectrum from
Maruti to Mercedes. Airline service is partitioned into first class, business class and
economy class. In each case, the segment dictates the strategy.
Unmet Needs
An unmet need is a customer need that is not being met by the existing
product offering. Unmet needs are strategically important because they represent
opportunities for firms to increase their market share, break into a market, or
create new markets. Sometimes customers may not be aware of their unmet needs
because they are so accustomed to the implicit limitation of the existing
equipment.
Unmet needs that are not obvious may be more difficult to identify, but they
can also represent a greater opportunity for an aggressive business because there
will be little pressure on the established firms to be responsive. The key is to stretch
the technology or apply new technologies in order to expose unmet needs. For
example Palm-top computers, blood-less operation, and commercial space travel
are some of the examples of once unmet needs that have been met.
3.4 The Concept of Motivation
Customer motivations are basic drives that explain customer behavior and
preferences. They are the fundamental basis for marketing and sales including
product design, promotion and customer experience. The following are common
customer motivations.
Often, people confuse the idea of 'happy' employees with 'motivated'
employees. These may be related, but motivation actually describes the level of
desire employees feel to perform, regardless of the level of happiness. Employees
who are adequately motivated to perform will be more productive, more engaged
and feel more invested in their work. When employees feel these things, it helps
them, and thereby their managers, be more successful.
It is a manager's job to motivate employees to do their jobs well. So how do
managers do this? The answer is motivation in management, the process through
which managers encourage employees to be productive and effective.
Think of what you might experience in a retail setting when a motivated
cashier is processing your transaction. This type of cashier will:
 Be friendly, creating a pleasant transaction that makes you more likely to
return
 Process your transaction quickly, meaning that the store can service more
customers
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 Suggest an additional item you would like to purchase, increasing sales for
the store
In short, this employee is productive and delivers a high-quality output.
3.5 Market analysis
A key part of any business plan is the market analysis. This section needs to
demonstrate both the expertise in particular market and the attractiveness of the
market from a financial standpoint.
What is a market analysis?
A market analysis is a quantitative and qualitative assessment of a market. It
looks into the size of the market both in volume and in value, the various customer
segments and buying patterns, the competition, and the economic environment in
terms of barriers to entry and regulation.
How to do a market analysis?
The objectives of the market analysis section of a business plan are to show to
investors that:
You know your market
The market is large enough to build a sustainable business
In order to do that the following is the plan:
Demographics and Segmentation
Target Market
Market Need
Competition
Barriers to Entry
Regulation
A market analysis is the process of learning the following:
Who are my potential customers?
What are their buying and shopping habits?
How many of them are there?
How much will they pay?
Who is my competition?
What have their challenges and successes been?
The market analysis is one of the most important parts of any startup strategy.
It can actually help reduce risk because if you really understand your potential
customers and market conditions, you’ll have a better chance of developing a viable
product or service.
It should also help you get clear on what exactly makes you different from your
competition, which can make or break your chances of standing out in a crowded
landscape.
 75

However, don’t fall into the trap of simply saying that your solution is for
everyone. Ultimately, setting some parameters around your target market will help
you focus your resources.
Ultimately, your market analysis should enable you to:
Avoid putting a lot of resources and time into creating a product or service
before you’ve determined that your solution is needed.
Determine that the need for your product or service is big enough that people
will pay for it.
What to include in the market analysis?
1. Industry description and outlook
This is where you’ll outline the current state of your industry overall and
where it’s headed. Relevant industry metrics like size, trends, life cycle, and
projected growth should all be included here. This will let banks or investors see
that you know what you’re doing, and have done your homework and come
prepared with the data to back up your business idea.
2. Target market
In the industry section of your market analysis, you focused on the general
scope. In this section, you’ve got to be specific. It’s important to establish a clear
understanding of your target market early on. A lot of new entrepreneurs make the
rookie mistake of thinking that everyone is their potential market. To put it simply,
they’re not.
For example, if you’re a shoe company, you aren’t targeting “everyone” just
because everyone has feet. You’re most likely targeting a specific market segment
such as “style-conscious men” or “runners.” This will make it much easier for you
to target your marketing and sales efforts and attract the kinds of customers that
are most likely to buy from you.
3. Competitive analysis
This is the section in which you get to dissect your competitors, which is
important for a couple of reasons. Obviously, it’s a good idea to know what you’re
up against, but it also lets you spot the competition’s weaknesses. Are there
customers that are underserved? What can you offer that similar businesses aren’t
offering?
The competitive analysis should contain the following components:
Direct competitors: What other companies are offering similar products and
services? What companies are your potential customers currently buying from
instead of you?
Indirect competitors: If your company is creating a new product category,
perhaps you aren’t competing with similar companies, but instead competing with
alternate solutions. For example, Henry Ford wasn’t competing so much with other
car companies, but was instead competing with other forms of transportation such
as horses and walking. A more modern example might be a to-do list application,
where the indirect competition would include notebooks and hand-written lists.
 76

Competitor strengths and weaknesses: What is your competition good at?

Where do they fall behind? Get imaginative to spot opportunities to excel where
others are falling short.
Barriers to entry: What are the potential pitfalls of entering your particular
market? What’s the cost of entry—is it prohibitively high, or can anyone enter? This
is where you examine your weaknesses. Be honest, with investors and yourself.
Being unrealistic is not going to make you look good.
The window of opportunity: Does your entry into the market rely on time-
sensitive technology? Do you need to get in early to take advantage of an emerging
market?
4. Projections
At this point, your projections are educated guesses, so don’t worry
about absolute accuracy. However, it pays to be thoughtful and avoid hockey-stick
forecasting.
Market share: When you know how much money your future customers
spend, you’ll know how much of the market you have a chance to grab. Be
practical, but don’t sell yourself short. Make sure you are able to explain how you
came up with your numbers. Don’t make the mistake of saying that you’ll easily get
1 percent of a huge market, and that this is enough to grow a successful business.
Instead, do a bottom-up projection where you explain how your marketing and
sales efforts will enable you to get a certain percentage of the market.
Pricing and gross margin: This is where you’ll lay out your pricing structure
and discuss any discounts you plan to offer. Your gross margin is the difference
between your costs and the sales price. Again, be realistic yet optimistic. Optimistic
projections not only serve as a guide—they can also be a motivator.
5. Regulations
Are there any specific governmental regulations or restrictions on your
market? If so, you’ll need to bring them up here and discuss how you’re going to
comply with them.
You will also need to address the cost of compliance. Addressing these issues
is essential if you are seeking investment or money from a lender, and everything
has to be legally squared away and above board.
3.6 Market size
The market size is defined through the market volume and the market
potential. The market volume exhibits the totality of all realized sales volume of a
special market. The volume is therefore dependent on the quantity of consumers
and their ordinary demand. Furthermore, the market volume is either measured in
quantities or qualities. The quantities can be given in technical terms, like GW for
power capacities, or in numbers of items. Qualitative measuring mostly uses the
sales turnover as an indicator. That means that the market price and the quantity
are taken into account. Besides the market volume, the market potential is of equal
importance. It defines the upper limit of the total demand and takes potential
 77

clients into consideration. Although the market potential is rather fictitious, it offers
good values of orientation. The relation of market volume to market potential
provides information about the chances of market growth. [5][6] The following are
examples of information sources for determining market size:
 Government data
 Trade association data
 Financial data from major players
 Customer surveys
3.7 Market growth rate
A simple means of forecasting the market growth rate is to extrapolate
historical data into the future. While this method may provide a first-order
estimate, it does not predict important turning points. A better method is to study
market trends and sales growth in complementary products. Such drivers serve as
leading indicators that are more accurate than simply extrapolating historical data.
Important inflection points in the market growth rate sometimes can be
predicted by constructing a product diffusion curve. The shape of the curve can be
estimated by studying the characteristics of the adoption rate of a similar product
in the past.
Ultimately, many markets mature and decline. Some leading indicators of a
market's decline include market saturation, the emergence of substitute products,
and/or the absence of growth drivers.
3.8 Customer Profitability Analysis
Customer profitability analysis is best conducted with a technique known as
Activity based costing or ABC analysis. Customer profitability analysis helps the
company understand the net profit coming from each customer which can be
calculated by revenue less costs. These costs are not only manufacturing and
distribution costs but also sales costs, marketing costs, services cost and any other
related costs which have to be undertaken to service the customer.
3.9 Key Success factors
The key success factors are those elements that are necessary in order for the
firm to achieve its marketing objectives. A few examples of such factors include:
 Access to essential unique resources
 Ability to achieve economies of scale
 Access to distribution channels
 Technological progress
It is important to consider that key success factors may change over time,
especially as the product progresses through its life cycle.
The term key success factors can be used in four different ways:
 as a necessary ingredient in a management information system,
 as a unique characteristic of a company,
 as a heuristic tool for managers to sharpen their thinking,
 as a description of the major skills and resources required to be successful
in a given market.
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4. REVISION POINTS
Customer analysis is the process of identifying and evaluating the
distinguishing characteristics of customers. The market volume is dependent on
the quantity of consumers and their ordinary demand.
5. INTEXT QUESTIONS
1. State the meaning of market size.
2. Write short on key success factors
3. What do you mean by market growth rate?
6. SUMMARY
The key success factors are those elements that are necessary in order for the
firm to achieve its marketing objectives. Customer profitability analysis helps the
company understand the net profit coming from each customer which can be
calculated by revenue less costs.
7. TERMINAL EXERCISES
1. Market ____________ is defined through market volume and potential
2. A market analysis is the following assessment of a market a. quantitative
b. qualitative c. competitors d. All the three above.
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Explain the points to be noted while doing market analysis
2. Narrate the aspects of profitability analysis
3. Describe the importance of calculating market growth rate.
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
I.K. International Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd.
11. LEARNING ACTIVITY
Discuss with an executive of a company regarding calculation of market size.
12. KEY WORDS
Profitability Analysis, Market Analysis, Market Size, Market Growth Rate, Key
Success Factors, Risk.

 79

LESSON - 11

ENVIRONMENTAL ANALYSIS
1. INTRODUCTION
An environmental analysis in strategic management plays a crucial role in
businesses by pinpointing current and potential opportunities or threats outside
the company in its external environment. The external environment includes
political, environmental, technological and sociological events or trends that can
affect the business directly or indirectly. An environmental analysis is generally
conducted as part of an analysis of strengths, weaknesses, opportunities, and
threats (SWOT) when a strategic plan is being developed. Managers practicing
strategic management must conduct an environmental analysis quarterly, semi-
annually, or annually, depending on the nature of the business's industry. Being
able to identify events or conditions in the external environments helps businesses
achieve a competitive advantage and decrease its risk of not being prepared when
faced with oncoming threats.
The purpose of an environmental analysis is to help in strategy development
by keeping decision-makers within an organization informed on the external
environment. This may include changing of political parties, increasing regulations
to reduce pollution, technological developments, and shifting demographics. If a
new technology is developed and is being used in a different industry, a strategic
manager would see how this technology could also be used to improve processes
within his business. An analysis allows businesses to gain an overview of their
environment to find opportunities or threats.
2. OBJECTIVES
 To study the aspects of environmental analysis
 To learn the importance of studying risk
 To understand the contents of scenario analysis
3. CONTENTS
General Environment - composed of dimensions in the broader society that
influence an industry and the firms within it.
Industry Environment - set of factors that directly influence a firm and its
competitive actions and competitive responses.
Competitor Environment - details about the direct and indirect competitors
for a firm and the competitive dynamics that are expected to impact a firm‘s efforts
to generate above-average returns.
3.1 Environmental analysis
It is a strategic tool. It is a process to identify all the external and internal
elements, which can affect the organization’s performance. The analysis entails
assessing the level of threat or opportunity the factors might present.
3.2 Components of the External Environmental Analysis
What four activities are involved with external environmental analysis?
 80

a. Scanning
b. Monitoring
c. Forecasting
d. Assessing
Environmental analysis and forecasting are based upon a number of
assumptions, among them are the following:
 The future cannot be predicted, but it can be forecasted probabilistically
lakh1g explicit account of uncertainty.
 Forecasts are virtually certain to be useless or misleading if they do not
sweep widely across possible future developments in such areas as
demography, values and lifestyles, technology, economics, law and
regulation, and institutional change.
 Alternative futures including the "most likely'' future are defined primarily by
human judgment, creativity, and imagination.
 The aim of defining alternative futures is to try to determine how to create a
better future than the one that would materialize if we merely kept doing
essentially what is presently being done.
Forecasting
Developing feasible projections of potential events.
3.3 Global Business environment
The ICFAI center for management research state that the global business
environment can be defined as the environment in different sovereign countries,
with factors exogenous to the home environment of the organization, influencing
decision making on resource use and capabilities.
3.4 Environmental Uncertainty
The concept of uncertainty has been a central construct in many research
initiatives that focused on the features of the association between a firm and its
surroundings. With the continuing rise in environmental dynamism and
complexity, the environment in which businesses operate will also become
increasingly uncertain. The management of uncertainty, therefore, will continue to
be the main task of management involving the development of mechanisms to
reduce, absorb, counter, or avoid it completely.
3.5 Definition of Uncertainty
Uncertainty is seen as lack of information for, and knowledge in decision
making). It is also postulated as resulting from the indistinct and convoluted causal
configuration underlying the internal operations of the firm, its environment, and
the complex relationship between the firm and the environment . Uncertainty is
equally viewed as a product of unpredictability, environmental turbulence, and the
complexity of influential variables. Further, uncertainty is also perceived as a
tangible facet of the external environment, and as an illumination of the perceptual
method through which managers interpret their decision situation.
The complexity, interrelatedness, and interconnectedness of influential
variables in the environment call for segmenting the environment for the purpose of
analysis. The dimensions of uncertainty include the following:
 81

Macro-environmental uncertainty: This is uncertainty in the organization’s

general environment, including political, regulatory, statutory, and economic
conditions. This uncertainty has the capacity to reduce an organization’s capability
for mapping out and pursuing strategic choices.
Competitive uncertainty: This is the inability to establish the intensity of
competition in the industry in the future, the relative powers of competitors, their
future courses of action, and strategies.
Market (and demand) uncertainty: This uncertainty stems from lack of
clarity in the dynamics of the market and their effects on the organization’s
operations, and demand and supply conditions in the industry.
Technology uncertainty: This is uncertainty pertaining to change in the
industry’s technological resources and capabilities. Technological uncertainty has
the potential to undermine an organization’s competitive base.
These dimensions are considered relevant for the purpose of this study.
Frequently, organizations are internally oriented in quality planning by looking
inward for ascertaining obstacles to quality in outputs. Although it is useful to seek
solutions for quality problems within the organization, limiting the search to the
organization alone is practically ineffective. Attention must also be accorded to
external elements (such as customers, suppliers, competitors, and technology,
which are traditionally considered by management in planning and decision making
for the organization) in dealing with quality issues. Thus, the nature, source, and
extent of environmental uncertainty will impact quality objectives of firms and
quality management. It is hence necessary to bring uncertainty into focus. This
study proposes appropriate quality measures given a particular uncertainty
construct. To accomplish this, the authors established different levels of the extent
of environmental uncertainty as follows.
Extent of Uncertainty
The extent of environmental uncertainty here is viewed as a function of the
level of increase in environmental dynamism and complexity. Thus, the more
dynamic and complex environmental conditions are, the greater the intensity of
uncertainty in the environment. The pace of change in environmental variables
determines the level of environmental dynamism. Thus, a dynamic environment is
typified by change in environmental variables constituting the uncertainty
dimensions (such as technology, customer needs and tastes, demand and supply
conditions, and competition). These changes generate uncertainty for the firm.
Environmental complexity, on the other hand, is summed up by the amount and
diversity of variables influencing the uncertainty dimensions in the environment.
Uncertainty may be viewed in a binary way. It is either that the environment is
certain and therefore can be easily predicted, or it is uncertain and therefore
extremely difficult to predict. But this view clearly underestimates uncertainty.
There is a lot in between uncertainty and certainty. Following is a framework for
determining the extent of uncertainty for adapting the management of quality
under varying levels of uncertainty. This is represented by a continuum ranging
from low uncertainty to high uncertainty.
 82

Low uncertainty: In this situation, changes in the environment affecting the

uncertainty factors are low (that is, low environmental dynamism). Also, there are
few elements influencing the uncertainty factors (low level of complexity). In this
situation, for instance, changes in consumer tastes are low, possibly due to there
being few factors influencing demand (an uncertainty dimension). Typically,
because of the low level of uncertainty, predicting the future is easy in this
circumstance. And, the management team is aware of the possible states of
occurrences and can encode probabilities in each of the states.
Moderate uncertainty: This situation combines high complexity and low
dynamism or low complexity and high dynamism.
High uncertainty: In this situation the environment is highly complex and
dynamic and the interconnections between the components of the environment and
the organization are unclear. This high level of uncertainty makes decision making
difficult. The telecommunications industry, for instance, is facing several
uncertainties relating to technology, demand, government regulations, and a host of
other macroenvironmental variables. All these uncertainties interrelate in
capricious ways making it virtually impossible to predict the environment and
develop plausible strategic decisions.
3.6 Scenario Analysis
Scenario analysis is a what-if analysis in which a model's output is calculated
for a number of scenarios. Scenario analysis is most commonly used in finance to
estimate the expected value of an investment in a number of situations (such as
best case scenario, base case scenario and worst case scenario).
Scenario analysis is more complex than sensitivity analysis because in
scenario analysis all inputs are changed towards one extreme while in sensitivity
analysis only one input is changed while keeping the other constant. Scenario
analysis is quite similar to simulation analysis but less complex because most often
it considers only the two extreme and one base case scenarios.
Scenario analysis of an investment would involve the following steps:
1. Finding the base case output at the most likely value for each input. For
example, when calculating net present value, use the most likely value for
discount rate, cash flows growth, tax rate, etc.
2. Finding the value of the output at the best possible value for each input. In
case of calculating net present value, use the lowest possible discount rate,
highest possible growth rate, lowest possible tax rate, etc. This is the best
case scenario.
3. Finding the value of the output at the worst possible value for each input.
For a net present value calculation, it would mean the highest possible
discount rate, lowest possible cash flow growth rate, highest possible tax
rate, etc. This is the worst case scenario.
4. This gives a range for output values
4. REVISION POINTS
Global business environment can be defined as the environment in different
 83

sovereign countries. Uncertainty is equally viewed as a product of unpredictability,

environmental turbulence, and the complexity of influential variables.
Scenario analysis is a what-if analysis in which a model's output is calculated
for a number of scenarios.
5. INTEXT QUESTIONS
1. What four activities are involved with external environmental analysis?
2. What are the steps involved in Scenario analysis of an investment?
3. Write the definition of Uncertainty
6. SUMMARY
Customer motivations are basic drives that explain customer behavior and
preferences. It is a strategic tool. It is a process to identify all the external and
internal elements, which can affect the organization’s performance.
7. TERMINAL EXERCISES
1. This is the inability to establish the intensity of competition in the industry
in the future i Competitive uncertainty ii Moderate uncertainty iii Market
(and demand) uncertainty iv none of these.
2. The activities involved with external environmental analysis are:
a. Scanning
b. Monitoring
c. Forecasting
d. all the three above
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Write an essay on uncertainity
2. Explain the aspects of external environmental analysis
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G. V. Satya Sekhar,
[Link] Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd.,
11. LEARNING ACTIVITY
Discuss with a corporate executive regarding uncertainity and take down the
points.
12. KEY WORDS
External environmental analysis, Scanning, Monitoring, Forecasting,
Assessing, Scenario analysis.

