Strategic management ( all solved questions covering year 99 to 02)

Strategic Management

University of Mumbai

Strategic management

In a nut shell the total questions which will cover strategic management subject are

1) Long range planning- step inputs & stages

2) Porters 5 forces model attractiveness of Industry e.g industry of your choice.

3) Usefulness of Vision/mission- statement with e.g Parameters to formulate Vision/Mission

4) BCG share growth matrix as a tool for/to evaluate business /strategic thrust , market share, market mix & functional strategies.

Criticism /drawback

5) Change management

Factors /key elements

How is it different from other areas of strategic management

How to implement change mgmt.

6) Diversification with Indian example..

Different forms & their stated objectives

Parameters to judge diversification

7) Mergers & Acquisitions

Why do companies opt for it

State strategic objectives

Steps in takeover process

Offensive steps to target companies

Hostile takeovers

8) Differentiation

Strategies/competitive strategy/competitive advantage with E g

Strategic options for gaining competitive advantage

Outline critical success factors & pitfall for each option.

9) Outline steps in Strategic mgmt process

To build /consolidate in a changing business scenario

Key elements in the process/main frame work

10) Strategic audit

Critical questions covered in the audit

Methods to get information

Aims & conclusion

11) Short notes

Value chain analysis

Product differentiation

Strategic business units

Competitive advantage- strategies

Strategic audit

Corporate objectives

Global strategies

Bench marking

Diversification strategic option

Strategies for Fragmented Industries

12) Distinguish between

Competency & core competency

Vertical v/s horizontal integration

Strategic alliance v/s joint ventures

Supplier value chain v/s Forward value chain

Star v/s cash cow in BCG matrix

Entry v/s exit barriers

Offensive v/s defensive strategies

Strategies of market leader v/s market challenger.

Divestment v/s demergers

Portfolio mgmt & restructing diversification.

Global v/s multi country operations

Declining market v/s fragmented market.

Outline steps in Strategic mgmt process To build /consolidate in a changing business scenario Key elements in the process/main frame work

The term STRATEGIC MANAGEMENT refers to the managerial process of forming

a) Strategic vision

b) Setting objectives

c) Crafting a strategy

d) Enabling it to implement & execute the set strategy.

e) Evaluating Performance

As an ongoing process overtime one has to initiate whatever corrective adjustments that may be deemed necessary in the above parameters may be carried out

Five components in the strategic management process are typically called as the 5-task framework

a) Develop strategic vision :-

What is the long term direction

where are we headed to as a company

what type of future should we embrace in terms of technology/product/customer focus.

What is the industry standing we wish to achieve in the next five years.

Mangers need to take a hard look at the companies internal & external environment in order to arrive at views & conclusions on the future business scope & focus that it intends to pursue.This pursuit constitutes the strategic vision for a company & reflects on the managements aspiration for the organization & its business. The strategic vision generally helps direction setting & strategy making value enabling organization leader to make clear business courses in terms of resource allocation & strategy to reach the company to its logical goal of being an industry leader.

b) Setting objectives :-

The purpose of setting objectives is to convert statements of strategic vision & business mission into specific result oriented targets which has to be achieved .

Objective setting is required by all managers . Every functional unit in a company needs concrete & measurable performance target that contribute meaningfully towards achieving company objectives .All managers of each unit are held accountable for achieving them. Thus building a result oriented climate towards the enterprise .

The objective may be defined as those relating to

1) Financial Performance : That is profitability , results of which are extremely crucial for the long term health & survival of the firm.

2) Strategic objective: Aims at achieving increased competitiveness & stronger business position that is gaining market share overtaking competitors on quality & service , achieving lower cots, improving technology & gaining International Exposure.

C) Crafting a Strategy :-

A corporate strategy represents the managements answers to the fundamental business objectives of an organisation. For e.g.-

Whether to concentrate on a simple business or have diversified portfolios Whether to focus on a market Niche of broad base the customer range. Whether to pursue competitive advantage based on lower cost or superior technology. How to respond to changing customer preferences What type of geographical markets needs to be covered. A strategy thus reflects managerial choices among its alternatives & signals focussed commitment to particular product markets , competitive approaches & ways of operating the enterprise . Hence strategy brings into play the critical issue of how the targeted results will be achieved.

Strategy continuously evolved & changed depending on continuously changing trends of technology, products, consumer & competition. It is not a one time event, that it needs to reform to adopt the changes from time to time & to prepare for tomorrows market & condition.

d) Implementing/Executing Strategy :-

The core task of the mgmt here is to develop an organisation capable of carrying out the strategy in order to reach targeted objectives & product results. The process involves

Allocating company resources I E people & funds.

Establish policies & operating procedures.

Continuously monitor & Fine tune performance & reform strategy wherever necessary

Motivate people to pursue targeted objectives with a reward structure for achievement

Create favorable company culture & work climate, conducive to successful implementation.

Instituting the best practice & program with adequate leadership for continuos improvement.

Hence strategy execution is fundamentally on action oriented process. The key task being

Developing Competencies

Budgeting

Policy making

Motivating

Culture building &

Innovative leadership.

e) Evaluating performance :-

Many a times strategies may not be progress as expected or changes in internal circumstances from time to time require fine tuning & adjustments in the companys long term strategy . This may involve

Revising budgets

Changing policies

Re-organizing & revamping activities

Building new competencies &

Changing personnel may be typical eg of managerial action to improve strategy through regular progress review.

It is appropriate to point out that the role of strategy making doesnt rest solely with the CEO of the company. Every manager at his /her level is a strategy maker & implementers for the areas under his supervision . Lower down the hierarchy the strategy making is more specific & becomes broader as we move up the hierarchy.

Porters 5 forces model attractiveness of Industry e.g Industry of your choice

Long run success of a company is largely dependant on crafting the right strategy. To do so the mgmt requires to undertake a solid analysis of the companys external environment & internal situation . The two most important consideration are

Industrial competitive condition

The firms own competitive capability , resources & market position.

