Strategic Management

Mr. Deepak Trivedi

(Associate Professor)

Marketing & Strategic Management

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1.The Introduction
Nature:
Strategy of an organization consists of w at management decides a!o"t t e f"t"re direction and scope of t e !"siness. #t entai$s manageria$ c oice among a$ternative action programs% commitment to specific prod"ct market% competitive moves and !"siness approac es to ac ieve enterprise o!&ectives. #n s ort% it may !e ca$$ed t e game p$an of management. T e decisions constit"ting strategy idea$$y invo$ve matc ing of enterprise reso"rces to t e c anging environment and determining w at t e enterprises s o"$d !e engaged in doing in f"t"re and ow it s o"$d position itse$f to take advantage of t e f"t"re market opport"nities. According to T ompson and Strick$and% 'A company(s strategy consists of t e com!ination of competitive moves and !"siness approac es t at managers app$y to p$ease c"stomers% compete s"ccessf"$$y% and ac ieve organizationa$ o!&ectives.) T e nat"re of strategy is essentia$$y t e 'pattern of an organization(s responses to its environment over time.) T "s% strategy may or may not invo$ve e*p$icit form"$ations of w at t e organizations intends to do. #n ot er words% w et er or not an organization form"$ates a strategy% it is pres"med to ave esta!$is ed a re$ations ip wit its environment and ence t ere is a strategy w ic can !e e*amined and descri!ed% even t o"g it is not spe$t o"t in so many words. + i$e s aping t e f"t"re% strategic decisions of ten mo"$d t e organizationa$ identity and c aracter deciding w et er t e enterprise wi$$ contin"e to !e in t e same $ine of !"siness% or com!ine new $ines of activity wit t e e*isting !"siness% enter new market segment or seek to ac,"ire a dominant position in t e same market and so on. -"nctiona$$y% strategy may provide t e !road s ape of t e !"siness. Strategic decisions are primari$y concerned wit e*terna$ rat er t an interna$ pro!$ems. #n ot er words% t ey are more concerned wit t e se$ection of t e prod"ct mi* w ic wi$$ !e prod"ced% and t e markets to w ic t e prod"ct wi$$ !e so$d.

Importance:
Financial Benefits: .n t e !asis of empirica$ st"dies and $ogica$ ana$ysis it may !e c$aimed t at t e impact of strategic management is primari$y t at of improved financia$ performance in terms of profit and growt of forms wit t e deve$oped strategic management systems.

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Enhanced capability of problem preventions: T is is $ike$y to res"$t from enco"raging and rewarding s"!ordinate attention to p$anning considerations% and managers !eing assisted in t eir monitoring and forecasting ro$e !y emp$oyees w o are a$erted to t e needs of strategic p$anning. Improved quality of strategic decisions through group interactions: T e process of gro"p interaction for decision making faci$itates generation of a$ternative strategies and !etter screening of options d"e to specia$ized perspective of gro"p mem!ers. T e !est a$ternatives are t "s $ike$y to !e c osen and acted "pon. Greater Employee Motivation: T e participation of emp$oyees or t eir representatives in strategy form"$ation $eads to a !etter "nderstanding of t e priorities and operations of t e reward system. eduction of Gaps and overlaps in activities: +it strategy form"$ation "ndertaken t ro"g t e participative process% t ere is a !etter "nderstanding of t e responsi!i$ities of individ"a$s and gro"ps. 0o$e differentiations w ic are t ere!y c$arified s o"$d red"ce t e gaps and over$aps in t e activities of gro"ps and individ"a$s. Minimum resistance to change: T e !enefit of accepta!i$ity of c ange wit minim"m resistance is a$so $ike$y to fo$$ow t e participative process of strategy making as t ere is greater awareness of t e !asis of c oosing a partic"$ar option and t e $imits to avai$a!$e a$ternatives. T e "ncertainty w ic is associated wit c ange is a$so e$iminated in t e process and resistance to c ange is rendered innoc"o"s.

Evolution of Strategic Management:

T e strategic management as evo$ved t ro"g fo"r p ases of strategic management1 Forecasting !Basic Financial "lanning#: Managers initiate serio"s p$anning w en t ey are re,"ested to propose t e fo$$owing year(s !"dget. Pro&ects are proposed on t e !asis of very $itt$e ana$ysis% wit most information coming from wit in t e firm. T e sa$es force "s"a$$y provides t e sma$$ amo"nt of environmenta$ information and for t at company activities are often s"spended for weeks w i$e managers try to cram ideas into t e proposed !"dget. T e time orizon is "s"a$$y one year. $ong ange "lanning !Forecast based planning#

An ann"a$ !"dget !ecomes $ess "sef"$ at stim"$ating $ong2term p$anning. T erefore% managers propose to attempt to propose five year p$ans. At t is point
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t ey consider pro&ects t at may take more t an one year. #n addition to interna$ information. Managers gat er any avai$a!$e environmenta$ data and e*trapo$ate c"rrent trends five years into t e f"t"re. T is p ase is a$so time cons"ming. %trategic "lanning !E&ternally 'riented "lanning# 4ere% t e top management takes contro$ of t e p$anning process !y initiating strategic p$anning. T e company seeks to increase its responsiveness to c anging markets and competition !y t inking strategica$$y. P$anning is taken o"t of t e ands of t e $ower $eve$ managers and concentrated in a p$anning staff w ose task is to deve$op strategic p$ans for t e corporation. %trategic Management 0ea$izing t at even t e !est strategic p$ans are wort $ess wit o"t t e inp"t and commitment of $ower $eve$ managers% top management forms p$anning gro"ps of managers and key emp$oyees at many $eve$s% from vario"s departments and workgro"ps.

Strategic Management Process:

T e strategic management process consists of fo"r !asic e$ements1 1. /. 3. 6. 5nvironmenta$ Scanning Strategy -orm"$ation Strategy #mp$ementation 5va$"ation and 7ontro$
Strategy -orm"$ation Strategy #mp$ementatio n %ocietal Environment 5va$"ation & 7ontro$

5nvironment a$ Scanning

Environmental %canning:
5nvironmenta$ scanning is t e monitoring( evaluating and disseminating of information from t e e*terna$ and interna$ environment to key peop$e wit in t e corporation. #ts p"rpose is to identify strategic factors (t e e*terna$ and interna$ e$ements t at wi$$ determine t e f"t"re of t e )as* Environment !Industry# corporation). T e easiest way to cond"ct t e environmenta$ scanning is t ro"g S+.T Ana$ysis. S+.T is t e acronym "sed to descri!e t e partic"$ar Strengt s% +eakness% .pport"nities and T reat t at are strategic factors for a partic"$ar company. T e strengt and weakness of a company !e$ong to its interna$ environment w i$e t e opport"nity and T reat e*ists in t e e*terna$ environment. Internal Environment Natural "hysical 6|Page !%tructure( +ulture( esources#

"hysical Environment

esources

,ildlife

+limate

- Environmental .ariables

%trategy Formulations:
Strategy form"$ation is t e deve$opment of $ong range p$ans for t e effective management of environmenta$ opport"nities and T reats% in $ig t of t e corporate strengt and weaknesses. #t inc$"des defining t e corporate mission% specifying ac ieva!$e o!&ectives% deve$oping strategies and setting po$icy g"ide$ines.

Mission and .ision: An organization(s mission is t e p"rpose or reason for t e organization(s e*istence. #t te$$s w at t e company is providing to society. A we$$ conceived mission statement defines t e f"ndamenta$% "ni,"e p"rpose t at sets a company apart from ot er firms of its type and identifies t e scope or t e domain of t e company(s operations in terms of
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prod"cts or services offered and market served. T e mission statement promotes a sense of s ared e*pectations in emp$oyees and comm"nicates a p"!$ic image to important stake o$ders gro"p in t e company(s task environment. Mission descri!es w at t e organization is now9 vision descri!es w at t e organization wo"$d $ike to !ecome. 'b/ectives and Goals: .!&ectives are t e end res"$ts of p$anned activity. T ese te$$ w at is to !e accomp$is ed !y w en and ,"antified if possi!$e. T e ac ievement of corporate o!&ectives s o"$d res"$t in t e f"$fi$$ment of a corporation(s mission. T e term goal is t e term "sed interc angea!$y wit t e term o!&ective. :oa$ is an open ended statement of w at one wants to accomp$is % wit no ,"antification of w at is to !e ac ieved and no time criteria for comp$etion. -or e*amp$e% a simp$e statement of 'increased profita!i$ity) is t "s a goa$% not an o!&ective% !eca"se it does not state ow m"c profit t e firm wants to make t e ne*t year. A good o!&ective s o"$d !e action oriented and !egin wit t e word ;to(. An e*amp$e of an o!&ective is 'to increase t e firm(s profita!i$ity in /<1< !y 1<= over /<<>. %trategy: #t is a compre ensive master p$an t at states ow t e firm wi$$ ac ieve its mission and o!&ectives. #t ma*imizes competitive advantage and minimizes competitive disadvantage. T e typica$ !"siness firm "s"a$$y considers t ree types of strategy1 corporate( business( and functional0 7orporate strategy descri!es a company(s overa$$ direction in terms of its genera$ attit"de towards growt and t e management of its vario"s !"sinesses and prod"ct $ines. 7orporate strategies typica$$y fit wit in t e t ree main categories of stability, growth and retrenchment. ?"siness strategy "s"a$$y occ"rs at t e !"siness "nit or prod"ct $eve$. T is strategy may fit wit in t e two overa$$ categories competitive and cooperative strategy. -"nctiona$ strategy is t e approac taken !y a f"nctiona$ area to ac ieve corporate and !"siness "nit o!&ectives and strategies !y ma*imizing reso"rce prod"ctivity. ?"siness firms "se a$$ t e t ree types of strategies sim"$taneo"s$y. A strategy is a gro"ping of strategy types !y $eve$ in t e organization. ierarc y of

4ierarc y of strategy is a nesting of one strategy wit in anot er so t at t ey comp$ement and s"pport one anot er. -"nctiona$ strategies s"pport !"siness strategies% w ic % in t"rn s"pport t e corporate strategies. "olicies:
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A po$icy is a !road g"ide$ine for decision making t at $inks t e form"$ation of a strategy wit its imp$ementation. 7ompanies make po$icies to make s"re t at emp$oyees t ro"g o"t t e firm make decisions and take actions t at s"pport t e corporation(s missions% o!&ectives and strategies. 5*amp$e1 w en 7isco decided on a strategy of growt t ro"g ac,"isition% it esta!$is ed a po$icy to consider on$y companies wit no more t an A8 emp$oyees% A8= of w om were engineers.

%trategy Implementation:
Strategy imp$ementation is a process !y w ic strategies and po$icies are p"t into action t ro"g t e deve$opment of programs( budgets% and procedures. T is process mig t invo$ve c anges wit in t e overa$$ c"$t"re% str"ct"re% andBor management system of t e entire organization. Sometimes referred to as operational planning, strategy imp$ementation often invo$ves day2to2day decision in reso"rce a$$ocation. 1 program is a statement of t e activities or steps needed to accomp$is a sing$e "se p$an. #t makes a strategy action oriented. 1 Budget is a statement of a corporation(s programs in terms of $oca$ c"rrency. A !"dget $ists t e detai$ed cost of eac program. "rocedures 2 (Standard .perating Proced"res S.P)1 T ese are a system of se,"entia$ steps or tec ni,"es t at descri!e in detai$ partic"$ar task or &o! is to !e done. ow a

Evaluation and +ontrol:

#t is a process in w ic corporate activities and performance res"$ts are monitored so t at act"a$ performance can !e compared wit desired performance. Performance is t e end res"$t of a$$ activities. #t inc$"des t e act"a$ o"tcomes of t e strategic management process. T e practice of strategic management is &"stified in terms of its a!i$ity to improve an organization(s performance% typica$$y meas"red in terms of profits and ret"rn on investments. T e eva$"ation and contro$ of performance comp$etes t e strategic management mode$. ?ased on performance res"$ts% management may need to make ad&"stments in its strategy form"$ation% in imp$ementation% or in !ot .

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2.Environmental Analysis
Need of Environment:
C"st $ike everyt ing e*ists in t e p ysica$ environment% organizations e*ist in t e !"siness environment. .rganizations make "p gro"ps as in t e case of a gro"p of riva$ companies t at form an ind"stry. Strategic management is !asica$$y a!o"t dea$ing wit t e e*terna$ environment and esta!$is ing a $inkage wit it. T ese $inkages are strategies. T e environment of any organizations is ;t e aggregate of a$$ conditions% events and inf$"ences t at s"rro"nd and affect it(. Since% t e environment inf$"ences an organization in m"$tip$e ways9 its "nderstanding is of cr"cia$ importance.