 84

LESSON - 12

REGRET ANALYSIS
1. INTRODUCTION
Scenario analysis is a process of analyzing possible future events by
considering alternative possible outcomes (sometimes called alternative worlds).
Thus, the scenario analysis, which is a main method of projections, does not try to
show one exact picture of the future.
2. OBJECTIVES
 To learn about the basics of PEST analysis
 To know the fundamentals of Industry analysis
 To understand Porter’s generic strategies
3. CONTENTS
3.1 Definition of 'Regret Theory'
A theory that says people anticipate regret if they make a wrong choice, and
take this anticipation into consideration when making decisions. Fear of regret can
play a large role in dissuading or motivating someone to do something.
Regret Analysis Unlike the previous techniques, which rely on probability
distributions, either objective or subjective, to establish expected values for the
variables relevant to a decision
3.2 PEST Analysis
PEST analysis categorizes the changes and forces that affect your startup
either directly or indirectly through your customers, suppliers and competitors.
PEST is an acronym that stands for the Political, Economic, Social and
Technological market forces. This type of analysis is usually conducted in the
process of preparing a strategic plan, with the goal being to identify threats and
opportunities for your business.
PEST is a common framework for conducting this macro-environmental scan
that summarizes high-level trends as they relate to your target customers, markets
and technology. To perform an environmental, or PEST, analysis, answer the
following questions:
1. What key political and regulatory developments are taking place now? How
do these changes affect your market and customers? How do these trends
affect your industry, suppliers, partners and customers? Focus your
analysis on:
a. tax regulations
b. trade rules
c. environmental legislation
2. Are economic changes affecting your company, your customers or your
suppliers? Does this create opportunities, or does it threaten your market
potential or your customers’ economy? Focus your analysis on:
a. economic growth rate
 85

b. interest rates
c. currency changes
d. inflation
3. What social and cultural changes are occurring? Focus on shifts in the
demographic profile, any broad attitudinal changes, and any cultural
trends that may impact the potential of your startup in the short and long
term. Look for movement in:
a. demographic trends such as birth rates, aging, and migration
patterns
b. attitudes towards healthy lifestyles, organic foods, the
environment, and so forth
c. attitudes on issues such as security, executive compensation, and
anti-terrorism
4. What key technological trends impact your business? Consider also
technology advances that affect your customers and suppliers. Do any of
these changes create
a. opportunities or threaten your potential? Focus your analysis on:
b. specific technological breakthroughs
c. the launch of innovative new products
d. areas that undergo much research and development
e. patents that receive publicity
3.3 Industry Analysis
Industry analysis is an essential responsibility for an equity research analyst.
As an equity research analyst, you need to analyze a particular industry, see
its past trends, demand-supply mechanics and future outlook.
The industry analysis report sheds light on the economic health of the
company, underlining the understanding whether it will be beneficial for the
stakeholders to invest in such a company and offering recommendations and/or
corrective actions to take in case of any untoward developments in the company.
As an equity research analyst, you might work on industries like Oil and Gas,
Metal, Information Technology, Automobile, Financial Services, Infrastructure,
Pharmaceuticals and Consumer durables.
In some companies, there is a dedicated industry analyst who will work on the
assigned industry and provide the analysis.
However, as an analyst you should be aware of industry dynamics and hence,
it is important to know how to do industry analysis.
How to do Industry Analysis?
An industry analysis is a complicated and time consuming process. If any of
the dimensions are missed, the whole analysis becomes faulty. Therefore, in this
section, I have highlighted all the necessary steps telling you how to do industry
analysis. Use these steps and apply it in your analysis.
What are the steps? Here you go:
 86

1. Review available reports

Read all the available but relevant industry reports and statistics to see
whether it makes sense to dig deeper.
Some of the reports you will find already contain in-depth information that the
need for new industry analysis is eliminated.
However, it is unwise to depend on existing industry analysis reports as the
market is always volatile and industry factors change constantly.
Therefore, pick up a current report and envisage its relevancy in the current
market.
2. Approach the correct industry
An industry has sub-parts. For example, if you look at the chemical industry,
you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes,
Organic chemicals.
Therefore, it is important to focus on the relevant industry. Without this, it will
be impossible to draw an accurate industry analysis report. So, take up an industry
and find out the sub-industries. Select the one which suits the company’s purpose.
Moreover, it is worthwhile to look at the different market segments in a particular
industry.
3. Demand & supply scenario
As any economist will know, demand and supply are the primary factors
governing any market. Hence, it becomes relevant to look into the demand-supply
scenario for a particular product or industry by studying its past trends and
forecasting future outlook.
You can do comparative analysis with other companies competing in the same
manner to find out the economic health of the company under consideration.
Future demand and supply forecasting helps investors understand the
viability of future investments in terms of profits and losses.
4. Competitive scenario
This is the most important step of any industry analysis. In this, you need to
study the competitive scenario using Porter’s Five Forces Model.
The model acts as the framework of industry analysis. Michael Porter, a
famous strategist and author, first came up with this model. In this model, five
parameters are analyzed to see the competitive landscape.
They are:
1. Barriers to Entry
2. Supplier Power
3. Threat of Substitutes
4. Buyer Power
5. Degree of Rivalry
The Porter’s model is extensively used while analyzing any industry.
 87

5. Recent developments
Any industry analysis report isn’t just about studying the particular industry
on a micro-level.
The analyst needs to incorporate influencing factors at the macro-level. These
macro-level factors include recent industrial developments, innovation in your
industry analysis report, sector valuations and global comparative valuation.
6. Focus on industry dynamics
The industry analysis should be specific to a particular industry and thus, it is
important to focus and understand the industry dynamics. Your industry analysis
should be in-depth and to-the-point.
For example, if you are tracking the aluminum industry, you should know the
per capita consumption in the country.
In India, the per capita consumption of aluminum is 1 Kg, in USA, it is 25 to
30 Kgs, in Japan, it is 15 Kgs and in Taiwan, it is 10 Kgs. Apart from the
consumption, you should also know the production of aluminum worldwide.
3.4 The Need for Industry Analysis
Industry analysis is an essential responsibility for an analyst.
As an analyst, you need to analyze a particular industry, see its past trends,
demand-supply mechanics and future outlook.
The industry analysis report sheds light on the economic health of the
company, underlining the understanding whether it will be beneficial for the
stakeholders to invest in such a company and offering recommendations and/or
corrective actions to take in case of any untoward developments in the company.
As an equity research analyst, you might work on industries like Oil and Gas,
Metal, Information Technology, Automobile, Financial Services, Infrastructure,
Pharmaceuticals and Consumer durables.
In some companies, there is a dedicated industry analyst who will work on the
assigned industry and provide the analysis.
However, as an analyst you should be aware of industry dynamics and hence,
it is important to know how to do industry analysis.
3.5 How to do Industry Analysis?
An industry analysis is a complicated and time consuming process. If any of
the dimensions are missed, the whole analysis becomes faulty. Therefore, in this
section, I have highlighted all the necessary steps telling you how to do industry
analysis. Use these steps and apply it in your analysis.
What are the steps? Here you go:
1. Review available reports
Read all the available but relevant industry reports and statistics to see
whether it makes sense to dig deeper.
 88

Some of the reports you will find already contain in-depth information that the
need for new industry analysis is eliminated.
However, it is unwise to depend on existing industry analysis reports as the
market is always volatile and industry factors change constantly.
Therefore, pick up a current report and envisage its relevancy in the current
market.
2. Approach the correct industry
An industry has sub-parts. For example, if you look at the chemical industry,
you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes,
Organic chemicals.
Therefore, it is important to focus on the relevant industry. Without this, it will
be impossible to draw an accurate industry analysis report. So, take up an industry
and find out the sub-industries. Select the one which suits the company’s purpose.
Moreover, it is worthwhile to look at the different market segments in a particular
industry.
3. Demand & supply scenario
As any economist will know, demand and supply are the primary factors
governing any market. Hence, it becomes relevant to look into the demand-supply
scenario for a particular product or industry by studying its past trends and
forecasting future outlook.
You can do comparative analysis with other companyies competing in the
same manner to find out the economic health of the company under consideration.
Future demand and supply forecasting helps investors understand the
viability of future investments in terms of profits and losses.
4. Competitive scenario
This is the most important step of any industry analysis. In this, you need to
study the competitive scenario using Porter’s Five Forces Model.
The model acts as the framework of industry analysis. Michael Porter, a
famous strategist and author, first came up with this model. In this model, five
parameters are analyzed to see the competitive landscape.
They are:
1. Barriers to Entry
2. Supplier Power
3. Threat of Substitutes
4. Buyer Power
5. Degree of Rivalry
The Porter’s model is extensively used while analyzing any industry.
5. Recent developments
Any industry analysis report isn’t just about studying the particular industry
on a micro-level.
 89

The analyst needs to incorporate influencing factors at the macro-level. These

macro-level factors include recent industrial developments, innovation in your
industry analysis report, sector valuations and global comparative valuation.
6. Focus on industry dynamics
The industry analysis should be specific to a particular industry and thus, it is
important to focus and understand the industry dynamics. Your industry analysis
should be in-depth and to-the-point.
For example, if you are tracking the aluminum industry, you should know the
per capita consumption in the country.
In India, the per capita consumption of aluminum is 1 Kg, in USA, it is 25 to
30 Kgs, in Japan, it is 15 Kgs and in Taiwan, it is 10 Kgs. Apart from the
consumption, you should also know the production of aluminum worldwide.
It is difficult for a business to survive without competitive strategies in place.
This is particularly the case if the company is contending in markets overflowing
with alternatives for consumers.
A competitive strategy may be defined as a long-term plan of action that a
company devises towards achieving a competitive advantage over its competitors
after examining the strengths and weaknesses of the latter and comparing them to
its own. The strategy can incorporate actions to withstand the market’s competitive
pressures, attract customers and assist in cementing the company’s market
position.
Michael Porter is considered a top authority on competitive strategy and the
economic development and competitiveness of regions, states, and nations. Porter’s
classification of generic competitive strategies includes differentiation, cost
leadership, differentiation focus, and cost focus.
Differentiation
This strategy aims at developing a competitive advantage by way of making
available and marketing a unique product or service – a product or service that is
different in some way to what a rival or competitor is offering. For this, you may
have to spend a lot for research and development, which you may not be able to
afford if yours is a small business. A successful differentiation strategy has the
potential to lower price sensitivity and better brand loyalty from customers.
Cost Leadership
The intention behind a cost leadership strategy is to be a lower cost producer
in comparison to your competitors. There are two traditional options for businesses
to increase profits – decreasing costs or increasing sales. In a cost leadership
strategy, the concentration is on acquiring quality raw materials at the lowest price.
Business owners additionally need to use the best labor to convert these raw
materials into valuable goods for the consumer. Thus, this strategy is especially
beneficial if the market is one where price is an important factor.
 90

Focus – Differentiation Focus and Cost Focus

If the business realizes that marketing to a homogenous customer niche would
not be an effective line of action for a particular product the business is selling, it
can adopt the focus strategy. This strategy involves the business tailoring its
marketing endeavors and service to one or more select customer segments and
excluding the other segments.
There are two variants of the focus strategy. In cost focus, the aim of the
business would be to have an advantage over its competitors with respect to cost in
its target segment. Thus, an electronics store may have the aim of being the
cheapest electronic store in a particular town but not essentially the cheapest
overall. A differentiation focus strategy takes advantage of the special needs of
consumers in specific segments and seeks differentiation by way of marketing its
product as unique in certain respects. For example, a company may bring out a
product specifically designed for left-handers.
4. REVISION POINTS
An industry analysis is a complicated and time consuming process. A
competitive strategy may be defined as a long-term plan of action that a company
devises towards achieving a competitive advantage over its competitors.
5. INTEXT QUESTIONS
1. Expand PEST.
2. Define the term Regret Analysis
6. SUMMARY
Scenario analysis is a process of analyzing possible future events by
considering alternative possible outcomes. Differentiation strategy aims at
developing a competitive advantage by way of making available and marketing a
unique product or service. The intention behind a cost leadership strategy is to be a
lower cost producer in comparison to your competitors.
7. TERMINAL EXERCISES
1. Porter’s generic strategy is i Product differentiation ii Cost leadership iii
Focus iv all the three above
2. Porter’s ____ Forces Model. i two ii three iii four iv five
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. How to do Industry Analysis?
2. Explain Porter’s generic competitive strategies.
 91

10. REFERENCE BOOKS

1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
[Link] Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd.
11. LEARNING ACTIVITY
Find out a company with cost leadership and discuss with the decision makers
of that company.
12. KEY WORDS
Regret analysis, PEST analysis, Industry analysis, competitive strategy.

 92

LESSON - 13

BUSINESS PORTFOLIO ANALYSIS-BCG

MATRIX, GE BUSINESS SCREEN
1. INTRODUCTION
A business portfolio analysis is a thorough evaluation of a company's products
and services. The purpose of such a review is to determine where a company should
focus its investments and business activities. Companies can hire a third party firm
to perform this work, or they can do it internally with assistance from key members
of management. This can be part of a plan for reorganizing, improving business
strategy, or cutting costs to make a business run more efficiently.
The first step in a business portfolio analysis is to determine the contents of
the business portfolio. For a single business with no holdings, this can be a
relatively simple task, as any products and services provided will be easy to list.
Businesses with subdivisions, departments dedicated to other activities, and
separate holdings are harder to analyze. In these cases, analysts must carefully
track down all holdings within the portfolio to get a detailed and complete picture.
With information about the portfolio's contents in hand, the analyst can start
to look at performance. This can include sales numbers, comparisons with
competitors, and so forth. Business portfolio analysis can also integrate projections.
A company with a great deal of business related to a service that will become
obsolete due to changing industry standards, for example, may need to think about
ways to compensate for projected drops in business.
2. OBJECTIVES
 To understand the inputs of Portfolio analysis
 To learn about the nature of BCG matrix
 To know the aspects of GE Business screen, Hofer matrix
3. CONTENTS
3.1 Portfolio analysis
portfolio analysis [Link] portfolio analysis. B portfolio analysis. B portfolio analysis. B
Definitions
1. Commerce: An analysis of elements of a company's product mix to
determine the optimum allocation of its resources. Two most common measures
used in a portfolio analysis are market growth rate and relative market share.
2. Securities: An analysis of an investment portfolio relative to an idealized
balance of holdings, used as means of optimizing allocation.
Portfolio—A collection of investments all owned –the same individual or
organization.
Business Portfolio --The business portfolio is the collection of businesses and
product that make up the company.
Analysis--is the systematic way of resolution or examination of any object or
 93

happening.
Definition-1
Business portfolio analysis is basically a process through which one may
review all the factors that together build up an organization’s business portfolio. It
involves a thorough analysis of an organization’s business objectives, policies,
products and services to infer on the image the company projects in the market.
The process of assessing a company's competitive position and business
performance relative to its market. Used in strategic planning to optimize
investment activities and effectively allocate resources towards the right business
opportunities.
3.2 Business portfolio analysis
Definition-2
business portfolio [Link] business portfolio business portfolio business portfolio
A method of
categorizing a firm's products according to their relative competitive position and
business growth rate in order to lay the foundations for sound strategic planning.
3.3 BCG matrix
Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix)
developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It
provides a graphic representation for an organization to examine different
businesses in it’s portfolio on the basis of their related market share and industry
growth rates. It is a two dimensional analysis on management of SBU’s (Strategic
Business Units). In other words, it is a comparative analysis of business potential
and the evaluation of environment.
According to this matrix, business could be classified as high or low according
to their industry growth rate and relative market share.
Relative Market Share = SBU Sales this year leading competitors sales this
year.
Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The
dimension of business strength, relative market share, will measure comparative
advantage indicated by market dominance. The key theory underlying this is
existence of an experience curve and that market share is achieved due to overall
cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative
market share and the vertical axis denoting market growth rate. The mid-point of
relative market share is set at 1.0. if all the SBU’s are in same industry, the average
growth rate of the industry is used. While, if all the SBU’s are located in different
industries, then the mid-point is set at the growth rate for the economy.
Resources are allocated to the business units according to their situation on
the grid. 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.
 94

10 x 1x 0.1 x
Figure: BCG Matrix
Stars- Stars represent business units having large market share in a fast
growing industry. They may generate cash but because of fast growing market,
stars require huge investments to maintain their lead. Net cash flow is usually
modest. SBU’s located in this cell are attractive as they are located in a robust
industry and these business units are highly competitive in the industry. If
successful, a star will become a cash cow when the industry matures.
Cash Cows- Cash Cows represents business units having a large market share
in a mature, slow growing industry. Cash cows require little investment and
generate cash that can be utilized for investment in other business units. These
SBU’s are the corporation’s key source of cash, and are specifically the core
business. They are the base of an organization. These businesses usually follow
stability strategies. When cash cows loose their appeal and move towards
deterioration, then a retrenchment policy may be pursued.
Question Marks- Question marks represent business units having low relative
market share and located in a high growth industry. They require huge amount of
cash to maintain or gain market share. They require attention to determine if the
venture can be viable. Question marks are generally new goods and services which
have a good commercial prospective. There is no specific strategy which can be
adopted. If the firm thinks it has dominant market share, then it can adopt
expansion strategy, else retrenchment strategy can be adopted. Most businesses
start as question marks as the company tries to enter a high growth market in
which there is already a market-share. If ignored, then question marks may become
dogs, while if huge investment is made, then they have potential of becoming stars.
Dogs- Dogs represent businesses having weak market shares in low-growth
markets. They neither generate cash nor require huge amount of cash. Due to low
market share, these business units face cost disadvantages. Generally
retrenchment strategies are adopted because these firms can gain market share
only at the expense of competitor’s/rival firms. These business firms have weak
market share because of high costs, poor quality, ineffective marketing, etc. Unless
 95

a dog has some other strategic aim, it should be liquidated if there is fewer
prospects for it to gain market share. Number of dogs should be avoided and
minimized in an organization.
3.4 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-
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.
Market is not clearly defined in this model.
High market share does not always leads to high profits. There are high costs
also involved with high market share.
Growth rate and relative market share are not the only indicators of
profitability.
This model ignores and overlooks other indicators of profitability. At times,
dogs may help other businesses in gaining competitive advantage.
They can earn even more than cash cows sometimes.
This four-celled approach is considered as to be too simplistic.
3.5 The General Electric Business Screen
The General Electric Business Screen was originally developed to help
marketing managers overcome the problems that are commonly associated with
the Boston Matrix (BCG), such as the problems with the lack of credible business
information, the fact that BCG deals primarily with commodities not brands or
Strategic Business Units (SBU’s), and that cashflow if often a more reliable
indicator of position as opposed to market growth/share.
For market attractiveness:
 Size of market.
 Market rate of growth.
 The nature of competition and its diversity.
 Profit margin.
 Impact of technology, the law, and energy efficiency.
 Environmental impact.
…and for competitive position:
 Market share.
 Management profile.
 R & D.
 Quality of products and services.
 Branding and promotions success.
 Place (or distribution).
 Efficiency.
 Cost reduction.
 96

At this stage the marketing manager adapts the list above to the needs of his
strategy. The GE matrix has 5 steps:
 One – Identify your products, brands, experiences, solutions, or SBU’s.
 Two – Answer the question, What makes this market so attractive?
 Three – Decide on the factors that position the business on the GE matrix.
 Four – Determine the best ways to measure attractiveness and business
position.
 Five – Finally rank each SBU as either low, medium or high for business
strength, and low, medium and high in relation to market attractiveness.
Now follow the usual words of caution that go with all boxes, models and
matrices. Yes the GE matrix is superior to the Boston Matrix since it uses several
dimensions, as opposed to BCG’s two. However, problems or limitations include:
 There is no research to prove that there is a relationship between market
attractiveness and business position.
 The interrelationships between SBU’s, products, brands, experiences or
solutions is not taken into account.
 This approach does require extensive data gathering.
 Scoring is personal and subjective.
 There is no hard and fast rule on how to weight elements.
 The GE matrix offers a broad strategy and does not indicate how best to
implement it.
The GE Business Screen introduces a three by three matrix, which now
includes a medium category. It utilizes industry attractiveness as a more inclusive
measure than BCG’s market growth and substitutes competitive position for the
original’s market share.