All oragnisation operate in a macro environment consisting of the economy at large , population lifestyle & value. Government regulations & technology factors . Even closer to that are the companys immediate industry & competitive business environment .

The entire macro environment V/S the organisation may be depicted br the following figure.

Structural attractiveness of an industry can be determined by undergoing a competitive force analysis involving identifying main sources of competitive pressures & their strengths , management can then devise successful strategies through a thorough understanding of an industries competitive character.

The best method adopted was the five force model made by Michael porter to understand the state of Competition in an industry.

Diagram to be drawn

Figure to be drawn

Competition pressure from

Outsiders offering substitutes to win buyers

Comp. Pressure

Arising from

Comp. Pressure

Suppler, seller

buyer seller

Bargaining

bargaining

Comp. Pressure from trait of new rivals

This model is widely used technique of competition analysis.

1) Rivalry among Competing sellers

The intensity of rivalry among competing sellers depends on how vigorously they employ tactics such as

Lowering prices

Improving with innovative features

Expand customer service

Longer warranties Special promotion

New product introduction

The rivalry can change as also competitive forces depending on how frequently & aggressively companies undertake fresh moves that threaten Rivals profitability & gain a competitive advantage. This however is a dynamic & ever changing process & competitive markets have become economic battle fields . The main factors are

Rivalry intensifies as number of competitors increase in size & capability.

Rivalry is stronger when demand is growing slowly.

Rivalry is more intense when slack industrial condition tempt competitor to cut price to boost unit sales.

Rivalry is stronger when cost of switching brands are low. Rivalry tends to be higher when exit barriers are high.

2) Entry of new Competitors

New entrants in the market bring about increase in production capacity to cater to the same finite market which brings about increase in competitive pressure . However a new entrant is also thwarted by two factors namely

Barriers of entry

Reaction of existing players to the new entry.

The main types of entry barriers could be

Economies of scale

Cost & resource disadvantage

Inability to match technology & know-how of existing firms.

Brand preferences & customer loyalty

Capital requirements

Access to distribution channels

Regulatory policies

Trade & tariff restrictions

Hence a new entrant needs to evaluate the entry barriers by looking at

How formidable the entry barrier is vis-a vis

How attractive the profit prospects are in motivating the potential entrant to commit his resources to overcome such barriers.

Threat of entry is stronger when entry barriers are low.

3) Pressure from substitute products Firms in one industry are quite often in close competition from firms in another industry, since their products are good substitutes. For E G Producer of Eye glasses compete with makers of contact lenses .Competitive pressure from substitute products depend on three factors

Whether substitutes are attractively priced

Whether buyers view substitutes as beneficial in terms of quality performance.

Cost of switch is low.

4) Supplier bargaining power

Supplier seller relationship represents a weak or strong competitive force depending on

Whether supplier exercises sufficient bargaining power to influence terms & condition of supply in their favour.

Extent of supplier seller collaboration supplier bargaining power can create competition pressure under the following condition.

Commodity product supplier has little or no bargaining power since it is available in the open market from numerous supplier with ample capacities only when supply position become tight they are in a position to bargain.

Suppliers are regulated to a weak position when there are good substitutes for their products

Suppliers tend to have less leverage to bargain over price & terms when the company under supply is a big & major corporate customer

5) Competition pressure from Buyer bargaining power

The circumstances under which buyers have bargaining leverage are

Their (buyers) numbers are large & they purchase a sizeable % of the output.

Cost of switching to competing brands or substitutes is low.

If the numbers of buyers are small or if a customer is important to the seller.

When buyers are well informed about seller, product, pricing & cost.

Implications of 5- Force model

The five force model thoroughly exposes a potential entrant to each of the 5- competitive pressures in the market , including the strength of each of the forces & the nature comprising such forces. The stranger the collective impact of the 5 forces, the lower the total profitability of the total industry, hence the competitive structure of an industry is clearly UNATTRACTIVE from profit making point of view. If rivalry is very strong, entry barriers are low, competition among substitutes are strong & both suppliers & customers are able to exercise considerable bargaining leverage.In contrast when competitive firms are not collectively strong the competitive structure of the industry is considered attractive or favorable.

For e g the TYRE industry

Rivalry among sellers is very strong No entry barriers exist allowing rivals to gain market share Suppliers & customers are able to exercise considerable bargaining Threat of substitute in terms of Raw materials always looms large. ( This is the answer for structural attractiveness of industry/ entry barriers)

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Mergers & Acquisitions

Why do companies opt for it

State strategic objectives

Steps in takeover process

Offensive steps to target companies

Hostile takeovers

Ans)

Strategic objectives of M & A

Pursuit of gains in terms of efficiency, capability, competitive advantage in a fiercely competitive market.

Used as a tool for diversification to expand product portfolio & enter new sectors

The early mover advantage can be established through M & A with no start up time & ready access to a manufacturing facilities & distribution channel thus giving rapid foothold in the market.

Economies of scale

Tax advantage- while acquiring a Company at time , the sole purpose would be to get into tax-shield particularly in case if the target company being a sick company.

M&A are an attractive strategy for strengthening a firms competitive position. This is particularly relevant in case of organisation heading towards global market leadership, frequently acquire companies to build market pressure in such countries whenever they do not compete. Similarly domestic companies trying to establish attractive positions in the industry of the future, merge or make acquisition in order to

Fill resource gap or correct competitive deficiencies.

Combine operations resulting in lower cost.

Access to improved technology with better product & services in wider geographic area

No company can afford to ignore the strategic & competitive benefits of acquiring & merging with another company to strengthen its market position & open up avenues of new opportunity.

Defn : A merger is a combination & pooling of two equally strong companies with a new craeted company taking on a new name.

Defn : A acquisition when one company namely the acquisition purchases & absorbs the operation of another that is the acquired.