+haracteristics of Environment
?"siness environment as many c aracteristics. Some of t em are as fo$$ows1

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1) Environment is Complex1 T e environment consists of a n"m!er of factors% events% conditions and inf$"ences arising from different so"rces. A$$ t ese do not e*ist in iso$ation% !"t interact wit eac ot er to create an entire$y new set of inf$"encers. #t is diffic"$t to compre end at once w at factors constit"te a given environment. /) Environment is Dynamic1 T e environment is constant$y c anging in nat"re. D"e to t e many and varied inf$"ences operating9 t ere is dynamism in t e environment ca"sing it to contin"o"s$y c ange its s ape and c aracter. 3) Environment is Multi-faceted1 + at s ape and c aracter an environment ass"mes depends on t e perception of t e o!server. A partic"$ar c ange in t e environment% or a new deve$opment% may !e viewed different$y !y different o!servers. 6) Environment has a far reaching Impact1 T e environment as a far reac ing impact on organizations. T e growt and profita!i$ity of an organization depends critica$$y on t e environment in w ic it e*ists. Any environmenta$ c ange as an impact on t e organization in severa$ different ways.

+ategori3ation of Environment
T e environment as !een divided into two categories1 1) Internal Environment1 T e interna$ environment refers to a$$ factors wit in an organization t at impact strengt s or ca"se weaknesses of a strategic nat"re. i. %trength1 is an in erent capacity w ic an organization can "se to gain strategic advantage. -or e*amp$e% good rep"tation among c"stomers% reso"rces% assets% peop$e% e*perience% know$edge% data and capa!i$ities. ii. ,ea*ness1 is an in erent $imitation or constraint w ic creates strategic disadvantages. 5*amp$es of weakness are1 gap in capa!i$ities% financia$ dead$ines% $ow mora$e and overdependence on a sing$e prod"ct $ine.

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/) E&ternal Environment1 T e e*terna$ environment inc$"des a$$ t e factors o"tside t e organization w ic provide opport"nities or pose t reats to t e organization. i. 'pportunity1 is a favora!$e condition in t e organization(s environment w ic ena!$es it to conso$idate and strengt en its position. 5*amp$es are1 economic !oom% favo"ra!$e demograp ic s ifts% arriva$ of new tec no$ogies% $oosening of reg"$ations% favo"ra!$e g$o!a$ inf$"ences and "nf"$fi$$ed c"stomer needs. ii. )hreats1 is an "nfavo"ra!$e condition in t e organization(s environment w ic creates a risk for% or ca"ses damage to% t e organization. 5*amp$e of t e t reats are1 economic downt"rn% demograp ic s ifts% new competitors% "ne*pected s ifts in cons"mer tastes% demanding new reg"$ations% "nfavo"ra!$e po$itica$ or $egis$ation% new tec no$ogy and $oss of key staff. An "nderstanding of t e e*terna$ environment% in terms of t e opport"nities and t reats and t e interna$ environment% in terms of t e strengt and weakness% is cr"cia$ for t e e*istence% growt and profita!i$ity of any organization.

%)EE" 2 "E%)E$ 1nalysis:

Earge 7orporations categorize t e societa$ environment in any one geograp ic region into fo"r areas and foc"s t eir scanning in eac area on trends t at ave corporate2 wide re$evance. ?y inc$"ding trends from t e nat"ra$% t is scanning can !e ca$$ed %)EE" 1nalysis% t e scanning of Socio2c"$t"ra$% Tec no$ogica$% 5conomic% 5co$ogica$ and Po$itica$2$ega$ environmenta$ forces. T is ana$ysis may a$so !e ca$$ed "E%)E$ 1nalysis for Po$itica$% 5conomic% Socio2c"$t"ra$% Tec no$ogica$% 5co$ogica$ and Eega$ forces. Economic variables are :DP trends% #nterest rates% Money s"pp$y% #nf$ation rates% "nemp$oyment $eve$s% 5nergy a$ternatives% 5nergy avai$a!i$ity and cost% :$o!a$ financia$ system etc. )echnological variables are tota$ government spending for 0&D% tota$ ind"stry spending for 0&D% internet avai$a!i$ity% te$ecomm"nication infrastr"ct"re% prod"ctivity improvements t ro"g a"tomation% new prod"cts etc "olitical4$egal variables are anti2tr"st reg"$ations% environmenta$ protection $aws% g$o!a$ warming $egis$ation% immigration $aws% ta* $aws% specia$ incentives% foreign trade reg"$ations% sta!i$ity of government% o"tso"rcing reg"$ations etc %ocio4cultural variables are $ifesty$e c anges% career e*pectations% cons"mer activism% rate of fami$y formation% growt rate of pop"$ation% age distri!"tion of pop"$ation% $ife e*pectancies% !irt rates% ea$t care% $eve$ of ed"cation etc.
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%tructural 1nalysis of competitive environment (Porter(s -ive

-orces Approac to #nd"stry Ana$ysis)1

0e$ative Power of "nions% :ovt%

"otentia l Entrant s

T reat of Few 5ntrants

'ther %ta*ehold ers %uppliers

Specia$ #nterest gro"ps

Industry +ompetito rs

?argainin g power of ?"yers

Buyers
ivalry among e&isting firms

Mic ae$ Porter as propo"nded t e )heory6. #t contends t at a corporation is most concerned wit t e intensity of competition wit in its ind"stry. T e %ubstitut !y !asic competitive forces as s own in t e fig"re $eve$ of t is intensity is determined e a!ove. T e co$$ective strengt of t ese forces determines t e "$timate profit potentia$ in t e ind"stry% w ere profit potentia$ is meas"red in terms of $ong r"n ret"rn on invested capita$. #n order to ac ieve profit% a corporation m"st assess t e importance to its s"ccess of eac of si* forces i.e. t reat of new entrants% riva$ry among e*isting firms% t reat of s"!stit"te prod"cts or services% !argaining power of !"yers% !argaining power of s"pp$iers and re$ative power of ot er stake o$ders. T e stronger eac of t ese forces% t e more $imited companies are in t eir a!i$ity to raise prices and earn greater profit. A$t o"g Porter mentions on$y five forces% a si*t force i.e. ot er stake o$ders% is added ere to ref$ect t e power t at governments% $oca$ comm"nities and ot er gro"ps from t e task environment wie$d over ind"stry activities. 0eferring t e fig"re a!ove% a ig force can !e regarded as a t reat !eca"se it is $ike$y to red"ce profits. A $ow force% in contrast can !e viewed as an opport"nity !eca"se it may a$$ow t e company to earn greater profits. #n t e s ort r"n% t ese forces act as constraints on a company(s activities. #n t e $ong r"n% owever% it may !e possi!$e for a company% t ro"g its c oice of strategy% to c ange t e strengt of one or more of t e forces to t e company(s advantage. For E&ample( De$$(s ear$y "se of t e internet to
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?argainin g power of S"pp$iers

T reat of s"!stit"te prod"cts or 5Five Forces Services

market its comp"ters was an effective way to negate t e !argaining power of distri!"tors in t e P7 ind"stry. A strategist can ana$yze any ind"stry !y rating eac competitive force as ig % medi"m or $ow in strengt . -or e*amp$e% t e g$o!a$ at $etic s oe ind"stry. Threat of New Entrants: Few entrants to an ind"stry typica$$y !ring to it new capacity% a desire to gain market s are% and s"!stantia$ reso"rces. T ey are% t erefore% t reats to an esta!$is ed corporation. T e t reat of entry depends on t e presence of entry !arriers and t e reaction t at can !e e*pected from e*isting competitors. An entry !arrier is an o!str"ction t at makes it diffic"$t for a company to enter an ind"stry. -or e*amp$e% no new domestic a"tomo!i$e companies ave !een s"ccessf"$$y esta!$is ed in t e Gnited States since 1>3<s !eca"se of ig capita$ re,"irements to !"i$d prod"ction faci$ities and to deve$op a dea$er distri!"tion network. Some of t e possi!$e !arriers to entry are1
5conomies of sca$e Prod"ct differentiation 7apita$ 0e,"irements Switc ing 7osts Access to distri!"tion c anne$s :overnment Po$icy

ivalry among Existing !irms: #n most ind"stries% corporations are m"t"a$$y dependent. A competitive move !y one firm can !e e*pected to ave a noticea!$e effect on its competitors and t "s may ca"se reta$iation. -or e*amp$e% t e entry of Mai$ order companies s"c as D5EE and :ateway into P7 ind"stry previo"s$y dominated !y #M?% App$e and 7ompa,. According to Porter% t e intense riva$ry is re$ated to t e presence of severa$ factors inc$"ding1
F"m!er of 7ompetitors Prod"ct or Service c aracteristics Amo"nt of fi*ed costs 4eig t of 5*it ?arriers Diversity of 0iva$s

Threat of "u#stitute $roducts or "ervices: A s"!stit"te prod"ct is a prod"ct t at appears to !e different !"t can satisfy t e same need as anot er prod"ct. -or e*amp$e% e2mai$ is a s"!stit"te for t e fa*. According to Porter% 's"!stit"tes $imit t e potentia$ ret"rns of an ind"stry !y p$acing a cei$ing on t e prices firms in t e ind"stry can profita!$y c arge.) To t e e*tent t at switc ing costs are $ow% s"!stit"tes may ave a strong effect on an ind"stry. Tea can !e considered as s"!stit"te for coffee. #f t e price of coffee goes "p ig eno"g % coffee
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drinkers wi$$ s$ow$y !egin switc ing to tea. T "s% t e price of tea p"ts a price cei$ing on t e price of coffee. 4owever% to identify t e s"!stit"te prod"cts is a diffic"$t task. %argaining power of %uyers: ?"yers affect an ind"stry t ro"g t eir a!i$ity to force down prices% !argain for ig er ,"a$ity or more services and p$ay competition against eac ot er. A !"yer or a gro"p of !"yers is powerf"$ if some of t e fo$$owing factors o$d tr"e1 A !"yer p"rc ases a $arge proportion of t e se$$er(s prod"ct or service. A !"yer as t e potentia$ to integrate !ackward !y prod"cing t e prod"ct itse$f. %argaining power of suppliers: S"pp$iers can affect an ind"stry t ro"g t eir a!i$ity to raise prices or red"ce t e ,"a$ity of p"rc ased goods and services. A s"pp$ier or t e s"pp$ier gro"p is powerf"$ if some of t e fo$$owing factors are met1 T e s"pp$ier ind"stry is dominated !y a few companies% !"t it se$$s to many (5*1 t e petro$e"m ind"stry) #ts prod"ct or service is "ni,"e andBor it as !"i$t "p switc ing costs (5*1 word processing software) S"!stit"tes are not readi$y avai$a!$e (5*1 5$ectricity) elative $ower of other "ta&eholders: T is is t e si*t force added to Porter(s $ist to inc$"de a variety of stake o$der gro"ps from t e task environment. Some of t ese gro"ps are governments% $oca$ comm"nities% creditors% trade associations% specia$ interest gro"ps% trade "nions% s are o$ders and comp$ementors. An e*amp$e of comp$ementary ind"stries is t e tyre and a"tomo!i$e ind"stries. Hey internationa$ stake o$ders w o determine many of t e internationa$ trade reg"$ations and standards are t e +or$d Trade .rganization% t e 5"ropean Gnion% AS5AF% ?0#7 etc T e importance of t ese stake o$ders varies !y ind"stry.

E)'" 1nalysis !a diagnosis tool#

!Environment )hreat 'pportunity "rofile#

T e identification of environmenta$ iss"es is e$pf"$ in str"ct"ring t e environmenta$ appraisa$ so t at t e strategists ave a good idea of w ere t e environment opport"nities and t reats $ie. Str"ct"ring t e environmenta$ appraisa$ is a diffic"$t process as environmenta$ iss"es do not $end t emse$ves to a straig tforward c$assification into neat categories. An iss"e may arise sim"$taneo"s$y from more t an one sector of t e environment. T ere are many tec ni,"es avai$a!$e to str"ct"re t e environmenta$ appraisa$. .ne s"c tec ni,"e% s"ggested !y :$"eck% is t at of preparing an environment threat and opportunity profile !E)'"# for an organization.
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T e preparation of an 5T.P invo$ves dividing t e environment into different sectors and t en ana$yzing t e impact of eac sector on t e organization. A compre ensive 5T.P re,"ires s"!dividing eac environmenta$ sector into s"! factors and t en t e impact of eac s"! factors on t e organization is descri!ed in t e form of a statement. A s"mmary 5T.P may on$y s ow t e ma&or factors for t e sake of simp$icity. -or e*amp$e% in case of a company in t e !icyc$e ind"stry% w ere t e main !"siness of t e company is in sports cyc$e man"fact"ring for t e domestic and e*ports market.

