Strategic Management

Chapter 1
Introduction to Strategic Management

Kodak- Rise and Rise and then a bitter fall!!!

Eastman Kodak revolutionised the photography industry by recording images on a film (as against
the traditional glass plates) through a novel product called portable camera, in early 1901. The
camera was a major hit with millions of customers. The name – Kodak – became the most respected
brand of photographic films almost instantaneously. Continuous innovations (especially the colour
film – those yellow little boxes of film) and the absence of competition took Eastman Kodak Company
to dizzying heights over the years. It became a giant corporation registering sales of over $20 billion
by 1990 – powered by contributions from a vast army of over 1 lakh employees. The ad campaign:
“You press the button; we do the rest” – made Kodak a household name all over the globe.
Meanwhile, Fuji Photo Film Company of Japan entered the fray with a little green box of film that
challenged Kodak’s dominance for over a century. Using latest manufacturing technologies, Fuji cut
the price down aggressively without, of course, sacrificing quality. For the customers, both were
equally good. But the big price differential between product prices brought Kodak down and the
company lost the title of “official film of the
1984 Summer Olympics to Fuji. From then onwards, Fuji gained market share steadily as customers
came to realise that Fuji is a legitimate alternative to Kodak and is not just a low price brand.
The introduction of digital imaging technologies at around the same time from the likes of Sony,
Cannon, Motorola, Casio and Hewlett-Packard changed the rules of the game, more or less,
permanently. In the interim, a bad acquisition (a pharma company) and some failed innovations
(entering office copier business, introducing a 35mm camera; a disposable camera – in a belated
manner — and some heavy investments in Kodak Advantix system running to over $200 million) have
had a telling effect on the brand image. When the mobile phone technology took off and the home
computer market exploded in a big way, it was all over for Kodak (2008 reported revenues just $442
million). The lethargic response to tumultuous changes in the industry environment, according to
experts, brought the company down. As Trout commented, ‘if you are known for one thing, the
market will not give you another thing’.
Kodak is a film in the minds of the marketplace and not camera (Nikon fits such a description). As it
turned out, Kodak could not find a rewarding space in the marketplace beyond the realm of
conventional photography. When you fail to make intelligent moves – proactively and in sync with
market expectations and
remain stuck with a well-entrenched position and fail miserably in exploiting emerging opportunities,
you get punished and pushed aside. Before hiding its head in the sand, Kodak did try a trick or two to
cover the lost ground by embracing the digital imaging technology. However, it was too late for it to
make any difference.

Adding salt to its injuries, due to fierce competition, the digital camera business got commoditised
and the Kodak brand did not offer any value for money. In 2006, the company had to close the
business and show the door to over 27,000 people. The most respected brand for over 100 years in
photographic films had been
decimated beyond belief within a span of just 10 years!
In earlier times, the managers focused on “today’s decisions for today’s business”. However, the
rapid changes experienced by companies have made the managers to anticipate the future and
prepare for it. They have prepared systems, procedures and manuals and evolved budgets and
planning and control systems, which included capital budgeting and management by objectives. The
inadequacy of these techniques has led to the emergence of long-range planning which in turn gives
rise to strategic planning subsequently to strategic management.

Strategic management deals with decision making and actions which determine an enterprise’s
ability to excel survive or die by making the best use of a firm’s resources in a dynamic environment.
The main purpose of study of strategic management is to examine why some organization succeed
while others fail and yet others completely change.

Consider the following examples:

Bharat Heavy Electricals Ltd. (BHEL) is now planning to expand its range to 800 MW supercritical
power projects.

LG Electronics India Ltd. (LGEIL) signed a MOU with Maharashtra government to expand
manufacturing facility at Pune for Rs.900 crores.

GAIL India has received an offer from China Gas Holdings for participation in a gas based
petrochemical project to be set at Humor in Mongolia.

The world’s largest steel conglomerate Mittal Steel Company is to become the second largest
stakeholder in a Chinese Steel firm in Hunan Province.

Mittal singed three MOUs with Jharkhand Government for setting up 12 million tonne Greenfield
projects in two phases.

Maruti Udyog slashed the price of Maruti-800 by Rs.16000 in small car segment drastically.

Lenovo, the Chinese computer giant acquired IBM in China.

Tata Steel entered a joint venture agreement with Iranian Mines and Mining Industries Development
and Renovation Organization.

These examples illustrate how organizations react to environment and adopt suitable course of
action such as divestment, expansion and stability as part of their operations. The decisions
regarding up-gradation of product mix, joint ventures and expansion have a long-term impact on the
activities and such crucial decisions are taken by senior management. The top management is mainly
responsible for providing a sense of direction and guiding future course of action for any firm.
Strategic management deals with long-term decisions taken up by top management which gives
overall direction to the organization. Strategic Management provides a cooperative, integrated and
enthusiastic approach for tackling problems and realizing opportunities.

An enterprise’s success mainly depends on three board factors:

(1) The Industry, it belongs to

(2) The Nation, it is located and

(3) Its own resources, capabilities and strategies.

Fig: Determinants of Company Performance Company Resources

Industry: Some industries are profitable than others due to industry attractiveness. A company in
attractive industry will achieve success compared to a firm in a less attractive industry. During the
last decade software industry is more profitable than pharmaceutical industry.

Nation: The country also influences the competitiveness of company based within the nation. Some
countries enjoy competitive advantage about certain industries. For example, the world’s most
successful automobile and consumer electronics companies are located in Japan. The most
successful pharmaceutical companies are located in U.S. and Switzerland. Many of the successful
financial services companies are located in the United States and Great Britain. The success or failure
of individual firms depends on national competitive advantage.

Company: Firm’s resources, capabilities and strategies are the strongest reasons for the success or
failure of the firm. Some firms thrive even in less attractive industry whereas some firms perform
poorly despite being in profitable industry. Often one comes across wide variation in the
performance of companies within the same industry and enjoying same national competitive
advantage. There is a grave need to understand the causes of success and failure in order to develop
strategies, which will increase the probability of success and reduce the probability of failure.
 THE CONCEPT OF STRATEGY AND THE STRATEGY FORMATION PROCESS

Strategy is a framework through which an organisation can assert its vital continuity whilst managing
to adapt to the changing environment to gain competitive advantage.

According to Igor Ansoff (1984), Strategic Management is a systematic approach to the major and
increasingly important responsibility of general management to position and relate the firm to its
environment in a way which will assure its continued success and make it secure from surprises.

Top executives, who formulate strategy, draw information from several publications in order to keep
abreast of current developments in their industry and business. Some of the online sources of
business strategy news are as follows:

1. Business line – [Link]/bline/

2. Financial Express – [Link]
3. The Economic Times – [Link]
4. Times Syndication – [Link]
5. Fortune – [Link]
6. Forbes – [Link]
7. Wallstreet – [Link]

Strategic management tends to develop a generalist approach to managerial problems and it

enables one to view organizational issues in its totality. Hence business is viewed as a system
consisting of number of subsystems and the narrow outlook of a specialist is not recommended for
solving business problems. For instance, employee turnover apparently looks like a personnel
problem. If one probes deeply into the problem, it genesis may be deeper.

Employee turnover may be attributable to unsuitable recruitment policy, poor training, MNC‟s
attractive package, declining demand for the products of the company, poor morale, lack of job
satisfaction, uncertainty of the tenure, underutilization of capability and so on. Apparently, it looks
like a personnel problem but truly speaking, it is due to various factors beyond the purview of the
Personnel Department. Hence a generalist‟ outlook, rather than that of specialists, isdesirable to
deal with organizational problems in its totality.

Analytical techniques and skills are needed for developing and exploiting strategies successfully.
Understanding strategy is the first step in strategic management process.

Definitions

 Strategy is “a unified comprehensive and integrated plan designed to ensure that the basic
objectives of the enterprise are achieved” – Glueck
 Strategy is “a determination of the basic long-term goals and objectives of an enterprise and
the adoption of courses of action and the allocation of resources necessary for carrying out
these goals” – Alfred Chandler
 Strategic management is “a stream of decisions and actions, which leads to the development
of an effective strategy to help achieve corporate objectives” – Glueck

NATURE AND CHARACTERISTICS OF BUSINESS STRATEGY

Following are the features of strategic management.

1. Objective Oriented: The business strategies are objectives oriented and are directed towards
organizational goal. To formulate strategies the business should know the objectives that are
 to be pursued. For example, if any business wants to achieve growth then it has to set
following objectives.
 To increase market share.
 To increase customers satisfaction.
 To enhance the goodwill of the firm.
2. Future oriented: Strategy is future oriented plan and formulated to attain future position of
the organization. Therefore, strategy enables management to study the present position of
organization and
decides to attain the future position of the organization. This is possible because strategy
answer question relating to the following aspects.
 Prosperity of the business in future.
 The profitability of the business in future.
 The scope to develop and grow in future in different business.

3. Availability and allocation of resources: Availability and Allocation of Resources:

To implement strategy properly there is need of adequate resources and proper allocation of
resources. If it is done, then business can attain its objectives. There are three types of
resources required by business namely physical resources, i.e. plant and machinery, financial
resources i.e. capital, and human resources i.e. manpower. If these resources are properly
audited/evaluated and find out its strength and weaknesses and co-ordinate well then
management can do better strategy implementation.

4. Influences of Environment: The environmental factors affect the formulation and

implementation of strategy. The business unit by analysing internal and external
environment can find out its strength and weaknesses as well as opportunities and threats
and can formulate its strategy properly.

5. Universal applicability: Strategies are universally applicable and accepted irrespective of

business nature and size. Every business unit design strategy for its survival and growth. The
presence of strategy keeps business moving in right direction.

6. Levels of strategy: There are companies that are working in different business lines with
regards to products /services, markets or Technologies and are managed by same top
management. In this case such companies need to frame different strategies. The strategies
are executed at three different levels such as
a) Corporate level
b) Business level
c) Functional/operational level
Corporate level strategies are overarching plan of action covering the various functions that
are performed by different SBUs(strategic business unit, which involved in a signal line of
business) the plan deals with the objectives of the company, allocation of resource and co-
ordination of SBUs for best performance.
Business level strategy is comprehensive plan directed to attain SBUs objectives, allocation
of resources among functional areas and coordination between them for giving good
contribution for achieving corporate level objectives.
Functional level strategy is restricted to a specific function. It deals with allocation of
resources among different operations within that functional area and coordinating them for
better contribution to SBU and corporate level achievement.

7. Review (Revision of strategy): Strategies are to be reviewed periodically as in the process of

its implementation certain changes are going to take place. For example, while
 implementing growth strategy there could be shortage of resources because of limited
sources or recession during the period so retrenchment strategy should be considered.
8. Classification of strategy:
Strategies are classified into four major categories known as –
 Stable growth strategy
 Growth strategy
 Retrenchment strategy
 Combination strategy

STRATEGIC MANAGEMENT

Strategic management is defined as the art and science of formulating, implementing, and
evaluating cross-functional decisions that enable the organization to achieve its objectives."
Generally, strategic management is not only related to a single specialization but covers cross-
functional or overall organization.

• Strategic management is a comprehensive area that covers almost all the functional areas of
the organization. It is an umbrella concept of management that comprises all such functional
areas as marketing, finance & account, human resource, and production & operation into a
top-level management discipline. Therefore, strategic management has an importance in the
organizational success and failure than any specific functional areas.
• Strategic management deals with organizational level and top-level issues whereas
functional or operational level management deals with the specific areas of the business.
• Top-level managers such as Chairman, Managing Director, and corporate level planners
involve more in strategic management process.
• Strategic management relates to setting vision, mission, objectives, and strategies that can
be the guideline to design functional strategies in other functional areas
• Therefore, it is top-level management that paves the way for other functional or operational
management in an organization
 Chapter 2
Strategic Management
Process : Vision, Mission,
Goal, Philosophy, Policies of
an Organisation

In today’s highly competitive business environment, budget-oriented planning or forecast-based

planning methods are insufficient for a large corporation to survive and prosper. The firm must
engage in strategic planning that clearly defines objectives and assesses both the internal and
external situation to formulate strategy, implement the strategy, evaluate the progress, and adjust
as necessary to stay on track. A simplified view of the strategic planning process is shown by the
following diagram

a) Step 1 : STRATEGIC INTENT

Strategic intent takes the form of a number of corporate challenges and opportunities, specified as
short term projects. The strategic intent must convey a significant stretch for the company, a sense
of direction, which can be communicated to all employees. It should not focus so much on today’s
problems, but rather on tomorrows opportunities. Strategic intent should specify the competitive
factors, the factors critical to success in the future.

Strategic intent gives a picture about what an organization must get into immediately in order to use
the opportunity. Strategic intent helps management to emphasize and concentrate on the priorities.
Strategic intent is, nothing but, the influencing of an organization’s resource potential and core
competencies to achieve what at first may seem to be unachievable goals in the competitive
environment.

Vision- Vision is the statement that expresses organization’s ultimate long-run objectives. It is what
the firm ultimately like to become. Vision once formulated is for forever and long lasting for years to
come. Vision is closely related with strategic intent and is a forward-thinking process. E.g.- Microsoft-
’A computer software on every desk and in every home’.

Mission- It tells who we are and what we do as well as what we’d like to become. Mission of a
business is the fundamental, unique purpose that sets it apart from other firms of its kind and
identifies the scope of its operations in product and market terms. E.g.- Microsoft- ‘Empower every
person and every organization on the planet to achieve more’.

Objectives- These are the end results of planned activity that state what is to be accomplished by
when and should be quantified if possible and their achievement should result in the fulfillment of a
corporation’s mission. Objectives state specifically how the goals shall be achieved. Following are the
areas for setting objectives- profit objective, marketing objective, production objective, etc.

b) Step 2 : Strategy Formulation:

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. For
choosing most appropriate course of action, appraisal of organization and environmental is done
with the help of SWOT analysis.

• Environmental Appraisal-The environment of any organization is "the aggregate of all

conditions, events and influences that surround and affect it". It is dynamic and consists of
External & Internal Environment.
• The external environment includes all the factors outside the organization which
provide opportunities or pose threats to the organization. In this stage, examination
of three environments normally takes place, the industry environment in which
organization operates, the national environment and the macro environmental
forces such as social, economic, government and legal, international and
technological factors, which affect the organization.
• The internal environment refers to all the factors within an organization which
impart strengths or cause weaknesses of a strategic nature. The competitive
structure of the industry, competing firms and the competitive positions are
analysed during this phase

• Organizational Appraisal-It is the process of observing an organizational internal

environment to identify the strengths and weaknesses that may influence the organization's
ability to achieve goals. The analysis of corporate capabilities and weaknesses becomes a
pre-requisite for successful formulation and reformulation of corporate strategies. This
analysis can be done at various levels: functional, divisional and corporate.

• Identifying strengths and weakness of the organization involves identification of

quantity and quality of resources and distinctive competencies that help in building
competitive advantage to achieve superior efficiency, quality, innovation and
customer loyalty.
c) Step 3 : Strategy Implementation

Strategy implementation is the action stage of strategic management. It refers to decisions that
are made to install new strategy or reinforce existing strategy.

• Designing structure, process & system- Strategy implementation includes

the making of decisions with regard to organizational structure, developing
budgets, programs and procedures in order to accomplish certain activities.

• Functional Implementation- Functional implementation is carried out

through functional plan and policies in five different areas- marketing,
finance, operation, personnel and Information management.

• Behavioral Implementation- It denotes mobilizing employees and managers

to put and formulate strategies into action and require personal discipline,
commitment and sacrifice. It depends upon manager’s ability to motivate
employees.

• Operationalizing strategy- It includes establishing annual objectives,

devising policies, and allocating resources. objectives- profit objective,
marketing objective, production objective, etc.

d) Step 4: Evaluation & Control

• Strategy evaluation- It is the primary means to know when and why

particular strategies are not working well. It is the process in which
corporate activities and performance results are monitored so that actual
performance can be compared with desired performance. Thus, strategic
evaluation activities include reviewing external and internal factors that are
the basis for current strategies.

• Strategic control- In this step, organizations Determine what to control i.e.,

which objectives the organization hopes to accomplish, set control
standards, measure performance, Compare the actual with the standard,
determine the reasons for the deviations and finally taking corrective actions
and review the policies and activities if needed.
Strategy Formation Process -by Mintzberg(Extra Notes)

Henry Mintzberg holds a different view about strategic management process. According to him,
strategies can emerge from within an organization without any formal plan. Strategies may emerge
from the grassroots of the organization in response to unforeseen circumstances. Strategy is more
than what a company plans to do; it is what the company does.

Mintzberg has defined strategy as “a pattern in a stream of decisions or actions” the pattern being a
product of whatever intended strategies (planned) are realized and of any emergent(unplanned)
strategies. Hence strategies may be intended (planned) as well as emergent(unplanned).

In Mintzberg’s opinion emergent strategies are more successful than other types. In practice, the
strategies of several organizations are probably a combination of the „intended‟ and the „emergent‟
types.
VISION, MISSION AND PURPOSE

VISION
The first task in the process of strategic management is to formulate the organisation’s vision and
mission statements. These statements define
The organisational purpose of a firm. Together with objectives, they form a “hierarchy of goals”

clear vision helps in developing a mission statement, which in turn facilitates setting of objectives of
the firm after analysing external and internal environment. Though vision, mission and objectives
together reflect the “strategic intent” of the firm, they have their distinctive characteristics and play
important roles in strategic management.
Vision can be defined as “a mental image of a possible and desirable future state of the
organisation” (Bennis and Nanus). It is “a vividly descriptive image of what a company wants to
become in future”.
Vision represents top management’s aspirations about the company’s direction and focus. Every
organisation needs to develop a vision of the future. A clearly articulated vision moulds
organisational identity, stimulates managers in a positive way and prepares the company for
the future.
“The critical point is that a vision articulates a view of a realistic, credible, attractive future for the
organisation, a condition that is better in some important ways than what now exists.”

According to Collins and Porras, a well-conceived vision consists of two major components:
 Core ideology
 Envisioned future
Core ideology is based on the enduring values of the organisation (“what we stand for and why we
exist”), which remain unaffected by environmental changes.
Envisioned future consists of a long-term goal (what we aspire to become, to achieve, to create)
which demands significant change and progress.
DEFINING VISION
Vision has been define d in several different ways. Richard Lynch defines vision as “a challenging and
imaginative picture of the future role and objectives of an organisation, significantly going beyond its
current environment and competitive position.” E1-Namaki defines it as “a mental perception of the
kind of environment that an organisation aspires to create within a broad time horizon and the
underlying conditions for the actualization of this perception”. Kotter defines it as “a description of
something (an organisation, corporate culture, a business, a technology, an activity) in the future.”
A number of authors have given their definitions of organisational vision as per their findings and
experiences, some of them are as follows:
Vision is “clear mental picture of a future goal created jointly by a group for the benefit of other
people, which is capable of inspiring and motivating those whose support is necessary for its
achievement”. — Johnson
Vision is “an ideal that represents or reflects the shared values to which the organisation should
aspire”. — Kirkpatrick et. al.

NATURE OF VISION
A vision represents an animating dream about the future of the firm. By its nature, it is hazy and
vague. That is why Collins describes it as a Big Hairy Audacious Goal (BHAG). Yet it is a powerful
motivator to action. It captures both the minds and hearts of people. It articulates a view of a
realistic, credible, attractive future for the organisation, which is better than what now exists.
Developing and implementing a vision is one of the leader’s central roles. He should not only have a
“strong sense of vision”, but also a “plan” to implement it.

Example:
Henry Ford’s vision of a “car in every garage” had power. It captured the imagination of others and
aided internal efforts to mobilise resources and make it a reality. A good vision always needs to be a
bit beyond a company’s reach, but progress towards the vision is what unifies the efforts of
company personnel.

Disneyland “To be the happiest place on earth”. Other examples are:

Hindustan Lever: Our vision is to meet the everyday needs of people everywhere.
Microsoft: Empower people through great software any time, any place and on any device.
Britannia Industries: Every third Indian must be a Britannia consumer
“A Coke within arm’s reaches of everyone on the planet” (Coca Cola)
“Become the Premier Company in the World” (Motorola)

Although such vision statements cannot be accurately measured, they do provide a fundamental
statement of an organisation’s values, aspirations and goals.

CHARACTERISTICS OF VISION STATEMENTS

As may be seen from the above definitions, many of the characteristics of vision given by these
authors are common such as being clear, desirable, challenging, feasible and easy to communicate.
Nutt and Back off have identified four generic features of visions that are likely to enhance
organisational performance:

 Possibility: means the vision should entail innovative possibilities for dramatic organisational
improvements.
 Desirability: means the extent to which it draws upon shared organisational norms and
values about the way things should be done.
 Actionability: means the ability of people to see in the vision, actions that they can take that
are relevant to them.
 Articulation: means that the vision has imagery that is powerful enough to communicate
clearly a picture of where the organisation is headed.

MISSION
Mission statement embodies an organization’s purpose of existence. When strategists raise certain
fundamental questions related to business such as:

 What is our business?

 Why are we in the business?

 What will it be after 5 years? The need for mission statement arises.

The survival of an organization mainly depends on its ability to satisfy specific needs of the society.
Mission statement defines the role that inorganization plays in a society. Mission statement
describes what the company stands for, its purpose, image and character to different stake holders.
A survey by Bain and Company indicates that planning and developing mission and vision statements
are the popular management tools of strategic management.

Thompson defines mission as “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”.

In Drucker’s opinion “mission focuses the organization on action. It defines the specific strategies
needed to attain goal. It creates a disciplined organization… The business purpose and business
mission are so rarely given adequate thought, is perhaps the most important single cause of business
failure and business frustration”.

In order to survive for a long period, organizations perform various functions, which are valued by
the society. Mission statements usually give internal direction for the future of the organization.

Ambition and visionary zeal are the main constituents of mission. Organizational values hold the
mission intact. The mission specifies what qualities the organization will uphold and impart to the
society and community. The organization’s beliefs are embedded in the mission.

Watson Jr. of IBM holds the view “I firmly believe that any organization, in order to survive and
achieve success, must have a sound set of beliefs on which it premises al its policies and actions”.

 A mission statement is full of enthusiasm.

 A mission statement is marked by grandeur.

 It is unique and personal.

 It is not time bound because the future envisioned in a mission statement cannot be achieved in a
day.

HOW IS MISSION FORMULATED

Strategists, consultants and chief executives are involved in formulated mission statements.
Contrary to the popular practice, State Bank of India solicits the cooperation of employee’s union for
formulation of mission statement.

In Hyderabad Bakelite Hylam, discussions are held at all levels and all employees are involved in the
exercise of framing a mission statement.

Sathya Computers conducts extensive discussions with clients and overseas joint venture partners
for framing mission statements.
In HCL, a core management team has analysed the strengths and weaknesses and designed a
customer-centric mission statement for team building, mutual trust, internal customer service and
empowerment.

The mission statements of some Indian companies are given below:

Infosys: “The primary purpose of corporate leadership is to create wealth legally and ethically. This
translates to bringing a high level of satisfaction to five constituencies – customers, employees,
investors, vendors and the society at large. The reason de „e‟tre of every corporate body is to
ensure predictability, sustainability and profitability of revenues year after year”.

Ranbaxy: “To become a $1 billion research based global pharmaceutical company”. Merck: “To
preserve and improve human life”.

Unilever: “To make cleanliness common place, to lessen work for women, to foster health and
tocontribute to personal attractiveness that life may be more enjoyable for the people who use our
products”.

ONGC: “To be a world class oil and gas company integrated in energy business with dominant Indian
leadership and global business”.

Nirma: “Nirma is a customer focused company committed to consistently offer better quality
products and services that maximize value to the customer”.

It is observed from these mission statements that mission provides direction to internal organization
and it embodies the values and philosophy of the founders of the organization.

CHARACTERISTICS OF A MISSION STATEMENT

Mission statement incorporates the basic business purpose and the reason for its existence by
rendering some valuable functions for the society. An effective mission statement should possess
the following characteristics.

1) Feasible: The mission should be realistic and achievable.

2) Precise: A mission statement should not be narrow or too broad.

3) Clear: A mission statement should lead to action. BSNL‟s mission of „connecting India‟ leads it to
a variety of service with varied tariff structure to cater to the preferences of mobile phone users.

4) Motivating: The mission should be motivating for the employees to be inspired for action. For
example, India Post’s mission is to „exceed the expectations of the customer‟ with dedication,
devotion and enthusiasm.

5) Distinctive: A mission statement will indicate the major components of the strategy to be
adopted. The mission should be unique.

6) Indicates Major Components of Strategy: The mission statement of IOC emphasizes petroleum
refining, marketing and transportation with international standards and modern technology. It
indicates that IOC is going to adopt diversification strategy in future.

IMPORTANCE OF MISSION STATEMENT

The purpose of the mission statement is to communicate to all the stakeholders inside and outside
the organisation what the company stands for and where it is headed. It is important to develop a
mission statement for the following reasons:
It helps to ensure unanimity of purpose within the organisation.
It provides a basis or standard for allocating organisational resources.
It establishes a general tone or organisational climate.
It serves as a focal point for individuals to identify with the organisation’s purpose and direction.

It facilitates the translation of objectives into tasks assigned to responsible people within the
organisation.
It specifies organisational purpose and then helps to translate this purpose into objectives in such a
way that cost, time and performance parameters can be assessed and controlled.
Mission contributes to strategic management in many ways:

1. It provides direction to corporate planning.

2. It clarifies the firm’s aspirations.
3. It communicates to employees at various levels the direction in which they should
move.
4. It focuses on business purpose and long-term objective of the firm.

Mission Statement versus Vision Statement comparison chart

Mission Statement Vision Statement
A Mission statement talks about HOW you
A Vision statement outlines WHERE you
will get to where you want to be. Defines
About want to be. Communicates both the
the purpose and primary objectives related
purpose and values of your business.
to your customer needs and team values.
It answers the question, “What do we do? It answers the question, “Where do we
Answer
What makes us different?” aim to be?”
A mission statement talks about the A vision statement talks about your
Time
present leading to its future. future.
It lists the broad goals for which the
organization is formed. Its prime function is It lists where you see yourself some
internal; to define the key measure or years from now. It inspires you to give
Function
measures of the organization's success and your best. It shapes your understanding
its prime audience is the leadership, team of why you are working here.
and stockholders.
As your organization evolves, you might
feel tempted to change your vision.
Your mission statement may change, but it
However, mission or vision statements
Change should still tie back to your core values,
explain your organization's foundation,
customer needs and vision.
so change should be kept to a
minimum.
What do we do today? For whom do we do
Where do we want to be going
Developing a it? What is the benefit? In other words,
forward? When do we want to reach
statement Why we do what we do? What, For Whom
that stage? How do we want to do it?
and Why?
Features of an Purpose and values of the organization: Clarity and lack of ambiguity: Describing
effective Who are the organization's primary a bright future (hope); Memorable and
statement "clients" (stakeholders)? What are the engaging expression; realistic
responsibilities of the organization towards aspirations, achievable; alignment with
 Mission Statement versus Vision Statement comparison chart
Mission Statement Vision Statement
the clients? organizational values and culture.

BUSINESS DEFINITION, OBJECTIVES AND GOALS

DEFINITION OF BUSINESS

1. An organization or enterprising entity engaged in commercial, industrial or

professional activities. A business can be a for-profit entity, such as a publicly-traded
corporation, or a non-profit organization engaged in business activities, such as an
agricultural cooperative.
2. Any commercial, industrial or professional activity undertaken by an individual or a
group.
3. A reference to a specific area or type of economic activity.

Business can be defined as:

1. Businesses include everything from a small owner-operated company such as a family

restaurant, to a multinational conglomerate such as General Electric.
2. To "do business" with another company, a business must engage in transaction or exchange
of value with that company.
3. In this sense, the word "business" can be used to refer to a specific industry or activity, such
as the "real estate business" or the "advertising business”.

A business (also known as enterprise or firm) is an organization engaged in the trade of goods,
services, or both to consumers. Businesses are predominant in capitalist economies, where most of
them are privately owned and administered to earn profit to increase the wealth of their owners.
Businesses may also be not-for-profit or state-owned. A business owned by multiple individuals may
be referred to as a company, although that term also has a more precise meaning.

Basic forms of ownership Although forms of business ownership vary by jurisdiction, there are
several common forms which are as follows:

 Sole proprietorship: A sole proprietorship is a business owned by one person for-profit. The
owner may operate the business alone or may employ others. The owner of the business has
unlimited liability for the debts incurred by the business.
 Partnership: A partnership is a business owned by two or more people. In most forms of
partnerships, each partner has unlimited liability for the debts incurred by the business. The
three typical classifications of for-profit partnerships are general partnerships, limited
partnerships, and limited liability partnerships.
 Corporation: A corporation is a limited liability business that has a separate legal personality
from its members. Corporations can be either government-owned or privately owned, and
corporations can organize either for-profit or not-for-profit. A privately owned, for-profit
corporation is owned by shareholders who elect a board of directors to direct the
corporation and hire its managerial staff. A privately owned, for-profit corporation can be
either privately held or publicly held.
 Cooperative: Often referred to as a "co-op", a cooperative is a limited liability business that
can organize for-profit or not-for-profit. A cooperative differs from a for-profit corporation in
that it has members, as opposed to shareholders, who share decision- making authority.
 Cooperatives are typically classified as either consumer cooperatives or worker
cooperatives. Cooperatives are fundamental to the ideology of economic democracy.
Classification of Business There are many other divisions and subdivisions of businesses.
 Agriculture and mining businesses are concerned with the production of raw material, such
as plants or minerals.
 Financial businesses include banks and other companies that generate profit through
investment and management of capital.
 Information businesses generate profits primarily from the resale of intellectual property
and include movie studios, publishers and packaged software companies.
 Manufacturers produce products, from raw materials or component parts, which they then
sell at a profit. Companies that make physical goods, such as cars or pipes, are considered
manufacturers.
 Real estate businesses generate profit from the selling, renting, and development of
properties comprising land, residential homes, and other kinds of buildings.
 Retailers and distributors act as middle-men in getting goods produced by manufacturers to
the intended consumer, generating a profit as a result of providing sales or distribution
services. Most consumer-oriented stores and catalo companies are distributors or retailers.
 Service businesses offer intangible goods or services and typically generate a profit by
charging for labour or other services provided to government, other businesses, or
consumers. Organizations ranging from house decorators to consulting firms, restaurants,
and even entertainers are types of service businesses.
 Transportation businesses deliver goods and individuals from location to location,
generating a profit on the transportation costs.
 Utilities produce public services such as electricity or sewage treatment, usually under a
government charter.

GOALS AND OBJECTIVES

It has been said that Goals without objectives can never be achieved while objectives without goals
will never get you to where you want to be. Indeed, the two concepts are related and yet separate.
Using both can enable you (or the organization) to be and do what you want to do.

Some management academics would say that the difference between goals and objectives is that a
goal is a description of a destination, and an objective is a measure of the progress that is needed to
get to the destination.

In this context goals are the long-term outcomes you (or the organization) want/ need to achieve.
More often than not, these goals can be broken into “chunks” or objectives. Goals are often open
and unstructured in nature. Goals can be fluid and are directional in nature.

Objectives tend to be single achievable outcomes. They are concrete in statement and purpose.
There is no ambiguity as to whether they have been achieved or not.

Goals Objectives
Broad in scope Narrow in scope
General intention or direction Specific/ Precise
Intangible or “soft” Tangible
Abstract Solid/ Concrete
Can’t be easily measured/ validated Can be easily measured/ validated
Large in size Chunks
The end Ends in themselves
The result The means to the end
The whole Part of the whole, often with milestones
Longer term Shorter term

Objectives and goals are used interchangeably in management literature, but the recent strategic
management literature shows a subtle distinction between these two terms. Objective is the end,
which the organization tries to achieve through its operations. ‘Goal’ is an open-ended statement,
which does not quantify what needs to be achieved, and time frame for completion. So ‘growth’ is a
goal whereas an objective is to ‘increase growth by 10% in terms of market share and sales over last
year’. Usually the long-term goals and short-term objectives are derived from mission.

SIGNIFICANCE OF OBJECTIVES
Objectives are formulated from mission statements. Objectives form the basis for all other
functional decisions such as finance, manufacturing, marketing and human resource. Objectives are
split into business wise objectives and functional targets and performance targets. While setting
objectives, the organization encounters the environment and determines the locus it will devise to
attain in the environment such as a dominant player, a meek player or one among the herd.
Objectives and strategy put together, explain the firm’s concept of business. Objectives indicate the
organizational performance to be realized and expected over a period of time.
Consider the objectives of some organizations:
Canara Bank: “The bank’s stated objectives are growth, innovativeness, and high profits as a
barometer of efficiency, highly involved employees distinctively charged with pride”.
Maruti: “We don’t just sell more car than No.2. We sell more cars than the entire competition put
together”.

AREAS WHERE OBJECTIVES ARE SET

Organizations follow multiple objectives such as:
 Growth.
 Profitability
 Market share:
 Productivity
 Technology
 R&D and Innovation
 Corporate Social Responsibility
 Image
 Employee Satisfaction

Growth: Growth in sales, in profits and assets are indicators of a firm’s financial soundness and long-
term welfare. Reliance Industries is a typical example, for growth objectives. Growth of a firm is
ensured if growth in sales, profits and assets are ensured

Profitability: Profitability has several dimensions and it is measured in terms of return on

investment, net worth, assets, revenue and earning per share. With profitability objective, the firm
examines the profit potential of present portfolio and reallocates accordingly. Some of the specific
issues are:
(a) How are the present investments of the firm behaving?
(b) What is the rate of return?
(c) How is the spread of the investment?
The example of ITC is worth studying. ITC has made investments in five main businesses namely
tobacco, agro products, financial services, paper and packaging, hotel and tourism

Market Share: Market share is a crucial indicator of the firm’s growth and around market share
objective, business level strategies are formulated. For many Japanese firms, building market share
is synonymous with long run profits and brand building. Tata, Colgate BPL and P&G are companies
that focus on market share as the key corporate objective. Colgate firmly believes that it should have
always 50% market share. The policy of P&G is „Profit via market share‟ and it is prepared to accept
short-term loss to win over the established leader HLL and be a market leader ultimately.

Technology: Corporate objectives are set in technology for companies like Du Pont and Intel. For Du
Pont, leadership in chemical technology and continuous new product development are their major
objectives. Product innovation is the key objective of Intel. Ranbaxy and 3M maintain that R&D and
new product development constitute a major objective for them. Human Resource: The software
giant Infosys, set objective in human resource. Development of a cadre of software professional is
set as a major corporate objective. „Human Capital‟ is shown in the balance sheet of Infosys as
additional information.

Corporate Image: Tata Group has set the objective of being viewed as a respectable business group.
They maintain transparency with regard to donations to political parties for their election campaigns
and created an electoral fund. They project as a role model in the matter of corporate governance.

Social Responsibility: Social responsibility includes setting objectives in community welfare, public
welfare and environmental protection. Tata Group has objectives relating to society. They are
involved in rehabilitation of handicapped children.

Peter Drucker has recommended that companies should set goals and objectives in the following
areas:
1) Return on Investment
2) Market Share
3) Innovation
4) Productivity
5) Physical and Financial Resource
6) Manager Performance and Development
7) Worker Performance and Attitude
8) Social Responsibility

In recent times, Management By Objectives (MBO) receives much attention from the strategists.