Vertical Integration strategies

Vertical Integration extends the firms competitiveness within the same industry. It involves expanding the firm activities backwards into source of supply &/or forward towards user of the final product.

For e.g Manufacturer invest in facilities to produce components it formerly purchased from suppliers .It essentially remain in the same industry goes backward in the value chain. Similarly a consumer goods manufacturer opts to integrate forwards by opening 100 retail store to sell directly to consumers, it remains in the same business. If it extends its competitive scope forward in the industry chain.

Vertical integration can be full Integration that is participating all stages in the value chain as partial integration in selected stages. Thus vertical integration has an appeal only if it achieves greater competitiveness in terms of quality, customer service or enhance the same. While integrating forward & finally earn bigger profit for the company.

Significant drawback include higher capital investment & increased business risk due to high exit barriers . Moreover such integration often calls for radically different capabilities at various ends of the value chain & often outsourcing is cheaper.

The five Distinct Competitive strategic approach

Ans.) 1) Low cost provider strategy

The aim is to operate the business in a highly cost effective manner & open up a sustainable cost advantage over competition .A company achieves low cost leadership when it becomes the industries lowest cost producer. Hence pursuing cost reduction in manner that sabotages the attractiveness of the companies product offering , that will turn buyers off. The company should achieve low cost advantage In a way difficult for rivals to match. It should always be sustainable in the long term in order to yield a valuable edge in the market . A low cost producer has two options

To underprice competition & attract the price sensitive buyers in larger numbers to increase total profits

Refrain from cutting price & use the low cost edge to earn higher profit per unit.

Cost advantage may be achieved by performing internal value chain activities more efficiently than competition or/and bypass some cost producing activity altogether.

Key success factors

Company managers have to scrutinize each cost creating activity to determine what drives such cost . One has to manage these cost drivers & exhaustively pursue cost savings in each section of the value chain.

Pitfalls

On getting carried away by excessive aggressive price cut ending up with lower rather than higher profitability. This may be due to prices being cut by less than the cost advantage.

The value of cost advantage is not sustainable in the long run & rivals manage to copy or match it shortly.

Cost reduction if pursued as a singular goal, may end up with a product offering too few features that may not appeal to buyers.

2) Differentiation Strategy

The essence of differentiation strategy is to be able to be unique (when buyers needs & preferences are diverse) in ways that are valuable to customer and that can be sustained. A firm needs to study buyers needs to learn what they consider as important in terms of value, attributes and p[product offerings for which they are willing to pay for.

A competitive advantage results once a sufficient number of buyers become attached to the differentiated attributes resulting in bonding of customers with the company giving rise to competitive advantage in terms of;

Firm can command a premium price

Increase unit volume by attracting new buyers

Gain long term buyer loyalty

Enhance profitability through higher pricing/ greater market share attained through differentiation strategies

e.g. of differentiation are

Unique taste e.g. Listerine & Wrigleys

Multiple features e.g. MS Office

Superior service FedEx

Value for money WALMART

Design & performance Mercedes

Prestige Rolex in watches

Reliability/ Quality Johnson & Johnson in baby products

Differentiation can be created not only through marketing & advertising but also in the internal value chain for e.g. in raw material procurement, product development & technology related activities, manufacturing processes, distribution & marketing.

How to achieve differentiation based advantage or success factors

Incorporate superior product attributes & features so as to

Lower cost

Raise the performance

Enhance buyer satisfaction

Deliver value to customers that rivals cannot match

Pitfalls

No guarantee that the differentiation will always produce competitive advantage. It value delivered to buyer versus value perceived may not be match

Differentiation can be easily copied

Over differentiation resulting to too high a price or quality/ service levels in excess of buyer needs

Not understanding what buyers consider as value

3) Best cost provider Strategy

The most successful best cost producers have competencies and capabilities to simultaneously manage unit cost downwards & product caliber upwards. This strategy aims at giving customer MORE VALUE FOR MONEY by satisfying their needs on key attributes like quality/ service/ performance while exceeding their expectation on price.

In other words the best cost provider must have resources and capabilities to produce excellent quality at a lower cost than rivals, incorporate better features, match product performance along with customer service at such cost.

Pitfalls

The greater danger to a best cost provider is that the user will get squeezed between firma offering low costs & differentiation strategies

Low cost leaders may be able to draw customers with lower price

While high end differentiation may steal customers with better product attributes

Thus to be successful in strategy the best cost provider must offer buyers a significantly better product to justify the price changed above the low cost leader

Similarly it has to provide at a lower price than the high end differentiator who is providing better features for his price

4) Focussed Strategies

Also known as market niche strategies.

Competitive advantage is either

1. Lower cost than competitors in the niche

2. The differentiated strategy i.e. ability to offer niche competitors something unique to suit their tastes & preferences

Focussed low cost strategies are fairly common for e.g producers of private label goods are able to achieve low product development marketing distribution and advertising by concentrating on generic items & selling directly to retail chain wanting a basic brand to sell to price sensitive shoppers. Pursuing cost advantage via focussing works well when a firm can lower cost significantly while limiting its customer base.

Most markets contain a buyer segment willing to pay a higher price or premium for finest items available thus opening a niche for firms to pursue a differentiation strategy at the very top end of the marketing pyramid. For e.g. Porsche cars.

Success factors

Target market niche should be big enough and growing to be profitable

Niche should be suited to the firm resource strengths & capabilities

There should be fewer rivals attempting to specialize in the same segment

Pitfalls

Merchandising i.e. competition offering similar or more appealing product offerings thus offsetting focussers strengths

Shifting preferences & needs of niche member over time

Diversification with Indian e.g.

Different forms & their stated objectives

Parameters to judge diversification

Ans.

Diversification

Defn: Most companies have their business roots in a single industry from where substantial parts of their revenue & profits usually come from diversification becomes an attractive strategy when a company runs out of profitable growth opportunities in its core business .