M
a
r
k
e
t
A
t
t
r
a
r
t
i
v
e
n
e
s
Competitive Position
s
So in come Strategic Business Units (SBU’s). A large corporation may have
many SBU’s, which essentially operate under the same strategic umbrella, but are
distinctive and individual. A loose example would refer to Microsoft, with SBU’s for
operating systems, business software, consumer software and mobile and Internet
technologies.
Growth/share are replaced by competitive position and market attractiveness.
The point is that successful SBU’s will go and do well in attractive markets because
 97

they add value that customers will pay for. So weak companies do badly for the
opposite reasons.
4. REVISION POINTS
Business portfolio analysis is the process of assessing a company's competitive
position and business performance relative to its market.
5. INTEXT QUESTIONS
1. Write short note on SBU
2. List out the limitations of BCG matrix
3. State the features of GE business screen
6. SUMMARY
BCG matrix provides a graphic representation for an organization to examine
different businesses in its portfolio on the basis of their related market share and
industry growth rates. BCG matrix classifies businesses as low and high, but
generally businesses can be medium also. The General Electric Business Screen
was originally developed to help marketing managers overcome the problems that
are commonly associated with the Boston Matrix.
7. TERMINAL EXERCISES
1. Cash Cows in BCG Matrix represents business units having a large i market
share ii sales iii profit iv market attractiveness.
2. The General Electric Business Screen was originally developed to help: i
marketing managers ii general managers iii finance managers iv production
managers
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Elaborate the nature of Portfolio analysis.
2. Write a detailed note on BCG Matrix.
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
[Link] Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd.
11. LEARNING ACTIVITIES
Do a portfolio analysis of a company of your choice with the guidance of an
executive working in that company.
12. KEY WORDS
Portfolio analysis, BCG Matrix, Strategic Business Units.

 98

LESSON - 14

BUSINESS PORTFOLIO ANALYSIS-HOFER AND

SCHENDEL’S MATRIX, McKINSEY SYSTEM
1. INTRODUCTION
Hofer and Schendel’s Matrix, McKinsey system is one of the tools used to
determine the assessment of the Competitive position of the company, as
determined by its internal and external factors. 15 squares matrix was created by
Ch.W. Hofer. It is a development of the ADL and McKinsey matrices and is
especially useful when analysing strategically diversified entity.
2. OBJECTIVES
 To know about Hofer-Schendel’s matrix
 To understand McKinsey system
3. CONTENTS
3.1 Rules of design
Matrix is created on the basis of two criteria: the maturity of the sector,
divided into 5 phases and the competitive position of companies in the sector. In
this way circles are created, which represent different areas of activity in the
company, and the size of the circle is proportional to size of the sector. Sometimes
segments could be added to the circle, which reflect the market share of company
in the sector.
Below is a sample matrix constructed according to the principles set out by
Hofer. In its interpretation attention should be paid to possible strategies for
products, their life cycle phases and the markets in different sectors.

Fig.1. Hofer Matrix Example

Interpretation of fields
In Hofer matrix, we can characterize groups of products:
 Products A - Dilemmas that have chance of success with appropriate
marketing strategies and financial aid
 99

 Products B - Winners, require appropriate marketing strategies and financial

aid, if company has limited resources for advertising managers must make a
choice between products A and B
 Products C - Potential losers, the weak position, the sector in the growth
phase - managers should make additional analyses to rule out the
possibility of going through the shock phase
 Products D - despite the current difficulties can become market leaders or
profitable producers
 Products E and F are profitable, so it is possible to introduce other products
in the phase of shock and generate considerable profits
 Products G and H are the losers are in the exit phase of the market, ahead of
the full withdrawal managers should use strategies for "gathering the
harvest".
3.2 Product-market Evolution Matrix
The GE Business Screen is not without controversy. Some observes argue that
there is too much subjectivity in the construction of the matrix.
According to Hofer and Schendel, "The Principal difficulty with GE Business
Screen is that it does not depict as affectively at it might the positions of new
businesses that are just starting to grow in new industries.
In such instances, it may be preferable to use a fifteen-cell matrix in which
businesses are plotted in terms of their competitive position and their stage of
product/market evolution". Thus, Hofer developed the Product/Market Evolution
Portfolio Matrix, or Life Cycle Matrix.
Several useful ideas concerning the strategic alternatives available to each
business unit emerge from an analysis.
 Business unit A would to be a developing winner. Its relatively large share of
the market combined with its being at the development stage of product-
market evolution and its potential for being in a strong competitive position
make it a good candidate for receiving more corporate resources.
 Business unit B is somewhat similar to A. However, it has a relatively small
share of the market given its strong competitive position. A strategy would
have to be developed to overcome this low market share in order to justify
more investments.
 Business unit C might be classified as a potential loser. A strategy must be
developed to overcome the low market share and weak competitive position
in order to justify future investments.
 Business unit D is in a shakeout period, has a relatively large share of the
market, and is in a relatively strong position. Investment should be made to
maintain that position.
 Business units E and F are cash cows and should be used for cash
generation.
 100

 Business unit G appears to be a dog. It should be managed to generate cash

in the short run, if possible; however, the long-run strategy will more the
likely be divestment or liquidation.
It has been suggested that most portfolios are variations of one of three ideal
types: growth, profit, balanced.
3.3 McKinsey-System
Definition
McKinsey 7s model is a tool that analyzes firm’s organizational design by
looking at 7 key internal elements: strategy, structure, systems, shared values,
style, staff and skills, in order to identify if they are effectively aligned and allow
organization to achieve its objectives.
McKinsey 7s model was developed in 1980s by McKinsey consultants Tom
Peters, Robert Waterman and Julien Philips with a help from Richard Pascale and
Anthony G. Athos. Since the introduction, the model has been widely used by
academics and practitioners and remains one of the most popular strategic
planning tools. It sought to present an emphasis on human resources (Soft S),
rather than the traditional mass production tangibles of capital, infrastructure and
equipment, as a key to higher organizational performance. The goal of the model
was to show how 7 elements of the company: Structure, Strategy, Skills, Staff,
Style, Systems, and Shared values, can be aligned together to achieve effectiveness
in a company. The key point of the model is that all the seven areas are
interconnected and a change in one area requires change in the rest of a firm for it
to function effectively.
Below you can find the McKinsey model, which represents the connections
between seven areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the
model emphasizes interconnectedness of the elements.
 101

The model can be applied to many situations and is a valuable tool when
organizational design is at question. The most common uses of the framework are:
 To facilitate organizational change.
 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.
7s factors
In McKinsey model, the seven areas of organization are divided into the ‘soft’
and ‘hard’ areas. Strategy, structure and systems are hard elements that are much
easier to identify and manage when compared to soft elements. On the other hand,
soft areas, although harder to manage, are the foundation of the organization and
are more likely to create the sustained competitive advantage.
7s factors
Hard S Soft S
Strategy Style
Structure Staff
Systems Skills
Shared Values
Strategy is a plan developed by a firm to achieve sustained competitive
advantage and successfully compete in the market. What does a well-aligned
strategy mean in 7s McKinsey model? In general, a sound strategy is the one that’s
clearly articulated, is long-term, helps to achieve competitive advantage and is
reinforced by strong vision, mission and values. But it’s hard to tell if such strategy
is well-aligned with other elements when analyzed alone. So the key in 7s model is
not to look at your company to find the great strategy, structure, systems and etc.
but to look if its aligned with other elements. For example, short-term strategy is
usually a poor choice for a company but if its aligned with other 6 elements, then it
may provide strong results.
Structure represents the way business divisions and units are organized and
includes the information of who is accountable to whom. In other words, structure
is the organizational chart of the firm. It is also one of the most visible and easy to
change elements of the framework.
Systems are the processes and procedures of the company, which reveal
business’ daily activities and how decisions are made. Systems are the area of the
firm that determines how business is done and it should be the main focus for
managers during organizational change.
Skills are the abilities that firm’s employees perform very well. They also
include capabilities and competences. During organizational change, the question
often arises of what skills the company will really need to reinforce its new strategy
or new structure.
Staff element is concerned with what type and how many employees an
organization will need and how they will be recruited, trained, motivated and
rewarded.
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Style represents the way the company is managed by top-level managers, how
they interact, what actions do they take and their symbolic value. In other words, it
is the management style of company’s leaders.
Shared Values are at the core of McKinsey 7s model. They are the norms and
standards that guide employee behavior and company actions and thus, are the
foundation of every organization.
The authors of the framework emphasize that all elements must be given equal
importance to achieve the best results.
Using the tool
The McKinsey 7s framework is often used when organizational design and
effectiveness are at question. It is easy to understand the model but much harder to
apply it for your organization due to a common misunderstanding of what should a
well-aligned elements be like.
The following steps that should help to apply this tool:
Step 1. Identify the areas that are not effectively aligned
During the first step, your aim is to look at the 7S elements and identify if they
are effectively aligned with each other. Normally, you should already be aware of
how 7 elements are aligned in your company, but if you don’t you can use the
checklist from WhittBlog to do that. After you’ve answered the questions outlined
there you should look for the gaps, inconsistencies and weaknesses between the
relationships of the elements. For example, you designed the strategy that relies on
quick product introduction but the matrix structure with conflicting relationships
hinders that so there’s a conflict that requires the change in strategy or structure.
Step 2. Determine the optimal organization design
With the help from top management, your second step is to find out what
effective organizational design you want to achieve. By knowing the desired
alignment you can set your goals and make the action plans much easier. This step
is not as straightforward as identifying how seven areas are currently aligned in
your organization for a few reasons. First, you need to find the best optimal
alignment, which is not known to you at the moment, so it requires more than
answering the questions or collecting data. Second, there are no templates or
predetermined organizational designs that you could use and you’ll have to do a lot
of research or benchmarking to find out how other similar organizations coped with
organizational change or what organizational designs they are using.
Step 3. Decide where and what changes should be made
This is basically your action plan, which will detail the areas you want to
realign and how would you like to do that. If you find that your firm’s structure and
management style are not aligned with company’s values, you should decide how to
reorganize the reporting relationships and which top managers should the company
let go or how to influence them to change their management style so the company
could work more effectively.
Step 4. Make the necessary changes
The implementation is the most important stage in any process, change or
analysis and only the well-implemented changes have positive effects. Therefore,
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you should find the people in your company or hire consultants that are the best
suited to implement the changes.
Step 5. Continuously review the 7s
The seven elements: strategy, structure, systems, skills, staff, style and values
are dynamic and change constantly. A change in one element always has effects on
the other elements and requires implementing new organizational design. Thus,
continuous review of each area is very important.
4. REVISION POINTS
Hofer and Schendel’s Matrix, McKinsey system is one of the tools used to
determine the assessment of the Competitive position of the company, as
determined by its internal and external factors. The McKinsey 7s elements are
strategy, structure, systems, skills, staff, style and shared values
5. INTEXT QUESTIONS
1. What do mean by shared values in McKinsey model?
2. What is the use of Hofer and Schendel’s Matrix?
6. SUMMARY
McKinsey 7s model is a tool that analyzes firm’s organizational design by
looking at key internal elements: strategy, structure, systems, shared values, style,
staff and skills, in order to identify if they are effectively aligned and allow
organization to achieve its objectives.
7. TERMINAL EXERCISES
1. McKinsey 7s model is a.... i tool ii formula iii brand iv none of these.
2. Shared Values are at the core...... of i McKinsey 7s model ii Hofer and
Schendel’s Matrix iii both iv none of these
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]/8736253/Strategic_Analysis_through_the_General...
3. [Link]
9. ASSIGNMENTS
1. Elaborate the nature of Hofer and Schendel’s Matrix.
2. Describe the characteristics of McKinsey 7s model.
10. REFERENCE BOOKS
1. Strategic management: a new view of business policy and planning Dan
Schendel, Charles W. Hofer Little, Brown, 1979 -
2. Metamorphosis in Strategic Market Planning Vijay Mahajan, P. Rajan
Varadarajan, Roger A. Kerin Marketing Classics Press, 15-May-2011.
11. LEARNING ACTIVITY
Go through and take down notes from the websites regarding the usage of
Hofer’s Matrix in foreign companies.
12. KEY WORDS
Hofer and Schendel’s Matrix, McKinsey 7s model, strategy, structure, systems,
shared values, style, staff and skills.

 104

LESSON - 15

SPACE MATRIX-DIRECTIONAL POLICY MATRIX

1. INTRODUCTION
The Strategic Position and Action Evaluation Matrix or SPACE analysis matrix
is a super technique for evaluating the sense and wisdom in a particular strategic
plan. It was developed by strategy academics Alan Rowe, Richard Mason, Karl
Dickel, Richard Mann and Robert Mockler.
2. OBJECTIVES
 To know the aspects of SPACE MATRIX
 To understand the contents of Directional Policy Matrix
3. CONTENTS
3.1 The Strategic Position and Action Evaluation Matrix SPACE Analysis
The Strategic Position and Action Evaluation (SPACE) analysis framework is a
very useful but not well known tool to develop and review a company’s strategy.
It can be used at
 The beginning of the exercise to predict the overall key themes.
As a check at the end of the process.
 It can also be used to evaluate individual strategic options generated by
using a tool like the Ansoff Growth Matrix.
SPACE Analysis is a systematic appraisal of four key issues that balance the
external and internal factors that should determine the general theme of the
strategy:
External
 Industry Attractiveness
 Environmental Stability
 Internal
 Competitive Advantage
 Financial Strength
By combining ratings on each dimension on one SPACE matrix diagram, the
framework guides the strategic agenda.
The dimensions are combined in a way that seems strange at first but makes
sense because two sets of factors are assessed as strengths (financial strength and
industry strength) and rated positive while the other two (competitive advantage
and environmental stability) are assessed as potential weaknesses and rated
negatively.
The logic is that financial strength is needed to compensate for environmental
instability. The more difficult the future environment is thought to be, the more
important it is to have strong financials.
Industry attractiveness and competitive advantage are seen as potentially
alternative sources of superior profit. and indeed there are treated as such in my
 105

five pathways to profit in my Profit Tipping Point report. If both favour the business,
then results should be very good, if both are unfavourable, then the business is in
trouble.
3.2 The SPACE Analysis Matrix Diagram

A very strong position in the SPACE matrix

This diagram shows that the firm is in a very favourable position and is able to
take an aggressive growth strategy. It is operating in an attractive and stable
industry and has major competitive advantages backed up by significant financial
strength.
3.3 Assessing the SPACE Analysis Scores
Each factor in the Strategic Position and Action Evaluation matrix can be
quickly judged but there are benefits for exploring each in detail.
There are a large number of factors that can be considered and each industry
will have its own key features which should be included in the detailed SPACE
evaluation.
A few factors to be considered to give you a flavour of what to include in your
SPACE analysis are listed below.
3.4 SPACE Analysis Factors for Financial Strength
 Return on Sales
 Return on Assets
 Cash Flow
 Gearing
 Working Capital Intensity
Financial Strength is scored 6 great to 1 poor in the SPACE Analysis Matrix –
for more details see Financial Strength In The SPACE Matrix
3.5 SPACE Analysis Factors for Competitive Advantage
 Market Share
 Quality
 Customer Loyalty
 Cost Levels
 Product Range
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Competitive advantage is scored -1 (minus 1) great to –6 (minus 6) poor – for

more details see Competitive Advantage In The SPACE Matrix
3.6 SPACE Analysis Factors for Industry Attractiveness
 Growth Potential
 Life Cycle Stage
 Entry Barriers
 Customer Power
 Substitutes
Industry attractiveness is scored 6 great and 1 poor in the SPACE analysis
matrix – for more details see Industry Attractiveness In The SPACE Matrix
3.7 SPACE Analysis Factors for Environmental Stability
 Political Uncertainty
 Interest Rates
 Technology
 Cyclical
 Environmental Issues
Environmental stability is scored –1 (minus 1) great to –6 (minus 6) poor – for
more details see Environmental Stability In The SPACE Matrix
Scores switch between positive and negative so that the combined position can
be assessed.
A firm operating with major competitive advantages in an unattractive
industry will have a similar net score (and profitability potential) to another firm
with little competitive advantage in an attractive industry.
e.g.
Attractiveness of industry 5 (very strong)
Competitive advantage -4 (weak – the business has more disadvantages than
advantages)
Net SPACE score on this dimension = 1
or
Attractiveness of industry 2 (weak – things look difficult)
Competitive advantage -1 (the company has powerful competitive advantages
over all the competitors)
Net SPACE score on this dimension = 1
The financial strength and environmental stability combination works the
same way.
3.8 Interpreting the SPACE Analysis Matrix Diagram
The arrow indicating the strategic thrust can be drawn from the origin by
calculating the net result on each axis and plotting this net position.
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The alternative strategic thrusts in the SPACE matrix

The Aggressive posture in the SPACE Analysis Matrix occurs when all the
dimensions are positive. The implicit strategy is to aggressively grow the business
raising the stakes for all competitors. The main danger is complacency. For more
details see Aggressive Strategy In SPACE.
The Competitive posture arises when a firm has strong advantages in an
attractive industry but its financial strength is insufficient to compensate for
environmental instability. The immediate strategy is to improve its financial
strength (raising capital, improving profitability, merging with a cash rich parent)
whilst maintaining its competitive position. For more details see Competitive
Strategy In SPACE.
The Conservative posture arises when the firm is financially strong but is
unlikely to make significant returns from the business. The strategy is to look for
diversification opportunities in more attractive competitive situations. For more
details see Conservative Strategy In SPACE.
The Defensive posture in the SPACE matrix occurs when all the dimensions
are scored poorly. Firms in this position are very weak and heading for failure
unless the external environment becomes more favourable. The firm will need to
retreat from all but its strongest segments so that it can concentrate its limited
resources on a turnaround. Fore more information see Defensive Strategies
3.9 Uncertain situations in SPACE Analysis
Sometimes the axis scores cancel each other out and the overall position falls
between segments. However by examining the four dimensions the strategic
imperatives can be established – the internal dimensions are easier to change but
the external dimensions indicate whether it is likely to be worthwhile.
For example if the Financial Strength is weak but the Environment Stability
high then raising capital is appropriate but if the scores were the other way around
then the business should be seeking to use its financial strength elsewhere.
 108