CHARACTERISITICS OF OBJECTIVES
Objective setting is complex process. Well-formulated objectives possess certain characteristics.
a) Specific
b) Time bound
c) Measurable
d) Challenging
e) Objectives form a hierarchy
f) Constraints
g) Verifiable
h) Timeframe
FORMULATION OF OBJECTIVES
Formulation of objectives and goals is a complex process. The strategists should consider the four
factors while evolving objectives.
1) The forces in the environment: The government regulations, powerful consumer groups,
trade unions and influential suppliers exert enormous pressure on organization. The
stakeholders, their priorities and views influence objective setting.
2) Realities of firm’s resources and power relationship: Material and human resource are
always scarce and powerful dominant groups try to take upper hand and exercise power
over other group in framing objectives of their choice and allocate scarce resources in their
favour. Internal power relationship influences objective setting.
3) The values of top management: Values of enduring beliefs, about what is good or bad,
desirable or undesirable. The top management may have entrepreneurial value and a
philanthropic value or social responsibility value which in turn will influence their goal
setting.
4) Past Strategies: Strategies and objectives followed in the recent past are likely to have deep
impact and radical deviation from them will not be possible. The changes from current
objectives will be marginal and incremental in nature.

OBJECTIVES AND STRATEGIC MANAGMENT

Objectives are important for strategic management for the following reasons:
1. Objectives help to relate the organization in the environmental context. It helps to attract
people with identical frame of mind.
2. Objectives help to coordinate decisions. All employees are aware of the objectives and
stated objectives proved to be a means of coordination
3. Objectives serve as standards of appraising organizational performance. They serve as a
basis for evaluating success or failure of organization.
 Chapter 3
Strategy, Strategy as planned action, its importance,

Process and advantages of planning Strategic v/s Operational Planning

Strategy as a planned Action and Its Advantages

Planning suggests clear and articulated intentions, backed up by formal controls to ensure their
pursuit, in an environment that is acquiescent. In other words, here (and only here) does the classic
distinction between formulation' and 'implementation' hold up.

In planned strategy, leaders at the centre of authority formulate their intentions as precisely as
possible and then strive for their implementation—their translation into collective action—with a
minimum of distortion, 'surprise-free'.
To ensure this, the leaders must first articulate their intentions in the form of a plan, to minimize
confusion, and then elaborate this plan in as much detail as possible, in the form of budgets,
schedules and so on, to pre-empt discretion that might impede its realization.
Those outside the planning process may act, but to the extent possible they are not allowed to
decide.
Programmes that guide their behaviour are built into the plan, and formal controls are instituted to
ensure pursuit of the plan and the programmes.

But the plan is of no use if it cannot be applied as formulated in the environment surrounding the
organization so the planned strategy is found in an environment that is, if not benign or controllable,
then at least rather predictable.

Advantage

For deliberate strategies such as planned and imposed strategies, it can be argued that this approach
has the advantage of clarity of purpose.

Here management’s intentions are clearly and explicitly spelt out, it becomes easier for everyone to
understand, identify and work towards a common collective purpose at a minimized level of
deviation from the intended objective. Focus on a particular desired outcome is honed and the
organization’s participants are provided with a clear and unambiguous sense of direction.

HOW DO STRATEGIES FORM IN ORGANIZATIONS?

Research into the question is necessarily shaped by the underlying conception of the term. Since
strategy has almost inevitably been conceived in terms of what the leaders of an organization 'plan'
to do in the future, strategy
formation has, not surprisingly, tended to be treated as an analytic process for establishing
long-range goals and action plans for an organization; that is, as one of formulation
followed by implementation. As important as this emphasis may be, we would argue that it
is seriously limited, that the process needs to be viewed from a wider perspective so that the variety
of ways in which strategies actually take shape can be considered.
Strategy is an extremely complicated and dynamic thing. A great strategy one day could be useless
the next, depending on market forces and changes that are outside of your control. Great businesses
are always adapting, and that means changing strategy frequently to meet with your needs. While it
is great to develop an initial, overall strategy for your business when first getting started, it is unlikely
that your chosen strategy is going to last very long. In reality, you will likely need to make many
changes along the way if you are going to find your way toward success.

With the understanding that strategy needs to change regularly in business, it is a good idea to turn
to a model such as Mintzberg’s 5 P’s of Strategy for assistance. This model, as the name would
indicate, includes five different approaches to strategy (each beginning with the letter ‘p’, which
makes them easier to remember). In the content below, we are going to take a quick look at each of
the 5 P’s.

PLAN

It is always better for the organizations to have a plan of action much in advance to be prepared for
any unforeseen internal and external situations. And a well-planned strategy is a plan to deal with
such situations. A plan needs to be made with a long-term and a futuristic approach in mind with its
execution and development followed up in a detailed and intricate manner.

The business goals and objectives can be attained with a good plan plus it enables the management
and the key employees of the company with a clear vision and mission in hand.

For instance, your strategic plan could include such basics as the products you are going to sell, how
you are going to produce those products, and how much they will cost at market. Basic business
planning can be thought of as the foundation of a good strategy – it is a great platform to start from,
but it is not going to get you all the way to the ‘promised land’.
PLOY

The facet of ploy is also one of the strategic options to beat the competition in the market and gain
the advantage. In this scenario, the organizations can come up with something very outlandish and
unexpected and surprise the market environment that also creates the waves of the ruckus within
the minds of the competitors.

It can be a well placed promotional tool or a feature in the product or service that is sure to
outsmart and beat the competitors as a ploy.

PATTERN
The aspect is the plan in the 5 P’s of Strategy model by Mintzberg focuses on the intended strategy
but the aspect of pattern comes into the picture where the strategies have already been
implemented before. The earlier patterns that have worked wonders for the organization before are
an integral part of developing the new strategy. The regular pattern that has been quite successful in
nature is used in the decision making flow and process. The strengths of such patterns are included
in the future strategies as intentionally or unintentionally, there is a consistent positive behavior of
employees and internal teams is displayed towards these patterns and are well accepted without
any prejudice and issues.

POSITION

The aspect of position in formulating the organizational strategy needs to be carefully understood,
designed, planned, and executed as it will define the overall position of the organization in the
market considering all the internal and external factors.

It focuses on how the organization wants to portray itself in the market and in the minds of the
consumers that will gain it a competitive advantage. What will be the core values, unique selling
propositions, nature and attributes of the offerings of products and services, and the overall brand
strength and value proposition? Working on all these factors in a detailed manner will help the
organization carve a distinctive position in the market with an edge over others.

PERSPECTIVE
Strategy is a perspective - its content consisting not just of a chosen position, but of an ingrained
way of perceiving the world. Strategy in this respect is to the organisation what personality is to the
individual. What is of key importance is that strategy is a perspective shared by members of an
organisation, through their intentions and / or by their actions. In effect, when we talk of strategy in
this context, we are entering the realm of the collective mind - individuals united by common
thinking and / or behaviour.

A big part of successful strategy is identifying exactly what your perspective on the market is going to
be so you can gear all of your decisions to match that concept.

There are many benefits to using Mintzberg’s 5 P’s of Strategy. Not only can this model help you get
a good handle on your strategy right up front, but it can also force you to think through a variety of
different angles that you may not have considered otherwise. Once you understand how each of the
5 P’s influences your strategic business decisions, you can use them to help you steer the
organization toward a prosperous future.

Key Points

 Mintzberg suggests there are five ways in which the term ‘strategy’ is used. These are called
his ‘5Ps for Strategy’. Strategy can mean any of the following:
 Strategy as Plan: The strategy is made in advance of its implementation and is followed up
by actual implementation and development.
 Strategy as Ploy: This is a specific manoeuvre intended to outperform a competitor.
 Strategy as Pattern: Strategy ca sometimes be explained in terms of a pattern that emerged
rather than something that was preplanned.
 Strategy as Position: This is represented by finding a niche, providing distinctive product, or
by exploiting existing competences to deter competitors.
 Strategy as Perspective: This refers organisational culture as strategy can be a result of the
way a company views itself.

The process of planning and the 5 P’s of Strategy :

The 5 P’s of Strategy model by Mintzberg should be an integral part of the organization’s culture but
it is also very important to look at all these 5 P’s on an individual level for developing a successful
and strong strategy.

They provide all the relevant information and helps with the aspects of testing, evaluation, market
information, and internal company information. They can be used as a final check at the end of the
planning process of a developed strategy to check if there are any discrepancies or loopholes. It can
save a lot of money, efforts, and resources of the organization.
Example of 5 P’s of Strategy :

bcg

Apple

Plan: The technology giant continues to plan and come up with the consumer electronics that offer
operational excellence and are easy to use. They also plan and come up with the various software
updates expanding their ecosystem.

Ploy: The Company is highly renowned for offering the products that are innovative, unique, and
outlandish in nature that gives them a competitive edge in the market. They threaten to sue their
competitors that copy their technology or features of the company’s products.

Pattern: Apple uses the previous innovations that have been quite successful in the past and follows
the same pattern to challenge the competition in the market.

Position: Apple has successfully carved a niche for itself in the market and in the consumers’ minds
as a niche and premium brand that offers only high-end products that are difficult to compete
against in terms of both hardware and software capabilities.

Perspective: The core values of Apple are innovation and to think differently and they work as an
integral part of their company culture. And their product offerings to stand as a testimony to the
same.

STRATEGIC AND OPERATIONAL PLANNING

Planning is an important activity, performed by the management, keeping in view, the vision,
mission, goals and objectives of the enterprise. It implies thinking in advance, what we need to do in
future and creates a rough draft, so as to fulfill the business objectives. Planning occurring at the
corporate level is termed as strategic planning, while the planning process taking place at the
functional level is called operational planning.

Strategic Planning is concentrated towards attaining the long-term objectives of business. On the
other hand, operational planning is done to achieve short-term objectives of the company. These are
used to set priorities and align the resources, in such a way that leads to the accomplishment of
business goals. Take a read of the article given below, to understand the difference between
strategic planning and operational planning.

COMPARISON CHART

Basis for
Strategic Planning Operational Planning
Comparison
The planning for achieving the Operational Planning is a process of deciding in
Meaning vision of the organization is advance of what is to be done to achieve the
Strategic Planning. tactical objectives of business?
Time Horizon Long term planning Short term planning
Approach Extroverted Introverted
Modifications Generally, the plan lasts longer. The plan changes every year.
Performed by Top level management Middle level management
Scope Wide Narrow
Planning of vision, mission and
Emphasis on Planning the routine activities of the company.
objectives.

DEFINITION OF STRATEGIC PLANNING

Strategic Planning is a planning process undertaken by the top level management, to decide Where
the organization wants to reach in future? And What should be done to pursue the organizational
vision, mission, and objectives? It is an analytical process which examines the micro and
macro environment of business. The process is used to define the company’s vision, ambitions, and
set priorities to make a route that will lead the company towards its ultimate goal.
The planning is not made for a particular department or unit, but it covers the entire organization.
The strategic planning is done to determine the factors of the internal and external environment
which directly influences the organization. The plan focuses on the enduring development of the
organization. The tools used in this process are:

 SWOT  Analysis  (Strength, Weakness, Opportunities, Threats)

 Portfolio Analysis
 PEST Analysis (Political, Economic, Social, Technological Environment)
 Porter’s 5 forces Analysis (New Entrants, Rival Sellers, Substitute Products, Buyer Bargaining
Power, Supplier Bargaining Power)
 BCG Matrix (Boston Consulting Group)

These tools help the management to design a strategy considering various elements, that will lead
the organization towards its vision.

DEFINITION OF OPERATIONAL PLANNING

The process which predetermines the day to day activities of the business is known as Operational
Planning. The planning is done to support the strategic planning to accomplish the organizational
goals. In this process, short run objectives of the company are determined as well as a means to
achieve those objectives are also discovered.
Middle-level management performs the function of the operational planning process. It includes
planning of regular business activities and operations for a short period. Under this process, the
organization is classified into the various department, division, unit, and center for which planning
is performed individually, which is aligned with the strategic planning to reach the organization’s
vision. The following are the features of Operational Planning:

 Objectives need to be clearly defined.

 Achievement of the desired result.
 The activities are to be performed as decided.
 Maintenance of quality standards.
 Measuring performance.

KEY DIFFERENCES BETWEEN STRATEGIC PLANNING AND OPERATIONAL PLANNING

The following are the differences between strategic planning and operational planning:

1. The planning to pursue the organization’s vision is known as Strategic Planning. The planning
to achieve the tactical objectives of the organization is known as Operational Planning.
2. Strategic Planning is long lasting as compared Operational Planning.
3. Operational Planning is done to support Strategic Planning.
4. Strategic Planning takes into account the internal as well as the external environment of
business. Conversely, Operational Planning is concerned with the internal environment of
business.
5. Strategic Planning is done by top level management, whereas the Operational Planning is a
function of middle-level management.
6. Strategic Planning covers the whole organization, but Operational Planning is done in a
particular unit or department of the organization.

The difference between and operational and strategic plans

Strategic Plan Operational Plan

A general guide for the management of the A specific plan for the use of the organisation's
organisation resources in pursuit of the strategic plan.
Suggests strategies to be employed in pursuit of Details specific activities and events to be
the organisation's goals undertaken to implement strategies
Is a plan for the pursuit of the organisation's Is a plan for the day-to-day management of the
mission in the longer term (3 - 5 years) organisation (one year time frame)
A strategic plan enables management to An operational plan should not be formulated
formulate an operational plan. without reference to a strategic plan
The strategic plan, once formulated, tends not Operational plans may differ from year to year
to be significantly changed every year significantly
The development of the strategic plan is a The operational plan is produced by the chief
responsibility shared and involves different executive and staff of the organisation.
categories of stakeholders.
 Chapter 4
Strategy Choices, Hierarchy of Strategies, Types of Strategies, Porter’s Generic Strategies,
Competitive Strategies and Strategies for different industries and company situations, Strategy
Development for Non -profit, Non-business oriented organizations

Mckinsey’s 7 S Model: Strategy, Style, Structure, Systems,

Staff, Skills and Shared values.

TYPES OF STRATEGIES

CORPORATE STRATEGY

Corporate level strategy fundamentally is concerned with the selection of businesses in which the
company should compete and with the development and coordination of that portfolio of
businesses. Corporate level strategy is concerned with:

• Reach - defining the issues that are corporate responsibilities; these might include
identifying the overall goals of the corporation, the types of businesses in which the
corporation should be involved, and the way in which businesses will be integrated and
managed.
• Competitive Contact - defining where in the corporation competition is to be localized. Take
the case of insurance: In the mid-1990s, Aetna as a corporation was clearly identified with its
 commercial and property casualty insurance products. The conglomerate Textron was not.
For Textron, competition in the insurance markets took place specifically at the business unit
level, through its subsidiary, Paul Revere. (Textron divested itself of The Paul Revere
Corporation in 1997.)
• Managing Activities and Business Interrelationships - Corporate strategy seeks to develop
synergies by sharing and coordinating staff and other resources across business units,
investing financial resources across business units, and using business units to complement
other corporate business activities. Igor Ansoff introduced the concept of synergy to
corporate strategy.
• Management Practices - Corporations decide how business units are to be governed:
through direct corporate intervention (centralization) or through autonomous government
(decentralization) that relies on persuasion and rewards.

Corporations are responsible for creating value through their businesses. They do so by managing
their portfolio of businesses, ensuring that the businesses are successful over the long-term,
developing business units, and sometimes ensuring that each business is compatible with others in
the portfolio.

Corporate level strategies are basically related to allocation of resources among the different
businesses of the firm, managing and nurturing portfolio of businesses etc. it helps to exercise the
choice of direction that an organization adopts. Corporate strategy typically fits within three main
categories- stability, growth, and retrenchment strategy. We will discuss these three strategies in
detail.
Corporate level strategies are principally about the decision related to dispersion of resources
among different businesses of an organization, transforming resources from one set of business to
others and managing and nurturing a portfolio of businesses such that the overall corporate
objectives are achieved.

1. Stability strategy: - This strategy is adopted by the firm when it tries to hold on to their current
position in the market. It also attempts at incremental improvement of its performance by
marginally changing one or more of its businesses in terms of their respective customer group,
customer function and technologies either individually or collectively. it does not mean that the
firm don’t wants to have any growth. Its attempts are at the modest growth in the same business
line. For example, any company offers a special service to an institutional buyer to increase its sale
by encouraging bulk buyer, so it is company’s strategy of stability by improving market efficient.

2. Growth Strategy: - This strategy is also known as expansion strategy. Here the attempts are made to
have substantial growth. This strategy will be pursued when firm increases its level of objectives
upward in a significant increment which is much higher as compared to its past achievements.
To achieve higher target compared to past the firm may enter into new /introduces new product
lines, enter into additional market segment. it involves more risk and efforts as compared to
stability strategy. The growth strategy is divided into two parts namely
I. Internal growth strategy and
II. External growth strategy.
Internal growth strategy mainly consists of diversification strategies and intensification strategy.
External growth strategy consists of merger, takeover, foreign collaboration and joint venture.

The major objectives of adopting of growth strategies are –

I. Survival: -This is natural tendency of every business to grow. If it does not, then new
entrants will be there in the market and its life will be in danger. Survival is also necessary to
face challenges of business environment.
 II. Innovation: -Innovation is important to business as it gives new product, new methods, new
schemes with which business can grow to a desirable extent. With this business gets high
performance, high results which are indication of growth.
III. Motivation to employees: - growth strategy generates higher performance and it enables
the firm to motivate employees with monetary and non-monetary incentives.
IV. Customer satisfaction: - Growth strategy enables the firm to give more satisfaction by
providing good quality products at reasonable price.
V. Corporate image: - corporate image means creating good image of the organization in the
minds of the all stakeholders. This will be made possible only with growth strategies of the
firm as it gives quality goods to people, good return to investor, fair wages and salaries to
employees with its increased volume of output and enhance performance.
VI. Economies of scale: - Due to growth strategy there is increase demand to a product which
results in large scale production, which in turn brings economies of large scale. It may be in
saving labour cost or material cost.
VII. Efficiency: - Efficiency is the ratio of returns to costs. Due to growth strategy there is
innovation, up gradation of technology, training and development of employees and
research and development all these leads to improvement in output and reduction in cost
and increases profit.
VIII. Optimum use of resources: -Due to growth strategy there is increased demand to a product.
This leads to large scale production and distribution. Therefore, the firm can make optimum
use of resources.
IX. Expansion of business: - The growth strategy facilitates expansion to business unit. Because
the performance of business units improves in terms of sales, market share and profit.
Therefore, the business unit can move from its local level function to national or
international level.
X. Minimize risk: -due to the expansion of business there is change in term of product sales,
market areas. In this case if business suffers a loss in one product or market then it will be
compensated in another market or product. Therefore, the business will be minimizing the
risk.

3. Intensification Strategy: In intensification strategy, the business tries to grow within the existing
businesses through market penetration, market development and product development. Market
penetration means increasing current market’s sale by undertaking aggressive efforts like high
advertising, price cutting and sales promotion etc.
Market development means entering into new markets along with the current market. Here
business units undertake market research, effective pricing policy, effective promotion mix and
distribution chain. And product development means introducing improved or substitute’s product.
It may be in the same market or new market.

4. Diversification Strategy: Diversification is one type of internal growth strategy. It is changing product
or business line. In this case business enters into in the new business service or product which is
extension of existing activity or there could be a substantial difference in skill technology and
knowledge. There are certain reasons because of company go for diversification. The reasons are
as under
a) Spreading of risk: - Diversification enables to spread the risk. In this the business operates in
a different market where in one market business suffer a loss, that can be compensated in
other market and the levels of profit will be maintained.
b) Improves corporate image: - Corporate image is creating mental picture of the company in
the people’s mind. Through the diversification company as changes products and
knowledge gives better quality product and services with which it creates positive impact on
people’s mind.
 c) Face competition effectively: - Due to the diversification company introduce wide range of
products and services. This enables company to maintain it’s a sale in the market.
d) Utilization of resources: - Diversification enables company to use the resources optimally as
it has excess capacity manufacturing. If facilities managerial man power and other resources
to production dept and other activities.
e) Economies of scale: - Diversification brings economies of scale especially in the area of
diversification. The company can combine the distribution old product as well as new
products with the help of same distribution chain.
f) Customer satisfaction: - When the company entered into new business it assured to give
qualitative product and good services. This leads to customer’s satisfaction.
g) Synergistic advantages: - Synergistic advantages are those which are gained by putting little
bit improvement in the same product or process which are related to old product and gain
new products. This will be easily attained in diversification.

TYPES OF DIVERSIFICATION: There are four major types of diversification knows as:

I. Vertical diversification: - Vertical diversification is the extension of current business

activities. Such extension is of two types known as
a. Backward diversification: - It is a diversification where company moves one step
back from the current line of business for example cupboard manufacturing unit
enter into it’s a raw material supply unit (Colour and Hardware)
b. Forward diversification: - In this case company enters into the activity which is
extension of its current business for example cloth manufacturer enter into garment
manufacturing.
II. Horizontal diversification: - In this case company enters into a new business which is very
closely related with existing line of business and it is with the help of the same technology
and the market. For example, gent’s garments manufacture enters into ladies’ garments
manufacturing.
III. Concentric diversification: - In this new business is linked to the existing business which is
indirectly related. For example, a car seller may start finance company to increase his sale.
IV. Conglomerate diversification: - In this type of diversification, the attempt is made to diversify
the present market or product in a totally new product of market. There is a no linkage
between old and a new business. For example, Transport operator entered into furniture
manufacturing

5. Turnaround Strategy: Turnaround strategy means converting loss making unit into a profitable one.
It is possible when company restructure its business operations. it is broad in nature and including
divestment strategy (where business get out of certain activities or sell off certain units or
divisions) Its aim is to improve the declining sales, market share and profit because of high cost of
materials, lower price utilization for goods and services or increase competitions, recession,
managerial in efficiency.
The turnaround strategy is needed when the following situations arise in business. Namely: -
I. Liquidity problem
II. Fall in market share
III. Reduction in profit
IV. Underutilization of plant capacity
V. High inventory

6. Divestment Strategy: Divestment is dropping out or sells off the products, or functions. It involves
the sale or liquidation of a portion of a business or major division or SUB. It is a part of
 rehabilitation plan and his adopted when turnaround has been attempted but has proven to be
unsuccessful. There is certain reason for divestment
a) Withdrawal of obsolete products: -Those products which do not give adequate return to the
firm will be removed. And the products which are having good market share and profitable
will be continued.
b) Problem of Mismatch: - The business which is undertaken by the company is not matching
with the existing business line. Therefore, the company may take initiative to get rid of
newly acquired business
c) Problem of competition: - Sometimes due to tough competition company may withdraw
some products from the market or sell the units producing such products.
d) Negative cash flows: - When business gets negative cash flows from a particular business.
The revenue collected from such a business is lower as the expenditure incurred on it
therefore it is to be divested
e) Technology Up-gradation: - Technology Up-gradation is important for survival of business.
But the cost of up-gradation is so high which is not affordable to business therefore that
business activity is to be divested
f) Concentration on Core Business: -When business undertake number of activities at a time,
then it may be difficult to the business to manage all activities satisfactorily. Due to this
business ignore its over activity which leads to loss in business therefore to concentrate on
core business divesting other activities is essential.
g) Alternative for Investment: -Some time, by divesting certain activity company can invest its
blocked fund into some another investment alternative which will give good return
h) Returns to Shareholders: - Company, by divesting may increase shareholders return by giving
shareholder hefty dividend.
i) Attractive Offers from Other Firm: -Sometimes it happens company may get offer from
another company. To invest in a good return giving from company may divest current
activity.

7. Liquidation Strategy: This is extreme case of divestment strategy and is undertaken in the situation
when all the efforts of reviving the company have come to an end. There is no possibility that the
business can made profit making unit again. In such situation business takes decision to sell its
entire business and the amount realized from it can be invested in another business. When it is
done it is known is liquidation. This is generally done by small businesses.
There are certain reasons because of the liquidation has taken place that reasons are –
I. When the business continuously suffered loss and all efforts
II. have failed to make it profitable again.
III. When there is good offer from other businesses
IV. When business found that there are difficulties to deal with the present business
V. When the business unit has taken over new business and the current business is not coping
with or matching and current business is not profitable.

Whenever such type of situation has occurred, business, as per company act 1956 can go for
liquidation. The relief gained on the part of liquidation to the company is
I. It gives relief to financial institution as financial institutions are able to get their funds back.
II. It enables the firm to enter into new business.
III. It enables to the acquirer to consolidate its market.
IV. The shareholders of liquidating company may get shares or compensation from new
company or acquirer.
V. The employees may not lose their job as the new management can continue them in new
business.
8. Modernization strategy: Modernization is nothing, but it is improvement/up-gradation of existing
physical facilities (plant, machinery, process etc) it is done to have improved quality of products
and offer customer value. It is also undertaken to face competition on proactive basis and take
competitive advantages. At present every firm is undertaking this on continuous basis to be there
in competitive business era and ensure its survival, growth and prosperity It is to be noted that
while doing modernization, it incurred a cost, so before introducing it the firm must go through
cost analysis and find out its impact in long term or short-term basis and then take decision.
However, modernization has some advantages
II. Modernization can improve both product quality and over all organizational efficiency.
III. There will be proper utilization of plant capacity, qualitative products will be produced and
there will be increase in sale.
IV. Modernization helps business to face competition in the market. In fact, due to introduction
of liberalization MNC, s and TNC,s are entering in market with sophisticated technology and
competing them is not an easy task to Indian business here modernization helps.
V. It also helps to build good corporate image in the market as good quality is the result of
modernization.
VI. Modernization also leads to economy in production by reducing cost of production per unit.
This is because of reduction in wastages and increase in efficiency.

9. Merger Strategy: Merger refers to combination of two or more companies where one company
survives, and another company ceases to exist. The merger takes place for consideration. Here
the acquiring company pays it either in cash or its shares.

Advantages of Merger:
II. It enables the pooling of resources and streamlining of operations, thereby, resulting in
improved operational efficiencies.
III. Merger can bring out a revival of sick units. The sick units can be merged with strong
companies, and therefore the problem of industrial sickness can be avoided.
IV. Merger provides faster growth to business as it offers advantages in several areas such as
marketing, production, finance, R&D and so on.
V. Merger can be used as effective source of tax planning, especially, when one of the merged
entities was having accumulated losses.
VI. There are some finance related advantages as merger results in integration of assets and ge
matrixother resources and provides stability of cash flows and serves as leverage for raising
more funds from the market.
10. Joint Venture Strategy: Joint venture could be considered as an entity resulting from a long-term
contractual agreement between two or more parties, undertaken for mutual benefits. It is a type
of partnership and when both parties establishing new units that time they are exercising
supervising and control over the new business. Joint venture also involves the sharing of
ownership.
Now a days joint ventures are very popular as there is sharing of development cost, risk spread out
and expertise combined to make effective use of resources. It is best way to enter into foreign
collaboration. Generally Indian firms are entering into foreign collaboration with the help of joint
ventures.
Following are the advantages of joint venture:
a. Huge capital
b. Better use of resources
c. Goodwill and reputation.
d. Risk sharing.
e. Economies of scale
f. Expansion and diversification.
 g. Helps to face competitions
h. Customer satisfaction.
i. Motivate employees

BUSINESS UNIT LEVEL STRATEGY

A strategic business unit may be a division, product line, or other profit centre that can be planned
independently from the other business units of the firm.

At the business unit level, the strategic issues are less about the coordination of operating units and
more about developing and sustaining a competitive advantage for the goods and services that are
produced. At the business level, the strategy formulation phase deals with:

• positioning the business against rivals

• anticipating changes in demand and technologies and adjusting the strategy to
accommodate them
• influencing the nature of competition through strategic actions such as vertical integration
and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that
can be implemented at the business unit level to create a competitive advantage and defend against
the adverse effects of the five forces.

FUNCTIONAL LEVEL STRATEGY

The functional level of the organization is the level of the operating divisions and departments. The
strategic issues at the functional level are related to business processes and the value chain.
Functional level strategies in marketing, finance, operations, human resources, and R&D involve the
development and coordination of resources through which business unit level strategies can be
executed efficiently and effectively.

Functional units of an organization are involved in higher level strategies by providing input into the
business unit level and corporate level strategy, such as providing information on resources and
capabilities on which the higher-level strategies can be based. Once the higher-level strategy is
developed, the functional units translate it into discrete action-plans that each department or
division must accomplish for the strategy to succeed.

Alternative types of Strategies (Extra Notes)

Planned Strategy: Leaders formulate and strive for implementation with the minimum of distortion
(Budgets, schedules etc). Formulated in the environment that is fairly predictable or controllable.

Entrepreneurial: More influenced by the individual, not as precise or articulate as planned strategy,
requires an ability to impose one’s vision on the organisation. Entrepreneurial strategy provides
flexibility at the expense of specificity and articulation of intentions.

Ideological Strategy: Shared vision collectively pursued is an ideology. Intentions can usually be
identified (Indoctrination, credo etc). Positively embraced by members of the organisation, not
passive acceptance.
Umbrella Strategy: Relax control, leaders set guidelines for behaviour, define boundaries and let
actors man oeuvre within. All organizations actions fall under the umbrella (Pricing strategies for
example). Umbrella strategy can be both deliberate and emergent. De Wit and Meyer (ibid) argue
that all „real‟ world strategies tend to be umbrella claiming that you cannot pre-empt the discretion
of others.

STRATEGY TYPOLOGY AND METHODS

The different typologies and methods of strategy are shown in Table

Strategy Typologies/ Methods

Dominance strategies Leader, Challenger, Follower, Nicher

Innovation strategies Pioneers, Close followers, Late followers

Growth strategies Integration, Diversification, Intensification

Co-operative strategies JV, licensing, strategic alliance, technology tie-up

Miles & Snow strategy Prospector, Analyser, Defender, Reactor

of firms typology

Dominance Strategies
Dominance strategies are a type of marketing strategy that classifies firms based on their market
share or dominance of an industry. Dominance is a measure of the strength of a brand, product,
service, or firm, relative to competitive offerings. There is often a geographic element to the
competitive landscape. In defining market dominance, you must see to what extent a product,
brand, or firm controls a product category in a given geographic area. Typically there are four
types of dominance strategies that a manager will consider. There are leader, challenger, follower
and nicher.
Leader
The market leader is dominant in its industry. It has substantial market share and often extensive
distribution arrangements with retailers. It typically is the industry leader in developing innovative
new business models and new products (although not always). It tends to be on the cutting edge of
new technologies and new production processes. It sometimes has some market power in
determining either price or output. Of the four dominance strategies, it has the most flexibility in
crafting strategy. There are few options not open to it. However it is in a very visible position and can
be the target of competitive threats and government anti-combines actions. Research in experience
curve effects and the PIMs study during the 1970s concluded that market leadership was the most
profitable strategy in most industries. It was claimed that if you cannot get enough market share to
be a major player, you should get out of that business and concentrate your resources where you
can take advantage of experience curve effects and economies of scale, and thereby gain dominant
market share. Today we recognise that other less dominant strategies can also be effective. The
main options available to market leaders are:
 Expand the total market by finding:
o new users of the product
o new uses of the product
o more usage on each use occasion
 Protect your existing market share by:
o developing new product ideas
 o improve customer service
o improve distribution effectiveness
o reduce costs
 Expand your market share:
o by targeting one or more competitor
o without being noticed by government regulators.
Challenger
A challenger is a firm in a strong, but not dominant position that is following an aggressive strategy
of trying to gain market share. It typically targets the industry leader (for example, Pepsi targets
Coke), but it could also target smaller, more vulnerable competitors. The fundamental principles
involved are:
 Assess the strength of the target competitor. Consider the amount of support that the target
might muster from allies.
 Choose only one target at a time.
 Find a weakness in the target’s position. Attack at this point. Consider how long it will take
for the target to realign their resources so as to reinforce this weak spot.
 Launch the attack on as narrow a front as possible. Whereas a defender must defend all
their borders, an attacker has the advantage of being able to concentrate their forces at one
place.
 Launch the attack quickly, then consolidate.
Some of the options open to a market challenger are:
o Price discounts or price cutting
o Line extensions
o Introduce new products
o Reduce product quality
o Increase product quality
o Improve service
o Change distribution
o Cost reductions
o Intensify promotional activity.
Follower
A market follower is a firm in a strong, but not dominant position that is content to stay at that
position. The rationale is that by developing strategies that are parallel to those of the market
leader, they will gain much of the market from the leader while being exposed to very little risk. This
“play it safe” strategy is how Burger King retains its position behind McDonalds. The advantages of
this strategy are:

 no expensive R&D failures

 no risk of bad business model
 “best practices” are already established
 able to capitalise on the promotional activities of the market leader
 no risk of government anti-combines actions
 minimal risk of competitive attacks
 don’t waste money in a head-on battle with the market leader.

Nicher
In this niche strategy, the firm concentrates on a select few target markets. It is also called a focus
strategy. It is hoped that by focusing ones marketing efforts on one or two narrow market segments
and tailoring your marketing mix to these specialised markets, you can better meet the needs of that
target market. The niche should be large enough to be profitable, but small enough to be ignored by
the major industry players. Profit margins are emphasised rather than revenue or market share. The
firm typically looks to gain a competitive advantage through effectiveness rather than efficiency. It is
most suitable for relatively small firms and has much in common with guerrilla marketing warfare
strategies. The most successful nichers tend to have the following characteristics:
 They tend to be in high value added industries and are able to obtain high margins.
 They tend to be highly focused on a specific market segment.
 They tend to market high end products or services, and are able to use a premium pricing
strategy.
 They tend to keep their operating expenses down by spending less on R&D, advertising and
personal selling.

Innovation Strategies
Innovation strategies is all about who is on the cutting edge, who churns out the new products and
technologies before anyone else.
The company is a pioneer, close follower or late follower.

Pioneer:
The firm or the organisation concentrates on being the one with the newest, hottest products
around. The company promise that its customers will get the new technology before anyone else
does.

Close follower:
The company waits for other to pioneer in different direction, and when they are on to something,
the company quickly adopts it, improve it and make it the company’s
own innovation.

Late follower:
The company adopts only the most stable of technology, the company stress to its customers that
the products of the company will be stable, tried and tested, with no bugs or last minute recalls.

Growth Strategies
When operating under growth strategies, the company focus should be on how to make its business
grow. The company use:
Horizontal integration:
The company tries to expand by acquiring or starting new business in the same field as its main
business, this way the company control a bigger market share,
and sideline the competition.
Vertical integration:
The company tries to acquire or start businesses that supply your current business or sell its
products. This way the company can have a stable production and delivery structure.
Diversification:
The company tries to conquer new markets with new products, expending in unexpected direction
where the company predict that there are great profits there.
Intensification:
The company adds new features to your existing products. The company releases new versions of its
products. Trying to consolidate then expand its market position

Co-operative Strategies
Cooperative strategies are becoming increasingly important for large corporations because
technology continues to drive many important markets. The rapid advance of knowledge in many
fields and the growing technical sophistication of the present day consumers are driving the
companies to cooperate with specialist firms. Strategic alliances represent one of the more
innovative methods of cooperation, and they are being actively exploited.