The purpose of diversification is to build/enhance share holder value. To create share holder value a diversified company must get into business that can perform better under common management than as stand alone businesses. Diversifying cos. Will aim to

Add value for customer

Gain competitive advantage by broadening present business

Transfer existing capabilities to new businesses

Save cost by diversifying into related businesses

There are two forma of diversification

1. Into relate business diversification

2. Unrelated diversification

1. Into relate business diversification

When there is competitively valuable relationship amounts to activities comprising their respective value chains. It involves adding businesses whose value chains posses similar STRATEGIC FITS with the value chain of the existing businesses i.e.

Firm can transfer expertise & technology from one business to another

Combine activities of separate businesses into a single operation to lower cost

Share common branding

Create enhance resource strength & capabilities through related diversification

Cross business strategic fits can exist along the value chain.

R&D/ technology Diversifying into businesses where there is potential for sharing common technology & its derivatives, transferring technology from one business to another. This results in potential cost savings & time in R&D & product development

Supply chain Can perform better together because of potential for transfer of skills in procuring raw material, greater bargaining power with suppliers for better input costs

Manufacturing Strategic fits in production related activities can give rise to competitive advantage when diversifiers expertise in quality & cost efficient methods. JIT systems, or training can be transferred to another business

Distribution Business with closely related distribution activities can perform better together than a part because of cost savings in sharing similar distribution facilities to access customers

Sales activities A variety of cost savings arises from diversifying into businesses with closely related sales & marketing activities. Sales costs are often reduced by using the same sales force for both businesses

Advantages

Related diversification can lead to huge cost savings whenever strategic fit along the two value chains is achieved to consolidate the overall business position. Such savings is known as Economies of scale where increase in size of numbers lowers unit cost. While economies of scope are cross business cost saving opportunities

Related diversification is attractive as opportunity to convert strategic fit between value chain of two businesses into a competitive advantage over rivals.

2. Unrelated diversification

Certain companies exhibit a willingness to diversify into ANY INDUSTRY WITH GOOD PROFIT OPPORTUNITIES. There is no deliberate effort to seek businesses having strategic fit.

The basic pre-condition of unrelated diversification is that any company that can be acquired on good financi9al terms & has satisfactory profit prospects, represents a good business to diversify into. Unrelated diversification is achieved by entering new businesses by generally acquiring an established companies whose

Assets are under valued

Those who are financially distressed cos.

Companies pursuing unrelated diversification across diverse industries are known as CONGLOMERATES.

Pros of unrelated diversification

Risk is scattered over diverse industries

Resources can be employed in areas where best profit prospects are offered

Profitabilit6y will be somewhat more stable i.e. hard times in one industry will be offset good times in other industries

Cons of unrelated diversification

Diversifying into a business without knowing how to run it

No competitive advantage due to lack of strategic fit in value chain between businesses

3) Combination of Related & Unrelated diversification

This is when a companys core business accounts for 50 80% of the total revenues & a collection of small related & unrelated business account for the remainder.

Strategies for entering new business

1. Acquisition It is a most popular means of diversifying. Easy to enter target market offers effective ways to cross entry barriers & gain market for foothold.

2. Internal start-up Involves creating a new company under existing umbrella to compete in the desired industry.

3. JV & Strategic partnerships JVs have two involved partners who get together to pursue opportunities in new industries central to their corporate strategy. It is a collaborative arrangement.

Parameters to judge diversification

The main objective of diversification is to increase shareholder value. It is possible to make an assessment of whether the diversification is warranted or not may be done by the following methods

1. Industry attractiveness test The industry chosen for diversification must be attractive enough to yield good returns on investment. Whether an industry is attractive depends chiefly on the presence of favorable competitive conditions & the market environment conducive to long terms profitability.

2. Cost of entry test The cost to enter the target industry must not be so high so as to erode the potential for good profitability. However the most attractive the industry , the more expensive it is to get into it. Entry barriers if are low, there would be a rush of new entrants which would erode potential for good profitability. Buying a company already in the industry with strong fundamentals often entails high acquisition cost. Hence costly entry undermines the prospects of profitability and diminishes shareholders value.

3. The better off test Diversifying into new business must offer potential for the companys existing business plus new business to perform better together. Such outcomes can occur when a form diversifies into businesses that have value chain strategic fit match with the existing business which will reduce cost, transfer skills/ technology, create new competencies & leverage existing resources. In absence of such fits firms should be skeptical of diversification.

Diversification that satisfies all three tests have the greatest potential to build shareholder value. Other moves to diversification which pass less than three tests are suspects

Strategic objectives of Mergers & Acquisitions

1. Pursuit of gain in terms of efficiency, capability, competitive advantage ina fiercely competitive market.

2. Used as a tool for diversification to expand product portfolios & enter new sectors.

3. The early mover advantage can be established through M&A with no start up time & ready access to manufacturing facilities & distribution channel, thgus giving rapid foothold in the market.

4. Economies of scale

5. Tax advantage While acquiring a company at times the sole purpose would be to get into tax shield particularly in case if target being a sick company.

Steps in take overs

Options

1) Target options

Look for companies with net operating losses but strong turn around prospects

Seek cash rich company which are not exploiting their potential to the fullest or the undervalued assets.

Seek an under capitalized company where promoters stake is low & mount a hostile attack (this is also called as hostile take over)

Watch out for family run businesses where promoter has no successor.

2) Estimate the degree of oversubscription by consulting primary market brokers

3) On these basis apply for a quantum of shares , large enough to ensure that the allotment exceeds promoters stake .

4) Purchase further shares after the script is listed to increase holding.

Secondary market

Offer shares to be bought out from Financial institutions Buy out foreign investors & NRI stakes by offering them 10 % premium Make offer to other Indian share holders as a portfolio managers. Initiate stock market purchase on all stock exchanges & ensure maximum publicity. Strategic audit / Critical questions covered in the audit / Method to get info /Aims & conclusions

Ans.)