3.10 Why isn’t SPACE Analysis more Popular?

The first time I came across the SPACE analysis matrix when I was doing my
MBA strategy course at the Manchester Business School and by then I’d read quite
a few strategy textbooks and since then, many more books on strategy but SPACE
analysis is hardly ever mentioned.
While the Strategic Position and Action Evaluation Matrix is a bit of a
mouthful, it does describe the tool perfectly and SPACE is a great acronym.
I like SPACE analysis because it can be applied at many different levels.
You can do the detailed analysis for each of the four SPACE dimensions and
come up with a subjectively objective rating and crank out the numbers to find
which posture is most suitable.
Or you can do a quick and dirty SPACE analysis based on a feel for the factors
and quickly know the big issues the business g=faces and which direction its
strategy should be taking.
3.11 The SPACE Matrix and the Six Step Profit Formula
It can be difficult to understand how various strategic planning models can
help you to increase profit in your business which is why we use the Six Step Profit
Formula as the model for profit improvement.
As well as helping you to think through the development of your starving
crowd with the environmental stability and industry attractiveness dimensions in
the SPACE Matrix, the competitive advantage dimension looks at your irresistible
promise and whether you can reliably deliver it.
While the Six Step Profit Formula provides a roadmap for improving any
business, the SPACE analysis assessment indicates whether the pay-off is likely to
be enough reward for the time, energy and money invested.
3.12 The SPACE Matrix & Other Strategic Planning Models
The SPACE analysis matrix is one of the strategic planning models which can
help you to organise your thoughts and conclusions from the other strategy models.
Environmental stability and industry attractiveness draw on PEST Analysis
and Porter’s Five Forces model. Your thinking on competitive advantage can be
guided by the generic strategies, value disciplines, the value chain and customer
value management.
3.13 Directional Policy Matrix
DPM analysis is aimed at determining the appropriate strategic planning goals
and the right strategies to achieve those goals across the portfolio of products,
strategic business units (SBUs) and markets.
In broad terms, the DPM is a framework and process to review the
performance and relative potential of each product/SBU/market and to decide
which products/SBUs/markets to:
 Build/develop further/increase market share of
 Maintain/resource to keep the status quo or current market share
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 Harvest/sell off or withdraw from having squeezed the last potential sales
 Divest/drop or exit immediately.
3.14 DPM Process
For best results, the DPM analysis should involve marketing, sales and
operations managers in both plenary and group sessions. It is very important that
all can contribute and thereby all can own the outcomes. In process terms, the
DPM analysis involves nine steps.
1. Determine markets
The first step is to define and agree the markets/SBUs/product groups or
segments that the business sees itself competing in. This should be heavily
informed by the external perception – the customers. For example, in the case of
the railway industry in the US market, customers re-defined the market as
“transport” when the option of car and air travel became available. Once the
markets have been defined, size them in current sales terms and at your future
strategic goal date (say three or five years time).
2. Decide market attractiveness factors and
3. Weight/Rank
For each product/SBU/market segment, establish and agree the four key
factors that define “attractiveness” relative to the overall market. You then weight
their importance and score where these factors are likely to evolve over the
planning period. This yields a ranking score, which plots that market on the
“attractiveness” axis of the DPM Grid. Figure 5.1 is an example of market
attractiveness ranking for a financial services product.
4. Define the critical success factors for market position and
5. Weight score and rank
Decide what the critical success factors are in establishing a strong market
position. Again, weight each factor and score it in relation to its evolution over the
planning period. This then yields a market position ranking on the horizontal DPM
Chart Axis (below). Figure 5.2 shows the market position for the same financial
product above.
6. Plot the market attractiveness/market positions on the dpm chart,
7. Agree planning goals,
8. Set objectives.
9. Design strategies.
Once each product/SBU/market segment has been scored and ranked, the
results are plotted on the DPM chart. According to where each
product/SBU/market segment lands in the nine sectors of the chart, there are
planning goals recommended for future evolution. Guided by these planning goals,
the management teams then set objectives and define strategies to realise those
objectives.
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Market Position
Strategic Direction
Assuming the product/SBU/market segment lands in the Medium Market
Attractiveness and Strong Market Position Box, the planning goals become
heavy investment in the attractive segments, build up ability to counter the
competition and raise productivity to enhance profitability. The key objectives will
include annual sales and profitability, and market share. The strategies to achieve
these objectives that lead to the goals will be focussed on product (development and
competitive insulation), sales process (effectiveness and efficiency), pricing (to
maximise margin), image/brand (competitive insulation and to support premium
pricing), customer understanding (to accelerate sales process) and service
(productivity and competitive insulation). These are the factors assessed as
underpinning future strength in market position.
The results of this DPM analysis are then incorporated in the business's three
to five plan and the annual business and marketing plan for execution.
4. REVISION POINTS
SPACE Analysis is a systematic appraisal of four key issues that balance the
external and internal factors that should determine the general theme of the
strategy. DPM analysis should involve marketing, sales and operations managers in
both plenary and group sessions.
5. INTEXT QUESTIONS
1. State the meaning of SPACE Analysis
2. What do mean by Directional Policy Matrix
6. SUMMARY
DPM analysis is aimed at determining the appropriate strategic planning goals
and the right strategies to achieve those goals across the portfolio of products,
strategic business units (SBUs) and markets.
7. TERMINAL EXERCISES
DPM analysis is useful for determining _________i goal ii objectives iii vision iv
mission
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. space-matrix-of-coca-cola-company
4. [Link].
9. ASSIGNMENTS
1. Explain the contents of the Strategic Position and Action Evaluation Matrix
Analysis
2. Write a detailed note on DPM PROCESS
 111

10. REFERENCE BOOKS

1. Strategic management: A Conceptual Framework BHANDARI Tata McGraw-
Hill Education, 2013
2. Strategic Management and Business Policy C Appa Rao, B Parvathiswara
Rao, K Sivaramakrishna Excel Books India, 2009
3. Understanding Corporate Strategy John L. Thompson Cengage Learning
EMEA, 2001.
11. LEARNING ACTIVITY
Go through and take down notes from the websites regarding the usage of
SPACE MATRIX, and DIRECTIONAL POLICY MATRIX in foreign companies.
12. KEY WORDS
Space Matrix, Directional Policy Matrix

 112

LESSON - 16

DUPONT MODEL, BALANCED SCORE CARD,

SHAREHOLDER VALUE ANALYSIS
1. INTRODUCTION
The DuPont Model is a technique that can be used to analyze the profitability
of a company using traditional performance management tools. To enable this, the
DuPont model integrates elements of the Income Statement with those of the
Balance Sheet.
The DuPont model of financial analysis was made by F. Donaldson Brown, an
electrical engineer who joined the giant chemical company's Treasury department
in 1914. A few years later, DuPont bought 23 percent of the stock of General
Motors Corp. and gave Brown the task of cleaning up the car maker's tangled
finances. This was perhaps the first large-scale reengineering effort in the USA.
Much of the credit for GM's ascension afterward belongs to the planning and
control systems of Brown, according to Alfred Sloan, GM's former chairman.
Ensuing success launched the DuPont model towards prominence in all major U.S.
corporations. It remained the dominant form of financial analysis until the 1970s.
2. OBJECTIVES
 To know the aspects about DuPont Model
 To understand the basics of Balanced score card
 To learn the importance of Shareholder Value Analysis
3. CONTENTS
3.1 Calculation of DuPont Formula
Return on Assets = Net Profit Margin x Total Assets Turnover = Net Operating
Profit After Taxes/ Sales x Sales/ Average Net Assets
3.2 Usage of the DuPont Framework
The model can be used by the purchasing department or by the sales
department to examine or demonstrate why a given ROA was earned. Compare a
firm with its colleagues. Analyze changes over time. Teach people a basic
understanding how they can have an impact on the company results. Show the
impact of professionalizing the purchasing function.
3.3 Steps in the DuPont Method
Collect the business numbers (from the finance department). Calculate (use a
spreadsheet). Draw conclusions. If the conclusions seem unrealistic, check the
numbers and recalculate. Strengths of the DuPont Model. Benefits Simplicity. A
very good tool to teach people a basic understanding how they can have an impact
on results. Can be easily linked to compensation schemes. Can be used to
convince management that certain steps have to be taken to professionalize the
purchasing or sales function. Sometimes it is better to look into your own
organization first. In stead of looking for company takeovers in order to compensate
lack of profitability by increasing turnover and trying to achieve synergy.
 113

Limitations of the DuPont analysis. Disadvantages Based on accounting numbers,

which are basically not reliable. Does not include the Cost of Capital. Garbage in,
garbage out. Assumptions of the DuPont method. Conditions Accounting numbers
are reliable.
Financial analysis with the DuPont ratio: A useful compass in today's dynamic
business environment, it is important for credit professionals to be prepared to
apply their skills both within and outside the specific credit management function.
Credit executives may be called upon to provide insights regarding issues such as
strategic financial planning, measuring the success of a business strategy or
determining the viability of an acquisition candidate. Even so, the normal duties
involved in credit assessment and management call for the credit manager to be
equipped to conduct financial analysis in a rapid and meaningful way.
Financial statement analysis is employed for a variety of reasons. Outside
investors are seeking information as to the long run viability of a business and its
prospects for providing an adequate return in consideration of the risks being
taken. Creditors desire to know whether a potential borrower or customer can
service loans being made. Internal analysts and management utilize financial
statement analysis as a means to monitor the outcome of policy decisions, predict
future performance targets, develop investment strategies, and assess capital
needs. As the role of the credit manager is expanded cross-functionally, he or she
may be required to answer the call to conduct financial statement analysis under
any of these circumstances. The DuPont ratio is a useful tool in providing both an
overview and a focus for such analysis.
A comprehensive financial statement analysis will provide insights as to a
firm's performance and/or standing in the areas of liquidity, leverage, operating
efficiency and profitability. A complete analysis will involve both time series and
cross-sectional perspectives. Time series analysis will examine trends using the
firm's own performance as a benchmark. Cross sectional analysis will augment the
process by using external performance benchmarks for comparison purposes.
Every meaningful analysis will begin with a qualitative inquiry as to the strategy
and policies of the subject company, creating a context for the investigation. Next,
goals and objectives of the analysis will be established, providing a basis for
interpreting the results. The DuPont ratio can be used as a compass in this process
by directing the analyst toward significant areas of strength and weakness evident
in the financial statements.
3.4 Balanced Scorecard Basics
The balanced scorecard (BSC) is a strategic planning and management system
that organizations use to: The DuPont Model is a technique that can be used to
analyze the profitability of a company
 Communicate what they are trying to accomplish
 Align the day-to-day work that everyone is doing with strategy
 Prioritize projects, products, and services
 Measure and monitor progress towards strategic targets
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The system connects the dots between big picture strategy elements such as
mission (our purpose), vision (what we aspire for), core values (what we believe in),
strategic focus areas (themes, results and/or goals) and the more operational
elements such as objectives (continuous improvement activities), measures (or key
performance indicators, or KPIs, which track strategic performance), targets (our
desired level of performance), and initiatives (projects that help you reach your
targets).
3.5 Who uses the Balanced Scorecard (BSC)?
BSCs are used extensively in business and industry, government, and
nonprofit organizations worldwide. Gartner Group suggests that over 50% of large
US firms have adopted the BSC. More than half of major companies in the US,
Europe, and Asia are using the BSC, with use growing in those areas as well as in
the Middle East and Africa. A recent global study by Bain & Co listed balanced
scorecard fifth on its top ten most widely used management tools around the world,
a list that includes closely-related strategic planning at number one. BSC has also
been selected by the editors of Harvard Business Review as one of the most
influential business ideas of the past 75 years.
The BSC suggests that we view the organization from four perspectives, and to
develop objectives, measures (KPIs), targets, and initiatives (actions) relative to each
of these points of view:
 Financial: often renamed Stewardship or other more appropriate name in
the public sector, this perspective views organizational financial performance
and the use of financial resources
 Customer/Stakeholder: this perspective views organizational performance
from the point of view the customer or other key stakeholders that the
organization is designed to serve
 Internal Process: views organizational performance through the lenses of the
quality and efficiency related to our product or services or other key
business processes
 Organizational Capacity (originally called Learning and Growth): views
organizational performance through the lenses of human capital,
infrastructure, technology, culture and other capacities that are key to
breakthrough performance
Strategic Objectives are the continuous improvement activities that we must
do to implement strategy. The break down the more abstract concepts like mission
and vision into actionable steps. Actions that your organization take should be
helping you achieve your strategic objectives. Examples might include: Increase
Revenue, Improve the Customer or Stakeholder Experience, or Improve the Cost-
Effectiveness of Our Programs.
3.6 Shareholder value analysis
A method for valuing the entire equity in a company. SVA assumes that the
value of a business is the net present value of its future cash flows, discounted at
the appropriate cost of capital. Once the value of a business has been calculated in
this way, the next stage is to calculate shareholder value using the equation:
shareholder value = value of business – debt.
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This method was first developed by Alfred in the 1980s. The key difference
between traditional financial accounting and SVA is that the latter recognizes the
time value of money. The traditional balance sheet and profit and loss account
report on the past performance of a company is not helpful when measuring the
change in value of the company.
Shareholder Value Analysis (SVA) is one member of the family of techniques
for determining the market value of a firm based on the drivers of its projected cash
flows. Other cash-based techniques include Cash Flow Return on Investment
(CFROI) and Total Shareholder Return (TSR). SVA is superior to other techniques
because valuations are derived from explicitly identified or postulated drivers of
value in a strategic framework.
SVA starts with fundamental financial theory: the value of an asset is the net
present value of its cash flows over the life of the asset. In SVA, the firm is the asset
to be valued. One identifies or postulates the drivers of firm cash flows over the life
of the firm and integrates the drivers into a model, which generates the estimated
free cash flows on a year-by-year basis. Let's look at the drivers of cash/value.
1. Sales growth rate: Everything else being constant, the higher the sales
growth rate, the greater the projected cash flows.
2. Operating profit margin: The higher the profit margin (sales - cash operating
expenses), the greater the cash flows.
3. Tax rate: The higher the tax rate, the lower the after tax net cash flow.
4. Working capital investment: Increased sales require greater investments in
working capital (inventories, cash, receivables, offset by simultaneous
financing provided by accounts payable and accruals), which decrease cash
flows accordingly.
5. New fixed capital investment: An expansion (growth in sales) of the business
requires a larger base of fixed capital investments, which will decrease cash
flows. This is equivalent to total projected capital investment for the year
less depreciation.
6. Competitive advantage period: In a perfectly competitive market there are no
superior profits to be had, given that all firms must price at marginal cost if
they want to make sales. However, by making use of technology, positioning
oneself in emerging or high growth industries, through superior customer
service/relationship management and by developing a differentiated or niche
product, firms will be able to set prices above marginal costs. Firms strive to
achieve competitive advantage and thus the flexibility to sell at higher prices
and realize higher profit margins. The more a firm is able to exploit a
competitive advantage and maintain it over time, the more successful it will
be and the higher its cash flows. The competitive advantage period affects
the estimate of the sales growth rate and the cash profit margin over time.
For example, an analysis of Microsoft's core competencies and its ability to
develop and maintain competitive advantage over time could provide the
basis estimation g at 20% per year for the next five years, 15% per year for
years 6-10 and then leveling out after year 10. The cash profit margin would
reflect the loss of superior competitive advantage over time accordingly,
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perhaps being estimated at 35% for years 1-5, 25% for years 6-10 and 10%
after year 10. The greater the competitive advantage, the greater the cash
flows and the calculated shareholder value.
7. Cost of capital: The cost of capital represents the expectations of
stakeholders (stock and bondholders). When the firm earns more on its
assets than expected/required by stakeholders, value is created for
shareholders. The management actions taken by the firm have an effect on
the firm's cost of capital and, the lower the cost of capital, the greater the
(net present) value of the firm.
Management would be able to decrease the firm's cost of capital and create
shareholder value by financing the firm's capital structure with the optimal
proportion of debt and by identifying ways to decrease the systematic risk of the
firm's investments.
Model: Firm Value = PV free cash flows over the forecast period + residual
value beyond the forecast period + firm's marketable securities.
1. PV free cash flows over the forecast (competitive advantage) period = Base
sales * sales growth * cash profit margin * after-tax cash income rate - new capital
investment - incremental working capital investment to support increased sales,
over the period that the company is projected to maintain a competitive advantage.
Expected cash flows are calculated for each year of the forecast (competitive
advantage) period and discounted by the cost of capital. In the Microsoft example
above, the forecast (competitive advantage) period of cash flows would be years 1-5
and years 6-10.
2. Residual value after the forecast (competitive advantage) period has expired
and the firm's sales and earnings level out:
The residual value is the present value of cash flows after expiration of
competitive advantage. After some period, the ability of the firm to earn profits
greater than the normal economy-wide risk-adjusted return on capital may
dissipate. For example, competitors may enter the market and provide work-alike or
superior products, or patents might expire. Should this point be reached, no
incremental capital investments or additional investments in working capital are
required; only maintenance-level investments are required. The expected cash flows
are the same each year after the competitive advantage period, or perpetuity. The
present value of an perpetuity, you will recall, is just the expected cash flow divided
by the discount rate/cost of capital for a no growth perpetuity, or by the cost of
capital less the constant growth rate for a growth perpetuity.
3. The firm's marketable securities: We add marketable securities because
1 and 2 above represent the value generated by investments in the business.
Marketable securities guarantee liquidity in contingencies and are not considered
an investment in the firm's income generating assets.
Work through the model to understand the relationships among the value
drivers and how the model is used to derive the estimate for firm value. The model
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provides flexibility by allowing the analyst to 'tweak' the driver values to fit the
specific situation for the firm being analyzed.
If we want to derive the value of equity, we can simply subtract the market
value of the firm's debt from Firm Value, which is the sum of 1, 2, and 3 above
(Equity value = Firm Value - Debt). We can then compare the 'fair value' of equity
we derived using SVA with the market value equity (# shares outstanding * price
per share) to obtain an indication of whether the firm is under- or over-valued.
The use of the Shareholder Value Added (SVA) methodology developed by
Rappaport extends far beyond a technique for estimating the value of the firm. It is
the ntegration of SVA valuation methodology into a strategic context that makes it
especially useful to managers.
SVA can be used to evaluate strategic alternatives: Which ones add value?
What can be done to create value? How can we extend the competitive advantage
period and keep profit margins high? The same answers we arrive at in building a
world class strategic plan are the same ones supporting the creation of shareholder
wealth in the SVA model.
3.7 Strategic options
1. Definition of strategic options
Strategic options are creative alternative action-oriented responses to the
external situation that an organisation (or group of organisations) faces. Strategic
options take advantage of facts and actors, trends, opportunities and threat of the
outside world.
 The Growth Option – focus on innovation, new products or new markets,
setting a clear vision for the future, strengthening your balance sheet and
working capital, enhancing your strategic networks and stress testing your
business model.
 The Stasis Option – fine tune your business, review efficiency and
contribution margins of existing products and services, tidy up the balance
sheet and boost profitability, strengthen your existing customer and supplier
relationships and look for ways to enhance loyalty across the supply chain.
 The Exit Option – focus on valuation and building systems and teams, tidy
up the balance sheet and trim away waste through efficient financial control
and reporting, groom a successor.
4. REVISION POINTS
Shareholder Value Added (SVA) methodology developed estimating the value of
the firm. Strategic options are creative alternative action-oriented responses to the
external. situation that an organisation faces.
5. INTEXT QUESTIONS
1. Write a short note on DuPont Model.
2. What do you understand by Balanced score card?
3. State the importance of Shareholder Value Analysis.
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6. SUMMARY
The DuPont Model is a technique that can be used to analyze the profitability
of a company. SVA starts with fundamental financial theory: the value of an asset
is the net present value of its cash flows over the life of the asset.
7. TERMINAL EXERCISES
Shareholder Value Added (SVA) methodology was developed for estimating the
value of the i firm ii brand iii share iv product produced
8. SUPPLEMENTARY MATERIALS
1. Strategic International Management: Text and Cases Dirk Morschett, Hanna
Schramm-Klein, Joachim Zentes Springer, 27-Jan-2015 - Business &
Economics
2. Customer Relationship Management: A Global Perspective Gerhard Raab,
Riad A. Ajami, G. Jason Goddard CRC Press, 2016.
9. ASSIGNMENTS
1. Explain the steps in DuPont Method.
2. Write a detailed note on Strategic options.
10. REFERENCE BOOKS
1. Concepts in Strategic Management and Business Policy Thomas L. Wheelen,
J. David Hunger Pearson Education India, 2011.
2. Strategic Management: Text and Cases, Second Edition Prasad, Kesho PHI
Learning Pvt. Ltd., 2015
11. LEARNING ACTIVITY
Discuss with an executive regarding shareholder value analysis.
12. KEY WORDS
DuPont Model, Balanced score card, Shareholder Value Analysis, Stasisoption.
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LESSON - 17