Joint ventures:
Joint ventures, alliances, and other corporate partnering are fuelling the growth of the world’s most
unsuccessful companies. The demand to deliver more new products, quicker, and at lower prices has
never been greater. Joint ventures and other collaborative business arrangements are
revolutionising how winning
companies compete. They permit companies to enter new markets and field new products that they
otherwise couldn’t do on their own. They are the quickest way to grow a company, particularly in
times of change.

Licensing:
A contractual agreement whereby one company (the licensor) makes an asset available to another
company (the licensee) in exchange for royalties, license fees, or some other form of compensation

 Patent
 Trade secret
 Brand name
 Product formulations
Advantages of Licensing
 Provides additional profitability with little initial investment
 Provides method of circumventing tariffs, quotas and other export barriers
 Attractive ROI
Low costs to implement
Disadvantages of Licensing
 Limited participation
 Returns may be lost
 Lack of control
 Licensee may become competitor
 Licensee may exploit company resources

Special Licensing Arrangements

Contract manufacturing:
Company provides technical specifications to a sub-contractor or local manufacturer.
Allows company to specialise in product design while contractors accept responsibility for
manufacturing facilities.

Franchising:
Contract between a parent company-franchisor and a franchisee that allows the franchisee to
operate a business developed by the franchisor in return for a fee and adherence to franchise-wide
policies.

Technology Tie-up:
Technology tie-ups give the companies double advantage of adopting – the new and advanced
technology resulting in improved and better productivity and the next thing is that the company
increases its size and people.

Miles & Snow Strategy of Firms Typology

Miles and Snow classify firms within a given industry into four groups, i.e. defenders, prospectors,
analysers and reactors, depending on how a firm responds to the three major problems facing the
firm (entrepreneurial, engineering and administrative problems).

Defenders: Defenders have a limited range of products and focus on efficiency and process
improvement.

Prospectors:
Prospectors have a broad market/product domain and tend to lead change in the industry.

Analysers:
Analysers fall between the above two groups and are likely to follow a second-but-better strategy.

Reactors:
Reactors have no consistent strategy and they merely respond passively to environment pressure
Miles and Snow argued that companies develop their adaptive strategies based on their perception
of their environments. Hence, as seen above, the different organisation types view their
environments in different ways, causing them to adopt different strategies. These adaptive
strategies allow some organisations to be more adaptive or more sensitive to their environments
than others, and the different organisation types represent a range of adaptive companies. Because
of their adaptive strategies, prospector organisations are the most adaptive type of company. In
contrast, reactor organisations are the least adaptive type. The other two types fall in between these
extremes: analysers are the second most adaptive organisations, followed by defenders

Classify the following companies as pioneers, close followers and late followers and state reasons
behind your choice:

Apple
Nokia
Samsung
Panasonic
Michael Porter is a professor at Harvard Business School.

A firm’s success in strategy rests upon how it positions itself in respect to its environment. Michael
Porter has argued that a firm’s strengths ultimately fall into one of two headings: cost advantage and
differentiation. By applying these strengths in either a broad or narrow scope, three generic
strategies result:, cost leadership differentiation, and focus

Which do you prefer when you fly: a cheap, no-frills airline, or a more expensive operator with
fantastic service levels and maximum comfort? And would you ever consider a small company with
just a few routes?

The no-frills operators have opted to cut costs to a minimum and pass their savings on to customers
in lower prices. This helps them grab market share and ensure their planes are as full as possible,
further driving down cost. The luxury airlines, on the other hand, focus their efforts on making their
service as wonderful as possible, and the higher prices they can command as a result make up for
their higher costs.

Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a few routes to
provide better or cheaper services than their larger, international rivals.

Generic Strategies

These three approaches are examples of "generic strategies," because they can be applied to
products or services in all industries, and to organizations of all sizes. They were first set out by
Michael Porter in 1985 in his book, "Competitive Advantage: Creating and Sustaining Superior
Performance."

Low cost Differentiation Focus

Low cost culture Adding value through Niche markets

Economies of scale -product features Targeting

Eliminate unnecessary costs -product quality Limited territory

Enjoy high profits through cost -distinctive offering Focus on a specific group of
advantage customers
Offer something new or
different Either cost leader or
differentiation with in the
High costs but charge premium segment
price
Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely
desirable products and services) and "Focus" (offering a specialized service in a niche market). He
then subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation Focus." These
are shown in figure below.

Five forces analysis

• Porter developed the five forces model as a framework for the analysis of profitability of
the industry

• The five forces are:

– Suppliers power: powerful suppliers can push up the cost of inputs

– Buyers’ power: powerful buyers can negotiate low prices

– The threat of substitutes: where there is a strong threat firms need to remain very
competitive

– The ease or otherwise of entry to the market: low barriers raise the prospect new
firms pushing down prices

– The intensity of rivalry in the market: intense competition forces firms to keep prices
down
 • The five forces model can be used to analyse each of the generic strategies

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage – in other words, developing
the "edge" that gets you the sale and takes it away from your competitors. There are two main ways
of achieving this within a Cost Leadership strategy:

 Increasing profits by reducing costs, while charging industry-average prices.

 Increasing market share by charging lower prices, while still making a reasonable profit on
each sale because you've reduced costs.

The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your
industry or market. Simply being amongst the lowest-cost producers is not good enough, as you
leave yourself wide open to attack by other low-cost producers who may undercut your prices and
therefore block your attempts to increase market share. Companies that are successful in achieving
Cost Leadership usually have:

 Access to the capital needed to invest in technology that will bring costs down.
 Very efficient logistics.
 A low-cost base (labor, materials, facilities), and a way of sustainably cutting costs below
those of other competitors.

Sources of cost leadership

• Size - economies of scale

 • Greater labour efficiency and effectiveness

• Control of overheads

• Superior management

• Greater operating efficiency and effectiveness

• Low cost production

• Low cost labour

• Design for low cost production

• Use the latest technology to reduce costs and or enhance productivity

• Relocation to low cost site

• Favourable access to low cost sources of supply

• Reduction in waste

Firms that succeed in cost leadership

• Access to the capital required to make significant investment in fixed assets

• Design skills for efficient manufacture

• A high level of expertise in manufacturing process engineering

• Efficient distribution channels

• Examples of cost leadership : Ryanair, Toyota, Wal-Mart (parent company of Asda), Tesco

E.g. Walmart

 The central goal of Wal-Mart is to keep retail prices low -- and the company has been very
successful at this.
 Experts estimate that Wal-Mart saves shoppers at least 15 percent on a typical cart of
groceries.
 Wal-Mart Stores Inc. is rolling out its "everyday low prices" (EDLP) retail strategy to more
international markets to replace the more usual high-low pricing in emerging markets. EDLP
means working with suppliers to ensure their prices are constantly low, but also means price
changes are kept to a minimum.
 Wal-Mart also employs a good structure that works with the systems to empower the low
price strategy.
 Wal-Mart has in place a set of systems that helps it achieve its strategy of low prices
everyday.

Success Mantra…

 Access to the capital required to make a significant investment in production assets.

 Design skills for efficient manufacturing
 High level of expertise in manufacturing process engineering.
 Efficient distribution channels.

A misconception

• Cost leadership is often seen as a strategy that aims to attract customers with low prices that
are made possible by low costs

• But cost leadership does not necessarily mean selling at the lowest price

• It might mean selling at the industry average price but enjoying above average profits
through low cost production

• The low costs result in high profit margins

Benefits of cost leadership

• Enjoy higher than average profits

• Engage in price war

• Eliminate rivals

• Defend market share

• Increase market share

• Build barriers to the entry of newcomers to the market

• Weaken the threat of substitutes

• Enter new markets

Five forces and cost leadership

The five forces The cost leader is

Entry barriers Able to cut prices to discourage potential

entrants to the market

Buyer power Able to offer a competitive price to buyers with

power

Supplier power Protected from a powerful buyer by low costs

Threat of substitution Able to make use of low price as defence

against substitutes

Rivalry Is better able to compete on price

Risks Involved
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are
not unique, and that other competitors may copy firm’s cost reduction strategies. This is why it's
important to continuously find ways of reducing every cost. One successful way of doing this is by
adopting the Japanese Kaizen philosophy of "continuous improvement."

 Other firms may be able to lower their costs as well.

 As technology improves, the competition may be able to leapfrog the production
capabilities, thus eliminating the competitive advantage.
 It could lead to a damaging price wars.
 There might be difficulty in sustaining cost leadership in the long run.
 A firm following a focus strategy might be able to achieve even lower cost within their
segment.

The Differentiation Strategy

Differentiation is about charging a premium price that more than covers the additional production
costs, and about giving customers clear reasons to prefer the product over other, less differentiated
products.

Differentiation involves making your products or services different from and more attractive than
those of your competitors. How you do this depends on the exact nature of your industry and of the
products and services themselves, but will typically involve features, functionality, durability,
support, and also brand image that your customers value.

To make a success of a Differentiation strategy, organizations need:

 Good research, development and innovation.

 The ability to deliver high-quality products or services.
 Effective sales and marketing, so that the market understands the benefits offered by the
differentiated offerings.

There are several ways in which this can be achieved, though it is not easy and it requires substantial
and sustained marketing investment. The methods include:

 Superior product quality (features, benefits, durability, reliability)

 Branding (strong customer recognition & desire; brand loyalty)
 Industry-wide distribution across all major channels (i.e. the product or brand is an essential
item to be stocked by retailers)
 Consistent promotional support – often dominated by advertising, sponsorship etc
Success in a differentiation strategy means

– Gaining a competitive advantage by making their product different from competitors

– Competing on the basis of value added to customers

– Persuading customers that the firm’s product is superior to that offered by rivals

– Customers being willing to pay a premium price to cover higher costs

• Differentiation can be based on product image or durability,after-sales,quality,additional

features,after sales

• And it requires talent, research capability and strong marketing

Extra costs and premium prices

• Differentiation adds costs in order to add value

• The extra costs can only be recouped if the market is willing to pay a premium price

• Problems occur if the extra costs incurred outweigh the additional revenue generated by
higher prices

• For a successful differentiation strategy it is insufficient merely to add value - customers

must recognise and appreciate the difference

• Extra costs should be added only in areas that customers perceive to be important

Sources of differentiation

• Creation of strong brand

• Superior performance

• High quality
 • Additional features offered

• Innovation in packaging

• Speed of distribution

• Higher service levels

• Greater flexibility

• Delivery

• Quality of the materials

Firms that succeed in a differentiation strategy

• Firms that succeed in a differentiation strategy have:

– Have access to leading scientific research

– A strong creative product development team

– Strong sales team with the ability to successfully communicate the strengths of the
product

– Reputation for quality and innovation

• Examples:

– BMW

– Mercedes

Differentiation: benefits

• Differentiation offers the prospect of charging a premium price

• Demand for a differentiated product will be less elastic than that for competitors products

• Differentiation can result in above average profits

• Differentiation can create additional barriers to entry to the market for newcomers

The five forces and differentiation

Five forces A firm pursuing a differentiation strategy…

Entry barriers Benefits from customer loyalty which

discourages potential entrants

Buyer power Enjoys some protection since large buyers have

less power to negotiate because of the absence
of close alternatives

Supplier power Is better able to pass on supplier price increases

 to customers

Threat of substitution Is protected from the threat of substitutes by

customer loyalty

Rivalry Benefits from brand loyalty to keep customers

from rivals

Risks of differentiation strategy

Large organizations pursuing a differentiation strategy need to stay agile with their new product
development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus
Differentiation strategies in different market segments.

• There are difficulties of sustaining differentiation

• Differentiation involves higher costs

• There is a risk of creating differences that customers do not value

• Customers might become price sensitive and choose on price rather than uniqueness

• It might involve differentiation on dimensions that become less important to customers over
time

• Customers may no longer need the differentiation factor

• Imitators may narrow the differentiation

• Rivals pursuing a focus strategy may be able to achieve even greater differentiation in their
market segments

The Focus Strategy

Companies that use Focus strategies concentrate on particular niche markets and, by understanding
the dynamics of that market and the unique needs of customers within it, develop uniquely low-cost
or well-specified products for the market. Because they serve customers in their market uniquely
well, they tend to build strong brand loyalty amongst their customers. This makes their particular
market segment less attractive to competitors.

• In a focus strategy the firm concentrates on one (or at most a limited number of) segments
of the market

• The premise behind this strategy is that the needs of the group can be bettered served by
focussing entirely on it

• The firm might feel more secure in the niche with greater insulation from competition

• A focus strategy means that the firm’s efforts are not spread too thinly

• Focus strategies are

 – Cost focus: cost leader in a particular segment

– Focus differentiation: differentiation in the chosen segment

The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could be
interpreted as meaning "a focus on cost" or "a focus on differentiation." Remember that Cost Focus
means emphasizing cost-minimization within a focused market, and Differentiation Focus means
pursuing strategic differentiation within a focused market.

Requirements of a focus strategy

• A focus strategy requires…

• The identification of a suitable target customer group

• Identification of the specific needs of that group

• Confirmation that the market is sufficiently large to sustain the business

• Estimation of the extent of competition within the segment

• Production of products to meet the specific needs of that group

• A decision on whether to opt for cost leadership or differentiation within the segment

Benefits of a focus strategy

• It involves lower investment in resources

• The firm benefits from specialisation

• It provides scope for greater knowledge of a segment of the market

• It makes entry to new markets easier and less costly

 • Firms using a focus strategy often enjoy a high degree of customer loyalty

Focussed cost leadership

• A strategy that aims…

• To attract one type of customer with a low cost product

• To be the lowest cost operator in one particular niche segment of the market

• Example :Hyundai

Focussed differentiation

• A strategy that aims to attract one type of customer with a differentiated product

• It involves distinctiveness in one segment

• Aims to exploit unique position in a niche segment of the market

• Not the cheapest but the best or most distinctive in that segment

• Example: BMW, Mercedes

The five forces and a focus strategy

The five forces A firm pursuing a focus strategy…

Entry barriers Develops core competencies that can act as an

entry barrier

Buyer power Enjoys some insulation since large buyers have

less power to negotiate because few
alternatives are available

Supplier power Is better able to pass on supplier price rises

thereby reducing the impact of supplier power

Threat of substitution Enjoys some protection against substitutes by

specialised products and core competencies

Rivalry Enjoys some protection because rivals cannot

meet differentiation focused customer needs

Problems associated with focus strategy

• Limited opportunities for growth

• Sacrifice of economies of scale that would be available from a larger market

 • The firm could outgrow the market

• Danger of decline in the chose segment or niche

• A reputation for specialisation inhibits move into new sectors

• Risk of imitation

• Risk of changes in the target segment

Stuck in the middle

• Porter argued that a firm must make a conscious choice about the competitive advantage it
seeks to develop. If it fails to choose one of these strategies, it risks being “stuck in the
middle”, trying to be all things to all people, and ends up with no competitive strategy at all.
Being stuck in the middle leads to low profitability. Competitors with a clear strategy
outperform those whose strategy is unclear or attempt a combination of strategies

What is wrong with being “stuck in the middle”?

• It is difficult to simultaneously become differentiated and low cost

• The firm loses out to others able to undercut it and to those able to offer a superior product

• If a firm differentiates itself by supplying very high quality products it risks undermining that
quality if it seeks to be come a cost leader

• Such a firm also suffers from a blurred corporate culture and the projection of a confusing
image

Summary

• Cost leadership

– Being the lowest cost producer in the industry as a whole

• Differentiation

– The exploitation of a product or service which is believed to be unique

• Focus

– Restricting activities to only part of the market through:

– Providing goods or services at lower cost to that segment (cost focus)

– Providing a differentiated product or service to that segment (differentiation focus)

Every industry follows a unique development path

I. Strategies for Competing in Emerging Industries(The pioneer strategy)

Feature of Emerging Industry

Emerging industries are new or reformed industries that originate from technological
innovation, changing the relationship between relative costs, new customer needs or other
economic and social changes. Its main features are

1. New and Unproven Market

2. Proprietary Technology
3. Low entry Barriers
4. Buyers are first times users
Young companies in fast-growing markets face three strategic hurdles:
(1) managing their own rapid expansion
(2) defending against competitors trying to horn in on their success
(3) building a competitive position extending beyond their initial product or market.
Example : Alternative technologies like Wind and Solar Power
Artifical Intelligence
Sensors
CORE CONCEPT: Strategic success in an emerging industry calls for bold entrepreneurship, a
willingness to pioneer and take risks, an intuitive feel for what buyers will like, quick responses to
new developments, and opportunistic strategy making.

To be successful in an emerging industry, companies usually have to pursue one or more of the
following strategic avenues:
a. Try to win the early race for industry leadership with risk-taking entrepreneurship and a
bold creative strategy
b. Push to perfect the technology, improve product quality, and develop additional
attractive performance features
c. As technological uncertainty clears and a dominant technology emerges, adopt it quickly
d. Form strategic alliances with key suppliers to gain access to specialized skills,
technological capabilities, and critical materials or components
e. Acquire or form alliances with companies that have related or complementary
technological expertise
f. Try to capture any first-mover advantages associated with early commitments to
promising technologies
g. Pursue new customer groups, new user applications, and entry into new geographical
areas
h. Make it easy and cheap for first-time buyers to try the industry’s first-generation
product
i. Use price cuts to attract the next layer of price-sensitive buyers into the market

CORE CONCEPT: The early leaders in an emerging industry cannot rest on their laurels; they must
drive hard to strengthen their resource capabilities and build a position strong enough to ward off
newcomers and compete successfully for the long haul.

II. Strategies for Competing in Turbulent, High-Velocity Markets

More and more companies are finding themselves in industry situations characterized by
a. rapid technological change
b. short product life cycles because of entry of important new rivals into the
marketplace
c. frequent launches of new competitive moves by rivals
d. fast-evolving customer requirements and expectations – all occurring at once.
Strategic Postures for Coping with Rapid Change
1. The central strategy-making challenge in a turbulent market environment is managing
change.
2. A company can assume any of three strategic postures in dealing with high-velocity change:
a. It can react to change
 b. It can anticipate change, make plans for dealing with the expected changes, and follow
its plans as changes occur
c. It can lead change
Reacting to change and anticipating change are basically defensive postures; leading
change is an offensive posture.

Figure, Meeting the Challenge of High-Velocity Change, illustrates the three strategic postures a
company can assume when dealing with high-velocity change.

The best performing companies in high-velocity markets consistently seek to lead change with
proactive strategies.
Strategic Moves for Fast-Changing Markets
1. Competitive success in fast-changing markets tends to hinge on a company’s ability to
improvise, experiment, adapt, reinvent, and regenerate as market and competitive
conditions shift rapidly and sometimes unpredictably.
2. The following five strategic moves seem to offer the best payoffs:
a. Invest aggressively in R&D to stay on the leading edge of technological know-how
b. Develop quick response capability
c. Rely on strategic partnerships with outside suppliers and with companies making tie-in
products
d. Initiate fresh actions every few months not just when a competitive response is needed
e. Keep the company’s products and services fresh and exciting enough to stand out in the
midst of all the change that is taking place
CORE CONCEPT: In fast paced markets, in-depth expertise, speed, agility, innovativeness,
opportunism, and resource flexibility are critical organizational capabilities.

III. Strategies for Competing in Maturing Industries

An industry is said to be mature when nearly all potential buyers are already users of the
industry’s products. In a mature market, demand consists mainly of replacement sales to
existing users with growth hinging on the industry’s ability to attract the few remaining
buyers and convince existing buyers to up their usage.
e.g. Toothpaste, cars, soaps, cereals etc.
When growth rates do slacken, the onset of market maturity usually produces fundamental
changes in the industry’s competitive environment:
a. Slowing growth in buyer demand generates more head-to-head competition for market
share
b. Buyers become more sophisticated, often driving a harder bargain on repeat purchases
c. Competition often produces a greater emphasis on cost and service
d. Firms have a topping-out problem in adding new facilities
e. Product innovation and new end-use applications are harder to come by
f. International competition increases
g. Industry profitability falls temporarily or permanently
h. Stiffening competition induces a number of mergers and acquisitions among former
competitors, drives the weakest firms out of the industry, and produces industry
consolidation in general

Strategic Moves in Maturing Industries

As the new competitive character of industry maturity begins to hit full force, any of several
strategic moves can strengthen a firm’s competitive positions:
a. Pruning Marginal Products and Models: Pruning marginal products from the line opens
the door for cost savings and permits more concentration on items whose margins are
highest and/or where a firm has a competitive advantage.
b. More Emphasis on Value Chain Innovation: Efforts to reinvent the industry value chain
can have a fourfold payoff – lower costs, better product or service quality, greater
capability to turn out multiple or customized product versions, and shorter design-to-
market cycles.
c. Trimming Costs: Stiffening price competition gives firms extra incentives to drive down
unit costs. Company cost reduction initiatives can cover a broad front.
d. Increasing Sales to Present Customers: In a mature market, growing by taking
customers away from rivals may not be as appealing as expanding sales to existing
customers.
e. Acquiring Rival Firms at Bargain Prices: Sometimes a firm can acquire the facilities and
assets of struggling rivals quite cheaply.
 f. Expanding Internationally: As its domestic market matures, a firm may seek to enter
foreign markets where attractive growth potential still exists and competitive pressures
are not so strong.
g. Building New or More Flexible Capabilities: The stiffening pressures of competition in a
maturing or already mature market can often be combated by strengthening the
company’s resource base and competitive capabilities.
Strategic Pitfalls in Maturing Industries (mistakes companies can make)
Perhaps the biggest mistake a company can make as an industry matures is steering a middle
course between low cost, differentiation, and focusing – blending efforts to achieve low cost
with efforts to incorporate differentiating features and efforts to focus on a limited target
market.

CORE CONCEPT: One of the greatest strategic mistakes a firm can make in a maturing industry is
pursuing a compromise strategy that leaves it stuck in the middle.

IV. Strategies for Firms in Stagnant or Declining Industries

Many firms operate in industries where demand is growing more slowly than the economy wide
average or is even declining.
Stagnant demand by itself is not enough to make an industry unattractive. Selling out may or may
not be practical and closing operations is always a last resort.
Businesses competing in stagnant or declining industries must resign themselves to performance
targets consistent with available market opportunities.

For example, the tobacco industry could decline because of the new world lobby against smoking.

The manufacturers of cabulators for automobiles are declining; the manufacture of typewriters is
also declining

The main cause of declining industry is:

o Technological substitution – where old technology is replaces by new ones

o Shift in the taste and preferences of customers
o Demographic factors – more babies, less old people etc

In general, companies that succeed in stagnant industries employ one or more of three strategic
themes:
a. Pursue a focused strategy aimed at the fastest growing market segments within the
industry
b. Stress differentiation based on quality improvement and product innovation
c. Strive to drive costs down and become the industry’s low-cost provider
The most common strategic mistakes companies make in stagnating or declining markets are:
a. Getting trapped in a profitless war of attrition
b. Diverting too much cash out of the business too quickly
c. Being overly optimistic about the industry’s future and spending too much on
improvements in anticipation that things will get better
CORE CONCEPT: Achieving competitive advantage in stagnant or declining industries usually requires
pursuing one of three competitive approaches: focusing on growing market segments within the
industry, differentiating on the basis of better quality and frequent product innovation, or becoming
a lower-cost producer.

V. Strategies for Competing in Fragmented Industries

1. The standout competitive feature of a fragmented industry is the absence of market leaders
with king-sized market shares or widespread buyer recognition.
e.g.
Fashion Industry
Auto shops/ repair shops
Café
Salons
Restaturant
Furniture
Meat processing
Professional services
publishing
Competitive rivalry in fragmented industries can vary from moderately strong to fierce.
Strategy Options for a Fragmented Industry
Suitable competitive strategy options in a fragmented industry include:
a. Constructing and operating “formula” facilities – This strategic approach is frequently
employed in restaurant and retailing businesses operating at multiple locations.
b. Becoming a low-cost operator – When price competition is intense and profit margins
are under constant pressure, companies can stress no-frills operations featuring low
overhead, high productivity/low-cost labor.
c. Specializing by product type – When a fragmented industry’s products include a range of
styles or services, a strategy to focus on one product or service category can be
effective.
d. Specialization by customer type – A firm can stake out a market niche in a fragmented
industry by catering to those customers who are interested in low prices, unique
product attributes, customized features, carefree service, or other extras.
e. Focusing on a limited geographic area – Even though a firm in a fragmented industry
cannot win a big share of total industrywide sales. It can still try to dominate a local or
regional geographic area.
In fragmented industries, firms generally have the strategic freedom to pursue broad or narrow
market targets and low-cost or differentiation-based competitive advantages. Many
different strategic approaches can exist side-by-side.
CORE CONCEPT: In fragmented industries competitors usually have wide enough strategic latitude
(1) to either compete broadly or focus

(2) to pursue a low-cost, differentiation-based or best-cost competitive advantage.

Competitive strategies based on either low cost or product differentiation are viable unless the
industry’s product is highly standardized or a commodity.
Focusing on a well-defined market niche or buyer segment usually offers more competitive
advantage potential than striving for broader market appeal.

VI. Strategies for Industry Leaders

Characteristics of Industry Leader
The competitive positions of industry leaders normally range from “stronger than average” to
“powerful.”
2. Leaders are typically well known and strongly entrenched leaders have proven strategies.
3. The main strategic concern for a leader revolves around how to defend and strengthen its
leadership position, perhaps becoming the dominant leader as opposed to just a leader.
4. The pursuit of industry leadership and large market share is primarily important because of
the competitive advantage and profitability that accrue to being the industry’s biggest
company.

CORE CONCEPT: The two best tests of success of a stay-on-the-defensive strategy are (1) the extent
to which it keeps rivals in a reactive mode, struggling to keep up and (2) whether the leader is
growing faster than the industry as a whole and wresting market share from rivals.

Three contrasting strategic postures are open to industry leaders:

a. Stay-on-the-defensive strategy: The central goal of a stay-on-the-defensive strategy is
to be a first-mover. It rests on the principle that staying a step ahead and forcing rivals
into a catch-up mode is the surest path to industry prominence and potential market
dominance. Being the industry standard setter entails relentless pursuit of continuous
improvement and innovation. The array of options for a potent stay-on-the-defensive
strategy can include initiatives to expand overall industry demand.
b. Fortify-and-defend strategy: The essence of “fortify-and defend” is to make it harder for
challengers to gain ground and for new firms to enter. Specific defensive actions can
include: (1) attempting to raise the competitive ante for challengers and new entrants
via increased spending for advertising, higher levels of customer service, and bigger R&D
outlays, (2) introducing more product versions or brands to match the product attributes
that challenger brands have or to fill vacant niches that competitors could slip into, (3)
adding personalized services and other extras that boost customer loyalty and make it
harder and more costly for customers to switch to rival products, (4) keeping prices
reasonable and quality attractive, (5) building new capacity ahead of market demand to
discourage smaller competitors from adding capacity of their own, (6) investing enough
to remain cost-competitive and technologically progressive, (7) patenting the feasible
alternative technologies, and (8) signing exclusive contracts with the best suppliers and
 dealer distributors. A fortify-and-defend strategy best suits firms that have already
achieved industry dominance and do not wish to risk antitrust action. A fortify-and-
defend strategy always entails trying to grow as fast as the market as a whole and
requires reinvesting enough capital in the business to protect the leader’s ability to
compete.
c. Muscle-flexing strategy: Here a dominant leader plays a competitive hardball when
smaller rivals rock the boat with price cuts or mount any new market offensives that
directly threaten its position. Specific responses can include quickly matching or
exceeding challengers’ price cuts, using large promotional campaigns to counter
challengers’ moves to gain market share, and offering better deals to their major
customers. The leader may also use various arm-twisting tactics to pressure present
customers not to use the products of rivals. The obvious risks of a muscle-flexing
strategy are running afoul of the antitrust laws, alienating customers with bullying
tactics, and arousing adverse public opinion.

CORE CONCEPT: Industry leaders can strengthen their long-term competitive positions with
strategies keyed to aggressive offense, aggressive defense, or muscling smaller rivals and customers
into behaviors that bolster its own market standing.

VII. Strategies for Sustaining Rapid Company Growth

1. Companies that are focused on growing their revenues and earnings at a rapid or above-
average pace year after year generally have to craft a portfolio of strategic initiatives
covering three horizons:
a. Horizon 1: “Short-jump” strategic initiatives to fortify and extend the company’s position
in existing businesses
b. Horizon 2: “Medium-jump” strategic initiatives to leverage existing resources and
capabilities by entering new businesses with promising growth potential
c. Horizon 3: “Long-jump” strategic initiatives to plant the seeds for ventures in businesses
that do not yet exist
The Three Strategy Horizons for Sustaining Rapid Growth, illustrates the three strategy
horizons.
The Risks of Pursuing Multiple Strategy Horizons
There are risks to pursuing a diverse strategy portfolio aimed at sustained growth:
a. A company cannot place bets on every opportunity that appears lest it stretch its
resources too thin
b. Medium-jump and long-jump initiatives can cause a company to stray far from its core
competencies and end up trying to compete in businesses for which it is ill suited
c. It can be difficult to achieve competitive advantage in medium- and long-jump product
families and businesses that prove not to mesh well with a company’s present
businesses and resource strengths

VIII. Strategies for Runner-Up Firms

Runner-up or second-tier firms have smaller market shares than first-tier industry leaders.
Runner-up firms can be:
a. Market challengers – employing offensive strategies to gain market share and build a
stronger market position
b. Focusers – seeking to improve their lot by concentrating their attention on serving a
limited portion of the market
c. Perennial runner-ups – lacking the resources and competitive strengths to do more than
continue in trailing positions and/or content to follow the trendsetting moves of the
market leaders
Strategic Approaches for Runner-Up Companies
 Runner-up companies can have considerable strategic flexibility and can consider any of the
following seven approaches:
a. Offensive Strategies to Build Market Share: A challenger firm needs a strategy aimed at
building a competitive advantage of its own. The best “mover-and-shaker” offensives
usually involve one of the following approaches:
1. pioneering a leapfrog technological breakthrough
2. getting new or better products into the market consistently ahead of rivals
and building a reputation for product leadership
3. being more agile and innovative in adapting to evolving market conditions
and customer expectations than slower-to-change market leaders
4. forging attractive strategic alliances with key distributors, dealers, or
marketers of complementary products
5. finding innovative ways to dramatically drive down costs and then using the
attraction of lower prices to win customers from higher-cost, higher-priced
rivals
6. crafting an attractive differentiation strategy based on premium quality,
technological superiority, outstanding customer service, rapid product
innovation, or convenient online shopping options.
b. Growth-via-Acquisition Strategy: One of the most frequently used strategies employed
by ambitious runner-up companies is merging with or acquiring rivals to form an
enterprise that has greater competitive strength and a larger share of the overall
market.
c. Vacant-Niche Strategy: This version of a focused strategy involves concentrating on
specific customer groups or end-user applications that market leaders have bypassed or
neglected.
d. Specialist Strategy: A specialist firm trains its competitive effort on one technology,
product or product family, end use, or market segment. The aim is to train the
company’s resource strengths and capabilities on building competitive advantage
through leadership in a specific area.
e. Superior Product Strategy: The approach here is to use a differentiation-based focused
strategy keyed to superior product quality or unique attributes.
f. Distinctive Image Strategy: Some runner-up companies build their strategies around
ways to make themselves stand out from competitors. A variety of distinctive strategies
can be used.
g. Content Follower Strategy: Content followers deliberately refrain from initiating trend-
setting strategic moves and from aggressive attempts to steal customers away from the
leaders. Followers prefer approaches that will not provoke competitive retaliation, often
opting for focus and differentiation strategies that keep them out of the leader’s path.

CORE CONCEPT: Rarely can a runner-up firm successfully challenge an industry leader with a copycat
strategy.
VIII. Strategies for Weak and Crisis-Ridden Businesses
A firm in an also-ran or declining competitive position has four basic strategic options:
a. Offensive turnaround strategy – If it can come up with the financial resources, it can
launch an offensive turnaround strategy keyed either to low cost or new differentiation
themes
b. Fortify-and-defend strategy – Using variations of its present strategy and fighting hard
to keep sales, market share, profitability, and competitive position at current levels
c. Fast-exit strategy – Get out of the business either by selling out to another firm or by
closing down operations if a buyer cannot be found
d. End-game or slow-exit strategy – Keeping reinvestment to a bare bones minimum and
taking actions to maximize short-term cash flows in preparation for an orderly market
exit

CORE CONCEPT: The strategic options for a competitively weak company include waging a modest
offensive to improve its position, defending its present position, being acquired by another
company, or employing an end-game strategy.

Turnaround Strategies for Businesses in Crisis

1. Turnaround strategies are needed when a business worth rescuing goes into crisis; the
objective is to arrest and reverse the sources of competitive and financial weakness as
quickly as possible.
2. Management’s first task in formulating a suitable turnaround strategy is to diagnose what
lies at the root of poor performance. The next task is to decide whether the business can be
saved or whether the situation is hopeless.
3. Some of the most common causes of business trouble are: (1) taking on too much debt, (2)
overestimating the potential for sales growth, (3) ignoring the profit-depressing effects of an
overly aggressive effort to buy market share with deep cost cuts, (4) being burdened with
heavy fixed costs, (5) betting on R&D efforts but failing to come up with effective
innovations, (6) betting on technological long-shots, (7) being too optimistic about the ability
to penetrate new markets, (8) making frequent changes in strategy, and (9) being
overpowered by more successful rivals.
4. Curing these kinds of problems and achieving a successful business turnaround can involve
any of the following actions:
a. Selling Off Assets: Asset-reduction strategies are essential when cash flow is a critical
consideration and when the most practical ways to generate cash are (1) through sale of
some of the firm’s assets and (2) through retrenchment.
b. Strategy Revision: When weak performance is caused by bad strategy, the task of
strategy overhaul can proceed along any of several paths: (1) shifting to a new
competitive approach to rebuild the firm’s market position, (2) overhauling internal
operations and functional area strategies to better support the same overall business
strategy, (3) merging with another firm in the industry and forging a new strategy keyed
to the newly merged firm’s strengths, and (4) retrenching into a reduced core of
products and customers more closely matched to the firm’s strengths.
c. Boosting Revenues: Revenue increasing turnaround efforts aim at generating increased
sales volume. Attempts to increase revenues and sales volume are necessary (1) when
 there is little or no room in the operating budget to cut expenses and still break even
and (2) when the key to restoring profitability is increased use of existing capacity.
d. Cutting Costs: Cost-reducing turnaround strategies work best when an ailing firm’s value
chain and cost structure are flexible enough to permit radical surgery, when operating
insufficiencies are identifiable and readily correctable, when the firm’s costs are
obviously bloated, and when the firm is relatively close to its break-even point.
e. Combination Efforts: Combination turnaround strategies are usually essential in grim
situations that require fast action on a broad front. Combination actions frequently
come into play when new managers are brought in and given a free hand to make
whatever changes they see fit. Turnaround efforts tend to be high-risk undertakings and
they often fail.
Liquidation – The Strategy of Last Resort
1. Of all the strategic alternatives, liquidation is the most unpleasant and painful because of the
hardships of job elimination and the effects of business closings on local communities.
2. In hopeless situations, an early liquidation effort usually serves owner-stockholder interests
better than an inevitable bankruptcy.
End-Game Strategies
1. An end-game or slow-exist strategy steers a middle course between preserving the status
quo and exiting as soon as possible.
2. Harvesting is a phasing-down strategy that involves sacrificing market position in return for
bigger near-term cash flows or current profitability.
3. A slow-exit strategy is a reasonable strategic option for a weak business in the following
circumstances:
a. When the industry’s long-term prospects are unattractive
b. When rejuvenating the business would be too costly or at best marginally profitable
c. When the firm’s market share is becoming increasingly costly to maintain or defend
d. When reduced levels of competitive effort will not trigger an immediate or rapid falloff
in sales
e. When the enterprise can redeploy the freed resources in higher-opportunity areas
f. When the business is not a crucial or core component of a diversified company’s overall
lineup of businesses
g. When the business does not contribute other desired features to a company’s overall
business portfolio
End-game strategies make the most sense for diversified companies that have sideline or
noncore business units in weak competitive positions or in unattractive industries.
Strategy Development for Non-profit, Non-business oriented organizations

Non-profit organizations are those organizations which don’t work for making profits instead their
purpose is social cause and they work for betterment of society. They contribute to country’s
economy. Individuals are motivated to donate to charities and proper strategies are formulated so
that organizational goals and objectives are achieved.