Strategic audit

It is an operational framework designed to access whether a firms corporate strategy is working or not ie it is a method evaluation of decided strategy. Any strategy that is formulated is speculative & rest heavily on certain assumption about external environment , hence periodic appraisal on the performance indicator of the strategy in the form of an audit informs management whether things are as per plan.

An audit should be conducted when

Operational signals suggest that there is a problem

Fine tuning is hence required

Key questions

Is the evidence that strategy is working

Performance indicator

Quantitative & qualitative identification of performance & strengths

Sales earning , stock price , market share , profit margin

Penetration of new market , products & process

Are objectives & strategies consistent

Objective policies & actions are the basic corner stones of strategy

All three should be renewed to ensure consistency in results

Is the strategy practical

Assessment includes the extent to which strategy builds on companys strength & whether resources required are adequate

Are the assumptions valid while making the strategy

Many assumptions fail because they are not well conceived & purely on the basis of beliefs rather than facts.

Adequate data collection is required internally & externally & same to be integrated with planning process

Implementation of audit

It aims at identifying the following aspects of strategy :-

1. Whether its is consistent with the managements style , values & preferences.

2. Whether organization is structured to achieve marketing objective

3. Whether information system monitor the strategic implementation at all times.

4. Whether there is a consensus within the company in regards to this strategy.

5. Whether there is a balance between preparing for the future & maximizing the present.

6. Whether strategy is consistent with the actual priorities of the company.

Conclusion

Strategic audit is the best way to get a wide number of complex & independent issues that need to be analyzed in order to reap growths & profits from strategic planning.

Methods of Evaluating SBU portfolios

BCG as a tool to evaluate

1. Current business position

2. Areas of strategic thrust, market share, market mix, functional strategies.

3. Drawbacks of the method

Ans.)

SBU Defn

In the case of highly diversified multi product companies , competitive analysis & strategic planning is a highly complex problem. However companies can solve this problem by dividing the organization into manageable profit centers based on product categories or operational characteristics. Each unit has its independent planning & has to meet its own performance target within the financial constraints. Firms that separate their product into such portfolios are called SBUs. Each SBU undertakes strategic planing to match resources with business potential . It also involves transfer of resources from one portfolio to the other.

BCG

20%

Market

Growth

Rate

(Cash 10%

use)

4.0 2.0 1.0 0.5 0.25

Relative market share

(Cash Generation)

The four general principals in interpretation are

1. Margins & cash generated depend on market share

2. Sales growth requires cash input to finance working capital & other needs. Hence participation in growing markets requires cash inputs to maintain share.

3. An increase in market share requires cash input to finance increase advertising expenditure & added capacities .

4. Growth in each market peaks ultimately on maturity. Cash generated from such products can be re-invested into still growing products.

Hence under the concept of SBU the strategic issue is how to invest cash generated by cash cows to finance market share increase for the question marks. If successful , this strategy produces new stars which inturn will become cash cows in future. Dogs should be divested preferably if they donot contribute to cash flow.

Uses of BCG matrix

It helps to analyze the competitive position of the various product portfolios in an organization.

1. The portfolio display should be examined to see where the products are distributed in the four quadrants. Products with larger sales should appear as stars or cash cows & fewer products should appear in question mark. It is desirable that least number of products should appear as dogs since they are cash traps.

2. Portfolios should be scrutinized over three to five years which will help understand the portfolio movements & ascertain the effects of current investments & identify future investment opportunities.

3. The product portfolio can be used to assess competitive strength of various products particularly in terms of industry position & market leadership.

4. The BCG matrix helps a firm understand the cash needs for each product at any given time .

Criticisms

1. Cash generation is primarily held dependent on cost differentials (Profit margin) which is a function of experience curve effects .I E firms with greater experience in a product has lowest cost of production.

2. The market share- profitability relationship will be diluted if proper segmentation is not done during analysis.

3. Long range strategic planning should not be done on the basis of this short term analysis

4. It is not a useful tool for short term or interim assessments.

Change management

Factors /key elements

How to implement

How is it different from other areas of strategic management.

Ans.)

Change is a process that can be schematically represented as

Pain

Remedy

For eg Liberalization , downsizing with VRS , merger & acquisition (change culture)

The pre-requisites of change are

1. Pain critical mass of information breaks the current status quo.

2. Remedy certain desirable & accessible action solve the problem or take advantage of the current status of the situation.

The key issues are

Will the people choose to accept change

If not should you force change

If you do force change will people value the benefit

The major requirement to effect change are

Continuos commitment & involvement of top management

High degree of trust at all levels of organization facilitates change

Patience in terms of time frame to allow benefits of change

Change is always expensive but has to be done if maintaining current status is even more prohibitive.

Change will result in significant disruptions of peoples expectations , resulting in loss of control over some important aspects of their lives & environment .

Change consistent with current organization cultures are usually successful

Change Process

Stage 1- Choosing the target actions

Identify possibilities/opportunity

Select the best one

Gain sufficient commitment to initiate the process

Set a target & general direction for efforts by clearly describing future situation

Stage 2- Setting Goals

Test feasibility of making change

Develop specific goals & action plans to achieve targets

Develop clear understanding of future requirements in terms of resources, skills , tools & timing.

Gain substantial commitment to time & resources required

Stage 3- Implementing action

Initiate the plan

Involve all those who must change . tell them how & why

Shift the working pattern

Demonstrate effectiveness of plan & progress towards goals & tangible proof of benefits of change.

Stage 4 Review

Complete the implementation process

Encourage & support people who are making efforts to change

Improve upon the approach based on feedback

Stage 5 Re balancing & accommodating change

Identify ripple effects of change on department , systems, organization structure

Integrate changes with existing attitudes & systems

Stage 6- Consolidation

Audit accomplishments against original goals

Identify what worked & what didnt & analyze why

Share the learning process

Leadership in the change process

An effective leader will be a visionary & a catalyst with creativity & intuition who will be the key driver in the change process .He will effectively target change by planning an effective path with a conducive climate to initiate the process. He will involve all concerned to realize the benefits of change & with continuos communication & commitment with adequate flexibility , he would lead the organization on the path way of change.