MERGER
1. INTRODUCTION
A merger usually involves combining two companies into a single larger
company. The combination of the two companies involves a transfer of ownership,
either through a stock swap or a cash payment between the two companies. In
practice, both companies surrender their stock and issue new stock as a new
company. There are five commonly-referred to types of business combinations
known as mergers: conglomerate merger, horizontal merger, market extension
merger, vertical merger and product extension merger. The term chosen to describe
the merger depends on the economic function, purpose of the business transaction
and relationship between the merging companies.
2. OBJECTIVES
 To study the definitions of merger
 To understand various types of merger
 To know about the concepts of Market extension, Acquisition and Joint
Venture
3. CONTENTS
3.1 Definition of Merger
The definition of merger in general and in finance can be stated as follows:
In General,
"Merger is an absorption of one or more companies by a single existing
company."
In Finance,
"Merger is an act or process of purchasing equity shares (ownership shares) of
one or more companies by a single existing company."
A merger is a deal to unite two existing companies into one new company.
There are several types of mergers and also several reasons why companies
complete mergers. Most mergers unite two existing companies into one newly
named company. Mergers and acquisitions are commonly done to expand a
company’s reach, expand into new segments, or gain market share. All of these are
done to please shareholders and create value.
3.2 Meaning of Merger
Merger is a technique of business growth. It is not treated as a business
combination. Merger is done on a permanent basis. Generally, it is done between
two companies. However, it can also be done among more than two companies.
During merger, an acquiring company and acquired companies come together to
decide and execute a merger agreement between them. After merger, acquiring
company survives whereas acquired companies do not survive anymore, and they
cease (stop) to exist. Merger does not result in the formation of a new company.
The management of acquiring company continues to lead (direct) the merger.
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3.3 Conglomerate
A merger between firms that are involved in totally unrelated business
activities. There are two types of conglomerate mergers: pure and mixed. Pure
conglomerate mergers involve firms with nothing in common, while mixed
conglomerate mergers involve firms that are looking for product extensions or
market extensions. The two companies are in completely different industries or in
different geographical areas. Conglomerate merger is helpful for companies to
extend their corporate territories, to gain synergy, expand their product range, etc.
It is also termed as Conglomerate Integration.
3.4 Advantages of Conglomerate Merger
Conglomerate merger enables the company to diversify its business. It helps to
overcome risks associated with the vulnerable market. If one business sector is
declining, the business has the opportunity to overcome the unfavourable situation
by performing well in the other diversified sector. It is also termed as a
conglomerate diversification strategy.
3.5 Gain Synergies
A combined entity always performs better than each individual entity. It brings
synergies by increasing the sales and revenue of the combined entity.
Utilization of Excess Cash
When a business has excess cash but does not have enough opportunity to
expand in its sector, then the business invests such excess cash into another
company of different sector to utilize the idle funds.
Improves Customer Base
With this type of merger, the company can cross-sell its products to the
customers of the other company. This helps to build a broader customer base. This,
in turn, helps to increase the sales and profits.
Utilization of Human Resources
The business has the option to utilize the managers from different sectors into
its business, whenever the need arises. This leads to best usage of human
resources.
Economies of Scale
It helps the business to achieve economies of scale. Various costs of business
like Research and development costs, cost of advertising, etc. are spread out to
numerous business units. It helps in reducing the production cost per unit and
helps in achieving economies of scale.
3.6 Disadvantages of Conglomerate Merger
In a conglomerate merger, the companies merging together do not have any
past experience about the functionalities of each other. This can lead to severe
mismanagement in the organization.
Shift in Focus
In a conglomerate merger, two unrelated companies merge. Management
requires a lot of efforts to understand the new business sector, operations of
business, etc. Hence, companies shift their focus from core business activity to
other business areas which can lead to poor performance in all the sectors.
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Complication
It leads to the merger of different human values and employees, who have
experience of working in the different industry. This leads to complication in
human relationships and behaviour.
Governance Issue
When two companies come together will different background, governance is a
big issue. All the past customers with their accounts are transferred into the new
company which may be following different accounting method. This creates a lot of
problem for the management.
Thus, a conglomerate merger is useful for those companies which have the
aim of strengthening their operational ability and improve their financial condition
by capturing bigger market share and expanding their product range.
3.7 Horizontal Merger
A merger occurring between companies in the same industry. Horizontal
merger is a business consolidation that occurs between firms who operate in the
same space, often as competitors offering the same good or service. Horizontal
mergers are common in industries with fewer firms, as competition tends to be
higher and the synergies and potential gains in market share are much greater for
merging firms in such an industry.
3.8 Product Extension Mergers
A product extension merger takes place between two business organizations
that deal in products that are related to each other and operate in the same
market. The product extension merger allows the merging companies to group
together their products and get access to a bigger set of consumers. This ensures
that they earn higher profits.
3.9 Vertical Merger
A merger between two companies producing different goods or services for one
specific finished product. A vertical merger occurs when two or more firms,
operating at different levels within an industry's supply chain, merge operations.
Most often the logic behind the merger is to increase synergies created by merging
firms that would be more efficient operating as one.
Example
A vertical merger joins two companies that may not compete with each other,
but exist in the same supply chain. An automobile company joining with a parts
supplier would be an example of a vertical merger. Such a deal would allow the
automobile division to obtain better pricing on parts and have better control over
the manufacturing process. The parts division, in turn, would be guaranteed a
steady stream of business.
Synergy, the idea that the value and performance of two companies combined
will be greater than the sum of the separate individual parts is one of the reasons
companies merger.
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A merger between firms that are involved in totally unrelated business

activities. There are two types of conglomerate mergers: pure and mixed. Pure
conglomerate mergers involve firms with nothing in common, while
mixed conglomerate mergers involve firms that are looking for product extensions
or market extensions.
An extension strategy is a practice used to increase the market share for a
given product or service and thus keep it in the maturity phase of the marketing
product lifecycle rather than going into decline.
Extension strategies include rebranding, price discounting and seeking new
markets.
Product extension is the strategy of placing an established product's brand
name on a new product that is in the same category.
Product extension is the introduction of a product that is known to the
company but which has features or dimensions which are new to consumers; three
types of product extensions are possible: revisions, additions and repositioning.
Diet Coke is a product extension of Coke, introduced to meet the need for a
low-calorie cola drink.
3.10 Market Extension Mergers
A market extension merger takes place between two companies that deal in the
same products but in separate markets. The main purpose of the market extension
merger is to make sure that the merging companies can get access to a bigger
market and that ensures a bigger client base.
3.11 Definition: Market Extension Strategy
Market extension is a marketing term which means the production of more
variety of products for a particular brand.
Market extension strategy is the strategy that is related on how to make a
product or service sustain in the market. Generally such kind of strategies takes
place in the maturity phase of the product life cycle to prevent the product from
entering the decline phase. There are various kinds of extension strategies being
adopted by the marketers, like repackaging, rebranding, discounting, market
expansion etc.
• Re packaging: It is the easiest way to retain a product in market. Re
packaging is done to give a new and fresh look to the product. The package
is done to change the perception of the consumers. For example, a product
which was popular among our parents and grandparents can go for new
package of the product so as to connect with the new young generation who
are more potential customers to them now. The reason why they do not
come with a product all together is due to a strong brand already built.
• Re branding: Rebranding is much more than repackaging. It includes
changing the name, package, and logo. The complete look and feel as well as
the brand name is changed and is relaunched as a new product although
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content of the product is same as previous one or slightly changed. It is

generally done to reach a new different audience all together.
• Discounting: Changing the prices of product is another strategy. Giving
discounts on products to attract the discount lovers or easy switchers can
increase the sales of the product and help retain in market for a long period.
Discounts are generally targeted to increase a customer base so that
customers who previously aspired for the product but could not afford that
will switch to this product now.
• Expanding to a new market: It is a costly affair and involves high risk. Since
the motive is to tap the untapped market, new promotions and other
strategies are also to be taken care of which is a costly affair. But
sometimes, it works well and helps to earn more profits.
3.12 Market Extension Vs Market Expansion
Market extension is a marketing term which means the production of more
variety of products for a particular brand. While often confused with another term,
market expansion, the two are different in the sense that market expansion is
about widening a product’s reach geographically i.e. going international, going
multi-state etc.
3.13 Business Acquisition
Business acquisition is the process of acquiring a company to build on
strengths or weaknesses of the acquiring company. A merger is similar to an
acquisition but refers more strictly to combining all of the interests of both
companies into a stronger single company.
Acquisition
The simple meaning of an acquiring company and acquired companies:
Acquiring company is a single existing company that purchases the majority of
equity shares of one or more companies. Acquired companies are those companies
that surrender the majority of their equity shares to an acquiring company.
Acquisition strategy
Acquisition strategy involves finding a methodology for the acquisition of target
companies that generates value for the acquirer. The use of an acquisition strategy
can keep a management team from buying businesses for which there is no clear
path to achieving a profitable outcome.
Instead of simple growth, an acquirer must understand exactly how its
acquisition strategy will generate value. This cannot be a simplistic determination
to combine two businesses, with a generic statement that overlapping costs will be
eliminated. The management team must have a specific value proposition that
makes it likely that each acquisition transaction will generate value for the
shareholders. Some of these value propositions (strategies) are as follows:
 Adjacent industry strategy. An acquirer may see an opportunity to use one
of its competitive strengths to buy into an adjacent industry. This approach
may work if the competitive strength gives the company a major advantage
in the adjacent industry.
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 Diversification strategy. A company may elect to diversify away from its core
business in order to offset the risks inherent in its own industry. These risks
usually translate into highly variable cash flows which can make it difficult
to remain in business when a bout of negative cash flows happen to coincide
with a period of tight credit where loans are difficult to obtain. For example,
a business environment may fluctuate strongly with changes in the overall
economy, so a company buys into a business having more stable sales.
 Full service strategy. An acquirer may have a relatively limited line of
products or services, and wants to reposition itself to be a full-service
provider. This calls for the pursuit of other businesses that can fill in the
holes in the acquirer’s full-service strategy.
 Geographic growth strategy. A business may have gradually built up an
excellent business within a certain geographic area, and wants to roll out its
concept into a new region. This can be a real problem if the company’s
product line requires local support in the form of regional warehouses, field
service operations, and/or local sales representatives. Such product lines
can take a long time to roll out, since the business must create this
infrastructure as it expands. The geographical growth strategy can be used
to accelerate growth by finding another business that has the geographic
support characteristics that the company needs, such as a regional
distributor, and rolling out the product line through the acquired business.
 Industry roll-up strategy. Some companies attempt an industry roll-up
strategy, where they buy up a number of smaller businesses with small
market share to achieve a consolidated business with significant market
share. While attractive in theory, this is not that easy a strategy to pursue.
In order to create any value, the acquirer needs to consolidate the
administration, product lines, and branding of the various acquirees, which
can be quite a chore.
 Low-cost strategy. In many industries, there is one company that has rapidly
built market share through the unwavering pursuit of the low-cost strategy.
This approach involves offering a baseline or mid-range product that sells in
large volumes, and for which the company can use best production practices
to drive down the cost of manufacturing. It then uses its low-cost position to
keep prices low, thereby preventing other competitors from challenging its
primary position in the market. This type of business needs to first attain
the appropriate sales volume to achieve the lowest-cost position, which may
call for a number of acquisitions. Under this strategy, the acquirer is looking
for businesses that already have significant market share, and products that
can be easily adapted to its low-cost production strategy.
 Market window strategy. A company may see a window of opportunity
opening up in the market for a particular product or service. It may evaluate
its own ability to launch a product within the time during which the window
will be open, and conclude that it is not capable of doing so. If so, its best
option is to acquire another company that is already positioned to take
advantage of the window with the correct products, distribution channels,
facilities, and so forth.
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 Product supplementation strategy. An acquirer may want to supplement its

product line with the similar products of another company. This is
particularly useful when there is a hole in the acquirer’s product line that it
can immediately fill by making an acquisition.
 Sales growth strategy. One of the most likely reasons why a business
acquires is to achieve greater growth than it could manufacture through
internal, or organic, growth. It is very difficult for a business to grow at more
than a modest pace through organic growth, because it must overcome a
variety of obstacles, such as bottlenecks, hiring the right people, entering
new markets, opening up new distribution channels, and so forth.
Conversely, it can massively accelerate its rate of growth with an acquisition.
 Synergy strategy. One of the more successful acquisition strategies is to
examine other businesses to see if there are costs that can be stripped out
or revenue advantages to be gained by combining the companies. Ideally, the
result should be greater profitability than the two companies would normally
have achieved if they had continued to operate as separate entities. This
strategy is usually focused on similar businesses in the same market, where
the acquirer has considerable knowledge of how businesses are operated.
 Vertical integration strategy. A company may want to have complete control
over every aspect of its supply chain, all the way through to sales to the final
customer. This control may involve buying the key suppliers of those
components that the company needs for its products, as well as the
distributors of those products and the retail locations in which they are sold.
Mergers and acquisitions are both changes in control of companies that
involve combining the operations of multiple entities into a single company.
In a merger, two companies agree to combine their operations into a single
entity.
In an acquisition, one company purchases another company, and has the right
to sell off operations, merge them into similar groups in the purchasing company,
or close facilities or cancel products altogether.
Why Acquire?
Acquisitions are undertaken for strategic reasons. For example:
1. A company might acquire another company to obtain a specific product. It
can be less expensive to purchase a company offering a product you'd like to
sell than building the product yourself. Software companies often purchase
smaller companies that offer extensions to their product line if they become
popular with customers, so they can add the functionality to their primary
offering.
2. A company might acquire other companies to increase its size. A larger
company may have more visibility in the marketplace, and also better access
to credit and other resources.
3. A company might acquire another to obtain control over a critical resource.
For example, a jewelry company might acquire a gold mine, to ensure they
have access to gold without market price fluctuations.
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Examples of Indian companies acquired foreign companies:

1. Tata Group Acquired Corus, October 2006 Deal size: $12.98 billion,
Country: United Kingdom
2. Bharti Airtel acquired Zain Africa, February 2010 Deal size: $10.7 billion,
Country: Kenya
3. Hindalco Industires acquired Novelis, February 2007 Deal size: $5.73 billion,
Country: Canada
3.14 Definition of Joint Venture
An association of two or more individuals or entities for the purpose of
engaging in a specific business enterprise for profit.
Joint Venture Legal Meaning
When two or more parties, whether individuals or entities, enter into an
agreement to combine resources for a specific business undertaking, it is referred
to as a “joint venture.” The organization of a joint venture serves as a short term
partnership for the duration of the project, in which each participant shares
responsibility for the project’s associated costs, profits, and losses. Although the
parties share responsibility, the joint venture is its own legal entity that remains
separate from the parties’ other business interests.
Joint venture - benefits and risks
A joint venture is a common way of combining resources and expertise of two
otherwise unrelated companies. This type of partnership usually offers great
advantages, but it can also present certain risks, since arrangements of this sort
are generally highly complex.
The benefits of joint ventures
A joint venture can help your business grow faster, increase productivity and
generate greater profits. A successful joint venture can offer:
 access to new markets and distribution networks
 increased capacity
 sharing of risks and costs with a partner
 access to greater resources, including specialised staff, technology and
finance
Joint ventures often enable growth without having to borrow funds or look for
outside investors.
You may be able to:
 use your joint venture partner's customer database to market your product
 offer your partner's services and products to your existing customers
 join forces in purchasing, research and development
A joint venture can also be very flexible. For example, a joint venture can have
a limited life span and only cover part of what you do, thus limiting the
commitment for both parties and the business' exposure.
Joint ventures are especially popular with businesses operating in different
countries eg. the transport and travel industries.
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The risks of joint ventures

Partnering with another business can be complex. It takes time and effort to
build the right business relationship. Problems are likely to arise if:
 the objectives of the venture are not clear and communicated to everyone
involved
 the partners have different objectives for the joint venture
 the partners bring in different levels of expertise, investment or assets into
the venture
 different cultures and management styles result in poor integration and co-
operation
 the partners don't provide sufficient leadership and support in the early
stages
Success in a joint venture depends on thorough research and analysis of aims
and objectives. For the venture to work, you should effectively communicate the
business plan to everyone involved. Find out how to plan your joint venture
relationship.
ICICI Prudential Life Insurance Company (ICICI Prudential Life) is a joint
venture of ICICI Bank, which is India’s largest private sector bank, and
prudential plc, which is a leading international financial services group with its
headquarters in the United Kingdom.
4. REVISION POINTS
A merger usually involves combining two companies into a single larger
company. Acquisitions are undertaken for strategic reasons A joint venture can
help your business grow faster, increase productivity and generate greater profits
5. INTEXT QUESTIONS
1. Define the term Merger.
2. What is the reason behind Joint Ventures
3. State the meaning of the term Acquisition.
6. SUMMARY
Conglomerate merger enables the company to diversify its business, It helps to
overcome risks associated with the vulnerable market. Business acquisition is the
process of acquiring a company to build on strengths or weaknesses of the
acquiring company.
7. TERMINAL EXERCISES
1. A _________is a common way of combining resources and expertise of two
unrelated companies
2. Market extension is a term which means the production of more variety of
products for a particular i brand ii company iii technology iv both i and ii.
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]/mergers-acquisitions/type/extension-merger...
3. [Link]
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9. ASSIGNMENTS
1. Narrate the various types of Mergers
2. Explain the difference between market extension and market expansion
10. REFERENCE BOOKS
1. Advances in Mergers and Acquisitions , Cary L. Cooper, Sydney Finkelstein
Emerald Group Publishing, 16-Sep-2014
2. Business Policy and Strategic Management: Concepts and Applications Vipin
Gupta, Kamala Gollakota, R. Srinivasan PHI Learning Pvt. Ltd., 01-Jan-
2007
3. Strategic Management: Concepts and Cases Michael Hitt, R. Duane Ireland,
Robert Hoskisson Cengage Learning, 02-Mar-2006
11. LEARNING ACTIVITY
Write the names of Joint Venture of your choice
12. KEY WORDS
Merger, Market extension, Acquisition, Joint Venture
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LESSON - 18