Nonprofit organizations also enjoys tax exemption advantages as they are established for welfare
and societal purposes regardless of earning revenues for its shareholders.

Strategic planning is considered as an important technique for nonprofit organizations as

specific strategies are formulated for those people who are voluntarily interested to work for
society’s betterment and meeting their organizational goals.

Strong Leadership

Nonprofit management requires strong leadership in strategic planning.

Some clear distinctions between vision of for-profit leadership and nonprofit leadership are in ethics
such as concern, honesty, care, trust etc. can be more seen in nonprofit leaders as compare to for-
profit leaders as nonprofit leaders are working for humanity and society. Wide range visionary
planning benefits organizations in nonprofit leadership. Nonprofit leader use both external and
internal stakeholder values in garnering and nurturing organizations

Strategic planning for non profit organisation, must have a set of strategies that meet these
requirements-

 make full use of all the organization's most impressive strengths.

 correct or neutralize all major weaknesses. It must not be based on these weaknesses.
 either eliminate or reduce the impact of all the major threats.
 exploit any highly rated opportunity for enhancing non-profit performance.
 be strictly practical and relevant to the precise strategic situation of the particular non-profit
organization, and hopefully be
 imaginative in the sense of being able to engage staff in implementation, and stand out
among similar non-profit organizations in some way, and not be a pale imitation of what
everyone else is doing, so as to strengthen the community standing of the organization and
its non-profit mission.
Conti SWOT Analysis

SWOT analysis (Strengths, Weakness, Opportunities and Threats) is an effective tool to

judge proficient strategic planning, as it can evaluate external as well as internal market factors for
organizations.

It can provide a detailed analysis of required strategies for an organization to succeed in competitive
marketplace. It also provide information about competitors, obstacles and strategies adopted by
competing firms as well as market target space so that organization can formulate those required
strategies which can be used to gain success. nuous Program Development

With most non-profit organizations a program development strategy may involve developing new
programs or modifying existing services, bundling or unbundling services in combinations or
packages to appeal to different client group segments or constituency groups

It requires focused attention to current and potential competing providers and beneficiary needs
now and in the future.

Anticipate Impact

Anticipating impacts on the other functions of the organization, including the financing of pilot
programs and service delivery processes, and possible changes to program promotion and location.

Use of IT/Internet/ Social Media

Nonprofit organizations utilize internet in order to generate resources and advertise online for
effective organizational success. It should enhance programs to reach out maximum people by use of
Social Media and leverage social media outreach to its maximum
McKinsey’s 7-S Model

McKinsey’s 7-S Framework has received considerable attention of management consultants and
strategists. This framework was developed in the late 1970 by McKinsey, a well-known consultancy
firm in the United States.

This framework is based on the proposal that effective organizational change is best understood in
terms of the complex relationship between hard elements (strategy, structure, systems) and soft
elements (style, skills, staff and shared values (or super-ordinate goals)); the seven S’s.

Hard elements can be easily identified and management can directly influence them. Some of them
are: organization hierarchy, reporting lines, span of management, formal processes, IT systems and
strategy statements.

Soft elements like style, skills, staff and shared values are as important as hard elements. They are
more difficult to describe, less tangible and more influenced by culture.

The McKinsey 7-S model can a help an organization to:

  Determine how it is going to achieve its target goals
 Identify as to how it is going to align departments and processed during merger or
acquisition
 Improve the style of the organization
 Examine the effects organizational changes within the company
 Implement policies to improve the skills and competencies of the employees

The framework upholds the viewpoint that there are multiple factors which influence on
organization’s ability to change. Since the variables are interconnected, significant progress cannot
be mode in other areas as well. The relevance of the model to strategic management is based on the
7-S which stand for policy areas vital to long-term organizational success.

1. Strategy:

Strategy making is an important variable that affects managerial excellence. Strategy means
determination of objectives and allocation of resources to achieve these objectives through
continuous interaction with the environment.

It is a single-use plan made to achieve the objective, for example, strategy to adopt a low cost
technology in order to be competitive in the environment. Strategies provide useful guide to
managerial planning and excellence. They are useful means of integrating the organisation’s internal
environment with its external environment.

Strategic planning refers to planning for long-run survival and growth of the firm. It helps in adopting
courses of action that enhance managerial effectiveness in adjusting the organisations to changes in
the external environment.

2. Structure:

Structure refers to arrangement of work amongst units and members of the organisation, assigning
responsibility and providing authority to perform the assigned tasks. Structure provides foundation
to the organisation. Organisation structure represents a formal pattern of interaction and
coordination amongst various people and departments that gear the activities towards
organisational goals.

The structure consists of division of work, departments, authority, responsibility relationships,

delegation, decentralisation, communication etc. Organisation structure affects managerial
effectiveness by coordinating internal activities with the external environment. A well designed
organisation structure increases managerial effectiveness.

3. Systems:

Systems refers to procedures and processes like management information systems, performance
evaluation systems, technology systems, manufacturing processes, control processes etc. that help
in smooth conduct of business enterprises. Companies develop well- designed systems and
processes to increase managerial effectiveness.
4. Style:

It is the way of managing the organisation. It is the way management interacts with members.
Understanding of human factors, suitable motivators, leadership styles, committee formation, group
decision-making, communication networks and media etc. affect the style of management.

More and more companies are managed by professional managers who adopt entrepreneurial,
innovative and creative management styles. They use a style that can adapt to environmental
changes. People are the most important asset of business organisations and management styles
must correspond to satisfaction of their needs and desires.

Amongst the management styles ranging between task-oriented to people-oriented, the most
suitable style is the one that corresponds to the situation. Not one style can be described as the
best. How well a management style is adopted determines how effective managers are in developing
the organisation culture in terms of values, beliefs, customs, perceptions, norms etc.

5. Staff:

Staff represents the human resource. Human resource management, accounting and appraisal are
important areas of human resource. The staff should be satisfied, young, dynamic, innovative and
creative. This pre-supposes a well-designed staffing procedure that helps in appointing people most
appropriate to fulfillment of organisational goals.

There should be proper balance between job description and job specification and people should be
placed at the jobs most suitable for them. A well designed staffing procedure, with policies related to
requirement, selection, placement, training, development, compensation etc. affects effectiveness
of an organisation. Most satisfied staff will be most effective staff. People are part of the
organisation culture and there should be complete harmony between organisational and individual
goals.

6. Skills:

Skills are distinctive capabilities of an enterprise. Every organisation has common strengths and
distinctive competence. While common strengths are possessed by all organisations alike, distinctive
competence is possessed by a small number of firms. Every organisation should enhance its
distinctive competence by enhancing its organisational skills – technological, managerial, marketing,
human skills etc. Organisation with high level of distinctive skills is an effective organisation.
Increasing the skills to meet the future requirements makes the organisation successful and
effective.

7. Shared Values:

Shared values refer to superordinate goals and values commonly shared by members of the
organisation. They represent the culture and system with specific set of goals and direction. They
result in optimum allocation of resources keeping in mind values, beliefs, attitudes and aspirations.

An organisation whose members share common values about its objectives and plans is an effective
organisation. Shared values represent organisation climate, structure, culture and dynamics.
Management styles, strategy, systems, skills etc. are largely determined by its shared values.
 Chapter 5
External and Industry Analysis
General Environment
Industry / Competitive Environment
Identifying industry’s dominant features
Porter’s Five Forces of Competitive Analysis
Analytic Tools: EFE Matrix and CPM

Environment literally means the surroundings, external objects, influences or circumstances under
which someone or something exists. The environment of any organisation is “the aggregate of all
conditions, events and influences that surround and affect it.”

Environment refers to all external forces which have a bearing on the functioning of business.
Jauch and Gluecke has defined environment as “The environment includes factors outside the firm
which can lead to opportunities or a threat to the firm. Although there are many factors the most
important of the sectors are socio-economic, technological, supplier, competitor and govt.”

The recent changes in tariff rates have changed the toy industry of India with the market now being
dominated by Chinese products. A slight change in the Reserve Bank of India’s monetary policy can
increase or decrease interest rates in the market. A slight shift in the government’s fiscal policy can
shift the whole demand curve towards the right or the left.

Example:
Hindustan Lever Limited (HLL) took advantage of the new takeover and merger codes and acquired
brands like Kissan from the UB group, TOMCO (Tata Oil Mills Company) and Lakme from Tata and
Modern Foods from the government, besides many other small takeovers and mergers.

Liberalization in 1991 opened lot of opportunities for companies and HLL took the advantage to
acquire companies like Lakme, TOMCO, KISSAN etc. Changes in environment often also pose a
serious threat to the entire industry. Like Liberalization
does pose a threat of new entrants to Indian firms in the form of Multi National Corporation (MNCs)

There are two parts or levels - Environmental analysis of the ‘far’ or ;macro’ environment affecting
all firms, and the industry analysis of the ‘near’ or ‘micros’ environment which is much more specific.

External Analysis

Introduction – Definition: External Analysis

Benefits of external analysis include

• Increasing managerial awareness of environmental changes.
• Increasing understanding of the context in which industries and markets function.
• Increasing understanding of multinational settings.
• Improving resource allocation decisions.
• Facilitating risk management.
• Focusing attention on the primary influences on strategic change.
• Acting as an early warning system
The far or macro environment
The macro-environment represents forces that affect all firms across all industries. There are various
suggestions as to how to define parts of an environment so as to understand them in depth. There
are common issues such as the Polticial, Economic, Social and Technological influences, the PEST
factors. Sometimes these are extended:
• PESTEL separates out Legal from Political activity and adds Environmental.
• STEEPV adds Values
• SPENT adds Natural environment
• STEEPLE adds Ethics

How to use the analysis tools:

• Scan the macro-environment for actual or potential changes in the PEST factors.
• Assess the importance of the changes for the market, industry and business.
• Analyse each of the relevant changes in detail and the relationships between them.
• Assess the potential impact of the changes on the market, industry and business.

What is PEST Analysis & Why Do It

The environment of corporate world is ever changing. No business operates in a vacuum

environment.  The corporate environment is something real complex and dynamic. There are several
external factors surrounding a business and influencing it strategy and activities. The external
environment of a company is called macro-environment. So every successful company need to
deeply analyse and understand all macro-environmental forces in order to achieve the defined goals
and objective as well as for the smooth running of a business. For this purpose, company did PEST
analysis.

Originally designed as a business environmental scan, the PEST or PESTLE analysis is an analysis of
the external macro environment (big picture) in which a business operates. These are often factors
which are beyond the control or influence of a business, however are important to be aware of
when doing product development, business or strategy planning.

PESTLE analysis is a useful tool for understanding the “big picture” of the environment, in which you
are operating, and the opportunities and threats that lie within it. By understanding the
environment in which you operate (external to your company or department), you can take
advantage of the opportunities and minimise the threats. Specifically the PEST or PESTLE analysis is a
useful tool for understanding risks associated with market growth or decline, and as such the
position, potential and direction for a business or organisation.

Definition of PEST

PEST Analysis is abbreviation of “Political, Economic, Social, & Technological analysis" and it allows

companies to make a framework of macro-environmental factors for the purpose of designing
effective environmental strategies

4 Factors of PEST Analysis with Examples

The forces or factors of PEST analysis with examples

Political Factors

The political factors which influence the external company environment includes consumer
protection laws, employment laws & regulations, competition regulations, environmental
regulations and government taxes etc. so every business needs to operate around these forces.

Example: Reduction in import duty of floor tiles for ceramic industry can have two types of impacts.
It will be positive to the local ceramic manufacturer as imported tiles are more costly. However, it
will leave negative impact to importers.

Some major examples of political factors are:

1. Taxation policy
2. Employment laws
3. Tariffs & Trade restriction
4. Political stability or instability in operating country and
5. Environmental laws

Economic Factors

Economic factors also influence the external environment of a particular company. It affects the
purchasing power of potential customer as well as company’s cost of capital.

Example: Unstable bank interest rate in a particular country affects the stability to the cost of a
business.

 The major economic forces include:

1. Economic growth trends and patterns

2. Government expenditure levels
3. Disposable income
4. Unemployment rate
5. Interest rate
6. Exchange rate and
7. Inflation rate

Social Factors

Social factors are also very important consideration for every company. Companies needs to
carefully analyze the demographics, fashion & trends, leisure activities, education, living standards
and lifestyle changes etc. these factors actually affects the customer wants and the size of potential
markets.

Major elements of social factors are:

1. Health consciousness
2. Age distribution
3. Population growth rate
4. Education
5. Career attitude and
6. Emphasis on safety
Technological Factors

Technological factor is the last step of PEST analysis. These factors lower the barriers to enter,
influence a company outsourcing decision and reduce minimum efficient production level.

Example: Changes of consumer preference toward advanced technological products which can be
produced with advance technology. The technological factors include:

1. New inventions & discoveries,

2. Research & development activities
3. Automation
4. Technological incentives and
5. Rate of technological change

All of the above factors should be carefully analyzed. Every company should conduct a thorough
PEST analysis because it enables a company to understand these external factors fully and take
advantage of the existing opportunities. Furthermore, it helps a company to foresee any existing
threats. So, PEST analysis is a best strategic tool which helps the company to make the right
decisions by keeping in mind the ever changing external environment that surrounds the company.

Legal factors are sometimes considered similar to political factors. But it affects how companies
operate costs, facilitate business, and handle product demands. For example, some firms require
several patents to ensure competition don’t copy their products. But this section also includes
consumer laws, health and safety laws, and more.

Environmental factors include climate (change), weather, and eco-friendliness of products. Tourism,
forestry, and agriculture industries must pay extra attention to these factors. Bad weather may
mean a severe lack of profits.
Industry Analysis (The ‘near’ environment)

Near environment otherwise known as a competitive business environment, micro-environment

consist of entities (organizations, businesses, banks, government bodies) that affect the functioning
of a company and which the company can influence. It is also called marketing environment and
consist set of all the factors that affect or potentially affect the activity of the enterprise (e.g., its
objectives, strategy, structure). The external environment of the company is divided into
macroeconomic and microeconomic (near) environment.

Distinctive feature of the near environment is that there is direct feedback between above
mentioned entities and the company. Subset of the near environment is Competitive environment
which consist of entities directly affecting (competing with) the company and influencing its actions.

The management of a company should only to examine relationship with entities of near
environment, but also shape this relationship by direct activity. Possible effects of this activities on
the competitive environment on the company is different and is determined primarily by its
competitive position. Near environment consists of all entities with which the company interacts
(competitors, customers, stakeholders).

Micro environment of business consist of:

 competitors (local, regional and national),

 producers of substitute and complementary goods,
 customers (actual and potential) for the goods,
 suppliers and subcontractors,
 financial institutions (banks, insurers, etc.),
 trade unions (their strength and social support),
 service companies.

In some cases, i.e. agriculture, tourism, important component of near environment is biosphere.

Competitive Environment

Competitive environment of organization is made up of all competitive or cooperative relationships.

Organizations may facilitate the positive or negative (harming) activities towards each another. The
competitive environment thus includes suppliers, customers, competitors, associations and
chambers of industry, research institutes, clusters, etc.

Porter's Five Forces

Porter proposes that competition in a given industry depends upon the interaction of five separate
forces. How profitable or difficult the competitive environment may be varies widely among given
industries. Producers of steel cans, for example, operate in a competitive environment which
ensures that profits remain generally low. Other industries, such as manufacturers of soft drinks and
toiletries, exist in competitive environments "where there is room for quite high returns."
Definition
Porter’s five forces model

is an analysis tool that uses five industry forces to determine the intensity of competition in an
industry and its profitability level.

Five forces model was created by M. Porter in 1979 to understand how five key competitive forces
are affecting an industry. The five forces identified are:

These forces determine an industry structure and the level of competition in that industry. The
stronger competitive forces in the industry are the less profitable it is. An industry with low barriers
to enter, having few buyers and suppliers but many substitute products and competitors will be seen
as very competitive and thus, not so attractive due to its low profitability.
It is every strategist’s job to evaluate company’s competitive position in the industry and to identify
what strengths or weakness can be exploited to strengthen that position. The tool is very useful in
formulating firm’s strategy as it reveals how powerful each of the five key forces is in a particular
industry.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If
an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more
organizations compete for the same market share, profits start to fall. It is essential for existing
organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high
when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand
reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other
industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low
quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to
pay more for materials. Suppliers have strong bargaining power when:

 There are few suppliers but many buyers;

 Suppliers are large and threaten to forward integrate;
  Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

What is Forward Integration

Forward integration is a business strategy that involves a form of vertical integration whereby
business activities are expanded to include control of the direct distribution or supply of a company's
products. This type of vertical integration is conducted by a company moving down the supply chain.
A good example of forward integration is when a farmer sells his crops at a local grocery store rather
than to a distribution center that controls grocery store placement.

 A bicycle tyre manufacturer starts manufacturing bicycles i.e. the end product.
 An FMCG company like Britannia build up its own distribution network including regional
warehouses so that it can directly sell to the retailers without having to go via wholesalers.
 A manufacturing company of ski equipment opens it outlets in various ski resorts to offer the
customers a brand experience to improve its brand image and brand recognition along with
having direct selling contact with the customers.
 Myntra, an e-commerce company starts its own logistics service- Myntra Logistics to reduce
costs, improve turnover time and reach its customers timely.
 A software company starts its own consulting and software development services so that it
does not have to depend on a network of partners to help customer implement their
products.
 Flipkart, an e-commerce company has its own customer service functions instead of
outsourcing them to improve customer experience.

Advantages of Forward Integration

 Low costs due to the elimination of market transaction costs.

 Reduction in transportation costs.
 Proper coordination in the supply chain as there is synchronization of supply and demand.
 Bigger market share.
 Strategic independence
 Better opportunities for investment growth.
 Creates entry barrier to potential competitors.

Disadvantages of Forward Integration

 Leads to higher cost if new activities are not managed properly.

 May lead to lower quality of product and reduced efficiency due to lack of competition.
 Increased bureaucracy and high investments may lead to lesser flexibility.
 Inability to offer product variety as in-house efficiency and skill sets are required.
 Possibilities of monopoly arise.
 Organizational structure may become rigid due to shortcomings of such implementations.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong. Lower price means lower
revenues for the producer, while higher quality products usually raise production costs. Both
scenarios result in lower profits for producers. Buyers exert strong bargaining power when:

 Buying in large quantities or control many access points to the final customer;
  Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

What is Backward integration

Backward integration is a form of vertical integration by which the Company integrates its
operations with the suppliers or the supply side of the business. The Company gains control over the
raw material suppliers by integrating them with their ongoing business.

The Company does so to maintain a competitive advantage in the business and increase entry
barriers. The Company can cut its costs by merging with its suppliers and maintain quality standards.

Backward Integration Example #1

Suppose there is a Car Company, XYZ which gets a lot of raw material like iron and steel for making
cars, rubber for seats, pistons, engine etc. from various suppliers. If this car Company merges/
acquires the supplier of iron and steel it will be called backward integration.

Backward Integration Example #2

Another backward integration example would be a tomato ketchup manufacturer purchasing a

tomato farm rather than buying tomatoes from the farmers.

Advantages of Backward Integration

Let us look at some of the advantages of backward integration:

#1 – Increased control

By integrating backward and merging with suppliers, Companies can control their supply chain in an
efficient manner. They will control the production of raw materials till the production of the end
product. By this, they will have a larger control on quality of raw material to be used in production.
Also, the Company secures itself with the supply of material. It will ensure that the Company
receives adequate supplies as and when required without worrying about raw materials being sold
to the competitor or not produced /manufactured by the suppliers.

#2 – Cost Cutting

Generally, backward integration is done to cut the costs. In a supply chain, there is always a markup
when goods are sold from one party to another. The supply chain involves various suppliers,
distributors, middlemen. By integrating the business with the producer of material, the Company
can remove these middlemen from the supply chain and cut the markup costs, transportation and
other unnecessary costs involved in the whole process.
#3 – Efficiency

While the Company will cut costs, backward integration also provides better efficiency in the whole
manufacturing process. With control over the supply side of the chain, the Company can control
when and which material to produce and how much to produce. With improved efficiency, the
Company can save its cost on the material which gets unnecessarily wasted due to over purchase.

#4 – Competitive Advantage and Creating Barriers to Entry

Sometimes Companies, to keep the competition out of the market can acquire the supplier. Consider
a scenario where a major supplier supplies materials to two Companies but one of them purchases
the supplier so it can stop the supplies of goods to the competitor. By this way, the Company is
trying that the existing competitor exits from business or look for another supplier and creating
entry barriers for new Competitors. Also, sometimes the Company may integrate backward to gain
access and control of technology, patents and other important resources which were only held by
the supplying firm.

#5 – Differentiation

Companies integrate backward to maintain differentiation of its product from its competitors. It will
gain access to the production units and distribution chain and thus can market itself differently from
its competitors. Integrating backward will enhance the Company’s ability to meet the customers
demand and may also help it to provide customized products since now it holds the production
capacity internally than sourcing it from the market.

Disadvantages of Backward Integration

Above we have seen the advantages of backward integration, however backward integration is not
always good. Let us look into potential issues with backward integration:

#1 – Huge Investments

Integration, merging or acquiring the manufacturer will require huge investments. It will be an extra
burden on the Company’s balance sheet may be in the form of debt or reduction cash and cash
equivalents.

#2 – Costs

It is not always that the costs will be reduced in backward integration. Lack of supplier competition
can reduce efficiency and thus result in higher costs. Further, it will be an extra burden on the
Company if it could not achieve the economies of scale that the supplier can achieve individually and
produce goods at lower cost.

#3 – Quality

Lack of competition can lead to less innovation and thus low quality of products. If there is no or less
competition in the market, the Company will become less efficient/less motivated in terms of
innovation, research and development as it knows it can sell whatever it produces. Hence, this could
impact the quality of the products. Further, if the Company wants to develop a different variety of
goods, it may have a significant cost for in-house development or it may incur high costs for
switching to other suppliers.

#4 – Competencies

The Company may have to adopt new competencies over the old ones or there may be a clash
between the old and new competencies causing inefficiency within the Company.

#5 – High bureaucracy

Acquiring the supplier will mean acquiring the workforce of the supplier as well. This will increase
the size of the Company thus bringing in new policies for the employees and leading to a
bureaucratic culture in the Company.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch from one product or
service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything,
unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive and
profitable an industry is. In competitive industry, firms have to compete aggressively for a market
share, which results in low profits. Rivalry among competitors is intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested
including the sixth force: complements. Complements increase the demand of the primary product
with which they are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes
was created to complement iPod and added value for both products. As a result, both iTunes and
iPod sales increased, increasing Apple’s profits.

Using the Tool

We now understand that Porter’s five forces framework is used to analyze industry’s competitive
forces and to shape organization’s strategy according to the results of the analysis. But how to use
this tool? We have identified the following steps:

Step 1. Gather the information on each of the five forces. What managers should do during this
step is to gather information about their industry and to check it against each of the factors (such as
“number of competitors in the industry”) influencing the force. We have already identified the most
important factors in the table below.

Step 2. Analyze the results and display them on a diagram. After gathering all the information, you
should analyze it and determine how each force is affecting an industry. For example, if there are
many companies of equal size operating in the slow growth industry, it means that rivalry between
existing companies is strong. Remember that five forces affect different industries differently so
don’t use the same results of analysis for even similar industries!

Step 3. Formulate strategies based on the conclusions. At this stage, managers should formulate
firm’s strategies using the results of the analysis For example, if it is hard to achieve economies of
scale in the market, the company should pursue cost leadership strategy. Product development
strategy should be used if the current market growth is slow and the market is saturated.

Example : This is Porter’s five forces analysis example for an automotive industry.

Porter's Five Forces Evaluation

Threat of new entry (very weak)
 Large amount of capital required
 High retaliation possible from existing companies, if new entrants would bring innovative
products and ideas to the industry
 Few legal barriers protect existing companies from new entrants
 All automotive companies have established brand image and reputation
 Products are mainly differentiated by design and engineering quality
 New entrant could easily access suppliers and distributors
 A firm has to produce at least 5 million (by some estimations) vehicles to be cost
competitive, therefore it is very hard to achieve economies of scale
 Governments often protect their home markets by introducing high import taxes

Supplier power (weak)

 Large number of suppliers
 Some suppliers are large but the most of them are pretty small
 Companies use another type of material (use one metal instead of another) but only to
some extent (plastic instead of metal)
 Materials widely accessible
 Suppliers do not pose any threat of forward integration

Buyer power (strong)

 There are many buyers
 Most of the buyers are individuals that buy one car, but corporates or governments usually
buy large fleets and can bargain for lower prices
 It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other
type of transportation
 Buyers can easily choose alternative car brand
 Buyers are price sensitive and their decision is often based on how much does a vehicle cost
 Buyers do not threaten backward integration

Threat of substitutes (weak)

 There are many alternative types of transportation, such as bicycles, motorcycles, trains,
buses or planes
 Substitutes can rarely offer the same convenience
 Alternative types of transportation almost always cost less and sometimes are more
environment friendly

Competitive rivalry (very strong)

  Moderate number of competitors
 If a firm would decide to leave an industry it would incur huge losses, so most of the time it
either bankrupts or stays in automotive industry for the lifetime
 Industry is very large but matured
 Size of competing firm’s vary but they usually compete for different consumer segments
 Customers are loyal to their brands
 There is moderate threat of being acquired by a competitor

Competitive Environment: Definition

A competitive environment is the dynamic external system in which a business competes and
functions. The more sellers of a similar product or service, the more competitive the environment in
which you compete. Look at fast food restaurants - there are so many to choose from; the
competition is high. However, if you look at airlines servicing Hawaii, very few actually fly to the
islands.

Direct competitors are businesses that are selling the same type of product or service as you. For
example, McDonalds is a direct competitor with Burger King. Indirect competitors are businesses
that still compete even though they sell a different service or product. The products or services
offered by indirect competitors tend to be those that can be substituted for one another. Again,
considering travel, you have the option to travel by plane, train, or car. Therefore, airlines are also
competing with train lines and buses (assuming the travel does not go overseas).

Examples

There are several examples of competitive business environments. The first that comes to mind is
smart phones. How many choices do you have when it comes to buying a smart phone? They
seemed to have multiplied overnight! That is an extremely competitive business environment.

Companies are constantly trying to one-up the latest best-selling model - a good indication of a
competitive environment. Additionally, prices of comparable smart phone models are relatively
close.

Another competitive business environment is the automobile industry. Again, almost every company
produces a car in every category. Therefore, when someone is looking at buying a new hybrid sedan
or full-size truck, they have so many options to choose from. Obviously, the automobile industry can
be segmented in economical and luxury brands, but when comparing within the same segment,
there is significant competition.

Industry’s Dominant Economic Characteristics

• Market Size: Annual sales revenue and total volume.

• Scope of Competitive Rivalry: Local, regional, international, global
• Market Growth Rate: 2-3 percent annually
• Stage in Life Cycle: Early development? Rapid growth? Mature.
• Number of Companies in Industry: Lots of small companies or few dominant ones.
EX: 110 plant locations and capacity of 4.5 million tons. Market shares range from a low of 3
percent to a high of 21 percent.
• Customers: How many buyers are there? Do they need large/small orders?
 • Degree of Vertical Integration: How prevalent is backward (suppliers) and forward
integration (distributors, retailers).
• Ease of Entry/Exit: Barriers to enter/leave the industry. EX: Moderate entry barriers exist in
the form of capital requirements to construct a new plant of minimum efficient size (cost
equals $10 million) and ability to build a customer base inside a 250-mile radius of plant
• Technology/Innovation: What is the pace of technological change in both productions,
process innovation and new products introductions?
• Product Characteristics: Goods/services highly differentiated, weakly differentiated or
essentially identical? Buyers perceive little real difference from seller to seller?
• Scale Economies: What impact does large volume have on – purchasing, mfg,
transportation, and marketing?
• Experience Curve What is the impact of learning and experience in this industry?
• Capacity Utilization: Do you only achieve low cost production efficiency with high levels of
capacity? EX: Manufacturing efficiency is highest between 90-100 percent of rated capacity;
below 90 percent utilization unit costs run significantly higher
• Industry Profitability: Is it above or below the norm? Do profits track the strength of
demand for the industry’s products? Impact on prices?

EFE

External Factors
• External factors are extracted after deep analysis of external environment. Obviously there
are some good and some bad for the company in the external environment. That’s the
reason external factors are divided into two categories opportunities and threats.
• Opportunities:- Opportunities are the chances exist in the external environment, it depends
firm whether the firm is willing to exploit the opportunities or may be they ignore the
opportunities due to lack of resources.
• Threats:- Threats are always evil for the firm, minimum no. of threats in the external
environment open many doors for the firm. Maximum number of threats for the firm reduce
their power in the industry.

About external factor evaluation

 EFE matrix can be defined as the strategic tool to evaluate external environment or macro
environment of the firm include economic, social, technological, government, political, legal
and competitive information.
 External Factor Evaluation (EFE) matrix method is a strategic- management tool often used
for assessment of current business conditions. The EFE matrix is a good tool to visualize and
prioritize the opportunities and threats that a business is facing.
 EFE Matrix is an analytical technique related to the SWOT analysis. EFE Matrix evaluates the
external position of the organization or its strategic intent.

External Factors
• External factors are extracted after deep analysis of external environment. Obviously there
are some good and some bad for the company in the external environment. That’s the
reason external factors are divided into two categories opportunities and threats.
• Opportunities: - Opportunities are the chances exist in the external environment, it depends
firm whether the firm is willing to exploit the opportunities or may be they ignore the
opportunities due to lack of resources.
 • Threats:- Threats are always evil for the firm, minimum no. of threats in the external
environment open many doors for the firm. Maximum number of threats for the firm reduce
their power in the industry.
Rating
Rating in EFE matrix represent the response of firm toward the opportunities and threats. Highest
the rating better the response of the firm to exploit opportunities and defend the threats. Rating
range from 1.0 to 4.0 and can be applied to any factor whether it comes under opportunities or
threats. There are some important point related to rating in EFE matrix.
Rating is applied to each factor.
• The response is poor represented by 1.0
• The response is average is represented by 2.0
• The response is above average represented by 3.0
• The response is superior represented by 4.0

Weight
• Weight attribute in EFE matrix indicates the relative importance of factor to being successful
in the firm’s industry. The weight range from 0.0 means not important and 1.0 means
important, sum of all assigned weight to factors must be equal to 1.0 otherwise the
calculation would not be consider correct. Weighted Score
• Weighted score value is the result achieved after multiplying each factor rating with the
weight.

Total Weighted Score

• The sum of all weighted score is equal to the total weighted score, final value of total
weighted score should be between range 1.0 (low) to 4.0(high).
• The average weighted score for EFE matrix is 2.5 any company total weighted score fall
below 2.5 consider as weak.
• The company total weighted score higher then 2.5 is consider as strong in position.

Steps in developing the EFE matrix

• Identify a list of KEY external factors (critical success factors).
• Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).
• Assign a 1to 4 rating to each critical success factor to indicate how effectively the firm’s
current strategies respond to the factor. (1 = response is poor, 4 = response is extremely
good)
• Multiply each factor’s weight by its rating to determine a weighted score.
• Sum the weighted scores.

EFE Matrix Example

Total weighted score of 2.46 indicates that the business has slightly less than average ability to
respond to external factors. (See the page on IFE matrix for an explanation of what category the 2.46
figure falls to.)

Competitive Profile Matrix (CPM)

This is a competitor analysis, which focuses on each company against whom a firm competes
directly. It helps to identify the strengths and weaknesses of the major competitors of the firm, vis-à-
vis the firm. Generally, the Critical Success Factors (CSFs) are compared. In addition, other factors
that can be compared are breadth of product line, sales, distribution, production capacity and
efficiency, technological advantages etc. Using the format shown in Table, a firm can prepare
competitor profile matrix.

Steps to a CPM
 Identify Critical Success Factors (CSF)
 10 or more
 Broad issues
 Internal and external (5 or 6 of each is a good mix)
 Assign a weight to each CSF
 Must add up to 1
 Assign a rating for your firm and each of your competitors
 4 = major strength
 3 = minor strength
 2 = minor weakness
 1 = major weakness
 Multiply weight by rating
 Sum the weighted ratings and compare
After calculating the weighted scores for the firm, and the major competitors, they are compared to
prepare a competitive profile

Differences between EFE and CPM

Following are some of the important differences between EFE (external factor evaluation) and CPM
(competitive profile matrix).

1. In competitive profile matrix, critical success factors include both internal and external
issues.
 2. In external factor evaluation, critical success factors are grouped into opportunities and
threats whereas such grouping does not exist in competitive profile matrix.
3. In external factor evaluation, total weighted scores of a firm can not be compared to the
total weighted scores of rival firms whereas such comparison is possible in competitive
profile matrix.

Planned intended and deliberate strategy - the Rational model

Planned or deliberate strategies come about where there are precise intentions, which are written
down and imposed by a central leadership. Key features include a large number of controls to
ensure surprise-free implementation in an environment, which is controllable, with managers who
are able to ascertain, review and evaluate every option available, and they are then able to choose
what appears to be the best option in the light of rational criteria. Often there is a specialist Strategy
Department.
Organisations using this strategy should
• be large enough to afford the costs of formal analysis
• have goals that are operational.
• operate in an environment that is reasonably predictable and stable.
• take a systematic and structured approach to its development.
• collect internal and external information and integrate decisions into a comprehensive strategy.
• focus on systematic analysis, particularly in the assessment of the costs and benefits of competing
proposals. Strategic planning is seen as a way of preparing for changes and providing direction for
the organisation. It also allows the organisation to co-ordinate its activities internally.