Usefulness of Vision /mission statements

Parameters to formulate mission/vision

Ans.)

A strategic vision is a road map of a companys future providing specific info about technology , customer focus , geographic markets , products to be pursued , capabilities & competencies to be developed , In short the total organization the management is trying to create. Thus the chief concerned addressed by strategic vision is where are we going .

The mission statement however tends to deal with the current & present business scope who are we & what are we doing.It stresses on the companys present products & services , its customers & as to what technological & business capabilities it has .It does not say where the company is headed or what its future scope is .

Effective strategy begins with a strategic vision of where the organization needs to head. & what the company is trying to create. It is not a management jargon but in fact is an carefully thought out exercise on Where do we go from here with a clear commitment to follow such a path.

The three elements of strategic vision are

Coming up with an appropriate mission statement which defines the current business in the essence of who are we , what do we do & where are we now.

Using mission statement as a basis for deciding long term course while making a choice about where we are going. I E charting a strategic path for the company to pursue

Communicating the strategic vision in clear exciting terms so as to arouse organizational commitment

The mission statement is the starting point for forming a strategic vision. One of the roles of the mission statement is to give the organization its own special identity , business emphasis & path for development one that typically sets it apart from similarly situated company .A strategically revealing mission statement incorporates the following

What is being satisfied i.e. customer needs

Who is being satisfied which customer segments

How the enterprise intends to create & deliver value to its customers

Technology, competencies & activities in a mission statement are important in defining a companys business because they indicate the boundaries of operation. Diversified companies would have broader missions & business definitions than single business enterprises.

It is also possible to put in place a mission statement for key departments within a business indicating the direction where each department is headed in its overall contribution to the companys business.

It is also critical to convert the mission statement into a strategic vision which should have a time horizon of Five years plus subject to volatile market conditions. However this conversion needs to address the following issues

What changes could occur in the market in these five plus years & what are then implications

Changing consumer needs & buyer segments

New products & geographic markets

What should the companys business make up look like in five years & what are we trying to become .

It is a course of astute entrepreunership in developing a strategic vision in a creative manner to prepare the company for the future. A well chosen strategic vision helps companys not just to survive but to remain successful

It is equally important to communicate the strategic vision to lower level managers & all employees to convey the sense of purpose while setting the organizations long term direction. People need to believe that the management knows where it is trying to take the company & see the changes that lie ahead both internally & externally. Most organization members will rise to this challenge provided the purpose is worthy & beneficial to customers .

Many firms put their vision statements in writing which is crisp & clear & conveys the unmistakable meaning while illuminating the direction in which the firm is headed. Hence a well conceived strategic vision will result in the following

Gives the firm long term direction & reduces rudderless decision making

Conveys firms purpose clearly & motivates all members

It provides a guiding light for all departments to set departmental objectives to synergise overall strategy to prepare for the future.

Short notes on

1) Global strategies:

Companies expand into foreign markets for the following reasons:

To gain access to the new customers

To achieve lower cost and enhance firms competitiveness

To capitalize a core competencies

To spread business risk across the wider mkt. base

A Company is considered as a global competitor when it is pursuing or has mkt. presence in most continence and virtually in all major countries.

The main concerns faced by companies competing in foreign mkt. are cross country variation in culture, demographic and mkt. conditions besides having into customized their offerings in each country differently in order to match local preferences. Global companies however offer standardized product worldwide which leads to scale economies and experience curve effects contributing to low cost advantage.

Global competition exists when competitor conditions across national mkt. are linked together strongly enough to form a truly international mkt. In global competition a firms competitive advantage grows out of its worldwide operations, a competitive advantage created at home is supplemented by advantages growing out of its operations in other countries. E.g. of global competitions are, automobiles, t.v. tyres, watches and aircraft.

The key strategic options for competing globally are,

Export from single country production base or license to foreign firms or employ franchising. These are generic strategies wherein country to country variation is minimum.

Employ a global low cost strategy to gain cost leadership over global and local rivals.

Opt for global differentiation strategy, thus endeavoring to set itself apart from rivals and create an image and mkt. position on this basis.

Follow a global best cost strategy and strive to provide bias the best value.

Adopt a global focused strategy serving certain select niches in each strategically important mkt.

Hence key aspects of global strategy are aimed at,

Same strategy and product standards worldwide

Plans located on the basis of maximum competitive advantage i.e. low cost countries, close to major mkt. and dispersed in order to minimize transport cost.

2) Benchmarking:

Benchmarking is a tool that allows a company top determine whether the manner in which it performs various functions and activities compare with the industrys best practices in terms of costs and effectiveness. Benchmarking entails doing cross company comparison on how basic functions and activities in the value chain are performed i.e. how materials are purchased, how inventories are managed, how products are assembled, how fast companies enter the new markets with new products, how quality control is performed, how employees are trained, how distribution is done and how maintenance is performed.

The way in which the above activities are performed and the costs associated with these activities are compared with leaders in the field. The objectives of benchmarking are to identify the best practices in performing the activity and to learn how other companies who are leaders achieve lower cost and better results in the said activities across the value chain.

The analysis that benchmarking will reveal will give managers an idea where they have to take action to improve companys competitiveness in terms of costs and results vis a vis the competition. Thus benchmarking has proven to be a potent tool for learning which companies are best at performing particular activities and then utilizing their best practice techniques to improve cost and effectiveness of companys own activities.

The tough part of benchmarking is gaining access to information about other companys practices and costs. This information can be complied from public reports, trade groups, research firms, industry analyst, customers and suppliers.

3) Value Chain Analysis:

A Companys value chain identifies the primary activities that create value for customers and related support activities. The value chain consist of separate activities, functions and business processes that are performed in designing, producing, mktg. and supporting a product or service. The chain of value creating activity starts with raw material supply i.e. suppliers value chain, continues through component production, manufacturing and assembling, distribution to the end user i.e. forward value chain.