PRODUCT DIVERSIFICATION
1. INTRODUCTION
Any modification of a current product that serves to expand the potential
market implies that the company is following a strategy of product diversification.
The product diversification strategy is different from product development in
that it involves creating a new customer base, which by definition expands the
market potential of the original product. This is almost always done through brand
extensions or new brands, but in some cases the product modification may "create"
a new market by creating new uses for the product.
2. OBJECTIVES
 To know about the meaning of Product diversification
 To understand types of diversification
 To learn the basics of conglomerate and concentric diversification
3. CONTENTS
3.1 Product diversification - a process
Product diversification is a process by which businesses attempt to expand
their market reach and customer base by delivering products somewhat different
than the ones for which they are known. These new products can simply be
extensions of existing brands or they may be entirely new. By engaging in product
diversification, a company can extend its business into new areas and markets,
thereby increasing their opportunities for profit. There are some potential pitfalls to
this strategy, including the possibility that a company might stretch itself too thin
or that it might dilute its original brand with the existence of the new product lines.
Diversification, in any form, is essentially a way to manage risk. By removing
all of the focus from one area and spreading it among many different areas, there is
less reliance on any one area to produce. This strategy can be used by investors
attempting to spread out their money and gain new areas of exposure. Companies
that sell products to the public may also need diversification, especially if they can’t
sustain their businesses with just one product or approach. For that reason,
product diversification is an often effective business strategy.
Product diversification is a strategy that many businesses use to grow and
manage risk. It can involve creating new products, adapting existing products to
suit the needs of other market segments or acquiring other businesses to tap into
their product markets.
Many companies diversify to reach new customers and increase sales.
However, there are several other reasons to pursue a diversification strategy. It can
help distribute risk within the company as it offers other sources of income when
one area of the business fails. Diversification can also help companies acquire new
skills, build strong brands and take advantage of economies of scale. Diversification
can also refocus a company in a different direction, help keep it secure against
takeover maneuvers, or help it acquire new assets.
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Diversification can have downsides and may not be appropriate for all
businesses, as reported in Entrepreneur. It can eat away at existing sales because
the new products may simply attract existing customers and cause the old
products to become obsolete. However, this effect may be useful for businesses that
are experiencing declining sales, as it can help bring back customer attention and
phase out poorly performing products or services.
Businesses should plan diversification carefully. They should focus on the
needs of their customers and new target customers and position new products in
those target segments.
Reasons for product diversification include expanding into different market
segments and expanding sales. Diversification can also help reduce risk, according
to Inc. Magazine.
3.2 Types of Diversification
Diversification is a strategic approach adopting different forms. Depending on
the applied criteria, there are different classifications.
Depending on the direction of company diversification, the different types are:
 Horizontal Diversification acquiring or developing new products or offering
new services that could appeal to the company´s current customer groups.
In this case the company relies on sales and technological relations to the
existing product lines. For example a dairy, producing cheese adds a new
type of cheese to its products.
 Vertical Diversification occurs when the company goes back to previous
stages of its production cycle or moves forward to subsequent stages of the
same cycle - production of raw materials or distribution of the final product.
For example, if you have a company that does reconstruction of houses and
offices and you start selling paints and other construction materials for use
in this business. This kind of diversification may also guarantee a regular
supply of materials with better quality and lower prices.
 Concentric Diversification enlarging the production portfolio by adding new
products with the aim of fully utilising the potential of the existing
technologies and marketing system. The concentric diversification can be a
lot more financially efficient as a strategy, since the business may benefit
from some synergies in this diversification model. It may enforce some
investments related to modernizing or upgrading the existing processes or
systems. This type of diversification is often used by small producers of
consumer goods, e.g. a bakery starts producing pastries or dough products.
 Heterogeneous (conglomerate) diversification is moving to new products or
services that have no technological or commercial relation with current
products, equipment, distribution channels, but which may appeal to new
groups of customers. The major motive behind this kind of diversification is
the high return on investments in the new industry. Furthermore, the
decision to go for this kind of diversification can lead to additional
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opportunities indirectly related to further developing the main company

business - access to new technologies, opportunities for strategic
partnerships, etc.
Single product diversification and multiple product diversification
A company or an organization needs to think about whether to have a single-
product strategy or a diversification strategy.
An organization that pursues a single-product strategy manufactures just one
product or services and sells it in a single market.
A firm who practice single-product strategy is likely to be very successful in
manufacturing and marketing the product because it has staked its survival on a
single product, the organization works very hard to make sure that the product is a
success.
Meanwhile, diversification strategy is where a company operates several
businesses to spread the risk. There are two kinds of diversification which are;
unrelated diversification and related diversification. Unrelated diversification is
where a company operates multiple businesses that are not logically associated
with one another. For example, Quaker Oats owned clothing lines, toy companies
and restaurant business. Meanwhile, related diversification is where an
organization operates separate businesses that are related to one another.
Concentric diversification is a type of business strategy where a company
acquires or creates new products or services to reach more consumers. These new
products and services usually are closely related to the company's existing products
and services. Concentric diversification involves adding new products or services
that are related to your current offerings -- either because they appeal to the same
market or because they can be offered without much investment in new resources
(or both.) If you own a bakery, for example, you might add a deli counter and start
serving sandwiches. If you produce table linens, you might start making curtains. If
you clean carpets for commercial customers, you might add services for the
residential market. You can achieve concentric diversity with acquisitions, but often
it's a natural outgrowth of what you're already doing.
Advantages
Concentric diversity aims for synergy -- using your experience and strengths in
one area to gain a foothold in another area. You use what you know about your
bakery customers to sell them sandwiches, or you use the same equipment to make
both napkins and curtains, or you take your commercial carpet cleaning experience
and apply it to homes. Concentric diversification can also provide a gainful use for
excess capacity. With conglomerate diversification, the advantage is the
diversification itself -- spreading the market risk across more sectors. If the
hardware store business falls into a funk, the car wash business may be able to
carry the company. This kind of advantage applies to concentric diversity, too.
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Disadvantages
Although diversification is supposed to reduce market risk, it carries dangers
of its own. With conglomerate diversity, there's no guarantee that the businesses
will be a good fit. A hardware store owner can buy a car wash, but if you don't
know anything about how to run one, you'll have problems. And even if you hire
someone to run it, you may not be able to tell with confidence if it's being run well.
Dangers of concentric diversity include line overextension -- diluting the value of
your brand by trying to do too much. If your new products or services don't
measure up to the quality of your current offerings, that could hurt your existing
sales as customers lose faith. And with both types, there is always the possibility
that the diversification will just be a poor investment -- you'll misread the market
and end up offering something that customers don't want (at least from you.)
3.3 Conglomerate
In business, a conglomerate is a company involved in multiple lines of
business that have little relationship to one another. One well-known example is
Warren Buffett's Berkshire Hathaway, which owns companies as varied as utilities,
newspapers, food processors and furniture stores. Conglomerate diversity, then,
refers to diversification by entering entirely new and unrelated lines of business. If
you owned, say, a hardware store and then bought a car wash, you'd be engaged in
conglomerate diversification. Typically, companies achieve conglomerate diversity
through acquisitions -- buying existing businesses -- rather than starting new
operations from scratch.
The main advantage of conglomerate diversification is that it opens the core
company to new opportunities. In certain cases, a company that focuses on a
specific product in a specific market may hit a ceiling in terms of the business it is
able to do.
4. REVISION POINTS
Concentric diversification is a type of business strategy where a company
acquires or creates new products or services to reach more consumers.
conglomerate is a company involved in multiple lines of business that have little
relationship to one another.
5. INTEXT QUESTIONS
1. Define Diversification
2. What is Vertical diversification
3. State the meaning of the term Horizontal diversification.
6. SUMMARY
Product diversification is a process by which businesses attempt to expand
their market reach and customer base by delivering products somewhat different
than the ones for which they are known. The main advantage of conglomerate
diversification is that it opens the core company to new opportunities.
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7. TERMINAL EXERCISES
1. Concentric is i centrating in one product ii related iii unrelated iv none of
these
2. Diversification is i strategy ii plan iii tactics iv objective
8. SUPPLEMENTARY MATERIALS
1. [Link] ›
2. [Link] ›
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Explain the various diversification strategies
2. Write a detailed note on single product and multiple product strategy.
10. REFERENCE BOOKS
1. Quality Management. Panneerselvam, p. Sivasankaran PHI Learning Pvt.
Ltd., 02-Apr-2014
2. Marketing Planning and Strategy Subhash C. Jain South-Western
Publishing Company, 01-Jan-1985
3. Strategic management: a choice approach John R. Montanari, Cyril P.
Morgan, Jeffrey S. Bracker Dryden Press, 1990
11. LEARNING ACTIVITY
Write down the list of five names of single product and multiple product
company each
12. KEY WORDS
Concentric, Conglomerate, Horizontal, Vertical, Single product, Multiple
product.
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LESSON - 19

MARKET PENETRATION, MARKET DEVELOPMENT

AND PRODUCT DEVELOPMENT
1. INTRODUCTION
Market penetration is both a measure and a strategy. A business will utilize a
market penetration strategy to attempt to enter a new market. The goal is to get in
quickly with your product or service and capture a large share of the market.
Market penetration is also a measure of the percentage of the market that your
product or service is able to capture.
2. OBJECTIVES
 To understand the meaning of the term market penetration
 To know the concept of market development
 To learn the importance of product development
3. CONTENTS
3.1 Tactics to increase market penetration:
Market penetration is a measure of the amount of sales or adoption of a
product or service compared to the total theoretical market for that product or
service. In addition, market penetration can also include the activities that are used
to increase the market share of a particular product or service.
Market penetration strategy comes in the picture when you are marketing and
selling products in a saturated and highly competitive market. Market penetration
strategy is needed when you are looking at the product market expansion grid.
Thus, the current market might already be saturated, or it may have high
competition or your current product has low turnaround time. In such case, what
can be your strategy to increase market penetration? Here are the ways to increase
market penetration.
Price The oldest trick in the book is to drop the price of the product thereby
possible increasing the attractiveness of the product and taking on the challenge of
the competitor. However, the implications of price drop are manifold. If you drop
the price, than your margins will drop. Otherwise, you have to do some
modifications in the product so that the price is less and you don’t suffer in
margins. If these modifications are done, is the product still good? Thus, price
penetration is not so easy and requires a lot of thinking before the strategy is
implemented. Price penetration will also affect the brand and positioning.
Increase promotions Another tactic for market penetration strategy is to
increase the promotions for the product and thereby increase the pull strategy for
the product. However, just plain old promotions might not work at times. You will
have to give offers and schemes to the customer to rope them in. By giving trade
discounts, sales promotion discounts, and any such additional benefits to the
customers along with promotions will ensure that you penetrate the market better.
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Increase reach If your product is channel driven, than increasing the reach of
your product is the best market penetration strategy to sell better than the
competition. The way to do this is to find more channel dealers and channel
partners. The trick here is to keep the channel partner motivated at all times to do
business with you. By increasing the reach, and having your products everywhere
through channel dealers and retailers, you ensure that the customer does not miss
out on your product and is sure to get your product wherever he goes, which is
another sure shot way for market penetration.
Increase in usage By increasing the usage of a product, you can increase its
consumption thereby penetrating the market even further. Thus, if people start
eating a packet of chips more often because these chips are marketed heavily in the
area, the higher consumption will increase the market penetration. If you look at
toothpaste brands, they encourage two time use of toothbrush and toothpaste not
only because it is hygienic, because toothpaste consumption will happen double
fast if brushing is done 2 times in a day.
Attracting competitors customers and dealers The cola wars are the best
example of attracting competition customers. By dropping the price in a given area
for the distributor or targeting the existing dealers of competition products, you can
increase your market penetration by decreasing the quantity of products sold by
competitor.
Non users to start the consuming the product Encouraging non users to start
using the product is a tough task and this is where the marketing department steps
in. Smaller refrigerators or mini bars in bedrooms where not the norm. But by
product placement strategies and by increasing awareness, many people have
started keeping mini bars in their bed rooms thereby making non users as “users”
of the product mini bar.
Thus, there are numerous market penetration strategies and tactics. However,
these tactics will implement best when you use multiple tactics together. Like
increasing the reach of the product should like be accompanied with increasing the
promotions. By increasing the promotions, you are increasing the usage and also
attracting competitors customers.
3.2 Market Development
Definition: Market development is a strategic step taken by a company to
develop the existing market rather than looking for a new market. The company
looks for new buyers to pitch the product to a different segment of consumers in an
effort to increase sales.
Market development is a growth strategy that identifies and develops new
market segments for current products. A market development strategy targets non-
buying customers in currently targeted segments. It also targets new customers in
new segments.
Market Development is a two-step process to tap the untapped market. It
begins with market research wherein a company does a segmentation analysis and
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short lists market segments which are worth pursuing. It is an attempt to use the
existing product or service to attract new customers. The goal is to expand the
reach or tap into a different segment or unexplored market. A segment is defined as
the small sub-group of a larger population. For example, the marketing team of the
company can divide the market based on geography, demographics as well as
income levels etc. Once the company decides which segment to choose, the next
step of market development involves creating a promotional strategy to enter into
the market. For that, companies may have to take the support of both audio and
visual media to push the product deeper into the market.
Another aspect is the pricing of the product. If there are competitors in the
market, you may have to price the product accordingly or come out with a product
which belongs to the same segment but differs in features, quality etc. to command
higher pricing. To counter competition, the marketing team could look at the
penetration pricing where you can aggressively price the product below competitors
product to gain market share. The major challenge faced by firms, which want to
indulge in market development, is that it is a costly affair. It requires huge capital
investment to keep the project going. If the investment in the new segment doesn't
pay off as desired, then the whole exercise turns out to be worthless.
A market development strategy targets non-buying customers in currently
targeted segments. It also targets new customers in new segments.
3.3 What is Product Development?
Meaning
1. Product means any marketable thing with some utility in it, produced either
by a labour or through series of automated processes.
2. Development is an act of making or achieving a continuous progress in
something by someone. Progress transit from an earlier policy (traditional
approach) to an advanced policy (modern approach).
Product development is a specialized activity. It is done to improve the existing
product or to introduce a new product in the market. It is also done to improve the
earlier features or techniques or systems. Generally, it means a new-product
development.
New-product development means to introduce a brand-new product in the
market. It means to add a fresh product to an existing line of products. Normally, a
company starts with one or two products. However, after some time it has few more
products in its line (say from 10 to 15). This is possible only because of new-
product development.
Product development takes place, works or functions as under:
1. Creation of an entirely new product or upgrading an existing product by
exploring all possibilities and outcomes.
2. Innovation of a new or an existing product to deliver better and enhanced
services to end-users.
3. Continuous improvement of a new product or enhancing an existing product
by giving preference to satisfy the demand of end-users.
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4. Enhancing the utility of a new product or upgrading features of an existing

product, for the personal and/or commercial use, to expand the defined goal
(objective).
Product development involves risk of investing precious time, money (capital)
and intellectual resources. Therefore, it is necessary that it is well-planned.
A good product development helps to:
1. Create new business opportunities and bring growth.
2. Boost productivity and profitability of the entrepreneurs.
3. Enhance the satisfaction levels of the consumers.
3.4 Definition of Product Development
“Product Development is a creation, innovation, utility enhancement or
continuous improvement of earlier features (design, service, etc.) of an existing
product or developing (manufacturing) an entirely new kind of product to satisfy the
requirements of its end-users (consumers).”
Example of Product Development
 Packing wheat flour in retail bags for household consumption.
 Packing cooking oil in retail pouches for household consumption.
 Converting land line phones into wireless handsets for easy portability and
full-time access to communication.
 Modify desktop computers into light-weight laptops to ease portability.
 Transform a traditional library into an e-library to facilitate faster searching
and accessibility of electronic books and other digital documents.
 Convert a simple airplane into a fighter jet to achieve a greater speed.
3.5 Diversification in Indian Companies
Aditya Birla group operated in diverse industries such as automobiles, cement,
dairy, electricity, jute, newspapers, plastics, sanitaryware, shipping, sugar, steel,
tea and textiles.
RPG group has interested in agribusiness, cable, carbon black, electricity,
engineering, fibreglass, financial services, music, radio, tea, tyres and typewriters.
Murugappa group diversified into Abrasives, Auto Components, Transmission
systems, Cycles, Sugar, Farm Inputs, Fertilisers, Plantations, Bio-products and
Nutraceuticals.
TVS group, is an automotive conglomerate company, specialized in
manufacturing of two-wheeler diversified to three-wheeler, auto-electricals
components, high tensile fasteners, die casting products, dealership business,
brakes, wheels, tyres, axles, seating systems, fuel injection components, electronic
and electrical components.
Reliance owns businesses across India engaged in energy, petrochemicals,
textiles, natural resources, retail, and telecommunications.
Godrej operates in sectors as diverse as real estate, consumer products,
industrial engineering, appliances, furniture, security and agricultural products.
Mahindra group has a presence in aerospace, agribusiness, aftermarket,
automotive, components, construction equipment, defence, energy, farm
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equipment, finance and insurance, industrial equipment, information technology,

leisure and hospitality, logistics, real estate, retail, and two wheelers. I
TATA group: Airlines, Automotive, Consumer goods, Chemicals, Defence &
Aerospace, Electrical distribution, Engineering services, Financial services,
Healthcare, Information technology, Locomotives, Real estate, Steel,
Telecommunication.
ITC - Its diversified business includes five segments: Fast-Moving Consumer
Goods, Hotels, Paperboards & Packaging, Agriculture Business & Information
Technology.
The Amalgations group is an Indian business conglomerate based in Chennai
which has several business interests in Manufacturing Tractors, Automobile
ancillaries, Plantation, Trading and services.
4. REVISION POINTS
Product Development is a creation, innovation, utility enhancement or
continuous improvement.
5. INTEXT QUESTIONS
1. What is market penetration?
2. Write a note on product development
6. SUMMARY
Market penetration is a measure of the amount of sales or adoption of a
product or service compared to the total theoretical market for that product or
service. A market development strategy targets non-buying customers in currently
targeted segments. Product development is a specialized activity.
7. TERMINAL EXERCISES
Product development is i creation ii innovation iii continuous improvement iv
all the three
8. SUPPLEMENTARY MATERIALS
[Link] [Link] [Link]
9. ASSIGNMENTS
1. Discuss the inputs of market development strategy.
2. Elaborate a company’s diversification in detail of your choice
10. REFERENCE BOOKS
1. Essentials of Marketing Charles W. Lamb, Joe F. Hair, Carl McDaniel
Cengage Learning, 01-Jan-2011
2. Essentials of Strategic Management Charles W. L. Hill, Gareth R. Jones
Cengage Learning, 13-Oct-2008
11. LEARNING ACTIVITY
Discuss about product development with an executive of a corporate.
12. KEY WORDS
Diversification, Market Penetration, Market Development, Product
Development.