Emergent Strategy
According to Mintzberg and Waters, strategies can be deliberate or emergent or a stage in-between.
There is a corporate intent followed by its implementation. Sometimes this intent is not formally
written down but emerges over time as part of the culture, as a series of related decisions.
Example 1
Top-down
A culture of like minded people who have values which coincide on a focus - on quality or a desire to
be internationally known etc.
Example
2 Bottom-up
Out in the field, a salesman visits a customer. The product isn’t right, and together they work out
some modifications.
The salesman returns to the company and puts the changes through; after two or three more
rounds, they finally get it right. A new product emerges, which eventually opens up a new market.
The company has changed strategic course’

Opportunistic Strategy
Strategies may come about in or entrepreneurial ways. An organisation may take advantage of
changes in the environment or recognise new skills in an opportunistic manner. Alternatively, a firm
may be set up by an entrepreneur because of an
opportunity in the market place.
In the entrepreneurial mode, strategy-making is dominated by the active search for new
opportunities, and is characterised by dramatic leaps forward in the face of uncertainty. Strategy is
developed by significant bold decisions being made.
Growth is the dominant goal of the organisations, and in uncertain conditions, this type of mode can
result in the organisation making significant gains. Entrepreneurial mode - requires the strategy-
making authority to rest with one powerful individual. The environment must be flexible, and the
organisation oriented toward growth. These conditions are most typical of organisations that are
small and/or young The organisation operating in this mode suggests by its actions that the
environment is not flexible, it is a force to be confronted and controlled. Power is centralised in the
chief executive, with an unwillingness to ‘submit’ to authority.
The organisation operating in this mode suggests by its actions that the environment is not flexible,
it is a force to be confronted and controlled. Power is centralised in the chief executive, with an
unwillingness to ‘submit’ to authority.

Schools of Strategy
Introduction - Definition - there are three ‘schools’ of
strategy
The ‘planning’ school
(Andrews, 1987, Ansoff, 1965)
• based on past trends, forecasts and stable structures and environments
• uses a very bureaucratic a rational manner
• tries to achieving a ‘fit’ between the organisational strategy and its environment.
• Requires detailed and inflexible planning not suitable in turbulent markets.

Example:used in mature, stable markets and industries, public sector.

The ‘positional’ school

• The focus is also on a rational, analytical approach of making strategy
• attempts to place the organisation and its products in a favourable market or environment.
• It is heavily based on performance measurement and decision making tools.
• Porter (1985) competitive advantage factors discussed in detail in other sections
• Boston Consulting Group Matrix - BCG - of four cells - cash cows, stars dogs and problem children,
based on income from market share and on potential market growth
• GE Matrix a large three-dimensional matrix extending the BCG which is only two-dimensional

BCG Matrix
GE Matrix
The ‘resource based’ school
Robert Grant 1998,
• This looks to the internal environent instead of the market, and
• incorporates the ‘core competence’ approach of Prahalad and Hamel, 1994
• Based on an ‘inside-out’ approach suggesting that the competitive advantage of an organisation is
based on its own distinctive resources, capabilities and competences.
• Danger of ignoring the external environment.
• However Grant and others do not consider culture and HRM
 Chapter 6
Internal Analysis
Assessment of Company Performance
Management & Business Functions Framework
Other Frameworks for Organisational and Internal Analysis
Analytical Tool: IFE Matrix

Internal Environmental Analysis

Internal Environmental analysis essentially identifies the actors - individuals and institutions - that
have some influence on a firm’s functioning; these can be shaped to a firm’s advantage.

The internal environmental analysis gives an understanding of the factors responsible for the
potential success or failure of a firm. This analysis essentially identifies the actors- individuals and
institutions- that have some influence on a firm’s functioning; these can be shaped to a firm’s
advantage. This is the layer next to the outer layer: a company’s external environment - political,
economic, social and technological forces; external environment; it is, contrarily, not subject to a
firm’s control, and presents opportunities and threats.

The internal environment, which is close to the firm, and on which a firm has relatively a higher
degree of control (unlike in the case of forces in the external environment on which a firm has
absolutely no control) consists of (1) company’s internal setting-organizational structure, its mission,
relationship among its functions and the prevalent work culture, (2) suppliers, (3) intermediaries, (4)
customers, (5) competitors, and (6) interest groups like general public and employee groups

Critical Success Factor Analysis or Key Success Factors

Critical Success Factor (CSF) Analysis is a tool to identify the factors that are very critical to the
success of a firm; this is usually done at business unit level. This analysis helps an analyst understand
either (1) what specific factors are responsible for the current success, or (2) what specific factors
have to be focused on in managing a firm to become successful.

These factors vary from industry to industry, and from firm to firm. For example, plant and
technology are very critical for steel-making but committed workforce is very crucial for a software
development.

Similarly, for a brick-mortar book-seller, shop location and physical facilities are more critical than
for an online book seller whose critical success factor might be user-friendly website.

The critical success factors of ONGC, among others, are (1) highly qualified and well-trained
manpower, (2) best drilling technology, (3) entrepreneurial leadership, (4) availability of rich natural
resources, and (5) sufficient autonomy.

Simply put, it helps an analyst or a strategist know what was very important to the firm, and focus
on what is important at the present.

Internal Analysis
No plan- big or small, strategic or tactical- can succeed if it is made without reference to the context
in which it is going to operate. When internal context is understood, the points that emerge include
its strengths, weaknesses, resources needed and competencies that have to be built. Understanding
internal context is ‘internal analysis’, which is defined as follows.

Internal Analysis is an exercise to list a firm’s resources, strengths, and weaknesses.

Internal Analysis

What is outside a firm-

External Analysis

What is inside
a firm-
Internal
Analysis

Internal Analysis Activity Chain

Identify Evaluate Determin

e

Challenges of Internal Analysis

The caveat here is that certain factors which were traditionally of strategic importance cannot
remain so in this globalized scenario, at least to some degree if not absolutely. For example,
availability of raw material or cheap labor or governmental protection against competitors is no
longer a strategic internal factor; this is so because once the borders between nations are erased,
resources and skills freely flow to reach where they are most needed from where they are
abundantly available. This is a new challenge to strategic analysts operating in this globalized
economic order.

A few of the challenges in internal analysis include industry variation and company variation.

What is considered as a strength in a particular industry may not be so in another industry. For
example, availability of good cotton may be critical to the success of a firm in textile industry but in
electronics industry, raw material is not as critical as that in textile industry. Even in the same
industry, what is critical to one firm may not be so in another firm; for one hotel, lower costs may be
important, but for another hotel, costs don’t matter as much as service does. It implies that
criticality varies by company also.

Another example would be that location may be critical to a book retailer selling through a
showroom located downtown, but for a book retailer of mail-order business format, location is not
as important.

Internal Analysis Vs Organizational Analysis

Organizational Analysis embodies ‘organizational appraisal’ too, in that the importance (criticality) of
the factors- how strong those factors are in terms of contribution to organizational goals- is
determined.

Organizational Analysis embodies ‘organizational appraisal’ too, as already explained in the

foregoing, in that the importance (criticality) of the factors- how strong those factors are in terms of
contribution to organizational goals- is determined. This is necessary because mere listing of factors
either serves very little purpose or leaves everything to the intuition or judgment of a reader. A
complete internal analysis or internal audit consists of profiling of strengths and weaknesses as well
as determination of potency of a strength and gravity of a weakness. In internal analysis or internal
audit, comparison of a factor’s contribution with the target set or with that of the other similar
department or an industry standard is made to facilitate determination of value of each factor or
activity.

Process of Internal Analysis

Organization Analysis implies developing a profile of an organization along its lines of its
activities-either along its functions or around the component operations in the manufacturing of a
product or producing service. These functions or activities, when identified and strung together, give
a broad picture about which activities of an organization are contributing to either better sale of its
products and services or their production or improvement in the firm’s profits, or reduction in its
costs, or boosting the firm’s goodwill. For example, design department contributes to production
and sale, manufacturing department or its wings produce goods, distribution system facilitates
marketing, advertising department pushes the sales, marketing department organizes outflow of
goods and services. After identifying these activities or departments or functions, those which are
best contributing to the goals of the firm are evaluated and ranked. The outcome of such an
evaluation is an identification of the most critical functions of the organization. Internal Analysis can
broadly be done under five approaches: (1) Function Approach (2) Value Chain Approach (3) Internal
Factor Analysis (4) Critical Success Factor Analysis, and (5) SWOT analysis.

Approaches to Internal Analysis

Functions Value Chain Internal Factor Critical Success SWOT Analysis

Approach Approach Analysis Factor Analysis

Resources Resources Support and Resources Strengths in

Strengths Strengths Resistance from: Capabilities Operations &
Competencies Competencies Operations Resources
Capabilities Capabilities Internal Setting
Weaknesses Weaknesses Weaknesses in
Gaps Gaps Suppliers Operations &
Resources
Competitors

Intermediaries

Customers

Interest Groups

Further, these activities are studied to understand what factors have contributed to their
current level of output;

for example, while higher sales are analyzed for a particular year or in a particular department,
they may be attributed to particular sales persons, or particular outlets or particular models of
distribution or particular campaigns.

Similarly, for a perceptible rise in the production, certain factors may be clearly found to be
responsible-new production incentive system or adding a new factory or expansion of production
capacity.

All such analyses lead to the identification of strengths and weaknesses of the factors engaged
to contribute to the goals of an organization. Simply stated, organizational analysis is the
identification of factors responsible for achievement of organizational goals besides establishing the
strengths and weaknesses of the factors so identified. It is worthy of note here that analysis in
strategic management revolves around strengths and weaknesses of the organizational factors.
Further, the distinct competencies or critical strengths are also referred to as ‘key internal forces’. It
is the function of internal analyst or organizational analyst or internal auditor to identify them.

What is a Competence?

A ‘competence’ is an ability to do something. When applied to companies we say:

  A company has a strength or a high competence activity if it can out-perform most
competitors on a competitive factor that customers' value.
 A company has a weakness or a low competence activity if it under-performs most
competitors on a competitive factor that customers' value.

Competence in this sense is a way of describing how well (or not) your firm performs its necessary
activities.

Overall, competence is best thought of as a variable, rather than an attribute. It is not something
that a company has, or does not have, but it is something that a company has to a certain degree.
We judge that degree by comparing it to the performance of its competitors. Thus a company with a
high competence in a particular activity is considered equal to its best competitors in that activity.

Competences - the ability to do something - are underpinned by resources, the things an

organisation needs to perform the task required of it

Contemporary Corporate Story

Rasna’s Organizational Analysis That Preceded Its Decision to Be a Multinational

The brand, which tasted the success in domestic market, and international market as well through
moderate exports, now wants to become a multinational company; for this to happen, it is pursuing
a new strategy - market expansion.

Rasna, a well-known fruit drink concentrate (SDC) brand, owned by Ahmedabad-based Pioma
Industries, is scouting for joint venture partners to expand its trade to former Soviet (CIS) and
African countries. It collaboration options include licensing, technology transfer, joint venture, and
marketing partnership.

Its vision is to be a global leader in processed foods. Its mission is to bring to the global market high
quality processed foods, beverages and confectionaries through superior technology. Its current
focus is to give the global consumers the true flavor of the Indian foods through its ethnic recipes.

In April 2008, with an annual turnover of Rs.291 crores (April, 2008), Rasna held a market share of
close to 97 % of soft-drink concentrate market in India. It currently exports its concentrate-11
products- to more than 40 countries in Europe, Asia and Africa. Before 1979, it was known as ‘Jaffe’
and marketed with the help of Voltas. It has now eight manufacturing units in India.

Besides expansion to CIS and African countries, its significant strategic initiatives include
consolidation of mass market segment for soft drink concentrates in sachets in India and expansion
of its fast food chain, Devil’s Work Shop. They want to expand them from the present 4 outlets to
100 by 2010.

Its products include Rasna Instant Drink, GoFrut Instant Drink, Fruto Instant Drink, Body Fuel Health
Drink, Rasna Shake-Up, Rasna Juc Up, Rasna Soft Drink Concentrate, Rasna Fruit Jams, Rasna Fruit
Cordial, Rasna 1/3 Sugar, and Rasna Flavors. Rasna has recently ( March 2008) launched Rasna
FruitPlus, a fat-free health drink concentrate containing fruit powder, vitamins and calcium; it will be
sold in both bottled packs and pouches. This drink concentrate, a rare soft drink of fruit-based
concentrate and nutrients for the Indian consumers will compete with juice brands like Tropicana as
well as the soft drinks like Frooti and Maaza.

With the kind of background given in the foregoing, Rasna is all set to embark on an expansion into
foreign turf.

Rasna’s internal analysis presumably preceded its strategy formulation involving expansion into
foreign markets. The factors which must have emerged from such exercise are as follows. (The
information given on its website reveals Rasna’s internal factors.)1

(1) flexibility in developing SKUs as required by the market, (2) sourcing quality raw material at
competitive prices, (3) quality assurance systems, (4) state- of- art technology in manufacturing and
packing, (5) strong and active R&D function, (6) knowledge of markets, (7) sharing of knowledge
among the personnel, (8) good cost control systems, (9) right interface with the consumers, (10) a
system to deliver natural, fresh products all through the year, (11) highly motivated and committed
managers, and (12) pursuit of a plan for phased and focused expansion into new products and
markets,

The foregoing factors which have emerged out of an internal analysis exercise drive and support its
strategic move involving expansion into foreign countries. In the absence of such an exercise, any
wishful moves will most likely confront a firm with unpleasant and expensive surprises.

Approaches to Internal Analysis

Internal Analysis is an exercise to list a firm’s resources, strengths, and weaknesses. An

understanding of a firm’s resources is a prerequisite to formulation of strategy; this prescription is an
offshoot of a theory called ‘Resource-Based View’.

Resource-Based View

What is a resource

A resource is something your organisation owns or has access to even if that access is temporary.
Resources can be either tangible or intangible:

Tangible resources are relatively obvious. Examples include buildings, plant, equipment, exclusive
licences, patents, stocks, land, debtors, employees – generally tangible resources can be touched or
felt; they have a physical shape.

Intangible resources are, by definition less easy to recognise. They include skills, experience and
knowledge of employees, advisers, suppliers and distributors. Skills, knowledge and experience can
also be held or embodied in systems, in-house databases, personal and organisational networks,
brands and reputation. An organisation’s culture and values can be very important resources too,
especially, for example, the prevailing attitudes to customers, quality and change.

Note that many of these resources lie within a firm’s ownership, for example stocks and equipment.
Many others are not owned but can be accessed; for example the experience and knowledge of
suppliers, customers or advisers. Other, often very important, resources are the skills and knowledge
of your employees. They are available to the company today but, having free will, they can leave
whenever they wish.
Model

The view of Hitt, Hoskisson and Ireland, the Resource-Based Model of above-average returns gives
some idea of ‘Resource-Based View’. According to them, it involves ‘identification of firm’s resources
and unique capabilities, and determination of the potential of such resources and capabilities in
terms of competitive edge; this is done before an attractive industry is chosen and a strategy is
formulated to utilize its resources and capabilities vis-à-vis the opportunities presented by the
external environment’. Essentially, it is about determining the unique capabilities of a firm and
pitting the same against the opportunities.

Resource-based view (RBV), which is the opposite of Industrial Organization View, lays emphasis on
a company’s resources and competitive capability for organizational success. Jay Barney has
proposed this view. Industrial Organization view lays stress on a firm’s fit with the external
environment

Resource-based view theory primarily divides the firm’s resources into three categories: (a)
physical resources consisting of plant, land, equipment, technology, and the like, (b) human
resources consisting of the manpower, their skills, their work culture, their training, experience,
intelligence, abilities and so on, and (c) organizational resources consisting of softer aspects of an
organization encompassing structure, systems, processes, patents, trademarks, brand value and so
on.

The Components of Resource-Based View

Physical Human Resources Organizational

Resources Include: Resources
Include: Skills Include:
Plant Work culture Structure
Systems
Land Training Processes
Equipment Experience Brand Value

The unique combination of resources, their magnitude and nature, not possessed by any other
firm, constitute the competitive advantage of a firm. For this unique position to be obtained, a firm
has to thoughtfully develop and maintain the resources that no other firm has, at least in the
combination it does.

The two critical assumptions of RBV are that resources must also be heterogeneous and immobile.

Heterogeneous. The first assumption is that skills, capabilities and other resources that
organizations possess differ from one company to another. If organizations would have the same
amount and mix of resources, they could not employ different strategies to outcompete each other.
What one company would do, the other could simply follow and no competitive advantage could be
achieved. This is the scenario of perfect competition, yet real world markets are far from perfectly
competitive and some companies, which are exposed to the same external and competitive forces
(same external conditions), are able to implement different strategies and outperform each other.
Therefore, RBV assumes that companies achieve competitive advantage by using their different
bundles of resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how two
companies that operate in the same industry and thus, are exposed to the same external forces, can
achieve different organizational performance due to the difference in resources. Apple competes
with Samsung in tablets and smartphones markets, where Apple sells its products at much higher
prices and, as a result, reaps higher profit margins. Why Samsung does not follow the same strategy?
Simply because Samsung does not have the same brand reputation or is capable to design user-
friendly products like Apple does. (heterogeneous resources)

Immobile. The second assumption of RBV is that resources are not mobile and do not move from
company to company, at least in short-run. Due to this immobility, companies cannot replicate
rivals’ resources and implement the same strategies. Intangible resources, such as brand equity,
processes, knowledge or intellectual property are usually immobile.

For example, Infosys, the Indian software giant, developed the best mix of highly motivated
manpower, client servicing apparatus, brand image and an effective selling and execution
mechanism.

Continuing the example of Infosys, one may easily figure out its three empirical indicators: (1)
its committed manpower, their training systems and effective execution can be considered as rare,
since very few firms possess this combination, (2) the committed and efficient manpower of Infosys
is hard to imitate or duplicate, and (3) there is no substitute for its committed and efficient
manpower in the imaginable near future.

Infosys enjoys a competitive advantage due to these rare, inimitable, non-substitutable, and
valuable human resources; this shows that Infosys has adopted Resource-based View to build a
competitive advantage.
VRIO Analysis

VRIO Analysis is an analytical technique briliant for the evaluation of company’s resources and thus
the competitive advantage. VRIO is an acronym from the initials of the names of the evaluation
dimensions: Value, Rareness, Imitability, Organization.

The VRIO Analysis was developed by Jay B. Barney as a way of evaluating the resources of an
organization (company’s micro-environment) which are as follows:

 Financial resources
 Human resources
 Material resources
 Non-material resources (information, knowledge)

VRIO is an acronym for a four-question framework of value, rarity, imitability, and organization.
These four components are typically approached in the style of a decision tree:

 Value: Do you offer a resource that adds value for customers? Are you able to exploit an
opportunity or neutralize competition with an internal capability?
o No: You are at a competitive disadvantage and need to reassess your resources and
capabilities to uncover value.
o Yes: If value is established, move on in your VRIO analysis to rarity.

 Rarity: Do you control scarce resources or capabilities? Do you own something that’s hard to
find yet in demand?
o No: You have value but lack rarity, putting your company in a position of
competitive parity. Your resources are valuable but common, which makes
 competing in the marketplace more challenging (but not impossible). It’s
recommended to go back one step and reassess.
o Yes: With value and rarity identified, your next hurdle is imitability.

 Imitability: Is it expensive to duplicate your organization’s resource or capability? Is it

difficult to find an equivalent substitute to compete with your offerings?
o No: If your resource has value and rarity, but is affordable or easy to copy, you have
a temporary competitive advantage. It will require considerable effort to stay ahead
of competitors and differentiate your services—go back one step and reassess.
o Yes: You offer something that’s valuable, rare, and hard to imitate—now the focus is
on your organization.

 Organization: Does your company have organized management systems, processes,

structures, and culture to capitalize on resources and capabilities?
o No: Without the internal organization and support, it will be difficult to fully realize
the potential of your valuable, rare, and costly-to-imitate resources. Your company
will have a unused competitive advantage and will need to reassess how to attain
the needed organization.
o Yes: Your company has achieved the ultimate goal of sustained competitive
advantage when it has successfully identified all four components of the VRIO
framework.

VRIO analysis is a complement to a PESTEL analysis (which assesses macro-environment). VRIO is

used to assess the situation inside the organization (enterprise) - its resources, their competitive
implication and possible potential for improvement in the given area or for a given resource. Such
an assessment is then used for example in the strategic management of development in various
areas or for decision making about the advantage of an external or internal process and the securing
service (e.g. outsourcing decision).

 If the resource is not valuable it should be outsourced because it brings no value to us

 If the resource is valuable but not rare the company is in competitive conformity. It means
we are not worse than our competition,
 If the resource is valuable and rare but it is not expensive to imitate it, we have a temporary
competitive advantage. Other companies will try to imitate it in the near future, then we
lost our competitive advantage.
 If the resource is valuable, rare and is expensive to imitate it but we are not able to
organization our company, the resource become expensive for us (unused incurred costs)
 if we can manage the advantage and we are able to organize our company and temporary
competitive advantage, it becomes as permanent competitive advantage

A real-life VRIO framework example is Google.

There’s no doubt that Google is one of the most powerful companies in the world, and its success
arguably stems from a sustained competitive advantage in human capital management. If we were
to break down Google’s VRIO framework from the HR perspective, it might look something like this:

 Value: Use human capital management data to hire and retain innovative, productive
employees. These employees consistently create some of the most popular consumer
products and services in the world.
  Rarity: No other companies are using data-based employee management so extensively.

 Imitability: Data-based human capital management is both costly and difficult to imitate, at
least for the near future. Companies have to build the software and invest in training their
HR staff on the new technology and strategy.

 Organization: Google is organized to capture value from this capability. The IT department
has the skills to collect and maintain the data, while HR and team leaders are trained on how
to use the data to hire, promote, manage, and improve performance of employees.

E.G.

Internal Analysis Approaches

Internal audit or internal analysis is usually done on traditional functions: production, marketing,
finance, human resources, technology and so on. This is referred to as ‘Function Approach’

Internal audit or internal analysis is usually done around traditional functions: production,
marketing, finance, human resources, technology and so on. This is referred to as ‘Function
Approach’. Each of these functions is further broken down to identify critical sub-functions, and their
strength is also determined in terms of their contribution to organizational goals. A general checklist
of functions or sub-functions is given in Table 4.2 The types of functions vary by industry. For
example, for a university, curriculum development may be a function while in a hospital, patient care
may be one. For a consumer goods firm, manufacturing is a vital function while for a large retailing
firm, sourcing/procurement department represents a very critical function.

These functions are each rated in regards to their importance to the firm with the help of a tool
called ‘Internal Factor Evaluation Matrix’, the discussion of which is presented a little later.

The other alternative approach to Function Approach is ‘Value Chain Approach’, in which
analysis and evaluation of the nine activities-five primary activities and four subsidiary ones as
identified by Michael Porter-is made to determine where the organization has to improve further.
These activities constitute a standard list of inbound logistics, operations, outbound logistics,
marketing, service, procurement, technology development, human resources and firm
infrastructure. Regardless of the type of organization, value chain analysis goes solely along these
activities in most of the cases if not all; it is needless to say that in this analysis, the functions are
fixed and standard. The description of this analysis is presented after ‘the function approach to
internal analysis’ is discussed.

Function Approach

Function Approach concerns itself with the identification and evaluation of strengths and
weaknesses of each function, commonly known as functional department. The functions that are
commonly found include production, marketing, finance, human resources, R&D, and general
management.

Function Approach

Production

General
Marketing
Manageme-
nt
Sales
Profit
Goodwill
Cost Reduction

Research&
Finance
Development

Human
Resources
Review of performance history of a firm on the lines of products, markets, departments, regions,
functionaries, key customers and so on lays bare who and which of them are contributing or have
contributed substantially or, conversely, underperforming noticeably; this review reveals the key
internal factors that have to be focused on and managed.

Function Approach refers to analysis of each function of an organization so its performance

capabilities are understood.

Functions and Sub-functions

Production
 Factories that work up to full capacity with the least cost of production;
 Smooth and abundant availability of raw material and their cost;
 Suppliers who are reliable and committed;
 Designing talent, and the pace and success of new product development function;
 Inventory levels that provide continuity in production with low carriage costs;
 Optimal utilization of facilities;
 Information systems that facilitate optimization of inventory at factory and outlet levels,
 optimal work assignment to machines and other facilities, and the like;
 Layout of facilities and systems of material handling, and their efficiency;
 Research and development activities and their productivity;
 Production processes that give high productivity and low wastage at low cost;
 The desirable scale of production that returns economies of scale;
 The production systems that give economies of scope and the resultant benefit of mass
customization;
 The desirability of sub-contracting and outsourcing;
 The necessity of integration-backward and forward;
 Quality control systems, their contribution to the customer acceptance of production, and
the like;
 Technological abilities consisting of cutting-edge processes or plant or systems;

Marketing
 Effectiveness of the segmentation, targeting and positioning;
 The most profitable customer groups and markets;
 Customer analysis that reveals to what extent the customers’ needs are met;
 The product lines that sell well and those that yield high profits;
 The distribution channels that perform well and to what extent they cover;
 The advertisement media and campaigns that are effective;
 The effectiveness of the sales organization;
 The efficiency of marketing information systems;
 The pricing policy and its reasonableness in terms of market share, growth and
profitability;
 Brand loyalty, brand image, and the scope left to improve it further;
  The level of post-sales service;

Human Resources
• Skills, Knowledge and Abilities;
• Commitment to the firm and the motivational level of the employees;
• Selection practices;
• Cultural composition of employees;
• Pay parity relative to industry standards, incentive systems and compensation methods;
• Attrition levels and absenteeism;
• Aggregate Personnel Experience;
• Employee productivity;
• Recruitment sources and their effectiveness;
• Selection practices that sifts through the best talent;
• Training methods that keep its people ahead of competition;
• Shared vision and attitude towards team work;
• Human resource productivity metrics & Performance appraisal;
• Career management that leads each employee to grow in his career;
• Institutionalization of knowledge-sharing;
• Industrial relations characterized by harmony and commitment;
• Quality of work life;

Finance
• Efficiency in the usage of funds as reflected in the sales as a ratio of funds in use;
• Reputation with general public and small investors;
• Access to financial markets for both long-term and short-term debt;
• Use of debt in relation to equity;
• Debt Servicing efficiency;
• Efficiency in the use of assets;
• Adequacy of working capital and avoidance of excess working capital;
• Cash Management to strike a balance between unproductive excess and crippling
shortage;
• Profitability in relation to sales, capital employed or equity;
• Cost of capital relative to industry standard;
• Cost control mechanisms;
• Accounting and reporting systems;

General Management
• Vision and mission
• Organizational structure and its fit with the operations;
• Lines of communication and distribution of power;
• Appropriateness of span of control;
• Planning systems and monitoring;
• Organization of strategic management;
• Culture and leadership;
• Core values that were upheld through thick and thin;
 Research and Development
• Importance of research, and the management’s current level of focus on it;
• Budget allotment on research and development as a percent of total sales;
• Appropriate mode of research - in-house or contract;
• Benchmarking of R&D function with the competitors;
• Research and development goals for both short and long terms;
• Ratio of new product launches to the total number of prototypes built;
• Research on manufacturing process improvements;
• Experience of persons in research and their training;
• Benefit-Cost Analysis of research done or the projects in progress.

Value Chain Approach (Michael Porter’s Value chain Approach)

A firm has to concentrate on nine activities that make for the maximization of value to the
consumer. Porter has divided the nine value activities into two groups: five primary and four support
activities.

In the previous approach, functions are the basis to understand a firm’s strengths and weaknesses.
But, usually, functions are not common to all industries, and also not common to all firms in an
industry. They vary. But Michael Portjointer, a Harvard professor, has proposed in his book
Competitive Advantage, another framework wherein the activities to be analysed are fixed; they are
nine. The standpoint that Porter has taken is value which can be generated by doing a particular
activity. A firm has to concentrate on those nine activities that make for maximization of value to the
consumer. Porter has divided the nine value activities into two groups: five primary activities and
four support activities.

Value refers to a single benefit or a bundle of benefits to the consumer, encompassing many aspects
like the best features of the product, best design, easy availability, easy to use and reorder,
economical, best service and anything that a customer needs.

The five primary activities are (1) Inbound logistics, (2) Operations, (3) Outbound logistics, (4) Sales
and Marketing, and (5) Service. These primary activities directly contribute to the creation of
product or service and its delivery and after-sales service to the customer.

The four support activities are (1) Procurement, (2) Technology Development, (3) Human Resource
Management, and (4) Firm Infrastructure. Each of these support activities helps in the effective
execution of each of the primary activities.
Inbound Logistics: The supplies that are coming into a production facility of a firm, called ‘inbound
logistics’, have to be correctly timed, properly received, correctly stored in a warehouse, and
correctly entered into data base. Incorrect data entry management, for example, may result in
denial of a request for transfer of the same to an indenting department, though it is already there
(because it is not properly entered). This entails wastage, cost, idle time and poor service. Each of
the numerous activities in inbound logistics has the potential to make or break the value of product
and service.

Operations: Operations are the manufacturing activities that turn raw material into products; they
are, on the one hand, doubtlessly the sources of wastage, avoidable expenditure, low productivity,
fatigue to the workers, and delay in the completion of the orders, but have the widest scope to
create value, on the other hand. The operations are there in service firms too; for example, hospitals
convert manpower, infrastructure and technology into patient care service. The scheduling of
doctors and equipment are part of operations of a hospital.

Outbound Logistics: The activities involved in arranging timely transportation of the manufactured
products to the points where they are consumed are referred to as ‘Outbound logistics’. Outbound
logistics are rated as effective to the extent the required merchandize is available on time with the
lowest possible transportation expenditure and transport damages.

Sales and Marketing: All the activities that aid in the ultimate sale of merchandize are marketing, and
the ultimate transactions that mark the transfer of merchandize to the buyer and the receipt of sales
proceeds are sales.

Service: Service keeps or enhances the value of the product. Products require its manufacturers to
give its buyers the required level of service before and after sales, particularly in respect of technical
products like software or high-tech plant and machinery. Installation, repair, training, supply of parts
and the like fall under service activities. Service is now an important criterion that attracts the
customers to the product and helps in the retention of them.

Support activities
Each of the activities discussed in the foregoing are further facilitated by four support activities;
these are often overlooked, though they are sources of great value. Each of these support activities
permeates all the five primary activities of value chain. They exert a decisive influence on each of
first five but not in an apparent manner; it requires a careful analysis to figure out their influence.

Procurement

The activities involved in the procurement of inputs for the operations are referred to as
procurement. The inputs encompass raw materials, supplies, buildings, machinery and the like. An
effective system of procurement makes for quality output. For example, material procured from
suppliers selected purely on the basis of best criteria – purely on merit- can supply quality material
on time, which, in turn, aids in the quality output at a reasonable price.

Technology Development

The activities involved in improving the technology and the process used in the manufacture of
products and their improvement, and the service procedures constitute Technology Development.
Redesigning of processes, basic research, new product development process, use of information
technology in service and distribution and the like are the different forms of technology
development.

Human Resource Management

The human resources- with their and skills and motivation - are very crucial to the growth and
survival of a firm. Each of the entire gamut of activities involved in the acquisition, training,
motivating, and compensating of the personnel has its absolute influence on how products are made
and distributed, and how customers are given the expected service; so, these activities require the
best attention of the managers and present the highest potential to create value.

Firm Infrastructure

The activities involved in how a firm is managed in all its managerial functions - planning, accounting,
finance, and general management and so on- that do not fall into any of the primary or supporting
activities make the general infrastructure.

For example, a flawed accounting system may ruin the firm as it happened in the case of Worldcom
or Enron; a good accounting system not only facilitates good management but also adds to the
reputation of a firm. So these activities are not to be overlooked when a firm is serious about
creating value.

Simply stated, value chain analysis is an approach that directly zeroes in on where a firm has to
concentrate to create value that leads to sustainable competitive edge. But care has to be taken to
see that the factors that require more focus vary from industry to industry and firm to firm, though
all the nine activity groups have the potential for generating value.
Internal Factor Evaluation (IFE) Matrix

Internal Evaluation Factor Matrix is constructed to determine which strength is more critical than
others. This tool furnishes both an enumeration of strengths and, and the value (in numerical) of
each of them so an aggregate score of strengths and weaknesses is calculated

To evaluate the worth of each identified strength (to determine which strength is more critical than
others), Internal Evaluation Factor Matrix is constructed. This tool furnishes both an enumeration of
strengths and weaknesses in the functional areas of a firm, and the value (in numerical) of each of
them so an aggregate score (a vector sum) of strengths and weaknesses is calculated; this can be
compared with those of the rival firms or industry standard. This tool also facilitates the
understanding of the relationship among their functional areas, and the degree of such relationship.
But the caveat is that numerical value should not be taken to mean that the tool is absolutely
scientific so there is no chance for intuitive judgment. Intuition is also needed. More specifically, a
thorough understanding of the factors included in the matrix is highly important since incorrect
weights given on certain factors may distort the picture.

A five-step process to construct Internal Factor Evaluation Matrix is described in the following.

The Procedure to Construct an IFE Matrix

1. List all the key internal factors- the strengths and weaknesses, usually a total of 10 to 20
factors- as found out from the internal audit process. If a particular factor is both a strength
and weakness, include it in both in strengths and weaknesses.
2. Weight should be given to each of the strengths and weaknesses but the total of all weights
should be equal to 1.0; so the weights should range from 0.0 to 1.00 representing the least
and highest importance of factors respectively as found out from the internal audit. Simply
put, each of these weights represents the importance of it to the success of the firm. Note
that it is a valuation of the factors but not how a firm fared on these factors.
3. Assign a rating to each factor depending on how the firm fares on it; the rating scale is
usually 4-to-1 with 4 indicating a major strength, 3 a minor strength, 2 a minor weakness and
1 a major weakness. To put it another way, strengths are given the ratings 4 and 3 while
weaknesses are given 2 and 1.
4. Multiply each of the scores arrived at by Step 3 with the corresponding weight assigned in
Step 2, which gives a weighted score.
5. Add up all the weighted scores calculated in step 4 to arrive at the total score for the
organization; such final score usually works out between 1 (at its low) and 4 (at its highest).
A score of less than 2.5 indicates a weak internal organization whereas that above 2.5
represents a stronger one.
A Sample Internal Factor Evaluation Matrix for ZSOFT Limited

Key Internal Factors Weight Rating Weighted Score

Internal Strengths
1. Strong customer base 0.10 3.0 0.3
2. Highly motivated workforce 0.10 3.0 0.3
3. World-class infrastructure 0.05 4.0 0.2
4. Strong sales organization 0.05 4.0 0.2
5. Strong R& D 0.05 4.0 0.2
6. Robust execution system 0.05 3.0 0.15
 7. High reputation among investors 0.15 3.0 0.45
8. Leadership 0.10 3.0 0.3
9. Organization for customer service 0.10 2.0 0.2
[Link] systems 0.05 3.0 0.15

Internal Weaknesses
1. Sales expenditure 0.03 2.0 0.06
2. Huge expenditure on land & Buildings 0.02 1.0 0.02
3. Lack of control over operations 0.10 2.0 0.20
4. Training expenditure 0.03 1.0 0.03
5. Lack of collaborations 0.02 2.0 0.04
Total 1.00 2.62

The sum of the weighted scores of ZSOFT Limited works out to 2.62 which is above the average of
2.5; so it can be inferred that its internal factors are strong enough.