Companys value chain shows the linked set of activities and functions that performs internally as shown in the diagram

Primary activities and costs

(Supplier Value chain)

Distributor Value chain

Company VC

Customers value Chain

Support

activities

And

costs

The value chain includes profit margin because the mark up over the cost of performing firms value creating activities is a part of the total cost to be born by the buyer. Further, creating value that exceeds the cost of creating it is the fundamental objective of business. Each activity in the value chain incurs cost and ties up assets and it is essential to arrive at cost estimates for each activity in the chain.

A companys cost competitiveness depends not only on cost of internally performed activities i.e its own value chain but also on cost of value chain of suppliers and forward channel allies. Thus managers need to understand the entire value chain system in order to access the companys competitiveness in end use mkts.

Suppliers value chain are relevant because suppliers perform activities and incur cost in creating and delivering the purchased units used in the companys own value chain, costs and quality of such inputs influence companys own costs and capabilities. Hence companies need to reduce its supply costs and supply effectiveness to enhance its own competitiveness.

Forward channel value chains are relevant because,

The cost and margins of down strains companies i.e. distributors and strategic partners are part of the price paid by the customer/end user.

The activities that forward channel allies perform effect end users satisfaction

Thus a company should work closely with forward channel allies to revise or reinvent their value chains to enhance mutual competitiveness. A company may also improve its competitiveness by undertaking activities that beneficially impact both its value chain and customer value chain.

Actual value chains vary with industry, type of company and products. Value chain analysis is a tool to achieve strategic cost analysis for each and every function performed as compared to cost incurred.

4) Strategies for fragmented industries:

Typical features in a fragmented industry are,

No. of players are small or large but total mkt. size is small

There is distinct, absence of a mkt. leader since no one firm as a substantial of industry sales

Low entry barriers, allow small firms to enter quickly and cheaply.

Buyers require relatively small quantities of customized products

Many paths of specialization have been formed in the industrys value chain

Industry is young with aspiring contenders with undeveloped resource base and capabilities.

In fragmented industries, growth rates are slow as the mkt. matures. If the competition is stiff, then the growth is even slower and weak, inefficient firms are weeded out. Competitive rivalry in fragmented industry can be moderately strong to fierce. Suitable strategy options include;

Become a low cost operator since price competition is intense and margins under pressure, companies with no frill operations featuring low overheads, high productivity and small capital budgets can stand out as low cost producers who can play a price discounting game and still earn profits above industry avg.

Specializing by product type when a fragmented industry products include a range of styles/services, a strategy to focus on one product or service can be very effective.

Specialization by customer type a firm can carve out a market niche by offering to customers who are interested in low prices , unique attributes , customized features & better service

Focusing on limited geographic area even though a firm is in a fragmented industry & cannot win total country wide sale s, it can still attempt to dominate a regional geographic area.Concentrating companys effort on a limited territory can produce better operating efficiency , brand awareness through saturated advertising while avoiding dis-economies of stretching operations over a wider area.

5)Competitive advantage strategies

write Porter five force GENERIC MODEL.

6) Environment scanning

involves studying & interpreting the sweep of social , political , economic , ecological & technological events in an effort to spot emerging trends & conditions that could become key driving forces. It involves time frames in excess of three to five years for e g Forecasting demand for electric power 10 years hence or how will people communicate in the future or how will income levels & consumer habits change .

Environmnet scanning thus attmepts to spot futuristic possibilities & their implications .The purpose of environment scanning is to raise consciosness of managers about potential developments that could have an important impact on industry & pose new opportunity or threats.

ES can be accomplished by systematically monitoring & studying current events & constructing future scenarios . These methods are highly qualitative & subjective & despite its speculative nature it helps managers lengthen the planning horizon, translate vague issues for future opportunities or threats into clearer strategic issues .

Distinguish Between

Competence & Core competence

A companys competence is the product of learning an experience & represents real proficiency in performance of internal activities. such competencies have to be consciously built & developed overtime. Such efforts entails selecting people with the required skill & knowledge upgrading capabilities within the co-op group effort to create a capability which can perform consistently at an acceptable cost. Thus competence consist of a bundle of skills , know-how , resources & technology as opposed to a single discrete activity

Core competence is something that a company does well relative to the other internal activities .The core competency as opposed to the normal competence is that it si central to the companys competitiveness & profitability. It can relate to any of the many aspects of the business for e g Good after sales service. Core competency gives a company competitive capability & it resides within its people I e the intellectual capital & not in the assets. Thus knowledge & Intellectual capital both intangible resources are key ingredients of core competency & firms competitive ability.

A companys core competency represents a DISTINCTIVE COMPETENCY when such competency is superior relative to competitors capability. Hence a core competency becomes a basis for competitive advantage only when it is a distinctive competency.

Vertical Integration V/S Horizontal integration Vertical Intg extends a firms competitive scope within the same industry .It involves expanding the firms range of activities backward into sources of supply &/or forward towards end users of the final product. Thus if a manufacturer invest in production facilities to produce certain components that was formerly outsourced , it essentially remains in the same industry & is an eg of backward integration. Similarly forward integration can be done by a firm by opening retail shops to market its own products.

Horizontal integration occurs when a firm extends its competitive scope by diversifying into totally different industries .In this case it is not in a position to utilize its competencies develop in the existing value chain & relies totally on developing new competencies & abilities in the unrelated industry. This can be done in a short period of time by acquiring a ready & established firm which enables it to get ready access to all aspects in the value chain of the new industry as well as market foothold.