0efer to t e e&hibit given !e$ow. (ne*t page)

E&hibit: 5nvironment t reat and opport"nity profi$e (5T.P) for a !icyc$e company.
Environment al %ectors
5conomic Market

Nature of Impact

Impact of each sector

:rowing aff$"ence among "r!an cons"mers9 rising disposa!$e incomes and $iving standards. .vera$$ ind"stry growt rate not enco"raging9 growt rate for nic e segments $ike sports% trekking% racing and fancy city cyc$es is ig % $arge$y "nsat"rated demand in nic e segments9 s$ender margins% traditiona$ distri!"tion systems. ?icyc$e principa$ mode of transport for $ow and $ower2midd$e income9 ind"stry too sma$$ for any ma&or po$itica$ attention. 5nvironment I and2 ea$t friend$y transport options9 wide "sage $ike comm"ting to work or sc oo$ and as recreation and p ysica$ fitness e,"ipments9 easier negotiating traffic congestions. Most anci$$aries and associated companies in sma$$ sca$e sector s"pp$y parts and components9 rising stee$ prices9 increasing "se of a$"mini"m9 ind"stria$ concentration in P"n&a! and Tami$ Fad" Tec no$ogica$ "pgradation of ind"stry in progress9 import of mac inery simp$e9 prod"ct innovations ongoing s"c as !attery operated and $ig t weig t fo$da!$e cyc$es. :$o!a$ imports growing !"t #ndia(s s are s rinking9 #ndia is second g$o!a$$y as man"fact"rer% cons"mer and e*porter after c ina9 ma&or importers are t e GSA and 5G !"t #ndia e*ports main$y to Africa9 t reat of c eap 7 inese imports.

Po$itica$ Socia$

S"pp$ier

Tec no$ogica$

#nternationa$

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Note: 7p arro8s indicate favora!$e impact9 do8n arro8 indicate "nfavora!$e impact% w i$e 9ori3ontal arro8 indicates a ne"tra$ impact. T e preparation of an 5T.P provides a c$ear pict"re to t e strategists a!o"t w ic sectors and t e different factors in eac sectors% ave a favora!$e impact on t e organization. ?y t e means of an 5T.P% t e organization knows w ere it stands wit respect to its environment. S"c an "nderstanding can !e of great e$p to an organization in form"$ating appropriate strategies to take advantage of t e opport"nities and co"nter t e t reats in its environment.

.Analysis of Internal !esources

%trategic 1udit:
#n o"r introd"ction to !"siness strategy% we emp asized t e ro$e of t e J!"siness environmentJ in s aping strategic t inking and decision2making. T e e*terna$ environment in w ic a !"siness operates can create opportunities w ic a !"siness can e*p$oit% as we$$ as threats w ic co"$d damage a !"siness. 4owever% to !e in a position to e*p$oit opport"nities or respond to t reats% a !"siness needs to ave t e rig t reso"rces and capa!i$ities in p$ace. An important part of !"siness strategy is concerned wit ens"ring t at t ese reso"rces and competencies are "nderstood and eva$"ated 2 a process t at is often known as a :%trategic 1udit:. T e process of cond"cting a strategic a"dit can !e s"mmarized into t e fo$$owing stages1 !;# esource 1udit: T e reso"rce a"dit identifies t e reso"rces avai$a!$e to a !"siness. Some of t ese can !e owned (e.g. p$ant and mac inery% trademarks% retai$ o"t$ets) w ereas ot er reso"rces can !e o!tained t ro"g partners ips% &oint vent"res or simp$y s"pp$ier arrangements wit ot er !"sinesses. !<# .alue +hain 1nalysis:
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Ka$"e 7 ain Ana$ysis descri!es t e activities t at take p$ace in a !"siness and re$ates t em to an ana$ysis of t e competitive strengt of t e !"siness. #nf$"entia$ work !y Mic ae$ Porter s"ggested t at t e activities of a !"siness co"$d !e gro"ped "nder two eadings1 (1) Primary Activities 2 t ose t at are direct$y concerned wit creating and de$ivering a prod"ct (e.g. component assem!$y)9 and (/) S"pport Activities% w ic w i$st t ey are not direct$y invo$ved in prod"ction% may increase effectiveness or efficiency (e.g. "man reso"rce management). #t is rare for a !"siness to "ndertake a$$ primary and s"pport activities. Ka$"e 7 ain Ana$ysis is one way of identifying w ic activities are !est "ndertaken !y a !"siness and w ic are !est provided !y ot ers (Jo"tso"rcedJ). !=# +ore +ompetence 1nalysis: 7ore competencies are t ose capa!i$ities t at are critica$ to a !"siness ac ieving competitive advantage. T e starting point for ana$yzing core competencies is recognising t at competition !etween !"sinesses is as m"c a race for competence mastery as it is for market position and market power. Senior management cannot foc"s on a$$ activities of a !"siness and t e competencies re,"ired "ndertaking t em. So t e goa$ is for management to foc"s attention on competencies t at rea$$y affect competitive advantage. !># "erformance 1nalysis T e reso"rce a"dit% va$"e c ain ana$ysis and core competence ana$ysis e$p to define t e strategic capa!i$ities of a !"siness. After comp$eting s"c ana$ysis% ,"estions t at can !e asked t at eva$"ate t e overa$$ performance of t e !"siness. T ese ,"estions inc$"de1 4ow ave t e reso"rces dep$oyed in t e !"siness c anged over time9 t is is 'historical analysisJ 2 4ow do t e reso"rces and capa!i$ities of t e !"siness compare wit ot ers in t e ind"stry 2 'industry norm analysis' - 4ow do t e reso"rces and capa!i$ities of t e !"siness compare wit J!est2in2c$assJ 2 w erever t at is to !e fo"nd2'#enchmar&ing' 2 4ow as t e financia$ performance of t e !"siness c anged over time and ow does it compare wit key competitors and t e ind"stry as a w o$eL 2 'ratio analysis' !?# "ortfolio 1nalysis: Portfo$io Ana$ysis ana$yses t e overa$$ balance of t e strategic !"siness "nits of a !"siness. Most $arge !"sinesses ave operations in more t an one market segment% and often in different geograp ica$ markets. Earger% diversified gro"ps often ave severa$ divisions (eac containing many !"siness "nits) operating in ,"ite distinct ind"stries. An important o!&ective of a strategic a"dit is to ens"re t at t e !"siness portfo$io is strong and t at !"siness "nits re,"iring investment and management attention are
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ig $ig ted. T is is important 2 a !"siness s o"$d a$ways consider w ic markets are most attractive and w ic !"siness "nits ave t e potentia$ to ac ieve advantage in t e most attractive markets. Traditiona$$y% two ana$ytica$ mode$s ana$ysis1 ave !een wide$y "sed to "ndertake portfo$io

2 T e ?oston 7ons"$ting :ro"p Portfo$io Matri* (t e J?oston ?o*J)9 2 T e McHinseyB:enera$ 5$ectric :rowt S are Matri* !@# %,') 1nalysis: !refer from boo* in detail# S+.T is an a!!reviation for Strengt s% +eaknesses% .pport"nities and T reats. S+.T ana$ysis is an important too$ for a"diting t e overa$$ strategic position of a !"siness and its environment.

%trategic 1dvantage:
Strategic Advantages are t e o"tcomes of organizationa$ capa!i$ities. T ey are t e res"$ts of organizationa$ activities $eading to rewards in terms of financia$ parameters% s"c as profit or s are o$der va$"e and Bor non2financia$ parameters% s"c as market s are or rep"tation. #n contrast% strategic disadvantages are pena$ties in t e form of financia$ $oss or damage to market s are. 7$ear$y% s"c advantages or disadvantages are o"tcome of t e presence or a!sence of organizationa$ capa!i$ities. Strategic advantage is meas"ra!$e in a!so$"te terms "sing t e parameters in w ic t ey are e*pressed. T erefore% ig er t e profita!i$ity !etter is t e strategic advantage. T ey are compara!$e in terms of t e istorica$ performance of an organization over a period of time or its c"rrent performance wit respect to its competitors in t e ind"stry. For E&ample: +a$2Mart strategic advantage is t eir $ow prices. T eir a$ways as t e $owest price% w ic p"ts any competitor at a disadvantage w en compared direct$y to +a$2Mart (aka1 Hmart). 7oca27o$a as t eir !rand name% w ic a$ways t em to c arge ig er prices for simi$ar prod"cts. An e*amp$e of a strategic disadvantage is t e trave$ !rokerage ind"stry after t e deve$opment of on$ine trave$ services. Trave$ services are c eaper and more convenient for most peop$e9 t erefore% t e traditiona$ trave$ !rokers were at a strategic disadvantage to $ow cost on$ine a$ternatives. S ort term advantages or disadvantages are not "sef"$ for a $ong2term investor. Additiona$$y% e*terna$$y2generated advantages or disadvantages are !etter categories as price triggers (opport"nities or t reats)% !eca"se t ey can move t e stock price over t e s ort2term% !"t not t e $ong2term.
'rgani3ation al esources

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%trength A ,ea*nesses

Synergistic 5ffects

7ompetencie s

.rganization a$ 7apa!i$ities

B
'rgani3ationa l Behaviour

Strategic Advantage

- Frame8or* for the development of strategic advantage by an organi3ation

.alue +hain 1nalysis:

A va$"e c ain is a $inked set of va$"e2creating activities t at !egin wit !asic raw materia$ coming from s"pp$ier% moving on to a series of va$"e2added activities invo$ved in prod"cing and marketing a prod"ct or service% and ending wit distri!"tors getting t e fina$ goods into t e ands of t e "$timate cons"mer.
"rimary
Manufacturin

a8 Material

Fabricatio n

Distributo r

etailer

- )ypical value chain for a manufactured "roduct T e foc"s of t e va$"e2c ain ana$ysis is to e*amine t e corporations in t e conte*t of t e overa$$ c ain of va$"e creating activities% of w ic t e firm may !e on$y a sma$$ part. )here are t8o types of value chain analysis: A. #nd"stry Ka$"e27 ain Ana$ysis ?. 7orporate Ka$"e2c ain Ana$ysis 1C Industry .alue4+hain 1nalysis: T e va$"e2c ains of most ind"stries can !e sp$it into segments% upstream and downstream segments. #n t e petro$e"m ind"stry% for e*amp$e% upstream (backward refers to oi$ e*p$oration% dri$$ing and moving of t e cr"de oi$ to t e refinery and downstream refers to refining t e oi$ p$"s transporting and marketing gaso$ine and refined oi$ to distri!"tors and gas station retai$ers. 5ven t o"g most $arge oi$ companies are comp$ete$y integrated% t ey often vary in t e amo"nt of e*pertise t ey ave at eac part of t e va$"e c ain. An ind"stry can !e ana$yzed in terms of t e profit margin avai$a!$e at any point a$ong t e va$"e c ain. -or e*amp$e% t e a"to ind"stry(s reven"es and profits are divided among many va$"e c ain activities% inc$"ding man"fact"ring% new and "sed car sa$es%
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gaso$ine retai$ing% ins"rance% after sa$es service and parts and $ease financing. -rom a reven"e standpoint% a"to man"fact"rers dominate t e ind"stry% acco"nting for a$most @<= of tota$ ind"stry reven"es. Profits% owever% are a different matter. #n ana$yzing t e comp$ete va$"e c ain of a prod"ct% it is to !e noted t at even if a firm operates "p and down t e entire ind"stry c ain% it "s"a$$y as an area of e*pertise w ere its primary activities $ie. A company(s centre of gravity is t e part of t e c ain t at is most important to t e company and t e point w ere its greater e*pertise and capa!i$ities $ay i.e. its core competencies. According to :a$!rait % a company(s centre of gravity is "s"a$$y t e point at w ic t e company started. After a firm s"ccessf"$$y esta!$is es itse$f at t is point !y o!taining a competitive advantage% one of its first strategic moves is to move forward or !ackward a$ong t e va$"e c ain in order to red"ce costs% g"arantee access to key raw materia$s% or to g"arantee distri!"tion. T is process is ca$$ed vertica$ integration. BC +orporate .alue4+hain 1nalysis: 5ac corporation as its own interna$ va$"e c ain of activities. Porter proposes t at a man"fact"ring firm(s Primary Activities "s"a$$y !egin wit in!o"nd $ogistics (raw materia$ and$ing and ware o"sing) go t ro"g an operations process in w ic a prod"ct is man"fact"red% and contin"e on to o"t!o"nd $ogistics (ware o"sing and distri!"tion)% to marketing and sa$es and fina$$y to service (insta$$ation% repair and sa$e of parts). Severa$ support activities s"c as proc"rement% tec no$ogy deve$opment (0&D)% "man reso"rce management and firm infrastr"ct"re (acco"nting% finance% strategic p$anning)% ens"re t at t e primary va$"e c ain activities operate effective$y and efficient$y. 5ac of a company(s prod"ct $ines as its own distinctive va$"e c ain. Since most firms make severa$ different prod"cts or services% an interna$ ana$ysis of t e firm invo$ves ana$yzing a series of different va$"e c ains. T e systematic e*amination of individ"a$ va$"e activities can $ead to a !etter "nderstanding of a firm(s strengt and weaknesses. According to Porter% t e differences among competitor va$"e c ain are a key so"rce of competitive advantage. 7orporate va$"e c ain ana$ysis invo$ves t e fo$$owing three steps: E&amine each product lineEs value chain in terms of the various activities involved in producing that product or service: + ic activities can !e considered weaknesses (core deficienciesL) strengt s (core competencies) or

E&amine the lin&ages 8ithin each product lineEs value chain: Einkages are t e connections !etween t e way one va$"e activity (for e*amp$e% marketing) is performed and t e cost of performance of anot er activity (for
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e*amp$e% ,"a$ity contro$). #n seeking ways for a firm to gain competitive advantage in t e marketp$ace% t e same f"nctions can !e performed in different ways wit different res"$ts.