In a Nutshell

Internal analysis is a preparatory exercise for strategy formulation. Internal analysis is variously
known as internal analysis, internal situation analysis, organizational analysis, internal environmental
analysis, internal appraisal of firm, internal assessment, internal audit and company analysis. It is an
exercise to understand where a firm stands in terms of capabilities and resources. Resource-based
view (RBV), which is the opposite of Industrial Organization View, lays emphasis on a company’s
resources and competitive capability for organizational success. Capabilities are understood by
understanding its functions. This understanding process is internal analysis.

Activities done to create value signal a firm’s capabilities and scope for improving its performance
further. A firm has to understand and concentrate on nine activities that make for the maximization
of value to the consumer. Porter has divided the nine value activities into two groups: five primary
and four support activities.

Internal Environmental analysis essentially identifies the actors - individuals and institutions - that
have some influence on a firm’s functioning; these can be shaped to a firm’s advantage. Internal
Evaluation Factor Matrix, a numerical tool, is constructed to determine which strength is more
critical than others.

A strategy formulated without considering its abilities and resources have the least chances of
success. The techniques presented in this chapter help the reader understand the importance and
the process of internal analysis.
 Chapter 7
Strategy Analysis and Formulation Tools
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
GE – McKinsey Matrix
Grand Strategy Matrix
Strategy Mapping and the Balanced Scorecard

SWOT analysis also known as internal analysis stands for Strengths, Weaknesses, Opportunities and
Threats. The SWOT analysis involves analysis of both the internal as well as external environment.
SWOT analysis is especially important during strategic planning wherein the organization needs to
decide the strategy which it has to take. The strategic decisions can be made only when the
organization knows everything about itself as well as where it stands in the market. Therefore it uses
“Internal Analysis” or “SWOT Analysis”.

Relation between SWOT analysis and Internal Analysis

The SWOT analysis uses the external business environment as well as internal business environment
to form an “Internal analysis”. This is an analysis done by the organization on how the organization
looks at itself. Hence, it is known as Internal analysis. 

This internal analysis decides what are the capabilities of the organization, what are its weaknesses.
Accordingly, it helps the organization decide which opportunities should be adopted and which
threats should be mitigated.

This internal analysis is then used by the firm to come up with the best solutions of how to move
from Point A (where the company currently stands) to point B (what the company wants to achieve)
The Internal analysis can help a company make decisions with regards to strategy and planning. If a
company looks at a product that it wants to launch, SWOT analysis will tell the company whether the
company is ready or not to launch the product.

SWOT works on the basis of elimination. Once you are ready with the internal analysis and what you
are capable of, the decision making becomes easier and an easier way is paved forward.

The SWOT Matrix

The SWOT matrix is a 2 x 2 four quadrant matrix. It has quadrants dedicated to

 Strengths
 Weaknesses
 Opportunities
 Threats

Among the above, strengths and weaknesses are something that the organization needs to decide
for itself. These are considered as internal environment analysis and should be done with a neutral
view point. A wrong analysis means that the company might think it has great strengths or very few
weaknesses. Hence, the internal analysis must be done correctly and a consultant with a neutral
point of view should be used if needed.

The external environment factors are the Opportunities and threats. All opportunities to any
organization are a factor of External environment. Example – If the government policies are
favorable, if the market is booming or any such positive or negative factors belong to the external
environment. Such external factors give new opportunities to the firm but also bring new threats to
the company. This is why Opportunities and threats are considered as External environment factors.

If a firm wants to grow, it needs to use all the four quadrants of the matrix to come to decisions
regarding growth of the firm.

Elements of SWOT analysis

Strengths

As the name suggests, an organization first needs to look at the strengths it has. This is because
whenever you are taking any decision, you need to know what you are capable of? If your strengths
don’t match your plans, then it is better to delay the plans or think of other ways forward which
match your strengths and capabilities.

Example of Strengths in SWOT Analysis

 What is the marketing mix of the company?

 What is the USP of the company?
 What is the market share of the company?
 How is the management of the company?
 Is the industry demand increasing or decreasing?
 How is the marketing effort of the company?
 What is the brand value and brand equity of the company?
 Examples of Strengths – brand equity, distribution, innovation, customer loyalty.

Weaknesses

More important then Strengths, analysing the weaknesses helps the company in deciding which
opportunities to say NO to. Example – If yours is an engineering company, and it does not have
skilled manpower or training is not done of executives after recruitment, then this is a major
weakness of the company – something which competition can exploit. All your weaknesses can
become opportunities for your growth. If a firm knows that its brand equity is low, then improving
branding can also be an opportunity for the firm.

Example of Weaknesses in SWOT Analysis

 Is the company utilizing resources optimally?

 How are the financials of the company?
 Is the company losing out to competition?
 How is the channel strength of the company?
 How is the loyalty of stake holders including internal and external customers?
 How is the organizational culture?
 Losing brand equity or too much competition?

Knowing your weaknesses can help your firm ward off threats and can also increase the
opportunities available to the firm.

Example – Nokia at one time thought that its Symbian OS was unbeatable and it did not adopt to
Android. While Nokia thought its OS was its strengths, it turned out that Symbian OS was in fact a
weakness and Android soon took over. Same ways, Apple’s Iphone was a game changer as well due
to its OS and hardware.

Opportunities

The crux of a SWOT analysis is to find out opportunities which are available to the brand. It is not
necessary that all these opportunities will be explored. Remember – SWOT is made of four
quadrants and each quadrant supports and helps in decision making. So if there is an opportunity, it
can be negated by a weakness or even a strength. Important is to list all the opportunities possible
to the firm, and then decide whether the opportunities can be explored by the firm.

Opportunities are presented to a firm by the external environment factors like Competitors in the
industry, government norms in the industry, prevelant market tactics and strategies, so on and so
forth.

Example of Opportunities in SWOT Analysis

 Any innovation possible?

 Left out markets and geographical territories?
 Any niche markets to be covered?
 New technology that can be applied to improve topline or bottomline?
 Developing mutually beneficial partnerships?
 Acquiring or merging with a similar product / company?
 Product line extensions?

Example – The best example of Opportunities being present in the market is E-commerce. Firms
which found it tough to reach the nook and corner of the country via distributors, are now present
online and even the most rural customers have a wide open market place. However, there is a huge
transportation cost associated with E-commerce. At the same time, there is huge competition as
well. So although it is an opportunity, the firm needs to look at all other quadrants of the SWOT
matrix to take a decision.

Threats

Threats are factors which are not internal to the firm and are more external in nature. Threats to the
firm can arise from many different angles. It is important that companies make plans to ward off
these threats. While exploring a new opportunity, a company cannot let a threat invade its current
market. Acting and adapting against threats to the company is needed at all costs.

Example of Threats in SWOT Analysis

 Increase in competition
 Changes in pricing
 Rising bottomline and dropping topline
 Credit control
 Outdated technologies
 Poor cost control
 Ineffective processes
 Political and environmental influence?
Example – The best example of threat is the change in the last 20 years itself of the massive usage of
desktop to laptop and finally to smartphone. Laptops ate the market of Desktops and now even
Laptops are slowly dropping in sales due to massive sales of smartphones.

Importance of SWOT analysis – Advantages of SWOT analysis

 Helps firm conduct an internal analysis – For growth, the most important factor is to
analyse yourself. SWOT analysis does exactly that for any firm.
 Helps the firm improve upon its weaknesses – A firm uses creative ways and feedbacks to
find out all weaknesses about itself. This is the step 1 of any improvement exercise – to find
out ways that you can improve.
 Helps in strategy and Decision making – Because SWOT analysis focuses on all different
aspects of an organization, it can help with quick decision making and also helps in strategy.
 Determines threats which need to be acted on – SWOT matrix helps analyse the threats to
the brand or to the company. This with combination of weaknesses, gives strategies which
can be acted upon to make the organization even more competitive.
 Can help decide short term and long term objectives – There many be many plans that the
company wants to implement. But deciding which plans are the priority and which can be
implemented later is the job of SWOT analysis.
 Helps understand barriers to growth – There are numerous barriers which a firm has. SWOT
analysis helps pin point these barriers and threats which can be overcome to explore more
opportunities.
 Helps in adjusting strategy – It is not necessary that every plan of an organization will be
successful. The company might have to keep adjusting its strategies based on results. With a
proper SWOT in place, the company can adjust after looking at its strengths and weaknesses
and keep adjusting until it mitigates threats or conquers opportunities.
 Paves the way forward – Strategy involves elimination of all alternatives and determining
which is the best way forward. In such decision making, SWOT is the perfect tool as it helps
in elimination of goals and objectives which are not achievable for the company thereby
leaving the objectives which can be immediately pursued.

SWOT analysis Examples

There are many SWOT analysis examples and actual SWOT analysis that we have conducted on this
site. Here are some of them

SWOT of Adidas

SWOT of Amazon

SWOT of Zara

List of all SWOT articles

SWOT Analysis Template

Here is a SWOT analysis template in Excel format. All you have to do is utilize the SWOT template to
fill in the strengths, weaknesses, opportunities and threats!

How SWOT analysis helps in decision making?

  Strengths – Gives confidence about factors which the company got right and which it can
capitalize on.
 Weaknesses – Shows the major weaknesses within a company which the company needs to
work on
 Opportunities – Informs of the opportunities available to the company to increase business
and get further customers
 Threats – Determines the major threats for the company, whether they be in internal
environment or external.

Summary – SWOT Analysis is excellent for the company to keep a track on its own activities and to
determine where the company stands in market. SWOT analysis is becoming increasingly important
with the tremendous increase in competition as well as the changing market dynamics.

 SO Strategies

 use a firm’s internal strengths to take advantage of external opportunities

 WO Strategies

 aim at improving internal weaknesses by taking advantage of external opportunities

 ST Strategies

 use a firm’s strengths to avoid or reduce the impact of external threats

 WT Strategies

 defensive tactics directed at reducing internal weakness and avoiding external

threats

SPACE Matrix Strategic Management Method

The SPACE matrix is a management tool used to analyze a company. It is used to determine what
type of a strategy a company should undertake. The Strategic Position & ACtion Evaluation matrix
or short a SPACE  matrix is a strategic management tool that focuses on strategy formulation
especially as related to the competitive position of an organization.

The SPACE matrix can be used as a basis for other analyses, such as the SWOT analysis, BCG matrix
model, industry analysis, or assessing strategic alternatives (IE matrix).

The SPACE matrix is broken down to four quadrants where each quadrant suggests a different type
or a nature of a strategy:

Aggressive

Conservative

Defensive

Competitive
The analysis describes the external environment using two criteria:

 Environmental Stability (ES) - it is influenced by the following subfactors: technological

change, inflation rate, demand volatility, price range of competitive products, price elasticity
of demand, pressure from the substitutes
 Industry Attractiveness (IA) - it is influenced by the following subfactors: growth potential,
profit potential, financial stability, resource utilization, complexity of entering the industry,
labor productivity, capacity utilization, bargaining power of manufacturers

The inside environment is also described by two criteria:

 Competitive advantage (CA) - it is influenced by the following factors: market share, product
quality, product lifecycle, innovation cycle, customer loyalty, vertical integration
 Financial strength (FS) - it is influenced by the following indicators: return on investment,
liquidity, debt ratio, available versus required capital, cash flow, inventory turnover

According to this model the SPACE analysis is used in strategic management. It concerns of key
decisions that are made by CEO and senior management of the organization.

To evaluate:

 For each subfactor in each criterion a value of 0-6 is assigned (for CA and ES it is 0 to -6)
 For each criterion, the value of the total factor is expressed as the mean of the individual
factors.
 The values of factors are put into the relevant axes of the matrix (see figure)
 In the quadrant, where the largest part of the surface of the resulting quadrilateral is, there
is a suitable alternative of the business behaviour.

The strategic position of the company and alernatives of the strategic behavior are following:
  Aggressive position - an attractive and relatively stable industry, the company has a
competitive advantage and it can protect it, a critical factor is the possible entry of new
competitors into the industry, it may be considered new acquisitions, increasing market
share and focusing on competitive products
 Competitive position - attractive and relatively unstable environment, the company has
some competitive advantage, a critical factor is the company’s financial strength - the
company should look for ways of their attachment, the solution is the possibility of joining
another company, increasing production efficiency and strengthening cash flow
 Conservative position - a stable industry with low growth rate and financially stable
company, a critical factor is in the product competitiveness, company should protect its
succesfull products and develop new ones and think about the possibilities of the
penetration into the industry more attractive and reduce costs.
 Defensive position - an unattractive industry, the company lacks competitive products and
financial resources, a critical factor is the competitiveness, the company should reduce costs,
reduce investment and consider leaving the industry.

This is what a completed SPACE matrix looks like:

This particular SPACE matrix tells us that our company should pursue an aggressive strategy. Our
company has a strong competitive position it the market with rapid growth. It needs to use its
internal strengths to develop a market penetration and market development strategy. This can
include product development, integration with other companies, acquisition of competitors, and so
on.

Definition

BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of
the business brand portfolio and its potential. It classifies business portfolio into four categories
based on industry attractiveness (growth rate of that industry) and competitive position (relative
market share). These two dimensions reveal likely profitability of the business portfolio in terms of
cash needed to support that unit and cash generated by it. The general purpose of the analysis is to
help understand, which brands the firm should invest in and which ones should be divested.
Understanding the tool
Relative market share. One of the dimensions used to evaluate business portfolio is relative market
share. Higher corporate’s market share results in higher cash returns. This is because a firm that
produces more, benefits from higher economies of scale and experience curve, which results in
higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits
with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits but it
also consumes lots of cash, which is used as investment to stimulate further growth. Therefore,
business units that operate in rapid growth industries are cash users and are worth investing in only
when they are expected to grow or maintain market share in the future.

There are four quadrants into which firms brands are classified:

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market.
In general, they are not worth investing in because they generate low or negative cash returns. But
this is not always the truth. Some dogs may be profitable for long period of time, they may provide
synergies for other brands or SBUs or simple act as a defense to counter competitors moves.
Therefore, it is always important to perform deeper analysis of each brand or SBU to make sure they
are not worth investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation

Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as much
cash as possible. The cash gained from “cows” should be invested into stars to support their further
growth. According to growth-share matrix, corporates should not invest into cash cows to induce
growth but only to support them so they can maintain their current market share. Again, this is not
always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating
new products or processes, which may become new stars. If there would be no support for cash
cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash
generators and cash users. They are the primary units in which the company should invest its
money, because stars are expected to become cash cows and generate positive cash flows. Yet, not
all stars become cash flows. This is especially true in rapidly changing industries, where new
innovative products can soon be outcompeted by new technological advancements, so a star instead
of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market
development, product development

Question marks. Question marks are the brands that require much closer consideration. They hold
low market share in fast growing markets consuming large amount of cash and incurring losses. It
has potential to gain market share and become a star, which would later become cash cow. Question
marks do not always succeed and even after large amount of investments they struggle to gain
market share and eventually become dogs. Therefore, they require very close consideration to
decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture

BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly. They can
help as general investment guidelines but should not change strategic thinking. Business should rely
on management judgement, business unit strengths and weaknesses and external environment
factors to make more reasonable investment decisions.

Advantages and disadvantages

Benefits of the matrix:

 Easy to perform;
 Helps to understand the strategic positions of business portfolio;
 It’s a good starting point for further more thorough analysis.

Growth-share analysis has been heavily criticized for its oversimplification and lack of useful
application. Following are the main limitations of the analysis:

 Business can only be classified to four quadrants. It can be confusing to classify an SBU that
falls right in the middle.
 It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are
actually dogs, or vice versa.
 Does not include other external factors that may change the situation completely.
 Market share and industry growth are not the only factors of profitability. Besides, high
market share does not necessarily mean high profits.
 It denies that synergies between different units exist. Dogs can be as important as cash cows
to businesses if it helps to achieve competitive advantage for the rest of the company.

Using the tool

Although BCG analysis has lost its importance due to many limitations, it can still be a useful tool if
performed by following these steps:

 Step 1. Choose the unit

 Step 2. Define the market
 Step 3. Calculate relative market share
 Step 4. Find out market growth rate
 Step 5. Draw the circles on a matrix

Step 1. Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products or a
firm as a unit itself. Which unit will be chosen will have an impact on the whole analysis. Therefore,
it is essential to define the unit for which you’ll do the analysis.

Step 2. Define the market. Defining the market is one of the most important things to do in this
analysis. This is because incorrectly defined market may lead to poor classification. For example, if
we would do the analysis for the Daimler’s Mercedes-Benz car brand in the passenger vehicle
market it would end up as a dog (it holds less than 20% relative market share), but it would be a cash
cow in the luxury car market. It is important to clearly define the market to better understand firm’s
portfolio position.

Step 3. Calculate relative market share. Relative market share can be calculated in terms of
revenues or market share. It is calculated by dividing your own brand’s market share (revenues) by
the market share (or revenues) of your largest competitor in that industry. For example, if your
competitor’s market share in refrigerator’s industry was 25% and your firm’s brand market share
was 10% in the same year, your relative market share would be only 0.4. Relative market share is
given on x-axis. It’s top left corner is set at 1, midpoint at 0.5 and top right corner at 0 (see the
example below for this).
Step 4. Find out market growth rate. The industry growth rate can be found in industry reports,
which are usually available online for free. It can also be calculated by looking at average revenue
growth of the leading industry firms. Market growth rate is measured in percentage terms. The
midpoint of the y-axis is usually set at 10% growth rate, but this can vary. Some industries grow for
years but at average rate of 1 or 2% per year. Therefore, when doing the analysis you should find out
what growth rate is seen as significant (midpoint) to separate cash cows from stars and question
marks from dogs.

Step 5. Draw the circles on a matrix. After calculating all the measures, you should be able to plot
your brands on the matrix. You should do this by drawing a circle for each brand. The size of the
circle should correspond to the proportion of business revenue generated by that brand.

Internal-External (IE) Matrix 

The Internal-External (IE) matrix is another strategic management tool used to analyze working
conditions and strategic position of a business. The Internal External Matrix or short IE matrix is
based on an analysis of internal and external business factors which are combined into one
suggestive model.

The IE matrix is a continuation of the EFE matrix and IFE matrix models.

How does the Internal-External IE matrix work?

The IE matrix belongs to the group of strategic portfolio management tools. In a similar manner like
the BCG matrix, the IE matrix positions an organization into a nine cell matrix.

The IE matrix is based on the following two criteria:

Score from the EFE matrix -- this score is plotted on the y-axis

Score from the IFE matrix -- plotted on the x-axis

The IE matrix works in a way that you plot the total weighted score from the EFE matrix on the y axis
and draw a horizontal line across the plane. Then you take the score calculated in the IFE matrix, plot
it on the x axis, and draw a vertical line across the plane. The point where your horizontal line meets
your vertical line is the determinant of your strategy. This point shows the strategy that your
company should follow.

On the x axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal
position. A score of 2.0 to 2.99 is considered average. A score of 3.0 to 4.0 is strong.
On the y axis, an EFE total weighted score of 1.0 to 1.99 is considered low. A score of 2.0 to 2.99 is
medium. A score of 3.0 to 4.0 is high.

IE matrix example...

Let us take a look at an example. Assuming we calculated IFE matrix for an anonymous company on
the IFE matrix. The total weighted score calculated on this page is 2.79 which points at a company
with an above-average internal strength.

We also calculated the EFE matrix for the same company on the EFE matrix. The total weighted
score calculated for the EFE matrix is 2.46 which suggests a slightly less than average ability to
respond to external factors.

Now we plot these values on axes in the IE matrix.

This IE matrix tells us that our company should hold and maintain its position. The company should
pursue strategies focused on increasing market penetration and product development (more about
this below).

What does the IE matrix tell me?

The horizontal and vertical lines meet in one of the nine cells in the IE matrix. One should follow a
strategy depending on in which cell those lines intersect.

The IE matrix can be divided into three major regions that have different strategy implications.

Cells  I, II, and III suggest the grow and build strategy. This means intensive and aggressive tactical
strategies. Your strategies should focus on market penetration, market development, and product
development. From the operational perspective, a backward integration, forward integration, and
horizontal integration should also be considered.

Cells IV, V, and VI suggest the hold and maintain strategy. In this case, your tactical strategies should
focus on market penetration and product development.
Cells VII, VIII, and IX are characterized with the harvest or exit strategy. If costs for rejuvenating the
business are low, then it should be attempted to revitalize the business. In other cases, aggressive
cost management is a way to play the end game.

What is the difference between the IE matrix and BCG matrix?

First, the IE matrix measures different values on its axes. The BCG matrix measures market growth
and market share. The IE matrix measures a calculated value that captures a group of external and
internal factors. This means that the IE matrix requires more information about the business than
the BCG matrix.

While values for each axis in the BCG matrix are single-factor, values for each axis in the IE matrix are
multi-factor figures.

Because the IE matrix is broader in its definition, strategists often develop both the BCG Matrix and
the IE Matrix when assessing their conditions and formulating strategies.

Is the IE matrix forward-looking?

By default, both the BCG matrix and the IE matrix are constructed using factors related to current
conditions. However, strategists often develop two sets of matrices -- a BCG Matrix and an IE Matrix
for the current state and another set to reflect expectations of the future.

GE-McKinsey nine-box matrix : is a strategy tool that offers a systematic approach for the multi
business corporation to prioritize its investments among its business units.

Understanding the tool

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

Industry Attractiveness

Industry attractiveness indicates how hard or easy it will be for a company to compete in the market
and earn profits. The more profitable the industry is the more attractive it becomes. When
evaluating the industry attractiveness, analysts should look how an industry will change in the long
run rather than in the near future, because the investments needed for the product usually require
long lasting commitment.

Some factor are

 Long run growth rate

 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of
substitutes and available complements
 Industry structure
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors
 Seasonality
 Availability of labor
 Market segmentation

Competitive strength of a business unit or a product

Along the X axis, managers try to determine whether a business unit has a sustainable competitive
advantage or not.

The following factors determine the competitive strength of a business unit:

 Total market share

 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities
 Your business unit strength in meeting industry’s critical success factor
 Strength of a value chain
 Level of product differentiation
 Production flexibility

Using the tool

Step 1. Determine industry attractiveness of each business unit

 Make a list of factors. which factors to include when measuring industry attractiveness.
  Assign weights. Weights indicate how important a factor is to industry’s attractiveness. A
number from 0.01 (not important) to 1.0 (very important) should be assigned to each factor.
The sum of all weights should equal to 1.0.
 Rate the factors. The next thing you need to do is to rate each factor for each of your
product or business unit. Choose the values between ‘1-5’ or ‘1-10’, where ‘1’ indicates the
low industry attractiveness and ‘5’ or ‘10’ high industry attractiveness.
 Calculate the total scores. Total score is the sum of all weighted scores for each business
unit. Total scores allow comparing industry attractiveness for each business unit.

Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score

Industry growth rate 0.25 3 0.75 4 1

Industry size 0.22 3 0.66 3 0.66

Industry profitability 0.18 5 0.90 1 0.18

Industry structure 0.17 4 0.68 4 0.68

Trend of prices 0.09 3 0.27 3 0.27

Market segmentation 0.09 1 0.09 3 0.27

Total score 1.00 - 3.35 - 3.06

Industry Attractiveness (2/2)

Business Unit 3 Business Unit 4

Factor Weight Rating Weighted Score Rating Weighted Score
Industry growth rate 0.25 3 0.75 2 0.50
Industry size 0.22 2 0.44 5 1.10
Industry profitability 0.18 1 0.18 5 0.90
Industry structure 0.17 2 0.34 4 0.68
Trend of prices 0.09 2 0.18 3 0.27
Market segmentation 0.09 2 0.18 3 0.27
Total score 1.00 - 2.07 - 3.72

The consultant will help to determine the weights and to rate them properly so the analysis is as
accurate as possible.

Step 2. Determine the competitive strength of each business unit

‘Step 2’ is the same as ‘Step 1’ only this time, instead of industry attractiveness, the competitive
strength of a business unit is evaluated.

 Make a list of factors.

 Assign weights.
 Rate the factors.
  Calculate the total scores

Competitive Strength (1/2)

Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score
Market share 0.22 2 0.44 2 0.44
Relative growth rate 0.18 3 0.48 2 0.38
Company’s profitability 0.14 3 0.42 1 0.14
Brand value 0.10 1 0.10 2 0.20
VRIO resources 0.20 1 0.20 4 0.80
CPM Score 0.16 2 0.32 5 0.80
Total score 1.00 - 1.96 - 2.74
Competitive Strength (2/2)

Business Unit 3 Business Unit 4

Factor Weight Rating Weighted Score Rating Weighted Score
Market share 0.22 4 0.88 4 0.88
Relative growth rate 0.18 4 0.64 2 0.36
Company’s profitability 0.14 3 0.42 3 0.42
Brand value 0.10 3 0.30 3 0.30
VRIO resources 0.20 4 0.80 4 0.80
CPM Score 0.16 5 0.80 5 0.80
Total score 1.00 - 3.92 - 3.56

Step 3. Plot the business units on a matrix

The size of the circle should correspond to the proportion of the business revenue generated by that
business unit. For example, ‘Business unit 1’ generates 20% revenue and ‘Business unit 2’ generates
40% revenue for the company. The size of a circle for ‘Business unit 1’ will be half the size of a circle
for ‘Business unit 2’.
Step 4. Analyze the information

There are different investment implications you should follow, depending on which boxes your
business units have been plotted. There are 3 groups of boxes: investment/grow,
selectivity/earnings and harvest/divest boxes. Each group of boxes indicates what you should do
with your investments.

Investment implications
Box Invest/Grow Selectivity/Earnings Harvest/Divest
Invest if there’s money left and the
Invest or Definitely Invest just enough to keep the
situation of business unit could be
not? invest business unit operating or divest
improved

Invest/Grow box. Companies should invest into the business units that fall into these boxes as they
promise the highest returns in the future. These business units will require a lot of cash because
they’ll be operating in growing industries and will have to maintain or grow their market share. It is
essential to provide as much resources as possible for BUs so there would be no constraints for them
to grow. The investments should be provided for R&D, advertising, acquisitions and to increase the
production capacity to meet the demand in the future.

Selectivity/Earnings box. You should invest into these BUs only if you have the money left over the
investments in invest/grow business units group and if you believe that BUs will generate cash in the
future. These business units are often considered last as there’s a lot of uncertainty with them. The
general rule should be to invest in business units which operate in huge markets and there are not
many dominant players in the market, so the investments would help to easily win larger market
share.

Harvest/Divest box. The business units that are operating in unattractive industries, don’t have
sustainable competitive advantages or are incapable of achieving it and are performing relatively
poorly fall into harvest/divest boxes. What should companies do with these business units?
First, if the business unit generates surplus cash, companies should treat them the same as the
business units that fall into ‘cash cows’ box in the BCG matrix. This means that the companies should
invest into these business units just enough to keep them operating and collect all the cash
generated by it. In other words, it’s worth to invest into such business as long as investments into it
doesn’t exceed the cash generated from it.

Second, the business units that only make losses should be divested. If that’s impossible and there’s
no way to turn the losses into profits, the company should liquidate the business unit.

Step 5. Identify the future direction of each business unit

For example, our previous evaluations show that the ‘Business Unit 1’ belongs to invest/grow box,
but further analysis of an industry reveals that it’s going to shrink substantially in the near future.

The following table shows how industry attractiveness and business unit competitive strength will
change in 2 years.

Business Unit 1 Business Unit 2 Business Unit 3 Business Unit 4

Industry attractiveness Decrease Stay the same Stay the same Increase
Business unit competitive strength Decrease Increase Increase Decrease

Step 6. Prioritize your investments

The last step is to decide where and how to invest the company’s money. While the matrix makes it
easier by evaluating the business units and identifying the best ones to invest in, it still doesn’t
answer some very important questions:

 Is it really worth investing into some business units?

 How much exactly to invest in?
 Where to invest into business units (more to R&D, marketing, value chain?) to improve their
performance?

Doing the GE McKinsey matrix and answering all the questions takes time, effort and money, but it’s
still one of the most important product portfolio management tools that significantly facilitate
investment decisions.
Advantages

 Helps to prioritize the limited resources in order to achieve the best returns.
 Managers become more aware of how their products or business units perform.
 It’s more sophisticated business portfolio framework than the BCG matrix.
 Identifies the strategic steps the company needs to make to improve the performance of its
business portfolio.

Disadvantages

 Requires a consultant or a highly experienced person to determine industry’s attractiveness

and business unit strength as accurately as possible.
 It is costly to conduct.
 It doesn’t take into account the synergies that could exist between two or more business
units.

Difference between GE McKinsey and BCG matrices

GE McKinsey matrix is a very similar portfolio evaluation framework to BCG matrix. Both matrices
are used to analyze company’s product or business unit portfolio and facilitate the investment
decisions.

The main differences:

 Visual difference. BCG is only a four cell matrix, while GE McKinsey is a nine cell matrix. Nine cells
provide better visual portrait of where business units stand in the matrix. It also separates the
invest/grow cells from harvest/divest cells that are much closer to each other in the BCG matrix and
may confuse others of what investment decisions to make.

Comprehensiveness. The reason why the GE McKinsey framework was developed is that BCG
portfolio tool wasn’t sophisticated enough for the guys from General Electric. In BCG matrix,
competitive strength of a business unit is equal to relative market share, which assumes that the
larger the market share a business has the better it is positioned to compete in the market. This is
true, but it’s too simplistic to assume that it’s the only factor affecting the competition in the market.
The same is with industry attractiveness that is measured only as the market growth rate in BCG. It
comes to no surprise that GE with its complex business portfolio needed something more
comprehensive than that.

Grand Strategy Matrix

Grand strategy matrix is the instrument for creating alternative and different strategies for
the organization. All companies and divisions can be positioned in one of the Grand Strategy Matrix’s
four strategy quadrants. The Grand Strategy Matrix is based on two dimensions: competitive
position and market growth. Data needed for positioning SBUs in the matrix is derived from the
portfolio analysis. This matrix offers feasible strategies for a company to consider which are listed in
sequential order of attractiveness in each quadrant of the matrix.

1. Quadrant I (Strong Competitive Position and Rapid Market Growth) – Firms located in

Quadrant I of the Grand Strategy Matrix are in an excellent strategic position. The first
quadrant refers to the firms or divisions with strong competitive base and operating in fast
moving growth markets. Such firms or divisions are better to adopt and pursue strategies
such as market development, market penetration, product development etc. The idea
behind is to focus and make the current competitive base stronger. In case such firms
possess readily available resources they can move on to integration strategies but should
never be at the cost of diverting attention from current strong competitive base.
2. Quadrant II (Weak Competitive Position and Rapid Market Growth) – Firms positioned in
Quadrant II need to evaluate their present approach to the marketplace seriously. Although
their industry is growing, they are unable to compete effectively, and they need to
determine why the firm’s current approach is ineffectual and how the company can best
change to improve its competitiveness. The suitable strategies for such firms are to develop
the products, markets, and to penetrate into the markets. Because Quadrant II firms are in a
rapid-market-growth industry, an intensive strategy (as opposed to integrative or
diversification) is usually the first option that should be considered. To achieve the
competitive advantage or becoming market leader Quadrant II firms can go into horizontal
integration subject to availability of resources. However if these firms foresee a tough
competitive environment and faster market growth than the growth of the firm, the better
option is to go into divestiture of some divisions or liquidation altogether and change the
business.
3. Quadrant III (Weak Competitive Position and Slow Market Growth) – The firms fall in this
quadrant compete in slow-growth industries and have weak competitive positions. These
firms must make some drastic changes quickly to avoid further demise and possible
 liquidation. Extensive cost and asset reduction (retrenchment) should be pursued first. An
alternative strategy is to shift resources away from the current business into different areas.
If all else fails, the final options for Quadrant III businesses are divestiture or liquidation.
4. Quadrant IV (Strong Competitive Position and Slow Market Growth) – Finally, Quadrant IV
businesses have a strong competitive position but are in a slow-growth industry. Such firms
are better to go into related or unrelated integration in order to create a vast market for
products and services. These firms also have the strength to launch diversified programs into
more promising growth areas. Quadrant IV firms have characteristically high cash flow levels
and limited internal growth needs and often can pursue concentric, horizontal, or
conglomerate diversification successfully. Quadrant IV firms also may pursue joint ventures

strategies listed in the first quadrant of Grand Strategy Matrix are intended to maintain a
firm’s competitive edge and boost rapid growth, while the other three quadrants represent
appropriate actions to take to reach the best position, which is the first quadrant. Increasing
market share, expanding to new markets and creating new products are common strategies.

The efficiency of the management greatly depends upon adoption of and pursuing the strategies
consistent with the market and competitive position of the firm. For devising appropriate strategy
management is required to reveal the firm’s competitive position and market place through a
scientific analysis of its current position. Grand Strategy Matrix is there to simplify the job.

Advantages of Grand Strategy Matrix is that, this model allows better implementation of strategy
because of the intensified focus and objectivity. It conveys a lot of information about corporate
plans in a simplified format.

However, Grand Strategy Matrix may not be as simple as it seems, upon application to real life due
to the unforeseen factors and also complications in the business world. In addition, the relationship
between market share and profitability differs in different industries. Another issue about this model
is that, the grand strategy options are mostly concern on cash related issues but not values of the
firm.

Balance Score Card

Organisations need to find a way to express their strategy simply and understandably – but that way
also needs to reflect the complexity of their relationships and activities. One increasingly popular
framework to combine these qualities is the balanced scorecard (BSC), and specifically the more
recent incarnation, the strategy map. At its simplest the strategy map describes how an organisation
plans to deliver its strategic goals expressed as a one-page systems diagram. The strategy map
outlines the fundamental business logic of the plan, demonstrates the implications for internal and
external stakeholders, codifies the organisational competencies needed, explores what kind of skills
and knowledge staff need, and identifies what resources need to be invested. The strategy map is
generally complemented by a balanced scorecard to track how effectively the plan is being
delivered, and an implementation plan to show how the activities to deliver the plan will be
sequenced and rolled out.
management consultancy@contact usthe management centre

The BSC & Strategy Maps – an introduction

Organisations need to find a way to express their strategy simply and understandably – but that way
also needs to reflect the complexity of their relationships and activities.

One increasingly popular framework to combine these qualities is the balanced scorecard (BSC), and
specifically the more recent incarnation, the strategy map.

At its simplest the strategy map describes how an organisation plans to deliver its strategic goals
expressed as a one-page systems diagram.

The strategy map outlines the fundamental business logic of the plan, demonstrates the implications
for internal and external stakeholders, codifies the organisational competencies needed, explores
what kind of skills and knowledge staff need, and identifies what resources need to be invested.

The strategy map is generally complemented by a balanced scorecard to track how effectively the
plan is being delivered, and an implementation plan to show how the activities to deliver the plan
will be sequenced and rolled out.

Strategy Map

What is it?

Framework

Strategy mapping is a tool created by Balanced Scorecard (BSC) pioneers Robert S Kaplan and David
P Norton. It allows organisations to describe and communicate their strategies. Strategy maps also
serve as an appropriate basis for the development of financial and non-financial Balanced Scorecard
(BSC) measures that can be used to monitor strategy execution and performance.