Strategic alliances V/S Joint ventures Joint ventures typically entail forming a new corporate entity owned by the partners normally two partners who join together to pursue opportunities that were some what peripheral to the strategic interest of both partners. Very few companies have used joint ventures to diversify into new industries central to their corporate strategy. JV s are some times the only way to gain entry into foreign markets where entry is restricted by govt. & companys must secure local partner to enter . JVs with local partners are a useful way to surmount tariff barriers & quotas

In recent years strategic alliances have replaced joint ventures as the favored mechanism for joining forces to pursue strategically important diversification opportunities .They also readily accommodate multiple partners & are more flexible & adaptable to changing market situations. Strategic alliances involve pooling of resources & competencies of two or more independent organizations to generate capabilities required to succeed.

Offensive V/S defensive strategies Offensive strategies are basically employed to achieve competitive advantage that cannot be easily broken by rivals in areas of cost advantage , differentiation advantage & resource advantage. Offensive strategies are used to CREATE AN ADVANTAGE & SUSTAINABLE EGDE .It involves a build up period where the moves produce competitive advantage followed by a benefit period where the size of advantage is achieved after which there is an erosion period where rivals counter attack to narrow the gap. One of the most powerful offensive a strategies is to challenge rivals with a better product at a lower price , leapfrogging into next generation technology , expanding product line s& developing customer service capabilities that rivals do not have.

The purpose of defensive strategy is to lower the risk of being attacked , weaking the impact of any attack that may occur .However the foremost purpose of defensive strategy is to protect competitive advantage & fortify firms competitive position . The two basic approaches are

Block challengers option for initiating an attack by may be introducing new features & broaden product lines to close of gaps & niches

Signaling that retaliation is imminent by may be cutting price increasing capacities & generally announce management commitment to defend its present share.

Strategies for market leaders V/S Challengers

The main strategic concern for a leader revolves around how to defend & strengthen its leadership position by becoming a DOMINANT LEADER as opposed to just a leader. The strategic posture adapted by market leader are

offensive strategy it rests on the principle of being the first mover & staying a step ahead of the competition forcing rivals to be in the reactive catch up mode

Fortify & defend The essence here is to make it harder for challengers to gain ground or new firms to enter. The goals here are to hold on to present share strengthen market position & protect competitive advantage by introducing more product versions , improve product attributes ,fill vacant niches & by keeping prices reasonable for the best quality

Muscle flexing strategy here the dominant player is fiercely competitive when smaller rivals resort to undercutting price or mount market offensives to threaten its position. specific responses could be exceed challengers price cut , increase advertising campaigns & offering better deals to customers .

Market challengers are the up & coming firms which employ offensive strategies to gain market share & build stronger market position. Strategies employed include

Pioneer a technology break through

Get newer & better products to adapt to changing market conditions

Use price cuts to win over customers from high cost , high price rivals .To be able to do this challenger firm must pursue aggressive cost reduction in its own value chain

Craft attractive differentiation strategy based on quality, technology , customer service , product innovations etc.

Increase market share & competitive position via acquiring smaller rivals to forma a bigger enterprise plus enhancing strength

Focussed niche strategy by identifying gaps & vacant niches

Be a content follower & refrain from initiating any of the above & continue to react from time to time.

Entry barriers & Exit barriers

New entrants to the market bring with them a new production capacity , a desire to establish a secure place in the market & some time s substantial resources to compete . A barrier to entry exists whenever it is hard for anew comer to break into the market or the economic factors that needs to be surmounted which poses a disadvantage to the new entrant relative to the competition. Entry barriers may be classified as :

Economies of scale deter entry because they force new players to enter on a large scale which is costly or accept cost disadvantage /lower profitability which is risky.

Existing firms will have cost & resource advantages due to learning curve effects

Successful entry may require complex technology & know how not readily available to the new comer.

Brand preferences & customer loyalty are often attached to establish brands & the cost that the entrant incurs to force the switch is high.

Capital requirements would be high in terms of plant , technology , advertising & start up period

Access to distribution channels potential entrant may have to buy such access .

Regulatory policies , tariffs & trade restrictions

Exit barriers are higher when it is more costly to abandon the market than to stay & compete . Rivalry hence tends to get more vigorous when it cost more to get out of the business than to stay in & compete, even though they may be earning lower profits or even making losses.

Divestment & Demerger

In multi product , highly diversified companies , it is essential to regularly study which products & businesses are doing well in terms of competitive positions , market share & ability to generate cash & profits . This can be done if then products are grouped into portfolios &/or SBUs based on similarity in characteristics & operations . By using tools like BCG share growth matrix & the nine cell GE mckinsey screen matrix , it is possible to plot the above parameters over a period of time .

If a business or product exhibits poor financial fit & soaks up a disproportionate share of the company financial resources , if it is a below sub-par bottom line contributor & threatens to jeopardize the entire enterprise then such portfolios /product may be divested i.e. withdrawn/discontinued or sold of for the best possible price.

De-merger is a major restructuring activity for delivering value to share holder. It involves spinning of part of the diversified co. into a new co. an undertaking free distribution of the shares of the spun off co. to the original shareholders of the original co. Eg. Sandoz de-merged its industrial chemical business into a new co. Clariant India Ltd. Unlike divesting, the parent co. does not receive any proceeds of the de-merger since the de-merged co. shares are directly distributed to co. shareholders.

Hence, the major motives of de-merger are to close the value gap, improve mgmt. Focus and avoid cross subsidisation between business portfolio

Develop Mission and vision

Set Objective

Develop Mission and vision

Implement and execute Strategy

Continues improvement

Surplus

Company

New entrants

Buyers

Substitutes

Rival firm

Technology

Population demographics

Society value and lifestyles

The economy at large

Legislation & regulation

Rivalry among competitors Pressures created by rallying for better market position and advantage

Substitutes

Buyers

Surplus

Potential entrants

Purchased supplies

Operations

Distribution/ logistics

Product R&D, Technology, and systems DevelopmentHuman Resources Management

General Administration

Sales / mktg.

Service

Profit margin

Present State

Transition state

Desired state

( Star Question Mark -?

Modest Positive or Negative

Cash FlowLarge Negative CashFlowoptimum cash flowCash HogsDog-X

$- cash cow

Large Positive Cash flow

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