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LESSON - 20

STRATEGIC CONGRUENCE AND RESOURCE AUDIT

1. INTRODUCTION
The integration of multiple goals, either within an organization or between
multiple groups. Strategic congruence is a result of the alignment of goals to
achieve an overarching mission. Understanding what you have available to you as
a business owner or manager is a crucial part of the overall puzzle. If you don’t
know what resources you have at your disposal, you have no way to making good
decisions that maximize your opportunities while minimizing your risks. That is the
balancing act that every business must play, so understanding exactly what
resources are at your disposal should be high on your priority list.
2. OBJECTIVES
 To know about the importance of Strategic Congruence
 To understand the aspects of Resource Audit
3. CONTENTS
Strategic Congruence
The strategic goals of the organisation should be linked to the goals of
individuals and teams.
3.1 What is a Resource Audit?
A resource audit is the process of going through everything that your business
or organization has available to it. These resources can take on many forms, and
are not limited to just obvious items like cash and inventory. The resource audit for
your organization is likely to be unique to you because it will take into
consideration specific needs that your industry has for things like experience and
knowledge in a particular field. While it might take some time and effort to perform
a proper resource audit on your organization, the information that this strategy
process will reveal to you can be invaluable.
Some of the categories of resources that could relate to your business. Some of
the following will be obvious to you, but some of these items you might not have
thought about as obvious resources up until this point.
3.2 Physical Resources
This is probably the first thing you think about when considering the
resources that you have on hand. These are things like equipment, inventory, and
even buildings that allow you to do what it is you do. Most likely, you are already
making the most of these resources since they are the ones that get the most time
and attention.
However, it is always worth taking a fresh look at your physical resources to
see if you could be getting more value from them than you currently are. Is some of
the space in your buildings going unused, or being wasted on an unnecessary
purpose? Are your machines being used to their fullest capacity as frequently as
possible? When you take the time to review everything that you do and how you use
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what you have, you might be surprised to notice inefficiencies where you didn’t
think any existed.
3.3 Financial Resources
Another category that receives plenty of attention. Unless your organization is
hopelessly disorganized, you certainly already know what kind of financial
resources you have available to you. Accurate financial records are one of the
essentials for any organization, so this is an area that you hopefully have under
control already.
As with your physical resources, a review of financial resources is something
that should be happening on an ongoing basis. You should always be finding ways
to be more efficient with your money, so that the organization squeezes every last
cent out of each dollar. In the competitive business environment that exists today,
no company can afford to just give away money due to poor decision making or
laziness among management. If you aren’t going to be smart with your financial
resources, you can assume that your competitors will be.
3.4 Human Resources
This is where it starts to get interesting from a management perspective, and
where you can start to make real improvements in your organization. Each person
that works within your company has a specific set of skills and experiences that is
unique to them. If you want to get the best possible performance from your
business as a whole, it starts by getting the most out of each individual person that
you have available to you. Wages make up a huge part of any organizations budget,
so make sure you get getting the best possible return from the investment you have
made in these people.
One of the most commonly made mistakes in terms of using human resources
is putting people ‘into a box’ in terms of what they can do. Just because someone
has been hired into your organization for a specific purpose doesn’t mean that they
don’t have more to offer. Instead of trying to keep all of your employees or team
members stuck in the same role that they are currently filling, encourage
exploration and collaboration so you can uncover skills that you didn’t know
existed within the work force. In doing this, you might find that you don’t need to
hire as many new people when new projects come up – because the skills and
experience are already found within your team. Give your employees the benefit of
the doubt and provide them with opportunities to impress you by going outside of
their usual routine.
3.5 The Intangibles
What else does your organization have going for it beyond what you can see
within the building? Intangible resources can include things like a great reputation
within the community, many years in business, or a presence in a niche market
that lacks significant competition.
Take a look at the advantages that you have from an intangible perspective
and think about ways you can make those advantages work for you. For example, if
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your organization has been in business for a long time, you should leverage that
point in advertising and marketing efforts to make sure potential customers
understand how trustworthy you really are. It takes time to build up many of the
intangibles in business, so don’t waste them once you have successfully put them
in place.
When you think about it, business is all about resources. Taking what you
have available to you, and making it work in a way that gets you closer to your
goals, is really the name of the game. The companies and organizations that play
this game the best – and get the most possible production from their resources –
are usually the ones that are going to come out on top. Don’t take anything that
you have for granted. Instead, look at each of your resources closely and try to
devise new ways to gain more and more benefit from them over time. An ongoing
approach to improving resource utilization is something that any successful
business will embrace and make a top priority.
3.6 Key Points
 Some of these may be owned (e.g. plant and machinery, trademarks, retail
outlets) whereas others can be obtained through partnerships, joint ventures
or suppliers.
 Financial resources include the organisation’s financial assets including the
ability to raise finance via credit.
 Physical resources include buildings and equipment, which may be either
owned or leased.
 Human resources include both permanent and temporary staff.
 Reputation is a reflection of how the organization is perceived in the
marketplace.
 Know-how is the intellectual property that enables the organization to
function.
4. REVISION POINTS
Strategic congruence is a result of the alignment of goals to achieve an
overarching mission. The resource audit identifies the resources available to a
business.
5. INTEXT QUESTIONS
1. What are physical resources?
2. Write note on Intangibles.
6. SUMMARY
A resource audit is the process of going through everything that your business
or organization has available to it. These resources can take on many forms, and
are not limited to just obvious items like cash and inventory.
7. TERMINAL EXERCISES
An example for Intangible resource is i machinery ii buildings iii patents, iv
all the three.
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8. ASSIGNMENTS
1. Write an essay on resource audit.
2. Explain the importance of strategic congruence
9. SUPPLEMENTARY MATERIALS
1. Controlling for Competitiveness: Strategy Formulation and Implementation
Through Management Control Fredrik Nilsson, Nils-Göran Olve, Anders
Parment Copenhagen Business School Press DK, 2011
2. [Link]
3. [Link]
10. REFERENCE BOOKS
1. Strategic Management BPP Learning Media BPP Learning Media, 30-Jun-
2015
2. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd., 19-Jan-2012
11. LEARNING ACTIVITY
Visit an organization which conducted resource audit and have a discussion
regarding the same.
12. KEY WORDS
Strategic Congruence, Resource Audit, Intangibles, Physical resources,
Financial resources, Human resources.
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LESSON - 21

CORE COMPETENCY
1. INTRODUCTION
Core competency is an organization's defining strength, providing the
foundation from which the business will grow, seize upon new opportunities and
deliver value to customers. A company's core competency is not easily replicated by
other organizations, whether existing competitors or new entries into its market.
Core competencies are the main strengths or strategic advantages of a business,
including the combination of pooled knowledge and technical capacities that allow
a business to be competitive in the marketplace.
2. OBJECTIVES
 To understand the basics of core competency
 To learn about the importance of core competency
3. CONTENTS
3.1 What are core competencies?
Recognizing the competencies of a company and leveraging them is helpful to
achieve a competitive advantage. Core competencies are those organizational
competencies which are either exclusive to a company or which a company carries
out better than the rivals and which create a considerable cost advantage or largely
contribute to customer perceived value. Organizational competencies are the
functional competencies and experience a company possesses in terms of how it
combines and integrates individual employee skills to accomplish outcomes. A few
examples of such competencies are:
 Experience in putting together and programming computer managed cutting
machines
 Experience in the design, manufacture and testing of miniaturized solid-
state electronic parts
 Experience in budgeting, planning and controlling costs
 Experience in fulfilling difficult customer delivery schedules
When listing out core competencies, we can include those skills that present
the product characteristics, intangible features and service features that persuade
our customers to buy the goods or service instead of that of a competitor.
A Core Competency is a deep proficiency that enables a company to deliver
unique value to customers. It embodies an organization’s collective learning,
particularly of how to coordinate diverse production skills and integrate multiple
technologies. Such a Core Competency creates sustainable competitive advantage
for a company and helps it branch into a wide variety of related markets. Core
Competencies also contribute substantially to the benefits a company’s products
offer customers. It’s hard for competitors to copy or procure. Understanding Core
Competencies allows companies to invest in the strengths that differentiate them
and set strategies that unify their entire organization. Core competencies
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differentiate an organization from its competition—they create a company’s

competitive advantage in the marketplace. Typically, a core competency refers to a
company’s set of skills or experience in some activity, rather than physical or
financial assets. An organizational core competency is an organization’s strategic
strength. Honda’s strategic strength, for example, lies in its small engine design
and manufacturing; Sony has a core competency in miniaturization; Federal
Express has a core competency in logistics and customer service.
3.2 Three tests can be applied to determine a core competency:
 A core competency must be capable of developing new products and services
and must provide potential access to a wide variety of markets.
 A core competency must make a significant contribution to the perceived
benefits of the end product.
 A core competency should be difficult for competitors to imitate. In many
industries, such competencies are likely to be unique.
A company can have more than one core competency. Core competencies,
which are sometimes called core capabilities or distinctive competencies, help
create a sustained competitive advantage for organizations. The concept of
identifying and nurturing core competencies to drive competitive advantages and
future growth applies to companies across industries. The concept of core
competency stems from the 1990 article titled, "The Core Competence of the
Corporation," written by C.K. Prahalad and Gary Hamel and published in Harvard
Business Review.
3.3 Core competency - Definition
The authors defined core competencies "as the collective learning of the
organization, especially how to coordinate diverse production skills and integrate
multiple streams of technology." They wrote, "If core competence is about
harmonizing streams of technology, it is also about the organization of work and
the delivery of value." They also wrote a core competency is a specific factor that a
business sees as being central to the way it, or its employees, works.
It fulfills three key criteria:
1. It is not easy for competitors to imitate.
2. It can be re-used widely for many products and markets.
3. It must contribute to the end consumer's experienced benefits.
3.4 Core competencies might be any of these:
 Facilitation of discussions and brainstorming for the management team
 Cost cutting and firing
 Finding new growth opportunities in contiguous markets
 Finding people with money who can finance new ventures from
the consultant’s clients
 Developing documents that are easy to read and cover the bases well
We can consider the variations on food services and restaurants. To name
just a few:
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 Quick, fast, drive-through

 Excellent cuisine
 Ambiance; good place for a date
 Sports bar
 Healthy fast foods
3.5 Companies use Core Competencies to:
 Design competitive positions and strategies that capitalize on corporate
strengths
 Unify the company across business units and functional units, and improve
the transfer of knowledge and skills among them
 Help employees understand management’s priorities
 Integrate the use of technology in carrying out business processes
 Decide where to allocate resources
 Make outsourcing, divestment and partnering decisions
 Widen the domain in which the company innovates, and spawn new
products and services
 Invent new markets and quickly enter emerging markets
 Enhance image and build customer loyalty
 Core Competencies
3.6 How to Identify Core Competencies?
Hamel and Prahalad give three tests to see whether competencies are true core
competencies:
1. Relevance: Firstly, the competence must give your customer something that
strongly influences him or her to choose your product or service. If it does
not, then it has no effect on your competitive position and is not a core
competence.
2. Difficulty of Imitation: Secondly, the core competence should be difficult to
imitate. This allows you to provide products that are better than those of
your competition. And because you’re continually working to improve these
skills, means that you can sustain its competitive position.
3. Breadth of Application: Thirdly, it should be something that opens up a good
number of potential markets. If it only opens up a few small, niche markets,
then success in these markets will not be enough to sustain significant
growth.
An example: One might consider strong industry knowledge and expertise to
be a core competence in serving your industry. However, if one’s competitors
have equivalent expertise, then this is not a core competence. All it does is
make it more difficult for new competitors to enter the market. More than
this, it’s unlikely to help one much in moving into new markets, which
would have established experts already.
3.7 Identification of core competencies
The following are the suggested steps:
I. Brainstorm the factors that are important to your clients
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 If you’re doing this on behalf of your company or organization, identify the

factors that influence people’s purchase decisions when they’re buying
products or services like yours (make sure that you move beyond just
product or service features and include all decision-making points.)
 If you’re doing this for yourself, brainstorm the factors (for example) that
people use in assessing you for annual performance reviews or promotion, or
for new roles you want. Then dig into these factors, and identify the
competences that lie behind them. As a corporate example, if customers
value small products (e.g. cell phones), then the competence they value may
be “component integration and miniaturization”.
II. Brainstorm your existing competencies and the things you do well.
III. For the list of your own competencies, synthesize them against the tests of
Relevance, Difficulty of Imitation and Breadth of Application, and see if any of the
competences you’ve listed are core competences.
IV. For the list of factors that are important to clients, screen them using these
tests to see if you could develop these as core competences:
 If you’ve identified core competencies that you already have, then great!
Work on them and make sure that you build them as far as sensibly
possible;
 If you have no core competencies identified, then look at ones that you could
develop, and work to build them; or
 If you have no core competencies and it doesn’t look as if you can build any
that customers would value, then either there’s something else that you can
use to create uniqueness in the market, or think about finding a new
environment that suits your competencies.
V. Finally, think of the most time-consuming and costly things that you do
either as an individual or a company, and strategize.
3.8 How to establish Core Competencies?
To develop Core Competencies a company must take these actions:
 Isolate its key abilities and hone them into organization-wide strengths
 Compare itself with other companies with the same skills to ensure that it is
developing unique capabilities
 Develop an understanding of what capabilities its customers truly value, and
invest accordingly to develop and sustain valued strengths
 Create an organizational roadmap that sets goals for competence building
 Pursue alliances, acquisitions and licensing arrangements that will further
build the organization’s strengths in core areas
 Encourage communication and involvement in core capability development
across the organization
 Preserve core strengths even as management expands and redefines the
business
 Outsource or divest noncore capabilities to free up resources that can be
used to deepen core capabilities
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4. REVISION POINTS
Core competencies are the collective learning of the organization, especially
how to coordinate diverse production skills and integrate multiple streams of
technology.
5. INTEXT QUESTIONS
1. Define the term Core competency
2. Give one example a core competency a company may have.
6. SUMMARY
Core competency is a specific factor that a business sees as being central to
the way it, or its employees, works. A Core Competency is a deep proficiency that
enables a company to deliver unique value to customers. It embodies an
organization’s collective learning, particularly of how to coordinate diverse
production skills and integrate multiple technologies.
7. TERMINAL EXERCISES
Relevance, difficulty of imitation, Breadth of Application are three tests used to
identify whether the core competencies are i true ii effective iii economical iv none of
these.
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
9. ASSIGNMENTS
1. Explain the steps in identification of core competency
2. What generally the companies identify as core competencies? Answer in
detail.
10. REFERENCE BOOKS
1. Constructing Core Competencies: Using Competency Models to Manage Firm
Talent Heather Bock American Bar Association, 2006
2. Strategic Management and Core Competencies: Theory and Application
Anders Drejer Greenwood Publishing Group, 2002
11. LEARNING ACTIVITY
Visit a company and have an appointment its CEO\Boss and discuss about
the core competency.
12. KEY WORDS
Core competency, Relevance, Difficulty of imitation, Breadth of Application

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LESSON - 22

COMPETITIVE ADVANTAGE
1. INTRODUCTION
In 1985, Harvard Business School professor Michael Porter wrote Competitive
Advantage. Porter outlined the three primary ways companies achieve a sustainable
advantage. They are cost leadership, differentiation, and focus. Porter identified
these strategies by researching companies.
Cost leadership means you provide reasonable value at a lower price.
Companies do this by continuously improving operational efficiency. That usually
means paying their workers less. Some compensate by offering intangible benefits
such as stock options, benefits or promotional opportunities. Others take
advantage of unskilled labour surpluses. As these businesses grow, they can
use economies of scale and buy in bulk.
Walmart and Costco are good examples of cost leadership. But sometimes they
pay their workers less than the cost of living. Higher minimum wage laws threaten
their advantage.
Differentiation means you deliver better benefits than anyone else. A company
can achieve differentiation by providing a unique or high-quality product. Another
method is to deliver it faster. A third is to market in a way that reaches customers
better. A company with a differentiation strategy can charge a premium price. That
means it usually has a higher profit margin.
Companies typically achieve differentiation with innovation, quality
or customer service. Innovation means you meet the same needs in a new way. An
excellent example of this is Apple. The iPod was innovative because it allowed you
to play whatever music you want, in any order.
Quality means you provide the best product or service. Tiffany's can charge
more because patrons see it as the best. Customer service means going out of the
way to delight shoppers. Nordstrom's was the first to allow returns with no
questions asked.
Focus means you understand and service your target market better than
anyone else. You can use either cost leadership or differentiation to do that. The
key to focusing is to choose one specific target market. Often it's a tiny niche that
larger companies don't serve. For example, community banks use a focus strategy
to gain sustainable competitive advantage. They target local small
businesses or high net worth individuals. Their target audience enjoys the personal
touch that big banks may not be able to give. They are willing to pay a little more in
fees for this service. These banks are using a differentiation form of the focus
strategy.
2. OBJECTIVES
 To know the meaning of the term competitive advantage
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 To learn the concept of sustainable competitive advantage

 To understand the types of sustainable competitive advantage
3. CONTENTS
3.1 Meaning
Competitive advantage is a set of unique features of a company and its
products that are perceived by the target market as significant and superior to the
competition. It is the reason behind brand loyalty, and why you prefer one product
or service over another. There are three different types of competitive advantages
that companies can actually use. They are cost, product/service differentiation, and
niche strategies.
Competitive advantage is the favourable position an organization seeks in
order to be more profitable than its competitors.
Competitive advantage involves communicating a greater perceived value to a
target market than its competitors can provide. This can be achieved through many
avenues including offering a better-quality product or service, lowering prices and
increasing marketing efforts. Sustainable competitive advantage refers to
maintaining a favourable position over the long term, which can help boost a
company's image in the marketplace, its valuation and its future earning potential.
Competitive advantage is a set of unique features of a company and its
products that are perceived by the target market as significant and superior to the
competition.
Sustainable Competitive Advantages: Definition, Types
Sustainable competitive advantages are required for a company to thrive in
todays global environment. Value investors search for companies that are bargains.
In order to avoid purchasing a value trap one of the factors we search for is
sustainable competitive advantages.
Without one or more sustainable competitive advantages a company may not
be able to recover from whatever caused the stock to become a bargain. We only
want to buy the stocks of companies that are real value investments, not value
traps. In other words, we want to buy stocks trading below their intrinsic value and
will grow cash flow for shareholders.
3.2 Definition: Sustainable Competitive Advantages
Sustainable competitive advantages are company assets, attributes, or abilities
that are difficult to duplicate or exceed; and provide a superior or favorable long
term position over competitors.
Definition: Sustainable Competitive Advantage
Sustainable competitive advantage is a lasting ability to outperform all
competition in a particular area or industry.
3.3 Types and Examples of Sustainable Competitive Advantages
Low Cost Provider/ Low pricing
Economies of scale and efficient operations can help a company keep
competition out by being the low cost provider. Being the low cost provider can be a
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significant barrier to entry. In addition, low pricing done consistently can build
brand loyalty be a huge competitive advantage (i.e. Wal-Mart).
Market or Pricing Power
A company that has the ability to increase prices without losing market share
is said to have pricing power. Companies that have pricing power are usually taking
advantage of high barriers to entry or have earned the dominant position in their
market.
Powerful Brands
It takes a large investment in time and money to build a brand. It takes very
little to destroy it. A good brand is invaluable because it causes customers to prefer
the brand over competitors. Being the market leader and having a great corporate
reputation can be part of a powerful brand and a competitive advantage.
Strategic Assets
Patents, trademarks, copy rights, domain names, and long term contracts
would be examples of strategic assets that provide sustainable competitive
advantages. Companies with excellent research and development might have
valuable strategic assets.
Barriers to Entry
Cost advantages of an existing company over a new company is the most
common barrier to entry. High investment costs (i.e. new factories) and government
regulations are common impediments to companies trying to enter new markets.
High barriers to entry sometimes create monopolies or near monopolies (i.e. utility
companies).
Adapting Product Line
A product that never changes is ripe for competition. A product line that can
evolve allows for improved or complementary follow up products that keeps
customers coming back for the “new” and improved version (i.e. Apple iPhone) and
possibly some accessories to go with it.
Product Differentiation
A unique product or service builds customer loyalty and is less likely to lose
market share to a competitor than an advantage based on cost. The quality,
number of models, flexibility in ordering (i.e. custom orders), and customer service
are all aspects that can positively differentiate a product or service.
Strong Balance Sheet / Cash
Companies with low debt and/or lots of cash have the flexibility to make
opportune investments and never have a problem with access to working capital,
liquidity, or solvency. The balance sheet is the foundation of the company.
Outstanding Management / People
There is always the intangible of outstanding management. This is hard to
quantify, but there are winners and losers. Winners seem to make the right
decisions at the right time. Winners somehow motivate and get the most out of their
employees, particularly when facing challenges. Management that has been
successful for a number of years is a competitive advantage.
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4. REVISION POINTS
Cost leadership means you provide reasonable value at a lower price.
Competitive advantage is a set of unique features of a company and its products
that are perceived by the target market as significant and superior to the
competition.
5. INTEXT QUESTIONS
1. What do you mean by competitive advantage?
2. Write a note on differentiation.
3. State the types of sustainable competitive advantage.
6. SUMMARY
Competitive advantage is the favourable position an organization seeks in
order to be more profitable than its competitors.
7. TERMINAL EXERCISES
Patents, trademarks, copy rights, domain names, and long term contracts
would be examples of i strategic assets ii fixed assests iii current assests iv both
i and ii
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]/node/11869910
9. ASSIGNMENTS
Write an essay on competitive advantage in business
10. REFERENCE BOOKS
1. Competitive Advantage: Creating and Sustaining Superior Performance
Michael E. Porter Simon and Schuster,2008
2. Managing Technology and Innovation for Competitive Advantage V.K.
Narayanan Pearson Education India, 2001
3. Strategic Management: A Study of Competitive Advantage and Approach for
Indian Enterprise Business" Dr. Malhar Pangrikar
11. LEARNING ACTIVITY
Write any three name of Indian companies of your choice having competitive
advantage.
12. KEY WORDS
Competitive advantage, Sustainable competitive advantage, Cost leadership.