E&amine the potential synergies among the value chains of different product lines or business units: 5ac va$"e e$ement% s"c as advertising or man"fact"ring% as an in erent economy of sca$e in w ic activities are cond"cted at t eir $owest possi!$e cost per "nit of o"tp"t. #f a partic"$ar prod"ct is not !eing prod"ced at a ig eno"g $eve$ to reac economies of sca$e in distri!"tion% anot er prod"ct co"$d !e "sed to s are t e same distri!"tion c anne$. T is is an e*amp$e of economies of scope% w ic res"$t w en t e va$"e c ains of two separate prod"cts or services s are activities% s"c as t e same marketing c anne$s or man"fact"ring faci$ities. T e cost of &oint prod"ction of m"$tip$e prod"cts can !e $ower t an t e cost of separate prod"ctions.
Firm Infrastructure 9uman esource Management

S"pport Activities

)echnology Development "rocurement

Inboun d $ogistic s
'perations

'utboun d $ogistics

Mar*eting and %ales

%ervic es

"rofit Margin "rofit Margin

Primary Activities - "orterEs Generic .alue +hain

Methods of 1naly3ing and Diagnosing +orporate +apabilities:

1) Functional4area profile and esource deployment matri&: T is met od is deve$oped !y 4ofer and Sc ende$. #t re,"ires t e preparation of a matri* of f"nctiona$ areas wit c aracteristics common to eac e.g. foc"s of f"nctiona$
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o"t$ay% p ysica$ reso"rce position% organizationa$ system and tec no$ogica$ capa!i$ity. T e f"nctiona$ area profi$e and t e reso"rce dep$oyment matri* o!vio"s$y determine t e interpretation and diagnosis of t e data and constit"te t e !asis on w ic strengt s and weaknesses are to !e identified. + i$e appraising t e capa!i$ities in eac f"nctiona$ area% t e strategists s o"$d consider w at t e po$icies and approac es governing t e operations in t e area were% are and wi$$ !e. #n ot er words% t e present position s o"$d !e e*amined in t e $ig t of past ac ievements% f"t"re e*pectations and interna$ re,"irements. #n t is process% one mig t discover t at an e$ement of strengt co"$d !ecome a so"rce of weakness in f"t"re. -or instance% if marketing capa!i$ities ave !een deve$oped in t e conte*t of t e growt in t e prod"ct $ife cyc$e% t e present advantage may t"rn o"t to !e a weakness d"ring t e sat"ration stage of t e prod"ct $ife cyc$e. #t is a$so necessary t at t e ana$ysis takes into acco"nt t e position over a period of time. T is wo"$d ena!$e t e strategist to see w et er areas of advantage are !eing f"rt er strengt ened or getting dissipated. Piecemea$ ana$ysis of t e capa!i$ities in eac f"nctiona$ area may !e mis$eading. T e re$ative strengt s and weaknesses of t e key f"nctiona$ areas s o"$d !e considered toget er. #f a company as deve$oped competency in one f"nctiona$ area% it needs to !e e*amined w et er t e capa!i$ities in ot er areas ave compati!$e potentia$ities. .t erwise% t e im!a$ance may $ead to a position of weakness for t e company as a w o$e. Anot er important aspect of capa!i$ity ana$ysis is t e comparison of strengt vis2 M2vis weaknesses. 5mp asizing strengt s rat er t an weaknesses is often &"stified for it may !e "sef"$ to take advantage of an opport"nity on t e !asis of identified strengt rat er t an viewing weaknesses as impediments.

(0efer t e fig"re ne*t page)

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- Functional41rea

esource4Deployment Matri& <F;<4;= !ne&t year#

Functional 1rea Marketing

esource Deployment 1nd Focus of efforts Deve$opment o"t$ay (=) Amo"nt (0s) -oc"s of 5ffort Deve$opment o"t$ay (=) Amo"nt (0s) -oc"s of 5ffort

<FF@4FG

<FFG4FH

<FFH4FI

<FFI4;F

<F;F4;;

Prod"ction

-inance

Deve$opment o"t$ay (=) Amo"nt (0s) -oc"s of 5ffort

0&D

Deve$opment o"t$ay (=) Amo"nt (0s) -oc"s of 5ffort

Manageme nt

Deve$opment o"t$ay (=) Amo"nt (0s) -oc"s of 5ffort

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<F;;4;<

<# %trategic 1dvantage "rofile: A profi$e of strategic advantages (SAP) is a s"mmary statement w ic provides an overview of t e advantages and disadvantages in key areas $ike$y to affect f"t"re operations of t e firm. #t is a too$ for making a systematic eva$"ation of t e strategic advantage factors w ic are significant for t e company in its environment.

N %trategic 1dvantage "rofile !%1"# of JKL India $td0 Internal !B# %trength !4# ,ea*ness 1rea Marketing (O) 7apa!$e sa$es force9 sa$es agents dispensed wit (2) S rinkiDng market for most prod"cts .perations (O) Profit after ta* picking "p after /<1<. (2) Stagnating sa$es performance (2) P$ant faci$ities are o$d 0&D (2) Fo 0&D effort so far (O) ?acking in 0&D e*pected from parent company -inance (O) Parent company now interested in e*pansion (2) Fo additiona$ investment since /<<<. 7orporate (O) Management team comprises yo"ng% am!itio"s 0eso"rces e*ec"tives. Since t e strategic advantage profi$e is a s"mmary statement of corporate capa!i$ities% in s"mmarizing t e f"nctiona$ competencies a comparative view needs to !e taken in t e $ig t of e*terna$ conditions and time orizon of pro&ections. -or e*amp$e% w i$e comparing t e $eve$ of inventory o$ding% one may find it to !e re$ative$y ig er t an t at of competing firms9 as s"c it s o"$d !e regarded as a weakness. ?"t if t e market demand s ows an increasing trend% apparent weakness s o"$d !e considered strengt . #n t e preparation of SAP one m"st a$so reckon t e pro!a!i$ity of t e strengt advantage contin"ing in f"t"re and ow $ong it can !e re$ied "pon. or

=# %,') 1nalysis !%elf4%tudy#

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".#ormulation of Strategy
1pproaches to %trategy Formation
T e possi!$e approac es to strategy form"$ation are many. 4owever% t e strategists ave considered two approac es to t e Strategy formation. T ese are1 1C )raditional 1pproach (deve$oped d"ring t e period !etween +or$d +ar # & ##) BC Modern 1pproach (evo$ved since t e mid 1>8<s) Prof :i$more as disting"is ed !etween t e two. T is distinction is as fo$$ows1 Traditional Approach
1. A size2"p of t e sit"ation of t e company as a w o$e genera$$y on t e !asis of size2"ps of t e f"nctiona$ department. /. Determination of o!&ectives. 3. Deve$opment of a programme of action covering t e vario"s activities of t e company in t e $ig t of direction and "nity of p"rpose provided !y t e o!&ectives.

Modern Approach
1. 0eappraisa$ of t e e*isting strategy in t e $ig t of c anging e*terna$ conditions. /. 7onstant s"rvei$$ance of t e environment to identify and capita$ize on $ong term opport"nities 3. -orm"$ation of a$ternative strategies and c oosing an appropriate strategy

T e met od of strategy formation e*p$ained a!ove is a rationa$% normative proposition. T e ot er approac es to strategy are as fo$$ows1 Intuition: T e !asic premise of t is approac is t at t e strategy evo$ves in t e mind of t e 7 ief 5*ec"tive .fficer wit o"t ever !eing e*p$icit$y stated and wit o"t t e aid of forma$ proced"res. A$ong wit int"ition% persona$ &"dgment is a$so a necessary e$ement in t is approac . Dis/ointed Incrementalism: Sometimes it is a$so referred to as ;m"dd$ing t ro"g (. T is approac to strategy2making ref$ects an attit"de of management aving strong preference for acting on$y w en forced to% and t en considering a few convenient a$ternatives invo$ving on$y sma$$% disr"ptive c anges in t e organization. T e decisions made are of remedia$ nat"re. .n$y t ose a$ternatives are considered w ic are important% interesting and easi$y "nderstanda!$e.

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 Entrepreneurial 1pproach: T e importance "nder$ying t is approac is re$ated wit t e ro$e of t e manager as an entreprene"r. Peter Dr"cker as tried to re$ate t e ro$e of an entreprene"ria$ manager as t at of a systematic risk2maker and risk taker% $ooking for and finding opport"nities. T e ro$e of an entreprene"r is opport"nity2foc"sed and not pro!$em2foc"sed. MInside outE planning: #n t is approac % strategies are first conceived in a t o"g t process arising o"t of t e "ni,"e ta$ents and reso"rces possessed !y a company. Market forecasts s o"$d !e considered $ater as a kind of c eck or constraint on strategies so conceived. Ney4factor approach: T is approac consists of determining t e rea$$y significant factors t at are important in t e s"ccess of a partic"$ar !"siness and concentrating ma&or decisions on it. -or instance% a new imaginative toy may !e a critica$$y strategic factor in t e s"ccess of a toy company. .r finding a nic e in t e market w ere a company can give t e c"stomers an irresisti!$e va$"e t at is not !eing satisfied at a re$ative$y $ow cost. #t may again !e a cornerstone of strategy formation. Integrated 1pproach: An integrative approac to t e strategy2making process provides a framework w ic consists of t e fo$$owing parts1 Ana$yzing t e present interna$ and e*terna$ conditions% #dentifying and eva$"ating t e present strategy I t e ma&or o!&ectives% po$icies and p$ans c"rrent$y g"iding t e firm% Searc for strengt s and weaknesses viewed wit in t e present strategy and environment% 7onsidering c anges in t e present strategy% :enerating t e a$ternatives to reso$ve t e pro!$ems and e*p$oit t e opport"nities% Deve$oping a$ternative "nified strategies !y com!ining t e vario"s a$ternatives in eac of t e pro!$em and opport"nity areas% 5va$"ation of eac "nified strategy in terms of t e enterprise o!&ectives and c oosing t e strategy t at !est satisfies t e o!&ectives.

-or ongoing organizations% re2appraisa$ of t e present strategy act"a$$y !ecomes t e first p ase in t e tota$ process. T is re,"ires t e identification of t e e*isting strategy. #t is often diffic"$t to identify t e present strategy. T e strategy !eing fo$$owed may not !e
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artic"$ated. .r% t ere may !e an artic"$ated strategy t at is not ad ered to in practice. .r% again t e enterprise may not ave deve$oped any rea$ strategy. #t may a$so !e m"dd$ing t ro"g . #f no strategy is c$ear$y indicated% it m"st !e constr"cted from act"a$ events and statements. #dentification of t e present strategy is invaria!$y accompanied !y an ana$ysis of t e enterprise o!&ective% po$icies and p$ans in t e content of t e f"nctiona$ areas and manageria$ config"ration of t e organization% and t e e*terna$ conditions. T "s% !y imp$ication% in t e process of identification and description of t e strategy% t e eva$"ation of strategy is a$so "nderway. Moe specifica$$y% t e effectiveness of t e present strategy may !e assessed on t e !asis of t e fo$$owing criteria1 a) Past res"$ts !) #ts appropriateness for t e f"t"re c) #ts rationa$e% i.e.% !y asking w y t e present strategy as !een p"rs"ed. 0eview of performance in terms of res"$ts ac ieved is an important !asis of appraising t e present strategy.