Strategy maps can be used as a standalone tool to depict an organisation’s strategy. However, their
real value is when they are used as part of a systematic strategic management process that aligns
organisational and individual targets and initiatives with a defined mission and desired strategic
outcomes. Strategy maps can be created for not-for-profit and public service entities, as well as for-
profit enterprises.

The original formulation of the strategy map is based on the ‘four perspectives’ of the BSC –
financial, customer, internal and learning and growth. The financial and customer perspectives – the
outcome perspectives – are developed in response to the basic question ‘What do we want to
accomplish?’ The internal and learning and growth perspectives – the input perspectives – depict
‘How do we plan to accomplish it?’
Example of Strategy Mapping  

What benefits does Strategy Mapping provide?

Strategy maps describe how organisations create value by building on strategic themes such as
‘growth’ or ‘productivity’. They provide a way for companies to ‘tell the story’ of their strategy to
employees and other corporate stakeholders, thereby increasing engagement in the strategic
process.

Strategy maps force organisations to place the onus first on the strategy, then on measuring
implementation, thus removing the problem of numerous, unfocused measures. They form the
appropriate basis for balanced scorecard performance measures, links to appropriate management
and validation techniques, and allocating resources to initiatives and strategies that support an
organisation’s value propositions and overriding objectives.

Actions to take / Dos Actions to Avoid / Don'ts

 Treat the strategy map as an integral part of  Do not treat strategy mapping as a
the strategy management process one-off, or ‘me-too’ exercise
 Engage a broad range of stakeholders – many  Do not forget to incorporate
include external stakeholders as well as strategy mapping into the overall
internal strategy management process
 Connect the strategy map to vision and  Never limit involvement to top
mission management
 Clarify your overriding value proposition  Don’t forget to validate the links
 Cascade the strategy map to business units and measures derived from the
and functional departments strategy mapping process
 Develop business unit and functional strategy  Do not ignore the resource
maps separately to reflect the appropriate requirements of the learning and
drivers of success that will contribute to growth, and internal process
 Actions to take / Dos Actions to Avoid / Don'ts
overall performance initiatives
 Link the strategy map to initiatives and  Do not adopt an inflexible
actions – for example, new customer service approach. Organisations are
goals might require changes in the customer complex and dynamic, and strategy
service process and additional training to maps should reflect the realities of
improve response times or quality the business
 Tie the strategy map to budget and
performance processes
 Include the operating costs and strategic
investments necessary to drive success of
learning and growth, and internal process
initiatives

Balanced Scorecard Basics

The balanced scorecard (BSC) is a strategic planning and management system that organizations use
to:

 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

Scorecard

The Balanced Scorecard concept, popularised by Robert S Kaplan and David P Norton, is a
performance management tool that encompasses the financial measures of an organisation and key
non-financial measures relating to customers or clients, internal processes, and organisational
learning and growth needs. It places these into a concise ‘scorecard’ that can be used to monitor
performance.

Early implementations of the Balanced Scorecard tended to focus on including a balance of

measures in the four domains or perspectives rather than on execution of strategy, but over time it
has become a widely used strategic management tool. The Balanced Scorecard process attempts to
identify important links between financial performance and the underlying customer, internal
processes and organisational metrics. This creates a mechanism for translating the strategic vision
into concrete actions necessary to achieve success.

This characteristic of the Balanced Scorecard places strategy at the core of management. When
implemented properly, it can be used to align measures, actions and rewards to create a proper
focus on the execution of strategic initiatives and achievement of strategic objectives, rather than a
sole focus on the annual budget.

The widespread adoption of the Balanced Scorecard is due in part to its flexibility. Many companies
have implemented their own variations to suit their strategic purposes. The Tesco ‘Steering Wheel’,
for example, includes five perspectives, capturing their commitment to the community in addition to
their financial, customer, operations and people aspects.

The Balanced Scorecard has also been successfully adapted for use by not-for-profit and public
sector organisations. While the top line financial objectives of for-profit organisations are replaced
by mission-related objectives, the process of identifying relevant stakeholder, internal process and
resource measures serves much the same purpose.

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.

 BSC Terminology: Perspectives

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

BSC Terminology: Strategic Objectives

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.

BSC Terminology: Strategy Mapping

One of the most powerful elements in the BSC methodology is the use of strategy mapping to
visualize and communicate how value is created by the organization. A strategy map is a simple
graphic that shows a logical, cause-and-effect connection between strategic objectives (shown as
ovals on the map). Generally speaking, improving performance in the objectives found in the
Organizational Capacity perspective (the bottom row) enables the organization to improve its
Internal Process perspective (the next row up), which, in turn, enables the organization to create
desirable results in the Customer and Financial perspectives (the top two rows).

BSC Terminology: Measures (Key Performance Indicators)

For each objective on the strategy map, at least one measure or Key Performance Indicator (KPI) will
be identified and tracked over time. KPI’s indicate progress toward a desirable outcome. Strategic
KPIs monitor the implementation and effectiveness of an organization's strategies, determine the
gap between actual and targeted performance and determine organization effectiveness and
operational efficiency.  
Good KPIs:

 Provide an objective way to see if strategy is working

 Offer a comparison that gauges the degree of performance change over time
 Focus employees' attention on what matters most to success
 Allow measurement of accomplishments, not just of the work that is performed
 Provide a common language for communication
 Help reduce intangible uncertainty

BSC Terminology: Cascading

Cascading a balanced scorecard means to translate the corporate-wide scorecard (referred to as
Tier 1) down to first business units, support units or departments (Tier 2) and then teams or
individuals (Tier 3). The end result should be focus across all levels of the organization that is
consistent. The organization alignment should be clearly visible through strategy, using the strategy
map, performance measures and targets, and initiatives. Scorecards should be used to improve
accountability through objective and performance measure ownership, and desired employee
behaviors should be incentivized with recognition and rewards.

Cascading strategy focuses the entire organization on strategy and creating line-of-sight between the
work people do and high level desired results. As the management system is cascaded down through
the organization, objectives become more operational and tactical, as do the performance
measures. Accountability follows the objectives and measures, as ownership is defined at each level.
An emphasis on results and the strategies needed to produce results is communicated throughout
the organization. This alignment step is critical to becoming a strategy-focused organization.

 What benefits does the Balanced Scorecard provide?

The Balance Scorecard provides a means to clarify, articulate and communicate strategy. It is a
shorthand way of putting all key measures into a ‘dashboard’ that can be used to monitor results. By
including non-financial measures, it can be used to show how the non-financial aspects of
performance, such as customer satisfaction, drive financial performance.

The Balanced Scorecard is a useful tool for motivating employees and focusing their attention on
factors that are deemed to be critical to long-term performance rather than simply short-term
financial results.
 Chapter-8 &9

Growth Accelerators: Business Web, Market Power, Learning based.

Management Control, Elements, Components of Management
Information Systems

Strategy Evaluation and Control

Performance Measurement and Monitoring

Generic growth accelerators (fast growth tigers)

First, let us take a closer look at the inner workings of growth cycles. Why do they lead to success for
one company rather than another? How can they be managed? And how do we even know they are
there? Every innovative strategy creates its own unique growth cycle, so there can be no definitive
answer to these questions. However, few analyst identified a number of generic feedback loops that
can act as a useful, though not exhaustive, checklist for managers. These effects are called growth
accelerators, since they are all reinforcing loops that drive (and are driven by) the customer base to
produce accelerating growth. There are three broad categories of growth accelerators: business
web, market power, and learning-based accelerators

Business web accelerators

Many reinforcing feedback loops that drive growth cycles are not under the direct control of the
companies concerned. Instead, they rely on the behaviour of external partners motivated by their
own interests. A company’s success in generating these feed-back loops will depend on its ability to
build and sustain a web of partners that coevolve with it. This ability is most critical in the early
phases of market development as businesses race to secure the best partners and distribution
channels. There are several types of business web accelerators:

[Link].

Just as the success of Windows

depends on the availability of applications based on it, many consumer electronics businesses are
dependent on content. It was for content that Sony and Matsushita bought Columbia Pictures, MCA,
and CBS Records. Other players in content-dependent markets may choose to rely on external
partners; Lotus Notes, for instance, fosters the development of applications through its developer
relations program.

[Link] products.

In a few cases, the same reinforcing loop structure applies also to complementary products, such as
the satellite dishes needed to receive Hughes DirecTV’s service.

[Link] and support.

Generally speaking, distribution is a reinforcing feedback loop for any business, in that the morale
ineffectiveness of salespeople increase with success, which then fuels further growth. Distribution
and support are particularly powerful when a product requires service long after purchase, which is
why car makers have dealer networks to sell their vehicles and support their installed base.

[Link].

Few people would buy cars if the necessary infra-structure (roads, gas stations) were lacking. Indeed,
the limited success of alternative fuels like liquid petroleum gas derives partly from the absence of a
supporting infrastructure. As a rule, the development of infrastructure(roads) creates demand for
products (cars) that justify building more infrastructure.

[Link] effects.

These arise when a product’s attractiveness relates to the size of its customer base. Network size is a
key growth accelerator for communication products, as Lotus Notes attests.

[Link] switching costs that harness the power of lock-in.

Spreadsheet users, for instance, often become familiar with a particular

application. Users of Lotus 1-2-3 or Microsoft Excel get to know their program so well that the main
commands, screen layouts, and keyboard shortcuts become “hardwired” in their brains. Customer
learning is a source of enduring loyalty, both for repurchases of the same product and for line
extensions that exploit familiarity, such as suites of PC applications sharing the same look and feel.

Market power accelerators

These are the virtuous cycles that result directly from increased volume and market share. They
come into effect once a market has matured and businesses can begin to exploit their market
leadership. Tigers use these loops to cement early advantages and build unassailable positions.

[Link] of fixed costs.

Every manager knows that expanding production reduces fixed costs per unit output. Although the
direct Benetton scale are sometimes overestimated, they play a key accelerating role in industries
where fixed costs are high and marginal costs low. Back-acetate processing as practised by FIServe,
First Financial Management, and ADP is an example.

[Link] image and brand.

Whether through advertising, word of mouth, or a “fashion effect,” market leadership enhances
visibility and credibility, which in turn strengthen leadership. Many businesses – from fashion
through computer software to drugs – actively manage word of mouth via programs aimed at
opinion leaders.

[Link] power.

In many businesses, size and market leadership confer bargaining power with suppliers, including
suppliers of capital. This translates into lower costs, which can be passed on to customers, breeding
further growth. Medco illustrates how sourcing power can fuel growth.

[Link] selection.

Successful businesses are more likely to attract and retain top talent – a key growth accelerator in
many service businesses (such as investment banking, advertising, and consultancy) and in the
critical functions of industrial companies. This accelerator depends not on bargaining power, but on
the fact that “the best wants to work with the best.”

[Link].

Some companies are by nature intermediaries. For them, a key growth accelerator is making the
market. Enron, for example, became an intermediary for natural gas risk-management products. As
the largest trading centre for these products, Enron can diversify its risk better than any other
company. Consequently, it can offer more tailored, cost-effective products, which in turn attract
more customers.

Learning-based accelerators

The final category of growth accelerators is related to the skills that an organization acquires on the
strength of its customer base. Though important at all stages of a market life cycle, learning
economies are most crucial early on, when businesses are trying to understand customer needs and
satisfy them through the design of their products or services. Later, the focus shifts to improving
production processes and replicating a winning formula in other geographic markets.

[Link] knowledge.

Many companies in many businesses exploit the information they possess about their customers to
obtain a competitive advantage. By developing expert systems to study the geodemographics of its
customer base, First Direct was able to deepen its penetration of existing accounts. Intone marketing
campaign, it achieved response rates of 25 percent, as against an industry average of 1 to 2 percent.
The bank was also able to screen the UK electoral roll using its customer characteristics as a filter to
develop much more targeted direct marketing campaigns. As a result, the acquisition cost of a new
account was cut by three-quarters.

[Link] curve effects.

Successful organizations do not just learn about their customers; they acquire process knowledge
that helps them to serve more customers better. They also use what they learn from their customers
to improve their current products or services and develop new ones.

[Link] knowledge.

Many businesses build on their successes to acquire less tangible, but nonetheless essential,
information and skills. For venture capital firms, for instance, more deals mean more contacts in the
communities in which they operate. Improved knowledge of their environment leads to yet more
deals, thus accelerating growth.

[Link] to replicate.

In virtually all businesses, a company’s ability to replicate what it has already done is a key growth
accelerator, enabling it to penetrate new geographic markets and unfamiliar market segments.
Successful retail businesses, for instance, strive for consistent store formats, as this helps their staff
to replicate behaviours that have proven effective in the past. As such businesses grow, they train
more and more staff to replicate the winning formula in new markets, at the same time developing
better processes and procedures to achieve this objective.

Identifying growth accelerators.

In most industries, some of the generic accelerators have become so widespread that they are
actually required merely to compete. Successful investment banks thrive on their excellent
management of people. Leading consumer goods companies ride the virtuous cycle of market
image. Excellent retailers combine sourcing power with replication capability. In many cases, all
participants play essentially the same game, and success for one hinges on its ability to push harder.
This means that “new game” strategies can be implemented only by introducing fresh growth
accelerators. One pharmaceutical company operating in a developing country had grown at 30
percent a year for three years, but was running out of steam. A hard strategic look at the business
revealed an untapped reinforcing loop. By shifting its distribution system from wholesalers and
pharmacists to direct sales and delivery to doctors, the company could provide doctors with financial
incentives to prescribe more of its leading product: a drug with no competitors, but only25 percent
penetration of its target market. Though this approach might give the company an advantage for a
few years, it would run the risk of alienating traditional channels and exposing future products to
retaliation. Moreover, any competitor entering the market would be able to replicate this strategy.
So, while it provided an impetus, this single growth accelerator did not seem to have the potential to
trigger sustained growth.

Combining growth accelerators.

One or two accelerators alone are not normally suƒficient to generate fast growth. As our examples
suggest, a combination of three, four, or more accelerators is usually needed to establish a powerful
growth cycle. The reason is simple. Each reinforcing loop is inherently self-reinforcing. But when they
are combined, loops with a common element become mutually reinforcing as well. When you bring
together reinforcing feedback loops related to the customer base, every loop boosts every other
loop. And since each reinforcing feedback loop in isolation leads to exponential growth, mutually
reinforcing loops produce not just faster growth, but exponentially faster [Link] things happen
when growth accelerators reach critical mass. First, growth really takes oƒf. It is in the nature of
exponential curves to move slowly at the beginning. Second, and more important, the bar is raised
for competitors. Each growth accelerator is a battleground in itself, but a company’s lead in one field
strengthens its lead in the others. This means that slowing down the growth momentum of a leader
that relies on a combination of accelerators would entail beating it on three, four, or five fronts at
the same time – a tall order.

Renewing growth accelerators.

Even a combination of accelerators cannot guarantee perpetual growth. Growth cycles naturally
erode under the pressures of competitive response, market evolution, and internal challenges. As
we have seen, using conventional accelerators in mature industries does not trigger growth,
although failing to use them would certainly precipitate decline. In order to ride their growth cycles
for as long as possible, fast-growing companies continuously devise new “layers” of reinforcing
feedback. Microsoƒt’s aggressive entry in the suites market was followed by rapid price cuts
exploiting its much higher volumes. Self-renewal focused on existing accelerators is a distinctive
feature of many growth tigers
The Primary Types Of Organizational Control

There are three primary types of organizational control: strategic control, management control, and
operational control.

*Strategic control, the process of evaluating strategy, is practiced both after the strategy is
formulated and after it is implemented.

* Management control focuses on the accomplishment of the objectives of the various

substrategies comprising the master strategy and the accomplishment of the objectives of the
intermediate plans (for example, "are quality control objectives being met?").

* Operational control is concerned individual and group performance as compared with the
individual and group role prescriptions required by organizational plans ( for example, "are
individual sales quotes being met?").

Strategic Control

Strategic control focuses on two questions: Is the strategy being implemented as planned? and Is it
producing the intended results? Therefore, strategic control: monitoring strategic progress,
evaluating deviations and taking corrective action is also very important. These are the key tasks in
strategy implementation.

Strategic controls take into account the changing assumptions that determine a strategy, continually
evaluate the strategy as it is being implemented, and take the necessary steps to adjust the strategy
to the new requirements. In this manner, strategic controls are early warning systems and differ
from post-action controls which evaluate only after the implementation has been completed.

Important types of strategic controls used in organizations are:

1. Premise Control: Premise control is necessary to identify the key assumptions, and keep
track of any change in them so as to assess their impact on strategy and its implementation.
Premise control serves the purpose of continually testing the assumptions to find out
whether they are still valid or not. This enables the strategists to take corrective action at
the right time rather than continuing with a strategy which is based on erroneous
assumptions. The responsibility for premise control can be assigned to the corporate
planning staff who can identify key asumptions and keep a regular check on their validity.
2. Implementation Control: Implementation control may be put into practice through the
identification and monitoring of strategic thrusts such as an assessment of the marketing
success of a new product after pre-testing, or checking the feasibility of a diversification
programme after making initial attempts at seeking technological collaboration.
3. Strategic Surveillance: Strategic surveillance can be done through a broad-based, general
monitoring on the basis of selected information sources to uncover events that are likely to
affect the strategy of an organisation.
4. Special Alert Control: Special alert control is based on trigger mechanism for rapid response
and immediate reassessment of strategy in the light of sudden and unexpected events called
crises. Crises are critical situations that occur unexpectedly and threaten the course of a
 strategy. Organisations that hope for the best and prepare for the worst are in a vantage
position to handle any crisis.
5. Strategic leap control: Today modern industry is highly competitive, volatile and unstable.
Companies are required to make strategies leaps so that they can make significant changes.
Strategic lead control can assist companies by helping to define the new strategic
requirements and to cope with emerging environmental realities. There are four different
techniques used in ensuring strategic leap control in the organization.

a. Strategic issue managementIt is aimed at identifying one or more strategic issues

and assessing their impact on the organization. A strategic issue is a forthcoming
development either inside or outside of the organization which is likely to have an
impact on ability of the company to meet its objectives. By managing on the basis of
strategic issues, the strategists can avoid being overtaken by surprising
environmental changes and design contingency plans to shift strategieswhenever
needed.

b. Systems modelingComputer based models simulate the essential features of the

company and its environment. Through systems modeling organizations may
exercise pre-action control by assessing the impact of the environment on the
company by adopting a specific strategy.

c. Strategic field analysisIt is a method of examining the nature and extent of

synergies that exist or are lacking between the components of a company.
Whenever synergies exist, the strategists can assess the ability of the company to
take the advantage. Alternatively, the strategists evaluate the company‟s ability to
generate synergic where they do not exist.

The Importance Of Strategic Control

Henry Mintzberg,one of the foremost theorists in the area of strategic management, tells us that no
matter how well the organization plans its strategy, a different strategy may emerge.

Starting with the intended or planned strategies, he related the five types of strategies in the
following manner:

1. Intended strategies that get realized; these may be called deliberate strategies.

2. Intended strategies that do get realized; these may be called unrealized strategies.
3. Realized strategies that were never intended; these may be called emergent strategies.

Recognizing the number of different ways that intended and realized strategies may differ
underscores the importance of evaluation and control systems so that the firm can monitor its
performance and take corrective action if the actual performance differs from the intended
strategies and planned results

Process of Strategic Control

Strategic control processes ensure that the actions required to achieve strategic goals are carried
out, and checks to ensure that these actions are having the required impact on the organisation.

Regardless of the type or levels of strategic control systems an organization needs, control may be
depicted as a six-step feedback model:
1. Determine What to Control: The first step in the strategic control process is determining the
major areas to control. Managers usually base their major controls on the organizational mission,
goals and objectives developed during the planning process.

2. Set Control Standards: The second step in the strategic control process is establishing standards.
A control standard is a target against which subsequent performance will be compared. Standards
are the criteria that enable managers to evaluate future, current, or past actions. They are measured
in a variety of ways, including physical, quantitative, and qualitative terms. Five aspects of the
performance can be managed and controlled: quantity, quality, time cost, and behavior.

Standards reflect specific activities or behaviours that are necessary to achieve organizational goals.
Goals are translated into performance standards by making them measurable. An organizational
goal to increase market share, for example, may be translated into a top-management performance
standard to increase market share by 10 percent within a twelve-month period. Helpful measures of
strategic performance include: sales (total, and by division, product category, and region), sales
growth, net profits, return on sales, assets, equity, and investment cost of sales, cash flow, market
share, product quality, valued added, and employees productivity.

Quantification of the objective standard is sometimes difficult. For example, consider the goal of
product leadership. An organization compares its product with those of competitors and determines
the extent to which it pioneers in the introduction of basis product and product improvements. Such
standards may exist even though they are not formally and explicitly stated.

Setting the timing associated with the standards is also a problem for many organizations. It is not
unusual for short-term objectives to be met at the expense of long-term objectives. Management
must develop standards in all performance areas touched on by established organizational goals.
The various forms standards are depend on what is being measured and on the managerial level
responsible for taking corrective action.

3. Measure Performance: Once standards are determined, the next step is measuring performance.
The actual performance must be compared to the standards. Many types of measurements taken for
control purposes are based on some form of historical standard. These standards can be based on
data derived from the PIMS (profit impact of market strategy) program, published information that
is publicly available, ratings of product / service quality, innovation rates, and relative market shares
standings.

Strategic control standards are based on the practice of competitive benchmarking – the process of
measuring a firm’s performance against that of the top performance in its industry. The proliferation
of computers tied into networks has made it possible for managers to obtain up-to-minute status
reports on a variety of quantitative performance measures. Managers should be careful to observe
and measure in accurately before taking corrective action.

4. Compare Performance to Standards: The comparing step determines the degree of variation
between actual performance and standard. If the first two phases have been done well, the third
phase of the controlling process – comparing performance with standards – should be
straightforward. However, sometimes it is difficult to make the required comparisons (e.g.,
behavioural standards). Some deviations from the standard may be justified because of changes in
environmental conditions, or other reasons.

5. Determine the Reasons for the Deviations: The fifth step of the strategic control process involves
finding out: “why performance has deviated from the standards?” Causes of deviation can range
from selected achieve organizational objectives. Particularly, the organization needs to ask if the
deviations are due to internal shortcomings or external changes beyond the control of the
organization. A general checklist such as following can be helpful:

 Are the standards appropriate for the stated objective and strategies?
 Are the objectives and corresponding still appropriate in light of the current environmental
situation?
 Are the strategies for achieving the objectives still appropriate in light of the current
environmental situation?
 Are the firm’s organizational structure, systems (e.g., information), and resource support
adequate for successfully implementing the strategies and therefore achieving the
objectives?
 Are the activities being executed appropriate for achieving standard?

6. Take Corrective Action: The final step in the strategic control process is determining the need for
corrective action. Managers can choose among three courses of action: (1) they can do nothing (2)
they can correct the actual performance (3) they can revise the standard.

When standards are not met, managers must carefully assess the reasons why and take corrective
action. Moreover, the need to check standards periodically to ensure that the standards and the
associated performance measures are still relevant for the future.

To conclude, strategic control is an integral part of strategy. Without properly placed controls the
strategy of the company is bound to fail. Strategic control is a tool by which companies check their
internal business process and environment and ascertain their progress towards their goal

Management Control

"Management control is the process by which managers influence other members of the
organization to implement the organization's strategies."

Where management control is imposed, it functions within the framework established by the
strategy. Normally these objectives (standards) are established for major subsystems within the
organization, such as SBUs, projects, products, functions, and responsibility centers.

Typical management control measures include ROI, residual income, cost, product quality, and so
on. These control measures are essentially summations of operational control measures. Corrective
action may involve very minor or very major changes in the strategy.

Management control decisions are made within the guidance established by strategic planning.
Management control is a systematic process. It is done by managers at all levels; it is done on regular
basis; it involves the whole organization; and it involves a large amount of personal interaction and
relatively less judgment.

Operating Control

Operational control systems are designed to ensure that day-to-day actions are consistent with
established plans and objectives. It focuses on events in a recent period. Operational control systems
are derived from the requirements of the management control system.
Corrective action is taken where performance does not meet standards. This action may involve
training, motivation, leadership, discipline, or termination.

Differences Between Strategic and Operational Control

The differences between strategic and operational control are highlighted by reference to a general
definition of management control: "Management control is the set of measurement, analysis, and
action decisions required for the timely management of the continuing operation of a process".

Measurement

 Strategic control requires data from more sources. The typical operational control problem
uses data from very few sources.
 Strategic control requires more data from external sources. Strategic decisions are normally
taken with regard to the external environment as opposed to internal operating factors.
 Strategic control are oriented to the future. This is in contrast to operational control
decisions in which control data give rise to immediate decisions that have immediate
impacts.
 Strategic control is more concerned with measuring the accuracy of the decision premise.
Operating decisions tend to be concerned with the quantitative value of certain outcomes.
 Strategic control standards are based on external factors. Measurement standards for
operating problems can be established fairly by past performance on similar products or by
similar operations currently being performed.
 Strategic control relies on variable reporting interval. The typical operating measurement is
concerned with operations over some period of time: pieces per week, profit per quarter,
and the like.

Analysis

 Strategic control models are less precise. This is in contrast to operational control models,
which are generally very precise in the narrow domain they apply.
 Strategic control models are less formal. The models that govern the considerations in a
strategic control problem are much more intuitive, therefore, less formal.
 The principal variables in a strategic control model are structural. In strategic control, the
whole structure of the problem, as represented by the model, is likely to vary, not just the
values of the parameters.
 The key need in analysis for strategic control is model flexibility. This is in contrast to
operating control, for which efficient quantitative computation is usually most desirable.
 The key activity in management control analysis is alternative generation. This is different
from the operational control problem, in which in many cases all control alternatives have
been specified in advance. The key analysis step in operations is to discover exactly what
happened.
 The key skill required for management control analysis is creativity. In operational control,
by contrast, the formal review of outcomes to discover causes means that they skill required
is the ability to do technical, even statistical, analysis of the data received.

Action

 The relationship between action and outcome is weaker in strategic control. This is not
surprising, as the most desirable area for control in strategic problems -the environment -is
the least subject to direct action.
  The key action variables in strategic control are organizational. In the operational control
problem, technical factors such as labor levels, production levels, choice of materials, and
the like are the predominant control levels.
 Alternative actions in strategic control are less easy to choose in advance. In strategic
control problem, it is possible to choose all possible action responses to received data in
advance. In an operational control problem, the few responses possible can usually all be
worked out before any operating data received.
 The worst failing in strategic control is omitting a worthwhile action. In operating control,
the most typical sins are those of omissions (e.g., complaints about too many people
employed, too many defects, and too much inventory). In the strategic control problem, sins
of omission are much more serious (e.g., not moving into a business opportunity when it
presents itself, not undertaking a particular social program, not applying resources to meet
that challenges in the best fashion).
 The time for strategic control is longer. The period in which control has an impact is longer
for strategic problems that for operating problems.
 The timing of strategic control is events oriented. By contrast, operating decisions tend to
be made on a periodic basis, and they are usually measured accordingly.
 Strategic control has little repetition. Not even the structure is the same as past problems of
a like kind, much less the technical details. Operating problems, by way of contrast, tend to
repeat their structure.

Implications for Information Systems

 Strategic control requires a greater variety of data types. Operating control problems
typically have a smaller variety of data.
 The total volume of data required for strategic control is smaller. On the other hand,
perhaps thousands of pieces of data of each type are required for some of operating
problems (e.g., the payroll processing of even a small organization).
 Strategic control data are more aggregated. Operating data are used at the most detailed at
transaction level.
 Strategic control data are less accurate. Operating data generally need to be as accurate as
possible.
 The most important strategic control information is structural. Unlike the operational
control are, the values of the technical variables are only of secondary importance.
 The receipt of data for strategic control is more sporadic. Data for strategic problems are
received sporadically as events take place.
 Strategic control data are less processable by computer. The strategic control that arise in
the environment rather than within the organization are generally not so easily available.
For the most part, such data need not be computerized. It does imply that any
computerization of strategic control tools must consider the important step of capturing
necessary in machine-readable form.
 The key decision in information for strategic control is what data to save. The principal
problem in operating control information systems design is the technological problem of
efficiently capturing and retrieving data.

Implications for Controlling Formal Plans

 Contingency plans are less possible in strategic control. The whole idea of contingency
plans is much more difficult in the strategic arena. It is more difficult to generate all possible
actions ahead of time in a strategic problem, because the alternatives are too numerous and
too complex.
  Triggering contingency planning is more important in strategic control. Because of this
difficulty in making contingency plans, triggering an examination of alternatives when things
do not go according to plan becomes much more important.
 Preprogramed variance analysis is less possible in strategic control. For an operational
control model might be possible that the computer performs all possible variance analyses
(in the accounting sense). For strategic control it is both difficult technically and impossible
practically.
 A variance inquiry system is more necessary in strategic control. It seems important to
have an inquiry system linked to the formal planning model with which combinations of
deviations from plans can be explored by the human operator.
 A variance inquiry language is more necessary in strategic control. Some sort of language in
which the human can do variance inquiries is highly desirable in the area of strategic control.
 An augmented formal planning system in more necessary in strategic control. A formal
planning system should be augmented with the variance inquiry language described. This
would permit the same system that was used to generate the plan to be used in controlling
that plan, leading to both ease of additional analysis as well, as to consistency with the plan
being controlling.

Total Quality control (Dr. Kaoru Ishikawa,Japan)

• Application of quality management principles to all areas of business from design to delivery
instead of confining them only to production activities. To meet this goal, everyone in the company
must participate in and promote quality control, including top executives, all divisions, within the
company and all employees.(quality circle is a essence) To engage in quality control means to:

1. Make total quality control the foundation of your business process.

2. Focus full scale efforts on the control of cost, price and profit.

3. Control quantity - amount of production and stock

• Total Quality Control is a continual process. Quality standards must be continually reviewed,
revised and improved.

• What this approach suggests is that the manufacturer must always be keenly attentive to
consumer requirements, and the opinions of consumers must be anticipated as the manufacturer
establishes his own standards. Unless this is done, QC cannot achieve its goals, nor can it assure
quality to consumers. Removal of the root cause not the symptoms this concept has come of with
seven simplified tools of Quality control instead of P-D-C-A of TQM cocept

Ishikawa’s Philosophy

managers should not only implement the quality into their company, but to keep the mentality of
continuous improvement. Besides just continuous improvement of quality, Ishikawa also promoted
something slightly different from the other gurus.

He valued the idea of a company - wide quality control that was based on a continuous customer
service mentality. “ He argues that quality control extends beyond the product and encompasses
after – sales service, quality of management, quality of individuals and the company itself” .Ishikawa
has a value led philosophy with an emphasis on people and focuses on company- wide quality
control and quality circles. He is best known for his Fishbone Diagram(Cause and Effect diagram)
theory; his quality tool diagram which identifies the possible causes and effects of a problem. It was
developed to graphically represent the relationship between a problem and its potential causes.
Fishbone diagrams can help a group examine thoroughly all possible causes of a quality problem and
discern the relationships among them.

• Ishikawa constructed the idea that customers are the only reason why business exists

The Total Quality Control Process(P-D-C-A) before ishikawa’s contribution in TQM concept

1. Plan Determine goals and targets Determine Standardized work procedures

2. Do Education and Training - work standards and technical standards must be taught.
Workers must be mentored and encouraged to do their best.
3. Check Inspection It is the supervisor`s duty to check and confirm the standards have
been put into practice exactly. When problems occur, check every possible angle,
focus on each process.
4. Action Take appropriate action.

Quality control process (Ishikawas contribution)

• Determine goals and targets

• Determine methods of reaching goals
• Engage in education and training
• Implement work
• check the efforts of implementation,
• Take appropriate action to accomplish goals and targets.

Often times this six-step process was used by quality circles.

Kaoru Ishikawa’s Basic Seven QC Tools

1. Cause-and-effect diagram (also called Ishikawa or fishbone chart): Identifies many possible
causes for an effect or problem and sorts ideas into useful categories.
2. Check sheet: A structured, prepared form for collecting and analyzing data; a generic tool
that can be adapted for a wide variety of purposes.
3. Control charts: Graphs used to study how a process changes over time.
4. Histogram: The most commonly used graph for showing frequency distributions, or how
often each different value in a set of data occurs.
5. Pareto chart: Shows on a bar graph which factors are more significant.
6. Scatter diagram: Graphs pairs of numerical data, one variable on each axis, to look for a
relationship.
7. Stratification: A technique that separates data gathered from a variety of sources so that
patterns can be seen (some lists replace “stratification” with “flowchart” or “run chart”)
According to ishikawa 95% of the quality problems can be solved with these tools

TQC vs. TQM - what`s the difference?

TQC

 Emphasis is placed on the process and continuous process improvement.

 Total participation is required. Employees are encouraged to generate ideas and implement
them.
 It is flexible - processes and methods can be easily changed.
 The target is not absolute - good for a changing market.
 Downside: Sometimes the end result is very different from the original target - employees
tend to lose sight of the goal because they are too focused on the process.
TQM

• Emphasis is placed on the target and achieving the target as soon as possible.
• The system is simple and straight-forward.
• Information delivery is accurate.
• The process is considered after the goal has been established.
• Limitation :Employees stop actively thinking of and implementing process improvement -
they don`t want to risk making a mistake or creating delays.

Problems of measuring strategic performance

• Measuring scale: there are various scale of performance measurement selection of

particular scale affects
• Performance filtering: Only valuable for very good or very poor performer
• Plural interest: Plurality in interest of the stakeholders invites conflicting performance
expectations like investors interest and managers interest
• Optimism bias: The tendency of individuals to underestimate the likelihood they will
experience adverse events(It won’t happen to me!” assumption.)
• Psychological contract: Refers to the relationship between an employer and its employees,
and specifically concerns mutual expectations of inputs and outcomes.
• Rater’s perceptual selectivity: The choice of the stimuli would depend on what they feel is
relevant for them and or appropriate for them
• Guidelines for proper control
• Link to objectives and strategies
• Do not exercise control
• Focus on meaningful aactivities and results
• Avoid rewards for inefficiency
• Encourage employees participation
• Develop verification procedure
• Attempt to pinpoint exception
• Accelerate, Deaccelerate and make adequate
 Control should involve only the minimum amount of information necessary (80-20
rule: Monitor those 20% of the factors that determine 80% of the results. It is
because too many information create confusion.)
 Monitor only meaningful activities and results
 Control should be timely (Correct before it is too late)
 Balance Long and short-term orientation
 Pinpointing exceptions (Take action only if goes beyond tolerance limits)
 Use reward to meeting/exceeding standards (avoid punishment)

Strategic audit

• A strategy audit is a review of a company's business plan and strategies to identify weaknesses and
shortcomings and enable a successful development of the company. •

A strategic audit helps small-business owners assess whether internal processes move the needle
toward their strategic goals. Based on audit results, management adjusts operations to maximize
progress toward the goals.
The strategy audit clarifies three crucial areas:

1. It secures that the present business plan is complete and includes all relevant information
for the development of the company.
2. It reveals if the management team shares a commitment and believes in the Company
vision, and has the same priorities for the strategies and activities as stated in the business
plan.
3. It secures the business logic of the business plan, e.g. if the vision is financially sound, if
prioritised actions will develop the company toward the vision, if enough activities are
planned to reach the goals in time.