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LESSON - 23

POSITIONING COMPETITIVE ADVANTAGE AND

COMPETITIVE INTELLIGENCE SYSTEM
1. INTRODUCTION
Competitive intelligence (CI) is the gathering of publicly-available information
about an enterprise's competitors and the use of that information to gain a
business advantage. The goals of competitive intelligence include discerning
potential business risks and opportunities and enabling faster reaction to
competitors' actions and events.
2. OBJECTIVES
 To know the advantages of positioning
 To understand about the basics and advantages of competitive intelligence
system
3. CONTENTS
3.1 Definition of 'Positioning'
Positioning defines where your product (item or service) stands in relation to
others offering similar products and services in the marketplace as well as the mind
of the consumer.
Description: A good positioning makes a product unique and makes the users
consider using it as a distinct benefit to them. A good position gives the product a
USP (Unique selling proposition). In a market place cluttered with lots of products
and brands offering similar benefits, a good positioning makes a brand or product
stand out from the rest, confers it the ability to charge a higher price and stave off
competition from the others. A good position in the market also allows a product
and its company to ride out bad times more easily. A good position is also one
which allows flexibility to the brand or product in extensions, changes, distribution
and advertising.
Positioning is a marketing strategy that aims to make a brand occupy a
distinct position, relative to competing brands, in the mind of the customer.
Positioning can be defined as “an organized system for finding a window in the
mind. It is based on the concept that communication can only take place at the
right time and under the right circumstances”- Al Ries and Jack Trout
In short, positioning is how consumers perceive your brand, product, service
or business. When you think of Coca-Cola, you may think of a classic brand with
timeless qualities. When Apple comes to mind, perhaps you think of constant
innovation. You perceive each brand differently, based on their positioning
statement and strategy.
Positioning statement is directed at external customers. When it comes to
targeting external customers, the brand’s positioning statement serves as the
guiding tool.
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3.2 Components Of a Positioning Statement

A positioning statement is a short, internal document that distils what is
known about the target market, the benefits its members seek, and ways to
communicate and deliver these benefits. A positioning statement is the distillation
of three strategic decisions. A positioning statement specifies:
1. The target market being pursued. It begins with the phrase “For target
customers” followed by a description of the target market.
2. The brand’s identity, meaning the higher-order (abstracted) summary of core
benefits that the brand offers. It begins with the phrase “Our brand offers”
followed by a description of the higher-order summary of core benefits
offered by the brand, including a tagline.
3. The marketing actions that make the brand identity real in the minds of
target customers. It begins with the statement “In these ways”.
Good positioning statements help employees understand what the brand is
and does, and why it should be attractive to customers. In short, they specify how
brands can build brand trust, love, and respect (and brand admiration) among
customers.
3.3 Competitive intelligence
Definitions:
The process of gathering actionable information on your business's competitive
environment.
Wikipedia list CI as “A broad definition of competitive intelligence is the action
of gathering, analyzing, and distributing information about products, customers,
competitors and any aspect of the environment needed to support executives and
managers in making strategic decisions for an organization.
3.4 Why Competitive Intelligence system?
Competitive intelligence systems help decision makers identify opportunities to
improve the company or organization’s strategic position among competitors,
customers, and suppliers. Such systems rely upon heavily qualitative information
and the intuition of decision makers.
Competitive Systems Intelligence
A competitive intelligence or business intelligence (BI) system is the
organizational process for systematically collecting, processing, analyzing, and
distributing to decision makers information about an organization’s external
environment. Such a systematic process organizes the flow of critical information
and focuses it on operational and strategic issues and decisions. A system may be
formalized in a central department or operated through an informal decentralized
association. The terms CI and BI are often used interchangeably. Technically, CI is
a subset of BI, focusing on the activities of competitors, markets, and industries.
BI, the larger term, covers activities that include the tracking of political, economic,
and social forces that affect an organization’s ability to effectively compete.
Optimally, the system should support BI but most often is limited to competitively
defined areas. In this article we will focus on CI. A CI system may track: competitor
capabilities, plans, and intentions;
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 markets and customers;

 industry structures and trends;
 political, economic, and social forces; or
 technological developments and sources.
The essence of a CI system lies in its function of contributing to better and
more timely organizational decision making. Its primary objectives are to help
decision makers avoid surprises from the competitive environment and to identify
current and potential threats and opportunities.
An effective system provides competitive advantage by reducing reaction time
to competitive actions and improving both strategic and tactical planning. CI
systems are built on three separate, yet interdependent, activities:
1. general information services,
2. primary information col- lection, and
3. analysis. Each activity requires
Different resources and sets of skills and is often performed by separate
individuals. These individuals may work directly for the CI organization or be drawn
into projects as needed. The three activities may be viewed as integrated parts of
the CI pyramid. The broadest and most basic activity, information services,
identifies, retrieves, and distributes published or secondary information. Published
or secondary information sources include commercially published reports, journals,
newsletters, studies, and other items-material available through online services
such as DIALOG, Dow Jones, and NEXIS. Effective CI information services also
track fugitive material from consultants, trade organizations, technical societies,
universities, and other sources.
3.5 Competitive Systems Information
Competitive information systems (CIS) help managers to stay abreast of
market, competitive, and world events. Technology (IT) is used to help organizations
keep ahead of their competition. However, CIS does not simply deliver large
amounts of information; it provides information for informed decisions. The key to a
successful implementation is facilitating the systematic col- lecting of intelligence
information.
4. REVISION POINTS
Positioning makes a product unique and makes the users consider using it as
a distinct benefit to them. Competitive information systems (CIS) help managers to
stay abreast of market, competitive, and world events
5. INTEXT QUESTIONS
1. Define the term Positioning
2. Write short note on competitive intelligence system
6. SUMMARY
Competitive intelligence is the action of defining, gathering, analyzing, and
distributing intelligence about products, customers, competitors, and any aspect of
the environment needed to support executives and managers making strategic
decisions for an organization.
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7. TERMINAL EXERCISES
Competitive information systems (CIS) help i managers ii workers iii
customers iv competitors
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
9. ASSIGNMENTS
1. Describe the components Of a Positioning Statement.
2. Explain the advantages of competitive intelligence system
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
I.K. International Pvt Ltd, 2009 -
3. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd.,
4. Competitive Advantage: Creating and Sustaining Superior Performance
By Michael E. Porter The Free Press.
11. LEARNING ACTIVITY
Take a note on the competitive advantage a company having of your choice.
12. KEY WORDS
Positioning, Competitive Advantage Competitive Intelligence System

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LESSON - 24

VALUE CHAIN ANALYSIS

1. INTRODUCTION
Michael Porter discussed value chain in his influential 1985 book "Competitive
Advantage," in which he first introduced the concept of the value chain. A value
chain is a set of activities that an organization carries out to create value for its
customers.
The five value chain activities are inbound logistics, operations, outbound
logistics, marketing and sales, and service. Value chain analysis is a strategy tool
used to analyze internal firm activities. Its goal is to recognize, which activities are
the most valuable (i.e. are the source of cost or differentiation advantage) to the firm
and which ones could be improved to provide competitive advantage. In other
words, by looking into internal activities, the analysis reveals where a firm’s
competitive advantages or disadvantages are. The firm that competes through
differentiation advantage will try to perform its activities better than competitors
would do. If it competes through cost advantage, it will try to perform internal
activities at lower costs than competitors would do. When a company is capable of
producing goods at lower costs than the market price or to provide superior
products, it earns profits.
2. OBJECTIVES
 To understand the meaning and theory of value chain analysis
 To learn about the preparation prior to value chain analysis
 To know the activities in the process of value chain analysis
3. CONTENTS
3.1 Value Chain Analysis - Meaning
Value chain represents all the internal activities a firm engages in to produce
goods and services. Value chain is formed of primary activities that add value to the
final product directly and support activities that add value indirectly.
Value chain analysis is a strategic analytical and decision-support tool that
highlights the bases where businesses can create value for their customers. The
framework can also be applied to identify sources of competitive advantage for
businesses. Value chain is a set of consequent activities that businesses perform in
order to achieve their primary objective of profit maximization.
Most sources explain the essence and application of value chain analysis
assuming their audience is businesses aiming to increase the level of their
competitiveness.
3.2 Theory of Value Chain Analysis
The concept value chain analysis was introduced by Michael Porter in
1985 and its significance and relevance to strategic management and marketing
has not diminished during 30 years of its existence.
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The framework divides activities that generate value into two categories –
primary activities and support activities. Primary activities comprise a set of
activities that contribute to the creation of value in a direct manner. Support
activities consist of functions and tasks that are intended to support primary
activities.
It is important to clarify that the relevance of value chain analysis is not
limited to manufacturing businesses and the framework can be applied towards
service firms as well.
Primary Activities
Inbound logistics involve receiving and storing raw materials and their usage
in manufacturing as the necessity arises.
Operations relate to the processes of transforming raw materials into finished
goods. For businesses operating in services sector operations relate to the process
of providing the service.
Outbound logistics is associated with warehousing and distribution of finished
products.
Marketing and sales refer to the choice and implementation of marketing
strategy to communicate the marketing message to the target customer segment
and generation of sales.
Service relates to support provided to customers after the sale.
Support Activities
Infrastructure of a company comprises its organizational structure, its
departments and committees, organizational culture etc.
Human Resource Management involve a wide range of activities related to
employee recruitment and selection, training and development, appraisals,
motivation and compensation.
Technology development involves the use of technology to increase the
effectiveness of primary activities in terms of value creation.
Procurement relates to the purchasing practices of raw materials, tools and
equipment.
Businesses need to engage in value creation via their primary and support
activities in order to survive in the marketplace. Value can be created in one of the
following two ways.
a) Cost advantage: Businesses can reduce the costs of activities wherever
possible and use the cost benefit to reduce the price of their final products or
services
OR
b) Differentiation: businesses can focus on activities closely associated with
their competitive advantage. Investing in activities adapted as sources of
competitive advantage allows the business to increase the quality of their products
and services and sell them for higher prices.
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3.3 Definition
"Value Chain Analysis can be defined as a strategic planning tool and it's used
to analyze the value chain of the company. Value chain is how internal functions
create value for customers. Value system is the way each value chain is structured
and it spans across multiple companies"
3.4 Preparing for Value Chain Analysis
This may require a preparatory meeting and a brief document outlining the
following:
 objective and mission of the analysis—is the analysis to inform a
policy/regulation-focused project, to increase exports, adjust to a new
market trend, or to update a previous value chain analysis?
 size and composition of the core analysis team—ideally, the assessment
team is led by a team leader skilled in value chain analysis, and includes an
industry expert with private-sector experience, and 2-4 local researchers
trained in information collection and value chain analysis.
 a clear statement about the depth and duration of the data collection period
and an idea of the budget (travel/lodging) available for each analysis phase
 agreement on a draft and data collection plan that balances qualitative data
(based mostly on interviews and secondary sources) and quantitative data
(based mostly on surveys at the macro and micro levels)—this will largely be
determined by the objective and intended beneficiaries of the analysis. For
example, USAID generally favors qualitative data, while still requiring
quantitative information to back up findings. Conversely, the World Bank
favors quantitative data in a value chain analysis, but gathers qualitative
information to reinforce the numbers. Quantitative data requires more time
to research and is more appropriate for public-sector interventions.
 a review by the whole team of the approach, framework and tools of the
analysis to ensure all are in agreement with the desired outcome.
 degree/scope of participatory approach in each step—that is, who should be
brought into the process and at what phase?
3.5 Using the Value Chain Analysis
1. Defining Value Chain: Identify business units/products, determine key
functions and include all relevant activities of each function
2. Capturing Cost Data: Estimate costs and assign them to various
activities in your value chain. Then, select stronger competitors and
determine how they allocate costs to each activity and why.
According to Porter, cost analysis part doesn't need to be very precise,
just the estimate is OK. But, a company needs to compare its cost profile
against its competitors to reveal the competitor's strategy.
3. Controlling Costs: Find cost drivers and control them such as,
- Scale: expand product lines/facilities
- Linkage: control supplier scheduling, location of warehouse, payment
policies
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- Timing: Wait until the technology is getting less expensive than

acquire them
- Investment: Focus on technology that cut costs
- Procurement: reduce SKUs, supply base for better volume
4. Cutting Buyer's Cost: Follow these simple guidelines,
- Lower setup cost/time
- Decrease financing cost
- Improve quality/reduce inspection
- Reduce required maintenance
- Speed up processing time
- Reduce required monitoring/control
5. Determining Purchasing Criteria: Try to figure out the key criteria and
try to provide favourable delivery timing or improve product features,
packaging and appearance or improve after sale service.
6. Reconfiguring Value Chain: Change the way each activity is performed to
support the strategy
3.6 Value Chain Analysis-A process
Entering a new era of innovation, businesses are competing for unbeatable
prices, fine products, successful marketing strategies and customer loyalty.
One of the most valuable tools, the value chain analysis, allows businesses to
gain an advantage over their competition. According to Smartsheet, a value chain
analysis helps you recognize ways you can reduce cost, optimize effort, eliminate
waste and increase profitability. A business begins by identifying each part of its
production process, noting steps that can be eliminated and other possible
improvements.
In doing so, businesses can determine where the best value lies with
customers, and expand or improve said value, resulting in either cost savings or
enhanced production. At the end of the proces. A value chain is a full range of
activities including design,production, marketing and distribution – businesses
conduct to bring a product or service from conception to delivery.
For companies that produce goods, the value chain starts with the raw
materials used to make their products, and consists of everything added before the
product is sold to consumers.
Value chain management is the process of organizing these activities in order
to properly analyze them. The goal is to establish communication between the
leaders of each stage to ensure the product is placed in the customers' hands as
seamlessly as possible.
3.7 Value Chain Analysis is a three-step process:
1. Activity Analysis: First, you identify the activities you undertake to deliver
your product or service.
2. Value Analysis: Second, for each activity, you think through what you would
do to add the greatest value for your customer.
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3. Evaluation and Planning: Thirdly, you evaluate whether it is worth making

changes, and then plan for action.
Step 1 – Activity Analysis
The first step is to brainstorm the activities that company undertakes that in
some way contribute towards its customer's experience.
At an organizational level, this will include the step-by-step business processes
that a company use to serve the customer. These will include marketing of the
products or services; sales and order-taking; operational processes; delivery;
support; and so on (this may also involve many other steps or processes specific
industry).
At a personal or team level, it will involve the step-by-step flow of work that a
company carry out.
But this will also involve other things as well. For example:
 How you recruit people with the skills to give the best service.
 How you motivate yourself or your team to perform well.
 How you keep up to date with the most efficient and effective techniques.
 How you select and develop the technologies that give you the edge.
 How you get feedback from your customer on how you're doing, and how you
can improve further.
Step 2 – Value Analysis
Now, for each activity identified, list the "Value Factors" – the things that the
customers value in the way that each activity is conducted.
For example, if we're thinking about a telephone order-taking process, our
customer will value a quick answer to his or her call; a polite manner; efficient
taking of order details; fast and knowledgeable answering of questions; and an
efficient and quick resolution to any problems that [Link] we're thinking about
delivery of a professional service, the customer will most likely value an accurate
and correct solution; a solution based on completely up-to-date information; a
solution that is clearly expressed and easily actionable; and so on.
Next to each activity identified, write down these Value Factors.
And next to these, write down what needs to be done or changed to provide
great value for each Value Factor.
Step 3 – Evaluate Changes and Plan for Action
By the time the company will completed Value Analysis, the responsible
person may probably be fired up for action: you'll have generated plenty of ideas for
increasing the value you deliver to customers. And if you could deliver all of these,
your service could be fabulous!
Now be a bit careful at this stage: you could easily fritter your energy away on
a hundred different jobs, and never really complete any of them.
So firstly, pick out the quick, easy, cheap wins – go for some of these, as this
will improve the company team's spirits no end. Then screen the more difficult
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changes. Some may be impractical. Others will deliver only marginal improvements,
but at great cost. Drop these.
And then prioritize the remaining tasks and plan to tackle them in an
achievable step-by-step way that delivers steady improvement at the same time that
it keeps the company team enthusiastic.
3.8 Factors affecting performance of the chain
The factors affecting performance of the chain are further analyzed to
characterize opportunities and constraints to competitiveness. These factors are:
 end markets
 business enabling environment
 vertical linkages
 horizontal linkages
 supporting markets
 value chain governance
 inter-firm relationships
 upgrading
3.9 Advantages and Disadvantages of Value Chain Analysis
Application of value chain analysis offers the following advantages:
1. Value chain analysis can play an instrumental role in terms of detecting
organizational, tactical and strategic issues related to the business.
2. The tool assists businesses to appreciate potential sources of competitive
advantage.
3. The strategic framework can be applied to any type of business regardless
of the industry and the size of the business.
The concept of value chain is not free from limitations.
These can be summarized into the following points:
1. The framework assumes that it is possible to achieve a clear separation of
company operations into different primary and support activities. This may
not be the case in real life taking into account increasing level of
complexity of business operations.
2. Application of the tool in practice can be overly time-consuming process,
since it requires a comprehensive analysis of all business operations.
3. It may be difficult to find all the required information in order to conduct
value chain analysis in an appropriate manner.
4. REVISION POINTS
Value chain analysis can play an instrumental role in terms of detecting
organizational, tactical and strategic issues related to the business. Value chain
analysis is a process. This analysis enjoys certain advantages and also suffers
certain limitations.
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5. INTEXT QUESTIONS
1. What do you mean by value chain analysis
2. State the advantages and disadvantages of value chain analysis
3. Brief the theory of value chain analysis
6. SUMMARY
Value chain management is the process of organizing these activities in order
to properly analyze them.
7. TERMINAL EXERCISES
1. Value chain management is a i process ii technique iii assumption iv none of
these
2. The factors affecting value chain is i vertical linkages ii horizontal linkages iii
supporting markets iv all the three
8. SUPPLEMENTARY MATERIALS
1. [Link]
2. [Link]
3. [Link]
4. [Link]
9. ASSIGNMENTS
1. Explain the factors affecting value chain analysis
2. Describe the process of value chain analysis
10. REFERENCE BOOKS
1. Corporate Strategy By B. Hiriyappa author house 2013
2. Business Policy and Strategic Management G.V. Satya Sekhar,
I.K. International Pvt Ltd, 2009
3. Strategic Management: Concepts, Skills and Practices R.M. Srivastava,
Shubhra Verma PHI Learning Pvt. Ltd.
11. LEARNING ACTIVITY
Discuss with an executive in detail about value chain analysis did in their
organization.
12. KEY WORDS
Value chain analysis.
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