Ma/or %trategy 'ptions: !+entral %trategy 1lternatives#

?road$y speaking% t e ma&or options in strategy formation may !e divided into fo"r categories1 10 %tability %trategy B0 Gro8th %trategy +0 etrenchment %trategy

D0 +ombination %trategy T ese a$ternatives are sometimes ca$$ed grand strategy alternatives. 10 %tability %trategy A sta!i$ity strategy arises o"t of a !asic recognition !y management t at t e firm s o"$d concentrate on "ti$izing its present reso"rces so as to deve$op its competitive strengt wit in a restricted prod"ct2market config"ration. #n ot er words% sta!i$ity strategy imp$ies t at t e company wi$$ contin"e in t e same or simi$ar o!&ectives. T is is not to !e mis"nderstood as a ;do4nothingE strategy. T e sta!i$ity strategy a$so imp$ies foc"sing on improvements of f"nctiona$ performance and maintaining t e $eve$ of ac ievements as in t e immediate past. T e distinctive e$ements of a sta!i$ity strategy are1
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i. ii. iii.

T ere is no ma&or c ange in t e prod"ct or service $ine% markets or f"nctions9 T e foc"s is on maintaining and deve$oping competitive advantages consistent wit t e present reso"rces and market re,"irements. T e po$icy t r"st is aimed at not on$y t e maintenance of t e present $eve$ of performance !"t a$so to ens"re t at t e rate of improvement contin"ing in t e past is s"stained.

Sma$$ and medi"m companies may p"rs"e sta!i$ity strategy so as to strengt en t eir e*isting prod"ct market post"res !y gearing "p f"nctiona$ efficiencies. #n o$d% esta!$is ed firms management may ave a conservative o"t$ook and t "s prefer a sta!i$ity strategy. .ariants of %tability %trategy T e sta!i$ity strategy is a$so sometimes referred to as (sta#le growth strategy). Depending "pon t e circ"mstances% t e sta!i$ity strategy may !e adopted wit different moda$ities so as to ens"re sta!$e growt . T ese moda$ities or variations may !e regarded as t e s"!2strategies of sta!i$ity strategy. Some of t e disting"is a!$e variants are as fo$$ows1 #ncrementa$ S"!2strategy S"!2strategy wit sta!$e growt as a pa"se Profit s"!2strategy S"staina!$e growt s"!2strategy

Incremental "u#-strategy: Many firms prefer to adopt incrementa$ growt as a strategy% concentrating on one prod"ct2$ine at a time and growing s$ow$y !"t s"re$y wit a strong !ase to move on. T e o!&ective may !e to enter new market segments grad"a$$y. Fot ing is attempted !y way of a !ig $eap onward. Few moves are caref"$$y tested in a$$ respects. S"c a strategy may s"cceed t ro"g effective market segmentation% red"cing cost of operation% or "se of 0 & D% in spite of adopting a $ow prod"ct2market post"re in t e ind"stry as a w o$e. "ta#ility as a pause: After aving ac ieved a ig growt $eve$% some firms may find it diffic"$t to maintain it and t "s attempt to set a $ower $eve$ of growt for t e time !eing "nti$ conditions are more favora!$e. + en e*terna$ conditions are c anging s$ow$y t en t is is a desira!$e means of attaining ;sta!$e growt wit a pa"se( to conso$idate t e
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firm(s interna$ reso"rces. #t may !e ca$$ed some sort of a ;!reat ing spe$$( strategy. S"c a strategy may invo$ve improving operationa$ efficiency% 0&D% marketing etc $rofit su#-strategy: T is is a$so ca$$ed ; arvesting strategy(. T e profit oriented sta!i$ity strategy is adopted in $arge companies for specific !"siness "nits w en generating cas f$ow is of prime concern for ens"ring d"ra!$e sta!i$ity of t e organization. T e circ"mstances prompting s"c a strategy may !e one or more of t e fo$$owing1 i. ii. iii. iv. v. vi. Dec$ining prod"ct2market of a "nit. Fat"re of e*pansion re,"ired !eing too cost$y. Sma$$ percentage contri!"tion of t e "nit to tota$ sa$es. -"nds avai$a!$e aving !etter "se. Ma*imizing ret"rn on investment w en it is opport"ne to do so. To ,"it t e prod"ct2market !efore it is too $ate.

T e profit s"!2strategy is a$so designated as 5end4game strategy6. "ustaina#le growth strategy: T is variant of sta!i$ity strategy is considered desira!$e w en e*terna$ conditions are not favora!$e for p"rs"ing a growt strategy d"e to reso"rce constraints. T e "s"a$ constraint in s"c a sit"ation is t at of financia$ reso"rces w ic may !e d"e to tig t conditions in t e capita$ and money markets% or a sit"ation in w ic t e norma$$y accessi!$e so"rces of finance can !e no $onger tapped. A$so% t ere may !e ot er kinds of c anges in e*terna$ conditions w en t e e*ec"tives may find growt no $onger wort w i$e% e.g. c anges in income distri!"tion% $i!era$ization of imports as a competing factor.

B0 Gro8th or E&pansion %trategy A growt strategy signifies somet ing different from sta!$e growt strategy or sta!i$ity strategy. + en a firm increases t e $eve$ of o!&ectives ig er t an w at it as ac ieved in t e immediate past% in terms of market s are% sa$es reven"e% etc or strategic decisions centres aro"nd increased f"nctiona$ performance in ma&or respects% we ave typica$ cases of growt strategy. Anot er kind of growt strategy is typica$$y fo"nd w en new prod"cts are added to t e e*isting $ine% or dissimi$ar prod"cts are taken "p for prod"ction and sa$e% or !"siness activities are e*panded t ro"g ac,"isition% merger% or ama$gamation of firms. #n a sense% growt strategy differs from sta!i$ity strategy in t at t e former imp$ies e*ponentia$ growt w i$e t e $atter imp$ies an e*trapo$ation of growt !ased on past performance.
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The #asic reasons underlying growth strategies are as follows: 1. :rowt is often a c eris ed c"$t"ra$ va$"e. A company t at is not e*panding is said to !e fa$$ing !e ind. .n t e ot er and% a growt company is !etter known and attracts !etter management. #t is a so"rce of strengt . /. #n ind"stries w ic are s"!&ect to fre,"ent c anges in tec no$ogy and ot er e*terna$ conditions% growt is necessary for s"rviva$. .pport"nities m"st !e avai$ed of and t reats m"st !e overcome so as to s"rvive. 3. :rowt strategy is associated wit strong manageria$ motivation in its favo"r. 5*pansion is a rewarding p enomenon in severa$ ways. Earger size means ig er e*ec"tive compensation. #t satisfies power and recognition needs. ?esides% growt is often perceived as an inde* of effectiveness w ic as greater news va$"e t an sta!i$ity. 6. T e wide$y accepted ;e*perience c"rve( t eory s"ggests t at t ere are significant performance rewards over time as a firm grows in size and e*perience. Experience Curve Effect T e e*perience c"rve t eory is !ased on t e re$ations ips !etween t e tota$ cost per "nit and t e n"m!er of "nits prod"ced (e*perience). T e c aracteristics pattern of t e e*perience c"rve is t at va$"e added net prod"ction cost dec$ines /8 to 3< percent eac time t e tota$ acc"m"$ated e*perience as !een do"!$ed. T e t eory is fo"nded on t e ypot esis t at peop$e repeated$y performing a task get !etter at it. Precise$y speaking% $a!o"r cost per "nit decrease in a predicta!$e manner wit increased vo$"me of prod"ction. According to :era$d A$$en% t e fo$$owing factors prod"ce t e e*perience c"rve effect1 i. ii. iii. iv. v. vi. Ea!o"r efficiency Few processes and improved met ods Prod"ct redesign Prod"ct standardization Sca$e effects% and S"!stit"tion in t e prod"ct

5*tending t e t eory% t e factors in t e e*perience c"rve mode$s are said to inc$"de1 costs( volume and mar*et share . T e greater t e vo$"me% t e $ower t e cost% and $arger t e market s are% t e $arger t e prod"ction vo$"me.
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.ariants of Gro8th %trategy :rowt or e*pansion in t e vo$"me of !"siness of a company imp$ying a s"!stantia$ stepping "p of sa$es reven"e% market s are or net earnings may !e ac ieved !y different approac es. According$y% t e strategists may consider different ways and means of e*pansion or growt . T e variants of growt strategy (its s"!2strategies) are differentiated as fo$$ows1 a) #ntensive :rowt Strategy (#nterna$ :rowt ) I Not part of BBA CA syllabus

!) Diversification %trategy1 At some point of time in t e process of intensive growt (interna$ growt )% it is no $onger possi!$e for a firm to e*pand in t e !asic prod"ct market0 #t is not a!$e to grow any more t ro"g market penetration. T en it m"st consider adding new prod"cts or markets to its e*isting !"siness $ine. T is approac towards growt is known as diversification0 Diversification strategy is t "s defined as a strategy in w ic growt is so"g t to !e ac ieved !y adding new prod"cts or services to t e e*isting prod"ct or service $ine. T ere are two types of diversification strategy2 i. 9ori3ontal Diversification1 T is is a !road categoryin w ic are inc$"ded strategies invo$ving addition of para$$e$ new prod"cts or services to t e e*isting prod"ct or service $ine. #t as two s"!2 categories1 a0 Concentric !iversification1 #t is a type of diversification strategy w ic invo$ves eit er a) introd"ction of new prod"cts or services to serve simi$ar c"stomers in simi$ar markets% or !) introd"ction of new prod"cts or services "sing tec no$ogies simi$ar to t e present prod"ct or service $ine. T e former is known as market related concentric diversification and t e $atter as technology related concentric diversification . -or e*amp$e% $ease financing in t e ire p"rc ase !"siness is t e case of market re$ated concentric diversification. T e addition of ;tomato ketc "p( and ;sa"ce( to t e e*isting ;Maggi( !rand processed items of Fest$e is t e case of tec no$ogy re$ated concentric diversification. T e concentric diversification takes p$ace w en t e prod"cts or services added are in different ind"stry !"t are simi$ar to t e e*isting prod"ct or services $ine wit respect to tec no$ogy or prod"ction or marketing c anne$s or c"stomers. S"c
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diversification may !e possi!$e in two ways1 interna$ deve$opment of new prod"cts or services !y t e firm on its own% or t ro"g ac,"isition (p"rc ase) or merger of two or more firms. b0 7ong$omerate Diversification1 Addition of dissimi$ar prod"cts or services to t e e*isting $ine of !"siness is known as cong$omerate Diversification. #t invo$ves diversification into !"siness fie$ds w ic are not significant$y re$ated or simi$ar to t e primary !"siness mission. T "s% it differs from concentric diversification w ic a$so invo$ves adding new prod"ct or service $ines !"t in a re$ated fie$d. 5*amp$e1 D7M Etd diversified its core !"siness of te*ti$es to !"siness w ic inc$"ded engineering goods% ferti$izers% c emica$s% rayon tyre cord% s"gar and data prod"ct. ii. .ertical Diversification !.ertical Integration# 1 #t is type of growt strategy w erein new prod"cts or services are added w ic are comp$ementary to t e e*isting prod"ct or service $ine. #t is c aracterized !y t e e*tension of t e firm(s !"siness definition in two possi!$e directions from t e present I !ackward and forward. #n ot er words% vertica$ integration is a growt strategy t at invo$ves t e e*pansion of !"siness !y moving !ackward or forward from t e present prod"cts or services esta!$is ing $inkages of prod"cts% processes or distri!"tion system. T "s% vertica$ integration may !e of two types1 a0 For8ard Integration: #t is a type of diversification strategy w ic invo$ves t e entry of firm into t e !"siness of finis ing% distri!"ting% or se$$ing of some of some of its present o"tp"ts. #t is sometimes descri!ed as ;downstream( e*pansion and refers to moving ig er "p in t e prod"ction B distri!"tion process towards t e end cons"mer. Many a firm in #ndia w ic started !"siness wit a spinning mi$$ as $ater added $oom s eds to prod"ce fa!rics. Earge te*ti$e mi$$s (D7M% Mafat$a$% ?inny% Fationa$ Te*ti$e 7orporation% and ot ers) ave set "p t eir own retai$ distri!"tion systems. T ese are e*amp$es of forward integration. Printing esta!$is ments entering t e !ook p"!$is ing !"siness% tim!er merc ants e*tending !"siness as f"rnit"re makers% prod"cers of a"tomo!i$e engine
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parts setting "p a"to2assem!$y works% are ot er e*amp$es of forward vertica$ integration. *dvantages: #t ena!$es a firm to gain greater contro$ over sa$es and prices of its e*isting o"tp"t. T "s% firms may improve t eir competitive position !y increasing t e scope of !"siness and t ere!y red"cing t e overa$$ costs. #t improves t e scope of ,"a$ity contro$ at different stages in t e prod"ction process and distri!"tion system.