Strategic Audit Steps

1. Review mission, vision, values and strategic objectives

2. Conduct detailed internal as well as external environment analysis
3. Review corporate governance system (a system by which company is regulated & controlled:
BOD structure & qualifications, organization structure, authority & responsibility
relationships, legal compliances, budget, strategic & operational control systems including
internal & external audit, information availability to managers for informed decisions &
actions etc.)
4. Evaluate existing strategies at different levels and modify them as required
5. Justify your recommendation in terms of its ability to resolve both long- and short-term
problems and capitalize opportunities
6. Suggest appropriate programs, policies, procedures
7. Suggest appropriate evaluation and control mechanism

Strategic audit activities

• Measures the performance of strategies

• Provides outside views to top management
• Strengthen link between the organizational actors
• Mirror the decision and actions of strategic leaders and adopters

Scope of strategic Audit

• It specifies means to achieve end(end-means)

• It contents role to be performed by each(content-roles)
• It contains the strategies for each stakeholder interest(stakeholders-strategies)
• It aims to comply the governance issue(Governance- Compliance)
• Its outcome is aimed at sustainability(Outcome-sustainability)

Management Information System (MIS)

A management information system (MIS) is a computer based information system that produces
routine reports and often allows online access to current and historical information needed by
managers mainly at the middle and first line levels.

Researchers treat MIS as a broad concept including all of the organization systems that support the
functional areas of the organization. However, Kenneth Laudon and Jane Price Laudon prefer to use
computerbased information systems (CBIS) as the umbrella term for all information systems and to
consider management information systems as those specifically dedicated to management level
functions.
Most contemporary organizations contain three kinds of MIS. The three different types of MIS are
strategic business unit MIS, which support a single division or business unit, coordinating MIS; and
policy/planning MIS.

Components of MIS and their relationship

A management information system is made up of five major components namely people, business
processes, data, hardware, and software. All of these components must work together to achieve
business objects.

People – these are the users who use the information system to record the day to day business
transactions. The users are usually qualified professionals such as accountants, human resource
managers, etc. The ICT department usually has the support staff who ensure that the system is
running properly.

Business Procedures – these are agreed upon best practices that guide the users and all other
components on how to work efficiently. Business procedures are developed by the people i.e. users,
consultants, etc.

Data – the recorded day to day business transactions. For a bank, data is collected from activities
such as deposits, withdrawals, etc.

Hardware – hardware is made up of the computers, printers, networking devices, etc. The hardware
provides the computing power for processing data. It also provides networking and printing
capabilities. The hardware speeds up the processing of data into information.

Software – these are programs that run on the hardware. The software is broken down into two
major categories namely system software and applications software. System software refers to the
operating system i.e. Windows, Mac OS, and Ubuntu, etc. Applications software refers to specialized
software for accomplishing business tasks such as a Payroll program, banking system, point of sale
system, etc.
 Chapter 10 &11
Financial Projections and Financial Impact of Strategies
Miscellaneous Management Topics
Social Responsibility
Environmental Sustainability
Value Chain Analysis
Economic Value Added ssss(EVA)
Market Value Added (MVA)
Strategic Issues in a Global Environment

What is Strategic Financial Management

Strategic financial management refers to specific planning of the usage and management of a
company's financial resources to attain its objectives as a business concern and return maximum
value to shareholders over the long run.

Strategic financial management involves precisely defining a company's business objectives or goals,
identifying and quantifying its available or potential resources, and devising a plan for utilizing
finances and other capital resources to achieve its goals.

After the initial planning phase, strategic management requires establishing ongoing procedures for
collecting and analyzing data, making consistent financial decisions, and tracking and analysing
variance, or differences, between budgeted and actual results to identify problems and take
appropriate corrective actions as a dynamic process of adjustment and fine-tuning.

BREAKING DOWN Strategic Financial Management

Financial management involves understanding and properly controlling, allocating and obtaining all
of a company's assets and liabilities, including monitoring operational financing items such as
expenditures, revenues, accounts receivable and accounts payable, cash flow and profitability.

Strategic financial management encompasses all of the above, along with ongoing evaluation,
planning and adjustment in order to keep the company focused and on track toward long-term goals
with an overarching focus on maximizing the company's profitability and value, while dealing with
short-term issues on a more tactical or ad hoc basis in a way that does not derail the long-run vision.

Techniques of Financial Analysis for Strategic Management

Strategic management consists of setting end goals, then analysing ways to reach those goals.
Department heads and their staff members might be responsible for creating specific tactics to reach
these goals but perform their work using the big-picture objectives set by the strategic management
team. Using different financial reports and projections can help managers determine which
strategies have the best chances for success.
Budgeting

The most basic form of financial analysis for strategic management is budgeting. In addition to
creating budgets for the coming year, management conducts budget variance analyses to determine
where previous budgets were not accurate and why. Using this information, the strategic
management team makes changes to the areas that caused negative budget results and looks to
take advantage of practices that caused better-than-budgeted results.

Pricing Analysis

Projecting the effects of price increases and decreases can help managers create strategic pricing
strategies, such as selling at a low price to create higher volumes or selling at higher prices, which
might result in lower volumes. Once this analysis is finished, managers can determine how these
strategies will affect gross profits.

Evaluating Costs

One technique for analysing the finances of a business is to calculate overhead and production costs.
Overhead costs are expenses related to running a business regardless of what your sales levels are.
These include such costs as rent, insurance, marketing and office staff. Production costs are those
expenses directly related to making your products, such as supplies, labour, machinery and
packaging. Once management knows overhead and production costs, it can determine those costs
per unit at different levels of production. This helps with setting prices and can tell the management
team if it needs to undertake cost-containment as one strategy to achieve or improve profitability.
The analysis might determine that the company cannot reduce production costs further and must
reduce overhead expenses, or vice versa.

Cash Flow Management

Profitable businesses can have trouble paying their bills if they don’t coordinate receipt of their
receivables with due dates of payables. Strategic management includes managing cash flow,
ensuring the company has enough cash or credit to pay its bills. Part of this strategy includes setting
procedures for issuing credit to customers, negotiating credit terms with suppliers and maintaining
cash reserves. This strategic management of cash helps prevent losing access to supplies and
materials, which can lead to production stoppages and loss of customers.

Performance Analysis

If a business is considering buying another company or shutting down a division, management

reviews the performance of the business or division to determine not only its profitability
performance, but also its financial effects on the rest of the company. Acquiring a profitable business
might put too much stress on the acquiring company’s administrative staff or debt-service abilities.
Shutting down a division that is not profitable might free up resources the company could use to
generate larger profits in other divisions.

Strategic Financial Planning and Forecasting aligns strategic and financial objectives used to
synchronize and coordinate operational plans across the enterprise.

A strategic plan helps companies establish guidelines for developing operational and financial plans.
Key corporate objectives are rationalized, and capital investments are considered. Objectives are
translated into tangible financial targets. Investment decisions and targets lead to creation of an
integrated financial statement that links strategic goals to financial metrics. Then the entire
organization rallies behind these objectives and targets. The focus is on creation of integrated
financial statements and their links to operational plans. For example, a company offering certain
customers more liberal payment terms to increase sales forecast revenue must also evaluate
impacts on cash flow. The overall process is characterized by the need to:

 Establish relationships between profit metrics and cash flow needs.

 Synchronize operational plans with integrated financial statements to understand their
impacts on the balance sheet and cash flow.
 Quickly model alternative business scenarios to make optimal investment decisions.

Key Strategic Planning and Forecasting outputs are a consensus income statement, balance sheet,
cash flow, and resulting financial metrics.

Strategic planning comprises three activities: 1. Set objectives2. Set tangible targets3.

Measure and adapt Corporate objectives and strategies for upcoming and future years are
translated into tangible targets—for most corporations, a set of financial statements that includes an
income statement, balance sheet, cash flow, and key ratios/metrics.

The statements should be integrated, so that any change in underlying assumptions ripples through
all of them:

DSO (days sales outstanding) assumptions affect the balance sheet as well as cash position;

revenue plan assumptions affect balance sheet and cash flow, and so on.

Because such targets are frequently iterated, accuracy is increased.

In high-performance companies, financial statements are the baseline for measuring results, and are
dynamic documents in constant use, not mere reports collecting dust on a shelf.

Strategic Financial Planning and Forecasting establishes the targets and metrics used to measure
organizational success. Response to changing business conditions is usually expressed as an updated
forecast. As forecasts change, integrated financial statements can be instantly updated to see the
impact on key strategic objectives such as DSO and cash flow per share.

The process begins with setting strategic objectives expressed as financial targets or goals to
establish operational plans, budgets, and forecasts. Companies that plan, budget, or forecast in any
manner start with establishing strategic objectives for the upcoming year to three to five years out.
Objectives are discussed and finalized, then expressed as a set of tangible targets in the form of
financial statements—initially an income statement. Revenue targets are modelled based on agreed-
upon strategic objectives, then measured against profitability objectives to identify margin
requirements.

Resources can now be properly allocated throughout the company.

As income statements are finalized, they’re tied to a model that includes a balance sheet and cash
flow. Accounts receivable, accounts payable, and major capital expenditures are modelled to analyze
key metrics.
Best-in-class companies iterate scenarios between the income statement, balance sheet, and cash
flow to ensure that an integrated view is taken when planning for the upcoming fiscal year. When
integrated financial statements are validated, they are used as targets to build corporate operational
plans, which are then linked back to integrated financial statements to validate targets. Changes to
plans or targets are reflected in integrated financials to increase chances of reaching strategic goals.

After strategic financial plans are agreed upon, the entire organization can monitor key metrics to
evaluate and adjust operational performance. Operational decisions are tied to corporate objectives
as business drivers are translated into a forecast, and strategic plans are adjusted as business
conditions change

A workflow supporting Strategic Financial Planning and Projection.

The process typically starts by establishing strategic objectives, which are typically associated with
near- and long-term goals (3 to 5 years) and usually linked to hard tangible targets.

Objectives are then modelled using an integrated financial statement. Revenue, profitability, and
cash flow are taken into account, as are key financial and non-financial metrics. Once models are
completed, senior management reviews them, frequently in concert with the board of directors.

After approval, statements are distributed across the organization as a set of financial targets. The
rest of the organization uses the targets to create tactical operational plans for the upcoming year.
Plans are typically driver-based and linked to key business factors such as number of units sold,
product mix, and so on. Once plans are reviewed and approved, they are tied back to integrated
financial statements to ensure they meet corporate objectives.

Through a series of iterations, company resources and plans often shift in order to meet strategic
objectives. Throughout the process, operational plans need to be continually translated into a set of
financial numbers. Strategic goals and objectives may need adjusting as operations provides a
clearer picture of what is achievable with the resources at hand. The association between integrated
financial and operational plans leads to alignment and commitment to reach corporate objectives.

Financial Impact of Strategies

Studies that have analysed the relationship between strategic planning and financial performance
proved that the intensity with which banks engage in the strategic planning process intervene-that is
cause an indirectness and lack of one-to-one correspondence-between factors such as strategic
planning expertise and beliefs about planning performance relationships (managerial factors),
environmental complexity and change (environmental factors), bank size and structural complexity
(organizational factors) and bank’s financial performance.
Corporate Social Responsibility
MEANING
Over the years, the nature of the involvement of business houses with social causes has undergone a
change. Doing business is no longer only making profits; organizations also have to behave in a way
that has gradually started to be called `Socially Responsible’. This attempt for new and expanding
responsibilities often called Corporate Social Responsibility - implies considering issues beyond the
conventional business scope. Thus, businesses all over the world are realizing that for sustainable
development, they need to consider benefit to society also, rather than only individual profits. The
World Business Council for Sustainable Development defines corporate social responsibility as “the
commitment of the company to contribute to the sustained economic development by working with
employees, their families, the local community, and the entire society in order to improve quality of
life. Thus, the meaning of Corporate Social Responsibility is twofold - on one hand, it exhibits the
ethical behaviour that an organization exhibits towards its internal and external stakeholders
(customers as well as employees) On the other hand, it denotes the responsibility of an organization
towards the environment and society in which it operates.

CHARACTERSTICS OF CORPOATE SOCIALRESPONSIBILITY:

1) It is an attempt made by companies to be voluntarily responsible to ethical and social
considerations.
2) It is not legal binding for the company, unlike corporate accountability.
3) It is a set of obligations to pursue those policies, to make those decisions, or to follow those
lines of action which are desirable in terms of the objectives and values of our society.
4) It is the overall relationship of the corporate with all of its stakeholders. These include
customers, employees, communities, owners / investors, government, suppliers and
competitors.
5) The socially responsible firms should strive to make a profit, obey the law, be ethical and be
a good corporate citizen.
6) The concept of Corporate Social Responsibility differs from society to society and country to
country according to the perception and sensitivity of the analyst.

Scope of Corporate Social Responsibility

The responsibilities for Corporate Social Responsibility are basically categorized into two areas
fundamental and voluntary.
 The fundamental responsibilities to society cover compliance withal the rules and
regulations of the land such as the rules regarding quality of the products, paying taxes, rules
regarding labour and fair work environment.

 In voluntary responsibilities, a company can take both internal and external roles.
o In internal role, it can work towards betterment of its staff, giving them more rights
and better facilities, making the superior quality product and making it available at
reasonable price giving benefit to its state holders, being ethical in all its dealings
etc.
o In external role, it can contribute to any social cause, like in the field of education,
health, sanitation etc.
Thus, to sum up, Corporate Social Responsibility can be defined as, the `ethical behaviour of a
company towards society’. It means engaging directly with local communities, identifying their basic
needs and integrating their needs with business goals and strategic intent. The Government
perceives Corporate Social Responsibility as the business contribution to the nation’s sustainable
development goals.
STRATEGIES OF LINKING CSR WITH PROFITAND SUSTAINABILITY FOR OBTAINING BUSINESSBENEFITS.
Business is a socio-economic activity. A firm cannot survive successfully in business unless it meets
its social obligations along with achieving its economic objectives. So, the management is required to
reconcile economic and social objectives, it is possible to reconcile socio-economic objectives
through proper planning rational approach and continuous balancing of multiple objectives. Giving
more importance to economic objectives, at the cost of social objectives may prove to be dangerous
in the long run, as business always needs support and cooperation from the society at large. Conflict
between economic & social objectives is quite possible if rational approach is not adopted. Balancing
of objectives is not an easy task. Here, mechanical solutions are not available. It requires minute
study of business situation, and ability to understand economic & social changes taking place in the
country. Suggestions for balancing economic and social objectives can be given an under.
1) Profit and Consumer Price - A firm should not aim only artmaking profits. Profits should not
be earned by charging unreasonable prices to the consumers. This would result in
exploitation of the consumers. Therefore, a firm should charge reasonable prices by striking
a balance between profits and consumer satisfaction.
2) Profit and Research and Development -A part of the profit needs to be invested in R & D.
This would help the firm to improve the quality of the product Improvement in quality would
not only lead to consumer satisfaction, but also higher sales to the firm.
3) Profit and After Sales Service - A business firm needs to focus on after sales service,
especially in the case of consumer durables. A part of the profit must be used for giving
efficient &quick and value added after sales service to the consumers.
4) Profit and Employees’ Welfare - Firms can make profits due to improvement in efficiency
and productivity of its work force. Therefore, a firm needs to spend a part of its profits for
the welfare of its employees by providing better facilities such as improved working
conditions, additional welfare facilities, increase in salaries etc.
5) Profit and Taxes - A business firm should provide a true picture of its profits. It should pay
properly its taxes and duties to the government authorities. As for as possible, business firms
should not in bulge in manipulating the profits so as to avoid payment of taxes and duties.
6) Profit and Shareholders’ Interest - Business firms should provide a fair return to the
shareholders in the form of dividends, bonus shares etc. As far as possible, the top
management should avoid manipulating the profits for their own interest. The interest of
the shareholders must be considered in the distribution of profits.
7) Profit and Social Welfare - A part of the profit must be utilized for social welfare activities
like donations to schools, colleges, trusts etc. Contributions can be made to the government
at the time of floods, famines and such other natural calamities.
8) Business Expansion and Social Interest - A firm may expand its business activities. It should
not be undertaken only to make profits but also in the interest of the society such as for
employment generation, better customer service etc. Also, health issues of the society must
be considered in setting up of industries.
9) Business Expansion and Competition - For increasing sales turnover, the firm may adopt
aggressive sales promotion techniques such as advertising, giving discounts, offers etc.
Affirm should not adopt unethical practices to spoil the image of competitors. In other
words, a firm should adopt healthy competitive practices.
10) Business Expansion and Suppliers - A firm needs support of suppliers for its business
expansion plans. It should not try to exploit the suppliers. by delaying payments, demanding
unreasonable higher discounts etc.
11) Profit and protection of environment - A part of the profits should be used to protect the
environment by using antipollution measures, planting of trees, investing in R and D. to
produce eco-friendly products & packages and so on.
 12) Use of modern technology & employment generation -Firms should use modern technology
for quality production at lower cost. Technology should not be used for reducing
employment opportunities. On the other hand, it should lead to creation of more jobs. This
brings fair balance between economic & social objectives. Thus, it can be concluded that
economic & social objective should be rather complementary & supportive to each other
because unless the firm earns profit, it cannot serve the society and unless it satisfies
different groups of the society, it cannot earn profits.

Environmental Sustainability

Environmental sustainability is defined as responsible interaction with the environment to avoid

depletion or degradation of natural resources and allow for long-term environmental quality. The
practice of environmental sustainability helps to ensure that the needs of today's population are met
without jeopardizing the ability of future generations to meet their needs.

Some routes towards environmental sustainability include: adopt so called 'cradle-to-cradle thinking

and practices'; dramatically reduce CO2 emissions; stop rainforest destruction; combine contraction
(in carbon use for affluent parts of the world) and convergence to align carbon footprints
internationally, within safe planetary operating limits. 

Cradle to Cradle (C2C) suggests that industry must protect and enrich ecosystems and nature's
biological metabolism while also maintaining a safe, productive technical metabolism for the high-
quality use and circulation of organic and technical nutrients

STRATEGIES FOR ENVIRONMENTAL ACCOUNTING AND AUDITING

Environmental Accounting
Environmental Accounting refers to a system for recording information on the status, use and value
of natural resources and environmental assets including fisheries and forest- accounts, as well as
expenditures incurred on environmental/protection and resource management. The latest
categorization of environmental accounts by the international community includes four types of
accounts i.e. natural resource asset accounts, pollution and material physical flow accounts,
monetary and hybrid accounts and environmentally adjusted macroeconomic aggregates.

1. Natural resource asset accounts primarily focus on stocks of natural resources. Two
types of changes in stocks take place: a. Changes due to economic activity (e.g. mining,
fishing etc.) and. Changes due to natural processes (e.g. birth s and deaths of trees in a
forest account. These accounts provide indicators of ecological sustainability and can be
used to show the effects of policy on resource stocks. They can help managers monitor
resources more effectively. They help us in knowing monetary value of the national
wealth of natural resources, the diversity of resources, its distribution and its price
fluctuations.
2. Pollution and physical material flow accounts provide information at the industry level
about the quantity of resources (energy, water and materials) that are used in economic
activities and quantity of residuals solid waste, air emissions and wastewater generated
by these activities. These accounts can take several forms, but they are generally
organized to show the origin (Supply) and destination (use) of materials and pollution.
More detailed accounts also show how inputs are transformed into other products,
pollution and waste, and they provide information on the net material accumulation to
either the economy or environment.
 3. Monetary and hybrid accounts focus on expenditures and taxes related to protecting
and managing the environment as well as the economic contribution of environmental
services industries. Examples of monetary and hybrid accounts include fees collected by
government for resource use such as levies on materials, forestry or fisheries and funds
spent on pollution control measures, water treatment and solid waste management.
4. Environmentally adjusted macroeconomic aggregates are used to assess overall
environmental health and economic progress.

Environmental Auditing
Environmental audit involves two words `environment’ and ‘audit’. In specific terms, environmental
auditing can be employed to
1. Assess compliance level with relevant legislative & regulatory requirements pertaining to
local & global environment.
2. Facilitate in designing of case specific Environmental Management Systems.
3. Facilitate management control of environmental practices.
4. Increase awareness and commitment in the employees to strengthen environmental
measures.
5. Assessment of internal policy & procedural conformance.
6. 6Establish current practice status.
7. 7)Promote good environmental management practices.
8. 8)Explore & identify improvement opportunities across the business line.
9. 9)Assess and quantity the achievements.
10. 10) Enhance creditability with the public as a responsible corporate citizen.

Market Value Added Vs. Economic Value Added

Business owners need to measure the value of their companies to determine their current status.
These valuations can be helpful for determining credit worthiness, tax purposes or suitability for
acquisition by a larger firm. Two primary methods available to measure the value of a business are
its market value added and its economic value added. While these methods use different techniques
and return different results, they are also highly useful in calculating a company's value.

MVA Method

Market value added can be calculated as the difference between the company's market value and
the amount of capital invested in the business. MVA measures the operational capabilities of a
company's management and represents the value of the company as a whole on the open market.
The MVA formula does not account for any cash payments that the company may have paid out to
shareholders. It also does not measure the opportunity costs relative to any alternative investments.

MVA Example

The MVA calculation works best for companies that have objective valuations, such as those with
stocks traded on public exchanges. However, the MVA method can also be useful for small, private
companies that have document the capital contributions of its owners. For instance, if the partners
in a small restaurant have contributed $250,000 into the business since its opening, and the
restaurant is currently valued at $600,000, the restaurant's MVA is $350,000.
EVA Properties

Economic value added can be calculated as the difference between the company's net operating
profit after tax and a portion of the amount of capital invested in the business. The amount of capital
invested is multiplied by the weighted average cost of capital, which measures the opportunity cost
of alternative investments. EVA, also known as "economic profit", indicates how profitable a
company's projects have been, which also serves as a measure of company management's efficiency.

EVA Example

Rather than measure the company's health based on its current value, EVA measures its robustness
based on its net profits. To use the example above, the total capital invested in the restaurant is
$250,000. If the restaurant's net operating profit after tax is $20,000, and its weighted average cost
of capital is 6 percent, the second term in the calculation is $250,000 x 0.06, or $15,000. The EVA
calculation returns a value of $20,000 - $15,000, or $5,000.

BREAKING DOWN Market Value Added - MVA

When investors want to look under the hood to see how a company performs for its shareholders,
they first look at MVA. A company’s MVA is an indication of its capacity to increase shareholder
value over time. A high MVA is evidence of effective management and strong operational
capabilities. A low MVA can mean the value of management’s actions and investments is less than
the value of the capital contributed by shareholders.

MVA Reflects Commitment to Shareholder Value

Companies with a high MVA are attractive to investors not only because of the greater likelihood
they will produce positive returns but also because it is a good indication they have strong
leadership and sound governance. MVA can be interpreted as the amount of wealth that
management has created for investors over and above their investment in the company. Companies
that are able to sustain or increase MVA over time typically attract more investment, which
continues to enhance MVA. The MVA may actually understate the performance of a company
because it does not account for cash pay-outs, such as dividends and stock buybacks, made to
shareholders. MVA may not be a reliable indicator of management performance during strong bull
markets when stock prices rise in general.

Companies With High MVA

Companies with high MVA can be found across the investment spectrum. Alphabet Inc., the parent
of Google, is among the most valuable companies in the world with high growth potential. Its stock
returned 1,293% in its first 10 years of operation. While much of its MVA in the early years can be
attributed to market exuberance over its shares, the company has managed to nearly triple it over
the last five years. Alphabet’s MVA has grown from $128.4 billion in 2011 to $354.25 billion in
December 2015 to $606.17 billion in December 2017.

On the other end of the spectrum is one of the most established companies in the S&P 500 index,
the Coca-Cola Company. Coca-Cola is one of Warren Buffett’s favourite stock holdings because its
management is so effective at increasing shareholder value. At the end of the year 2017, the
company's MVA was $158.52 billion - up from $150.4 billion in 2015 and $119.8 billion in 2011, and
that does not include the nearly $6 billion in dividend payments to shareholders. As of 2016, Coca
Cola has increased its dividends each year for the last 25 years by an average of 8% per year.
Value chain analysis (VCA)

Definition
is a process where a firm identifies its primary and support activities that add value to its
final product and then analyse these activities to reduce costs or increase differentiation.

Value chain : represents the internal activities a firm engages in when transforming inputs into
outputs.

Understanding the tool

Value chain analysis is a strategy tool used to analyse internal firm activities. Its goal is to recognize,
which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the
firm and which ones could be improved to provide competitive advantage.

In other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will try
to perform its activities better than competitors would do. If it competes through cost advantage, it
will try to perform internal activities at lower costs than competitors would do. When a company is
capable of producing goods at lower costs than the market price or to provide superior products, it
earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal
activities a firm engages in to produce goods and services. VC is formed of primary activities that add
value to the final product directly and support activities that add value indirectly.

Although, primary activities add value directly to the production process, they are not necessarily
more important than support activities. Nowadays, competitive advantage mainly derives from
technological improvements or innovations in business models or processes. Therefore, such
support activities as ‘information systems’, ‘R&D’ or ‘general management’ are usually the most
important source of differentiation advantage. On the other hand, primary activities are usually the
source of cost advantage, where costs can be easily identified for each activity and properly
managed.

Firm’s VC is a part of a larger industry's VC. The more activities a company undertakes compared to
industry's VC, the more vertically integrated it is.
GLOBALIZATION

To reach the economies of scale necessary to achieve the low costs, and thus the low prices, needed
to be competitive, companies are now thinking of a global (worldwide) market instead of a national
market.

Nike and Reebok, for example, manufacture their athletic shoes in various countries throughout Asia
for sale on every continent.

Instead of using one international division to manage everything outside the home country, large
corporations are now using matrix structures in which product units are interwoven with country or
regional units.
International assignments are now considered key for anyone interested in reaching top
management.

As more industries become global, strategic management is becoming an increasingly important way
to keep track of international developments and position the company for long-term competitive
advantage.

For example, Maytag Corporation purchased Hoover not so much for its vacuum cleaner business,
but for its European laundry, cooking, and refrigeration business., Maytag's management realized
that a company without a manufacturing presence in the European Union (EU) would be at a
competitive disadvantage in the changing major home appliance industry.

Similar international considerations have led to the strategic alliance between Air India and
Lufthansa and to the merger between Daimler-Benz and Chrysler Corporation

GLOBAL CHALLENGES IN STRATEGY IMPLEMENTATION

An international company is one that engages in any combination of activities, from exporting/
importing to full-scale manufacturing, in foreign countries.

The multinational corporation (MNC), in contrast, is a highly developed international company with a
deep involvement throughout the world, plus a worldwide perspective in its management and
decision making.

For a Multinational corporation to be considered global, it must manage its worldwide operations as
if they were totally interconnected.

This approach works best when the industry has moved from being multi domestic (each country's
industry is essentially separate from the same industry in other countries; an example is retailing) to
global (each country is a part of one worldwide industry; an example is consumer electronics).

Strategic alliances, such as joint ventures and licensing agreements, between a multinational
company (MNC) and a local partner in a host country are becoming increasingly popular as a means
by which a corporation can enter other countries, especially less developed countries.

The key to the successful implementation of these strategies is the selection of the local partner.
Each party needs to assess not only the strategic fit of each company's project strategy, but also the
fit of each company's respective resources.

STAGES OF INTERNATIONAL DEVELOPMENT

Corporations operating internationally tend to evolve through five common stages, both in their
relationships with widely dispersed geographic Markets and in the manner in which they structure
their operations and programs. These stages of international development are:

Stage I (Domestic Company): The primarily domestic company exports some of its products through
local dealers and distributors in the foreign countries.

Stage 2 (Domestic Company with Export Division): Success in Stage I leads the company to establish
its own sales company with offices in other countries to eliminate the middlemen and to better
control marketing. Because exports have now become more important, the company establishes an
export division to oversee foreign sales offices.
Stage 3 (Primarily Domestic Company with International Division): Success in earlier stages leads the
company to establish manufacturing facilities in addition to sales and service offices in key countries.
The company now adds an international division with responsibilities for most of the business
functions conducted in other countries.

Stage 4 (Multinational Corporation with Multidomestic Emphasis): Now a full-fledged multinational

corporation, the company increases its investments in other countries. The company establishes a
local operating division or company in the host country, such as HLL of Unsilvers, to better serve the
market. The product line is expanded, and local manufacturing capacity is established.

Stage 5 (Multinational Corporation with Global Emphasis): The most successful multinational
corporations move into a fifth stage in which they have worldwide personnel, R&D, and financing
strategies.

STRATEGIES TO GLOBAL ENTRY

There are five main modes of entering a foreign market:
1) exporting,
2) licensing,
3) franchising,
4) entering into a joint venture with-a host country company, and
5) setting up a wholly owned subsidiary in the host country.

Market Entry Strategy

(Export Marketing)There are various strategies of entering an international market. Each of these
strategies has certain advantages and disadvantages. A strategy, appropriate for one market, may
not be suitable for another market with a different business environment. Therefore, an exporter
should select an appropriate strategy keeping in mind internal and external factors. A brief account
of the different strategies is given below

(a)Exporting :-Exporting is the most traditional way of internationalization. it is attractive when

excess capacity exists or when the cost of production in the home country is substantially lower than
in the foreign markets. There are, broadly, two ways of exporting: Direct Exporting :-Whereby the
producer himself undertakes the responsibility of exporting.
Indirect Exporting :-Whereby the producer utilizes the services of international marketing
middlemen or co-operative organizations for exporting.

b) Licensing :-Under international licensing, a firm in one country (the licensors) permits a firm in
another country (the licensee) to use its assets such as patents, trademarks, copyrights, technology,
technical know-how, marketing skills or some other specific skills. The monetary benefit to the
licensor is the royalty or fees, which the licensee pays.

c) Franchising :-Franchising is a form of licensing in which a parent company (the franchiser) Permits
another independent entity (the franchisee) the -right to do business in a prescribed manner. This
right can take the form of selling the franchiser's products, using its name, production and marketing
techniques, or general business approach.

(d)Contract Manufacturing :-Under contract manufacturing, a company contracts with firms in

foreign countries to manufacture or assemble the products while retaining the responsibility of
marketing the product. This is a common practice in the internationals business.
(e)Management Contracting :-Under management contracting, a company contracts with firms in
foreign countries to supply management know-how. Such technical knowledge is generally supplied
by the technically advanced countries to the technically backward countries.

(f)Fully Owned Manufacturing Facilities :-MNCs and TNCs generally establish fully owned
manufacturing facilities in foreign countries using local raw material, labour and other resources.

(g)Counter Trade :-Counter trade is a form of international trade in which import of goods is paid for
by export of goods, instead of money payments. Counter trade takes several forms, such as, barter,
buy-back, compensation deal and counter purchase.

(h)Turnkey Contracts :In case of turnkey contracts, a foreign company plans and constructs a project
and hands it over to the government or a domestic private company for execution. Such practice is
common in oil, steel, cement and fertilizer sectors.

(I) Third Country Location :-When trade relations between nations is restricted due to the political
reasons or the like, firms located in these countries may trade with each other from third country
base. For example, Taiwanese entrepreneurs found it easy to enter the People's Republic of China
through bases in Hong Kong.

(j) Joint Ventures :-Joint venture is a very common strategy of entering the foreign market like:-
Sharing of ownership and management in an enterprise.
Licensing agreements.
Contract manufacturing.
Management contracts.

Strategic Issues in a Global Environment

Expanding business overseas means reaching new clients or customers and potentially boosting
profits. Despite all the uncertainty of 2017 and the challenges that have yet to reveal themselves,
there are some guidelines for conducting business on a global scale that you should always consider
before leaping into new international operations.

1. International company structure

2. Foreign laws and regulations
3. International accounting
4. Cost calculation and global pricing strategy
5. Universal payment methods
6. Currency rates
7. Choosing the right global shipment methods
8. Communication difficulties and cultural differences
9. Political risks
10. Supply chain complexity and risks of labor exploitation
11. Worldwide environmental issue

International company structure

Coca-Cola offers one example of effective multinational business structure. The company is
organized into continental groups, each overseen by a President. The central Presidents manage
Presidents of smaller, country-based or regional subdivisions. Despite its diverse global presence,
the Coca-Cola brand and product is controlled centrally and consistent around the world.

Foreign laws and regulations

Along with getting your company structure in place, gaining a comprehensive understanding of the
local laws and regulations governing your target markets is key. From tax implications through to
trading laws, navigating legal requirements is a central function for any successful international
business. Eligibility to trade is a significant consideration, as are potential tariffs and the legal costs
associated with entering new markets.

Airbnb ran into trouble in 2014, with a crackdown on advertised rental properties falling outside
local housing and tourism regulations. The company was forced to pay a €30,000 fine for a breach of
local tourism laws in Barcelona.

International accounting

Of the main legal areas to consider when it comes to doing international business, tax compliance is
perhaps the most crucial. Accounting can present a challenge to multinational businesses who may
be liable for corporation tax abroad. Different tax systems, rates, and compliance requirements can
make the accounting function of a multinational organization significantly challenging.

Cost calculation and global pricing strategy

Setting the price for your products and services can present challenges when doing business
overseas and should be another major consideration of your strategy. You must consider costs to
remain competitive, while still ensuring profit. Researching the prices of direct, local-market
competitors can give you a benchmark, however, it remains essential to ensure the math still works
in your favor. For instance, the cost of production and shipping, labor, marketing, and distribution, as
well as your margin, must be a taken into account for your business to be viable.

Universal payment methods

The proliferation of international e-commerce websites has made selling goods overseas easier and
more affordable for businesses and consumers. However, payment methods that are commonly
accepted in your home market might be unavailable abroad. Determining acceptable payment
methods and ensuring secure processing must be a central consideration for businesses who seeks
to trade internationally.

Currency rates

While price setting and payment methods are major considerations, currency rate fluctuation is one
of the most challenging international business problems to navigate. Monitoring exchange rates
must therefore be a central part of the strategy for all international businesses. However, global
economic volatility can make forecasting profit especially difficult, particularly when rates fluctuate
at unpredictable levels.

Communication difficulties and cultural differences

Good communication is at the heart of effective international business strategy. However,
communicating across cultures can be a very real challenge. At Hult, developing cross-cultural
competency and communication skills are a core focus inside and outside of the classroom.

Political risks

An obvious risk for international business is political uncertainty and instability. Countries and
emerging markets that may offer considerable opportunities for expanding global businesses may
also pose challenges, which more established markets do not. Before considering expansion into a
new or unknown market, a risk assessment of the economic and political landscape is critical.

Supply chain complexity and risks of labor exploitation

When it comes to sourcing products and services from overseas, managing suppliers and supply
chains can also be a tricky process. Unfortunately, the length and complexity of supply chains
increases the chance of working with suppliers who have unethical — and even illegal — business
practices. Of growing concern is the risk in international business of forced labor and worker
exploitation.

Worldwide environmental issues

As the environmental risks and effects of climate change are becoming better understood,
sustainability is high on the agenda of many major global corporations. Recent international
legislations and proposals, such as the UN’s Sustainable Development Goals, have put environmental
issues at the forefront of international business development.