Disadvantages: #t may invo$ve a firm competing wit its own c"stomers. 5*1 Prod"cer of TK components enters t e !"siness of making TK sets. #t is diffic"$t to cope wit t e c anges in tec no$ogy% c aracter and size or n"m!er of t e additiona$ "nits of prod"ction or distri!"tion.

T "s% it is advisa!$e t at forward integration s o"$d !e attempted on a s"fficient$y $arge sca$e. b0 Bac*8ard Integration: #t is a$so known as "pstream deve$opment9 !ackward integration strategy invo$ves addition of activities to ens"re t e s"pp$ies of a firm(s present inp"ts. #t is aimed at moving $ower on t e prod"ction process sca$e so t at t e firm is a!$e to s"pp$y its own raw materia$s or !asic components. Many s"gar mi$$s in #ndia ave deve$oped s"garcane farming. T.K man"fact"rers may prod"ce pict"re t"!es and ot er components. A$$ t ese are instances of !ackward integration.

*dvantages: To sec"re reg"$ar s"pp$y of materia$s or components partic"$ar$y w ere t e market is

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dominated !y monopo$istic or o$igopo$istic firms. To improve or ens"re ,"a$ity contro$ over ma&or components for t e fina$ prod"ct. To ac ieve a ig er ret"rn on investment for t e enterprise as a w o$e t ro"g !etter "se of over ead faci$ities. To improve t e power of negotiation wit s"pp$iers on t e !asis of known costs. To save indirect ta*es paya!$e on t e p"rc ase of inp"ts.

Disadvantages: Tec no$ogica$ "pgrading of "nits prod"cing inp"ts may !e diffic"$t d"e to reso"rce constraint. P"rc asing from tec nica$$y more efficient s"pp$iers is r"$ed o"t. .pport"nities of p"rc asing at a $ower cost w ic may emerge cannot !e avai$ed of. T e pro!$em of transfer pricing may !e ac"te partic"$ar$y if t e divisions "sing t e inp"t do not ave t e freedom of comparing market condition of s"pp$y. 7 anging economic conditions affecting t e main prod"ct market nay ca"se a magnified impact on t e prod"ction of inp"ts.

7o$$a!oration wit ot er firms !y way of &oint vent"re may !e e$pf"$ in red"cing t e risks of !ackward integration to some e*tent. T e capacity of prod"ction may !e p$anned in keeping wit t e re,"irements of co2partners. Simi$ar$y% t e disadvantage of economic f$"ct"ations prod"cing a magnified effect co"$d !e taken care of !y !ackward integration wit a $ower
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capacity so t at% in case of need% o"tside p"rc ases may !e c"t down and interna$ capacity f"$$y "sed. +0 etrenchment %trategy A strategic option w ic invo$ves red"ction of any e*isting prod"ct or service $ine a$ong wit t e $eve$ of o!&ectives set !e$ow t e past ac ievement is known as retrenchment strategy. #t is an essentia$$y a defensive strategy adopted as a reaction to operating pro!$ems stemming from eit er interna$ mismanagement% "nanticipated actions !y competitors% or c ange in market conditions. 0easons for "sing t e retrenc ment strategy are t e fo$$owing1 1. "oor "erformance: + en a firm s"ffers from poor performance in terms of $ower earnings and profits% and is "na!$e to recover its position !y any ot er means% it may !e re,"ired to s "t down "nits of activity or segments of !"siness w ic contin"e to !e a drag on tota$ performance. /. )hreat to survival: + en t e s"rviva$ of a firm is t reatened !y "nanticipated pro!$ems in t e prod"ct market% t e management may !e "nder press"re from s are o$ders and emp$oyees to improve performance !y a$$ means inc$"ding c"t!ack of operations. 3. edeployment of resources: + en a$ternative investment opport"nities promise ig er ret"rns% some of t e e*isting !"siness "nits or segments of activity may !e s ed and reso"rces t "s re$eased "ti$ized for increased profita!i$ity and growt .

6. Insufficiency of resources: To s"stain and deve$op satisfactory earning position in a prod"ct2market% it may !e necessary to dep$oy $arge financia$ reso"rces. #f t e firm is not in a position to provide ade,"ate f"nds for t at p"rpose% t e !est t ing to do may !e divestment of t e partic"$ar prod"ct2 market for !etter "se of t e finances re$eased t ere!y. 8. )o secure better management and improved efficiency: #t may !e necessary to c"t down some of t e e*isting operations to simp$ify t e range of enterprise activities and t "s sec"re ig efficiency of operations. .ariants of etrenchment %trategy:

T ere are different ways in w ic a company may defend its e*istence and s"rvive% or !est serve t e interest of owners in t e ace of interna$ or e*terna$ crisis. T e variants or s"!2strategies of retrenc ment strategy are as fo$$ows1 i. T"rnaro"nd Strategy

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ii. iii.

Divestment Strategy% and Ei,"idation Strategy

)urnaround %trategy is often necessitated d"ring recessionary conditions in an ind"stry or in t e economy as a w o$e. #n ot er words% t e t"rnaro"nd strategy is ca$$ed for w en t ere is a s"!stantia$ and s"stained downtrend in t e indicators of !"siness performance w ic may !e ca"sed !y e*terna$ factors and t e a!sence of proper$y timed% fres management inp"t. T is strategy is aimed at a$ting t e present dec$ining trend in performance w i$e improving t e $ong2r"n efficiency of operations. T "s% its foc"s is on1 7ost red"ction 0even"e increase% and 0ed"ction of assets

)he process of turnaround1 #n t e face of a dec$ining trend in !"siness performance% t e o!&ective of t"rnaro"nd strategy s o"$d o!vio"s$y !e to a$t t e dec$ining trend w i$e improving t e $ong2r"n efficiency of performance% sta!i$ization and ret"rn to growt . T "s t e process of t"rnaro"nd constit"tes t e fo$$owing steps1 ecognition: T e pro!$em may !e rea$$y serio"s or of minor nat"re% permanent rat er t an temporary% strategic rat er t an operationa$ or administrative% and t e pro!$em may ave arisen !eca"se of management errors or e*terna$ factors. + atever t e facts% t ey m"st !e s,"are$y faced. .n$y t en is t"rnaro"nd possi!$e. Evaluation: T e process s o"$d consist of an assessment of t e serio"sness of t e pro!$ems% t e dimensions of t e firm(s environment and reso"rces responsi!$e for t e diffic"$ties% and of t e direction in w ic t e potentia$ f"t"re s"ccess $ies. Emergency actions: T e action may invo$ve ma*imizing cas inf$ow and minimizing cas o"tf$ow so as to ens"re c"rrent s"rviva$. T e foc"s at t is stage s o"$d !e on1 o 7ost red"ction o 0even"e increase
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o 0ed"ction of assets %tabili3ation: Decision at t is stage s o"$d !e directed towards ac ieving norma$ profita!i$ity w i$e keeping down e*penses% rea$igning t e firm to its environment in t e $ig t of its reso"rce position% and improving "pon strategies w ic were origina$$y responsi!$e for t e dec$ine in !"siness performance. eturn4to4gro8th: T e firm at t is stage s o"$d prepare for strengt ening t e state of financia$ ea$t % se$ective e*pansion of !"siness in re$ated or "nre$ated prod"ct markets% and gearing t e o!&ectives to increased sa$es and profits.

Divestment %trategy (a$so known as Divestit"re Strategy) invo$ves se$$ing off or s edding !"siness "nits or prod"ct divisions% or segments of !"siness operations to redep$oy t e reso"rces so re$eased for ot er p"rposes. + i$e se$$ing off a !"siness segments or prod"ct division is one of t e common forms of divestment% it may a$so inc$"de se$$ing off or giving "p t e contro$ over a s"!sidiary% or a demerger w ere!y t e w o$$y owned s"!sidiaries may !e f$oated off as independent$y ,"oted companies. 5*1 Sa$e of Samrat 4ote$ !y t e #ndian To"rism Deve$opment 7orporation. 7$osing down of two o"t of t e five te*ti$e "nits "nder De$ i c$ot Mi$$s. A$t o"g divestment of a !"siness "nit or s"!sidiary !y one company may !e $inked wit t e ac,"isition of a "nit divested !y anot er firm% it wo"$d not !e correct to s"ppose t at divestment and ac,"isition are opposite n"merica$ sides of t e same coin. easons for divestment: T e !asic o!&ective "nder$ying a divestment strategy is to prevent any partic"$ar "nit or segment of !"siness !eing a drag on t e tota$ profita!i$ity of t e enterprise% partic"$ar$y w en opport"nities of a$ternative investments e*ist. Divestment as a de$i!erate strategic decisions are as fo$$ows1 A firm may ave a favora!$e competitive position and satisfactory earnings in a prod"ct market. ?"t to s"stain and deve$op its position in t at segment e firm may !e re,"ired to dep$oy reso"rces s"c as financia$% tec nica$ or manageria$% w ic are $acking. #n t at sit"ation% t e appropriate strategy s o"$d !e to divest and wit draw from t e partic"$ar segment for !etter "ti$ization of t e avai$a!$e reso"rces in some ot er prod"ct market. Sometimes after t e ac,"isition of a !"siness it may !e fo"nd t at some parts of t e ac,"ired !"siness are not as desira!$e as ot er parts. T e "nwanted operations of t e ac,"ired !"siness may !e &"stifia!$y disposed of !y t e ac,"iring firm so as to recover a part of t e ac,"isition cost. S"c a sit"ation arises w en t e ac,"ired !"siness ad to !e p"rc ased as a w o$e.

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#f t e profita!i$ity or growt performance of any "nit of !"siness or s"!sidiary t at e$d o"t promises ear$ier proves to !e "nsatisfactory d"e to "ne*pected emergence of strong competitors% rise in costs or fa$$ing off of demand% t e most sensi!$e po$icy wo"$d !e to divest and seek !etter ret"rns in ot er areas. T e sca$e of operation of some "nits !ot in re$ation to t e tota$ operations of t e firm and re$ative to t e respective markets may !e a sma$$ part of t e enterprise activities% and yet invo$ve disproportionate$y $arge management efforts. -or t e m"$ti2prod"ct% m"$ti2divisiona$ firm% divestment of some of its traditiona$ activities may !e desira!$e as a part of its prod"ct portfo$io strategy. 0eso"rces w ic are re$eased !y t e divestment may !e c anne$ed into re$ative$y ig growt and profita!$e prod"ct2markets of t e f"t"re. T e firm may t ere!y reposition itse$f vis2M2vis t e severa$ markets in w ic it operates% even t o"g it does not envisage any pro!$em in t e s ort r"n. Sometimes% a strategic reassessment of t e ,"a$ity and t e e*tent of !"siness diversity may prompt divestment of one or more !"siness segment wit a view to simp$ifying t e range of enterprise activities and t "s ens"re !etter management and improve efficiency. Divestment strategy may !e "navoida!$e in t e face of a financia$ crisis invo$ving $i,"idity pro!$ems w ic may even t reaten t e s"rviva$ of t e firm as a w o$e. T e immediate concern of t e firm in t at sit"ation may !e to divest itse$f of operations responsi!$e for draining of cas % and to "se t e disposa$ proceeds eit er to strengt en t e core !"sinesses or to meet t e financia$ $i,"idity pro!$em.

$iquidation %trategy may !e regarded as a strategy of $ast resort. #t invo$ves se$$ing off or c$osing down a firm to avoid !ankr"ptcy and sec"ring a !etter dea$ for s are o$ders t an r"nning at a $oss. D. +ombination %trategy 2 !Mi&ed %trategy#: As t e name s"ggest% a com!ination strategy is one in w ic t ere is a conscio"s "se of different strategies for different "nits or divisions at t e same time% or se,"entia$ "se of different strategies for different over time. #n ot er words% a mi*ed or com!inations strategy invo$ves "sing e$ements of two or more !asic strategies at t e same time in different segments of t e organization or "sing different !asic strategies for t e same segment at different stages. T e possi!$e com!inations at a point of time may !e1 i. Sta!$e growt in some segments or divisions and retrenc ment in ot ers. ii. Sta!$e growt in some and growt in ot ers. iii. 0etrenc ment in some and growt in ot ers.
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iv. 0etrenc ment% sta!$e growt % and growt strategies in different "nits or divisions. T "s a com!ination strategy may !e "sef"$ w ere a firm is operating in severa$ markets s"!&ect to different rates of c ange in demand or w ere a firm dea$s in m"$tip$e prod"cts w ic are in different stages of t e prod"ct $ife cyc$e. .ver a period of time t ere may !e vario"s se,"entia$$y com!ined strategies% e.g. sta!i$ity strategy fo$$owed !y growt strategy or vice versa% and so on. +hy Com#ination "trategy, T e com!ination strategy is most fre,"ent$y "sed in m"$ti2prod"ct% divisiona$ised companies. T e main p"rpose of s"c a strategy is optimization of t e enterprise profita!i$ity and B or minimizing its $osses. T e !asic reason "nder$ying its "se is t at a sing$e strategy does not fit a$$ prod"cts or a$$ markets. 4ence% t e p"rpose of a mi*ed strategy is to a$$ocate reso"rces to t e ig growt and ig potentia$ areas of !"siness w i$e red"cing investments in or se$$ing off t e $ess profita!$e endeavo"rs. A company may p"rs"e t e com!ination strategy for one or more of t e fo$$owing reasons1 i. Different products in different stages of life cycle- A strategy s"ited to a prod"ct at t e initia$ growt stage m"st !e different from t at of a prod"ct at t e mat"re stage. Industrial recession- + en recessionary condition prevai$s in a prod"ct market% t e strategy more s"ited to it is retrenc ment strategy% w i$e growt strategy may !e s"ited to ot er prod"ct markets not so affected. "i.e of the firm- #t may !e "ndesira!$e or impractica!$e to p"rs"e growt strategy in a$$ segments of activity at t e same time9 partic"$ar$y w en t ere are severa$ opport"nities and reso"rces are not ade,"ate to avai$ of a$$ of t em.

ii.

iii.

7om!ination strategies are most $ike$y to !e effective a# for $arge% m"$ti2ind"stry firms in periods of economic transition or in periods of prod"ct B service transition in t e $ife2 cyc$e% and b# in t e case of firms of w ic t e prod"ct or market divisions ave "neven performance or "neven f"t"re potentia$s.

+hoice of %trategy
A c oice from among a$ternative strategies is t e most critica$ step in t e strategic p$anning process. T e p"rpose of t is c oice% or strategic decision% is to direct reso"rces towards o!&ectives in accordance wit t e c osen strategy. #n s ort% strategic
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decision is t e process of systematica$$y comparing t e impact of t e possi!$e strategies on t e prod"ct2market and t e firm. #t imp$ies trade2offs !etween different co"rses of actions. T e strategy of a firm is t e centra$ core of o!&ectives and po$icies against w ic a$$ ma&or decisions are meas"red and a$$ new strategy c osen. T e firm(s strategy s o"$d !e c$ear and "nam!ig"o"s and we$$ "nderstood and accepted !y t e principa$ decision makers. Factors influencing %trategic +hoice: Strategy form"$ation% according to Mintz!erg% is interp$ay among t ree !asic forces1 1. A dynamic environment t at c anges contin"o"s$y !"t irreg"$ar$y wit fre,"ent discontin"ities and wide swings in t e rate of c ange9 /. T e operating system of t e organization w ic seeks to sta!i$ize its activities despite t e c aracteristics of t e environment it serves9 and 3. T e ro$e of $eaders ip mediating !etween t e two forces so as to maintain sta!i$ity of t e organization(s operating system w i$e at t e same time adapting it to t e environmenta$ c ange. Strategic c oice invo$ves se$ecting from among severa$ a$ternatives t e most appropriate strategy w ic wi$$ !est serve t e enterprise o!&ectives. T e c oice takes p$ace wit in a frame of reference consisting of different e$ements% and t e c oice (decisions) made is t e prod"ct of interaction of t e e$ements in t e frame of reference. Alvar "lbing has distinguished between seven categories of such elements# a. Acc"m"$ated know$edge !ase. !. Decision2making processes (int"itive vers"s rationa$% individ"a$ vers"s gro"p) c. Ass"mptions a!o"t ca"se and effect d. 4"man needs e. Past e*periences f. 5*pectations% and g. 7"$t"re and va$"es According to $lueck, strategic choices are made in the light of four selection factors, such as# i. ii. Manageria$ perceptions of e*terna$ dependence Manageria$ attit"des towards risk

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iii. iv.

Manageria$ awareness of past enterprise strategies9 and Manageria$ power re$ations ip and organization str"ct"re

)he more important factors influencing the strategic choice are as follo8s:
1. E&ternal +onstraints: T e s"rviva$ and prosperity of a firm depend $arge$y on its interaction wit t e e$ements or "nits in t e environment i.e. its owners (s are o$ders)% c"stomers% s"pp$iers% competitors% t e government and t e comm"nity. T ese e$ements constit"te t e e*terna$ constraints% and f$e*i!i$ity in t e c oice of strategy is often governed !y t e e*tent and degree of t e firm(s dependence on t e e$ements. +e$$ esta!$is ed% $arge companies in different ind"stries are more powerf"$ vis2M2vis t eir environment and t erefore ave greater f$e*i!i$ity in t e strategic c oice t an t eir co"nterparts in t e respective fie$ds. -or instance% a firm w ic o!tains !"$k s"pp$y of its raw materia$s or components in a competitive market wi$$ ave greater f$e*i!i$ity in its strategic c oice t an anot er firm w ic as to depend for its s"pp$ies on an o$igopo$istic market. T e strategy of competitors in t e prod"ct may a$so restrict t e c oice of strategy of a firm. /. Intra4organi3ational forces and managerial po8er4relations: +it in an organization ma&or decisions are often inf$"enced !y t e power p$ay among different interest gro"ps. Strategic decisions are no e*ceptions. #f t e 7 ief 5*ec"tive is in favor of a strategic option% it may !e endorsed !y senior managers c$ose to im. ?"t% one or t e ot er manageria$ personne$ may oppose it. +i$$iam :"t in is st"dy of t e process of strategy making in a $arge GS 7orporation over a period of fo"r years fo"nd t at t e decisions were significant$y affected !y interpersona$ re$ations and power re$ations ip among mem!ers of t e top management team. #n t eir st"dy of /8 strategic decisions% Mintz!erg fo"nd t at in D o"t of /8 decisions% power po$itics was a cr"cia$ factor determining t e c oice. + ere a participative decision2making process is in vog"e% t e strategic c oice event"a$$y made !y top management is ,"ite often t e o"tcome of a $ot of fi$tering t at takes p$ace of t e a$ternatives at $ower $eve$s of management. -or instance% strategic c oices made !y $ower $eve$ managers may $imit t e strategic options considered !y top management. T "s% ?ower% in is st"dy of strategic decisions in a $arge corporation fo"nd t at e*ec"tives at $ower $eve$s affect t e process in s"c a way t at t e fina$ c oice does not consider a$$ t e a$ternatives. 3. .alues and preferences and managerial attitudes to8ards ris*: T e ro$e of va$"e systems in decision making !y managers is we$$ esta!$is ed. + i$e eva$"ating t e strategic a$ternatives% different e*ec"tives may take different positions !eca"se of difference in t eir persona$ va$"es and t e conse,"ent weig ing of key factors. .n t e !asis of !ot o!servation and systematic st"dies of top management in !"siness organization% :"t and Tagi"ri fo"nd t at
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persona$ va$"es were important determinants of t e c oice of corporate strategy. Si* ma&or va$"e orientations $isted !y :"t and Tagi"ri were1 Theoretical: an orientation toward tr"t and know$edge. Economic# an orientation toward w at is "sef"$ and powerf"$. $olitical: an orientation toward power. *esthetic: an orientation toward form and armony. "ocial: an orientation toward $ove of peop$e. eligion: an orientation toward "nity in t e "niverse. Manageria$ attit"de towards risk is anot er ma&or factor t at inf$"ences t e c oice of strategy. #ndivid"a$s differ considera!$y in t eir attit"de toward risk taking. Some are risk prone% ot ers are risk averse. 7oncept"a$$y% one may disting"is !etween t e fo$$owing attit"des ref$ecting t e order of risk preferences1 0isk is necessary for s"ccess9 0isk is a fact of $ife and some risk is desira!$e9 and 4ig risk destroys enterprises and needs to !e minimized. 5*ec"tives w o are risks prone and risk takers $ook for ig ret"rns in ig growt % $ess sta!$e markets9 t ey prefer to !e pioneers or innovators% seeking ear$y entry into new ig 2growt markets. T ose w o tend to !e $ow risk takers prefer to adopt safer options even t o"g t ey pay off is not ig 9 t ey prefer to !e fo$$owers rat er t an innovators in newer% "ntried fie$ds. T ose w o consider some risk is desira!$e% !a$ance ig wit $ow risk c oices and prefer a com!ined strategy. 4owever% manageria$ attit"de toward risk is not to !e regarded as somet ing "nc angea!$e. #t may vary in t e face of fast c anging ind"stry or environmenta$ conditions. -or instance% in t e event of deteriorating ind"stry conditions% e*ec"tives m"st decide in favor of more risky strategies so as to f"nction. Again% e*ec"tives may over$ook t e risks invo$ved if t ey perceive an opport"nities wit optimism% i.e.% w ere t e tradeoff !etween risk and ret"rn weig s eavi$y in favor of t e gains from t e potentia$ opport"nity. 6. Impact of past strategy1 T e c oice of c"rrent strategy may !e inf$"enced !y t e ear$ier strategy for a variety of reasons. Since past strategies are "s"a$$y t e starting point in t e form"$ation of new strategies% some a$ternatives may not !e e*p$ored as t oro"g $y as mig t !e ot erwise e*pected or certain a$ternatives may not !e considered at a$$. T is may !e regarded as t e inertia of past strategies. Anot er reason may !e t e persona$ invo$vement of t e decision maker wit t e ear$ier strategy. According to ?arry Staw% as decision makers committed $arger and $arger amo"nts to strategic decisions% t ey tended to
61 | P a g e

!ecome persona$$y invo$ved wit t e decision% t "s inf$"encing $ater strategic c oices. 0esearc findings of Mintz!erg and ot ers ave t rown considera!$e $ig t on ow past strategies inf$"ence t e c oice on c"rrent strategy. T e findings s owed t at1 T e o$der and more s"ccessf"$ a strategy% t e arder it is to c ange. T e present strategy evo$ves from a past strategy deve$oped !y a sing$e% powerf"$ $eader. T is origina$ and tig t$y integrated strategy (a :esta$t Strategy) is a ma&or inf$"ence on $ater strategic c oices. .nce a strategy gets "nder way% it !ecomes e*ceeding$y diffic"$t to c ange% and t e !"rea"cratic moment"m keeps it going. #t !ecomes a sort of ;p"s 2p"$$( p enomenon9 t e origina$ decision maker p"s es t e strategy% t en $ower management p"$$s it a$ong. + en t e past strategy !egins to fai$ !eca"se of c anging conditions% t e enterprise reacts and grafts new s"!2strategies onto t e o$d and on$y $ater seeks o"t a new strategy. #f t e environment c anges even more radica$$y% t en t e enterprise !egins to serio"s$y consider ot er a$ternative strategies w ic mig t ave !een previo"s$y s"ggested !"t ignored. #t is !eca"se of t e $ingering inf$"ence of past strategy t at a c ange of strategy may ca$$ for rep$acement of t e e*isting top e*ec"tives. As :$"eck ave mentioned 'Strategic c ange is $ess $ike$y if new e*ec"tives are promoted from wit in% and it is $east $ike$y if t e e*isting management gro"p remains in power.) 8. )ime constraints in choice of strategy1 T e time dimension of strategic c oice is anot er factor in t e strategic decision process t at may !e of considera!$e significance. -o"r e$ements of time dimension may !e wort noting. T ese are1 i. ii. iii. iv. Time press"re% Time frame Time orizon Timing of t e decision.

T e dead$ines for making t e decision create time press"res "nder w ic managers may !e forced to make a c oice. #n t e a!sence of time press"re% t e c oice mig t !e different. T e time constraint is genera$$y imposed !y ot ers% so t at e*ec"tives ave $itt$e discretion in t e matter of c oice% it as to !e eit er ;yes( or ;no(.
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T e second aspect of time dimension is t e time frame of t e decision itse$f% viz9 t e s ort term and t e $ong term imp$ications of a c oice. #f t e reward system of a company is $inked wit t e ac ievement of s ort2term goa$s% it may in i!it making strategic decisions w ic are $ike$y to prod"ce res"$ts in t e $ong r"n. #n ot er words% if t e incentive compensation of e*ec"tives is re$ated to s ort tern earning performance% as it often is% t ere is very $ike$i ood t at $ong term strategic considerations wo"$d !e ignored. T e e$ement of time hori%on wit regard to a decision refers to t e period of commitment t at goes wit it. Sta!i$ity strategy% for instance% invo$ves immediate action and as a s ort gestation $ag. .n t e ot er and% diversification and growt may take a n"m!er of years to !ear fr"it. Parkinson(s ;Eaw of De$ay( may a$so ave a !earing on t e c oice of strategy. T e $onger a decision can !e de$ayed t e $ower t e pro!a!i$ity t at it wi$$ ever !e accepted. T e timing of a decision is anot er aspect of time dimension t at may determine t e ,"a$ity of t e strategic c oice. A prompt decision may !e re,"ired to make t e !est "se of an opport"nity and !efore t e competitors ave time eno"g to capita$ize it. Simi$ar$y t e decision to enter a new prod"ct market cannot !e de$ayed% for competitors are not $ike$y to waste any time in doing so. @. Information +onstraints: A cr"cia$ factor in t e c oice of strategy is t e avai$a!i$ity of information. #t is on t e !asis of re$evant data and information t at e*ec"tives are $ike$y to make t e decision. T e degree of "ncertainty and risk depends "pon t e amo"nt of information t at is avai$a!$e to t e decision maker. T e $esser t e amo"nt of information avai$a!$e% t e greater t e $eve$ of "ncertainty and risk9 t e greater t e amo"nt of avai$a!$e information t e $esser t e risk. To !e a!$e to take ca$c"$ated risk% managers m"st t erefore% ens"re t e avai$a!i$ity of a$$ information !earing on t e strategic a$ternatives% w ic may !e cost$y in terms of money and time. A. +ompetitorsE reaction: 7onsideration of competitor(s reaction to any strategic options is often re,"ired in weig ing strategic c oices. S"ppose t e option !eing considered !y a company is an aggressive strategy c a$$enging near e,"a$ competitor. #t is ,"ite possi!$e t at t e competitor wo"$d adopt a co"nter strategy so as to wit stand t e aggressive strategy of t e initiating company. #t wo"$d !e "nrea$istic for t e company not to consider t at possi!i$ity. T e management m"st take into acco"nt t e $ike$i ood of t e reaction% t e competitor(s capa!i$ity to react% and its impact on t e strategic c oice.

Generic %trategies:
T e !ases on w ic an organization may seek to ac ieve a $asting position in its environment are known as generic strategies0 According to Mic ae$ Porter% t ere are
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t ree f"ndamenta$ ways in w ic advantage. T ese are1 1. 7ost Eeaders ip Strategy /. Differentiation Strategy 3. -oc"s Strategy

firms mig t ac ieve sustaina#le competitive

+ost $eadership %trategy1 A firm w ic finds and e*p$oits a$$ so"rces of cost advantage and aims at !ecoming a $ow cost prod"cer in t e ind"stry is said to p"rs"e a s"staina!$e cost $eaders ip strategy. #t imp$ies ac ieving t e $owest cost in prod"ction and marketing to gain a $arge market s are compared wit competitors over time. #f a firm can ac ieve and s"stain overa$$ cost $eaders ip t en it wi$$ !e an a!ove average performer in t e ind"stry provided it can command price at or near t e ind"stry average. T e advantage of re$ative market s are of a s"!stantia$ order may $ead to cost advantage t ro"g economies of sca$e% !"ying power% or cost efficiency w ic fo$$ows increased vo$"me of activity (e*perience c"rve effect). Differentiation %trategy1 A firm seeking to !e "ni,"e in its ind"stry a$ong some dimensions of its prod"ct or service t at are wide$y va$"ed !y c"stomers is said to ave adopted differentiation strategy. T e "ni,"eness of t e prod"ct or services may !e !y way of design% !rand image% c"stomer service% dea$er network% or any s"c attri!"tes. Differentiation strategy re,"ires t at a firm c oose attri!"tes in w ic to differentiate itse$f t at are different from its riva$s. According to Porter% s"c a firm is a$so rewarded for its "ni,"eness wit a premi"m price. T is is !eca"se a prod"ct or service t at offers somet ing "ni,"e% or is of greater va$"e t an t e competing prod"cts or services% s o"$d merit a ig er price. Focus %trategy: + en a firm seeks a narrow competitive scope% se$ects a segment or gro"p of segments in t e ind"stry and tai$ors its strategy to serving t em to t e e*c$"sion of ot ers% t e strategy is termed as foc"s strategy. #t may !e a cost focus% if t e firm seeks cost advantage in its target segment9 or% it may !e differentiation focus, if t e firm seeks differentiation in its target segment. +omparing 1lternatives for %trategic Decision #n t e strategic decision process t e top management as to consider a n"m!er of possi!$e a$ternatives. T e a$ternative strategies may range from e*treme$y aggressive growt strategies to defensive strategies inc$"ding retrenc ment and divestment strategies. To compare t e vario"s a$ternatives% managers may "se a simp$e approac as fo$$ows1

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Eet t e strategic a$ternatives !e gro"ped on t e !asis of two key varia!$es% a# potential mar*et gro8th and b# firmEs competitive position0 T is is a $ogica$ starting point since t e appropriateness of t e strategic c oice depends "pon t e firm(s position in re$ation to t e e*terna$ market and its competitive position ass"ming t at t e firm as or can sec"re t e necessary financia$ reso"rces. T e a$ternative strategies may t "s !e said to comprise t e fo$$owing com!inations of t e two varia!$es1 1. Eow market growt potentia$ B +eak competitive position /. Eow market growt potentia$ B Strong competitive position 3. 4ig market growt potentia$ B +eak competitive position 6. 4ig market growt potentia$ B Strong competitive position #n t e defensive sit"ation /0uadrant 12 wit $ow growt potentia$ and weak competitive position% firms may serio"s$y consider defensive strategies I retrenc ment or divestment I and "se e*cess cas to invest in areas w ere profit potentia$ is greater.

T e mi*ed sit"ation /0uadrant 32 is one w ere t e firms ave weak competitive position !"t a ig growt market potentia$. #n t is position% some variant of t e com!ination or mi*ed strategy is ca$$ed for. S"c firms s o"$d eit er seize t e opport"nity presented !y t e ig growt market potentia$ and carve o"t a market segment for itse$f% or divest itse$f of t e prod"ct or service $ine.
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4#:4 222222222222Mar*et Gro8th2222222222 E.+

Mi&ed

Gro8th

Defensive

Neutral

+5AH 2222+ompetitive "osition2222 ST0.F:

1lternative %trategies

eflecting "ossible %ituations

-irms in t e ne"tra$ sit"ation /0uadrant 42 aving $ow growt market potentia$ !"t wit strong competitive position s o"$d norma$$y favor a sta!$e growt strategy so as to maintain its market s are. #t wo"$d !e desira!$e for s"c firms to minimize investments in t e $ow growt areas t "s generating cas for ot er strategic moves. :rowt strategies are idea$$y s"ited for firms in t e ;growt ( sit"ation /0uadrant 52 wit ig market growt potentia$ and strong competitive position. T e firms in t is sit"ation s o"$d aim at ma*imizing market s are so as to prevent competitors from gaining a foot o$d. Evaluating %trategic 1lternatives: 1nalytical Models A. ?oston 7ons"$ting :ro"p Matri* (?7: Matri*) ?. Stop2Eig t Strategy Mode$ 7. Directiona$ Po$icy Matri* (DPM) Mode$ D. Prod"ct Market 5vo$"tion Matri* 5. Profit #mpact of Market Strategy (P#MS) Mode$

1C Boston +onsulting Group Matri& !B+G Matri&# 2 "ortfolio "lanning Model Gsed !y t e ?oston 7ons"$ting :ro"p "nder t e c airman ?r"ce D. 4enderson% t is mode$ aims at systematica$$y identifying t e main "nder$ying strategic c aracteristics of specific !"siness segments. #t re,"ires caref"$ ana$ysis of eac prod"ct and market
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segments as a separate !"siness so t at eac !"siness may !e assigned to a specific strategy or s"!2strategy. #t is a$so known as "ortfolio "lanning Model in as m"c as it invo$ves t e a$$ocation of reso"rces according to a corporate strategic perspective of eac of t e !"siness segments

BC %top4$ight %trategy Model T e second ana$ytica$ mode$ w ic as !een "sed !y t e :enera$ 5$ectric 7ompany is t e ;Stop2Eig t strategy mode$ or ?"siness P$anning Matri* or :5 Fine27e$$ P$anning :rid deve$oped !y :enera$ 5$ectric and Mckinsey 7ompany in GSA. T e strategic p$anning approac in t is mode$ is !ased on t e ana$ogy of traffic contro$ $ig ts at street crossings1 :reen (go)% Am!er or Pe$$ow (ca"tion) and 0ed (Stop). T e mode$ emp asizes t at strategic decisions as to !e made on t e !asis of two key varia!$es i.e. %usiness "trength and Industry attractivenessBusiness strength is rated considering s"c factors as size% growt rate% market s are% profita!i$ity% profit margins% tec no$ogy position% image and peop$e. &ndustry attractiveness is simi$ar$y rated in t e $ig t of severa$ factors $ike size% market growt and pricing% ind"stry profita!i$ity% tec nica$ ro$e% competitive str"ct"re% market diversity% environmenta$ conditions% etc. t e ratings may !e ig % medi"m or $ow in respect of ind"stry attractiveness and strengt of !"siness.
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4#:42222222Business Gro8th ate22222222E.+

%tars Ouestion Mar*s !,ildcats#

+ash +o8s

Dogs

4ig 22222222222222Mar*et %hare222222222222 Eow

9igh $o8

#f t e prod"ct fa$$s in t e ;green( (go) sections% i.e. if t e !"siness position is strong and ind"stry is at $east medi"m in attractiveness% t e strategic decision s o"$d !e to e*pand% to invest and grow. #f t e !"siness strengt is $ow !"t ind"stry attractiveness is ig % t e prod"ct is in t e ;am!er( or ;ye$$ow;zone. #t needs ca"tion% and manageria$ discretion is ca$$ed for in making t e strategic c oice. A prod"ct in t e ;red( (stop) zone indicates t at !"siness strengt is $ow and so is ind"stry attractiveness. T e appropriate strategy in t is case s o"$d !e retrenc ment% divestment or $i,"idation. T "s% S?Gs in t e green section may !e said to !e$ong to t e category of ;stars( or ;cas cows( in t e ?7: mode$. T ose in t e ;red( zone are $ike dogs and t ose in t e ;ye$$ow( or am!er zone are $ike ;,"estion marks(. T e #nd"stry Attractiveness #nde* is p$otted a$ong t e vertica$ a*is of t e matri* divided into $ow% medi"m and ig scores. .n t e orizonta$ a*is is p$otted t e score on competitive !"siness strengt in t ree segments 2 strong% average and weak. -or eac !"siness% t e size of ind"stry is represented !y a circ$e% and t e market s are of t e concerned !"siness is s own !y s aded parts of t e circ$e. T e mode$ is an adaptation of t e ?7: Mode$ and differs in two respects. #t as overcome t e ?7: matri* $imitation !y e*panding t e matri* from fo"r ce$$s to nine. T e ig B $ow c$assification is rep$aced !y ig B medi"m B $ow and weak B average B strong c$assification in t e two a*es so as to ena!$e a finer distinction to !e made !etween !"siness portfo$io positions. Anot er improvement in t e :5 mode is t at t e :rid "ses
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Industry 1ttractiveness

Medium
%trong 1verage ,ea* +ompetitive Business

m"$tip$e factors to assess ind"stry attractiveness and !"siness strengt % instead of sing$e meas"res (growt and market s are) "sed in t e ?7: mode$.

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